The typical professional or businessperson tries to ensure that if everything else is lost and they become bankrupt, at least the house will be saved. The classical way of doing this was thought to be to put the house in the name of the other spouse. However, the recent High Court case of Cummins suggests that the asset protection manuals need to be rewritten.
Cummins was a barrister who had a large tax debt and feared bankruptcy. So in 1987 he transferred his share of the house to his wife.
In 2000 Cummins became a bankrupt. The bankruptcy trustees were successful in convincing the Court that they had a valid claim under section 121 of the Bankruptcy Act. An order was made that the bankrupt’s half share in the house be transferred to the bankrupt estate. There is nothing surprising about this except for the fact that the wife paid 76.3% of the purchase price of the house.
Worse still, the High Court went on to suggest that even if Cummins had paid nothing towards the purchase price of the house and was not on title, there would have been an order that the wife transfer half of the house to the bankrupt estate. The High Court’s reasoning was that it is often a “purely accidental circumstance” whether money of the husband or the wife is actually used to pay the purchase price while the other spouse is contributing money or labour to the expenses of the household. So it does not matter how much each spouse contributes to the purchase of the house. The house is split 50/50.
Is there any protection against this result?
There is.Firstly, spouses can enter into a written agreement before purchasing the house. This works because the rule from Cummins is about the “inferred intention” of the parties. The written agreement puts the intention of the parties clear.
Secondly, if the spouses are divorcing before one becomes a bankrupt, the family law rules prevail. That is not to say that the writer is endorsing divorce where one spouse is about to become a bankrupt.
If you are interested in receiving further information please contact Ray Tolcher (02) 4962 2294.
