Superannuation contributions – protected in bankruptcy and third party preference payments - april 2018
Apr 14 2018
Superannuation Contributions - Protected In Bankruptcy?
Ordinarily, a bankrupt’s interest in a regulated superannuation fund is not an asset recoverable by a Trustee in Bankruptcy. Pursuant to Section 116 of the Bankruptcy Act 1966 (“the Act”), a bankrupt is entitled to retain an interest in a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993).
As a consequence of Section 116 of the Act, it is not uncommon that a bankrupt will have minimal to no assets in their name, however, at the same time, have a significant member balance in a complying superannuation fund, whether self-managed or otherwise.
In the circumstances where there are no assets and a significant member balance, a bankruptcy Trustee will conduct investigations into the deposits made into the superannuation fund, to identify whether any deposits are deemed to be ‘out of character’ and thereby voidable under the provisions of the Act.
The provisions of the Act, provide a basis for a bankruptcy Trustee to void contributions and/or other transfers of property made into a superannuation fund, either by the bankrupt themselves or by a third party contributor.
We have identified in a number of bankruptcy administrations where, during the years prior to the commencement of the bankruptcy, the bankrupt’s employer, typically an associated entity, has made additional superannuation contributions at the direction of the bankrupt.
Additional superannuation contributions have regularly been found to be in excess of the Maximum Superannuation Contribution Base (“MSCB”). Consequently, investigations have been undertaken to determine whether these additional contributions are voidable.
Pursuant to Section 128C of the Act, a transfer of property, by way of a contribution to an eligible superannuation plan for the benefit of a person who later becomes bankrupt, is voidable if:-
• The property would have become available to creditors of the bankrupt estate and,
• The main purpose of the transaction was to prevent or delay the property from becoming divisible amongst the creditors of the bankrupt estate.
The difficulty for a Trustee is proving that the main purpose of the transaction was to prevent or delay the property from becoming available to the creditors of the bankrupt estate.
However, Section 128C(3) of the Act provides that the main purpose of a transaction is taken to be the purpose described, if it can be reasonably inferred from all circumstances that, at the time of the transaction, the bankrupt was, or was about to become, insolvent.
Where such a claim is identified, Section 128E of the Act provides that the Official Receiver, at the request of the Trustee, may issue a superannuation account-freezing notice. If the Trustee is concerned that the property of the superannuation fund may be diminished or otherwise disposed, he may apply to the Official Receiver for a freezing notice to be served on the superannuation fund.
Upon being served with a freezing notice, the superannuation fund is directed to not dispose of any property of the fund, thereby protecting the Trustee’s interest in the same.
As Trustees, we have recently argued that the excess superannuation contributions made above the MSCB are void, where it can be proved that the bankrupt was insolvent at the time the additional contributions are made.
The MSCB sets a limit on the superannuation contributions that an employer must make into an employee’s nominated superannuation fund.
If an employee earns income in excess of the MSCB, the employer is not required to make the 9.5% superannuation contributions for any amount above the set limit.
The current MSCB is $52,760 per quarter, therefore, the maximum superannuation liability payable by an employer is $5,012.20 per quarter or $20,048.80 per annum.
As an employer is not required to make contributions above the MSCB, the additional contributions made by the employer are an additional benefit payable to the bankrupt, which have been paid into the bankrupt’s superannuation fund at their direction. If the property had not been transferred into the bankrupt’s nominated superannuation fund, it would have become property available to creditors of the bankrupt estate and such contributions may be recoverable by a Trustee in bankruptcy directly from the superannuation fund.
Are Third Party Payments Preferences?
In our September 2017 issue, we highlighted the defences available to creditors of an unfair preference claim issued by a Liquidator, including the running account defence.
The running account defence applies to creditors who maintain a continuing business relationship with the insolvent company, which will likely significantly reduce the size of the Liquidator’s claim.
Recently PCI Partners was engaged by a creditor to review a running account defence, which had the effect of reducing a claim from $700,000 to $35,000. A far more palatable result for the creditor!
The Court has recently considered whether certain types of third party payments to a creditor fall outside the preference provisions.
The recent decision in the matter of Alex (Bankrupt) [2017] FCAFC 217 considered the situation where the transfer of property came directly from a third party. The case suggests a way in which a creditor may be able to protect itself against a preference claim when an individual debtor is potentially in financial distress. The relevant facts were:
1. Ms Alex owed a significant debt to the DCT.
2. Ms Alex entered into a loan agreement with a third party whereby the third party would lend Ms Alex money to pay the debt. The loan was only to be used for the purpose of paying the debt owed to the DCT.
3. On 7 July 2014, the third party provided a cheque in favour of the DCT to Ms Alex. Ms Alex then deposited it at a post office for the credit of the DCT.
4. Ms Alex was made bankrupt on 8 December 2014.
The DCT accepted that the effect of the transaction was to give him a preference over other creditors and that the transaction was made during the relevant period, but argued that the transfer should not be void because the payment was not in fact a transfer of property by Ms Alex.
It was argued the transfer came directly from the third party or, in the alternative, that the property was only ever held by Ms Alex on a “Quistclose trust” for payment to the creditor (a trust which can arise when a loan is made for a specific purpose).
The Full Court accepted the DCT’s argument and found that there was no point at which ownership of the bank cheque or the funds represented by it passed to Ms Alex. Further, there was no basis for inferring that Ms Alex had ever become entitled to the money or indeed that Ms Alex had anything more than possession of the bank cheque for a limited purpose.
Consequently, there was no transfer of property by the debtor and therefore no unfair preference. Despite this, the Full Court held that there was no Quistlclose trust because no legal or equitable interest in the property ever passed to the bankrupt.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:Stephen Michell - Director
smichell@pcipartners.com.au
Philip Newman - Director
pnewman@pcipartners.com.au
David Quin - Director
dquin@pcipartners.com.au
Clyde White - Director
cwhite@pcipartners.com.au
Sean Pulverman - Principal
spulverman@pcipartners.com.au
Warren White - Principal
wwhite@pcipartners.com.au
Kylie Wright - Principal
kwright@pcipartners.com.au
Sophie Zapantis - Senior Manager
szapantis@pcipartners.com.au
Peter Fraczek - Manager
pfraczek@pcipartners.com.au
Frank Ntim - Manager
fntim@pcipartners.com.au
Anna Odrzywolska - Manager
aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any reader wishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.
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