In the September 2024 newsletter, Brett Harron from the Gold Coast office prepared an article on “How Property Matters in Bankruptcy”. In the article Brett discussed the steps that a Trustee in bankruptcy should take to realise a Bankrupt’s property with particular emphasis on residential property.
In circumstances where a Bankrupt’s interest in a property is minimal because the property is heavily mortgaged, it may not be commercial for a Trustee to realise the interest. Under the provisions of the Bankruptcy Act 1966 (the Act), property which is vested in the Trustee at the time a Bankrupt is discharged from bankruptcy remains vested until the six-year anniversary of the day on which the Bankrupt was discharged. The practical implication of this is that the Trustee will still be able to sell the property even after the person is released from their bankruptcy.
A Bankrupt will remain bankrupt for a period of three years and one day from the day on which a Statement of Affairs is filed and accepted with the Australian Financial Security Authority. The period of the bankruptcy may be extended to a total of five or eight years from the filing of the Statement of Affairs if the bankrupt has failed to comply with various obligations under the Act. Also, a bankruptcy can continue indefinitely if a bankrupt does not lodge a Statement of Affairs.
Practically, this means that a Trustee has up to 6 years from the date of the person’s discharge from bankruptcy to sell that property. There are 3 additional timeframes regarding the revesting period:
- The Trustee may extend the revesting time by a period of 3 years at a time with an indefinite number of extensions, subject to point 2 below
- The 6-year period does not apply where a bankrupt does not disclose the property in the Statement of Affairs; and
- The maximum timeframe for a Trustee to make a claim to the property is 20 years from the date that the person was made bankrupt.
There are no exceptions to the above, however, it should be noted that the limit relates to making a “claim” and not necessarily realising the property. Legal advice may be required to determine whether the Trustee has made a claim as required by the Act where property is subject to this exemption.
There are two common examples where the above may cause issues in a bankrupt estate as follows:
- Significant increase in equity prior to revesting of property; and
- An interest in property, which is subject to a life-interest or other interest of a third party.
Increase in Equity
It’s outlined in the September article a Trustee may give a co-owner of the property the option to buy out the Bankrupt’s interest. If the co-owner is unable or unwilling to do so and the equity in the property is minimal, the property will remain vested in the Trustee potentially for a number of years.
There have been several cases recently where the equity in the property has been minimal at the commencement of the bankruptcy but with the rapid increase in house prices, especially following COVID-19, the equity has become significant resulting in the sale of the property.
As the housing market has not yet stabilised it would be prudent for a non-bankrupt co-owner of a property to enter into early discussions with a Trustee to come to a commercial resolution. A Trustee would normally communicate with the co-owner from time to time during the course of the bankruptcy to give them the opportunity to acquire the Bankrupt’s interest in the property.
It should be noted that following a decision of the Federal Court in July 2024, it has now been determined that a Trustee is liable to account for the Capital Gains Tax (CGT) on a bankrupt’s interest in property, which would be subject to CGT in the hands of the Bankrupt. This has significant consequences for the administration and may cause further delay to the realisation of property by a Trustee. It is proposed to discuss this in more depth in a future issue of the newsletter.
Life Tenancy or Other interest
There are a number of circumstances where related parties may wish to provide for the future security of a person who may or may not be registered on title. Examples include:
- A life interest for an older, infirmed or disabled person not registered on title;
- An interest for a minor before reaching the age of 18;
- A life interest affecting the title of one party of a jointly owned property.
Life interests are often provided for in a person’s will. They are becoming increasingly common as people re-partner during life but want their children from previous relationships to be the beneficiaries of their assets. The life interest granted to a co-owner of a property in these circumstances often allows that person to sell the existing property and buy a new property. The interest of the deceased estate, however, carries over to the new property.
A bankrupt’s interest as a beneficiary in a deceased estate vests in the Trustee if the bankrupt becomes entitled to an inheritance during the period of the bankruptcy (this may be subject to teams of the will, for example, a testamentary trust). In circumstances where the assets of the deceased estate provide for a life interest there can be considerable delays in waiting for property to be dealt with and this may extend beyond the 20-year period outlined above. One option for the Trustee is to approach the other beneficiaries of the deceased estate, if any, to see whether they are prepared to acquire the bankrupt’s beneficial interest which enables a more timely completion of the administration.
Dealing with a life interest is complicated and the options available differ depending on whether the life interest is independent of or provided for in a will. A Trustee may be able to record the interest of the bankruptcy estate by registering a caveat on title in some circumstances. Legal advice is generally recommended when dealing with a bankrupt beneficiary of a deceased estate where the property is held in a life-interest.
Article by Hillary Orr (Consultant) – Adelaide