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(September-2003) How safe is super in bankruptcy?
When a person becomes bankrupt, any transfers of property he or she made in the previous two years (in some cases, up to five years) may be recovered by the trustee and applied for the benefit of the bankrupt’s creditors. This rule, sometimes known as the “antecedent transactions” rule, operates to prevent a person’s property being transferred to relatives and others to the disadvantage of creditors. A transfer of property does not have to be fraudulent — that is, deliberately carried out to put the property beyond creditors’ reach — to be affected by this rule.
A transfer of property for which the transferee makes no payment, or makes inadequate payment, can be void as against the trustee in bankruptcy, if it takes place within the specified period before the transferor’s bankruptcy, even if it is not done in contemplation of likely bankruptcy.
Two questions:
(1) Does the rule affect transfers of money, ie. is money “property” for this purpose?
(2) Does the rule affect contributions to a super fund made by a person who later becomes bankrupt?
The answer to the first question is yes.
The answer to the second question, provided recently by the High Court, is: no. The rule as it applied prior to 1996 would not apply to contributions to super funds. But whether the rule in its current form would affect contributions is more problematic.
In its pre-1996 form, the rule was that if the transferee was acting in good faith, was a “purchaser” and gave “valuable consideration” for the property transferred, then the trustee in bankruptcy could not ask for the property back. It did not matter how much consideration was given — provided some consideration was given, and it had something more than merely nominal or trivial value, that was enough to put the property beyond reach.
Now, however, the rule says that for the transfer to be valid as against the trustee in bankruptcy, the transferee must give consideration at least equal to the market value of the property transferred. The significance of this change will become apparent later.
What happened?
In Cook v Benson, the case which the High Court was considering, Benson’s employment had been terminated back in 1990, when his employer went into liquidation. He received a lump sum payment from the employer’s super fund. Being well below retirement age, he arranged for the bulk of the payment to be rolled over into three other funds.
Benson subsequently became bankrupt. His bankruptcy commenced in September 1991. The trustee in bankruptcy sued Benson, and the trustee of each of the three super funds to which his entitlements had been rolled over, claiming that the rollovers were void under the antecedent transactions rule, and the moneys should be paid to the trustee in bankruptcy.
The central question in the case was whether, in receiving the rolled-over amounts, the fund trustees were “purchasers” for “valuable consideration” of those amounts.
By a majority of four to one, the High Court decided that the fund trustees were indeed purchasers of the amounts rolled over, and they gave Benson valuable consideration in return. That put the money beyond the reach of the trustee in bankruptcy.
The High Court said that the rollover payments were made in the course of arm’s-length, commercial transactions. The payments from the old fund, at Benson’s direction, as contributions to other commercial superannuation schemes, were made in return for the scheme trustees’ obligations to provide him with the rights and benefits of each scheme. Those rights and benefits constituted substantial and valuable consideration for Benson’s contributions.
So far so clear, at least under the antecedent transactions rule as it stood in 1990-91.
But what now?
The current version of the rule, however, requires not just valuable consideration, but consideration at least equal to the market value of the property transferred.
Market value is an elastic concept. When the antecedent transactions rule was amended in 1996, it was said that the expression “is intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount or incentive for purchase being offered”.
Thus, when a person pays money on an arm’s-length basis to a regulated super fund, and the fund makes the usual undertakings in return to provide the person with the benefits that will accrue under the rules of the fund, it is at least arguable that the trustee is giving market value for the payment. If that is the case, then the payment is safe from the trustee in bankruptcy. But it may take further court cases to establish this beyond doubt.
— Brian Egan is a freelance commentator on superannuation, tax and corporations law matters, and a principal of Sirius Information Services. Email: [email protected]
AUTHOR
Zilla Efrat
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