Historically, transferring assets into one of the spouse’s names has been used as a method to protects assets from a trustee in bankruptcy. However, in 2020 the Federal Court explored the circumstances where transferring the family home into the name of one of the spouse’s may not protect the bankrupt’s share of the house from the bankrupt’s trustee. In 2022, the Full Federal Court reversed this decision, primarily on the facts of that case.

In Warner (Trustee), in the matter of McMillan (Bankrupt) v McMillan [2020] FCA 1759, Mr McMillan transferred his share in the family home in Strathfield to his wife for the price of $1 out of love and affection. Sixteen years later, Mr McMillan became bankrupt.

As a result of bankruptcy, the bankrupt has a trustee appointed to take over all the bankrupt’s financial affairs. This includes managing their assets and repaying creditors where possible.  The trustee’s duty is to the creditors and to the court in the case of a sequestration order, and not to the bankrupt person. This becomes crucial when considering the operation of Section 121(1) of the Bankruptcy Act 1966.

This section permits the trustee to declare that a transfer of property by a person who later becomes a bankrupt to another person  is void if:

  • the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
  • the transferor’s main purpose in making the transfer was;
    • to prevent the transferred property from becoming divisible among the transferor’s creditors; or
    • to hinder or delay the process of making property available for division among the transferor’s creditors.

In some circumstances, the transfer would not be void if it can be proven that the parties acted in good faith. Good faith transactions occur if:

  • the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
  • the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in Section 121(1)(b) above; and\
  • the transferee could not have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

Mr McMillan’s trustee in bankruptcy, Mr Warner, wanted to use the ‘claw-back’ provision in the Bankruptcy Act to void the transfer of Mr McMillan’s half interest in the family home.

In evidence, Mr McMillan stated that he transferred the property to his wife, not to defeat creditors but because she had asked him to do so and it was done ‘out of love’. The trial judge found that there were reasons for questioning the reliability of Mr McMillan as a witness, and rejected his account of the purpose of the transfer.

Due to the nature of the transfer, the trustee was successful in clawing back Mr McMillan’s interest in the family home. This meant that half of the family home  became part of Mr McMillan’s estate and thus available for the benefit of creditors, but not available to Mrs McMillan.

Mrs McMillan appealed that decision in  McMillan v Warner (Trustee) [2022] FCAFC 2022. In the appeal, the Full Federal Court emphasised the importance of identifying clear and unambiguous facts that indicate the main purpose of the transfer. It re-emphasised that not every restructure of personal or business affairs will result in a finding that the main purpose is to defeat creditors, even if the intention was to place the asset beyond their reach. The court concluded that the primary judge was mistaken in finding that the main purpose of Mr McMillan transferring shares in the Strathfield home 16 years ago was to defeat his creditors and ordered that Mr Warner pay Ms McMillan’s costs in both court cases.

A note of caution here is that the wording of section 121 at the time of the transfer was different to the current definition as quoted above.

How we can help

Whether you are the bankrupt or non-bankrupt party, it is essential to acquire legal advice and representation, particularly when it comes to bankruptcy and family law matters. Our team at Snedden Hall and Gallop are highly experienced in dealing with property settlements, children’s matters, divorce and separation. Please get in touch to see how we can help you on 02 6285 8000 or by email.