The Federal Circuit Court in Weston v McAuley  FCCA 1 (Weston) has recently reaffirmed the application of the decision in Prentice (trustee of the property of Cummins, a Bankrupt) v Cummins (No 5)  FCA 1503 (affectionately known as Cummins Case), that in the absence of proceedings brought under s 79 of the Family Law Act 1979 (Cth) (Family Law Act), the distribution of matrimonial property in bankruptcies will be determined by the application of the general law of property, including equitable principles and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
The Court used equitable and property law principles in each case to interpret sections of the Bankruptcy Act to give the trustee in bankruptcy rights to property where he otherwise would have none.
2. Equitable and Property Law Principles
Where two or more people have contributed purchase money for a property in unequal shares and the property is purchased in joint names, there is a presumption that the property is held by the purchasers in trust for themselves as tenants in common, proportionate to their individual purchase money contributions (resulting trust). However, a demonstrated intention that the property was a gift and was intended to be held jointly, known as a presumption of advancement, may displace the original presumption that the purchasers are tenants in common and they may instead be held to be joint tenants. The existence of a resulting trust may be more easily rebutted by a presumption of advancement where the purchasers were related to each other, for example as spouses or parents and children.
These principles have significant implications in situations where spouses have purchased property jointly but in unequal shares and the spouse with the lesser share becomes bankrupt. In these instances, Courts must turn to the intentions of the parties at the time of purchase to ascertain whether the lesser amount paid by the bankrupt spouse was an attempt to prevent the division of assets amongst creditors. If this is found, a presumption of advancement will rebut the resulting trust, equally dividing the property value amongst spouses seen to be joint tenants and thereby rendering the bankrupt liable to disburse half the value of the property to creditors.
2. The Cummins Case
The Cummins Case concerned a barrister who failed to lodge his tax returns for 45 years, claiming that he had pre-emptively transferred his interest in the matrimonial property (Property) to his wife to protect himself from future claims made by his clients (where there were no current claims at the time of the transfer) under s 121 of the Bankruptcy Act.
Section 121 of the Bankruptcy Act provides that a transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void if the property would probably have become part of the transferor’s estate or been available to creditors had it not been transferred. The trustee must also prove the primary purpose of transferring the property was to prevent or hinder the division of the property amongst creditors. It will be taken that this was the transferor’s purpose if it could have been reasonably inferred at the time of transfer that the transferor was about to become insolvent.
In characterising the transfer of the Property to his wife, Justice Sackville on the first occasion found that the main purpose of the transfer under s 121 of the Bankruptcy Act was to prevent his assets being divisible among his creditors, namely the Commissioner of Taxation. The Court held that the matrimonial property was to be distributed according to the intention at the time the property was purchased. Therefore, the Court looks towards evidence of a bankrupt’s prior knowledge of their impending insolvency at the time of the property transfer. This test has been applied by looking to all surrounding circumstances to reflect the flexibility of equitable principles.
Interestingly, when proceedings are brought under the Family Law Act, the result is often divergent from property law proceedings applying principles of equity as the Family Law Act expands the Court’s discretion to alter the interests in property of a bankrupt and their spouse.
Weston concerned the purchase of property by a wife and husband as tenants in common registered on the title in 95% and 5% respectively before the husband became bankrupt. Unlike Cummins, the primary issue was whether the resulting trust could be rebutted by the presumption of advancement, thereby entitling the trustee to 50% of the proceeds of the sale of the property.
Though primarily concerning a different issue, principles expounded in Cummins were drawn upon to inform the reading of s 52 of the Bankruptcy Act. Although Weston did not concern the operation of s 121 of the Bankruptcy Act, it is relevant to the extent that the Court considered what proportion of the matrimonial home was vested in the trustee. The Court predictably reaffirmed that property will be held according to the intention at the time of purchase.
s 52(1) of the Bankruptcy Act provides that at the hearing of a creditor’s petition, the Court requires proof of the matters stated in the petition (this may be satisfied by the affidavit verifying the petition), service of the petition, and the fact that the debt relied upon is still owing. If satisfied, the Court may make a sequestration order against the estate of the debtor.
In characterising the intention of the parties at the time of purchase the Court considered the interaction of the information listed on the title and the presumption of advancement. This analysis is further informed by principles of equity.
On these bases, the court did not find that the presumption of advancement displaced the resulting trust in Weston, and that the wife was entitled to her 95% share of the proceeds of the property sale. The primary evidence distinguishing Weston from Cummings was that the only reason the bankrupt’s name was on the title was due to bank pressure, additionally explaining the small sum he paid to purchase the property. The bankrupt’s wife gave evidence she purchased the home as security for her future, and would not have included the bankrupt’s name on the title had it not been for bank pressure.
Though other considerations of equity will be taken into account to determine a bankrupt’s liability with respect to jointly owned property, it has recently been affirmed that the starting point of the inquiry as described in Cummins is the intention of the bankrupt at the time of purchase. It is incumbent upon spouses and de facto partners to be aware of how their intentions may be demonstrated.