Following on from recent posts it is important to remember that not all of a bankrupt’s property automatically vests in a trustee in bankruptcy.
A summary of the types of assets that do not vest in the trustee, and in turn are therefore not divisible amongst creditors, is set out in section 116 of the Bankruptcy Act and includes:
property held by the bankrupt in trust for another person;
the bankrupt's household property;
personal property of the bankrupt that has sentimental value for the bankrupt;
the bankrupt's property that is for use by the bankrupt in earning income by personal exertion, within certain limitations;
property used by the bankrupt primarily as a means of transport, within certain limitations;
policies of life assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt;
certain superannuation payments, including under split orders following a family law property settlement;
the rights of the bankrupt to recover damages or compensation for (among other things) personal injury or wrong done to the bankrupt.
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Wonder Stuff song ‘Welcome to the cheap seats’.
Recent posts have considered various aspects of the interplay between the Family Law Act and Bankruptcy Act.
In 2006, Federal Magistrate John Walters, released a paper titled 'Some Aspects of the Interaction of Bankruptcy with Family Law' which set out a number of the key factors likely to be relevant in balancing the interests of spouses and a trustee in bankruptcy.
A summary of the factors mentioned is as follows, in the context that the overriding objective is to effect a just and equitable division of property between the parties to the marriage while also taking into account the legitimate interests of creditors -
has a party to the marriage acted recklessly, negligently or wantonly with matrimonial assets and reduced or minimised their value;
the non-bankrupt spouse's knowledge of the events leading to the other spouse's bankruptcy, including (for example) to what extent, the non-bankrupt spouse has either benefited from, or contributed to, the bankrupt spouse's insolvency;
when and how a relevant debt was incurred by the bankrupt spouse, and whether, for example, the debt was incurred in deliberate or reckless disregard of the non-bankrupt spouse's potential entitlement;
the factual circumstances surrounding the commencement or continuation of the property settlement proceedings – including, the perceived objective reasons, such as any strategic or tactical plan or initiative designed, in some way, to insulate the assets of the family (or a member of the family) from creditors;
whether and in what manner the creditor pressed or pursued – directly or indirectly – their rights in relation to the payment of the debt prior to bankruptcy, or prior to the commencement of proceedings in the Family Law Court, and whether the creditor did so in a timely fashion;
the overall conduct of all relevant parties, including the making of full and frank disclosure of their respective financial positions at all relevant times;
whether the debts were incurred pre or post separation; and
the overall financial circumstances of the non-bankrupt spouse and the children of the parties during the period since the incurring of the relevant debt or debts, and at the time of the property settlement proceedings (including the effect on the non-bankrupt spouse and the parties' children of the orders proposed by the parties to the proceedings).
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the XTC song ‘Scissor man’.
Last week's post provided an overview of the legislative changes requiring the family court to take into account the rights of creditors as part of any property settlement.
There have been a number of decisions that have applied the changed regime, a summary of a few of the key decisions and outcome is set out below.
Trustee of the Property of G Lemnos and Lemnos (2009) FLC 93-394 - the interests of unsecured creditors do not automatically prevail over the interests of the non-bankrupt spouse. The Court must balance the competing claims. Here the non-bankrupt wife was at least aware of the bankrupt husband's activities and therefore had to bear some of the responsibility owed to creditors.
Debrossard & Official Trustee in Bankruptcy [2011] FamCA 648 - Having analysed the contributions of the spouses it was clear that the non-bankrupt wife had contributed to creation of the available assets. The appropriate division of property was held to be 60:40 to the wife's benefit as between her and the husband. As the husband was bankrupt the matrimonial property was distributed 60:40 between wife and trustee in bankruptcy respectively.
Sutherland v Byrne-Smith [2011] FMCA 632 - a relatively complex factual matrix was further complicated by a lack of documentary evidence. Having considered the individual contributions made by the couple towards the property the court treated both parties as having contributed equally towards the property which was the main asset of the parties. Therefore 50% of property or sale proceeds from property passed to the non-bankrupt spouse with the balance 50% passing to the creditors of the bankrupt.
Next week's post will consider the main factors the courts appear to take into account in this area.
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Wonder Stuff song ‘Can’t shape up’.
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:
creditors were given the right to apply to set a property settlement agreement;
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;
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.
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Ned’s Atomic Dustbin song ‘Who goes first?’.
Previous posts have 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.
The amendments to the Family Law Act and the Bankruptcy Act made in 2005 radically changed how the Family Court is able to treat property interests where one or both of the parties to the marriage became bankrupt.
In particular, the Family Law Act permits the court to make whatever orders it considers appropriate, including -
altering the interests of the bankruptcy trustee in the vested bankruptcy property of a party involved in a family law property settlement;
ordering a relevant bankruptcy trustee to transfer property for the benefit of either or both the parties to the marriage or a child of the marriage; and
taking into account the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt.
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Blur song ‘Out of time’.
,%20paper,%20rock%20%E2%80%93%20Family%20Law%20v%20Bankruptcy%20Act%20(part%20III)%20by%20Matthew%20Burgess.jpg "View Legal blog - Scissors (man)**, paper, rock – Family Law v Bankruptcy Act (part III) by Matthew Burgess")
%20can%E2%80%99t%20shape%20upby%20Matthew%20Burgess.jpg "View Legal blog - Scissors, paper, rock – Family Law v Bankruptcy Act (part II): can’t shape up**by Matthew Burgess")
%20who%20goes%20first%20by%20Matthew%20Burgess.jpg "View Legal blog - Scissors, paper, rock – Family Law v Bankruptcy Act (part I): who goes first?** by Matthew Burgess")
