Bankruptcy and Binding Financial Agreements (Part 2)

Picking up from Part 1 of this Article, we now turn to a couple of family law cases that were handed down after the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) was passed.

In CPPIB Credit Investments Inc v Ren [2017] NSWSC 771, Ms Kong and Mr Ren had been married for approximately 10 years. They divorced in September 2016. In November 2016, the parties entered into a BFA pursuant to section 90C (that is, during marriage). The BFA provided that a Warrawee home worth $11.5 million be transferred to the Wife, which at the time was owned by the parties as joint tenants.

An action was commenced by CPPIB Credit Investments in the New South Wales Supreme Court against the Husband to recover an amount in excess of $50 million, for which the applicant argued that the Husband was liable under a guarantee.

On 28 April 2017, the New South Wales Supreme Court made an order freezing assets including the Warrawee home. Ms Kong (who was now the former Wife of Mr Ren) filed a notice of motion seeking that the freezing order be dissolved so far as it affected her. Ms Kong argued that the freezing order be lifted on the ground that the Warrawee property was subject to the BFA and that Mr Ren no longer had any interest in the property.

Ball J stated that it was common ground that, should the Court find that the Warrawee property was the subject of a BFA, the freezing order should not continue against Ms Kong.[1] However, should the converse be true, the freezing order was to stay pending further order of the Court.

CPPIB submitted that the BFA was not binding, primarily for two reasons:-

  1. Firstly, that the agreement was entered into after Mr Ren and Ms Kong divorced and therefore, was not an agreement pursuant to section 90C (which deals with Financial Agreements during marriage); and
  2. Secondly, that the Court could not be satisfied that Mr Ren received a copy of the Certificate of Independent Legal Advice signed by the Wife’s lawyer pursuant to section 90G(1)(ca) given that there appeared to be some inconsistencies with respect to the dates.

Ball J accepted both these submissions.

In relation to the first point, Ms Kong unsuccessfully submitted that the Court could not be satisfied that her divorce would be recognised in Australia, given that she had filed divorce proceedings in China in or about April 2016. Ball J rejected this argument, positing that the circumstances were sufficient to conclude that the divorce satisfies the requirements of section 104, and therefore, would be recognised.

In relation to the second point, Ball J acknowledged that, under section 90G(1A), a Financial Agreement may be binding if section 90G(1)(ca) was not formally complied with “if a court is satisfied that it would be unjust and inequitable if the agreement were not binding” – however, went further to say that there was no evidence before the Court to come to this conclusion.

Ms Kong also unsuccessfully submitted that, even if the document was not found to be a BFA, the freezing order should not be continued because there were multiple freezing orders over the property, each with differing conditions as to how the proceeds of sale were to be dealt with, which in turn may not be possible to comply with.

The Court ordered that Ms Kong’s motion be dismissed with costs and that the freezing order made by the Court continue pending further order of the Court.

The Husband became bankrupt on 5 April 2018.

It appears that, had the parties complied with the strict legislative requirements to render a BFA binding in nature, the outcome of this case may have been starkly different.

In Official Trustee in Bankruptcy v Galanis [2017] FamFC 20, a separated Husband and Wife entered into a BFA requiring the Husband, a discharged bankrupt, to transfer all his right, title and interest in the former matrimonial home to the Wife.

The Official Trustee in Bankruptcy (“Trustee”) had filed an application seeking orders that the BFA between the Husband and Wife be set aside.

The Family Court of Australia was tasked with the question of whether it had the jurisdiction to hear and determine this matter, given that the Appellant was arguing that the primary judge erred by failing to find that proceedings brought by the Official Trustee fell within the definition of a “matrimonial cause” in sections 4(1) and 4A.

In this matter, Ms Galanis (the first respondent) and Mr Dukas (the second respondent) commenced their relationship in 1999 and purchased a property together in 2002 as tenants in common with Ms Galanis owning 60 per cent and Mr Dukas owning the remaining forty (40) per cent. Despite the unequal ownership, Mr Dukas submitted that Ms Galanis provided the entirety of the purchase price. The parties married in 2006 and subsequently separated in October 2011.

In 2008, Mr Dukas (the Husband) became bankrupt. He was subsequently discharged from the bankruptcy in October 2011 – at the same time of his separation.

In February 2013, the parties entered into a BFA pursuant to section 90D (after a Divorce Order is made) requiring the Husband to transfer to the Wife all of his right, title and interest in the former matrimonial home. The Wife was also to discharge the mortgage and indemnify the Husband against any further liabilities relating to the property.

In July 2013, the Trustee filed an application in the Federal Circuit Court of Australia seeking that:-

  1. The Financial Agreement between the First Respondent and the Second Respondent be set aside;
  2. Forty (40) percent of the net proceeds from the sale of the matrimonial home be paid to the Applicant for distribution amongst creditors in the bankrupt estate of the Second Respondent Husband; and
  3. That the Court considers the issue of costs.

In January 2014, the Wife filed an Application in a Case seeking that the proceedings be dismissed, successfully arguing that the Court did not have the jurisdiction to hear the matter because the application by the Trustee did not constitute a “matrimonial cause” as contained within section 4(1). Upon its transfer to the Family Court of Australia, the matter was dismissed. The Trustee appealed.

On appeal, the Trustee contended it was a “government body acting in the interests of the creditor” pursuant to section 4A(1)(b)(iii). The Wife again, submitted that the Court did not have jurisdiction. The Court expressly stated that the Trustee was not a government body under that definition, contrasting the role of the Trustee with ASIC, which is a Commonwealth entity.

Accordingly, the appeal was dismissed with costs.

Thus, BFAs are entered into to provide certainty and predictability to parties in relation to the division of assets or the maintenance of a party when a relationship breaks down. Put simply, they are intended to protect a party’s financial position. Ultimately, there is no effective method of predicting the future with certainty when dealing with a change of circumstances or impracticability of adhering to the agreement – which appears to be the biggest weakness of using BFAs as an asset protection vehicle.

In terms of its use as an asset protection vehicle when a party subsequently becomes bankrupt – evidently, it was often misused to the bankrupt’s advantage prior to the amendments to the Bankruptcy Act 1966 (Cth) following ASIC v Rich and Anor [2003] FAMCA 114. However, apart from the result in CPPIB Credit Investments Inc v Ren [2017] NSWSC 771 which occurred due to a drafting error and deviation from the strict legislative requirements, the cases discussed above were found in favour of the parties seeking to uphold the BFA in the face of bankruptcy – albeit, due to technicalities. It appears that whilst the effectiveness of BFAs in protecting assets from attack in a bankruptcy has diminished somewhat, they have also done what was intended to be achieved.

Key Takeaways:

  1. It is important to remember that Binding Financial Agreements are not “bulletproof” and can be set aside in certain circumstances such as fraud, duress, a change in circumstances and so on.
  2. The 2005 amendments now allow creditors to have standing to apply to set aside a Binding Financial Agreement.
  3. Those seeking to enter into Binding Financial Agreements are well advised to obtain a second opinion from another legal professional and obtain financial advice from other professionals.

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.

[1] CPIBB Credit Investments Inc v Ren [2017] NSWSC 771 at [5].

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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