Family law and bankruptcy – ‘creditors should be expected in these times to be aware’…

The Civil Law and Justice Legislation Amendment Bill 2017 is before parliament, one purpose of its many amendments being both to fill a gap in family and bankruptcy law, and to clarify the family courts’ jurisdiction. While these would clarify existing law, the changes may need to be reconsidered in light of the announced reforms to the family courts, due to commence in 2019. 

Whatever the law, creditors have to accept the reality of competing family law and related claims on the assets of those with whom they deal.

Clarifying the present law

The Family Court of Australia has jurisdiction to annul a person’s bankruptcy in certain cases, typically the bankruptcy of a spouse who is before the Court on a family law matter.

In a recent case, the Court noted that while it is limited in making orders under the Bankruptcy Act (BA) to cases where the matter has been transferred to the Family Court from the Federal Court or the Federal Circuit Court under s 35A of the BA, it has full jurisdiction under s 35 BA if a party to a marriage is a bankrupt and their trustee is a party to proceedings in the Family Court, typically property proceedings.

The Family Court then has jurisdiction “in relation to any matter connected with, or arising out of, the bankruptcy of the bankrupt”.

The Court in that case – Porter & Porter [2018] FamCA 433 – heard an application to annul a spouse’s voluntary bankruptcy under s 153B of the Bankruptcy Act, but refused it; the spouse had gone bankrupt a week before the other spouse’s property application. The Court accepted the debtor spouse was insolvent. The trustee of the bankrupt said that the bankrupt was “hopelessly insolvent”, and the Court accepted that assessment.

The pre-2005 law

This shared jurisdiction contrasts with the old law – before 2005 – whereby whichever spouse acted first would invariably succeed, one rushing to apply to the Family Court for a property order, the other hurriedly presenting their debtor’s petition.

Re Thanos (FCA 14 October 1988) is an example of a husband going bankrupt on the very morning of the wife’s family law property hearing, thereby denying the Family Court any jurisdiction in relation to the bankrupt husband’s divisible property. That contrasts with Re Moncada [1986] FCA 138 where the bankrupt husband had filed “a grossly untrue affidavit” purporting to show his insolvency to thwart a family law claim by his former wife as his only substantial creditor. The court annulled his bankruptcy on the basis that it was an abuse of process.

Civil Law and Justice Legislation Amendment Bill 2017 

In relation to the existing law, this Bill deals with discharged bankrupts and the family courts’ bankruptcy jurisdiction.

Discharged bankrupts

A gap in the present law is that if a person is discharged from bankruptcy, the trustee is unable to take part in family law proceedings concerning their vested property. This is because of the limited definition of ‘bankrupt party’ in the FLA: see Official Trustee in Bankruptcy and Galanis [2017] FamCAFC 20.

The same gap exists in relation to de facto relationship claims.

This change would apply to existing and new claims by trustees where relevant property remains vested.

Other changes are being made out of what appears to be undue caution.

Section 35A BA

The Bill would amend s 35A BA to clarify that the Family Court has bankruptcy jurisdiction in circumstances when a trustee applies to the Family Court to set aside a financial agreement under sections 90K and 90UM of the Family Law Act. This is only, it is said, to clarify existing law.

The Family Court currently has such jurisdiction by virtue of the definition of ‘property settlement proceedings’, which is given the same meaning in section 35 of the BA as in the Family Law Act (see subsection 35(3)) and covers proceedings under sections 90K and 90UM.

The Family Law Act defines ‘property settlement proceeding’ to include proceedings concerning ‘vested bankruptcy property in relation to a bankrupt party’.

Section 35 BA

Subsection 35(1) BA would also be amended, but only to make it clear, that the Family Court has jurisdiction in bankruptcy where the party to a marriage is bankrupt and the trustee is an applicant for an order under s 90K for the setting aside of a financial agreement of the parties to the marriage; or under s 90UM in relation to de facto parties.   

Federal Circuit and Family Court of Australia

Whether this all remains needed depends on the announced amalgamation of the Family Court and the Federal Circuit Court to create the new Federal Circuit and Family Court of Australia (FCFCA); not to be confused with the Full Court of the Federal Court of Australia (FCFCA).  A new Family Law Appeal Division in the Federal Court sitting as the FCFCA would also be established to hear all appeals in family law matters from the FCFCA.

There is some uncertainty at the moment as to where and how the rights of third parties – like creditors and trustees in bankruptcy – might be handled in the family law context.

Creditors beware

Spousal disputes and bankruptcy do not sit well together as much as the law tries to provide some fair solution.  Creditors of one spouse are often in competition with the needs of the non-bankrupt spouse and more particularly of any children.

In a related context, Justice Roslyn Atkinson has commented that a trustee in bankruptcy takes the bankrupt’s property “subject to all the liabilities and equities which affect it in the bankrupt’s hands” and that

“creditors should be expected in these times to be aware of the possibility of constructive trusts or of equitable interests which may arise when the debtor is married or in a de facto relationship” (Clout v Markwell [2001] QSC 91);

or, it should be added, the probability of family law claims.

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