In a Bankruptcy scenario it is not uncommon for a home or investment property to be owned by spouses or de facto partners as joint tenants or as tenants in common. Where one person becomes bankrupt there are serious ramifications for the non bankrupt partner.
This article will consider as a starting point various equitable principles that may be relevant in determining a dispute as to the beneficial ownership of property in a bankruptcy scenario.
Property of the Bankrupt under the Bankruptcy Act
Upon bankruptcy, the "property of the bankrupt" vests in the trustee in bankruptcy under section 58(1) of the Act.
Under the Act, the making of a sequestration order also severs a joint tenancy in respect of land, and the legal ownership becomes a tenancy in common in equal shares. In such circumstances the trustee in bankruptcy will ordinarily seek to claim a ½ interest to the equity in the property. Where the legal ownership is recorded as tenants in common, the trustee as a starting point will look to claim the recorded share of the bankrupt partner or spouse.
The "property of the bankrupt" is defined in section 5(1) to be "property divisible amongst the creditors of the bankrupt".
What is important to note is that section 116(2)(a) of the Act specifically excludes from the definition of what property is divisible among the creditors of the bankrupt "property held by the bankrupt on trust for another person".
It is clear that only property in which the bankrupt holds a beneficial interest is divisible among his or her creditors. Any equitable entitlement in favour of another person will bind the bankrupt's trustee.
This is important for the non bankrupt because there are a number of equitable doctrines or claims that may assist the non bankrupt in adjusting his or her apparent share as against the trustee in bankruptcy.
The essence of the argument for the non bankrupt is the assertion that the description of ownership as stated on the legal title to the property does not reflect who is entitled to the beneficial interest and the respective shares of the beneficial interest in the property.
Of course, presumptions regarding interests in property can be rebutted and their application will depend upon the facts.
The acts and declarations of parties before, at the time of or immediately after a purchase, are admissible evidence for the purpose of drawing an inference as to the intention of the parties relating to the beneficial interest which each of them has in the asset.
In making an assessment of entitlements a court will look at what the parties said and did when the property was purchased, and by their later conduct insofar as it throws light on what those intentions then were. Subsequent declarations of intention are only admissible against interest.
The starting position is that prima facie the beneficial ownership of property is commensurate with the legal title, and in the case of land the ownership is reflected by the recorded interests on the title.
It is important to note that in order to displace the presumption by evidence of an actual intention to the contrary, a court will not be persuaded "by slight circumstances". A court will only displace the starting presumption in the event that that actual intention can be reliably determined.
There are a number of ways that that starting position may be refuted.
The first method by which the discrepancy between legal title and beneficial ownership may be rebutted is through proving the existence of what is called a "resulting trust" where two or more purchasers pay the purchase price in unequal shares.
The "purchase price" includes the actual price paid. It is presently unresolved whether it extends to stamp duty, agents fees, solicitors costs and other incidental costs and expenses.
An initial obstacle to the establishment of a resulting trust, if a married couple has acquired a matrimonial home is the presumption that they are acquiring a joint interest, even if one contributes more to the purchase price. This is particularly the case where after a long period of time a party seeks to assert that ownership is not equal.
In Cummins, the wife contributed ¾ of the initial purchase price of the land and Mr and Mrs Cummins used jointly owned assets to finance the construction of the house. Many years later Mr Cummins sought to transfer a ½ share to his wife. Mrs Cummins unsuccessfully argued she was entitled to a ¾ share commensurate with her contribution to the original purchase price. Critically the Court said the purported transfer of the ½ interest to Mrs Cummins, years after the purchase was inconsistent with any belief by her that she was entitled to a ¾ share.
The outcome in Cummins can be contrasted with the Full Federal Court case of Draper, where the husband, an accountant, became the joint registered owner of a matrimonial home with his wife, the day before he became bankrupt. Part of purchase price was borrowed jointly by the husband and wife at the insistence of the lender secured against the property. The balance was secured by vendor finance and also secured by mortgage. Significantly, all mortgage payments were made by Mrs Draper from her own earnings.
Cummins and Draper illustrate that the question is one of fact.
Even if there is no resulting trust, a constructive trust may have arisen. There are essentially two types.
In the first case there is a "common intention" constructive trust. These arise where there is a denial by the legal owner of another party's rights contrary to an earlier agreement in relation to that property. The second and the more important type of constructive trust that arises is one which commonly applies in de facto property settlement situations. This doctrine depends on the general equitable principle which restores to a party, contributions which he or she has made to a joint endeavour, and fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them.
Constructive trusts of the second type cannot arise and will not be imposed to alter legal property
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.