Most advisers have been in the situation where they are advising a client who is, or is on the brink, of insolvency and ultimately, is forced into bankruptcy. A key issue for clients in this situation is what assets are available to the trustee in bankruptcy and thus, can be used to satisfy the client’s creditors. This article considers the status of superannuation on bankruptcy in light of a recent case, Trustee of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846.
Status of superannuation on bankruptcy
Generally, superannuation benefits are protected from creditors on bankruptcy where the superannuation contribution has not been made with the intention of defeating creditors. Broadly, section 128B of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) provides that contributions made by a member to a superannuation fund to avoid creditors will be void and, therefore, recoverable by the trustee in bankruptcy. Section 128B allows a contribution to be clawed back if the following requirements are satisfied:
- The property was transferred by a person (the transferor) who later became bankrupt;
- The transfer was a contribution to an eligible superannuation fund (including a regulated superannuation fund);
- The property would have become part of the transferor’s estate or would have been available to creditors if the property had not been transferred;
- The transferor’s main purpose in making the transfer was either:
- To prevent the property from being divided among creditors; or
- To hinder or delay the process of making property available for creditors; and
- The transfer occurred on or after 28 July 2006.
A transferor’s dominant purpose in making the contribution is deeded to be the avoidance of creditors (or the hinder or delay creditors) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
In determining the transferor’s dominant purpose, regard must be had to the transferor’s existing pattern of superannuation contributions and whether the contribution was out of character.
When are superannuation benefits available to creditors?
Importantly, superannuation benefits withdrawn before a member is bankrupt (either as a lump sum or as a pension) are not protected and could therefore be available to satisfy creditors.
In contrast, once a member is bankrupt, any lump sum benefits paid from a fund trustee to the member are protected and therefore, are not divisible between creditors (subject to the member having satisfied an applicable condition of release). Further, there is no restriction on the quantum of the lump sum benefit that can be withdrawn in this scenario.
A member that receives a pension, however, may find that all or a proportion of the pension payments are required to be transferred to the trustee in bankruptcy if the member’s total income exceeds the prescribed amount. Generally, 50% of any income received above the relevant threshold is available to be divided between the member’s creditors.
Are superannuation benefits protected on a member’s death?
The key issue in the Morris case was whether a deceased member’s superannuation benefits were available to satisfy the creditors of a superannuation dependant, or whether the protection enjoyed by the member effectively flowed through to the deceased member’s superannuation dependants.
The facts of this case are broadly as follows:
- Mrs Morris was an undischarged bankrupt. Her husband subsequently died.
- Mrs Morris and her two children from the marriage were superannuation dependants of the deceased member.
- While bankrupt, Mrs Morris received a payment from each of her deceased husband’s superannuation funds.
The issue in this case was whether the superannuation payments formed part of the property that was divisible amongst Mrs Morris’ creditors. Critically, the Bankruptcy Act broadly provides that the interest of a bankrupt in a regulated superannuation fund, including a payment made on or after the date of bankruptcy (excluding pension payments), is not available to satisfy creditors.
As her husband had not made a binding death benefit nomination, Mrs Morris received each payment pursuant to each trustee’s discretion to pay the deceased member’s superannuation benefits to her as a lump sum. On the exercise of each trustee’s discretion, Mrs Morris became presently and absolutely entitled to receive the benefit.
In contrast, prior to the exercise of the trustee’s discretion in each instance, Mrs Morris had no interest in either fund. She was merely a possible object of each trustee’s discretionary power, such that Mrs Morris had no right to receive a benefit from the fund. Mrs Morris had a right to the due administration of each fund in accordance with the respective governing deeds, but no other right in respect of each fund.
On the exercise of each trustee’s discretion, however, the court held that Mrs Morris acquired, quite literally, an interest in a regulated superannuation fund. Importantly, who constitutes a ‘beneficiary’ of a fund is typically broadly defined and usually includes each fund member and the member’s superannuation dependants. Thus, Mrs Morris, as the former spouse of the deceased member was held to be a beneficiary of each fund as at the date each fund trustee exercised its discretion and resolved to pay the deceased member’s superannuation benefits to her.
Thus, the application made by the bankruptcy trustee was dismissed. As a result, the payments from each superannuation fund were protected under the Bankruptcy Act and as such, not available to satisfy Mrs Morris’ creditors.
Conclusion
The case of Trustee of the Property of Morris (Bankrupt) v Morris (Bankrupt) highlights the importance of obtaining advice before superannuation benefits are paid to the trustee in bankruptcy. It may be the case, as in Morris, that superannuation benefits are protected and as a matter of law, not available to satisfy creditors.
Rebecca James, special counsel, DBA Lawyers
