30 Apr 2015

After-acquired income and after-acquired property—the position changes again


3 min

Di Cioccio v Official Trustee contradicts De Santis v Aravanis

As usually happens when you write an article about a court decision, another court quickly makes a decision that overturns the principle. Days after releasing the article last month, we became aware of a more recent decision in the Federal Court that was on point.

In March 2015 Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30 was decided. The decision in that appeal involved consideration of after-acquired income and after-acquired property, with the court reaching a conclusion that contradicts De Santis v Aravanis.

The court in De Santis v Aravanis held there was a special class of property created when a bankrupt used after-acquired earned income to purchase something, and hence the property would not vest in the bankruptcy trustee as after-acquired property. The court decided that the bankrupt could keep property purchased with after-acquired income.

In the March 2015 decision, Mr Di Cioccio (the bankrupt) argued that the provisions relating to property should give way to the provisions relating to income and that the shares he purchased with his income should not vest in his trustee. The court rejected that argument and the position of a special class of property.

The court said that it had to look at the question purely from a position of what the Bankruptcy Act actually says. They determined that the Bankruptcy Act defines what is divisible property and what vests in the trustee and what does not. The court determined that the Bankruptcy Act states that property that would be divisible at the start of the bankruptcy will be divisible when acquired during the bankruptcy, and this position holds regardless of how it is acquired.

Further the court said that the Bankruptcy Act does not specifically refer to “property acquired by an undischarged bankrupt using property representing income previously derived by an undischarged bankrupt” or create an exemption for that property. They went further to ask “What role then, if any, does [the income assessment provisions] have to play in determining the property that is divisible amongst the bankrupt’s creditors, and does it .. conflict with ss 58(1)(b) and 116? Again, the answer is none.”

The court decided that any property acquired by a bankrupt that would have been divisible if held at the commencement of the bankruptcy is divisible property when acquired during the bankruptcy and vests in the bankruptcy trustee.

The court seems to summarise the position as:

The Act does not prohibit a bankrupt from acquiring a specific item of property. The Act simply deems that after-acquired property vests in the bankrupt’s trustee, unless the property is of a kind specified in s 116(2).

We are back to the position that an undischarged bankrupt is unable to keep certain property purchased with income earned during the bankruptcy period.

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