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Property vesting in the Trustee: after acquired property

On 11 March 2015 the Full Court of the Federal Court of Australia handed down its reasons in Di Ciccio v Official Trustee in Bankruptcy (as Trustee of the bankrupt estate of Di Ciccio) [2015] FCAFC 30. This decision confirms that Trustees in bankruptcy have significant powers to realise money and other property of an undischarged bankrupt, even if his or her income does not exceed the threshold requiring income contributions to be made

The decision in Di Ciccio has confirmed that under the Bankruptcy Act 1966 (Cth) (“Act”) property acquired as a result of being paid an income below the amount triggering a requirement to make income contributions is ‘after acquired property’ and therefore vests in the Trustee.

Background

The bankrupt used funds he had earned at a time his income was at a level not requiring him to make income contributions to acquire shares in several companies.

The Official Trustee determined that the shares were after acquired property and vested in the Official Trustee under section 58 of the Act.

The bankrupt applied to the Federal Court for a review of that decision under section 178 of the Act, contending that the shares were excluded from the operation of section 58 based on the effect of the sections in Division 4B of Part IV of the Act which require the making of income contributions. The bankrupt’s application was dismissed by the Federal Court at first instance.

The bankrupt’s argument on appeal was that there is a conflict between the income contribution sections of the Act (in Division 4B of Part IV) and sections 58 and 116.

Decision

The question before the Full Court was whether an exemption could be discerned from the scheme of the Act, such that property acquired by an undischarged bankrupt using money which was the product of earning an income at a level which fell below the income threshold was exempt from vesting in the bankrupt’s Trustee.

The Court’s answer to this question was that there is no exemption.

The bankrupt argued that an anomaly arose if amounts standing in credit of a bank account in the name of the bankrupt vested in the Trustee even if the amounts in the account were derived from income earned at a level below the income threshold.

The Court found there is no anomaly because:

  • The Trustee has an ability under section 134 to make allowance out of the estate as he or she thinks just to the bankrupt, the spouse/de facto partner or family of the bankrupt and the Court can review decisions of the Trustee under section 178.
  • The Trustee has the ability to require that a supervised account be opened under section 139ZIE.
  • Funds in an account could be used to purchase property within the exemptions in section 116(2), such as tools of trade.

The Court unanimously dismissed the appeal on the basis that:

  • The nature of the property (whether it is divisible amongst creditors or not) determines whether or not the property vests in the Trustee. That is specifically dealt with in sections 116(1) and (2).
  • Sections 58 and 116 are concerned with property, not with the character of property as income or capital.
  • If an item is not listed in section 116(2) then it is caught by section 116(1) and is divisible amongst the bankrupt’s creditors. This includes all money in bank accounts and all property not mentioned in section 116(2).
  • The Act does not prohibit a bankrupt from acquiring a specific item of property. The Act simply deems that after acquired property vests in the Trustee unless it falls within the types mentioned in section 116(2).

Conclusion

If funds are utilised by an undischarged bankrupt to purchase property which does not fall within the specified exemptions in section 116(2) then the property purchased will be after acquired property which vests in the Trustee. It is irrelevant whether the funds used to purchase the property are acquired by the bankrupt earning an income below the threshold requiring income contributions to be made.

Cowell Clarke has significant expertise and experience in bankruptcy law. If you need any assistance concerning this area or have any insolvency related queries, please do not hesitate to contact us.

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