Section 106B – a cautionary tale about the Court’s ‘claw back’ power

The Family Law Act confers considerable powers on the Court. One such power is found in Section 106B of the Family Law Act enables the Court to set aside a transaction if that transaction may defeat an existing or anticipated order.

In the recent decision of Ferguson & Ferguson [2022] FedCFamC2F 1194, Betts J set aside a property transfer from the husband and wife to the husband’s daughter from a previous marriage executed 19 years before the wife filed her application for a property division.

While the facts of Ferguson & Ferguson are peculiar to say the least, this decision is a cautionary tale that serves as a timely reminder that detailed and thorough legal advice is a must if you are considering restructuring your family’s financial affairs, particularly when thinking about making ‘gifts’ to children.

Section 106B – what can the court do?

A party seeking that the Court exercise its discretion under s 106B has the onus of proof.

The Court must be satisfied of the following elements:

1. there must be proceedings under the Family Law Act;
2. there must be (or proposed to be) an instrument or disposition such as the transfer of an asset such as real property;
3. the instrument or disposition must be by or on behalf of, or by the direction and in the interest of, a party – that is that one proposes, executes or directed that the disposition occur; and
4. the instrument or disposition proposed or made to defeat an existing or anticipated order, or which irrespective of intention, is likely to defeat an order – such as the transfer of real property to a third party prevents that property from being available for distribution between spouses.

Ferguson & Ferguson – what was it all about?

This short summary attempts to do justice to Betts J’s detailed exposition of the facts.

The proceedings between the husband and wife also concerned  the husband’s adult daughter from a previous relationship. The husband and wife were 83 years of age at the time of the hearing. The husband had moderate dementia and did not give evidence. The NSW Trustee and Guardian represented his interests at the hearing. The wife initiated proceedings in June 2020 after the husband’s health deteriorated. The husband’s daughter was added as the Second Respondent.

This marriage was the parties’ second. The property pool available for division between the husband and wife was modest at around $550,000, and insufficient to provide for parties’ considerable health costs in their advanced age. The matrimonial home, transferred to the husband’s daughter in 2001, was valued at $1,000,000. Given the value of the home and modest size of the pool without it, it is understandable that the wife sought to set asides its transfer.

But what lead to the husband and wife transferring the property to the husband’s daughter? In short, the husband had fraught relationships with all his family, including his daughter whom he did not speak to between 2009 and 2016.  In the 1990s the husband was embroiled in protracted property litigation with his son.

There was a brief reunification of the family after the parties won $4,696,940 playing KENO.

The controversial transfer of the home occurred in 2001 when the husband, his daughter and the wife attended upon a solicitor to execute the Deed and Transfer document. Legal title was transferred to the daughter in consideration for the husband and wife having a life tenancy in the property.

The wife’s evidence was that she did not comprehend what she was signing. The husband controlled their finances and she trusted him implicitly. English was not her native language and she did not have strong understanding of written English. On the wife’s account, the husband told her the documents were necessary to protect the property from the government.

The daughter’s evidence was that the husband wanted to transfer the property to her to protect it from an anticipated estates dispute with the husband’s other children.

What did Bett J have to say?

His Honour’s summation of the relevant authorities and application to the facts is worth reading in full.

Looking at the preliminary elements, it was uncontentious that there were proceedings under the Family Law Act, a disposition (a transfer of property) existed and that the disposition (the transfer of property) was by or on behalf a party. Betts J notes the unusual fact that the disposition was executed by both parties. But His Honour did not find it fatal to the wife’s case. The wife’s limited command of the written English language, trust in the husband’s management of their finances, and that he had told her it was necessary to protect the house from the government, explained why she would sign on the dotted line without question.

The controversial element here was whether the disposition was intended, or likely, to defeat an anticipated order. The wife’s case was that the husband actually anticipated an order being made in future family law proceedings regarding home. The daughter’s case was that the husband’s subjective anticipation fell short of the established objective test for an anticipated order.

The objective test is this: the order must be anticipated by a reasonable disponer, at the time of the disposition, properly considering all the circumstances of the case.

The daughter’s argument was that regardless of the husband’s actual intentions, the court must apply the objective test. And on the view of reasonable disponer at the time, it could not have been anticipated that an order would be made with respect to the family home.

His Honour disagreed and found that the authorities do not require him to apply the objective test where the actual intentions of the disponer can be established on the facts.  Betts J at [128]:

…In my view, where the disponer actually anticipated an order at the relevant time, there is no need to deploy a further objective test as to whether or not it was an ‘anticipated’ order from the perspective of the hypothetical reasonable disponer. In my respectful view, a plain reading of s 106B(1) does not require the addition of this further objective layer.

Betts J went on to say at [129]:

Put shortly, [the husband] was the very opposite of the “determinedly ignorant” or “blissfully unaware” disponer referred to by Elliott in Pflugradt’s case (supra). The objective test rightly holds that category of disponer to a higher standard. But it would be a curious result if a disponer who actually ‘anticipated’ an order being made, and acted intentionally so as to defeat it, could then evade s 106B(1) by pointing not to their own state of mind but the state of mind of the so-called reasonable disponer. I do not consider such a result to be mandated by the jurisprudence, properly considered. (my emphasis)

In considering whether to exercise his discretion, His Honour had regard to the difference in the size of the property pool if the home was included and the wife’s innocent implication in the transfer some 19 years prior. The latter point, together with the wife only comprehending what had happened in 2019 (ie she did not know that the property was being transferred out of her reach in the event of separation), influenced His Honour in his exercise of discretion to set aside the transfer.

It is worth noting that the outcome may have been different if the transferee had been a genuine third party. However, in this case the daughter was not a bona fide third party to the transfer.

Ultimately, the transfer of the home to the daughter in 2001 was set aside to put the parties the position they would have been but for the transfer.

How can we help?

If you have any queries about your matter, our Family & Relationship Law team is here to help you navigate difficult issues during these difficult and unprecedented times.