insolvency law & family law practice groups · insolvency law & family law practice groups...

Insolvency Law & Family Law Practice Groups

Chaired by Andrew Kirkham AM, RFD, QC.

Speakers

Alison Umbers

Issues for trustees in bankruptcy in family law property proceedings

Paul Glass

Family law issues and recent cases

Commentator

Federal Circuit Court Judge Grant Riethmuller

5th September, 2014 @ Monash University Law Chambers

Andrew J Kirkham AM, RFD, QC

LL.B.

Chambers: Floor 13, Room 1308, ODCE

Year Admitted: 1965

Year Signed Bar Roll: 1967

Year Appointed QC: 1983

Admitted to Practice in: Victoria, New South Wales, Western Australia, Queensland, Northern Territory, Tasmania,Australian Capital Territory, Federal Jurisdictions..

Phone: (03) 9225 8097

Facsimile: (03) 9225 7907

Areas of Practice

o Common Law o Coronial Inquests o Courts Martial/Military Law & Tribunals o Criminal Law o Family Law (Including Defacto) o Mediation : Accredited Mediator o Medical Negligence o Occupational Health and Safety o Personal Injuries o Probate/Wills/Family Provision o Professional Negligence

From 30/04/2009: Professional Standards Act 2003 [Vic] "Liability limited by a scheme approved under Professional Standards Legislation."

Judge Grant Riethmuller

is a Judge of the Federal Circuit Court based in Melbourne, sitting in both

the Federal and Family Law jurisdictions. He holds a Bachelor of Laws

degree from the Queensland Institute of Technology. From 1987, he

practised as a barrister in Townsville and had a wide ranging practice. In

addition, he lectured part time in Civil Procedure at James Cook University

until his appointment to the bench in 2004. His Honour is also well known

for his work as a consultant editor of the CCH looseleaf service “Federal

Circuit Court Practice” and his work on the development of the Court’s e-

filing system. His Honour continues to be a member of the Federal Circuit

Court’s Information Technology (IT) Committee.

ALISON UMBERS

5 September 2014

Issues for trustees in bankruptcy in proceedings under s79 of the Family Law Act: 10 years after BFLLAA1 By Alison Umbers

Alison Umbers Barrister

Owen Dixon Chambers

205 William Street

Melbourne Vic 3000 DX 94 Melbourne Vic

03 9225 6985 T 0410 467 451 M

[email protected] E

Introduction

1. Next year will mark ten years since the introduction of the Bankruptcy and

Family Law Legislation Amendment Act 2005 (BFLLAA).

2. The aim of BFLLAA was to:

“enable concurrent bankruptcy and family law proceedings to be brought

together in a court exercising family law jurisdiction, to ensure that all

issues are dealt with at the same time. This is achieved by giving courts

exercising family law jurisdiction to deal with bankruptcy matters that are

run concurrently with a family law financial matter, and by facilitating the

bankruptcy trustees’ and third party creditors’ involvement in family law

proceedings. By merging the courts’ jurisdiction on bankruptcy and family

law matters in cases where these areas interact, the amendments will allow

the courts exercising family law jurisdiction to consider the non financial

1 Bankruptcy and Family Law Legislation Amendment Act 2005

ALISON UMBERS

contributions of a non bankrupt spouse to the acquisition of family

property.”2

3. This paper offers some reflections on some of the challenges that have

arisen in the application of the BFLLAA for trustees in bankruptcy and

creditors, particularly in terms of the trustees’ ability to:

estimate with any accuracy the extent to which the interest of creditors is

likely to be accounted for in a property settlement proceedings; and

recover remuneration and costs incurred in the administration of the

bankrupt estate from property the subject of s79 application.

The pre BFLLAA position

4. Prior to the introduction of BFLLAA, once a bankrupt spouse’s property

had vested in a trustee pursuant to s58 of the Bankruptcy Act, a non

bankrupt spouse could only hope to recover a share in that property in

the event of a surplus after the creditors had been paid. This was so even

though the property vested in the bankrupt spouse’s trustee in

bankruptcy had been acquired with the assistance of the non financial

contributions of the non bankrupt spouse (usually the wife). This was

largely due to the way in which the Family Court treated liabilities of third

party creditors. Even though, in theory, there was no priority expressly

afforded to third party creditors, the usual practice of the Family Court

was to determine (and often satisfy) the liabilities of third parties before

the interests of a non bankrupt spouse could be considered3

2 from House of Representatives Second Reading Speech for the Bill (the Hon. Phillip Ruddock, Attorney General), 17 February 2005

3 see page 116 of “When Bankruptcy and Family Law Collide” by the Hon Justice TE Lindenmayer and Paul

A Doolan (1994) Australian Journal of Family Law

ALISON UMBERS

The amendments introduced by the BFLLAA

5. As a result of the BFLLAA, s58(1) of the Bankruptcy Act became subject to

s79(1)(b) of the Family Law Act. Section 79(1)(b) empowers the Family

Court to make orders that require the trustee in bankruptcy to transfer

property that has vested in the trustee to a non bankrupt or spouse.

6. Section 79(1)(b) specifically provides :

“79. Alteration of property interests

(1) In property settlement proceedings, the court may make such order as it considers appropriate …

(b) in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage — altering the interests of the bankruptcy trustee in the vested bankruptcy property”

7. The other important change (for the purposes of the paper) was the

addition of s75(2)(ha) to the Family Law Act which requires the Court to

consider “the effect of any proposed order on the ability of a creditor of a

party to recover the creditor’s debt, so far as the effect is relevant”.4

The framework within which creditors’ interests are considered by the Family

Court in property settlement proceedings

The four step process

8. Insolvency practitioners and their advisers who are not frequently

involved in Family Court proceedings might be assisted by a brief

explanation of the four step framework in which the Family Court

considers the interest of creditors.

4 The equivalent of s75(2)(ha) for parties to a de facto relationship is s90SF(3)(i).

ALISON UMBERS

9. The four steps are set out in Hickey v Hickey & The Attorney General for

the Commonwealth of Australia (intervener)5:

Step 1: identification of the property, liabilities, and financial

resources of the parties at the time of the hearing.

Step 2: evaluation of the parties’ contributions as defined by s79(4)

of the Act with particular reference to the matters listed in

s79(4)(a) and s 79(4)(c).

Step 3: evaluation of the matters in by s 79(4)(d) to s 79(4)(g), and

in particular, s75(2) of the Act insofar as any of those matters are

relevant (sometimes referred to as the “needs factors” but more

frequently called the “other factors”)

Step 4 : the court must be satisfied in all the circumstances that it is

just and equitable to make the actual orders proposed: Russell v

Russell (1999) FLC 92-877; Stanford v Stanford [2012] HCA 52.

10. For trustees and creditors, the most relevant factor is found in section

75(2)(ha) (one of the factors at Step 3)

Lemnos

11. Lemnos v Lemnos6 was one of the first to deal with the competing

interests of non bankrupt spouses and creditors under the amendments

introduced by the BFLLAA.

12. Le Poer Trench J adopted the four step approach notwithstanding the

bankruptcy of the husband, stating:

“I conclude that the [BFLLAA] amendments require me to consider this

case in the usual manner adopted for consideration of Part VIII property

applications with exception that I am to treat all of the former property of

5 Hickey v Hickey & The Attorney General for the Commonwealth of Australia (intervener)(2003) FLC 93-143 6 Lemnos v Lemnos[2007] FamCA 1058 at [62].

ALISON UMBERS

the husband, now vested in the Trustee, as available for distribution to the

wife if that be an appropriate result”7.

13. Even though the total liabilities exceeded the assets, the Court found that

the wife was entitled to share in half of the equity of a property with the

husband’s trustee. The trustee appealed.

14. In the appeal, Trustee of the property of Lemnos (a bankrupt) v Lemnos8,

the trustee in bankruptcy argued (amongst other matters) that the Court

should have stopped at Step 1 because the liabilities exceeded the assets.

15. Thackray and Ryan JJ of the Full Court held that the wife ought not

“escape all responsibility for payment of the primary tax”9, and all three

members of the court (Thackray, Ryan and Coleman JJ) appeared to agree

that the trial judge had incorrectly considered the interest of creditors at

the second step before considering them under s75(2)(ha) at the third

step.

16. However, the Full Court did not disagree with Le Poer Trench J’s approach

to adopt the four step process, and treating the vested property as part of

the assets available.

17. Ultimately, the Full Court remitted the matter for rehearing before a

single judge10. However, the Full Court’s decision in Lemnos is important

in this area because it set down the following general principles, which

still apply11 :

The interests of the bankrupt’s unsecured creditors do not

automatically prevail over the interests of the non-bankrupt

spouse and nor do the interests of the non-bankrupt spouse prevail

7 At [62]

8 (2009) 41 Fam LR 120

9 At [243]

10 Trustee of the property of G Lemnos, a bankrupt & Lemnos and Anor (No 2) [2009] FamCAFC 200

11 This summary is taken from paragraph [60] of Jarrett J’s judgment in Simon v Simon [2013] FCCA 432

ALISON UMBERS

over the interests of unsecured creditors. The court is required to

balance the competing claims of the bankrupt spouse’s unsecured

creditors and the non-bankrupt spouse having regard to the wide

discretion conferred by s 79 of the Act: at [57], [59]–[61], [97], [99]

and [200];

The claim of a non-bankrupt spouse pursuant to s 79(1)(b) of the

Family Law Act is not of the same nature as the claim of an

unsecured creditor who proves in the administration of the

bankrupt spouse’s estate. The non-bankrupt spouse is not an

unsecured creditor of the bankrupt spouse. Accordingly, s 108 of

the Bankruptcy Act does not require the court to treat the claim of

a non-bankrupt spouse and the claims of a bankrupt spouse’s

unsecured creditors equally. That is to say, the pari passu principle

does not apply when exercising the discretion conferred on the

court by s 79(1)(b) of the Family Law Act: [271]–[274];

the court may make orders in favour of a non-bankrupt spouse,

even though the combined liabilities exceed the total value of the

property (including property vested in the trustee): at [97]–[101]

and [202];

In an appropriate case, the effect of the court’s orders may have an

adverse impact upon the rights of the bankrupt’s unsecured

creditors: at [97].

ALISON UMBERS

The uncertainty created by the non directive nature of s75(2)(ha)

18. By virtue of the operation of s79(4)(e), s75(2)(ha) requires the Court to

take into account the interest of creditors. More specifically :

“ s75(2)(ha) the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as the effect is relevant”.

The section does not provide any specific guidance.

19. The language of s75(2)(ha) does not provide any specific guidance as to

the extent to which the interests of creditors are to be considered. This

presents challenges for a trustee and creditors because the wording of

s75(2)(ha) provides little, if any, basis upon which a trustee can estimate

the extent to which the creditors might receive a dividend as a result of

the orders made in a s79 application.

20. This is important for a trustee in the context of settlement negotiations. A

trustee in bankruptcy has a statutory duty to exercise powers and

perform functions in a commercially sound way12 and the duty to

administer the estate as efficiently as possible by avoiding unnecessary

expenses13. When presented with an offer from a non bankrupt spouse, a

trustee and his or her advisers will obviously want to be in a position to

determine if it is commercial to continue with the proceedings in an

attempt to secure a better outcome for creditors.

21. Despite the lack of clarity in the language of the s75(2)(ha), the Family

Court has, in some cases, demonstrated a willingness to explain the

application to s75(2)(ha) by quantifying the extent to which creditors’

interests are to be considered.

12 s19(1)(k) of the Bankruptcy Act 13 s19(1)(j) of the Bankruptcy Act

ALISON UMBERS

22. The case of Pippos v Pippos14 illustrates how s75(2)(ha) can be applied to

provide a clear framework for trustees and creditors.

Pippos v Pippos

23. In Pippos, the Judge identified the percentage shares of the asset pool at

Step 2 and then a percentage adjustment at Step 3 based on the factors

as between husband and wife.

24. What is interesting, and (it is suggested) quite helpful in Pippos is that His

Honour then specified a further percentage adjustment in relation to the

interest of creditors.

25. In Pippos, the assets of the marriage were modest, largely being the

equity in the former matrimonial home in which the wife and 12 year old

child of the marriage were residing. The total net pool was $190K.

26. The bankrupt husband's total unsecured creditors in the bankruptcy were

$28,500 (not substantial for a bankruptcy) and the trustee's remuneration

and costs were $31,500.

27. The parties’ superannuation was minimal and not treated separately.

28. The wife had made most of the financial contributions to the marriage,

largely from property settlement that she had received from a previous

marriage. Burr J assessed contributions at 65% in favour of the wife and

35% for the husband.

29. The Court made an adjustment of 10% in favour of the wife by first

considering the following factors as between the husband and the wife

the most significant being:

the wife was the sole carer of the 12 year child of the marriage

14 [2008] FamCA 542 (Burr J)

ALISON UMBERS

the wife’s more limited capacity to earn income as a result of being

7 years older than the husband

the fact that most of the wife’s modest income was from Centrelink

payments and child support

the wife had indicated that she would be able to raise approximately

$20,000 in finance to pay towards any amount that would be required to

satisfy that portion of the pool to which the bankrupt estate of the

husband was entitled.

“Adjusting the adjustment”: Interest of creditors – s75(2)(ha)

30. His Honour then calculated the dividend that would be paid to creditors

on a division of 65/35 and noted that unsecured creditors would receive

62 cents in the dollar.

31. His Honour then calculated the share of the pool that would have to be

ordered in favour of the husband if the creditors’ debts and trustees’

costs (totalling $60,000) were to receive 100 cents in the dollar, being

41% in favour of the husband and a large portion of the estate.

32. At the third step, the 10% adjustment in favour of the wife was then

reduced by 5% to take into account the creditor's ability to recover their

debts.

33. The final result was that the wife received 70% of the asset pool, which

meant that the return to creditors was about 29 cents in the dollar after

payment of trustee’s fees.

34. Although the wife had indicated that she only had capacity to borrow

$20,000 against the home to pay the share to which the husband’s

trustee in bankruptcy was entitled, the Court accommodated this by

allowing a more extended period of time in which to pay the trustee in

bankruptcy.

ALISON UMBERS

35. It is not contended that the Pippos approach necessarily results in a more

just and equitable result. However, it is suggested this kind of analysis is

helpful to trustees because, over time, it provides an indication of the

likely range of percentage adjustments that might be made in favour of

trustees in particular circumstances and therefore the extent to which a

creditor is likely to have its interests taken into account, particularly in

terms of negotiations.

36. Of course, there is no magic formula available to trustees and creditors

and their advisers in order to determine likely outcomes. But having a

clear framework within which to work certainly helps.

Non vested assets

37. Section 75(2)(ha) provides little guidance where, as is frequently the case,

a large portion of the asset pool is non vested property, most commonly

superannuation.

38. In West v West15, the needs of the wife and the interest of the creditors of

the bankrupt husband could both only be met in any meaningful way

from the non superannuation assets which was the former matrimonial

home in which the wife resided with the three of the seven children of

the marriage.

39. The equity in the home was $108,000. It appears that wife had a very

limited ability to raise funds to pay the trustee any share of the asset pool

that might be ordered in favour of the husband (and therefore the

trustee).

40. The wife wanted to retain the former matrimonial home for the care of

the children. The husband had moved out some years earlier and had very

little involvement with the children. The wife was dependent on social

security payments but also earned a small income as a trolley collector.

15 (2007) 38 Fam LR 431

ALISON UMBERS

41. The Court held that as a result of the contributions made by the wife, she

was entitled to 85% of the assets16.

42. Accordingly, the Court and the parties were faced with the unenviable

prospect of an all or nothing outcome: the superannuation was of no

practical value to the trustee as it was exempt property under s116(2) of

the Bankruptcy Act. Similarly, a splitting order would not have met the

wife’s immediate needs, and the wife’s ability to refinance was limited.

43. His Honour was not prepared to make such an order that would require

the sale of the home in circumstances where the creditors would not

receive any of the sale proceeds as a result of the priority given to

payment of trustee’s fees under s109 of the Bankruptcy Act (the amount

owed to the trustee was far in excess of the debt owed to creditors).

44. It is unclear if, based on the financial circumstances of the wife, the Court

would have declined to make an order requiring a payment from the wife

to the trustee (from sale proceeds of the home or otherwise) even if there

were sufficient funds from the share of the asset pool ordered in favour of

the husband that would result in unsecured creditors receiving a small

dividend from a share of the asset pool.

45. The case raises the unpleasant question of whether there are

circumstances in which a court would be prepared to order the sale of the

former matrimonial home in order to allow creditors to recover part of

their debt, and if so, what would those circumstances be? It is unlikely

that those circumstances would involve a non bankrupt spouse with

limited financial resources, caring for children.

16 The case is further complicated by the fact that the husband did not participate in the proceedings and so His Honour could only make determinations about the contributions from the material available to him.

ALISON UMBERS

46. Unfortunately, the absence of any legislative mechanism for dealing with

these situations means that the courts can end up in the unenviable

position of having to make “all or nothing” decisions.

47. In West, the creditors and the trustees missed out. The trustees were

ordered to transfer the bankrupt estate’s interest in the former

matrimonial home to the wife. The wife also ordered to refinance the

mortgage over the home in order to discharge council rates and

Centrelink debts.

Orchard v Orchard 17

48. Orchard v Orchard is a further example of how the nature of the property

within the asset pool is just as important as the amount of property

available and that sometimes the most equitable outcome is a less

predictable one.

49. In Orchard, a large portion of the asset pool was non divisible property in

the form of the bankrupt husband’s superannuation (approximately

$140,000). The other main asset was the equity in the former family

home.

50. The incomes of the husband and wife were each described as modest.

The husband required a further $50,000 to annul his bankruptcy.

51. It was held at the second step that the husband was entitled to a 70%

share and the wife 30%. After considering the other factors, at step three,

no adjustment was made.

52. The Court ordered that the wife’s share of the asset pool be paid entirely

via a splitting order. Although the wife would not have immediate access

to her share of the asset pool, the Court was satisfied that the wife moved

17

[2008] FamCA 979

ALISON UMBERS

into the future financially secure as a result of her relationship with her

partner.

53. The decision in Orchard was a win for the trustee in bankruptcy and the

creditors. By obtaining an order that the wife’s share in the property be

satisfied from the non exempt asset (ie the superannuation), the husband

was left with a greater share in the non exempt property (the home),

against which the husband could potentially borrow to pay out creditors,

whilst at the same allowing him to retain the home.

54. The wife appealed the decision, unsuccessfully, on the basis of how

Dessau J had assessed the contributions of the parties. There was no

criticism of the way in which Her Honour applied considerations under

s75(2)(ha).

Trustee’s costs and remuneration

55. In West v West18 (also referred to above under the topic of non vested

property), the husband was made bankrupt in 2006 on the petition of

RACV Finance, who was owed a debt of around $8,000. At the time of the

trial, the costs of the husband’s trustee in bankruptcy were around

$69,00019.

56. The Court was particularly concerned at the significant extent to which

the asset pool would be reduced (25%) if the Trustees’ fees were to be

treated as a joint debt (as part of the first step of the four step process in

Hickey).20

57. His Honour referred to and adopted a list of principles taken from a paper

prepared by Walters FM (as he then was) in 200621 that His Honour

described as relevant to the this issue. Based on those principles, His

18 [2007] FMCAFAM 681

19

paragraph [67]

20 at [76]

21 “Some Aspects of the Interaction of Bankruptcy with Family Law” 12th National Family Law Conference Perth

ALISON UMBERS

Honour accepted the wife’s evidence to the effect that she was not aware

of the debt, had no part in incurring the debt, nor did she enjoy any

benefit from the debt and declined to treat the trustee’s remuneration

and costs as a joint debt at the first step.

58. Consequently, the trustee could only recover fees from any share of

property ordered in favour of the bankrupt husband. Given that the

husband’s share was only 15%, and that the extent of trustee's fees

meant there would be no return to creditors, the court was not prepared

to make orders that would essentially require the home to be sold.

59. His Honour said at paragraph 139:

“I conclude that it would not be just and equitable to make orders that

would see the wife and the children removed from the former matrimonial

home in order to meet what is in large part the Trustee’s costs”

60. The absence of any statutory protection for trustee’s fees in this situation

may well have resulted in the trustee being out of pocket, unless the

trustee had had litigation funding in place or was legally represented on a

conditional basis (ie a no win/no fee). This appears to be an aspect of

these proceedings that was not anticipated when the BFLLAA was drafted.

61. Nelson v Perry22, however, may have elevated the status of the trustee’s

fees in s79 proceedings somewhat by recognising an equitable lien akin to

that imposed by the common law in favour of administrators and

receivers who deal with property for the benefit of creditors.

62. In Nelson v Perry, the wife sought orders that the trustee of her husband’s

bankrupt estate repay certain funds back into the asset pool. The funds

represented part of the sale proceeds of a property owned by the

husband, and which had vested in the trustee upon the husband’s

bankruptcy. The sale proceeds were applied by the trustee to recover his

22 [2011] FMCAFAM 239

ALISON UMBERS

remuneration and costs associated with a Supreme Court dispute with

parties who claimed an interest in the property. The trustee's costs and

remuneration were in excess of $100,000.

63. Her Honour referred to the judgment of Ward J in In the matter of

International Art Holdings Pty Ltd (admin apptd) v Adams23 which cited a

number of decisions that supported the proposition that a trustee was

entitled to have his or her remuneration and outgoings met from the

assets recovered in circumstances where the work performed by the

trustee was for the benefit of creditors and indeed “for the benefit of all

who have legitimate interests in the assets”24.

Conclusions

64. It would appear that the BFLLAA has generally enhanced the position of

the non bankrupt spouse. Cases like Lemnos show that a non bankrupt

spouse may still be able to share in some of the assets of the marriage

even if the liabilities exceed the assets. But what of the trustees in

bankruptcy? Has their involvement in family law proceedings been

“facilitated” by the BFFLLA, as intended according the Explanatory

Memorandum?

65. The imprecise language of s75(2)(ha) may explain why the body of law in

relation to the application of s75(2)(ha) has not developed with any great

speed over the course of nearly a decade, creating uncertainty for

trustees and creditors. The slow development may also be driven, at least

in part, by different facts arising in different cases. However, it may be

also partly be the result of any lack of consistency in the arguments put

before the court.

66. Pippos indicates a willingness on the Family Court’s behalf to quantify the

extent to which creditors interest will be taken into account which over 23

[2011] NSWSC 164 24

from Re Application of Central Commodities Services Pty Ltd at paragraph [60] of the judgment.

ALISON UMBERS

time may lead to more certainty. This approach might be assisted if the

representatives of trustees in these cases seek such an adjustment on a

consistent basis.

67. Further, it is suggested that neither s79 nor s75(2)(ha) deals adequately

with the limitations arising from situations where large parts of the asset

pool are made up of non vested property. In these cases, the trustees

might seek a greater share of the non exempt property, but in the

absence of any legislative reform, where the financial position of the non

bankrupt spouse is not strong, the trustee needs to be aware that the

Court may be in the unenviable position of having to make decisions that

will leave at least one of the parties less than happy.

68. As to trustees' fees, it appears that the trustee's statutory entitlements to

remuneration under the Bankruptcy Act may now receive greater

recognition as a result of cases like Nelson v Perry, compared to the

earlier case of West v West. Trustees in bankruptcy would welcome such

an outcome.

69. The trustee is a sophisticated litigant, and well used to the risks and

uncertainties of litigation. Trustees are likely to continue to be cautious

about their position in Family Court proceedings for some time yet.

However, it is suggested that over time, through the continued efforts of

the Court and the practitioners who present these cases, the identified

shortcomings of the BFLLAA insofar as they affect trustees and creditors

may eventually, at least in part, be overcome.

Alison Umbers

LL.B; B.Comm. ACCREDITED MEDIATOR

Chambers: Floor 4, Room 2, ODCW

Year Admitted: 6th November, 1996

Year Signed Bar Roll: 21st May, 2009

Admitted to Practice in: Victoria, Federal Jurisdictions.

Phone: 9225 6985

Mobile: 0410 467 451

Facsimile: 9225 7907

E-Mail: [email protected]

Areas of Practice

o Banking and Finance o Bankruptcy/Insolvency o Commercial Law o Corporations (Company) Law

o Equity and Trusts o Family Law (Property) o Mediation : Accredited Mediator o Property Law/Sale of Land

Alison has practised in the area of commercial litigation since 1996, and has since that time established a client base within the field of insolvency, acting for some of Melbourne's most well regarded insolvency practitioners.

She practises in both bankruptcy and corporate insolvency.

Alison's insolvency law practice is complemented by a general commercial practice in which she is regularly briefed to draw pleadings and provide advice in relation to a variety of contractual and property disputes.

Before coming to the Bar in 2009, Alison was a principal of a mid tier Melbourne law firm, where she practised exclusively in commercial litigation. Her 15 years of experience as a solicitor means that Alison understands the demands on instructors to provide accurate and practical advice to their clients, and to provide cost effective outcomes.

Since 2004, Alison has been a member of the LIV Commercial Litigation Advisory Committee which assists the Specialisation Board of the Law Institute of Victoria.

She has presented at numerous conferences held by the Law Institute of Victoria on topics related to both insolvency and general commercial litigation.

Alison is a member of the Commercial Bar Association of Victoria, the Law Institute of Victoria and IWIRC (Victoria) (International Womens Insolvency and Restructuring Confederation).

Alison has also served on boards of not for profit organisations, including St Laurence Community Services and the Geelong Community Legal Service.

From 16/07/2009: Professional Standards Act 2003 [Vic] "Liability limited by a scheme approved under Professional Standards Legislation."

mailto:[email protected]

PAUL GLASS

3 September 2014

Family Law and Bankruptcy Is the marriage any happier post-Stanford? By Paul Glass

Paul Glass Barrister

Owen Dixon Chambers

205 William Street

Melbourne Vic 3000 DX 94 Melbourne Vic

03 9225 7333 T 03 9225 7907 F

[email protected] E

It has been nearly ten years since legislative amendments were made that were

intended to clarify the interaction between family law and bankruptcy, and

notably the uncertainty as to the competing rights of creditors and non-bankrupt

spouses1. The legislation requires the court to balance the competing claims of

unsecured creditors and the non-bankrupt spouse in the exercise of the wide

discretion conferred by section 79 of the Family Law Act 19752. Any preferential

position of unsecured creditors was removed as a result of the 2005

amendments3 and there is nothing to suggest that there is any particular weight

or priority to be accorded either to unsecured creditors’ interests or those of the

non-bankrupt spouse4.

1 Revised Explanatory Memorandum to the Bankruptcy and Family Law Legislation Amendment Bill 2005.

2 Trustee of the Property of G Lemnos, a Bankrupt & Lemnos & Anor (2009) FLC 93-394 per Coleman J at

[61, 99], per Thackray & Ryan JJ at [200]. 3 Ibid per Coleman J at [59].

4 Ibid per Coleman J at [58, 60], per Thackray & Ryan JJ at [200].

PAUL GLASS

This paper will examine the way in which the wide discretion is being exercised

and consider any impact of the High Court’s decision in Stanford5. It will also

consider setting aside orders pursuant to section 79A6 and Financial Agreements.

IDENTIFYING INTERESTS IN PROPERTY

The High Court has recently emphasised the necessity of commencing

consideration of property cases by ‘identifying, according to ordinary common

law and equitable principles, the existing legal and equitable interests of the

parties in the property’7. The court ‘must take the property of the parties as it

finds it’8.

Two aspects of the nature of section 79 proceedings between bankruptcy

trustees and non-bankrupt spouses are of significance:

1. Section 79 empowers the court to adjust interests in property. An

application for property settlement does not create, or give rise to any

interests in property that do not at that time exist9. In other words, rights

under the Family Law Act as a result of contributions or other

considerations in sections 79 and 75(2) do not create interests in

5 (2012) 247 CLR 108; (2012) FLC ¶93-518; [2012] HCA 52.

6 Analogue provisions for de facto relationships that broke down after 1 March 2009 are contained in

sections 90SM and 90SN of the Family Law Act. 7 Stanford (supra) per French CJ, Hayne, Kiefel and Bell JJ at [37].

8 Ascot Investments Pty Ltd v Harper & Anor (1981) 148 CLR 337 per Gibbs J at p 355.

9 Bryson & Pember [2013] FamCA 43 per Forrest J at [21-2].

PAUL GLASS

property. Proprietary rights deriving from the Family Law Act come into

existence only upon the making of an order10.

2. As between a bankruptcy trustee and a non-bankrupt spouse, the

legislation allows the court to make orders with respect to vested

bankruptcy property11. ‘There is no power to order a transfer of property

vested in the non bankrupt spouse to a trustee.’12

There is therefore a need to clearly understand what property has vested in the

trustee. Vested bankruptcy property is that property in which the bankrupt had a

legal or equitable interest on the date of bankruptcy13, unless it falls within

particular exclusions, such as property held by the bankrupt in trust for another

person, household property, a motor vehicle of limited value or

superannuation14.

Careful consideration of equitable interests in property is also essential. The

existence of beneficial interests in property arising from resulting or constructive

trusts, equitable estoppel, contribution or charge or a Cummins15 type trust will

determine whether those interests have vested in the trustee or the non-

10

Crandall & Crandall [2009] FamCAFC 120 per Bryant CJ, Thackray & Bennett JJ at [83]. 11

Family Law Act ss 4(1) and 79(1)(b). 12

Reua & Reua & Anor [2008] FamCA 1038 per Stevenson J at [32]. The question was left open by the majority in Lemnos (supra) per Thackray and Ryan JJ at [247]. 13

Bankruptcy Act 1966 s 58. 14

Bankruptcy Act 1966 s 116(2). 15

Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278.

PAUL GLASS

bankrupt spouse16. For the trustee, identifying property held by the non-

bankrupt spouse on trust in favour of the bankrupt provides perhaps the only

avenue to expand the property available for distribution to creditors17.

A ‘Net Pool’ Approach?

Family law practitioners will be familiar with the following ‘general practice’

adopted in identifying assets and liabilities for the purpose of section 79

proceedings:

‘A general practice has developed over the years that, in relation to

applications pursuant to the provisions of s. 79, the Court ascertains the

value of the property of the parties to a marriage by deducting from the

value of their assets the value of their total liabilities.

In the case of encumbered assets, the value thereof is ascertained by

deducting the amount of the secured liability from the gross value of the

asset.

Where the assets are not encumbered and moneys are owed by the

parties or one of them to unsecured creditors, the court ascertains the

16

For a summary of these principles, see O’Hara & O’Hara & Ors [2008] FamCA 189 per Watts J @ [94-115]. 17

For example, Official Trustee in Bankruptcy v Brown & Anor [2011] FMCA 88.

PAUL GLASS

value of their property by deducting from the value of their assets the

value of their total liabilities, including the unsecured liabilities.’18

However, ‘the rule is not absolute, is not prescribed by the statute and there are

a number of well recognised exceptions’19. This general approach or practice

does ‘not find expression in any statutory provisions. Clearly, they must

accordingly yield to express statutory provisions.’20 It is noteworthy that ‘a debt

due does not diminish the property of the parties until it is paid or execution is

levied’21.

A particular problem is encountered in cases where the combined liabilities

exceed the value of the assets. If the general approach is adopted, no section 79

order would be made22. Given that it is settled that the court may make orders in

favour of a non-bankrupt spouse in these circumstances23, the general approach

is likely to be unhelpful.

An examination of trial cases does not reveal a consistent approach to the

exercise of identifying the parties’ interests in property. In cases involving

18

Biltoft (1995) FLC 92-614 per Nicholson CJ, Ellis and Buckley JJ at p 82,124. 19

Ibid at p 82,128. 20

Lemnos (supra) per Coleman J at [93]. 21

Af Petersens (1981) FLC 91-095 per Nygh J at 76,669. 22

Brereton J, Recent Developments in Family Law: Bankruptcy, Third Parties and Other Matters (21 September 2005). 23

Lemnos (supra) per Thackray & Ryan JJ at [202].

PAUL GLASS

unsecured liabilities that do not exceed the value of the assets, they are often

deducted from that value24. However, in some cases where the liabilities exceed

the assets, they are deducted and in others they are excluded. There is even less

consistency to dealing with trustees’ fees which by virtue of section 109 of the

Bankruptcy Act 1966 are to be paid prior to any distributions to creditors. It is

suggested that applying a ‘pool’ approach to the exercise is likely to be of limited

utility in resolving the ‘critical tension’ that arises precisely where the legitimate

claims of a non-bankrupt spouse cannot be met out of net assets25.

JUST AND EQUITABLE – s 79(2)

The High Court in Stanford re-emphasised the mandatory requirement contained

in section 79(2) not to make an order unless it is satisfied that, in all the

circumstances it is just and equitable to make the order.

‘The expression “just and equitable” is a qualitative description of a

conclusion reached after examination of a range of potentially competing

considerations. It does not admit of exhaustive definition. It is not possible

to chart its metes and bounds.’26

24

E.g. West & West & Anor [2007] FMCAfam 681, Tolbiac & Tolbiac & Anor [2008] FamCA 265. 25

Commissioner of Taxation & Worsnop & Anor (2009) FLC 93-392 per Bryant CJ, Warnick and Cronin JJ at [52]. 26

Stanford (supra) at [36].

PAUL GLASS

‘The question posed by s 79(2) is thus whether, having regard to those

existing interests, the court is satisfied that it is just and equitable to make

a property settlement order.’27

‘…whether making a property settlement order is “just and equitable” is

not to be answered by beginning from the assumption that one or other

party has the right to have the property of the parties divided between

them or has the right to an interest in marital property which is fixed by

reference to various matters (including financial and other contributions)

set out in s 79(4).’ 28

The court is required ‘to have a principled reason for interfering with the

existing legal and equitable interests of the parties to the marriage and

whatever may have been their stated or unstated assumptions and

agreements about property interests during the continuance of the

marriage’29.

Although a third party creditor does not acquire by intervention in property

settlement proceedings rights based on s 79(2) for a just and equitable remedy

in addition to the creditor’s other rights at law30, the court has a duty to satisfy

itself that the order is just and equitable in all the circumstances, including the

existence of unsecured liabilities31. Put another way, if an order is likely to defeat

27

Ibid at [37]. 28

Ibid at [40]. 29

Ibid at [41]. 30

Worsnop (supra) per Bryant CJ, Warnick and Cronin JJ at [78] 31

Official Trustee in Bankruptcy v Mateo (2003) FLC 93-128 per Branson J at [99].

PAUL GLASS

the claims of creditors, ‘there must be a real issue as to whether such orders

altering property interests are just and equitable’32.

An increased focus on the requirements of section 79(2) in circumstances where

the phrase ‘just and equitable’ does not admit of exhaustive definition may

support arguments that non-bankrupt spouses ought not benefit from an order

interfering with the trustee’s interests in vested bankruptcy property. Requiring

the court to determine the justice and equitability of making any order can bring

a larger range of factors into play that may assist the trustee to resist a claim on

vested bankruptcy property. Conversely though, the practical effect of an order

that would require a mother and children to be removed from their former

matrimonial home to meet what was in large part the trustee’s costs led a court

to find that it was not just and equitable to make the order33.

CONTRIBUTIONS – s 79(4)(a-c)

‘The task is to make findings as to the nature, form and characteristics and

duration of each and all of the contributions made by each of the parties

referenced to s 79(4).’34

32

Ibid per Merkel J at [144]. 33

West (supra) at [139]. 34

Hoffman [2014] FamCAFC 92 at [61]

PAUL GLASS

A number of difficulties present themselves for the bankruptcy trustee in an

assessment of the parties’ contributions. Firstly, the legislation makes no

reference to parties who have become bankrupt in any of the relevant sub-

sections. Secondly, the trustee is unlikely to be able to adduce evidence about

the parties’ contributions to rebut the evidence of the non-bankrupt spouse35.

The assessment of contributions is being done as between the parties to the

marriage. No challenge was made on appeal in Lemnos to the trial judge’s finding

that the husband and wife’s contributions were equal36. Doing a complete

injustice to the multitude of facts particular to each of the cases, a majority of

trial decisions reveal contributions findings being made that favour of the non-

bankrupt spouse, sometimes to an overwhelming extent37. Two cases are

identified where contributions were found to have favoured the bankrupt

spouse38.

A non-bankrupt spouse’s lack of knowledge of, or complicity in the activity that

created the liabilities is relevant but not determinative. In Lemnos, the majority

found that the wife’s lack of knowledge or complicity in the husband’s wrongful

tax deductions ought not be determinative of whether she should share

35

see West (supra). 36

Lemnos (supra) per Thackray & Ryan JJ at [281]. 37

West (supra); Nelson & Perry & Anor [2011] FMCAFAM 239; Trustee for the Bankrupt Estate of Lasic & Lasic [2010] FamCA 682; Debrossard (supra); Reua (supra); D & D [2005] FamCA 356. 38

Roberts & Ors & Perdana & Ors [2012] FamCA 224; O’Hara (supra).

PAUL GLASS

responsibility for the payment of primary taxation39. Justice Coleman, in

minority, found that the trial judge’s ‘focus on the absence of complicity or

culpability on the part of the wife diverted him from the discretionary exercise

which the statute required him to undertake’40. In Worsnop, the Full Court found

that the questions of “knowledge”, while likely to be almost irrelevant where net

assets were sufficient to meet creditors claims, ‘might come into much sharper

focus where liabilities exceeded assets’41. Trial judges are having regard to

questions of complicity, responsibility and knowledge of liabilities in their

determinations42.

OTHER MATTERS – s 79(4)(d-g) and s 75(2)

The court is required to consider ‘the effect of any proposed order on the ability

of a creditor of a party to recover the creditor’s debt, so far as it is relevant’,

alongside a total of 21 matters listed in these subsections43. It is the practical

prospects of recovery to which the consideration is directed rather than the

creditor’s rights of recovery44. The consideration of the matters in section 75(2) is

said to be holistic, and not an accounting exercise45.

39

Lemnos (supra) per Thackray & Ryan JJ at [245]. 40

Ibid per Coleman J at [176]. 41

Worsnop (supra) per Bryant CJ, Warnick and Cronin JJ at [70]. 42

E.g. Nelson & Perry (supra); Pippos & Pippos & Anor [2008] FamCA 542. 43

Family Law Act 1975 s 75(2)(ha). 44

Worsnop (supra) per Bryant CJ, Warnick and Cronin JJ at [79] 45

Chapman (2014) FLC 93-592 per Strickland & Murphy JJ at [39].

PAUL GLASS

Although not a statement of principle, the majority in Lemnos made the

following observation with respect to section 75(2)(ha) in cases involving a

bankrupt spouse:

‘Although it will not always necessarily be so, it would seem that in many

cases the application of section 75(2)(ha) will result in the assessment of

the Family Law Act entitlement of the non-bankrupt spouse at an amount

less than he or she would otherwise have been entitled to receive.’46

An examination of trial cases suggests that a majority of trial judges are adopting

this approach. Many cases reveal modest adjustments of 5 to 10% in favour of a

non-bankrupt spouse on account of factors that might otherwise lead to a higher

adjustment47. Examples can be found of more significant adjustments in favour

of a non-bankrupt spouse, where the bankrupt spouse had not disclosed what

financial resources would be available to him after being discharged from

bankruptcy48 and also in a case involving a significant outstanding child support

liability49.

46

Lemnos per Thackray & Ryan JJ at [264]. 47

For example, West (supra); Roberts & Perdana (supra); Reua (supra); Pippos (supra); D & D (supra). 48

O’Hara (supra). 49

Tartabull & Tartabull & Ors [2007] FamCA 1670.

PAUL GLASS

Only a minority of determined cases include consideration of the actual effect on

creditors in terms of how many cents in the dollar they are likely to receive50.

This is surprising given the practical import of section 75(2)(ha) and suggests that

there may be some deficiencies in the presentation of cases that do not enable

such findings to be made.

Some hope may be found for trustees in what might otherwise be a bleak

litigation environment from a finding by Justice Stevenson that a section 75(2)(o)

adjustment of 2.5% in favour of the trustee was warranted because of the non-

bankrupt spouse’s ongoing resistance to the trustee’s claims51.

There may be a prospect of presenting a case which focuses more on the

reasonable needs of the non-bankrupt rather than a conventional contributions

and adjustment approach. This possibility was left open in Worsnop, although no

evidence had been adduced at trial as to the non-bankrupt spouse’s likely cost of

alternative accommodation52. Further support for this possibility may be found

in Stanford, where one basis for the Court holding that it was unjust and

inequitable to make a property settlement order was because the wife’s needs

were met53.

50

Pippos (supra); Debrossard (supra). 51

Lasic (supra) per Stevenson J at [130-1]. 52

Worsnop (supra) at [100]. 53

Stanford (supra) per French CJ, Hayne, Kiefel & Bell JJ at [49], Heydon J at [62].

PAUL GLASS

SETTING ASIDE PREVIOUS ORDERS – s 79A

Where section 79 orders are made which divest a bankrupt spouse of interests in

property, trustees may apply under section 79A to set those orders aside54. That

position is confirmed by the nomination of a bankruptcy trustee as a person

whose interests are affected by the order in subsection 79A(6). The alteration of

interests of parties in property is not a transfer of property within the meaning

of sections 120 or 121 of the Bankruptcy Act55 and therefore not amenable to

those “clawback” provisions.

In the situation where an order has been made under section 79 for the transfer

of property but effect has not been given to it prior to bankruptcy, that interest

does not vest in the trustee56. This arises due to the effect of the section 79

order being to vest the equitable interest in the property in the beneficiary of

the order57.

Where section 79 orders were made in circumstances were the Court is not

appraised of the parties’ creditors in accordance with the duty of disclosure, that

54

Official Trustee in Bankruptcy v Mateo (2003) FLC 93-128. 55

Ibid per Branson J at [102] and Merkel J at [136]. 56

Jones v Daniel (2004) FLC 93-146. 57

Mateo (supra) per Wilcox J at [57].

PAUL GLASS

failure will ordinarily amount to a miscarriage of justice58. The proper approach

to disclosure and its consequences in relation to significant creditors is as

follows:

‘There is an obligation on both parties to disclose any significant creditors

or any significant claim against either of them by a third party. If, as a

result of the order of the Court in the property proceedings, the ability of a

creditor or claimant to recover his or her debt or claim is likely to be

affected, notice of the Family Court proceedings must be given to that

creditor or claimant. He/she may then intervene in the Family Court

proceedings and either seek a stay of those proceedings or some

appropriate order which recognises his/her rights.’59

By way of example, Justice Young found there to have been a miscarriage of

justice where consent orders were made providing for the transfer to the wife of

the husband’s interest in a property following the intentional and deliberate

suppression of information relating to the husband’s creditors60. On application

by the husband’s trustee in bankruptcy, the Court exercised its discretion to set

aside the transfer order. This had the effect of leaving the trustee in bankruptcy

and the non-bankrupt spouse as equal owners of the property.

58

Morrison & Morrison (1995) FLC 92-573, Trustee in Bankruptcy v Donovan and Donovan and Stevens [1996] FamCA 58. 59

Biltoft (supra) at 82,129. 60

Official Trustee in Bankruptcy v Bryan, AJ and The Estate of Christine Ann Gatenby (deceased) (2006) FLC 93-256.

PAUL GLASS

SETTING ASIDE FINANCIAL AGREEMENTS

Unlike the situation where a transfer of property occurs pursuant to orders

under section 79, the transfer of property pursuant to a Family Law Act Financial

Agreement is amenable to challenge under sections 120 and 121 of the

Bankruptcy Act61. This flows from the removal by the 2005 Amendments of the

term ‘financial agreement’ from the definition of ‘maintenance agreement’62, a

species of transfer which is not void in accordance with section 120 of the

Bankruptcy Act. This is consistent with the legislative intention to permit trustees

using the Bankruptcy Act’s “clawback” provisions to recover property transferred

prior to bankruptcy pursuant to financial agreements63.

Where transactions pursuant to a Financial Agreement are void under section

120 or 121 of the Bankruptcy Act, it may be that a subsequent application is

brought by the non-bankrupt spouse for orders adjusting interests in vested

bankruptcy property under section 79 of the Family Law Act. The non-bankrupt

spouse would theoretically have to apply to set aside the Financial Agreement,

although several of the requirements in section 90K of the Family Law Act would

seem to be available for that purpose.

61

Combis, Trustee for the Property of Peter Jensen (Bankrupt) v Jensen [2009] FCA 778 per Collier J, followed in Sutherland v Byrne-Smith [2011] FMCA 632. 62

Bankruptcy Act 1966 s 5(1). 63

Explanatory Memorandum (supra) at [17].

PAUL GLASS

Although section 90K of the Family Law Act contemplates broader grounds for

intervention than section 121 of the Bankruptcy Act, it is unclear whether a

trustee has standing to apply to set aside a Financial Agreement under section

90K. In the case of ASIC v Rich64, Justice O’Ryan held that a third party creditor

did not fall within the definition of a party who was entitled to apply to set aside

a Financial Agreement65. Subsequent amendments were made to the Family Law

Act to enable third party proceedings to be brought to set aside a financial

agreement66. Significantly for present purposes, third parties are defined to be

creditors or government bodies acting in the interests of a creditor67. On its face,

that definition would appear to exclude private registered trustees.

64

(2003) FLC 93-171. 65

Family Law Act s 4(1) definition of “matrimonial cause”. 66

Family Law Amendment Act 2003. 67

Family Law Act s 4A(1)(b).

Paul Glass

BSc (Psych), LLB (ANU), MAppLaw (Family Law)

Chambers: 411 ODCW

Year Admitted: 19/10/2007

Year Signed Bar Roll: 2011

Admitted to Practice in: Victoria, ACT, Federal..

Phone: 9225 7333

Mobile: 0414 853 310

Facsimile: 9225 7907

E-Mail: [email protected]

Areas of Practice

o Family Law (Including Defacto) o Mediation

Paul specialises in family law. He regularly appears in the Federal Magistrates and Family Courts.

Paul's expertise is informed by his background as a solicitor in private practice and at Victoria Legal Aid.

Aside from the law, Paul is a keen kite surfer

mailto:[email protected]

GORDON & JACKSON

DISCLAIMER OF RESPONSIBILITY

The provision of seminar papers by Gordon & Jackson is a free service provided for members of the legal profession. It is not intended nor recommended that the seminar papers and the information contained in them be used by members of the public. Gordon & Jackson, the members of List S and the authors of the seminar papers do not accept responsibility for the information or opinions contained in the seminar papers. No guarantee, undertaking or warranty is provided concerning the accuracy, completeness or currency of the information provided in the seminar papers or for any damage sustained by any person as a result of any reliance placed on such information. As the law is constantly evolving and subject to change it is very likely that the information contained in the seminar papers may be out of date even shortly after publication.

insolvency law & family law practice groups · insolvency law & family law practice groups...

Documents