Assets transferred to spouse available to creditors: High Court
The High Court has held that property and shares transferred to a spouse before a barrister was made bankrupt were available to trustees acting for his creditors.
In a unanimous decision, the court upheld an appeal by the creditor’s trustees from a majority decision of the Full Court of the Federal Court, which found in favour of the barrister’s wife and family trust.
The case involved barrister John Cummins, who became bankrupt in December 2000. At 30 January 2001, his assets totalled $259,614 and his liabilities $1.04 million.
His largest creditor is the Australian Taxation Office which instituted proceedings to recover $955,672.92, following the lodging of income tax returns in February 2000 for the years 1991-92 to 1998-99. Mr Cummins had not lodged any returns since 1955.
In August 1987, Mr Cummins transferred to his wife his interest in the family home and transferred to Aymcopic, the trustee of the Cummins family trust, his shares in Wentworth Chambers in Phillip Street, Sydney.
The trustees in bankruptcy sought declarations that the transfers were void, pursuant to section 121 of the Commonwealth Bankruptcy Act.
In the Federal Court, Justice Ronald Sackville made the declarations and ordered consequential relief. He held that the main purpose of the transfers was to prevent property becoming divisible among Mr Cummins’s creditors or to hinder or delay the process of making property available for division among creditors.
Mrs Cummins and Aymcopic appealed to the Full Court which, by majority,allowed the appeal. The trustees appealed to the High Court, who upheld the appeal.
To read the judgment click here
Source: CCH
This was the result even before the recent amendments to the Bankruptcy Act forshaddowed in the Attorney General’s media release in December 2005:
Media Release 227/2005
7 December 2005
CHANGES TARGET BANKRUPTCY ABUSE
Practices which undermine the integrity of the bankruptcy system are the target of a Bill introduced into Parliament today, Attorney-General Philip Ruddock has said.
“These changes will strengthen existing laws which allow for the recovery of property disposed of prior to bankruptcy or owned by a third person but acquired by that person using the bankrupt’s resources,” Mr Ruddock said.
“Currently, bankrupts can avoid these laws by, for instance, transferring assets to family members or close associates when insolvency is looming and then deliberately delaying the commencement of the bankruptcy.”
The most significant amendments include:
- increasing the time limit for recovering under-market value transfers to related parties;
- creating a rebuttable presumption of insolvency where a bankrupt has failed to keep proper books, accounts and records; and
- voiding those transfers where it is reasonable for the transferee to infer that the bankrupt was trying to avoid creditors.
Further changes will allow for the recovery of property or money acquired by a person in the lead up to bankruptcy as a result of the bankrupt’s financial contributions.
“The amendments have been developed after extensive public consultation and show the Government has listened carefully to community concerns on the proposals,” Mr Ruddock said.
“They strike an appropriate balance between the rights of individuals to arrange their affairs as they see fit and the rights of creditors to be paid what is duly owed to them.”