Members Voluntary Liquidation – does not mean insolvency!

People often associate the word “liquidation” with insolvency or the failure/collapse of a company. While this may generally be the case, Members Voluntary Liquidations (“MVLs”) relate to the winding up of a solvent entity and fulfil quite an important purpose.
MVLs occur where the company has sufficient assets to pay all its liabilities within a short period (generally less than 12 months). In many MVLs, after the payment of all the company’s liabilities, shareholders (or members) of the company can receive a return. MVLs should not be confused with “deregistration” which we find all too often occurs.

MVLs may also provide a more tax advantageous method for the shareholders or members of a company to receive distributions (particularly in the case of pre-GST assets). MVLs can also fulfil an important role when a key director/shareholder has had a serious illness/death and the business assets need to be realised.

A Liquidator may make two types of distributions to shareholders:

  • Income distributions; or
  • Capital distributions.

1. Income Distributions

These are essentially distributions to members from profits generated by the company. These payments will be classed as dividends and generally be assessable income in the hands of the members. If the company has paid income tax, a Liquidator may issue “franked” distributions which contain franking credits and allow members to reduce their income tax. Distributions that do not contain franking credits are known as “unfranked”.

2. Capital Distributions

Capital items generally include capital reserves or gains as a result of the sale of capital assets. A capital distribution will also include the return of the initial paid-up capital to the shareholders.

The tax implications of the capital distributions will be dependent on the composition and nature of the capital asset being distributed. For example, where the capital distributions relate to pre-capital gains tax (“CGT”) profits generated by the company, generally any distributions made to shareholders in this regard would be exempt from CGT in the hands of the taxpayer.

Forms of Distributions

A Liquidator is not limited to making cash distributions to shareholders. Distributions can comprise in-specie distributions of the underlying asset to the shareholders in portion to the shareholder’s interests. An in-specie distribution allows the Liquidator to distribute assets to shareholders without converting it to cash and incurring potentially significant costs associated with the sale of assets.

Other Benefits and Taxation Considerations

In addition to the above mentioned advantages, MVLs may provide the following benefits:

  • Where shareholders have received loans from the company, a Liquidator can offset amounts previously received by shareholders in calculating the final distribution to the shareholders without the need to physically return the funds to the Liquidator.
  • Eligible taxpayers may be able to apply for 50% discount on CGT (if the capital asset has been held for more than twelve months) or small business CGT concessions such as the small business 15 year exemption or retirement exemption.
  • Stamp duty concession and exemptions may apply where a Liquidator is distributing assets.

A Liquidator will also provide the shareholders with a distribution statement setting out the composition of the distributions made to assist in the preparation of their tax returns. Notwithstanding, shareholders will need to consider their individual circumstances in determining the tax implications of the distributions. Accordingly, we recommend obtaining professional advice from a tax professional to consider whether MVLs are the most appropriate option.

It is not mandatory that shareholders appoint a Registered Liquidator as part of the MVL process. However, in our significant experience in regularly being appointed to MVLs, there are sometimes unknown complications that arise during the Liquidation. Registered Liquidators like Jones Partners are more accustomed in dealing with these issues.

If you would like to know more about MVLs and how they might be appropriate for you or a client please contact us.

Bankruptcy & Self Managed Superannuation Funds – will you be able to continue to manage it?

Many individuals, in particular business owners, are now choosing to control the destiny of their superannuation through the use a Self Managed Superannuation Fund (“SMSF”). The Australian Taxation Office (“ATO”) statistics suggest that there are now more than 500,000 SMSF’s in operation. It is likely that this number will continue to increase and that from time to time a SMSF may find itself in the position of having a bankrupt member and therefore possibly having to be wound up.

The winding up of a SMSF can quite often result from the bankruptcy of one of its members. There is more information on the ATO website about how to wind up an SMSF. Just go

SMSF’s are managed by either a corporate trustee or each member of the fund as trustees. In this article, we assume (as is most often the case) that the trustee is a corporate trustee. Certainly from Government commentary of late it appears to be that they may look at legislating that all SMSF’s must have a corporate trustee (with potentially some grandfathering provisions in the near future). We note that presently the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) requires that all members of the SMSF be directors of that corporate trustee.

  • So what happens when a member of the SMSF becomes bankrupt?

When a member of the SMSF becomes bankrupt or enters into a personal insolvency agreement (“PIA”) with their creditors as an alternative to bankruptcy, then that member becomes a “disqualified person” in accordance with the Section 120(1)(b) of the SIS Act. Further, the Corporations Act says that when an individual becomes bankrupt, “they are prohibited” from acting as a director of a company. This means that the member cannot take part in the management of the SMSF. When this happens, the trustees are required to notify the ATO immediately in writing. Failure to do so is an offence.

The above issue CANNOT be overcome by appointing someone prior to the bankruptcy event as their enduring attorney as is frequently suggested – based on Section 17A of the SIS Act this is ineffective.

Such provisions mean that SME business owners need to consistently review whether their SMSF needs to be restructured and then possibly wound up. This is particularly important where the SME may be facing financial difficulty and the business owner/s (for example husband and wife) may ultimately end up in bankruptcy (and accordingly they become a disqualified person).The typical SMSF (consisting of the husband and wife) the fund will need to be restructured if bankruptcy occurred or control of the SMSF may revert to an small APRA fund or alternatively the assets realised and rolled over into a retail fund and then the SMSF can be wound up.

  • But what if there is a non-bankrupt member – options available for them!

Members of a SMSF are permitted under the SIS Act a grace period of six (6) months from the date of bankruptcy in which to restructure the fund. Possible options for members to consider with input from their professional advisors could include:

1. IF the SMSF’s Assets are significant or lumpy (ie commercial property which may take many months to realise for a fair price) or may give rise to significant CGT issues then consider converting same into a small APRA fund (“SAF”) whereby an “approved trustee company” can be appointed to manage same. In this case, a bankrupt and even the non-bankrupt member can continue to be members of the SAF. An approved trustee company’s costs will vary depending on the specifics of the SMSF assets, but we understand range from around $5,000 upwards.

2.Rolling out the bankrupt member’s account balance to an externally managed retail fund. Obviously this would involve realisation of certain assets of the SMSF to facilitate the rollover and timing and CGT considerations would need to be given. This would leave the non-bankrupt member to operate the SMSF solely.

3.However in analysing point 2 above, it is relevant to also consider whether there may have been any breaches of the SMSF. We often see that SMSF’s are in breach of the in-house asset rules whereby they have lent money to a related business which ultimately is not recoverable because it is had to go into external administration. In instances such as this, point 2 may not be appropriate. It may be more appropriate to consider rolling out member account balances to an externally managed retail fund and then winding up the SMSF.

So in short, where an SME is in financial difficulty and may end up in some form of external administration with the flow-on effect to directors via personal guarantees, a review and discussion of the implications on the SMSF and non-bankrupt member funds should occur with the individuals and their professional advisor. Don’t leave it too late!!!

However Reminder: ALSO BE aware of the claw back provisions

In previous communications we considered in detail the various provisions within the Bankruptcy Act (“the Act”) that deal with a bankrupt’s interest in a superannuation fund. Section 116(2)(d) of the Act says that an interest in a regulated superannuation fund is not divisible property. However, Section 128B of the Act provides that a transfer (i.e. a payment) made by way of a contribution to an eligible superannuation fund with the purpose of that property then not being available to creditors is void against a Bankruptcy Trustee. This occurs for transfers on or after 28 July 2006 and includes transfers made to a SMSF.

In determining whether the person had the requisite purpose in making the contribution, the Bankruptcy Trustee will typically consider the individual’s pattern of contributions and whether the contribution in question is “out of character”. It is not always the case that an out of character contribution will automatically be void, rather, an out of character contribution may indicate that the transferor was aware of their financial problems and as a result would be required to explain the purpose of the contribution to a Bankruptcy Trustee.

Let’s consider the example of an individual who withdraws $50,000 from their SMSF to fund working capital in a business interest. Let’s assume that the business interest fails and shortly prior to bankruptcy, the individual, in an effort to repay the $50,000 to the SMSF, makes a transfer to the SMSF (either cash or some other asset). A Bankruptcy Trustee may view this transfer as out of character and made at a time when the individual was insolvent and seek to recover the amount.

Whether a particular strategy is right for you (and the other members) depends on the circumstances of the SMSF. Accordingly, it is important that members of SMSF’s facing financial difficulties (and ultimately bankruptcy) get the right professional advice at the earliest possible time.

Bankruptcy & The Family Home – it’s mine to deal with isn’t it?

Undoubtedly one of the most important questions asked by individuals who may be contemplating bankruptcy is what will happen to the family home? It is understandably a question that emotionally occupies the mind of the individual [or couple] as other key aspects centre around it, such as:

  • the impact on children and schooling [including before and after school care]; and
  • concerns regarding the ability to otherwise find somewhere with similar amenities.

Such emotion can be heightened where the spouse / co-owner who is not subject to financial distress is unaware of the current predicament.In my view, it is vital that empathy is shown in dealing with this aspect, whilst still properly dealing with same. It is the latter point, particularly where I continue to see individuals receiving incorrect advice [including that available on the internet] from supposed experts in the area.

Equally, it is vital that individuals who enter into bankruptcy understand what future impacts there may be regarding the property – even after they are discharged! A bankrupt CANNOT ASSUME that once they are discharged [which usually occurs 3 years after the commencement of bankruptcy] that they will be free to deal with their interest in the property.

This article will help explain some of the key considerations to be given when property [particularly the family home] becomes intertwined with the bankruptcy process.


1. What happens to Property [ie the Family Home] upon Bankruptcy?

In accordance with Section 58 of the Bankruptcy Act (“the Act”), upon bankruptcy all property of the bankrupt, with the exception of property outlined in Section 116 of the Act (for example certain household furniture and effects) is realisable. Hence the family home or any other real estate (including interests overseas) are available for Bankruptcy Trustee’s to meet the claims of creditors.

The effect of bankruptcy, particularly regarding real estate is that at the commencement of the bankruptcy, the bankrupt’s interest is severed from being that of a “joint owner” such that the Bankruptcy Trustee can seek to realise or sell this share for the benefit of unsecured creditors.

Shortly after the commencement of the bankruptcy, it is quite normal for a Bankruptcy Trustee to place a registered caveat over the family home (and other real estate) so that parties enquiring about the property are aware of the interest of the Bankruptcy Trustee. We regularly write to the bankrupt and co-owner (if there is one) informing them of the overall position and what options are available in terms of dealing with the equity position. It is this communication that I find from time to time which is forgotten by bankrupt’s with the passage of time.

2. So who can realise the Property / Real Estate after the commencement of bankruptcy?

Whilst a mortgagee over real estate can still exercise their rights (Section 58(5) of the Act), in the absence of this, it is the Bankruptcy Trustee that would seek to realise the bankrupt’s share in the property or the family home. Importantly, this power also this needs to be considered with Section 129AA of the Act. In short Section 129AA contemplates when the bankrupt’s interest in the property / real estate will revest or revert back to them. Generally speaking this DOES NOT occur until the end of the 6th year after they are discharged from bankruptcy. Consequently the Bankruptcy Trustee has up to 9 years to realise the property / real estate.

We have seen particularly over the past 2 years as real estate markets in Sydney and Melbourne have significantly increased that real estate which may not have had equity at the commencement or end of the bankruptcy now has and the discharged bankrupt (as their 3 year period of bankruptcy has ended) becomes quite understandably frustrated when informed that the Bankruptcy Trustee still have an entitlement to realise the equity (subject to certain considerations) for the benefit of unsecured creditors. In some cases the equity position might have increased by close to $100,000 or more!!

3. What are the key considerations to be given when considering keeping the family home or other real estate?

Shortly after the commencement of bankruptcy, a Bankruptcy Trustee will write to the bankrupt and co-owners informing them of the appointment and what options are available. Certainly this is the practice of Jones Partners. Among the options are:

  • a “Deed of Forbearance”; or
  • a “Deed of Sale”.

The former option contemplates a position where the real estate is owned solely by the bankrupt and there is an offer put forward to the Bankruptcy Trustee which results in the realisation of an amount equivalent to the equity in the property.

The later option, generally involves the co-owner or a family member making an offer to acquire the bankrupt’s share of the real estate.

Whilst it is entirely a matter for the bankrupt / co-owner or family member, our view is that once the Bankruptcy Trustee has had sufficient time to determine the equity position in the real estate, if the bankrupt (and their family) is desirous of staying in the family home, the sooner an offer is put to dealing with the equity position, the better.

Even if an offer cannot be put forward early on in the bankruptcy, we strongly suggest, particularly with regard to the family home, that the bankrupt re-consider the position annually and certainly when they are due to be discharged at the end of the 3 year period of bankruptcy.

The present property cycle as mentioned in point 2 above is clear evidence of what happens when the matter is delayed for considerable time. In making this comment, we of course realise that the act of bankruptcy itself may mean that available funds may be scarce for the family.

Ultimately, if there is sufficient equity in the family home and the bankrupt, co-owner or other family members are NOT able to put forward an acceptable offer, then the Bankruptcy Trustee will have to consider placing it on the market for sale. However, there are obviously considerations that may impact this, such as co-ownership of the property etc.

4. How is equity determined?

In determining the equity position, the Bankruptcy Trustee will generally obtain a number of market appraisals and a formal valuation.

They will also seek to confirm the present mortgage outstanding and any other particular factors (which may vary from matter to matter, ie doctrine of exoneration claims). Once they have this information, they will be able to determine the equity position.

5. The Family Home Doesn’t Need to be Lost in Bankruptcy

Whilst each particular position will need to be considered in its own right with regard to equity, individuals should not automatically believe that the family home will be lost in bankruptcy. We have and continue to be appointed to Bankrupt Estates where the bankrupt and their family reach a satisfactory arrangement with us as Bankruptcy Trustee which not only means that they do not have the significant emotional stresses to deal with by relocating, but quite often the outcome minimises the professional costs of dealing with the property and optimising the chance of a dividend to unsecured creditors.

In my next article I will consider the “Doctrine of Exoneration” and how this issue can be critical for the co-owner when putting forward an offer to the Bankruptcy Trustee for the bankrupt’s interest in real estate.