It is not uncommon, working in an insolvency environment, to be asked whether you can transfer assets to your spouse prior to the lodgement of a Debtors Petition. Similarly, it is also not uncommon to see assets transferred to a spouse prior to an individual being declared bankrupt by a third party under a Sequestration Order.
So, are these assets protected from being seized and sold by a Bankruptcy Trustee? The answer is no, in some circumstances.
Following his or her appointment, the Bankruptcy Trustee will investigate all pre-insolvency transfers where the Trustee believes that the transfer may have been carried out to defeat payment being made to creditors.
To enable the Trustee to void the transaction, the Trustee must first;
- identify the transaction;
- identify the other party to the transaction;
- prove that the transaction occurred within a specific time period, or while the bankrupt was insolvent;
- prove that the transaction was either under value or had the required intention; and
- show that the transaction did not involve protected property.
The Trustee can review and potentially overturn a transaction completed within the last 4 years if the other party to the transaction is related to the bankrupt. This means that transactions occurring in the period 4 years before the commencement of the bankruptcy are automatically void if they involve related parties, defined as ‘related entities’ in the Bankruptcy Act.
Some transfers of property will not be void. The Bankruptcy Act provides protection to payments of tax, payments under family law agreements and payments under Part IX debt agreements.
A transfer is exempt if it is:
- a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
- a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
- a transfer of property under a debt agreement;
- a transfer of a kind described in the regulations of the Bankruptcy Act; or
- transfers made under Maintenance Agreements or Orders made in relation to the Family Court.
The Family Court would need to overturn the original maintenance order before the trustee will be able to make any recovery under this section. It is difficult for any Trustee to convince the Family Court that it should overturn its own decision in order to allow the trustee to recover assets from an ex-spouse.
The court will usually look to the trustee to provide some evidence on insolvency at the time of the transfer.
The Bankruptcy Act provides a presumption of insolvency if the debtor did not keep proper records of their financial affairs during that period. That presumption is rebuttable, i.e. it may be disproved by positive evidence of solvency. This may be difficult if there are truly no records on the financial affairs of the bankrupt.
Should a person be considering bankruptcy, or if they believe that they may be subject to a Sequestration Order in the future, their best options would be to seek assistance from a solicitor experienced in the bankruptcy sector, or alternatively from a registered trustee.