OTPS2 - Treatment of property in bankruptcy

Treatment of property in bankruptcy
Last updated: 
19 April 2021
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  1. INTRODUCTION

    1. The Bankruptcy Act 1966 provides for the vesting of property in the trustee upon commencement of bankruptcy, subject to certain specific exclusions.
    2. “Vesting” of property means that the trustee becomes the owner of the property and can deal with the property for the benefit of the bankrupt estate.
    3. EXAMPLE 1

      Ricky became bankrupt on 2 January 2020.  The Official Trustee was appointed trustee of his estate. Prior to his bankruptcy, Ricky had been the owner of a house in Spring Hill, Qld. As a result of his bankruptcy, the Official Trustee is now the owner of the Spring Hill property.  The Official Trustee intends to sell the property to enable payment of a dividend to creditors. Because Ricky is no longer the owner of the property, he cannot take any action to sell it, rent it to tenants or mortgage it.

    4. “Property” is defined in the Bankruptcy Act as follows:
    5. “‘property’ means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”
    6. All property owned at the date of bankruptcy, or that the bankrupt acquires or that devolves upon the bankrupt before his or her discharge from bankruptcy, vests in the trustee unless the property is specifically protected pursuant to subsection 116(2) of the Bankruptcy Act.
    7. Scope of this practice statement

    8. This practice statement provides information about certain categories of property and their treatment in those bankrupt estates administered by the Official Trustee.  It must be noted that there may be other types of property that form part of bankrupt estates that the trustee will also be required to deal with.
    9. The interaction between the Bankruptcy Act and the Family Law Act 1975 is not addressed in detail in this practice statement.
    10. This practice statement does not address choses in action, which are addressed in Official Trustee Practice Statement 6 – Choses in action.
  2. DISCLOSING OWNERSHIP OF AND INTERESTS IN PROPERTY

    1. When completing a Bankruptcy Form, the debtor or bankrupt must disclose all property required by the form.
    2. When a bankrupt acquires or becomes entitled to property during bankruptcy, he or she must advise the trustee.  This includes where the bankrupt hasn’t yet received the property but has a right to it or an interest in it.
  3. FOR HOW LONG DOES PROPERTY REMAIN VESTED IN THE TRUSTEE?

    1. The Bankruptcy Act contains provisions regarding the time limit in which a trustee must deal with property before it becomes the bankrupt’s property again (that is, before it “revests”) if the trustee hasn’t dealt with it by that time.
    2. Discharge from bankruptcy does not have the effect of returning property to the bankrupt.
    3. The relevant sections of the Bankruptcy Act are:
      • Section 129AA, which outlines the time limit for realising property other than cash that was disclosed to the trustee (either on the bankrupt’s statement of affairs or, if after-acquired property, within 14 days of the property devolving on or being acquired by the bankrupt).  Initially, the time limit is generally six years from discharge from bankruptcy, but in some cases is six years from the date the property was disclosed; however, the trustee can extend the revesting time by giving written notice to the bankrupt.
      • Section 127, which applies to most property not caught under section 129AA and which requires the trustee to make a claim within 20 years from the date of bankruptcy.  If the trustee has made a “claim” within the 20-year period, the trustee is not subject to any timeframe in relation to realisation of the property.
      • Sections 74 and 154, which provide for the revesting of property after annulment of the bankruptcy.  (More information about annulment of bankruptcy can be found in Official Trustee Practice Statement 4 – The end of a bankrupt’s period of bankruptcy.)
    4. Different property may revest in a former bankrupt on different dates, depending on:
      • the type of property
      • whether the property was owned at the date of bankruptcy or was after-acquired
      • whether the bankrupt disclosed the property to the trustee and, if so, when
      • whether the trustee has made a claim to the property.
  4. RIGHTS OF CO-OWNERS OF PROPERTY

    1. It is common for the bankrupt to own property jointly with another person.
    2. In the first instance, it can be assumed that the bankrupt and co-owner(s) have equal interests in the property.  If there is any indication that this is not the case, supporting evidence will be required to confirm the correct proportionate interests.
    3. Where the co-owner is bankrupt, the trustee will hold a proportionate interest with the trustee of the co-owner’s estate (which may or may not be the Official Trustee).
    4. Where the co-owner is not bankrupt, the bankrupt’s interest vests in the trustee and it becomes an owner of the property with the co-owner.  The co-owner’s rights in relation to the property are retained and he or she must be consulted regarding the realisation of the property and costs incurred in relation to the property.
    5. Where the co-owner is not bankrupt and the realisation of the property will provide a return to the estate, the co-owner is to be invited in the first instance to make an offer to purchase the trustee’s right, title and interest or to join in the sale of the property.  The Official Trustee is not obliged to accept an offer from the co-owner though and may need to refuse it if, for example, it does not reflect the value of the trustee’s interest and/or there are conditions attached to the offer that are not acceptable to the trustee.
    6. In the event that the co-owner is unable or unwilling to purchase the Official Trustee’s interest and will not consent to a joint sale, the Official Trustee may need to consider an application to court for an order to have statutory trustees appointed to effect a sale.  If such an application is pursued and is successful, the net surplus will be divided according to the proportionate ownership interests of the trustee and the co-owner.
  5. RIGHTS OF SECURED CREDITORS

    1. A secured creditor retains the rights it had over secured property prior to the bankruptcy, which generally include selling or otherwise dealing with the security if the terms of the loan are in default.  The bankrupt estate remains entitled to any surplus funds following sale of the security and discharge of the loan.
    2. A secured creditor also has the option of surrendering the security to the trustee for the benefit of all creditors and to claim for the full amount of the debt in the estate.  In this respect, where a secured creditor wishes to present or join in presenting a creditor’s petition, that creditor is only considered a creditor to the extent the debt owed exceeds the value of the security.  However, a secured creditor may present or join in presenting a creditor’s petition as if he or she was an unsecured creditor, if the petition contains a statement that the secured creditor is willing to surrender his or her security for the benefit of creditors generally in the event a sequestration order is made.
    3. If a sequestration order is made on the petition of a secured creditor, section 44 of the Bankruptcy Act permits the trustee to require the creditor to surrender the security to the trustee.  If this option is to be pursued, subsection 44(5) requires the trustee to notify the creditor within three months of the date of the sequestration order.
    4. A creditor claiming to have security over particular property may require further investigation, including examination of the contract that gave rise to the debt and the purported security.
    5. Sale of secured property

    6. Where property forms valid security, the trustee may defer to the secured creditor to sell that property.
    7. Once the property has been sold by the secured creditor, any shortfall that is provable in the bankruptcy is recorded as an unsecured liability (as the debt is no longer secured).
    8. Alternatively, the trustee may sell the property and repay the secured creditor at the time of sale.
    9. Unregistered securities

    10. In circumstances where a security or an encumbrance is not registered, it is initially presumed that it is not valid and more information will need to be obtained from the bankrupt and encumbrance holder to determine whether this presumption is valid.
    11. Liens

    12. Where a creditor is claiming a lien as an entitlement to hold goods as security for unpaid money in respect of the actual goods being held, evidence will be required to substantiate the validity of the lien.  Solicitors may also claim liens over documents or, in some cases, funds they hold on behalf of a client if their bills have not been paid.
    13. The treatment of liens in bankruptcy was further addressed in Worrell v Power and Power,[1] where it was found that enforcement of a lien within the relevant preference payment relation back period outlined in section 122 of the Bankruptcy Act does not amount to a preference payment.  (More information about preference payments is contained below.)
  6. PROTECTED PROPERTY / EXEMPT PROPERTY

    1. Subsection 116(2) of the Bankruptcy Act details property that is not divisible amongst creditors, commonly known as protected property or exempt property.  This is property that the bankrupt can keep.
    2. The following protected property is provided for in subsection 116(2):
      1. those ordinary household items specified in section 27 of the Bankruptcy Regulations.  These items include kitchen equipment, certain furniture and certain electronic appliances
      2. property held in trust for someone else
      3. property of the bankrupt that has sentimental value, where creditors vote to let the bankrupt keep the specific property
      4. property of the bankrupt used by the bankrupt in earning income, up to the limit prescribed in the Bankruptcy Regulations
      5. property of the bankrupt used primarily as means of transport, up to the limit prescribed in the Bankruptcy Regulations
      6. life insurance policies
      7. any balance the bankrupt has in a regulated superannuation fund
      8. certain payments received pursuant to the Family Law Act 1975
      9. in certain circumstances, the right of a bankrupt to recover damages or compensation and some types of compensation received (more information about compensation is contained below)
      10. amounts paid under certain government schemes.
    3. The protected property thresholds applicable to property used to earn an income and vehicles used primarily for transport are contained in sections 29 and 30 of the Bankruptcy Regulations and are indexed annually.  Refer to the indexed amounts for the current amounts.
    4. In the Di Cioccio[2] case, the Full Court of the Federal Court held that the list of protected property in subsection 116(2) is an exclusive statement of the categories of property that do not vest:
    5. “[34] … If an item of property (for example, shares) is not listed in s 116(2) then it is caught by s 116(1) and is divisible amongst the bankrupt’s creditors …”
    6. Requesting information to determine whether property is protected

    7. Although certain property may be protected, there may still be a need to conduct investigations to confirm the status of the property.  Bankrupts have obligations to provide information and documentation to the trustee on request, including where the trustee needs this information or documentation to determine whether the property is protected.
  7. OFFENCES

    1. The Bankruptcy Act contains a number of offence provisions in relation to property, which include the following.
    2. Provision

      Offence

      Penalty upon conviction

      152

      A discharged bankrupt must give assistance to the trustee

      Imprisonment for 6 months

      263(1)(a)

      Concealment of property of the bankrupt, deceased person or his/her estate property with intent to defraud creditors

      Imprisonment for 5 years

      263(1)(b)

      Receive property with intent to defraud creditors

      Imprisonment for 5 years

      263(2)(a)

      Knowingly dispose of, receive or conceal property that has been seized

      Imprisonment for 1 year

      265(1)

      Fail to disclose information and/or property

      Imprisonment for 1 year

      265(4)

      Conceal, remove, dispose of or deal with property

      Imprisonment for 1 year

      266(1)

      Dispose of or charge property after bankruptcy

      Imprisonment for 5 years

      266(3)

      Dispose of property with intent to defraud prior to bankruptcy

      Imprisonment for 5 years

    3. More detailed information about offences, including a complete list of offence provisions, can be found on the AFSA website in IGPS14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General.
  8. PART B. CATEGORIES OF PROPERTY

  9. CASH AND FUNDS HELD IN FINANCIAL INSTITUTION ACCOUNTS

    1. Cash and cash at bank held at date of bankruptcy

    2. Cash that a bankrupt holds in person, in a bank account or other financial institution account at the date of bankruptcy vests in the trustee.  This is the case unless the funds are protected (such as certain compensation moneys – see below).
    3. Where a bankrupt has spent moneys that vest in the trustee, he or she may be required to pay an equivalent amount to the estate.
    4. Cash and cash at bank earned after the date of bankruptcy

    5. Income earned post-bankruptcy does not vest in the trustee, including where it is held in a financial institution account or a standard term deposit account, although the bankrupt may have an income contribution liability.  Note that, while such income does not vest, property bought with non-vesting post-bankruptcy income will vest.
    6. Application of section 125 of the Bankruptcy Act

    7. Section 125 of the Bankruptcy Act requires a “prescribed organisation” (defined as a bank or co-operative society) to notify the trustee of the existence of a bankrupt’s account and not to make any payments out of the account except under an order of the court or in accordance with written instructions of the trustee.  If no such court order or instructions from the trustee are received within a month from the organisation becoming aware of the existence of the account, payments out of the account are permitted.
    8. Although the balance of accounts held with prescribed organisations vests in the Official Trustee, as a matter of practice the Official Trustee will not claim the balance of a bankrupt’s account used predominantly to receive personal income, where the account has a low balance.  The automatic freezing of such an account pursuant to section 125 can lead to hardship or inconvenience for bankrupts trying to access funds to meet living expenses.  As such, the Official Trustee does not expect prescribed organisations to notify it of the existence of the account that holds less than $3000.
    9. Application of section 86 of the Bankruptcy Act

    10. Section 86 of the Bankruptcy Act permits a “person” (which includes a financial institution) claiming to be a creditor in an estate who has had mutual dealings with a bankrupt to offset any amount due from any amount owed.
    11. A financial institution may only rely on section 86 where the criteria outlined in that section have been met.  As subsection 86(2) states, subsection 86(1) cannot be relied upon if the person holding money has notice of an available act of bankruptcy at the time the credit is given to, or received from, the person who later becomes bankrupt.
    12. Section 86 requires there be “mutual credits, mutual debts or other mutual dealings” between the parties.  Case law indicates the mutuality requires that the mutual obligations are between the same parties acting in the same right.
    13. Where both the account with the debit balance and the account with the credit balance are in the same joint names, it is unlikely that set-off could occur unless all of the account holders became bankrupt.
    14. Where there is security held over a debt, this does not prevent it from being able to be set off.  For example, a bank would not be prevented from offsetting funds it holds against a personal loan or a mortgage.
    15. Immigration Assurances of Support

    16. Assurance of Support bonds are moneys held as security for a person who is immigrating to Australia to ensure that the person adheres to all requirements during his or her time in Australia until obtaining citizenship.  These bonds are usually held in a term deposit account over a one-, two- or 10-year period and cannot be accessed until the Department of Human Services gives authority for release of the funds.
    17. These funds vest in the trustee when they are released.
    18. Where the bankrupt claims funds are being held as part of an immigration bond, documentation needs to be provided to the Official Trustee in support of this claim.
  10. TAX REFUNDS

    1. The treatment of a tax refund in bankruptcy depends on the period to which the refund relates:
      • Refunds of tax for a period before the date of bankruptcy vest in the trustee (subject to the ATO’s right of set-off).[3]
      • Refunds of tax for a period after the date of bankruptcy do not vest in the trustee and are included in the bankrupt’s income contribution assessment when they are received.
    2. Refunds that vest may be claimed by the trustee from the ATO directly or the bankrupt may be required to transfer funds to the trustee.
    3. Where a bankrupt has spent a tax refund (or part of a tax refund) that vests in the trustee, he or she may be required to pay an equivalent amount to the estate.
    4. Where the bankrupt has a debt to the ATO, the ATO can apply any refunds to that debt before either paying the balance to the trustee (if the balance vests) or to the bankrupt (if it doesn’t vest).
  11. INTERESTS IN DECEASED ESTATES

    1. Where the bankrupt has an interest in a deceased estate that arises before or during bankruptcy, this interest vests in the trustee.
    2. Where the deceased died before the bankrupt was discharged from bankruptcy, the interest vests – this is the case even if a distribution from the deceased estate doesn’t occur until after discharge.
    3. Deceased estate interests involving life tenancies

    4. If the bankrupt has an interest in a deceased estate that includes property that is subject to a life tenancy, the trustee is bound by that  The executors are asked to advise the trustee when the terms of the will have been complied with and the interest is able to be dealt with.
  12. VEHICLES

    1. Pursuant to paragraph 116(2)(ca) of the Bankruptcy Act, a bankrupt is entitled to keep a vehicle(s) used primarily for transport worth up to the indexed threshold (refer to the indexed amounts for the current amount).  The equity in the vehicle, or in other vehicles, above this amount vests in the trustee.
    2. Property used primarily for transport

    3. Paragraph 116(2)(ca) makes reference to “property used by the bankrupt primarily as a means of transport” and not the bankrupt’s primary means of transport, a point that is often confused.  This means that the Bankruptcy Act does not limit the bankrupt to only having one vehicle, so he or she is entitled to keep more than one vehicle with a combined value up to the protected property threshold.
    4. Case law extends the definition of “property used by the bankrupt primarily as a means of transport” beyond that of a car or motor cycle – for example, the court has found that a trailer satisfies the definition of property used primarily as a means of transport, even though it is not used to transport the bankrupt and is instead used to transport goods.
    5. Joint interests

    6. Where a joint bankruptcy occurs (for example, a husband and wife become bankrupt and a joint estate is created) or where two individual petitions are filed, the value of the vehicle(s) the bankrupts are entitled to keep is twice the protected property threshold.  That is, bankrupts can combine their protected vehicle thresholds where the vehicle is jointly owned.
    7. Vehicles used primarily for transport worth more than the protected property threshold that are sold by the trustee

    8. Subsection 116(2C) requires the trustee, when selling a vehicle worth more than the protected property threshold, to pay the bankrupt compensation equivalent to the protected property threshold.
    9. Vehicles not used primarily for transport

    10. Where the vehicle is not used primarily for transport, it is not subject to the paragraph 116(2)(ca) protected property threshold and it vests in the trustee.
  13. REAL ESTATE

    1. Real property, including residential property, commercial property and land, vests in the trustee.
    2. Effect of bankruptcy on joint tenancies

    3. Where the bankrupt and a non-bankrupt co-owner owned the property as joint tenants, the joint tenancy is severed upon bankruptcy and the non-bankrupt co-owner and the trustee own the property as tenants in common.
    4. Effect of bankruptcy on tenancies in common

    5. Where the bankrupt and a co-owner owned the property as tenants in common, their proportionate interest remain unchanged, with the bankrupt’s proportionate interest vesting in the trustee.
    6. Rights of mortgagees

    7. A party holding a valid registered mortgage maintains its right to deal with (including to sell) the property to pay the mortgage if the mortgagors do not maintain payments.  Where the mortgagee sells the property, the trustee is entitled to claim a proportion of any surplus sale proceeds, following discharge of the mortgage.
    8. Options for dealing with real estate

    9. Options available to the trustee for sale of the property may include:
      • awaiting sale of the property by the mortgagee and claiming the trustee’s interest in the sale proceeds at settlement
      • where there is a co-owner, selling the trustee’s interest to the co-owner
      • disclaiming the property, if it is burdened by onerous covenants (see section 133 of the Bankruptcy Act)
      • selling the property on the open market, including by auction
      • if there is a co-owner that does not agree to sell the property on the open market, the trustee can consider making an application to the court to have trustees appointed for the partition and mandatory sale of the property, under the supervision of the court.  If this course is pursued, the co-owner may bear the legal costs of any such application.
    10. Property in which the bankrupt has an equitable interest, even if not recorded on title

    11. In certain situations, a bankrupt may have an equitable interest, even if this is not recorded on title.  For example, the equitable concept of a resulting trust means that, where two parties contribute to the purchase of a property that is registered in the name of one of them, the registered proprietor is presumed to hold an interest on trust for the other party.  It is also the case that the High Court accepted in Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6 the principle that “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” (i.e. where a husband is the only party registered on title, but both the husband and wife contributed to the purchase price, the wife has a half interest in the property).
    12. The effect of such equitable interests is that the trustee may have an interest in property and may have the right to take action to realise it for the benefit of the estate, even if the bankrupt is not recorded on title.
  14. SHARES AND OTHER SECURITIES

    1. Shares and other securities such as debentures, convertible notes and warrants vest in the trustee.
    2. Information about types of securities can be found in the ASX glossary.
    3. Both shares in public companies and shares in private companies vest in the trustee.  Share dividends also vest in the trustee.
    4. Shares with restrictions on their sale

    5. Some shares have restrictions in place that prevent them from being traded immediately.  Bankruptcy does not affect these restrictions, which most often relate to employee share schemes where employees are provided with shares after certain periods of service and cannot trade these shares until a certain date passes or a specified event occurs.  As such, the trustee will need to await the lifting of the restrictions before the shares can be sold.
    6. Government (Treasury) Bonds

    7. Treasury bonds held by a bankrupt or acquired during bankruptcy vest in the trustee.
    8. Other investments

    9. The bankrupt’s investments (other than superannuation, in respect of which see below) vest in the trustee upon bankruptcy or when acquired before discharge.
  15. SUPERANNUATION

    1. Superannuation that is held in a regulated superannuation fund at the date of bankruptcy is protected property.  The superannuation also retains its protection if it is paid from the fund to the bankrupt during bankruptcy, and any property purchased with it (where the funds were paid to the bankrupt on or after the date of bankruptcy) is protected.
    2. Superannuation that is held in a fund that is not a regulated fund vests in the trustee and is divisible among creditors.
    3. Where the bankrupt withdrew funds from his or her superannuation fund before the date of bankruptcy, any funds remaining in the bankrupt’s possession at the date of bankruptcy vest in the trustee and are divisible.
    4. Where property was transferred to a superannuation fund before the date of bankruptcy to defeat creditors, the property may be recoverable by the trustee.  This includes where the transfers were made to a regulated fund and includes transfers made by the bankrupt and transfers made by third parties for the benefit of the bankrupt.  More information about this is contained below.
  16. LOTTERY WINS AND OTHER WINDFALL GAINS

    1. Amounts that a bankrupt wins before discharge vest in the trustee.  These include lottery winnings and competition prizes.
  17. HOUSEHOLD ELECTRONICS AND POSSESSIONS

    1. Section 27 of the Bankruptcy Regulation permits a bankrupt to retain certain items ordinarily used in a household, including:
      • cutlery, crockery and foodstuffs
      • sufficient household furniture
      • beds sufficient for the number of members of the household, bedding and linen
      • heating and cooling equipment
      • sporting or recreational items used by children or students who live in the house
      • a television
      • a stereo and a radio
      • certain whitegoods, including a washing machine and refrigerator.
    2. Household items that the bankrupt is permitted to keep do not include items that are valuable due to their age or historical significance, with these classified separately as antiques.
  18. MONEY OWED TO THE BANKRUPT

    1. Certain moneys owed to the bankrupt at the date of bankruptcy vest in the trustee.  These may consist of settlement moneys, pre-payments (leases, rent, insurance etc.) surpluses from creditor sales, loans and other funds held by someone in trust for the bankrupt.
    2. Section 86 of the Bankruptcy Act (outlined above) also applies to persons who both owe money to and are owed money by a bankrupt and allows one debt to be set off against the other, with the balance either a debt in the bankrupt estate or due and payable to the trustee.  Where a bankrupt was owed money at the date of bankruptcy, he or she must provide supporting evidence in the form of invoices, contracts and, if applicable, email communications.
    3. EXAMPLE 2

      Prior to becoming bankrupt, Jack operated a business as a sole trader.  He provided $10,000 worth of services to a company that supplied him with $6000 worth of goods.  At the date of bankruptcy, both these amounts remain unpaid. The company is able to offset the $10,000 it owes Jack with the $6000 that he owes the company.  As such, the trustee is able to realise $4000 from the company for the benefit of the estate.

    4. In some cases, money owed to the bankrupt for services performed prior to the date of bankruptcy are income of the bankrupt and do not vest in the trustee.  This can be the case where the bankrupt provides professional services and accounts on a cash basis.  This means that amounts received after the date of bankruptcy for work done before bankruptcy are income, which means they are included in the calculation of his or her income contributions liability, and not vesting property.[4]
  19. PROPERTY OF THE BANKRUPT USED IN EARNING AN INCOME BY PERSONAL EXERTION (TOOLS OF TRADE)

    1. Pursuant to subparagraph 116(2)(c)(i) of the Bankruptcy Act, any property that is for use by the bankrupt in earning income by personal exertion and which exceeds the indexed threshold as determined in the Bankruptcy Regulations (refer to the indexed amounts for the current amount) is divisible amongst creditors.  Tools of trade above this amount that are owned at the date of bankruptcy or that are acquired during the bankruptcy vest in the trustee.
  20. BUSINESS STOCK / GOODS ON HAND

    1. The bankrupt’s interest in property for sale or use in a business context vest in the trustee, subject to valid encumbrances and retention of title clauses.
  21. ITEMS WITH STATUTORY RESTRICTIONS ON THEIR SALE

    1. The following property may be present in bankrupt estates and vest in the trustee, with the trustee subject to certain restrictions attached to their sale under various state and territory legislation:
      • firearms
      • alcohol
      • some licences.
  22. INTELLECTUAL PROPERTY

    1. Intellectual property owned by the bankrupt vests in the trustee.
    2. In some cases, royalties and other rights stemming from the ownership of intellectual property vest in the trustee.  In other cases, royalties may be income of the bankrupt for the purposes of calculating income contributions liabilities.  Whether or not royalties are vesting property can be determined with reference to factors including the terms of the contract between the relevant parties and whether the royalties are due for work already done or for future work that the bankrupt is contracted to perform (i.e. advances).
  23. LICENCES

    1. There are many types of licences that vest in the trustee.    In some cases, licences that can be sold may be sold by the trustee.
  24. LIVESTOCK AND RACEHORSE

    1. Livestock and racehorses owned by the bankrupt vest in the trustee.
    2. Rights attaching to the ownership of livestock and racehorses, such as winnings from horse racing activities, vest in the trustee.
  25. PROPERTY LOCATED OVERSEAS

    1. The vesting provisions in the Bankruptcy Act apply to property overseas in the same way in which they apply to property in Australia.  This means that any property that the bankrupt owns overseas vests in the trustee.
    2. Australia is one of a number of countries that has adopted the United Nations Commission on International Trade Law Model Law on Cross-border Insolvency (“the Model Law”).  The Model Law is designed to assist countries to equip their insolvency laws with a modern legal framework to address more effectively cross-border insolvency proceedings, focusing on authorising and encouraging cooperation and coordination between jurisdictions where the insolvent debtor has property in more than one country.  The Australian Cross-Border Insolvency Act 2008, which commenced on 1 July 2008, saw Australia adopt the UNCITRAL Model Law, subject to some modifications that are contained in the Cross-Border Insolvency Act.
    3. Separately, section 29 of the Bankruptcy Act provides for the Federal Court or Federal Circuit Court to request assistance from a court of a “prescribed country” that has jurisdiction in bankruptcy to act in aid of and be auxiliary to it in any matter of bankruptcy.  The prescribed countries are presently the United Kingdom, Canada, New Zealand, Jersey, Malaysia, Papua New Guinea, Singapore, Switzerland, and United States of America.
  26. TIMESHARE INTERESTS

    1. Timeshares are the entitlement to a certain period of accommodation per annum generally in an apartment development.  Timeshare interests vest in the trustee.
  27. ANTIQUES, ARTWORKS, JEWELLERY AND PROPERTY WITH SENTIMENTAL VALUE

    1. Antiques, artworks and jewellery owned or acquired by the bankrupt vest in the trustee.  Generally, wedding and engagement rings where the bankrupt remains married will not be sold by the Official Trustee, but the Bankruptcy Act does not prevent this.
  28. ABANDONED GOODS / UNCOLLECTED ITEMS

    1. Where a tenant or resident abandons goods, different processes apply depending on the type of good which has been abandoned.  All jurisdictions have their own legislation to deal with abandoned goods.  Where goods have been abandoned (or thought to have been abandoned), the Official Trustee may conduct investigations to verify what the goods are, the potential value of the goods and where they are stored.
    2. The landlord may have the right to dispose of goods if they are perishable, dangerous or of no monetary value.  The rights of the landlord to deal with other goods are determined under the legislation applicable in the relevant jurisdiction, which may require consideration of certain facts such as:
      • how long the goods have been on the premises
      • the value of the goods
      • whether the landlord has notified the tenant that the goods are being stored and are available for collection.
  29. CRYPTOCURRENCY

    1. Cryptocurrency that the bankrupt owns at the date of bankruptcy, or that the bankrupt acquires or becomes entitled to during bankruptcy, vests in the trustee.
  30. COMPENSATION

    1. Certain types of compensation vest in the trustee and other types are protected.  While the trustee may need to conduct detailed investigations to determine whether particular compensation vests or not, some general guidelines are:
      • Compensation paid to the bankrupt, whether before or after the date of bankruptcy, in relation to a personal injury or wrong done to the bankrupt or to the spouse of the bankrupt, the de facto partner of the bankrupt or a member of the bankrupt’s family does not vest in the trustee.  (See paragraph 116(2)(g) of the Bankruptcy Act.)
      • Amounts paid by superannuation funds under total and permanent disability insurance policies vest in the trustee if paid before bankruptcy.  However, if paid on or after the date of bankruptcy, such amounts do not vest.  (See paragraph 116(2)(d) of the Bankruptcy Act.)
      • Amounts paid under life insurance policies, relating to the life of the bankrupt or the spouse of the bankrupt or the de facto partner of the bankrupt, that are paid before bankruptcy vest in the trustee.  However, such amounts paid on or after the date of bankruptcy do not vest.  (See paragraph 116(2)(d) of the Bankruptcy Act.)  Note that it may be possible for a bankrupt to receive a life insurance policy payout in respect of his or her own life before he or she dies, as some policies provide for payment of a lump sum amount if the policy holder is diagnosed with a terminal illness or condition.
      • In the case of a death benefit or life insurance policy paid by a superannuation fund, whether or not the payment vests in the Official Trustee can depend on who the recipient of the funds is.
      • Compensation payments that do not relate to personal injury or wrong vest in the trustee, whether those payments were received prior to, during or post-bankruptcy.  For example, compensation payments where the payment relates to illness where such illness was not a result of a personal injury are not protected.
      • Compensation paid to a bankrupt in relation to unfair lending practices vests in the trustee.
      • Compensation paid under the National Redress Scheme for Institutional Child Sex Abuse does not vest in the trustee, but any property purchased with this compensation does vest.
      • Payments made under the Defence Abuse Reparation Scheme do not vest in the trustee.
    2. “Personal injury or wrong done”

    3. In Rogers v Asset Loan Co Pty Ltd [2006] FCA 1708 (7 December 2006), the court defined “personal injury or wrong” for the purposes of paragraph 116(2)(g) at paragraph 27:
    4. “the rights of action in respect of the bankrupt’s interests in property vest in the trustee and those rights of action where the essential cause is emotional injury done to the bankrupt (in respect of a recognised cause of action) remain with the bankrupt.”
    5. In Cox v Journeaux,[5] it was found that whether something relates to “personal injury or wrong” requires consideration of:
    6. “whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body, character and without reference to his rights of property.”
    7. Conducting investigations

    8. While it may ultimately be the case that certain compensation does not vest in the trustee, the trustee is permitted to conduct investigations to determine the nature of the compensation.  The bankrupt has obligations to comply with requests to provide information and documents, even where the bankrupt believes the compensation is protected.
  31. PROPERTY PURCHASED WITH COMPENSATION OR OTHER PROTECTED MONEYS

    1. Where the whole, or substantially the whole, of property was purchased with  protected moneys (for example, moneys received from a life insurance policy for the deceased’s spouse or property purchased after the date of bankruptcy with funds withdrawn from a regulated superannuation fund), this property does not vest in the trustee.  This is pursuant to subsection 116(3) and paragraph 116(2)(n) of the Bankruptcy Act.
    2. Where a property was purchased partly with protected moneys and partly other moneys and the trustee realises the property, the trustee must pay the bankrupt a portion of the proceeds that can be “fairly attributed to” the protected moneys.  This is pursuant to subsection 116(4) and paragraph 116(2)(n) of the Bankruptcy Act.  Examples of such calculations can be found in Reaper v Vrsecky (Trustee) [2016] FCA 509 (12 May 2016) and Manivilovski; Ex parte Official Trustee in Bankruptcy [1993] 45 FCR 358; 117 ALR 537.
    3. What constitutes a purchase of “substantially the whole” with protected moneys is not detailed in the Bankruptcy Act, but case law provides some guidance.  See for example:
  32. PROPERTY THE BANKRUPT ACQUIRES AFTER THE DATE OF BANKRUPTCY

    1. Vesting of after-acquired property

    2. As already noted in this chapter, property that the bankrupt acquires or that devolves upon the bankrupt after the date of bankruptcy and before discharge also vests in the trustee, unless the property is protected.  This is the case even if the bankrupt doesn’t receive the property until after discharge.
    3. Protected property received on or after the date of bankruptcy

    4. Where the bankrupt receives or becomes entitled to protected property after the date of bankruptcy, this does not vest.  Note that the categories of property that are protected that the bankrupt receives on or after the date of bankruptcy differ from protected property received prior to the date of bankruptcy.
    5. Certain property that is protected if it is received on or after the date of bankruptcy, that would not be protected if received prior to the date of bankruptcy, includes:
      • certain compensation payments
      • certain payments made to an undischarged bankrupt by regulated superannuation funds.
    6. While some property may not vest in the trustee if received on or after the date of bankruptcy, it may be income for contributions purposes.  See Official Trustee Practice Statement 1 – Income contributions.
    7. Property purchased with post-bankruptcy income

    8. Any property acquired by a bankrupt with his or her post-bankruptcy income vests in the trustee, unless the property is protected.
  33. PROPERTY HELD IN TRUST FOR ANOTHER PARTY

    1. Property held in trust for another person does not vest in the trustee.  The bankrupt will, however, be required to provide evidence to support the claim that property is held in trust.
    2. Transfers of property to trusts

    3. Where property was transferred to a trust by a person prior to that person becoming bankrupt, the circumstances of the transfer may be investigated in order to determine whether the trustee has a claim to the property.  More information about property transferred prior to bankruptcy is contained below.
  34. PROPERTY TO WHICH THE BANKRUPT CONTRIBUTED THAT IS OWNED BY ANOTHER PERSON

    1. Three distinct situations often arise in bankrupt estates:
      • the bankrupt has contributed to property owned by another person and both the bankrupt and the other person accept that the bankrupt has an interest in the property
      • the bankrupt claims to have an interest in property but the owner claims the bankrupt does not have an interest, or
      • the bankrupt claims to not have an interest in property but may in fact have an interest.
    2. Where there is a dispute as to whether the bankrupt has an interest in particular property, the trustee can conduct investigations to determine whether and to what extent the bankrupt contributed to:
      • the purchase of the property
      • improvements to the property
      • the maintenance of the property.
    3. The bankrupt’s contributions may have been financial or non-financial.  A non-financial contribution could include where one party in a relationship may have assumed responsibility for loan payments where the other party assumed responsibility for other joint financial commitments, or where the bankrupt contributed to the maintenance of the property by conducting repairs at no cost.
    4. Where the bankrupt has contributed to a property, the trustee may have an interest in that property that can be realised for the benefit of the bankrupt estate.  That is, the fact that the bankrupt is not in the possession of the property, and/or if the bankrupt claims to not have an interest, does not mean that the trustee does not have an interest.
  35. INCOME

    1. Pre-bankruptcy income

    2. Income earned prior to the bankrupt’s date of bankruptcy that remains in his or her account or on his or her person at the date of bankruptcy vests in the trustee.[6]
    3. Where the bankrupt has earned income before the date of bankruptcy and it is paid after the date of bankruptcy, and where the bankrupt accounts for his or her income on a cash basis (such as for taxation purposes), this does not vest – it is treated as post-bankruptcy income.
    4. Post-bankruptcy income

    5. Income earned by the bankrupt after the date of bankruptcy does not vest in the trustee.  However, if a bankrupt earns above a certain amount, he or she will have a contributions liability payable to the trustee under Division 4B of Part VI of the Bankruptcy Act.  The court has summarised this as follows:[7]
    6. “after-acquired income of a bankrupt remains vested in the bankrupt rather than the bankruptcy trustee, subject to his or her contribution obligations.”
    7. More information about contributions is available in Official Trustee Practice Statement 1 – Income contributions.
  36. PROPERTY THAT WAS SOLD OR TRANSFERRED PRIOR TO BANKRUPTCY

    1. In some circumstances, the trustee can “undo” a transaction that occurred prior to the date of bankruptcy where certain criteria are satisfied.  These types of transactions are referred to as antecedent transactions and the relevant provisions of the Bankruptcy Act are:
      • execution by a creditor against property of the bankrupt prior to the date of bankruptcy (section 118)
      • undervalued transactions (section 120)
      • transfers to defeat creditors (section 121)
      • transfers of property where consideration was given to a third party (section 121A)
      • superannuation contributions made to defeat creditors (sections 128B and 128C).
    2. These provisions mean that, where the bankrupt sold, transferred or otherwise disposed of property before bankruptcy, or where a creditor had seized and sold property prior to the date of bankruptcy, the trustee may be able to recover the property (or an amount equal to its value).  The purpose of these provisions is to ensure that property that should form part of the bankrupt estate is available for distribution to creditors.
    3. EXAMPLE 3

      Three months prior to becoming bankrupt, Liam had transferred a house he owned to his wife.  This meant that, when he became bankrupt, he wasn’t the owner of any real estate. The trustee can investigate the circumstances of the transfer to Liam’s wife and the trustee may be able to claim the property, or a share of it, for the benefit of the estate, even though Liam was no longer the registered owner at the date of his bankruptcy. The relevant provisions of the Bankruptcy Act that might apply to the transfer to Liam’s wife are:
      - section 120: this would apply if Liam transferred his interest in the property for less than its value, including where he transferred it for no money or for a discounted price
      - section 121: this would apply if Liam’s purpose for transferring the property was to defeat his creditors (meaning his intention was to make sure the property was not available to his trustee in the event of his bankruptcy).

    4. Preference payments

    5. Section 122 of the Bankruptcy Act allows the bankruptcy trustee to “undo” transfers of property, including money, to creditors that were made by an insolvent debtor before he or she became bankrupt, where that transfer or payment had the effect of giving that creditor a preference, priority or advantage over other creditors.
    6. There is no requirement that the debtor had the intention to prefer one creditor over another at the time of the transfer.
    7. There are some defences that the creditor may have to receiving property before bankruptcy, which are:
      • the creditor who received the property or payment did so in the ordinary course of business, acted in good faith and gave consideration at least as valuable as the property transferred
      • the transfer or payment was made in accordance with a maintenance order, maintenance agreement or debt agreement
      • the debtor was solvent at the time of the transfer.
    8. A creditor shall be deemed not to be a payee in good faith if the payment was made in circumstances that lead to the inference that the creditor knew, or had reason to suspect, that:
      • the debtor was unable to pay his or her debts as they became due from his or her own money
      • the effect of the payment would be to give that creditor an advantage over other creditors.

Footnotes

[1] Ivor Worrell As Trustee of the Estate of John Martin Wedgwood, A Bankrupt v Power and Power, Solicitors [1993] FCA 551; (1993) 118 ALR 237 (1993) 46 FCR 214 (19 November 1993)

[2] Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30 (11 March 2015)

[3] See Deputy Commissioner of Taxation v Vera Mary Kavich and Official Trustee in Bankruptcy [1996] 68 FCR 519

[4] See for example Peter Andrew Gillies Ex Parte: the Official Trustee In Bankruptcy; the Trustee of the Property of Peter Andrew Gillies [1993] FCA 289; (1993) 115 ALR 631 (1993) 42 FCR 571 (11 June 1993), Re Sharpe; Ex parte Donnelly [1998] 80 FCR 536 and Michell (Trustee), in the matter of Lee (deceased) [2012] FCA 1046

[5] Cox v Journeaux (No 2) [1935] 52 CLR 713

[6] See Trustee of the Property of Patrick Bede O’Reilly v Law Society of New South Wales [2001] FCA 701 (12 June 2001)

[7] See Adrian Garfield Barwick v Ross Ian Goodridge [2011] NSWSC 1233 (21 October 2011