No locked safe for superannuation when bankrupt

Sam was a contributor to his employer’s staff superannuation scheme (“the Scheme”).

On 1 September 2008 Sam entered into bankruptcy. Sam initially continued to contribute to the Scheme and then took a contributions holiday. 

On 17 January 2011 Toby, the Scheme’s secretary, sent Sam an email confirming the Scheme’s trust deed protected Sam’s superannuation from being paid to the Official Assignee. Sam restarted his contributions and made these payments until 13 June 2012 when he took another contributions holiday.

Sam was discharged from bankruptcy in August 2012.

On 16 November 2014 Toby advised Sam that the Scheme’s trustees intended to pay Sam’s superannuation to the Official Assignee. Sam’s superannuation totalling $68,263.58 was paid to the Official Assignee on 12 January 2015.

Sam complained to FSCL.

 

Sam’s view

Sam complained that the Scheme incorrectly paid his superannuation to the Official Assignee.

Sam said that the Scheme had incorrectly told him that the trust deed would protect his superannuation being passed to the Official Assignee. Sam said he was also told that any contributions he made to his superannuation during his bankruptcy would not be paid to the Official Assignee. Sam believed he had been misled by the Scheme and that the Scheme was now denying the advice it had given to him.

Sam said his superannuation should not have been paid to the Official Assignee because he had been discharged from bankruptcy at the time the superannuation was released. He considered that a recent Court of Appeal decision supported his view that his superannuation should not have passed to the Official Assignee.

Sam wanted the Scheme to pay him the amount in his superannuation fund at the time it was released to the Official Assignee ($68,263.58) and compensation for the stress and inconvenience the Scheme had caused him.

 

The Scheme’s view

The Scheme said it was legally required to release Sam’s superannuation to the Official Assignee. It considered it had been consistent in its application of the trust deed and the interpretation of the legislation affecting Sam’s position. The Scheme said it had not misled Sam and had not provided him with any contradictory advice.

The Scheme also said that in the event it had given incorrect advice to Sam, such advice did not cause a financial loss to Sam.

 

Review

The Insolvency Act 2006 administers the rights and powers of the Official Assignee and a bankrupt during and after bankruptcy. On bankruptcy, all property belonging to the bankrupt passes to the Official Assignee[1]. ‘Property’ is widely defined in the Insolvency Act and the High Court has confirmed that property includes a person’s superannuation scheme[2].

 

Clause 12 of the trust deed

Sam said Toby told him that clause 12 of the trust deed protected his superannuation from being passed to the Official Assignee. 

Clause 12’s intent was to protect a scheme member’s superannuation from the Official Assignee. Clause 12 effectively allowed for a scheme member’s superannuation to be “forfeited” to the Scheme’s trustees if the person was declared bankrupt. Once the member was discharged from bankruptcy, the trustees would return the superannuation to the member.

Unfortunately for Sam, the High Court[3] found that the Superannuation Schemes Act 1989 expressly repealed these types of clauses. As such, clause 12 was not applicable and did not protect Sam’s superannuation being passed to the Official Assignee.

 

Court of Appeal judgment

Sam referred us to a Court of Appeal judgment[4] which found that bankrupt persons are entitled to keep the money saved in their KiwiSaver accounts. Sam argued that this decision also applied to private superannuation schemes.

The Court of Appeal’s decision looked at two seemingly inconsistent enactments, the Insolvency Act 2006 and the KiwiSaver Act 2006. Under the Insolvency Act, all property belonging to a bankrupt, including superannuation, passes to the Official Assignee[5]. However, the provisions of the KiwiSaver Act prohibits a KiwiSaver interest being passed to any other person[6]. The Court determined that the KiwiSaver provisions prevailed and a bankrupt’s KiwiSaver cannot pass to the Official Assignee.

The Court’s decision focused on the express purpose and strongly worded provisions of the KiwiSaver Act. This meant that the application of the Court’s decision was limited to KiwiSaver. The Court’s decision did not affect the law relating to private superannuation schemes.

We found that the Court of Appeal’s decision did not apply to Sam’s superannuation and in accordance with the Insolvency Act provisions, Sam’s superannuation passed to Official Assignee upon bankruptcy.

 

Discharge from bankruptcy

Sam argued it was wrong for his superannuation to be paid to the Official Assignee after he was discharged from bankruptcy. However, the Official Assignee does not automatically stop administering a person’s estate when the person has been discharged from bankruptcy. The Official Assignee needs to apply to the court to release them from administering an estate. This usually happens once the Official Assignee is satisfied the creditors have been repaid. In Sam’s case, at the time his superannuation was released, he had been discharged from bankruptcy but the Official Assignee continued to administer his estate.

We concluded that Sam’s superannuation correctly passed to Official Assignee in January 2015. 

 

Direct financial loss

As above, we found that the Scheme had correctly released Sam’s superannuation to the Official Assignee. The payment of Sam’s superannuation to the Official Assignee was not a financial loss the Scheme was responsible for.

However, we did consider that Toby’s emails of 17 January 2011 led Sam to conclude that contributions he made during his bankruptcy would not pass to the Official Assignee. This was incorrect. We recommended the Scheme refund Sam the contributions he made during his bankruptcy. This was an amount of $4,667.67.

 

Compensation for stress, humiliation and inconvenience

We also found Sam had been inconvenienced by the Scheme not clearly communicating to him that his superannuation would be forfeited to the Official Assignee.

Sam suffered considerable disappointment and distress when the Scheme told him his superannuation would be passed to the Official Assignee. This was contrary to his expectations and what the Scheme had previously advised Sam.

We also found that Sam had been inconvenienced through the Scheme’s responses to him during the course of his complaint and we recommended the Scheme pay Sam $2000 as compensation for inconvenience.

 

Decision

Sam received $6,667.67 in compensation from the Scheme’s trustees, being $4,667.67 in refunded contributions and $2000 in compensation for inconvenience.