The Facts
Bankrupt receives money from his late mother’s superannuation fund
A man was declared bankrupt and a trustee in bankruptcy was appointed to his estate in 2011.
In December 2013, the bankrupt’s mother died and, after a grant of probate was made in February 2014, the proceeds of her estate were distributed. Her estate included, amongst other assets, the proceeds of a regulated superannuation fund.
Under the Bankruptcy Act 1966 (Cth), payments made from a regulated superannuation fund to a bankrupt after the date of bankruptcy, unlike other payments, do not have to be divided amongst the bankrupt’s creditors.
Part of the mother’s estate, an amount of $87,900.33, was distributed to the bankrupt in accordance with her will. The money was paid to the bankrupt’s wife because the bankrupt did not operate a bank account in his own name.
The trustee brought proceedings against the bankrupt’s wife seeking a declaration that the money was not excluded under the Act and should be divided amongst the bankrupt’s creditors.
Expert commentary on the court's decision
Court finds in favour of trustee in bankruptcy
In the case Cunningham (Trustee) v Gapes, in the matter of Gapes (Bankrupt) [2017] FCA 787, the court found in favour of the trustee in bankruptcy, Mr Cunningham.
Section 116(2)(d) of the Bankruptcy Act 1966 (Cth) excludes payments from regulated superannuation funds received after the date of bankruptcy from property divisible amongst creditors. However, the court rejected the argument put forward by the bankrupt’s wife, Ms Gapes, that the money she had received from her mother-in-law’s superannuation fund met the criteria to be classified as property which is excluded from the pool to be divided among creditors.
It was not in dispute that the superannuation fund paid no money directly to the bankrupt or the bankrupt’s wife. The money was paid from the superannuation fund to the estate and then paid to Ms Gapes. Although the money derived from a regulated superannuation fund, it did not bear that character at the time it was paid to Mr Gapes.
Bankrupt found to have no interest in superannuation fund
Also, the interest in the superannuation fund was that of Mr Gapes’ mother, not of Mr Gapes himself. Accordingly, as Mr Gapes had no interest in the superannuation fund and the money was paid to him from his mother’s estate and not from the superannuation fund, the court ordered that the trustee was entitled to summary judgment and that the money was property divisible amongst creditors.
The court agreed with the trustee’s assertion that Cunningham v Gapes could be distinguished from the case of Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846 because Ms Morris, being a dependent of the deceased (her late husband), was paid the benefits directly upon the favourable exercise of the discretion of the trustees of the two superannuation funds.
Leaving money to beneficiaries who are bankrupt or prone to taking financial risks
The case brings to light two important practical points.
First, ensure that you have a binding death benefit nomination in place for your superannuation fund if a beneficiary is a bankrupt or is prone to undertaking risky financial activities, rather than allowing your superannuation to become part of your estate and potentially available to creditors in bankruptcy.
Secondly, when planning the distribution of your estate, it would be prudent to make a binding death benefit nomination in favour of beneficiaries who are bankrupt or prone to undertaking risky financial activities and draft your will with a greater distribution to other beneficiaries to compensate for this.