Our August 2009 e-Update included an article on the 20 July 2009 decision in Rodway v White.
The case involved a bankrupt who purchased property with surplus income that he had earned and which had been subject to an income assessment. It was found and confirmed on appeal, that the property purchased with that money was after-acquired property and vested in the trustee. It was also found that the bankrupt should have notified the trustee when that property was purchased.
This raises the strange position of a bankrupt having to say to his trustee: "I have just spent some of my protected money - earned working whilst a bankrupt - and bought something. Please come over and take it away from me".
Another case was brought to our attention recently that highlighted another position that catchs unaware bankrupts and their family or friends.
Randall & Albaugh was decided in the Federal Magistrates Court - Family Law Division – on 14 May 2009. It involved an estranged wife of a bankrupt who had purchased a lotto ticket and won $400,000. Statements made by the bankrupt at the time indicated that the ticket was bought in their joint names. Based on this the trustee believed that one-half of the winnings vested in him. The wife maintained that she had bought the winning ticket solely.
The court found that there was no evidence of a joint purchase and the winnings were the property of the wife solely, not the bankrupt or more correctly his trustee.
But what if she had bought the ticket jointly?
The Bankruptcy Act says that divisible property includes all property belong to the bankrupt at the time of bankruptcy, or that devolves on him or her after bankruptcy.
116(1)(a) 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;
If the ticket had in fact been purchased by the wife and bankrupt jointly or had been purchased solely by the bankrupt, the winnings or the bankrupt’s share of the winnings would vest in the trustee.
The result is the same for amounts received from deceased estates. Any money received by bankrupts from a deceased estate will vest in the trustee at that time and, according to the Rodway case, it is an offence for the bankrupt not to disclose the acquisition of this property to his or her trustee.
One particular file (not conducted by Worrells) was of a bankrupt who decided to take a moral stand and not lodge his Statement of Affairs, meaning that he remained bankrupt indefinitely. The trustee could find no assets at the time of bankruptcy. 6 years after the bankruptcy started - and 3 years after it should have ended - the bankrupt's mother died and left him $500,000. The money vested in the trustee as the bankruptcy was still continuing. The trustee paid out all of creditors and returned about $5,000 to the (now annulled) bankrupt after doing so. Some people would call that justice.
Obviously, if the bankrupt had lodged his statement of affairs when he was meant to, he would have been discharged when his mother died, and the money would have been his.
As we stated in our October 2008 e-Update on this topic: "The solution is for bankrupts not to purchase lotto tickets in their name (let someone else do it), and get people to change their wills to remove the bankrupt as a beneficiary during the bankruptcy. They can change their wills again after the bankrupt has been discharged." That advice has not changed.
Superannuation funds and money received from those funds after bankruptcy are protected assets. The Bankruptcy Act specifically sets out this exclusion from divisible property:
116(2) Subsection (1) does not extend to the following property:
116(2)(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);
116(2)(iv) a payment to the bankrupt from such a fund received on or after the date of the bankruptcy,
But what is the position if money is withdrawn from a superannuation fund just before bankruptcy? Is that money protected?
The answer is no. It loses that protection the moment it is withdrawn as the protective provisions do not apply until a bankruptcy occurs. This has been tested in the past (and this is one of those occasions that I cannot recall the name of the case that we ran). The soon-to-be bankrupt withdrew a significant amount of money from his superannuation fund and used these monies to pay a creditor. We recovered the money as it was found that it did not have any protection under the Act not being superannuation monies at the time of bankruptcy.
Money in a regulated superannuation fund or the other funds mentioned in the section is protected only if it is in the fund at the time of the bankruptcy. If it is converted to cash before the bankruptcy starts it is not an "interest of the bankrupt in .. a regulated superannuation fund". It is simply cash that vests or, in our case, can be recovered.
Sometimes a bankrupt may be able to withdraw money from their superannuation fund under the relevant provisions. But they should be aware that, if that money is withdrawn prior to the bankruptcy, it does not maintain any protection.