Revised Explanatory Memorandum
(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)Section 2 - Policy objectives
Increased time period for undervalue transfers from 2 to 4 years
6. A proposed amendment will increase the time period in section 120 from 2 to 4 years where property was transferred to a related entity during that period for less than market value consideration. Examples of related entities are business partners, parents, children, relatives, trustees and beneficiaries of trusts that are related to the bankrupt or the bankrupt's spouse. The term 'related entity' is defined in section 5 of the Act.
7. This approach is based on the premise that gifts designed to dissipate assets rendering them unavailable to creditors are in practice more likely to be made to relatives and associates rather than to strangers. Further, it is common for people to be aware they are likely to become bankrupt more than 2 years before they become bankrupt or even become technically insolvent. If transfers in this early period can't be declared void, it is open to a person to dispose of their assets in a way that will leave little for creditors (eg gifts to relatives). It is appropriate to extend the bar to doing this to 4 years, not 2, because in the period between 2 and 4 years there is too much scope for a person to deliberately divest themselves of assets.
Rebuttable presumption of insolvency
8. A further proposed amendment will create a rebuttable presumption of insolvency for the purposes of sections 120 and 121 of the Act. A presumption will arise that the transferor was insolvent at the time of the transfer if it is established that the transferor had not, in respect of that time, kept proper 'books, accounts and records'; or where, having kept the appropriate books, accounts and records in relation to that time, the transferor had failed to preserve them. A similar presumption will be introduced in relation to Division 4A of Part VI of the Act.
9. These amendments are proposed on the basis that it is usual commercial practice to keep these books and records. This removes the incentive to avoid making, hiding or destroying, records that would demonstrate insolvency. This amendment will overcome some of the difficulties faced by trustees when, for example, endeavouring to establish an intention on the bankrupt's behalf to defeat the interests of creditors under section 121. The bankrupt will of course have the opportunity to rebut the presumption.
Additional element of 'reasonableness' in section 121
10. It is proposed to amend subsection 121(4) to place an additional limit on the circumstances in which a transfer is protected by that provision. At present, a transferee can be wilfully blind as to whether a transferor's purpose is to defeat creditors. For example, if a person is heading towards bankruptcy and transfers all their assets to their spouse, that transfer is protected by subsection 121(4) if the non-bankrupt spouse claims they did not think about why the transfer was occurring. This 'wilful blindness' can be used to take advantage of subsection 121(4) and protect actions divesting the bankrupt (and later, their creditors) of assets.
11. The proposed amendment will introduce standards of reasonableness in relation to the transferee's knowledge of the transferor's intention in conveying the property.
Third party consideration
12. In order to ensure that the trustee can recover any loss to the bankrupt estate resulting from property being transferred as an avoidance measure, an amendment proposes to insert new section 121A into the Act. This proposed new provision will allow for the recovery in certain circumstances of consideration paid to third parties.
Extending Division 4A of Part VI to natural persons
13. Division 4A of Part VI of the Act allows the trustee to obtain property in certain circumstances from an 'entity' that, during the 'examinable period', was 'controlled' by the bankrupt and benefited from his or her personal services. The purpose of the provision is to allow the trustee to recover a bankrupt's property in the situation where that property is disguised as an asset of a trust, company or the like.
14. The current definition of 'entity' in the Act would theoretically allow these provisions to apply to natural persons. However, the provisions could not logically operate in that way. For example, the provisions could not apply to the situation where the non-bankrupt spouse acquires an estate in property, (or the value of the non-bankrupt spouse's interest in property increases) as a result of the bankrupt's financial contributions and the bankrupt uses or derives a benefit from that property. This is because the bankrupt does not provide 'personal services' to, does not 'control', and does not receive any remuneration from, the non-bankrupt spouse.
15. The amendments proposed by this Bill will extend these provisions to natural persons. The policy underlying these amendments is that just as a person can hide their own assets in a trust or company, they can do so by placing them with a spouse or other relative or associate.
Extending the time period in Division 4A of Part VI
16. The 'examinable period' is the relevant claw back period for the purposes of Division 4A of Part VI. The term is currently defined in the Act as either 2 years prior to the commencement of the bankruptcy, or from the first point of insolvency in the 2 years previous to that if the bankrupt became insolvent in those 2 years.
17. A proposed amendment will amend the definition of 'examinable period' to bring it in line with the proposed changes to the time periods in section 120. That is, it is proposed to amend the 'examinable period' to either 4 years prior to the commencement of the bankruptcy in relation to property acquired by a related entity, or from the first point of insolvency in the year prior to that if the bankrupt became insolvent in that year. The claw back period for non-related entities will also be amended to align it with the changes proposed to section 120. That is, for non-related entities the 'examinable period' will be either 2 years prior to the commencement of the bankruptcy, or from the first point of insolvency in the 3 years previous to that if the bankrupt became insolvent in those 3 years.
Notion of 'benefit' in Division 4A of Part VI
18. A further proposed amendment to Division 4A of Part VI will make it clear that it is sufficient that the bankrupt benefited directly or indirectly from the relevant property that the trustee seeks to recover under these provisions. This will overcome the situation where it may not be immediately apparent how the bankrupt has benefited. This was the case in one of the few reported decisions under these provisions- Birdseye v Sheahan
[2002] FCA 1319
.
Transcripts of proceedings
19. Currently, it is not clear whether the transcript of proceedings carried out under section 77C can be used in proceedings relating to the bankrupt estate. The proposed amendment will insert a provision into section 77C to make that clear. This proposed change is similar to current subsection 81(17) of the Act which provides:
Notes taken down and signed by a person in pursuance of subsection (15), and the transcript of the evidence given at the examination of a person under this section:
- (a)
- may be used in evidence in any proceedings under this Act in which the person is a party; and
- (b)
- shall be open to inspection by the person, the relevant person, the trustee or a person who states in writing that he or she is a creditor without fee and by any other person on payment of the fee prescribed by the regulations.
20. It is proposed to further amend sections 77C and 81(17) to allow notes and transcripts to be admissible in subsequent proceedings to claw back assets, irrespective of whether or not the bankrupt is a party to those proceedings. This proposed change is consistent with a general philosophy that relevant evidence should be able to be used in an efficient manner. The transferee will still be able to call the bankrupt as a witness and to cross-examine the bankrupt on their prior statements, as appropriate.
Technical Amendments
21. Subsections 120(5) and 121(6) provide that a number of things are to have no value as consideration for the purposes of subsection 120(4) and 121(5) (for example, the transferee's love and affection for the transferor). An amendment would provide that the grant of a right to a bankrupt spouse to reside at a place owned by the non-bankrupt spouse, such as the family home, does not constitute consideration (except in cases of marital breakdown).