De Santis v Aravanis re-opens the debate
A principle in the 2009 decision of Rodway v White has been rejected by a 2014 decision in De Santis v Aravanis.
The cases in part deal with whether property purchased by a bankrupt with after-acquired income is after-acquired property and therefore vests in the bankruptcy trustee.
In the 2009 case the court decided that it did and convicted a bankrupt for not reporting to his bankruptcy trustee that he had purchased shares in publicly listed companies with after-acquired income.
The 2014 case of De Santis v Aravanis  FCA 1243 reopens that debate.
By way of background, the Bankruptcy Act:
- makes no distinction between cash and physical assets when determining whether something is after-acquired property. Cash winnings are treated the same as the acquisition of physical assets (e.g. from a deceased estate). Essentially, if something would have been divisible property if held at the time of bankruptcy, it would be divisible property when received after bankruptcy.
- provides that income earned by the bankrupt during the bankruptcy be assessed for income contributions and any amount not subject to an income contribution liability is not after-acquired property.
The 2009 Rodway v White case determined that property purchased with after-acquired income (income left over after appropriate income contributions are made) was after-acquired property and vested in the trustee. This decision raised a lot of eyebrows at the time as being somewhat unfair.
The 2014 case revisited the question and reversed some of that position.
De Santis v Aravanis has a separate aspect too. The court determined the bankrupt held real property on trust for his wife “subject to the right of [the] trustee to be indemnified”. The bankruptcy trustee was vested with the trustee’s indemnity (right of recoupment) for money paid by the bankrupt as trustee towards the mortgage on that property during the period before bankruptcy. This right vested in the bankruptcy trustee when the bankruptcy commenced.
The main question in the case was whether the bankruptcy trustee also had vested a right of indemnity for money paid towards the mortgage (by the bankrupt after bankruptcy) from after-acquired income. That is, did the payments from after-acquired income created after-acquired property?
The court held that after-acquired property generated or purchased with after-acquired income did not vest in the trustee. Rather, it was a special class of property. This contrasts with Rodway v White.
However, the court then determined that the trustee’s right of indemnity (right of recoupment) was something different that did vest in the bankruptcy trustee upon the bankruptcy, and that he was entitled to recover money under that indemnity irrespective if the money was paid pre-bankruptcy or from after-acquired income.
This was due to the mortgage being created, and hence the right of indemnity being created, pre-bankruptcy and vesting in the bankruptcy trustee at the commencement of the bankruptcy. The court held that it did not matter when the money was paid, or when the money under the right of indemnity became due and payable.
The two cases seem to be at odds regarding the use of after-acquired income. It will be interesting to see where this question goes to from here.
To read our previous article on Rodway v White click here.