Thursday, 27 November 2008

Federal Magistrates Court: intersection of Family Law Act and Bankruptcy Act

The often painful intersection between the family Law Act and the Bankruptcy Act has been illustrated, again, in the recent Federal Magistrates Court case of Zachary and Zachary. it is a salutary lesson to be ever so careful in starting proceedings, and if it is possible to do so under both the Family Law Act and the Bankruptcy Acts, to use both Acts.

The facts

The wife applied for property settlement and spousal maintenance. She had obtained interim injunctions against:
  • the husband, who was bankrupt, and whose bankruptcy had been extended for 5 years, because of his failure to provide explanations to his trustee;
  • a company which employed the husband and in which he had an interest, which owed the husband commissions, estimated at $70,000; and
  • the bankruptcy trustee.

At some stage after he became bankrupt, the husband acquired almost 350,000 shares in the company.

The questions before the court included whether the injunctions should continue and whether the court had jurisdiction to deal with property matters when the husband was an undischarged bankrupt.

The law

Federal Magistrate Kemp stated:


By virtue of the Bankruptcy
and Family Law Legislation Amendment Act 2005
(Cth) (“the Amending Act”),
the Court was given jurisdiction to make orders with respect to vested
bankruptcy property in relation to a party to the marriage who was bankrupt.
Item 60 of Part 2 of Schedule 1 to the Amending Act states as follows:
60
Application of amendments
(1) Subject to sub-items (2) and (3), the
amendments of the Family Law Act
1975
made by this Schedule , to the extent to which they relate to
bankruptcies or personal insolvency agreements, apply in relation to:
(a)
bankruptcies for which the date of the bankruptcy is after the commencement of
this item; and
(b) personal insolvency agreements executed before, at or
after the commencement of this item.
(2) The following provisions:
(a)
subsections 74(2), (3) and (4) of the Family Law
Act 1975
as amended by this Schedule;
(b) subsection 74(8) of the Family Law
Act 1975
as amended by this Schedule, to the extent to which that subsection
relates to subsection 74(2) of the Family Law
Act 1975
as amended by this Schedule;
(c) the definitions inserted in
subsection 4(1) of the Family Law
Act 1975
by this Schedule, to the extent to which those definitions relate
to subsections 74(2), (3) and (4) of the Family Law
Act 1975
as amended by this Schedule;
apply to proceedings instituted
after the commencement of this item, whether the date of the bankruptcy is
before, on or after the date of commencement of this item.
(3) The following
provisions:
(a) subsections 79(11), (12) and (13) of the Family Law
Act 1975
as amended by this Schedule;
(b) subsection 79(17) of the Family Law
Act 1975
as amended by this Schedule, to the extent to which that subsection
relates to subsection 79(11) of the Family Law
Act 1975
as amended by this Schedule;
(c) the definitions inserted in
subsection 4(1) of the Family Law
Act 1975
by this Schedule, to the extent to which those definitions relate
to subsections 79(11), (12) and (13) of the Family Law
Act 1975
as amended by this Schedule;
apply to proceedings instituted
after the commencement of this item, whether the date of the bankruptcy is
before, on or after the date of commencement of this item.

It is clear that in respect of a bankruptcy entered before the commencement
date of the Amending Act being 18 September 2005, there was no jurisdiction in
the Court to deal with the vested bankruptcy property of a bankrupt party to the
marriage. In those circumstances, the Court would adjourn the proceedings until
after the bankrupt party was discharged, when the Court could then deal with
whatever assets the former bankrupt possessed. The power to adjourn being
conferred under s.79(5)
of the Family Law
Act
.

The Amending Act did not, in any event, give the Court jurisdiction to deal
with property other than “vested bankruptcy property”. Accordingly, property
coming to the possession of the [trustee] as a result of the operation of other
provisions of the Bankruptcy Act (such as the income contribution scheme or as a
result of proceedings under the anti-avoidance provisions) which moneys do not
fall within the concept of “vested property” for the purposes of the Bankruptcy
Act
and are held solely for the purposes of distribution amongst creditors
and not for the benefit of the bankrupt would not be within the Court’s
jurisdiction to deal with.

The findings

The Court accepts the submissions of [counsel for the trustee] that the
[wife]’s present application seeks relief only under the provisions of the Family Law
Act
and accordingly, this Court’s original jurisdiction under the Bankruptcy
Act
is not engaged.

The Court further accepts the submissions of [counsel for the trustee] that
this Court does not have jurisdiction over the [trustee]under the Family Law
Act
for the following reasons:

  • The Transitional provisions contained in Item 60 of Part
    2
    Schedule 1 of the Amending Act, as set out above, make it clear that the
    operative provisions of s.79(1)-(10)
    of the Family Law
    Act
    do not operate where the date of bankruptcy, as here, is prior to 18
    September 2005.
  • The Court does not accept [the wife's counsel's] submission that the
    extension of the life of the bankruptcy on 25 August 2006 in effect creates a
    further or new act of bankruptcy, in this case, after the date of amendment of
    the Family Law
    Act
    , so as to give the Court the power to deal with the vested estate of the
    first respondent in this case.
  • The said Transitional provisions make it clear that the operative provisions
    relating to maintenance of s.74
    (2), (3), (4) and (8) and relating to property of s.79(11),
    (12), (13) and (17) of the Family Law
    Act
    which apply to bankruptcies existing both before and after 18 September
    2005 do so on the basis that it is the [trustee] who must apply “to be joined as
    a party to the proceedings”. The [trustee] has not applied in these proceedings.
    The Court does not accept [the wife's counsel's] submission that there is no
    significant difference between the trustee making an application to be joined
    and the applicant in this case, joining the trustee.
  • There is little factual evidence before the Court for it to determine the
    nature of the unpaid commissions, (save [the counsel for the trustee's]
    submission that the amount is about $70,000.00) in terms of whether they are
    characterised as property which vests in the Trustee or as income which would be
    exempted property. Whilst the definition of property in s.5
    of the Bankruptcy
    Act
    is wide enough to encompass income, see Re
    Gillies; Ex-parte Official Trustee in Bankruptcy Re Gillies (1993) 42 FCR
    571
    (French J. as he then was). Division 4B of the Act establishes a
    comprehensive scheme and accordingly where it is inconsistent with ss.58
    and 116,
    Division 4B applies rather than those last mentioned sections. Accordingly if
    the relevant item has an income nature, it will not vest in the Trustee, see Re
    Sharpe; Ex-parte Donnelly (1998) 80 FCR 536
    (Lockhart J.). The Court is of
    the view that if the loan account in the third respondent is property it has
    been derived out of income and would not be divisible under s.116
    of the Bankruptcy
    Act
    .
  • Section
    139P
    of the Bankruptcy
    Act
    states, subject to s.139Q
    of that Act, that if the income that a bankrupt is likely to derive during a
    contribution assessment period as assessed by the Trustee under an original
    assessment exceeds the actual income threshold amount applicable in relation to
    the bankrupt when that assessment is made, then the bankrupt is liable to pay to
    the Trustee a contribution in respect of that period. Income over and above the
    amount the bankrupt is required to pay to the Trustee and which is accumulated
    is not after acquired property which vests in the Trustee. The bankrupt is
    entitled to deal with that surplus income for example by way of an offer to
    creditors when proposing a composition in satisfaction of debts see Re Gilles
    (supra). The contribution payable by a bankrupt is determined by the application
    of the formula set out in s.139S.
    Any assessments made by the Trustee may be the subject of review by the
    Inspector General and then the Administrative Appeals Tribunal. The
    contributions that a bankrupt is liable to pay may be payable at such times as
    the Trustee determines and the Trustee may permit such sums to be paid by
    instalments. The total of any contributions or instalments that are not paid by
    the bankrupt are recoverable by the Trustee as a debt due to the estate of the
    bankrupt. The Trustee under s.139ZG
    may sign a Certificate setting out the nature and the amount of the debt and
    file such certificate in the Court in which proceedings have been instituted and
    that Certificate will be prima facie evidence of the existence and the amount
    the debt. The Certificate so issued essentially shifts the onus of proof from
    the Trustee to the bankrupt. However, the bankrupt still has standing to contest
    the debt and adduce evidence to show why such an assessment should not be
    accepted and to attack the validity of any underlying certificate.
  • The second respondent has certain rights under the Bankruptcy
    Act
    , to have the Official Receiver issue, in effect, a statutory garnishee
    notice to the third respondent to pay the outstanding debt towards the income
    contribution, creating in effect a statutory charge in favour of the second
    respondent.
  • To the extent that the applicant seeks relief under s.79 and/or s.74
    of the Family Law Act
    in respect of:
    vested property within s.58 of the Bankruptcy Act (s.59A
    of the Bankruptcy
    Act
    having no application) and the Court accepts the shares in the
    [company]are in this category as are any dividends received on those shares;
    and/or
    monies (being the commission income that the [husband] has received
    from the [company] deposited into a loan account in his name) which become
    payable to the [trustee]on account (relevantly) of assessed Income Contributions
    which have accrued or which will accrue during the period of the bankruptcy,
    being a debt due by the first respondent to the second respondent, held for the
    benefit of the trustee’s remuneration and the creditors entitled to participate
    in the bankruptcy under his administration,
    they are beyond power. This is
    so, notwithstanding any agreement by the Trustee, as jurisdiction cannot be
    conferred on the Court simply by the consent of the parties.
    Accordingly,
    property and maintenance proceedings can only be maintained against the
    [husband] in respect of the property not vested in the [trustee] - [in other
    words, the shares and unpaid commission
    ].

Kemp FM then dismissed the proceedings as against the trustee.

Kemp FM held:


In light of the above, the Court is also of the view that the first
respondent will otherwise remain a party and in such circumstances, [the
solicitor for the husband]would be entitled to make submissions on his behalf as
any submissions to the Court would necessarily relate to non vested bankruptcy
property (that is exempt property including income, superannuation or financial
resources). In those circumstances, Ms Reid would not need leave under ss.79(12)
and (13) and ss.74(3)
and (4) of the Family Law
Act
which provide as follows:
s.79(12)
If a bankruptcy trustee is a party to property settlement proceedings, then,
except with the leave of the court, the bankrupt party to the marriage is not
entitled to make a submission to the court in connection with any vested
bankruptcy property in relation to the bankrupt party.
s.
79(13)
The court must not grant leave under subsection (12) unless the court
is satisfied that there are exceptional circumstances.
s.74(3)
If a bankruptcy trustee is a party to proceedings with respect to the
maintenance of a party to a marriage, then, except with the leave of the court,
the bankrupt party to the marriage is not entitled to make a submission to the
court in connection with any vested property in relation to the bankrupt
party.
s.74(4)
The court must not grant leave under subsection (3) unless the court is
satisfied that there are exceptional circumstances.

In any event, even if the Court was required to find exceptional
circumstances, the Court is satisfied that such exceptional circumstances exist
here, based on the need to afford the husband procedural fairness in being able
to make submissions referrable to the impact of the injunctions on him and in
respect of any orders seeking periodic and urgent spousal maintenance and costs
as these would otherwise have a direct impact on him in:

  • being able to financially support his children;
  • being able to meet his day to day living expenses;
  • being able to meet his obligations to his creditors and the Trustee in
    bankruptcy;
  • being able to discharge his bankruptcy.

Kemp FM discharged the injunctions against the trustee in part because they would restrain the trustee from exercising his statutory duty, but kept in place the injunctions against the company.

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