Trustee of the Property of G Lemnos, a Bankrupt & Lemnos and Anor
[2009] FamCAFC 20
•12 February 2009
FAMILY COURT OF AUSTRALIA
| TRUSTEE OF THE PROPERTY OF G LEMNOS, A BANKRUPT & LEMNOS AND ANOR | [2009] FamCAFC 20 |
| FAMILY LAW - APPEAL – FROM A DECISION OF A FAMILY COURT JUDGE – Appeal by the trustee of the bankrupt estate of the husband against orders made by the trial Judge in proceedings for settlement of property between the wife and the trustee – Where the debt lodged by the Deputy Commissioner of Taxation in the husband’s bankrupt estate, as a consequence of the husband’s improper tax deductions over many years, far exceeded the net equity in the matrimonial home, the only significant asset of the parties – The trial Judge’s orders pursuant to s 79(1)(b) provided that the matrimonial home vested in the trustee be sold, and the net proceeds be divided equally between the trustee and the wife. FAMILY LAW – APPEAL - Point of law – “Property” in s 4 of the definition of matrimonial cause is not confined to “net” property and thus, subject to s 90AE(3)(b), there is no legislative impediment to the making of property settlement orders where unsecured liabilities exceed the parties’ total equity in such property – The relevant provisions of Part VIII of the FLA which include s 75(2)(ha) do not require the exercise of discretion to afford any priority, or particular weight, to the interests of unsecured creditors, of the bankrupt, or the non-bankrupt spouse – Not established that the trial Judge erred in law or in the exercise of his discretion by failing to apply principles of bankruptcy law, namely the pari passu principle, to the distribution of the proceeds of the bankrupt’s property. FAMILY LAW – APPEAL - Findings of fact – Whether the trial Judge erred in findings of fact, including declining to find that the parties could never have acquired and/or retained the property if the husband had properly completed his income taxation returns, or that the wife was not complicit in the husband’s taxation indiscretions. FAMILY LAW – APPEAL - Exercise of discretion – Whether the trial Judge erred in the exercise of his discretion by failing to have regard, or adequate regard, to any relevant fact or circumstance, including the circumstances of the acquisition and maintenance of the property and whether the parties could have acquired or retained the property if the husband had properly completed his income taxation returns, and that the wife benefited from the income tax deductions – Whether the trial Judge erred in the exercise of his discretion by according excess weight to the wife’s lack of complicity in the husband’s actions – Whether the trial Judge erred in the exercise of discretion in his consideration of the husband’s actions by reference to Kowaliw “waste” – Whether the outcome determined by the trial Judge was outside the range of reasonable discretion – The trial Judge’s exercise of discretion miscarried by concluding that the husband should satisfy the debt to the ATO from his resources by relying solely upon the matters considered by him prior to his consideration of s 75(2)(ha) and/or by treating the primary tax burden as “waste” and/or by declining to make any adjustment in favour of the trustee by reference to unspecified “injustice and hardship” to the wife. Appeal allowed. |
| Family Law Act 1975 (Cth), s 4, s 75(2)(ha), s 79(1)(b), s 79(2) Allesch v Maunz (2000) 203 CLR 172 Biltoft and Biltoft (1995) FLC 92-614 Commissioner of Taxation & Worsnop and Anor [2009] FamCAFC 4 De Winter and De Winter (1979) FLC 90-605 Hickey and Hickey and the Attorney-General for the Commonwealth of Australia (Intervener) (2003) FLC 93-143 Johnson and Johnson [1999] FamCA 369 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 |
| APPELLANT: | TRUSTEE OF THE PROPERTY OF G LEMNOS, A BANKRUPT |
| FIRST RESPONDENT: | MRS LEMNOS |
| SECOND RESPONDENT: | MR LEMNOS |
| FILE NUMBER: | SYC | 2906 | of | 2007 |
| APPEAL NUMBER: | EA | 116 | of | 2007 |
| DATE DELIVERED: | 12 February 2009 |
| PLACE DELIVERED: | Parramatta |
| JUDGMENT OF: | COLEMAN, THACKRAY & RYAN JJ |
| HEARING DATE: | 3 September 2008 |
| LOWER COURT JURISDICTION: | Family Court of Australia |
| LOWER COURT JUDGMENT DATE: | 30 August 2007 |
| LOWER COURT MNC: | [2007] FamCA 1058 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Skinner and Mr Walsh |
| SOLICITOR FOR THE APPELLANT: | Church & Grace |
| COUNSEL FOR THE FIRST RESPONDENT: | Mr Whitford SC and Mr Millar |
| SOLICITOR FOR THE FIRST RESPONDENT: | Gayle Meredith & Associates |
Orders
That the appeal be allowed.
That within 28 days the parties file and serve submissions in relation to:
(a)the form of orders to be made consequent upon the appeal being allowed;
(b)whether the Full Court should re-exercise the trial Judge’s discretion or remit the matter to a single Judge for that purpose;
(c)the further evidence, if any, intended to be relied upon in the event that the Full Court re-exercises the trial Judge’s discretion;
(d)if the trial Judge’s discretion is to be re-exercised by a single Judge, whether such re-exercise should be by the trial Judge or another Judge; and
(e)the costs of the appeal and the re-exercise of the trial Judge’s discretion.
IT IS NOTED that publication of this judgment under the pseudonym Trustee of the Property of G Lemnos, a Bankrupt & Lemnos & Lemnos is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT SYDNEY |
Appeal Number: EA 116 of 2007
File Number: SYC 2906 of 2007
| TRUSTEE OF THE PROPERTY OF G LEMNOS, A BANKRUPT |
Appellant
And
| MRS LEMNOS |
First Respondent
And
| MR LEMNOS |
Second Respondent
REASONS FOR JUDGMENT
Coleman J
I have had the benefit of reading, in draft form, the judgment of Thackray and Ryan JJ. Whilst I agree with the orders their Honours propose, I do so for slightly different reasons which I set out hereunder.
Introduction
By Amended Notice of Appeal filed 11 April 2008 [the trustee] (“the trustee”) as trustee of the bankrupt estate of Mr Lemnos (“the husband”), appealed against orders made by Le Poer Trench J on 30 August 2007 in proceedings for settlement of property between Mrs Lemnos (“the wife”) and the trustee.
The trial Judge’s orders relevantly provided that property vested in the trustee be sold, and the net proceeds of sale after payment of selling expenses and the discharge of a mortgage over the property be divided equally between the trustee and the wife. In lieu of that order, the trustee sought that the trial Judge’s order be set aside and the wife’s application be dismissed or, in the alternative, that an order be made “for a lump sum provable in the bankrupt estate” of Mr Lemnos, the former husband of the wife.
The wife resisted the trustee’s appeal and sought to maintain the trial Judge’s orders.
Background
The husband and wife married in 1976 and separated in 2007.
The husband was aged 55 years and the wife 53 years at the date of the trial Judge’s orders.
The marriage produced four children, all of whom were over 18 years at the date of the parties’ separation.
In 1989 the husband purchased in his own name a property at W (“W property”) for $1 300 000 which was funded by bank borrowings. The wife was required to sign a guarantee for the financing of the acquisition. Another property which the parties had purchased in their joint names at B (“B property”) in 1981 was provided as part security for the acquisition of the property.
The parties’ earnings, the husband as a solicitor, and the wife through distributions from a family trust, the primary source of income of which was generated by the husband through his legal practice, were deposited into a joint account with the National Australia Bank (“the NAB”) from which loan repayments were made for the B and W properties.
Subsequent to its acquisition, W property was renovated, the husband drawing down approximately $1 000 000 from the bank which held security over W property and B property to fund the renovations. The parties occupied W property on completion of the renovations in 1991.
The B property, which the parties had previously occupied, was then rented and continued to be rented until its sale in 1994 for approximately $696 000, all of which sum was paid to the NAB to reduce the parties’ liabilities to that bank.
In 2000 the husband re-financed W property with the Arab Bank.
At the date of the trial Judge’s judgment, W property was estimated to be worth $4 5000 000 - $5 000 000 and was encumbered in favour of Arab Bank in the sum of approximately $2 415 000.
As a result of an investigation conducted by the Australian Taxation Office (“ATO”) in 2002, the husband was re-assessed for income tax for the years 1991 – 2002. During that period the husband had impermissibly claimed tax deductions of $3 396 333 with respect to W property and, to a lesser extent, B property.
The re-assessment of the husband’s taxation liability required him to pay a sum which was not less than $5 700 000 at the date of the hearing before the trial Judge. The ongoing accrual of interest meant that sum was probably greater by the date of the trial Judge’s Judgment.
The husband challenged the re-assessment of his taxation liability in the Federal Court. He withdrew his challenge during the course of the hearing in the Federal Court. The husband’s challenge was ill-conceived, with virtually no prospect of success. The costs of the husband’s unsuccessful challenge to the ATO’s re-assessment of his taxation liability increased his liability beyond the sum of $5 700 000. There was no suggestion that the wife was consulted with respect to the husband’s challenge in the Federal Court.
On the application of the ATO, a sequestration order was made against the husband on 17 November 2006.
At the date of the trial Judge’s judgment the husband was practising on his own account as a solicitor with the consent of the Law Society of New South Wales.
The parties separated on 3 July 2007.
The trial Judge’s Reasons for Judgment
Having recounted the background facts which have here been briefly recounted, the trial Judge recorded under the heading “Credit” that 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”. His Honour found the evidence of the husband “unreliable” in the respects which he identified. The appeal to this Court did not involve any challenges to the trial Judge’s conclusions with respect to the credibility of the husband or the wife.
The trial Judge referred to “the balance sheet”, noting the value of W property and the secured encumbrance over it. The equity in W property was approximately $2 - 2.5 million. Post separation the wife purchased a property registered in her sole name using borrowed funds and in which there was no equity. Otherwise she had identified personalty of modest value and drove a motor vehicle which formed part of the husband’s bankrupt estate. The trial Judge identified that the husband’s bankrupt estate had proved debts of about $6,000,000.
His Honour then considered the effect of the 2005 amendments to the Bankruptcy Act 1966 (Cth) (“the BA”) and the Family Law Act 1975 (Cth) (“the FLA”) (“the 2005 amendments”). In that context, reference was made to the Second Reading Speech in the House of Representatives. His Honour concluded that:
44.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.
A number of sections of the BA were then considered.His Honour concluded in that regard:
50.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.
His Honour then considered the topics of “Alteration of property interests: s 79 of the FLA”, “Expansion of definition of property under FLA to include vested bankruptcy property”, “Vesting property in trustee subject to orders order under Part VIII of FLA” and “General powers of the Family Court”.
The trial Judge then had regard to the “impact or [sic] 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)”.
After referring to a number of “Relevant provisions of Bankruptcy Act”, the trial Judge detailed his “Conclusion as to the manner in which the subject case should be approached”.
His Honour concluded that the 2005 amendments to which he had referred required him 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”. He also concluded that the trustee was “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”.
Reference was made to the submission on behalf of the trustee 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 effect of that being that “The wife would then receive the same proportion of her debt as the other creditors”. The trustee had submitted that if such an approach were adopted the “provisions of section 75(2)(ha) would be satisfied and the result would be just and equitable”. His Honour accepted that such an outcome “may be a possible result in a particular case”.
The trial Judge then considered “The contributions of the parties”. He there had regard to the 30 year duration of the marriage, the financial contributions of the husband and particularly the non-financial contributions of the wife.
So far as W property was concerned, the trial Judge found that the wife had 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” and that “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”.
For reasons which he detailed, the trial Judge accepted that “the contributions of the parties should be assessed as equal at the date of the trial”.
The trial Judge then proceeded to consider the relevant factors under s 75(2). His Honour referred to the wife’s submissions and evidence in relation to those factors in paragraphs 73 to 76 of his judgment. Reference to paragraph 91 of his judgment establishes that his Honour accepted the submissions and evidence. His Honour found:
·The wife’s income earning capacity was “significantly limited by her lack of experience over the years of the marriage” and the medical evidence served to “further cloud” her ability to work;
·The wife “has no real skills to market”, whilst the husband is a very experienced property lawyer who has been permitted to continue practising notwithstanding his bankruptcy (albeit he does not have “a great deal of incentive” to earn large amounts during his bankruptcy);
·Although the children of the marriage are adults, they are “still dependant [sic] to some degree upon their parents” and some of the burden of the children will continue to fall on the wife;
·The wife “contributed substantially to the success of her husband” in that her care of the family freed the husband to pursue his career and study.
His Honour next considered the wife’s contention 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”.
His Honour described the wife’s contention in the following terms:
78. 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.
Reference was then made to the evidence relied upon by the wife, which included the fact that the husband for twelve years claimed outgoings on the W property, notwithstanding that no income was “sought to be generated by the rental of the property” during that period, the property having been “occupied as the family home from 1991 to current date”.
His Honour referred to the husband’s concession that he “knew and understood the provisions of section 51 of the Income Tax Assessment Act”. He also referred to the husband’s concession that he made “mistakes in the tax returns and that he claimed sums wrongly”, and to the husband’s failure to “exercise sufficient care in the preparation of his Tax returns” from 1991 until 2002. The husband’s concession that he had been “reckless in failing to ensure that his Tax Return contained his correct residential address” was also recorded.
The trial Judge observed that he was unable to “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”.
His Honour ultimately concluded:
88. 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.
In reliance upon his findings, the trial Judge concluded that the husband should satisfy his debt to the ATO from his own resources.
The trial Judge went on to observe that the effect of his finding that the husband should satisfy the debt to the ATO from his own resources was that there was likely to be a “very substantial deficit” which would leave the creditors “out of pocket” (even after allowing for the application of the husband’s income during his bankruptcy).
The trial Judge then set out his conclusions in relation to the matters arising under s 75(2) as follows:
91.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”
92.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.
93.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.
Under the heading “Just and Equitable”, the trial Judge referred to the submission on behalf of the trustee that “the husband had received the benefit of about $3,000,000 as a result of the [tax] 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 [W] property”.
His Honour was not satisfied that the trustee had “established that case” and said:
96....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.
Whilst his Honour recorded that he had “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”, for reasons which he provided, the trial Judge concluded that, in the circumstances of the case before him the wife would nevertheless retain her 50 per cent contribution based entitlement.
The nature and effect of the 2005 amendments to the FLA and the BA
Before considering the specific issues raised by Counsel for the parties pursuant to the grounds of appeal, having regard to the manner in which the trustee’s appeal was presented, and resisted on behalf of the wife, it is hopefully constructive to give some general consideration to the effect of the 2005 amendments to the FLA and the BA. Whilst Counsel for the parties disagreed as to their operation, is was common ground that the provisions of the two statutes were intended to operate “harmoniously”.
Section 79(1)(b) of the FLA provides:
79 Alteration of property interests
(1)In property settlement proceedings, the court may make such order as it considers appropriate:
…
(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.
Section 75(2)(ha) of the FLA provides:
75Matters to be taken into consideration in relation to spousal maintenance
(1)In exercising jurisdiction under section 74, the court shall take into account only the matters referred to in subsection (2).
(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 58 of the BA sets out the “general rule” for vesting of property upon bankruptcy. It provides:
58 Vesting of property upon bankruptcy - general rule
(1) Subject to this Act, where a debtor becomes a bankrupt:
(a)the property of the bankrupt, not being after‑acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b)after‑acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
Section 115 of the BA sets out the time of commencement of bankruptcy. It is unnecessary to refer further to it, or set out its terms for present purposes.
Section 116(1) of the BA sets out the property that is divisible amongst the creditors of the bankrupt. Section 116(2)(q) provides a specific exclusion for
(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.
Both learned Counsel referred the Court to portions of the Second Reading Speech in the Commonwealth Parliament of the Bill which, when enacted, gave rise to the current provisions of the FLA and the BA. The trial Judge also referred to portions of the speech. Subparagraph 15AB(2)(f) of the Acts Interpretation Act 1901 permits reference to the Attorney General’s Second Reading Speech either to confirm that the meaning of the provision under consideration is the ordinary meaning conveyed by the text or alternatively to determine the meaning if the provision is ambiguous or obscure or if the ordinary meaning would lead to a manifestly absurd or unreasonable result. It was not suggested that the trial Judge erred in making reference to the Second Reading Speech in seeking to resolve the present controversy. The critical portions of the Attorney General’s Second Reading Speech were as follows:
In particular, this bill addresses the interaction of bankruptcy law and family law, and implements key recommendations of the Joint taskforce report on the use of bankruptcy and family law schemes to avoid payment of tax (the task force).
The most significant amendments contained in this bill are designed to harmonise the law that applies to the division of assets upon insolvency and upon the breakdown of a marriage and, in particular, to the interaction between the Family Law Act 1975 and the Bankruptcy Act 1966. There have been longstanding concerns about the uncertainty facing both bankruptcy trustees and non-bankrupt spouses when these two areas of law operate concurrently.
This bill will make comprehensive changes, some of which affect the Bankruptcy Act 1966, but are mainly focused on powers and procedures in relation to family property and financial arrangements under the Family Law Act 1975.
Schedule 1 contains amendments designed to clarify the rights of the bankruptcy trustee and the non-bankrupt spouse, and to offer certainty as to the competing claims of creditors and the non-bankrupt spouse.
The amendments in schedule 1 will 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.
…
The government is committed to enhancing and making the family law and bankruptcy systems more accessible, efficient and effective, and this bill is part of the government's commitment to that goal.
It is also useful to set out the sections of Dr (now Federal Magistrate) Tom Altobelli’s commentary to which the trial Judge in his judgment made reference, which Counsel for the trustee challenged as being unsound:
…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).
and:
… 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. ([40-750] Determining priorities: creditors or family of the bankrupt?” in Marriage and Bankruptcy, CCH Family Law and Practice (accessed online 27/07/2007)).
I respectfully disagree with Dr Altobelli’s proposition that 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”. With respect to Dr Altobelli, the failure of the legislature to provide that “creditors’ interests have any priority” does not mean that a legislative intention to prefer “the needs of children and spouses” over those of creditors can be inferred.
I also respectfully do not accept as a statement of general principle Dr Altobelli’s assertion that “to equate the claims and needs of the bankrupt’s family to the position of unsecured creditors is simply illogical”. In so saying, I do not however disagree with the proposition that, in a proper exercise of discretion, unsecured creditors may be disadvantaged by comparison with a bankrupt’s children and spouse.Nor do I disagree with the proposition that the converse may occur.
Whilst Dr Altobelli was undoubtedly correct in suggesting that many unsecured creditors “could have protected themselves against the consequences of being unsecured”, that was not so in the present case. The distinction between the two factual situations in my view highlights the difficulty in making statements of principle in a vacuum. As is clear, each case turns on its own facts and circumstances. The findings in a particular case will potentially determine whether there is, or ought to be, property with respect to which an order could, or should, be made. Those findings will also, often decisively, impact upon the determination of what order should be made.
No part of the appeal to this Court involves any challenge to the constitutional validity of the 2005 amendments to either the FLA or the BA.As such, I interpret those provisions on the basis that they are valid legislative enactments.
In my view, by the express wording of the amendments to the FLA and the BA, the legislature revealed an intention that the rights of unsecured creditors of a bankrupt spouse to a share of the bankrupt’s estate were no longer to be automatically preferred to the property settlement rights of the non-bankrupt spouse. To the extent that support for this construction of the legislation is required, the Second Reading Speech provides it. The more vexing question is how such rights are to be regarded.
It was conceded by Counsel for the trustee that, if there was “property” in respect of which a property settlement order could be made, determination of the rights of the non-bankrupt spouse should proceed by reference to the relevant provisions of Part VIII of the FLA which include s 75(2)(ha). Nothing to which the Court has been referred suggests that the exercise of discretion requires that the interests of unsecured creditors, of the bankrupt, or the non-bankrupt spouse, be afforded any particular weight, or approached in any particular fashion. That is unsurprising given the intent of the 2005 amendments as the legislation itself reveals, and the Second Reading Speech confirms.
In my view, it is clear that Parliament intended by the 2005 amendments to change bankruptcy and family laws so as to avoid the situation where a non-bankrupt spouse could only make a s 79 claim against non vested property and whatever other property might remain after the completion of the bankruptcy. As was fairly conceded by Counsel for the trustee, the preferred position of unsecured creditors of the bankrupt spouse was removed by the 2005 amendments (the preferred position of the ATO having already been removed by the Insolvency (Tax Priorities) Legislation Amendment Act 1993). Consistent with that intention, property to which the non‑bankrupt spouse was determined to be entitled pursuant to the provisions of the FLA no longer vested in the trustee in bankruptcy for the benefit of creditors of the bankrupt’s estate.
As I have suggested, whilst the 2005 legislative amendments removed the priority previously enjoyed by unsecured creditors of the bankrupt spouse over the non-bankrupt spouse’s claim for s 79 relief, I do not accept that the legislation established an effective priority in favour of the non-bankrupt spouse. The legislation does not generally evince such an intention and the provisions of s 75(2)(ha) are inconsistent with any such notion.
On a proper construction of the legislation, I conclude that the reconciliation of the conflicting rights of unsecured creditors of the bankrupt and the rights of the bankrupt’s spouse involves the exercise of discretion. That discretion is clearly exercised by reference to the facts as found, and the relevant provisions of the FLA.
The Grounds of Appeal
Albeit not necessarily by specific reference to the Grounds of Appeal, Counsel for each of the parties filed comprehensive outlines of the arguments presented on behalf of their respective clients which were amplified by oral submissions on the hearing of the appeal.
Counsel for the trustee submitted at the commencement of the hearing of the appeal that the “most critical” of the 19 grounds contained in the trustee’s Amended Notice of Appeal was Ground 15 which ground “latches onto” Grounds 17 and 18.
Those grounds provided:
15.His Honour should have considered all relevant circumstances and factors and made orders, having regard to the bankruptcy of the Second Respondent the effect of which was to treat the First Respondent and the creditors of the Second Respondent equally.
17. His Honour erred in failing to follow the procedure described in Biltoft and Biltoft (1995) FLC 92-614 for identification of the property of the parties, their assets and financial resources net of their liabilities.
18.Had his Honour correctly taken into account the liabilities of the Second Respondent there would have been no property of the Second Respondent available for the alteration of property interests pursuant to s79(1).
Without being critical, for the appeal raises issues which are not without complexity, these, and some other challenges agitated before the Court, do not necessarily or readily permit identification of discrete issues of principle or discretion. With all due respect to Counsel for the trustee, I discern that Ground 15 articulates a challenge to the trial Judge’s exercise of discretion whilst Grounds 17 and 18 are directed to what might be termed the threshold issue, namely whether there was, in the circumstances of this case, “property” capable of enlivening the jurisdiction to make orders under Part VIII of the FLA. In the reasons which follow, I have not necessarily followed the path by which Counsel for the parties agitated the various issues which arise for determination in the appeal. In the hope that my reasons are thereby more readily able to be understood, I have taken the liberty of dealing with grounds, or groups of grounds, by reference to what I perceive to be the broader issues raised by them.
The Threshold Issue: Whether There Was Any Property To Be Divided
The primary submission made on behalf of the trustee in support of Grounds 17 and 18 focussed on the “four step process” referred to by the Full Court in Hickey and Hickey and the Attorney-General for the Commonwealth of Australia (Intervener) (2003) FLC 93‑143. It was effectively submitted on behalf of the trustee that the case should have terminated at the conclusion of the first step because the trial Judge should have concluded that there was no property available with respect to which orders for settlement of property could be made. If the challenges embodied in Ground 17 or 18 succeeded, that would be the end of the appeal. If, however, those challenges failed, Ground 15 would fall for consideration, since it is directed more to how the trial Judge exercised his powers under Part VIII rather than to whether or not jurisdiction to exercise such powers had been enlivened.
Counsel for the trustee suggested that, had this case been decided one day prior to the making of the sequestration order with respect to the husband’s estate, and the “process followed”, there would undoubtedly have been a “nil result for the wife”. It was thus submitted that it would be extraordinary if the wife’s rights could have been enhanced if, as occurred in this case, a sequestration order was made against the husband prior to the case being determined. It was submitted that the legislature could be inferred to have intended no such consequence and that, as a matter of statutory construction, the legislation would not permit such an outcome.
Counsel for the trustee referred the Court in some detail to the history of the December 2005 amendments to the BA and the FLA. Whilst such explanation was instructive, I perceive that the issues which must be determined in this appeal ultimately turn upon the construction of the statutory provisions themselves in the light of a number of relevant provisions of the Acts Interpretation Act 1901.
I record hereunder the submissions made by Counsel for the trustee in relation to the December 2005 amendments and their claimed impact in the present matter.
13.Amendments to the FLA and the BA made by the Amendment Act on 18 September 2005 permitted the first respondent to bring an application under s.79 of the FLA notwithstanding that the property had vested in the appellant as trustee of the property of the second respondent.
14.The origin of the changes brought about by the Amendment Act was to give effect to key recommendations contained in the Joint Taskforce Report on the Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax (2002). The intent of the Joint Taskforce was to overcome the use of FLA proceedings in the avoidance of tax.
…
17.The only relevant consequence of the amendments which introduced FLA s. 79(l)(b) was to remove the technical result, which the vesting of property otherwise produced, namely that vested property would not be susceptible to an order under FLA s. 79. The Court remains able (and ought) to apply the usual balance sheet approach to the identification of the property of the parties to the marriage notwithstanding the intervention of bankruptcy and the vesting of property.
Counsel for the trustee submitted that application of what he called “the usual balance sheet approach” would have involved determining the assets of the parties, as his Honour did, then deducting the liabilities of the parties, which included the creditors of the husband’s bankrupt estate. Such an approach would have revealed a substantial excess of liabilities over assets, leaving no “property” of the parties to the marriage or either of them, and thus nothing with respect to which any order for settlement of property could be made.
As Counsel for the trustee confirmed, if this approach were correct, the practical position with respect to the claims of a non-bankrupt spouse would be substantially unaltered from the position which applied prior to the 2005 amendments. As is not in doubt, prior to the 2005 amendments, a non-bankrupt spouse such as the wife in this case, wishing to pursue a s 79 claim against her bankrupt spouse, could only have her application for settlement of property adjourned pending the completion of the bankrupt spouse’s bankruptcy and, if a surplus of assets resulted upon completion of the bankruptcy, seek orders with respect to such assets or out of other property of the parties which might then exist. Reed and Reed; Grellman (Intervenor) (1990) FLC 92-105.
In response to the Court’s enquiry, Counsel for the trustee submitted that, in three types of circumstances, the 2005 amendments did change the position from that which applied prior to the enactment of the amendments. In all other respects the position was asserted to have been unchanged.
The first of those situations concerned the “doctrine of exoneration”, which Counsel for the trustee described in the following terms:
An example of how that doctrine operates is if, for example, a jointly owned property is mortgaged jointly, in other words, security has taken over the entire property, but the proceeds of raised money or borrowed moneys is used by one spouse for the purposes of that spouse only…
What happens then is that the doctrine of exoneration provides that the repayment of the loan is made out of the spouse’s interest responsible for borrowing those funds. [Transcript of proceedings, 3 September 2008, page 6, lines 41-47].
Counsel for the trustee referred the Court to Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700 which Counsel described as “an example of where vested property although vested would result in a non-bankrupt spouse receiving priority by operation of that doctrine in the application of section 79 principles.” [Transcript of proceedings, 3 September 2008, page 7, lines 14-17].
Counsel for the trustee commented that “it doesn’t occur a great deal in the administration of bankruptcy. The first reported case of which I am aware in which it arose in recent times was as late as 1979.” [Transcript of proceedings, 3 September 2008, page 7, lines 2-4]. Fairly, Counsel for the trustee did not suggest that the doctrine had potential application in this case.
The second situation was where general discretionary powers might arise. Counsel described such situations as follows:
[B]ecause of the effect of section 79(1)(b) there would be in this – well, in the Family Court, the opportunity to deal with an application under section 79 whereby an asset otherwise vested namely the one half interest in a matrimonial home to take an example could be traded off in respect of the interest of the non-bankrupt spouse in lieu of other assets and a specific order could be made that the trustee transfer to the non-bankrupt spouse his interest or her interest in the matrimonial home. [Transcript of proceedings, 3 September 2008, page 7, lines 39-46].
It was conceded on behalf of the trustee that:
Now, clearly I can see and recognise that I am really not submitting much more than what as a matter of discretion could be dealt with by a trustee informally with a non-bankrupt spouse, however I can also foresee examples where a trustee would seek that protection for orders under section 79 in circumstances where there were hostile creditors who took a view that for whatever reason they didn’t wish to see that result. They wished to see a scorched earth result where all assets were sold. [Transcript of proceedings, 3 September 2008, pages 7-8].
By way of further example, Counsel for the trustee suggested:
I also can foresee an example where this section has work to do where, for example, there is a jointly owned property which otherwise on the face of it is vested 50 per cent to each party, and there are circumstances where the non-bankrupt spouse has made improvements to the property and has generally expended moneys over and above what would normally be expected on a jointly [owned] property.
In other words, even though on the face of it one half of the property is vested in the trustee there is a claim by a non-bankrupt spouse for a greater division of that property. [Transcript of proceedings, 3 September 2008, page 8, lines 11-20].
Counsel for the trustee added “there are circumstances where by reason of negotiation at conciliation stage such adjustments can be made.” [Transcript of proceedings, 3 September 2008, page 8, lines 22-23]. Counsel for the trustee did not suggest that the second type of these circumstances in which s 79(1) could be enlivened arose in this case.
The third situation was where the rule in Re Condon; Ex parte James (1874) 9 LR Ch App 609; [1874-80] All ER Rep 388 might be applied. Counsel for the trustee described this “general equitable principle” as applying as “a fallback rule of equity… if all else fails and it is otherwise inequitable for a trustee to assert his rights”. [Transcript of proceedings, 3 September 2008, page 8, lines 45-48].
Counsel for the trustee also referred the Court to Re Sabri; Ex parte Brien v Sabri (1996) 137 FLR 165; (1997) FLC 92-732 in which the rule was applied in this Court.
In summary, Counsel for the trustee submitted:
Both the doctrine of exoneration and the rule in ex parte James are both [sic] long-standing rules of equity which might – and the principles in those cases which might otherwise have been applied by a Court exercising jurisdiction in respect of property vested in a trustee the legislative amendment by the inclusion of section 79(1)(b) gives … a codified position to allow those principles to be applied. [Transcript of proceedings, 3 September 2008, page 9, lines 5-10].
and:
[W]e do not assert that by application of the four stage process there will always be a result that a non-bankrupt spouse gets nothing. That is the furtherest [sic] thing from our submission. [Transcript of proceedings, 3 September 2008, page 9, lines 12-15].
None of the circumstances outlined by him having application to the present case, it was submitted by Counsel for the trustee that the trial Judge had no option than to conclude that there was no property of the parties to the marriage or either of them and thus no s 79 orders could be made. If that contention be correct, in the context of the present case the 2005 amendments to the FLA and the BA will have changed nothing.
By way of alternate submission, Counsel for the trustee asserted that the s 79(2) requirement that an order be “just and equitable” is “where we pick up the proposition that where you have got a bankruptcy what is just and equitable is an application of the rules pari passu”. [Transcript of proceedings, 3 September 2008, pages 10-11].
As to the operation of s 75(2)(ha) Counsel for the trustee contended:
[T]he inclusion of that subsection really doesn’t impact in any real way on the process that I have identified in the four step process, it is more if I may say so with respect when we’re talking about a creditor recovering a debt in a sense that is pre-bankruptcy… If it is included to have some impact after the vested property is included then it is not a particularly helpful piece of amendment or phraseology. [Transcript of proceedings, 3 September 2008, page 11, lines 9-14].
In his written outline of argument, Counsel for the trustee, having referred critically to extra curial writings, submitted that:
25. By virtue of its subsection (b), FLA s.79(1) applies concurrently and jointly with the provisions of BA. For that reason the section must be interpreted in a way that gives, as far as possible, effect to the purposes of both Acts. The process of interpretation must always begin by examining the context of the provision that is being interpreted.
The decision of the High Court in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 per McHugh, Gummow, Kirby & Hayne JJ at 381-2 was submitted, correctly in my view, to support that proposition. Their Honours there said under the heading “Conflicting statutory provisions should be reconciled so far as is possible”:
69. The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined “by reference to the language of the instrument viewed as a whole”. In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that “the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed”. Thus, the process of construction must always begin by examining the context of the provision that is being construed.
70. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflicting provisions will often require the court “to determine which is the leading provision and which the subordinate provision, and which must give way to the other”. Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.
71. Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision. In Commonwealth v Baume Griffith CJ cited R v Berchet to support the proposition that it was “a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent”. (footnotes omitted)
It was then submitted on behalf of the trustee that:
26.So far as concerns the historical context of FLA s.79(1)(b) the position was that prior to its enactment the creditors in bankruptcy had effective priority over spouses. Once a sequestration order was made against a party to a marriage, his or her property vested in the trustee in bankruptcy. The result was that the vested property ceased, automatically and irretrievably, to be available to claims by the spouse or susceptible to orders of this Court. Some saw this as harsh and the insertion of subsection (1)(b) may been [sic] seen as a measure to alleviate this perceived harshness. The result of the insertion of subsection (1)(b) is that the interests of creditors do not automatically or irretrievably trump the interests of a spouse and children. Rather, the FLA now requires the Court to balance the interests of family members and of creditors in the exercise of its discretion. (Our emphasis) (footnotes omitted)
There seems little doubt that this submission involves a challenge to the trial Judge’s exercise of discretion. Whilst, taken literally, it might be thought to contain a concession as to the power to make an order in favour of a spouse out of the property of a bankrupt spouse, I do not proceed on the basis that the submission was necessarily so intended, but rather that it represented a further and alternate proposition to those agitated earlier in the terms I have recorded.
Finally in this context it was submitted that:
27.There is no reason to suppose that its [sic] was the intention of the legislature that FLA s.79(1)(b) should operate to do more than remove what was the previous automatic and irretrievable consequence of bankruptcy, or to operate in a manner that prefers the interests of a spouse or children over the interests of creditors (or, indeed, visa versa).
As did the trial Judge, Counsel for the trustee relied upon the Second Reading Speech, albeit with a somewhat different emphasis to that placed upon it by the trial Judge, or by Senior Counsel for the wife. In the passage upon which Counsel for the trustee relied, the Attorney General 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.” (Counsel’s emphasis).
With respect to Grounds 17 and 18, it was submitted on behalf of the wife:
33. In determining applications pursuant to s79 of the Act the Court will usually identify and value the property and liabilities of the parties together with their superannuation interests and then divide the net property obtained by reference to percentage assessments resulting from an evaluation of contributions and other factors referred to in s79(4)(a)-(g) of the Act. However, in Biltoft v Biltoft (1995) FLC 92‑614 to which reference is made by the appellant in ground 17, this approach is described at p 82,124 as “a general practice”. In Hickey v Hickey and Attorney General for the Commonwealth of Australia (Intervener) (2003) FLC 93.143 at para 39, this approach is referred to as “a preferred approach” to determining applications pursuant to s79 of the Act.
34.In Davut v Raif (1994) FLC 92-503 reference was made to Ferraro v Ferraro (1993) FLC 92-335 where the approach referred to above was referred to as “the approach normally to be taken to the exercise of the discretion in s79 proceedings”.
35.In Biltoft at p82,124, the Full Court said:
“Where the assets are not encumbered and moneys are owed by the parties or one of them to unsecured creditors, the Court ascertains the value of their property by deducting from the value of their assets the value of their total liabilities, including the unsecured liabilities”.
36.The Court then referred to Prince v Prince; General Credits Australia Ltd (Intervener); Attorney General for the State of Queensland (Intervening); Attorney General for the Commonwealth of Australia (Intervening) (1984) FLC 91.501 where Evatt CJ referred at p79,076 to the various options open to the Court when considering liabilities. After considering Prince’s case the Court said at p82,128:
“Thus, although there is a general rule as set out in Prince v Prince (supra) and Rowell v Rowell (supra), the rule is not absolute, it is not prescribed by the statute and there are a number of well recognised exceptions to some of which we have already referred. There is no requirement that the rights of an unsecured creditor or a claim by a third party must be considered and dealt with prior to the Court making an order under s79, nor is there a rule of priority as between a creditor claimant and a spouse. Those rights, however, cannot be ignored. They must be recognised, taken into account and balanced against the rights of the spouse. That was the approach adopted by the trial judge”.
37.In Cavanaugh v Thrum, No EA91 of 2001 (Full Court, unreported, 4 April 2002), the Court said at paragraph 57:
“…s79 does not prescribe a set of rigid legislative strictures on the way a trial judge has to go about the task of evaluating what an appropriate and just and equitable order should be. Providing proper attention is given to the matters set out in s79(4) there may be many ways to explain how the result reached is appropriate.
58. The High Court’s decision in Norbis further illustrates the point that there are many ways open to a trial judge to reach an appropriate conclusion that no one way is required”.
38.Accordingly, his Honour was not obliged to simply offset the liabilities against the property and find that there was no net property for division under s79 with the result that the wife should receive nothing. His Honour considered the effect of the amendments in detail at AB1:28-36 and concluded that the proper approach in a case such as this was to treat all of the vested property as available for distribution to the wife if that was an appropriate outcome having regard to the matters referred to in s79. It is submitted that his Honour correctly approached the exercise of the discretion under s79 in the circumstances of this case where the claims of the creditors substantially exceeded the value of the vested property.
I accept that the position is essentially as submitted by Senior Counsel for the wife in relation to the “general practice” or “preferred approach” emerging from the decisions to which he, and Counsel for the trustee, referred. As is apparent, these approaches or practices do not find expression in any statutory provisions. Clearly, they must accordingly yield to express statutory provisions.
Whilst there may be cases where, on the facts, the Court may conclude that, there being no “net” property of the parties to the marriage or either of them, no order for alteration of interest in property could, or should be made, I do not accept that the reference to “property” in s 4 of the definition of matrimonial cause is confined to “net” property. Although not so expressed, that is the effect of Counsel for the trustee’s primary submission.
The relevant provision of s 4 provides:
“matrimonial cause” means:
…
(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 …
There is no legislative provision which expressly or impliedly constrains the Court from making orders with respect to “property”. Commonsense and experience suggest that there will be many cases in which alterations to parties’ interests in property will be appropriate or necessary notwithstanding that the parties have unsecured liabilities which may exceed the parties’ total equity in such property. Subject to s 90AE(3)(b), I perceive there to be no legislative impediment to the making of property settlement orders in such circumstances.
Accordingly, in cases where there is “property” of the parties to the marriage or either of them, the effect of the 2005 amendments is that the Court has jurisdiction to make orders which have an adverse impact upon unsecured creditors. In this regard the term “property” includes property vested in the trustee of a bankrupt spouse.
Although not so expressed, implicit in the submission of Counsel for the trustee that there could be no property with respect to which an order could be made in favour of the wife in this case is the reality that, if correct, such approach potentially and significantly enhances the position of an unsecured creditor. Rather than having to "take its chances" on being paid, the unsecured creditor would be paid after the entitlements to secured creditors were satisfied, and without regard to the rights of the non-bankrupt spouse. That would be a fundamental change in the law. The fortuitous breakdown of the marriage of the debtor would, on that scenario, result in the unsecured creditor potentially being able to recover more than would have been possible had the debtor remained married. There is no apparent legislative foundation for such propositions. As Counsel for the trustee fairly outlined to this Court, by the Insolvency (Tax Priorities) Legislation Amendment Act 1993 the priority previously enjoyed by the ATO has been removed and it now ranks equally alongside other unsecured creditors.
It follows that I agree with the alternative proposition made on behalf of the trustee which I have earlier set out, namely that the effect of the insertion of section 79(1)(b) in the FLA is that the interests of unsecured creditors do not automatically “trump” the interests of the non-bankrupt spouse and that the legislation now requires the Court to balance their competing claims in the exercise of the wide discretion conferred upon the Court by s 79.
Accordingly, I am unable to accept the contention that the trial Judge was obliged to conclude at the first stage or “step” of the “process” which he was undertaking that there could be no property with respect to which any order could be made.
I conclude that it was open to his Honour to make the orders he did insofar as there was no statutory bar to his doing so. It remains to consider however whether, in the exercise of discretion, it was reasonably open to his Honour, on the facts as found, to make the orders he did.
Challenges to Findings of Fact
A number of grounds of appeal expressly or impliedly assert that the trial Judge’s exercise of discretion was vitiated by its reliance upon erroneous findings of fact. As is self-evident, the exercise of discretion by the trial Judge was in reliance upon the facts of the case as he found them. It is thus appropriate to consider the trustee’s challenges to the trial Judge’s findings of fact before considering challenges to the exercise of discretion, as success or failure with those challenges may impact upon the broader challenges to the trial Judge’s exercise of discretion.
The challenges to the trial Judge’s decision directly or indirectly involving findings of fact are conveyed by Grounds 2, 3, 4, 5, 8 and 9. Those grounds provided:
2.His Honour erred in failing (at para 96) to recognise that the Appellant’s case included the submission that the property known as [W property] would not have been available to be claimed by the First Respondent had the Second Respondent not had funds available to him from savings generated by wrongful claims for tax deductions and so failed to give adequate consideration to that submission.
3.His Honour’s finding (at para 96) that the evidence was not clear as to the savings made by the Second Respondent as a consequence of his wrongful claims for tax deductions could not be reasonably arrived at in circumstances where the undisputed evidence was that such savings were $3,396,333 and is inconsistent with his Honour’s apparent earlier finding (at para 29).
4.His Honour’s finding (at para 96) that the Appellant had failed to establish that the Second Respondent would not have had the resources to acquire and renovate the [W] property without the savings made by the Second Respondent as a consequence of his wrongful claims for tax deductions could not reasonably be arrived at upon the evidence.
5.His Honour’s finding (at para 96) that there were “a number of possible outcomes for the Second Respondent which may not have meant the parties would not have been able to acquire the ([W]) property and renovate it” could not reasonably be arrived at on the evidence.
8.His Honour should have found that the [W] property would not have been able to be acquired, renovated, maintained and retained by the Second Respondent, and so would not have been available to the First Respondent to claim, had the Second Respondent not had funds available to him from savings generated by wrongful claims for tax deductions.
9.His Honour erred in so far as he found (at para 96), in the alternative to the findings referred to in paragraphs 2, 3, 4 and 5 above, that an absence of complicity on the part of the First Respondent in the Second Respondent’s wrongful claims for tax deductions negated any significance which might otherwise have attached to the circumstance that the Second Respondent would not have been able to acquire, renovate, maintain and retain the [W] property without the savings made by him as a consequence of his wrongful claims for tax deductions.
The crux of a number of the trustee’s challenges to the findings of fact is that the trial Judge erred in declining to find that the parties could never have acquired and/or retained W property if the husband had properly completed his income taxation returns between 1991 and 2002. It was submitted that his Honour’s exercise of discretion miscarried as it was conducted in the context of this error. (De Winter v De Winter (1979) FLC 90-605). If this challenge has merit, the trial Judge’s order could not stand.
Counsel for the trustee referred to the circumstances surrounding “the acquisition by the second respondent of the [W] Property and the manner in which he funded the costs associated with acquiring and holding it.”
It was thus submitted on behalf of the trustee that:
40.The only source of money used in the acquisition of the [W] property was the second respondent (by borrowing). Any contributions made by the first respondent to the acquisition of the property were of an indirect financial nature. (footnotes omitted)
and that:
41.It is important in considering the facts of this case to note that the husband and wife made a business decision not to hold the [W] property in joint names, with the consequence that the first respondent can only obtain a share of it in accordance with a proper exercise of the Court’s discretion pursuant to FLA s.79(1). There is nothing to suggest that the second respondent acted fraudulently or deceitfully towards her in his conduct of their business affairs. The evidence of the first respondent was that she simply left such matters to the second respondent. The position of the first respondent in regard to the process of decision- making does not assist her. (footnotes omitted)
Counsel for the trustee then set out the husband’s account of the relevant factual circumstances:
42.The effect of the second respondent’s evidence is that his financial position in 1990 was parlous. By that time he was unable to meet his obligations to the NAB as a result of an increase in building costs of renovations then being undertaken to the [W] property. Between October 1991 and November 1994 the first and second respondents were attempting to sell [B property] to reduce the NAB debt. [B property] was sold for $696,000 on 20 December 1994. All of the sale proceeds went to the NAB in reduction of its mortgage over that property.
43.By 1994 the borrowings of the first and second respondents had increased to $2,692,380.
44.The second respondent asserted that as a consequence of a valuation obtained in September 1990 to the effect that sold in an unfinished state the property would realize $1,450,000, he changed his mind about selling the property for profit and intended thereafter to use it as a family home. (footnotes omitted)
It was accordingly submitted on behalf of the trustee that:
45.It is an inescapable inference that had the second respondent not elected to make impermissible claims for tax deductions and thereby obtain a cash flow benefit by so doing, the borrowings against the property could not have been serviced from his after tax income. Indeed, interest alone would have more than exhausted the second respondent’s after tax income had it been calculated without reference to the deductions he improperly claimed. The result would have been a forced sale of the [W] property (and the [B] property) regardless of the wishes of the first and second respondent.
46.Were it not for the impermissible manner in which the second respondent claimed deductions relating to the cost of acquiring and maintaining the [W] property, the property would have been sold at a time when there was no available net equity in it. The debt to the DCT would not have arisen and the property (including the capital gain of some $3.15 million which has accrued since that time) would not be available to meet a claim made by the first respondent. (footnotes omitted)
Senior Counsel for the wife made submissions in response to grounds 2, 3, 4, 5, 8, 9, 12 and 16 globally. Senior Counsel submitted that:
7.… Contrary to the assertion in ground 2 his Honour recognised the case being put on behalf of the appellant in this regard and dealt with it in the reasons given in paragraph 96.
and that:
8.In answer to the submissions made for the appellant on this issue his Honour explained at AB4:724: 1-30, why he rejected that submission.
Relevantly for the purpose of this group of complaints, and with particular relevance to Ground 8, Senior Counsel for the wife submitted:
6.The husband purchased the [W] property in 1989 for $1.3m. This was funded by borrowings from the National Australia Bank. The jointly owned home [B property] was one security for those borrowings: AB1:25, para 19. Loan repayments were made to the Bank from a joint bank account into which the earnings of both parties were deposited: AB1:25, para 20. Between 1989 and 1991 the property at [W] was renovated. This was funded by a further loan of $lm from the National Australia Bank: AB1:26, para 22. In 1994 the first and second respondents sold the [B property] for $696,000 and paid all of the net proceeds of sale to the National Australia Bank to reduce their debt to the Bank: AB1:26, para 27. In 2000 the loan on the [W] property was refinanced with the Arab Bank: AB 1:26, para 28. The amount borrowed from the Arab Bank was $2,350,000: AB1:76, para 26. Repayments in relation to this loan were made from the joint bank account of the first and second respondents into which both of their incomes were deposited: AB1:76, para 26.
It was also submitted on behalf of the wife in this context:
7.It was submitted for the appellant at the trial that had the wrongful claims for deductions not been made by the husband he would not have been able to retain the [W] property and he would have either gone bankrupt or the property would have had to be sold. It was submitted that he in effect received a subsidy for the amount of tax which he failed to pay as a result of the wrongful claims for deductions: AB4:72l-5. His Honour recognised the case put on behalf of the appellant in this regard at AB1:43, para 96. Contrary to the assertion in ground 2 his Honour recognised the case being put on behalf of the appellant in this regard and dealt with it in the reasons given in paragraph 96.
Senior Counsel for the wife also submitted that:
9.[H]is Honour was not in error in rejecting the submission that the parties would not have had available to them the [W] property if the second respondent had not made the wrongful claims for tax deductions during the relevant years. The parties were not only using the second respondent’s income for their support, including for the loan repayments and other outgoings concerning the [W] property. The first respondent’s income was also available and was banked to the joint account of the parties. Her income was substantial as appears from AB1:110. Further, had the second respondent found that his claims for deductions were rejected in the 1991 year, being the first relevant year, he may not have made claims in subsequent years for deductions which he was not entitled to make with the result that the parties would have been required to reduce their lifestyle expenditure in relation to such matters as travel, dining out, entertainment, motor vehicle expenses and private school fees. His Honour correctly recognised that it did not follow that if the claims which were wrongfully made had not been made the [W] property would necessarily have had to be sold or that the renovations which were done to the property could not have been carried out.
and further that:
10.His Honour noted at AB1:43, para 96, that “the evidence however was not clear to me as to what those savings were”. His Honour was referring to the tax savings generated by the wrongful claims for deductions. It is asserted in ground 3 that this conclusion could not be reasonably arrived at and that the undisputed evidence was that such savings were $3,396,333. It is submitted that at no stage was it made clear to the Court by submission or evidence what the total amount of the savings was which resulted from the wrongful claims. Further, the undisputed evidence did not establish that such savings were $3,396,333 as asserted in ground 3. This figure is the amount of the wrongful claims for deductions: AB2:260, para 45. Consequently the amount of tax saved by reason of claiming deductions in that amount would have been considerably less than that amount but the appellant did not establish the amount of the tax saved. No reference is made to it in the appellant’s submissions at AB4:717-730.
11.His Honour found that, in relation to the second respondent’s tax returns for the relevant years, the first respondent “neither participated in, had knowledge of or was complicit in the preparation of or signing or lodging of the relevant returns”: AB1:41, para 78. His Honour further found that there was no evidence to suggest that the first respondent 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”: AB1:43, para 96.
To evaluate the grounds challenging the findings of fact upon which the trial Judge based the exercise of his discretion, it is appropriate to commence with his Honour’s findings with respect to the “credit” of the parties. I have earlier recorded the trial Judge’s findings on that regard (see para 19).
His Honour concluded that 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”. There has been no challenge to that finding of fact, and sensibly so.
The husband’s evidence was found to be “unreliable” in a number of respects each of which related to the critical tax returns for the period 1991-2002.
Although favourable to the wife, the credit finding does not ultimately impact significantly on matters, for reasons which will become apparent.
The trial Judge found that the wife had been “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”. When that was his Honour did not find, or need to find with precision. Given the ages of the children, however, it can be safely inferred that it was prior to 1991. This is clear from the wife’s income schedule to which his Honour referred with approval on a number of occasions. The wife’s schedule reveals that her income from non family trust sources ceased in the 1980 taxation year and briefly resumed during 1997, 1998 and 1999.
His Honour then referred to the wife’s contribution of a “significant income” by reference to her evidence setting out her taxable income during the marriage. That evidence was contained in a table annexed to the wife’s affidavit sworn 1 June 2007.
It is not in contest that the source of the “significant income” of the wife to which the trial Judge referred was a family trust, the source of its income being the income of the husband. Because of the importance of the wife’s income to the challenges to findings concerning the parties’ ability to acquire and retain real estate, I should record that the evidence revealed that between 1991 and 2002 the wife earned about $1 124 388 from the Family Trust and $14 222 from other sources.
I confess to some difficulty in determining the challenge raised by Ground 8. As the evidence to which Counsel for each of the parties referred us in the submissions which I have earlier recorded confirms, neither party’s contention was without an evidentiary foundation.
Given that the husband’s income was considerably reduced for taxation purposes, and that of the trust, and in turn the wife, increased by reason of matters which ultimately led to the husband’s re-assessment and bankruptcy, it is superficially attractive to assume that the wife’s “significant income” was related to the husband’s failure to lodge accurate tax returns and thereby have available more income to pay through the family trust than would otherwise have been the case. It would also be reasonable to infer that the wife, and the family, would have benefited from the husband’s taxation indiscretions. It does not however follow, and has not been established, that, had the wife not derived the “significant income” which she did in the way in which she did, the parties would have been unable to acquire and retain the W property.
The Court has not been directed to any circumstantial or other direct evidence which could or should have impacted upon the probabilities in relation to this issue. Thackray and Ryan JJ have thoroughly analysed the evidence in relation to this topic in their judgment. I cannot usefully add to that analysis. Whilst I accept that proving a negative, as the trustee sought to do before the trial Judge in this case, would have been difficult, nothing to which the Court has been referred in the evidence at trial persuades me that the trial Judge erred in finding as he did with respect to the wife’s income. Other findings may have been open to his Honour, but that is not the test for present purposes.
To the extent that the trustee has challenged the trial Judge’s conclusions that the wife was not complicit in the husband’s taxation indiscretions, whether that be viewed in the way the trial Judge did by reference to “waste” principles, or on the simpler basis that the wife could not be seen as having actual or constructive notice of the husband’s activities, nothing to which the Court has been referred persuades me that the trial Judge’s findings of fact were erroneous. The significance of so finding in the context of the exercise of discretion is potentially another question.
Whilst “waste” would have been a significant issue in relation to the exercise of discretion had this case involved only the competing contribution based entitlements of the husband and wife, it is difficult to see how conclusions in that regard could have properly impacted on the rights and entitlements of the creditors of the husband’s bankrupt estate. In circumstances where the creditors had no knowledge of, or complicity in, the husband’s “wasteful” acts or omissions, visiting them upon the creditors appears difficult to justify. Expressed another way, innocence on the part of the wife could not properly in this case translate as guilt on the part of the creditors. Whilst, as Thackray and Ryan JJ suggest in their Judgment, the distinction between primary tax and fines, penalties and other liabilities arising by virtue of the husband’s failure to file accurate taxation returns may have assumed significance within the context of s 75(2) of the Act, I am unable to accept that the trial Judge could rely upon any “waste” committed by the husband in the way in which he appears to have done. The trial Judge’s consideration of “waste” thus had the potential to lead him into error in the exercise of his discretion in the circumstances of this case. It is less than clear to me whether his Honour’s discretion miscarried as a result of his findings with respect to “waste”. Given the conclusion I have reached in relation to other aspects of the exercise of his Honour’s discretion, the inability to conclusively determine this issue does not assume significance.
The trial Judge set out in some detail the reasons which led him to conclude that the husband had been “negligent at the least in filling in his tax returns for the relevant years” and that such action had been “solely within the knowledge and control of the husband” who “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”. Nothing to which the Court has been referred persuades me that the trial Judge erred in so finding. As with the previous challenge, the significance of so finding in the context of the exercise of discretion is potentially another question.
Counsel for the trustee argued that the trial Judge should have approached his task in the following sequence:
(a)first, the quantification of the relief to which the [wife] would have been entitled, in the ordinary course and also taking into account as property of the parties to the marriage “vested bankruptcy property”;
(b)second, the quantification of the legitimate claims of the [husband’s] creditors;
(c)third, the effect of any order on the ability of those creditors to recover their debts;
(d)fourth, where, as in the present case, there is insufficient (net) property to satisfy both the relief to which the [wife] would otherwise be entitled and the debts owed to creditors, the trial judge ought to have considered of [sic] all the circumstances and the justice and equity of any order proposed to be made (in particular, any special circumstances which might justify the making of an order the effect of which was to prefer the interests of the [wife] to those of the creditors);
(e)fifth, in the absence of any such circumstances, the trial judge ought to have made an order the effect of which was that the debts owed to creditors and the amount as determined by the trial judge to which the [wife] would ordinarily have been entitled (including by reference to “vested bankruptcy property”) be paid ratably (sic) so as to prefer neither the interests of creditors or those of the [wife].
Counsel for the trustee concluded by saying:
33.Assuming that the [wife] satisfied the trial judge that she had a legitimate claim (which is not conceded) a fair and equitable result could arguably have been achieved by declaring that the [wife] had a specified interest in the [[W]] property of a dollar amount equal to that amount of the net equity available to the parties to the marriage as would result in the [wife] recovering that percentage of what the trial judge found to be her entitlement under the FLA which equals the percentage of their debts which the [husband’s] unsecured creditors would recover as dividends by virtue of the remainder of that net equity being received by the [trustee] as trustee of the [husband’s] bankrupt estate (after provision for the costs of the administration of the bankrupt estate and the realisation charge payable by the [trustee] in respect of the amount of that net equity received by the trustee of a bankrupt estate). (footnotes omitted)
Although his submissions were directed to different grounds of appeal than those presently under consideration, we consider it useful to set out at this point the submissions made by senior counsel for the wife concerning the effect of the 2005 amendments:
17.… [I]t is useful to have regard to the origin of the amendments to the relevant legislation made by the Bankruptcy and Family Law Legislation Amendment Act 2005. As appears from the Explanatory Memorandum the amendments were developed following the Joint Task Force Report on the use of bankruptcy and family law schemes to avoid payment of tax. This task force was comprised of representatives from the Attorney General’s Department, the Insolvency and Trustee Service Australia, the Australian Taxation Office and Treasury. The interaction between family law and bankruptcy prior to the amendments and the problems resulting from that interaction were identified at paragraphs 9-12 of the Explanatory Memorandum.
18.Paragraph 13 of the Explanatory Memorandum said:
“The amendments proposed in this Bill will address these issues by clarifying the rights of the bankruptcy trustee and the non-bankrupt spouse. Generally, the amendments will enable concurrent bankruptcy and family law proceedings to be brought together to ensure all the issues are dealt with at the same time”.
19.It is submitted that rather than clarifying the rights of the trustee on the one hand and the non-bankrupt spouse on the other the effect of the amendments was to pass to the Court the task of balancing the interests between the non-bankrupt spouse and the trustee on behalf of the creditors. The amendments did not have the effect that one was given priority over the other. The issue was resolved principally by the inclusion of paragraph (ha) in s75(2) of the Family Law Act and ss59A and 116(2)(q) of the Bankruptcy Act.
20.Having regard to the name of the Task Force, being concerned with schemes to avoid payment of tax, and the membership of the task force, including representatives from the Australian Taxation office and Treasury, it might be expected that the amendments would have given some priority to the payment of tax debts. That did not occur. Further, s109 of the Bankruptcy Act was not amended to restore the priority to tax debts which they previously had until 1993.
21.In these circumstances, where Parliament did not give priority to the payment of tax debts over the payment of other debts when distributing the estate of a bankrupt and where Parliament did not require that the Court give priority to the payment of tax debts when exercising the powers under s79 of the Family Law Act there is no reason why the Court should be required to give particular priority to the payment of tax debts over the other factors to be considered under s79 including s79(4)(e).
22.Further, in terms of paragraph (ha) in s75(2) no distinction was made between creditors to suggest that some priority or greater weight should be given to a tax creditor.
Dealing specifically with Ground 13, senior counsel for the wife submitted:
26.The error asserted in this ground fails to take into account that the effect of the amendments made to the Family Law Act and the Bankruptcy Act by the Bankruptcy and Family Law Legislation Amendment Act 2005 was to bring about significant change to the law of bankruptcy. Section 58 of the BankruptcyAct provides for the vesting of the property of the bankrupt in the trustee forthwith upon bankruptcy. However, by reason of s59A of the [Bankruptcy] Act that section now has effect subject to an order made under Pt VIII of the FamilyLawAct. Further, s116 of the [Bankruptcy] Act provides for the kinds of property which will be divisible amongst the creditors of a bankrupt. However, as a result of the amendments to the [Bankruptcy] Act, s116(2)(q) provides that such property is not to include any property that, under an order under Pt VIII of the FamilyLawAct 1975, the trustee is required to transfer to the spouse of the bankrupt.
27.Accordingly, the scheme of the legislation is that once the Court determines the property to be received by the non-bankrupt spouse pursuant to an order under s79 of the Family Law Act that property ceases to be vested property and ceases to be available for distribution among the creditors of the bankrupt. However, with respect to the remaining property that property is still available for distribution among the unsecured creditors in the same manner as occurred prior to the amendment.
28.His Honour was not required to have regard to the principles of bankruptcy law concerning the pro rata distribution of vested property among creditors. His Honour was required to consider the effect of the orders proposed to be made upon the creditors’ ability to recover their debts when considering the factors referred to in s75(2) of the FamilyLawAct. That matter was addressed by His Honour at AB 1:42, paragraphs 91-3. No error is demonstrated in the reasons given concerning the factor referred to in s75(2)(ha). His Honour was not required to consider the position of creditors with regard to the law of bankruptcy.
In dealing with Ground 15, senior counsel for the wife submitted:
32.Ground 15 asserts that his Honour should have made orders which had the effect of treating the [wife] and the creditors of the [husband] equally. If this is intended to mean that in relation to the factors referred to in s75(2) there should have been equal treatment of the [wife] on the one hand and the creditors of the [husband] on the other, this is what in fact occurred. The interests of the [wife], given that there were factors warranting an adjustment in her favour under s75(2), gave way to the interests of the creditors pursuant to paragraph (ha) with the result that there was no adjustment by reason of the factors referred to in s75(2). If ground 15 is intended to mean that the wife and each of the creditors should have been treated equally so that there would be a pro rata distribution of the vested property among the wife and the creditors according to the value of their claims it is submitted that this would be an erroneous approach and one which fails to have regard to the effect of the amendments made to the Bankruptcy Act and the Family Law Act by the Bankruptcy and Family Law Legislation Amendment Act 2005.
We consider the submissions made on behalf of the trustee concerning the application of the pari passu principle to be misconceived. We can see no warrant in the words of the legislation, or in any of the other materials to which we were referred, for treating the entitlement of the wife under the FLA in the same way as the entitlement of an unsecured creditor of the husband.
Proven liabilities of an unsecured creditor are admitted in the administration of the bankrupt estate at full value. The entitlement of a non‑bankrupt spouse under the provisions of the FLA are assessed only after proper regard has been paid to s 75(2)(ha) of the FLA which requires the Court to consider “the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as that effect is relevant”.
Although it will not always necessarily be so, it would seem that in many cases the application of s 75(2)(ha) will result in the assessment of the FLA entitlement of the non‑bankrupt spouse at an amount less than he or she would otherwise have been entitled to receive. To then treat the resulting entitlement as if it were of the same character as the entitlement of an unsecured creditor would not, in fact, result in the “equal treatment” proposed by the counsel for the trustee. The entitlement of the unsecured creditor would be admitted at full value, whereas the entitlement of the non–bankrupt spouse may already have been heavily discounted as a consequence of the application of s 75(2)(ha).
We do not consider that the principles laid down by the High Court in Project Blue Sky Inc v Australian Broadcasting Authority (supra) advance the trustee’s argument. Those principles concern the task faced by judicial officers when dealing with “conflicting statutory provisions”. On this issue, we do not discern any conflict between the provisions of the FLA and the BA.
Section 82 of the BA relevantly provides:
(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
(1A) Without limiting subsection (1), debts referred to in that subsection include a debt consisting of all or part of a sum that became payable by the bankrupt under a maintenance agreement or maintenance order before the date of the bankruptcy...
Section 108 of the BA provides:
Except as otherwise provided by this Act, all debts proved in a bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately. [our emphasis added]
Section 116(1) of the BA sets out the property divisible amongst the creditors but s 116(2)(q) specifically excludes from the list “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”.
A potential “entitlement” to a settlement pursuant to s 79 of the FLA is not properly characterised as a “present or future, certain or contingent” debt or liability, nor is it a debt or liability to which the bankrupt spouse “may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy” for the purposes of s 82(1) of the BA.
That this is so follows from authorities such as Fisher v Fisher (1986) 161 CLR 438 at 453 where Mason and Deane JJ said:
True it is that orders made under s. 79 do not give effect to antecedent rights arising in virtue of the marital relationship. Instead they perform a dual function by creating and enforcing rights in one blow, so to speak…
It follows that any potential entitlement to make a claim under s 79 of the FLA and any entitlement arising under an order made pursuant to s 79 after the date of the bankruptcy are not a debt or liability provable in bankruptcy. The pari passu principle embodied in s 108 therefore has no application to such entitlements.
Had Parliament intended to treat the entitlement of the non–bankrupt spouse as if it were a debt provable in the bankruptcy, it could have so provided when enacting the 2005 amendments, for example by expanding the scope of s 82(1A) of the BA to include obligations pursuant to orders made after the date of bankruptcy in proceedings under the FLA between the trustee in bankruptcy and the non–bankrupt spouse. Parliament instead elected to enact s 116(2)(q) of the BA, which removes from the property available for distribution between creditors any property that the trustee is required to transfer to the spouse of the bankrupt under s 79 of the FLA. In so doing, Parliament ensured that there was no inconsistency between the operation of the FLA and the BA.
Accordingly there is no merit in Ground 13 since there was no obligation upon his Honour to have regard to “the principles of bankruptcy law that … the proceeds of a bankrupt’s property be distributed pro rata amongst unsecured creditors” for the simple reason that the wife is not an unsecured creditor and any property to which she is entitled pursuant to an order made pursuant to s 79 would not be divisible amongst the unsecured creditors.
Similarly, to the extent that Ground 15 relies on the pari passu principle to suggest there was any obligation upon his Honour to treat the wife and the husband’s creditors equally, it too has no merit.
Grounds 1, 10, 11, 12, 14 and 16 – the exercise of discretion
These grounds were expressed as follows:
1.His Honour erred in law in the exercise of his discretion pursuant to s 79(1)(b) of the Family Law Act 1975 (Cth) in failing to have adequate regard to:
(a)whether it was just and equitable in all the circumstances to make the orders that were made: s 79(2);
(b)the effect of the orders made on the ability of the [trustee] as trustee of the bankrupt estate of the [husband] to recover for the benefit of creditors of the [husband]: s 75(2)(ha); and
(c)other relevant facts and circumstances to be taken into account: s 79(2)(o)
with the consequence that his Honour improperly preferred the interests of the [wife] to those of the [trustee] and creditors of the [husband].
10.His Honour erred in law in failing to have regard to any adequate regard to the public interest in ensuring observance by tax payers of the income tax laws of Australia.
11.His Honour erred in law in failing to have regard to any adequate regard to the following facts:
(a)the only asset of the [husband] of any significance was the [W] property which had vested in the [trustee] as trustee of the [husband’s] bankrupt estate;
(b)the [W] property was found to have a value of between $4,500,000 and $5,000,000 which was burdened by a loan of approximately $2,415,000 secured by mortgage and leaving an equity of between $2,585,000 and $2,000,085;
(c)The Deputy Commissioner of Taxation has lodged a proof of debt in the [husband’s] bankrupt estate in the sum of $5,704,678.71;
(d)The proofs of debt admitted to prove in the [husband]’s bankrupt estate total the sum of $5,973,623.00;
(e)The effect of the orders made is to divest the trustee of one half of the equity of the [husband] in the [W] property and so diminish the return to creditors by that amount.
12.His Honour erred in law in the exercise of his discretion in failing to have adequate regard to the fact that the consequence of the orders made was that the [wife] would profit at the expense of the [husband]’s creditors (including the Australian Tax Office) and so the public revenue by obtaining a one‑half share in the equity of the [W] property in circumstances where that asset was, on the evidence, entirely funded by the [husband’s] savings made by the [husband] as a consequence of his wrongful claims for tax deductions.
14.His Honour erred in law in the exercise of his discretion in that he placed excessive reliance on one factor, namely hardship to the [wife], to the exclusion or partial exclusion of all other relevant factors.
16.His Honour should have held that an order under s 79(1)(b) should not have been made with respect to the [W] property because of:
(a)the circumstances of the acquisition and maintenance of the [W] property by the [husband]; and
(b)the nexus between the tax deductions wrongfully claimed by the [husband] with respect to it which deductions enabled the [husband] to retain funds otherwise payable to the Australian Taxation Office and utilise those funds to maintain that property at all times since 1991.
As will be observed, the theme of these challenges is the unfairness/immorality of the wife receiving a large settlement under the FLA, while the husband’s unsecured creditors (and in particular the Australian taxpayer) receive only a small proportion of what otherwise would have been their entitlement. The impropriety associated with such an outcome is said to arise because the funds the wife will receive were the product of the husband’s wrongdoing.
In support of some of the grounds, counsel for the trustee submitted:
48.… The means by which the unsecured debt to the DCT arose weighs strongly against the conclusion that the Court ought to exercise its discretion in favour of the [wife] and create for and [sic] interest in that property for her. The notion that because she simply left the decision making to the [husband], the [wife] ought to be able to maintain a claim [to an interest in [W]] is not only absurd but is an effrontery to the taxpayers of Australia. As a matter of public policy and commercial morality the [wife] cannot maintain a claim to an interest in [[W]], at least an interest which ranks in priority to the interests of creditors including the DCT as the predominant creditor. The Court’s discretion should not be exercised in a manner which effectively permits the [wife] to benefit from the fruits of wrongdoing on the part of the [husband] and do so in a manner which she could not do but for the bankruptcy of the [husband] . The trial judge erred in exercising his discretion in a contrary manner.
In response, senior counsel for the wife submitted:
12.His Honour took these matters into account when considering submissions made in relation to s75(2)(o) and when considering the justice and equity of the orders that were ultimately made. His Honour did not find that the absence of complicity on the part of the [wife] in the [husband’s] conduct “negated any significance which might otherwise have attached to the circumstance that the [husband] would not have been able to acquire, renovate, maintain and retain the [W] property without the savings made by him as a consequence of his wrongful claims for tax deductions” as asserted in ground 9.
13.Even if his Honour ought to have found that the nexus between the wrongful claims for deductions made by the [husband] and the acquisition and renovation of the [W] property had been established on the evidence this would have been a factor for his Honour to take into account when determining the orders to be made under s79. His Honour was still required to take into account the other factors referred to in s75(2) of the Act which his Honour considered commencing at AB1:40, para 73. In the circumstances it is submitted that it is likely that the result would not have been any different given that his Honour found that although there were a number of factors which it might be expected would achieve an adjustment in favour of the [wife], nonetheless no adjustment was made by reason of the factor referred to in s75(2)(ha) of the Act.
In dealing with the specific complaint contained in Ground 14, senior counsel for the wife submitted:
29.The appellant asserts that his Honour placed excessive weight on hardship for the [wife] to the “exclusion or partial exclusion of all other relevant factors”. It seems that the [trustee] is referring to the factors in s75(2) in relation to this ground. However, his Honour did not consider hardship to the [wife] as one of these factors. Rather, the factors considered and the relevant paragraphs were as follows: the age of the parties (a), their earning capacities (b), the duration of the marriage and the effect upon the earning capacity of the wife (k), the wife’s ill health (a), the responsibilities of the wife to support the children although over the age of 18 years (e) and the extent to which the wife contributed to the husband’s earning capacity (j). These factors are evaluated at AB1:40, paras 73-6.
30.His Honour also considered the conduct of the husband in relation to his tax affairs giving rise to the substantial debt now owed to the Australian Taxation Office as a factor relevant under paragraph (o) at ABl:40, paras 77-89.
31.His Honour weighed all of these factors which favoured the [wife] against the factor referred to in paragraph (ha) being the effect of any proposed order on the ability of the creditors to recover their debts and found that the latter factor balanced the other factors with the result that no adjustment was made for the factors referred to in s75(2) of the Act.
It is important at the outset of our discussion of these grounds/submissions to record the way in which his Honour went about exercising the wide discretion conferred on him by s 79 of the FLA.
Having identified the asset pool, his Honour considered the respective contributions made by the husband and the wife and determined that they were of equal value. There is no challenge to his assessment.
His Honour then turned to consider the factors set out in s 75(2) of the FLA. He made reference to the ages of the parties; their income earning capacities; the wife’s health; the extent to which the children were still dependent; and the extent to which the wife had contributed to the husband’s “success”. He then turned to consider the wife’s submissions that the husband had wasted assets because of the way in which he “acted recklessly and negligently in filling out his income tax returns” and the wife’s lack of complicity in his wrongdoing.
Having reviewed the evidence relating to those issues, his Honour found that the husband had been “reckless and negligent” and concluded that as a consequence it was appropriate for the husband to “satisfy the debt to the ATO from his own resources”.
Having so concluded, his Honour immediately recorded that the effect of his decision was that there was likely to be a “very substantial deficit in the bankrupt estate leaving the creditors out of pocket”. His Honour then said:
91.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)…
His Honour then noted that the trustee’s position was that there “should be an adjustment of 100% (or something very close thereto) in favour of the trustee”. However, his Honour did not accept this proposition and concluded:
93.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.
His Honour further explained his decision in relation to the s 75(2) adjustment when discussing whether the orders he proposed to make were “just and equitable”. In doing so, he said:
97.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 Lexus motor vehicle is just and equitable.
Coleman J has concluded that the trial Judge’s discretion miscarried because it was only after consideration of s 75(2)(ha) that his Honour could have properly concluded that it was appropriate for the husband to bear the entire burden of the taxation debt – whereas the trial Judge appears to have so concluded before considering s 75(2)(ha).
We have earlier recorded our view that the trial Judge erred in the first place in treating the primary tax burden as “waste”. It would be on that basis that we would allow the appeal, rather than the way in which his Honour applied s 75(2)(ha).
We do accept, as Coleman J has found, that the trial Judge appeared to decide the issue which s 75(2)(ha) required him to consider before he came to consider it. This conclusion is based on the fact that in paragraph 89 of his reasons, his Honour recorded that the husband should satisfy the tax debt from his own resources before he had given any consideration to s 75(2)(ha). However, out of fairness to his Honour it should be noted that notwithstanding what he said in paragraph 89, his Honour did go on to consider the possibility that there should be an adjustment in favour of the trustee based on s 75(2)(ha).
Having considered that possibility, his Honour concluded, in effect, that reliance on s 75(2)(ha) negated any adjustment in favour of the wife and found that an adjustment in favour of the trustee was not warranted because such an adjustment would “work an injustice and hardship upon the wife in the circumstances of this particular case”. The implication in these findings is that, were it not for the “injustice and hardship” to the wife, his Honour would have made an adjustment in favour of the trustee, notwithstanding his earlier statement that the husband should meet the entire tax liability.
As Coleman J has observed, his Honour did not particularise the way in which an adjustment in favour of the trustee would “work an injustice and hardship” on the wife. It is true that the wife would have less money than she otherwise would if such an adjustment had been made, but that is not in itself necessarily “injustice and hardship”, especially as the wife’s entitlement pursuant to his Honour’s orders would exceed $1 million. Given that his Honour’s orders would lead to unsecured creditors receiving only a very small proportion of their entitlement, it was in our view incumbent upon his Honour to explain, at least briefly, in what way any adjustment in favour of the trustee would cause the wife “injustice and hardship”.
Furthermore, notwithstanding the very limited circumstances in which appellate intervention is warranted in discretionary decisions, we conclude that the outcome determined by the learned trial Judge was outside the range of reasonable discretion. We so conclude for the reasons expressed by Coleman J. Like Coleman J, we perceive that the error in the exercise of the discretion may well have been the result of his Honour having given disproportionate weight to the wife’s lack of complicity in the husband’s indiscretions and having given inadequate weight to the fact that the wife had benefited from those indiscretions.
For these reasons, we find merit in these grounds and conclude that his Honour’s discretion miscarried.
Ground 19 – the reasons challenge
As we have concluded that his Honour erred in other respects, it is unnecessary to consider Ground 19, by which it is asserted that his Honour failed to give adequate reasons for his decision.
Conclusion
We would allow the appeal and would seek submissions from the parties as proposed in the judgment of Coleman J.
We record that we are aware of the decision of the Full Court in Commissioner of Taxation & Worsnop and Anor [2009] FamCAFC 4, which was published after we heard argument in this appeal. For the reasons given by Coleman J, we do not see it as necessary or appropriate to seek submissions concerning that decision.
I certify that the preceding two hundred and ninety six (296) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court.
Associate:
Date: 12 February 2009
12
6
18