One of the biggest misconceptions in insolvency law and administration is the notion that if your property is in your spouse’s name, it is safe from your creditors.
Speaking with legal expert, Stipe Vuleta from Chamberlains, he re-iterated the point that this is a common misconception, and something that most people get wrong. In Stipe’s words: “We hear it all the time. And frankly, it’s pretty concerning when you have a chat with someone, particularly as a lawyer assisting with restructuring to hear how confident they are about their asset protection strategies.”
Most business owners’ belief that their assets are safe, because their accountant instructed them to put their assets in a particular place, but it’s just not the case. – Particularly in relation to formal insolvency administration.
From a legal point of view, it’s important to consider formal personal insolvency or bankruptcy. When you become bankrupt, your property, (with a few exceptions), becomes the property of your bankruptcy estate, which is controlled by a trustee. An independent insolvency expert is appointed to manage the affairs of the bankruptcy estate and investigate what is going on. What this means is that if you own property in your own name, that immediately becomes the property of your creditors.
And this is where the misconception arises, because a lot of people think, “well, it’s not in my own name, so it must not form part of my bankruptcy estate.”
This is not correct. Because the laws of equity that have developed over the last two or 300 years, as well as other statutory rights, ensure that Liquidators must actually investigate the way in which transactions are done, how a property got into somebody’s name, how it was funded etc, and you now realise that it’s a lot more complicated than people think!
The power of the Family Court to make orders about third parties is incredibly broad. There have been many cases over the last 15 years where they’ve made orders not just against spouses and ex-spouses, but against the ATO and against independent third-party creditors. Once you include family law in the mix… it can become very complicated.
From our point of view at O’Brien Palmer, when we are appointed as trustees in bankruptcy, we often have a look at how is it that that property was purchased and financed. If the debtor has paid the money to acquire the property or has been paying the loans for the acquisition of the property, the fact that that property is in somebody else’s name isn’t going to be sufficiently put it beyond being brought back into the estate. That is, the debtor has an equitable claim on the property, and we are obliged to pursue that claim for the benefit of your creditors.
It gets very complicated, and we encourage you to watch this video in full to answer some of your questions and get a better understanding of this broad misconception, that your assets are ‘safe’ from your creditors, because when an Insolvency Administrator or Trustee in bankruptcy or liquidator is appointed, our first duty of care is to the interests of the creditors.
We are required to have a look at:
- who bought the property?
- who paid for the property?
- who maintained the property?
- and does the debtor have a right to pursue a claim on that property?
We also look at whether it is commercial to pursue with the claim through litigation. One of the issues may result in having to take an action to bankrupt an individual because when the individual is bankrupt, then the marital property can come into play.
What we can all agree upon, is that it is so important to get some advice from a qualified lawyer for the specifics of your circumstances and think commercially about these issues rather than hope for the best outcome.
If you’d like more information about how you can better legally protect your assets in all situations, please reach out to Liam Bailey from O’Brien Palmer, or Stipe Vuleta from Chamberlains.
Liam Bailey, Managing Partner