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Goods disposed of for less than market value

Some debtors, seeing the threat of bankruptcy, try to get rid of their property first by transferring it to others, often to family members. Under the 'clawback' provisions of the Bankruptcy Act 1966 (Cth) a trustee can take back some property that no longer belongs to the bankrupt, such as property that was sold, or given away, with intent to defraud creditors and not for its real value. Trustees have greater powers to set aside certain transactions entered into up to five years before the bankruptcy where the market value was not paid.

A transaction is not void:

  1. in the case of a transfer to a related entity of the transferor: if the transfer took place more than 4 years before the commencement of the bankruptcy and the transferee proves that, at the time of transfer, the transferor was solvent; OR
  2. in any other case: the transfer took place more than 2 years before the commencement of the bankruptcy and the transferee proves that, at the time of transfer, the transferor was solvent.

[Bankruptcy Act 1966 ss 120, 121]

Where a payment was made to a creditor the Official Receiver may, on behalf of the trustee, issue a notice requiring repayment of the sum [s 139ZQ]. A person disobeying a notice faces up to six months gaol [s 139ZT]. A person can apply to the court to set aside a notice [s 139ZS]. Where the transaction concerns property a charge can be registered over the property [s 139ZR]. The charge has priority over any other mortgage, lien, charge, or encumbrance unless it was a genuine transaction at 'arms length' (i.e. no favours were made as a result of a family relationship or friendship) for valuable and adequate consideration.

Exceptions to this include [s 120]:

  • payments for tax payable to either State or Commonwealth governments
  • payments made under maintenance agreements or orders
  • transfer of property under a debt agreement
  • where the cost of recovery of the transferred property would be likely to exceed its value

Similarly, where a bankrupt (transferor) transfers property to another party (transferee) and the transferee then gives money (or anything else of value) in consideration of this transfer to a third party, these transactions can also be set aside [Bankruptcy Act 1966 s 121A]. The Act allows a trustee to treat the transaction as if it had occurred between the transferor and the third party directly.

Advantages of Bankruptcy  :  Last Revised: Thu May 8th 2014
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