Family lawyers are often asked the question “can my ex-partner avoid paying my entitlement by going bankrupt“.
In most cases, the answer will involve a discussion about the assets in the asset pool, and how a particular settlement should be worded.
In cases where a party actually does go bankrupt to defeat a Family Court settlement, the same topics can arise.
In Rahman v Rahman [2020] FamCAFC 279 and Wilkinson v Kemp [2020] FCCA 69, the husband in each case went bankrupt, voluntarily, after a final property settlement order had been made.
In these cases, the initial result for the wives was harsh. In both matters, the husband had or was accruing superannuation entitlements and the Trial Court had not made a splitting order.
As superannuation is a protected or “exempt” asset under bankruptcy law, the husbands were able to keep and build their superannuation despite going bankrupt.
This left the husbands in a far stronger financial position, relative to the wives, than the Trial Court had ever intended.
To rectify that, the wives in each case asked the Family Court to give them a portion of their husband’s superannuation (under a splitting order) in substitution for the unpaid money.
In both cases, the Court said that this option was possible. However, as the wife’s cases hadn’t been drawn up and argued correctly, neither succeeded at first instance.
What these cases demonstrate is that the Court will entertain a claim to substitute unpaid money with superannuation, when there are no other assets left to satisfy the judgment.
The decisions also, to a lesser extent, indicate how property agreements and orders can be structured to better protect against future bankruptcy.
Background
Prior to 2005, a financial order made by the Family Court against a party could not be enforced if that party later went bankrupt.
Historically, a Family Court judgment was considered a “provable debt” in bankruptcy law.
For the non-bankrupt spouse, that meant that there was no ability to use the Family Court to enforce a property settlement judgment. The non-bankrupt spouse had to lodge a debtor’s petition in the bankruptcy Court instead.
The trustee-in-bankruptcy then determined the claims and priorities of all of the bankrupt’s creditors under the general bankruptcy law. The non-bankrupt spouse did not hold any special status above the other creditors. The trustee was not bound to give effect to the Family Court judgment.
When the bankruptcy period ended, the bankrupt spouse’s debt to the non-bankrupt spouse was extinguished and could no longer be pursued.
In 2005, with the implementation of the Bankruptcy and Family Law Legislation Act 2005 (Cth), the law changed to allow certain Family Court judgments to sit outside of, and survive, the bankruptcy.
This included orders for transfers of property from one spouse to another, child support orders and spousal maintenance orders. This meant that these orders could be pursued by the non-bankrupt spouse through non-bankruptcy processes (i.e. enforcement applications to the Family Court).
Other common Family Court awards such as payments of money and costs orders were not included in the reforms and remained “provable debts”.
Another key aspect of the 2005 reforms was to grant the Family Court the power to sit as a bankruptcy court.
The amendments allowed that in cases where a spouse went bankrupt before a Family Court settlement was ordered, or if bankruptcy occurred while the Family Court proceedings were running, the trustee-in-bankruptcy could be brought into the Family Court proceeding.
The entitlements of all the creditors, as well as the bankrupt and non-bankrupt spouse, could then be resolved at the same time, in one proceeding.
But what happens if the bankruptcy occurs after the Family Court case has finished?
Rahman: initial decisions
Rahman dealt with a situation where the husband had unilaterally withdrawn $580,000 from the home mortgage and transferred it overseas after the parties separated.
In February 2012, the trial judge ordered that the husband transfer the wife the sum of $377,000 from the $580,000. The trial judge also placed a travel ban on the husband. He was restrained from leaving Australia until the wife had received that money.
The husband refused to transfer the money to the wife. He brought an appeal against the decision (which he lost). He then entered into voluntary bankruptcy a few weeks after the appeal ended.
The husband’s period of bankruptcy ended in 2016. In 2017, the husband then applied to the Court to lift travel ban. He argued that his debt to the wife under the Orders had been extinguished by the bankruptcy which meant that the travel ban had no legal basis anymore.
The husband’s application to remove the travel ban was not decided by the Court until March 2020. The Court rejected the husband’s arguments and confirmed the travel ban. The Court found that the payment order was a “transfer order” protected by section 59A of the Bankruptcy Act 1966. In other words, the order had survived the bankruptcy and the wife could pursue the $377,000.
In April 2020, the wife brought a fresh application, to the Family Court, to pursue the $377,000. The wife asked to be paid superannuation in substitution for the unpaid money. She also sought an interim Court order to “freeze” the husband’s bank accounts.
The lower courts heard the wife’s interim application in May 2020 and granted the freezing order.
The husband appealed both of the March 2020 and May 2020 decisions. The appeal was determined in November 2020 and is discussed below.
Rahman: decision of the appeal court
The Full Court of the Family Court of Australia agreed with the lower Court’s decision in March 2020. The travel ban and the $377,000 payment obligation were confirmed, for the same reasons given by the primary judge.
The Appeal Court did not agree, however, with the primary judge’s decision in May 2020. The Court dismissed her case on a legal technicality.
Essentially, the Appeal Court found that the wife had made her application in the wrong way, in the wrong form, and that she’d asked the Court to use a power it didn’t have.
More specifically, the problem lay in the fact that the wife has asked the Court to order the superannuation payment as a second Final Order in circumstances where there’d already been a trial and Final Orders made in 2012.
The Court found that the wife’s application was incompetent and dismissed it, along with the interim freezing order on the husband’s bank account which was connected to it.
His Honour Justice Austin, who wrote the main judgment, said:-
- As Final Orders had been made in 2012, the Court’s power to decide the parties’ interests in the property had been exhausted;
- The Court could not now change the 2012 Orders, other than through an appeal or a section 79A Application;
- If the wife decided to bring another application to enforce the 2012 Orders, it should be an enforcement application in both style and substance.
In doing so, the Court left the door open for the wife to reapply in the correct way. At this point, there have been no further reported Family Court cases involving these parties.
Wilkinson: initial difficulties
In Wilkinson, the asset pool was smaller than in Rahman. There were no existing cash reserves from which a transfer order could be made.
In this case, the Trial Judge made a Final Order in 2015 that the husband keep certain assets and pay the wife the sum of $45,352 within three months. This Order effectively created a debt in the husband’s name.
Importantly, the Final Orders did not include any “fallback” provision. That is, there were no orders that required the husband to sell, transfer or provide assets to the wife if he didn’t pay her.
The $45,352 payment, therefore, was not a transfer order (as had been the case in Rahman). The payment was not covered or protected by section 59A of the Bankruptcy Act 1966. The obligation was a “money order” and thus a “provable debt” which had to be dealt with under general bankruptcy law.
The Court confirmed this in 2015 when the wife made a Family Court enforcement application to recover the money due under the judgment. By that time, the husband had gone bankrupt and hadn’t paid.
Importantly, the husband’s period of bankruptcy was still running when the case was brought. The wife did not seek to change the Final Orders. She had simply asked the Family Court to compel the husband to pay the money previously ordered. She wasn’t seeking any superannuation orders at that time. She had not obtained the bankruptcy trustee’s permission to bring the case to the Family Court. The wife had not lodged a debtor’s petition with the bankruptcy trustee.
For these reasons, the Court found the wife’s application was incompetent and dismissed it.
In April 2016, the wife again applied to the Family Court, this time for superannuation splitting orders in substitution for the unpaid money. Unfortunately, the wife’s case contained technical mistakes, similar to those made in Rahman.
In June 2016, the wife’s case came before a Judge who told her why it was defective. The wife then withdrew her case, before it went any further in the Court process.
Wilkinson: subsequent success
In 2019, the wife brought a fresh case to the Family Court and was successful.
The wife asked the Court to discharge the original orders and make new final orders in their place (i.e. a section 79A Application) which included a superannuation splitting order.
In the alternative, she argued that the Court could make a superannuation order, without having to change the old Orders, using its enforcement powers.
Importantly, in both the “section 79A” claim and the “enforcement” claim, the wife was not asking for a greater share of the asset pool than she’d been awarded in 2015. Rather, she sought an outcome that had the same overall effect on a “percentage basis” that the 2015 orders had intended.
The husband was no longer bankrupt when the 2019 case began. However, he went into voluntary bankruptcy again shortly thereafter.
At the hearing, the wife tendered a letter from the bankruptcy trustee. The trustee confirmed its consent to the wife’s case being heard in the Family Court. It confirmed it had no power over the husband’s superannuation because it was a protected asset. It confirmed that the case didn’t affect their rights as trustees. The Court agreed with the trustees.
As to the wife’s “enforcement” application, the Court agreed with the wife’s reasoning. The Court found that it had the power to alter the 2015 Final Orders by means of a “machinery provision” amendment and that in this case, it was appropriate to do so. In deciding this, the Court referred to the case of Molier v Van Wyk [1980] FamCA 851 which deals with enforcement powers and when they should be used.
As to the “section 79A Application”, the Court found it had legal merit, albeit on only one of the grounds she’d argued. The court accepted that the husband’s act of defaulting on the payment obligations meant that the 2015 Final Orders could be set aside and amended The Court considered it was just and equitable to do that, in all the circumstances.
The Court made the superannuation order the wife sought, primarily as an enforcement order, and as a section 79A Order in the alternative. The Court appeared to prefer the enforcement remedy over the section 79A remedy, although both were available.
During the proceedings, the husband tried to invoke a legal doctrine called “Anshun estoppel”. He argued that the wife shouldn’t be allowed to pursue a superannuation order because she hadn’t asked for his superannuation in the original 2015 case and because she’d already in 2016 to get it and been unsuccessful.
In this case, the Court said that the husband’s poor conduct and ongoing attempts to defeat the Court orders effectively disqualified him from using Anshun estoppel.
Conclusion
These cases show that the legal distinction between money orders and transfer orders can be important in an enforcement context.
Failure to seek superannuation splitting orders in the original proceedings does not necessarily prevent them from being sought later, in the enforcement or Section79A application.
As always, care should be taken when negotiating final orders at first instance, to ensure enforceability in the event of non-payment.
It is best practice to obtain the consent of the trustee in bankruptcy when seeking enforcements of Family Law judgments, of any kind.
Western Australian couples
Presently, the Family Court of Western Australia does not have the power to alter the superannuation interests of de facto couples or to hear bankruptcy proceedings.
This means the de facto couples in Western Australia do not have the superannuation remedies indicated in the Rahman and Wilkinson cases.
This anomaly is scheduled to change in the near future, with legislation having recently passed the Western Australia upper house of parliament and awaiting proclamation: see Family Law Amendment (Western Australia De Facto Splitting and Bankruptcy) Act (Cth) 2020 and Family Law Amendment Bill (WA) 2022
References:
- 1 Ejje and Ejje (2003) FLP 93-129; Melnik v Melnik (2005) 144 CR 141.
- See in particular sections 59A and 116(q) Bankruptcy Act 1966. Initially, these measures were available only to married couples. On 1 March 2009, they became available to de facto couples: see Family Law Amendment (De Facto Financial Matters and Other Measures) Act 2008. The reforms did not extend to Western Australian de facto couples.
- Pursuant to section 79A of the Family Law Act 1975, the Court has the discretion to vary or set aside a Final Order, and if it considers appropriate, make another Final Order in substitution for the order so set aside.
- Ie made under Part XIII of the Family Law Act and Part 20 of the Family Law Rules 2004.
- Superannuation is a non-divisible asset protected under section 116(b) of the Bankruptcy Act 1966
- The case was held to found to come within section 79(1)(b) only. The husband had defaulted on his payment obligations including during periods when he was not bankrupt. None of the other criteria contained in section 79A were found to have been satisfied, including section 79A(1(c) which considers orders that have become “impracticable”.
- See Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45 and the cases which refine it including: Tomlinson v Ramsey Food Processing Pty Limited [2015] HCA 28; (2015-16) 256 CLR 507.
