The case raises a number of interesting questions, but most notably clarifies the position regarding the rebuttable presumption of insolvency under section 128B(5) of the Act as it relates to superannuation contributions made to defeat creditors.

In deciding against the trustees, the appeal court has raised the evidentiary burden on trustees seeking to rely on the rebuttable presumption of insolvency in claiming that super transfers are void.

Background

A short summary of the facts is as follows:

1. The bankrupt, Tien Dung Do, had a self-managed superannuation fund called the Andrew Superannuation Fund (Super Fund) which was established on 1 October 2009
2. In the period of 2009 to 2015, contributions made to the Super Fund totalled circa $970,000, which were made on the advice of the bankrupt’s accountant
3. Relevantly, the appeal concerned payments made during the financial year ended 30 June 2013, which totalled $437,767, which the trustees claimed were void against the trustee pursuant to section 128BC of the Act
4. In making their claim, the trustees relied upon the rebuttable presumption of insolvency which arises under section 128B(5) of the Act.

Relevant Legislation and Principles

Section 116 of the Act sets out the property that is divisible to the creditors of a bankrupt. Notably, a bankrupt’s interest in a regulated superannuation fund is not property divisible to creditors.

However, section 128B of the Act allows a trustee to be able to claw back certain payments made to a superannuation fund.

Pursuant to section 128B of the Act transfers are void if:

1. the transfers were made after 28 July 2006;
2. they are made to eligible superannuation plans of the bankrupt;
3. the property would have formed part of the bankrupt estate if the transfer had not been made; and
4. the main purpose of the transaction was to keep an asset from falling into the bankruptcy trustee’s hands and being available to creditors.

For the purposes of determining the main purpose, the Act contains, relevantly, the following provisions:

• Section 128B(2)(b) of the Act provides that the main purpose for making the transfer is to be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent; and
• Section 128B(5) of the Act provides a rebuttable presumption of insolvency if the transferor:
  • had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor's business transactions and financial position; or
  • having kept such books, accounts and records, has not preserved them.

(emphasis added)

Decision

In this case, the Court held that the trustees had not established the rebuttable presumption of insolvency, and in this respect noted that:

1. The first step of engaging section 128B is to establish the “business carried on”
2. The onus of establishing the “business carried on” lay with the trustees
3. The trustees’ evidence in this case as to the “business carried on” (that he was director of various companies and during certain public examinations on 19 July 2012 and 24 August 2012 gave evidence that he was a “manager” and a “businessman”, respectively) was not sufficient to establish that the bankrupt was carrying on a business, and therefore he was required to keep books, accounts and records. And in not being required to do so, the presumption of insolvency did not arise
4. The phrase “business carried on by the transferor” supports a narrow construction, focusing on the business of the transferor. That is to be construed as the business, if any, carried on by the transferor at the time of the impugned transactions. The books, accounts and records that are required to be kept are the books, accounts and records as are usual and proper for the business, if any, carried on by the transferor
5. In essence, it is necessary for the trustee to be able to clearly identify the business that was carried on by the transferor in order to require the keeping of books, accounts and records. In this respect, the Court noted that the business carried on by the transferor could not extend to activities carried on by a retiree, a person engaged in unpaid domestic duties or a person who may be engaged in full time employment but does not carry on the business, in terms of having ownership and/or control over its activities, in which he or she is employed. Those undertakings could not be classified as a “business”
6. If the presumption is established, then the onus shifts to the bankrupt to rebut the presumption which involves the question of solvency and whether the bankrupt could pay his debts as and when they became due and payable.

In assessing the balance of the ground of appeal, the Court also noted the relevant payments made into the Super Fund were not out of character as there was a pattern or such payments in the past and that they had been made following advice from an accountant, which was relevant for the purposes of sections 128B.

Key Takeaways

In order for superannuation transfers to be void as against the trustees and available for the benefit of creditors, this case highlights the high evidentiary burden placed on  trustees to establish “the business carried on” requirement of establishing the rebuttable presumption of insolvency. If trustees are seeking to rely on the rebuttable presumption of insolvency to make their case to clawback any superannuation payments, they need to give close consideration to what business, if any, that has been carried on by the transferor.

Further information / assistance regarding the issues raised in this article is available from the authors, Radhika Kanhai Partner, Abhinav Sharma Senior Associate and Emily Jarman, Lawyer or your usual contact at Moray & Agnew.