The 20 July 2009 decision in Rodway v White in Western Australia has highlighted one of the less common anomalies in the Bankruptcy Act – whether items purchased with post-bankruptcy income vests in the trustee and are available to creditors.
The case involved a bankrupt who had been prosecuted for not advising his trustee that he had received – or in this case purchased – after-acquired property. He was found guilty of 21 offences under section 265(1)(a) of the Bankruptcy Act for failing to disclose to his trustee that he had an interest in shares in publicly listed companies.
The interesting point was that he did not own the shares when he was made bankrupt – there was no suggestion that he had improperly completed his statement of affairs. He also had not ‘acquired’ these shares by way of gift or otherwise. He had purchased these shares while he was a bankrupt from income earned post-bankruptcy and before discharge, and which had been the subject of income assessments. The shares were purchased with funds that did not vest in the trustee and were not available to creditors.
The now ex-bankrupt appealed the conviction, but lost.
There was no dispute that he had earned the money legitimately and that it had been properly assessed for contributions. The dispute was whether after-acquired (earned) income, or an item purchased with that money, was or was not after-acquired property and (in the current case) should have been disclosed to the trustee. Additionally there was the question of whether the money or the item purchased vested in the trustee and should have been available to creditors, or whether the items retained the same excluded nature as the original money.
Income earned after bankruptcy and before discharge is not a divisible asset. The trustee gains a right to some of a bankrupt’s income through the income assessment provisions under Division 4B of the Bankruptcy Act. But income does not fall under the section 116 definition of property and does not in itself vest in the trustee.
Interestingly the courts have determined that items purchased with the ‘protected’ money do not maintain that protection. Unless the item is one of the excluded items under section 116(2) – for example a motor vehicle – or was purchased by money obtained from excluded items and has protection under section 116(3), the item will be classified as after-acquired property and will vest in the trustee for distribution to creditors.
In the current case, the ex-bankrupt was found guilty of not notifying the acquisition of this after-acquired property – the shares he purchased – to his trustee.
The position is that bankrupts who can earn and accumulate surplus income should be very wary about spending any of it before they are discharged. Accumulated income will not keep its protected status once it was been turned into another asset.