The Bankruptcy Act essentially provides for a trustee in bankruptcy to take control of or recover a bankrupt’s assets, to realise those assets and to distribute the proceeds amongst the bankrupt’s creditors. Each of these elements is qualified, for example by placing limits on those assets which come into the trustee’s hands, what may be recovered after the bankruptcy, how assets are sold or realised, and who gets what in the distribution.

This article discusses one of the qualifications regarding the assets which come into the trustee’s hands. The Bankruptcy Act creates two broad categories of assets those being ‘divisible assets’ meaning available to the trustee for the satisfaction of creditors, and ‘non-divisible assets’ meaning that the trustee is prohibited from dealing with them. We look to section 116 of the Bankruptcy Act for what is and what is not divisible.

Section 116(1)(a) starts with a sweeping all inclusive statement about what is divisible which it defines as:

all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;

It then adds rights to other property, money and income that is generated or recovered during the administration of the estate.

The section then sets out what is not available to the trustee, the non-divisible assets. For the purposes of this article we are interested in the following subsection dealing with superannuation.

116(2) Subsection (1) does not extend to the following property:
(d) subject to sections 128B, 128C and 139ZU:
(iii) the interest of the bankrupt in:

(A) a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993 ); or
(B) an approved deposit fund (within the meaning of that Act); or
(C) an exempt public sector superannuation scheme (within the meaning of that Act);

(iv) a payment to the bankrupt from such a fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993;

The concept of superannuation being a non divisible (commonly known as a protected asset) has long been reflected in the Act. The reasons or usefulness of making superannuation a protected asset are not debated here. We are just dealing with the fact that “the interest of the bankrupt in” their superannuation is protected.

Human nature being what it is, it was inevitable that some debtors facing bankruptcy sought to subvert the purpose of the Bankruptcy Act by contributing assets or money to a superannuation fund in the expectation that they would then be protected. To counter this, the legislation was amended to include subdivision B of division 3 of Part IV of the Act, or sections 128A to 128N as we know them. Section 128B mirrors section 121 of the Act by voiding transfers of property where the intention of the transfer was to defeat creditors. Where section 121 cover all sundry transactions, section 128B concentrates on transfers into superannuation funds.

Section 128B provides the trustee with recovery powers where the now-bankrupt has paid money into his or her superannuation prior to bankruptcy so as to protect that money from their creditors.

But the recovery of wrongly paid superannuation contributions is not the subject to this article. Rather it is the effect of the words “the interest of the bankrupt in” superannuation. As the wording suggests the legislation protects money in a superannuation fund at the date of bankruptcy. The protection does not extend to money withdrawn from a superannuation fund before bankruptcy even if the funds withdrawn can be traced into some other asset. Money withdrawn from superannuation prior to bankruptcy not superannuation at the time of the bankruptcy and the bankrupt does not have an ‘interest in’ superannuation; they have plain old money.

This is confirmed by paragraph (iv) that uses the words “a payment to a bankrupt … on or after the date of bankruptcy” to extend the protection to the proceeds of the fund withdrawn after the bankruptcy commences. It does not say a payment before bankruptcy. Money withdrawn after bankruptcy will be protected in most circumstances as would be any assets purchased with that money (sections 116(2D) and 116(3)).

This became important in a recent bankruptcy controlled by a Worrells partner, where the bankrupt had withdrawn many tens of thousands of dollars from his superannuation fund in the months before bankruptcy and gave it to his wife. As the money lost its protected status as soon as it left the fund the trustee was able to recover it for the benefit of creditors. This is not an uncommon occurrence.

The conclusion is that those who may become bankrupt should be aware that both money going into superannuation and money coming out of superannuation in the period before bankruptcy may not be protected.