Trustees in Bankruptcy have obtained clarity from the Federal Court about when it will make orders granting a trustee an interest in land held by a third party resulting from financial contributions made by a bankrupt, and the orders which may be made.
In the case of Kite (Trustee), in the matter of Murray (a Bankrupt) v Murray  FCA 198 handed down on 10 March 2023 Raper J found in favour of a trustee in bankruptcy pursuant to the rarely used s139DA of the Bankruptcy Act.
Section 139DA of the Bankruptcy Act
The section provides that the Court may make an order against a natural person who has title to land vesting an interest in that land in a trustee in bankruptcy where the owner of land:
acquired an estate in the land as a direct or indirect result of financial contributions made by the bankrupt
the bankrupt used, or derived (whether directly or indirectly) a benefit from, the land
the owner of the land still has the estate in the land
the acquisition of the interest in land and the bankrupt’s use of the land occurs within the relation back period set out in s139CA of the Bankruptcy Act
The making of an order does not depend on the bankrupt ever having had an interest in the land.
The facts and findings
A married couple jointly purchased a residential property in Sydney which at settlement was conveyed solely into the name of the respondent, who was the bankrupt’s wife. The sources of the funds paid at settlement were $197,773.86 from a joint account and $1.7 million borrowed from a bank. The conveyance only to the respondent was said to have occurred for succession planning reasons.
The respondent conceded she still owned the property, that it was conveyed to her at the relevant time and that the bankrupt obtained a benefit from the property in the relevant period as he resided in it as his home. The only question was whether the acquisition of the property was a direct or indirect result of financial contributions made by the bankrupt during the relevant period.
The Court found that the funds paid at settlement from the joint account, which were mainly obtained through the sale of other jointly owned properties, were financial contributions made by the bankrupt which directly or indirectly resulted in the respondent acquiring an interest in the property.
Raper J rejected the respondent’s argument that the joint account payment could not be viewed in isolation and that a wholesale reconstruction of all dealings involving the bankrupt and respondent which involved joint accounts was required.
Exercise of the discretion
Having determined that the criteria in s139DA were made out, Raper J found she had a discretion as to whether an order should be made, subject to the criteria provided for in s139F, which concern firstly any interest that any other person has in the property and what hardship an order may cause and secondly the respondent’s net worth and what effect the order might have on the respondent’s creditors.
In the circumstances, where the respondent led no evidence as to the s139F factors and where making an order was entirely consistent with the purpose for which the provisions were enacted, Raper J was prepared to exercise her discretion and make an order.
The form of order
As to the form of order Raper J rejected the trustee’s contention that the order should attach to 50% of the respondent’s interest in the property (subject to the operation of the mortgage) given the bankrupt was party to the bank loan.
Instead, her Honour held that the order should go no further than an 11% interest in the land, representing in broad terms the contribution of $197,773.86 as a portion of the purchase price.
In the same proceedings Raper J also found that the trustee had made out claims under sections 120 and 121 of the Bankruptcy Act. Given the potential for different remedies it may that the trustee ultimately elects not to seek final orders under s139DA. The case is nevertheless a useful examination of the background to and potential effect of the section.
Cowell Clarke’s Insolvency & Turnaround team provides assistance on a range of bankruptcy issues, including those relating to transactions entered into by bankrupts ahead of bankruptcy. If you would like assistance in this area please contact us and a member of our team will be in touch.
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