Superannuation a useful way to protect personal assets of individuals

Asset ProtectionIt is true that superannuation funds are ordinarily protected property in the event that an individual becomes bankrupt.  There is however and exception to this general principle where a superannuation contribution has been made to defeat the creditors.  In particular Section 128 B of the Bankruptcy Act makes specific provision in relation to transfers of property to a super fund where it can be inferred from all of the circumstances that at the time of the transfer, the transferor was or was about to become insolvent.  The kinds of transactions envisaged by these provisions relate to unusually large and irregular payments that are outside of the normal scope of the individual’s contribution to superannuation.
Unfortunately there are no cases decided on what this constitutes.

One problem that does occur is that if an individual becomes bankrupt after receiving a lump sum distribution from a superannuation fund.  The protection afforded by Section 116 no longer applies as the funds received are simply divisible property within the meaning of the Bankruptcy Act.  In these circumstances a debtor would be wise to delay receiving superannuation money until after the date of the bankruptcy.

Another problem occurs in relation to self-managed superannuation funds.  Pursuant to the superannuation legislation, an individual who is a beneficiary under a self-managed super fund must be a trustee of the fund, either individually or as a director of a trustee company.  Unfortunately the legislation prevents a person who is a bankrupt from being a trustee under of a self-managed superannuation fund and the Corporations Act, prevents an individual from being a director of a company if that individual is bankrupt.  This means that whilst the intention of the Bankruptcy Act is to protect superannuation from creditors, in the case of a self-managed super fund there are practical difficulties.  One solution for an individual in these circumstances is to roll their superannuation into a retail fund.  Whilst this is not an ideal solution, particularly in that the individual, during the course of the bankruptcy loses control over the investment strategy in relation to the super fund, it does not of itself erode the protected nature of the superannuation, afforded by the Bankruptcy Act in relation to superannuation.

Finally, if the bankrupt receives their superannuation benefits by way of an annuity or pension, that will be taken into account by the trustee in calculating the bankrupt’s income for the purpose of the Compulsory Income Contribution Scheme.  Therefore an individual facing bankruptcy is much better to receive a lump sum from his or her superannuation fund rather than an annuity.



Protecting Inherited Personal Assets In the event of Bankruptcy

Protecting Inherited  Personal Assets In the event of Bankruptcy

One issue that frequently arises in relation to the administration of bankrupt estates is the difficulty of the bankrupt being a beneficiary under a Will.

Divisible property is defined broadly in the Bankruptcy Act and it includes, not only property owned by the bankrupt at the time of the bankruptcy, but also property acquired by the bankrupt after bankruptcy up until the time of the discharge, which is usually three years.  This is referred to as “after acquired property”.

The most common form of after acquired property is inheritance.  Simply put, if a bankrupt inherits money or property from a parent or some other person, that property forms part of the assets available to the trustee for distribution to creditors.  Of course, if the benefactor changes the Will and dis-inherits the individual, the problem is avoided, but on its own, this can have many practical problems quite apart from the enormous relationship issues that might be created amongst siblings.  In addition it is not uncommon for bankrupts to remain circumspect about their financial affairs when it comes to relatives particularly parents, and consequently, parents may be totally unaware of their children’s dire financial circumstances.

A useful solution to this problem would be to have a standard clause in every Will which specifically refers to a bankruptcy event and creates a testamentary trust in the event of the bankruptcy of any beneficiary.  Such a standard clause would avoid the necessity to revisit the Will in the event of a bankruptcy and the complications that may arise in these circumstances.


Asset Protection for Directors and Business Owners

Antecedent transactions

Business owners are often anxious about what might happen to their private assets should their business runs into difficulties and ultimately fail.

Many individuals contemplate transferring private property into some form of entity separate from the individual (such as a company or a trust), or transferring the property to a close relative or friend in the hope that if something untoward happened to them creditors would not be able to access the property.

Unfortunately the Australian Bankruptcy Act anticipates this kind of conduct and in certain circumstances affords provisions for a subsequent Bankruptcy Trustee to reverse the effect of a transfer.

In particular, two sections are relevant.  Section 120 of the Bankruptcy Act deals with transfers of property for undervalue or for no value at all.  Section 121 deals specifically with transfers of property with the intention of defeating creditors.

Undervalued Transactions

These provisions make void transfers of property within 5 years of the date of bankruptcy.  Certain kinds of property are of course exempted.  When the property is transferred to a related party, even if that party can demonstrate that at the time the transfer was affected, the transferor was solvent, i.e., can meet all his or her debts, the transfer may still be void if it is within 4 years of the date of bankruptcy.

The situation is a little easier if the property is transferred to an unrelated party.  In those circumstances, the relation back period is only 2 years.

What this means is that if an individual decides to transfer his house, for example to his daughter, and at the time of the transfer he has no debts or liabilities, the transfer may still be void as against a future bankruptcy trustee if the transfer is within 4 years.  This is because the transferee is a related party.

Transfers designed to defeat the creditors

These provisions introduce the concept of intention to defeat the creditors and the Act specifically states that if the transfer is done at a time when the transferor is insolvent, then that is an indication that the transfer can be taken to have its main purpose in defeating creditors.  Clearly the fact that there is no time limit placed on reversing transactions of this nature, these provisions are very powerful indeed.