In Part 1 of this series, we explored the concept of “divisible property” under the Bankruptcy Act 1966 (“the Act”) and a common misconception that this type of property, such as real estate, automatically reverts back to bankruptcy upon discharge from bankruptcy after the normal three-year period.
However, in reality, the Act prescribes that the Trustee retains control over a former bankrupt’s divisible property for six years post-discharge. This means that the family home with no present equity could become an asset in the bankrupt estate when there is equity in, say, five years.
This vesting period gives creditors a framework to make claims against the bankrupt estate while allowing the Trustee sufficient time to manage the estate equitably. However, this initial six-year period is not the absolute limit because the Act empowers the Trustee to extend the initial 6-year period by a further 3 years where required, to further protect creditors’ interests. Furthermore, there is no prescribed limit for the number of extensions that a Trustee can make.
This article delves into the Trustee’s ability to extend the vesting period, providing clarity on how this can impact bankrupt individuals and their assets.
Extending the Vesting Period: Trustee Powers Under Section 129AA(4)
Section 129AA(4) of the Act empowers the Trustee to extend the vesting period for a former bankrupt’s property, should the circumstances require it. To extend the vesting period, the Trustee must provide written notice to the former bankrupt, specifying the new period of extension. This ensures the Trustee has sufficient time to manage complex assets, ensuring that creditors’ claims are protected.
Section 129AA(6) of the Act provides that the time specified in the notice must either be:
- A designated time not exceeding three years beyond the current revesting time; or
- Based on a specified event (e.g., the death of a life tenant), with the new vesting period not exceeding three years from the occurrence of that event.
Real-Life Application: Extending the Vesting Period in a Deceased Estate
In one of our administrations, the Act recently played a role. The administration involved a bankrupt individual who disclosed that they had been bequeathed an interest in a property in a deceased estate which was subject to a life tenancy held by a relative of the deceased. Given the specific circumstances in the deceased estate, it became necessary for the Trustee to extend the vesting period beyond the standard six years.
To protect creditors’ interests, the Trustee formally notified the former bankrupt of the extension to the vesting period by three years from the expiration of the life tenancy. This measure enabled the Trustee to retain control of the asset for an additional three years beyond the cessation of the life tenancy, ensuring creditors’ potential claims were adequately protected. During that extended period, the life tenancy expired, and the property was sold by the Executor of the deceased estate and the former bankrupt’s interest under the Will of the deceased was paid into her bankrupt estate. These funds were then distributed by the Trustee.
Why Extensions Are Sometimes Necessary
Some assets can present complexities, especially when life tenancies or other long-term arrangements are involved. The Trustee’s ability to extend the vesting period serves as a safeguard for creditors while providing a means to handle unique legal and logistical challenges associated with complex assets.
In the example above, the extension of the vesting period supported an orderly estate management, aligning with the best interests of creditors.
Key Takeaways for Bankrupt Individuals and Their Advisors
Understanding the flexibility within section 129AA of the Act is essential for individuals going through bankruptcy and those advising them. Key points to remember include:
- Vested property may remain under the Trustee’s control for longer than six years if an extension notice is issued by the Trustee.
- Maintaining open communications with the Trustee can help mitigate surprises, particularly regarding the management of deceased estates or other assets with complex conditions.
By staying informed and engaged with the Trustee, bankrupt individuals can better navigate the bankruptcy process and understand the potential impact of extended vesting periods on their property and assets.
For expert support in navigating bankruptcy or if you would like to discuss your situation, contact one of our experienced team at dVT Group at (02) 9633 3333 or by email at mail@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
By Trung Nguyen
December 2024
