Australia: The Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2006 – No Toothless Tiger!

Last Updated: 3 May 2006
Article by David Dowd

On 29 March 2006, the Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2006 (the amendments) was passed by the Senate. The amendments are not retrospective and are expected to commence before the end of the 2006 financial year.

The amendments arguably represent the most controversial bankruptcy legislation in recent history. The amendments first emerged on 22 March 2001, when the Attorney General’s department announced the establishment of a Taskforce to consider whether changes should be made to Australia’s bankruptcy and taxation legislation to address high income earners using bankruptcy to avoid paying debts. Since 2001, the Federal Government has released draft legislation, withdrawn it, revised it and released it again, all in response to over 40 submissions lodged in response to a Discussion Paper by registered trustees, professional bodies, financial advisors and lawyers.

So what’s the result? Well, in this, our third Insolvency Update for 2006, we dissect the major amendments and examine how they are likely to assist trustees and creditors to recover assets for the benefit of creditors. We also explain the justification for the various amendments and, where practical, we explore working examples to demonstrate how the amendments will operate in practice. We conclude this Insolvency Update with a summary of how the amendments are likely to benefit trustees and creditors.

Objectives of the amendments

The amendments are intended to strengthen the ‘claw-back’ provisions in the Bankruptcy Act 1966 (the Act) by:

  • Increasing claw-back provisions from two to four years for transfers of property by a bankrupt to a related entity for less than market value.
  • Introducing a rebuttable presumption of insolvency where a bankrupt has failed to keep proper books, accounts and records.
  • Making transfers to defeat creditors voidable if it was reasonable for the transferee to infer that the bankrupt's main purpose in transferring the property was to defeat creditors.
  • Allowing trustees to recover consideration given to third parties prior to bankruptcy.
  • Empowering the Court to make orders in relation to property or money held by natural persons where the bankrupt derived a benefit from the property and made a financial contribution to the property prior to bankruptcy.

We examine each of these amendments below.

Claw-back period

The amendments will increase the time period under section 120 of the Act from two to four years where property was transferred to a related entity during that period for less than market value. The term ‘related entity’ includes parents, children, relatives, trustees and beneficiaries of trusts and business partners who are related to the bankrupt or the bankrupt’s spouse.

The justification for targeting related entities is empirical evidence that gifts designed to dissipate assets prior to bankruptcy are more likely to be given to relatives than strangers.

The claw-back period has been doubled because it is now commonplace for people to be aware that they are likely to become bankrupt more than two years before they become technically insolvent. It is believed that the pre-bankruptcy period of two and four years previously afforded too much scope for the deliberate divestment of assets.

Rebuttable presumption

The amendments create a rebuttable presumption of insolvency for the purposes of sections 120 and 121 of the Act. The presumption holds that the transferor was insolvent at the time of the transfer if it can be established that the transferor did not, during that time:

  • Keep proper 'books, accounts and records'; or
  • Preserve books, accounts and records for the relevant period.

These amendments have been introduced to remove the incentive to avoid maintaining, hiding or destroying records that would otherwise demonstrate insolvency. The presumption will be rebuttable by the bankrupt.

Inference of purpose

Section 121(4) has been amended to place additional limits on the circumstances in which a transfer will be protected by that provision. In its previous form, section 121 protected a situation where, for example, a person was approaching bankruptcy and transferred all their assets to their spouse. A transfer in those circumstances was previously protected by section 121(4) if the transferee spouse could establish that they did not know why the transfer occurred.

Importantly, the amendments introduce a test of reasonableness in relation to the transferee’s knowledge of the transferor’s intention at the time of the transfer.

Recovery of third party consideration

To enable trustees to recover property transferred as an avoidance measure, a new section 121A has been inserted into the Act which allows trustees to recover consideration paid to third parties in certain circumstances.

Section 121A will apply where, for instance, four years before bankruptcy a bankrupt transfers his Harley Davidson to a friend for $25,000 in an arm’s length transaction where the transfer was performed as part of a plan to place assets beyond the reach of creditors in anticipation that the bankrupt was likely to become insolvent at some point in the future. The bankrupt directs the transferee of the Harley Davidson to pay the bankrupt’s brother the $25,000 purchase price which the bankrupt treats as a gift. Pursuant to section 121A, the payment to the brother would be void where the trustee could prove that the brother knew of the bankrupt’s intention in transferring the Harley, and that the brother failed to provide market value consideration for the $25,000 ‘gift’.

Recovering property from natural persons

Perhaps the most radical amendments are those that now extend the provisions contained in Division 4A of Part VI of the Act. These amendments empower trustees to recover property of a bankrupt from natural persons, in addition to the existing power to recover property disguised as an asset of a trust, company or similar. These amendments have been introduced to combat people hiding their assets by placing them with a spouse or relative in the same way as a trust or company. In this respect, the amendments apply to all relatives of the bankrupt.

The applicable ‘examinable period’ is either four years prior to the commencement of the bankruptcy, or from the first point of insolvency in the prior year, if the bankrupt became insolvent in that year. The ‘record keeping’ rebuttable presumption of insolvency applicable under sections 120 and 121 of the Act is also applicable to these provisions.

These amendments have far-reaching consequences because they allow the Court to make orders in relation to property owned by a natural person where:

  • During the examinable period, the person acquired an estate in property as a direct or indirect result of financial contributions made by the bankrupt during that period; and
  • The bankrupt used or derived (whether directly or indirectly) a benefit from the property during the examinable period; and
  • The person still holds an estate in the property.

The extent of these amendments is best demonstrated by the common situation where a bankrupt’s spouse holds the family home in her name solely, the bankrupt lived in the home and serviced outgoings on the property within four years of bankruptcy. In these circumstances, the Court may order the spouse to pay into the bankrupt’s estate, the value of the spouse’s interest in the home which is attributable to the financial contributions made by the bankrupt within the four year’s before bankruptcy.

These provisions extend to any financial contribution, regardless of size, and regardless of the benefit derived by the bankrupt from the property which may be as simple as living in the home for only one week. The provisions also do not require the bankrupt to have been insolvent at the time of the contribution, the bankrupt need not have had an intention to defeat creditors, and the bankrupt need not be deriving a benefit from the property (ie. living in the home) at the time of bankruptcy.

Summary of impact of amendments

If the number of submissions lodged by interested parties is anything to go by, the amendments are likely to substantially enhance a trustee’s ability to recover assets for the benefit of creditors. In short, we believe the amendments are likely to have the following impact:

  • The increased time period of four years under section 120 of the Act should allow trustees to attack more related party based avoidance transactions.
  • The third party 'reasonableness test' should assist trustees to pursue previously unprovable recovery actions.
  • The third party consideration provisions reach into previously protected transaction to enable trustees to recover property and more importantly, the proceeds of sale of property, disposed of by the bankrupt via other parties.
  • The rebuttable presumption of insolvency which arises when a bankrupt fails to maintain or preserve proper books and records should assist trustees in establishing a bankrupt's intention to defeat creditors under section 121, especially given the usual lack or complete absence of direct documentary evidence to establish insolvency.
  • Trustees now have the ability to recover a bankrupt's contribution to the 'family home' and other assets held in the name of a spouse and relatives.

Overall, the amendments will have a significant impact on all risk takers, including the well-advised, who may seek to protect their wealth in the event of insolvency. From now on, such strategies will only be effective if more complex asset protection measures are implemented at a much earlier time well before insolvency looms.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.