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Bankruptcy: Transfers to defeat creditors

3 August 2017

Bankruptcy is often seen as a negative step however it has the benefit of providing a release from debts and the chance for a fresh start.  Along with the advantages of bankruptcy, it is important to be aware that there are consequences that may apply if certain transactions made prior to bankruptcy come under scrutiny of the Trustee. 

In certain instances, a Bankruptcy Trustee has the ability to claw back payments made prior to bankruptcy.  Certain payments made prior to bankruptcy give some creditors or parties an advantage over others, or have the effect of reducing the assets available to creditors of the bankrupt.  The Bankruptcy Act has provisions to allow a Trustee to recover certain transactions for the benefit of all creditors of the bankrupt.

A transfer to defeat creditors is a transaction that is void against the Trustee in bankruptcy.  In determining if a transfer of property is void, consideration is given to both the physical transfer of property and the intent with which the transfer was made.

Section 121 of the Bankruptcy Act provides that a transfer of property by a person who later becomes a bankrupt (transferor) to another person (transferee) is void if:

  • The property would probably have become part of the transferor’s estate or would probably have been available to creditors;
  • The transferor’s main purpose in making the transfer was
  • To prevent the transferred property from becoming divisible among creditors; or
  • To hinder or delay the process of making property available for division among creditors.

An example of such a transfer is a withdrawal or transfer of cash from the bankrupt’s account, or a transfer of the bankrupt’s share in a property, to a spouse or relative.

In certain circumstances, the transfer will not be void if it can be proved that the transferee acted in good faith including:

  • The consideration given by the transferee was at least as valuable as the market value of the property;
  • The transferee was unaware of the transferor’s purpose in making the transfer;  and
  • The transferee could not have inferred that the transferor was, or was about to become insolvent.

What penalties apply?

In addition to the transferee being required to repay the amount of the transfer to the Trustee (less any consideration that may have been given by the transferee), the Trustee may lodge an objection to the bankrupt’s discharge which has the effect of extending the period of bankruptcy to 8 years.  The usual bankruptcy obligations and restrictions will apply to the bankrupt for this entire period.

Action

Bankruptcy is often seen as a negative, however it provides an opportunity to start afresh and to be released from your debts.  If you are considering bankruptcy, it is important to be aware that certain transactions undertaken prior to bankruptcy may come under scrutiny by your Trustee.  Any transaction that is deemed to be a transfer to defeat creditors is voidable against the Trustee and may be recoverable from the transferee.  A Trustee may also use any such action as grounds to object to your discharge and extend your period of bankruptcy up to 8 years. 

If you have any queries in relation to your individual financial circumstances or would like more information in relation to bankruptcy, contact Rodgers Reidy now and take advantage of the guidance and assistance of an experienced, independent advisor.

Further resources:

1.       AFSA – www.afsa.gov.au - Personal Insolvency Information for Debtors

2.       AFSA – www.afsa.gov.au - Consequences of bankruptcy

3.       AFSA – www.afsa.gov.au - Indexed Amounts

 

 

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