Unconsidered considerations.
Prior to bankruptcy it is not uncommon for a debtor to turn their mind to some last-ditch form of asset protection strategy, which often involves a hasty transfer of assets. Of course, if asset protection is only being considered shortly prior to bankruptcy, it is very likely already too late; any transfer of assets will likely be met by a bankruptcy trustee seeking to recover the transferred asset for the bankrupt estate’s benefit by using the void transaction provisions of the Bankruptcy Act 1966.
Occasionally we find that prior to appointment a bankrupt has transferred their interest in real property to their non-bankrupt spouse for “natural love and affection”, which for the purposes of the Bankruptcy Act has no value as consideration.
A common tool for a bankruptcy trustee to effect recovery of a void transaction is to request that the Official Receiver (the Personal Insolvency Regulator) issue a notice, referred to as a 139ZQ Notice (creatively named after the legislation giving rise to its effect), on the person who received the transferred property. That 139ZQ Notice requires them to pay the bankruptcy trustee an amount equal to the property’s value received. Helpfully, if a 139ZQ Notice is given in respect of any property, the property is charged with the liability of the person to make the required payments.
While complying with a 139ZQ Notice can simply be paying the requisite amount, the property subject to the notice is transferred to the bankruptcy trustee is also permitted. In most cases we find that notice recipients will simply pay the amount required under the notice or try to negotiate a resolution to the claim. However, we have found in a current matter being handled by our Melbourne office a few practical complications where the notice recipient is unwilling to pay the amount due under the notice, however, is happy to transfer 50% of the property which is subject to the notice back to the bankrupt (i.e. their trustee):
- Depending on the relevant state or territory regulations stamp duty may apply to the transfer, in which case questions are also raised about the party which is liable to pay any stamp duty.
- What if the mortgagee refuses to provide consent for a transfer? It is unlikely they would be happy for (let’s say) 50% of a property they have a secured debt over to be transferred to a bankruptcy trustee given they would not necessarily have security over the bankruptcy trustee’s newly granted share.
Although designed to strengthen a bankruptcy trustee’s abilities to make recoveries, it seems that the above are unintended consequences that can arise out of compliance with the Bankruptcy Act’s provisions under section 139ZQ. While the above issues are not insurmountable, they do cause additional time and expense to a bankruptcy trustee—ultimately borne by creditors.