Bankruptcy Act 1966

 

 

Laws providing for the recovery of undervalued transactions and transfers to defeat creditors

 

Section 120 (1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

(b) the transferee gave no consideration for the transfer or grave consideration of less than the market value of the property

 

Section 121 of the Bankruptcy Act 1966 covers the provisions on transfers to defeat creditors providing that the following transfers are void:

(1) A transfer of property by a person who later becomes bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

 

(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b) the transferor’s main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.

 

(2) The transferor’s main purpose in making the transfer is taken to the purpose described in paragraph (1) (b) if it can be reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

 

(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.

 

(4A) Under this section there is a rebuttable presumption which arises that the transferor was, or was about to become insolvent at the time of the transfer it is established that the transferor:

(a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

(b) having kept such books, accounts and records, has not preserved them.

 

Superannuation contributions made to defeat creditors where a contributor is a person who later becomes a bankrupt is covered by section 128B which provides the following transfers to be void:

(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) the transfer is made by way of a contribution to an eligible superannuation plan; and

(b) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(c) the transferor’s main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor’s creditors; and

(d) the transfer occurs on or after 28 July 2006.

 

Superannuation contributions made to defeat creditors where contributor is a third party is covered by section 128C which provides the following transfers to be void:

(1) If:

(a) a person (the transferor) transfers property to another person, (the transferee); and

(b) the transfer is by way of a contribution to an eligible superannuation plan for the benefit of a person who later becomes a bankrupt (the beneficiary); and

(c) the transferor did so under a scheme to which the beneficiary was a party; and

(d) the property would probably have become part of the beneficiary’s estate or would probably have been available to creditors if the property had not been transferred; and

(e) the beneficiary’s main purpose in entering into the scheme was:

(i) to prevent the transferred property from becoming divisible among the beneficiary’s creditors; or

(ii) to hinder or delay the process of making property available for division among the beneficiary’s creditors; and

(iii) the transfer occurred on or after 28 July 2006; the transfer is void against the trustee in the beneficiary’s bankruptcy.

 

Bankruptcy Guidelines under the Australian Financial Security Authority.

 

Policy underpinning this law

Australian Financial Security Authority (AFSA) provides that under the Bankruptcy Act 1966, the policy underpinning the legislation and the Official Receiver’s practice is that a debtor is entitled to seek relief from an unmanageable debt burden which is to avail of the bankruptcy process in an event that such debtor is unable to resolve his or her financial difficulties using other means thereof.  Bankruptcy is considered as a last resort option and carries with it serious consequences.  Although the debtor will be released from certain debts categories at the end of his or her bankruptcy, there are some debts which remains to be paid as they are not covered by bankruptcy.

In Commonwealth countries including Australia, when individuals become bankrupt the legal mechanism is the bankruptcy act.  The goal of the bankruptcy act, is effective debt collection.  Another important feature of the bankruptcy act, is for individual debtors who resort to bankruptcy either for relief or rehabilitation.  Such discharge is viewed as a grant of a financial fresh start for a debtor.  The feature to serve as a co collective debt-collection instrument and for the protection of the interest of the debtors in providing for their discharge have entered bankruptcy laws at different stages.  The bankruptcy act concerns itself in the creditor’s maximisation of return to recover their debts, protect the interests of the debtors for their discharge, the protection of the public from culpable bankrupts, among others are some of the underpinning policies of this law.

 

Relevant Case Law

 

Official Trustee in Bankruptcy v Lopatinsky [2003] FCAFC 109 ruled that it would be inconsistent with the observations of Wilcox J and Branson J in Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26 (28 February 2003), to proceed upon the basis that “consideration” could be something less than the ordinary legal and commercial understanding of that term as it would be inconsistent with the statutory purpose of the section which is designed to protect creditors to hold that the Parliament intended to enable a transferee to provide something less than the well-established legal definition of “consideration”. The consideration therefore must adhere to the legal definition of consideration, and cannot be past consideration as in the case of Mateo.

 

In the case of Sutherland v Brien [1999] NSWSC 155, the Court ruled that its task is twofold: first is to identify as precisely as one can, the consideration which was in fact given and secondly, if consideration was given, to determine whether the value of the consideration at the time of the transfers was less than the market value of the property transferred. Therefore in determining if a transaction was undervalued pursuant to section 120 of the bankruptcy Act which is a voidable transaction in bankruptcy, firstly there must be a determination as to whether legal consideration was given;  and if so, whether such value of the consideration was equal to the market value of the property which was transferred.

 

In the case of James v Commonwealth Bank of Australia [2015] FCA 582, the Court said “Although there appears to be a dearth of authority on the point, section 122(1) is directed at a situation of the pool of assets being available to creditors generally, being detrimentally affected by a transaction in favour of one creditor.” What one has to do is to consider the creditors situation generally before the transaction and thereafter look at the situation and see whether the other creditors have been disadvantaged.  The main point of consideration is that the transaction must have a detrimental effect on other creditors and in favour of one creditor.

 

In Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37, the Court ruled that cases such as Richardson v The Commercial Banking Company of Sydney Ltd [1952] HCA 8; 85 CLR 110; [1952] ALR 315 do focus consideration on the ultimate effect of the transaction with respect to general creditors over and against the relevant creditor. Therefore if one can see that the position of the general creditors after the transaction was no worse than it was before the transaction then said transaction does not have the effect of giving preference over one creditor.

 

In Orix Australia Corporation Limited v McCormick [2005] FCA 1032 (28 July 2005), the court considered that the scope of an enduring power of attorney under Queensland law and ruled that the same is not wide enough to include the presentation of a debtor’s petition by the attorney. Simply put, the ability of the Official Receiver in accepting the petition of the debtor which is presented through a power of attorney or under a Guardianship Board order or similar, could be considered doubtful and such applications may not then be accepted.  The Court further opined that a debtor cannot become bankrupt by force of s 55 (4A) (b) of the Bankruptcy Act 1996 (Cth) on a debtor’s petition presented to the Official Receiver against the debtor by an attorney ostensibly on the debtor’s behalf.

 

The case of Mathai v Kwee [19 July 2005] FCA 932 is instructive in establishing the Australian connection and regarding the requirement to have both “a place where in the ordinary course of a person’s life he regularly or customarily lives” and “some element of permanence, to be contrasted with a place he stays only casually  or intermittently”.  It is in this case where the court opined that there is a difference between simply being a “resident” in Australia and being “ordinarily resident” in which the latter connotes more than just owing a house in Australia.  It is therefore essential that circumstances surrounding the person must be ascertained at the time of his act of bankruptcy.

 

The court examined the closely-related concept of “habitual residence in the case of Gainsford v Tannenbaum [2012] FCA 904 where in relied on LK v Director-General, DOCS [2009] HCA 9 (11 March 2009) where the High Court considered that “the ordinary meaning of the composite expression” is to be regarded as a question of fact, and therefore has accepted that the habitual residence identifies the centre of a person’s personal and family life as disclosed by the facts of an individual’s activities.

 

Overview of the most effective way for the trustee in bankruptcy to recover payments

 

The trustee after the debtor becomes bankrupt pursuant to section 77 of the Act must ensure to obtain from such bankrupt all books that are in the latter’s possession which relates to his or her examinable affairs; and any passport or document for the purpose of travel. The trustee must likewise ensure that the bankrupt attend said trustee whenever required and provide such information about his or her conduct and examinable affairs as required by the trustee; to ensure that the bankrupt advise the trustee of any material change between the time the bankrupt lodged his or her statement of affairs and the time the bankrupt became a bankrupt; Such a material change occur later, the trustee must ensure that the bankrupt advise him or her of the change as soon as practicable; the trustee must likewise ensure that the bankrupt attend a meeting of creditors as required and at each meeting give such information regarding the bankrupt’s conduct and examinable affairs; Ensure the bankrupt’s faithful compliance of the bankrupt to the orders of the court and timely execution of instruments in relation to his or her property; Ensure that the bankrupt disclose as soon as practicable property that is acquired by him or her, or property that devolves on him or her, before the bankrupt’s discharge, being property divisible amongst the creditors; Ensure that the bankrupt aids the trustee to the utmost of his or her power in the administration of his or her estate.

 

1. The trustee must file an application to the relevant Court or Registrar ‘Discovery of Bankrupt’s Property under section 81 (1) (b) of the Act.
2. Section 137 confers upon the trustee a right to inspect the goods held as security after giving due notice, in effect, the person holding the goods is not entitled to realize his or her security until he or she has given the trustee a reasonable opportunity of inspecting the goods and of exercising his or her right of redemption if he or she thinks fit to do so.
3. A Trustee may apply to Court orders in relation to property of entity controlled by bankrupt or from which bankrupt derived a benefit at any time within 6 years after the date of the bankruptcy pursuant to Section 139 A of the Act.
4. The Trustee must assess the income of a bankrupt versus the original assessment to ascertain if it exceeds the actual income threshold amount applicable in relation to the bankrupt when that assessment was made, since the bankrupt is liable to pay to the trustee a contribution in respect of that period pursuant to section 139P.
5. Likewise, the trustee must determine the income of the bankrupt during a contribution assessment period as when the subsequent assessment exceeds the actual income threshold amount applicable, then the bankrupt is liable to pay the trustee a contribution in respect of that period under Section 139Q
6. The trustee must at all times secure evidence of income from the bankrupt pursuant to Section 139U to ascertain whether his or her circumstances has favourably improved.
7. The trustee must ensure compliance of the bankrupt to open and maintain supervised account under Section 139ZIE.
8. Trustee must ensure that bankrupt’s monetary income be deposited to supervised account under Section 139ZIF.
9. Trustee must supervise withdrawals from supervised account under Section 139ZIG.
10. The trustee has the power to ensure that the bankrupt does not enter into a constructive income receipt arrangement pursuant to Section 139ZIH.
11. The trustee must ensure that the bankrupt does not enter into a non-monetary income receipt arrangements as provided for by Section 139ZIHA.
12. The trustee must ensure that the bankrupt to whom the supervised account regime applies must not receive income in the form of cash under Section 139ZII.
13. The trustee has the power to grant an injunction against the bankrupt pursuant to Section 139ZIJ restraining the latter from engaging in the conduct and if in the Court’s opinion, it is desirable to do so-requiring the bankrupt to do something. This is material if the bankrupt refused or failed or is proposing to fail to do an act or thing, and the same is in contravention of the agreement.
14. If the administrator of a debt agreement dies, the Official Trustee becomes the replacement administrator of that debt agreement under Section 185ZB.
15. Ensure that the trustee exercise his powers over a bankrupt who has an intent to leave Australia and defeat creditors under Section 272 in which a trustee may impose written conditions on a consent given to a bankrupt who will leave Australia or intend to leave prior to his bankruptcy discharge, and likewise impose conditions regarding the payment of contribution under section 139P or 139Q.
16. The trustee must take every single step necessary for the protection of the property of the debtor pursuant to section 276 for its preservation and eventual monetary realisation to satisfy the debt.
17. The trustee must ensure that the bankrupt must keep books that record and explain any income derived by the bankrupt and record particulars of any employment of the bankrupt, and record and explain any other dealings, transactions or financial or business affairs of the bankrupt, during the period of the bankruptcy and retain such books until discharged pursuant to section 277A.

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