In brief: A recent Federal Court case brings
clarity to the treatment of protected money payments under
Australia's bankruptcy laws.
What you need to know:
This case determines the law on how Trustees should deal with
protected money payments used to pay mortgages under Australian
Trustees for bankrupt estates can now confidently calculate the
amount of the proceeds of sale which should be attributed to the
On 12 May 2016 the Federal Court of Australia handed down the
judgment of Reaper v Vrsecky (Trustee)  FCA 509. In
this case, Madgwicks acted for the Trustee who was completely
successful in his cross-appeal to the Federal Court.
This case is significant for insolvency practitioners because it
settles the law on how Trustees should deal with protected money
payments in circumstances where the bankrupt has used these funds
to pay some of the mortgage on their house.
The Question for consideration by the Court
How much of the proceeds of realising the property should the
Trustee attribute to protected money?
The Bankruptcy Act
Section 166(2)(g) of the Bankruptcy Act 1966
(Cth)(the Act) provides that any damages
or compensation recovered by the bankrupt for personal injury is
not divisible amongst his or her creditors.
In this case, the Court considered Section 116(4) which relates
to where the outlay of a property is paid in part by the bankrupt
by protected funds and the Trustee attempts to realise the
property. It is relevant in this case that only part of the
repayments (not substantially the whole of the acquisition) were
paid from protected moneys.
Madgwicks acted for the Trustee of the Bankrupt estate of Brett
Mr Reaper owned a property as joint tenants with his wife,
The Trustee applied in the Federal Circuit Court for partition
and sale of the property.
Mr Reaper produced documents to the Court to show that some
mortgage payments on the property were made with compensation funds
received from a workplace injury. The Court found that these
compensation funds were protected funds and not divisible property
for the purpose of the Bankruptcy Act 1966 (the
The Court held that the Trustees' interest in the property
The Federal Circuit Court judgment was appealed.
In 2004 Mr Reaper and his wife, Ms Fisher, entered into a loan
for $285,000 to construct their house.
Between 2007 and February 2013, all the loan repayments were
made by Mr Reaper's compensation funds, totalling
The principal on the loan during this time was reduced by
$45,033.63 and the overall amount outstanding (including interest)
was reduced from $317,649 to $275,000.
The Federal Court Findings
The Trustee is required to pay the bankrupt so much of the
proceeds of the property as can fairly be attributed towards the
The Court conducted a detailed review of the definitions of
"exempt loan money" and "protected money" and
how they related to Section 116(4) of the Act.
The Court held that only that part of the compensation moneys
that repaid the loan principal constituted "protected
money" and was therefore exempt loan money. The loan
repayments reduced the principal by $45,033.63.
The Court also held that the protected money is to be treated
as having been paid for the joint benefit of Mr Reaper and Ms
Fisher (the other joint tenant).
The Court found that because Mr Reaper made payments
incrementally, his percentage interest in the property should be
averaged over the period of payment. The Court outlined these
calculations in its judgment and held that the amount which can be
fairly attributed to Mr Reaper's protected money was
The Court gave Ms Fisher the option to purchase the
Trustees' interest in the property for $221,635.
For the purpose of Section 116(4) of the Act, if:
a Trustee intends to realise a property which is jointly held
by the bankrupt and another; and
some of the repayments of the mortgage are made by the bankrupt
with protected money;
the Trustee needs to pay the bankrupt so much of the proceeds of
the property as can fairly be attributed towards the protected
funds. In calculating this, the Court has held that:
Only that part of the compensation moneys that repaid the loan
principal in these circumstances constitutes protected money.
Where the bankrupt is a joint tenant, the protected money may
be treated as having been paid for the benefit of the bankrupt and
the other joint tenant. This may have the result of halving the
Bankrupt's share of the protected money.
Trustees for bankrupt estates in these circumstances can now
confidently calculate the amount of the proceeds of sale which
should be attributed to the Bankrupt.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.Madgwicks is a member
of Meritas, one of the world's largest law firm
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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