What comes first? unsecured loan or profit share rule?

Hi gurus,
Need some advice on the JV agreement on property development. Please...

JV project set up the Unit trust with 2 unit holders - Holder A and B (50%:50% ownership and profit share)
Holder B lent money $200k to the project as a unsecured loan.
If project proceed with sale but cash is not enough to pay Holder B's debt, how is B's unsecured loan treated?

Would loan repayment to Holder B included in Profit&Loss calculation of Unit trust, and then loss is distributed to A and B equally (Scenario A)? or
Holder B is get paid whatever cash leftover, then bear the cost of unpaid amount? (Scenario B)

Project doesn't have any other asset. Holder A's role is the 'project manager' in agreement.

<Scenario A>
Proceeds $500k
Debt - Bank ($350k)
Deb -Holder B ($200k)
Expenses ($126k)
Project loss ($176k)

Distribute loss to A ($88k)
Distribute loss to B ($88k)


<Scenario B>
Proceeds $500k
Debt - Bank ($350k)
Deb -Holder B ($24k)
Expenses ($126k)
Project loss ($0)

Deb -Holder B bear the loss of $176k

 

Neither, really.

There is insufficient cash to pay the loan to unit holder B. So it remains as a liability in the unit trust's accounts. The loss cannot be distributed to the unit holders.

Though question for the tax experts: if the unit trust goes into liquidation, can Unit Holder B then claim a tax loss on the loan?

 

Terry_w answered 'No' to this question in other thread that I created. If unit trust wound up, then capital loss will be lost.

 

This couldn't be correct. Was it lent to the trustee who used it for the project?

Was it a JV or just 2 unit holders of a unit trust?

They are 2 separate things
a) the unit trust doing some project, and
b) a loan to the unit trust.

If the trust has money it should be repaying the loan as per the agreement it entered into with the lender.
Can the trustee pay unit holders a 'income' before repaying the loan? That will depend on how it was all set up but possibly.

What agreement is this? Are they owed a fee for project managing?

Trusts can't distribute losses

if the trustee sells the property for $500k and pays out the bank $350k, there is $150k left. It will then have to pay other bills - what is the 126k expense? if this gets paid first there may be $24k left with which to repay the loan from B.

But it might be better for B if they try to put the trustee in liquidation so all unsecured creditors are treated equal and that way they might be able to get around half of the $150k

But whether they could do this will depend on a lot such as the terms of the loan agreement.

 

Yes possibly.

 

I don't know where I said no - you might be misinterpreting something i wrote

 

thats not what i asked. Thats not what terry answered either.

 

Yes correct. Holder B lent to the trustee of unit trust and, trustee purchased the property. Loan agreement is signed by between Holder B's family trust and Trustee

 

Holder A have been taking out the management fee from the project. Nothing for Holder B.
It seems unlikely to Holder B is getting any income as project is going to be loss. Net proceed can't cover all debts and outstanding expenses and Holder B's unsecured loan is third in line after two other loans.

 

The difficulty in these things is that the people who should know the details dont understand which details are important.

if the loan is from the trustee of the family trust to the trustee of the unit trust thats a different thing. And who owns the units?

 

It's JV agreement where Holder A is managing project and Holder B is assisting/learning from Holder A.
Yes trustee has been paying management fee to Holder A

 

It's for monthly interest, architect plan, stamp duty etc - project operating expenses spent so far.

 

Okay, I would like to know more about it. Can I get some property legal advice from you off-line please? How do I contact you?

 

I may misunderstood it.

 

I may misunderstood it

 

No, this is not an area I would advise on.

 

It is very costly for a JV partner in a unit trust to engage in a legal dispute concerning BOTH a usecured loan and that of beneficial rights based on the trust and the JV agreement. Even if B was the lender AND the unitholder they are not the same rights. JV agreemnets and enforcemnets of rights can be fraught with peril and legal advice before commencing is recommended. To late for that now. Your rights could be asserted through a caveat to push the trustee who borrowed to settle the loan matter THEN account for the interest and the loan discharge prior to resolving the respective unitholder rights. A solicitor should be consulted.

 

Thanks Paul. appreciate it.