By Amelia Fearnside, a Law Clerk of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
Section 128B(5) creates a shortcut to establishing that a bankrupt was intending to defeat his creditors in making superannuation contributions. In the absence of proper books and records of the bankrupt’s business, the section presumes the bankrupt was insolvent, which in turn deems the relevant purpose to exist. But records of what business?
In the case of Re Andrew Superannuation Fund v Sijabat [2023] FCAFC 6, the Full Federal Court considered for the first time the scope of this presumption as it applies to superannuation contributions made prior to bankruptcy.
Facts
The appellant (Mr Do) made contributions to his superannuation fund over several years. In mid-2010, the appellant’s dental practice ceased trading and ultimately he became bankrupt. His trustee in bankruptcy sought to recover the superannuation contributions.
Primary Court Decision
The Trial Judge in the Federal Circuit and Family Court of Australia (Div 2) made an order that payments made by the appellant into the superannuation fund during the relevant financial years were void due to the provisions in s 128B of the Bankruptcy Act 1966 (Cth) (‘the Act’).
Importantly the Trial Judge found that the appellant was deemed to be insolvent (and therefore have had the intention of defeating his creditors by making the contributions) because of a finding pursuant to s128B(5) that the bankrupt had failed to keep books and records “in relation to the business carried on by [the bankrupt]”. The bankrupt and his super fund appealed.
The Bankruptcy Act
Section 128B of the Act allows a bankruptcy trustee to recover superannuation contributions made with the intention to defeat creditors of a bankrupt.
Section 128B(1) states that a transfer of property by a person who later becomes bankrupt (transferor) to another person is void if:
(c) 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.
Section 128B(2) deems a bankrupt to have had the intention of defeating creditors if the bankrupt was (or was about to become) insolvent at the time of the transfer.
In turn, a rebuttable presumption of insolvency arises under s 128B(5) of the Act if it is established that the transferor:
- had not, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position or
- having kept such books, accounts and records, has not preserved them.
The emphasised words became critical in the appeal. No case had previously determined the scope of the presumption in s128B(5) or how it is to operate in the context of the voidable transaction regime in s128B (or indeed the equivalent regime in s121 relating to general transfers to defeat creditors).
Full Federal Court Decision – What Business?
On appeal it was argued that the trial judge had failed to identify which “business” was the relevant one for the purposes of consideration, the presumption in s128B(5), and therefore what books and records ought to have been kept.
Essentially, the appellants argued for a narrow construction of s 128B(5)(a), while the Trustees suggested that a more broad construction should be adopted, which is not synonymous with carrying on a commercial enterprise and that the section “must be capable of application to persons who are not doing so, such as the unemployed, retired or those engaged in unpaid domestic duties” (at [66]).
The Full Court (Markovic, Halley & Goodman JJ) held that the natural reading of the section favoured the narrow construction – that is, “the business, if any, carried on by the transferor”. This was supported by the context and purpose of the provision, including its relation to the similar provision in s 120(3A) and s121(4A) and the explanatory memorandum regarding insertion of those provisions and its reference to “usual commercial practice” (at [80]-[81]).
The Full Court also noted the similar but not identical words in the offence in s 270 of the Act for failing to keep records which are “usual and proper in any business carried on by him or her”. These words “focuses on financial records relating to any business carried on by the bankrupt” (at [86]) and have been given a narrow construction in analogous cases which have considered them (at [98]).
The Full Court also considered who had the onus of establishing what books and records are “usually kept” concluding that what was required was “a finding that the transferor was carrying on an identified business, a fact which necessarily had to be established as a first step to engage the section”. The mere fact that the bankrupt was a director of various companies “did not support a finding that he was carrying on any particular business” at the time of the transfers.
Therefore, in the absence of evidence or a finding as to what business was being undertaken, and what were the ‘usual and proper’ records for that business, no finding could be made that there had been any failure to keep such books and records for the purposes of s128B(5)(a). Accordingly, the appeal was upheld.
The Full Court also noted that the provision in s128B(5)(a) is not (as the trial judge had regarded it) a deeming provision. It is a presumption of insolvency, which could be rebutted by evidence to the contrary. In the end the appeal was allowed, and the judgment declaring the superannuation transfers void were overturned.
Key takeaways
The full court’s decision in the case was the first appellate decision in Australia to consider s 128B(5) of the Act. The presumption of insolvency is an important tool for trustees in bankruptcy who often rely upon insolvency in order to establish the deeming of the bankrupt’s intention to defeat creditors. However it is important in doing so to consider the narrow scope of the presumption and the need to identify what business is being undertaken by the bankrupt, and what, in respect of that particular business, are the usual books and records which should exist in relation to that business, before moving to consider whether or not those records were in fact kept.
Trustees should treat this short cut with some caution.
A copy of the decision can be accessed here
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
