CASE UPDATE: A Bankrupt’s Interest in Superannuation of a Deceased Estate

Generally, in bankruptcy, any interest of the bankrupt in a superannuation account will not be an asset available for distribution to creditors. The recent case of Cunningham (Trustee) v Gapes, in the matter of Gapes (Bankrupt) [1], discussed whether superannuation funds in a deceased estate in which the bankrupt was a beneficiary is available to a trustee in bankruptcy.

Background:

Andrew Gapes (the Bankrupt) was made bankrupt on 17 January 2011. On 18 December 2013, the Bankrupt’s mother died and in accordance with her will, her assets including the proceeds of her superannuation fund were distributed to the beneficiaries including the Bankrupt.  The funds (totalling $187,900.22) from the superannuation account were paid to the deceased estate and subsequently paid to the Respondent, the Bankrupt’s wife (at that time, the Bankrupt allegedly did not operate a bank account in his own name).

Proceedings:

The Applicant (the Trustee) argued that as the payment to the Respondent was not received from a regulated superannuation fund, it was available to the Trustee for the benefit of creditors. The Trustee also argued that the interest in the relevant superannuation fund was held by the deceased, rather than him personally. Additionally, the Trustee submitted that the Bankrupt had a residuary interest as a beneficiary under his mother’s will, and thus had no proprietary interest in any of the assets contained in the deceased’s estate (i.e. he did not have an actual interest in the superannuation funds).

Conversely, the Respondent argued that the grant of probate separately identified funds held by the deceased in a regulated superannuation fund and that those funds were received by solicitors of the estate, rather than being intermingled with any other funds and distributed separately to any beneficiaries.  On this basis, funds received through the administrative mechanism of a solicitor does not alter the nature of the funds. Additionally, the Respondent noted that the funds were received when she was unaware that the period of bankruptcy had been extended that that the money had since been dispersed and was therefore not recoverable.

Decision:

The matter was decided upon a summary judgment application. Collier J decided that the Respondent’s defence had no real prospect of success at trial.

Section 116(I)(a) of the Bankruptcy Act provides that all property that passes from a person who has died to the bankrupt, after the commencement of the bankruptcy and before his or her discharge, is property divisible amongst the creditors of the bankrupt.

Here, it was uncontroversial that the money was derived from the superannuation fund of the deceased. Collier J noted that the trustee of the relevant superannuation funds had made payments to the estate of the deceased, before it was distributed by the estate to the Bankrupt.

Additionally, it was held that the money could not constitute an interest in a regulated superannuation fund. Though it may have derived from a superannuation fund, after passing through many hands, the funds lost their character as a fund payment. This could be distinguished from the case of Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt)[2] where funds were received directly by the bankrupt from each superannuation fund.

In this case, the Bankrupt had no real interest in the superannuation fund, but rather, a claim under the deceased’s will and his right to a one-third share in the estate with other beneficiaries. Additionally, Collier J determined that an ignorance of the extension of the period of bankruptcy is immaterial, as is the fact that the Respondent dispersed the money.

In light of these deliberations, Collier J ordered summary judgment in favour of the Trustee.

Implications:

If it were decided that superannuation fund payments could retain their character, regardless of how many hands they passed through, this could enable a bankrupt to avoid property being made divisible to creditors (which is against the public interest).

Care should be taken when setting up beneficiary interests in superannuation accounts to consider potential bankruptcy implications. Also, care should be taken when distributing the proceeds of superannuation where a bankrupt is involved, otherwise, there is a risk that superannuation funds could be available to a trustee in bankruptcy for the benefit of creditors.

Levi Smouha, Partner of Rostron Carlyle Lawyers, is an expert in bankruptcy and corporate insolvency matters. Contact Rostron Carlyle Lawyers on (07) 3009 8444 or email our office at bne@rostroncarlyle.com.

[1] [2017] FCA 787 per Collier J.

[2] [2016] FCA 846.

levi smouha

Levi Smouha

Partner

Brisbane 07 3009 8444
Sydney 02 9307 8900
Email l.smouha@rclaw.com.au

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