Family Law property adjustments between spouses may sometimes coincide with the bankruptcy of a spouse, often to the detriment of creditors of the spouse left with little or no assets. The Bankruptcy and Family Law Legislation amendments were introduced to enable concurrent bankruptcy and family law proceedings to be brought together so that all the issues can be dealt with simultaneously. This will provide certainty and clarify the rights and interests of creditors and the non-bankrupt spouse where bankruptcy and family law issues occur.
The amendments cover three scenarios.
Scenario one is where the bankruptcy of a spouse occurs after separation and prior to the property being finally dealt with under the Family Law Act. In this scenario, the Trustee in Bankruptcy stands in the shoes of the bankrupt and may apply to become a party to the proceedings. Correspondingly, the non-bankrupt spouse will have the right to continue the proceedings against the Trustee.
The second scenario occurs where bankruptcy occurs after separation and subsequent to property being finally dealt with under the Family Law Act. In this scenario, where the orders of the family court have not been implemented the doctrine of relation-back may continue to apply so that the Trustee may be entitled to make an application to have the proceedings properly take into account the interests of creditors where those interests had not previously been considered.
The third scenario is where a separation occurs after the date of bankruptcy but prior to property been finally dealt with by the Trustee in Bankruptcy. Here, the non-bankrupt spouse may seek to have his or her interests in the property recognised and a distribution from the bankrupt estate of any property which is not being dealt with.
Family Law Financial Agreements
A binding agreement between parties is a good way of dealing with the distribution of property in the event of a marriage breakdown. However, for the purposes of the Bankruptcy Act 1966, these transactions can be clawed back for the benefit of creditors. Furthermore, if assets are transferred pursuant to a financial agreement under the Family Law Act, this may constitute an act of bankruptcy in circumstances where the person transferring the assets is insolvent at the time, or becomes insolvent as a result of the transfer.
This is a significant issue since it will mean the commencement of the bankruptcy for the purposes of the clawback provisions is taken to be at the time of the transfer. The amendments will ensure that debtors cannot use financial agreements to defeat the claims of creditors where they are insolvent at the time of the transfer or later become insolvent as a result of the transfer.
Further information may be obtained by contacting our office: Ray Tolcher – Newcastle – (02) 4962 2294 or Tamie Schneider – Sydney – (02) 8346 6000.
