De facto father tries to frustrate a property settlement by going bankrupt. How would you feel?

De facto husband entered into a personal insolvency agreement to frustrate the effect of a partial property settlement order – Family Court of WA considers interaction between Bankruptcy Act 1966 (Cth) and Family Court Act 1997 (WA) – Order for controlling trustees to release control of property under s 208 of the Bankruptcy Act.

In Beaman & Bond [2014] FCWA 21 (4 April 2014) Crisford J considered an application by a de facto wife under s 208 of the Bankruptcy Act 1966 (Cth) “to obtain the release of property owned by [her former de facto partner] from the controlling trustees of his estate” (para 1), arguing that his entering into a personal insolvency agreement (“PIA”) appointing trustees to control such property was “an abuse of Part X” of the Bankruptcy Act and “was designed to frustrate existing Family Court proceedings for property settlement” (para 2).

The applicant had brought an application in March 2010 seeking an order setting aside a financial agreement between the parties and orders for property adjustment and maintenance (para 19). In February 2013 the Court ordered that the respondent pay $100,000 to the applicant “for … forensic investigation fees … and future legal costs and disbursements” of the applicant (para 24). After that order was made the respondent was referred to a solvency expert by his solicitor, who said “that [the respondent] needed to enter into a Part X arrangement because of ‘Issues with Family Court settlement’” (para 26). The respondent then “signed an authority under s 188 of the [Bankruptcy Act] in favour of” the controlling trustees who were second respondents to the proceedings (para 28).

The applicant argued that the respondent was solvent such that he was not a debtor for the purpose of s 188 of the Bankruptcy Act, or alternatively, that the authority signed by the respondent “in favour of the controlling trustees was made for a purpose not contemplated by s 188” (para 13).

Crisford J said (at para 5):

“ … As a former de facto partner living in the State of Western Australia when issues of bankruptcy and family law exist together, unlike in every other Australian state, they do not exist harmoniously. The Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) and the Family Law Amendment (De Facto Financial Matters and Other Measures) Act 2008 (Cth) … were enacted to overcome the inability of a non-bankrupt spouse to obtain property settlement orders pursuant to s 79 of the FLA in respect of the property of a spouse subject to bankruptcy legislation.”

Crisford J continued at para 9:

“In Western Australia, unlike in other states, de facto property disputes are not subject to the FLA because the West Australian Parliament has not referred the requisite powers to the Commonwealth. Part 5A of the Family Court Act 1997 (WA) … governs such disputes.”

Crisford J was not satisfied that the respondent was solvent (such that the applicant’s argument that s 188 did not apply to him was unsuccessful), however Crisford J then said (from para 98):

“Section 208 of the [Bankruptcy Act] provides for a court to terminate control of a debtor’s property in the following terms:

‘The Court may make an order releasing the debtor’s property from control under this Division if:

(a) an interested person applies to the Court for such an order; and

(b) the Court is satisfied that special circumstances justify it making the order.’

[99] [Counsel for the respondent] concedes that [the applicant] is an interested person in accordance with s 208(a) of the [Bankruptcy Act, but] she maintains the Court could not be satisfied there are special circumstances justifying any exercise of discretion in making the order sought.

( … )

[102] Whilst the term special circumstances can and often does include an abuse of process there is nothing to suggest that an abuse of process is pivotal to a finding of special circumstances. Special circumstances are simply those which are ‘out of the ordinary course’.

( … )

[104] This is a case in which I consider that special circumstances exist and that the property of [the respondent] should be released from the control of the trustees. There are a number of different factors, which when taken together, can be properly described as ‘out of the ordinary course’.

( … )

[106] The nature of [the respondent’s] financial circumstances is presently the central issue in contention, both in the FCA and BA proceedings. Rather than having this central issue dealt with and determined in one court hearing, there will be two disparate manners of addressing it. If the PIA proceeds in isolation, it will disable or utterly ruin [the applicant’s] claim in the Family Court. There is a decided risk of an inconsistent result in the two courts relating to the same issue. Proceeding with the PIA will have an irreversible effect on the FCA proceedings.

( … )

[114] It is difficult to see [the respondent’s] actions in taking steps to enter into the authority as a genuine response to a recently realised insolvency. However, whether the response was genuine or not, the actual effect and impact of the action he took allows him some form of reprieve from the Family Court proceedings.

( … )

[128] The practical effect of the BA procedures has been to gain, what can only be termed, as some form of collateral advantage for [the respondent]. This is not a purpose contemplated by the BA and, using the words of earlier authority, is simply extraneous to that legislation. The issue of payment by [the respondent] of the $100,000 previously ordered is something that can be dealt with by the Family Court. ( … )

( … )

[130] The considerable investment in the Family Court proceedings in terms of time, effort and investigation will effectively be frustrated if the PIA is executed and given effect. I find that the removal of [the respondent’s] property from the control of the trustees is unlikely to cause unfair prejudice to either the parties to the de facto marriage or to the creditors. The issues will still be resolved, but in one set of proceedings.”

Orders were made releasing the property of the de facto husband from the control of the trustees.

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