Written by Zachary Gazzard, Solicitor

What happens if a debtor attempts to divest their assets before they become bankrupt by selling or transferring the assets to a family member or friend? 

When a person is made bankrupt, a Trustee is appointed to administer the bankrupt’s estate and sell the bankrupt’s assets for the benefit of creditors. If a bankrupt dissipates assets that would have come under the Trustees control to distribute to the bankrupt’s creditors, the Bankruptcy Act 1966 (Cth) can enable the Trustee to apply for orders that the transaction is void, and thereby “claw back” the assets.

From how long ago can transfers by the debtor be “Clawed back”? 

Undervalued transactions – These are transactions within five years before the deemed commencement of the bankruptcy where a debtor sells or transfers an asset for less than its market value, of the asset or purchases something for consideration greater than it is worth.

There are different time periods for determining whether a person will have a defence to an undervalued transaction claim. Transfers that occur two years before the deemed commencement of bankruptcy are void against the Trustee if it can be shown that the bankrupt person was insolvent at the time. This period extends to four years if the transferee is a related entity of the bankrupt. The relevant period extends to five years unless the transferee can prove that the transferor was solvent at the time of the transfer.

If the transaction is void, the Trustee will need to repay any consideration given by the transferee for the transfer.

Certain transfers are excluded from the avoidance provisions and the transfer is also protected where the transferee acquired the property in good faith and provided market value for the transfer.

Transfers done with the intention to defeat creditors – These are transfers where the debtor transfers property primarily for the main purpose of preventing property from being divisible among their creditors, or to hinder or delay the property being made available for division among their creditors.

There is no time limit within which the disposition must have occurred.

A transfer of property from a person who later becomes bankrupt is void against their Trustee in bankruptcy if it can be shown that:

  1. The transferred property would probably have become part of the transferor’s estate or would probably have been available to creditors; and
  2. The transferor’s main purpose in making the transfer was to prevent, or delay the transferred property from becoming available to creditors.

If void, the Trustee in bankruptcy must repay any consideration given by the transferee for the transfer.

Preferential payments – These are transfers or payments made to unsecured creditors that result in a creditor receiving a preference over the remaining unsecured creditors at a time when the debtor was insolvent. The transaction must have occurred within 6 months prior to the deemed commencement of the bankuptcy.

It is a defence to a preferential payment claim if it can be shown that the person:

  1. was a purchaser, payee or encumbrance in good faith who gave consideration at least as valuable as market value and entered into the transaction in the ordinary course of business and did not know, or have reason to suspect, that the debtor was insolvent and that the transfer would give him preference, priority or advantage;
  2. has taken title in good faith and for market value through a creditor of the debtor;
  3. executed a conveyance, transfer, charge, payment or obligation pursuant to or under a maintenance agreement or order; or
  4. transferred the property under a debt agreement.

Some recent cases which illustrate how the claw back provisions in the Bankruptcy Act take effect are:

Nelson v Mathai (2011) 253 FLR 139; [2011] FMCA 686

A number of transfers were challenged under s 121 of the Bankruptcy Act 1966 (Cth). Where money of the transferor was used to purchase real property in the name of another person, it was held that such real property was, in substance, purchased by the transferor and transferred to the transferee and the applicant was entitled to recover the property. Alternatively, the applicant was entitled to recover the property as it was purchased entirely from the funds of the transferor and the funds could be traced to that property.

Sutherland v Byrne – Smith [2011] FMCA 632

A De facto couple had a financial agreement in place and bought property as joint owners. The couple separated after two years and sought to rely on the financial agreement to transfer the share of the male partner to Ms Byrne-Smith. The male partner filed for bankruptcy a few months later.

The financial agreement was held not to be protected as it was not an order of the Family Court. Transfer according to Financial Agreement was an undervalued transaction so could be set aside. It was not a transfer to defeat creditors as there was a relationship breakdown. The Court looked to the actual contributions to the acquisition and found the transfer to the extent of the male partners contribution to the property was void against the Trustee.

Official Trustee v Brown [2011] FMCA 88

Mr Daeveys made contributions to Ms Brown’s property prior to his three year bankruptcy. After he was discharged from bankruptcy, Daeveys applies for property settlement. The Trustee discovered his application for the property settlement.

The Trustee got Mr Daevey’s share in the property as Mr Daeveys had this interest at time of bankruptcy but failed to disclose it.