Bankruptcy and Family Law
Posted on 24 April 2023
Geoff Munce
Bankruptcy and family law
What relief might a non-bankrupt spouse have against the trustee in bankruptcy (where their spouse is bankrupt)
The pool of assets available to a debtor’s creditors can be affected by a non-bankrupt’s rights under the Family Law Act 1975 (FLA).[1] Section 31 of the FLA allows the court to have accrued jurisdiction where there are other proceedings in other jurisdictions where a trustee may have commenced proceedings about a similar dispute about the division of matrimonial property.[2]
The Federal Circuit and Family Court of Australia (FCFCOA) has wide powers[3] to bind third parties or alter their interest in matrimonial property where there is s. 79 of the FLA proceedings on foot.
Section 78 of the FLA gives the FCFCOA power to alter the existing rights in the matrimonial property. Once the party has been declared bankrupt the Trustee can take the place of the bankruptee in proceedings.
Pursuant to s. 90AE of the FLA, the court can make an order that: -
- Alters the debt liability wholly or partially to one party.
- Alters the third party’s interest in the property.
- Directs the third party to carry out a particular task.[4]
Pursuant to s. 90AF of the FLA the FCFCOA can make an injunction under section 114 to: -
- Stop a third party from repossessing matrimonial property.
- Alter the rights, and interests in the property.[5]
However, the FCFCOA will not deprive a third party of an existing right or impose a duty on them that they would not otherwise perform.[6] The Court will consider what is procedurally fair, and what is just and equitable when dividing the property.[7]
Whether a third party has intervened or not, the FCFCOA has the power under s79 to discharge the debt to a party.[8] When deciding how the division of property should be dealt with where there is a bankruptee, the FCFCOA may consider whether a bankrupt spouse is on a frolic on their own, without the knowledge of the non-bankrupt spouse, and may rule that the non-bankrupt spouse does not have to take the ‘Good with the Bad’.[9] However, there will need to be compelling reasons why the non-bankrupt spouse should not be also liable for the debt if they also enjoyed the benefits of that debt.[10]
Advantages of commencing proceedings under the FCFCOA when not separated.
The advantages are: -
- One set of proceedings about the same matter of dispute may save time and money.
- Despite the parties not being able to divorce given the 12-month separation requirement, the FCFCOA has the power to deal with the property.[11]
- Section 59A of the Bankruptcy Act 1966 (BA) says that where the property is subject to an order made under Part VIII or Part VIIIAB of the FLA, the property is not divisible amongst the creditors of the debtor as the property would be if captured only by ss. 58 and 59 of the BA.[12]
- Where orders have been made in the FCFCOA, a third party will not be able to also use the clawback provisions under section 121 of the BA.[13]
- Pursuant to section 106B of the FLA, the FCFCOA can protect the property by setting aside instruments or depositions where the bankrupt party has altered the interest of the property.[14]
HOW CAN OMNIA LEGAL ASSIST YOU?
If you are considering a separation or divorce and have concerns about your financial situation, it is important to seek legal advice to understand your rights and options under the Family Law Act.
If you would like to schedule an obligation-free complimentary phone consultation to talk through your option, call (07) 5415 0248 or email info@omnialegal.com.au.
[1] R v Dovey; exparte Ross [1979] HCA 14.
[2] Family Law Act 1975 (Cth) s 31.
[3] See section 34 of the Family Law Act 1975: the court has inherent jurisdiction to prevent injustice.
[4] Family Law Act 1975 (Cth) s 90AE.
[5] Ibid s 90AF.
[6] Ascot Investments Pty Ltd v Harper [1981] HCA 1.
[7] Family Law Act 1975 (Cth) ss 90AE & s 114. See also Stanford v Standford [2012] HCA 52.
[8] Zdravkovic and Zdravkovic [1982] FamCA 23 at 17.
[9] Commissioner of Taxation & Worsnop [2009] FamCAFC 4.
[10] Trustee of the Property of G Lemmnos v Lemnos [2009] FamCAFC 20
[11] Family Law Act 1975 (Cth) s 4(1).
[12] Bankruptcy Act 1966 (Cth) s 59A.
[13] Ibid, s121.
[14] Family Law Act 1975 (Cth) s106B.
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