02 May 2022

Transferring funds out of superannuation before bankruptcy


3 min

The sad cost of being unsure and not seeking advice.

A person with a significant personal guarantee debt due to several, now, failed associated entities came to Worrells about making themselves bankrupt. The debt was owed to one of the big four banks and it had already realised anything of value. Based on the information they provided, no material assets were available for realisation and due to being currently unemployed, income contributions were not required under the Bankruptcy Act 1966.

From the information made available at our appointment as bankruptcy trustee it appeared unlikely there would be any return to creditors. The bankruptcy’s administration seemed straightforward enough…until it wasn’t.

Our investigations identified that eight months prior to the bankruptcy appointment, the debtor transferred $150,000 out of their regulated superannuation fund to their self-managed superannuation fund. This transaction on its own would not be an issue provided the self-managed fund was regulated, the problem arose when the debtor then transferred these funds out of the self-managed fund to a friend for ‘safe keeping’.

Under 116(2)(d)(iii) of the Bankruptcy Act, property divisible among creditors of a bankrupt does not extend to the balance of a regulated superannuation fund. However, bankruptcy trustees have limited powers to recover payments made to a superannuation fund if it can be shown those payments were intended to prevent creditors from accessing those funds.

The bankrupt explained to us that at the time of transfer, the bank was taking possession of their assets subject to the personal guarantee agreement terms and didn’t know if their superannuation fund was protected in that scenario. Therefore, they took matters into their own hands and transferred the balance earmarked for retirement into their friend’s account to safeguard.

Here lies the issue, at the time of the bankruptcy appointment, the funds were no longer held in a regulated superannuation fund, they were re-characterised on transfer to the debtor’s friend to ‘funds held on trust’, an asset which vests and is available to a bankruptcy trustee. Following an assertive letter from our solicitor, the debtor’s friend paid the $150,000 to the bankrupt estate—after an understandably considerate suggestion that they just transfer the funds back to their friend’s superannuation fund to try and reverse the damage done.

So how could this have been avoided?

With good advice, at a fraction of the cost, this bankrupt could have avoided losing their superannuation. If they had come to Worrells when things started to unravel with the entities attached to their personal guarantees we could have explained how bankruptcy works and how assets/divisible property are treated in a bankruptcy scenario. We do this every day as complimentary and without expectation. An accountant or solicitor could also give this advice and clarity. We’re really saddened to see the cost of not getting advice to impact someone so dearly.

Related articles:

Income contributions in bankruptcy

Bankruptcy and superannuation

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