Super contributions “clawed back” in bankruptcy

A recent case in the Federal Court has provided a practical illustration of how superannuation contributions could be at risk of being “clawed back” if the member later becomes bankrupt: Ruhe v Rodmarg Pty Ltd [2024] FCA 638.

Under Australia’s bankruptcy laws, there is a general rule that a transfer of property carried out with the intention of defeating creditors by a person who later becomes bankrupt can be clawed back by the bankruptcy trustee, meaning it becomes available to creditors.

While a member’s benefits in a superannuation fund are generally protected in bankruptcy, specific claw-back rules can apply to some contributions. A contribution by a person who later becomes bankrupt can be clawed back if:

• that property would probably have become part of the bankrupt estate had it not been contributed, and
• the person’s main purpose for making the contribution was to prevent, hinder or delay the process of that property becoming divisible among creditors.

Similar rules apply where a contribution is made by a third party for the member’s benefit (as part of a scheme in which the member participated with the intention of preventing, hindering or delaying the creditor process).

What happened in the Ruhe case?

This case demonstrates the claw-back rules in action. A husband and wife were members of a self-managed superannuation fund (SMSF), and they also personally owned units in a separate unit trust that held various real estate. In 2014, the couple contributed their units into the SMSF. The husband was then made bankrupt in 2016, and his wife in 2017. The bankruptcy trustee commenced proceedings to have the contribution of the units declared “void” so that the assets would be available to creditors. The bankruptcy trustee was successful because the Federal Court was satisfied that the couple’s main purpose in contributing the units was to prevent those units from becoming divisible among creditors.

The Court reached this conclusion because the couple had stated that their purpose had been “asset protection” so that their creditors “couldn’t get” access to the units held in their name. This would appear to be a straight-forward case of an intention to defeat creditors.

However, it’s important to be aware that this intention can be demonstrated in other ways. Significantly, the law deems a person to have had this intention if it can be reasonably inferred that at time of the contribution, the person was, or was about to become, insolvent. In this case, if the couple had not admitted their intention, the Court was prepared to infer that they were, or were about to become, insolvent when the contribution was made in 2014. This was because the couple had been exposed.