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Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2006

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2004-2005-2006

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

BANKRUPTCY LEGISLATION AMENDMENT (ANTI-AVOIDANCE) BILL 2005

 

 

 

 

 

SUPPLEMENTARY EXPLANATORY MEMORANDUM

 

 

 

            Amendments and New Clauses to be Moved on Behalf of the Government

 

 

(Circulated by authority of the Attorney-General,

the Honourable Philip Ruddock MP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BANKRUPTCY LEGISLATION AMENDMENT (ANTI-AVOIDANCE) BILL 2005

 

OUTLINE

 

The amendments contained in the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005 (the Bill) are intended to strengthen the claw back provisions in the Bankruptcy Act 1966 (the Act).  Those provisions allow trustees to recover property disposed of prior to bankruptcy or owned by a third person but acquired by that person using the bankrupt’s resources.

2.         These Government amendments will remove amendments in the Bill which sought to clarify the meaning of ‘consideration’ in sections 120 and 121 of the Act.   The purpose of those amendments was to ensure that the trustee could recover the loss to the bankrupt estate resulting from consideration being diverted away from the estate in the period leading up to bankruptcy.  However, a potential consequence of these changes is that the trustee may have been able to recover property from an arms length transferee who, at the direction of the bankrupt, has paid full market value consideration to a third party for the transfer. 

3.         To avoid this outcome, while still ensuring that the trustee can recover any loss to the bankrupt estate resulting from property being transferred as an avoidance measure, these Governments amendments will also insert new amendments in the Bill.  These proposed new provisions will amend sections 120 and 121 to protect purchasers who have paid full market value consideration and will also allow for the recovery in certain circumstances of consideration paid to third parties.

 

FINANCIAL IMPACT STATEMENT

 

4.         These Government amendments will have no financial impact.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



NOTES ON CLAUSES

 

Clauses 1, 2, 3 and 4

 

5.       Clauses 1, 2, 3 and 4 of the Government amendments omit items 6, 9, 11 and 14 respectively from Schedule 1 of the Bill.  Items 6 and 11 are substituted with a note directing the reader to the new proposed amendment concerning third party consideration (refer clause 5). 

 

6.       It is proposed to remove these items because the effect of the relevant amendments was that the trustee would have been able to recover property from a bona fide purchaser for market value who had forwarded the consideration to a third party.  

 

Clause 5—consideration directed to a third party

7.         Proposed new section 121A of the Act would allow for the application of the provisions in sections 120 and 121 to the movement of consideration from a transferee to a third party.  This is achieved by, firstly, creating a new provision (subsection 121A(1)) that applies if a person who later becomes bankrupt (the bankrupt) transfers property to a transferee who gives some or all of the consideration for the transfer to a third party.  If the new provision applies, then by virtue of the proposed new subsection 121A(2), the movement of consideration is deemed to be ‘transfer of property’ (the ‘property’ being the consideration) by the bankrupt to the third party for the purposes of sections 120 and 121.  This enables the existing rules in sections 120 and 121 to apply to that deemed transfer.

8.         The third and final element of the provision (subsection 121A(3)), is that if a transfer is void against the trustee by virtue of these proposed changes, then the trustee has the same rights to recover the property (i.e. the consideration) as the trustee would have had if there has actually been a transfer of the consideration between the transferor and the third party. 

9.         This would mean that, in the situation where a transferee passes on market value consideration to a third party (instead of to the transferor who subsequently becomes the bankrupt), and the third party does not provide market value consideration to the transferor, the trustee would be able to utilise section 120 to recover for the bankrupt estate the consideration received by the third party. 

10.       Similarly, the effect of this proposed change on section 121 is that a transfer made to defeat creditors would not be protected from that provision where paragraph 121(4)(a) was not satisfied- i.e. where the third party did not give market value consideration for the property that constitutes the consideration.

Example 1

11.       In the 18 months prior to his bankruptcy, John transfers a house property with a market value of $350 000 to Steven.  The $350 000 consideration is forwarded by Steven to James (John’s brother).  As Steven paid market value consideration for the transfer (albeit to a third party), the transfer between John and Steven is not affected by the current provisions in section 120.  Steven is able to retain the property.  However, pursuant to these proposed changes, the transaction will be deemed to be a transfer between John and Steven for the purposes of sections 120 and 121. 

12.       The question will then be whether the current provision in sections 120 and 121 apply.  If James had earlier lent $200 000 to John, and John had directed the payment be made in order to extinguish that debt, then James had not provided market value consideration to John for the payment of $350 000.  That deemed transfer would be void against the trustee.

13.       Current subsection 120(4) would also be relevant.  By virtue of that provision, the trustee would be obliged to refund to James the $200 000 consideration he had earlier paid.

14.       Had the transaction between John and James taken place in the months immediately prior to bankruptcy, it may have also been void as a preference under section 122 of the Act.

Example 2

15.       Some 6 year prior to her bankruptcy, Alice’s finance’s are far from healthy.  She decides to organise her affairs so as to remove the bulk of her estate from the reach of creditors.  Alice transfers her luxury vehicle (worth $80 000) to Claire (an arms length transferee) and directs Claire to pay the $80 000 to her sister Sarah (as a gift).  Pursuant to these changes, the transaction is deemed to be a transfer between Alice and Sarah for the purposes of sections 120 and 121.  The transfer would be void under section 121 where Sarah was aware of Alice’s intention in transferring the property, and had failed to provide market value consideration for the transfer.

Example 3

16.       David transfers shares worth $50 000 to his brother Mark in the 12 months prior to bankruptcy.  At David’s direction, Mark gives $10 000 to Pat as consideration for the transfer.  Pursuant to current section 120, the transfer between David and Mark would be void against the trustee because Mark did not pay market value consideration.  The trustee could recover the shares from Mark.  Further, under the proposed changes, the trustee could also recover the consideration paid to Pat.  

 

17.       Current subsection 120(4) would also be relevant.  If Pat had paid $5 000 for that transfer then the trustee would be obliged under current subsection 120(4) to refund that amount to him.  Similarly, the trustee would be obliged to refund the $10 000 paid by Mark.  The net effect of this would be that the estate is returned to the position it would have been in had the transfer not occurred.