When structuring your personal assets, it’s crucial to make the right choices that see them secured against any liability.
Unfortunately, this doesn’t always happen.
The following case study is based on real-life events, and is a stark reminder of the impact that making early wrong decisions can have on your personal assets. The names have been changed for privacy reasons.
If you want to protect your personal assets, get in touch with a Liston Newton business adviser immediately. We will take the time to help you understand the best business structure to minimise your liability, and keep your family safe and secure.
The situation
Phil owns a real estate agency that has been growing steadily over the past three years. Excited about this growth, he decides to move ahead and begin scaling his business.
He does this by:
- Signing a three-year lease agreement for the existing office space property
- Purchasing five company cars for himself and his sales managers, on a hire purchase agreement with the bank, total amount borrowed is $500,000.
- Borrowing $200,000 from the bank to help with working capital
Prior to starting his business, Phil had a keen interest in the share market, and was in possession of a healthy share portfolio that he’d spent the last 15 years cultivating. He also owns an investment property, and a beautiful family home in Camberwell.
The issue
After a period of significant growth, things start to turn. Two of Phil’s biggest corporate clients conclude their contracts with his agency in the same month.
Suddenly, a huge gap in revenue has appeared.
Things start to go downhill
In order to make payroll, and work on replacing the clients he lost, Phil needs to increase his overdraft with the bank by $100,000.
But when Phil meets with the bank, he is devastated by their response. Due to the loss of revenue the bank has declined his request. Not only that, but they have recalled the $200,000 loan and demanded it be repaid in full within three months.
When Phil originally took the loan out from the bank, he also signed a mortgage debenture. This means that if he doesn't pay the debt, the bank has the right to take over his company and liquidate it.
Part of the loan recall process involves the bank sending an investigating accountant to do a full audit on the viability of Phil’s business. According to the bank, this is mandatory, and Phil is required to pay for this service upfront to the tune of $30,000.
When the investigating accountant completes their audit, they report back to the bank saying that Phil’s business is past the point of saving and it has no future.
Liquidating the business
The bank decides to place the business into liquidation. The liquidator’s job is to recover as much money back for the bank as possible.
The first priority is the $200,000 that Phil owes the bank. He only has $20,000 cash in his bank account, so the liquidator takes control of this. A debt of $180,000 remains.
Second is the $500,000 owing for the five cars. The liquidator sells the cars at fire sale value for $250,000. This leaves $250,000 owing to the bank.
Finally, Phil signed a three-year lease on the office building, however the landlord has told Phil that they’re unable to relet the building due to a drop in demand. At this point in time, Phil is stuck with the rent for the upcoming three years, which is $150,000 in total.
How it plays out
His business can’t repay the money, so as the individual Phil is now being chased for these debts.
This is because when Phil signed the contracts, he signed a personal guarantee for all three. The issue here is that he didn’t understand the full extent of what a personal guarantee meant when he signed it. He didn’t bother to take a careful look at how his personal assets are structured, nor the level of liability he was agreeing to shoulder.
Phil had kept his family home, the investment property, and the share portfolio all under his own name, which left him with unlimited liability, and zero protection.
As he is unable to repay his debts, the bank and the landlord take Phil to court in order to recover their loans.
To repay the debts, Phil is forced to sell his family home, his investment property, and his entire share portfolio.
This is the worst possible outcome for Phil, his wife, and three children. The family is destitute, and must start again with no money, and no home to live in.
What if Phil had structured his personal assets correctly?
If Phil had structured his personal assets correctly, things would have played out much differently.
To do so, Phil could have made the following structural changes:
- Put their family home under his wife’s name
- Purchased his investment properties and share portfolio via a family trust
- Placed a company as the trustee of the family trust, with his wife as the director of the company
While this doesn’t stop his two major clients from concluding their contracts, it does see the resulting impacts play out much differently.
In this situation, after receiving the news from the bank that they were taking his business, Phil has no choice but to declare bankruptcy. In this situation, the flow-on impact stops there.
Phil and his family are overwhelmed and confused at the outcome, but they are grateful that they haven’t lost their family home, the investment property, and Phil’s share portfolio.
Of course, this is still an undesirable position to be in, but it is the best possible outcome from a difficult situation such as this.
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Getting the right support is critical
Situations like this can and do happen. This case study demonstrates that taking the time upfront to get these technicalities all lined up can be life-changing, and save untold heartache in the future.
Situations like this all come down to understanding. We encourage all of our clients to consider if they have structured their assets in the correct way.
Timing is everything with asset protection. Even if you are simply curious about your particular situation, please don’t hesitate to reach out to Liston Newton Advisory today.
With over 40 years of experience, we have analysed and researched the fine print around these particular situations, and are well equipped to help navigate you through them—and avoid them altogether.
