Tuesday, April 22, 2014

Bankruptcy clawback - a leading case

In any asset protection exercise, the impact of the 'clawback' rules under the bankruptcy legislation needs to be carefully considered. 

One key aspect in this regard is whether a decision by a person to divest themselves of assets was done for the main purpose of defeating creditors.

Recently, I was reminded of arguably the leading case in this area, which is now over 80 years old, namely Williams v Lloyd [1934] HCA1. As usual, a link to the full copy of the decision is as follows - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1934/1.html?stem=0&synonyms=0&query=title(Williams%20and%20Lloyd%20).

In this case, a bankrupt transferred assets to family members while he was solvent, but knowing that he was likely to start engaging in a 'risky' business activity in the future.

The court held that the transfers could not be clawed back and the key aspect of the decision was as follows –
‘Once it is acknowledged, as upon the evidence I think it must be, that in 1926 the bankrupt was in a perfectly sound financial position and had nothing to fear, subsequent conduct and events form an insufficient basis for a finding that the documents were shams, or that he had an intent to defraud his creditors, or that they were made subject to a suspensory condition allowing them to take effect only in case of attack by creditors.’.
Until next week.

Image credit: EJP Photo cc