Trustee of the Bankrupt Estate of Nagarno & Talbert
[2024] FedCFamC1F 19
•31 January 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 1)
Trustee of the Bankrupt Estate of Nagarno & Talbert [2024] FedCFamC1F 19
File number(s): ADC 1158 of 2016 Judgment of: BERMAN J Date of judgment: 31 January 2024 Catchwords: FAMILY LAW – PROPERTY – BANKRUPTCY – Where the parties separated in 2013 and Consent Orders were made in 2016 – Where the husband went bankrupt 18 months later – Where the husband is a discharged bankrupt – Where the original trustee concluded their investigations – Where a creditor applied to the Federal Court seeking to appoint a new trustee – Where the new trustee filed an Initiating Application seeking to set aside the Consent Orders pursuant to s 79A of the Family Law Act 1975 (Cth) – Where the trustee contends there was fraud and suppression of evidence – Where the parties seek a summary dismissal – Consideration of the trustee’s standing following the s 79A application – Consideration of Valder & Saklani (2021) FLC 94-042 – Consideration of what constitutes vested property – Where the trustee cannot enlarge the vested property pool – Application dismissed. Legislation: Bankruptcy Act 1966 (Cth) ss 5, 35, 58, 116,
Family Law Act 1975 (Cth) ss 4, 45A, 79A, 79, 80
Cases cited: Bennett v Bennett (2001) FLC 93-088
Deputy Federal Commissioner of Taxation (W.A.) v Spanjich (1988) 93 FLR 98
Harris v Caladine [1991] HCA 9
Hicks v Trustee of the Bankrupt Estate of Hicks (2021) 94-006
Jefferson Ford Pty Ltd v Ford Motor Company of Australia Limited [2008] 246 ALR 465
Needham & Trustees of the Bankrupt Estate of Needham (2017) FLC 93-777
Official Trustee of Bankruptcy & Galanis (2017) 318 FLR 22
Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571
Re: Attorney-General (Cth); Ex parte Skyring [1996] HCA 4
Spring v Spring [2014] FCCA 970
Trustee of the Bankrupt Estate of Hicks & Hicks and Anor [2019] FamCA 695
Valder & Saklani (2021) FLC 94-042
Valder & Saklani (No 3) [2023] FedCFamC1F 98
Zabaneh & Zabaneh (1986) FLC 91-766
Division: Division 1 First Instance Number of paragraphs: 95 Date of hearing: 6 October 2023 Place: Adelaide Counsel for the Applicant: Mr Roberts SC and Mr Wicks Solicitor for the Applicant: Charlton Rowley Legal Counsel for the First Respondent: Mr Fary SC and Mr Werner Solicitor for the First Respondent: Susan Snyder Counsel for the Second Respondent: Mr Cudmore Solicitor for the second Respondent: CCK Lawyers ORDERS
ADC 1158 of 2016 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: TRUSTEE OF THE BANKRUPT ESTATE NAGARNO
Applicant
AND:
AND:
MS TALBERT
First Respondent
MR NAGARNO
Second Respondent
ORDER MADE BY:
BERMAN J
DATE OF ORDER:
31 JANUARY 2024
THE COURT ORDERS THAT:
1.The trustee’s Initiating Application filed 2 June 2023 is dismissed.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under a pseudonym has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
Berman J
INTRODUCTION
Ms Talbert (“the wife”) and Mr Nagarno (“the husband”) commenced cohabitation in 1995, were married in 1996 and separated on 6 November 2013. A Divorce Order was made in 2016.
There are two adult children of the marriage.
The wife is a health professional. Relevant to the proceedings, the husband was in business.
By Initiating Application filed 28 April 2016, the wife sought the following orders:-
1.That the husband pay to the wife such lump sum settlement as this Honourable Court considers appropriate.
2.That the wife be excused from particularising the amount sought by her in paragraph 2 hereof, until such time as the husband has provided full and frank disclosure of his financial circumstances.
The husband did not file a Response however the Court file reflects that he instructed his solicitors, who then entered into settlement discussions with the wife’s solicitors, resulting in a final Consent Order being made by a Registrar on 23 May 2016 (“the Consent Order”). The Consent Order includes a Notation as follows:-
A.The parties agree that the assets, liabilities, superannuation entitlements and resources of the parties and the values of the same are as set out in the wife’s Financial Statement sworn 26 April 2016 and the husband’s Financial Statement sworn 21 May 2016.
The Consent Orders can be summarised as follows:
(1)That the wife pay to the husband a settlement sum of $225,000.
(2)That the wife pay all monies due and owing by the parties in relation to the school fees for the child of the marriage to the conclusion of the 2016 school year including any arrears thereof.
(3)That the husband retains for his sole use and benefit absolutely free of any further claim or demand by the wife the following:
(a)Furniture and effects and artwork in his possession;
(b)The settlement sum to be paid by the wife;
(c)The husband’s motor vehicle;
(d)The husband’s interest in D Pty Ltd, E Pty Ltd and the F Trust (the trustee of which is F Investments Pty Ltd);
(e)His personal savings; and
(f)Any other personal property and/or financial resources not otherwise specified.
(4)That the wife retains for her sole use and benefit absolutely free from any further claim or demand of the husband the following:
(a)Furniture and effects and artwork in her possession;
(b)Her motor vehicle;
(c)Her interest in G Pty Ltd, H Pty Ltd and the K Family Trust (the trustee of which is K Pty Ltd);
(d)Her properties situate at:
(i)J Street, Perth WA;
(ii)Lot 1 in Strata Plan … at Suburb M, NSW;
(iii)Lot 2 in Strata Plan … at Suburb M, NSW; and
(iv)N Street Suburb O, VIC.
(e)Her interest in Superannuation Fund 1;
(f)Her personal savings; and
(g)Any other property and/or financial resources of the wife in her name and/or possession not otherwise specified herein.
(5)The orders provided that each of the parties indemnify the other in respect of their respective liabilities.
The settlement sum was paid by the wife in terms as set out in the Consent Orders.
The solicitors for each of the husband and wife made joint written representations to the Registrar in support of the Consent Orders.
The Notations to the Consent Orders reflect the gravamen of the representations made by the husband and the wife to the Registrar on 21 May 2016 namely, to enable the husband’s company to enter into contracts in mid-2016 as referred to at Part L, paragraph 56 of the husband’s Financial Statement sworn 23 May 2016.
The further agreed representations acknowledged that the effect of the Consent Order would represent a division of the net assets, superannuation, and resources of the parties as to $4,015,000 (96%) in favour of the wife and $182,700 (4%) in favour of the husband.
The representations confirmed that the husband was in business and via his company, he intended to enter into contracts in mid-2016 from which he considered would result in a substantial income but also, the potential to acquire significant equity in property.
There was an acknowledgment by the husband that there was no certainty in respect of the success of the venture however, the anticipated windfall return on the venture, if successful, would provide a basis for the husband agreeing to a significant imbalance in the adjustment and apportionment of property with the wife.
To a lesser degree of importance was the husband’s further consideration that his parents were elderly and upon their death there was a reasonable expectation (although not a certainty) of a significant inheritance.
Each of the husband and wife were represented and by both their correspondence to the Registrar, and as reflected in the Notation to the Consent Orders, the parties each acknowledged that the settlement was genuine and that their consent was informed. The importance of informed consent is reflected by the following remarks in Harris v Caladine [1991] HCA 9:-
25.In considering what order, if any, should be made under s.79, a court is required under sub-s.(4) of that section to take a number of matters into account, including the various financial contributions made by the parties to the marriage. And sub-s.(2) provides that a court shall not make an order under the section unless it is satisfied that, in all the circumstances, it is just and equitable to do so. The fact that an order is sought by consent does not relieve a court, or a Registrar, from compliance with the requirements of the section, but it may render compliance much less demanding. Provided that a court, or a Registrar, is adequately informed, where the parties are at arms length and are properly represented little more than consent may be needed to establish that the requirements of the section have been met: see Jenkins v Livesey (1985) AC 424, at pp437, 444.
The husband was declared a bankrupt in 2017 which was four years after separation and 18 months after the making of the Consent Order.
The original trustees of the husband’s bankrupt estate were Mr P and Mr Q.
Mr R and Ms S, in their capacity each as creditors of the husband having filed Proofs of Debt totalling $2,764,994, filed an application in the Federal Court on 5 October 2018 seeking that the original trustees be removed and that Mr C be appointed in their place.
On 21 December 2018, White J made orders that Mr C be appointed as trustee of the husband’s bankrupt estate.
By reference to the related FCA judgment the matters relied upon in support of the application for the replacement of the trustees was that there was a basis to consider further investigations of the husband’s affairs. The original trustees considered that their investigations into the husband’s financial affairs had come to an end whereas Mr C was prepared to undertake the further investigations supported by some of the creditors who were prepared to fund his engagement. In particular, the focus was on the matrimonial settlement between the husband and the wife, aspects of which the applicant considered was a cause for suspicion given that the applicant considered that the wife retained property in the sum of $5.64 million whereas the husband received a settlement sum of $250,000.[1]
[1] By reference to the related FCA judgment.
A further aspect considered by the trustee to warrant further investigation, was the husband’s exclusion from his father’s will which suggested (in the absence of the will being introduced into the evidence) that the husband’s father, being aware of the husband’s failed venture, included the following term in his will which had the effect of the husband being considered an “excluded person” such that he would not receive a distribution or bequest from his father’s estate:[2]
…“excluded person” as person “who is not entitled to any distribution from the Testamentary Trust”.
[2] By reference to the related FCA judgment.
There were other areas raised in relation to the husband’s financial dealings and the potential status of the husband’s brother who controlled T Pty Ltd and had filed a Proof of Debt of $9,000,000.
Consequent upon the orders made by White J replacing Mr C as the trustee of the husband’s bankrupt estate, the trustee caused an Application in a Proceeding and an Amended Bankruptcy Application to be filed on 14 October 2022. The applications were ill received resulting in the trustee filing an Initiating Application on 5 June 2023.
The final orders sought by the trustee are necessary to set out in full:-
1.That pursuant to s 79A(1)(a) of the Family Law Act 1975 the orders made by the Family Court of Australia in these proceedings on 23 May 2016 be set aside.
2.Further to the relief sought in paragraph [1] herein, that pursuant to s79 of the Family Law Act, the following orders be made:
2.1That in full and final settlement of any claim that First Respondent and the Second Respondent may have against each other for settlement of property or alteration of property pursuant to the Family Law Act in the past, in the present or in the future:
a)The net assets of the First and Second Respondent be divided such that the First Respondent do retain 80% thereof and the Second Respondent be entitled to 20% thereof, or such other percentages as this Honourable Court deems fit;
b)That in the alternative, that the Consent Orders be varied, such that there be a further order that the First Respondent pay to the Second Respondent the amount of $2,000,000.00, or such other amount as this Honourable Court deems fit;
c)On the making of any order under paragraph [2.2(a)] or [2.2(b)] herein, there be a further order that any assets to be divided in favour of the Second Respondent, or alternatively cash to be provided to him, be the subject of restraint pursuant to s30 of the Bankruptcy Act 1966 (Cth) and/or such assets or cash vest in the Applicant pursuant to s58 of the Bankruptcy Act 1966 (Cth).
2.2That in the alternative to the relief sought in paragraph [2.1] herein, that in full and final settlement of any claim that each of the parties may have against each other for settlement of property or alteration of property pursuant to the Family Law Act in the past, in the present or in the future:
a)The net assets of the First and Second Respondent be divided such that the First Respondent do retain 80% thereof and the Applicant be entitled to 20% thereof, or such other percentages as this Honourable Court deems fit;
b)That in the alternative, that the Consent Orders be varied, such that there be a further order that the First Respondent pay to the Applicant the amount of $2,000,000.00, or such other amount as this Honourable Court deems fit;
3. Such further or other orders as this Honourable Court deems fit.
The final orders sought are supplemented by interlocutory orders that seek for the husband and wife to provide mutual informal discovery and that the parties jointly appoint single expert witnesses to value the wife’s interest in various corporate entities, a family trust, a superannuation interest and the fair market value of four properties.
The trustee acknowledges that proposed order 2.1(c) is not possible given that property cannot vest pursuant to s 58 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) in circumstances where the husband has been discharged from his bankruptcy.
In the absence of a formal Response, the wife seeks the following orders as set out in her Summary of Argument:-
(b)Pursuant to rr 10.09 and 10.11 of the [Family Law] Rules, there be summary orders as follows:
(i)The Trustees Initiating Application dated 2 June 2023 (Trustee’s IA) be struck out or summarily dismissed.
(ii)In the alternative to (i), some or all of the orders sought in paragraph 2 of the Trustee’s IA be struck out or dismissed in so far as relief is sought in respect of some or all of the relevant property.
(c) Further or in the alternative:
(i)That within 14 days the Trustee file and serve and affidavit containing an inventory of all property that:
A. is presently “vested bankruptcy property”;
Bthat the Trustee claims will become “vested bankruptcy property” as a consequence of the orders sought in the Trustee’s IA.
(ii)The wife’s application for summary dismissal is adjourned to a date to be fixed for further hearing.
If the Court were to reject the wife’s application for summary dismissal, then the wife seeks orders by way of security for costs in the sum of $250,000 which is to be paid to her before the trustee is able to advance his application.
SUMMARY DISMISSAL
Section 45A of the Family Law Act 1975 (Cth) (“the Act”) is in the following terms:
No reasonable prospect of successfully defending proceedings
(1)The court may make a decree for one party against another in relation to the whole or any part of proceedings if:
(a)the first party is prosecuting the proceedings or that part of the proceedings; and
(b)the court is satisfied that the other party has no reasonable prospect of successfully defending the proceedings or that part of the proceedings.
No reasonable prospect of successfully prosecuting proceedings
(2)The court may make a decree for one party against another in relation to the whole or any part of proceedings if:
(a)the first party is defending the proceedings or that part of the proceedings; and
(b)the court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceedings or that part of the proceedings.
When there is no reasonable prospect of success
(3)For the purposes of this section, a defence or proceedings or part of the proceedings need not be:
(a) hopeless; or
(b) bound to fail;
to have no reasonable prospect of success.
It is a general principle that parties have a right to seek remedy and redress from a court. The Full Court in Bennett v Bennett (2001) FLC 93-088 accepted what Kirby J said in Re: Attorney-General (Cth); Ex parteSkyring [1996] HCA 4 at 323:-
“… it is regarded as a serious thing in this country to keep a person out of the courts. The rule of law requires that, ordinarily, a person should have access to the courts in order to invoke their jurisdiction.”
The principle, enunciated by Kirby J and adopted by the Full Court, is not without limit. The Court has been able to restrict a party’s right to commence or pursue proceedings if they are considered to be vexatious, frivolous or an abuse of process. See Zabaneh & Zabaneh (1986) FLC 91-766.
Section 45A of the Act was inserted pursuant to the Family Law Amendment (Family Violence and Other Measures) Act2018 which repealed s 118 and replaced it with s 45A.
The test, as now required by s 45A of the Act, is that the Court needs to be satisfied that a party “has no reasonable prospects of successfully defending” the proceedings before a decree can be made to dismiss an application.
A consideration that proceedings have “no reasonable prospect” does not require a finding that the proceedings are bound to fail.
Senior Counsel for the wife highlights the fulsome consideration by Judge Riethmuller (as his Honour then was) in Spring v Spring [2014] FCCA 970[3] and the clear statement from Finkelstein J in the decision of Jefferson Ford Pty Ltd v Ford Motor Company of Australia Limited (2008) FCAFC 60.
[3] Spring v Spring [2014] FCCA 970 at [212]-[17].
It is not controversial that the highlighted extract provides an appropriate consideration of the issues necessary to consider before a decree should be made dismissing an application or proceedings.
The summary of the basis for the wife seeking a decree pursuant to s 45A of the Act, which would have the consequence of dismissing the Initiating Application filed by the trustee, is summarised in the Summary of Argument prepared by Senior Counsel for the wife as follows:[4]
50.This is an appropriate case in which the Court should determine on a summary basis the questions of law raised by the Trustee's application.
51.In this case, although it is not necessary that the Court do so, the Court can find (and should find) that Trustee's application is doomed to fail.
52.Alternatively, if the Court remains in any doubt, it should resolve as a preliminary question the following issue: Upon setting aside the Consent Orders at trial, what specific items of property within the Relevant Property might be the subject of an alteration of property interests under s 79 of the [Act]?
53.Further, the Court should direct the Trustee, before taking any further steps in the proceeding, to file and serve an affidavit containing an inventory of all property that:
a) is presently "vested bankruptcy property," and
b)that the Trustee claims will become "vested bankruptcy property" as a consequence of the orders sought in the Initiating Application.
[4] Wife’s Summary of Argument filed 2 July 2023.
Standing of third parties
Section 79A of the Act should be considered as a remedial section in that it is self-evident from the section, that it enables the Court to exercise its discretion to “vary the order or set the order aside, and if it considers appropriate, make another order under s 79 in substitution for the order so set aside” if the Court is satisfied that:[5]
there has been a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information, the giving of false evidence or any other circumstance; …
[5] Family Law Act 1975 (Cth) s 79A(1)(a).
It is common ground that the trustee contends that the Consent Order should be set aside by reason of fraud, the suppression of evidence including, failure to disclose relevant evidence, or the giving of false evidence.
Proceedings under s 79A are not limited to the parties but rather extends to a person “affected by an order made by a Court under s 79 in property settlement proceedings”. See Deputy Federal Commissioner of Taxation (W.A.) v Spanjich (1988) 93 FLR 98.
The following sections of s 79A of the Act are relevant for the purposes of the trustee’s application:
79A(4)[Creditors] For the purposes of this section, a creditor of a party to the proceedings in which the order under section 79 was made is taken to be a person whose interests are affected by the order if the creditor may not be able to recover his or her debt because the order has been made.
79A(5) [Property-Bankruptcy] For the purposes of this section, if:
(a)an order is made by a court under section 79 in proceedings with respect to the property of the parties to a marriage or either of them; and
(b) either of the following subparagraphs apply to a party to the marriage:
(i) when the order was made, the party was a bankrupt;
(ii) after the order was made, the party became a bankrupt;
the bankruptcy trustee is taken to be a person whose interests are affected by the order.
79A(6) [Vested bankruptcy property] For the purposes of this section, if:
(a) a party to a marriage is a bankrupt; and
(b)an order is made by a court under section 79 in proceedings with respect to the vested bankruptcy property in relation to the bankrupt party;
the bankruptcy trustee is taken to be a person whose interests are affected by the order.
Accordingly, s 79A(4) of the Act enables a creditor to be a person “affected” if they are not able or may not be able to recover their debt consequent upon an order being made pursuant to s 79 of the Act. If, however, a trustee in bankruptcy commences proceedings pursuant to s 79A of the Act, then a creditor who has lodged a Proof of Debt is not thereafter enabled to be a party to the proceedings and to seek a separate order.
It is not in issue that the trustee has a right to bring proceedings pursuant to s 79A of the Act seeking to set aside the Consent Order entered into between the husband and the wife.
The argument that is raised by the wife and husband is that even if the Consent Orders were set aside, and it is not conceded that there is any proper basis for that to occur, the trustee could not bring proceedings pursuant to s 79 of the Act and in the absence of any interest by either the husband or the wife to prosecute proceedings for settlement of property, the husband would have no property of significance in circumstances where the property that vested at the time of his bankruptcy was minimal.
It is not controversial that at all material times, the substantial and likely valuable interest of the wife in business facilities and real property as recorded in her Financial Statement filed 26 April 2016 would remain in her legal and equitable ownership and it could not vest either in whole or in part to the husband.
Section 58 of the Bankruptcy Act provides that “the property of the bankrupt, not being after acquired property, vests in his or her trustee at the moment that a person becomes a bankrupt”.
“Property” is defined in s 5 of the Bankruptcy Act and the definition for “the property of the bankrupt” includes relevantly:
… any rights and powers in relation to [the property divisible among the bankrupt’s creditors] that would have been exercisable by the bankrupt if he or she had not become a bankrupt.
Property divisible among the creditors of a bankrupt is defined in s 116 of the Bankruptcy Act which includes:[6]
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;
[6] The Bankruptcy Act 1966 (Cth) s116(1)(b).
It is not the subject of argument that the right to apply for property adjustment orders under s 79 of the Act should be considered as a personal right and not proprietary. As such, it did not vest in the trustee.
There is no serious contention put on behalf of the trustee that the proposition is incorrect. Rather, it is argued that a consideration of s 79A and s 80 of the Act provides the basis for the orders sought in proposed order 2.1(b) and 2.2(b) and that s 79 of the Act provides the scope for the orders that are able to be made under s 80 of the Act.
ISSUES RAISED BY THE TRUSTEE
The contention of the trustee is that at the time of the making of the Consent Orders, the husband and the wife suppressed evidence as summarised at paragraph 7 of the trustee’s Outline of Case Document but referred to in detail in the affidavit of the trustee filed 2 June 2023.
The trustee properly contends that the evidence relied upon is unchallenged by the husband and the wife.
It is reasonable to find that the trustee has made out a prima facie case that there were substantial liabilities not disclosed by the husband. Specifically, paragraph 3.1 of the trustee’s affidavit refers to the liabilities that were apparently in existence at the time of the Consent Order. The source of the information derives from the Proof of Debts filed in the husband’s bankruptcy proceedings.
If established on the evidence that the husband’s knowledge that his father had revised his will such that he would no longer inherit in the event of a bankruptcy and that as part of the loan agreement with Mr R the husband accepted a condition that he would not resolve the foreshadowed property settlement proceedings with the wife, these would be relevant considerations pursuant to s 79A(1)(a) of the Act.
I am not so certain of the assertion that the wife was complicit with the husband in terms of deliberate conduct to suppress evidence relevant to the determination by a Registrar as to whether it would be just and equitable to make the Consent Orders. I do not necessarily accept that the wife’s interest in the corporate entities, as set out in 3.2.1 to 3.2.4 of the trustee’s affidavit filed 2 June 2023, was an understatement of assets to the value of $1.625 million.
As discussed, the application for summary dismissal does not focus on whether there has been a miscarriage of justice at the time that the Consent Orders were made but rather that even if the Consent Orders were set aside, the trustee would not be entitled to the relief as sought in their Initiating Application. The trustee argues that the orders sought are pursuant to s 80 of the Act as a standalone power albeit informed by s 79 of the Act.
It is conceded that whilst the trustee does not have standing to bring a s 79 claim, a trustee can join in s 79 proceedings, lead evidence and make submissions thereby creating a right that does vest in the trustee. The trustee would not be entitled to the relief sought because the orders relate to property that has not vested.
That proposition is not controversial and it is not suggested on behalf of the husband and the wife that a trustee is not able to intervene in s 79 proceedings.
The trustee refers to the decision of Needham & Trustees of the Bankrupt Estate of Needham (2017) FLC 93-777 (“Needham”) in support of the proposition that whilst a trustee can resist claims to the vested bankruptcy property, there is no entitlement to enlarge the vested bankruptcy property. The Full Court in Needham (supra) summarised the position as follows:-
37.That Act amended s 79(1) of the Family Law Act to include relevant provisions related to bankruptcy of one of the parties. His Honour correctly said that “the 2005 Amendment Act therefore enables a Trustee to join proceedings for the purpose of resisting claims by a non-bankrupt spouse to vested bankruptcy property. The legislation does not…empower the Respondent Trustees to…enlarge the vested bankruptcy property available to the bankrupt spouse’s creditors.”
The trustee considers that the approach sought to be adopted is well settled law. Reference is made to the decision of the Full Court in Official Trustee in Bankruptcy v Mateo (2003) 202 ALR 571 (“Mateo”) as to the ability of the trustee to seek orders pursuant to s 79A of the Act where it says as follows:-
74.… If the Family Court is to deal, on their merits, with the issues mentioned to us, it will be necessary for it to have, before it, an application by the Official Trustee pursuant to s 79A of the Family Law Act. If that application is successful, it is likely that the Family Court will make new and different orders under s 79 of the Family Law Act, presumably leaving greater assets in Mr Mateo’s hands, as between himself and his wife and children, than under the earlier order. Those assets would be property divisible among creditors, by virtue of s 116 of the Bankruptcy Act.
As considered, whilst the trustee accepts that order 2.1(c) of the Initiating Application could not be properly made in that it seeks property to vest in the husband in circumstances where the husband has been discharged from his bankruptcy, the correct approach is for an amount to be paid directly from the wife to the trustee.
The consideration of the Court’s power under s 79A of the Act in bankruptcy by the Full Court in Valder & Saklani (2021) FLC 94-042 (“Valder & Saklani”) and the subsequent decision of Christie J, following a successful appeal remitting the matter for hearing (see Valder & Saklani (No 3) [2023] FedCFamC1F 98) is relied upon to consider the parameters of the Court’s power and to support the trustee’s contention in these proceedings as to the orders sought.
Paragraphs 46 to 47 of Valder & Saklani (supra) are also relied upon to counter the proposition of the wife and the husband that if successful on a s 79A application, any property ordered to revest to the wife would not automatically vest in the trustee as after acquired property. As highlighted by the trustee’s Senior Counsel, the following appropriately incapsulates the relevant considerations:
46.The second respondent submitted that, even so, the discharge had the effect of rendering the proceedings regarding s 79A of the Act doomed to fail. This was because the effect of any order under that section would be to revest the property, which was transferred under the consent orders to the first respondent. As he was no longer bankrupt, it would not automatically vest in his trustee in bankruptcy as after-acquired property. Thus, the submission continues, the appellant could not be a person affected by the orders and was not entitled to bring proceedings under s 79A of the Act.
47.We do not accept, however, the revesting of the property in the second respondent consequent upon the setting aside of the consent orders, is the only available outcome in proceedings under s 79A of the Act. The court is empowered by s 79A(1) of the Act to “vary the order or set the order aside and, if it considers appropriate, make another order under section 79 in substitution for the order so set aside”. Section 80(1)(k) of the Act allows the court to “make any other order… which it thinks it is necessary to make to do justice”. If it was found that the consent orders had been entered into with the intention of defeating creditors, we do not see why an appropriate variation or substituted order could not see the provision for the payment of those creditors, either directly (in which case here, the appellant would be obliged by the terms of the leave granted to her by the Federal Court to pay the funds to the trustee in bankruptcy) or indirectly by a payment or transfer of property to the trustee. The court would be astute to make orders to overcome fraud on it, on creditors or on persons whose interests would be affected by the property settlement order. The court also has the power to protect the interests of third parties where there has been a miscarriage of justice in any of the other forms described in s 79A(1)(a) of the Act.
(Emphasis added)
ISSUES RAISED BY THE WIFE
The contention of the wife is that the involvement of the trustee has extended over a period of five years and has exhausted all reasonable avenues under the Bankruptcy Act. The wife considers that the Initiating Application filed by the trustee was to use the provisions of s 79A, and then s 79 of the Act, to explore what other relief might be available to the trustee.
The focus is therefore upon what constitutes vested bankruptcy property and the provisions of the Family Law Act that do not allow the vested property available to a bankrupt’s creditor to be enlarged.
There does not appear to be any contest to the wife’s proposition, however, the trustee relies upon the provisions of s 79A and s 80(1)(a) enabling the Court to exercise its discretion to “vary the order or set the order aside, and if it considers appropriate, make another order under s 79 in substitution for the order so set aside”.[7]
[7] Family Law Act 1975 (Cth) s 79A.
The wife distinguishes the decisions of Valder & Saklani (supra) and Hicks v Trustee of the Bankrupt Estate of Hicks (2021) 94-006 (“Hicks”).
It is argued that in both Valder& Saklani (supra) and Hicks (supra), the Consent Orders provided for the divesting of property in anticipation, or reasonable expectation, by the spouse who was to become a bankrupt.
Paragraph 29 of Valder& Saklani (supra) highlights the point made as follows:-
29.At the time the appellant commenced the proceedings in the Family Court she was entitled to do so. She was the creditor of a bankrupt estate which had been diminished by the operation of the consent orders. She had the requisite leave to commence the proceedings. As well as being “a person affected by an order” for the purposes of s 79A(1), the appellant is also a “party”, a “creditor” and a “person whose interests would be affected by the making of the instrument or disposition” for the purposes of s 106B(4AA)(a), (b) and (c) of the Act.
The contention is that no property was transferred from the husband to the wife. He did not divest himself of any property that could be considered property that would vest upon his voluntary bankruptcy.
Simply put, the Consent Order did not have the effect of diminishing the property of the husband.
The manner in which the proposed orders are crafted by the trustee are not able to be determined by any objective reference to the circumstances of the creditors in the husband’s bankrupt estate.
The orders sought by the trustee are significantly different to the orders made by Loughnan J in Trustee of the Bankrupt Estate ofHicks & Hicks and Anor [2019] FamCA 695 (“Hicks and Anor”) where his Honour ordered that the wife pay to the applicant trustee an amount being the judgment debt obtained against the husband in the Supreme Court proceedings. It is also a relevant consideration in the first instance decision of Hicks and Anor (supra) that his Honour did not bring to account the husband’s liabilities as a liability of the parties.
The wife argues that Hicks, Valder& Saklani and Mateo are all distinguishable from the present case by the similar fact of the property order causing the transfer of a beneficial interest in property.
What appears to be an important consideration is that the Court seeks, in setting aside the Consent Orders, to restore the parties to their former ownership position.
ISSUES RAISED BY THE HUSBAND
The husband focuses upon the orders sought by the trustee pursuant to s 79 of the Act because it is argued that neither the Family Law Act nor the Bankruptcy Act would allow orders to be made in those terms.
The husband does not consider that the reliance by the trustee on the Full Court’s decision in Valder & Saklani (supra) can in any way be considered analogous to the current proceedings.
In Valder & Saklani (supra), the creditor obtained a judgment on 1 July 2013 and at the time of the Consent Orders entered into by the husband and the wife, it was understood by the parties that damages were to be assessed against the husband. On 18 September 2014, judgment in favour of the creditor was fixed in the sum of $594,028.25. The husband then became a bankrupt on his own petition on 6 March 2015.
The husband considers that it was “critical” to the decision in Valder & Saklani (supra), that the judgment creditor “was the creditor of a bankrupt estate which had been diminished by the operation of the orders”.
The distillation of what the Full Court said in Valder & Saklani (supra), was that the judgment creditor was a person affected by the Consent Order and her interests would be affected by the provision in the order for the disposition of property from the debtor spouse to the non-debtor spouse. In a similar submission to that of the wife, the husband’s contention is that the Consent Orders did not divest the husband of any property in favour of the wife.
The argument raised by the husband is considered to be reflected, and ultimately conceded by the acknowledgment of the trustee, that the orders sought by him in paragraph 2.1(c) of the Initiating Application are untenable.
The focus then must be upon a consideration of what might constitute vested bankruptcy property. Section 58 of the Bankruptcy Act provides that property of a bankrupt will vest as at the date of the commencement of bankruptcy. Any property acquired upon or by the bankrupt before his discharge will also vest. It was also argued that the husband may have a possible equitable interest in the assets held by the wife and therefore an order could be made under s 80 of the Act. The trustee could do no more than speculate as to an alternate outcome other than the wife retaining the legal equitable interest in property held by her before and after the final orders.
Setting aside the Consent Order will not cause property to vest in the husband.
In short summary, orders under s 79 do not create or enable antecedent rights. The husband has long been discharged from his bankruptcy. Any order under s 79A would have the effect of creating a property right in the husband that he did not have at the time he was bankrupt. The trustee at the time did not seek to bring proceedings pursuant to s 79A of the Act during the currency of the husband’s bankruptcy. Upon his discharge, any after acquired property could not vest in the trustee.
In Official Trustee of Bankruptcy & Galanis (2017) 318 FLR 22 (“Galanis”), the Full Court summarised the position as follows:-
35.In the ordinary course, a bankrupt is discharged from his or her bankruptcy three years from the date on which the bankrupt filed his or her statement of affairs (s 149(4) Bankruptcy Act). The discharge operates to release the bankrupt from all debts, subject to specified exceptions (s 153 Bankruptcy Act). However, the bankrupt estate continues for the benefit of creditors. The trustee has 20 years from the date of the bankruptcy to claim and recover the property of the bankrupt (s 127(1) Bankruptcy Act).
36.By the combination of ss 58(1)(b) and 116(1)(a) and (b) of the Bankruptcy Act, property acquired by the bankrupt after the commencement of the bankruptcy and before his or her discharge from bankruptcy vests in the trustee of his or her bankrupt estate and is available for division between creditors. However, a transfer of such property by the bankrupt in good faith and for valuable consideration before any intervention by his trustee is valid as against the trustee. For the purposes of dealing with land, the lodging of a caveat by the trustee is a sufficient intervention.
Further in Galanis (supra) the Full Court referred to s 35 of the Bankruptcy Act and said as follows:-
43.The words emphasised by us indicate that the jurisdiction of a court exercising jurisdiction under the Family Law Act is limited by a requirement that a party to the marriage have the status of a bankrupt (ie an undischarged bankrupt) at the time of the commencement of the proceedings. This is indicated by the phrase “is a bankrupt”.
The contention of the husband is that any proceedings brought by a trustee under the Act cannot be a “matrimonial cause” within the meaning of s 4(1)(c)(b) of the Act.
CONCLUSION
The trustee does not seek to place the parties back in the same position that they were at the time of the husband entering bankruptcy. To do so would not assist the trustee. The husband did not cause property to be transferred to the wife.
The focus of the Family Law Act and the Bankruptcy Act requires a careful consideration of what might properly constitute vested property.
Whilst it is opined by the trustee that the husband and wife supressed evidence, the tenor of the Consent Orders was to reflect the broad contention of the parties namely, that they should each retain property held by them without adjustment save for a settlement sum of $225,000.
There is no explanation as to the inordinate delay in proceedings being commenced by the trustee in this Court other than to acknowledge that two of the Proof of Debt creditors were prepared to fund the current trustee if their application to replace the original trustee was successful.
The inevitable consequence is that the husband was discharged from his bankruptcy.
It is not permissible for orders to be made pursuant to s 79 of the Act to enlarge the vested property. The opportunity to seek orders, as promoted by the trustee, is now not available even if the orders sought were permissible which, they are not.
It is doubtful that the orders now sought by the trustee could have been sought at first instance if the trustee had intervened in the s 79 proceedings.
In those circumstances, even at the high-water mark of the trustee’s case which would be contingent upon a successful s 79A application, no vested property would be brought into existence. The application of the wife seeking the dismissal of the Initiating Application of the trustee filed 5 June 2023 has merit.
I make orders as appear at the commencement of these reasons.
I certify that the preceding ninety-five (95) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Berman. Associate:
Dated: 31 January 2024
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