Trying to think of ways to protect your assets before heading into business? You may want to think twice before transferring assets from your name to your spouse.
The recent Federal Court decision of Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace  FCCA 963 (Wallace Case) suggests that transferring an asset to a spouse may not be an effective strategy in some circumstances.
Mr Wallace, an accountant, went into a family business involving motor vehicle retailing. He transferred his interest in his family home to his wife when he became director and took on a number of personal liabilities, including responsibility for a financing arrangement with St George Bank.
Ten (10) years later the business failed, and the trustee in bankruptcy of Mr Wallace sought to claw back his interest in the family home.
The Court held that the transfer of Mr Wallace’s interest in his home to his wife was void under section 121 of the Bankruptcy Act 1966 (Cth).
Bankruptcy laws provide that if people seek to transfer assets to avoid an actual or impending liability, then the transfer should be voidable.
The Court stated the following reasons, “Although I have found that the agreement upon which the wife’s defence rests is not made out, this does not, of course, mean of itself alone that the transfer to her of the husband’s interest makes the transfer void pursuant to s 121 of the Bankruptcy Act 1966 (“the Act”). The husband, after all, has denied that the transfer of the property was in any way designed to defeat creditors. He says he had no idea at the time that he would have any such creditors…
…Furthermore, although the wife denied it, I think the husband and the wife must have discussed this. It was a major alienation of property. It altered the legal ownership of it. There is, in my mind, no doubt that a couple happily married (and the wife was an intelligent woman and a business woman herself) would have failed to discuss the matter of so much moment. The underlying detail of the potential risks in Ripponlea Motors may well not have been fully disclosed to the wife but I have no doubt that it is more probable than otherwise that the intention and effect of the transfer was…
…Likewise, on the evidence I have no doubt that the husband’s main purpose in making the transfer was to prevent the transferred property from becoming divisible among his creditors should there ultimately be any. I make this finding in essence for two interrelated reasons. First of all because I do not accept and indeed entirely reject the explanation that the wife and the husband have proffered. I do not accept that there was any representation or agreement as they have alleged.
Second, that explanation being rejected, no other explanation makes any real sense. It seems clear to me beyond doubt that in transferring the property to his wife the husband was protecting it against creditors even though he may or may not have had any active appreciation that there would be some. He was on any view very heavily personally committed to the business by the time the transfer took place."
In order for the transaction to not be considered void, section 121(4) would have had to have been satisfied, requiring that “it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.” Arguably, section 121(4) requires the transfer and the insolvency to be closely tied together in a timing sense. However, the Court in the Wallace Case instead took a strict interpretation to the law.
In coming to this conclusion the Court relied on a ‘hazardous financial venture’ test. The Court decided that ‘motor vehicle retailing’ was such a hazardous financial venture that it justified accepting a 10-year gap between the transfer of the interest in the home and his ultimate bankruptcy of Mr Wallace.
The Court stated that given Mr Wallace was embarking on a motor vehicle retailing business, being a very hazardous industry, it could be expected that sometime in the future, things may turn bad. Therefore, any transfer of asset at the outset must have occurred to defeat future creditors – even if those creditors were not known at the time.
Adopt a business structure that affords you a good level of limited liability. Importantly, you should have a structure that provides:
- the flexibility to accommodate changing circumstances with minimal consequences;
- adequate asset protection to the directors of the business / limited liability;
- minimal costs, including tax; and
- efficient distribution of profits.
There are a number of structures which can be used to carry on a business. Each business structure has varying legal requirements and liability limitations. In choosing the right business structure, it is important to have an understanding of the characteristics of each structure and consider its advantages and disadvantages.
As a director of company, you should also limit, as much as possible, providing personal guarantees to trade suppliers, financiers and other third parties.
If you would like advice or assistance please contact our accredited business law specialists and Partners Justin Thornton on email@example.com and Rahul Lachman on firstname.lastname@example.org or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.