When natural love and affection can’t protect you.
It is often the case that prior to bankruptcy, a bankrupt will transfer their interest in real property to their non-bankrupt spouse for “natural love and affection”. The Bankruptcy Act 1966 specifically states that love or affection has no value as consideration.
While it is refreshing to know that such overly generous individuals exist, it is often the case that they have transferred their interest in real property to prevent it from becoming available to the bankrupt estate for the benefit of creditors.
In the instance where no consideration is paid by the recipient, there is a potential voidable transaction claim available to the bankruptcy trustee pursuant to section 120 and/or 121 of the Bankruptcy Act.
So what options are available to a bankruptcy trustee in respect to the transfer of property?
A bankruptcy trustee may seek to apply to court to set aside the original transfer and then realise the bankrupt estate’s interest in the property. This can prove to be quite an expensive process and in most cases, the bankruptcy trustee is without sufficient funds to pursue this avenue.
When previously faced with this issue, Worrells have called on the Official Receiver’s powers to assist in issuing a notice to the recipient pursuant to section 139ZQ of the Bankruptcy Act (hence, the name: 139ZQ notice). The notice requires the recipient of the transferred property to pay to the bankrupt estate the value of the property it received as a result of the transfer. If the notice is not complied with or is unsuccessfully objected to, the bankruptcy trustee may take action against the recipient for recovery of the amount demanded in the notice and the transferred property is then charged with the liability. The charge then needs to be acknowledged and lodged by the Registrar of Titles against the property so that it can be enforced.
In our Victorian office, we have faced practical challenges with successfully lodging the charge with the Registrar of Titles, as they have formed the opinion that to record the charge would obscure and mislead any potential purchaser. In this case, we have been successful in registering a caveat over the property to secure the interest of the bankrupt estate.
As a result of the 139ZQ notice, a bankruptcy trustee is in a slightly better position as there is now a liability that they can seek to obtain judgment on, however, they are no closer to recovering the transferred property. Notwithstanding, the 139ZQ notice is certainly a cost-effective tool to negotiate a settlement where the parties are willing.
The question remains: do 139ZQ notices really work or should a bankruptcy trustee bypass that mechanism and apply to court to set aside the original transfer? While certainly more expensive, an application to court will give a more certain and effective outcome—subject to the availability of funding to pursue this course.