Law, in pretty general terms, is the art of regulating and governing relationships between people and organisations. These relationships are usually governed by contracts, agreements, regulations and statute. There are however two areas of law that have the awesome ability to rip through most other areas of law and agreement: family law and insolvency.
Often times, these areas of practice have the ability to ignore other forms of governance and impact certain transactions and structures in the best interest of families and/or creditors.
While it might seem like these areas of law have a similar approach and can be easily reconciled, the reality is that they are balancing two completely different interests. Where there is a bankruptcy of one party to a marriage or de facto relationship, the other spouse often argues those debts should not come out of the matrimonial pool of assets.
From a bankruptcy perspective, the creditors will want as many of the assets to be made available to the bankruptcy trustee and to try to focus solely on the financial contributions of the parties. In family law however, the interests of any children and non-financial contributions to the relationship are important factors to be considered (which generally are not considered in bankruptcy).
So, what happens when the unstoppable force of family law meets the immoveable object of insolvency? Well, Bennett & Philp recently had the task of trying to balance these very competitive and powerful areas in one convoluted matter.
In a nutshell: the de facto wife became the sole director of a company trustee of a discretionary trust, which had been operating a construction business. That construction business and individual were in the process of being sued by her son, alleging significant amounts of money were owed to him for his contributions to the construction business, along with the increase in value of the properties held. Those proceedings were being run in the Supreme Court of Queensland.
At the same time, the de facto wife was also in a matrimonial property dispute with her de facto husband, following the ending of their relationship. The de facto husband also claimed to have contributed to the construction business. In the course of the proceedings the company trustee went into a members’ voluntary liquidation and liquidators were appointed to the trust.
The de facto wife then failed to appear in the family law proceedings in the Federal Circuit and Family Court of Australia (Division 2) (“FCFCOA Div 2”) and incurred a costs’ judgment against her. She failed to pay the costs’ judgment and was made a bankrupt.
As a result of the actions in the FCFCOA Div 2 the Supreme Court proceedings were stayed and the son, along with the bankruptcy trustee, became joined to the proceedings in the FCFCOA Div 2. A trial was then scheduled between all the parties in the FCFCOA Div 2 but was transferred to Division 1 (“FCFCOA Div 1”) which has jurisdiction in both bankruptcy and family law. The FCFCOA Div 1 was set to determine the dispute over the construction business, the discretionary trust, the bankruptcy and the de facto property dispute in the one final hearing.
The trust had managed to recover significant funds from the sale of assets held. A contest arose about the ex-de facto’s proceedings and her rights versus those of creditors (including the son with whom the trust was in dispute).
Bennett & Philp Lawyers acted on behalf of the trustees in bankruptcy and were required to consider and properly balance the interests of the de facto (bankrupt) wife along with the creditors and the de facto husband. This included careful consideration of the competing claims, including conflicting expert accounting evidence, purported trust deed amendments, allegations of wastage (gambling) and evidence of domestic violence.
A settlement conference was held between the trustees, the de facto husband and the son. Fortunately, Bennett & Philp Lawyers has experienced family lawyers, commercial litigators and insolvency lawyers that were able to properly advise the trustees on all of the competing legal issues and factual disputes in order to balance these interests appropriately.
The main challenge was balancing the justice and equity of a settlement in the FCFCOA Div 1 against the trustee’s primary obligation to creditors, including, in essence, justifying, ruling and settling on the provable debt of the son in the bankruptcy.
While the bankrupt eventually agreed with the proposed settlement terms with her ex, she did not agree with the proposed settlement to the son (and major creditor). The liquidator was in favour of a negotiated outcome noting the significant additional time costs and expenses that would otherwise be incurred if they were required to assess and adjudicate on the various claims. The liquidator advised they would distribute the surplus funds in accordance with an Order of the Court.
The proposed settlement between the son, the bankruptcy trustee and the de facto husband had to be put to the Court for judicial consideration to determine that the proposed settlement represented a just and fair resolution for all parties. Bennett & Philp Lawyers prepared a detailed position paper and written submissions addressing the justice and equity of both the relationship claim, the son’s claim and the potential outcome for the bankrupt herself. The de facto husband and the son accepted these submissions and they were provided as joint submissions to the Court. A hearing before the judge was also required.
Fortunately for all, the Court agreed that the proposed outcome was indeed just and equitable for all parties. The proposed settlement was approved with final Orders made in the terms drafted. A costly trial was avoided. Her Honour advised that having regard to the submissions, considerations of commerciality and the complexity of the issues arising, the parties had saved significant final hearing costs. While the bankrupt was no longer a party in the court proceedings, consultation with the bankrupt and evidence of the bankrupt’s views was appreciated by the Court in approving the settlement of this matter. Had the matter proceeded to a final hearing of at least 5 days, the costs involved would have significantly reduced the funds available for distribution.
One clear learning from this matter is that neither family lawyers nor insolvency lawyers acting alone are likely to be able to resolve disputes such as these.
For insolvency practitioners, the unique features of family law and considerations as to a “just and equitable” outcome require assistance from an experienced family lawyer. While a commercial settlement could be reached, the legislated requirements of justice and equity required by the Court in family law could mean a settlement might fail to gain the Court’s approval. This could have significant impacts in urgent matters or where distributions are made on the basis of agreed terms, without the Court’s involvement or without consultation with the bankrupt.
Conversely, for family law practitioners, it is vital to have the expertise from insolvency lawyers in reaching settlement terms that properly consider a creditor’s interests, and the very strict duties owed by insolvency practitioners and bankruptcy trustees.
As two powerful forces, insolvency practitioners should ensure their representatives have access to expertise in both insolvency law and family law.
For more information, please contact Andrew Lambros or Katherine Lambros at Bennett & Philp Lawyers for legal advice.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific circumstances. It is intended for information purposes only and should not be regarded as legal advice. Further professional advice should be obtained before taking action on any issue dealt with in this publication.