Often the first question that arises when a spouse or family member becomes bankrupt is: what will happen to our home?
Pursuant to section 58 of the Bankruptcy Act 1966 (Cth) (“the Act”), a bankrupt’s property vests in the trustee at the date of bankruptcy. This includes any interest the bankrupt has in real property.
In the case that you are a registered owner of a property as joint tenants with the now bankrupt person, the joint tenancy is severed and your legal ownership becomes tenants in common in equal shares with the trustee (and any other registered owners). The trustee then has an obligation to realise the property for the benefit of creditors of the estate. As a first step, the trustee may:
- invite you to make an offer to purchase the trustee’s interest in the property; or
- seek confirmation from you of or your co-operation to sell the property on the open market.
In either event, the trustee has duties and obligations to ensure that the property is sold for fair market value, based on expert advice received.
You may have found this page because you have received such a letter from a trustee in bankruptcy with regards to your property. So, what do you do next?
It is not always the case that the trustee will be able to realise the property, or that if realised the trustee is entitled to an equal share of the property. Equity affords several defences which may be relied on if a trustee comes knocking (pun intended).
There are a number of legal principles that often come into play when dealing with competing interests in property, particularly where the property is jointly owned by spouses. These are:
- the doctrine of exoneration;
- equitable accounting;
- a resulting trust; and
- presumption of advancement.
Doctrine of Exoneration
The Doctrine of exoneration provides that in distributing the proceeds of a property, where a party has received the sole benefit of any loan secured against the property, it is that party that should pay that loan from their interest in the property in the first instance.
An example often encountered is as follows:
- Mr and Mrs Smith own a residential property as joint tenants with a first mortgage.
- Mr Smith takes out a loan for expenses relating to his business, and the family home is provided as security for the loan by way of a second mortgage.
- The second mortgage is registered over both Mr and Mrs Smith’s interests in the property.
- Mr Smith is made bankrupt and the trustee notifies Mrs Smith of the intention to sell the property.
In this scenario, Mrs Smith can rely on the Doctrine of exoneration to say that her interest in the property is adjusted to reflect her intention only to provide surety (guarantee) for the second mortgage. As such, in distributing the proceeds from sale of the property, the second mortgage should be paid from 100% of Mr Smith’s sale proceeds before recovering any remainder from Mrs Smith.
Often it is the case that the co-owner has directly benefited from the loan, for example (with reference to the above scenario), where the business income has assisted to fund the family’s living expenses. Despite the benefit received in this scenario, the doctrine will continue to apply but careful consideration needs to be given on a case by case basis.
Equitable Accounting
This is a legal principle often seen in Family Court proceedings, but which may also afford co-owners in bankruptcy some protection when a trustee seeks to realise their property. While equitable accounting does not affect the beneficial ownership of the property, it may impact the distribution of the proceeds of sale.
Equitable accounting is the principle that when accounting for the proceeds of sale of a property, you must consider any contributions made to the expenses, recurrent outgoings, improvements and repairs, and any capital and interest of the mortgage. The aim of this is to achieve broad justice between the parties.
An example of the application of equitable accounting will arise where one spouse contributed solely to the outgoings and maintenance associated with the property over a period of time, perhaps due to illness or unemployment of the co-owner.
Resulting Trust
Where owners of a property registered as joint tenants contribute unequal shares towards the purchase price, it is presumed that they hold the legal interest proportionate to their contributions on trust, as tenants in common. This is what is referred to as a “Resulting Trust”.
Despite this, there is a presumption that certain payments were a gift, for example in the case of transfer from a husband to a wife (known as the presumption of advancement). The onus of rebutting this presumption rests on the person asserting that there was no intention for the contribution or transfer to be a gift, and each case is considered on its facts. Matters pertaining to family agreements are often times undocumented and it is important to consider what evidence can be provided to support your claim.
As most properties are purchased by way of a deposit and the balance by way of a loan in joint names, the relevant contributions to consider would then be that which made up the initial deposit.
Presumption of Advancement
This legal principle can only be applied to benefit the female in marriage, or a child. A somewhat antiquated principle, but still good law, the presumption of advancement is applied to argue (in a narrow range of relationships) that notwithstanding unequal financial contributions to the purchase of the property, the value obtained by the wife or child was intended to be a gift by the husband or parent to advance the recipient.
Summary
There are therefore a range of potential defences available in circumstances where jointly held property is at risk. One or more of these defences may apply and it is important that they investigated early so that meaningful negotiations can be entered into with the trustee in bankruptcy before steps are taking to sell a home.
