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.
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.