Third party property settlement issues
Thursday, April 13, 2017
Recently I presented at the seventh annual Family Law Forum run by Legalwise in Brisbane about third party property settlement issues. My paper is below. The shorthand version of what I have set out in the paper is to be circumspect before leaping into quicksand. It’s a lot easier getting in than getting out.
LEGALWISE FAMILY LAW CONFERENCE
SEVENTH ANNUAL FAMILY LAW FORUM SESSION 1:
FAMILY LAW UPDATE
THIRD PARTY PROPERTY MATTERS
By Stephen Page
Partner Harrington Family Lawyers
Third Party Property Matters
1. Is it necessary to join the third party?
This is the fundamental question that every lawyer must consider. Join a third party when it is not necessary to join that third party and there is a real chance that a costs order will be made against your client. If it is necessary to join the third party and they aren’t joined, then is your client prejudiced?
In most situations, it is not necessary to join a third party, but require the other party to the relationship to do certain things or refrain from doing them.
Example 1Many years ago I was in the duty list in the Family Court. I was for the wife. The husband had been put on notice that he was to not deal with a sizeable amount of money in a bank account or in the alternative for it to be paid into my trust account.
There were some settlement negotiations outside the door of the court. The husband then told me that there was no point negotiating or having any orders made because in fact the bank had already given notice of its intention to exercise its power of sale as mortgagee and everything was lost.
The injunction application was proceeded with. The injunction was granted, but as it turns out the husband did not comply with that in any event. Enquiries were made with the bank and, instead of joining the bank as a party, the bank was persuaded not to take further action for the moment, in reliance upon my client’s representations that she would protect the bank’s position, including keeping the bank informed of the Family Court proceedings (which the bank hadn’t been aware of).
|
A very useful illustration of whether it is necessary to join a third party is the case of Budiarta and Zavahir [2016] FamCA 923, a decision of Forrest J. The wife who was the respondent in parenting property proceedings filed a further amended response. In that, she sought an order that the husband’s mother be joined as a second respondent to the property settlement proceedings as well as orders pursuant to section 106B setting aside some transfers of money from the husband to his mother.
When the matter was before his Honour on a trial management hearing, it became clear that the wife’s application for the order that her former mother-in-law be joined had not been heard and determined and after hearing it was opposed by the former mother-in-law and husband, his Honour listed it for a discrete hearing. Counsel who appeared for the wife pointed out that the wife could simply have complied with Rule 6.03 of the Family Law Rules which provides a clear means by which a party may add another party after the case is started, leaving it for the party who was joined to apply under Rule 6.04 to be removed if they considered that appropriate. His Honour noted that as no explanation was proffered as to why that course was not taken, he could only assume that the availability of that course was overlooked by the wife’s solicitors.
The wife’s counsel then said that the question of whether or not the wife’s former mother-in-law is to be joined involves a consideration of the proposition contained in Rule 6.02(1):
“A person whose rights may be directly affected by an issue in a case, and whose participation as a party is necessary for the court to determine all issues in dispute in the case, must be included as a party to the case.”
The evidence of the wife, the husband and his mother confirmed without dispute that the transactions the wife sought to have set aside occurred with the money being paid, as the wife alleged, from the husband’s account to his mother on the specified date. The wife sought orders from the court that required the husband’s mother to repay the money to the husband and then simply to be paid directly to the wife by way of property settlement. The wife sought a further order securing that payment by charge against her former mother-in-law’s unincumbent Western Australian property.
His Honour stated:
“At first glance, it therefore appears [under s106B(2) and s80(1)] that the Court could very well have the power to make the order charging the husband’s mother’s property if the Court is satisfied after a trial of the orders sought pursuant to s106B should be made and that the husband’s mother should be ordered to repay the money directly to the wife rather than the husband, with an order charging her own real property with that payment. I did not hear detailed argument on this point from counsel for both parties and do not consider that I need now to definitively determine that question at this point. I am merely determining the question of whether the husband’s mother should be joined as a party to the proceedings. Whether, ultimately, a charging order can be made against her property to secure any order that she may repay money through the husband’s wife if dispositions are set aside pursuant to s106B is a matter I am satisfied can be left to be determined after trial if the question of the Court’s power to do so still remains in dispute at such time. The legitimate invocation of the Court’s power contained in s106B to set aside the identified dispositions of money from the husband to his mother, if the preconditions for the exercise of such power are satisfied, is sufficient context within which to determine the disputed question of joinder, in my judgment.”
His Honour then considered whether it was necessary for the husband’s mother’s participation as a party is necessary for the court to determine all the issues in dispute in the case.
The husband’s mother submitted that it was not necessary for her to be joined because:
· The husband had filed affidavit evidence of his mother already;
· It was clear that she will be a witness at the trial and will be available for cross-examination;
· She will already be a participant in the trial, as a witness and does not need to be joined to ensure that she participates;
· Her participation in the trial as a witness will permit the court to determine all issues in dispute in the case;
· It is simply not necessary for her to be a party to the proceedings for this court to make orders that affect her rights such that would bind her.
His Honour said at [12]:
“I took that to be a concession that procedure fairness has been done by the husband’s mother being appropriately put on notice of the orders sought against her by the wife and a further concession that even if she is not a party to the proceedings in which orders pursuant to s106B are sought for the setting aside of dispositions and money by the husband to her and the repayment of that money by her to the wife through the husband pursuant to a s79 order, that any such orders would bind her. Those are, in my judgment, sensible and appropriate concessions which are, in the circumstances, correct.
When the possibility of the husband subsequently making a tactical decision not to read and rely upon the affidavit evidence of his mother at the trial, so as to prevent her from being available to be cross-examined by counsel for the wife, was raised, counsel for the husband’s mother pointed out that the husband would then face grave, probably insurmountable difficulties in his defence of the wife’s application for s106B orders if he chose to take that course. The solicitor who appeared for the husband agreed with that submission and positively assured the Court that no such tactical decision would be taken and that the husband’s mother can be expected to be a critical witness at the trial, whose evidence the husband clearly wants the Court to consider.”
His Honour noted that Warnick J in Wayne and Dillon and Dillon [2008] FamCAFC 204 at [18] and [19] said in respect of Rule 11.01(1) of the then Federal Magistrates Court Rules, which are very similar in form to Rule 6.02 of the Family Law Rules:
“The word “necessary”… must mean something more than “useful” or “expeditious”. In my view, if there are available alternative means to joinder to the substantive proceedings, of obtaining from a third person or someone already a party what is needed to allow an applicant for joinder to establish an identified “case”, joinder is unlikely to be “necessary”.
However, if a cause of action, recognisable at law, against a “third person” is particularised, then it is at least highly likely that joinder will be “necessary for the Court to completely and finally determine all matters in dispute”.”
Forrest J determined that it was not necessary to join the husband’s mother: at [18]:
“The husband’s mother was quite apparently resolute in not wanting to be a party to the proceedings although she was quite content to be a witness and to be cross-examined on her affidavit evidence. As I have said, she accepts that any orders the Court makes directed at her pursuant to s106B will bind her. Of course, although as a party she could choose not to have legal representation and choose to take no real active part in the trial other than as witness, there is a potential for her to consider she should have legal representation and that could cost her quite a lot of money. She clearly eschews that prospect and has chosen, notwithstanding being full appraised of the relief that the wife seeks against her and the husband and having clearly received comprehensive legal advice from experience family law solicitors and counsel, not to become a party to the proceedings and to actively oppose such course.”
His Honour stated at [21]:
“I accept the submission of counsel for the husband’s mother that her joinder is not necessary to determine all of the issues in dispute and to make, if considered appropriate just and equitable, orders that bind her at the conclusion of the trial.”
2. Get the other party to do your bidding
The classic example of that is Re Dovey ex parte Ross (1979) FLC90-616 in which there were orders restraining the husband from taking action as a shareholder or director of a company which owned the former matrimonial home.
3. Associated Jurisdiction
Let us assume that you decide that you can’t merely obtain orders against the other party but you need to seek orders against someone else. Section 33 of the Act gives the Family Court jurisdiction which is associated jurisdiction:
“To the extent that the constitution permits, jurisdiction is conferred on the Court in respect of matters not otherwise within the jurisdiction expressed by this Act or any law to be conferred on the Court that are associated with matters (including matters before the Court upon an appeal) in which the jurisdiction of the Court is invoked or that arise in proceedings (including proceedings upon an appeal) before the Court.”
In Philip Morris Inc v. Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457, the High Court considered s32(1) of the Federal Court of Australia Act 1976, an equivalent provision to s33. The majority observed that by virtue of s77 of the Constitution, the jurisdiction that can be conferred by the Commonwealth Parliament on any federal court is limited to matters which fall within the scope of s75 and s76 of the Constitution. Therefore, the associated jurisdiction of the Federal Court must be limited to matters that arise under a Commonwealth statute which does not itself invest the Court with jurisdiction and that the associated jurisdiction therefore does not enable the Court to entertain matters based on state law.
Subsequently, in Prince and Prince (1984) FLC91-501, Fogarty J recognised that the decision in Philip Morris equally applied to s33. Under s33 there must be a matter. In Fencott v. Muller [1983] HCA 12; (1983) 152 CLR 570, four members of the High Court said that the majority view in Philip Morris was that a matter is a justiciable controversy:
“…which must either be constituted or must include a claim arising under a federal law but which may also include another cause of action arising under another law, provided it is attached and is not severable from the former claim.”
Of course s33 only operates if the Family Court already has jurisdiction: Re Ross-Jones; ex parte Beaumont (1979) FLC90-606 at pp78, 102 – 78, 103 per Gibbs J.
4. Accrued Jurisdiction
Accrued jurisdiction is best explained by Barwick CJ in Philip Morris at p.475:
“It is settled doctrine in Australia that when a court which can exercise federal jurisdiction has its jurisdiction attracted in relation to a matter, that jurisdiction extends to the resolution of the whole matter. This accrued federal jurisdiction is not limited to matters incidental to that aspect of the matter which has in the first place attracted federal jurisdiction. It extends, in my opinion, the whole matter between the parties. This accrued jurisdiction carries with it the authority to make such remedial orders as are necessary or convenient for or in consequence of that resolution. For this purpose the court exercising federal jurisdiction may enforce rights which derive from a non-federal source. This exercise of this jurisdiction, which for want of a better term I shall call ‘accrued’ jurisdiction is, discretionary and not mandatory, although it will be obligatory to exercise the federal jurisdiction which has been attracted in relation to the matter.”
It is within the Court’s discretion whether it will exercise accrued jurisdiction: Stack v. Coast Securities (No.9) Pty Ltd(1983) 57ALJR 731; in Mackay and Mackay(1984) FLC91-573, Nygh J at p.79, 639 said:
“The crucial question is the relationship of the issues with each other as they have emerged from the pleadings.
The fact that the parties to the federal claim and the non-federal claim are not identical, does not per se render those claims several.”
Warby and Warby(2002) FLC93-091
The Full Court held at pp88, 790 to 88, 792 that the Family Court of Australia is not restricted to the determination of a family law claim or proceeding; it may exercise accrued jurisdiction to determine the non-federal aspects of a justiciable controversy of which the family law claim or cause of action forms a part. The factual circumstances of the case will determine whether jurisdiction arises and whether it is appropriate to exercise the jurisdiction:
1. There is no constitutional basis for not applying to the Family Court of Australia the High Court’s analysis in Philip Morris of how and why the Federal Court has and may exercise accrued jurisdiction.
2. The applicability of Philip Morris, Fencott v Muller and Stack to “federal courts”, a category which necessarily includes the Family Court of Australia, is expressly recognised in Re Wakim.
3. But the Federal Court of Australia and the Family Court of Australia are creatures of statute and courts of limited jurisdiction. The fact that the Family Court of Australia has a more specialised jurisdiction than the Federal Court of Australia does not provide a basis for doubting the availability of accrued jurisdiction of the Family Court of Australia. It should not be forgotten that the Family Court of Australia is currently invested with federal jurisdiction by Commonwealth legislation under the Family Law Act.
4. The amendment to s31 of the Family Law Act 1983 gave the Court jurisdiction in “matters arising”under the principal or repealed Act “in respect to which matrimonial causes are instituted or continued” and that this legislative grant is to be distinguished from the earlier conferral of jurisdiction in “matrimonial causes” only. The granted jurisdiction should not be read down.
5. There may have been a blurring of distinction between the existence of accrued jurisdiction of the power to grant a remedy if accrued jurisdiction is exercised. Once the property factual test is satisfied, the inability to grant an appropriate remedy is relevant to whether the available accrued jurisdiction should, in the exercise of discretion, be invoked.
6. The Full Court in Davidson and Davidson (No.2) (1984) FLC92/469 gave an expansive interpretation to the ambit of powers available to the Court in s80 and there was power granted in s34 of the Act to the Court: “in relation to matters in which it has jurisdiction, to make orders of such kinds, and to issue, or direct the issue of, writs of such kinds, as the Court considers appropriate” – although there are questions about the scope of that provision.
7. There is the issue of the Family Court’s capacity to adjudicate and make orders with respect to third parties. Section 78 confers the power to make a declaration with respect to existing title or rights. Since the amendment in 1988, the provision is not expressly confined to the property of the parties to the marriage or either of them and there is no authority which says that such a declaration may not bond a third party. Ascot Investments – it was decided with reference to the limitation of the Family Court’s powers under sections 80 and 114 of the Act to validly order a company and its directors to register a transfer of shares and thereby to alter the nature, incidence or extent of the parties’ property and impose new restrictions on rights or powers of third parties.
The Full Court then said at p88, 793 as to the relevant factors as to whether the Court will exercise the accrued jurisdiction are:
1. What the parties have done;
2. The relationships between or among them;
3. The laws which attract rights or liabilities to the conduct and relationships;
4. Whether the claims are part of a single justiciable controversy and in determining that question whether the claims are “attached” and not “severable” or “disparate”;
5. Whether the claims are non-severable for matrimonial cause and arise out of the common sub-stratum of facts; and
6. Whether the Court has the power to grant appropriate remedies in respect of the “attached” claims.
The Full Court went on to say at p.88, 793:
“Once the Family Court of Australia has the jurisdiction to make determinations which affect a properly notified third party, that third party cannot thwart the making of orders that affect the third party by declining to participate in the proceedings. We agree with the submission for the husband that to find otherwise would elevate the status of the third party so as to enable the third party to thwart the exercise of the Court’s duty to determine the application between the parties to a marriage or former marriage.”
In Noll and Noll (2013) FLC93-529, the Full Court considered an appeal from the decision by Le Poer Trench J following refusal to determine the husband’s application for the Court to exercise accrued jurisdiction to determine the husband’s cross-claim for damages against the wife’s solicitors at the same time as it determined the wife’s claim against the husband relating to the financial agreement between the husband and the wife.
The Full Court said:
“[36] One of the difficulties with a case such as this is…is that the question of the availability of the accrued jurisdiction has to be “decided on limited information”. This is particularly so in the present case where we do not have available to us any affidavit. We have only the claims made in the wife’s Statement of Claim, the husband’s Defence, and his cross-claim…Those documents reveal only that the wife claims that she entered the financial agreement on the basis of misrepresentations from the husband, and/or as a result of undue influence or unconscionable conduct on his part, and/or that the husband failed to ensure that the legal advice which the wife received was independent, and that if the wife succeeds in a challenge to the financial agreement, the husband will claim damages against the solicitors for breach of provisions of the Fair Trading Act 1999 (Vic), breach of warranty and breach of duty, with such damages being the difference between any order that would have been made had the financial agreement been binding and that which would be made if the agreement had not been binding.
37. There would certainly be some facts relating to the entry by the husband and wife into the financial agreement and the dealings which each had with Law Firm A which would form some common substratum of fact, both for the wife’s claim against the husband in relation to the financial agreement and for the husband’s cross-claim against Law Firm A. But we cannot be certain on the material before us that the entire factual basis of the husband’s claim against Law Firm A would coincide with the factual basis for the wife’s claim against the husband.
38. Nevertheless, even if the facts upon which the claims depend “do not wholly coincide”, there can be still be a sufficiently common substratum of facts existing between the wife’s claim and the husband’s claim…but even if a common substratum of facts exists in this case, there remains the need to identify one justiciable controversy, or matter, in order to attract the accrued jurisdiction, and that identification…is “the central task”.”
Bryant CJ, Finn and Strickland JJ said at [46] to [50]:
46. “It is instructed to note that in those cases in which, to date, the Full Court has upheld, or sanctioned, the use of the accrued jurisdiction…it has been the determination under state law of what is the property of the parties that has been essential for the purposes of the Family Court’s jurisdiction under s79 of the Act and thus has been the subject of the accrued jurisdiction.
47. Applying what was said by Mason J in Philip Morris to the present case, the “federal” matter is of course constituted by the wife’s claim in relation to the financial agreement and would include the property settlement proceedings which would follow if the agreement is held to be non-binding or set aside, while the matter sought to be “attached” is the husband’s claim against the solicitors.
48. It appears, at least prima facie, that in this case the determination of the federal claim does not require the determination of the claim sought to be attached. Indeed it might well be said that the attached claim will not even arise until the proceedings relating to the financial agreement are determined, and are determined adversely to the husband, and on the basis which could provide him with a claim against Law Firm A. Furthermore, the measure of damages that could be sought in the attached claim would only be known if and when the order was made for a property settlement under s79 of the Act.
49. There was some discussion before us as to whether the husband’s potential claim for damages might constitute an item of property on the part of the husband which would need to be taken into account in any s79 property proceedings between the husband and wife, and therefore require resolution before the property settlement proceedings. But this was not a matter strongly pressed before us. In any event it is not unknown in property settlement proceedings for the Court to take into account the outcome of the damages claimed by one of the parties that is pending in another court.
50. As to the issue of the risk of conflicting findings for the claims in question and heard in different courts, we agree with senior counsel for the wife that this risk is more hypothetical than real, and could be overcome by access to the transcript of proceedings heard in the other Court. In our opinion, it is certainly not a consideration which would, of itself, attract the accrued jurisdiction in this case.
Nollwas discussed further in F Firm and Ruane & Others [2014] FamCAFC 189; (2014) FLC93-611. A law firm, F Firm appealed. The husband was the first respondent, the wife the second respondent and the wife’s barrister the third respondent. F Firm was formally retained by the wife to prepare a financial agreement after the parties separated. The third respondent was the barrister who was retained by F Firm to advise the wife.
The parties separated and a financial agreement was then executed. The husband commenced property proceedings which the wife resisted on the basis that there was a financial agreement in place. Cronian J found that the financial agreement was not binding as it did not comply with certain requirements. The wife sought orders for costs against F Firm and also joined her former barrister, relying upon the accrued jurisdiction of the Family Court. F Firm’s application to be removed from the proceedings was dismissed. They appealed. The appeal was dismissed. Thackray J stated at [27]:
“It seems to me that it cannot be right that the Court has accrued jurisdiction to determine a claim for damages by one party against their own solicitor, while not having jurisdiction to determine a damages claim against the other party’s solicitors, in circumstances where both claims arise out of a Part VIIIA agreement. The fact the claims are differently based, that different defences may be pleaded, and that entitlements may “crystallise” at different times seems to me to be relevant to jurisdiction.”
All three Justices May, Thackray and Strickland took the view that issues of accrued jurisdiction may depend on the facts of each case.
5. Cross-vested jurisdiction
Bearing in mind that the Federal Circuit Court of Australia has much of the jurisdiction of the Family Court and the Family Court has much of the jurisdiction of the Federal Court on a cross-vested basis, for example under the Bankruptcy Act 1966.
It does not hurt to engage counsel, in appropriate cases, who practise in insolvency matters when relief might be sought:
– related to a bankruptcy (and be aware of Chapter 26 of the Family Law Rules); or
– relating to a company, especially one where your client is a director or shareholder (and be aware of Chapter 25 of the Family Law Rules, and the Federal Court Corporation Rules 2000).
6. Which Court?
The appropriate court might be the Family Court, Federal Circuit Court, Federal Court or the Supreme Court. Careful thought needs to be given. The case of Elias v. Chidiac below is an illustration.
7. Shams
Gibbs J in Ascot Investments v. Harper [1981] HCA 1; (1981) 148 CLR 337 held that companies could be bound to orders when there was a clear sham.
The problem often is to have the evidentiary basis to establish that there is a sham. This can be an extremely costly process and may require joining the third party in order to establish proper disclosure. As the Full Court in Rand and Rand (below) said, make sure you have the evidence to show there was a sham.
8. Alter Ego
Similarly, Gibbs J in Ascot Investments v. Harperfound that a third party company would be bound by an order when it was in effect the alter ego of the principal.
It is essential when dealing with an alter ego argument or a sham argument to look carefully at the evidence. This includes the basics of reading the constitution (or memo and articles) of the company, any shareholder agreements and other similar documents.
9. Obligation of Disclosure to Third Parties
There can be not merely an obligation of disclosure to the other party or to the Court but to third parties, particularly in circumstances where it would result in a denial of payment to the third party of the debt owing to them in full. The authority is the Official Trustee in Bankruptcy v. Donavan and Donavan and Stevens (1996) FLC 92-703. I note that there are now specific provisions in s79A and s90K concerning this issue.
|
Example:
John was a teacher who was charged with indecent dealing and similar offences relating to various of his students. A solicitor announced that he was acting on behalf of those students or parents and bringing in a class action against the school and John. John separated from his wife Mary. They wanted to undertake a property settlement whereby John transferred his interest in the home to Mary and John retained his superannuation.
An application for consent orders was filed. Before that was sought, the solicitors acting for the various claimants were given notice of the intention to seek those orders. They chose not to become involved in the property settlement between John and Mary. The Court was advised of the nature of those claimants. Consent orders were made in terms of the draft as prepared by John and Mary.
|
10. What are your options?
There are three obvious options:
1. An injunction under s.114(3).
2. An order under s.1068.
3. An order or injunction under Part VIIIAA.
If you are seeking orders against a third party, the Full Court has made plain that if they are of the nature of orders under s.90AE (and presumably s.90AF) they must be brought under s.90AE giving the protections in that Part for third parties: see the discussion under Rand and Rand below.
11. s.106B
I consider that the hurdles under s106B are lower and the reasoning in the section is straightforward:
1. Is there the making of an instrument or disposition?
2. Was that made or proposed to be made to defeat an existing or anticipated order in the proceedings?
3. Irrespective of intention, is the instrument or disposition likely to defeat any such order?
4. Should the Court as a matter of discretion set aside or restrain the making of the instrumental disposition?
The third element is particularly significant, because it’s an effect test. What is the likely effect of the instrument or disposition?
If the instrument or disposition is not likely to defeat an order, because there may be plenty of other property available, then the threshold will not be met.
Even if the basis of the section is made out, should the Court as a matter of discretion set aside the instrument?
Under 106B(3), the Court must have regard to the interests of, and should make any order proper for the protection of, a bona fide purchaser or other person interested.
The types of cases where the Court might be reluctant to set aside, even though on the face of it the effect of the instrument was likely to defeat a property settlement order or spousal maintenance order are:
· There is a bona fide purchase for value without notice;
· The contract has been completed and effectively cannot be unwound;
· There are significant costs in unwinding the transaction, such as capital gains tax or stamp duty;
· Your client (the one seeking to impugn the transaction) was a willing participant in the transaction.
An illustration of the competing approaches is seen in Elias.
Elias & Elias Pty Ltd atf The Elias Family Trust v. Chidiac & Ors[2010] NSWSC 1364
Brereton J said:
“Long before the introduction of s90AF, s114(3) where he conferred power in courts exercising jurisdiction under the Family Law Act to grant interlocutory injunctions and in any case which appeared to the Court just or convenient to do so, in aid of its jurisdiction.” – at [18]
His Honour then said an order restraining a third party respondent to s106B application, pending determination of that application, from further dealing with property the subject of an impugned disposition, or from exercising powers pursuant to the impugned transaction, would plainly be within s114(3).
The parties separated in 2007. Seventeen months later, before there had been any financial settlement between them, the husband alone entered into a transaction by which $300,000 was paid, not to him (which might have benefited the matrimonial estate) but to a third party (albeit one in which he had an interest); yet he personally incurred the liability to repay that sum, with interest, in the words of Brereton J “…at the very high rate of $5,000 per monthcapitalised monthly”, and secured that liability on his interest in the three properties. According to his financial statement on total assets of over $2,000,000 he had a surplus of only $30,500 and that assumed that the debt to Elias was $300,000 only (overlooking the impost of interest).
Brereton J started at [14]:
“A reasonable disponor in the position of the husband, knowing that he and wife had separated but that there had not yet been a financial settlement, would have anticipated that there might well be an order for matrimonial property adjustment. It is well established that a transaction that brings about a material diminution in the pool of matrimonial property available for division can qualify as one that is likely to defeat an anticipated order, for the purposes of s106B:
In the marriage of Gould; Swire Investments Ltd [1993] FamCA126; (1993) 115 FLR371; (1993) 17 Fam LR 156; (1993) FLC 92-434; Halabi and Artillaga (1993) 17 Fam LR 675. In the context of the available pool here, a reduction of $300,000 (now, with interest, $518,000) could plainly have that effect. On the material presently available, it cannot be said that a reasonable disponor in the husband’s position would not have anticipated that an adjusted property order might be made which would be defeated if he caused or permitted the pool to be diminished by $300,000 or more.”
His Honour stated at [15]:
“Section 106B(3) provides that the Court must have regard to the interest of, and make, any order proper for the protection of a bona fide purchaser or other person interested. The test of bona fides is whether the purchase at the time of the disposition was aware, or should have been aware by making due enquiry, that the disposition would be likely to defeat the claim [In the marriage of Heath (No.2) (1984) 9 Fam LR 642, 647; and The marriage of D & D (1984) 10 Fam LR 73], John Elias, the solicitor who was a director and secretary of Elias at the time of the shareholders agreement and mortgages in…2009, and a shareholder, was involved in the negotiations with Mr Chidiac at the time, knew that the wife was a joint tenant with Mr Chidiac of [two properties], was aware that the husband and wife were separated, and was nonetheless content for Elias to take a mortgage from the husband alone. While the issue will no doubt be clarified in due course by further evidence, whether in this Court or in the Family Court, it cannot be said in those circumstances to be unarguable that Elias, at least through John Elias, was sufficiently on notice as not to be a “bona fide purchaser” entitled to the protection afforded by 106B(3).”
His Honour then noted that s106B having been invoked it was not necessary for the wife to resort to the hurdles of s90AF.
His Honour was satisfied that the wife has a seriously arguable claim for her s106B relief. He then considered whether the balance of justice and prejudice favours the grant rather than the withholding of an injunction or stay. He noted that if a stay or injunction is not granted, then the possibilities are, first, that Elias will obtain summary judgment, and enforce its remedies, with the consequences that the wife’s s106B claim would be wholly defeated; or secondly, that Elias might be permitted to obtain judgment and exercise its remedies but not appropriate the proceeds until after determination of s106B case; or thirdly, that the wife might be given leave to amend her defence to propound the s106B claim in this Court. The first course would entirely defeat the wife’s s106B claim without it having been heard; that would be a serious prejudice to her. The second course has the disadvantage that the s106B case would then necessarily involve not just an attack on the disposition, but also an order of this Court in which the disposition had subsequently merged, and it is by no means clear that s106B would extend so far. Moreover, it would have the difficulty that the sale of the former matrimonial home would have defeated the wife’s claim in the matrimonial proceeding that the husband’s interest in it be transferred to her. Again, there would be significant prejudice to the wife. The third course would avoid those difficulties, but (unless the whole of the matrimonial proceeding were transferred to this Court) would mean that the s106B application would be dealt with separately from the s79 application. While such a course is not unprecedented, it is usually undesirable, because there is likely to be a significant overlap between the evidence adduced on the s106B application and that in the s79 proceeding, and because the discretion to make an order under s106B is usually informed by whether the applicant’s entitlement can be satisfied without resort to the property the subject of the impugned transaction.
Furthermore, if a stay or injunction were granted, a potential prejudice to Elias was that the husband’s assets would be still further eroded by interest, which would not be recoverable because his liabilities would soon, if they did not already, exceed his assets. Indeed, there was a suggestion that the husband had already been served with a bankruptcy notice by another third party creditor. There is no doubt that there was a significant risk that Elias would not recover its interest, particularly having regard to the high interest rate, and that is a significant risk of prejudice to Elias.
His Honour stated at [23] – [31]:
“23. Because of this, the Court sought the usual undertaking as to damages from the wife. However, she declined to give that undertaking, apparently because she was (perhaps understandably) not prepared to expose herself to the interest rate under the impugned securities. I have been greatly troubled by the wife’s refusal to give an undertaking as to damages. It is the almost invariable price for an interlocutory injunction. But the Court has power, although very rarely exercised, to dispense with it in an appropriate case. Is this such a case? One can easily understand the wife being reluctant to expose herself to a compound interest of 5% per month, which may well be the practical effect of giving the undertaking. A further relevant consideration in this respect is the timing of Elias’ application. The debt it seeks to enforce became due in or about May 2009. Elias did nothing about it for a year, apparently content to “earn” its lucrative interest. Only after the wife had filed her response in the matrimonial proceeding did Elias chose to act. In this way, it has itself contributed in no small measure to the risk that further interest will not be recoverable.
24. If the undertaking as to damages had been proffered, the balance of convenience might have favoured a stay. An absent undertaking as to damages, the position is finally balanced. But given the conclusion of the wife’s s106B claim is seriously arguable, and the matters to which I have referred as mitigating the significance of her declining to give the usual undertaking, it would be unreasonable that she not be permitted to advance her s106B case before determination of the wife’s application. This means that, at the least, she should be permitted to bring that case as a defensive cross-claim in the mortgage proceeding, to be determined before the mortgage proceeding renders it futile.
25. On the basis, as I have concluded, that the wife should be permitted to advance her s106B case before determination of the wife’s mortgage proceeding renders it futile, there appear to be three possible courses of action. The first was to stay the mortgage proceeding, allowing the Family Court to resolve the matrimonial proceeding (including the s106B application) first. The second was to refuse a stay, allow the wife to amend her defence and bring a cross-claim to raise s106B in the mortgage proceeding in the Supreme Court, and deal with all the mortgage issues in this Court; that might but would not necessarily result in the whole of the matrimonial proceeding being transferred by the Family Court to this Court. The third course was to transfer this proceeding to the Family Court, thus allowing all the proceedings to be dealt with in that Court.
26. The wife’s primary contention became not so much that the mortgage proceeding should be stayed, but that it should be transferred to the Family Court, to be heard with the matrimonial proceedings. However, it also emerged that Elias had filed in the Family Court, an interlocutory application for an order transferring the matrimonial proceeding to this Court, which – while a matter for the Family Court – raised starkly the competing possibility that the matrimonial proceeding not be transferred to be heard in this Court with the mortgage proceeding, as an alternative to the transfer of the mortgage proceeding to the Family Court.
27. Of the three potential courses identified above, the first – staying the mortgage proceeding pending determination of the matrimonial proceeding – seemed to offer no benefit: Elias would have had to be involved in the proceeding in the Family Court as a respondent to the s106B application, and only when it was completed could it then prosecute its mortgage proceeding in this Court. There seemed therefore little advantage in the first course, except perhaps that it would leave the mortgage proceeding in a Court which unquestionably had jurisdiction and was the national forum to deal with it. The real issue was whether the mortgage proceeding should be transferred to the Family Court.”
His Honour stated at [30] – [31]:
“30. In the matrimonial proceedings between the husband and the wife, a fundamental issue is the nature, extent and value of the property of the parties to the marriage, including their liability. Before deciding what adjustive property orders it should make, the Court must identify and value the property of the parties available for division; this includes the liability. It must therefore determine whether the husband is indebted to Elias, for how much, and whether the liability is secured or unsecured. Moreover, the wife now having instituted the s106B application in the Family Court, the Court hearing that application will be required to decide whether the share sale agreement and mortgage should be set aside. That is, in effect, the opposite of enforcing it, as Elias seeks: setting aside the mortgage, and enforcing it, would be an inconsistent result.
31. These matters reveal, in my opinion, a common substratum of fact underlying the matrimonial proceedings and the mortgage proceedings. In addition, there is a fundamental inter-relationship between the relief sought in the s106B claim, and the relief sought in the mortgage proceeding: granted the first were denied the second, and vice versa. In my view, therefore, the mortgage proceeding and the matrimonial proceeding (which includes the s106B application), comprise a single justicial controversy, so that the Family Court would have accrued jurisdiction to hear and determine Elias’ claim and to grant the relief Elias seeks [cf. Valceski v. Valceski [2007] NSWSC440; (2007) 70 NSWLR 36, [60] – [65]].”
Brereton J came to the point that he was going to transfer the proceeding in the Family Court:
“First, the desirability of ensuring that all issues being determined by the one Court so as to avoid any risk of inconsistent findings and multiple proceedings is a significant matter, and a decision to that effect would have avoided the need for a further, potentially contested, transfer application in the Family Court, the outcome of which could not have been assumed. Secondly, the Family Court was the natural forum for the overwhelmingly greater part of the single justicial controversy – the overarching matrimonial property issue, which the other disputes are but subsets. Thirdly, there is a policy, referred to in Valceski, that creditors of parties to a marriage use the occasion of their separation and consequent matrimonial litigation to enforce their own rights, cannot complain if they become caught up in the maelstrom of the breakdown of the marriage, including any associated matrimonial property litigation. Fourthly, while I would not have contemplated transfer to the Family Court if I thought there were doubt as to the accrued jurisdiction of the Family Court to deal with Elias’ mortgage claim, not only do my reasons explain why it has jurisdiction, but also no argument was developed performing as to why it would not. I think, therefore, that the jurisdictional issue is clear” – [38].
However, Collier J in the Family Court had already made an order transferring the matrimonial proceeding to the Supreme Court! Under the cross-vesting scheme such an order was conclusive and not subject to appeal, therefore ultimately the wife’s motion for transfer was dismissed and indeed but for the earlier order of the Family Court would very likely have succeeded, costs of the motion should be costs in the proceedings.
Manotis and Manotis[2016] FCWA 10
An example of a nightmare 106B case was this decision of Crisford J. Proceedings between the parties started in 2004. In the twelve years since then the Court had been called, on a regular basis, to assist in determining how the lives of the parties should be regulated. The case was a re-hearing and took 17 days.
In 2008, Penny J made orders that the husband was to pay the wife $77,717.50 and if he failed to do so a property was to be sold with the proceeds to be divided 70/30 in favour of the husband.
Eighteen months later, an order was made appointing the wife trustee for sale in accordance with the orders made by the Court and that her lawyers, X Lawyers, had the conduct of the sale, whether by auction or private treaty and be authorised to instruct an auctioneer for that purpose and that within 14 days a request from them, the husband shall do all acts and sign all such documents as may be required to procure such sale in accordance with the orders.
Several applications were brought in 2011 to aid the inspection of the property by a valuer and restrain the husband from leasing the property or any part of it.
If things weren’t difficult enough, the husband alleged that a Mr Matthews, a goat farmer, had entered into a handwritten lease in 2003 at a nominal rate. That lease had not been the subject of the earlier proceedings. Mr Matthews lodged a caveat over the property and in 2011 to secure a debt of $10,000 the husband owed him for legal fees.
The Court then in 2012 restrained the husband from leasing the property apart from the issue of the alleged current lease in favour of Mr Matthews and that any monies owed by the husband to Mr Matthews by way of a debt be paid from his share of the net proceeds of sale.
Mr Matthews lodged another caveat in 2012, which then resulted in him being added as the second respondent.
The husband and wife then entered in 2012 into a deed of settlement. Mr Matthews acted as an intermediary. Both parties explained the intent of the deed was a swap of the entitlement the wife would receive pursuant to the orders with an alternate amount of cash the husband anticipated receiving from his late mother’s estate. His mother had died almost six years before it was signed. Mr Matthews sent a copy of the deed to the Court. A registrar advised that if the parties reached an agreement that was different to the orders, they should enter into an application for consent orders and file it.
The wife then filed an application for consent orders in 2012 and then terminated her retainer with X Lawyers. The application sought orders which would give effect to the deed of settlement. The husband obtained independent legal advice on the application, but the wife did not.
By this stage, the wife owed X Lawyers about $150,000. As a result of various cost orders against the husband, she stood to receive about $63,000 from him.
X Lawyers then sought to be added as a respondent to the proceedings and that the application for consent orders be dismissed. They sought to be appointed trustee in lieu of the wife for the sale of the property and that the husband vacate the property within 14 days of the date of contract.
When the matter came back before the Court in 2013, the wife no longer appeared wanting to vary the orders but wanted X Lawyers to press ahead with the sale of the property.
X Lawyers were granted leave to intervene, were appointed trustee for the sale of the property and within 14 days the husband provide vacant possession and within 7 days Mr Matthews vacate the property and withdraw his caveat. The husband appealed and unsuccessfully sought a stay. X Lawyers acted for the wife and in its own right as trustee for the sale of the property. It did not file a notice of ceasing to act on the wife’s behalf until December 2014 after being ordered to do so.
X Lawyers settled a contract for the sale of the property for net $304,000. The husband’s appeal was successful but he brought no application to set aside the sale.
The re-hearing was the husband’s application to set aside the sale. The purchase from X Lawyers, Mr Bells was made a third respondent. He sought amongst other things summary dismissal of the husband’s claim. That application was unsuccessful primarily because any defect in the pleadings, it appeared the husband had a reasonable cause of action albeit poorly articulated. His claim, taken at its highest, was not doomed to fail.
The husband, wife and Mr Matthews appeared without any legal representation. Mr Bells and X Lawyers were represented by Queen’s Counsel.
Her Honour noted that the wife was of Thai origin, had limited English especially in a legal setting and that from time to time she received conflicting information depending on to whom she spoke and what their agenda was.
When the matter came before the Full Court in 2014 [Manotis and Manotis and Ors (2014) FLC 93-594] the Court recognised that the property seemingly acquired by a bona fide purchaser, the transaction could not be undone.
The Full Court noted that the solicitors continued to hold funds from the sale and there therefore remained an issue as to whether they should continue to hold those funds as trustees or in some other capacity, and as to how those funds should be dispersed.
Her Honour noted that s106B of the Act provides the Court with a discretionary power and wide scope to set aside transactions, including those which may affect the interest of third parties. Further, the legislation identifies the elements which need to be established before the exercise of this discretionary power can be considered. Despite the defects in the presentation of the husband’s case, it is clear upon which facts he bases his claim pursuant to s106B of the Act. The husband bore the onus of proof of the necessary elements (ANZ Banking Group Ltd v. Harper (1998) FLC91-938).
Her Honour said:
· The Court must consider whether the contract for sale was made to defeat an anticipated order in these proceedings or, irrespective of intention, was likely to defeat such an order.
· Orders may be considered “anticipated in proceedings” if they are asked for in the proceedings (see Ganas and Ganas (1971) 18FLR 298). The test to be applied is an objective test (see Pflugradt and Pflugradt (1981) FLC91-052).
· The issue pared to its most simple form as reflected in the question of whether X Lawyers’ acceptance of the offer to buy the property had the effect of defeating an anticipated order. The order of the wife and husband had anticipated, by the filing of the application for consent orders, was that they would be able to preserve the property, ultimately for their son, and for the wife to receive her payment from an alternate source. The sale of the property had the effect of defeating what the parties had intended when they signed and subsequently filed the application for consent orders.
Her Honour considered that the concluded date of sale was on the date that the contract was signed. There was an offer and acceptance on that date and it was not subject to the obtaining of finance or the sale of another property. There was no obstacle preventing the conclusion of the sale at that time, although there may well have been some opportunity for Mr Bells to apply to terminate the contract at a later stage if another less important condition was not fulfilled. Her Honour did not accept that the date of settlement was the date of actual sale. Ostensibly, the application for consent orders was still on foot on the date of sale. The husband was actively seeking the orders in the wife’s application be made and to this end he had filed an application which was to be dealt with on 21 January 2013. The wife’s application for consent orders was before the Court on 21 January 2013. It had not been withdrawn by either party. The orders that Moncrieff J made that day did not include dismissal of the application for consent orders. It was difficult for the interveners to argue that the wife’s consent to the application for consent orders had been withdrawn. The dismissal of the application for consent orders was actually done on Moncrieff J’s own motion on 19 March. The Full Court noted that the transcript stated that the wife came to Court expecting to obtain orders in terms of her application for consent orders, which she anticipated (along with the understanding she had reached with her husband) would allow her to move into the property and remain there, on the basis that the husband would ensure the property was inherited by their son. She left the Court with an order which led to the almost immediate sale of the property, leaving her with no home of her own and potentially no money. In the Full Court’s view there was some basis for the husband’s assertion that the wife was, at worst bullied, and at best, led into giving what his Honour took as consent to the outcome his Honour had predetermined. Furthermore, for his Honour to have found that the wife had “indicated that she consents quite clearly to [Mr H from X Lawyers] continuing to act on her behalf and to effect the sale” was to overstate his Honour’s exchange with the wife.
Prior to the order being made on 19 March 2013 dismissing the application for consent orders, a contract of sale was entered into between X Lawyers and Mr Bells. The husband lodged a Notice of Appeal on 12 February 2013 in which he sought to appeal all the orders made on 21 January 2013. The Notice of Appeal was lodged after the concluded sale of the property but prior to its settlement. It was lodged before the amendment of Moncrieff J on 19 March 2013.
Her Honour stated at [99]:
“In all the circumstances here, I am satisfied the sale of the property had the effect of defeating an anticipated order. The reason the sale of the property was not concluded earlier was because the wife had not wanted it sold and had specifically instructed the real estate agent…and X Lawyers to withdraw it from the market for sale. It was only sold after X Lawyers’ appointment as trustee for sale…On 1 February 2013 the disposition of the property was effected by a party who at the very least, on behalf of, the husband and the wife. The result was to circumvent the likely effect of the application for consent orders.”
Her Honour stated at [101] – [102]:
“I find that Mr H and X Lawyers were keen to preserve its position vis a vis the wife in relation to legal costs…I do not accept that Mr H was enviewed with the altruism suggested…X Lawyers wanted to be paid its legal fees. It saw the sale of the property as the most expeditious way of achieving this. Payment from the husband’s late mother’s estate was far from clear cut or certain. It was appointed trustee for sale of the property despite the fact that it was then continuing to act for the wife and as such, even by virtue of Penny J’s earlier orders, had the conduct of the sale. The resumption of its position of the wife’s solicitors obviated the need for X Lawyers to continue with their application to be trustee for sale in its own right.”
Her Honour then needed to consider the issue of discretion. It was one thing for the elements to be made out for s106B, another whether the orders ought to be set aside.
Mr Bells was a 25 year old carpenter/draftsman. He lived at the property and had done so since settlement in April 2013. He was in a long term de facto relationship with Ms Plum, who also lived there. Mr Bells’ parents lived next door. He was aware that the property was originally on the market because there was a for sale sign placed upon it when he was visiting his parents. An offer to purchase was made by Mr Bells in June 2011 for $350,000, increased to $365,000 in October 2011. The matter did not proceed smoothly given the husband’s reluctance to facilitate the sale despite court orders. There was an additional hiccup when it became apparent in late 2011 that Mr Matthews was running goats on the property pursuant to the lease. Mr Bells wanted vacant possession. Despite this, Mr Bells remained keen to purchase and was finally able to secure the arrangement with X Lawyers in early February 2013. From mid 2012 until 21 January 2013, the wife had instructed X Lawyers to withdraw the property from the market. The matter stalled, X Lawyers were keen to try to persuade the wife to continue. When this failed it sought to become trustee for sale in its own right. After the hearing on 21 January 2013 matters moved swiftly.
The husband did all he could to defeat the orders. Her Honour was not satisfied that there was a collusion by some actual agreement to do some act in order to enter a third person or deceive a Court. Mr Bells simply wanted to get the best deal he possibly could.
There was a relationship through marriage between Ms Plum and the real estate agent. The husband said that the women were related and that this was said to impact upon the bona fides of Mr Bells. Her Honour was not satisfied there was any relationship at all between the two families but even if there were, it was a relationship of marriage and not of blood. There was simply no evidence to suggest anything inappropriate in the dealings between the agent and the purchaser. It was purely a business transaction. Mr Bells was not then involved in the Court proceedings and the events that surrounded them. He had little idea of what was going on in Court.
Other interested persons
Her Honour noted that pursuant to s106B, the Court has to consider “persons interested”. These were the wife and X Lawyers. Her Honour noted that given the amount of time since the settlement of the sale and a finding that Mr Bells was a bona fide purchaser, she intended to dismiss the s106B application. Her Honour noted that the accrued jurisdiction applied to the Family Court of Western Australia as it did to the Family Court of Australia and found that the accrued jurisdiction applied.
Her Honour dismissed claims against:
· X Lawyers for the way in which they handled the sale (except that they had to bear the costs of changing the locks due to their failure to tell the Court about the earlier sale order in which they were appointed as a trustee for sale;
· Mr Matthews sought damages against X Lawyers. Her Honour found that they did not owe a fiduciary duty to him. Instead, the claim by Mr Matthews of $69,000 was to be met by the husband.
However, her Honour was satisfied that X Lawyers breached its duty to the husband in facilitating the disposal of reimbursement by the purchaser for the purchase of certain chattels in the house and the property.
Her Honour stated:
“It is trite that a lawyer must not during the course of a retainer engage in any conduct that places his own interests or those of a third party in conflict with a duty to the client. The lawyer/client fiduciary duty is well known. If the wife wishes to take this matter further, I intend to allow her the opportunity to refer to the content of my judgment in so doing. The wife stood to receive nothing from the proceeds of sale.”
Her Honour considered that the trust money retained by X Lawyers on the wife’s behalf should be preserved pending the wife having the opportunity to commence the process of having the bills assessed.
12. Part VIIIAA
The two key provisions of Part VIIIAA are sections 90AE and 90AF.
Section 90AE relates to s79 proceedings (and therefore does not relate to spousal maintenance). Section 90AF concerns an order and injunction under s114. Therefore, it may have wider reach by relating to spousal maintenance. By s90TA, ss90AE and 90AF apply in de facto matters.
Scope and limitations of Section 90AE
1. There have to be proceedings under s79.
2. There can be an order directed to a creditor of the parties to the marriage to substitute one part for both parties or if it is the creditor of one party, to substitute the other or both.
3. An order to a creditor that the parties be liable for a different proportion of the debt.
4. An order to a director of a company or to a company to register a transfer of shares from one party to the other.
Furthermore, under s90AE(2) the Court may make any other order that:
(a) directs a third party to do a thing in relation to the property of a party to the marriage; or
(b) alters the rights, liabilities or property interests of a third party in relation to the marriage.
Balanced against this enormous power are the hurdles which allows the Court only to make those orders if:
(a) the making of the order is reasonably necessary, or reasonably appropriate and adapted, to defect a division of property between the parties;
(b) to the marriage; and
(c) if the order concerns a debt of a party to the marriage – it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and
(d) the third party has been accorded procedural fairness in relation to the making of the order; and
(e) the Court is satisfied that, in all the circumstances, it is just and equitable to make the order; and
(f) the Court is satisfied the order takes into account the following matters:
(i) The taxation effect (if any) of the order on the parties to the marriage.
(ii) The taxation effect (if any) of the order on the third party.
(iii) The social security effect (if any) of the order on the parties to the marriage.
(iv) The third party’s administrative costs in relation to the order.
(v) If the order concerns a debt of a party to the marriage – the capacity of a party to the marriage to repay the debt after the order is made.
Example– The capacity of a party to the marriage to repay the debt would be affected by that party’s ability to repay the debt without undue hardship.
(vi) The economic, legal or other capacity of the third party to comply with the order.
Example– The legal capacity of the third party to comply with the order could be affected by the terms of a trust deed. However, after taking the third party’s legal capacity into account, the Court may make the order despite the terms of the trust deed. If the Court does so, the order will have the effect despite those terms.
(vii) If, as a result of the third party being accorded procedural fairness in relation to the making of the order, the third party raises any other matters – those matters.
(viii) Any other matter that the Court considers relevant.
Scope and limits of Section 90AF
As to the scope:
1. there must be proceedings under s114;
2. the Court may make an order restraining a person from repossessing property of a party to a marriage; or
3. grant an injunction restraining a person from commencing legal proceedings against a party to a marriage;
4. the Court may make any other order or grant any other injunction that:
(a) directs a third party to do a thing in relation to the property of a party to the marriage;
(b) alters the rights, liabilities or property interests of a third party in relation to the marriage.
The limitations under s90AF are almost identical to those under s90AE. When an injunction order is to be made under s114(1), the Court must be satisfied that, in all the circumstances, it is proper to make the order or grant the injunction but for an injunction under s114(3) – the Court must be satisfied that, in all the circumstances, it is just or convenient to grant the injunction.
Part VIIIAA has the effect despite any other law: s90AC and is intended to allow the Court to alter the rights, liability or property interest of a third party as concerns the property of a party to a marriage: s90AA.
Procedural fairness is to be given by way of service in the usual manner: s90AI. A third party in relation to a marriage is not liable for loss or damage suffered by any person because of things done (or not done) by the third party in good faith in reliance on an order or injunction made or granted by a Court in accordance with this Part: s90AH. The usual expectation is that the necessary expenses of the third party as the necessary result of the order and injunction should be considered to be met by the parties, but the Court has a wide discretion about whether any order as it considers just for the payment of the reasonable expenses of the third party be met and if so, by whom, although the usual principle is that the parties to the marriage should bear the reasonable expenses of a third party equally: s90AJ.
The orders are also binding on trustees and their replacements: s90AG.
A simple s90AE case
Ibbott and Ibbott[2008] FMCAfam 38
The Facts
The parties were married for nearly 22 years. During most of the marriage the husband operated a trade business through a company. The company was in liquidation and had debts in excess of $173,000. The wife was a woman of modest means engaged in household duties for much of the marriage. She raised the parties’ two children now aged 20 and 16. She worked as a sales assistant earning around $33,000 a year. Her husband may have been a good tradesman but he was not a very good businessman nor astute in financial affairs. At the end of the long marriage between the parties, there were few assets available to be divided between them. The most significant asset by far was the proceeds of the parties’ former family home worth around $245,000. The wife’s position was that in consideration of justice and equity, she should receive the lion’s share of this sum if not all of it. The liquidators of the company believed that the sum should be utilised to pay the company’s debts. Both the parties were the directors of the company and were the only shareholders. Both parties were recorded as having drawn considerable monies from the shareholders’ loan accounts amounting to $191,000. During the period the loans were recorded, the company was not paying its debts as they fell due, particularly to the ATO or to WorkCover.
The wife’s position was that she was a director and shared in its profits in name only and in reality knew little, if anything, about its affairs which were managed by the husband and his accountant. She says she signed what she was asked to sign by her husband and the accountant and received little, if any, monies directed from the company, which was a creature of her husband. Essentially she said she did not know what was going on and it would be both unfair and inaccurate to regard her as being indebted to the company, certainly not an amount of $95,000 or more. She characterised the husband as a violent and wasteful person who lost the majority of the profits made by the company in gambling on poker machines and horseracing, which took place independently of her and in which she was powerless to prevent his involvement. The husband chose not to take any part in the proceedings. The liquidators of the company sought the Court’s leave to intervene.
Brown FM held at [186] – [194] as to the strict pre-conditions for the powers under part VIIIAA:
“186 Firstly, the use is subject to an objective standard of reasonableness. Secondly, it is just and equitable to make the order concerned. Thirdly, it can be foreseen that the making of the order will result in any debt effected not being paid in full. Fourthly, the third party debtor affected is given a right to be heard about the consequences of the order sought which concerns its rights. Finally, regard must be had to financial consequences for others, including government instrumentalities, the making of the order.
187 Essentially, the powers available to the Court under Part VIIIAA are closely circumscribed and their use should not result in the loss of any substantive rights by a third party, who is extraneous to the matrimonial relationship before the Court.
188. The principle (sic) mechanism by which a statute is to be interpreted is of course the wording of the statute itself. However, in order to confirm the meaning of any particular piece of legislation or to resolve obscurities or ambiguities in respect of it, it is permissible for the Court to have regard to certain specified pieces of extrinsic material.
189. Two such extrinsic sources are any explanatory memorandum, which related to the legislation when it was in bill form; and the second reading speech made by the relevant minister to the legislature. The examination of such extrinsic material is often a useful exercise for the Court to following, particularly in respect of novel pieces of legislation.
190. In the case of the Family Law Amendment Bill 2003 the then Attorney General, Mr Williams said as follows in the bill’s second reading speech:
“Of major significance are the provisions in schedule 6 of the bill that will allow the Court to make orders binding third parties to give effect to property settlement proceedings under the act. These provisions will apply to all creditors of the parties to the marriage, whether they are family, friends or financial institutions. In limited circumstances, where it is considered necessary, the Court will be able to alter the terms of the contract between the parties to a marriage and a creditor. For example, the Court could adjust the proportion of debt that each party of a marriage owes a creditor or order that the liability for a debt belongs to just one of the parties. The changes do not affect the underlying substantive rights of creditors and provide creditors with procedural rights.”
191. The relevant passage of the explanatory memorandum reads as follows:
“Schedule 6 of the Bill provides for the Family Court to be given power to bind third parties in order to give effect to property settlements. This will apply for any creditor of a party to a marriage irrespective of whether the creditor is a friend, relative or financial institution. Procedural rights will be given to third parties to ensure that the changes do affect the underlying substantive property rights of the creditor.”
[It appears that “not” was missing from that last sentence.]
192. These sources confirm that the Court is not to utilise the provisions of Part VIIIAA of the Act in such a way that affects the “underlying substantive property rights” of any creditor.
193. In addition, the Court is directed to construe each piece of legislation, which it is empowered to apply, subject to the powers contained in the Constitution. Specifically, pursuant to s90AK of the Family Law Act, the Court is prohibited from making any order pursuant to Part VIIIAA which result in the acquisition of property from some other person other than on just terms. Reference is made to the provisions of paragraph 51(xxxi) of the Constitution.
194. I regard a debt owed to a creditor as being a species of property to which the provisions of s90AK apply. Accordingly, in applying the provisions of Part VIIIAA, the Court is not entitled to act in such a way that substantive property rights of any third part are affected.”
His Honour noted that the wife did receive material benefits from the company over many years, whilst at the same time the company was not paying its proper debts as they fell due and the husband was plundering of its resources. The company, and its pre-insolvency incarnation, was a major contributor to the lifestyle enjoyed by the family, albeit that lifestyle was not a lavish one, certainly insofar as the wife and children were concerned. Accordingly, the power under s90AE(1)(c) may afford a mechanism whereby there is some apportionment between the rights of a spouse, who may have made many contributions during a marriage, say as a homemaker and parent, which of themselves have not resulted in the acquisition of material assets with the rights of an unsecured creditor. At the same time, account may be had to benefits received by that spouse in the period prior to issues of insolvency arising. Essentially, regard be had to the “for better or worse” principle and both spouses share whatever proportion is deemed appropriate, in a downside of any particularly matrimonial venture.
The difficulty, in this particular case, was determining what that proportion should be and how the other provisions of s90AE, particularly ss3(b) and 4, may be honoured. In the absence of any detailed forensic examination of the accounts of the company, it was difficult to determine which benefits Mr Ibbott took from the company alone and which flowed on to benefit both parties.
His Honour went on to say that no matter how derelict and reprehensible the husband’s actions may have been and no matter how innocent from misdoing the wife may have been, the Court was not in a position to ignore effectively the substantive rights of the company nor indirectly those of its creditors, most of whom were representatives of the public purse, most particularly the ATO. Nor did the Court have authority to balance the rights and entitlements of the wife with those of the company on the other. Essentially the court could not rob Peter to pay Paul or perhaps more accurately and less figuratively, cannot put into place measures that will see each of them receiving a proportion of what is due to them. The company’s right is to be paid in full. Rather, the Court’s responsibility is to make some sort of assessment of the consequences of a third party order, which is sought by the wife being made, particularly whether such order will result in the substantive rights of that third party being either negated or eroded. In particular, it is required to assess whether it is not foreseeable that such an order would result in the debt not being paid in full: s90AE(3)(b). The standard required is a high one. It must not be foreseeable by the Court that the order sought will result in anything other than the total repayment of the debt in question. In this instance, the absence of evidence from the husband is something of a double edge sword for the wife.
The Court reached the conclusion that the essential pre-conditions required by s90AE(3) for the making of the order sought by the wife had not been established. It was not foreseeable that the debt to the company would be paid in full. In addition, the Court was not persuaded that the considerations, regarding the foreseeability of the debt owed to the company being repaid in full, would be altered, if different proportions to the debt were attributed to the husband and the wife. The essential pre-condition is foreseeability of a payment of the debt owed to the third party in full. Anything short of this will result in the diminution of the substantive rights of such a third party. His Honour did not think attributing, in effect part of the debt owed, for payment from the proceeds of the sale of the former family home, is likely to result in it becoming foreseeable that the whole debt will be paid in full, unless the remainder required is a negligible amount. The company’s most significant debt was the ATO amounting to somewhere in excess of 80% of its total debts. In his Honour’s view it was the case that if the orders sought by the wife were made, the effect would be that the company would not pay its taxation debt in full. Such an outcome would need to be just nor equitable, certainly not so far as the public purse is concerned or within the intention of the applicable legislation.
His Honour therefore ordered that the parties pay the company $191,033 being the payment of the outstanding loan accounts and the whole of the balance being paid to the wife.
Payne and Payne[2013] FCCA 974
A year after the parties separated, their company went into liquidation. The only tangible asset of any significant value was the former matrimonial home. The wife wished to remain there, to ensure ongoing stable accommodation for her and the two children. She acknowledged some responsibility for the matrimonial debts, posed that she retain her existing credit card debts and paid the sum of about $40,000 towards the parties’ liabilities. This was the maximum amount she could raise through refinancing the home. She said that the husband should retain responsibility for all remaining debt, including to the company in liquidation and to his father.
The husband argued that such an approach was untenable, that the home be placed on the market for sale and the balance outstanding should be directed to their liabilities arising out of their failed business. Any net proceeds should be paid to the husband’s father. Both parties blamed each other for the financial difficulties surrounding the company but the end result was that their personal liabilities exceeded their assets. Faced with this difficulty reality, the parties were unable to resolve their competing applications for property settlement. By October 2010 it became clear that the company’s financial circumstances were precarious. The parties met with their company accountant in an attempt to negotiate a property settlement as well as manage their financial situation. The accountant advised them to cease all payments from the company including repayments to the home, the business loan and the two car loans. The wife subsequently negotiated to maintain the mortgage repayments on her own behalf.
Shortly thereafter the husband ceased trading through that company and established a new company acting on the advice of other accountants. He didn’t inform the wife that he had instructed new accountants or had set up a new business structure for another six months. His new business undertook work for a number of existing customers. The company in October 2010 ceased making rental payment to the husband’s father for the premises rented by it. The father terminated the informal rental agreement. All of the plant, machinery and stock belonging to the company was apparently placed in a shipping container. The husband’s father issued a demand for payment for the unpaid rent owing for nine months. He issued proceedings in the Supreme Court to wind up the company on account of unpaid debts in the sum of just under $8,000. The parties decided to voluntarily liquidate the assets. Nevertheless, the debtors’ position proceeded and the company was placed into liquidation. All the company assets have been called in and sold by the liquidator. By the time of trial, it was clear that the parties owed the company $93,500. The company’s liabilities include the business loan which was secured by way of personal guarantee from the parties and the husband’s father. Once the loan fell into arrears, the bank called in the personal guarantees. Where neither party was in a position to discharge the loan, the husband’s father paid out the balance owing to the bank of about $123,000 rather than face enforcement proceedings. The bank was an unsecured creditor in the liquidation. The husband’s father was substituted for the bank and the list of creditors. While he had no greater status than any other creditor, the husband’s father filed an affidavit informing the Court that he intends seeking repayment from the parties in their personal capacity as joint guarantors.
Kelly J noted that there was a legitimate concern that the company may have been trading insolvent in October 2010. Whether that was the case or not, it was clear that the husband’s actions in setting up a new business and direct competition with the company removed any possibility that the company could trade its way out of its difficulties. The husband conceded that while trading in the new company, he continued to use the old company’s plant and equipment and operating through the premises on his father’s property. This raised the question whether he should have been paying rent to his father for that nine months rather than from the old company. The husband said he could not recall telling his father about setting up his new business but his Honour rejected that evidence. The husband was living with his father at the time. His father was in the process of suing the company for unpaid rent.
Whatever past difficulties that might have been in the relationship between the husband and his father, by the time of trial they were working together and directing all payment for their services. The husband’s father provided him with a track that they use to undertake various contracts. Yet again, it appeared the husband had no interest in this asset. The husband reiterated that he did not receive any payment for his services and the income was all paid direct to a company which was controlled by his de facto partner. He said that their relationship was on again off again but he trusts her to run the business properly.
In the words of Kelly J:
“The husband’s present business structure seems designed to ensure that there are no assets and virtually no income that can be placed personally to the husband at present. He is asking the Court to accept that his whole livelihood and financial support is in the hands of his partner B. In light of all of these matters, it is surprising the husband did not call his father or Ms B to give evidence.”
As Kelly J stated, the conditions of s90AE are cumulative and the powers contained in part VIIIAA of the Family Law Actare closely circumscribed. The Court must be careful to ensure that a third party’s rights are not undermined as a result of the orders made by the Court adjusting the property interests between the parties. The liquidators were aware of the Family Law proceedings and attended various hearings and endeavoured to provide some assistance to the Court, least to the extent of clarifying the debt owing to the liquidators. They were invited to participate as a party, but declined to do so. The husband’s father was invited to participate and has been present during numerous interlocutory hearings. On at least one occasion he was represented by solicitors. He was invited to intervene, but declined to do so. The Court made it clear to the husband’s father that order may be made that effect his position as a third party creditor.
Kelly J stated:
“I have not allocated a precise percentage adjustment in relation to my discussion regarding the parties’ contributions or the s75(2) factors. There is too great an air of artificiality in doing so, given that what remains to be determined is the allocation of responsibility for debt. Nonetheless, I repeat my findings that the wife’s post separation parenting contributions and the s75(2) factors warrant a significant adjustment in the wife’s favour.
At the end of the day, the Court is faced with the reality that the parties’ liabilities exceed their assets. The wife’s proposal – that she retain the former matrimonial home and pay approximately $40,000 and discharge the outstanding debts – is not an outcome that the Court can contemplate. This would result in the wife retaining net assets valued between $50,000 and $75,000 and the husband retaining matrimonial debts in excess of $160,000, including the balance due to the liquidators. Such an outcome could not possibly be viewed as just and equitable as between the parties. It also ignores the legitimate claims of the creditors within the liquidation process.
There is no option other than to sell the former matrimonial home, so as to enable the net proceeds of sale to be directed to the outstanding debt. As to the question of priority between debtors, neither the liquidators nor the husband’s father chose to take formal part of the proceedings. Both parties acknowledge their liability to the liquidators and I conclude that this debt should take priority. If there are any net proceeds still remaining, those funds should be paid towards the parties’ remaining debts owing to the school and to the husband’s father. The husband’s father will presumably receive a distribution from the liquidation process, once the directors’ liability has been paid in and the company finally wound up.
The husband is clearly able to work and earn an income. His precise income cannot be quantified by the Court, but that arises by virtue of the husband’s own actions in setting up his present work/business structure. That situation, together with the fact that he is actually working together with his father, leaves me to conclude that he will be well placed to negotiate a reasonable repayment arrangement with his father in the future. Indeed he has a strong incentive to do so.
The wife will continue to provide for the parties’ two young children. She will continue to discharge the credit card debts owing since separation. The husband will be left with a greater debt burden, but he has structured his finances in such a way that he will not be making any meaningful financial contribution to the children’s support in the foreseeable future. In those circumstances, I conclude it is appropriate that he retain that greater debt burden.”
His Honour concluded that the husband should retain responsibility for the debt owing to his father and should indemnify the wife in relation to the balance of the debt still owing to him.
Section 90AE(3)(b) required the Court to consider whether it is foreseeable that making an order would result in the debt not being repaid in full. His Honour found that that was not the situation here in relation to the husband’s father who already faced the possibility that the debt owing will not be repaid in full, whether or not an order is made. The reality is that once the former matrimonial home has been sold and the net proceeds distributed, there are no assets remaining in the possession of either party again which the husband’s father can claim. On any view of the present situation, it is unlikely that the husband’s father’s remaining debt will be repaid in full, irrespective of any order made pursuant to s90AE.
His Honour having ruled that it was just and equitable as between the parties that the husband retain responsibility for the balance of any debt owing to his father, he was satisfied that such an order was necessary to effect a property settlement between the parties. Having determined that the husband should indemnify the wife in relation to this debt, it was proper that he be substituted for the wife in relation to this debt, in terms of implementing the property settlement.
Rand and Rand [2002] FamCAFC 50
The Full Court in considering s90AE(3) and (4) required that the Court explain the reason not only because of the general obligation on a Court to give reasons, but for the Court to be satisfied of the various matters referred to in the subsections before an order of the type referred to in s90AE(1) and (2) is made.
The Court held:
“The matters in s90AE(3) and (4) are clearly in the nature of safe-guards to third parties. At least since the decision of the High Court in Ascot Investments Pty Ltd v. Harper, it is clear that the position of third parties who may be affected by financial orders made under the Act must always be approached with caution as constitutional limits be exceeded.” – at [138]
The Court further commented about the trial judge [145] to [149]:
“145. Moreover, he needed to explain not only how orders under s90AE(1)(b) would protect the wife’s position in the sense, presumably, of safeguarding the funds which she was to receive by way of property settlement, and thus that they were reasonably necessary to effect a division of property, but also how such orders could as a matter of justice and equity be made having regard to the matters set out in s90AE(3) and (4).
146. We do not accept that the findings of a “sham”…would themselves justify orders under s90AE(1) or (2) at least without a much greater explanation of exactly what transactions constituted the sham and of the role in the alleged sham of the third parties who were to be subjected to the order. But even so, the trial judge would be required to address the matters in s90AE(3) and (4)…
147. Similarly, in our view what was referred before us as the wife’s “estoppel” claim (being a claim as we understand it of the liquidator of [the company] would be estopped from pursuing claims against her in relation to insolvent trading or the directors’ loan account…) could not, without much greater explanation by his Honour, be relied upon to support the orders purportedly made under s90AE(1)(b)…
148. Senior counsel for the respondent wife also endeavoured to meet the reasons challenged advanced by the appellants by reference to the submissions which were made to his Honour in support of the orders sought against the third parties. Such a course may be available when the judgment is given ex tempore either immediately or very shortly after the conclusion of a trial, but it is not satisfactory in the case of a reserve judgment, particularly one in a case such as the present where the issues both of fact and law are complex.
149. Finally, in relation to the reasons challenged…senior counsel for the respondent wife endeavoured to argue that even if those orders were vulnerable because his Honour had not addressed all the requirements in s90AE, nevertheless the orders could otherwise be supported as an exercise of the general powers available under s79. In our view, it is not beyond doubt that power to make orders of the type now available under s90AE was necessarily available prior to the introduction of that section. But even if such power did exist, we agree with the submission of senior counsel for the appellants, that if such a power is now to be exercised, it must be exercised in accordance with the requirements of s90AE. As we indicated earlier, that section contains important safeguards for third parties who are to be the subject of financial orders made under the Act.” [Emphasis added]
The Court then went on to find that a debt was not an insolvent trading claim and therefore it had not been established that the wife had an obligation now or in the future to pay money to anyone (pursuant to s588M of the Corporations Act) on account of insolvent trading. An insolvent trading claim under 588M of the Corporations Actcannot be characterised as a debt for the purposes of s90AE(1)(b) and therefore there was no power to make orders under s90AE(1)(b) to the extent that those orders purported to extend to a claim for insolvent trading. The position would seem to be different in relation to the directors’ loan account or other accounts in that such a debtor obligation to pay money back to the company would be established in the books of the company. It could thus be the subject of an order under s90AE(1)(b).
13. Section 85A
This rarely used section deals with any nuptial or imposed nuptial settlements. You would no doubt be well aware of the decision in Kennon v. Spry [2008] HCA56. I’ll just remind you that there is a useful discussion of s85A in the judgment of Kiefel J (as she then was). In that judgment it may be that we will see further developments on that section in due course.
Stephen Page
Harrington Family Lawyers
6 March 2017
australiandivorce.blogspot.com
twitter.com/stephenpagelaw
