Scissors, paper, rock – Family Law v Bankruptcy Act (part I): who goes first?**

Last week’s post looked at the interplay between the rights of spouses on a property settlement under the Family Law Act and the rights of creditors on the bankruptcy of a spouse.

Since 2005, the Family Law Act has required that the court consider 'the effect of any proposed order on the ability of a creditor of a party to recover the creditor's debt, so far as that effect is relevant'.

These amendments were largely as a result of the 'Jodee Rich Strategy' which saw the One.Tel founder allegedly seek to transfer significant assets to his wife under a property settlement entered into only days before he was at risk of commencing bankruptcy. At the time the transfers would have defeated creditors despite the clawback rules under the Bankruptcy Act which were unavailable for transfers under a property settlement.

Specifically the amendments introduced the following changes:

1. creditors were given the right to apply to set a property settlement agreement;
2. creation of a new act of bankruptcy for situations where a person becomes insolvent as a result of a transfer or transfers made under a property settlement;
3. extension of the claw back provisions under the Bankruptcy Act to allow the recovery of property transferred under a property settlement.

In a practical sense the provisions require the court to firstly consider the respective contributions made by each of the parties to the marriage and then also factor in the interests of creditors. Importantly however, the interests of creditors are not given more or less weight than the other factors the court must take into account.

Given that the legislation provides no particular guidance on how the court is to resolve disputes between non-bankrupt spouses and a trustee in bankruptcy, the case law in this area has evolved to develop the key principles.

Next week's post will summarise some of the key themes from the leading cases.

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** For the trainspotters, the title of today's post is riffed from the Ned’s Atomic Dustbin song ‘Who goes first?’.

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