Bank Repos for pty ltd implications?

[Truly Exotic]

the legalities of bankruptcy isnt my strong point,

I was looking at a property for sale and realised its a person I used to know professionally for a short period of time, who owns it

anyway, assuming its a one man operation, and they are a single director,

they have purchased a property or two in pty ltd. ie a $2 shelf company

anyway, I contacted the agent to ask why they were selling as it was a fairly short period of time,

got told "oh all correspondance needs to go to the bank"

so it looks like the bank has repossesed or taken over.

does that mean the director has already been bankrupted, or is inevitable too???

I know with bankruptcy the protocol is that the director cant be a director again for 5-7 years, your credit is stuffed for 3 years, and full doc loans and even credit cards can be a problem for 5+ years AFTER the bankprutcy period

any legal experts out there?

 

[Terry_w]

A company is a legal person separate from its directors and shareholders.

If a director were to go bankrupt this would not directly affect property owned by a company they were a director of. The property would still be owned by the company. A bankrupt cannot be director so a new director would need to be appointed. This may need the mortgagee's permission or it may be a breach of the terms of the mortgage and the bank could demand repayment of the loan.

If the director was shareholder and held those shares beneficially then the shares would fall into the hands of the trustee in bankruptcy and the company and therefore its property would fall into the hands of creditors.

However if the company becomes insolvent then it may go into liquidation and be wound up with all its property sold and the proceeds used to pay creditors - secured first. This is separate to the director and the director may still be solvent and continuing as per normal - the bank will no doubt be chasing this person for the personal guarantee.

 

[Terry_w]

I know with bankruptcy the protocol is that the director cant be a director again for 5-7 years, your credit is stuffed for 3 years, and full doc loans and even credit cards can be a problem for 5+ years AFTER the bankprutcy period

any legal experts out there?

This is not correct.

A person cannot be a director (or trustee) while bankrupt. But they could become direct straight after the bankruptcy has finished - unless banned.

The bankruptcy will affect finance for the rest of the life of the bankrupt as many lenders ask 'have you ever been bankrupt?' on forms. It would be an offence to lie too. bankruptcy would be recorded on the credit report of the bankrupt for 7 or 8 years after the bankruptcy.

 

[Paul@PFI]

the legalities of bankruptcy isnt my strong point,

I was looking at a property for sale and realised its a person I used to know professionally for a short period of time, who owns it

anyway, assuming its a one man operation, and they are a single director,

they have purchased a property or two in pty ltd. ie a $2 shelf company

anyway, I contacted the agent to ask why they were selling as it was a fairly short period of time,

got told "oh all correspondance needs to go to the bank"

so it looks like the bank has repossesed or taken over.

does that mean the director has already been bankrupted, or is inevitable too???

I know with bankruptcy the protocol is that the director cant be a director again for 5-7 years, your credit is stuffed for 3 years, and full doc loans and even credit cards can be a problem for 5+ years AFTER the bankprutcy period

any legal experts out there?

The bank may well be enforcing its powers as mortgagee. They don't have to send the company to liquidation (adds to costs) if a sale can be achieved. They may even be accepting cents in the dollar (ie 85%). The issue of personal bankruptcy could follow from that sale if a shortfall is enforced personally and cant be met. ie the other 15%. You don't know bank may have other security yet to enforce (home)

If sale occurs its probable that a default will tarnish the credit history anyway. Banks wont sell assets without lots of black marks and opportunity to work a solution.

Bank would likely instruct REA to sell if its a fair offer but all offers will take time to get the OK. In this market bank may be less inclined to give it away. You don't know what has been agreed or what the issue is. If the bank can walk away with 100% of its loan paid they will give it away. Nobody will tell you.

 

[Truly Exotic]

The bank may well be enforcing its powers as mortgagee. They don't have to send the company to liquidation (adds to costs) if a sale can be achieved. They may even be accepting cents in the dollar (ie 85%). The issue of personal bankruptcy could follow from that sale if a shortfall is enforced personally and cant be met. ie the other 15%. You don't know bank may have other security yet to enforce (home)

If sale occurs its probable that a default will tarnish the credit history anyway. Banks wont sell assets without lots of black marks and opportunity to work a solution.

Bank would likely instruct REA to sell if its a fair offer but all offers will take time to get the OK. In this market bank may be less inclined to give it away. You don't know what has been agreed or what the issue is. If the bank can walk away with 100% of its loan paid they will give it away. Nobody will tell you.

this is my undestanding, for a one man operation who is a director of a pty ltd company, they have a personal guanratee attached automatically to it,

so if its bought under a company and all turns sour, they will be personally repsonsible

however, if the banks reposess, they will try and get as much money back so I assume at this point because of all the missed payments, their record with the banks would be no good, but their credit report would be fine.

This is not correct.

A person cannot be a director (or trustee) while bankrupt. But they could become direct straight after the bankruptcy has finished - unless banned.

The bankruptcy will affect finance for the rest of the life of the bankrupt as many lenders ask 'have you ever been bankrupt?' on forms. It would be an offence to lie too. bankruptcy would be recorded on the credit report of the bankrupt for 7 or 8 years after the bankruptcy.

yes I agree, a bankrupt cannot be a director, the example was someone who when they became a director werent bankrupt.

I believe its 5 or 7 years after bankruptcy that you cannot be a director,
as for hte *have you been bankrupt* questions, thats an internal policy I believe, if you tick yes, your application gets flicked for the most part for home loans, however, for credit cards it is far more lax.

I have been told that even after the 7-8 yr period after bankruptcy, many mistakingly believe its a totally clean slate but as youd expect, many are rejected for even basic forms of credit

 

[Truly Exotic]

A company is a legal person separate from its directors and shareholders.

If a director were to go bankrupt this would not directly affect property owned by a company they were a director of. The property would still be owned by the company. A bankrupt cannot be director so a new director would need to be appointed. This may need the mortgagee's permission or it may be a breach of the terms of the mortgage and the bank could demand repayment of the loan.

If the director was shareholder and held those shares beneficially then the shares would fall into the hands of the trustee in bankruptcy and the company and therefore its property would fall into the hands of creditors.

However if the company becomes insolvent then it may go into liquidation and be wound up with all its property sold and the proceeds used to pay creditors - secured first. This is separate to the director and the director may still be solvent and continuing as per normal - the bank will no doubt be chasing this person for the personal guarantee.

yes my original question, maybe i was bit ambiguous, was that in what typically happens with bank repos is that owners stop paying their mortgage, and basically disappear or try to (typical human defensive behaviour).

once the bank realises that its not going to sort itself, they come in and take over the property, at this point the relationship with the bank is kaput. and if there is a shortage, then the banks will chase them and if this shortage is not met, then bankruptcy eventuates

 

[Terry_w]

and if there is a shortage, then the banks will chase them and if this shortage is not met, then bankruptcy eventuates

But they will only end up bankrupt if they can't pay the debt.

 

[Terry_w]

I believe its 5 or 7 years after bankruptcy that you cannot be a director

ASIC has the power to disqualify a person from being a director for up to 5 years. But this is only applied to some. Discharged bankrupts could be directors after day 1 of the bankruptcy finishes.

 

[Paul@PFI]

ASIC has the power to disqualify a person from being a director for up to 5 years. But this is only applied to some. Discharged bankrupts could be directors after day 1 of the bankruptcy finishes.

There are some instances where they cannot manage a corporation after bankruptcy too. In addition, The ATO are now doing rigorous checks on individuals who apply to be a SMSF director / trustee. Discharged bankrupts get special attention and a tough process that takes weeks. The ATO + APRA has powers under SISA to disqualify an individual based upon character and offences of dishonesty in addition to current bankrupts under s120

 

[Truly Exotic]

ASIC has the power to disqualify a person from being a director for up to 5 years. But this is only applied to some. Discharged bankrupts could be directors after day 1 of the bankruptcy finishes.

yes that makes sense. I do know of people who ASIC or whoever has banned them from being directors for 5-7 years

ok, lets just point out, for this person in this example, the fact that the bank has taken over means the financial position is bad, I doubt any sane person with a personal guarantee over the directorship would simply let the bank take over the property for the sake of it

chances are if they can repay the balance, then technically they arent bankrupt and probably have no adverse credit , so they can continue trading under this company or even open another one

 

[Terry_w]

chances are if they can repay the balance, then technically they arent bankrupt and probably have no adverse credit , so they can continue trading under this company or even open another one

A personal guarantee is separate from the company. A company will be wound up if it cannot pay its debts. separately the person guaranteeing a company debt will be personally liable.

 

[GreyGhost]

I want to know why they bought a property via a company structure in the first place "face palm".......

 

[Terry_w]

I want to know why they bought a property via a company structure in the first place "face palm".......

Can be a good idea in some instances - new land tax threshold, ability to hold profits to stream out later etc.

We also don't know if it is acting as trustee for a trust.

 

[GreyGhost]

Can be a good idea in some instances - new land tax threshold, ability to hold profits to stream out later etc.

We also don't know if it is acting as trustee for a trust.

Correct regarding potential to be acting in trustee capacity.
However, being conservative I would rather have the cgt concessions available to me.
Prefer to set up multiple trusts to deal with land tax threshold issues. Still more cost effective than not having cgt discount available.

In any case, client needs should he assessed and a company structure may be used in specific situations, but as a general rule not the case

 

[Terry_w]

However, being conservative I would rather have the cgt concessions available to me.
Prefer to set up multiple trusts to deal with land tax threshold issues. Still more cost effective than not having cgt discount available.

In any case, client needs should he assessed and a company structure may be used in specific situations, but as a general rule not the case

Generally I agree but this is not always the case with NSW property.

Take for instance a person who has used up their land tax threshold. They will pay land tax in their own name or if the property is owned by the trustee of a discretionary trust.

I have done some modelling with a hypothetical property valued at $500,000 with the land being 50% of the value of the property, CPI at 4% (land tax threshold increase) and values increasing by 6% pa.

If the property was owned for 10 years and then sold it the approx capital gain would be $339,606

An individual at the top tax rate would pay approx $79,807 in tax. Plus approx $60,987 in land tax over the 10 years = $140,794

A DT distributing to an individual on the top tax rate would be the same.

A DT distributing to a company would mean approx $101,882 plus land tax of $60,987 = $162,868

However, a company would pay $101,882 (30%) in tax plus there would be no land tax at all as the property is under the threshold.

However to be fair the trustee of the trust may be able to distribute to 5 individuals who each have no other income. In practice I have never seen this happen, but it is a possiblity. This could mean there is no tax payable at all, other than the land tax of $60,987


But if the trustee distributed all the gain to a non working spouse then they would pay $54170.17 in tax plus the land tax of $60,987 = $115,157

Summary Income tax and land tax payable:
Individual owner at top marginal rate before the gain = $140,794
DT flowing thru to a person on the top marginal rate = $162,868
DT flowing thru to a person with no other income = $115,157
DT flowing thru to 5 persons (adults) with no other income = $60,987
Company = $101,882

But it gets better.

Say the shares of the company were owned by a discretionary trust. The trustee of the trust could receive franked dividends from the company. There would be a tax credit for taxes the company has paid. This money could then come out potentially totally tax free to the 5 adults who are not working, assuming they are beneficiaries of this trust. That means no land tax at all and no income tax at all.

But even if there are no non working adults the company can retain the income and once the person or persons behind the company has stopped work they can cause the company to make a dividend payment to them, via the trust, when their income is low enough to maximise the use of the franking credits. It is therefore also possible that they could end up getting the money out of the company totally tax free and land tax free.

 

[GreyGhost]

Generally I agree but this is not always the case with NSW property.

Take for instance a person who has used up their land tax threshold. They will pay land tax in their own name or if the property is owned by the trustee of a discretionary trust.

I have done some modelling with a hypothetical property valued at $500,000 with the land being 50% of the value of the property, CPI at 4% (land tax threshold increase) and values increasing by 6% pa.

If the property was owned for 10 years and then sold it the approx capital gain would be $339,606

An individual at the top tax rate would pay approx $79,807 in tax. Plus approx $60,987 in land tax over the 10 years = $140,794

A DT distributing to an individual on the top tax rate would be the same.

A DT distributing to a company would mean approx $101,882 plus land tax of $60,987 = $162,868

However, a company would pay $101,882 (30%) in tax plus there would be no land tax at all as the property is under the threshold.

However to be fair the trustee of the trust may be able to distribute to 5 individuals who each have no other income. In practice I have never seen this happen, but it is a possiblity. This could mean there is no tax payable at all, other than the land tax of $60,987


But if the trustee distributed all the gain to a non working spouse then they would pay $54170.17 in tax plus the land tax of $60,987 = $115,157

Summary Income tax and land tax payable:
Individual owner at top marginal rate before the gain = $140,794
DT flowing thru to a person on the top marginal rate = $162,868
DT flowing thru to a person with no other income = $115,157
DT flowing thru to 5 persons (adults) with no other income = $60,987
Company = $101,882

But it gets better.

Say the shares of the company were owned by a discretionary trust. The trustee of the trust could receive franked dividends from the company. There would be a tax credit for taxes the company has paid. This money could then come out potentially totally tax free to the 5 adults who are not working, assuming they are beneficiaries of this trust. That means no land tax at all and no income tax at all.

But even if there are no non working adults the company can retain the income and once the person or persons behind the company has stopped work they can cause the company to make a dividend payment to them, via the trust, when their income is low enough to maximise the use of the franking credits. It is therefore also possible that they could end up getting the money out of the company totally tax free and land tax free.

Correct.
Great post and great explanation. This does assume that land would represent 50% of the site value though.
To be honest I am I'm victoria and have not had too much exposure to naw land tax laws.
To add to your post regarding a disc trust owning the shares in the bucket coy. This is how I set up all of my structures.
Trading entity typically a disc trust or unit trust, distributes to investment or bucket coy. There are no debit loans going to individuals or other trusts from the trading trust. Underneath bucket company have the investment trust which owns the shares in the bucket coy. From here distributions are fully franked. Distribute to individuals and or the other investment trust which usually has the negative gearing losses. The balance of funds after gearing losses are then distributed to individuals which will then be franked at greater than 30%.
This structure works as long as you keep debit loans under control and don't create any loans between any entities in the group, this then helps avoid the minefield of division 7a issues.
Note, this structure is suited to a larger client with a significant business and assets with high incomes to justify the bigger tax structures.

Terry I did enjoy your modelling thank you, I will look future into nsw land tax laws.