Recover what you can! The implications of bankruptcy

It used to be, that four blokes sat in a pub, most nights in my small town of Warrnambool.  I’ll call them Alf – the Architect, Bob – naturally he’s the Builder, Charlie – he’s the Contract earthmover – and Dave the developer.  Now Dave was an upright sort of guy and personally guaranteed his company’s debts, at least when he dealt with locals.  

After a while, Dave stopped joining his mates for a drink.  Things had changed.  It became common knowledge throughout this small, tight-knit community that there had been an environmental challenge to one of Dave’s developments and that the hold-up was costing him dearly.  Alf’s company, Bob’s Company and Charlie’s company were owed large amounts of money.  

Dave couldn’t be found at home, he’d put tenants in his house and was rumoured to be hiding in a caravan park out of town.  But locals knew that he came into Warrnambool to watch the Roosters play every home footy game at the Eastern Oval.

The local lawyers advised them that the recovery process might be difficult, involving taking time to liquidate Dave’s company and then possibly suing him under insolvent trading provisions.  Fortunately, they asked for a second opinion.

The idea is to recover whatever you can… but as Dave clearly has money troubles, only your fair share.  So A’s company, B’s company and C’s company must claim under their guarantees.  Assuming that the claims won’t be met, A B and C then have rights to sue D personally upon the guarantees… each is owed a debt for a certain sum.  The cheapest way to claim is for each of the companies to assign the debts to their directors – this way a lower filing fee is payable in the Federal Magistrates’ Court.  Then, the creditors (now the individuals) need to go to the footy game and meet Dave.  It’s a meeting of creditors – there’s nothing in the legislation that says that it has to be a formal meeting of creditors, a meeting of all creditors or a meeting of creditors that has been called in any particular way.  Dave’s departure from his home and his hiding in the caravan park is probably an act of bankruptcy… and if at the meeting Dave says that he can’t pay, he commits another act of bankruptcy.  

A B and C can now file a single petition jointly.  Their costs are shared between them, so it’s probably cheaper than were each of them individually to sue… and if it is true that D has no money then his assets will be distributed, after costs, in proportion to the debts proven against his estate.  Generally, A B and C need spend no more money on lawyers and need just sit back and wait for the dividends.

My new bankruptcy guide, Bankruptcy in Australia – A Practical Guide, is chock-a-block full of practical hints like this and priced so that you’ll make at least twice the costs of the book if you charge only scale fees on your first bankruptcy petition.  Given that legal fees and trustees fees come out of an estate before other creditors are paid out, it’s hard to lose.

By Yaakov Gorr

Yaakov Gorr is the author of Smokeball’s, Bankruptcy in Australia – A Practical Guide.