A critical function of a Bankruptcy Trustee is the investigation into the conduct of a Regulated Debtor prior to becoming a Bankrupt. There are two main purposes to undertaking these investigations, firstly to identify whether the Regulated Debtor has breached the Bankruptcy Act 1966 (“the Act”), which may result in an offence being committed that requires referral to the Australian Financial Security Authority and/or an objection to discharge being lodged, meaning that the Regulated Debtor remains a Bankrupt longer than three years. For more information, please refer to https://www.rodgersreidy.com.au/news/articles/bankruptcy-beyond-the-three-year-period.

The second purpose is to identify any transactions that involve the Regulated Debtor and that are considered by the Act, to be antecedent transactions and that are void against the Trustee (meaning that the transaction can be reversed for the benefit of creditors). The process to investigate a potentially antecedent transaction depends on the nature of the transaction, however, the initial steps undertaken by a Trustee include:

• Writing to major banks and credit institutions to confirm accounts held and request account statements;
• Reviewing account statements for the period up to four years prior to appointment;
• Undertaking Australian Securities and Investments Commission searches to identify the RD’s interest in corporate entities;
• Undertaking land title property searches to identify the RD’s interest in real property;
• Reviewing superannuation fund statements;
• Obtaining details of vehicles held with the relevant state authority (ie Vic Roads);
• Obtaining a copy of the ATO’s file including income tax returns for at least the previous two years;
• Conducting searches of the Personal Property Security Register to identify Personal Property Security Act registrations held over the RD;
• Obtaining information in relation to shares held, gaming accounts and various statutory bodies;
• Correspondence with the Petitioning Creditor (when applicable) and other creditors who may have knowledge of the affairs of the RD; and
• Interviewing the RD to discuss their financial history and current circumstances.

Once these initial investigations have been completed, potentially antecedent transaction fall into the following categories:

Section 120 – Undervalued Transactions

This section refers to the transfer of assets for less than market value and are therefore considered to be “undervalued”. This type of transaction can take the form of the sale of an asset for less than the market value or the purchase of an asset for greater consideration that its market value (therefore moving funds to another party, prior to Bankruptcy).

Examples of this type of transaction include:

• The transfer of the Regulated Debtors interest in a property in a property to a spouse or related party for little or nil consideration;
• Granting security over assets to a party in exchange for funds that were previously loaned; or
• Purchasing an assets that has little or nil value and paying a price that is significantly over market value for the asset.

There are circumstances where the transfer of an asset are protected, for this to occur, the following conditions must be met:

1. The transfer took place in excess of two years prior to the beginning of the Bankruptcy.
2. The transfer did not involve a related party of the Regulated Debtor.
3. The Regulated Debtor was solvent at the time of the transfer and remained solvent, following the transfer.

The period extends to four years if the transfer was with a related party.

Section 121 – Transfer to Defeat Creditors

This section refers to the scenario where a Regulated Debtor preemptively transfers an asset or assets, with the primary intention to avoid the asset from being available to their creditors. The circumstances that need to be identified to pursue this type of transaction are:

1. The property would probably have become part of the Bankrupt Estate or probably would have become available to creditors, had it not been transferred; and
2. The main purpose of the transfer, was to make the property unavailable to creditors (defeat creditor claims).

A transfer is not considered voidable, under any of the following circumstances:

• The Regulated Debtor can demonstrate that the transfer was in good faith;
• The transfer was for at least market value;
• The transferee could not reasonably have inferred, that the purpose of the transfer was to defeat creditors;
• The transferee could not reasonably have inferred that, at the time of the transfer, the Regulated Debtor was, or was about to become insolvent.

Section 121A – Transactions where consideration is given to a third party

This section refers to the circumstances where the consideration for a transfer is given to a third party, rather than being retained by the Regulated Debtor. This section gives a Bankruptcy Trustee the ability to collect funds that should have been paid to a Regulated Debtor, held by a third party, even if the transfer was neither:

• An undervalued transaction (section 120); or
• A transfer to defeat creditors (section 121).

Section 128B and 128C – Superannuation contributions

Significant investigations are also undertaken with respect to potentially voidable contributions to the Regulated Debtors superannuation fund pursuant to Section 128B and 128C of the Act. For more information, please refer to https://www.rodgersreidy.com.au/news/articles/bankruptcy-what-happens-to-my-superannuation.

It is crucial to understand the extensive investigative powers of a Bankruptcy Trustee prior to providing advice to clients about asset protection methods.  Any advice given to clients should be at a time when they are solvent and are not suffering financial distress.  Advisors should not under any circumstance provide advice on asset protection if a client is suffering from financial distress.  Advice of this nature could result in the advisor being prosecuted for aiding and abetting breaches of the Bankruptcy Act which have significant penalties (including imprisonment upon conviction).

Seeking expert advice is critical to ensure that the individual in financial distress understands the consequences and likely investigations that will be undertaken by a Trustee in Bankruptcy.  Alternatives to bankruptcy, such as a Personal Insolvency Agreement (Part X), may be a more appropriate course of action to resolve the individual’s financial distress.

If you have any questions regarding this topic, or you have a client experiencing financial distress, please contact Brodie Hilet or Neil McLean on (03) 9670 8700 for a confidential and obligation free discussion.