Lemnos & Lemnos
[2007] FamCA 1058
•30 August 2007
FAMILY COURT OF AUSTRALIA
| LEMNOS AND ORS & LEMNOS AND ANOR | [2007] FamCA 1058 |
| FAMILY LAW - PROPERTY – Bankruptcy – Rights of Creditors - Payment out of bankrupt estate to non-bankrupt spouse |
| Family Law Act 1975 (Cth) Bankruptcy Act 1966 (Cth) Bankruptcy and Family Law Legislation Amendment Act 2005 |
| Kowaliw and Kowaliw (1981) FLC ¶91-092 Trustees of the Property of Cummins (a bankrupt) v Cummins (2006) 224 ALR 280; (2006) 80 ALJR 589; (2006) 35 Fam LR 343; (2006) 61 ATR 642; [2006] HCA 6 Hill and Hill (2005) FLC ¶93-209 |
| 1st APPLICANT: | Mrs Lemnos |
| 2nd APPLICANT: | Mr P Lemnos |
| 3rd APPLICANT: | Mr D Lemnos |
| 4th APPLICANT: | Ms S Lemnos |
| 1st RESPONDENT: | Mr G Lemnos |
| 2nd RESPONDENT: | Mr M of F Company Trustee of the property of Mr G Lemnos, a bankrupt |
| FILE NUMBER: | SYC | 2906 | of | 2007 |
| DATE DELIVERED: | 30 August 2007 |
| PLACE DELIVERED: | Parramatta |
| PLACE HEARD: | Sydney |
| JUDGMENT OF: | Justice Le Poer Trench |
| HEARING DATE: | 16 and 17 July 2007 |
REPRESENTATION
| COUNSEL FOR THE 1ST APPLICANT: | Mr Miller |
| COUNSEL FOR THE 2ND, 3RD AND 4TH APPLICANTS | Mr Roden |
| 1ST RESPONDENT: | No appearance |
| COUNSEL FOR THE 2ND RESPONDENT: | Mr Skinner with Mr Walsh |
Orders
I mark as exhibit “X1” a document titled “Short Minutes of Order” filed in Court on the 16th July 2007.
By consent orders be made as between P, D and S Lemnos of the one part and the balance of the parties on the other part as contained in paragraphs 1, 2, 3, 5 and 6 of a document titled “Short Minutes of Orders”, marked exhibit “X1” of 16 July 2007 as set out hereunder:
“1.That the motor car registered number […] in New South Wales together with any equity therein vested in the Second Respondent be transferred by the Second Respondent to the Second Applicant [Mr P Lemnos].
2.That in consideration of an indemnity provided by the Third Applicant [Mr D Lemnos] to the Second Respondent that motor car registered number […] in New South Wales together with any equity therein vested in the Second Respondent and subject to any existing encumbrance arranged by the First Respondent be transferred by the Second Respondent to the Third Applicant.
3.Subject to Order 4 hereof, that in consideration of an indemnity provided by the Fourth Applicant [Ms S Lemnos] that motor car registered number […] in New South Wales together with any equity therein vested in the Second Respondent and subject to any existing encumbrance arranged by the First Respondent be transferred by the Second Respondent to the Fourth Applicant [Ms S Lemnos].
5.That the Second Respondent execute each of the transfers of the certificates of registration in respect of the abovenamed motor cars as provided above and forward them to the solicitor for the Second, Third and Fourth Applicants within 14 days of the date of approval of these Orders or if not in his possession within 14 days of his receipt of the same whichever shall be later in time.
6. Each party to pay their own costs.”
The second respondent forthwith do all things and execute all documents to cause the property at W (“the property”) to be sold for the best price reasonably obtainable.
The best price reasonably obtainable for the purposes of order 3 shall be as agreed between the applicant wife and the second respondent but if they cannot agree within 14 days then they shall forthwith do all things and execute all documents to cause the President of the Real Estate Institute of New South Wales or his nominee to be appointed to determine the best price reasonably obtainable.
Upon completion of the sale of the property the wife and the second respondent shall do all things and execute all documents to cause the proceeds of sale to be paid as follows:
(a)in payment of agent’s commission, auctioneer’s expenses and legal expenses referable to the sale
(b) in payment of the secured mortgage on the property
(c) as to the balance 50% to the wife and 50% to the second respondent.
Leave granted to either party to seek further orders relating to the implementation of the sale of the property.
The second respondent shall forthwith do all acts and things to cause the right, title and interest of the second respondent in the Lexus GS300 motor vehicle registered number … to be transferred to the wife.
The wife otherwise declared the owner of the items of matrimonial property currently in her possession or control.
| FAMILY COURT OF AUSTRALIA AT SYDNEY |
FILE NUMBER: SYC2906 of 2007
| Mrs Lemnos |
1st Applicant
And
| Mr P Lemnos |
2nd Applicant
And
| Mr D Lemnos |
3rd Applicant
And
| Ms S Lemnos |
4th Applicant
And
| Mr G Lemnos |
1st Respondent
And
| Mr M of F Company Trustee of the property of Mr G Lemnos, a bankrupt |
2nd Respondent
REASONS FOR JUDGMENT
Introduction
As far as I can determine from the Court’s records this is the first decision of the Court which relies on section 79(1)(b) of the Act for jurisdiction to make a property order in respect of property which has vested in a Trustee of a bankrupt. Those who have represented parties in the hearing have been unable to find any decision delivered by the Court exercising the particular jurisdiction which was conferred on the Court as a result of amendments to the Family Law Act and the Bankruptcy Act passed by the Parliament in 2005. I will refer in detail to those amendments later in these reasons.
Listed for hearing with the application I heard (the wife’s application for property orders) were proceedings initiated by three of the children of the husband and wife. They sought orders in relation to specific items of property. Those proceedings were settled and Terms of Settlement were filed in Court on the first day of the trial. I was asked to make those orders by consent at the time I made orders in the proceedings between the balance of the parties.
When I refer to the “balance of the parties” they include the wife, the husband and the Trustee of the husband’s bankrupt estate. The husband elected not to participate in the hearing other than as a witness called on behalf of the Trustee. Following the conclusion of his oral evidence the husband asked to be excused and no opposition to that course was voiced by either the wife or the Trustee. Somewhat unusually the wife asked to be able to leave the Court room during the time the husband gave his oral evidence. I was told she would find it too difficult to remain. Although I expressed my preference that she stay she in fact left the court room. Nothing flows as a result of that action, however, I think it appropriate to mention the matter for the benefit of the Full Court should this matter require their attention.
At the commencement of the hearing each of the wife’s and the Trustee’s counsel identified the documents being relied upon in the hearing. The Trustee told me that notwithstanding he had sent to the Court attached to his Case Outline document a Minute of Orders (titled Draft Orders) sought (received by the Court on 13th July 2007), they were not the orders being sought in the trial. The Trustee was relying on the Response filed on the 11th May 2007. The one area of real difference between the two documents seems to me to be that in the Minute of Order the Trustee was proposing that the wife should retain the prestige motor vehicle which is currently in her possession whereas in the Response the Trustee pursues the inclusion of that vehicle as part of the bankrupt estate.
Prior to the commencement of the trial I managed the preparation of the case for trial and as part of that process I was provided with a joint balance sheet (wife and Trustee) on the 11th July 2007. This balance sheet was referred to during the trial and for the purpose of identification I have identified that document as exhibit X2.
The Issues
The issues in the case can be summarised as:
1.The power of the Court to make an order under section 79 against the property of the bankrupt husband now vested in the Trustee of the bankrupt estate?
2.Whether it is appropriate in the circumstances of this case to make any order which would vest property of the estate held by the Trustee in the wife?
3.Whether the court should make a money order in favour of the wife rather than an order which changes the entitlement of the Trustee in specific property?
4.Assuming a determination based upon an assessment of contribution of the parties to the marriage gives rise to an interest in favour of the wife in the W property, what adjustment should be made under section 75(2) increasing or decreasing the wife’s entitlements/interest in that property?
5.Does the husband’s action in relation to dealing with his Income Tax Returns from 1991 onwards amount to “waste” within the guidelines set out in the decision of Kowaliw and Kowaliw (1981) FLC 91-092?
6.How should the court approach the consideration of section 75(2)(ha) in this case?
Background Facts
The background facts are relatively straight forward and devoid of issue in this case. The facts emerge from the evidence filed by the wife and the Trustee. The husband did not participate in the proceedings although being required to be present by the Trustee. The husband was not present on the first day of the trial and the Trustee obtained leave to issue a subpoena requiring his attendance. I requested the wife and any other person in the Court who had contact with the husband to request that he attend on the 17th July. It was clear from correspondence relied upon by the Trustee when seeking the issue of the subpoena to the husband that the husband was a reluctant participant when he attended at Court on the 17th July. After answering questions in the witness box the husband asked to be excused.
The husband and wife are aged 55 and 53 respectively. They were married in November 1976. They separated on 3rd July 2007.
There are four children of the marriage. A born in 1980, P born in 1982, D born 1984 and S born 1987.
At the time of the marriage the husband was employed as a solicitor and the wife as a secretary. The wife worked until the children were born and then she cared for the children and the home until February 2007 when she again obtained some employment. The husband pursued a career in the law and he gained partnership in a large well respected … firm. He worked as the property partner of the firm until he left to join another … practice in July 2005. The exhibits show that the husband generated substantial earnings for himself and the Lemnos Family Trust during the marriage. The wife earned a substantial income through receiving distributions from the Lemnos Family Trust. The sums received by the wife appear as annexure “H” to her first affidavit. No issue was taken with the accuracy of that table. It is conceded by the Trustee that the wife’s income for the 1985 tax year was $23,831. The tax returns for the Lemnos Family Trust are exhibit R10 in the trial. That exhibit also shows the distributions to the wife.
The evidence suggests that all of the income of the parties was applied to the family expenses.
The husband worked long hours and the wife was responsible for caring for the children. It seems she did the bulk of the caring for the children unassisted by the husband.
The parties led a good standard of life although no extravagance is alleged or evidenced. The children were educated at private schools and all were involved in extensive extra curricular activities.
The parties each had the use of a motor vehicle and as the children all obtained their licences the husband purchased cars for their use although the vehicles remained in the husband’s name largely because he borrowed money to fund the purchase of the vehicles.
In 1976 the parties purchased in their joint names their first home at M. This purchase was made just before the marriage.
In 1981 the parties purchased their second family home at B. They sold the first home shortly after the purchase of the B property. The parties borrowed to buy each property and used the proceeds from the sale of the first to help fund the second property. The parties had each contributed some savings to the acquisition of the first home.
At some stage during the marriage the husband in partnership with another acquired an interest in a home unit in Queensland.
Between 1984 and 1988 the husband undertook a course of study at a College of Advanced Education.
In 1989 the husband completed the purchase of the property at W for $1.3 million. The purchase price was funded by borrowings from the National Australia Bank (NAB). The wife was required to sign a guarantee for the advance and it is clear that the parties’ property at B served as part of the security for the loan.
All of the parties’ earnings were deposited to a joint account and the loan repayments made from that account.
The evidence supports a conclusion that the husband managed the parties’ finances and accounting records, preparation of tax returns, engaging of accountants and the like for the family.
Between 1989 and 1991 the property at W was renovated. The husband drew down about $1 million from the NAB to fund the renovations.
The husband says that at the time of the purchase of W, he intended the property to be an investment property and not a new home for the family. The wife says that she was the person who found the property. She was very involved in the supervision of the renovations. She chose the colours and fittings for the house. At all times she understood she was preparing the parties’ new home.
I accept that the wife believed the property at W was to be their home. I think it probable that the husband by his words and conduct allowed her to have that view whether by deliberate intent or otherwise. I also accept that at the time of the purchase of the W property the husband had in mind that the property would be purchased as an investment property.
In 1991 the renovations of the W property were complete and the family moved in to occupancy of that property. It appears common ground that irrespective of whatever the husband’s intention might have been as to the primary purpose of the acquisition of the W property it in fact became the parties’ home. It is also agreed that the W property was never rented.
Following the parties move to the W property the B property was rented. The tenancy commenced on 11th August 1993 and continued until 17th October 1994.
At about the time the family moved to the W property the B property was listed for sale with estate agents. The property was initially offered for sale at a price of at least $1million dollars. It seems that price was well above the real market value and the property was not sold until 1994 and then for only $696,000. All of the net sale proceeds were paid to the NAB to reduce the parties’ liability to that Bank.
In 2000 the husband refinanced the W property with the A Bank. The amount now outstanding secured against the property is about $2.415 million. The property is said to be worth about $4.5 to $5 million. Both the wife and the Trustee are pursuing a sale of the property.
In the 1991 tax year the husband claimed substantial tax deductions arising from his ownership of the W property. Between the 30th June 1991 and the 30th June 2002 the husband claimed tax deductions of $3,396,333. These claims related to both W and B properties.
It seems that when the husband’s 2002 tax return was received by the Australian Tax Office (ATO) an investigation was commenced which gave rise to a re-assessment of the husband’s taxation liability for the years 1991 onwards. The re-assessment required the payment by the husband of an amount in excess of $3 million. That sum has grown to at least $5.7 million at the date of hearing.
The husband challenged the re-assessment in the Federal Court in proceedings which were heard on the 24th and 25th October 2006. After a full day of hearing on the 24th October 2006 the husband withdrew his challenge to the re-assessments. The cost of the proceedings has no doubt added to the husband’s liability to the tax office. It seems the challenge was ill conceived and had virtually no prospect of success. There is no suggestion that the wife was consulted about the husband mounting the challenge.
On the 17th November 2006 a sequestration order was made against the husband.
In December 2006 as a result of the bankruptcy the husband was excluded from participating further in the partnership of the law firm. He has since obtained permission from the Law Society of NSW to practice on his own.
In March this year the wife purchased a property at L. In order the buy the property she has had to borrow all of the purchase price.
Credit
The wife gave her evidence by affidavit and orally. She was required for cross-examination by the Trustee. I found her to be straight forward in her answers to the trustee’s questions. There was nothing about the evidence of the wife in terms of its content or delivery which made me doubt the veracity of her evidence.
The husband’s evidence was before the Court in affidavit form tendered by the Trustee as an annexure to his affidavit. The husband was also required for oral evidence by both the Trustee and the wife.
The portions of the two affidavits of the husband which were admitted to evidence and the husband’s oral evidence dealt in part with the tax returns he had lodged for the tax years between 1991 and 2002. The husband attempted to explain certain aspects of those returns which ultimately, it seems, rendered his challenge to the amended assessments for those years which I have referred to earlier, nugatory. I will deal with those areas shortly in these reasons. I mention these matters here because it seems to me that the husband’s evidence in this area is unreliable.
The Balance Sheet
The balance sheet is relatively simple.
The property at W which is vested in the Trustee has a value of between $4.5 and $5 million dollars. I do not have to have a precise figure as all parties agree the property should be sold. There is a liability to A Bank of $2.4 million secured against W property.
The wife has her property at L which has only recently been purchased. The property was purchased for $1.78 million and is encumbered by loans of at least $1.8 million. She owes $100,000 to Mr S. Otherwise the wife has the Lexus Motor vehicle which is registered in the husband’s name and vested in the Trustee as part of the husband’s bankrupt estate. She has savings, however, some of those savings are sourced in the advance to her from Mr C. She has jewellery and household contents valued at $45,000. These figures are all set out in exhibit X2 which was the balance sheet which I have referred to earlier. Legal costs have also been incurred by the wife however no costs letter was tendered by or on behalf of the wife so I do not know the state of her indebtedness at the conclusion of the hearing.
The husband has debts proved in his bankrupt estate of about $6 million.
Determination of the Issues
Property proceedings where a spouse is bankrupt
The Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth)
Of central importance to this case is the effect of the Bankruptcy and Family Law Legislation Amendment Act 2005 on property proceedings in the Family Court where one party is bankrupt and the trustee has been joined in proceedings. The aim of these amendments was to clarify the law when the competing interests of bankruptcy trustees and non-bankrupt spouse come before the courts. This was done in main through granting an expanded jurisdiction to the Family Court over bankruptcy matters. The legislation attempts to achieve this through amendments to the Family Law Act1975 (“the FLA”) and the Bankruptcy Act 1966 (Cth) (“the BA”) which came into effect on 19 September 2005.
As explained by the Honourable Phillip Ruddock, Attorney General in the House of Representatives Second Reading Speech for the Bill on 17 February 2005, the intention of the amendments was to:
… enable concurrent bankruptcy and family law proceedings to be brought together in a court exercising family law jurisdiction, to ensure that all issues are dealt with at the same time. This is achieved by giving courts exercising family law jurisdiction additional jurisdiction to deal with bankruptcy matters that are run concurrently with a family law financial matter, and by facilitating the bankruptcy trustees’ and third party creditors’ involvement in family law proceedings. By merging the courts’ jurisdiction on bankruptcy and family law matters in cases where these areas interact, the amendments will allow the courts exercising family law jurisdiction to consider the non-financial contributions of a non-bankrupt spouse to the acquisition of family property.
Under the schedule 1 amendments, the trustee in bankruptcy can be a party to property or spousal maintenance proceedings under the Family Law Act 1975, and the court will have jurisdiction over property that has become vested bankruptcy property. The court will be able to make an order against the relevant bankruptcy trustee as part of the property adjustment order, allowing the trustee effectively to stand in the shoes of the bankrupt spouse.
The effect of these amendments will be to offer procedures and protections to the non-bankrupt spouse that were not previously available. At the same time, the court can be on notice about the interests of creditors of a bankrupt spouse and can take those interests into account in determining family property or spousal maintenance orders.
By virtue of these amendments the Family Court has jurisdiction to deal with the bankruptcy of a spouse involved in matrimonial property proceedings. The court is empowered to make such orders as it considers appropriate, and this may include alteration of the interests of the bankruptcy trustee in the vested bankruptcy property.
Conferral of bankruptcy jurisdiction on Family Court: s 27, 35 & 35A of the BA
Pursuant to s 27, s 35 and s 35A of the Bankruptcy Act the Family Court now has jurisdiction over bankruptcy where a trustee is or has been a party to proceedings under the Family Law Act.
Section 27 “Bankruptcy courts” states:
(1) The Federal Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than:
(a) the jurisdiction of the High Court under section 75 of the Constitution; or
(b) the jurisdiction of the Family Court under section 35 or 35A of this Act.
Section 35(1) states:
If, at a particular time:
(a) a party to a marriage is a bankrupt; and
(b) the trustee of the bankrupt's estate is:
(i) a party to property settlement proceedings in relation to either or both of the parties to the marriage; or
(ii) an applicant under section 79A of the Family Law Act 1975 for the variation or setting aside of an order made under section 79 of that Act in property settlement proceedings in relation to either or both of the parties to the marriage; or
(iii) a party to spousal maintenance proceedings in relation to the maintenance of a party to the marriage;
then, at and after that time, the Family Court has jurisdiction in bankruptcy in relation to any matter connected with, or arising out of, the bankruptcy of the bankrupt.'' (Emphasis added).
Section 35A deals with transfer of proceedings from the Federal Court to the Family Court.
Dr Tom Altobelli in his commentary at “[40-730] Family Court’s Bankruptcy jurisdiction” in Marriage and Bankruptcy, CCH Family Law and Practice (accessed online 27/07/2007) says of these provisions:
This is a complete conferral of bankruptcy jurisdiction on the Family Court extending not just to the Bankruptcy Act, but also to adjudicating on all of the equitable issues that may arise in connection with bankruptcy. This is a new and very broad jurisdiction for the Family Court, and it enables it to deal with all the diverse issues that will be encountered when bankruptcy and family law interact.
Thus as a result of the jurisdiction conferred on the Family Court under the Bankruptcy Act the court has available to it the full range of statutory remedies provided under this Act as well as at general law. If equitable remedies are necessary, these may be available under the accrued jurisdiction of the Family Court.
Constitutional validity of FLA provisions
Importantly, bankruptcy matters are now brought within the matrimonial causes definition in the Family Law Act. This enables the court to exercise jurisdiction over these matters provided they arise out of the marital relationship. Relevant to these proceedings is section 4(1)(cb) which defines “matrimonial causes” as including:
(cb) proceedings between:
(i) a party to a marriage; and
(ii) the bankruptcy trustee of a bankrupt party to the marriage;
with respect to any vested bankruptcy property in relation to the bankrupt party, being proceedings:
(iii) arising out of the marital relationship; or
(iv) in relation to concurrent, pending or completed divorce or validity of marriage proceedings between the parties to the marriage; or
(v) in relation to the divorce of the parties to the marriage, the annulment of the marriage or the legal separation of the parties to the marriage, being a divorce, annulment or legal separation effected in accordance with the law of an overseas jurisdiction, where that divorce, annulment or legal separation is recognised as valid in Australia under section 104; or
Note that s 4(1)(caa) achieves the same effect in relation to spousal maintenance.
Alteration of property interests: s 79 of the FLA
In property proceedings the Family Court has power to make such order that it considers appropriate with respect to altering the interests of the bankruptcy trustee in vested bankruptcy property where the bankrupt is a party to the marriage: s 79(1)(b). This includes power to order that the bankruptcy trustee make settlement or transfer property: s 79(1)(d).
Section 79(1) reads:
(1) In property settlement proceedings, the court may make such order as it considers appropriate:
(a) in the case of proceedings with respect to the property of the parties to the marriage or either of them—altering the interests of the parties to the marriage in the property; or
(b) in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage—altering the interests of the bankruptcy trustee in the vested bankruptcy property;
including:
(c) an order for a settlement of property in substitution for any interest in the property; and
(d) an order requiring:
(i) either or both of the parties to the marriage; or
(ii) the relevant bankruptcy trustee (if any);
to make, for the benefit of either or both of the parties to the marriage or a child of the marriage, such settlement or transfer of property as the court determines.
There are other provisions in s 79 that deal with circumstances where a spouse is bankrupt. Section 79(11) requires the bankruptcy trustee be joined as a party in certain circumstances. Section 79(12) prevents a bankrupt from making submissions with respect to any vested bankruptcy property if a trustee is a party to proceedings, except with leave of the court. By virtue of s 79(13) leave will only be granted in exceptional circumstances. There are other provisions in s 79 that were enacted through the bankruptcy amendments but these are not directly relevant to the present proceedings.
Expansion of definition of property under FLA to include vested bankruptcy property
The Amendments have also expanded the definition of property under the Family Law Act to include property that has vested in the trustee of a bankrupt party to a marriage. Pursuant to section 4 of the Family Law Act the definition of “property settlement proceedings” and “property settlement or spousal maintenance proceedings” now includes reference to “vested bankruptcy property”. Vested bankruptcy property is defined under s 4 as “property of the bankrupt that has vested in the bankruptcy trustee under the Bankruptcy Act 1966. For this purpose, property has the same meaning as the Bankruptcy Act 1966.”
Vesting property in trustee subject to orders order under Part VIII of FLA
Upon a person becoming bankrupt, the property divisible amongst creditors vests in the trustee of the bankrupts estate by virtue of s 58(1)(a) of the Bankruptcy Act. Divisible property is defined in s 116 and s 116(2) sets out certain categories of exempt property. Pursuant to s 59A of the Bankruptcy Act, vesting of property in the trustee in bankruptcy is “subject to an order under Part VIII of the Family Law Act 1975”. Further, section 116(2)(q) of the Bankruptcy Act provides that property divisible amongst creditors does not extend to:
… any property that, under an order under Part VIII of the Family Law Act 1975, the trustee is required to transfer to the spouse of the bankrupt.
General powers of the Family Court
Section 80(4) of the Family Law Act enables the Court to make an order under s 80(1)(d) of the Act, directing the bankrupt to do such things as necessary “to enable an order to be carried out effectively or to provide security for the due performance of an order”.
Impact of any orders on ability of any creditors to recover debt: s 75(2)(ha)
The Amendments have given legislative recognition to the obligation of the Court to consider the impact or any orders on the ability of a creditor to recover debt “as far as that effect is relevant” through the insertion of s 75(2)(ha). In property proceedings, the court is required to take into account section 75(2) factors as far as they are relevant by virtue of s 79(4)(e). Section 75(2)(ha) reads:
75(2) The matters to be so taken into account are…(ha) 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
Section 75(2)(ha) is only one of many factors the court is required to consider under s 75(2) and is not given any special priority over the other factors. Note that s 75(2)(n) requires consideration of the terms of the order made or intended to be made in relation to property or vested bankruptcy property. Also, s 75(4) clarifies that reference to ‘party’ under s 75 means a party to the marriage not the bankruptcy trustee.
Dr Tom Altobelli in his commentary at “[40-750] Determining priorities: creditors or family of the bankrupt?” in Marriage and Bankruptcy, CCH Family Law and Practice (accessed online 27/07/2007) considers the impact of the amendments on priorities between creditors and the spouse, in particular the effect of s75(2)(ha). In summary, Altobelli argues:
1)Section 75(2) gives no priority to creditors interests. Altobelli said:
…it is hard to see how the interests of creditors will not be subsumed to the needs of children and spouses in those cases where it is not possible to reasonably meet those needs in some other way. This is not because of some ideological favouritism towards the interests of families as opposed to the interest of creditors — it is simply the result of an exercise in statutory interpretation. If the legislature had intended that creditors' interests have any priority, the legislature would have said so. There is not even a hint of priority as there is no logical rationale for the inclusion of s 75(2)(ha) where it is, ie between s 75(2)(h) and s 75(2)(j) (both of which deal with maintenance). It is not as if, for example, s 75(2)(ha) marks the point at which the factors under consideration change in character from personal to financial. There is simply no hint at any special priority, and it is probably quite fortuitous and unexpressive that s 75(2)(ha) is now the middle factor in a list of 17 (ie it is ninth on the list).
2)Creditors interests have higher protection in wording of s 90AE than s 75(2)(ha)
3)No assistance can be gained from the Bankruptcy Act as to priorities. Section 109 of this Act has an order of priority in relation to bankruptcy proceedings. Altobelli argues that s 109 is not relevant to Family Law Act proceedings as:
… to equate the claims and needs of the bankrupt's family to the position of unsecured creditors is simply illogical. Unsecured creditors chose to become creditors, and they could have protected themselves against the consequences of being unsecured (eg through retention of title clauses, effective credit control and administration etc). It might be somewhat harder to convincingly assert that a bankrupt's child chose to be in a situation where they might lose the home they live in, and that they could somehow have protected themselves. The Bankruptcy Act provides no assistance as to how priorities should be determined in the present contest.
4)There is potential flexibility to accommodate claims of an equitable nature
5)Providing confirmation that Family Law Act rather than Bankruptcy Act principles apply is section 116(2)(g) of the Bankruptcy Act (which excludes property covered by a Part VIII Family Law Act order from divisible property).
6)In relation to statutory interpretation of s 75(2)(ha), Altobelli referred to the Attorney-General's Second Reading Speech (House of Representatives, 17 February 2005, Bankruptcy and Family Law Legislation Amendment Bill 2005, p 20) as support for the proposition that creditors interests don’t have priority, although they are not to be ignored and they may be taken into account. In the second reading speech referred to above Mr Ruddock stated:
The effect of these amendments will be to offer procedures and protections to the non-bankrupt spouse that were not previously available. At the same time the Court can be on notice about the interests of creditors of a bankrupt spouse and can take those interests into account in determining family property or spousal maintenance orders.
Relevant provisions of Bankruptcy Act
There are other provisions of the Bankruptcy Act which it is important in my opinion to know as an aid to considering how the legislative changes in 2005 were to operate.
Section 27- Bankruptcy courts
(1) The Federal Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than:
(a) the jurisdiction of the High Court under section 75 of the Constitution; or
(b) the jurisdiction of the Family Court under section 35 or 35A of this Act.
Section 35- Family Court's jurisdiction in bankruptcy where trustee is a party to property settlement or spousal maintenance proceedings etc.
(1) If, at a particular time:
(a) a party to a marriage is a bankrupt; and
(b) the trustee of the bankrupt's estate is:
(i) a party to property settlement proceedings in relation to either or both of the parties to the marriage; or
(ii) an applicant under section 79A of the Family Law Act 1975 for the variation or setting aside of an order made under section 79 of that Act in property settlement proceedings in relation to either or both of the parties to the marriage; or
(iii) a party to spousal maintenance proceedings in relation to the maintenance of a party to the marriage;
then, at and after that time, the Family Court has jurisdiction in bankruptcy in relation to any matter connected with, or arising out of, the bankruptcy of the bankrupt.
(2) Subsection (1) does not limit the Family Court's jurisdiction under section 35A.
(3) In this section:
"property settlement proceedings" has the same meaning as in the Family Law Act 1975 .
"spousal maintenance proceedings" means proceedings under the Family Law Act 1975 with respect to the maintenance of a party to a marriage.
Section 59A- Orders under Part VIII of the Family Law Act 1975
Sections 58 and 59 have effect subject to an order under Part VIII of the Family Law Act 1975.
Section 116- Property divisible among creditors [see Table B]
(1) Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge;
(c) property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D or 139DA; and
(d) money that is paid to the trustee of the bankrupt's estate under an order under section 139E or 139EA;
is property divisible amongst the creditors of the bankrupt.
(2) Subsection (1) does not extend to the following property:
…
(q) any property that, under an order under Part VIII of the Family Law Act 1975 , the trustee is required to transfer to the spouse of the bankrupt.
Conclusion as to the manner in which the subject case should be approached
I conclude that the amendments require me to consider this case in the usual manner adopted for consideration of Part VIII property applications with exception that I am to treat all of the former property of the husband, now vested in the Trustee, as available for distribution to the wife if that be an appropriate result. The Trustee is also bound by any order I make (within power and jurisdiction) which has the effect of removing property from the vested pool of property reposing in the Trustee prior to the hearing.
In submissions the Trustee argued that the appropriate pathway for me to take was to make a finding which is formulated as a money order against the husband and then have that order rank with the other creditors in the bankruptcy. The wife would then receive the same proportion of her debt as the other creditors. In such a circumstance the Trustee says the provisions of section 75(2)(ha) would be satisfied and the result would be just and equitable.
With respect to that argument of the Trustee I would say that may be a possible result in a particular case although I would think that in most cases which are likely to be considered by the Court involving a similar situation (i.e. all of the parties’ matrimonial assets vesting in a Trustee of one of the parties bankrupt estate) the applicant will be seeking a transfer of property or the declaration of an interest of the non-bankrupt party in the property vested in the Trustee.
In the High Court decision of Trustees of the Property of Cummins (a bankrupt) v Cummins (2006) 224 ALR 280; (2006) 80 ALJR 589; (2006) 35 Fam LR 343; (2006) 61 ATR 642; [2006] HCA 6 the following extract appears in 224 ALR 280 at 295- 297:
“[67] The “transaction” to which attention must be directed, in the sense given in Charles Marshall respecting the principles of resulting trusts, is a composite of the purchase of the Hunters Hill property followed by construction of a dwelling house occupied as the matrimonial home for many years preceding the August transactions. The relevant facts bearing upon, and helping to explain, the nature of the joint title taken on registration on 10 August 1970 include the other elements in that composite. To fix merely upon the unequal proportions in which the purchase moneys were provided for the calculation of the beneficial interests in the improved property which was dealt with subsequently in August 1987 would produce a distorted and artificial result, at odds with practical and economic realities.73 Looked at in this way, this is not a case which requires consideration of the authorities where an equitable lien or charge secures expenditure on improvements made but no beneficial interest in the land is conferred.74
[68] Calverley v Green concerned the beneficial ownership of an improved property acquired as joint tenants by a man and a woman who had lived together for about 10 years as husband and wife. The decision of this court was that the presumption that they held the registered title in trust for themselves in shares proportionate to their contributions was not rebutted by the circumstances of the case. Mason and Brennan JJ75 referred to the statement by Lord Upjohn in Pettitt v Pettitt76 that, where spouses contribute to the acquisition of a property then, in the absence of contrary evidence, it is to be taken that they intended to be joint beneficial owners. Their Honours said that Lord Upjohn’s remarks reflected the notion that both spouses may contribute to the purchase of assets through their marriage “as they often do nowadays”77 and that they would wish those assets to be enjoyed together for their joint lives and by the survivor when they were separated by death. However, Mason and Brennan JJ considered such an inference to be appropriate only between parties to a lifetime relationship, being the exclusive union for life undertaken by both spouses to a valid marriage, though defeasible and oftentimes defeated.78
[69] It is unnecessary for the purposes of the present case to express any concluded view as to the perception by Mason and Brennan JJ of the particular and exclusive significance to be attached to the status of marriage in this field of legal, particularly equitable, discourse. It is enough to note that, as Dixon CJ observed 50 years ago in Wirth v Wirth,79 in this field, as elsewhere, rigidity is not a characteristic of doctrines of equity. The reasoning of the Privy Council in Malayan Credit80 is an example of that lack of rigidity.
[70] In the present case, Sackville J referred in the second judgment to the operation of statute law to produce divergent outcomes in particular classes of case.81 In particular, his Honour referred to the regimes established by s 79 of the Family Law Act 1975 (Cth) and, in New South Wales, by the Property (Relationships) Act 1984 (NSW).82 The New South Wales statute provides for the declaration of title or rights in respect of property held by either party to a “domestic relationship”. That term is broadly defined in s 5 as extending beyond the already broad definition of “de facto relationship” in s 4. The extent to which these statutory innovations may bear upon further development of the principles of equity is a matter for another day.83
[71] The present case concerns the traditional matrimonial relationship. Here, the following view expressed in the present edition of Professor Scott’s work respecting beneficial ownership of the matrimonial home should be accepted:84
It is often a purely accidental circumstance whether money of the husband or of the wife is actually used to pay the purchase price to the vendor, where both are contributing by money or labor to the various expenses of the household. It is often a matter of chance whether the family expenses are incurred and discharged or services are rendered in the maintenance of the home before or after the purchase.
To that may be added the statement in the same work:85
Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one-half interest in the property, regardless of the amounts contributed by them. [Footnote omitted]
[72] That reasoning applies with added force in the present case where the title was taken in the joint names of the spouses. There is no occasion for equity to fasten upon the registered interest held by the joint tenants a trust obligation representing differently proportionate interests as tenants in common. The subsistence of the matrimonial relationship, as Mason and Brennan JJ emphasised in Calverley v Green,86 supports the choice of joint tenancy with the prospect of survivorship. That answers one of the two concerns of equity, indicated by Deane J in Corin v Patton,87 which founds a presumed intention in favour of tenancy in common. The range of financial considerations and accidental circumstances in the matrimonial relationship referred to by Professor Scott answers the second concern of equity, namely the disproportion between quantum of beneficial ownership and contribution to the acquisition of the matrimonial home.” (Footnotes ommitted)
Although all of the paragraphs 55 to 75 ought be read under the heading “The ownership of the Hunters Hill property” for my purpose I particularly draw attention to paragraphs 67 to 72 inclusive. These paragraphs highlight the special nature of beneficial ownership of property as between spouses irrespective of the fact that the legal title to the property may stand in one party’s sole name.
The contributions of the parties
This was a long marriage (30 years). Throughout the marriage the husband was in employment as a solicitor. He was a good provider. The wife was employed in the early stages of the marriage and then left the workforce to care for the children of the marriage (4) and the home. This was a contribution which must be assessed as very significant given that the husband worked long hours and that left the wife very much on her own to raise the children.
The wife also contributed a significant income as can be seen from her evidence setting out her taxable income during the marriage.
The wife contributed towards the improvements on the property at W. She has been a contributor directly to that property in a financial sense in that she was a guarantor of the husband’s obligations under mortgages with the NAB. Further all of her earnings were deposited to the parties joint account from which payments were made for all of the family expenses including expenses associated with the properties owned by the parties or either of them during the marriage.
The wife’s solicitor provided a case outline document for the hearing which carefully described the contributions relied upon by the wife and showed where the evidence was to be found to support that contribution. I accept that the wife has contributed in the manner described in that document.
The contributions of the husband are not precisely in evidence in the manner the court would normally see. However, there is sufficient evidence for me to be able to find consistent with the submission of the wife that the contributions of the parties should be assessed as equal at the date of the trial.
I should point out at this stage that the submissions made were directed to the equity in the property at W. That is the surplus likely to be available to the Trustee to distribute to the creditors following the sale of the property, payment of sale expenses and the discharge of the secured mortgage. The only other assets of moment in the balance sheet are the assets vesting in the Trustee or assets of the wife which have no equity because of secured debts and borrowings of the wife to acquire the asset. It seems that if the W property sold for $5 million then after sale expenses and discharge of the secured creditor A Bank there would remain about $2.4 million available to be applied by the Trustee to pay the creditors.
Considerations of section 75(2) factors
The wife submitted that an adjustment of 20% should be made in her favour. It was submitted that the husband and wife are each in their 50’s albeit that the wife is slightly younger than the husband. The wife’s income earning capacity is significantly limited by her lack of experience over the years of the marriage and the fact that she has no real skills to market. The husband on the other hand is a very experienced property lawyer. He has been permitted to practice on his own behalf notwithstanding his bankruptcy. It is acknowledged that his ability to retain all the income he might earn will be limited during the period of his bankruptcy which should be limited to a period of about 3 years from the date of his bankruptcy. During that period there is probably not a great deal of incentive on the husband to earn large amounts of money.
The wife relies on the evidence she filed from her medical practitioners. It was submitted that this evidence would serve to further cloud the wife’s ability into the future to earn income.
Although the children are over the age of 18 years they are still dependant to some degree upon their parents. Some of the burden will fall on the wife.
The wife submitted that she had contributed substantially to the success of the husband. She has cared for the home and the children which freed the husband to pursue his career and studies. This care extended to long hours whilst the husband was away from the home building his career and income earning capacity.
The wife argues that pursuant to section 75(2)(o) the husband should be seen as having wasted assets in the sense described in the case of Kowaliw and Kowaliw (1981) FLC ¶91-092. In the Full Court decision Hill and Hill (2005) FLC 93-209 the Full Court summarised the gravamen of Kowaliw as follows:
“72. Earlier in Kowaliw and Kowaliw (1981) FLC ¶91-092 Baker J had said that financial losses incurred by parties or either of them in the course of a marriage should be shared unless (a) one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets, or (b) one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value.”
The wife says in this case the losses incurred by the husband through the debt to the ATO should not be shared by the parties but rather attributed to the husband solely because he acted recklessly and negligently in filling out his income tax returns and thereby occasioned the loss. The wife goes further to say the completing of the husband’s tax returns was an act completely within his knowledge. The wife neither participated in, had knowledge of or was complicit in the preparation of or, signing or lodging of the relevant returns.
The wife pointed to the following evidence in support of her submission.
Between the year ended 30th June 1990 and 30th June 2002 the husband claimed outgoings associated with the W property as tax deductions. These included interest payments for the money borrowed to buy and renovate the property. During that period there was no income sought to be generated by the rental of the property. The property was occupied as the family home from 1991 to current date.
The husband conceded he knew and understood the provisions of section 51 of the Income Tax Assessment Act.
The husband denied that at all times he intended the W property to be the family home however he conceded that changed in about May 1991.
In 2006 the husband participated in a Federal Court hearing to challenge the amended assessments which had been issued against him by the Tax Office. He conceded that on the 2nd day of the hearing he withdrew his challenge. It seems from a reading of the transcript of those proceedings which is annexed to an affidavit by the Trustee that the husband realised the futility of his action during the course of a cross-examination of himself on the first day of the trial.
Although denying that he knew he was not entitled to claim the tax deduction for the property at W which he did for the 1991 tax year until the 2002 tax year, the husband was prepared to concede he did make mistakes in the tax returns and that he claimed sums wrongly. He also accepted that he did not exercise sufficient care in the preparation of his Tax returns.
One of the pieces of information which was contained in the husband’s tax returns for the Tax years ended 30th June 1991 to 30th June 2002 was his residential address. The husband stated his residential address to be B. The perpetuation of this address in the return did not alert the husband’s accountant nor the Tax office to the possible irregularity in the husband’s claimed tax deductions for the W property until after he had lodged the 2002 return. In the 2002 tax return the husband showed his residential address as the W property.
The husband conceded that he was reckless in failing to ensure that his Tax Return contained his correct residential address.
The husband is a lawyer by profession. He is an intelligent articulate person. He specialises in the area of property law. He mixes in the general community. I cannot see how it is that the husband could have believed he would be entitled to claim tax deductions for the property at W once he commenced to occupy the property as his family home.
An assessment of the whole of the evidence on this point leads me to the conclusion that the husband was reckless and negligent at the least in filling in his tax returns for the relevant years. This was an action solely within the knowledge and control of the husband. He took the action of filing those returns without the knowledge or consent of the wife. The wife could not be said to have been complicit in the filing of those returns.
As a consequence of the above finding I conclude that it is appropriate in this case to require the husband to satisfy the debt to the ATO from his own resources.
That being the case, and understanding that the resources of the husband include his share of matrimonial assets as determined by me based upon an assessment of the parties contributions, and his income during the course of his bankruptcy which can be applied to meet the creditors proofs of debt, it is clear that there is still likely to be a very substantial deficit in the bankrupt estate leaving the creditors out of pocket.
I need to balance the section 75(2) matters which I have referred to above which favour an adjustment in favour of the wife with the very substantial loss which the creditors in the husband’s bankrupt estate will suffer. This is required by the specific provisions of section 75(2)(ha) of the Act which requires:
“75(2) The matters to be so taken into account are … (ha) 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”
In this case the section requires me to consider an adjustment in the share of assets to be provided to the wife under the assessment of contribution. The Trustee’s case is that there should be an adjustment of 100% (or something very close thereto) in favour of the trustee. He says that even with such an adjustment there will still be a very substantial loss occasioned by the creditors once the property at W has been sold and the available funds divided between the competing creditors.
I find that in the circumstances of this case the balance falls in favour of the Trustee in relation to further possible adjustments. Given the size of the debt to the creditors it would not be appropriate in my view to make any further adjustment in favour of the wife, otherwise than referred to hereafter in relation to a motor vehicle. I also find that it would not be appropriate to make any further adjustment in favour of the Trustee as to do so would work an injustice and hardship upon the wife in the circumstances of this particular case.
There remains one other asset which is in the Trustees name by reason of the bankruptcy and that is the Lexus motor vehicle. This vehicle, although registered in the husband’s name was used by the wife during the marriage. The wife has had the use of the vehicle for a considerable number of years. The value of the vehicle is quite small. Without the vehicle the wife will have to obtain another. In the circumstances there should be an adjustment at least to the extent of requiring a transfer of that vehicle to the wife.
Just and equitable
The consequence of the findings and conclusions set out above is to provide for the equity in the sale proceeds of the W property to be divided equally between the Trustee and the wife. The wife retains her furniture, jewellery and savings. She retains the property recently acquired by her with borrowed funds. The Lexus car will be transferred to the wife. She will remain liable to meet her indebtedness as outlined in the evidence.
In the case run by the Trustee, although it has not been specifically argued, it seemed implicit to me that the Trustee’s case included a statement to the effect that the parties would not have had available to them the property at W had the husband not had the funds available to him from the savings generated by the wrongful claims for tax deductions over the particular years in question. The evidence however was not clear to me as to what those savings were. As best I can understand, the Trustee put that the husband had received the benefit of about $3,000,000 as a result of the claims and had those claims not been available then the husband (or the parties) would not have had the resources to buy and develop the property. I do not accept that the Trustee has established that case. There seems to me that there were a number of other possible outcomes for the husband which may not have meant the parties would have been unable to acquire the property and renovate it. As that circumstance was never faced it is not possible to determine what the outcome would have been. In any case, even if I am in error in that determination, there is no evidence to suggest that the wife was complicit in any scheme or plan to defraud any creditor or potential creditor nor is it suggested that she should have been aware of the circumstances of the husband in terms of his financial capacity to carry out the work which was carried out on the property without obtaining some very large tax advantage in doing so.
I have some concern with the outcome of this case in so far as the creditor principally to lose out in this case is the Australian Tax Office and therefore the tax payers of this land. The question should realistically be asked why the wife should ultimately prosper at the expense of the public purse. The answer so far as I am concerned is that the Family Law Act as now standing provides for that to be the outcome in appropriate cases. The legislation does not elevate the status of creditors to a ranking above the other considerations which the Court is required to consider under section 75(2). In the circumstances of this case therefore the result which sees the wife receive half of the equity in the W property and the prestige motor vehicle is just and equitable.
The Orders to be made by the court
The effect of my findings set out above is to require the Trustee to hold one half of the property at W upon trust for the applicant wife. Orders should be made to provide for the sale of the property and distributions of the net sale proceeds equally between the Trustee and the wife.
The orders should also provide for the mechanics of effecting the sale of the property. There should also be an order for the transfer of the Trustees interest in the prestige motor vehicle to the wife.
I certify that the preceding ninety-nine (99) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Le Poer Trench.
Associate:
Date: 30 August 2007
IT IS NOTED that this judgment for all publication and reporting purposes be referred to as LEMNOS & LEMNOS
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