04 Jun Transferring Property Prior to Bankruptcy
Often, people with financial difficulties facing pressure from creditors will try to protect their property by transferring it to a spouse or family member to avoid the property forming part of the asset pool if the person later becomes bankrupt.
The following options are available to bankruptcy trustees to recover property that was transferred by a person who later becomes bankrupt:
Commencement of Bankruptcy
For bankruptcies initiated by way of a Sequestration Order (i.e. a creditor makes an application to court to enforce bankruptcy), the Bankruptcy Act 1966 (Cth) (“the Act”) relates the commencement of bankruptcy back to the earliest act of bankruptcy in the six months prior to the presentation of the creditor’s petition. Usually, that date will be the expiry of the bankruptcy notice issued by the creditor.
Any property owned by a bankrupt at the commencement of bankruptcy vests in the bankruptcy trustees. If the property has been transferred between the date of the commencement of the bankruptcy and the date the court issues the Sequestration Order, the transfer is likely to be void against the trustee and recoverable in the bankrupt estate. Of course, if the property was transferred for market value and consideration was actually paid, there would be no benefit to a trustee in voiding the transfer.
Transfers prior to the commencement of bankruptcy can also be clawed back by a trustee, usually in circumstances where the value of the transfer is less than the market value of the property. For transfers to related parties, a bankruptcy trustee can claw back undervalued transfers within a four year period prior to the commencement of the bankruptcy. For transfers to unrelated parties, a bankruptcy trustee can claw back undervalue transfers within a two year period prior to the commencement of the bankruptcy. If the bankrupt was insolvent at the time of the transfer and the recipient was aware of the insolvency, a bankruptcy trustee can look back five years prior to the commencement of bankruptcy.
The Act provides that the following have no value as consideration:
- The fact that the transferee is related to the transferor;
- Spouses entering into a Deed evidencing a transfer;
- A promise to marry or become a de facto partner;
- Love and affection;
- Granting a right to live at the property.
Transfers to Defeat Creditors
A transfer of property with the main purpose being to remove the property from being divisible amongst creditors is void against the trustee. A trustee must prove that the person was insolvent at the time of the transfer, the value of consideration given for the transfer was less than the market value of the property at the time of the transfer and the transferee should have reasonably inferred that the person was insolvent.
The primary authority on transfers to defeat creditors can be found in the Cummins case, which involved a Sydney barrister transferring his 50% interest in a jointly-owned property to his wife at a time when he had not lodged a tax return for approximately 30 years. The court ruled that the bankrupt knew he would have a significant tax liability and was therefore insolvent at the time of the transfer, and that his wife ought to have known this was the case. The court ordered the bankrupt’s wife to pay half the value of the property to the bankruptcy trustees.
Case Study 1
We were recently appointed trustees of a bankrupt estate pursuant to a Sequestration Order. Our searches identified a property was transferred by the bankrupt to her spouse approximately six months prior to the bankruptcy. We have obtained documents relating to the sale which indicate the property was transferred for a value that appears to be the market value of the property, however the contract stipulated that no actual consideration would be paid as the transferee would be responsible for refinancing the existing mortgage on the property and the balance of the purchase price would be utilised to set off against any debts owing by the bankrupt to her spouse.
Our assessment of the transfer is that it is void against the trustees as there has not been valuable consideration given for the transfer and the transfer occurred after the commencement of the bankruptcy.
Case Study 2
We were appointed trustees of a bankrupt estate pursuant to a debtor’s petition. Prior to the bankruptcy, the bankrupt transferred his interest in a jointly-owned property to his wife for minimal consideration. We assessed the value of the property at the time of the transfer and determined that the market value of the property was greater than the amount paid by the wife for the transfer, therefore making it an undervalued transaction. After negotiations with the bankrupt’s wife, we settled our claim making a further payment to the bankruptcy trustees.
Tips to Protect a Property Transfer
Our experience in assessing property transfers has provided us with a good insight into what should be done to protect any transfers from being recoverable by a bankruptcy trustee, including:
- Obtaining a formal valuation of the property at the time of the transfer from a registered valuer;
- Entering into a formal contract for the sale of the property for a value at least equal to the market value of the property;
- Ensuring the sale price is paid by the transferee in a manner that is traceable;
- Ensuring the sale price is paid by the transferee from their own funds and not funds that the transferor may have an interest in; and
- Ensuring the appropriate stamp duty is paid on the transfer (if it is a dutiable transaction).
If you or one of your clients are facing financial difficulties and require assistance in navigating through a bankruptcy, get in contact with one of our Specialist Accountants by calling 1800 246 801.
Article written by Adam Kersey, Senior Manager SV Partners Queensland