The value of owning property free of the co-owner-bankrupt - member comments
Three IPA members have responded to IPA’s query of the standard of conduct expected of a trustee in dealing with co-owned real property in which there is negative equity. IPA's query is prompted by an article in ITSA's latest Personal Insolvency Regulator. These three member comments are as follows, as paraphrased by the writer. It is a useful issue to discuss and the IPA may pursue it further.
Obviously one of the roles of a practitioner is to maximise the realisations from the insolvent's assets. It would appear that persons are realising funds from interests in real estate in situations when there may be no equity – I assume on the guise that “unless you buy the bankrupt's interest or have it transferred to you the bank's may sell up the property etc – and for this service please pay me $15,000”.
Certainly a Trustee is entitled to be paid for services and there is a value to the NBCO in getting title transferred – this value can ultimately be negotiated and is a factor of market forces.
Consider another situation when a Trustee sells an asset at 20% above valuation – does he say “no” to the extra 20%? I appreciate there are slightly different situations where one has the impression of coercion and the other does not, more a kin to a sale between a willing buyer and seller, but you need to also consider the benefit to the NBCO, even in situations where there is no equity – there is a premium perhaps to be paid to get control / ownership of the property, even with no equity.
I can understand your comments that "trustees are not to use their position to extract unreasonable or unfair consideration’, and must ‘ensure they only take account of the bankrupt’s fair share and value in property at the time an offer is made and must not speculate on what the property will be worth in future".
Obviously there is a fine line in realising assets on the basis of willing buyer and a willing seller – so a NBCO may pay a premium (pay more than the apparent level of equity, even when there is nil equity) on a willing basis.
This is different to a NBCO paying for an interest in a property where the Trustee has utilised his or her position to extract unreasonable or unfair consideration – I think it is a very fine line and Trustees need to be careful how they operate.
I think this issue should be clarified to the point that as long as the Trustee acts honestly and reasonably and with transparency, selling an interest to a NBCO is an appropriate course of action (even if no equity). What I think is not considered appropriate behaviour is where a Trustee sells an interest to a NBCO on the basis of coercion, lake of candour, etc. This is the fine line.
Commercial is getting the best price possible. It's not up to the regulator to second guess. A property s value today may be it's discounted future value therefore trustee is only getting value anyway. Trustee would not do a transaction which doesn't cover costs. Alternative is to wait 9 years plus extensions as property does not revest.
At first blush I think the issues are – Costs of transferring title – I think the trustee is entitled to be recompensed for his time and out of pocket expenses. If the trustee was seeking to recover more than what was “necessary and proper” I thinks that’s unethical.
ITSA says that it has received several complaints about trustees dealing with non-bankrupt co-owners (or discharged bankrupts) in this way, with certain trustees inviting (or only considering) offers well in excess of the available equity in the property; in some cases up to $15,000.
IPA members may wish to consider what value should be placed, for the benefit of the creditors, on an outcome that permits the non-bankrupt co-owner (NBCO) to obtain full title to the property. While that may not have a typical market value, it has a real value to the NBCO which, it may be argued, it is permissible for the trustee to ask be paid. Indeed, while each case will be different, an amount of $15,000 may in many cases represent the trustee’s remuneration, legal expenses, and other expenses in facilitating the title transfer. Alternatively, if the trustee were not to seek a price that at least covered these items, he or she may be remiss in agreeing to the transfer and thereby unfairly imposing the cost on creditors.
As ITSA says, trustees ‘are expected to exercise discretion and commercial judgement when dealing with parties to realise assets’. But it goes on to say that ‘trustees are not to use their position to extract unreasonable or unfair consideration’, and must ‘ensure they only take account of the bankrupt’s fair share and value in property at the time an offer is made' and must not 'speculate on what the property will be worth in future’, presumably if owned outright by the former NBCO. These comments may be true if there is an unfair bargaining position between the purchaser and the trustee, or if there is misrepresentation, or if the purchaser is unrepresented, but perhaps not otherwise.
IPA member comment is invited.