It is commonly known that the property of a bankrupt vests in the bankruptcy trustee upon appointment, however, a common misconception is that the bankrupt’s superannuation is safe. Unfortunately that is not always the case and if you are considering voluntary bankruptcy or exploring options with one or more creditors, it is important that you are aware of how your superannuation contributions pre-bankruptcy will be treated by your trustee.
Is superannuation ‘divisible property’?
Section 116(1) of the Bankruptcy Act 1966 sets out the property of a bankrupt that is divisible amongst his/her creditors. Section 116(2)(d), however, provides that the interest of the bankrupt in a regulated superannuation fund is exempt, subject to certain provisions.
It is consideration of the operation of those provisions, being sections 128B, 128C and 139ZU which needs to be undertaken carefully to ensure that your superannuation is not exposed (in part or in full) to a claim by a trustee in bankruptcy.
To say that contributions made or property transferred to eligible superannuation funds could not ever be challenged by a bankruptcy trustee is not entirely true. The trustee has powers to investigate dispositions by a person prior to bankruptcy that were undertaken with the intention to defeat creditors. These actions were (and continue to be) commonly commenced pursuant to section 121 of the Bankruptcy Act 1966.
However, since July 2006, a more direct path for the trustee to recover contributions made by the bankruptcy to his/her superannuation became available with the introduction of sections 128B and 128C which provides that contributions are void against the trustee in circumstances where a transfer of property (which includes a payment of money) by a person who later becomes a bankrupt to another person if:
- the transfer is made by way of contribution to an eligible superannuation fund; and
- the property would have become part of the bankrupt estate, or would have properly been available to the bankrupt’s creditors if the property had not been transferred by the bankrupt; and
- the bankrupt’s main purpose in making the transfer was:
- to prevent the transferred property from becoming divisible among the bankrupt’s creditors; or
- hinder or delay the process of making property available for division among the bankruptcy’s creditors.
In determining whether or not the transfer of property, or funds to a superannuation fund, would have become divisible in the bankrupt’s estate, a court will need to look at:
- the main purpose for that transfer and whether or not it can be reasonably inferred, from all the circumstances, that, at the time the bankrupt transferred the property, the bankrupt was or was about to become insolvent;
- whether, during the period before bankruptcy, the bankrupt established a pattern of making contributions to one or more of his/her eligible superannuation funds, and if so, whether those transfers (in having consideration to the pattern of making contributions) are out of character.
A bankrupt can rebut the presumption of insolvency but then bears the onus of proving that he/she was solvent at the time the contributions were made by providing evidence to his/her financial position and still needs to answer to the allegation that the contributions were an attempt defeat creditors.
Importance of keeping financial records
A failure to keep proper records and even report your liabilities to the Australian Taxation Office by lodgement of returns will work against a bankrupt trying to protect his/her superannuation from an attack by a trustee.
If a bankruptcy trustee pursues the bankrupt for contributions made into his/ her superannuation fund, it is presumed that the bankrupt was, or was about to become, insolvent at the time of the transfer if it can be established that the bankrupt:
- had not, in respect of that time, kept such books, accounts and records as a usual and proper in relation to the business carried on by the bankrupt and sufficiently disclosed the bankrupt’s business transactions and financial positions; or
- if he/she kept such books, accounts and records, but has not preserved them.
That presumption of insolvency, whilst rebuttable, creates an extra hurdle for a bankrupt if opposing proceedings by a trustee seeking to void contributions to the superannuation fund of the bankrupt.
Takeaways
Whether you are entering bankruptcy voluntarily, or enforcement actions by one or more creditors are compelling you down that path, it is essential that you have a proper understanding as to how your superannuation may be treated.
