COVID-19, bankruptcy and the family home: economic impacts of COVID-19 on Family & Relationship Law disputes

The current state of affairs and Government relief

The intersection between family law property settlements, bankruptcy and insolvency issues can be difficult to navigate.  The COVID-19 pandemic has had a devastating impact on businesses and individuals.  On 7 September 2020, the Federal Government announced a six month extension of its suspension on insolvent trading law to 31 December 2020.  Further, on 24 March 2020, the Federal Government announced ‘temporary’ changes¹ to the operation of the Bankruptcy Act 1966 (“BA”), for a period of six months, which also expire on 31 December 2020.  The cessation of these measures and the looming cessation of the Federal Government ‘job-keeper’ subsidy will likely have an unfortunate impact on Australian families, as businesses and individuals fight to stay afloat as the economy comes to grips with life as the restrictions supposedly ease.

There is an expectation that the nature of family law property settlement matters will reflect the economic impact of the pandemic, with an increasing number of matters to involve the interests of third parties such as liquidators, receivers, trustees in bankruptcy and/or unsecured creditors.  For present purposes, this short article will focus on the interests of trustees in bankruptcy in family law disputes.

Jurisdiction:  the interplay between bankruptcy and the Family & Relationship Law Act

Section 79(1) of the Family & Relationship Law Act 1975 (“FLA”²), empowers the court to deal with ‘vested’ bankrupt property³ in family law property settlement matters.  What this means is that is that s 79(1) of the FLA empowers the court to remove property from the hands of a trustee or from the scope of s 58 of the BA⁴ and place it into the hands of a non-bankrupt spouse, or vice versa, after the court’s assessment of the parties’ contributions and assessment of future needs and further considerations such the as the interests of creditors under s 75(2) of the FLA.

Claw-backs:  how can the trustee in bankruptcy widen the pool available to creditors? Does it matter if the family home is not in the name of the bankrupt spouse?

A trustee may also attempt to claw-back transfers of property in order to widen the assets that are available for creditors of provable debts.  In a hypothetical family law dispute, a trustee may be faced with a situation where a registered proprietor of the former matrimonial home is the non-bankrupt spouse, with the trustee seeking to recover assets on behalf of unsecured creditors following the collapse of the family business.  The trustee will attempt to claw-back the bankrupt’s equitable interest in the former matrimonial home in circumstances where the bankrupt does not have a registered legal interest.  In this situation a trustee in bankruptcy, in addition to placing reliance on the claw-back provisions under s 106B of the FLA and ss 120, 121 and 122 of the BA, may seek to apply the principle in Cummins v Cummins⁵, which provides that irrespective of the fact that legal title to real property may stand in one party’s sole name, it is inferred that the parties to the marriage intended that they take a one-half interest in the property, irrespective of the amounts contributed by them⁶. Therefore, subject to rebutting the presumption that the parties intended that they have a one-half interest each in the property, such as was the case in Weston v McAuley⁷ there is a likelihood that the decision in Cummins may impact on an increasing number of Australian families.  What this means is that the court, more than ever, will likely be faced with the delicate task of balancing the competing interests of unsecured creditors against factors such as the stability and safety of the non-bankrupt spouse and children⁸.

Further information

If a bankruptcy is looming to a party to a family law proceeding, it is important that specialist advice is obtained as soon possible.  Advice should also be sought in terms of asset protection mechanisms available if contemplating high-risk business activities.  The Family & Relationship Law department at Coulter Legal is equipped to provide expert, specialist advice in relation to these issues to both individuals and trustees in bankruptcy.  If you would like to arrange an initial, no cost consultation with one of our Family & Relationship Lawyers, please call our office on (03) 5273 5227, or get started now with our tailored online preparation tool.

[1] These changes include (a) temporary deb protection; (b) debt threshold for creditors increased from $5,000 to $20,000; (c) time frame for a debtor to respond to a Bankruptcy Notice increased from 21 days to six months: see https://www.afsa.gov.au/about-us/newsroom/economic-response-coronavirus-changes-bankruptcy-law
[2] And the relevant ‘defacto-provision’ being s 90SM.
[3] Section 58(1) Bankruptcy Act 1966.
[4] To be read with section 58A of the Bankruptcy Act 1966.
[5] [2006] HCA 6.
[6] See also In Turner as Trustee for the Bankrupt Estate of Wallace v Wallace [2017] FCCA 3044.
[7] [2017] FCCA.
[8] Section 75(2)(ha) of the Family & Relationship Law Act 1975.