A Common Occurrence in the Face of Financial Distress

Bankruptcy trustees frequently encounter cases where individuals experiencing financial difficulty transfer assets—particularly the family home—to a spouse or other family member for little or no consideration (payment). This is especially common in situations where a soon-to-be bankrupt person, often the husband in a traditional property setup, transfers ownership to their spouse in anticipation of insolvency.

Once a person is declared bankrupt and a trustee is appointed, one of the trustee’s key responsibilities is to review prior financial dealings to determine whether any transactions may be voidable under the Bankruptcy Act 1966 (Cth).

This article outlines how trustees can “claw back” properties that have been transferred for less than market value.

When are undervalued property transfers void against the trustee?

Section 120(1) Bankruptcy Act 1966 (Cth):

A transfer of property made by a person who later becomes bankrupt (the transferor) is void against the trustee in bankruptcy if:

  • The transfer occurred within five years before the commencement of the bankruptcy; and
  • The transferee gave no consideration or gave consideration of less than market value for the property.

What about transfers to related parties (like a spouse)?

Transfers to spouses and other related entities are subject to closer scrutiny under section 120(3). This section introduces a Related Entity Presumption:

If the transferee is a related entity (which includes a spouse under section 5(1) of the Act), and the transfer occurred within four years before bankruptcy, it is presumed to be undervalued—unless the transferee can prove otherwise.

In effect, this reverses the onus of proof, requiring the related party (e.g. the spouse) to demonstrate that the transfer was for market value or was part of a legitimate financial arrangement.

The Takeaway

Transferring the family home to a spouse before bankruptcy will not protect it. If the transfer was undervalued or to a related party, it may be clawed back by a trustee. Importantly, undervalued transfers are just one of several clawback mechanisms available to trustees under the Bankruptcy Act. Always seek advice before shifting assets during financial distress.