Bankruptcy and Family Law

By | December 20th, 2016|

The intersection between family law and bankruptcy is a particularly niche area of law to practice for both legal practitioners and the Court. There are conflicting ideologies in the discretionary nature of the Family Law Act 1975 (Cth) and the commercial nature of the Bankruptcy Act 1966 (Cth). Therein creates the practical and academic difficulty for dealing with bankruptcy issues in family law matters.

In family law property proceedings, the decision in Stanford & Stanford [2012] HCA 12 clarified a clear four step approach to be used to determine whether and then how matrimonial (or de facto) property interests will be adjusted in the event of separation on a just and equitable basis:

  1. Firstly, the Court must identify the party’s legal and equitable interests, both their individual and joint property.
  2. Secondly, the Court must consider the contributions to the acquisition, conservation and improvement of the assets including financial and non-financial contributions, and homemaker and parent contributions.
  3. Thirdly, the Court must consider any future needs factors for each of the parties pursuant to Section 75(2) of the Family Law Act 1975 (Cth), which include but are not limited to each party’s age and state of health, their income, property and financial resources, their physical and mental capacity for appropriate gainful employment and whether either party has the care and control of the children of the relationship under the age of 18.
  4. Lastly, to consider whether any proposed adjustment would be just and equitable to both parties to the proceedings in a global sense.

If a party to the proceedings declares bankruptcy before or during the family law property proceedings, the outcome of any adjustment between the parties becomes significantly complicated by the fact that the bankrupt party’s property becomes vested in the trustee of the bankrupt estate, and then too the Court’s duty is expanded to consider the creditor’s interests in any property adjustment proposed to be made between the parties.

In 2005, the landscape of the intersection between family law and bankruptcy drastically changed with the introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth). The way in which the Court viewed the contributions by the non-bankrupt spouse in competition with the interests of the creditors vastly changed in removing the priority interest of the creditors and creating an even playing field for the interests of all parties to the proceedings.

As it currently stands the default bankruptcy period is three years. From a family law perspective, the biggest issue is the practical ability of the Court to determine and resolve a family law property matter within the term of bankruptcy. It is undisputed that the Federal Circuit Court of Australia and the Family Court of Australia are already under significant pressure with a serious lack of resources to keep up with the demands placed on the Courts.

For example, in the Sydney Registry of the Federal Circuit Court of Australia, matters are waiting up to six months for their first court date, eight months for an interim hearing, and anywhere between three and four years for a final hearing depending on how many days the trial requires. If you are seeking an airport watch list order to stop your former spouse from fleeing the country with your child, it is unlikely your application will be heard within a week from filing.

From the trustee’s perspective, there are a few issues to consider:

  1. Is it worth making an offer to avoid litigation? Yes. Not only will this save cost for the trustee in legal fees, but it will also serve to the benefit of the creditors of the bankrupt. Furthermore, an offer before entry in to the litigation is called a Calderbank offer, this will assist in any costs application you may make in the future.
  2. Is it worth talking to the bankrupt about their relationship and family issues in the first instance? Absolutely. You should do this in your initial client appointment. Knowledge is power. If the bankrupt indicates that their relationship might be in the process of breaking down, or has broken down irretrievably, this is essential information you need to know in order to prepare yourself as the trustee in a family law dispute.
  3. Can the bankrupt still participate in family law proceedings? Yes. Superannuation is protected in bankruptcy however it is treated as an asset capable of adjustment in family law proceedings. While the bankrupt cannot make submissions without permission from the court in relation to the assets vested in the trustee of the bankrupt estate, they can still freely engage in relation to their superannuation. Super-splitting is very common in family law and any adjustment made in relation to superannuation is accounted for in any overall adjustment of the non-superannuation and superannuation assets in a global sense.
  4. Can a trustee bring an application under the Family Law Act 1975 (Cth)? No. Only a party to the marriage or de facto relationship can make an application. Once proceedings have started, the trustee can make an application to be joined to the proceedings as a party.

The complex nature of bankruptcy in family law proceedings creates a myriad of obstacles to reach an outcome that could be considered just and equitable for all parties involved. It is becoming clearer that a ‘one stop’ approach for approaching these matters is not appropriate and each case must be assessed individually. Even though the sweeping amendments in 2005 sought to clarify the uncertain waters, we are still seeing the velocity of those changes in matters being determined today.

Watch this space!

This article was first published in the Personal Insolvency Regulator Newsletter published by the Australian Financial Security Authority. View the full newsletter here >