PIR Newsletter – March 2020

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The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA’s independent Regulation and Enforcement division.

COVID-19 update

Temporary changes to Commonwealth bankruptcy legislation

On 4 March 2020, the Australian Government made changes to the Bankruptcy law as part of the economic response to the Coronavirus. These temporary changes will be in place for six months from 25 March 2020.

The temporary measures include an increase to the:

  • Minimum amount of debt that can trigger bankruptcy from $5,000 to $20,000
  • Amount of time an individual has to respond to a Bankruptcy Notice from 21 days to six months 
  • Temporary debt protection – people who submit the Temporary debt protection form will have six months relief from creditors, an increase from 21 days

The Commonwealth Government have also announced a range of other economic stimulus measures to support those who have been impacted. More information about these types of payment are available at Services Australia.

How payments from the Coronavirus Economic Response Package affect people in bankruptcy:

Economic support payments are not claimable as income or as an asset, regardless of whether payments are received before or after the date of bankruptcy.

COVID-19 supplement payments are claimable by a trustee if they were received before the date of bankruptcy and remain in the recipient’s bank account when they became bankrupt. During bankruptcy these payments are included in the after-tax income amount that determine compulsory income contributions.

We have updated relevant parts of the AFSA website to explain how these changes impact people who are bankrupt:

Can’t pay my debts section

Income and employment

What happens to my money?

Currently bankrupt section

What if I receive money during my bankruptcy?

My income or employment has changed (or may change)

Initial Remuneration Notices – guidance on when the ‘20 business days’ period starts

AFSA Regulation has been asked to provide guidance to trustees on their obligation to send an initial remuneration notice (IRN) in circumstances where a sequestration order (SO) has been made and the regulated debtor (the bankrupt) has attempted to file a Statement of Affairs (SOA) with the Official Receiver (OR), but it has been returned as incomplete.

It appears there is some uncertainty about interpreting the words in subparagraph 70-35(5)(b)(i) of the Insolvency Practice Rules (Bankruptcy) 2016 which provides:

70-35 Initial remuneration notice 

 …

(5) The initial remuneration notice must be in writing and must be given to the regulated debtor and creditors:

(b) in any other case:

(i) within 20 business days after the day the trustee receives the regulated debtor’s statement of affairs; or (emphasis added)

The question which arises in SO matters is whether the relevant date for sending the IRN should be based on when the trustee receives the SOA, whether directly from the bankrupt or indirectly from the OR, and regardless of whether it has been accepted by the OR or not (i.e. because it has been returned as incomplete).

In short, the relevant date for counting 20 business days is the date from when the trustee is notified of the SOA being accepted by the OR and receives a copy of the SOA from AFSA Registry. 

This is important because there may be a material delay between when the bankrupt first attempts to file the SOA and when it is accepted by the OR, after initially being returned as incomplete.

The bankrupt’s duty to file a SOA and give a copy to the trustee is set out in subsection 54(1) of the Bankruptcy Act 1966 which provides:

54 Bankrupt’s statement of affairs

  • Where a sequestration order is made, the person against whose estate it is made shall, within 14 days from the day on which he or she is notified of the bankruptcy:
  • make out and file with the Official Receiver a statement of his or her affairs; and
  • furnish a copy of the statement to the trustee.

Penalty: 50 penalty units.

The OR may refuse to accept a SOA in SO matters which is not signed, dated, in the approved form, illegible or substantially blank or incomplete. The OR’s discretionary power to accept or reject a SOA was considered by the Federal Court of Australia in Wangman v Official Receiver, Insolvency & Trustee Service Australia [2006] FCA 202.

This is discussed in IGPS 14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General, with paras 2.10 to 2.13 extracted below for reference:

Statement of affairs

2.10 Subsection 6A(2) of the Act states that:

'A reference in a provision of this Act referred to in subsection (1) to a statement of affairs is a reference to a statement that:

(a) is in an approved form; and

(b) includes a statement identifying any creditor who is a related entity of the debtor or bankrupt; and

(c) contains a declaration that, so far as the debtor or bankrupt is aware, the particulars set out in the statement are correct.'

2.11 In Wangman v The Official Receiver [2006] FCA 202 the Federal Court also considered the extent to which a statement of affairs needed to be completed before it could be considered to be a valid statement of the debtor's affairs. In his judgment at first instance Jarrett FM stated that a statement of affairs form must carry sufficient information for it to be considered a statement of the debtor's affairs and to assist the trustee in the administration, otherwise it fails to comply with the Act. His Honour dismissed the application and found, inter alia, subsection 306(1) Bankruptcy Act was of no assistance to the appellant, for the reason that the defects in his Statement of Affairs were so significant that the document could not be said to be a statement of affairs at all. On appeal, Collier J endorsed this finding and noted that “[o]bviously, it would not satisfy s 54(1) for a bankrupt to seek to file a blank statement of affairs in the form approved by the Inspector-General without including the personal information required by the form, because then the form would not be a statement of the bankrupt’s personal affairs as required by the section.” Further elaboration provided on appeal, citing Nilant v Macchia [2000] FCA 1528, was that “the lack of information inserted by the appellant into the 1998 Statement of Affairs meant that the document was not a valid statement of affairs within the meaning of s 54(1) Bankruptcy Act. It was clearly not a statement of the appellant’s affairs. This is not to say that any omission from a statement of affairs sought to be filed by a bankrupt would render the document so defective as to be invalid for the purposes of the section.”

2.12 Due to the operation of subsection 6A(2) of the Act, subsection 54(1), and further supported by the line of authority cited in Wangman v The Official Receiver, the Official Receiver has a discretionary power to either accept or not to accept a statement of affairs as being a valid statement of the debtor’s affairs.

2.13 Should a trustee receive a completed or partially completed statement of affairs from a bankrupt, that document (or an original copy of it) should be forwarded to the Official Receiver for consideration as to whether or not it has been properly completed. It is not appropriate for trustees to make a determination as to whether or not such a document is properly completed and therefore acceptable to the Official Receiver. To facilitate this process, statement of affairs forms may be delivered or posted to any AFSA Registry or emailed to registry@afsa.gov.au.

Based on the above, the better view is that the relevant date to determine when an IRN should be sent is the date that the trustee receives the bankrupt’s SOA which has been accepted by the OR for filing.

Trustees should note that it is the OR’s practice to notify them when a bankrupt has filed (or made an attempt to do so) and when it has been accepted (or rejected and returned as incomplete). This is outlined in ORPS 3 – Bankruptcy by sequestration order at para 9.8, which is extracted below for reference:

9.8. Where a statement of affairs is not accepted and is returned to the bankrupt, it is sent by Registered Post (with a requested delivery confirmation) with information regarding the reason why it was not accepted and the corrective action that need to be taken. Copies of the deficient statement of affairs are retained by the Official Receiver and provided to the trustee, but the statement of affairs is not available for public inspection.

The trustee will receive an OR letter by email from AFSA Registry which either states:

  • Please be advised the Statement of Affairs for the matter of <Bankrupt’s name and number> was not accepted by the Official Receiver for the reason/s listed in the attached letter ;or
  • Please be advised the Statement of Affairs for the matter of <Bankrupt’s name and number> lodged on <date> was accepted on <date>.

The relevant date for counting the 20 business days in subparagraph 70-35(5)(b)(i) of the Insolvency Practice Rules (Bankruptcy) 2016 should therefore be the date from when the trustee is notified of the SOA being accepted by the OR under paragraph 54(1)(a) of the Bankruptcy Act 1966 and receives a copy of the SOA from AFSA Registry. 

Paul Eric, Assistant Director National Allocation
AFSA Regulation

ATO Update: Deliberate liquidation: Tale of the illegal phoenix

Illegal phoenix activity is a wicked problem that has a significant impact on the Australian economy; estimated to cost as much as $5 billion each year, with much of that impact borne by other honest businesses and employees. At its core, illegal phoenix activity is the deliberate and repeated shutdown of a business to avoid its debts (such as employee entitlements, supplier invoices, or tax obligations) only to resume operation under a new company or entity.

The Australian Taxation Office (ATO) leads the Phoenix Taskforce – 37 federal, state and territory government agencies who have come together to detect, disrupt, and deter illegal phoenix operators.

Strengthening the Taskforce

As part of the ongoing fight against illegal phoenix activity, the Australian Government has allocated an additional $58.7 million and $4.7 million in funding to the ATO and ASIC respectively over the next four years.

The Phoenix Taskforce takes a coordinated and strategic approach to dealing with illegal phoenix activity. In the ATO we try to influence lower risk groups to return to the tax system, while we take a more intensive compliance approach against higher risk phoenix groups and their facilitators. Strategies include early intervention work targeting specific industries, and working with key supply chain entities to close off potential opportunities. Through marketing and communications activities, we’re also warning at-risk employees and businesses about the warning signs of illegal phoenix operators, and what they can do to take action.

From the Taskforce’s establishment in 2014 up until 31 December 2019, the ATO has raised more than $1.29 billion in liabilities from audits and reviews of illegal phoenix activity, and returned more than $560 million in cash to the community.

In 2018-19 we completed more than 750 audits and reviews across a range of industries and locations. The Phoenix Taskforce also recorded nine criminal convictions in this period, and banned and disqualified 30 directors from being involved in the management of a corporation.

Case study:

Collaboration between Phoenix Taskforce agencies resulted in a property developer losing his building licence and being disqualified as a company director. The developer had liquidated entities six times in five years, leaving behind more than $160 million in unpaid debts to creditors. The development group had been subjected to 46 previous ATO compliance activities and owed more than $7 million in current and written-off debt to the ATO alone. The Supreme Court found the man, along with his wife and their associated entities, guilty of falsification of bank statements, appointment of shadow directors, and unauthorised withdrawal of funds. For their dishonest behaviour the taxpayer lost their NSW and Queensland building licences, and were ordered to pay over $9.4 million. As a result, the taxpayer entered into bankruptcy, and was disqualified from being a company director.

Law reform in 2020

A number of upcoming law reforms aim to help combat illegal phoenix activity. The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 introduces:

  • Phoenixing offences targeting property transfers to defeat creditors, extending to people who facilitate illegal asset stripping, such as pre-insolvency advisors, and enhancing recovery of assets by ASIC and liquidators for the benefit of employees and other creditors.
  • Improved accountability of resigning directors, by preventing them from backdating their resignation or abandoning the company as an empty shell to frustrate creditors.
  • Goods and Services Tax (GST), Luxury Car Tax (LCT), and Wine Equalisation Tax (WET)  estimates and director penalties to make phoenix operators personally liable for their company’s GST, LCT, and WET liabilities and prevent them from gaining a competitive advantage over honest businesses that do pay their obligations.
  • Retention of tax refunds where there is non-lodgement to ensure phoenix operators satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

As part of the new Deregulation Agenda, the Government has also announced the Modernising Business Registers (MBR) Program.

The MBR Program will unify the Australian Business Register (ABR) and 31 registers administered by ASIC on a contemporary, digital registry system. This includes the registers for companies, business names, Australian business numbers (ABNs), and others. The Program will also incorporate the introduction of a Director Identification Number (DIN) – a unique identifier that a director will keep forever. The DIN will prevent the appointment of fictitious directors, and facilitate traceability of a director’s profile and relationships with companies over time. This will improve the integrity of company formation and acquisitions – including making it more challenging for directors to engage in illegal phoenix activity.

The ABR and existing ASIC registers will continue to operate as per normal, until the new registry service is in place. For more information, visit abr.gov.au/MBRProgram.

Make a difference

The Phoenix Taskforce is dedicated to combating illegal phoenix activity. If you have suspicions about a business, please report it (you can remain anonymous if you prefer) on 1800 060 062 or at ato.gov.au/tipoff. Visit ato.gov.au/phoenix for more information.

Bronwyn Du Mont
Director, Debt — Significant Debt Management
Australian Taxation Office

The Foots Case: Costs Orders and Bankruptcy

A number of candidates for registration as trustees, have shown in the committee interview process that they have not heard of “Foots Case” and do not understand that amounts payable under costs orders made after the date of bankruptcy are not provable in bankruptcy.

Below is athe statement made by the High Court on 7 December 2007 in relation to “Foots Case” (with emphasis added). Read the High Court’s decision.

December 2007 KENNETH JOHN FOOTS v SOUTHERN CROSS MINE MANAGEMENT PTY LTD, ENSHAM RESOURCES PTY LTD, BLIGH COAL LIMITED, IDEMITSU QUEENSLAND PTY LTD, EPDC (AUSTRALIA) PTY LTD, LG INTERNATIONAL (AUSTRALIA) PTY LTD, FOOTS PTY LTD, LITTLE DIGGER MINING LIMITED, NORMA AGNES FOOTS AND KENNETH JOSEPH HILL

A costs order made against a bankrupt after he entered bankruptcy is not a debt provable in his bankruptcy, even though it related to a damages award made before the bankruptcy, the High Court of Australia held today.

In the Queensland Supreme Court in 2005, Justice Richard Chesterman heard a complex multiparty action concerning the ownership of machinery at an open-cut coal mine. On 26 August he gave judgment for Ensham in its cross-claim against Southern Cross Mine Management and Mr Foots, who had been Ensham’s chief executive officer. Justice Chesterman found that Mr Foots had breached his fiduciary and contractual duties of good faith towards Ensham, and that he had was also liable for breaches by Southern Cross of section 52 of the Trade Practices Act relating to misleading and deceptive conduct. On 1 September 2005, Justice Chesterman awarded damages of $2.46 million to Ensham. Two weeks later, Mr Foots entered bankruptcy. On 22 November 2005, Justice Chesterman heard argument as to whether a stay under section 58(3) of the Bankruptcy Act applied so that Ensham would require leave of the Federal Court to take a fresh step in proceedings, in this case applying for costs, where the fresh step was in respect of a provable debt. If the costs order was a debt or liability provable in his bankruptcy within the meaning of section 82(1) of the Bankruptcy Act, the proceedings in which the costs order was made would be stayed under section 58(3). If the costs order was not a provable debt or liability Mr Foots remains liable to meet those costs after his discharge from bankruptcy. A release from bankruptcy only applies to debts provable in the bankruptcy. Justice Chesterman held that since the costs order would not be a debt provable in Mr Foots’s bankruptcy, section 58(3) was no impediment to his making a costs order. On 3 February 2006, Justice Chesterman ordered Mr Foots to pay Ensham’s costs. Rather than awarding costs on the usual party-and-party basis, on application from Ensham Justice Chesterman awarded them on an indemnity basis in light of Mr Foots’s wrongdoing. By majority, the Queensland Court of Appeal dismissed an appeal by Mr Foots. In the High Court, he argued that the costs order was, in the terms of section 82 of the Bankruptcy Act, a debt or liability arising from the award of damages, an obligation incurred before his bankruptcy. Alternatively, Mr Foots submitted that the costs order was a liability incidental to a provable debt. The Court, by a 4-1 majority, rejected both arguments and dismissed the appeal. It held that the award of costs is discretionary, and arises independently of the entry of judgment against Mr Foots. The costs order fell outside section 82(1) because it was made after bankruptcy and was not a liability to which he was subject at the date of bankruptcy. Mr Foots was also not under a pre-existing obligation to pay costs until the order was made against him. The stay in section 58(3) of the Act therefore did not apply.

Mark Findlay - Director Regulation

Annulments & Drawing of Remuneration and Costs - s.153A

Reviews undertaken of trustee remuneration over the last 12 months have shown that some trustees are drawing remuneration and/or costs after an annulment has been effected under s.153A of the Bankruptcy Act 1966.

Annulment of bankruptcy under s153A occurs if the trustee is satisfied that all of the bankrupt’s debts (which includes the costs, charges and expenses of the administration, including the remuneration and expenses of the trustee) have been paid in full, and the bankruptcy is annulled, by force of s153A(1), on the date on which the last such payment was made. Within 2 days after that date, the trustee must give the Official Receiver (OR) a written certificate setting out the former bankrupt’s name and bankruptcy number and the date of the annulment.

It is relevant to note that s153A(1) annuls the bankruptcy on the date the last payment of the bankrupt’s debts, as defined in s153A(6), was made. The tense is important here. The subsection clearly indicates that the annulment can only occur after all the debts have been paid. It does not contemplate that annulment can occur, for example, when the trustee has received sufficient funds to pay all of the bankrupt’s debts, but has not yet applied those funds in payment of the debts.

Once the trustee has issued the certificate to the OR under s153A(2), there is no ability for the trustee to thereafter claim any expenses or remuneration (unless this was sanctioned by a court). Once the annulment has occurred under s153A(1), if the trustee wished to claim remuneration or expenses for work undertaken after this date, the trustee would effectively be arguing that they were not in fact satisfied that all of the debts had been paid in full at the time they previously indicated.

In situations where, after annulment, additional work is required that was not foreseen or foreseeable at the time annulment occurred under s153A(1), it would not be possible for the trustee to unilaterally change their mind as to whether the debts had been paid in full and for this reversal to bind the bankrupt (or any other party for that matter).

Mark Findlay - Director Regulation

Mental health - How a national insolvency firm created a new program to benefit employees and clients

Driven by a desire to do more to help clients suffering mental ill-health and offer improved support for their employees exposed to ‘second-hand’ stress, national independent insolvency firm Jirsch Sutherland turned to Beyond Blue to help create a dynamic new mental health program.

Insolvency specialists, accountants, lawyers and other financial advisers regularly work closely with clients who are suffering mental ill-health as a result of a period of financial distress or the unrelenting demands and stress of running a business.

Driven by a desire to do more to help their clients and support their employees who are often exposed to ‘second-hand’ stress, the partners at national insolvency and business recovery firm Jirsch Sutherland recently turned to Beyond Blue to create a new, more effective mental health program.

“Being on the frontline of businesses in distress, we not only see first-hand how owners and directors are affected by the associated stress, we’re in a position where we can offer support,” explains Bradd Morelli, Jirsch Sutherland’s National Managing Partner.

“The first person to notice changes in behaviour isn’t always a family member, particularly if the business owner is hiding things from them. Accountants are often the first port of call when clients are under financial pressure, and they’ll have a clear view of a person’s financial position. They may be the first to notice unusual transactions or other changes that could signal difficulties in a client’s life.”

With this in mind, the Partners realised that all of their employees needed the skills and knowledge to offer the right support to each other and clients.

“Our relationship with Beyond Blue has increased our mental health literacy - how to recognise the signs and symptoms of mental ill-health and how to offer the right support, including how to encourage clients to seek professional help. Too often people dig themselves into a financial hole and don’t seek help until it too late,” explains Morelli.

In addition to Beyond Blue’s input, all of Jirsch Sutherland’s Managers, Partners and Principals have attained the Mental Health First Aid Certificate, which provides information on how to help someone experiencing mental ill-health problems or are in crisis.

“The certificate provides us with the confidence to help business owners and directors in a practical way. We are the first insolvency practice in Australia to take this committed approach and I hope others will follow our lead,” says Morelli.

Mental Health Week 2019 provided the perfect time for Jirsch Sutherland to launch its new mental health plan. To involve both employees, clients and their advisers from day one, a series of free Mental Health Breakfast Seminars hosted by a Beyond Blue mental health professional, and Walk and Talk ‘Netwalking’ tours were held in Sydney, Newcastle, Brisbane, Melbourne and Perth. The seminars focused on how to create and maintain a mentally healthy workplace while the Walk and Talk tours provided an opportunity for participants to take time out of their workday to recharge, reflect, learn and engage with colleagues. The seminars and tours were well attended and the company received immediate positive feedback.

Many said they enjoyed hearing about easy, doable ways they can help support the good mental health of colleagues and clients, including how to have a conversation with someone they’re concerned about or simply asking “How are you?” and taking the time to listen to their response.

“We had calls from advisers, company owners and directors asking about our program and how they can implement a similar one in their businesses. We also received calls from people asking how they can help someone struggling with mental health issues,” says Morelli. 

The success of last year’s Mental Health Breakfast Seminars and Walk and Talk tours has seen them included in Jirsch Sutherland’s 2020 Mental Health Week program.

Other key parts of Jirsch Sutherland’s new mental health program include mental health topic content on their website and in its monthly e-newsletter JS Matters, which is shared with their clients and referral networks, and an updated and comprehensive Mental Health Policy and Employee Assistance Program created with assistance from Beyond Blue and other mental health experts. The firm also offers all employees access to support, guidance and counselling.

This year, Jirsch Sutherland’s clients who are experiencing a period of financial distress and their advisers will also receive a newly created Support is just a phone call away brochure, which features vital information on Beyond Blue’s mental health support services and tips on how to maintain good mental health.

Advisers, small business owners and directors are also directed to Beyond Blue’s free online Supporting small business owners to improve their mental health and wellbeing at work guide, which provides practical tips about how to recognise the signs of poor mental health and how to provide support without needing to be trained counsellors or clinicians.

According to Patrice O’Brien, Beyond Blue’s General Manager Workplace, Partnerships and Engagement, some signs and symptoms someone is struggling with their mental health include:

  • not meeting deadlines
  • being less engaged in meetings
  • withdrawing from colleagues and clients and avoiding social situations
  • letting their work standards lower
  • being absent from work
  • finding it difficult to control their behaviour such as being unusually emotional, getting angry easily, and being frustrated with tasks and people
  • struggling to make decisions and concentrate on tasks.

Read more on Jirsch Sutherland’s initiative on the Jirsch Sutherland website

Jane Ryder - Consultant
Llewellyn Communications Pty Ltd

Improving AFSA’s online resources

Over the last year, AFSA has been working on a variety of projects to improve the online resources available on our website. These resources have been created to provide more information about the options and consequences of personal insolvency, and to help people make informed financial decisions.

The income contributions calculator is an online tool which provides a guide of the contributions a client may be required to pay under bankruptcy. Simply enter your client’s after-tax income (either fortnightly or as an annual total) and the number of dependents, and the calculator will provide an estimate of the expected repayment required. The calculator is updated regularly to reflect changes to indexed amounts.

We have also published a series of case studies that illustrate the realities of bankruptcy for clients. The case studies provide context to the general public on issues such as the sale of assets, operating a business while bankrupt, receiving an inheritance and more. These simplified examples help clients understand the seriousness of bankruptcy, while also clarifying some of the common myths about insolvency in Australia. The case studies are available across the AFSA website, afsa.gov.au.

Interested in contributing to the development of new AFSA resources? AFSAsandpit is our consultation site where we test new ideas, services and designs. We welcome new members to our research group, and would appreciate your feedback. Surveys and activities are emailed to participants regularly. For more information or to register, visit sandpit.afsa.gov.au.

Simone Ball
Communications and Media Advisor - AFSA

Case summary: Shepard (Trustee) v Behman [2019] FCA 18

BANKRUPTCY AND INSOLVENCY – transfer of property before bankruptcy – application by trustee for relief under ss120 and 121 of the Bankruptcy Act 1966 (Cth) and s37A of the Conveyancing Act 1919 (NSW) in relation to a Deed of Settlement and transfer of property –whether intention to defeat creditors – whether consideration was less than the market value – whether transfer made in good faith – consideration of the transferor’s “main purpose”

EQUITY – claim of equitable interest in property – constructive trust – based on common intention – money contributed to common pool of funds used for mortgage repayments and various other expenses 

Background: The trustee was appointed to the bankrupt estate of Mr Behman on 28 February 2018 consequent upon acceptance by the Official Receiver of a debtor’s petition. Of primary interest to the trustee was the family home registered in the name of Mr Behman and valued at some $1.5m (with a mortgage of some $900,000).  The father resided in the family home with his four sons; he had been granted sole custody in 2002 and one son had left to live with his mother in 2009.

The son’s prior action against his father: However Daniel, one of Mr Behman’s sons, had previously been successful in a legal action claiming the father held part of the property for him on constructive trust on the basis of agreement or common intention.  Of the $204,000 he earned (including tax refunds), Daniel retained $29,000 with the balance of the funds being used to pay expense for the family, including mortgage repayments. Contributions ceased when Daniel left the home in 2012 leaving the remaining two sons living with their father. The court had accepted that a common intention applied upon Daniel commencing a full time job in 2007; adding at [36] that ‘[t]here was in a sense a joint pooling of resources for the benefit of all family members much as a de facto might contribute their income to the needs of both themselves and their partner.’

The court gave judgment for Daniel in an amount of $120,000 and granted Daniel a charge over the property while setting a time period for payment.

Daniel granted indemnity costs: On 30 November 2015, Rein J delivered reasons for concluding that Daniel was entitled to indemnity costs from 1 April 2015 and to interest on the judgment amount of $120,000 from the date of commencement of the proceedings.

The father’s appeal dismissed: The father appealed the decision. On 3 November 2016, the NSW Court of Appeal dismissed the appeal, with costs. The judgment held at [18] that when Daniel commenced university and a new job and made clear that he wanted to be independent, to move out of the home and to manage his own affairs, the father persuaded him not to do so because the contribution of his wages was necessary to enable the repayment of the mortgage and retention of the family home in which he had a joint interest. 

The property is refinanced: The father gave evidence that in December 2016 he refinanced the property to pay Daniel the judgment amount and interest, totalling over $140,000.  He thought he borrowed about $1.1 million.  The equity in the property at that time was about $400,000.  Daniel’s costs had not been paid.

The ‘Deed of Settlement’: On 4 January 2017, the father entered into the “Deed of Settlement” with the two sons who had remained in the family home. By the Deed the father acknowledged that the two sons each had a proprietary interest in the property of which the father was the sole registered proprietor. A schedule to the Deed purported to show that the combined contributions of the two sons amounted to $1.4m. However, the court found the Schedule grossly overstated the contributions of the two sons and applied an interest rate far in excess of any relevant rate.

The Deed contemplated that the father would provide an executed mortgage in registrable form for the purposes of the father charging all of his interest in the property to the two sons for their proprietary interest in the property.  The two sons granted to their father a right to occupy the property “for the term of [his] life”.

The Transfer: A transfer of the property from the father to the two sons as joint tenants occurred on 27 June 2017.  The transfer was registered on 10 July 2017.  The transfer recorded that the father acknowledged receipt of consideration of $1,450,000.  Stamp duty of $67,880 was paid. The two sons borrowed $1,100,000 from a bank and granted that bank a mortgage over the property, dated 27 June 2017.  These funds were used to discharge the father’s loan in relation to the property.

Daniel seeks to void the transfer: In October 2017 Daniel commenced proceedings to have the transfer of the property to his two brothers declared void pursuant to s 37A of the Conveyancing Act.

Costs order in favour of Daniel: On 25 January 2018, the District Court of New South Wales issued an order for the payment of Daniel’s costs in the amount of $224,595.25. 

The father’s debtor’s petition accepted: In February 2018 the father was declared bankrupt upon acceptance by the Official Receiver of his debtor’s petition. 

Trustee takes action to void the transfer: The trustee filed an application in August 2018 to disturb the Deed of Settlement and void the transfer of property pursuant to ss120 and 121 of the Bankruptcy Act 1966 and s37A of the Conveyancing Act 1919 (NSW) (Daniel’s proceedings being stayed pending the determination of the trustee’s action). 

After reviewing the bankrupt’s evidence as to what he claimed to know leading up to the transfer of the property the court did not accept that the bankrupt thought he did not owe Daniel money; stating at [84] that he must have known that he owed Daniel in respect of the costs orders but that the amount so owed had yet to be formally quantified.

The interest of the two sons in the property: The court concluded that at least up until August 2015, the two sons contributed funds to the general expenses of the family, as members of the family, without expectation of having a proprietary interest in the property.  However, the court found at [88] that position changed at some point after the decision ordering the payment to Daniel.  At some point after that decision, the bankrupt and his two sons operated on the common assumption and with the common intention that, by the two sons continuing to contribute to the pool of funds as they had in the past, they would hold a beneficial interest in the property. 

The court held that there was a common intention they each hold an equal share in the property irrespective of the amount of their previous financial and non-financial contributions or the precise amount of their ongoing financial contribution to family expenditure. On the basis that the equity in the property was $400,000, each interest equated to a little over $133,000.

The court went on to indicate that s116(2)(a) of the Bankruptcy Act excludes property held on trust by the bankrupt from divisible property; and as a trustee takes property subject to all liabilities and equities which affect it in the bankrupt’s hands, it would be unconscionable for the trustee to deny those interests. This meant the divisible property was limited to the bankrupt’s one third interest in the family home.

The trustee’s claim under s120: In their submissions defending the transfer the two sons relied upon s120(6) of the Bankruptcy Act which provides:

Protection of successors in title

(6)       This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.

The court rejected a number of grounds relied upon as constituting consideration; mortgage repayments, pre-2013 payments to the ‘family pool’, renovation expenses, and utility and miscellaneous expenses, stating simply that the market value of the property was $1.5 million but the two sons did not give consideration in that amount.

Further, the court was not satisfied that the bankrupt’s one third equitable interest in the property was transferred in “good faith” within the meaning of s120(6), given the knowledge of all three parties that Daniel’s court costs had not been paid and the inflated amounts provided in the Schedule to the Deed. The court concluded the claim under s120 must succeed.

The trustee’s claim under s121: The court began by noting the section focusses attention on the “main purpose” on the part of the transferor in making the transfer; observing that the “main purpose” is the actual purpose of the transferor in making the disposition; and adding that purpose is different to motive - the motive for a person’s conduct is the person’s reason for engaging in it. By contrast, the purpose of a person’s conduct is the end that is sought to be accomplished by it. The “main purpose” may be proved directly or it may be inferred, including from the objective circumstances.

The court then set out the objective circumstances pertaining to the bankrupt who:

  • as at 4 January 2017, knew Daniel was still owed a large amount for his costs
  • must have known that he would not have be able to meet Daniel’s costs from his earnings
  • would not have been able to pay when due the costs owed to Daniel once demanded, and that he would become “insolvent”
  • did not believe he owed the two sons a debt in the amount shown in the Deed
  • secured the outcome that he could remain living in the property without having to pay Daniel the costs which Daniel would inevitably seek, and 
  • had a state of mind which did not relevantly alter between 4 January 2017 and 27 June 2017 when he transferred the property

The court concluded by inference at [127] from all of the circumstances that the bankrupt’s “main purpose” in making the transfer was “to prevent the transferred property from becoming divisible among the transferor’s creditors”: s121(1)(b). The court concluded the claim under s121 must succeed. The court also noted that had it not concluded that s121(1) of the Bankruptcy Act was engaged, it would have concluded that the claim under s37A of the Conveyancing Act had been made out.

Case summary: Boensch v Pascoe [2019] HCA 49 (13 December 2019)

Background

Mr Boensch claimed that he held a house in Rydalmere (the property) as a trustee for his two children. He claimed that Mr Pascoe, as his trustee in bankruptcy, held no vested interest in the property. Mr Pascoe disputed the claim that a trust existed at general law and argued the alleged trust was void as it fell within the terms of s120 or s121, or both, of the Bankruptcy Act 1966 (Cth).

Mr Pascoe (the trustee) lodged a caveat over the property in 2005. The trustee was ultimately unsuccessful in establishing his claims that there was no valid trust over the property. Subsequently Mr Boensch (the bankrupt) brought a claim under s74P of the Real Property Act 1900 (NSW) for compensation from his trustee in relation to the lodging and maintenance of the caveat over the property. 

During the trustee’s investigations of the trust there was reference to the bankrupt’s "mutually beneficial arrangement" which was claimed to relate to the room that the bankrupt occupied in the property. The bankrupt explained that the room was not of a standard that would enable it to be let and that the mutual benefit was that he had a roof over his head and the property appeared to be occupied. This was to assume significance in later deliberations concerning whether this asserted arrangement prejudiced the trustee's right of indemnity wholly or in part (by way of set-off).

Given the fact that in this matter the bankrupt claimed to hold an estate in land under the Torrens system on trust, the High Court considered whether property held by a bankrupt on trust was capable of vesting in a trustee in bankruptcy. After an appeal as to whether there was a trust was dismissed by the Full Court of the Federal Court and special leave to appeal to the High Court was dismissed, the caveat was allowed to lapse in September 2009.

In 2012, the bankrupt commenced compensation proceedings pursuant to s74P(1) of the Real Property Act 1900 (NSW) alleging that the trustee had lodged, and later refused or failed to withdraw, the caveat without reasonable cause. At first instance the court rejected the claims.

The Full Court of the Federal Court of Australia subsequently dismissed the bankrupt’s appeal. They upheld the finding that the trustee acted with "reasonable cause" in lodging and not withdrawing a caveat.

Analysis

The bench of seven judges delivered two judgments with the first and pithy one being delivered by Kiefel CJ, Gagaler and Keane JJ. The more detailed judgment was from Bell, Nettle, Gordon and Edelman JJ (the ‘second judgment’). The seven judges unanimously dismissed the appeal. The second judgment set out their summary conclusion as follows:

Provided the bankrupt has a valid beneficial interest in the trust property, the trust property will vest in the trustee in bankruptcy subject to the equities to which it is subject in the hands of the bankrupt. For these purposes, a valid beneficial interest means a vested or (subject to applicable laws as to remoteness of vesting) contingent right or power to obtain some personal benefit from the trust property [15]

This judgment began by considering the general principles to be applied when considering the vesting of property held by a bankrupt on trust for another. The judges endorsed the ‘broad and general principle’ that a "trustee in a bankruptcy takes only the property of the bankrupt, and takes it subject to all the liabilities and equities which affect it in the bankrupt's hands".

Turning to the situation where land subject to the Real Property Act had been held by a bankrupt on trust for others, the fact that a trustee in bankruptcy was registered as proprietor under s90 of the Real Property Act by operation of statutory vesting would not destroy any trust of which the bankrupt was formerly a trustee. Section 116(2)(a) of the Bankruptcy Act 1966 excludes from vesting any property held by the bankrupt solely in trust for another person.

The court emphasised one qualification to those principles - that property held by a bankrupt on trust for another will not vest in the bankrupt's trustee in bankruptcy if the bankrupt does not have any interest in the property, whether vested or contingent, and subject to applicable laws as to remoteness of vesting.

The issue then is to distinguish what interest is sufficient to constitute property that would vest with the trustee upon bankruptcy. The Court’s useful formulation was that it would need to be a contingent beneficial interest which is extant and valid; and that such an interest is capable of being immediately realised for the benefit of a bankrupt's creditors, even if it is likely to vest after the period of bankruptcy [91]. The court went on to observe that if a bankrupt's vested or contingent beneficial interest in trust property arose either:

  • under the express terms of the trust, or
  • from outside (including due to the trustee's right to be indemnified out of the trust property for obligations incurred in the bankrupt's capacity as trustee)

Then that would be sufficient for the property to pass to the trustee in bankruptcy.

In summary, while the ‘property of the bankrupt’ does not include property held by the bankrupt on trust for any other person, it does include property held by the bankrupt on any trust for his own benefit, and this includes property held to secure his own right of indemnity in priority to all claims of any beneficiary.

If the retention of such property is necessary to give full effect to such right, it follows that the property, ie, the legal estate, and right to possession vest in the trustee in bankruptcy to the extent to which they were vested in the bankrupt. In the context of registering as legal proprietor in accordance with the Real Property Act (or equivalent), after the trustee in bankruptcy is so registered as proprietor, the trustee will hold the estate or interest subject to the equities to which it was subject in the hands of the bankrupt.

In this matter the trustee’s caveatable interest arose due to the bankrupt’s right of indemnity. The bankrupt had admitted incurring significant expenses in his capacity as trustee of the Boensch Trust. The bankrupt sought to offset the effect of the right of indemnity by relying on the bankrupt’s so-called "mutually beneficial arrangement" with the Boensch Trust (referred to above) but the court concluded the claim was without merit.

The court summarised the position concerning the interest held by the bankrupt as being:

  1. The bankrupt had a beneficial interest in the property.
  2. The interest was the bankrupt’s right to retain the property as security for satisfaction of his right of indemnity as trustee of the Boensch Trust.
  3. That beneficial interest, being an estate in the property, vested forthwith in equity pursuant to s58 of the Bankruptcy Act 1966.
  4. The vesting was subject to a sub-trust on the terms of the Boensch Trust, but permitting Mr Pascoe to exercise the right of indemnity.
  5. On that basis, the trustee in bankruptcy was entitled to be registered as proprietor of the property in accordance with s90 of the Real Property Act, and that was a sufficient basis to sustain his caveat [102]

Departing from the Full Court, the four High Court judges:

  • held that the possibility that the trust might have been set aside under s120 or s121 of the Bankruptcy Act 1966 would not have been sufficient to sustain the caveat. This was because only a legal or equitable interest in land can sustain a caveat and a mere statutory right to take steps to avoid a transaction does not confer such an interest.
  • observed that the expression "Legal Interest pursuant to the Bankruptcy Act 1966" in a caveat to describe an equitable estate vested in a trustee is not only apt to mislead; but more to the point, it did not afford sufficient information to determine whether any other dealing with the property would adversely affect the interest claimed. However, they added that this would not of itself ground a claim for compensation as ‘a mere technical deficiency in the statement of the interest claimed does not of itself demonstrate the absence of a "reasonable cause’”, and on the facts of this matter if anything, the description used in the trustee’s caveat understated the extent of his interest.

Decision

The court concluded that:

  1. Upon the making of the sequestration order, the property vested in equity in the trustee by reason of the bankrupt’s right of indemnity and, therefore,
  2. The trustee had a caveatable interest in the property.
  3. The trustee honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of the bankrupt’s right of indemnity.
  4. The trustee did not lodge or refuse to withdraw the caveat without reasonable cause. The High Court accepted that to establish the absence of reasonable cause, the bankrupt had to establish two matters. First, that the trustee did not have a caveatable interest and secondly, that the trustee did not have an honest belief based on reasonable grounds that he had a caveatable interest. The Court found the bankrupt had not discharged this onus.

The appeal was dismissed with costs.

Recent prosecution: Victorian man convicted after concealing $250k transfer to friend

On 20 February 2020, Mr Robert John Wilson was convicted in the Dandenong Magistrates’ Court after he pleaded guilty to two charges under Commonwealth bankruptcy law.

Mr Wilson, who became bankrupt for a second time in June 2017, received over $250,000 from the sale of his house in September 2015. Mr Wilson provided false statements regarding the whereabouts of the money, telling the Official Trustee in Bankruptcy that he gambled it away.

An investigation by the Australian Financial Security Authority (AFSA) found that Mr Wilson had the $250,000 transferred into a friend’s bank account when the property was sold. Over time, Mr Wilson’s friend withdrew all of the funds and the account was closed.

Commonwealth law requires bankrupt people to fully and truthfully disclose all funds and assets in their statement of affairs. The trustee uses the bankrupt person’s funds or assets to repay people who are owed money.

AFSA Deputy Chief Executive, Gavin McCosker, explained that AFSA pursues convictions to help maintain the public’s confidence in the personal insolvency system.

“For most people bankruptcy is a difficult and stressful situation,” Mr McCosker said.

“However, it is important that people entering into bankruptcy are honest.

“Failing to disclose funds and assets is both unfair to genuine creditors and illegal.

“It is important that we take action against those who are dishonest and break the law.”

The matter was prosecuted on behalf of AFSA by the Commonwealth Director of Public Prosecutions.

Charges and sentence:

Bankruptcy Act 1966 (Cth)

Mr Wilson pleaded guilty to two charges under the Bankruptcy Act 1966 (Cth):

  • Dealing with property to the value of $20 or more within 12 months before the presentation of the petition which made him bankrupt contrary to section 265(7) read with section 265(4)(a) of the Bankruptcy Act 1966 (Cth), and
  • Failure to fully and truly disclose to the trustee such information about his conduct and examinable affairs as the trustee requires contrary to section 265(1)(ca) of the Bankruptcy Act 1966 (Cth).

Mr Wilson was convicted of both charges and ordered to enter a recognizance – with $1,000 as security – that he would be of good behaviour for 12 months.

Mr Wilson will remain bankrupt until 29 June 2025.

Recent prosecution: QLD man convicted for hiding and spending $140k

On 28 February 2020, Queensland man Mr Nicholas Gannon was sentenced in the Caboolture Magistrates Court after he pleaded guilty to two charges under Commonwealth bankruptcy law.

Mr Gannon filed for voluntary bankruptcy in May 2013, owing creditors more than $1.3 million.

During his bankruptcy Mr Gannon received over $150,000 as an inheritance. Commonwealth law requires bankrupt people to let their trustee know if they receive money or assets during bankruptcy.

Mr Gannon didn’t tell his bankruptcy trustee about the money, and instead made several cash withdrawals. He also transferred money to friends and made a number of large purchases including racing car parts, supplements and furniture.

In total, Mr Gannon spent almost $140,000 that could have otherwise been used to repay his creditors.

Australian Financial Security Authority (AFSA) Deputy Chief Executive, Gavin McCosker, explained that despite AFSA’s intelligence gathering and monitoring systems, the community is a vital source of information.

“Mr Gannon knew that he was required to let his bankruptcy trustee know if he received any funds or assets while bankrupt,” Mr McCosker said.

“However, he chose to not only attempt to hide the money that he had received, he also went out of his way to spend it.

“The existence of the money was only discovered in November 2017, thanks to a tip-off from the community.

“We encourage anyone who suspects wrongdoing by a bankrupt person to submit a tip-off – they are a vital source of intelligence and can make a real difference.

“More information about tip-offs, and the online submission form, is available on our website at afsa.gov.au/tip-off.”

As a result of AFSA’s investigation, Mr Gannon repaid over $150,000. A dividend can now be paid to those who were owed money.

The matter was prosecuted on behalf of AFSA by the Commonwealth Director of Public Prosecutions.

Mr Gannon was sentenced to 12 months imprisonment on each of the two charges. He was released on a recognisance of $3,000 to be of good behaviour for two years. He was also ordered to pay court costs.

In sentencing, Magistrate Blanch took into account Mr Gannon’s guilty plea, the lack of relevant criminal history and the fact that he had repaid the entire amount by the court hearing in February 2020.

Mr Gannon has since been discharged from his bankruptcy, effective 8 May 2016.

Useful links:

Bankruptcy Act 1966 (Cth)

Mr Gannon pleaded guilty to:

  • Disposal of property after bankruptcy contrary to section 266(1) of the Bankruptcy Act 1966 (Cth), and
  • Failure to fully and truly disclose to the trustee all of his property and its value, contrary to section 265(1)(a) of the Bankruptcy Act 1966.

Recent prosecution: Conviction and fine for two bankrupts who failed to file Statement of Affairs

Two bankrupts have been convicted and fined for failing to submit their Statement of Affairs to the personal insolvency regulator, the Australian Financial Security Authority (AFSA).

When someone is made bankrupt by court order they are legally required to file a Statement of Affairs within 14 days of notification of their bankruptcy. Failing to file a Statement of Affairs is a criminal offence under Commonwealth bankruptcy law and carries a maximum penalty of a $10,500 fine.

Malcolm Robert Coghill

On 11 March 2020, Mr Malcolm Robert Coghill was convicted and fined in the Tweed Heads Local Court, after failing to file a Statement of Affairs for his bankruptcy, which commenced in 2009. 

Mr Coghill has previously faced two separate criminal prosecutions for offences relating to his failure to file his Statement of Affairs. As a result of the latest prosecution, Mr Coghill has now filed his statement.

Mr Coghill’s bankruptcy will continue until 2022 – 13 years after the initial bankruptcy court order was made.

Danuta Janina Power

On 9 March 2020, Ms Danuta Janina Power was convicted in the Kalgoorlie Magistrates’ Court after failing to submit a Statement of Affairs in response to her court-ordered bankruptcy.

Ms Power, also known as Danuta Janina Malec, became bankrupt by order of the court in September 2018.

Despite repeated attempts by the registered trustee to obtain information from Ms Power, she failed to submit her Statement of Affairs and the case was referred to AFSA.

In June 2019, AFSA pursued criminal charges against Ms Power.

While Ms Power’s bankruptcy commenced on the day of the court order in September 2018, her failure to submit the Statement of Affairs means that her bankruptcy will continue indefinitely.

Both cases were prosecuted on behalf of AFSA by the Commonwealth Director of Public Prosecutions.

Charges under the Bankruptcy Act 1966 (Cth)

Ms Power failed to attend court and the matter was dealt with in her absence. She was convicted of one charge under the Bankruptcy Act 1966 (Cth):

  • Failure to file a Statement of Affairs with the Official Receiver within 14 days of being notified of bankruptcy – Section 54(1)
  • Ms Power was convicted in her absence and fined $2,500

Mr Coghill pleaded guilty to one charge under the Bankruptcy Act 1966 (Cth):

  • Failure to file a Statement of Affairs – Subsection 77CA
  • In total, Mr Coghill has been fined over $2,000 and is now subject to more than two years of recognisance

Your questions answered

In January, we asked you to consider sending us questions about regulation and the role of AFSA. We’ve answered some of your questions below.

Question: Taking into consideration that Section 139ZG(3) provides that the unpaid income contributions due to the Trustee of the first bankruptcy “…is recoverable by the trustee as a debt due to the estate of the bankrupt…” then is the unpaid income contribution part of the Trustee of the First Bankruptcy Claim “..as a debt proved in the earlier bankruptcy…”  in the later bankruptcy pursuant to Section 59(1)(c)?

Answer: If a bankrupt owes income contributions and becomes bankrupt a second time with an outstanding liability for contributions from the first bankruptcy,  the trustee in the first bankruptcy can prove for the contributions in the later bankruptcy, i.e. they are provable.

Question: How does a Trustee deal with potential tensions between the Privacy Act and the right of creditors to review Bankruptcy files and request documents?

Answer: Creditors have always had the right to inspect the files of trustees. Former s173 gave this right, and now s70-10 of Schedule 2 gives this right, although this right would be (and has been) subject to the restrictions under the Privacy Act 1988.

If a creditor wants to inspect a file, any personal information about the bankrupt (or indeed any other individuals) needs to be protected from view unless the individual to whom the information relates has consented to it being viewed, or one of the other circumstances in which disclosure of personal information is permitted under Australian privacy Principle 6 exists.

This means that preparing the file for inspection may be a time consuming exercise.

Guidance as to what information can be provided to and withheld from creditors is provided by the Insolvency Practice Rules at 70-10.

The Privacy Act 1988 and the Australian Privacy Principles govern the use of private information. The Bankruptcy Act 1966 does not override the principles and Australian Privacy Principle 6 provides guidance about personal information.

Question: Since the introduction of the online bankruptcy form, what information has AFSA provided to registered trustees seeking a SOAs on creditors petition as to:

  • How to notify a bankrupt of the obligation to electronically file a SOA?

If you are administering estates where no Statement of Affairs has been filed and would like to alert your bankrupt clients to the new Bankruptcy Form, please contact us for a list of these estates at registry@afsa.gov.au

  • Notifying the bankrupt how to access the form since it can no longer be mailed?

If the person applying for bankruptcy doesn’t have access to a computer or the internet, they can call AFSA’s national service centre on 1300 364 785 and ask for the Bankruptcy Form to be posted to them.

  • What is sufficient notice for Section 54?

Sufficient notice for acceptance of a section 54(1) referral is evidence that the bankrupt has been informed of their obligation to file a Statement of Affairs with the Official Receiver. This can include an Affidavit detailing the personal service of documents on the intended recipient, an Australia Post Delivery Confirmation Advice Receipt signed by the intended recipient, case notes detailing a conversation or meeting with the bankrupt acknowledging receipt of correspondence or ordinary post followed by a phone call to confirm receipt and understanding can be considered sufficient notification.

  • What constitutes proof of notice for offence referral and/or requesting a s77CA Notice?

In relation to proof of service for an offence referral and/or a request for a 77CA Notice, the above also applies. Nothing has changed in terms of proof of notice for the purposes of applying for a s77CA and trustees should refer to Official Receiver Practice Statement 7 – Official Receiver Notices

These Q&As do not constitute legal advice. You should seek your own professional advice to find out how any applicable laws apply to you, because it is your responsibility to determine your obligations.