You will no doubt have at least a passing familiarity with the broader effects of the Bankruptcy Act 1966 and the insolvency provisions of the Corporations Act 2001.
You may also be familiar with the effect of bankruptcy or liquidation upon an individual’s right to hold a builders licence under the Queensland Building Services Authority Act.
More than likely you have had a client or two that has had the unfortunate situation where they have fallen victim to insolvency (and seen the consequences for them and their families).
In essence, any individual who holds a building licence that also becomes bankrupt or is a ‘person of influence’ in a company placed into liquidation will be deemed an ‘excluded individual’ by the QBSA.
They will no longer be entitled to hold a builders licence or be director of a company with a building license. This naturally places an awful burden on those in the building trade.
Most business people are able to avail themselves of the benefits of the various insolvency regimes and then carry on business in some modified form (often for the benefit of creditors).
Many often reinvigorate their business and prospects through a Deed of Company Arrangement or a Part X Personal Insolvency Arrangement.
However, subject to a few exceptions, builders are unable to effectively utilise these benefits of the statutory regime.
Their ability to ‘trade on’, often the most effective resolution of a cash flow crisis is severely limited by these provisions in the QBSA Act.
We have recently been involved in the Scheme of Arrangement approved by the creditors of Opes Prime Stockbroking Ltd.
Of particular interest in that process is the decision of Justice Finkelstein in the Federal Court which gave final approval to the Scheme.
The decision in effectvalidated arrangements between debtors and their creditors that had a bindingeffect on third parties.
Previously there had been doubt over whether any such arrangements couldbind third parties – much court authority suggested it could not (basedprimarily on ‘privity of contract’ arguments).
However the Court held in this case that the Scheme couldbind third parties to the arrangements.
The advantage of the decisionis that previously many arrangements between debtors and their creditors often fell down due to third party guarantees and the inability to bind third parties to the arrangements.
This difficulty can now be overcome with a suitably drafted Deed of Arrangement.
At Sajen legal we have had recent good results with informal arrangements.
These are designed specifically to assist those in the building trade and for whom the retention of their licence is vital to their business future is vital.
In particular we have utilised a ‘creditors’ trust’ as a substitute for a Deed of Arrangement.
This has the benefit of all parties beingable to give effect to an agreement to permit the debtor company/individual to trade on.
It also helps ensure a return to creditors without the detrimental effect of the builder being classified an ‘excluded individual’ by the QBSA.
In simple terms these trusts operate as follows:
-
a registered liquidator is appointed as trustee of a unit trust established for the purposes of carrying out the debtor’s proposal;
-
the creditors swap their debt for units in thetrust which are issued on a pro rated basis;
- the trustee can take security for the debtor’s obligations under the trust deed (a mortgage over real property, fixed and floating charge or both); and
- the debtor enters into an agreement with the trustee in terms that permit the debtor to trade on while at the same time requires him or her to make ongoing contributions
(whether of capital or income or both as circumstances permit).
Given that the debt previously existing is substituted for a fresh set of obligations it makes it easier to maintain capital requirements of the QBSA and even refinance.
This strategy can, anddoes, result in a win win for builder and creditor alike.
Often in circumstances this is the only alternative to a liquidation with no return to creditors and the debtor being prevented from any future business operation.
Naturally an agreement of this nature requires the goodwill of a builder’s creditors.
In circumstances wherea builder has chosen to leave creditors in the dark, or refused to meet thereality of their situation until it is too late, it is unlikely creditors willbe able to be convinced of the merits of such an arrangement.
However, where the builder takes the matter in hand and deals with issues promptly, with a view to the best outcome for all involved the use of a creditors trust can certainly be a very effective means to that end.
If you would like to know more, or have clients that may be able to utilise anarrangement of this nature please don’t hesitate to call me for a no obligation discussion.