Australia: The power of 139ZQ notices in undervalued transactions

WHEN A BANKRUPT TRIES TO PROTECT ASSETS BY TRANSFERRING TO DAUGHTERS.

People making desperate attempts to protect assets when bankruptcy is imminent isn't uncommon. Often this manifests into the-soon-to-be bankrupt party transferring their interest in a real property (their home) to their non-bankrupt spouse or another family member prior to the bankruptcy appointment.

One tool to combat these types of transactions, and arguably bankruptcy trustees uses most widely, is the "claw back" tool under section 120 of the Bankruptcy Act 1966. In short, this section allows trustees to void transactions occurring up to five years before the person's bankruptcy commenced, where the transferee gave zero, or less than, market value consideration (i.e. an undervalued transaction).

If the undervalued transaction's recipient cooperates with the bankruptcy trustee, directly negotiating a settlement outcome is the preferred method to resolve these identified claims for creditors' benefit. But what are the options when there is no cooperation, and the bankrupt estate has little funds to commence court proceedings? Without another recourse, many potential claims a bankruptcy trustee identifies would not be pursued and therefore not recovered.

Fortunately, the Bankruptcy Act provides a useful and cost-effective tool to assist bankruptcy trustees to recover voidable transactions. Section 139ZQ of the Bankruptcy Act allows a bankruptcy trustee to apply with requisite evidence to the Official Receiver ¹ to issue a 139ZQ notice to a third party. While the court can only void a transaction, the issuing of this notice requires the person (i.e. the recipient as an individual or as an entity) to pay the bankruptcy trustee an amount equal to the property's monetary value received as a result of the void transaction.

Once a section 139ZQ notice is served on the transferee, an automatic charge is created over the property (not limited to real property) by operation of law and is not discharged until payment is made and/or the notice is complied with. When the property transferred is real property, the Official Receiver will provide the bankruptcy trustee with a certificate to evidence the charge, and a bankruptcy trustee will generally use this to register their interest over the property on title with the state-based titles office (e.g. Titles Queensland, NSW Land Registry Services).

The outcome of the notice, in most cases, is that the amount on the notice is paid or alternative arrangements are negotiated.

In a recent file administered by one of our Queensland offices, real property was transferred from joint owners of husband and wife, to their daughters shortly prior to the husband being made bankrupt by sequestration order (a court-ordered bankruptcy). Further to our request for information about this transfer, the bankrupt provided their real estate agent's correspondence that purported to support the value that the property was transferred for.

We obtained several other real estate agents' appraisals that indicated the property's value may have been significantly higher.

Following very little further cooperation, we summoned the bankrupt and his daughters for an examination under Section 77C of the Bankruptcy Act. Essentially this is a streamlined examination where the persons must attend before the Official Receiver (instead of the court) and provide evidence under oath/affirmation. We obtained additional information from third parties i.e. the transferee's mortgagee under Section 77A of the Bankruptcy Act ("a trustee's powers to obtain records of associated entities"). The output from these processes quite clearly identified the property was transferred for the mortgage value and was well short of the property's fair market value.

The Official Receiver approved and issued the section 139ZQ notice requiring payment of the value of the estate's interest in the void transfer. The bankruptcy trustees registered a statutory charge on the property's title to ensure no further dealings occurred with the property without being notified.

Despite being through the examination and uncovering information that clearly demonstrates that the transaction was undervalued, the daughters tried to get the notice revoked by arguing that they paid market value and were innocent bystanders in a process driven by the bankrupt (their dad) and his advisors. The Official Receiver rejected their submission and through negotiations the daughters agreed to undertake a sale of the property subject to certain conditions we as the bankruptcy trustee imposed.

The property eventually sold for a sufficient amount to pay the bankruptcy trustee's assessed interest at settlement for the estate's creditors' benefit.

Although this practical example illustrates some level of cooperation once the Official Receiver is involved, it may not always be the case. Creating a charge in the property merely protects the bankruptcy trustee's interest in the property but does not guarantee compliance with the 139ZQ notice; and court proceedings may still need to follow to enable recoveries, which must be considered. In any case, as soon as a 139ZQ notice is brought into play, any failure to comply can attract a maximum criminal penalty of six months' imprisonment-something very few people would risk on their nearest and dearest.

Related articles:

139ZQ notices: the powers and complications

139ZQ notices, do they really work?

Footnote

¹ The Official Receiver role under the Australian Financial Security Authority (AFSA) operates a public bankruptcy registry service with compliance and coercive powers to assist bankruptcy trustees to discharge their responsibilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.