When bills are piling up, or other personal troubles are getting in the way, it can be human nature to ‘bury their head in the sand’ and pretend everything is fine. It is very common for scenarios to come across our desks where earlier intervention or action could have significantly reduced the longer-term financial and emotional impact of insolvency.
That is, of course, not a groundbreaking statement (especially from an insolvency practitioner). Many readers would also share a similar sentiment in their own professional lives. With that in mind, this article is intended to serve as a ‘horror story’ of sorts. An article that can be shared with your clients during difficult conversations to help demonstrate the significant long-term costs – both financial and personal – that ‘doing nothing’ can invite.
In this case study, we will be exploring a particular bankruptcy administration being dealt with by Worrells. Details are, of course, anonymised.
Background and context
We will be talking about the bankruptcy of John Smith – a UK national who ditched the dreary English weather for the sunny Gold Coast in the ‘70s
Mr Smith was a painter by trade and quickly found himself a dream PAYG job in his new hometown, where he remained a loyal employee for decades until his employer ceased trading and the role was made redundant. Luckily for Mr Smith, he was quickly found an opportunity to continue plying his craft as a contractor, rather than an employee, which he took with open arms. This new business was operated as a sole trader.
Issue number 1 – not seeking appropriate structuring and tax planning advice when undertaking a new venture
Mr Smith, although having lived in Australia for some time by this point, was unfamiliar with the taxation system and did not seek advice on effective structuring and planning for this new venture. This may be one of the more important milestones of this scenario. Effective planning, structuring, and advice at this point may have meant that the ensuing issues never arose, this matter never crossed our desk, and this article would have never been written. Unfortunately, that was not the case.
Mr Smith’s operated a successful business for the first few years, at which time he was handling his own affairs and tax lodgements. After a while, revenue started deteriorating, and Mr Smith was unable to meet his tax obligations. Instead of seeking professional advice, Mr Smith simply stopped engaging with the ATO. Lodgement deadlines and reminders for payment were not opened and ignored. Needless to say, this was not an effective strategy. The tax debt, penalties, and interest continued to grow exponentially.
At the same time, Mr Smith’s relationship with Mrs Smith was also deteriorating.
Issue number 2 – informal and undocumented separation from spouse
Prior to this point, Mr Smith had been living the Australian dream. Shortly after arriving in Australia, Mr Smith met his soon-to-be wife. The couple married, purchased two houses (the primary family home together with a weekend rural retreat), and had children. Around the time the business was suffering, so too was the marriage. Eventually, it reached a breaking point, and the couple separated in the mid-2000s.
The separation was informal. That is, there was no legal divorce. With multiple real properties, looming individual tax debt, and children involved, a well-informed advisor may be left scratching their head. This is also an important milestone in the context of the eventual bankruptcy. More on that later.
The couple purportedly agreed on their own terms. Mr Smith would permanently move to the rural weekender, and Mrs Smith would retain their family home. The years went by, and the informal arrangement appeared to be working without a hitch. Unfortunately, the ignored tax debt would soon come back to bite.
Issue number 3 - non-engagement with the ATO regarding outstanding obligations
Shortly before 2020, the ATO came knocking for the first time, obtaining a judgement debt for a considerable sum. Notably, a substantial portion of which comprised of interest and failure to lodge penalties. However, the COVID-19 pandemic bought Mr Smith some time, with the ATO holding off on enforcing recovery of the judgement debt. Regrettably, despite the ATO’s delay in enforcement, Mr Smith failed to make any attempt to engage with the ATO, meet the tax debt, or otherwise seek professional advice regarding his options.
After the pandemic, and once the ATO’s enforcement activity commenced again, it will be no surprise that this debt was quickly enforced. The ATO sought, and obtained, a sequestration order for Mr Smith’s bankruptcy.
Bankruptcy
The culmination of the above issues leads us to where we are today – administering Mr Smith’s bankruptcy.
Although the couple had informally separated and had effectively agreed to split the properties between them, the legal titles to the properties did not reflect this. At the time of bankruptcy, Mr Smith and Mrs Smith remained co-proprietors of each property. With seemingly a 50% beneficial interest in both properties, the Trustee in bankruptcy sought to move quickly to realise this interest for the benefit of creditors.
And so began a lengthy and costly legal battle. Mrs Smith has issued proceedings seeking a division of the marital assets – some 20 years after the informal separation – which we as Trustees in bankruptcy are now also involved in. Not only does this come at a great financial cost (with multiple parties involved – all legally represented), but the couple now has to rehash old wounds they once thought fixed over two decades ago, and no doubt there is a great personal cost to the couple individually associated with this process.
Consequences of ‘doing nothing’
In the case of Mr. and Mrs. Smith, there are tangible consequences resulting from Mr. Smith's inaction. These include:
The original ATO debt, which arose primarily due to unfamiliarity with the taxation system and a lack of professional guidance, and subsequently increased as a result of continued inaction and insufficient advice.
Legal expenses incurred by Mrs. Smith in initiating proceedings and managing related matters.
The loss of Mr. Smith’s residence. As part of the settlement, Mrs. Smith waived her claimed interest in the weekender, and the house will be sold, with all net proceeds directed to the bankruptcy estate. Consequently, Mr. Smith was required to vacate the property and secure alternative accommodation.
Increased administrative costs associated with the bankruptcy process, which will have priority against the eventual realisation of the bankrupt’s property interests.
Emotional strain experienced by the family in revisiting a separation that occurred two decades prior.
While a positive outcome is expected for creditors in the bankruptcy, there are several crucial stages throughout the narrative where earlier action could have avoided the need for bankruptcy all together. Broadly, these are summarised as:
Obtaining appropriate legal and accounting advice before commencing a new business venture to ensure appropriate structuring, tax planning, and asset protection.
Seeking professional advice and engaging with the ATO early on regarding outstanding obligations and options available.
Seeking legal guidance and advice in marital (or de facto) separations. Ensuring such matters are properly documented and conclusively dealt with.
Conclusion
As mentioned, the idea that seeking advice early can significantly reduce longer-term negative impacts is not groundbreaking. But what makes it confronting is seeing those negative impacts play out.
The lesson for individuals and advisors is simple: doing nothing rarely results in a positive outcome. It may only serve to ‘kick the bucket down the road’ at great personal and financial cost. Early conversations with an accountant, lawyer, or insolvency practitioner can preserve options, reduce costs, and prevent matters from hardening into disputes that are expensive to resolve. If a client is falling behind on lodgements, ignoring ATO obligations, or navigating a separation with shared assets, timely advice and documented decisions can be the difference between a controlled resolution and an outcome imposed by enforcement and littered with professional costs.
If this case study prompts one earlier phone call, it will have served its purpose. When pressures are mounting, the most effective step is often the first one - seeking advice and taking action before time and compounding consequences take the decision out of your hands.
At Worrells, we are always available to pick up a phone call to discuss the consequences inaction may bring. Please feel free to reach out to the author or your local Worrells principal if you have any situations you may wish to discuss.