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Can I claim and keep my TPD benefit if I am a bankrupt?

in Superannuation & Insurance by Annemarie Gambera on

You might want to, but the more important question is, can you? Annemarie Gambera discusses legal scenarios and aims to answer these questions in the post. If you would like to see whether you are entitled to a superannuation disability benefit, please take our free superannuation benefits assessment.

It is not uncommon for clients claiming a Total and Permanent Disability (TPD) benefit to suffer from financial distress.

The reasons may vary. However, there are some common factors which can lead to financial crisis, such as:

  1. The typical waiting period contained within a TPD policy definition, which requires the claimant to be unable to work for a specified minimum period, usually 6 months; and
  2. The absence of a statutory time limit for superannuation funds and insurers to make a decision, which means that claims often taking 6 to 12 months to be decided from the date they are lodged.

This means that many claimants may have been without any income for at least 12 months before a decision about payment of the TPD benefit is made.

It is therefore unsurprising that circumstances may arise, which lead to a person’s bankruptcy while they are waiting for their TPD claim to be approved.  Fortunately, in my experience, I have seen this occur in only a few cases.

However, where a claimant does become bankrupt, the questions below follow:

Does the claimant have the right to pursue the claim, and if the claim is approved?

Can they retain the TPD lump sum benefit or does it go to their creditors?

The law governing this question is found in the Bankruptcy Act 1966 (Cth). Section 58 (1) of the Bankruptcy Act (“the Act”) provides that when a person becomes bankrupt their property vests in the trustee in bankruptcy. There are some important exceptions.  Specifically, for the purposes of this discussion, the key exception is found in section 116(2)(g) of the Act.

Section 116(2)(g) provides that property divisible amongst the creditors of the bankrupt does not extend to:

“Any right of the bankrupt to recover damages or compensation for personal injury or wrong done to the bankrupt…and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong …”

The key question is whether a TPD benefit can be properly categorized as “damages or compensation … in respect to a [personal] injury.”?

Until recently, there was some doubt, the argument being that a TPD benefit is paid pursuant to contractual rights under the policy of insurance, and so does not fall within s116(2)(g).

However, the implications of a recent case seem to have altered the landscape.

Berryman-v-Zurich Australia Limited [2016] WASC 196

The Western Australian Supreme Court in the case of Berryman-v-Zurich Australia Limited [2016] WASC 196 provided some comfort to claimants in this situation. The case concerned a man, Mr. Berryman, who suffered a crushed foot injury, which caused him to lodge a TPD claim.  He issued proceedings in Court against the insurer, and then became bankrupt before the case went to trial.  The insurer argued that Mr. Berryman’s case could not continue in Court because of the bankruptcy.

The Court accepted that the TPD claim was properly formulated as a breach of contract, but it also decided that the substance of the claim had to be examined. The judge concluded that had it not been for this personal injury, Mr. Berryman, could not have claimed the TPD benefit, and that it followed that the TPD claim was in respect of a personal injury, and protected by the carve out in s116(2)(g).  Mr. Berryman was permitted to pursue his TPD claim in his own right. 

The implication of this reasoning is that the proceeds of a TPD lump sum benefit will not be available to creditors and can be retained by the bankrupt. 

Trustees of the Property of Morris (Bankrupt)-v-Morris (Bankrupt) [2016] FCA 846

This position is reinforced by another case recently decided by the Federal Court of Australia:

In Morris, the deceased’s widow, who became bankrupt a short time after her husband’s death, relied upon the exception in section 116 (2)(d) of the Bankruptcy Act to seek to shield her husband’s account balances (death benefits), held by two different superannuation fund trustees, from her creditors.

Section 116 (2)(d)(iv) excludes the following property from division amongst creditors:

A payment to the bankrupt from [a superannuation] fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993

Applying that provision, the Court held that Ms. Morris was entitled to keep the lump sum death benefits.

It is likely that other kinds of lump sum payments from superannuation funds, including TPD benefits paid to super fund members, will be treated in the same way.

It appears from the case studies discussed above that the Courts are prepared to give a broad approach to protecting payments, including TPD lump sum benefits, from claw back by creditors in bankruptcy.

To find out whether you’re eligible to claim your super, take our free Superannuation benefits assessment.