Asset Protection

 

ASSET PROTECTION

 

 

A paper prepared and presented by

Leigh Adams  of Leigh Adams Lawyers

 

 

Introduction

Structuring a commercial transaction involves considerations of commercial efficiency, tax efficiency, succession planning, estate planning and wealth preservation.

 

RichstarEnterprises

The case of ASIC v Carey[1]is our starting point.

 

In that case, Justice French held that

“In the ordinary case the beneficiary of a discretionary trust other than perhaps a sole beneficiary of an exhaustive trust, does not have an equitable interest in the trust income or property which would fall within the most generous definition of “property” in s9 of the Corporations Act and be amenable to control by receivers under s1323. I distinguish the ordinary case from the case in which the beneficiary effectively controls the trustee’s power of   selection. Then there is something which is akin to a proprietary interest in the beneficiary.[2]”

He then went on to say[3]

 

“I am inclined to think that a beneficiary…at arms length from a trustee, does not have a ‘contingent interest’ but rather an expectancy or mere possibility of a distribution…On the other hand, where a discretionary trust is controlled by a trustee who is in truth the alter-ego of a beneficiary, then at the very least a contingent interest may be identified because, in the words of Nourse J [4], ‘it is a good as certain’ that the beneficiary will receive the benefits of distribution either of income or capital or both”.

 

Accordingly it is now imperative for business owners to get legal advice before setting up a family trust in order to avoid exposure of the trust assets to creditors of the beneficiaries.

 

Section 120 of the Bankruptcy Act

 

Section 120 deals with clawback rights where assets are transferred at less than market value at a time when the transferor was insolvent.

 

Section 120(3A), which was introduced in 2006, establishes a rebuttable presumption that the transferor was insolvent if it is established that the transferor at the time of the transfer:

 

a)     had not kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

b)     havingkept such books, accounts and records, has not preserved them.

 

A safety net for this section is the transferee paying market value. Whilst this does not reduce the net worth of the transferor immediately, the transferor can consume the value on living expenses, school fees, holidays etc.

 

Section 121

 

This section is dependant upon motive but not on time. In the Cummins case[5] a transfer 15 years prior to the hearing of the case was found void against the trustee in bankruptcy.

 

Under s121, the transfer is void if:

-        the transferor’s main purpose was to prevent the transferred property from becoming divisible among the transferor’s creditors (or to hinder or delay that process); and

-        the property would have become part of the transferor’s estate or would probably have been available to creditors if that property had not been transferred.

 

If you can reasonably infer from all the circumstances that the transferor was at the time of the transfer insolvent or about to become insolvent, then the transferor is taken to have the required "main purpose”.

 

Section 121 does not apply where the transferee gave at least market value and did not know or could not reasonably have inferred that the transferor’s main purpose was to defeat his or her creditors and that the transferor was or was about to become insolvent.

Cummins[6]

 

The High Court in Cummins re-wrote the law of presumption for the modern age. Whilst the new rule applies only to married couples, it is most likely that a trustee in bankruptcy relying on this case would be able to use the analogy and apply it to a de facto spouse in due course. Further, it is only a presumption and it is capable of being rebutted by evidence to the contrary. Nevertheless, the High Court stated the following about married relationships.[7]

 

“It is often a purely accidental circumstance whether the money of the husband or the wife is actually used to pay the purchase price to the Vendor, where both are contributing by money or labour to the various expenses of the household.”

 

The High Court then went on to say[8]:

 

“Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one half interest in the property, regardless of the amounts contributed by them.”

 

It is now more important than ever to get proper legal advice before buying a property in order to avoid the application of this case to your situation.

 

The Bankruptcy and Family Law Legislation Amendment Act 2005(BFLLA)

 

This came into operation on 18 September 2005. The Federal Government enacted this legislation to allow a non-bankrupt spouse to make or continue family law property settlement proceedings against their bankrupt spouse.

 

Before the BFLLA, a non-bankrupt spouse who had separated from the bankrupt whether before or after commencement of the bankruptcy, could have been left out of any distribution of the bankrupt’s assets.

 

Bankruptcy Legislation Amendment (Anti-Avoidance) Act 2006 (BLAAA)

 

Where a bankrupt transfers his half interest in his property to his wife in consideration for the right to live there for, say, the next 10 years, this is now insufficient[9] to amount to consideration for the purpose of s121 which was discussed above. Accordingly the trustee in bankruptcy could still seek to claw back the asset even though the transfer took place many years ago and the non-bankrupt spouse had no reason to suspect any ulterior motive for the transfer.

 

But this change does not apply where the arrangement is sanctioned by Family Court orders.

 

Division 4A- Trust Busting Provisions Go Bust

This division [10] was introduced in the late 1980s but it is very complicated and is almost useless for trustees.

 

To use these provisions, the trustee has to show that

a)     the bankrupt controls an entity;

b)     he provides personal services to the entity;

c)     at an undervalue;

d)     the entity holds property;

e)     the entity acquired the  property as a direct or indirect result of the supply by the bankrupt of the personal services;

f)      the bankrupt enjoys the use or benefit of that property.

 

Where all of this is made out, the bankruptcy trustee can obtain an order from the Federal Court vesting the property in the bankruptcy trustee[11].

 

It is now the case that a direct or indirect enjoyment of property of the entity will suffice by virtue of the amendments brought into play by the BLAAA.

 

Superannuation

 

The Bankruptcy Legislation Amendment (Superannuation Contributions) Act 2007 became law on 15 April 2007. It applies to contributions made on or after 28 July 2006.

 

The general rule in relation to superannuation and bankruptcy is set out in s116(1)(a) of the Bankruptcy Act which provides that:

 

“All property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge… is property divisible among the creditors of the bankrupt.”

 

However, s116(2) contains exceptions to this rule. Property covered by s116(2) is excluded from s116(1).

 

Example where the protection applies

 

If a bankrupt has a balance in a regulated superannuation fund, then that amount is protected even if it is considered to be the property of the bankrupt. Proceeds of life insurance are protected and superannuation splits in Family Law are protected as well as damages for personal injury and death.

 

Changes from 1 July 2007

As a result of the Tax Laws Amendment (Simplified Superannuation) Act 2007 and the Superannuation Legislation Amendment (Simplification) Act 2007, from 1 July 2007 a bankrupt’s entire interest in their superannuation fund is protected from being divisible amongst his or her creditors.

 

Nevertheless, this protection is subject to the new provisions contained in the Bankruptcy Legislation Amendment (Superannuation Contributions) Act 2007. Broadly this Act amends the Bankruptcy Act to provide that a bankruptcy trustee can recover superannuation contributions on or after 28 July 2006 where their payment was made  with  intent to defeat creditors. These provisions are set out in ss128B and 128C of the Bankruptcy Act.

 

Forfeiture

 

Reserves

A bankrupt has at least a contingent interest in a reserve account and so the funds in a reserve account should not be available to creditors under s116 of the Bankruptcy Act if the member were to become bankrupt – see section 116 (2) (d) (iii). But is this correct? It seems that an alternative view is that it has not been allocated to the member and may never be allocated to him. On that basis, it could be subject to forfeiture, unless s116(1)(b) applies. That subsection is to the effect that property divisible amongst the creditors of the bankrupt includes the right to take such proceedings in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy.