Under s 116(2) of the Bankruptcy Act 1966 (Cth) (‘the Act’), there are certain assets which cannot be shared between creditors when an individual goes bankrupt. Some of these assets include:

  • items which have a sentimental value
  • household items
  • property that is essential for the bankrupt to earn income
  • a basic vehicle
  • assets held in trust
  • compensation for personal injury or the death of the bankrupt,
  • his or her spouse, de facto partner or family member

Section 116(2)(d) is also significant. The provision ensures that any life insurance policies of the bankrupt and their spouse or de facto partner received on or after bankruptcy remain untouched. This section also protects the superannuation the bankrupt has on and after bankruptcy. A case dealing with this provision is Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846.

In this case, Debbie Morris’ husband became bankrupt and died, leaving her with two children, one of whom she had recently given birth to. She became a bankrupt shortly afterwards. These circumstances all occurred within the space of one year. Her husband had two superannuation policies and one life policy on his death:

  • His superannuation with Plum Super totalled $67,240.27
  • His superannuation with AustSafe Super totalled $45,392.48
  • His life insurance with Plum Super totalled $311,865.93
  • The life insurance fell within the scope of s 116(2)(d) of the Act.

As such, this amount was not available to be distributed to creditors. However, the trustee in bankruptcy deemed that the two superannuation amounts were not exempt from distribution among creditors. The trustees of the superannuation funds had exercised their discretion to pay the superannuation death benefits of Debbie’s husband to Debbie as her husband’s dependent. Her husband had not left death benefit nominations.

The trustee in bankruptcy argued that because her husband failed to leave any such nomination, the superannuation death benefits of Debbie’s husband were properly categorised as after acquired property. They were not protected under s 116(2)(d)(iii)(A) and (iv) of the Act, since they were Debbie’s husband’s superannuation, and not her own. This reasoning was said to apply because Debbie had no interest in either fund within the meaning of s 116(2)(d)(iii)(A).

The court affirmed that Debbie did not have any rights in relation to her husband’s superannuation other than a right to be considered and a right of due administration. She would only have rights if the trustees of the superannuation funds exercised their discretion in her favour. The Court held that upon the trustees of the superannuation funds exercising their discretion to award the death benefits to Debbie, her interest in the superannuation funds were created. Accordingly, the payments fell within the scope of s 116(2)(d)(iii)(A), meaning that the payments she had received were protected.

The court noted that the legislature recognised the “breadth of persons who may receive payments from superannuation funds” under s 116(2)(d)(iv). The court further commented that the provision recognises that the breadth of persons to whom protection is provided “extends to those who are members of funds, as well as to their spouses and their dependent”.

What this case tells us is that a bankrupt who satisfies a condition of release and withdraws a lump sum from their superannuation will be able to retain that amount and not lose it to their trustee in bankruptcy. The case also confirms that superannuation remains the best asset protection strategy. It would be wise for clients to include clauses in their wills which ensure that the personal representatives of estates separate life insurance and superannuation benefits from the other types of assets in their estate.

It is also important that the personal representatives of estates do not use these assets to pay debts or to pay creditors. Finally, a binding death benefit nomination is a very good idea in the context of this discussion. The case involving Debbie Morris would never have occurred if Debbie was named in a binding death benefit nomination.

Our Leigh Adams has a particular interest in asset protection and structuring. Give him a call to take your business succession planning to the next step on 9549 0755.