We�ve all heard those media driven tales of people engaged in shonky dealings who then go bankrupt to avoid creditors, and go on to lead luxurious lifestyles after being declared bankrupt, much to the frustration of creditors.  Some recent cases in the Federal Court may give some encouragement to creditors  pursuing debtors who have engaged in shading dealings or who are otherwise determined to avoid the intended consequences of bankruptcy, in so far as obligations to creditors and trustees in bankruptcy are concerned under the Bankruptcy Act 1966 (�the Act�).

A recent Federal Court decision provides a good example of how the trustee in bankruptcy  can examine transactions prior to a persons estate being made bankrupt, in circumstances where significant property is disposed of in an attempt to shield assets from creditors.  The Federal Court was confronted with three wildly diverging valuations of a property disposed of by a bankrupt to relatives.  There is nothing necessarily wrong with such transfers if they are for fair market value and the transferee could not be reasonably aware that the disposal of the asset was with the specific intent to deny creditors of the assets real value.  In the case in question the Court was satisfied that the asset had been disposed of to relatives at a value far less than market value.  Three valuations had been presented to the Court varying between just below half a million dollars and more than a million dollars.  The Court had no difficulty in ordering the transaction void as against the trustee based on the valuation evidence.  Another recent case involved the disposal of assets through a family trust where again valuation evidence was crucial in establishing that the disposal of the asset was not for a fair market consideration and was accordingly a sham to conceal wealth from creditors.

In recent years it has also been decided that the trustee in bankruptcy can apply to set aside transactions after a bankrupt has been discharged from bankruptcy, which in most cases occurs after three years.  In that case a husband had transferred an interest in real property and shares to his wife some years prior to being declared bankrupt.  The Court heard evidence that the transactions were not for proper consideration or indeed, in relation to the real property for any consideration at all.  The main argument centred around the procedural question of whether the trustee had standing to commence an action at all after the discharge of a bankrupt, in relation to dealings in property prior to the declaration of bankruptcy.  The Court found that the trustee did have such power, a decision which may have far reaching implications for creditors who allege fraudulent or sham transactions against discharged bankrupts.

The assets that can be investigated by the trustee are no longer confined to real estate, shares and cash.  Amendments to the Act now include superannuation benefits disposed of with intent to defraud or otherwise deny creditors of their proper entitlements. Several recent decisions of the Court have shown that the operation of Section 128B of the Act in relation to disposal of superannuation funds, where the intent is clearly to deny those funds to creditors has proven to be effective in the overall sense.  Of interest to creditors in this area of the law however will be a recent decision of the Federal Magistrates Court, where a ruling was made granting  to a respondent to proceedings brought by the trustee, (the respondent being itself a trustee company for the bankrupts superannuation entitlements), access to the capital of the super fund in question to cover the respondent�s legal costs of defending the action. Such applications can often have profound consequences for the recovery prospects of creditors where proceedings can be expected to be protracted and costly, especially where the super fund forms the only worthwhile asset to pursue.

The Federal Court recently handed down a decision which should serve as a reminder to bankrupts of their obligation to disclose their affairs truly and frankly to the trustee.  In a case on appeal from the Federal Magistrates Court Queensland Registry, the Federal Court found that a bankrupt had failed to file a proper Statement of Financial Affairs with the trustee in 1998.  The findings of the Federal Magistrates Court would mean that the bankrupt would remain so for nearly a decade, based on the omission of crucial information from the 1998 Statement.  The bankrupt appealed to the Federal Court, which rejected the argument that the bankrupt was unaware that the Statement had not been accepted by the trustee for being inadequate.  The end result was that the bankrupt would not be eligible for discharge for an additional 2 years, taking the total period of bankruptcy in this case to almost ten years.

The trustee in bankruptcy in the majority of cases will be the Official Trustee in bankruptcy as defined in the Act, the Insolvency and Trustee Service of Australia (ITSA).  This is so because in many cases there is not any great prospect of  recovery for creditors, unless there are real issues of fraudulent or otherwise improper dealings in relation to a bankrupts former assets, where the value of those assets is such as to justify the appointment of a private trustee to pursue claims by creditors.  Private trustees are appointed only with the consent of the trustee nominated.  Subject to some regulation, private trustees charge substantial fees for their services and rates of $250.00 per hour or more are not uncommon.   Private trustees will typically require security for their costs before agreeing to act, in some cases in the form of up front security payment, especially where recovery prospects are questionable.

Creditors will normally need to think carefully before nominating private trustees to pursue bankrupts for hidden assets.  Close attention will need to be paid to transactions in which the bankrupt engaged prior to the making by the Court of a sequestration order, which is effectively a declaration by the Court that a person's estate has been made bankrupt.   Whilst the normal time limit for clawback of assets is five years prior to the date of order, in some instances time limits may be extended for enquiries by the trustee,  particularly in cases of outright fraud. 

The service provided by ITSA to creditors is typically focussed on the basic obligations of the bankrupt under the Act, especially in relation to the filing of a Statement of Financial Affairs and attendance at examinations to which the bankrupt may be summonsed by the Court.  Court based examinations are usually not required by ITSA where the estate of the bankrupt is small or where the reasons for bankruptcy are otherwise obvious or not such as to arouse suspicion.  Other powers typically exercised by ITSA relate to such matters as applying for arrest warrants where a bankrupt refuses to provide financial information,  or where there is a flight risk in circumstances where the trustee can require the surrender of a passport and make appropriate notifications to commonwealth and airport authorities.

Creditors are well advised to seek legal advice prior to commencing substantial recovery operations against bankrupts where private trustees are involved.    A recovery operation likely to incur substantial cost usually involves a careful assessment of the likely total cost and merit of litigious enquiry, relative to the notoriety and or suspicion aroused by the relevant transaction under scrutiny, in cases where bankrupts improperly dispose of their assets.  McDonald Pynt Lawyers offer an initial first conference on a complimentary basis where we can generally provide an assessment of relative risk in pursuing asset trails and an expert appraisal of the merits or otherwise in pursuing recovery litigation.  We  also have access to expert accountants with forensic commercial and financial skills to assist with the assessment process.  All enquiries will be provided with a frank and transparent assessment of the range of likely recovery costs.

Any enquiries in relation to bankruptcy or insolvency generally, or any matters arising from this article may be directed to Andrew Foster of McDonald Pynt Lawyers tel: 9289 6108 (direct).*

*Readers should note that this article is intended only to provide insights into general developments of the law in this area and is not intended to constitute legal advice of a definitive nature in individual cases.  Concerned parties should seek specific and tailored legal advice to suit the requirements of their individual cases.