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 1
Many 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).
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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.
Noll
was 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. Harper
found 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.
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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.
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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 month
capitalised 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 Act
are 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 Act
cannot 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
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