30 Sep 2021

Beware claw-back of contributions to superannuation before bankruptcy


5 min

Intent is only one part of the equation.

In last months’ newsletter, we highlighted some important considerations for bankrupts who withdraw funds from superannuation (which is a protected asset) during their bankruptcy. In this article, we consider the circumstances in which a bankruptcy trustee can set aside contributions made into superannuation before someone is made bankrupt.

For a person approaching an inevitable insolvency status, there may be a temptation to transfer property into the name of a spouse or trusted friend, or into either existing or newly established trusts or companies. The Bankruptcy Act 1966 therefore establishes a regime which enables bankruptcy trustees, in certain circumstances, to 'claw back' property transferred by a person who later becomes bankrupt. The two main provisions are Section 120 and 121 of the Bankruptcy Act.

Other provisions are available to bankruptcy trustees where the bankrupt has made a transfer of property into superannuation. Section 128B of the Bankruptcy Act provides transfers made by a debtor are void if:

  • they occurred after 28 July 2006; and

  • they are made to eligible superannuation plans of the bankrupt; and

  • the property would probably have become part of the bankrupt estate or would probably have been available to creditors if it had not been transferred; and

  • the transferor’s main purpose in making the transfer was to prevent, hinder or delay the property from becoming available to creditors.

Section 128C of the Bankruptcy Act is also relevant, which involves circumstances where the person contributing to the superannuation fund is a third party (e.g. employers making contributions under a salary sacrifice arrangement).

No time limit applies to how far back a bankruptcy trustee can go to unwind/claw back a transfer into superannuation (provided the transfer was made after 28 July 2006). One of the main purposes of the transaction must be to protect the asset from creditors—to defeat the creditors’ interest in the property. This intention only needs to be one main purpose of the transaction, not the only purpose. This is a subjective test and is usually inferred from the circumstances of the transaction, the debtor’s financial position at that time, and the result of the transaction.

This intention can be deemed by the actual or impending insolvency if it can be shown that the person was or was about to become insolvent at the time of the transaction. If the bankruptcy trustee relies on that deeming provision, the court will require evidence of insolvency.

However as with section 121 of the Bankruptcy Act, the debtor does not have to be insolvent at the time of the transaction for a transfer to be void. It is the debtor’s intention that is important. The bankruptcy trustee can therefore bring whatever evidence they can discover to establish purpose.

To ascertain the bankrupt’s intention, the bankruptcy trustee will examine the debtor’s history of personal contributions to eligible superannuation funds. For example:

  • If the transfer is one of a series of similar payments over a long period, arguably the required intention to defeat creditors did not exist.

  • If the transfer is a once-off large payment—especially if significantly larger than any previous payments—it is more likely that the intention existed, particularly if the transfer is made when the debtor was experiencing financial difficulties.

While an established pattern of contributions is a relevant factor to consider, even without a pattern, the bankrupt could show their main purpose in making the contributions was legitimate and thereby protect themselves from a bankruptcy trustee’s claim (to unwind the transaction). For example, they may be able to show a change in their family circumstances and subsequent consultation with a financial planner led to new/increased contributions being made for their retirement.

Once a bankruptcy trustee establishes a voidable transfer of property to a superannuation fund (under section 128B or 128C of the Bankruptcy Act), the relevant amount can be recovered through a 139ZQ notice directly to the superannuation fund’s trustee under section 139ZQ of the Bankruptcy Act. Such a notice requires the superannuation fund trustee to pay to the bankruptcy trustee an amount equal to the value of the property transferred (e.g. the amount of a cash contribution), or the bankrupt person's withdrawal benefit if that is a lesser amount (section 137ZQ(1)(c) of the Bankruptcy Act).

The Official Receiver[1] can also serve a freezing notice on the superannuation fund’s trustee (section 128E of the Bankruptcy Act). The freezing notice’s effect prohibits the superannuation fund’s trustee from doing a range of things regarding the person's superannuation interest, including cashing, debiting, rolling­ over, transferring or forfeiting the interest, other than for specified purposes. Freezing notices apply for 180 days (and can be extended), allowing the bankruptcy trustee time to look into the circumstances of relevant superannuation contributions, and to take recovery action if that appears to be warranted.

Related articles:

How early access superannuation scheme withdrawals are treated in bankruptcy

The power of 139ZQ notices in undervalued transactions

Bankruptcy and superannuation

[1] The Official Receiver role under the Australian Financial Security Authority (AFSA) operates a public bankruptcy registry service with compliance and coercive powers to assist bankruptcy trustees to discharge their responsibilities.

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