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Divisible property in bankruptcy: Which assets/property are realised in bankruptcy?

Not all of a bankrupt’s assets are available to a bankruptcy trustee. This factsheet looks at which assets can be sold by the bankruptcy trustee.

Introduction

In simple terms, bankruptcy trustees sell the assets of a bankrupt and distribute the proceeds to the bankrupt’s creditors. This factsheet looks at which assets can be sold by the bankruptcy trustee. It does not look at assets that may be recovered from other parties through other provisions relating to void transactions under the Bankruptcy Act 1966.

Not all of the bankrupt’s assets are available to a bankruptcy trustee. The Act defines ‘divisible’ assets (assets available to a bankruptcy trustee) from ‘non-divisible’ assets (assets that are not available to a bankruptcy trustee). Understandably, whether or not an asset is divisible is often a contested issue.

Items that are held on trust or loaned to a bankrupt—or that do not belong to a bankrupt —do not vest in a bankruptcy trustee. They are not the bankrupt’s assets and cannot be divisible.

Vesting of the ‘property of the bankrupt’

Upon bankruptcy, any property of the bankrupt automatically vests in the bankruptcy trustee. Under section 58 of the Bankruptcy Act, a bankruptcy trustee is not required to take any action for this ‘vesting’ to occur. Where applicable, legal title to some property may have to be registered in the bankruptcy trustee’s name, but equitable title will vest automatically, e.g. real property.

Assets acquired by a bankrupt after the bankruptcy commenced but before discharge may also vest in the bankruptcy trustee when they are acquired. These are called ‘after-acquired property’.

After-acquired property includes any property acquired by or inherited by the bankrupt on or after the date of the bankruptcy, and before discharge, being property that is also divisible among their creditors. Non-divisible, after acquired property does not vest in the bankruptcy trustee.

There are two important factors in defining after-acquired property:

  1. The property must have been acquired during the bankruptcy’s term.
  2. The property would otherwise be classified as divisible property.

If existing owned property is not deemed as ‘divisible’ at the commencement of bankruptcy, it is not divisible if acquired during bankruptcy.

One purpose of section 58 of the Bankruptcy Act is to immediately protect assets from individual creditors who attempt recovery of their debts by exercising securities against assets. Creditors cannot take these assets from a bankrupt, or from the estate, under enforcement actions.

Once an asset has vested in a bankruptcy trustee, only the bankruptcy trustee may deal with that asset, as a bankrupt is no longer the legal owner. This allows for an orderly and fair distribution of the bankrupt’s assets between the proper creditors.

Bankruptcy Act 1966 – section 58

Vesting of property upon bankruptcy — general rule:

(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

There are two exceptions that allow creditors to commence or continue action against property:

  1. Secured creditors have a right to exercise their security over any asset covered by their security. Section 58 of the Bankruptcy Act only provides protection to divisible assets that are not covered by a valid security.
    2. Creditors can exercise their rights against nondivisible property for debts under maintenance orders or agreements. Non-divisible property does not fall under the control or protection of the bankruptcy trustee, as it does not vest in the bankruptcy trustee.

Bankruptcy Act 1966 – section 58

Vesting of property upon bankruptcy —general rule:

(5) Nothing in this section affects the right of a secured creditor to realise or otherwise deal with his or her security.
(5A) Nothing in this section shall be taken to prevent a creditor from enforcing any remedy against a bankrupt, or against any property of a bankrupt that is not vested in the trustee of the bankrupt, in respect of any liability of the bankrupt under:

(a) a maintenance agreement; or
(b) a maintenance order; whether entered into or made, as the case may be, before or after the commencement of this subsection.

All divisible property that is not secured to a particular creditor is solely under the control of the bankruptcy trustee. But deciding what is divisible property is not always straightforward.

Registration of interests

In some cases, registration is necessary to record vesting of property in the bankruptcy trustee. This is usually the case with real property, where the title of the property needs to be transferred to the bankruptcy trustee in order for the bankruptcy trustee to be able to legally deal with the property.

This process is known as ‘entering transmission’ (i.e. transmitting legal ownership). The equitable interest will vest in the bankruptcy trustee; however, the legal interest will also need to be transferred.

Usually, in the case of real property, a bankruptcy trustee will initially protect the estate’s interest by lodging a caveat on title—vesting of the property provides a ‘caveatable’ interest. However, a bankruptcy trustee will only be able to sign transfer documents when the property title is transferred into their name.

New bankruptcy trustees

Occasionally, a bankruptcy trustee will change during a bankruptcy. Any remaining property in an estate automatically vests in the new bankruptcy trustee when the change of bankruptcy trustee takes effect. The same transmission rules apply, so the new bankruptcy trustee may have to enter into ‘transmission’ of the relevant property into their name.

Changes in bankruptcy trustees are uncommon, but the procedural mechanism is in place to allow a smooth transfer of the rights to property to any new bankruptcy trustee.

What is divisible property?

Section 58 does not define what is or is not divisible property, only that all divisible property vests in the bankruptcy trustee. A bankruptcy trustee considers divisible property as all of the property of the bankrupt, then, eliminates non-divisible assets from the list.

The Bankruptcy Act broadly defines divisible property as covering the following:

  • All property owned at the time of bankruptcy, or acquired during the bankruptcy.
  • Any rights or powers over property that existed at the date of bankruptcy, or during the bankruptcy.
  • Any rights to exercise powers over property.
  • Any property that vests because an associated entity received the property as a result of personal services supplied by the bankrupt (section 139D of the Bankruptcy Act).
  • Monies recovered from an associated entity due to an increase in the net worth of the entity as a result of personal services supplied by the bankrupt (section 139E of the Bankruptcy Act).

Section 116 of the Act lists what classes of assets are divisible among creditors.

Bankruptcy Act 1966 – section 116

Property divisible among creditors

(1) Subject to this Act:

(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her Discharge; and
(c) property that is vested in the trustee of the bankrupt’s estate by or under an order under section 139D or 139DA; and
(d) money that is paid to the trustee of the bankrupt’s estate under an order under section 139E or 139EA; and
(e) money that is paid to the trustee of the bankrupt’s estate under an order under paragraph 128K(1) (b); and
(f) money that is paid to the trustee of the bankrupt’s estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and
(g) money that is paid to the trustee of the bankrupt’s estate under an order under section 139ZU; is property divisible amongst the creditors of the bankrupt.

What is non-divisible property?

Determining what is not divisible property is a difficult area. The Bankruptcy Act provides that some property types will not be divisible. Section 116(2) of the Act summarises what is not classified as property divisible among creditors.

In some instances, assets that would be nondivisible in bankruptcy that are converted to cash or asset before bankruptcy— can become divisible property.

The list of non-divisible assets is extensive but, in most cases, these assets rarely appear. Some of them are very common and are non-divisible because they are necessary for the bankrupt’s ability to live.

These can be grouped into the following areas:

  1. Property held by the bankrupt in trust for another person (i.e. not owned by the bankrupt).
    2. The bankrupt’s household property prescribed by Regulation 6.03 or identified by a resolution passed by the creditors before the bankruptcy trustee realises the property.
    3. Personal property that has sentimental value for the bankrupt and is identified by a special resolution passed by the creditors before the bankruptcy trustee realises the property.
    4. The tools of trade that the bankrupt uses in earning income by personal exertion—subject to the value limit prescribed by the regulations.
    5. A vehicle used by the bankrupt as a means of transport—subject to the value limit prescribed by the regulations.
    6. Policies of life assurance or endowment assurance covering the life of the bankrupt or their spouse, whether the proceeds are received on or after the date of the bankruptcy.
    7. The bankrupt’s interest in a regulated superannuation fund (or approved deposit fund or an exempt public sector superannuation scheme). And any payment to the bankrupt from such a fund (received on or after the date of the bankruptcy) if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.
    8. A payment to the bankrupt under a payment split under Part VIIIB of the Family Law Act 1975, where the eligible superannuation plan is a fund or scheme covered by the Act and the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.
    9. Money held in the bankrupt’s retirement savings account (RSA)—or a payment to a bankrupt from an RSA received on or after the date of the bankruptcy—if the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997.
    10. A payment to the bankrupt under a payment split under Part VIIIB of the
    Family Law Act where the eligible superannuation plan involved is an RSA, and the payment involved is not a pension or annuity within the meaning of the Retirement Savings Accounts Act.
    11. Any right to recover damages or compensation (or amounts received before or after bankruptcy) for personal injury or wrongdoing or regarding the death of the bankrupt’s spouse, de factor partner, or family member.
    12. Amounts paid to the bankrupt under a rural support scheme as prescribed by the Act.
    13. Amounts paid to the bankrupt by the Commonwealth as compensation in relation to loss as prescribed by the Act relating to the rural support scheme.
    14. Property that was purchased or acquired with protected money.
    15. Any property that, under an order—under either Part VIII, or Part VIIIAB of the Family Law Act 1975—the bankruptcy trustee is required to transfer to the bankrupt’s spouse or a former spouse, or former de facto partner.
    16. The bankrupt’s property that is a support for the bankrupt that was funded under the National Disability Insurance Scheme (NDIS), or NDIS amount as defined in that Act.

Exempt assets
Some divisible property is subject to statutory value limits. Property valued under these limits is exempt or non-divisible to the extent of the limit. These limits change periodically, as prescribed by the Australian Financial Security Authority (AFSA).

The limits are designed to allow the bankrupt to maintain a standard of living (the household property limitations), and maintain some employment (the tools of trade and motor vehicle limitations).

Sentimental property

The Bankruptcy Act defines what is sentimental property, and whether it is exempt. Sentimental property must be non-monetary, have real sentimental value to the bankrupt, or be an award for sporting, cultural, military or academic achievement. If it does not fall into these categories, it cannot be classified as sentimental and usually becomes divisible.

Creditors must also resolve by special resolution at a meeting of creditors (or a virtual meeting) that this property is sentimental. If the creditors do not approve it as sentimental property, it becomes divisible property to the estate.

Time limits for realisation

Section 129AA sets out the periods that divisible assets must be dealt with. A bankruptcy trustee must realise any divisible assets disclosed by a bankrupt within six years after the bankrupt is discharged. This period can be extended up to three years at a time by giving written notice to the bankrupt prior to the six-year expiry. There is no limit on how many extensions a bankruptcy trustee can seek.

For after-acquired property disclosed to the bankruptcy trustee during bankruptcy, the bankruptcy trustee has six years after the bankrupt’s discharge date to deal with the property. For any after-acquired property disclosed by the bankrupt after discharge, the bankruptcy trustee has six years commencing on the date of disclosure to realise the property. Again, a bankruptcy trustee can extend these periods.

If the assets are not dealt within the required period, they can revest to the bankrupt.

Section 127 of the Bankruptcy Act outlines that a bankruptcy trustee has 20 years from the date of bankruptcy to deal with the property of the bankrupt. After the 20 years’ expiry, the property revests to the bankrupt.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017