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Parents who help their kids financially should take care

21 August 2017

Throughout Australia right now, there are adult children running companies AND turning to their parents/relatives, mentors and advisors for financial help as these businesses struggle.  Some will inevitably fail.

It’s important that people using their own funds to assist anyone financially should ensure assets involved are properly protected.  Should things go pear shaped, there could be, in addition to financial loss, incalculable emotional consequences for families (and extended families).

 Here’s an illustrative cautionary tale of value to those in similar circumstances.Throughout Australia right now, there are adult children running companies AND turning to their parents/relatives, mentors and advisors for financial help as these businesses struggle. Some will inevitably fail.

 Totally unnecessary outcome

 Peter Macks was appointed Trustee of the bankrupt estate of Ms Townsend.

 Attempting to avert the collapse of her company, she sought her family’s help.  They arranged funding by way of a mortgage over Ms Townsend’s interests in a couple of properties, believing this protected them in the event of non-payment and/or the collapse of their daughter’s company.

 The company did collapse and was placed in liquidation.  Ms Townsend, as the only director and guarantor of various company debts, was subsequently declared bankrupt.

 Best intentions may need to be able to stand the test of law.  The parents’ best intentions here didn’t stand that test. The family should have sought expert, seasoned advice before acting. Finally, when needing to face consequences of this failure, they ignored valuable advice from the Trustee Mr Peter Macks.

 Although the inescapable requirement of his job was to do the best he could for Ms Townsend’s creditors, this didn’t preclude him from helping family members (or trying to), provided creditors weren’t disadvantaged.

 Numerous and lengthy discussions were held to explain issues. Ultimately there was no question of an out-of-court settlement.  Family members had their heads in the sand from go to woe.  The only option was to take the matter to Court.

 If the family had thought more carefully from the start before acting, if they’d not ignored valuable advice, it would have been a totally different outcome.  Not only did they ignore the Trustee’s claim and his efforts to settle, they ignored the facts.

 How it all started

 Ms Townsend, with her former husband, operated NQ Blinds & Shutters Pty Ltd.  The company had borrowed money from the Queensland Country Credit Union through a credit contract for which she was personal guarantor.

 Defaulting on repayments set her on a slippery slope to bankruptcy.

 Realising their daughter was not only in difficulty financially but also in her marriage, the parents decided to act while they believed their daughter’s business was still solvent.

 Accordingly, it was arranged Ms Townsend would agree to give a mortgage on interests she had in two properties by transferring these interests to them.  They would then advance her money ostensibly to fund her struggling business.

 But section 129(1) of the Bankruptcy Act states that a transfer by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the Trustee of the bankrupt’s estate (in his instance, Peter Macks) if:

 (a)      the transfer took place in the period beginning 5 years before commencement of the bankruptcy and ending on the date of the bankruptcy; and

 (b)      the transferee gave no consideration for the transfer, or gave consideration of less value than the market value of the property.

 The unravelling

 It’s round about here that the security the parents thought they’d been provided by their daughter was legally unravelling.

 The transfer of Ms Townsend’s property interests to her parents was clearly within the prescribed five-year period referred to in section 129(1), and was therefore a breach of the Bankruptcy Act.

 It was also subsequently established the transfer of Ms Townsend’s property interests was below the value of the mortgage she’d granted her parents.

 The parents had always insisted they’d been provided with a proper consideration for this transfer.  This, they claimed, had been done by way of an assurance Ms Townsend need only repay their money when she could do so, and that they would only require payment should the properties concerned be sold.

 Ultimately the Federal Court of Australia would rule this was not a legal consideration, and further, the mortgage had no legal standing.

 However, Mr Macks’ situation was crystal clear.  He was legally obliged as Trustee of Ms Townsend’s bankrupt estate to pursue all money that could be used to repay her creditors.

 The court also found: “Certainly it is self-apparent that there was no written loan agreement of any kind….and that the parents must be regarded as having been unsecured creditors, at least when monies were advanced.”

 It gets still worse for the parents.  The Court’s view was that the bankrupt’s company was insolvent when it ceased trading and was also not solvent before the funds were advanced.  Additionally, it was the Court’s view that the aim of the mortgage (to put the mortgage holder in a position of advantage over other potential unsecured creditors of either Ms Townsend, her company, or both) was way off target.

 The denouement

 Mr Macks discovered that a significant portion of the funds advanced were advanced by Ms Townsend’s parents to their daughter’s company NQ Blinds & Shutters Pty Ltd and the Court accepted there was no evidence to show she, personally, had ever received any advances from them.

 Thus, even if the mortgage had been initiated within the period prescribed by law - and it wasn’t - Mr Macks submitted the bankrupt did not, as the Act required, give proper consideration for the mortgage granted after her company had ceased to trade.

 The parents responded to this, arguing that a mortgage their daughter granted them protected their assets from any action Mr Macks might take as Trustee of their daughter’s bankrupt estate.

 The counter argument put to the Trustee’s position was that the bankrupt has in fact provided “proper consideration” for the mortgage by way of an agreement never to sue for the money they’d advanced her.

 In the context of the circumstances of the case this was irrelevant and otherwise without substance, although it raises an interesting legal issue.

 Austin J in Sutherland v Brian accepted that “forbearance to sue” has always been regarded as “good consideration”.. but of course, it can’t be regarded as “good consideration if it’s not “proper”.

 The parents’ solicitor maintained in Court that a valuation of Ms Townsend’s “forbearance to sue” needed to be made in the light of legal costs sure to have arisen because of a decision to sue, and that accordingly this consideration was proper.  The Court was told the parents were in a position at one stage to sue their daughter for money they’d advanced her personally, but elected not to do so in return for the grant of the mortgage in question.

 No specific agreement between Ms Townsend and her parents has been sighted by Mr Macks or the Court -Judge Brown pointed out the cost of pursuing their daughter for money they’d advanced her between 2008 and 20012 would have been commercially inappropriate.

 And so to crunch time

 There’s a vast distinction between dealing with a proprietary limited company and an individual.  As Judge Brown said in his decision: “Commercial entities need to know whom they will be able to sue and what will be the prospect of successful suing should that become necessary.” ….. rather than as the parents did, hope for the best.  In this sense, the various transactions that arose were, as Judge Brown said, “not founded in any commercially”.

 Early in his examination of the bankrupt’s estate it was apparent to Trustee Mr Macks that if efforts were made to thwart his recovery efforts as Trustee, he would have to do what the law required him to do – namely the best he could for creditors.  This meant he would probably have to take the parents to court.

 He was convinced also that any challenge to him in Court would be futile and of considerable and pointless cost to all concerned.

 Accordingly Judge Brown ordered:

 (1)                A declaration be made that the transfer of property made under the mortgage dated 22 November 2012 granted by Janice Townsend to the respondents Ronald Grima and Violet Grima [her parents] is void against Peter Ivan Macks.

 (2)                The respondents pay the applicant’s costs of the application to be agreed or failing agreement as taxed.

 In essence, in lay terms this meant the Trustee had applied to the Court for orders that would allow him to get on with his job, and now the Court had confirmed he had an equitable interest in the family’s properties.

 Judge Brown’s order on “voiding” simply meant the mortgage was null and completely without legal force or binding effect.

 Parents: please remember this cautionary tale, for there can be many a slip ‘twixt cup and lip’ in trying to financially support a child’s business.  However, if you’re resolved to help, get the best and most seasoned expert advice – and take it.

 A future article on this case will provide more information for readers particularly interested in its technicalities

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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