Super claw back from bankrupts?

The proposed changes

The Federal Government intends to amend the Bankruptcy Act 1966 Act so that a creditor can claw-back superannuation contributions made by a person for the purpose of defeating creditors' claims if that person later becomes bankrupt. The change is the government's response to the Cook v Benson High Court case.

The changes are yet to be finalised. But they will take effect from the date the proposed changes were announced - 27 July 2007.

The law as it stands: Superannuation contributions and bankruptcy

Currently, transfers of property by a person who later becomes bankrupt can be set aside if:

• the transfer was not supported by valuable or sufficient consideration; or
• the transfer was made to prevent the property from being available to meet debts due to the bankrupt's creditors.

The aim of these sections is to prevent people who later become bankrupt from defeating creditors' claims by placing their assets, including cash, in the hands of third parties and out of creditors' reach.

A case triggers the planned change Cook v Benson

The High Court's decision in Cook v Benson triggered the planned change by casting doubt on whether a transfer in the form of superannuation contributions could be set aside. The doubt arose because of the difficulty in determining the bankrupt's intention. The relevant sections of the Act provide little guidance. There is no specific reference in either section to superannuation contributions.

Under the changes:

• the law will specifically provide that superannuation contributions can be 'clawed back' in the above circumstances; and
• the Courts will be permitted to take into account a bankrupt's past history of superannuation contributions and whether the relevant contributions are 'out of character'.

In Cook v Benson[2] contributions were made to a number of superannuation funds in September 1990. The contributions were applied by the funds to make life policy and other investments on the member's behalf — entitling the member to retirement and death benefits. An order for bankruptcy was made against the member's estate in July 1992.

The trustee in bankruptcy argued that the contributions were made with a lack of good faith and without consideration: therefore they could be clawed-back under sections 120 and 121. [1]

The High Court found that the contributions were made in return for rights and benefits under the funds' policies. These benefits constituted substantial and valuable consideration, and, as a result could not be 'clawed-back'.

Would the new law have changed the result in Cook v Benson?

If the proposed changes been in force at the time, it is likely the High Court's decision would have been reversed in favour of the creditors. Although the superannuation contributions were made for substantial and valuable consideration, they were made primarily to defeat the prospective claims of creditors. So they could thus be 'clawed-back'. A key factor would have been whether the contributions were out of character given the history of the member's superannuation contributions.

Summary

In future, it seems likely that persons who are insolvent will not be able to put their assets beyond the reach of creditors by making‚ out of the ordinary' superannuation contributions. However, the primary consideration will remain whether the insolvent person's objective was to defeat the claims of their potential creditors.

[1] Sections 120 and 121 of the Act
[2] (2003) 53 ATR 195