Bankruptcy and Binding Financial Agreements (Part 1)

What happens when parties enter into a Binding Financial Agreement and one party subsequently becomes bankrupt?

What do you do when the one asset pool to be divided is in circumstances where there are competing claims between the bankrupt’s spouse or partner and the bankrupt’s creditors?

If you find yourself in a situation like this and are unsure of the next steps, read on.

Broadly speaking, individuals thinking about asset protection are primarily concerned with protecting assets from attack either through a family breakdown, poor business or investment decisions, bankruptcy or a family provision claim.

So, what happens when family law and bankruptcy intersect?

In such circumstances, the non-bankrupt partner may find him or herself competing against claims from unsecured creditors for a share in the bankrupt’s assets. Conversely, in a scenario where one party intends to frustrate or prevent their former partner from obtaining a share of assets, that party may attempt to use bankruptcy proceedings to put assets out of the reach of their former partner. In a situation like this, the non-bankrupt partner may find him or herself competing for a share of the assets against “fake creditors”.

Generally, in relation to both married and de facto couples, the presence of a third party in proceedings and the subsequent conflict between the claims of the former partner and creditor(s) is dealt with extensively in Part VIIIAA (subsections 90AA to 90AK) of the Family Law Act 1975 (Cth).

With respect to Binding Financial Agreements (‘BFAs’), the items of property that can be dealt with by parties in a domestic relationship under such a document may comprise of assets including domestic and international real estate, personal property, superannuation, spousal maintenance, child support, and future inheritances. There are strict legislative requirements to enter into same and, of course, one needs to consider the grounds for review as to what circumstances may set them aside.

In relation to bankruptcy proceedings, they are dealt with under the Bankruptcy Act 1966 (Cth). A person may be made bankrupt either by a creditor’s petition[1] or through a debtor’s petition.[2] A trustee in bankruptcy is then appointed and the bankrupt’s property then vests in the trustee,[3] albeit he or she is permitted to retain certain household items and any interest in a regulated superannuation fund.[4] The bankrupt’s property consequently becomes available to be divided amongst his or her creditors.[5]

So how do BFAs hold up in the face of bankruptcy?

Prior to the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth), BFAs held up pretty well in that the tax man was generally unable to obtain a share of a bankrupt’s assets once a BFA had been correctly executed. This was seen in the case of Australian Securities and Investments Commission v Rich and Anor [2003] FAMCA 114 wherein O’Ryan J was tasked with answering the question as to whether the Family Court had the jurisdiction to set aside Financial Agreements on the application of a third party, in this case – the Australian Securities and Investments Commission (‘ASIC’).

In this case, the Husband was a founding Director of One.Tel Ltd and had numerous business interests. Between 17 May 2001 and 4 June 2001, the Husband transferred and altered the ownership of his assets. On 29 May 2001, the board of Directors of One.Tel Ltd resolved to place the company into administration. On 31 May 2001, the parties entered into the Financial Agreement pursuant to section 90C (during marriage). On that same day, ASIC started investigating the Husband in relation to suspected contraventions of the Corporations Act 2001 (Cth).

ASIC tried to rely upon sections 90KA and 90K(1)(b), arguing that the Financial Agreement was void or voidable. However, this point was futile if ASIC did not have standing, being the ability to bring an action before the Family Court.

Both the Husband and Wife in that case filed responses seeking an order that the application by ASIC be dismissed for similar reasons. The Husband submitted that there was no jurisdiction to grant the relief whereas the Wife submitted that the application should be summarily dismissed as there was an absence of a triable issue and that the application was so flawed that it could not succeed.

The Court reasoned that the definition of a “matrimonial cause” provided that the proceedings be “between the parties to a marriage”. Accordingly, given that ASIC cannot be a party to the marriage – the application by ASIC was not a “matrimonial cause”. Thus, the Court did not have jurisdiction to hear the matter by ASIC and subsequently dismissed the application. His Honour did note, however, that “there are good policy reasons why” it is appropriate for the Family Court to determine whether third parties may apply to set aside BFAs – however this did not address the issue of jurisdiction.[6]

Further, His Honour went on to state that:

it is of concern to me that the consequence of my finding is that the Family Court has no jurisdiction to deal with an application by an unsecured or contingent creditor to set aside a financial agreement in circumstances where the interests of such a third party are or may be adversely affected by the terms of the agreement. This position in contrary to that taken by the court over a number of years in circumstances where an order was made under section 79 or an agreement approved under section 87.”[7]

Following this case, the legislation was amended to rectify this position and it is now easier for trustees in bankruptcy to attack BFAs resulting in them being more susceptible. Why? Because prior to the amendments, the Bankruptcy Act 1966 (Cth) exempted a ‘maintenance agreement’ from its purview. This is no longer the case. The definition of ‘maintenance agreement’ contained within s 5(1) of the Bankruptcy Act 1966 (Cth) was further clarified so as to exclude “Financial Agreement within the meaning of the Family Law Act” following interpretation issues.

We will continue looking closely at the intersection between Binding Financial Agreements and Bankruptcy in our next article, so remember to return to our website soon. In particular, in our next post we will look at a couple of cases following the amendments to the Bankruptcy Act 1966 (Cth) and how this affects BFAs in Family Law.

[1] Bankruptcy Act 1966 (Cth) s 43.

[2] Bankruptcy Act 1966 (Cth) s 55.

[3] Bankruptcy Act 1966 (Cth) s 58.

[4] Bankruptcy Act 1966 (Cth) s116(2).

[5] Bankruptcy Act 1966 (Cth) s116(1).

[6] Australian Securities and Investments Commission v Rich and Anor [2003] FAMCA 114 at [95].[7] Australian Securities and Investments Commission v Rich and Anor [2003] FAMCA 114 at [115].

Doolan Wagner Family Lawyers offer specialist family law advice in St Leonards on Sydney’s North Shore. If you have recently separated or have a Family Law enquiry, please contact us on (02) 9437 0010 or to discuss your matter in complete confidence. We have a team of experienced and caring professional family lawyers available to help you in this difficult time.

These posts are only intended as an overview or comment on current issues that may interest you and are not legal advice. If there are any matters that you would like us to advise you on, then please contact us.

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