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31 Aug 2016

Court reaffirms protections around super in bankruptcy


3 min

Trustees unsuccessful in grab for super payments.

Most advisors would be aware that superannuation held in a regulated superannuation fund by a bankrupt is considered to be non-divisible property under section 116(2) of the Bankruptcy Act 1966 (the Act).

Those advisors would also be aware that payments received by a bankrupt from their fund on or after the date of bankruptcy are also considered to be non-divisible property.

But advisors, including insolvency practitioners, may be unsure as to what happens when a bankrupt receives a distribution from a superannuation fund held by their deceased spouse…

In the recent decision of Trustees of the Property of Morris (Bankrupt) v Morris (bankrupt) [2016] FCA 846 the court has reaffirmed that protection held by superannuation extends to payments received by a bankrupt from their spouse's superannuation fund.

Ms Morris became bankrupt some four months after her husband, Mr Foreman, died. Mr Foreman held policies with two superannuation funds: AustSafe Super and Plum Super.

After becoming bankrupt, Ms Morris received three payments. Plum Super made a life insurance payment of $311,865.95, which is not controversial as section 116(2)(d)(ii) of the Act provides that divisible property does not extend to life assurance policy proceeds of a bankrupt—or their spouse—received on or after the date of bankruptcy.

What was 'controversial' was AustSafe Super's payment of $45,392.48 and Plum Super's payment of $67,240.27. Those funds made these payments to the bankrupt under discretionary powers, as Mr Foreman had not nominated any dependents or beneficiaries.

Mrs Morris’s bankruptcy trustees applied to court in respect of these payments arguing that the superannuation monies received by the bankrupt were after-acquired property that vested in them (as bankruptcy trustees) and was therefore divisible among the bankrupt estate's creditors.

Question to be decided
The disagreement between the parties was largely in relation to the application of section 116(2) of the Act and in particular, subsections 116(2)(d)(iii)(A) and 116(2)(d)(iv). These sections provide that divisible property of a bankrupt does not include:


(d) (iii)   the interest of the bankrupt in:

  • A regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993; or

  • An approved deposit fund (within the meaning of that Act);or

  • An exempt public section 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 bankruptcy...

Justice Logan held that prior to the superannuation fund trustees’ exercising their discretion in favour of Ms Morris, she had no interest in either fund; however, upon this favourable decision, an interest was then created in the superannuation funds, and therefore these payments (totalling $112,632.75) made to Ms Morris (after bankruptcy) were held to be captured by s116(2)(d)(iii) and s116(2)(d)(iv) of the Act. Consequently, the bankruptcy trustees were unsuccessful with their application.

There appear to be no previous authorities concerning the meaning and effect of the above sections of the Act, however the decision seems to be consistent with the intention of legislation to protect and preserve benefits in respect of retirement for both members of funds as well as their spouses and dependents.

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