On 10 July 2018

Unlike death, debt remains

Dealing with the unknown in the face of a death and the debt left behind, is a stressful time. This case study gives some guidance into how an insolvent deceased estate can become a bankrupt estate, thereby relieving the executors of the stress and challenges associated with the deceased’s creditors. This case study also exemplifies how the events leading up to a person’s death can be unwound to show what transactions, assets, and preconceived ‘protected’ money can be available to creditors in an insolvency administration appointment, after the death of a debtor.

Many people wrongly assume that when a person dies, all their financial dealings die too. This is incorrect—a person can be made bankrupt and their financial affairs can be investigated after they die.

In deceased estates with no assets or very few assets to distribute to creditors, administering it under State and Territory laws may be the easiest approach (subject to obtaining advice). This would likely involve notifying creditors that no assets are available to pay the deceased’s debts and therefore request creditors to write off their debts. However, Part XI of the Bankruptcy Act 1966 (Part 11—deceased estates) may be a better option in more complex cases for the following reasons:

  • An independent expert is appointed to deal with the deceased estate and relieve the executors from dealing with creditor and family pressure.
  • Creditors will likely prefer an independent trustee to administer the estate.
  • The Bankruptcy Act provisions might enable recoveries such as—undervalued transactions, transfers to defeat creditors, and preferential payments—that might not otherwise be available.

The Theory

Besides the obvious difference of the debtor being deceased, the process to become bankrupt and the estate’s administration is very similar to that of a living bankrupt.

For a deceased person to become bankrupt, it is still the case that this can occur by two methods, either voluntarily through the executor of the deceased estate applying to court, or by a creditor applying to bankrupt the deceased.

1. The executor voluntarily petitioning to appoint a bankruptcy trustee

The executor of the deceased estate may apply for a court order to appoint an administrator over the estate under Part XI of the Bankruptcy Act. Accompanying the petition, must be a statement of the deceased person’s affairs and a statement of the executor’s administration of the deceased person’s estate.

2. A creditor petitioning to appoint a bankruptcy trustee

If creditors (group or individual) are owed at least $5,000, they can bankrupt the deceased estate by applying to court using a creditor’s petition under section 244 of the Bankruptcy Act.

A secured creditor must be owed at least $5,000 after deducting the value of any security they hold, to present this petition.

Administration under Part XI of the Bankruptcy Act

The administration of a deceased bankrupt estate is conducted in much the same manner to that of a normal bankruptcy i.e. the bankruptcy trustee has the same obligations and powers. Principally the trustee can recover any assets, investigate the affairs, and if appropriate, recover any voidable transactions.

The distinct difference and challenge in deceased bankrupt estates is that the debtor is deceased, therefore unable to complete any documentation, nor provide any books and records, or assist the bankruptcy trustee. To assist a bankruptcy trustee, when first appointed, the deceased estate’s legal representative must lodge a Statement of Affairs within 28 days of being notified of the court order. This provides the bankruptcy trustee with the required information to administer the bankrupt estate and commence their investigations.

At this point the executor’s powers cease and the trustee undertakes the following tasks:

  1. Identify and realise all divisible property.
  2. Identify and recover any undervalued transfers, transfers to defeat creditors, and preferential payments.
  3. Distribute any recoveries to creditors pursuant to the Bankruptcy Act’s priority provisions.
  4. Report to creditors and regulators as required.

Case Study Facts

In this case study we look at an intriguing deceased estate that related to our appointment as liquidators over a fibre-glass wholesaler whose director died shortly after our appointment.

We found the director owed money to his company under director loan accounts and an insolvent trading claim. We then made enquiries with the deceased estate’s executor who was struggling to obtain the estate’s full financial position, but could advise from the outset that the funds were insufficient funds to pay our claims, and/or other creditors.

We sought judgment from the court for our claims, and were successful in our creditor’s petition to bankrupt the deceased estate.

The appointed bankruptcy trustees requested the executor to prepare a Statement of Affairs within 28 days, which took some time for the estate’s executor to complete and contained only the available information at the time.

Interestingly the Statement of Affairs identified the following creditors:

  • The Australian Taxation Office (ATO)—for personal income tax and company debt pursuant to a Director Penalty Notice.
  • A major bank—for multiple property mortgages and finance facilities.
  • Worrells as liquidator—for the director loan account claim and insolvent trading claim.

While paperwork was being traded between the courts, the Australian Financial Security Authority, and multiple creditors, we were making detailed enquiries into the company’s transactions and assets. These included a vintage plane collection and dealing with the director’s wife who had made some ‘shady’ financial transactions pre- and post- her husband’s death. Notably, these transactions were in conjunction with a financial planner (now banned) whose efforts to defeat creditors went as far as Luxemburg.

You might be asking why these efforts went as far as Luxemburg…

This is where the intrigue into this bankrupt deceased estate started. As liquidators we found a significant insurance payout made under a Total & Permanent Disability (TPD) policy to the director shortly before he died. Our subsequent investigations identified the insurance payout was directed to the wife.

Upon uncovering this vital information, we held a meeting with the bankruptcy trustee and disclosed this information in view of the following Bankruptcy Act provisions:

  • TPD payments received by a bankrupt either before or after the date of bankruptcy are not protected in bankruptcy and would be divisible among his creditors under section 58 and 116(2).
  • Regardless of whether the TPD payout proceeds were deposited into an account or used to purchase an asset, these are recoverable by a trustee of a bankrupt estate (deceased or otherwise) under sections 58, 116, and 249 (deceased estates).
  • If the TPD payout proceeds had beenpaid into a superannuation fund (irrespective of fund type) it can be claimed back if the contributions were paid to defeat the bankrupt’s creditors under sections 128B and 128C.
  • If the TPD payout proceeds had been gifted(any amount) to a spouse, family member or third party, it can be claimed back by a bankruptcy trustee under sections 120-121.

In this case the bankruptcy trustees found the TPD payout proceeds were directed into superannuation policies that his wife was the 100 percent beneficiary of.

Our investigations as liquidator found that after the director died the wife transferred the superannuation policy’s funds—containing the TPD payout proceeds—into other accounts under her control. With this information, the bankruptcy trustees commenced court proceedings against the wife to recover the TPD payout proceeds. Ultimately a settlement out of court was reached with the wife to pay the bankrupt estate’s creditors $1 million.

The assumption that when a person dies, all their financial dealings die too is clearly an incorrect one. In this case study, the creditors, which included the ATO, a major bank, and the company’s creditors (the director’s fibre-glass wholesaler), were able to get some relief for the debts incurred by the deceased debtor despite the unsuccessful attempts to transfer the monies to related parties. This result would not have been possible if a bankruptcy trustee had not been appointed.

Creditors received a greater return on the debts incurred by the deceased debtor despite the underhanded attempts to transfer the monies to related parties—thanks to a bankruptcy trustee appointment.

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