From time to time trustees in bankruptcy become involved in administering the bankruptcies of deceased debtors. Such appointments come about where the administrator of a deceased estate which is insolvent seeks protection under the bankruptcy regime. From a practical perspective, the administration of a deceased bankrupt estate is much like the administration of a living bankrupt estate and the trustee’s role and aims are effectively the same.
The Bankruptcy Act caters for deceased bankrupt estates under provisions in Part XI of the Act. Specifically, as with living bankruptcies, section 249 of the Act vests divisible property and after-acquired property of a deceased debtor in the trustee. Broadly speaking, where the bankruptcy commenced before the death of the debtor, section 249(6) of the Act provides that “divisible property” comprises of property that, had the debtor not died but been declared bankrupt, would have been available to creditors. Importantly (and perhaps unusually) this particular provision of the Act also has the effect of maintaining the protection of exempt property in a situation where that exempt status no longer appears necessary.
Those familiar with bankruptcy estates will know that, amongst other things, this protection includes:
1. Property that is for use by the bankrupt in earning income;
2. Property used by the bankrupt primarily as a means of transport;
3. Any right of the bankrupt to recover damages or compensation for personal injury; and
4. Any interest of the bankrupt in a regulated superannuation fund.
Ostensibly, the purpose of these protections is to provide a bankrupt with a fresh start as well as the means to be a valuable member of society. This concept of protecting certain assets can be traced back almost 150 years to the Bankruptcy Act 1869 (UK) from which Australia’s bankruptcy legislation has its origins (see section 38 which provides that ‘the trustee … may make such allowance to the bankrupt out of his property for the support of the bankrupt and his family’). The protections whilst logical and valuable in a living bankruptcy makes very little sense in the context of a deceased person.
It is the final point on the above list that I want to focus on in some greater detail; the protection of superannuation. As many readers may recall, in August 1991 the Hawke government’s ninth budget laid the groundwork for modern superannuation as we now know it. Its purpose was to effectively shift the burden of retirement income from the Commonwealth to the individual and employer. The bankruptcy provisions were also then amended to protect superannuation to align with the purpose of the superannuation regime. Again, the theory behind this protection was to allow a bankrupt to fund their own retirement, irrespective of the bankruptcy.
It goes without saying that where a bankrupt is deceased the need to fund their retirement is redundant. The purpose of the superannuation regime is therefore not promoted by the protection offered; nor is the fresh start principle of bankruptcy being served. The question I pose therefore is why are these funds protected in a deceased bankruptcy? Further, why is it that the beneficiaries of these funds (typically the bankrupt’s family), many times in the hundreds of thousands of dollars, are given a windfall in priority to the bankrupt’s creditors? Perhaps it is time for the law to be reviewed and amended – this author certainly believes so.
p.s. that as the deceased is likely to have some difficulty driving a car there is also no point in continuing the allowance for motor vehicle.