The question of whether or not an undischarged bankrupt broker is entitled to receive upfront or trail commission is determined by the interplay of their commission agreement and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
The commission agreement
Most commission agreements contain clauses specifically governing the effect of bankruptcy and insolvency events. The terms of the contract will dictate a bankrupt broker’s entitlement to commission.
The relevant provisions vary from excluding any entitlement to commission when a bankruptcy or insolvency event occurs, to silence, to continuing the broker’s entitlement of receiving commission payments. Many allow for termination (of the agreement and commission) if the broker is subject to a banning order.
While ASIC may make a banning order against a person if they become insolvent or bankrupt, the ban is discretionary and an individual is not necessarily prohibited from providing credit services. However, the circumstances of the bankruptcy and the broker’s candour regarding it may become relevant issues. ASIC may conclude the circumstances or candour mean that the broker is not of “good fame and character” or a “fit and proper person” to provide credit services.
For example, in 2014 ASIC banned a Queensland-based authorised representative of an Australian Financial Services license for a period of six months because the authorised representative:
“…falsely represented to his Australian financial services (AFS) licensee that he was not a bankrupt, and in doing so deprived the AFS licensee of the opportunity to disclose his bankruptcy to the AFS licensee’s insurer.”
Other considerations apply if the broker uses a company for executing the broker agreement. An undischarged bankrupt is automatically disqualified from managing a corporation and ceases to be a director unless granted leave by the Court to manage a corporation.
Who receives the commission earned before bankruptcy, if it is still payable?
Assuming the commission agreement provides for trail to be paid notwithstanding bankruptcy the next question is, who gets the commission?
The property of the bankrupt (save for irrelevant exemptions) automatically vests in the bankrupt’s trustee in bankruptcy (to be distributed amongst creditors) by virtue of the Bankruptcy Act.
Under most commission agreements the broker’s right commissions is an accrued right. This means the broker is entitled to it even though it may not be payable until some later date (ie: trail). An accrued right is part of the bankrupt’s property and therefore vests in the trustee in bankruptcy.
By contrast, some commission agreements, such as mortgage management agreements, include a management component. These agreements sometimes do not make it clear what portion of the trail commission is an accrued right and what portion is payment for the management functions. Such agreements are poorly drafted and can lead to expensive disputes in the event of insolvency or a parting of ways.
If the commission agreement is made through a company, and the broker owns all the shares in the company, the shares vest in trustee in bankruptcy (to be distributed amongst creditors). However if the shares are held by parties other than the bankrupt broker, such as the broker’s wife or mother, the trustee in bankruptcy cannot lay claim to the commissions.
If the shares, or the entitlement to commission, are held on behalf of a discretionary trust then the trustee in bankruptcy cannot lay claim to the commissions. This is because the trustee has an absolute discretion to pay the commission to whichever beneficiary he or she or it decides. While the broker is not bankrupt this will be the broker. If the broker becomes bankrupt it will be other beneficiaries, such as the broker’s wife or children.
Who receives the commission earned during bankruptcy?
Income or commission which a bankrupt broker receives during their bankruptcy vests in the bankrupt rather than the trustee, subject to them making the mandatory contributions to their bankrupt estate when their income exceeds the relevant threshold. However, the broker should exercise abundant caution in the way such income is expended because any property acquired by the broker during their bankruptcy automatically vests in their trustee. For example, any shares which a bankrupt broker purchases with the income they receive during bankruptcy will vest in their trustee.
Advice for brokers
Firstly, brokers should make the effort to negotiate an agreement or variation to provide for the continued payment of commission in the event of your bankruptcy. In our experience most aggregators, lenders and managers will agree, but not necessarily volunteer this concession, it is after all, only fair. There is a strong argument that a provision which provides for forfeiture in the event of bankruptcy is either an unenforceable forfeiture or an unjust standard provision however a bankrupt has no ability to argue these matters. You need to put your house in order before something happens.
Secondly brokers should ensure their commission, and especially their trail commission, is payable to a discretionary family trust which they maintain de facto control of. The trustee of the commissions should be a corporate vehicle which does not engage in other activities (at least not in its capacity as trustee of the trust). This ensures that in the unfortunate event of bankruptcy your trail will be safe from your creditors. No one has a crystal ball, even if you are not developing property or undertaking some other venture that could incur large debts, the risk of being sued for negligence, and your insurance for one reason or another not responding, is ever present. Many bankruptcies occur through no fault of the bankrupt, witness Australia’s longest serving Chief Justice of the High Court, Sir Garfield Barwick, who was made bankrupt as a result of guaranteeing a debt.
Thirdly your trail book is only one of the assets you should protect. The other big one is your family home. It should also be put out of reach of your creditors, and this can be done quickly with inexpensive asset protection structure known as an asset protection mortgage.
Finally, it should be pointed out that many bankruptcies occur as a result of marital breakdown and many marital breakdowns occur as a result of bankruptcy. Taking precautions ahead of time may help save your marriage, or, if your marriage fails it will ensure your assets are shared between you and your wife and not forfeited to your aggregator or whoever pays your commissions.
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