Choose your own adventure case study: We compare three ways to deal with debt

Too often we see the fallout from ‘bad advice’ taken and therefore we believe that we need to raise awareness (in as many ways possible) as to what constitutes sound advice; and to illuminate the importance of working with a good advisor.

To assist us in raising this awareness, we have prepared a ‘choose your own adventure’ case study, which might sound flippant but we’ve used this intentionally to expose the severity of financial decisions in stressful times. It highlights the differences between the consequences of taking either the right or wrong path.


Marcus owns and operates a steel manufacturing business. For the past two years the business has been operating at a loss that has resulted in accumulated losses. This has now resulted in creditors putting significant pressure on Marcus to pay the outstanding debts. The following is a summary of Marcus’s business position.


Plant & Machinery – $50,000


Outstanding superannuation – $25,000

Accrued employee entitlements – $10,000

Creditors – $150,000

In addition to the business assets, Marcus owns real property jointly with his wife Donna. There is $50,000 total equity available in the property.

Choose your own adventure

Marcus wants to keep both the business and the real property if possible. He has three options available to him:

Head in the sand—do nothing.

Marcus decides that he doesn’t need any help. His view is that the hardest times are behind him and therefore thinks business will improve. To ensure this, he prices his jobs very competitively to increase the volume of sales. Unfortunately, he doesn’t look at what the underlying problems are and as a result continues to trade at a loss and over the following 12 months and the business suffers significantly with the level of creditors increasing and ultimately a creditor takes legal proceedings and Marcus is made bankrupt by the court.

The bankruptcy trustee is required to recover Marcus’s assets. It is considered whether the business can be sold as a ‘going concern’, but the bankruptcy trustee quickly identifies that due to the accumulated losses incurred the business has no goodwill and therefore it cannot be sold as a going concern. As a result, the business ceases to trade, the bankruptcy trustee then collects the business assets and sells them at auction. Marcus is forced to seek employment as a salaried worker.

The bankruptcy trustee then considers the position regarding the real property, which is required to be ‘realised’ if beneficial to creditors. It is determined that there is $60,000 equity in the property, with the bankrupt holding a 50 percent interest and his wife, Donna holding the other 50 percent interest. The trustee inquires as to whether Donna is interested in purchasing the property from the trustee. Donna does not have the financial capacity to purchase the property and therefore the bankruptcy trustee has to sell the property on the open market. Marcus and his family then have to vacate the property that is then sold with $40,000 being realised after all selling costs are paid and the mortgagee is paid out. Donna receives $20,000 and the bankruptcy trustee retains the other $20,000.

As a result of Marcus’s refusal to acknowledge the seriousness of his financial position he has lost his business and his family home, and now has to start all over again.

Too good to be true—seek advice from a ‘questionable’ advisor.

Marcus is at a social gathering and confides in a friend about his financial problems. His friend says that he knows of an advisor that can help and gives him the advisor’s details.

Marcus meets with the advisor who gains an understanding of Marcus’s financial position. The advisor says that he can certainly help. He confirms that Marcus will need to go bankrupt because he can’t pay all of his debts, but says that he can implement a strategy whereby Marcus will be able to keep both his business and house by transferring them to other entities. Marcus feels this seems too good to be true and questions the advisor as to whether the strategy is appropriate. The advisor assures him that it will be setup in a certain manner, a form of consideration will be paid and therefore any bankruptcy trustee won’t be able to attack the transactions. Further, the advisor states that he does it all the time. While Marcus isn’t entirely convinced, he engages the advisor on this basis given he doesn’t really see any other option.

The advisor immediately sets up a company and arranges for Donna (Marcus’s wife) to be the director and shareholder of the company. The advisor arranges for a valuation to be performed of the plant & machinery, which discloses a value of $35,000, rather than the $50,000. A sale contract is prepared whereby the company purchases the assets for $35,000. The consideration is not paid by way of cash, but rather the new company taking over the employees and their entitlements and superannuation (totalling $35,000).

The advisor then takes the steps to sell the property to Donna with a formal sale contract whereby the advisor can get sufficient borrowing for the wife to pay for the bankrupt’s share of the property’s equity of approximately $25,000. As a result the property is transferred into Donna’s name. Marcus receives payment of the $25,000 and transfers it into his superannuation fund. His advisor says that there is nothing wrong with making a superannuation contribution to his superannuation fund, and that it is specifically protected from a bankruptcy trustee.

The final step is that Marcus declares himself bankrupt by debtor’s petition. His advisor assures him that these business assets and real property are safe with Donna as the new owners.

The bankruptcy trustee immediately identifies the transfers of assets and questions Marcus about the transactions, which Marcus fully discloses.

The bankruptcy trustee promptly determines that both transactions—sale of business and the superannuation contribution—are voidable.

In relation to the sale of the business, the bankruptcy trustee finds two issues. The first relates to the valuation of $35,000. The trustee arranges for an independent valuation that confirms that the business assets are worth $50,000. Secondly the bankruptcy trustee identifies that the consideration, paid by way of the superannuation component of $25,000, is not appropriate (however, the transfer of accrued employee entitlements component is appropriate). Superannuation is a statutory debt owed to the Australian Taxation Office (ATO) and is not transferrable without the ATO’s consent and therefore remains a debt of the bankrupt estate. Given this situation the bankruptcy trustee commences immediate legal action against the company for the undervalued transaction pursuant to section 120 of the Bankruptcy Act 1966. The matter is ultimately resolved by settlement with the company handing the assets back to the bankruptcy trustee, and this ceases the business to trade, and the assets are sold at auction.

The bankruptcy trustee considers the validity of the sale of the real property and finds it is not voidable as proper consideration was paid for the bankrupt’s interest in the property. However, it is identified that the payment of the $25,000 lump sum to the superannuation fund is voidable pursuant to section 128B of the Bankruptcy Act. A payment made to a superannuation fund where the intent is to defeat creditors, is voidable. As a result the bankruptcy trustee can take appropriate action to recover the $25,000 from the superannuation fund.

As a result of Marcus engaging the questionable advisor, he is in a position where he has lost all of the business assets and subjected his wife to legal proceedings through the company. Further, the bankruptcy trustee recovered the $25,000 from the superannuation fund and Donna has to pay off a $25,000 debt given her loan from the advisor’s finance broker, which was lent at a high interest rate. This task is made even more difficult by the fact that Marcus now needs to find employment.

Make the hard decisions—seek advice from his accountant and a registered bankruptcy trustee.

Marcus identifies that he has some financial problems that he needs to seek appropriate advice on. He approaches his trusted accountant of the last eight years to get this advice. His accountant is quick to recommend getting a registered bankruptcy trustee’s advice to consider the position and get some real options.

Marcus and his accountant meet with the bankruptcy trustee. Together they determine that while the business has not been trading profitably there is some ability to turn it around if some hard decisions are made. This includes setting some strict debt collection policies, reduce the number of staff, moving premises to a more cost-effective location and establishing a more rigid job quoting system to ensure that only profitable jobs within a particular margin range are undertaken.

Given the business can be traded profitably, it is determined that Marcus is in a position to put a proposal for a personal insolvency agreement to his creditors under Part X of the Bankruptcy Act. If successful, this allows Marcus to avoid bankruptcy.

Marcus then commences the Part X estate by appointing the registered trustee as a controlling trustee. Between Marcus, the accountant, and the controlling trustee, a proposal is drafted that would enable a return to creditors that would exceed any return under a bankruptcy scenario. Under this proposal, Marcus will pay 50 percent of all net profits over the next three years to the bankruptcy trustee and the sale of some non-critical plant & machinery for the proceeds to be paid into the Part X estate. Further, Donna would also make monthly contributions from her income. This would avoid Marcus and Donna having to sell the property should the creditors accept their proposal.

The proposal is then put to a creditors meeting who vote in favour of the proposal and it is then executed.

This results in a much better outcome for Marcus and Donna. Because the issues were identified early enough he could implement a strategy, with the right advice, to make the business profitable again while retaining the home.