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Surprise for property developer 17 Aug 2015

Spare a thought for Mr X who borrowed a large sum of money for a development project, which came unstuck.

Five houses were built and all of them were sold to pay back the mortgage. Shortly afterwards, the company was put into liquidation. The liquidator argued that the sole company director had to pay GST, personally, to the IRD.

He pointed to the Companies Act. You are not allowed to incur a debt when you know you can't pay it back. In this case, by selling the properties he incurred a debt to the IRD he knew he couldn’t pay.

He was therefore liable to pay it out of his own pocket.

What's the solution? When borrowing money for a development project, you would need an agreement that if there was a mortgagee sale the IRD would be paid first out of the proceeds.

It might be hard to find anyone who would lend you money on this basis, but that's what you need.

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