NEWS LETTER - SUMMER 2010
25 02 2010
This publication produced by Foremans Business Advisors specifically focusing on insolvency issues relevant to accountancy practices and their clients. In this edition we look at Void Transactions under the Bankruptcy Act, particularly Undervalued Transactions and Transfers to Defeat Creditors. We consider that area in light of a decision from the High Court of Australia.
TRANSFERS OF PROPERTY - WHEN ARE THEY VOID?
Section 120 of the Bankruptcy Act – Undervalued Transaction
A transfer of property by a person who later becomes a bankrupt is void against the Trustee if the transfer took place within 5 years of the commencement of the bankruptcy and the transferee gave no consideration for the transfer or gave less than the market value of the property.
The transfer is not void if the property was transferred to a related entity greater than 4 years before the commencement of the bankruptcy and the transferee can prove at the time of the transfer the transferor was solvent.
In any other case, the transfer is not void if the property was transferred greater than 2 years before the commencement of the bankruptcy and the transferee can prove at the time of the transfer the transferor was solvent.
Section 121 of the Bankruptcy Act – Transfer to Defeat Creditors
A transfer of property by a person who later becomes bankrupt to another person is void against the Trustee if the property would have formed part of the bankrupt’s estate if not transferred and the transferor’s main purpose in transferring the property was to prevent that property being available to the creditors or to hinder or delay the property being available to the creditors.
If the transferee acted in good faith the transfer is not void. Good faith includes valuable consideration having been paid, the transferee did not know of the main purpose being to defeat, hinder or delay creditors rights and the transferee could not reasonably have inferred that at the time of the transfer the transferor was, or was about to become, insolvent.
A transfer between a married couple, for example, being “for love and affection” is not valuable consideration.
HIGH COURT DECISION
In Malcolm Geoffrey Vale v Roderick Mackay Sutherland [2009] HCA 26 the matter before the High Court was in relation to a void transaction under Section 120 of the Bankruptcy Act. The Trustee had obtained a Section 139ZQ notice requiring the transferee to pay the Trustee the disputed sum.
The transferee argued the validity of the notice. The High Court ruled in favour of the Trustee.
Of importance in this ruling by the High Court is that in determining the shortfall in consideration paid by a transferee, the value of the property (where a Section 139ZQ notice has been issued) is the value at the time of the Section 139ZQ notice being issued not the value of the property at the time of the transfer.
For example, a property is transferred in 2002 from a husband to his wife for $200,000 when the value was $240,000. A Trustee is appointed to the husband’s bankrupt estate in 2005. The Trustee in 2006 makes demand for $40,000 from the wife. The wife refuses to pay the $40,000. The Trustee obtains a Section 139ZQ notice in 2009 at which time the property is now worth $500,000.
The demand against the wife is no longer for $40,000. On the basis of the High Court ruling, the amount to be repaid under the Section 139ZQ notice is $300,000, being the difference between the consideration paid of $200,000 and the value of the property at the time of the issuing of the Section 139ZQ notice (now increased in value to $500,000).
This case certainly provides a massive incentive for transferees to settle such matters with a bankruptcy Trustee and avoid wherever possible a Section 139ZQ notice being issued.
If you have any questions concerning the above topics or about insolvency matters generlly, please contact:-
Carins - Call Todd Kelly or Peter Morris to arrange a free consultation on 07 4052 1655
Melbourne - Call Dean McVeigh, Craig Bolwell or Vincent Savage to arrange a free consultation on 03 9521 6662