Related Party Transfers – Pre-Bankruptcy

Related Party Transfers – Pre-Bankruptcy

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Transfer of property (assets) by a debtor to a spouse / relative in the period leading up to bankruptcy is a common occurrence. This transfer is often for little or no consideration and is done with an intention to reflect a hopeless or assetless situation at the time of bankruptcy.

Case Study 1 – s120 Undervalued Transactions

One of our bankrupt’s had his wages credited into his wife’s bank account, for a 4-year period prior to bankruptcy. He claimed he ‘did not have any bank accounts’ when a request was made for bank statements along with his Annual Statement of Income for each of the 3 CAP’s (Contribution Assessment period) as the ATO had ‘garnished’ the balance of his previous bank account.

The facts were that in this 4 year period leading up to bankruptcy, the bankrupt was ‘director’ of his employing company. The ‘director’ debtor was aware that this company had Super Guarantee and PAYGW (pay as you go withholding) owing to the ATO for several years. He was also aware that his company was trading insolvent and that liquidation was imminent. The ‘director’ was ultimately issued with a DPN (Director’s penalty notice) and this claim led to his bankruptcy via a Debtor’s Petition.

The Trustee claimed the net wages of the bankrupt that were transferred to his wife’s bank account for the 4 year period leading up to bankruptcy after allowing for reasonable living expenses under s120 / and or s121 of the Bankruptcy Act 1966 (Cth).

In this case where the Trustee’s claim was against a related entity (the bankrupt’s spouse) for the 4 year period leading up to bankruptcy, the solvency of the transferor / debtor is immaterial.

Further, the bankrupt’s wife used the bankrupt’s wages credited into her account to pay the mortgage of a property whose title was solely in her name. This created a charge on the wife’s property that was claimable by the Trustee to the extent of the net transfer of wages made by the bankrupt.

The 3 main tenets of a s120 transfer that focuses on the effect of the debtor’s transaction on the creditors are:

    • The time periods involved;
    • The transfer must have taken place within the relevant time period; and
    • The transfer was for no consideration or that the consideration that was given was less than market value.

 

Cast Study 2 – s121 Transfers to defeat creditors

In the 2-year period leading to bankruptcy, the bankrupt (‘transferor’) transferred the title of his home to his wife (‘transferee’). This transfer was executed perfectly by a settlement agent, at market value, with stamp duty paid and the transferor’s mortgagee repaid/discharged in full. The bankrupt’s wife simultaneously took out a new mortgage in her own name to finance the property now solely in her name.

There was a gain of $50,000 in this ‘market value’ transfer. However, the transferee claimed that this was the $50,000 she had contributed to the transferor 5 years earlier for home renovations undertaken by the transferor.

The Trustee proceeded with his claim contending that the $50,000 was the transferee’s contribution for living in the property for over 10 years ‘rent free’ or for no consideration.

The 3 main tenets of a s121 transfer focuses on the purpose of the transfer;

    • There was a transfer of property;
    • The property, if it had not been transferred, would probably have become part of the transferor’s bankrupt estate and would have been divisible among the creditors; and
    • The main purpose of the transferor in transferring the property was either to prevent the property’s division among the creditors or to hinder or delay making the property available to those creditors.

Recovery of these transactions that are void against the Trustee can be made via a notice sent pursuant to s139ZQ which must set out the facts and circumstances which have satisfied the Official Receiver that the transaction referred to in the notice is void against the trustee: s139ZQ(2)

To learn more about Transferring Property Prior to Bankrupty, click here.

Article written by Naina Pereira (Supervisor) – SV Partners Perth

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