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Complex Property Cases – The Husband, The Wife, The Company Liquidator and The Trustee in Bankruptcy

07/12/2020

Most people would think that in the Family Court or Federal Circuit Court the parties to a property case would be between the husband and the wife.  This is not always the case.  The structure and nature of the assets that constitutes the property pool can be complex.  The nature and structure of assets and/or liabilities may mean that other persons or entities become involved in the case. 

For example:

  • Assets may be held in Trust and be out of the direct control of the parties. 
  • The husband or wife may have given personal guarantees to Creditors. 
  • One of the parties may be or become a bankrupt.
  • There may also be proceedings commenced in Courts other than the Family Court or Federal Circuit Court for debt claims which impact on the liabilities which need to be met from the property pool available for division.  The proceedings may need to be amalgamated. 
  • A party or parties may be a director or shareholder of an insolvent company. 

Personal Bankruptcy

The Bankruptcy Act (Cth) 1966 sets out the law of bankruptcy in Australia.  A person can become a bankrupt if they are unable to pay their debts as and when they fall due.  A person may become a bankrupt because a Creditor has served a Bankruptcy Notice and then filed and pursued a Petition for Bankruptcy in the Federal Court.  A person can also present a Debtors Petition to The Insolvency and Trustee Service Australia and become a bankrupt on their own application. 

If one party to a marriage or a de facto relationship is a bankrupt or becomes a bankrupt, there are consequences in Family Law Bankruptcy will affect the way in which a Family Law matter proceeds as well as affecting the outcome.  The costs of conduct of the proceedings and the length at the proceedings will also increase. 

What Happens When You Go Bankrupt?

When a person becomes a bankrupt all of their property (except exempt property) vests in the Trustee in Bankruptcy (Section 58 Bankruptcy Act 1966).  This means that they no longer own their property.  The Trustee in Bankruptcy can replace the Bankrupt on title of the Bankrupt’s property.  In cases where for example, a husband and wife own property jointly, the Trustee will become the co-owner of the property with the spouse. 

The Bankruptcy Trustee in the Family Court

The right to commence proceedings for property settlement against the bankrupt spouse does not vest in the Trustee in Bankruptcy.  Other provisions of the Family Law Act allow the Trustee to enter the Family Court proceedings. 

The Trustee cannot commence the proceedings.  The Trustee is not automatically a party to property settlement proceedings.  An action commenced by a person who later becomes bankrupt is stayed until the Trustee elects to prosecute or discontinue the action.

Section 79(11) of the Family Law Act provides that:

          “If:

(a)      an application is made for an order under this section in proceedings between the parties to a marriage with respect to the property of the parties to the marriage or either of them; and

(b)      either of the following subparagraphs apply to a party to the marriage:

(i)       when the application was made, the party was a bankrupt;

(ii)      after the application was made but before it is finally determined, the party became a bankrupt; and

(c)      the bankruptcy trustee applies to the court to be joined as a party to the proceedings; and

(d)      the court is satisfied that the interests of the bankrupt's Creditors may be affected by the making of an order under this section in the proceedings;

the court must join the bankruptcy trustee as a party to the proceedings.”

If the Section 79(11) requirements are met, the Family Court or Federal Circuit Court must join the Trustee as a party to the family law proceedings.  The Trustee is not obliged to join the proceedings and can seek to be released from the proceedings if they object to continuing.  The Trustee may not see any cost benefit in pursuing the Application.

Effect of a Bankruptcy on Jointly Owned Property

In the event that one of the registered proprietors of real estate becomes bankrupt the interest of the Bankrupt in that property vests in the Trustee and the Trustee goes on to the title.  The co-owners become the Trustee in Bankruptcy and the spouse of the Bankrupt.  The Trustee will attempt to move as much of the assets as are available into the Estate of the Bankrupt.  The interests of the Creditors rather than the interest of the spouse will be most important to the Trustee.

Corporate Insolvency

In circumstances where a company in which one or both parties may be a director, secretary or shareholder, the company can become insolvent.  When a company becomes insolvent (not able to pay its debts as and when they fall due) the company may go into administration and the parties of the marriage may lose control of the company to the administrator.  The administrator may trade the company but the administrator may also arrange to have the company put into liquidation. 

Alternatively a Liquidator may be appointed to the company; without first being placed into Administration.

In the same way as a trustee in bankruptcy can become a party to the Family Law proceedings, a liquidator can seek to intervene and become a party in the Family Law proceedings between the husband and wife. 

When and Why Might a Liquidator Intervene in Family Law Proceedings between a Husband and Wife

The Liquidator will pursue the Creditors’ interests and may:

  • Seek to recover moneys from the husband and/or the wife that is owed to the company (including loan accounts).
  • Pursue an insolvent trading claim against the husband or wife or both. 

If you are in the process of financial/property settlement and the possibility of bankruptcy is a potential issue for you or your spouse/partner or you or your spouse/partner have become bankruptcy whether voluntarily or at the hands of a Creditor, our highly experienced Senior Family Lawyers can assist you in navigating what can be a stressful situation.  Please contact Richard Watson Senior Family Lawyers or his Personal Assistant Shereen Da Gloria to discuss your matter and seek timely and appropriate advice.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011

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