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Newsletter Issue 3
The Law of Bankruptcy is continually evolving and in the current climate, is the subject of increased client enquiries. This newsletter includes two articles in the area. Melinda Di Condio's article A Spouse's entitlement to the Property of A Bankrupt Estate explains how, under amendments to the Family Law Act 1975, a non-bankrupt spouse may be entitled to obtain a proportion of the bankrupt spouse's property as a consequence of his or her contributions to the relationship. The non-bankrupt spouse's interests may now be directly balanced by the Court with the interests of the unsecured creditors. Sean Brogan's article The Treatment of Superannuation in Bankruptcy explains how, in certain circumstances, a trustee in bankruptcy may be entitled to claw back superannuation contributions, if it can be shown that the contributions were made for the purpose of preventing, hindering or delaying payment to creditors.
Treatment of Superannuation in Bankruptcy
As a direct result of the economic climate we have received a number of requests for advice regarding the ability of a trustee in bankruptcy to access a person's superannuation.
Generally a person's superannuation is protected from creditors in the event of bankruptcy. However, a trustee in bankruptcy may claw back superannuation contributions if it can be shown that the contributions were made for the purpose of preventing, hindering or delaying payment to creditors.
In determining whether a contribution may be clawed back, the courts will look at the timing of a contribution and also the pattern and history of contributions. By way of example, a large one off lump sum contribution of say $150,000 made within the 6 months prior to a person filing for bankruptcy would be more likely to attract the attention of a trustee as opposed to contributions of say $1,000 made each month over the last 5 years.
Importantly the Bankruptcy Act now also provides for a rebuttable presumption of insolvency in the event that a bankrupt has failed to maintain and keep usual records disclosing his or her financial position. Consequently a bankrupt will need to be able to produce records evidencing their solvency at the time the contribution in question was made. There is no time limitation to which the presumption can be applied. Theoretically this means that contributions made 20 years ago could be clawed back if a bankrupt has failed to keep records of his or her financial position at the time the contribution was made and the presumption is not otherwise able to be rebutted.
How a person receives money from their superannuation fund while bankrupt should also be considered. Lump sum superannuation payments are protected from creditors. However, periodic pension payments above set threshold levels will be available to creditors. The threshold levels as at 22 October 2008 range between $41,250.30 and $56,100.41 depending on the number of dependents the bankrupt has. The threshold levels are adjusted bi-annually to account for changes in inflation.
If you would like any further information regarding the content of this article, please contact Peter McLachlan or Sean Brogan on (02) 9229 2222.
Sean Brogan
A Spouse's Entitlement to the Property of a Bankrupt Estate
In circumstances where a party to a marriage or a de facto relationship becomes a bankrupt, his or her non-bankrupt spouse is able to commence proceedings in a court with jurisdiction under the Family Law Act 1975 to obtain an entitlement of property from the bankrupt estate. The non-bankrupt spouse is thus able to compete with the trustee in bankruptcy for a share of the property of the bankrupt estate. The non-bankrupt spouse's entitlement depends on various factors including his or her contribution, both financial and non-financial, to the assets of the bankrupt spouse, but it is subject to the Court applying a balancing act between the claims of the non-bankrupt spouse and the unsecured creditors.
Upon bankruptcy, the assets of the bankrupt spouse will vest in the trustee in bankruptcy. Generally superannuation and household goods are excluded from the bankrupt estate.
The Family Law Act 1975, which now applies to de facto couples, was amended in 2005 to provide a remedy for the non-bankrupt spouse to obtain a proportion of property that he or she would have otherwise been entitled to as a consequence of his or her contributions to the relationship. In Trustee in Bankruptcy & Lemnos [2009] FamCAFC 20 the Full Court of the Family Court confirmed that the effect of the 2005 amendments is that the interests of the unsecured creditors do not automatically prevail over the interests of the non-bankrupt spouse. However, the Court determined that the 2005 legislation requires the Court to balance the competing claims of the non-bankrupt spouse and the unsecured creditors in the exercise of the wide discretion the Court has to determine property matters.
Prior to the 2005 legislation, the non-bankrupt spouse would rank as an ordinary unsecured creditor of the bankrupt estate. The non-bankrupt spouse is now in a position whereby his or her interests may be directly balanced with those of the unsecured creditors which, subject to the specific facts of the case, is expected to provide a much greater distribution of property to the non-bankrupt spouse from the bankrupt estate than was previously provided for under general bankruptcy legislation.
For further information about family law and bankruptcy, please contact Melinda Di Condio on (02) 9229 2222 or at
mdicondio@mtpartners.com.au
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Melinda Di Condio
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