Is your super protected from bankruptcy?

It took 13 years for the High Court to finally get the chance to decide whether or not a super contribution made just before bankruptcy was protected. Not everybody agreed, but four out of five is good enough. On June 19, 2003, in a majority decision, the full High Court said Mr Benson did not lose to his trustee in bankruptcy the super he had rolled over almost 13 years earlier.

The facts were really quite straightforward. The company that Mr Benson had worked for since 1972 went into liquidation in 1990. As a result, his employment was terminated and he became entitled to a lump sum superannuation benefit of $96,192.36 from the company super fund. As he was in his 40s at the time, well below the normal retirement age, he decided to rollover $80,000 into other superannuation funds. On July 21, 1992, Mr Benson became a bankrupt. His trustee in bankruptcy, Mr Cook, sought to claw back the superannuation rollover of $80,000.

One wonders what happened to the original investment of $80,000 over this period. It seems to have endured not only the Keating and Howard Governments, two market cycles and three industry amalgamations, but it seems to have also survived 13 years of legal fees, all the way to the full High Court of Australia.

Much to the disappointment of many, the issue before the full High Court was not a test of the superannuation protection rules of the Bankruptcy Act, as the facts of the case occurred before the 1994 introduction of section 116(2)(d). The issue before the Court was more basic than this, with far wider application. The issue was whether the public offer superannuation trustees received the rollover for valuable consideration. If the answer was yes, the money could not be clawed back. If the answer was no, the trustee in bankruptcy took the lot.

The answer is vitally relevant for any person who fears a looming bankruptcy. The High Court decision goes a long way to indicating whether it is a good strategy to drop as much as possible into a superannuation fund in the hope it becomes protected.

The trustee claim on Mr Benson’s superannuation was made under Section 120(1) of the Bankruptcy Act. This section allows the trustee in bankruptcy to claw back any settlement or disposition of a property to another (for this, read contribution to superannuation) that was not in good faith or for valuable consideration that was made within two years before the commencement of the bankruptcy.

All of the courts accepted that there was no question of a want of good faith on behalf of Mr Benson. Therefore, the only issue was whether the trustees of the superannuation fund, when it received the rollover, gave valuable consideration at that time. Remember, just like the receipt of any superannuation contribution, the superannuation trustees simply received the monies for crediting to Mr Benson’s superannuation account.

The bankrupt Mr Benson kept his superannuation! The full High Court decided that there was valuable consideration given by the trustees of the superannuation funds that had received his rollover.

Does this mean that all superannuation contributions are protected? I don’t know. There is enough in the High Court decision to suggest that the case may turn on its own unique facts. But then again, it will likely take another full High Court to determine the breadth of this decision.

Many superannuation and bankruptcy specialists will be surprised to learn that the High Court recognised that valuable consideration was given by the trustees. After all, the trustee is the mere passive recipient of Mr Benson’s rollover.

But in the view of the High Court, “the payments in question were made pursuant to arm’s-length, commercial transactions. The payments, at the direction of the first respondent (Mr Benson), out of the funds due to him under the ISAS superannuation scheme, by way of contributions to other commercially marketed superannuation schemes, were made in return for the obligations, undertaken by the trustees of those schemes, to provide him with the rights and benefits to which he would in due course become entitled under the rules of each scheme. Those rights and benefits constituted substantial and valuable consideration for the contributions of the first respondent (Mr Benson)”.

It may seem surprising, but the High Court was of the view that the superannuation contributions were made in return for the undertaking by the trustees to pay retirement or other related benefits to the bankrupt or his nominees.

What is of significant interest is that the High Court seems to accept that after termination of his employment, Mr Benson was fully entitled to his superannuation; it was not subject to preservation or capable of being taken away from him. It was as though it were cash that he could have drawn upon at any time. This makes the judgement of more importance since it talks of protection of the contribution to the super fund and does not need to rely on the specific legislative protection, which in effect acts as a second barrier to a claim on a person’s super.

So what is to stop a person from depositing cash from a bank account into a superannuation fund just prior to bankruptcy? Perhaps the answer comes from the good faith requirement of Section 120 of the Bankruptcy Act. The High Court seems to make a point out of the fact that the rolled over monies were originally superannuation monies.

In the view of the High Court this “provided a commercial explanation of the first respondent (Mr Benson’s) conduct, unrelated to any attempt to defeat his creditors. On the face of it, what was involved was ordinary commercial dealing, being a reimbursement of funds representing the proceeds of superannuation benefits to which the first respondent had become entitled prematurely. His original intention had been to make provision for his retirement, and he wished to carry that intention forward”.

It is difficult to see the distinction raised by the High Court between monies already in a superannuation fund and monies in a dedicated (non-superannuation) retirement savings plan that is subsequently “undeducted-contributed” into a superannuation fund. Indeed, faced with the future prospect of bankruptcy, and therefore a very poor retirement, it would seem to make sense that such a person would contribute their available cash resources into a superannuation fund “to make provision for his retirement”.

There is one clear position the High Court decision presents: notwithstanding full entitlement to superannuation, rollover from one fund to another will not of itself constitute a voidable bankruptcy transaction, at least where the receiving superannuation trustees are clearly independent of the contributor.

Not everybody in the High Court agreed. Justice Kirby was alone in his decision that the bankruptcy trustee was entitled to Mr Benson’s superannuation money. But then, he was in the minority. In fact, he was alone. The precedent has now been set, only a future High Court will determine just how far it extends.

So what would I do if I had a nest egg in the bank and wanted to make sure it would be available for my retirement? I would put it into superannuation. If a bankruptcy trustee wants to have a go at my money they would need to be very determined to do so — so determined they would be prepared to undertake a new 13-year battle that could lead them all the way to the High Court.

Peter Bobbin is partner ofThe Argyle Partnership .