Trustee in Bankruptcy – Trustee Applies to be joined to proceedings in Family Court of Australia

29/07/2021

Watson & Watson Lawyers acted for the Trustee in Bankruptcy of a party to property division proceedings in the Family Court of Australia.  The Trustee appointed Watson & Watson following work carried out in Bankruptcy proceedings in the Federal Court of Australia. 

Background

The husband and wife separated and had commenced proceedings in the Family Court of Australia before the husband became a Bankrupt.  At the time the proceedings were commenced, the husband and wife were co-owners of a valuable land holding that was available for sub-division.  At the time the proceedings were commenced, the husband and wife controlled the asset.  Once the Trustee in Bankruptcy was appointed, this position changed. 

What Happens When You Go Bankrupt?

When a person becomes a bankrupt all of his or her property (except exempt property) vests in the Trustee in Bankruptcy (Section 58 Bankruptcy Act 1966).  This means that the Bankrupt no longer own his or her property.  The Trustee in Bankruptcy can replace the Bankrupt on title of property owned by the Bankrupt including co-owned property. The Trustee can be registered on the title of the real estate owned by the Bankrupt at the date of his/her bankruptcy and will be registered as the owner or in place of the Bankrupt, as a co-owner.

The automatic vesting of property in the Trustee does not apply to exempt property which includes:

• Property that the Bankrupt requires for work.
• Property held by the Bankrupt on trust for another.
• Superannuation.
• Superannuation splits under the Family Law Act.
• Most household goods.
• A motor vehicle of modest value.
• Tools of trade.
• The property transferred under a maintenance order.
• Compensation for personal injury; or assets bought substantially with that, compensation money. 

The Bankruptcy Trustee in the Family Court

The right to commence or continue proceedings for property settlement against the Bankrupt spouse does not vest in the Trustee in Bankruptcy.  The Trustee is not automatically a party to property settlement proceedings.  Section 79(11) of the Family Law Act allows the Trustee to be added as a party to the Family Court proceedings.

Proceedings already commenced by a person (who later becomes Bankrupt) are 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 of Australia 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.

Watson & Watson Advice- Conduct of the Property Proceedings

Watson & Watson advised the Trustee to make application to the Family Court of Australia for an Order that the Trustee be joined as a party to the property proceedings between the husband and wife.  The application was made and the Court joined the Trustee in Bankruptcy to the proceedings. 

Once joined, the Trustee and not the husband had the control of the proceedings. 

The Trustees’ duty was to conduct the proceedings on behalf of the husband and to carry out its duty to secure assets for the creditors of the Bankrupt estate. 

In this case, the Court granted the husband leave to be heard in relation to the proceedings but not to conduct the proceedings. 

Watson & Watson acted for the Trustee and prepared the case for Final Hearing and as a result of the Orders made by the Court, the available property was divided between the wife and the Trustee in Bankruptcy.  The husband retained exempt property only which included his superannuation. 

Overview

The husband did not attempt to resolve disputes with his creditors and failed to stop the Federal Court of Australia making an Order declaring him Bankrupt (Sequestration Order).  Once the husband lost control of his assets his financial situation was effectively out of his control. 

If you are proposing financial/property settlement and you or your partner or spouse are facing possible bankruptcy and you are unsure of your position or how this will impact your financial settlement, our highly experienced Family Law Solicitors can assist you in navigating this often times complex position.  Please contact Richard Watson Senior Family Law Solicitor or his Personal Assistant Shereen Da Gloria to discuss your matter and seek appropriate advice from the outset.

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