One of the most seminal decisions in bankruptcy law is the High Court decision of The Trustee of the Property of John Daniel Cummins, A Banklrupt v Cummins (2006) [2006] HCA 6.
Cummins was a barrister who transferred property in 1987, failed to lodge tax returns for 40 years and then went bankrupt. As a result, the trustee sought to have the 1987 transfers recovered under s121 of the Bankruptcy Act 1966. This action was brought some 16 years after the transfers were affected.
At first instance the court found that the transfers were for the purposes of defeating creditors and as such should be considered void and recovered. On appeal the full court of the Federal Court reversed this decision and noted that there was not sufficient evidence of the main purpose of the transfers to consider them effected to defeat creditors.
The trustee appealed and the High Court restored the first instance judgment and declared that there was enough evidence to show the intent of the transfers was to defeat creditors.
While Cummins actions were extraordinary, it is a cautionary tale for accountants, lawyers and advisors when instructing business owners about risk.
It is commonplace for advisors to instruct clients that they should transfer property and assets out of their own name and consolidate their assets and their risk into separate people. Commonly, one spouse is the main property owner while the other spouse takes the risk. While this could be a solution, the affairs of the individuals must be examined. It is important to consider the solvency of the individuals, the consideration that is being paid and the circumstances of the transfers.
Section 120(5) of the Bankruptcy Act 1966 details a number of examples where no value attaches to certain consideration. For example, the ‘love or affection’ of the transferee or promise to marry.
It is critical that all material circumstances are explored prior to assets being transferred out of an individual’s name when that individual has creditors or is involved in high risk industries.
The Takeaway
Restructuring and de-risking individuals especially company directors are like building a fire. You shouldn’t do it blindfolded.
If you have further questions, please contact James Frank at jfrank@franklaw.com.au
This is not legal advice.
