Bankruptcy and superannuation – a fraught and technical battleground

Bankruptcy trustees are often required to consider whether unusually large or suspicious contributions made to a superannuation fund by or on behalf of a bankrupt are designed to defeat the interests of creditors.

In a decision handed down on Monday, the Full Court of the Federal Court provided a salutary reminder of the difficulties associated with seeking to set aside such transactions absent precise satisfaction of the elements of the relevant provisions of the Bankruptcy Act 1966.

Superannuation contributions – protecting creditors

As is widely known, the interest of a bankrupt in a regulated superannuation fund is not property which is divisible amongst creditors.[1]

However, such protection is explicitly subject to ss 128B and 128C of the Act. Those sections operate in a similar way to s121 to declare payments made by a bankrupt (or a third party for the benefit of the bankrupt in the case of s 128C) void if made with the “main purpose” of preventing that property from becoming available to a bankrupt’s creditors.

That “main purpose” is taken to be the defeating of creditors if it can be reasonably inferred that the bankrupt was insolvent at the time. A rebuttable presumption of insolvency arises if the bankrupt fails to keep relevant books and records (discussed below).

All three sections also provide that a transfer is void if the property (and in the case of ss 128B and 128C the “contribution to an eligible superannuation plan”) probably would have become part of the bankrupt’s estate or would have become available to creditors.

However, unlike s 121, in a proceeding pursuant to ss 128B and 128C, no good faith or valuable consideration defence is available to the relevant fund, the sections instead providing a formula for the payment by the trustee to the fund of any fees or expenses charged or incurred as a condition of repayment to the bankrupt estate of the voidable payments.[2]

An additional difference is that ss 128B and 128C also require an analysis to be undertaken, in determining if the “main purpose” was to defeat creditors, whether there was an historical pattern of contributions to the relevant fund and whether, in light of that pattern, the payments are out of character.

Do (Trustee), in the matter of Andrew Superannuation Fund v Sijabat [2023] FCAFC 6

On Monday, the Full Court of the Federal Court ruled in favour of the trustees of a private superannuation fund that certain payments made to that fund were not void within the meaning of s 128B of the Act.

In doing so, the court clarified how and in what way the presumption of insolvency (for the purposes of establishing the bankrupt’s main purpose) is established and the defences available to a claim that payments to a superannuation fund are voidable.

The appeal concerned contributions made to a private superannuation fund for the financial year ended 30 June 2013 for or on behalf of the bankrupt in the amount of $437,767. On the advice of the bankrupt’s accountant, substantial contributions had been made to the fund in previous years, including a payment to the fund of $450,000 in the financial year ended 30 June 2010.

With a view to establishing the bankrupt’s main purpose was to defeat creditors, the trustees sought to rely on the presumption of insolvency in s 128B (5) of the Act which provides that a rebuttable presumption of insolvency may arise in circumstances where the bankrupt “had not …. kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or (b) having kept such books, accounts and records, has not preserved them.”[3]

The decision of the Full Federal Court illuminated and resolved a number of issues, including the proof required to establish a presumption of insolvency of a bankrupt where he or she has not maintained adequate “books, accounts and records”.

What “books” must be kept by a bankrupt when considering whether a rebuttable presumption of insolvency arises?

As to engaging s 128B (5), the Court noted that:

• as to the books to be kept in relation to “the business carried on by” the bankrupt, attention must be directed to the specific commercial enterprise formerly carried on in assessing what books were required to be maintained

• the mere fact that a bankrupt acts as a director or holds shares in a company that carries on business is not sufficient to demonstrate what business was carried on by a bankrupt

• absent evidence that a bankrupt was carrying on a business, and what that business was, it was not possible to invoke a rebuttable presumption of insolvency on account of a failure to keep any – or adequate – books and records.

If insolvency is established, what happens next?

In terms of proving insolvency, the Court noted that

• where a rebuttable presumption is established (e.g. for the failure to maintain books) the onus then shifts to the bankrupt to rebut that presumption

• the question of solvency is a cash-flow test and requires a consideration of when debts are due and payable. However, in making that assessment, a court may consider whether debtor and creditor have come to arrangements which may reflect, for example, that “a creditor may not wish to put at risk an ongoing commercial arrangement, or the creditor may be prepared to give the debtor time because the creditor believes the debtor has temporary liquidity problems.”

The Court’s decision

Given the above, the Full Court determined that:

• as the trustees had adduced insufficient evidence of the “business carried on” by the bankrupt, no rebuttable presumption of insolvency arose because absent such evidence, the failure of the bankrupt to “keep such books, accounts and records as are usual and proper” in relation to any commercial business undertaking could not be established

• further to this point, the trustees necessarily bore the onus of establishing the “business carried on” and the “usual and proper” books required to be maintained

• As the trustees did not meet that onus, the presumption of insolvency was not established

• At the time that transfers were made, there was no evidence that the bankrupt was insolvent. No formal demands had been made on the bankrupt (despite the prospect of a claim being made) and negotiations with creditors were ongoing. To the extent that the trustees had sought to establish a presumption of insolvency (which they had not) the bankrupt had successfully rebutted that presumption in any event

• When considering the prior significant contributions to the relevant superannuation fund, the attacked payments were in keeping with a prior pattern and were not out of character. Evidence that these earlier payments were made with the benefit of professional advice was a relevant factor.

Take outs

The avoidance provisions in the Act have much to commend them. Ss 128B and 128C, focused as they are on potentially voidable transactions pertaining to contributions to a superannuation fund by or on behalf of a bankrupt are even more powerful (in that context) than s 121.

However, as Sijabat demonstrates, a bankruptcy trustee must still jump high evidentiary bars and faces the prospect that a bankrupt will be able to rebut presumptions or establish that seemingly suspicious contributions to a superannuation fund are entirely in keeping with his or her financial history.

With these risks in mind, a few take outs suggest themselves:

• Where a rebuttable presumption of insolvency is proposed to be relied upon, a trustee ought to:
• Identify with some specificity the business said to be carried on by the bankrupt
• Lead evidence of the usual and proper books that should ordinarily be kept by the bankrupt and why the records of the bankrupt fail to meet that standard

• A trustee should closely consider whether creditors have agreed to withhold enforcement or other recovery action (for example, a lessor might forego termination rights in return for a repayment plan in exchange for the assurance of a continuing tenant whose obligations were guaranteed by a bankrupt) and, if so, whether that affects an assessment as to whether certain debts are truly due and payable

• A trustee should closely consider the history of payments made to the superannuation fund(s) in order to determine whether they fit a particular pattern or are out of character. Additionally, consideration should be given to any professional advice provided to the bankrupt in relation to the payments made and whether that advice is consistent with a retirement strategy or involves something more nefarious.

Bankruptcy is often overlooked in the context of insolvency practice. Cases like Sijabat are a reminder that the law in the area remains highly technical and that the work of trustees can be challenging and exacting – and that success is not always guaranteed.

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[1] S 116 (1) (d) (iii) of the Act.

[2] The enactment of ss 128B and 128C in 2006 was designed to overcome the effect of the High Court decision in Cook v Benson [2003] HCA 36 which, in effect, held that an arm’s length, commercial payment to such a regulated fund constitutes valuable consideration, thereby providing the fund with a defence to a trustee’s claim even if the payments were otherwise voidable.

[3] Although similar to s 286 of the Corporations Act 2001 which, where appropriate, can be utilised in a similar way in relation to certain voidable transaction proceedings and insolvent trading claims, the Court noted that the two provisions are not analogous as there is no positive obligation on a bankrupt to have maintained books and records.

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