Jacky Campbell, November 2017

Thorne v Kennedy—has the High Court hung financial agreements out to dry?

There has been a strong reaction, almost panic-stricken, in the media and by lawyers to the first examination of financial agreements by the High Court. Is this reaction justified? Has the High Court hung financial agreements out to dry, or are they still a viable option?

In Thorne v Kennedy [2017] HCA 49; (2017) FLC 93-807 the High Court set aside two financial agreements, casting considerable doubt on the viability of financial agreements which are a bad bargain for one of the parties. Unanimously, the High Court set aside the two agreements for unconscionable conduct. The plurality also set them aside for undue influence, finding it unnecessary to decide whether there was duress. Helpfully, the High Court explained the distinctions between the three concepts, as the concepts are often confused and used interchangeably. The question is, in clarifying the law, did the High Court set such a high bar that it will be impossible for a financial agreement to withstand an application to set it aside?

The facts

The wife was aged 36 and the husband was 67 when they met on a bride website in mid-2006. The wife was living overseas, spoke Greek and very little English. She had no children and no assets of any substance, whilst the husband was an Australian property developer with assets worth at least $18 million. He was divorced from his first wife, and had three adult children.

During their courtship the husband promised the wife that he would look after her like “a queen”. In February 2007 the wife travelled to Australia with the husband and moved into his penthouse. The husband made it clear to the wife prior to her coming to Australia that he wanted to protect his wealth for his children and that, if they were to get married, she would have to sign a legal agreement to that effect. The wife, however, did not learn the terms of the first agreement until 10 days before the wedding. By that stage, the wife’s parents and sister had arrived in Australia from Eastern Europe for the wedding. The husband told the wife that if she failed to sign the first agreement, the wedding was off.

When presented with the draft first agreement, the wife’s only concern was with the testamentary provisions – not the separation provisions. Her solicitor advised the wife orally and in writing not to sign the first agreement, saying that it was all in the husband’s favour. After some minor changes to the testamentary provisions of the first agreement requested by the wife’s solicitors were agreed to by the husband, the wife received further advice on the amended first agreement. Her solicitor again advised her not to sign it. The wife understood her solicitor’s advice to be that it was the worst agreement that the solicitor had ever seen. Under the separation provisions, the wife was to receive a total payment of $50,000 plus CPI in the event of a separation after at least three years of marriage, which the wife’s solicitor described as “piteously small”. In the event of the husband’s death, the wife would receive an apartment worth up to $1.5M, a Mercedes and a continuing income. The wife nevertheless signed the first agreement 4 days before the wedding. The first agreement contained a recital that within 30 days the parties would sign another agreement in similar terms. In November the wife signed the second agreement, revoking the first agreement but otherwise in the same terms. The wife’s solicitor urged her not to sign the second agreement. During the meeting the wife received a telephone call from the husband asking her how much longer she would be. The wife’s solicitor had the impression that the wife was being pressured to sign the second agreement.

The husband signed a separation declaration after the couple had been cohabiting for about 4½ years. It was slightly less than 4 years after the first agreement was signed.

Litigation history

The wife commenced proceedings in the Federal Circuit Court, seeking orders under the Family Law Act 1975 (“FLA”) that both agreements be declared not to be binding and/or to be set aside, and orders for a property settlement and spousal maintenance. The husband died part way through the hearing and the husband’s legal personal representatives were substituted for him in the proceedings.

In March 2015 Demack J in Thorne & Kennedy [2015] FCCA 484 made orders that neither Agreement was binding and set them both aside. Demack J held (at [94]) that the wife had:

“signed the Agreements under duress borne of inequality of bargaining power where there was no outcome to her that was fair and reasonable.”

On 26 September 2016 the Full Court of the Family Court (Strickland, Aldridge and Cronin JJ) in Kennedy & Thorne (2016) FLC 90-737 allowed an appeal by the husband’s estate. The Full Court found that both agreements were binding on the parties, holding that there had not been duress, undue influence or unconscionable conduct by the husband.

On 10 March 2017 the High Court granted special leave to the wife to appeal from the decision of the Full Court of the Family Court. The special leave application is reported as Thorne v Kennedy [2017] HCA Trans 54. Further details of the special leave application are in an article by the writer at http://www.wolterskluwercentral.com.au/legal/family-law/high-court-rule-financial-agreements/

The grounds of appeal were that the Full Court erred in law in failing to find the financial agreements were not binding and they should be set aside on the ground of duress, undue influence or unconscionable conduct.

What did the High Court decide?

The judgment of the plurality was delivered on 8 November 2017 by Kiefel CJ, Bell, Gageler, Keane and Edelman JJ. They held that the findings and conclusion of the trial judge should not have been disturbed by the Full Court and both agreements were voidable due to both undue influence and unconscionable conduct.

The plurality said that the trial judge used duress interchangeably with undue influence, and considered that undue influence was (at [2]) “a better characterisation of her findings”. The plurality decided that it was not necessary to consider whether the agreement should be set aside for duress.

In two separate judgments, Nettle and Gordon JJ agreed that the agreements should be set aside for unconscionable conduct, but did not agree that they should be set aside for undue influence.

Marriage and equitable principles

Although initially the wife’s case was that the principles of common law and equity as described in s 90KA (and also applied in s 90K) might be affected by their statutory context and interpreted differently because of the marital relationship, she conceded (at [23]) “that the principles were not altered although the particular circumstances of the marital context would be taken into account”. The High Court plurality accepted that the same tests applied to marital relationships as to commercial relationships when assessing vitiating factors such as duress, undue influence and unconscionable conduct, although, of course, duress and undue influence generally, if not always, arise in non-commercial contexts.

Requirements of duress

The plurality commenced by considering the requirements of duress, although it held that it was not necessary to decide whether the agreement should be set aside for duress. The plurality described the requirements for duress (at [26]):

“Duress does not require that the person’s will be overborne. Nor does it require that the pressure be such as to deprive the person of any free agency or ability to decide. The person subjected to duress is usually able to assess alternatives and to make a choice. The person submits to the demand knowing ‘only too well’ what he or she is doing” [footnotes removed, but relying strongly on Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40]­

The plurality noted (at [27]) the uncertainty as to whether duress should be based on any unlawful threat or conduct or, whether lawful threats or conduct might suffice. It said that the question was a “difficult” one, but did not shed any light on the answer to it.

The plurality’s view was that it was not necessary for the trial judge (and therefore the High Court) to determine whether there was common law duress, because the sense in which the trial judge described the pressure on the wife was to focus on the wife’s lack of free choice (in the sense used in the undue influence cases) rather than whether the husband was the source of all the relevant pressure, or whether the impropriety or illegitimacy of the husband’s lawful actions might suffice to constitute duress.

Requirements of undue influence

The High Court plurality referred (at [30]) to

“the difficulty of defining undue influence” and that “the boundaries, particularly between undue influence and duress, are blurred”. Undue influence occurred when a party was “deprived … of ‘free agency’” [footnotes removed].

In Johnson v Buttress (1936) 56 CLR 113 at 134; [1936] HCA 41, Dixon J described how undue influence could arise from the “deliberate contrivance” of another (which naturally includes pressure) giving rise to such influence over the mind of the other that the act of the other is not a “free act”. The plurality accepted this analysis, and said (at [32]):

“The question whether a person’s act is ‘free’ requires consideration of the extent to which the person was constrained in assessing alternatives and deciding between them. Pressure can deprive a person of free choice in this sense where it causes the person substantially to subordinate his or her will to that of the other party … It is not necessary for a conclusion that a person’s free will has been substantially subordinated to find that the party seeking relief was reduced entirely to an automaton or that the person became a ‘mere channel through which the will of the defendant operated’. Questions of degree are involved. But, at the very least, the judgmental capacity of the party seeking relief must be ‘markedly sub-standard’ as a result of the effect upon the person’s mind of the will of another.” [footnotes omitted]

The plurality noted (at [14]) that there were different ways to prove the existence of undue influence. One method of proof was by direct evidence of the circumstances of the particular transaction and that was the approach relied upon by the trial judge and the High Court. The plurality rejected the proposition that the wife was entitled to the benefit of a presumption of undue influence because of the relationship of fiancé and fiancée, as that presumption no longer existed.

Requirements of unconscionable conduct

The parties agreed that the applicable principles of unconscionable conduct in equity were recently restated by the High Court in Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392; [2013] HCA 25. No submissions were made as to whether the statutory concept of unconscionable conduct in s 90K(1)(e) might differ from the equitable concept in s 90K(1)(b) and the High Court did not determine that issue.

A finding of unconscionable conduct requires (at [38]) the innocent party to be subject to a special disadvantage “which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests”. The other party must also unconscientiously take advantage of that special disadvantage, and have known or ought to have known of the existence and effect of the special disadvantage.

The plurality quoted favourably from Amadio (1983) 151 CLR 447 at 461, where Mason J emphasised the difference between unconscionable conduct and undue influence:

“In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position’.”

The trial judge’s decision

The plurality found that the trial judge was at a considerable advantage in assessing the parties and their personalities, particularly where issues of undue influence and unconscionable conduct were involved. In Kakavas the High Court said that where a transaction is sought to be impugned for vitiating factors, such as duress, undue influence or unconscionable conduct, it is necessary for a trial judge to conduct a “close consideration of the facts.” On appeal, it is essential for the appellate court to scrutinise the trial judge’s findings in light of the advantages enjoyed by the trial judge.

The trial judge posed the hypothetical question of why the wife would sign an agreement when she understood the advice of her solicitor to be that the agreement was the worst that the solicitor had ever seen. The trial judge also asked, despite the advice of her solicitor, why the wife failed to conceive of the notion that the husband might end the marriage.

The trial judge described duress ([2015] FCCA 484 at [68]) as “a form of unconscionable conduct”. The plurality said that this did not mean that duress was subsumed within the doctrine of unconscionable transactions, but the trial judge used “unconscionable” in the sense described by Gaudron, McHugh, Gummow and Hayne JJ in Garcia v National Australia Bank Ltd [(1998) 194 CLR 395 (at [34])] as “to characterise the result rather than to identify the reasoning that leads to the application of that description”.

The trial judge concluded that the wife was powerless to make any decision other than to sign the first agreement, and referred to an inequality of bargaining power and a lack of any outcome for the wife that was “fair or reasonable”. However, the trial judge also explained that the wife’s situation was “much more than inequality of financial position”, setting out six matters which, in combination, led her to the conclusion that the wife had “no choice” or was powerless:

1. Her lack of financial equality with the husband;
2. Her lack of permanent status in Australia at the time;
3. Her reliance on the husband for all things;
4. Her emotional connectedness to their relationship and the prospect of motherhood;
5. Her emotional preparation for marriage; and
6. The “publicness” of her upcoming marriage.

These six matters were the basis for what the plurality described as the “vivid” description by the trial judge (quoted at [47]) of the wife’s circumstances:

“She was in Australia only in furtherance of their relationship. She had left behind her life and minimal possessions … She brought no assets of substance to the relationship. If the relationship ended, she would have nothing. No job, no visa, no home, no place, no community. The consequences of the relationship being at an end would have significant and serious consequences to Ms Thorne. She would not be entitled to remain in Australia and she had nothing to return to anywhere else in the world.

Every bargaining chip and every power was in Mr Kennedy’s hands. Either the document, as it was, was signed, or the relationship was at an end. The husband made that clear.”

As to the second agreement, the High Court plurality noted (at [48]) that trial judge held that it was “simply a continuation of the first – the marriage would be at an end before it was begun if it wasn’t signed”. In effect, the trial judge’s conclusion was that the same matters which vitiated the first agreement, with the exception of the time pressure caused by the impending wedding, also vitiated the second agreement. The factors had not otherwise dissipated.

The Full Court’s decision

The Full Court found that the agreements were fair and reasonable because, as summarised by the plurality (at [51]):

1. The husband had told the wife at the outset of their relationship, and she had accepted, that his wealth was intended for his children
2. The wife’s interest, which was provided for in the agreements, concerned only the provision that would be made for her in the event the husband predeceased her.

The Full Court held that the wife could not have been subject to undue influence because she acquiesced in the husband’s desire to protect his assets for his children and because she had no concern about what she would receive on separation. The Full Court also held that the husband’s conduct was not unconscionable because he did not take advantage of the wife, referring to:

1. Its findings of the lack of any misrepresentation by the husband about his financial position;
2. The husband’s early statements to the wife that made clear that she would not receive any part of his wealth on separation;
3. The wife’s staunch belief that the husband would never leave her and her lack of concern about her financial position while the husband was alive; and
4. The husband’s acceptance of handwritten amendments to the agreements that were made by the wife’s solicitor.

The High Court plurality, noting (at [54]) the advantages enjoyed by the trial judge in evaluating the evidence, said that with one exception, none of the findings of fact by the trial judge were overturned by the Full Court. That exception was the Full Court’s rejection of the trial judge’s finding that there was no outcome available to the wife that was fair or reasonable. The High Court found that the Full Court erred in rejecting this finding. It was open to the trial judge to conclude that the husband, as the wife knew, was not prepared to amend the agreement other than in minor respects. Further, the High Court plurality said (at [55]) that the description of the agreements by the trial judge as not being “fair or reasonable” was not merely open to her, it was “an understatement”. The unchallenged evidence of the wife’s solicitor was that the terms of the agreements were “entirely inappropriate” and wholly inadequate.

As the terms of the agreement were so unfavourable to the wife – a bad bargain – the plurality considered those terms to be relevant to a finding of undue influence. It said (at [56]) that the trial judge:

“was correct to consider the unfair and unreasonable terms of the pre-nuptial agreement and the post-nuptial agreement as matters relevant to her consideration of whether the agreements were vitiated. Of course, the nature of agreements of this type means that their terms will usually be more favourable, and sometimes much more favourable, for one party. However, despite the usual financial imbalance in agreements of that nature, it can be an indicium of undue influence if a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of this nature.”

The plurality did not agree with the Full Court that the trial judge’s conclusion was based only upon an inequality of bargaining power. The trial judge carefully set out the 6 specific factors (stated earlier in this paper) which, together with the lack of a fair or reasonable outcome, led her to the conclusion that the wife had no choice but to enter into the two agreements.

In circumstances where the Full Court accepted almost all of the finding of fact, and had erred in not accepting there was no outcome available to the wife which was fair and reasonable, the High Court plurality said that the Full Court ought to have found that the wife was subject to undue influence, albeit

mis-described by the trial judge as duress.

The plurality’s conclusion

The plurality set out factors which it identified as being relevant to whether a financial agreement should be set aside for undue influence (at [60]):

1. Whether the agreement was offered on a basis that it was not subject to negotiation;
2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
3. Whether there was any time for careful reflection;
4. The nature of the parties’ relationship;
5. The relative financial positions of the parties; and
6. The independent advice that was received and whether there was time to reflect on that advice.

These factors were not only important to the determination in this case, but clear guidance as to the factors which should be looked at in future applications to set aside a financial agreement for undue influence.

In relation to unconscionable conduct, the High Court plurality relied on Amadio and said (at [64-65]) that the adjective “special” in the requirement for “special disadvantage” is “used to emphasise that the disadvantage is not a mere difference in the bargaining power but requires an inability for a person to make a judgment as to his or her own best interests”.

The trial judge found that the wife’s powerlessness and lack of choice but to enter into the agreements pointed inevitably to the conclusion that she was at a special disadvantage. The husband was aware of the wife’s special disadvantage and it was, in part, created by him:

1. He created the urgency with which the pre-nuptial agreement was required to be signed and the haste surrounding the post-nuptial agreement and the advice upon it.
2. She had no reason to anticipate an intention on his part to insist upon terms of marriage that were as unreasonable as those contained in the agreements, even though she knew in advance that there was to be some type of document.
3. The wife and her family members had been brought to Australia for the wedding by the husband and his ultimatum was not accompanied by any offer to assist them to return home.

The High Court plurality said these matters increased the pressure which contributed to the substantial subordination of the wife’s free will in relation to the agreements. The husband took advantage of the wife’s vulnerability to obtain agreements which, on the uncontested assessment of the wife’s solicitor, were entirely inappropriate and wholly inadequate.

Minority judgments

There were two separate minority judgments, being of Justices Nettle and Gordon. Both agreed that the 2 agreements should be set aside for unconscionability, but not for undue influence.

Justice Nettle felt he could not depart from the decision of the Court of Appeal of the Supreme Court of New South Wales in Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149, which decided that the concept of illegitimate pressure should be restricted to the exertion of pressure by “threatened or actual unlawful conduct”. He said that had “largely been followed without demur”.

Justice Nettle said (at [71]) that there was much to be said for the view that, the test of illegitimate pressure should be whether the pressure goes beyond what is reasonably necessary for the protection of legitimate interests. However, the equitable doctrine of unconscionable conduct did not have the same restrictions as undue influence and is not restricted to unlawful means.

Although Nettle J believed that the concept of illegitimate pressure might be more appropriate for this case, it was also capable of being seen as unconscionable conduct, for reasons similar to those expressed by the plurality. Like the plurality, Nettle J’s view (at [76]) was that the circumstances had so affected the wife’s state of mind that she was incapable of make a judgement in her own interests. There was no other rational explanation for the wife’s decision not to insist upon the substantive changes which her solicitor recommended, and instead to acquiesce to the husband’s “extraordinary demands”.

The second agreement was dependent for its efficacy upon the first agreement, and so it fell with the earlier agreement, but, if that were not so (at [77]) the wife was “in a position of special disadvantage which rendered her even less capable of making a decision in her own best interests to refuse to sign the second agreement than she had been capable at the time of the first agreement of insisting upon amendments in accordance with [her solicitor’s] recommendations”. On this analysis, the second agreement was more at risk of being set aside than the first agreement.

Justice Nettle held that it was against equity and good conscience for the husband or his successors to be permitted to enforce either agreement.

Justice Gordon said in relation to unconscionability, (at [81]) that although the wife’s “independent, informed and voluntary will was not impaired, she was unable, in the circumstances, to make a rational judgement to protect her own interests”. Those circumstances were evident to and substantially created by the husband, and it was unconscionable for the husband to procure or accept the wife’s assent to the agreements.

Justice Gordon held that undue influence did not apply because (at [80]) the wife’s “capacity to make an independent judgment was not affected”. She “was able to comprehend what she was doing when she signed the agreements, and that she knew and recognised the effect and importance of the advice she was given”. Moreover, she wanted the marriage to proceed and to prosper. She knew and understood that it would proceed only if she accepted his terms. Once she decided to go ahead with the marriage, it was right to say, as the trial judge said, that she had “no choice” except to enter into the agreements. No other terms were available. But her capacity to make an independent, informed and voluntary judgment about whether to marry on those terms was unaffected and she chose to proceed. Her will was not overborne.

Justice Gordon set out the requirements to establish unconscionable conduct (at [113]):

“A special disadvantage may also be discerned from the relationship between parties to a transaction; for instance, where there is ‘a strong emotional dependence or attachment’ … Whichever matters are relevant to a given case, it is not sufficient that they give rise to inequality of bargaining power: a special disadvantage is one that “seriously affects” the weaker party’s ability to safeguard their interests.”

She found that the wife was under a special disadvantage and that the agreements were “grossly improvident” (Bridgewater v Leahy (1998) 194 CLR 457 at 493). It was relevant that the wife’s entitlements in the event of separation were (at [121]) “extraordinarily and disproportionately small in comparison to what the wife would have been entitled to if she had not entered into the agreements”. Unlike the other judges, who looked at the general fairness of the agreements, Gordon J, expressly compared the wife’s entitlements under the agreements to her entitlements under the FLA, if she had not entered into the agreements.

Although the wife was expecting an agreement about the husband’s wealth, he had brought her to Australia promising to look after her like “a queen” and it was only 10 days before the wedding that she received detailed information about the husband’s finances and became aware of the specific contents of the first agreement.

Justice Gordon said (at [123]) that the fact that the wife received independent legal advice about the two agreements and rejected her solicitor’s recommendation on each occasion did not mean that there was not unconscionable conduct. The fact that she was willing to sign both agreements despite being advised that they were “terrible” served to underscore the extent of the special disadvantage under which she laboured, and to reinforce the conclusion that it was unconscientious for the husband to procure or accept her assent.

Section 90F

The agreements included an “acknowledgement” that the wife was able to support herself without an income tested pension, allowance or benefit, taking into account the terms and effect of the agreement when the agreement came into effect. This statement was designed to ensure that the agreement, in compliance with s 90F, ousted the jurisdiction of the court to make an order for spousal maintenance.

As the plurality said, this statement was made (at [20]) despite the wife’s “extremely limited personal means”. The plurality made no findings on whether the s 90F declaration was effective as submissions were not made with respect to it either in the Full Court of the Family Court or in the High Court, but the plurality appeared to express doubt as to whether the wife was bound by her “acknowledgment”. The High Court drew the attention of the parties to the issue, but because of the way the case was presented it was significant only (at [20]) “as a matter of contextual construction”, which suggests that the incorrect statement may have assisted the plurality to reach the conclusions it made.

What next?

The High Court unanimously agreed that a financial agreement which was a bad bargain for a party who had been given legal advice not to enter into it, might be evidence of a vitiating factor such as duress, undue influence and unconscionable conduct. In the process, it clarified aspects of the law relating to the financial agreements, but also created new uncertainties.

Areas where Thorne v Kennedy gives some clarity for the future include:

1. The High Court listed six factors (which were not intended to be exclusive) which will have prominence in assessing where there has been undue influence in the particular context of pre-nuptial and post-nuptial agreements. They are repeated here because of their importance:
   1. Whether the agreement was offered on a basis that it was not subject to negotiation;
   2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
   3. Whether there was any time for careful reflection;
   4. The nature of the parties’ relationship;
   5. The relative financial positions of the parties; and
   6. The independent advice that was received and whether there was time to reflect on that advice.
2. Unfair and unreasonable terms of a financial agreement are relevant to a consideration of whether there has been undue influence or unconscionable conduct.
3. It is safer if the agreement provides for a fair outcome, by reference to s 79 or otherwise, and is not a “bad bargain”.
4. Entering into an agreement after marriage in the same terms as one entered into before the marriage will not overcome issues of undue influence or unconscionable conduct associated with the pre-nuptial agreement.
5. There is no longer any doubt as to whether undue influence can arise where a party has received independent legal advice.
6. Solicitors are sensible to be wary of “ink on the wedding dress” or “ink on the tuxedo” type agreements. If there are those concerns, the better approach is probably not to have a pre-nuptial agreement, but to simply have a post-nuptial agreement. Of course, the client may not want to marry without an agreement, because of the risk that the other party may not sign one afterwards. In Thorne v Kennedy the pre-nuptial agreement required both parties to enter into a post-nuptial agreement in the same terms as the pre-nuptial agreement, which was almost certainly counter-productive to finding that she entered into the second agreement voluntarily.
7. The principles of common law and equity are interpreted in the same way in a marital relationship as in other contexts.
8. The relationship of fiancé and fiancée is no longer a category of relationship where the presumption of undue influence applies.

Whilst the High Court gave clarity on some issues, many others were left unresolved. In reality, there are more uncertainties than there were before. These include:

1. How will the 6 factors be applied to other cases? – Dilemmas will undoubtedly arise when applying them to other facts. Does every factor need to be relevant? How long is needed for “careful reflection”? What if there are limited negotiations? What if the advice received by the weaker party was not as emphatic as it was in Thorne v Kennedy?
2. Although the plurality was clear that the circumstances constituted undue influence, there were two dissenting judgments.
3. Duress – The High Court did not address whether the agreements could have been set aside for duress.
4. Lawful act duress – There is limited Australian authority on “lawful act duress” and conflicting authority in England as to whether pressure must be “illegitimate” to constitute duress. The law in this area has not been clarified.
5. Test for “bad bargain” – The plurality described the agreements as “unfair and unreasonable”, and Nettle J described the husband’s demands as “extraordinary”. Only Gordon J expressly tested the terms of the agreements against the wife’s entitlements under the FLA without the agreements. Is Gordon J correct? Or are financial agreements in the context of vitiating factors tested against another standard, such as whether the terms are “unfair and unreasonable” or simply a “bad bargain”? How bad does a bad bargain have to be?
6. Effect on s 90K(1)(a) – Will “a bad bargain” mean that a financial agreement is more likely to be set aside for fraud, remembering that the court has a discretion as to whether to set aside an agreement, even if it finds that there was fraud?
7. Effect on s 90K(1)(d) – Will the test for hardship in relation to the care of children in Fewster & Drake (2016) FLC 93-745; [2016] FamCAFC 124 be ameliorated and the courts adopt a test along the lines of the test in Pascot & Pascot [2011] FamCAFC 945?
8. Meaning and effect of s 90KA – The High Court did not consider the meaning and effect of s 90KA, which is an issue the Family Law Courts have struggled with.
9. Unconscionability – Whether there is a distinction between unconscionability making the agreement void, voidable or unenforceable under s 90K(1)(b) and statutory unconscionability under s 90K(1)(e) remains unresolved.
10. Third parties – The case was only concerned with the presence of a vitiating factor between parties to an agreement. The plurality noted that duress, undue influence or unconscionable conduct by a third party raises different issues.
11. Section 90F – What is the effect of a statement in an agreement that a party is able to support themselves without an income-tested pension, allowance or benefit when that statement is untrue? This issue was raised by the High Court plurality which seemed to express doubt as to the effectiveness of such statements, but the issue was not determined.
12. False recitals – If s 90F statements are not effective when they are clearly untrue, what about statements that the parties had the ability to inspect financial disclosure of the other party or engage accountants or valuers but chose not to do so, when in fact they had no real choice? If there is unequal bargaining power and the parties state that they have waived their rights to seek disclosure, will this help to establish that there has been undue influence or unconscionable conduct?
13. Section 79A – How do the principles of undue influence and unconscionable conduct apply when a party is seeking to set aside a property settlement order under s 79A? Whilst s 79A(1)(a) expressly refers to duress (which appears to be difficult to establish), does “any other circumstance” include undue influence and unconscionable conduct as applied by the High Court to financial agreements? The High Court said that despite legal advice there could still be undue influence. If the “agreement” has been made into orders of the court, does this intervening step reduce the likelihood of establishing undue influence?
14. Dection 90G(1A) and “bad bargains” – A majority of the Full Court of the Family Court in Hoult & Hoult (2013) FLC 93-546; [2013] FamCAFC 214 said that the terms of the bargain were irrelevant when considering whether a financial agreement which does not meet the s 90G requirements should be “saved” under s 90G(1A) because it is “unjust and inequitable” if the agreement is not binding on the parties. Some judges, such as Murphy J (the trial judge in Hoult), and Thackray J (who supported the orders of the majority in Hoult but for different reasons) disagreed. Is it now open, and indeed proper, for the Family Law Courts to re-consider whether a “bad bargain” should influence the exercise of the s 90G(1B) discretion as to whether it is “unjust and inequitable if the agreement were not binding on the spouse parties to the agreement”. Considerable weight was attributed by the High Court to the unfairness and unreasonableness of an agreement when considering whether there were vitiating factors under s 90K. Why should the s 90G(1A) discretion not take into account the fairness and reasonableness of the agreement? Why can’t the court consider contractual concepts, such as whether it is a “bad bargain” or whether the agreement is “unfair and unreasonable” in considering whether it is “unjust and inequitable” for this type of contract not to be binding?

Conclusion

The impact of Thorne v Kennedy reaches beyond cases where a party is seeking to set aside a financial agreement for a vitiating factor such as duress, undue influence or unconscionable conduct. Whilst its most obvious effect will be on lawyers (and their clients) negotiating pre-nuptial agreements where the parties have unequal bargaining power, Thorne v Kennedy is a salutary warning to all lawyers to be careful when negotiating and advising on all financial agreements, and possibly property settlement orders under s 79 and 90UM. It is also a useful reminder we are dealing with contracts. Financial agreements are a form of contract but they are still contracts, and subject to contract law. There is nothing special about them to take them out of the realms of contract law. Despite the introduction of s 90G(1A)–(1C), which gives the court a discretion to save agreements which do not comply with the s 90G(1) requirements, the safest way to ensure a financial agreement is binding is to meet those requirements and for the terms of the agreement to result in a fair outcome for the less wealthy party.

© Copyright – Jacqueline Campbell of Forte Family Lawyers and Wolters Kluwer/CCH. This paper uses some material written for publication in Wolters Kluwer/CCH Australian Family Law and Practice. The material is used with the kind permission of Wolters Kluwer/CCH.

Jacky Campbell, November 2017

Escaping tax debts? Is this the brave new world of Pt VIIIAA Family Law Act?

Minimising tax paid, if not actively evading tax, is considered by many family law clients to be a justifiable activity or even a national sport. The power of the Family Law Courts to use Pt VIIIA Family Law Act 1975 (“FLA”) to assign a taxation debt owed by one party to a relationship to the other party was considered by the Full Court of the Family Court in Tomaras & Tomaras and Official Trustee in Bankruptcy and Commissioner of Taxation (2017) FLC 93-806; [2017] FamCAFC 216. In Tomaras, the Full Court agreed that one spouse could be substituted for another spouse as the debtor responsible for the debt, even though it was a taxation debt and therefore owed to the Crown. The Commissioner of Taxation’s argument that Pt VIIIAA did not bind the Crown failed. Does this mean that the floodgates have opened to a new way to avoid paying tax?

Facts

The background facts can be explained fairly simply in a short chronology:

The orders sought by the wife included:

“8.   Pursuant to s 90AE(1)(b) of the FLA in respect of the applicant wife’s indebtedness to the Commissioner of Taxation for the Commonwealth of Australia taxation related liabilities in the amount of $256,078.32 as at 9 August 2016 plus General Interest Charge (GIC), the respondent husband be substituted for the applicant wife as the debtor and the respondent husband be solely liable to the Commissioner of Taxation for the said debt.”

The Federal Circuit Court judge, Purdon-Sully J, stated a case for the opinion of the Full Court in the following terms:

“Does s 90AE(1)-(2) of the FLA (Cth) grant the court power to make order 8 of the final orders sought in the amended initiating application of the wife?”

A case stated involves a court seeking the opinion of another court as to questions of law based on agreed facts.

Relevant legislation

The wife sought to rely on Pt VIIIAA of the FLA which empowers the Family Law Courts to make orders and injunctions which bind third parties if certain prerequisites are met. In particular, the wife relied on s 90AE(1)(b), which allows the court to direct a creditor to change the debtor or debtors. Section 90AE(1) provides:

“In proceedings under s 79, the court may make any of the following orders … (b) an order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to a debt owed to the creditor.”

Section 90AE(2) specifically allows the court to make any such order that:

(a) directs a third party to do a thing in relation to the property of a party to the marriage; or

(b) alters the rights, liabilities or property interests of a third party in relation to the marriage.”

Section 90AE(3) and (4) set out the requirements for making an order under s 90AE(1) and (2).

“(3) The court may only make an order under subsection (1) or (2) if:

(a)   the making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and

(b)   if the order concerns a debt of a party to the marriage – it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and

(c)   the third party has been accorded procedural fairness in relation to the making of the order; and

(d)   the court is satisfied that, in all the circumstances, it is just and equitable to make the order; and

(e)   the court is satisfied that the order takes into account the matters mentioned in subsection (4).

(4)   The matters are as follows:

(a)   the taxation effect (if any) of the order on the parties to the marriage;

(b)   the taxation effect (if any) of the order on the third party;

(c)   the social security effect (if any) of the order on the parties to the marriage;

(d)   the third party’s administrative costs in relation to the order;

(e)   if the order concerns a debt of a party to the marriage – the capacity of a party to the marriage to repay the debt after the order is made;

(f)   the economic, legal or other capacity of the third party to comply with the order;

(g)   if, as a result of the third party being accorded procedural fairness in relation to the making of the order, the third party raises any other matters – those matters;

(h)   any other matter that the court considers relevant.”

There is very little case law where s 90AE has been successfully used although it commenced operation in 2004. For example, it was unsuccessfully relied on in Stephens & Stephens & Anor [2005] FamCA 118 and B Pty Ltd & K and Anor and Ors [2008] FamCAFC 113. In Rand & Ors and Rand [2008] FamCAFC 50 the Full Court found that the trial judge provided inadequate reasons. Manichaeus & Manichaeus and Ors [2010] FamCA 397 was a rare example where s 90AE was used to re-assign liability for a debt, but the court expressed confidence that the husband would be able to pay the debt in full. The creditor bank had been a party to the proceedings earlier, but had elected not to be a party at trial. The bank was given procedural fairness before the final orders were made.

Presumption with respect to binding the Crown

The presumption that the statutory provisions expressed in general terms do not bind the Crown was considered by the High Court in Bropho v State of Western Australia [1990] HCA 24; (1990) 171 CLR 1. In Tomaras, Thackray and Strickland JJ discussed this case and noted that the presumption does not apply to provisions which, properly construed, confer a benefit on the Crown (Madras Electricity Supply Corporation v Boarland [1955] AC 667; McGraw-Hinds (Aust) Pty Ltd v Smith [1979] HCA 19; (1979) 144 CLR 633 at 656). They said (at [17]) that it could be reasonably argued that s 90AE can only impose a benefit on the Crown since:

“(a) instead of an impecunious taxpayer being responsible for a tax liability, his or her more wealthy spouse may be made solely responsible pursuant to s 90AE(1)(a), thereby increasing the prospects of recovery;

(b)   instead of one spouse being responsible for a tax liability, both spouses may be made liable pursuant to s 90AE(1)(b), thereby providing a remedy for recovery that otherwise would have been unavailable;

(c)   whilst an order might be made leaving the less wealthy spouse to meet a tax debt, such an order could not be made if it was foreseeable that the order would result in the debt not being paid (s 90AE(3)(b)); and

(d)   the legislation permits the court to make such order as it considers just for the payment of the reasonable expenses of the creditor incurred as a necessary result of the order (s 90AJ(2)).”

Section 90AE could therefore only operate to the detriment of the Crown if the court, in making an order (at [18]):

“(a) relieved a spouse of their obligation to pay tax which they would have paid if the order had not been made; and

(b)   instead imposed the obligation on a spouse who, although appearing at the time able to meet the liability in full, ultimately was unable to do so for some unforeseeable reason.”

Of course, as noted by Thackray and Strickland JJ, the Commissioner would be on notice that an order under s 90AE was sought and was entitled to be heard as required by s 90AE(3)(b) and 4(e) on the issue of the foreseeability of the tax not being paid if one party were to be substituted for the other. They concluded (at [20]):

“that the possibility of the Commissioner being adversely affected by an order under s 90AE does not arise by operation of the Act but only by the happening of an event that could not have been reasonably anticipated.” There was therefore no place for the presumption that statutory provisions are not binding on the Crown in relation to s 90AE.”

Although finding that the presumption did not apply, Thackray and Strickland JJ went on to consider the Commissioner’s arguments which were based on the view that the presumption did apply.

Taxation debts are not connected with particular assets

The Commissioner argued that a substitution order could only be made if a debt was associated with a specific item of property. Otherwise, it could not be seen as “reasonably necessary” or “appropriate and adopted” in order “to effect a division of property (s 90AE(3)(a)). Thackray and Strickland JJ were not convinced that there “was any sound basis for construing the provision so narrowly” (at [27]) and then said (at [28]):

“In any event, this argument goes only to the exercise of the power, rather than the existence of the power. It would always be open to the Commissioner to argue in a particular case that a proposed order was not “reasonably necessary, or reasonably appropriate and adopted, to effect a division of property.”

Commissioner’s other grounds

The Commissioner had other arguments which were rejected by the Full Court. These included:

• There was no express statement in s 90AE that the section bound the Crown
• There were alternative provisions in the FLA to deal with the circumstances where it was appropriate for one spouse to be responsible for a taxation liability incurred by the other spouse. In particular, s 80(1)(f) FLA gives the court the power to make an “order that payments be made … to a public authority for the benefit of a party to the marriage”.
• Permitting tax debts to be transferred between spouses would create absurdities in the application of the tax scheme because objection, review and appeal rights associated with the tax debt could not be transferred.
• The Explanatory Memoranda to the Bill which amended the FLA to include Pt VIIIAA did not refer to tax debts or other liabilities owed to government agencies.

Use of the word “creditor”

The wife argued that as the Commissioner was a “creditor” for the purposes of s 79 and s 79A of the FLA, it was also a “creditor” for the purposes of s 90AE.

Thackray and Strickland JJ found that there was an express link between s 79 and s 90AE and it would be surprising if different meanings were given to the word in the two linked sections. They said (at [55]):

“Had Parliament intended to exclude the Commissioner as a “creditor” when expanding the existing powers of the court, it would have readily done so in precisely the same way that it excluded a species of property from the ambit of the section when enacting s 90ACA, which is in these terms…”

Minority judgment

Aldridge J agreed generally with the majority and the orders made, but made two further points. He expressed a “tentative” view that s 90AE could not be regarded as beneficial to the Crown. He also considered that in relation to the rights to object and appeal in relation to a taxation liability, the original creditor could still exercise these rights even if one spouse was substituted for another and, perhaps a more complete answer was that an order was unlikely to be made if there was a genuine dispute as to the debt.

Outcome

The Full Court answered the case stated in the affirmative, but with the proviso that s 90AE(1) confers power only to make an order that the Commissioner be directed to substitute the first respondent for the applicant in relation to the debt owed by the applicant to the Commissioner of Taxation. The words “and the respondent Husband be solely liable to the Commissioner for the said debt” were omitted. The reason for the omission was that otherwise there was (at [60])

“… the potential to create the impression that whatever rights the applicant may have had to challenge the debt (which senior counsel for the Commissioner acknowledged might still exist) are extinguished by the making of the order. For the reasons given earlier, we are not entirely persuaded that such rights would be extinguished by an order under s 90AE”.

What next?

It is difficult to see what the wife was seeking to achieve in Tomaras. The husband was bankrupt, so unless the husband was likely to have a surplus after his bankruptcy ended, or there was a chance of an annulment, it appeared on the face of the judgment unlikely that the court would order that the taxation debt be borne solely by the husband as this would mean, contrary to s 90AE(3)(b) and (4)(e), that the debt was not likely to be paid.

Rather than opening the flood gates, the Full Court emphasised that s 90AE(3) requirements had to be satisfied before one party could be substituted for another party in relation to a debt as the Full Court has now clarified that s 90AE can bind the Commissioner of Taxation, so there may be other cases where one party can be substituted for another in relation to a tax debt, although the court will need to be satisfied that it is not foreseeable that the debt will not be paid in full if the order for substitution is made.

© Copyright – Jacqueline Campbell of Forte Family Lawyers and Wolters Kluwer/CCH. This paper uses some material written for publication in Wolters Kluwer/CCH Australian Family Law and Practice. The material is used with the kind permission of Wolters Kluwer/CCH.

Jacky Campbell, November 2017

Bullet-proof financial agreements—rare as hens’ teeth? Looking at financial agreements after Thorne v Kennedy

Not all financial agreements under the Family Law Act 1975 (FLA) are drafted equally. While a completely challenge-proof financial agreement is an urban legend, there are things you can do to increase their effectiveness. Understanding the fundamentals that are required is key. Keeping up-to-date with the latest case law is arguably even more vital than in other aspects of family law. When and why are financial agreements found not to be binding or set aside? The High Court delivered its judgment in Thorne v Kennedy [2017] HCA 49; (2017) FLC 93-807 on 8 November 2017, changing the law, yet again. There is probably no other aspect of family law which has been subject to such a barrage of legislative changes, prospective legislative changes and contradictory judgments.

This paper covers:

1. What needs to go into a financial agreement to make it valid?
2. Duress, undue influence, unconscionability and Thorne v Kennedy
3. Disclosure
4. Power of the court to declare financial agreements binding
5. Dealing with hybrid agreements
6. Contract law and financial agreements – how do they interact?
7. Equitable and common law right to performance of contract
8. Interpretation of financial agreements – Uncertainty and incompleteness
9. Material change in circumstances in relation to children
10. Checklist

1. What needs to go into a financial agreement to make it valid?

The basics

A close reading of s　90G(1) and (1A) (the de facto equivalents are s　90UJ(1) and (1A)), s　90K and 90UM (as the de facto equivalent is differently worded) and s　90KA (s　90UN) is vital to ensure a bullet-proof agreement.

The agreement also needs to comply with one of s　90B, 90C, 90D, 90UB, 90UC or 90UD, or be a termination agreement under s　90J or 90UK.

When is an agreement binding?

Section 90G(1)　 “Subject to　subsection　(1A), a financial agreement is binding on the parties to the agreement if, and only if:

(a)　 the agreement is signed by all parties; and

(b)　 before signing the agreement, each spouse party was provided with independent legal advice from a legal practitioner about the effect of the agreement on the rights of that party and about the advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement; and

(c)　 either before or after signing the agreement, each spouse party was provided with a signed statement by the legal practitioner stating that the advice referred to in　paragraph　(b) was provided to that party (whether or not the statement is annexed to the agreement); and

(ca)　 a copy of the statement referred to in　paragraph　(c) that was provided to a spouse party is given to the other spouse party or to a legal practitioner for the other spouse party; and

(d)　 the agreement has not been terminated and has not been set aside by a court.”

Sections 90G(1A)–(1D), which allow certain agreements which do not comply with s 90G(1) to be “saved”, are set out later in this paper.

An agreement can be set aside on any of the grounds in s　90K (s　90UM). The most relevant for the purposes of this paper are s　90K(1)(a), (b), (d) and (e) which provide that “a court may set aside a financial agreement if, and only if, the court is satisfied that:

(a) the agreement was obtained by fraud (including non-disclosure of a material matter); or …

(b) the agreement is void, voidable or unenforceable; or …

(d) since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and, as a result of the change, the child or, if the applicant has caring responsibility for the child (as defined in subsection (2)), a party to the agreement will suffer hardship if the court does not set the agreement aside; or

(e) in respect of the making of a financial agreement — a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable; or …”

2. Duress, undue influence, unconscionability and Thorne v Kennedy

In its first examination of financial agreements, the High Court in Thorne v Kennedy [2017] HCA 49; (2017) FLC 93-807 set aside two financial agreements, casting considerable doubt on the viability of financial agreements which are a bad bargain for one of the parties. Unanimously, the High Court set aside the two agreements for unconscionable conduct. The plurality also set them aside for undue influence. It was unnecessary to decide whether there was duress.

This paper was not intended to cover that decision, which was handed down 6 days before this presentation, but it has impacted on some of the topics covered in this paper. This paper includes only a brief summary of the decision, refers to that decision where relevant and should be read in conjunction with my article, “Thorne v Kennedy – Has the High Court hung financial agreements out to dry?” which can be accessed from http://www.wolterskluwercentral.com.au/category/legal/family-law/

The trial judge concluded that the wife was powerless to make any decision other than to sign the first agreement, and referred to an inequality of bargaining power and a lack of any outcome for the wife that was “fair or reasonable”. However, the trial judge also explained that the wife’s situation was “much more than inequality of financial position”, setting out six matters which, in combination, led her to the conclusion that the wife had “no choice” or was powerless:

1. Her lack of financial equality with the husband;
2. Her lack of permanent status in Australia at the time;
3. Her reliance on the husband for all things;
4. Her emotional connectedness to their relationship and the prospect of motherhood;
5. Her emotional preparation for marriage; and
6. The “publicness” of her upcoming marriage.

In relation to unconscionable conduct, the plurality (and the other 2 judges separately in minority judgments) referred favourably to the trial judge’s findings that the wife’s powerlessness and lack of choice but to enter into the agreements pointed inevitably to the conclusion that she was at a special disadvantage. The husband was aware of the wife’s special disadvantage and it was, in part, created by him:

1. He created the urgency with which the pre-nuptial agreement was required to be signed and the haste surrounding the post-nuptial agreement and the advice upon it.
2. She had no reason to anticipate an intention on his part to insist upon terms of marriage that were as unreasonable as those contained in the agreements, even though she knew in advance that there was to be some type of document.
3. The wife and her family members had been brought to Australia for the wedding by the husband and his ultimatum was not accompanied by any offer to assist them to return home.

The High Court plurality said these matters increased the pressure which contributed to the substantial subordination of the wife’s free will in relation to the agreements. The husband took advantage of the wife’s vulnerability to obtain agreements which, on the uncontested assessment of the wife’s solicitor, were entirely inappropriate and wholly inadequate.

For the purposes of this paper, perhaps the most important aspect of the judgment is the attitude of the High Court to “a bad bargain”. Whilst the Full Court of the Family Court has, in relation to s　90G(1A) said that parties are free to enter into “a bad bargain”, the High Court did not agree that in relation to s　90K(1)(b) and (e) “a bad bargain” will always be upheld, and in fact found that a bad bargain may contribute to a finding that it should be set aside. The terms of the agreements were very unfavourable to the wife and the plurality considered their terms to be relevant to a finding of undue influence. It said (at [56]) that the trial judge:

“was correct to consider the unfair and unreasonable terms of the pre-nuptial agreement and the post-nuptial agreement as matters relevant to her consideration of whether the agreements were vitiated. Of course, the nature of agreements of this type means that their terms will usually be more favourable, and sometimes much more favourable, for one party. However, despite the usual financial imbalance in agreements of that nature, it can be an indicium of undue influence if a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of this nature.”

Interestingly, it was only Gordon J who compared the outcome for the wife under the agreement to the outcome under the FLA. It is unclear by what benchmark the plurality and Nettle J judged the agreements as being “unfair and unreasonable” to the wife.

The plurality set out factors which it identified as being relevant to whether a financial agreement should be set aside for undue influence (at [60]):

“1. Whether the agreement was offered on a basis that it was not subject to negotiation;

2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;

3. Whether there was any time for careful reflection;

4. The nature of the parties’ relationship;

5. The relative financial positions of the parties; and

6. The independent advice that was received and whether there was time to reflect on that advice.”

The decision raises many questions and I identify some of these in this paper. Others are referred to in my article.

3. Disclosure

An explicit duty of disclosure is not set out in the FLA in relation to financial agreements. The duty is almost a negative one – if a party does not disclose their financial circumstances, the agreement is at greater risk of being set aside under s　90K(1)(a) or s　90UM(1)(a) or perhaps s　90K(1)(e) or s　90UM(1)(h).

A duty of disclosure may arise in relation to financial agreements in various ways:

• the Family Law Rules 2004, especially r 13.04(1) and the Pre-Action Procedures and the Federal Circuit Court Rules 2001, especially r　24.03
• the meaning of fraud” in s　90K(1)(a), (aa) and (ab), and 90UM(1)(a) – (d)
• the common law and equitable doctrines incorporated by s　90K(1)(b), 90UM(1)(e), 90KA, and 90UN, e.g. misrepresentation, unconscionable conduct.

Rule　13.04(1) requires that in any financial case there be a “full and frank disclosure of the party’s financial circumstances”. This suggests that silence and failure to disclose material facts amount to statutory fraud upon the court or the other party.

However, r 13.04 only applies to “a financial case” which is defined in the Dictionary to the Family Law Rules so as not to include the making of a financial agreement, but only proceedings to set one aside under s　90K or s　90UN. Justice Murphy said in Hoult & Hoult [2011] FamCA 1023 (at [126]) that there was an argument that financial agreements ought to embrace the fundamental principle in the Court’s Rules, namely the duty of full and frank disclosure, but the position was clarified in the FLA by specifying that fraud for the purposes of s 90K(1)(a) can be constituted by material non-disclosure.

The Full Court of the Family Court in Kennedy & Thorne (2016) FLC 93-757 (which was successfully appealed to the High Court on other grounds), adopted the submissions made on behalf of the husband’s deceased estate as to the distinction between disclosure in relation to property settlement orders and financial agreements (at [104]):

“… The obligation of disclosure under Pt VIII occurs in a context where a court is required to make findings about the assets, liabilities and financial resources of the parties, and where the court is also required to be satisfied that it is just and equitable to make orders.

By contrast, a financial agreement is a private contract between parties into which there is no express statutory requirement that disclosure be made or valuations be obtained; and there is no judicial scrutiny relating to their formation. A party may enter an agreement, and such agreement is capable of being binding, with little or no knowledge of the other party’s financial position. That is, consistent with the doctrine of freedom of contract, a party [sic] enter into a bargain without undertaking due diligence if they choose to do so, just as they may enter a bad bargain in the face of the proper due diligence. The fact that a financial agreement results in a different outcome to that which may have been awarded under s 79 and s 75 is not relevant to whether the agreement should be set aside.” (Footnotes omitted)

The Full Court pointed out that the safeguard was that if there is inadequate disclosure, the legal advice given to the other party can be, for example, not to enter into the agreement or only to enter into it upon receipt of specific financial information. Whilst correct, this presumes that the parties are on relatively equal bargaining terms.

Furthermore, it was fatal to the wife’s argument that she could not point to any detriment suffered by her as a consequence of her claims of non-disclosure, given that her legal advice was not to sign it. Her lawyer described the agreement as “the worst agreement I have ever seen”. There was no indication that the advice would have altered if the husband’s worth had been fully disclosed.

The High Court delivered judgment on 8 November 2017 in Thorne v Kennedy [2017] HCA 49; (2017) FLC 93-807. All judges found that the fact that the wife entered into “a bad bargain” was relevant to the determination that the agreement should be set aside for unconscionable conduct and by the majority for undue influence. The High Court did not deal with disclosure, but it is at least arguable that where an agreement includes statements to the effect that the parties waived their rights to seek disclosure from each other and there was unequal bargaining power, that the non-disclosure might assist the court to find that there has been a vitiating factor.

Case examples

In Grant & Grant-Lovett [2010] FMCAfam 162 the court found that the fact that the parties had been married for 12 years did not lessen the parties’ obligation to disclose prior to entering into the financial agreement.

In Adame & Adame [2014] FCCA 42 one of the grounds on which the financial agreement was set aside was non-disclosure of material matters by the husband. He failed to disclose real estate in the United States and bank accounts. Judge Jarrett did not accept that the disclosure requirement extended to providing values of assets, but he considered that parties were generally entitled to satisfy themselves about the values of assets and financial resources if they chose to do so. The failure to disclose was also found to be a misrepresentation. The agreement was voidable at the wife’s option.

In Jeeves & Jeeves (No 3) [2010] FamCA 488, although Cronin J found there had been a suppression of evidence, the wife’s case did not reach the standard of establishing any deceit on the part of the husband. There was no evidence that the husband concealed any plans that would have objectively made a difference. The wife did not act on the husband’s assertions. She did not believe the husband’s information and did not act upon it. There could therefore be no fraud, duress or unconscionable conduct on the part of the husband.

The wife’s application was under both s　79A and s　90K. In relation to the distinction between the two sections, Cronin J said (at [484], [485]):

“In respect of the financial agreement executed prior to the orders being made by the Court, the wife’s argument was inextricably linked to the material relating to the s　79A application. The words in s　90K are slightly different to those in s　79A but the underlying concept is the same.

The simple use of the word ‘fraud’ in s　90K must be read widely because of the inclusion of the reference to non-disclosure of a ‘material matter’. Thus it encompasses knowledge and intention relating to financial matters that, if known, would create a different picture to that portrayed on the surface. It is hardly distinguishable from the s　90K(1)(e) reference to conduct that was in all of the circumstances unconscionable. Fraud no longer means just the unlawful use of pressure to enter into such an arrangement.”

On appeal in Jeeves & Jeeves [2011] FamCAFC 94, the Full Court found that although the trial judge had erred in some of his findings as to the husband’s disclosure, the wife had not established that the non-disclosure was, or could reasonably have been, material to her consent, as she didn’t believe him anyway.

Justice Murphy in Hoult & Hoult [2011] FamCA 1023 disagreed with some earlier cases which supported inadvertent non-disclosure as being sufficient to constitute fraud under s　90K(1)(a). He considered that as s 90K(1)(a) refers to “fraud” there must be some proof of an intention to deceive.

In Parke & Parke [2015] FCCA 1692 a financial agreement was set aside for non-disclosure or suppression of facts amounting to a misrepresentation. The husband represented that Schedule 1 contained a list of all of his assets. That was untrue. He omitted the self-managed superannuation fund of which both parties were members although the wife did not know of its existence or even that she had a member’s account.

The finding of the misrepresentation being false, rather than unintentional, was strengthened by the conduct of the applicant in the financial agreement proceedings where he did not disclose the fund. Its existence was only discovered as a result of a subpoena to the husband’s accountant.

A Full Court appeal by the husband in Parke did not proceed as the husband died and his legal personal representative discontinued the action.

The parties in Kapsalis & Kapsalis [2017] FamCA 89 entered into 2 ageements. The court found that the wife chose not to make enquiries of the husband about his financial position before she signed a cohabitation agreement, although she conceded that she had every opportunity to do so. She understood when she signed the agreement that she would receive nothing if she and the husband separated. She conceded in cross-examination that, had she been told the husband’s assets were worth, say $20 million rather than $3 – 4 million, she would still have entered the agreement. She knew he had a house and corporate assets, but made no enquiry as to the value of them before entering into a second agreement under s 90B financial agreement one year after entering into the cohabitation agreement. Justice Rees found (at [25]):

“More relevantly here, it was clear … that nothing in the husband’s disclosure of his assets induced her to enter into the Agreement. To use the words of the section, the wife’s entering into the Agreement was not ‘obtained’ by the husband’s representations about his asset position. She was determined to enter into the Agreement no matter what his asset position was.”

After an eight year marriage and two children, the wife received no property and only modest spousal maintenance. This view of the effect of non-disclosure was consistent with Kennedy & Thorne (2016) FLC 93-757; [2016] FamCAFC 189, which was appealed to the High Court on other grounds. It is difficult to say if the outcome in Kapsalis would have been different if it was determined after the High Court delivered its judgment in Thorne v Kennedy, because the background facts set out in the decision are insufficient. Almost certainly, though, the case would have been argued differently in relation to whether there was undue influence or unconscionable conduct.

In Ainsley & Lake [2016] FCCA 2132, the wife sought enforcement of a post-separation financial agreement and the husband sought that it be set aside pursuant to s 90K(1)(a). The wife did not disclose her superannuation of $35,000 in the agreement although she had told her lawyers of its value and they had confirmed this in a letter. The husband knew that the wife had superannuation but believed it to be about $6,000. There was a blank space left in the schedule next to the words “Ms Ainsley’s superannuation”. The asset pool was modest, being less than $400,000.

The husband defaulted under the agreement, with his 2 breaches amounting to over $38,000.

Judge Henderson found that the wife failed “to disclose a material fact, albeit without any intention to defraud in the usual meaning of such a phrase” (at [14]). She accepted that fraud under s　90K(1)(a) had a broader meaning than the general understanding of its meaning and seemed to indicate that s　90K(a)(a) set a high bar said (at [23]–[24]):

“To find that an agreement was binding when there has been a non-disclose [sic] of a material matter would make a mockery of s 90K(1)(a) and its clear intention. For parties to be able to rely upon this section there must be a full and frank disclosure by each of them of their total financial position as at the date of signing the deed. That is clearly the intention of s 90K(1) and the intention of the certificate so that there is confidence that advice given to a party is as best as it can be because all material facts have been disclosed.

In addition the wife’s failure to disclose her current superannuation at the time she signed the deed is in breach of recital K, recital L and recital M of the binding financial agreement.”

The agreement was set aside although the husband had knowledge that the wife had some superannuation, he had failed to comply with the terms of the agreement and the pool was modest. These matters were irrelevant to the discrete issue in the case, which was the wife’s failure to disclose.

The wife argued that the husband’s failure to waive privilege and produce his then solicitor’s file was relevant and an adverse inference could be drawn from it. Judge Henderson rejected this argument and concluded (at [27]):

“It was the wife’s obligation to disclose her financial position. It was not the husband’s obligation to find it out.”

The wife’s application for leave to appeal out of time was dismissed in Ainsley & Lake [2016] FamCAFC 253.

4. Power of the court to declare financial agreements binding

To mitigate the strict technical interpretation of s　90G and make it more difficult for financial agreements to be set side, the Federal Justice System Amendment (Efficiency Measures) Act (No　1) 2009 (Cth) introduced remedial sections into Pt　VIIIA and Pt　VIIIAB relieving against the consequence of an agreement not meeting the requirements of s　90G(1)(b), (c) and (ca) or s　90UJ(1)(b), (c) and (ca).

To put it bluntly, to have a bullet-proof agreement, if you stuff something up under s　90G(1) (s　90UJ(1)), you need to be able to try to “save” it under s　90G(1A) (s　90UJ(1A)).

When can an agreement be saved? The legislative provisions

Section　90G(1A)–(1C) states:

“(1A) A financial agreement is binding on the parties to the agreement if:

(a) the agreement is signed by all parties; and

(b) one or more of paragraphs (1)(b), (c) and (ca) are not satisfied in relation to the agreement; and

(c) a court is satisfied that it would be unjust and inequitable if the agreement were not binding on the spouse parties to the agreement (disregarding any changes in circumstances from the time the agreement was made); and

(d) the court makes an order under subsection (1B) declaring that the agreement is binding on the parties to the agreement; and

(e) the agreement has not been terminated and has not been set aside by a court.

(1B) For the purposes of paragraph (1A)(d), a court may make an order declaring that a financial agreement is binding on the parties to the agreement, upon application (the enforcement application) by a spouse party seeking to enforce the agreement.

(1C) To avoid doubt, section 90KA applies in relation to the enforcement application.”

Section　90UJ(1A) – (1C) are the equivalent provisions for Pt　VIIIAB financial agreements.

The effect of s 90G(1A) is that an agreement, provided that it is signed by all parties, which does not meet all the other requirements of s　90G may be saved “if a court is satisfied that it would be unjust and inequitable if the agreement were not binding on the spouse parties”. In considering this, any changes in circumstances after the agreement was executed are irrelevant. This summary is subject to the difficulty with the transitional provisions identified in Hoult and Parker, and of interpreting s　90G(1A)(c) both of which are discussed below.

The Hoult and Parker appeals

The two main cases on s　90G(1A) – (1C) are Hoult and Parker. It is useful to look at both the trial judgments and the appeals, as there were strong minority judgments which approved aspects of the trial judgments. Because the divergent views it was my view before Kennedy v Thorne, that the interpretation of these sections remained unsettled. After Kennedy v Thorne, there is an even stronger case for reviewing the interpretation of these sections.

In Hoult & Hoult [2012] FamCA 367 when discussing the exercise of the discretion under s　90G(1A), Murphy J referred to the distinction between the phrase “just and equitable” used in s　79 and the phrase “unjust and inequitable” used in s　90G(1A)(c). He said (at [37], [39]):

“Yet, it nevertheless seems to me that in the exercise of the s　90G(1A) discretion, the ‘justice and equity’ of the bargain, or, perhaps, its inherent ‘fairness’ referenced to ordinary notions of that term, cannot be wholly irrelevant to the exercise of the s　90G(1A) discretion. …

In other words, it seems to me that the content of the bargain reached between the parties, in all of the circumstances of their particular marriage and its breakdown, must have some relevance if the inquiry is into ‘injustice and inequity’.”

Justice Murphy said (at [57]) that the enquiry required of s 90G(1A)(c) was a wide-ranging one that might include considerations such as:

• “The facts and circumstances surrounding the particular s 90G requirement not being met;
• What the parties themselves said and did, if anything, so as to render the agreement not binding;
• The circumstances within which the parties’ bargain was concluded;
• The length of time between the signing of the agreement and the decision as to whether the parties are to be held to it;
• What the parties said and did in reliance upon the agreement being binding subsequent to the signing of the agreement;
• Whether the terms of the bargain itself offend ordinary notions of fairness or plainly fall markedly outside any reasonable broad assessment of the s 79 discretion;”

On appeal, two out of the three judges of the Full Court expressly rejected the last of these. In the wake of the High Court’s judgment in Thorne v Kennedy, perhaps Murphy J was right and the Full Court was wrong?

Justice Murphy found that it would be unjust and inequitable if the financial agreement was not binding on the spouse parties to the agreement, saying (at [59]):

“I found in the first hearing that the wife was an active participant in negotiations that led to earlier drafts of the agreement and in discussions by which a bargain was struck. The bargain was satisfactory to both the husband and the wife at the time it was struck. Proper weight should be given to holding the parties to their bargain and to the importance that the legislature attaches thereto evident in the section in addition to, the place of Pt VIIIA in the Act and its role in replacing, relevantly, s 87 agreements. These, too, are important considerations.”

Both parties appealed. The husband appealed against the finding that the agreement was not binding within s　90G(1)(b). The wife appealed against the later declaration that within s　90G(1A)(c), it would be “unjust and inequitable” if the agreement was not binding on the parties.

The Full Court upheld both parties’ appeals in Hoult & Hoult (2013) FLC 93-546; [2013] FamCAFC 214. The majority, Strickland and Ainslie-Wallace JJ, found that Murphy J misdirected himself and applied the wrong test in interpreting and exercising the discretion under s 90G(1A) and erred in finding that a relevant enquiry in exercising the discretion under s 90G(1)(c) was whether “the terms of the bargain itself offend ordinary notions of fairness or plainly fall markedly outside any reasonable broad assessment of the s 79 discretion”.

Justices Strickland and Ainslie-Wallace said (at [305]–[306]):

“We are firmly of the view that the content of the bargain has no relevance to the exercise of discretion under s 90G(1A)(c) and we base that on the plain words of the paragraph. That is also consistent with what Justice Strickland said at first instance in Parker … and neither of the judges who formed the majority in the Full Court in Parker found otherwise.

We do not accept that because the enquiry in paragraph (c) is as to injustice and inequity, the content of the bargain must have some relevance. The issue of injustice and inequity can far more easily be seen as directed to whether, given the nature and extent of the non-compliance with the s 90G(1) requirements, it would be unjust and inequitable if the agreement was not binding.”

Justices Strickland and Ainslie-Wallace noted that whereas the trial judge claimed not to pass judgment or comment upon how the terms of the agreement might compare to any s　79 order made by the court, he did in fact consider the justice and equity of the bargain “in s　79 terms”, and overlooked the plain words of the paragraph.

Justice Thackray also upheld the appeals, but for slightly different reasons. Importantly, he found the brevity of the consultation was consistent with the wife’s assertion that she had not received the requisite advice. During a 50 minute attendance, the solicitor read the agreement to the wife, whose first language was not English, verbatim. He considered the fairness of the agreement was potentially relevant to s　90G(1A)- (1C) and said (at [197], [200], [201]):

“Having determined the appeal should be allowed for another reason, it is unnecessary to express a concluded view on Murphy J’s view that the inherent fairness of an agreement cannot be “wholly irrelevant” to the exercise of the discretion. However, as presently advised, I consider the inference to be drawn from the words in brackets is that although it is impermissible to take account of “circumstances” that have changed after execution of the agreement, it is permissible to take into account “circumstances” at the time of formation of the agreement. However, I cannot see any warrant in the text or in the extrinsic materials to treat “circumstances” as being restricted to matters associated with the negotiation, drafting and execution of the agreement, since these are not “circumstances” that are capable of change after execution. If those were truly the only relevant “circumstances”, then the words in brackets would appear to be surplus (rather than words of limitation, as suggested by Strickland and Ainslie-Wallace JJ) …

Although the Act now undoubtedly allows parties to enter into bad or grossly unfair bargains, it is perfectly consistent for the legislation to permit consideration of the fairness of the bargain (judged at the date of execution) in those cases where the safeguards in s 90G(1) have not been met. The absence of one or more of these safeguards surely means that different public policy considerations apply. Furthermore, failure to consider the potential injustice of the terms of the bargain would mean the discretion is exercised in a vacuum.

Therefore, while it may be appropriate to make a s 90G(1B) declaration where a party did not receive the prescribed legal advice but where the bargain was fair at the time it was struck, it may be inappropriate to make such a declaration where the advice was not given and the bargain was unfair or even punitive.”

The High Court in Thorne v Kennedy, whilst involving a consideration of s　90K, arguably affects the interpretation of s　90G(1) and 90G(1A)–(1C). If the bargain isn’t fair, and particularly if advice was not given, should s　90G(1) be more strictly adhered to? Should the court be more reluctant to find the agreement binding under s　90G(1A) than if there is a more minor beach of s　90G(1) and the agreement is a fair one? The High Court in Thorne v Kennedy reminded us that financial agreements are contracts, so contract law is relevant.

Justice Strickland pointed out at first instance in Parker & Parker [2010] FamCA 664 (at [108]):

“Significantly s 90G(1A)(c) does not refer to whether the terms of the agreement are unjust and inequitable, but whether ‘it would be unjust and inequitable if the agreement was not binding’. … (Our emphasis)”

He also noted that the legislature deliberately chose the words “unjust and inequitable” rather than “just and equitable” as in s　79 and considered (at [110]) that he was required:

“… to determine whether, given the circumstances surrounding the making of the financial agreement in this case, it would be unjust and inequitable for the agreement not to be binding on the parties.”

The husband submitted that the wife should not be able to avoid the terms of the agreement being binding on the basis of a technicality and should not be able to rely on her own legal practitioner’s omission. Justice Strickland was concerned about the wife not receiving advice as to the amendment to the agreement. Despite this omission being within s　90G(1A), he was not satisfied that it was unjust and inequitable if the agreement was not binding. He said (at [113], [115]):

“As mentioned above, the intention of the amendments is to avoid financial agreements being found not to bind the parties due to technical difficulties. Although s　90G(1A)(b) includes subsection　(1)(b) in the list of relevant subsections, it could be argued that the provision of legal advice is not a ‘technical’ issue but a substantive matter going to the heart of the agreement …

However, the receipt of independent legal advice by all parties to a financial agreement is an essential requirement. Indeed, it could well be unjust and inequitable to the wife if she was bound by the financial agreement in circumstances where I have found she was not fully advised of the implications of the amendment to clause 15.”

The husband appealed. A majority of the Full Court in Parker & Parker (2012) FLC 93-499; [2012] FamCAFC 33 allowed the appeal and remitted the matter for rehearing. This was decided before the Full Court decided Hoult. Justice Coleman said that Strickland J’s view of s 90G(1A) was overly narrow. Justice Coleman considered that s　90G(1A), (1B) and (1C) were “remedial” or “beneficial” and statutory interpretation principles required such provisions to be interpreted “generously” to ensure that the “mischief which the legislation sought to address was remedied” (see DC Pearce & R S Geddes, Statutory Interpretation in Australia, LawNews Butterworths, 7^th ed, 2011 at p 30).

The husband did not need to seek an order to enforce the financial agreement, as it had already been performed. He could only seek an order to dismiss the wife’s s　79 application. The question was whether the remedy in s　90G(1B) was available to the husband as s　90G(1B) referred to an “enforcement application being made by the party seeking to enforce the agreement”. Justice Coleman allowed the appeal on the basis that a “permissibly generous interpretation of s　90G(1A)” would not have led the trial judge to the conclusion he reached, “albeit other factors may have”. He did not specify those factors.

Justice May said Strickland J was hindered in considering s　90G(1A) by the manner in which the case was presented. There was no alternative but for the matter to be remitted for re-hearing so that consideration could be given to:

• The reference to an “enforcement application”, noting that no such application was made by the husband. She said, however, that “this may be of little moment”;
• Evidence to be adduced directed to an application under s　90G(1A);
• The full weight of s　90KA may need to be considered as s　90G(1C) refers to s　90KA.

Justice Murphy was the only judge to dismiss the appeal. He agreed with the trial judge, Strickland　J, that s　90G(1A) could not be used to find the agreement was binding. Justice Murphy agreed though with Coleman J that s　90G(1A), (1B) and (1C) were remedial provisions and should be read broadly so that an “enforcement application” was not required in the narrow sense.

Justice Murphy was also concerned about the legislation which applied to this particular agreement, as a result of the transitional provisions of the Federal Justice System Amendment (Efficiency Measures) Act (No 1) (2009) (Cth) (“Efficiency Measures Act”). The trial took place 12 months before judgment was handed down in Senior & Anderson [2011] FamCAFC 129; (2011) FLC 93-470 which dealt with the application of s　90G to an agreement entered into in the same period as the agreement in Parker, namely after 14 January 2004 and before 4 January 2010. This meant that the Efficiency Measures Act’s retrospective operation applied so as to (at [168] of Parker):

“(a) give s 90G(1) the “consolidated form” outlined in Senior at [189];

(b) give s 90G(1A) a form which excludes from its operation:

(i) s 90G(1)(c) either in the form in which that sub-paragraph appears in Senior or as it appears in the amended s　90G; and

(ii) s 90G(1)(ca).

(c) render s 90G(1A) applicable only to a financial agreement declared to be not binding by reason of non-compliance with s 90G(1)(b). But compliance with that paragraph is referenced to the “consolidated form” of that paragraph.”

The consolidated form of s　90G which Murphy J said applied in the 2004 to 2010 period was:

“Section 90G(1) Subject to subsection (1A), a financial agreement is binding on the parties to the agreement if, and only if:

(a) the agreement is signed by all parties; and

(b) before signing the agreement, each spouse party was provided with independent legal advice from a legal practitioner about the effect of the agreement on the rights of that party and about the advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement;

OR

before signing the agreement, the spouse party was provided with independent legal advice from a legal practitioner about:

i. the effect of the agreement on the rights of that party; and

ii. whether or not, at the time when the advice was provided, it was to the advantage, financially or otherwise, of that party to make the agreement; and

iii. whether or not, at that time, it was prudent for that party to make the agreement; and

iv. whether or not, at that time and in the light of such circumstances as were, at that time, reasonably foreseeable, the provisions of the agreement were fair and reasonable.

(c) either before or after signing the agreement, each spouse party was provided with a signed statement by the legal practitioner stating that the advice referred to in the italicised text or, in the alternative, stating that the advice referred to in the underlined text in paragraph (b) above, was provided to that party (whether or not the statement is annexed to the agreement); and

(d)   the agreement has not been terminated and has not been set aside by a court.

[Note to 90G(1) has been omitted]

(1A)   A financial agreement is binding on the parties to the agreement if:

(a) the agreement is signed by all parties; and

(b) One or more of paragraphs (1)(b) in either of the forms in which it above appears (c) and (ca) are is not satisfied in relation to the agreement; and

(c) a court is satisfied that it would be unjust and inequitable if the agreement were not binding on the spouse parties to the agreement (disregarding any changes in circumstances from the time the agreement was made); and

(d) the court makes an order under subsection (1B) declaring that the agreement is binding on the parties to the agreement; and

(e) the agreement has not been terminated and has not been set aside by a court.

(1B) For the purposes of paragraph (1A)(d), a court may make an order declaring that a financial agreement is binding on the parties to the agreement, upon application (the enforcement application) by a spouse party seeking to enforce the agreement.

(1C) To avoid doubt, section 90KA applies in relation to the enforcement application.

(2) A court may make such orders for the enforcement of a financial agreement that is binding on the parties to the agreement as it thinks necessary.”

Justice Murphy considered that the trial judge made two errors:

1. There was not an “agreement” and an “amended agreement”. A document was signed by the wife on 5 November 2004, and submitted to the husband’s solicitors on 8 November 2004. The document proffered by the husband on 11 November 2004 which included the addition of a substantive term by him constituted a counter-offer to the offer made by the wife. On the traditional analysis of offer and acceptance, there was only an agreement on 12 November 2004 when the wife accepted the husband’s counter-offer. The analysis of compliance with s　90G at trial concentrated on what took place before and after 5 November 2004, when it should have concentrated on what took place before and after 12 November 2004.

Justice Murphy agreed with the trial judge that there was insufficient evidence by which he could be satisfied that there was compliance with s　90G(1)(b) in its correct “consolidated form”, leading to Murphy J’s conclusion that the trial judge’s declaration that the agreement was not binding by reason of non-compliance with s　90G(1)(b) was plainly right.

2. The application of the transitional provisions of the Efficiency Measures Act.

When can an agreement be saved? The case law

A review of the cases which have considered s　90G(1A)–(1C) reveals a dearth of cases which actually show how these provisions apply. This is unfortunate, as ensuring a bullet-proof agreement is assisted by knowing when the courts won’t save an agreement under these sections. Due to lack of evidence, cases which reach the Full Court are usually remitted for re-hearing as to whether the agreement should be saved.

The manner in which s　90G(1A)–(1C) should be applied was considered, with some disagreement, in the following cases which were remitted for a re-hearing:

• Hoult & Hoult [2012] FamCA 367
• Hoult & Hoult [2013] FamCAFC 109; (2013) FLC 93-546
• Parker & Parker [2010] FamCA 664
• Parker & Parker [2012] FamCAFC 33; (2012) FLC 93-499
• Senior & Anderson [2011] FamCA 192; (2011) FLC 93-470

Other cases in which the result was that they were remitted for re-hearing, and are not particularly helpful to the question here are:

• Bilal & Omar [2015] FamCAFC 30; (2015) FLC 93-636 because the judge incorrectly found that the wife had not waived legal professional privilege.
• Logan & Logan [2013] FamCAFC 151; (2013) FLC 93-535 because it was not apparent how the trial judge found that the wife’s evidence was insufficient for the trial judge to be reasonably satisfied that s　90G(1)(b) had not been complied with.
• Campbell & Peters [2014] FamCAFC 76 because the issues of s　90G and 90G(1A) were not adequately dealt with.

The cases we are left with are:

• Manner & Manner [2015] FCCA 3043
• Piper & Mueller [2015] FamCAFC 241; (2015) FLC 93-686
• The Estate of Ms Fan & Lok [2015] FamCA 300
• Senior & Anderson [2011] FamCA 802
• Abrum & Abrum [2013] FamCA 897
• Warner & Cummings [2015] FCCA 3043

Manner & Manner [2015] FCCA 3043

The wife argued unsuccessfully that she did not receive the requisite advice. However, Jarrett J accepted that it was the husband who did not receive the requisite advice and concluded (at [142]):

“Again, leaving aside the certificate signed by [his lawyer] and recital J in the agreement, there is no evidence from [his lawyer] that he gave advice to Mr Manner about the matters specified in s　90G(1)(b) of the Act, or the matters provided for in item 8A(2) of the Efficiency Measures Act. The only evidence I have about those matters is in the certificate that is attached to the agreement and recital J in the agreement. At no time in the course of his evidence did [his lawyer]:

a. swear that what he certified in the certificate of advice annexed to the agreement was true;

b. give any particularity about the occasion or occasions upon which he gave the requisite advice to Mr Manner; or

c. give any particularity about the advice that he gave to Mr Manner.”

There was no question that s　90G(1A)(a), (b), (d) and (e) were satisfied. The issue was whether s　90G(1A)(c) was satisfied. After rejecting the wife’s application that the agreement be set aside under s　90K for fraud, Jarrett J found that in the making of the agreement the husband engaged in unconscionable conduct. The circumstances which led to this finding were (at [183]):

“a. Mr Manner was in a much stronger financial position and Ms Manner as each of them well knew;

b. Ms Manner asked three times in writing (2 and 9 February and 30 April 2007) for details of Mr Manner’s financial position;

c. Mr Manner gave instructions to his solicitor not to disclose his assets and liabilities and not to answer the correspondence from Ms Manner’s solicitor in any meaningful way;

d. Mr Manner then told his solicitor not to negotiate on his behalf, that he would do that directly with Ms Manner, thereby cutting out Mr Davies in the process;

e. Mr Manner knew that Ms Manner was very keen to marry him and had been for a long time;

f. Ms Manner knew that Mr Manner would not marry her unless she entered into a “pre-nup” before the wedding;

g. arrangements for their wedding had been made and guests were attending.

Mr Manner, I am satisfied, either by design or by accident, created an atmosphere of crisis when he had his own solicitor deliver the first draft of the agreement to Ms Manner’s solicitor (omitted) hours before the wedding and apparently without warning. It was at that point, for the first time, that Ms Manner was given a list of Mr Manner’s assets and liabilities. In my view, there was insufficient time for her to form any view about the accuracy of that list let alone make her own inquiries about the value of his assets if that is what she wished to do.”

Judge Jarrett declined to set the agreement aside under s　90K because the significant delay between the parties’ separation and the commencement of the proceedings (nearly 2¾ years) was unexplained and in the meantime the wife had insisted that the agreement be performed.

For the same reasons, Jarrett J was satisfied that it would be unjust and inequitable if the agreement were not binding. The agreement was “saved” because the wife had sought to enjoy the benefits of the financial agreement. Having made the decision to call on performance of the agreement, and accepted its performance, there was a very strong argument that she should not later be heard to assert rights which were inconsistent with that choice. The wife’s own conduct in affirming the financial agreement through her insistence on its performance was, she said, nothing more than a sham because she did not consider the agreement binding and she always intended to pursue a property settlement with the husband. For Jarrett J those matters weighed heavily against exercising the s　90K(1) discretion in the wife’s favour. In addition, it was the husband who had not received legal advice, not the wife, and the husband sought to maintain the agreement. It is likely that this case would not be decided differently post Thorne v Kennedy. Although not expressly stated by Jarrett J, equity relies on clean hands. The wfie did not have clean hands.

The fact that if the agreement was set aside that s　79 proceedings could not be commenced as the wife had passed away was not relevant as other courts could deal with the parties’ disputes.

Piper & Mueller [2015] FamCAFC 241; (2015) FLC 93-686

The husband argued that the agreement was not binding because the certificate referred to:

“whether or not, at the time the advice was provided, it was to the advantage financially or otherwise, of that party to make the Agreement.”

Justices Ryan and Aldridge summarised the evidence given by the husband (at [19]) to which objection was not taken, that instead of the advice he should have received, he:

“received advice as to the effect of the agreement on the parties’ rights, whether or not it was to the appellant’s advantage, financially or otherwise, to make the agreement, whether or not it was prudent for him to make the agreement and whether or not at the time, and in the light of such circumstances as were at that time reasonably foreseeable, the provisions were fair and reasonable.”

After looking at cases not under the FLA about giving advice, the judges concluded (at [52] – [53]):

“The significance of these cases is that, in determining what is “prudent”, the court looks to the future and the interests of the person in taking, or not taking, the proposed course. In other words, whether a particular course is prudent involves consideration of the advantages and disadvantages of the proposed course. Similarly, an assessment of whether the provisions of an agreement were fair and reasonable, necessarily involves a consideration of the advantages and disadvantages of those provisions.

… That evidence [as to the advice that the husband was given] gives rise to the inference that the appellant had been given advice as to the advantages and disadvantages of making the agreement. Advice as to whether making the agreement was prudent, or whether its provisions were fair and reasonable must have involved such consideration and advice. How else could advice be given that the proposed course was prudent, or the terms fair and reasonable?”

They said that the matters considered by the trial judge under s　90UJ(1A) were “relevant considerations that carried considerable and appropriate weight. The reference to the word ‘disadvantage’ in her Honour’s reasons … is clearly a reference to the disadvantages of an agreement not being in place as opposed to the disadvantage of losing the benefit of the particular terms of this agreement” (at [58]). The factors the trial judge took into account were:

• It would be to the disadvantage of the respondent if the agreement that the parties entered into was not upheld;
• The parties got advice;
• They each saw solicitors;
• The documents made it abundantly clear that each party wanted to keep their own assets;
• Both parties were adults;
• They had each been advised that they knew what they were doing;
• It was the intention of both parties that the agreement would deal with their financial arrangements and that neither of them would have resort to the FLA;

Justices Ryan and Aldridge referred to the Full Court in Hoult & Hoult [2013] FamCAFC 109; (2013) FLC 93-546 where Strickland and Ainslie-Wallace JJ (at [307]) stated the range of factors that were appropriate to consider when exercising the discretion (being factors relied upon by the trial Judge with one deletion):

• The terms of the section, the nature of a financial agreement as a creature of the Act, and the place of Part VIIIA within the overall scheme of the Act;
• The nature and extent of the non-compliance with the requirements of s 90G(1);
• The facts and circumstances surrounding the making of the agreement including, in particular, if one of the parties has complied with all of the mandatory requirements necessary to render the agreement binding.

Justices Ryan and Aldridge concluded (at [60], [62]) that the nature of the non-compliance was not substantial. The agreement was drawn up by the husband’s own solicitors on his instructions and he had the benefit of legal advice before signing the agreement and before it was sent to the wife for her to sign. The evidence did not establish that there was a failure to give the requisite legal advice to the husband.

Justice Murphy agreed with the conclusions of Ryan and Aldridge JJ.

Senior & Anderson [2011] FamCA 802

This was a re-hearing before Young J as to whether the agreement was binding under s　90G(1) or 90G(1A) and (1B) after the Full Court had upheld the husband’s appeal.

The husband disagreed with the finding by the Full Court that the remedies in s　90G(1A), (1B) and (1C) were not available if there was not an application to enforce a financial agreement. He sought leave to amend his response. The wife agreed with the husband’s interpretation and did not oppose the granting of leave. The husband also argued for a narrow interpretation of s　90G(1A)(c) as detailed in Parker & Parker [2013] FamCA 664.

Justice Young disagreed with the husband and agreed with the wife with respect to the different reasoning of Strickland and Murphy JJ in Senior & Anderson. He considered that Murphy J (who repeated his views in Parker above) was most likely correct and found that as the agreement between the parties satisfied s　90G(1)(b) but did not satisfy s　90G(1)(c), the consolidated s　90G(1A)(b) was not satisfied as each party was not provided with signed statements by their legal practitioners stating that the advice had been provided as the certificates referred to incorrect names. The form of s　90G(1A) at the relevant time did not give this as a ground on which an agreement could be found to be binding.

Of course, it must be remembered that Senior & Anderson is only relevant to agreements entered into in the 2004-2010 period.

Abrum & Abrum [2013] FamCA 897

Justice Aldridge found that the agreement did not meet the s　90G(1) requirements because:

(a) The wife was not given the advice required by s　90G(1)(b);

(b) The certificates did not comply with s　90G(1)(b). The certificates stated that the advice given was:

“1. the effect of the Deed on the rights of the parties to apply for an order for property adjustment under the Family Law Act 1975 (Cth);

2. whether or not at that time it was to the advantage, financially or otherwise, of my client to enter into the Deed;

3. whether or not at that time it was prudent for my client to enter into the Deed; and

4. whether or not at that time and in the light of such circumstances as were at that time reasonably foreseeable the provisions of the Deed were fair.”

Paragraphs 3 and 4 were no longer required by s　90G(1) when the agreement was entered into, but Aldridge J found that their presence did not render the certificate non-compliant. However, paragraphs 1 and 2 presented more serious problems, as (at [56]):

“Section 90G(1)(b) requires advice to be given about “the effect of agreement on the rights of that party”. That is different to the “rights of the parties to apply for an order for property adjustment”. Similarly, the Act requires advice to be given about “the advantages and disadvantages” and not merely the “advantage, financially or otherwise” of entry into the agreement.”

(c) A copy of the agreement was not given to the wife until five years after it was signed and five months after separation.

(d) A copy of the statement required to be given by s　90G(1)(ca) was not given until the copy of the agreement was given. Although the FLA does not give a time-frame, Aldridge J considered that the better view, but not a concluded view, was that a prompt exchange was necessary.

The wife’s solicitor didn’t give the advice in accordance with s　90G(1), as it was at the time (in 2007), but also didn’t give advice which complied with any other version of s　90G(1). There was no history taken of the marriage, no instructions taken on contributions and s　75(2) factors, and no advice given on the wife’s rights under s　79. There was no suggestion or recommendation that the parties could negotiate about the terms of the agreement. The wife’s entitlements under the agreement were limited to 5/44ths of the value of a waterfront property transferred by the husband’s parents to the husband at under-value.

Justice Aldridge said that the lack of proper advice to the wife was significant and constituted a very substantial failure to comply with s 90G(1)(b). However, he noted that the lack of advice or the lack of proper advice was not, of itself, determinative. He quoted from Thackray J (the minority judge on this point) in Hoult & Hoult and agreed with him that where there are minor breaches of s　90G(1) the court might be more easily satisfied that it would be unjust and inequitable if the agreement was not found to be binding, than where there are more serious breaches. It did not reflect a change in the onus but reflected the wide range of weight that can be given to various factors. In the case before him the non-compliance with s 90G(1)(b) was serious in that appropriate legal advice was not given as was required. However, he found that the agreement was binding, persuaded by the following factors (at [103]–[104]):

“On the other hand, it is clear that the gift of the property would not have occurred but for the wife entering into the Binding Financial Agreement along with the Deed of Family Arrangement and the Contract to Make Mutual Wills. These agreements not only involved the parties to the marriage but the paternal grandparents. It is more likely than not that the gift would not have taken place without those agreements being entered into. The husband’s parents acted to their detriment in reliance on the Binding Financial Agreement.

Also to be taken into account is the fact that the agreement does not oust all of the wife’s property rights but only those against this specific property. This carries less weight in this case because the evidence does not suggest that there were other assets of substance, or of the magnitude of the waterfront property, available against which property orders could otherwise be made. The only asset to which the evidence referred as being owned in February 2007 was the Suburb E property.”

Justice Aldridge did not look at the unfairness of the bargain for the wife (which a court might have felt justified in doing post Thorne v Kennedy despite the majority in Hoult saying it was irrelevant), but was persuaded by the fact that the parties acted in reliance on the agreement and in accordance with its terms and that the husband’s father had also complied with the agreement by transferring a waterfront property at gross undervalue, thereby effecting a gift of 39/44ths of a waterfront property of $1.7 million to the husband and the husband’s parents moved out of that property. The husband’s parents acted to their detriment in reliance on the financial agreement. It was unjust and inequitable for the agreement not to be binding.

Estate of Ms Fan & Lok [2015] FamCA 300

A pre-nuptial agreement (under s　90B) provided that in the event of separation a property at suburb C was to be sold and the proceeds used to discharge a mortgage for which one of the security properties was a property in the name of the wife. The wife died shortly after separation. The husband arranged for the suburb C property to be transferred into his sole ownership by right of survivorship. The applicant was the executrix of the wife’s estate and was one of the wife’s children. She sought orders to enforce the agreement.

The husband sought to set the agreement aside. He unsuccessfully argued that either the agreement was impracticable to be carried out (s　90K(1)(d)) or that there had been a material change in circumstances (s　90K(1)(c)). The former argument was rejected as the husband did not have evidence to support his assertion, and the latter as there were no children of the marriage.

The husband also argued that the agreement was not binding as he had not received the requisite legal advice required by s　90G(1)(b). The certificates of advice set out that the parties received advice in relation to a s　90B agreement when in fact it was a s　90C agreement. Justice Rees did not deal with the argument that the agreement may have still been valid (e.g. under Wallace & Stelzer (2013) FLC 93-566), but exercised her discretion under s　90G(1A)(c) and made a declaration that it would be unjust and inequitable if the agreement was not binding on the husband. Her Honour concluded (at [124]) without giving a detailed explanation as to her reasons:

“I do not find that the nature and extent of the non-compliance with the requirements of s　90G(1)(b)-(ca), which follows from the Court’s inability to rectify the certificates of legal advice, is sufficient to prevent the exercise of my discretion pursuant to s　90G(1A)(c).”

Other remedies were available to the deceased estate if the agreement was found not to be binding, so this was not a relevant issue.

Warner & Cummings [2017] FCCA 432

The husband did not raise his discontent with the agreement until the primary asset (a property known as Property E) did not sell for the amount that he anticipated and expected. Likewise, his expectations regarding an insurance recovery was not as much as he expected. It was not until 2 years after the agreement was entered into that he sought to re-visit the terms of the agreement.

Judge Neville considered the timing of the husband’s complaint about the financial agreement to be relevant to s　90UJ(1A)(c) and said (at [125]):

“In all of the circumstances, not least the Court’s assessment of the opportunism of the Applicant in bringing the Application, the “technical” nature of any omissions or deficiencies in the Agreement and or advice in relation to it, it would be utterly unjust and inequitable if the Agreement were not to be binding on the parties. The Applicant has sought, long after the event, to renege on the Agreement he had struck with the Respondent, which was properly recorded in that Agreement. He did so only after there was a change in his financial circumstances. And prior to the filing of the Application, for some two years or thereabouts there was no issue raised by the Applicant in relation to the nature, quality or extent of the advice provided to him by his former solicitor.”

Although Neville J seemed satisfied on the totality of the evidence that the relevant advice was given to the husband, he nevertheless declared the agreement binding under s　90UJ(1B).

5. Dealing with hybrid agreements

It has been the usual practice for parties to enter into two separate agreements if they want an agreement as de facto parties (under s 90UB of Pt VIIIAB) and as a couple contemplating marriage (under s　90B of Pt VIIIA). This appeared to be the best practice, as it ensured:

• that the advice is given in relation to each type of agreement, and
• that if one agreement is found not to be binding or set aside, the other agreement may still stand.

However, the Full Court in Piper & Mueller (2015) FLC 93-686; [2015] FamCAFC 241 in two separate judgments determined that one agreement could be under both Pts VIIIA and VIIIAB FLA. The parties were in a de facto relationship and also engaged to marry. As they had not married, whether the agreement would still be valid if they were married did not need to be determined.

Justices Ryan and Aldridge said (at [33]) that it was “a powerful indication that the two financial agreements can exist concurrently and in the one document” that s 90B(1)(aa) specifically prevents parties to a s 90B financial agreement from entering into another financial agreement to which s 90C and 90D apply, and that a similar scheme applied under Pt VIIIAB by the application of s 90UB(1)(b), but the Pt VIIIA exclusion in s 90B(1)(aa) did not preclude a Pt VIIIAB 9 agreement and vice versa.

The notion that two financial agreements can exist concurrently and in the one document was reinforced by the fact that only one can have operative effect at any one time. Both may be binding on the parties at the time of execution, but only one can have operative effect.

The operative terms of the agreement only referred to the “breakdown of the relationship” and not the “breakdown of a marriage”. Arguably, the precise phrase “breakdown of marriage” must appear in an agreement under s　90B for it to be binding. If that was true, there may have been no valid Pt　VIIIA financial agreement (s　90B), but the validity of the Pt　VIIIAB financial agreement (s　90UC) would be unaffected.

The Full Court did not believe that different types of advice were required to ensure the validity of the agreement under Pts　VIIIA and VIIIAB, but even if this is correct, the Full Court considered that both types of advice could be given in relation to the on agreement . If the formal requirements for one agreement were met, but not for the other one, the valid agreement would still stand.

While the Full Court did not concede that different advice was required under each section, one of the main areas of difference is addressed in the Civil Law & Justice Legislation Amendment Bill 2017. Currently, there is no provision in the FLA for a de facto couple whose financial agreement has been set aside or found to be invalid to apply for orders under s　90SE, 90SG or 90SM or a declaration under s　90SL, unless the application is made within two years of the end of the de facto relationship. The proposed amendment to s　44 FLA will allow an application to be made within 12 months after the day a financial agreement is set aside or found to be invalid.

Another change was proposed by the Family Law Amendment (Financial Agreements and Other Measures) Bill 2015, which lapsed upon the calling of the 2016 Federal election and is not in the 2017 Bill. This change was to have maintenance obligations in Pt　VIIIAB financial agreements end in the event of the recipient remarrying or entering into a de facto relationship with another person. Currently, only maintenance for married couples ends upon re-marriage (s　82(4)), although not upon entering into a de facto relationship with another person.

Other distinctions include that “other matters” cannot be dealt with in a Pt VIIAB agreement and a Pt VIIIAB agreement terminates upon marriage.

So, even if I am wrong (and the Full Court says I am), care is required with hybrid agreements.

6. Contract law and financial agreements – how do they interact?

It is beyond the scope of this paper to consider all the grounds in s　90K and 90UM for setting aside a financial agreement. Sections　90K(1)(b) and 90UM(1)(e) allow a court to set aside a financial agreement or a termination agreement if, and only if, the court is satisfied that “the agreement is void, voidable or unenforceable”. These sections incorporate all the principles of common law and equity which might render a contract “void, voidable or unenforceable” into the grounds to set aside agreements. The three concepts are:

• Void. If an agreement is void it never effectively existed. Contracts may be void for uncertainty, incompleteness or, in very limited circumstances, mistake.
• Voidable. A voidable contract can be pronounced void by one of the parties or held to be void by a court. It is not void unless action to void the contract is taken. Agreements may be voidable due to misrepresentation, mistake, duress, undue influence or unconscionability. A party may choose to rescind or affirm the agreement which is valid unless and until it is rescinded.
• Unenforceable. Unenforceable means that the contract is valid but for some reason cannot be enforced. An agreement may be unenforceable for public policy reasons or breach of contract.

An aggrieved party cannot unilaterally set aside a financial agreement. Setting aside requires a court order. Even where an applicant satisfies common law principles and establishes that the agreement is “void, voidable or unenforceable”, the court still has a discretion whether to set it aside.

Section 90K(1)(b) highlights the tension between the two main objectives of contract law:

1. to find a valid contract and promote commercial certainty, and
2. to protect parties who are at, or are assumed to be at, a disadvantage.

Grounds for finding a contract void or voidable which are particularly relevant to financial agreements are:

• Uncertainty. If an essential term is too vague the agreement will be void.
• Incompleteness. If the parties have failed to reach agreement on an essential term the agreement will be void.
• Duress.
• Undue influence.
• Unconscionability.
• Misrepresentation.
• Mistake.
• Fraud.

7. Equitable and common law rights to performance of contracts

Sections 90KA and 90UN deal with the validity, enforceability and effect of financial agreements and termination agreements. Section 90KA states:

“The question whether a financial agreement or a termination agreement is valid, enforceable or effective is to be determined by the court according to the principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts, and, in proceedings relating to such an agreement, the court:

(a)　 subject to　paragraph　(b), has the same powers, may grant the same remedies and must have the same regard to the rights of third parties as the High Court has, may grant and is required to have in proceedings in connection with contracts or purported contracts, being proceedings in which the High Court has original jurisdiction; and

(b) 　has power to make an order for the payment, by a party to the agreement to another party to the agreement, of interest on an amount payable under the agreement, from the time when the amount became or becomes due and payable, at a rate not exceeding the rate prescribed by the applicable Rules of Court; and

(c) in addition to, or instead of, making an order or orders under paragraph　(a) or (b), may order that the agreement, or a specified part of the agreement, be enforced as if it were an order of the court.”

The meaning and effect of s 90KA and its interaction with s　90K are still being explored by the courts and there is disagreement. Recent examples of its use are discussed below.

Cole & Abati [2015] FamCA 185

The trial judge, Macmillan J, made an anti-suit injunction restraining the husband from taking legal proceedings in Indonesia relating to property owned by the wife. The parties separated after 8 months and had 1 child. The husband had assets in Australia, New Zealand and Indonesia of $63 million. The wife had assets in Indonesia of $3 million which she had acquired prior to the marriage with money given to her by the husband.

The financial agreement was executed on the parties’ wedding day as a s　90B agreement. The husband’s statement of independent legal advice was signed that day, but before they were married. The wife’s statement had been signed three days earlier. She was pregnant at the time of the marriage and had moved from Indonesia to Australia earlier that year. They had been in a de　facto relationship for between 2 and 2½ years.

Although the Family Court is arguably not a court of equity, Macmillan J accepted that an injunction could be granted in the exercise of the power conferred by s 90KA. This approach was not challenged on appeal and the Full Court proceeded on the basis that this was correct.

The wife relied on s　90KA and s　34 FLA. Justice Macmillan did not find it necessary to consider whether s　34 (which gives the court power to issue writs), gave her the power to grant the injunction, although she noted that the Family Court had previously relied upon that section to make injunctions of the kind sought by the wife. Justice Macmillan accepted that there was no basis for construing the opening words of s　90KA as confining the operation of the words “in proceedings relating to such an agreement” to proceedings in which there was question as to whether the agreement was “valid, enforceable, or effective” (at [68] of Abati & Cole [2015] FamCA 185).

Justice Macmillan’s approach was upheld by the Full Court of the Family Court in Cole & Abati (2016) FLC 93-705; [2016] FamCAFC 78, in the absence of any challenge to that approach.

A narrower approach was adopted by Carew J in Lincoln (deceased) & Miller [2016] FamCA 457. Justice Carew’s judgment was delivered after the Full Court’s judgment in Abati & Cole, but the hearing of Lincoln was prior. Justice Carew refused to make declarations as to the validity of the financial agreement, as she said there was doubt as to whether there was a question as to the validity, enforceability or effectiveness of the financial agreement as required by s　90UN (the Pt　VIIIAB equivalent of s　90KA for de facto couples).

Cai & Hsueh [2017] FamCA 671

Justice Foster gave effect to the common intention of the parties as to the meaning of the agreement, taking into account s 90KA which enabled the Court to rely on the breadth of s 32 Judiciary Act 1903 (Cth) to “quell” disputes about financial agreements. Whilst this case is perhaps not the best exposition of the law of unenforceability of contracts where there is lack of clarity, the reference to s 32 is a useful reminder of the potential breadth of s　90KA. Section 32 provides:

“The High Court in the exercise of its original jurisdiction in any cause or matter pending before it, whether originated in the High Court or removed into it from another Court, shall have power to grant, and shall grant, either absolutely or on such terms and conditions as are just, all such remedies whatsoever as any of the parties thereto are entitled to in respect of any legal or equitable claim properly brought forward by them respectively in the cause or matter; so that as far as possible all matters in controversy between the parties regarding the cause of action, or arising out of or connected with the cause of action, may be completely and finally determined, and all multiplicity of legal proceedings concerning any of such matters may be avoided.”

An appeal to the Full Court in Hsueh & Cai [2017] FamCAFC 172 was not relevant to this issue.

Donald & Forsyth (2015) FLC 93-650; [2015] FamCAFC 72

The principles applied in determining whether a party to a contract has repudiated the contract such that the other party can terminate it were set out by Strickland and Ryan JJ (at [67]):

“a. there must be either a breach or an anticipatory breach of an essential term of the contract, or a sufficiently serious breach of a non-essential term (Koompahtoo Local Aboriginal Land Council and Anor v Sanpine Pty Limited and Anor [2007] HCA 61; (2007) 233 CLR 115), and

b. the other party must be ready and willing to complete the contract (Foran v Wight [1989] HCA 51; (1989) 168 CLR 385).”

The trial judge found that the husband’s position that he would not participate in his share of the cost of repairs to a property amounted to a repudiation of the contract.

The Full Court, in two separate judgments, found that the husband’s anticipatory breach of the agreement related to a non-essential term and that his anticipatory breach was not sufficient grounds to justify the wife rescinding the agreement.

Justices Strickland and Ryan found that the essential term was that the house be marketed in good repair. The husband did not seek to breach that term. If the husband had maintained his resistance to having his half-share of the costs of repair deducted from the proceeds of sale, then the obvious remedy for the wife was in damages. It was also apparent that at the time of the purported termination of the agreement by the husband, the wife was not ready and willing to complete the agreement as she did not want to sell the property. Therefore, she was not able to rescind the agreement.

The husband was entitled to seek orders for enforcement of the agreement. May J, but not Strickland and Ryan JJ referred expressly to s　90KA as being relevant.

8. Interpretation of financial agreements – Uncertainty and incompleteness

A contract may be held void for uncertainty or incompleteness if the intention of the parties cannot be determined objectively. The terms “uncertainty” and “incompleteness” are defined as:

• Uncertainty: The agreement, or an essential term of it is too vague or ambiguous for the court to determine the parties’ rights and obligations. The court cannot enforce an agreement or an essential term which is not definite and clear.
• Incompleteness: The agreement is incomplete because the parties failed to reach agreement on an essential term. Not everything necessary for the agreement to be implemented has been agreed.

Uncertainty

Points to note about uncertainty include:

• Courts are reluctant to strike down an agreement which parties intend to be binding. They endeavour to uphold contracts wherever possible.
• Courts try to objectively ascertain the parties’ intentions.

Clauses and agreements otherwise void for uncertainty may be saved by:

• applying an external standard such as the standard of reasonableness
• if the parties have acted on the agreement, their actions may clarify the uncertainty
• severing the uncertain part from the contract if it is not important.

Kostres & Kostres (2009) FLC 93-420

The Full Court found that an agreement was void for uncertainty. The agreement was entered into two days before the marriage. At the time, both parties mistakenly believed that the husband was an undischarged bankrupt. They did not tell their lawyers this. The parties’ mistaken belief about the husband’s status led to them acquiring assets in the wife’s name rather than in the parties’ joint names. Both parties sought that words be “read into” clause 6 of the agreement.

The Full Court was not satisfied that it could read words into the agreement. The agreement was particularly difficult to interpret as it used terms which were ambiguous or did not reflect the wording of the FLA, such as “acquired”, “assets”, “‘joint funds” and “from their own moneys”.

Parke & Parke [2015] FCCA 1692

This case involved two clauses in a financial agreement which created ambiguity and uncertainty. Pursuant to one clause, the wife’s half interest in a real property was excluded property which she retained in the event of a separation. However, pursuant to another clause the wife was required to transfer her 50% share to the parties’ son X within 60 days of a separation. A complicating factor which was not foreseen, at least by the husband when the agreement was entered into, was that X refused to accept a transfer of the wife’s half interest in the property and the agreement did not have a default provision setting out what was to occur in the event that X refused to accept the transfer.

The trial judge found that the clauses were essential terms of the agreement because they dealt with what was to happen in the event that the parties separated and set the agreement aside. They could not be severed from the agreement. The husband’s appeal was discontinued by the husband’s legal personal representative after the husband’s death.

Gibbs & Gibbs [2015] FamCA 630

Justice Hogan, in setting aside the financial agreement for uncertainty, said (at [8]):

“I think, instead, that essential terms (for example: matters such as “matrimonial property”; what happens to property acquired after marriage but before dissolution – to us only two examples) of the Agreement are vague.”

Incompleteness

An agreement is void for incompleteness if the parties failed to reach agreement on an essential term. Important points to note about incompleteness are:

• If it is clear that the parties intended to form a binding contract, the courts may imply an omitted term into the contract to save it.
•  If an agreement provides the formula or machinery necessary to clarify an essential term, the agreement is not void.
• Tools which are helpful to save contracts from voidness for incompleteness may also be useful to save contracts from voidness for uncertainty (eg if only part of the agreement is incomplete, it may be severable).

Incompleteness and the limitations of the doctrine of rectification were discussed in Fevia & Carmel-Fevia (2009) FLC 93-411; [2009] FamCAFC 816. In Fevia, Murphy J quoted from Sindel v Georgiou [1984] HCA 58; (1984) 154 CLR 661 where the High Court said (at [13]):

“Rectification is a remedy which cures the erroneous expressions of the parties’ true intentions in a contract which is already binding. It is not a remedy which brings a contract into existence in a situation in which the parties have not by their own acts arrived at the concluded contract.”

Garvey & Jess [2016] FamCA 445

Justice Carew rejected the argument of the wife that the financial agreement was void for uncertainty as the parties only had an “agreement to agree”. The agreement provided that in the event of a breakdown of the relationship, the parties would “equally divide the joint assets”.

Justice Carew said (at [340) in relation to financial agreements generally:

“It is important, in my view, to have regard to the context in which agreements of this kind are entered into. They are not commercial agreements but arise as a result of a personal relationship which at the time of making is presumably a happy one. Parties to such agreements aim to avoid dispute as to how their assets should be divided if their relationship breaks down at some future time which may be decades away. The future circumstances of the parties cannot possibly be known at the time of entering into such an agreement.”

She concluded (at [41], [44):

“In my view, the deed is not void for uncertainty because:

a. The deed evinces an intention:

i) to be legally bound;

ii) to oust the jurisdiction of the court pursuant to Part VIII;

iii) to divide the assets in the proportion provided for in the deed.

It is not an ‘agreement to agree’.

b. While the term ‘joint assets shall be equally divided’ is an essential term, it is not uncertain nor is it incomplete because on the application of the objective test of a reasonable bystander, the term would be construed to mean that whatever assets they own jointly when the marriage breaks down are to be divided equally whether in specie or upon sale;

c. At the time of making the agreement the parties could not possibly have known what assets they may own at the relevant time and therefore it could not be said that the failure to allocate a mechanism for implementing the essential term of equally dividing the joint assets would have caused the husband or the wife to have refused to have entered into the deed because at that time they could not have known what mechanism would have been appropriate e.g. it was argued on behalf of the wife that the agreement should have stated who was to retain which asset or class of asset – in my view, such a suggestion would prove an impossible task when the nature and value of assets in the future could not be known at the time of entering into the agreement…

Applying the principles identified above, the term I would imply is to the effect that the parties will do all things necessary to give effect to the terms of the deed and in the event of dispute, a court may determine the method of implementing the terms of the deed. Such a term would be reasonable, would give business efficacy to the deed, “goes without saying”, is capable of clear expression and does not contradict any express term of the deed.”

9. Material change in circumstances in relation to children

Under s　90K(1)(d) and 90UM(1)(g) changed circumstances in relation to a child may be a ground to set aside a financial or termination agreement. Section 90K(1)(d) requires that:

“since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and, as a result of the change, the child or, if the applicant has caring responsibility for the child (as defined in subsection (2)), a party to the agreement will suffer hardship if the court does not set the agreement aside…”

Section 90K(2) sets out that a person has　caring responsibility for a child if:

“(a)　 the person is a parent of the child with whom the child lives; or

(b)　 a parenting order provides that:

(i) the child is to live with the person; or

(ii)　 the person has parental responsibility for the child.”

For an agreement to be set aside under this ground it must be established:

1. that there has been a change in circumstances relating to the care, welfare and development of a child
2. that the change in circumstances is “material”;
3. the change will cause either the child or the person with caring responsibility for the child to suffer hardship if the agreement is not set aside;
4. the court then has a discretion as to whether or not to set the agreement aside.

The term “material” occurs in s 90K(1)(a) and (d) and 90UM(1)(a) and (g). It appears to be a less stringent test than the term “exceptional” used in s 79A(1)(d) and 90SN(1)(d) and in s　136(2)Child Support (Assessment) Act 1989 which are similar provisions.

Parkes & Parkes [2014] FCCA 102

The financial agreement was set aside on the grounds of duress, but was also set aside under s　90K(1)(d). The financial agreement was signed by the wife three days before the wedding and gave the wife no entitlement to any of the property of the husband. After five years of marriage, the parties had two children for which the wife had the major responsibility for care, including the major financial responsibility. She had been employed full time when the agreement was entered into, but at the time of trial, she was a full time carer of the children and dependent upon Centrelink payments and child support. The only property listed in the financial agreement as belonging to her were a car which had been sold and the proceeds used for the family, and her superannuation. Under the agreement she had no claim on the matrimonial home, another real property and a business.

Judge Phipps found that there had been a material change in circumstances of the type required under s 90K(1)(d) and that if the agreement was not set aside, the wife would suffer hardship.

Pascot & Pascot [2011] FamCA 945

The financial agreement was entered into when the parties were the parents of one child and the prospective parents of a second child. There was no consideration in the agreement to the possibility of a third child and no evidence that this was discussed during the parties’ negotiations. As there is no definition of “material” in the FLA, Le Poer Trench J looked at the definition in the Butterworths Legal Dictionary where “material” is defined as “important, essential or relevant” and

“material alteration” is defined as being “a substantial or significant alteration”. Adopting these definitions, Le Poer Trench J said (at [359]):

“The birth of a third child cannot be dismissed as an insignificant or unsubstantial change in circumstances. There are significant costs associated with an additional child in terms of time and emotional investment as well as the financial cost that would most certainly affect the care, welfare and development of the children of the relationship. The change is certainly relevant to the agreement, as there is specific provision that the wife is to be primarily responsible for the children and she is not permitted by the Agreement to claim any compensation from the husband for that effort.”

The agreement assumed that the wife would be able to support herself and the children with an unspecified appropriate level of child support paid by the husband. This created hardship for the wife, thus satisfying the second leg of s 90K(1)(d).

Fewster & Drake [2015] FamCA 602

Foster J set aside the agreement under s 90K(1)(d). At the time of entering the agreement, the wife was pregnant and there had been two miscarriages. A　second child was born two years after the agreement.

The agreement provided in substance for the parties to retain their respective assets as at the date of the agreement and for any after-acquired joint property to be divided, after reimbursement of contributions with interest calculated at a daily rate, in the same proportions as the contributions. During the negotiations, at the request of the wife, the right of the wife to apply for spousal maintenance was re-instated.

Justice Foster said that it was not difficult to see that the wife would have little expectancy to any interest in after-acquired joint property when, at the time of the agreement, she had no prospective capacity to make any contribution. He relied heavily on Pascot. Some of the wife’s other grounds for setting aside the agreement which were unsuccessful – duress, undue influence and unconscionable conduct – might be decided differently since Thorne v Kennedy.

Fewster & Drake (2016) FLC 93-745; [2016] FamCAFC 214

On appeal, Aldridge and Kent JJ (with whom Strickland J agreed), noted that few cases have examined s　90K(1)(d). They referred unfavourably to the test for s　90K(1)(d) as proposed by Le　Poer Trench J. That test (at [354] of Pascot) was:

“a. There must be circumstances that have arisen since the making of the Binding Financial Agreement, being circumstances of a material nature relating to the care, welfare and development of a child of the marriage;

b. It must be demonstrated that the child or the applicant, if she has caring responsibility for the child, will suffer hardship if the court does not set the agreement aside;

c. The court may set the agreement aside if it considers it appropriate and make such orders under sec 90K(3) as it deems appropriate.”

Justices Aldridge and Kent were critical of this analysis of the test (at [50]):

“Essentially, the analysis in Pascot separates the words of the subsection into three steps. However, this test omits the critical words ‘as a result of that change’. Those words provide a necessary link between the changing circumstances and the hardship. According to the clear terms of the subsection, the hardship must result from the material change in circumstances, and not from some other cause.”

In relation to the meaning of “material”, Aldridge and Kent JJ said (at [52]) that the words “substantial, significant and relevant” used by the trial Judge were not an inapt way of describing the word; however, “for our part we do not see the benefit of substituting other words for those used in the Act itself, as in some cases that can mislead”.

Justices Aldridge and Kent found (at [63]) that the trial Judge had not erred in finding that the birth of the second child and the mother having the overwhelming care of the children physically and financially after separation constituted a material change in circumstances that had arisen since the parties entered into the agreement.

However, in relation to “hardship”, they said (at [65]) that it was “the changed circumstances which must give rise to the hardship, and not the agreement itself”.

The Full Court referred to Hoult & Hoult (2013) FLC 93-546; [2013] FamCAFC 214 and confirmed that there is no statutory provision which enables a financial agreement to be set aside “merely because it is unfair”. The hardship required was something more than unfairness. The Full Court quoted favourably from Whitford & Whitford (1979) FLC 90-612 at pp 78,144–78,145 where the Full Court said that “hardship” in relation to s 44(4) is:

“… akin to such concepts as hardness, severity, privation, that which is hard to bear or a substantial detriment …

In ordinary parlance, hardship means something more burdensome than ‘any appreciable detriment’. We consider that in s 44(4) the word should have its usual, though not necessarily its most stringent, connotations.”

Although Whitford dealt with applications for leave to institute property proceedings the Full Court in Hoult found that these passages were relevant to the ordinary meaning of “hardship”. The Full Court rejected the approach taken by the trial judge in Pascot (and adopted by the trial judge in Fewster & Drake) (at [378], [379]):

“If the Agreement is set aside, the wife would be able to make an application for orders under s 72 and 79 of the Act. It is safe to say that the outcome of such an application is likely to be very different to that brought about by the Agreement.

In light of this, I would find that hardship on the part of the wife is established, and that setting the Agreement aside is the only remedy.”

The Full Court concluded (at [71]) that “those findings do not establish hardship as it is correctly understood”. The husband’s appeal against the order setting aside the agreement was allowed as:

• The evidence did not establish how the wife’s circumstances had changed as a result of birth of or the care, development and welfare of the second child.
• The order did not permit a comparison to be undertaken between the financial position of the child, or the wife, under the agreement and the position that would exist if the agreement was set aside.
• There could be no determination that hardship would ensue if the agreement was not set aside.

An order for interim spousal maintenance had been made pending the determination of property proceedings. It was set aside and the application for spousal maintenance remitted for rehearing.

Post Thorne v Kennedy, it is possible that the test for the hardship required might less stringent and closer to that used in Parkes and Pascot than that set out in Fewster & Drake.

Kapsalis & Kapsalis [2017] FamCA 89

Justice Rees followed Fewster & Drake, saying (at [42]):

“The wife does not assert that she suffered any hardship after the birth of the children and up to the date of separation. The hardship which she now asserts arises out of the fact that she no longer lives in the house owned by the husband, that she has to pay rent, and that she no longer has the use of the husband’s income. Those are not matters arising out of changed circumstances relating to the children but rather out of changed circumstances relating to the marriage and separation.”

Justice Rees rejected the wife’s submission that the mere circumstance of the birth of children was sufficient to amount to a change in circumstances. The agreement itself contemplated that the parties would have children and that the agreement would still be binding. Justice Rees agreed with the Full Court in Fewster that the birth of a child is within the ordinary realms of expectation of a marriage and so is the care, welfare and development of a child.

The wife’s weekly income consisted of Centrelink benefits, child support and spousal maintenance. Her income totalled $1,224 per week, or $63,648 per annum, tax-free. She paid rent of $540 per week and, although her financial position was poor, it did not equate with the test of “hardness, severity, privation, that which is hard to bear, or a substantial detriment” as adopted in Fewster. The wife conceded that she had a good work history and that she was capable of seeking employment of some kind when the children were not in her care (which was every weekend). The wife conceded that she had the capacity to improve her financial position.

Milavic & Banks (No 2) [2016] FamCA 884

Macmillan J held that there was a “material change in circumstances” within s 90UM(1)(g). A child was born with autism after the signing of the financial agreement. It was found by Macmillan J (at [94]) that “the fact that since the parties entered into the Agreement the younger child has been diagnosed with autism, adding significantly to what is required of the parties for his care physically and emotionally and to some extent financially, is a material change relating to his care welfare and development”.

However, Macmillan J declined to set aside the agreement on that ground, stating (at [110]):

“Insofar as there is hardship caused to the husband, and directly or indirectly to the younger child, because he is in a financially disadvantageous position compared to the wife, that is in my view not a consequence of the fact that the child is autistic and in fact arguably his position would be exactly the same even if the child had not been autistic.”

The child spent limited time with the husband and the wife paid the husband child support. Insofar as there were additional costs arising from the child’s autism, the wife was meeting the lion’s share of those expenses, there was no dispute that the wife had the capacity to meet the child’s expenditure or that she would not do so. There was also evidence of government funding to meet the child’s needs.

10. Checklist

The following checklist is not intended to be comprehensive, but lists a few tips to make sure that that things don’t go wrong:

1. Check the names of the parties are correct.
2. Check the section of the FLA under which the agreement is made is correct, eg. s　90B or s　90C. The parties’ circumstances may have changed since the first draft.
3. Read that section of the FLA and check that the matters covered by the agreement can be.
4. Is it necessary to update disclosure or lists of assets & liabilities since the first draft?
5. Have detailed and contemporaneous file notes of conferences, including the time the conferences started and ended and who was present.
6. Give the client a letter of advice about the final version of the agreement a few days before the agreement is signed.
7. Update the advice if amendments are made to the agreement, making sure that the advice is given in relation to the final version of the agreement, not just the amendments.
8. Don’t include general statements in the agreement which are not true – e.g. mutual disclosure has occurred, party able to support themselves without Centrelink.
9. Follow s　90G(1) (s　90UJ(1)). Look at the wording of this section before your client comes into the office to sign the agreement, when you write to the other lawyer and before you close the file. Create a checklist and keep it on the file.
10. Avoid, if possible, provisions relating to superannuation in agreements entered into before separation, as the s　90MJ(1) requirements may not be met.
11. Post-separation, finalising a property settlement in court orders is almost always preferable. A financial agreement ousting the jurisdiction of the court to deal with spousal maintenance may be a useful adjunct. The proviso to this is that the impact of Thorne v Kennedy, if any, on s　79A is unknown. Will it be easier to set aside orders for undue influence or unconscionable conduct than it has been for duress? Are they “any other circumstance” in s　79(1)(a)?
12. Property acquired after the end of a de facto relationship or after a divorce cannot be dealt with in a financial agreement.
13. If there are spousal maintenance provisions, ensure you have complied with s　90E or 90UH and s　90F or 90UI.
14. If it is a Pt　VIIIAB financial agreement, make sure there is a de facto relationship. If it is a s　90B agreement, there needs to be a marriage before the agreement can be effective.
15. Check for uncertainties and inconsistencies in drafting. Use terms which are in the FLA.
16. Have another senior lawyer read the agreement.
17. Have you covered all the assets and potential assets?
18. Have you read the most recent cases on financial agreements, particularly of the Full Court and the High Court?
19. Are there potential claims in overseas jurisdictions now or later?
20. Don’t forget the kids. If the parties may have children, then provide for this.

Following the High Court judgment in Thorne v Kennedy, whilst there are many uncertainties, some further matters can be added to the above checklist:

21. The High Court listed six factors (which were not intended to be exclusive) which will have prominence in assessing where there has been undue influence in the particular context of pre-nuptial and post-nuptial agreements. They need to be considered when taking instructions, negotiating, drafting and advising on financial agreements. They are repeated here because of their importance:

21.1. Whether the agreement was offered on a basis that it was not subject to negotiation;

21.2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;

21.3. Whether there was any time for careful reflection;

21.4. The nature of the parties’ relationship;

21.5. The relative financial positions of the parties; and

21.6. The independent advice that was received and whether there was time to reflect on that advice.

22. An agreement which is fair and reasonable, perhaps close to a party’s s　79 entitlements, is more likely to be upheld.
23. Ensure there is mutual disclosure
24. Accept that the advice requirement in s　90G(1) is important and if there is a “bad bargain”, the absence of advice may mean that it cannot be “saved” under s　90G(1A).

Conclusion

Most of this paper was written before Thorne v Kennedy was handed down, but following Thorne v Kennedy had to be re-written to place provisos and question marks over cases already decided in relation to financial agreements, and not just those dealing with duress, undue influence and unconscionable conduct. As it was never intended that this paper deal with these vitiating factors, the fact that so much had to be reviewed and re-written was a surprise. It is likely there will be other surprises as the courts, lawyers and clients make sense of and apply the High Court’s first look at financial agreements.

It is possible to have a “bullet-proof” financial agreement, but the High Court has made it harder. Following Thorne v Kennedy, it is even more important than it was before to meet the requirements of s　90G(1) (or S　90UM(1)) and not just rely on the “saving” provisions as an escape clause. Having a fair bargain has always been my recommendation but it is even more important now, as it gives fewer opportunities for a party, lawyers and the courts to find that an agreement is not binding or have it set aside.

© Copyright – Jacqueline Campbell of Forte Family Lawyers and Wolters Kluwer/CCH.　This paper uses some material written for publication in Wolters Kluwer/CCH Australian Family Law and Practice.　The material is used with the kind permission of Wolters Kluwer/CCH.

Jacky Campbell, April 2017

High Court to rule on financial agreements

How do the concepts of duress, undue influence and unconscionability apply to the setting aside of financial agreements? Are they alternative arguments or overlapping? Does the giving of legal advice mean that a financial agreement cannot be set aside for duress? These are the types of questions which may be addressed in a forthcoming decision of the High Court.

Brief litigation history

The Federal Circuit Court in Thorne & Kennedy [2015] FCCA 484 decided that a financial agreement signed shortly before the wedding and a second agreement signed shortly after their wedding were not binding and should be set aside because of duress. The Full Court of the Family Court in Kennedy & Thorne (2016) FLC 90-737 upheld an appeal by the husband’s deceased estate. The Full Court found that the two agreements were not signed under duress and allowed the husband’s appeal.

On 10 March 2017 the High Court granted special leave to the wife to appeal from the decision of the Full Court of the Family Court. The special leave application is reported as Thorne v Kennedy [2017] HCA Trans 54.

Basis for special leave application

The wife’s counsel said the central question of the application for special leave was whether the High Court should give authoritative guidance on the principles of law and equity for setting aside financial agreements. The controversy reflected the “longstanding tension between the common law’s enthusiasm for the sanctity of freedom of contract and equity’s concern to prevent unconscientious misuse of bargaining power” (quoting Brereton J in “Binding or Bound to Fail? Equitable Remedies and Rectification of Financial Agreements” Australian Family Lawyer, Vol. 23, No 2.). The main equitable principle relied upon by the wife was duress but her alternative grounds were undue influence and unconscionability.

Counsel for the wife said that this is “an area that cries out for some guidance”, particularly as these principles were now usually dealt with in the context of consumer legislation. He contended that the facts of the case made it “a particularly good vehicle” and “a golden opportunity” for the High Court to examine the application of principles such as duress to financial agreements because:

“It is difficult to contemplate a starker set of circumstances – no job, no home, no visa, her parents brought out from Romania. Four days before the wedding she is put in a position of ‘sign the agreement or the wedding is off’.”

Another issue raised before the High Court was whether an agreement entered into after a marriage is tainted by the circumstances of an agreement entered into before the marriage.

Opposition to granting of special leave

The husband’s counsel, opposing the granting of special leave to appeal, argued that the principles of law and equity that should govern the court’s approach, were set out in s 90KA Family Law Act 1975 which provides that the court will apply “the principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts”, and specifically that the court “has the same powers, may grant the same remedies and must have the same regard to the rights of third parties as the High Court has.”

Justice Edelman was not certain that s 90KA was adequate for the task, asking:

“are there not large issues such as whether lawful actual duress is sufficient to set aside a contract, what is meant by the presumption of undue influence, whether the limited circumstances of a relationship is sufficient for setting aside a contract on the basis of undue influence or duress, what amounts to a sufficiently special disadvantage?”

His Honour noted that there was limited Australian authority on lawful act duress and conflicting authority in England.

The husband’s counsel contended that the law of duress was clear as ANZ Bank v Karam [2005] NSWCA 344 said that the act must be unlawful. Edelman J referred to the conflicting Privy Council authority of R v Attorney-General [2003] UKPC 22, an appeal from New Zealand.

The husband’s counsel also argued that the legal advice requirement for financial agreements under the Family Law Act removes the parties from the category of any special disadvantage. He relied on the plain reading of s 90G(1), rather than any case authority.

Justice Keane said that compliance with s 90G(1) did not ensure that there had not been unconscionability:

“These provisions are directed to ensuring that the parties know what they are doing. They cannot guarantee that there has not been the unconscionable exercise of a superiority of bargaining power by one of the parties.”

There was a discussion as to whether there was anything special about marriage which affected the operation of the principles of unconscionability, duress and undue influence compared to their operation in relation to commercial contracts. Keane J noted that a marital relationship “necessarily involves mutual support and maintenance” but then went on to say that “the marriage relationship which for centuries has recognised as one of its fundamental elements the obligations of mutual support – ‘With all my worldly goods I thee endow’, except that now we do not endow anybody with anything apparently.”

The husband’s counsel argued that at the time the financial agreements were signed the wife was unconcerned about her entitlements under the financial agreement in the event of a separation (and only concerned about the testamentary provisions) so it was inappropriate for her to “subsequently, when the matter turns out in a fashion that she does not intend, come back and complain about that particular agreement”. She got the bargain that she wanted, so there was no question of compulsion, duress or unconscionability. He also submitted that it was not an appropriate case for the High Court to examine the principles.

Special leave granted

The High Court granted special leave to the wife to appeal. At this stage, written submissions and other documents are due to be filed by 24 May 2017.

Cases mentioned in the special leave hearing which may be looked at by the High Court to examine their applicability to financial agreements include Commonwealth Bank of Australia v Amadio (1983) 151 CLR 447; Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649; Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113; Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621; and Bridgewater v Leahy [1998] HCA 66; 194 CLR 457.

What can we expect?

The legal difficulties which may be addressed in the appeal include:

• The distinctions between duress, undue influence and unconscionable conduct but particularly duress. Some Family Law Court judges and family lawyers have found it difficult to apply them and to distinguish between them.
• Whether a different test applies to marital relationships than to commercial relationships.
• Whether duress requires “illegitimate pressure” or there can be “lawful act” duress.
• Whether the giving of legal advice as required by s 90G(1) means that there cannot be a finding of duress (or perhaps undue influence or unconscionable conduct).
• Whether an agreement signed after marriage is tainted by problems associated with an agreement signed prior to marriage.

This High Court appeal is “a golden opportunity” for Family Law Courts and family lawyers to receive some guidance, not only about the application of duress to financial agreements (and perhaps undue influence and unconscionable conduct as well) but also the interaction of s 90G(1) and s 90KA. It is over 16 years since financial agreements were introduced into the Family Law Act. Some guidance on these issues from the High Court is well overdue.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH

Jacky Campbell, April 2016

Bankruptcy, financial agreements and the rights of creditors

The Full Court of the Family Court of Australia in Grainger & Bloomfield^[1]  considered the standing of a creditor to apply to set aside a financial agreement after the debtor spouse became a bankrupt. Shortly prior to the bankruptcy, the bankrupt spouse transferred her legal title in the home to her husband, which left the creditor unable to recover as there were little or no assets in the bankrupt estate.

Background Facts

Mrs Grainger purchased an unencumbered property at E in Queensland in 2007 with funds provided by her husband, Mr Grainger. From 2008, Mrs Grainger borrowed amounts totalling $2.6 million from a bank. The loan was secured by a mortgage over the E property.

As a result of proceedings in the Queensland Supreme Court between Mrs Grainger and Ms Bloomfield (arising out of business arrangements between them), Mrs Grainger became a judgment debtor to Ms Bloomfield for $2,100,000 in late 2011. On or about 14 October 2012 a bankruptcy notice was served on Mrs Grainger in respect of that judgment debt.

On 1 November 2012 Mr and Mrs Grainger entered into a financial agreement under s 90C (during marriage) of the Family Law Act 1975 (“FLA”). Under the agreement, Mrs Grainger transferred her interest in the E property to Mr Grainger subject to the mortgage.

Mrs Grainger was served with a creditor’s petition in December 2012. She became a bankrupt on a debtor’s petition in January 2013. Ms Bloomfield lodged a proof of debt in respect of her judgment debt with Mrs Grainger’s trustee in bankruptcy.

Applications

In January 2014 Ms Bloomfield filed an initiating application in the Federal Circuit Court naming Mr and Mrs Grainger as respondents and seeking orders under s 90K of the FLA to the effect that:

• under s 90K(1)(aa)(i), the financial agreement between Mr and Mrs Grainger be set aside;
• under s 90K(3), Mr Grainger transfer the E property (free of the mortgage) to the bankrupt estate of Mrs Grainger, or alternatively pay to that estate a sum equal to the market value of the property as at the date of transfer.

Ms Bloomfield also sought a declaration to the effect that the agreement was not binding under s90G of the FLA.

Mr Grainger sought that all, or parts, of the statement of claim filed by Ms Bloomfield in support of her initiating application be struck out, or alternatively that the proceedings be dismissed (in whole or in part).

Neither Mrs Grainger or her trustee in bankruptcy took any part in the proceedings before Judge Cassidy or before the Full Court.

Proceedings before the trial judge

On 24 September 2014, Judge Cassidy of the Federal Circuit Court made orders striking out:

• certain paragraphs of the statement of claim (being those in support of the claim for the declaration that the financial agreement was not binding).
• the paragraph of the initiating application in which that declaration was sought.

Ms Bloomfield’s application, to the extent that it sought orders under s 90K(1)(aa) and s 90K(3), remained on foot. Judge Cassidy also ordered a transfer to the Family Court.

The appeals and leave to appeal

The Full Court of the Family Court granted both parties leave to appeal against the interim orders. Mr Grainger said that three questions were raised. Ms Bloomfield phrased the three questions differently, but they were similar in substance. Mr Grainger’s questions were:

Q1  Where a party to a financial agreement has become bankrupt, does a creditor of the bankrupt have standing to apply to set aside a financial agreement or seek relief under s 90K(3)?

Q2  Does the power in s 90K(3) to make orders adjusting the rights of persons extend to adjustments other than for the purpose of substantially restoring the position existing before the financial agreement?

Q3  In seeking to set aside a financial agreement under s 90K may a creditor rely on any grounds other than the ground specified in s 90K(1)(aa)?

The trial judge answered Q1 as yes, Q3 as no and refused to determine Q2.

Relevant statutory provisions

Section 90K(1) sets out the grounds for setting aside a financial agreement. The relevant subsections relied upon by Ms Bloomfield were:

“A court may make an order setting aside a financial agreement … if, and only if, the court is satisfied that:

(a)     the agreement was obtained by fraud (including nondisclosure of a material matter); or

(aa)   a party to the agreement entered into the agreement:

(i)    for the purpose, or for purposes that included the purpose, of defrauding or defeating a creditor or creditors of the party; or

(ii)   with reckless disregard of the interests of a creditor or creditors of the party; or …

(b)     the agreement is void, voidable or unenforceable …”

A “creditor” for the purposes of s 90K(1)(aa) is defined in s 90K(1A) to include “… a person who could reasonably have been foreseen by the party as being reasonably likely to become a creditor of the party”.

Also relevant was s 90K(3), which deals with the rights of a party or “any other interested person” in the event that a financial agreement is set aside:

“A court may, on an application by a person who was a party to the financial agreement that has been set aside, or by any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of persons who were parties to that financial agreement and any other interested persons”.

Jurisdiction in relation to married or formerly married persons is conferred under the “matrimonial causes”.^[2] The definition of “matrimonial cause” is in s 4(1). The definition includes:

“(eab)  third party proceedings (as defined in section 4A) to set aside a financial agreement;”

The definition of “third party proceedings” in s 4A for the purposes of paragraph (eab) is proceedings between:

“(a)    any combination of:

(i)    the parties to a financial agreement; and

(ii)   the legal personal representatives of any of those parties who have died;

(including a combination consisting solely of parties or consisting solely of representatives); and

(b)    any of the following:

(i)    a creditor;

(ii)   if a creditor is an individual who has died—the legal personal representative of the creditor;

(iii)  a government body acting in the interests of a creditor;

being proceedings for the setting aside of the financial agreement on the ground specified in paragraph 90K(1)(aa) …”

For the purposes of s 4A, a “creditor” is:

“(a)    a creditor of a party to the financial agreement; or

(b)    a person who, at the commencement of the proceedings, could reasonably have been foreseen by the court as being reasonably likely to become a creditor of a party to the financial agreement.”

and a government body is:

“(a)    the Commonwealth, a State or a Territory; or

(b)    an official or authority of the Commonwealth, a State or a Territory.”

Therefore, for a court to have jurisdiction in proceedings to set aside the agreement under s 90K(1)(aa), the proceedings must be between the parties to the agreement and either a creditor of one of those parties or “a government body acting in the interests of a creditor”. It was not contended before the Full Court that a trustee in bankruptcy was within the definition of “a government body” in s 4A.

The FLA was amended in 2003 to give a creditor standing to apply to set aside a financial agreement. Sections 90K(1)(aa) and 90K(3) (and related s 4A and new paragraph (eab) of the definition of “matrimonial cause” in s 4(1)) were inserted into the FLA. These amendments were intended to overcome the problems raised in ASIC and Rich & Rich,^[3] by clarifying the rights of a creditor to apply to set aside a financial agreement.

Significant amendments were made to both the FLA and the Bankruptcy Act 1966 (“the BA”) in 2005. Two of the three objectives of the amendments, according to the Explanatory Memorandum, were to:

“(a)    address longstanding issues concerning the interaction between family law and bankruptcy; and

(b)    prevent the misuse of financial agreements as a means of avoiding payment to creditors …”.

The amendments included:

• giving the Family Law Courts the power to make orders with respect to vested bankruptcy property in relation to a bankrupt party to a marriage;
• allowing a trustee in bankruptcy to be a party to s 79 proceedings;
• introducing a new act of bankruptcy where a party became involved as a result of a transfer of property pursuant to a financial agreement.

The appeal

Question 1: Does a creditor of a bankrupt have standing under s 90K(1)(aa) or s 90K(3)?

The first, and apparently novel question was whether a creditor of a bankrupt party remained “a creditor” for the purpose of s 90K(1)(aa) or an “interested person” for the purpose of s 90K(3), and thus could apply for relief under those sub-sections. It was accepted by the parties that if a person had standing as a creditor to apply to set aside an agreement under s 90K(1)(aa), that person was also an “interested person” entitled to apply for orders under s 90K(3).

Ms Bloomfield phrased this question as whether a “creditor” entitled to commence a third party proceeding was a “creditor” in the broad or ordinary meaning of that word, or whether it was limited to a creditor before a sequestration order was made against that party.

Mr Grainger argued that on Mrs Grainger’s bankruptcy, Ms Bloomfield ceased to be a “creditor” within the meaning of s 4A or an “interested person” within the meaning of s 90K(3), and accordingly ceased to have standing for the purposes of an application under either s 90K(1)(aa) or s 90K(3). Mr Grainger relied on the specific provisions of the BA, and the public policy considerations underlying it, for his essential submission that once bankruptcy intervened, no action could be taken by a creditor against the debtor to enforce the creditor’s debt. The creditor’s rights were confined to proving the debt in the bankruptcy, to sharing in the distribution of the bankrupt’s estate, and to ensuring the proper administration of the estate by the trustee. It was for the trustee to take action, where appropriate, to recover property the bankrupt disposed of prior to the bankruptcy. The creditor was not an “interested person” for the purposes of s 90K(3), because any relief that might be obtained on the setting aside of the agreement benefited the whole of the bankrupt estate, not just as an individual creditor.

Although not discussed in detail in the judgment, orders are rarely made allowing creditors to be or continue as parties to, proceedings (under the FLA or otherwise), or to remain parties, following the bankruptcy of one of the parties for the purposes associated with the recovery of the debt. Generally, as envisaged by s 58 and s 60 BA, fresh proceedings cannot be commenced against the bankrupt and existing proceedings are stayed. Section 58(3) provides:

“Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a)   to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b)   except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

Section 60(1) provides:

“The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit: …

(b)   stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection, against the person or property of the debtor:

(i)    in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt ….”

Leave to continue or commence proceedings against a bankrupt can only be given to the creditor by a court exercising bankruptcy jurisdiction under s 27(1) BA. There is, therefore, an absolute bar on the enforcement of a remedy under s 58(3)(a) BA except as otherwise provided in the BA.^[4] The meaning of the proviso, which is the only “out” for the creditor, do not appear to have been tested despite there being a significant number of cases on the meaning of s 58(3)(b) where the reliance on any exception could have been pleaded in the alternative. For example, in Fraser v Commissioner of Taxation & Official Trustee^[5] the creditor succeeded in her application under s 58(3)(b) because her s 79A application under the FLA was characterised as a “legal proceeding” not “the enforcement of a remedy”.

The application of Fraser was not discussed in Grainger, although it was referred to briefly.

Ms Bloomfield argued that on the bankruptcy of the debtor the status of a creditor as a creditor did not change; rather only the remedies available to the creditor to enforce the debt change by virtue of the provisions of the BA. A creditor remained a creditor for purposes of s 90K(1)(aa) and an “interested person” for the purposes of s 90K(3) of the FLA.

The Full Court said that the definitions of “creditor” in s 4A(2) and in s 90K(1A) did not assist it to answer the question. The Full Court referred to the revised Explanatory Memorandum to the Bankruptcy and Family Law Legislation Amendment Act 2005 and said that s 79(10A) qualified the operation of s 79(10) so that a creditor could not be a party to property settlement proceedings if a party to the proceedings was a bankrupt (to the extent to which the creditor’s debt was a provable debt under the BA) or was a debtor subject to a personal insolvency agreement (to the extent to which the creditor’s debt is covered by the personal insolvency agreement). The amendments aimed to ensure that the trustee in bankruptcy represented the interests of all creditors in property settlement proceedings.

When Pt VIIIAB, which concerns financial matters relating to de facto relationships, was inserted into the FLA by the Family Law Amendment (De Facto Financial Matters and Other Measures Act) 2008 (Cth), it contained similar provisions in s 90SM to s 79(10) and s 79(10A). Pt VIIIAB also provided for financial agreements between persons in de facto relationships, which were of virtually identical effect to the provisions of Pt VIIIA, including s 90UM which provides for the setting aside of financial agreements in identical circumstances to those in s 90K in relation to creditors. The Full Court concluded:

“Given these various legislative initiatives, the better view must be that it is the legislative intention that, unlike the position of a creditor in relation to property settlement proceedings, the entitlement of a creditor to apply to set aside a financial agreement under s 90K(1)(aa) or s 90UM(1)(b) does not cease on the bankruptcy of the debtor, who is a party to the agreement”^[6]

The Full Court found support for the conclusion that it was possible for a creditor to commence or continue proceedings against a bankrupt in respect of a provable debt in s 58(3) of the BA which provides:

“Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor …

(b)   except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

The Full Court recognised that the court’s leave was necessary for a creditor to commence proceedings to set aside a financial agreement under s 90K(1)(aa) (or s 90UM(1)(b)), but that did not detract from the conclusion that the BA itself envisaged a creditor commencing or continuing litigation against a bankrupt in respect of a provable debt.

The Full Court concluded that Ms Bloomfield had standing as a creditor to apply under s 90K(1)(aa) of the FLA to set aside the agreement, and also under s 90K(3) of the FLA to seek ancillary orders (subject to a grant of leave under s 58(3)(b) of the BA).

Question 2: The extent of the power in s 90K(3)

The second question related to the extent of the power under s 90K(3) of the FLA which

provides:

“A court may, on an application by a person who was a party to the financial agreement that has been set aside, or by any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of persons who were parties to that financial agreement and any other interested persons.”

Mr Grainger contended that the power in s 90K(3) “is consequential on the setting aside of a financial agreement, in order to reverse transactions affected under that agreement, or to make adjustments to achieve a restoration in substance” and it did not permit a creditor to prosecute other causes of action as between the husband and wife or third parties.

Ms Bloomfield contended that the power in s 90K(3) was a power “to make such orders as it considers just and equitable for the purpose of preserving or adjusting the rights of the parties to the financial agreement or other interested persons” and was not limited in the way the appellant contended.

In support of the more restrictive interpretation of s 90K(3), Mr Grainger relied on the decision of Burnett FM (as his Honour then was) in Reamy & Milne.^[7] In Reamy, judgment creditors of a party to a de facto relationship sought to set aside a financial agreement between the parties to the de facto relationship (entered into at the time of the trial which resulted in the judgment debt) pursuant to s 90UM(1)(b) of the FLA. Section 90UM(1)(b) is in virtually identical terms to s 90K(1)(aa). Similarly, s 90UM(6) is in virtually identical terms to s 90K(3).

Burnett FM refused the application of the parties to the de facto relationship for summary dismissal of the creditors’ application saying:

“In conclusion I consider s 90UM gives rise to a discretion in that the relief contended for cannot be automatically provided upon satisfaction of the requisite intention. From the material it appears that the applicants have demonstrated a prima facie case and sufficiently strong to resist an application for summary dismissal. The evidence however is not sufficient to warrant the relief contended for although further inquiry may establish such other facts as are necessary to support the inference.”^[8]

Mr Grainger contended that his Honour held, correctly in his opinion, that the power in s 90UM(6) was a “discretionary power for restoring the parties to the former status quo”, while Ms Bloomfield contended that if his Honour did so hold, he was wrong in law and his decision should be overturned.

At trial, Judge Cassidy appeared to depart from the approach taken by Burnett FM in Reamy. Mr Grainger submitted that setting aside the agreement would return the parties to a status quo where the wife’s trustee in bankruptcy would take the E property encumbered with a mortgage and that the utility of proceeding was not obvious in terms of a remedy for the creditor. Ms Bloomfield argued that s 90K(3) was broader. Cassidy J considered that while Burnett FM’s reasoning was attractive and, unless it was clearly wrong, it was likely to be applied by other judges in relation to s 90UM(6), the section under consideration was s 90K(3). It was unclear why he distinguished s 90K(3) from s 90UM(6), as the wording is in virtually identical terms. He found that the analysis in Reamy was not determinative of the issues in Grainger. It was an issue that should be taken to a hearing to fully explore submissions on the extent of the power under s 90K(3).

Furthermore, the trustee in bankruptcy was still a party to the proceeding even though he had elected not to participate in that part of the proceeding. Cassidy J did not consider that she could give summary judgment on the basis that s 90K(3) was a power limited to returning the parties to their positions prior to the agreement and therefore the orders the applicant sought would not be available. Ms Bloomfield was entitled to argue the breadth of the s 90K(3) power at the trial.

To the extent that Cassidy J considered that there was some difference between s 90UM(6) and s 90K(3), the Full Court pointed out that she was in error. Otherwise, Cassidy J did not err in the approach she took to s 90K(3). The Full Court said, therefore, that the trial judge was not wrong in permitting, in the exercise of her discretion, the s 90K(3) issue to go to trial.

The Full Court thought it might be useful for it to make observations about s 90K(3) (and its counterpart s 90UM(6)) given that it appeared “that to date there has been no decision of any court in relation to the scope of the powers in s 90J(3)”.^[9] The Full Court observed that s 90K(3) had some similarities to s 87(9)(b) of the FLA, which was concerned with a court’s powers when it revokes an approval by a court of a s 87 maintenance agreement. Section 87(9) provides:

“Where the approval of a maintenance agreement under this section is revoked by a court:

(a)   the agreement ceases, for all purposes, to be in force; and

(b)   the court may, in proceedings for the revocation of the approval or on application by a party to the agreement or any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of the parties to the agreement and any other interested persons;

and, in exercising its powers under paragraph (b), the court shall have regard to the ground on which it revoked the approval of the agreement”.

The Full Court noted there had been little exploration of s 87(9), with the only authority it could find of any assistance being Re Chemaisse; Federal Commissioner of Taxation (Intervener)^[10] where the Full Court observed that it was unnecessary and inappropriate to consider the wider questions raised by senior counsel for the wife relating to the interpretation of s 87(9)(b).^[11] The facts involved a fraud perpetrated upon the Court and whatever may be the appropriate exercise of the discretion in other cases, there was really no other proper exercise of the discretion open to the trial judge as s 87(9)(b) specifically required the court to have regard to the ground of revocation.

The Full Court in Grainger considered that the “observations of the Full Court in Chemaisse can be read as cautioning against an over-expansive application of a provision such as s 87(9)(b) or s 90K(3). But they also suggest that the application of such a provision will depend on the particular facts of the case in which the provision is to be applied”.^[12]

As the facts in Grainger had yet to be found, the Full Court did not consider it appropriate to say more regarding the operation of s 90K(3) in the context of this appeal against a refusal of a summary dismissal order. The Full Court agreed that the primary judge was correct in refusing in the context of a summary dismissal application, to determine the scope of the preservation and adjustment powers in s 90K(3).

Question 3: In seeking to set aside a financial agreement is a creditor limited to the s 90K(1)(aa) ground?

Ms Bloomfield contended that once she had invoked the court’s jurisdiction pursuant to s 90K(1)(aa) to set aside the financial agreement, she was entitled to rely on other grounds in s 90K(1) as a basis for her application to set aside the agreement, in particular the ground contained in s 90K(1)(b), being that “the agreement is void, voidable or unenforceable”. She claimed that the agreement was “unenforceable” pursuant to s 90K(1)(b) as it did not comply with the requirement in s 90G(1)(b) of the FLA for each party to the agreement to have had independent legal advice about certain matters before entering the agreement, because of an alleged lack of independence on the part of a solicitor, Mr P, who provided advice to Mrs Grainger before she entered into the agreement. This was, in any event, a broader view of s 90K(1)(b) as agreements which do not comply with s 90G(1)(b) are found not to be binding under s 90G(1)(b), rather than set aside under s 90K(1)(b).

However, Ms Bloomfield’s status in the proceedings, if she had status, was to seek orders under s 90K(1), not under s 90G(1).

Mr Grainger contended that a creditor can only challenge a financial agreement on the ground set out in s 90K(1)(aa), because of the content of the definition of “third party proceedings” in s 4A of the FLA and the reference to that definition in paragraph (eab) of the definition of “matrimonial cause” in s 4(1) of the Act. The trial judge accepted this.

The Full Court agreed and said:

“It will be seen that an essential element of the definition of ‘third party proceedings’ …. We can only say that we are at a loss to understand how it can be asserted in circumstances where the statute permits a creditor of a party to a financial agreement to apply to set aside the financial agreement on one specified ground, that the accrued jurisdiction (or indeed, the associated jurisdiction which was also pressed, albeit faintly, before us) would permit the creditor to apply to set aside the financial agreement on any other ground provided in the Act.

Put simply, the purpose of the accrued jurisdiction is to permit a party, or parties, to obtain all remedies available to that party, or parties, in the one proceeding in relation to a particular matter. It cannot confer on a party additional remedies under a statute that are not otherwise conferred by that statute on that party.”^[13]

The cross appeal was also dismissed.

Conclusion

In Grainger & Bloomfield the right of a creditor to apply to set aside a financial agreement after the bankruptcy of the creditor spouse was confirmed. However, the creditor was limited to arguing the s 90K(1)(aa) ground in applying to set the agreement aside and was unable to rely on s 90G(1) and argue that it was not binding as being void, voidable or unenforceable under s 90K(1)(b).

This decision has significant impact for creditors and for couples where one spouse is bankrupt. The rights of a creditor to apply to set aside a financial agreement have been confirmed by the Full Court of the Family Court to survive a spouse’s bankruptcy.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, June 2016

Two recent cases on setting aside financial agreements

Introduction

There are complex legal principles involved in drafting a financial agreement which will stand up to court scrutiny. There are two main risks:

1. The agreement is found not to be binding because it does not meet the technical requirements; and
2. The agreement is set aside.

Two recent cases illustrate the problems. In Saintclaire & Saintclaire^[1] the Full Court over-turned the trial judge’s decision that the agreement was not binding for technical deficiencies and should also be set aside for undue influence and unconscionable conduct . In Parke & Parke^[2] provisions in an agreement were void for uncertainty, the agreement was set aside for non-disclosure and because the husband had breached essential terms of the contract. The latter case, although only a decision of the Federal Circuit Court, is under appeal and the hearing of the appeal has been expedited due to the husband’s ill-health.

Legal basics

Financial agreements can be made before, during or after a marriage or before, during or after a de facto relationship. The traditional view has been that an agreement cannot be both a pre-nuptial agreement and an agreement entered in not during a de facto relationship. The main problem is ensuring compliance with the advice requirements of each (which are different), but there is also the problem that an agreement made during a de facto relationship terminates on marriage. In a recent case, Piper & Mueller^[3] however, the Full Court suggested that it is possible to have a combined agreement, although it only needed to find that the agreement was binding during a de facto relationship, not that it was binding after the parties were married. It is, therefore, probably safer to have two separate agreements until there is greater clarity about this.

There are two broad grounds on which agreements can be found by a court not to be binding, valid or enforceable:

1. Not binding because of a failure to comply with technical requirements, which for agreements before, during or after a marriage are:

(a)        the agreement is signed by all parties; and

(b)       before signing the agreement, each spouse party was provided with independent legal advice from a legal practitioner about the effect of the agreement on the rights of that party and about the advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement; and

(c)        either before or after signing the agreement, each spouse party was provided with a signed statement by the legal practitioner stating that the advice referred to in paragraph (b) was provided to that party (whether or not the statement is annexed to the agreement); and

(ca)     a copy of the statement referred to in paragraph (c) that was provided to a spouse party is given to the other spouse party or to a legal practitioner for the other spouse party; and

(d)       the agreement has not been terminated and has not been set aside by a court^[4].

An agreement which is found not to meet the above requirements may, in some circumstances, be “saved” if the court is satisfied, “that it would be unjust and inequitable if the agreement were not binding on the spouse parties to the agreement^[5].

2. Set aside on such grounds as:

(a) fraud (including non-disclosure of a material matter);

(b) the agreement was entered into for the purpose of, or for purposes which included, defrauding or defeating a creditor or creditors or with reckless disregard of the interests of a creditor or creditors;

(c) common law and equitable principles such as duress, undue influence, unconscionable conduct, uncertainty, incompleteness, breach, mistake and misrepresentation;

(d) material change in circumstances relating to the care, welfare and development of a child;

(e) impracticability^[6].

Saintclaire

On appeal, in Saintclaire & Saintclaire^[7], the husband was successful in arguing that the agreement was binding and also that it should not be set aside for undue influence and unconscionable conduct. The trial Judge had found against him.

There were errors in the certificates of independent legal advice which the trial judge said meant that the agreement was not binding. The Full Court found the errors were a mutual mistake and that the true intention of the parties was plainly evident. The agreement was intended to be a s 90C agreement – which is made during a marriage – but instead it was described in the certificates and the recitals as a s 90B agreement – which is made before a marriage. The Full Court distinguished other cases where the Full Court had found that this type of error in a certificate could not be rectified, so there is inconsistency in the case law in this area.

The Full Court was also satisfied that the intention of the parties was plainly evident and that the reference to s 90B in the recitals should be read as a reference to s 90C.

The wife’s postnatal depression had resolved about 11 months prior to the agreement being executed and so it was no longer an issue relevant to the wife’s argument that there had been undue influence. In addition, the Full Court found that the husband had an intimate knowledge of the stresses under which the wife laboured but those “stresses” (such as her indebtedness) did not amount to a “special disadvantage” and nothing about his negotiating with knowledge of them amounted to unconscionable conduct.

The Full Court found that the trial judge was in error in not distinguishing between “actual undue influence” and “unconscionable conduct”.

Parke

Howard J found in Parke & Parke,^[8] that the husband had breached the financial agreement and by his actions (in particular by dissipating the wife’s superannuation entitlements), he had repudiated the contract. He evinced “an intention no longer to be bound by the contract”. He showed that he intended “to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way”. The wife, who was the innocent party, was entitled to accept the repudiation thereby discharging herself from further performance.

The husband had breached an essential term of the contract which entitled the wife to rescind the contract. This was the dissipation of the wife’s entitlements in a self-managed superannuation fund. Although the wife did not know that she had the entitlements and they were dissipated before separation, the wording of the agreement was such that she was entitled to retain them.

With respect to other breaches the wife had waived her right to rescind the agreement on the basis of the applicant’s non-compliance. These were:

• The applicant was required to pay to the wife the sum of $25,000 prior to the marriage. The sum was not paid in full but the wife proceeded with the marriage. She could not rely on that breach 14 years later;
• The husband stopped paying the sum of $200 per week to the wife about one year after the marriage. She sought legal advice during the marriage but decided not to pursue the matter;
• The husband was obliged not to engage in physical, emotional and financial abuse of the wife but did so. It was too late for the wife to rescind the agreement on this basis after the end of the marriage.

Howard J was satisfied that the wife would not have entered into the agreement unless she had been assured of strict performance by the husband with the clause regarding abuse. Substantial performance was insufficient. This clause is arguably a lifestyle clause which are rarely, if ever, enforced in Australia.

In 2008 the wife had $120,000 in a self-managed superannuation fund. In 2011, her entitlements were reduced to nil. The parties separated in 2013. The agreement was entered into in 2001.

The financial agreement was set aside for non-disclosure or suppression of facts amounting to a misrepresentation. The husband represented that Schedule 1 contained a list of all of his assets. That was untrue. He omitted the Parke Super Fund of which both parties were members although the wife did not know of the existence of the fund or even that she had a member’s account.

The misrepresentation was false, rather than unintentional, and this finding was strengthened by the husband’s conduct in the financial agreement proceedings where he had provided no disclosure of the fund and its existence was only discovered by the wife as a result of a subpoena to the husband’s accountant.

However, there was not an actionable misrepresentation or fraud. The trial Judge found that it was more likely than not, that even if the wife had been told with certainty that the husband had failed to provide a full list of his own assets, she would nonetheless, have still gone ahead and entered into the contract. The wife knew that she and the husband were shareholders of a company with assets of approximately $170,000 but failed to insist that these assets be included in the schedules to the agreement. She was also warned by her lawyers that there was a “high likelihood” that the husband had not made complete disclosure of his assets but she gave “adamant instructions” that she wanted to proceed with the marriage and with the agreement. She was not induced by the misrepresentations.

There were two clauses in the agreement which created ambiguity and uncertainty. Pursuant to one clause, the wife’s half interest in a real property was excluded property which she retained in the event of a separation. However, pursuant to another clause she was required to transfer her 50% share to the parties’ son X within 60 days of a separation. In addition, X refused to accept a transfer of the wife’s half interest in the property and the agreement did not have a default provision setting out what was to occur in the event that X refused to accept the transfer. The trial Judge found that the clauses were essential terms of the agreement because they dealt with what was to happen in the event that the parties separated. They could not be severed from the agreement.

Very few reported cases deal with impracticability in relation to financial agreements. The impracticability in this case arose in relation to two matters:

1. The wife was required by the agreement to transfer her interest in three properties to the parties’ adult son, X. X refused to accept the transfers and the agreement was silent as to a default provision.
2. The husband had dissipated the wife’s superannuation. The agreement was silent about the wife’s superannuation entitlements. The wife did not know that she had superannuation entitlements. The agreement which was entered into by the parties in 2001 purported to deal with the parties’ “property and financial resources” at the date of this agreement, or at a later time.

Conclusion

The case law on financial agreements is continuing to develop. At the time of writing, a Federal election had been called while the Family Law Amendment (Fincaial Agreements and Other Measures) Bill 2015, about which there were hopes that many of the technical problems with agreements could be rectified, still languished in the Senate at the Committee stage.

The next stage in the development of law in this area is likely to be further case law, such as the Full Court decision in Parke.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, July 2017

Property—the latest on contributions and superannuation

Introduction

The assessment of contributions to property is a fraught area. Clients often want to argue that their contributions should be given more weight. This is particularly problematic when dealing with initial contributions, post-separation contributions, windfall such as inheritance and Tattslotto wins.

This paper gives some background to the problems and discusses recent cases.

CONTRIBUTIONS

Mallet

The starting point in considering the assessment of contributions must always be the High Court’s judgment in Mallet v Mallet. ^[1]In separate judgments the High Court rejected in strong terms, the notion or presumption of equality of contributions as a normal or proper starting point after a long marriage. Gibbs CJ said:

The respective value of the contributions made by the parties must depend entirely on the facts of the case and the nature of a final order made by the court must result from a proper exercise of the wide discretionary power… unfettered by the application of supposed rules for which the Family Law Act provides no warrant. ^[2]

Fields & Smith

Contributions are assessed at the date of trial, not the date of separation. There is a tendency for parties, and sometimes the courts, to look at contributions differently after separation, as if there are “two pools”. However, Bryant CJ and Ainslie-Wallace J in Fields & Smith^[3] (for example) referred to several cases^[4]where the Full Court had cautioned against automatically assessing contributions differently after separation, as s 79(4) requires a “holistic” assessment of the parties’ contributions. There is a tension between these two approaches.

In Fields & Smith, the trial Judge had assessed the wife’s post-separation contributions as less than her contributions during the marriage, and assessed the husband’s contributions, which were primarily financial, as being greater than those of the wife both during cohabitation and after separation. The wife’s contributions were primarily as a parent and homemaker. Following separation, her role had altered because the children had left home and the parties no longer belonged to a household where they provided each other with mutual support. After a 29 year marriage the trial Judge distributed the property on the basis of contributions as to 60% to the husband and 40% to the wife and made no s 75(2) adjustment.

Before the Full Court, the wife pointed to the “implicit prejudice” of failing to acknowledge the intrinsic changes to the role of a long term homemaker and parent as the children grow older, where the parties had accepted and agreed on that role during the marriage. Bryant CJ and Ainslie-Wallace J agreed that there was a potential for prejudice but pointed out that s 75(2) could be used to take account of matters other than contributions where it was appropriate to do so. May J found that the trial judge had “impermissibly ignored the wife’s continuing contributions” and that the proper exercise of discretion ought to have led to a finding that the property be divided equally.

The problem of comparing financial contributions with homemaking and parenting contributions was described in Norbis v Norbis^[5] (the ultimate High Court decision on the asset-by-asset approach) in a passage recently quoted by Ainslie-Wallace and Ryan JJ in Stone & Stone.^[6] Mason & Deane JJ said in Norbis, whilst stating that the general preference was for a global approach that this was for reasons of convenience:

Although it is natural to assess financial contributions under s 79(4)(a) by reference to individual assets, it is also natural to assess the contribution of a spouse as homemaker and parent either by reference to the whole of the parties’ property or to some part of that property. For ease of comparison and calculation it will be convenient in assessing the overall contributions of the parties at some stage to place the two types of contributions on the same basis, ie on a global or, alternatively, on an “asset-by-asset” basis. Which of the two approaches is the more convenient will depend on the circumstances of the particular case. However, there is much to be said for the view that in most cases the global approach is the more convenient.^[7]

It is also problematic that some contributions such as inheritances and lottery wins are capable of precise assessment in monetary terms but perhaps only in historical monetary terms, and other contributions, such as parenting, are incapable of measurement in monetary terms^[8]. The Full Court in Fields & Smith accepted that assessing the contributions of a homemaker/parent after the children had grown up as less than those of the primary income-earner could be unfair and that s 75(2) factors (presumably s 75(2)(j) and (k)) were relevant.

Relevance of timing of contribution

An early and often quoted case on the relevance of the timing of a particular contribution when contributions are being assessed is Aleksovski & Aleksovski.^[9] During an 18-year marriage each party provided their labours towards the acquisition, conservation and improvement of assets, and towards the welfare of the marriage generally. Late in the marriage, the wife received a large capital sum due to a personal injury claim arising from a motor vehicle accident. Baker and Rowlands JJ said:

It is therefore necessary that trial Judges weigh and assess the contributions of all kinds and from all sources made by each of the parties throughout the period of their cohabitation and then translate such assessment into a percentage of the overall property of the parties or provide for a transfer of property in specie in accordance with that assessment.

It really comes down to questions of weight. Whilst weight would and must be given to a contribution which a party makes shortly before the separation, less weight may be given to a contribution made by one of the parties to a marriage early in the cohabitation period of a long marriage, particularly in circumstances where the contribution has gone into the parties’ assets or been used up in the payment of family expenses.^[10]

Kay J, in a more frequently quoted passage, albeit the minority judgment, said:

In my view whether the capital sum was acquired early in the marriage, in the midst of the marriage or late in the marriage, the same principles apply to it. The Judge must weigh up various areas of contribution. In a short marriage, significant weight might be given to a large capital contribution. In a long marriage, other factors often assume great significance and ought not be left almost unseen by eyes dazzled by the magnitude of recently acquired capital. A party may enter a marriage with a gold bar which sits in a bank vault for the entirety of the marriage. For 20 years the parties each strive for their mutual support and at the end of the 20 year marriage, they have the gold bar. In another scenario they enter the marriage with nothing, they strive for 20 years and on the last day the wife inherits a gold bar. In my view it matters little when the gold bar entered the relationship. What is important is to somehow give a reasonable value to all of the elements that go to making up the entirety of the marriage relationship. Just as early capital contribution is diminished by subsequent events during the marriage, late capital contribution which leads to an accelerated improvement in the value of the assets of the parties may also be given something less than directly proportional weight because of those other elements.^[11]

All three judges allowed the appeal by the husband. The majority considered that less weight may be given to a contribution made by a party early in a long period of cohabitation than one made shortly before separation. This “erosion” principle is discussed later in this paper. Kay J considered that the time at which the contribution was made did not necessarily affect the outcome. All contributions needed to be weighed up.

Cronin J in Murdock & Tucker^[12] quoted with approval the above passage of Baker and Rowlands JJ. He said:

There is also a risk that the isolating of one or more items of property creates an artificial approach where percentages are applied to certain items but not others. Such a focus can ignore long and consistent contributions because of the attraction of a very recent financial one. That attention may also ignore long periods of homemaker and parent roles.^[13]

In Bolger & Headon^[14] the Court was required to weigh up the wife’s inheritance received at around the time of separation (valued at $250,000 at the time of trial), as against the husband’s initial contribution of $774,900. The trial Judge accepted the submission of the wife’s counsel that she should receive a 7.5% credit for her contribution in a $1.5 m pool. The trial judge gave the husband a 7% credit his contribution. The husband appealed. The Full Court said that the trial Judge erred in assessing the wife’s inheritance at 7.5% while assessing the value of the husband’s initial contribution made 7½ years earlier as requiring an adjustment of 7%.

A further difficulty with the approach of the trial Judge was that she assessed contributions by attributing specific percentages to each component of the contributions and used 50/50 as a starting point. This was described by the husband’s Counsel as “a suppressed assumption that you start from equality”^[15] – an approach which was erroneous and inconsistent with Mallett.

The Full Court in Bolger quoted the above passages from Aleksovski and then quoted from the Full Court in Dickons & Dickons, emphasising a holistic rather than a mathematical approach to the assessment of contributions:^[16]

There can be little doubt that the classification of contributions by reference to terms such as “initial contributions”, “contributions during the relationship”, and “post-separation contributions”, can be helpful as a convenient means of giving coherent expression to the evidence in a s79 case and to giving coherence to the nature, form and extent of the parties’ respective contributions. However, the task of assessing contributions is holistic and but part of a yet further holistic determination of what orders, if any, represent justice and equity in the particular circumstances of this particular relationship. … The essential task is to assess the nature, form and extent of the contributions of all types made by each of the parties within the context of an analysis of their particular relationship. …

The necessarily imprecise “wide discretion” inherent in what is required by the section is made no more precise or coherent by attributing percentage figures to arbitrary time frames or categorisations of contributions within the relationship. Indeed, we consider that doing so is contrary to the holistic analysis required by the section and, in the usual course of events, should be avoided.^[17]

The Full Court in Bolger also quoted favourably the following passage from the Full Court in Lovine & Connor^[18] on the difficulty of weighing up contributions when not all are measurable in money terms:

As part of the process of ultimately determining just and equitable orders under s 79 there is included a complex of discretionary assessments and judgments of many components of contribution, only some of which are capable of measurement in money terms and then often only in historical, rather than present, money terms. Any dictate to the effect that in the course of assessment each disparate component part or kind of contribution must be assigned a discrete and identifiable value or percentage is antithetical to the nature of the discretion involved.^[19]

The Full Court (in a bench which included Kay J) said in the earlier case of Williams & Williams,^[20] that looking at the value of an initial contribution at the commencement of cohabitation without looking at its value at the time it was realised or at the time of the trial was incorrect, although it was important to weigh up all contributions. The Full Court said:

We think that there is force in the proposition that a reference to the value of an item as at the date of the commencement of cohabitation without reference to its value to the parties at the time it was realised or its value to the parties at the time of trial, if still intact, may not give adequate recognition to the importance of its contribution to the pool of assets ultimately available for distribution towards the parties. Thus where the pool of assets available for distribution between the parties consists of say an investment portfolio or a block of land or a painting that has risen significantly in value as a result of market forces, it is appropriate to give recognition to its value at the time of hearing or the time it was realised rather than simply pay attention to its initial value … But in so doing it is equally as important to give recognition to the myriad of other contributions that each of the parties has made during the course of their relationship.^[21]

Consistently with Williams, in Agius & Agius^[22] the Full Court looked at the values of the assets brought into the relationship by the wife at the time of trial and not just at the times they were purchased. The wife won a Tattslotto prize of about $450,000 shortly prior to the commencement of the 10 year period of cohabitation. At the commencement of cohabitation, the husband had no significant assets whereas the wife had 2 properties and the balance of her Tattslotto winnings. A third property was purchased during the marriage in the name of the husband largely using the wife’s Tattslotto winnings. The wife’s father also lent monies to assist the wife with the purchase of all 3 properties. The wife always earned substantially more than the husband.

The Federal Magistrate found that the husband’s contribution based entitlements were 25% of a pool of about $1m, which meant that he could retain the cheapest of the 3 properties, being the one purchased during the relationship. There was no s 75(2) adjustment.

In upholding the decision of the Federal Magistrate, the Full Court referred to the fact that at the time of trial the 2 properties which the wife owned at the commencement of cohabitation were worth $775,000 and represented approximately 72% of the current net assets. The third property, which was retained by the husband (although the husband had made no financial contribution to it) had a value of $250,000. At the commencement of cohabitation, the wife’s 2 properties and the balance of her Tattslotto win were approximately $645,000 which amounted to about 60% of the pool at trial.

“Erosion” Principle

Despite Kay J’s often quoted passage from Aleksovski, later contributions are usually given more weight than early contributions. This is known as the “erosion” principle.^[23] For example, in Bonnici & Bonnici^[24] and Burke & Burke^[25]the courts credited the recipient of an inheritance received shortly prior to or after separation entirely with that contribution, effectively quarantining it from the pool. By contrast, in cases such as MVB & SDB^[26], early inheritances were not given much weight.

The Full Court in Pierce & Pierce^[27] added a gloss to the erosion principle:

In our opinion it is not so much a question of erosion of contributions but a question of what weight is to be attached in all the circumstances, to the initial contributions. It is necessary to weigh the initial contributions by a party with all other relevant contributions of both the husband and the wife. In considering the weight to be attached to the initial contribution, in this case of the husband, regard must be had to the use made by the parties of that contribution.^[28]

Most recently, in Wallis & Manning^[29] the Full Court summarised the position with reference to Aleksovski, Dickons and other cases as:

By those central submissions the parties approached the assessment of contributions by suggesting that “an adjustment” should be made to a result reached otherwise by reference to a miscellany of other contributions. Her Honour adopted a similar approach. Such an approach is by no means uncommon to both the presentation of cases and the structure of judgments. It is convenient in this case, as it is more broadly, so as to describe a contribution or contributions of a particular type said to have particular importance and to distinguish it or them from other contributions.

Yet, that approach must also ensure that the “myriad of other contributions” and the duration over which, and circumstances in which, the miscellany of other s 79(4) contributions were made is not accorded a subsidiary role. The essential s 79(4) task is for “trial Judges [to] weigh and assess the contributions of all kinds and from all sources made by each of the parties throughout the period of their cohabitation.^[30]

A different approach was taken by Cronin J in Sinclair & Sinclair^[31] (see also Murdock & Tucker quoted earlier in this paper) where he suggested that greater weight might be given to early contributions:

The longer the relationship, the greater the importance of the early non-financial contributions because like an initial financial contribution from which more wealth grows, they form the foundation of the relationship. They set up needs and obligations of the parties about support for one another and children. They set up assets that require ongoing maintenance and preservation. Thus, what happened from 1959 to 1985 in this case is important. The inherited wealth had not significantly materialised until towards the end of that period and it has the tendency to distract attention from the importance of the early period of this relationship when both parties worked extremely hard at whatever commitments they had made to each other to fulfil. True it is also that some of those contributions are offset by the benefits received but all this shows the inability of the law to simply process the outcome by some mathematical formula.^[32]

Recent “windfall” cases

Eufrosin

In Eufrosin & Eufrosin,^[33] the husband argued that he had contributed to the wife’s gambling win of $5 million received six months after separation. There was uncertainty as to the source of the funds used to purchase the ticket. Stevenson J accepted that the source was the wife, rather than the husband. Stevenson J agreed with the wife that it was “pure sophistry” to credit the husband with a contribution to the funds used for the purchase of the winning ticket. She referred with approval to the English decision of S v AG^[34] where Justice Mostyn remarked:

The price of the ticket, £1 or £2, is so inconsequential as can be safely disregarded. Arguments that the £1 or £2 derives from the joint matrimonial economy are, it can be said, pure sophistry. The money could just as easily have been found on the pavement.^[35]

Stevenson J adopted a two pool approach. Pool 1 consisted of the assets, liabilities and financial resources at separation (although not necessarily at that value or quantum) and Pool 2 consisted of the assets, liabilities and financial resources representing the balance of the wife’s share of the lottery win. The net property in Pool 1 was $2,437,987 and in Pool 2 was $3,368,530.

Stevenson J assessed the parties’ contributions to Pool 1 as equal and that the husband made no contribution to Pool 2. No s 75(2) adjustment was made to Pool 1. The husband argued for a 33.3% (or $1,111,615) adjustment in his favour in relation to Pool 2. The wife argued that it should be only 5% (or $168,426). Section 75(2)(b) was relevant because as a result of the contributions assessment, the wife had over $4.5 million and the husband, after a 20 year marriage with 2 adult children, had just over $1.2 million on contributions. Stevenson J rejected both proposals and made an adjustment of $500,000 out of Pool 2 to recognise the husband’s future needs.

On appeal in Eufrosin & Eufrosin^[36] the Full Court rejected the significant focus by the husband at trial on the source of funds used by the wife to purchase the winning ticket. The parties were living “separate” lives, including separate financial lives. The Full Court said:

That crucial matter, the importance of which is reinforced by the High Court in Stanford, renders reference to the sources of the funds or nomenclature such as “joint funds” or “matrimonial property” unhelpful in assessing what is just and equitable.^[37]

The Full Court said this approach was consistent with Zyk and Anastasio where the tickets were purchased during the relationship:

As this Court in Zyk made clear, the source of funds should not “determine the issue” of how a lottery win should be treated for s 79 purposes. What is relevant, in our view, is the nature of the parties’ relationship at the time the lottery ticket was purchased. In our view, the authorities just cited, together with what was said by the High Court in Stanford regarding the “common use” of property, is sufficient to dispose of the husband’s contention that her Honour erred in failing to find that he contributed to the wife’s lottery win. At the time the wife purchased the ticket, regardless of the source of the funds, the “joint endeavour” that had been the parties’ marriage had dissolved; there was no longer a “common use” of property. Rather, the parties were applying funds for their respective individual purposes.^[38]

The Full Court upheld the two pool approach and the orders made by the trial Judge.

Singerson & Joans

In Singerson & Joans^[39] the Full Court took a “two pool” approach. The outcome was that the wife received a significant proportion of the husband’s inheritance, based on her contributions to the marriage prior to it being received, as well as her post-separation contributions. The husband’s father died in February 2009, in the same month as, but just prior to, the parties’ separation. The husband received an inheritance of approximately $3 million.

During the marriage the wife made greater contributions to the responsibilities of caring for the children, and her financial contributions (except for the inheritance) were much greater. After initially working as a professional, she operated a successful business. The husband was retrenched in 1991 and suffered from depression from time to time in the years that followed. His employment since 2001 had been sporadic. Separation occurred 4 years prior to trial, during which period the parties shared the care of the children.

The trial judge’s assessment was that the wife receive 60% of the property excluding the inheritance (valued at $4,806,000) and a 20% share of the husband’s inheritance (valued at $2,619,105). This translated to the wife receiving 46% of the combined property and the husband receiving 54%. In practical terms, the wife retained $3,408,000 and the husband retained $4,017,000 of the total pool of $7,425,000. The trial Judge adopted an asset by asset approach, but compared the ultimate result to outcomes based on other possible approaches including a global approach.

On appeal, the husband sought 40% of the property (excluding the inheritance) and to retain the balance of his inheritance. This equated to about 61% of all the property. The wife sought 65%, but her position before the Court was to seek 55% of all the property, including the inheritance.

The Full Court found that the trial Judge, in desiring to give the parties a speedy resolution by delivering judgment promptly after the end of the trial:

… intermingled his assessments on contributions with s 79(4)(e) matters when utilising a separate approach. In doing so we find he fell into the error identified by Nygh J of “mistaking the trees for the forest.^[40]

The Full Court was critical of the manner in which the trial Judge assessed the wife’s contributions to the husband’s inheritance. It said:

We are of the view that his Honour misled himself, and thus fell into error, in identifying only the four years between separation and trial as being the appropriate time upon which to assess contributions to the inheritance rather than across their 15 year relationship.

Section 79(4) of the Act is clear. There is nothing to suggest that any category of contributions needs to be quarantined and applied solely to particular assets. The court is mandated to look at the totality of what the parties have contributed in a financial and non-financial sense, including contributions to the welfare of the family and to the acquisition, conservation and improvement of assets. The court is required to evaluate the significance of all the various contributions to the property, notwithstanding there may be different categories of that property.^[41]

The Full Court therefore impliedly dismissed any notion of a “fractional contemporaneity”^[42] being a requirement in the assessment of contributions and gave the wife 73% of the property excluding the inheritance, which was 47.5% of all the property including the inheritance, with the net result that the wife retained about $3.6 m and the husband retained about $3.9 million. The Full Court concluded that, over a period of approximately 15 years cohabitation and a further 4 years between separation and the trial, the wife made significantly greater contributions to the property acquired prior to separation, both in a financial sense and as a homemaker and parent. The Full Court said:

Despite the timing of the receipt of the inheritance we consider that over this long marriage a global approach is appropriate. The contributions the parties made to various components of their assets are assessed carefully and then looked at holistically to arrive at an overall assessment.

On this basis and utilising the trial judge’s largely unchallenged findings of fact we would assess the parties’ contributions to all their property to the date of trial as 52.5 per cent in favour of the husband.

This assessment acknowledges the initial contributions of the husband and also his post separation inheritance. However, this is more than matched by, inter alia, the considerable contributions of the wife to the family including her post separation contributions.^[43]

The husband’s position after the appeal, was over $100,000 worse than it was before (without taking legal costs into account).

Bishop

In Bishop & Bishop^[44] the court had to weigh up the husband’s initial contribution and the wife’s inheritance received later in the marriage. The trial judge considered he was constrained by the authority of Bonnici^[45] to leave the wife’s inheritance out of the calculation of the pool. The Full Court said:

We agree … that his Honour was not constrained by what the Full Court said in Bonnici about the treatment of inheritances. As the Full Court emphasised in that decision, and as we cannot emphasise too strongly, each case in this jurisdiction will depend on its own facts or circumstances.^[46]

The Full Court did not, however, interfere with the trial judge’s decision on this ground, as taking the inheritance into account as a s 75(2) factor only, was an approach which was open to him.

The husband referred to the unfairness of the different treatment of his initial contribution in 1982 with the wife’s inheritance received before separation. The Full Court said:

It is relevant to mention in this context that counsel for the husband endeavoured to persuade us that it was in some way inconsistent, or even unjust, that the wife’s inheritance had been effectively quarantined, while the rural property which could be traced to an initial contribution by the husband was included in the so-called “asset pool”, and that the husband’s contribution of that property was ultimately given no greater weight than the wife’s contributions to the parties’ property (being property other than her inheritance and both parties’ superannuation interests).

The difficulty with such an argument is that although the husband brought some rural property (subject to a mortgage) into the marriage, over the years of the marriage, that property, and the property subsequently acquired with the proceeds of sale of the first property, were used for the benefit of the family (as a home and a source of income), with the wife having made significant financial and non-financial contributions to both properties. On the other hand, the husband was found to have made no contribution to the wife’s inheritance.

His Honour cannot be said to have been wrong in having treated, in what can be termed, separate categories, property to which both parties had contributed and property to which only one (or perhaps neither) had contributed. Whether each party’s contributions to the property to which they had contributed were adequately recognised by his Honour is a different consideration, and is one to which we will return.^[47]

The appeal was allowed on other grounds.

Elford

Elford & Elford^[48] involved a lottery win by the husband of $622,842 in January 2004, about a year after cohabitation of slightly less than 10 years commenced. The husband had been using the same numbers since 1995 and always paid for the weekly tickets. He retained the winnings in a separate account, topped up by about $27,000 from his savings and that sum of $650,000 remained intact at the end of the marriage.

Roberts J distinguished the facts from those in Anastasio & Anastasio.^[49] The husband in Elford never intended the weekly purchase of lottery tickets to be “a joint matrimonial purpose” of the type in Anastasio. Roberts J quoted from Eufrosin & Eufrosin^[50] the passage which referred to the “common use” of property discussed in Stanford v Stanford.^[51] He then said:

In my view, it is not only “the nature of the parties’ relationship at the time the lottery ticket was purchased” that sets this case apart from so many of the decided “lottery winnings” cases; it is also the manner in which the husband and the wife conducted their financial affairs after those winnings were received by the husband in 2014. Those winnings were placed into an account in the husband’s sole name and that is where they remain to this day. The parties also kept all their other finances separate for the entirety of their relationship.

In view of those circumstances, I consider it appropriate to treat the husband’s lottery winnings of $622,842 in January 2004 as a contribution by the husband alone.^[52]

The wife initially sought $480,000 from the husband, but reduced her claim to $360,000. The husband sought to pay her $50,000 after initially seeking that her claim be wholly dismissed. At the time of trial the husband’s assets were worth $1,313,500 and the wife’s were $89,600. At the time of the lottery win and taking into account the win, their respective assets were $1,158,000 and $130,000.

Roberts J assessed the wife’s contributions as 10%. Based on contributions and after taking into account $14,800 used by the wife from the sale of shares to pay her legal costs, the husband would have to pay the wife $51,000 to bring her proportion of the pool up to 10%. The husband was older, in poor health and effectively blind. The wife worked full time and had three children but the husband had no legal liability to support them. Their respective incomes were similar. No adjustment was made for s 75(2) factors. Roberts J effectively treated the husband’s lottery win as Kay J’s gold bar in Aleksovksi.

Perhaps not surprisingly, the wife appealed. She failed, although as a majority of the Full Court said:

Some or all of us may have reached a decision different to His Honour but that circumstance does not warrant appellate interference. In the absence of any demonstrable criteria by which it is said that His Honour’s decisions [sic] was “plainly wrong”, we are in the position of being asked to provide a “second opinion” as to the appropriate exercise of discretion. We are unable to persuade ourselves that the result is outside the parameters upon which reasonable judicial minds might differ.^[53]

       [emphasis added]

This was certainly a case where the husband was rewarded for not sharing. If he had put his win into a home for the parties, he would not have walked out with his winings intact.

SUPERANNUATION

The main issues which arise with respect to the assessment of contributions to superannuation are:

1. How to take account of the superannuation of the parties at the commencement of cohabitation?
2. How to take account of contributions to superannuation compared to contributions to non-superannuation during the relationship? The preferred Coghlan approach of separate pools enables contributions to be assessed differently to superannuation and non-superannuation. But should they always be assessed differently?
3. How to assess indirect financial contributions or homemaking and parenting contributions to superannuation? Sometimes they are assumed to be non-existent.

Coghlan

The five member Full Court in Coghlan & Coghlan (2005) FLC 93-220 said as to the interpretation of s 90MC (at p 79,642):

“… superannuation interests are another species of asset which is different from property as defined in s 4(1), and in relation to which orders also can be made in proceedings under s 79”.

The majority considered that s 90MC did no more than confer jurisdiction on the courts to make orders in relation to superannuation. Section 90MC did not mean that superannuation was “treated” exactly the same as “property” as defined in s 4(1). The court did not explain precisely the consequences of superannuation being “another species of asset”. This phrase has not been widely adopted since.

The Full Court majority in Coghlan said that superannuation can be included in one pool with non-superannuation property:

• by agreement, or
• if the court is satisfied that the interest is property within the definition in s 4(1), or
• if the interest is not within that definition, but is of relatively small value in terms of the other assets, or
• there are features about the interest which lead the court to conclude that this is an appropriate approach.

The majority said that the preferred approach was to deal with superannuation separately from property as defined in s 4(1). This approach meant that the direct and indirect contributions by either party to superannuation were more likely to be given proper recognition, and “the real nature” of the superannuation interests taken into account. It was relevant to “the real nature” of a superannuation interest, that an interest “may be no more than a present or future periodic sum, or perhaps a future lump sum, the value of which at date of receipt is unknown” (at p 80,203). All matters in s 79(4)(a)–(c), including the factors in s 75(2), had to be considered in relation to a superannuation interest, regardless of whether or not it was being split.

The majority concluded there was insufficient evidence before it to enable it to re-exercise its discretion, and remitted the case for a rehearing in accordance with the principles it had enunciated.

The two pool approach outlined in Coghlan allows courts to assess contributions differently to superannuation than to non-superannuation. Usually, this is to the disadvantage of the non-member. Sometimes it occurs because one spouse came into the relationship with more superannuation than the other. Sometimes it occurs because the court gives more weight to the direct financial contributions of the member and the member’s employer to the superannuation rather than the indirect financial contributions or homemaking and parenting contributions of the non-member. This approach is contrary to the accepted approach that non-financial or homemaking and parenting contributions are given the same weight as financial contributions (eg Mallet v Mallet (1984) FLC 91-507).

Warnick J and O’Ryan J gave separate minority judgments. They disagreed with the majority’s interpretation of s 90MC and considered that the Full Court was bound by Hickey & Hickey (2003) FLC 93-143. They both said that s 79(4)(a)–(c) did not apply to a superannuation interest if it was not being split.

Prior to the superannuation splitting scheme, superannuation entitlements were usually not property with a defined or ascertainable value, but rather a financial resource which was taken into account as a factor under s 75(2).

Will a splitting order be made and, if so, what order?

Whether superannuation will be split and in what proportions will depend upon the circumstances of the case. Superannuation and non-superannuation need not be divided in the same proportions (Engelbrecht & Moss [2015] FCWA 10). Possibly, relevant factors were set out in such cases as

Levick & Levick (2006) FLC 93-254, BAR & JMR (2005) FLC 93-231 and Coghlan & Coghlan (2005) FLC 93-220. These include:

• whether there are children
• if splitting the superannuation means the primary carer can keep the home
• whether one party has little or no superannuation
• the needs of the parties for cash and saleable assets
• the value of all the property and the proportion of the property pool which is superannuation
• the type of fund
• the ages of the parties
• the length of time before the parties reach a condition of release, and
• tax implications such as whether a party is close to the employment termination payment components. For example, some pre-1983 tax benefits may be lost if the fund is split.

The Full Court confirmed in Doherty & Doherty (2006) FLC 93-256 that the mix of superannuation and non-superannuation was discretionary.

Engelbrecht & Moss

In Engelbrecht & Moss [2015] FCWA 19 Walters J considered whether or not the wife should receive part of her property entitlements in the form of a share of the husband’s superannuation, as proposed by the husband. The wife wanted to retain as much non-superannuation property as possible so she could acquire a home for herself and the children. Neither party would be able to access their superannuation entitlements for at least 15 years in normal circumstances. Walters J said (at para 228) that:

If the wife’s entitlement is 72.5% of the property ‘pool’, then it is at least arguable that she ought to receive 72.5% of the net realisable property and 72.5% of the superannuation entitlements.

However, he went on to say (at para 229):

Justice and equity do not require both ‘types’ of property to be divided in the same way. Clearly, the Court has a wide discretion as to how to structure the proposed property settlement. Put another way, this Court has always had power to allocate individual items of the parties’ property as it sees fit, and in such a way as to achieve what it considers to be an appropriate division of the property as a whole. It is in the course of this process that the structure, style and balance of the actual orders the Court proposed to make are considered. The provisions of s 79(2) permeate this process as they do all other aspects of the property settlement exercise.

Walters J made orders which meant that the wife should retain or receive approximately 84% of the parties’ net realisable assets (which included paid legal fees) and 47.5% of the total value of the parties’ superannuation entitlements. The husband received approximately 58.5% of his overall entitlement in the form of superannuation. The husband was “allocated” about $49,000 over and above his paid legal fees. Some of this was in the form of the husband’s furniture, chattels and effects, his net interest in his motor vehicle and his savings.

Bellenger & Bellenger

In Bellenger & Bellenger [2015] FamCA 645 the husband did not seek a superannuation split. Although the wife considered the fact that she had about $162,000 more superannuation than the husband was reasonable due to her greater superannuation at the commencement of their 10-year relationship (about $78,000 more), she proposed a split in the husband’s favour of about $50,000. Berman J took into account that the wife’s superannuation scheme was more generous than that of the husband. He reflected the wife’s greater initial contribution to superannuation by assessing contributions to the superannuation pool as 60/40 in the wife’s favour but he gave the husband a further 5% on account of s 75(2) factors. Berman J said (at para 151):

“It is however reasonable to consider s 75(2) factors in respect of the disparity in superannuation and in this regard the greater potential for the wife’s financial security arising out of her more generous superannuation entitlement and the likely exponential growth arising out of greater income and higher accrued multiple is such that would warrant an adjustment of 5 per cent in the husband’s favour with an overall outcome of 55/45 per cent.”

This meant that the husband was entitled to a superannuation split of about $54,000. The non-superannuation pool was adjusted 53% to 47% in favour of the husband on the basis of contributions alone as no party sought a s 75(2) adjustment.

Assessment of contributions to SMSFs

The management of investments in an SMSF may also be an issue when contributions are assessed. The Full Court in Kane & Kane (2013) FLC 93-569 dealt with the issue of whether the husband’s contributions to an SMSF were a “special” contribution. The Full Court found that they were not. Although not the decisive factor, all three judges, in two separate judgments, considered that it was relevant that the husband would not have argued that he bear all the losses if his investments had made losses.

Similarly, Benjamin J in Idoni & Idoni [2013] FamCA 874, refused to take into account the husband’s extra contributions to the SMSF or his losses on the investment in the fund in his assessment of the parties’ contributions. The husband had transferred his superannuation entitlements of about $166,000 into the fund and the wife had only transferred $40,000. Over a period of about six years the fund fell from an asset base of between $200,000 and $300,000 to about $22,000. The husband had effective control of the funds and oversaw what Benjamin J described as its “decimation”. Benjamin J said (at para 35):

“The husband could have at any time taken steps to sell the options and reduce the losses. He did not, as he did with the other investments, draw a line in the sand. He stood mute while the fund was reduced to where it is now.”

Benjamin J ordered that the balance of the fund be transferred to the wife. He said (at para 147):

I have considered the superannuation fund both in the context of contribution and s 75(2)(o) factors. As to contribution the husband put aside a relatively large sum and the wife a lesser sum. That arose from the different, but agreed, paths the parties took during their relationship. As indicated earlier I have treated those, as part of a holistic approach, as equal. As to the disastrous post-separation superannuation investments, it was open for the husband to discuss this fund (in which the wife had a significant interest) with her. He did not do so. It was also open for the wife to become involved in the management of the fund, she did not do so. I have not made an adjustment in favour or against either party in the context of contributions. I have included a modest percentage (3 per cent) in the overall adjustment in favour of the wife under the s 75(2) factors.

Out of the total pool of $575,207, the husband received $171,886 or 32%. The parties’ contributions were assessed as equal but the wife received a s 75(2) loading of 15% (including 3% for the husband’s wastage of the fund) plus an adjustment of $12,500 for half of the legal costs drawn down by the husband.

In Courtnay & Courtnay [2015] FamCAFC 108, the Full Court upheld the trial judge’s decision that the husband was partly responsible for the losses to the value of his self-managed superannuation fund. He lost $400,000 from his entitlements of $633,173 over two years. Prior to 2008 when he retired, his superannuation had been in an accumulation fund. The husband did not adequately explain his usage of his entitlements and did not provide disclosure to establish that the losses were attributable to the global financial crisis, which was his verbal explanation for the losses.

Weight given to contributions to superannuation before cohabitation and after separation

Prior to December 2002, when superannuation could not be split, courts and legal practitioners sometimes used formulas to calculate the amount of “extra” non-superannuation assets which the non-member would receive to adjust for the member retaining all of their superannuation.

Under a formula based on West & Green (1993) FLC 92-395, the non-member sometimes received extra non-superannuation calculated on the following formula:

Formula approaches were described as “artificial” by the Full Court in such cases as Tomasetti & Tomasetti (2000) FLC 93-023 and Bartlett & Bartlett (1996) FLC 92-721. Since the commencement of the superannuation splitting regime, the Full Court’s criticisms of a formulaic approach were repeated in M & M (2006) FLC 93-281, which is discussed below.

When used post-December 2002, West & Green is used to calculate the percentage split of superannuation to which the non-member is entitled on the basis that the member’s pre-cohabitation and/or post-separation contributions are quarantined from being divided between the parties. Contributions and s 75(2) factors are not assessed on this quarantined amount.

Example:

• the husband has $300,000 of superannuation at the end of a 10-year relationship and 15 years of employment
• 10 years as a proportion of 15 years is two-thirds
• two-thirds of $300,000 is $200,000
• $200,000 is divided equally between the two parties. Before December 2002 this could only be done notionally. The non-member received their share from non-superannuation assets, and
• the non-member receives $100,000 and the member retains $200,000.

However, if the actual superannuation at the start of a 10-year relationship can be ascertained, this is better evidence than saying, as under the above formula, that after 15 years of employment, one-third of the superannuation was accrued prior to the relationship. Clearly, one-third of the superannuation did not accrue prior to separation. In most cases, contributions in money terms were less in the first five years than in the final five years. There would also have been growth in the fund during the relationship.

In long relationships, pre-cohabitation contributions made to non-superannuation are often of little, if any, significance. Using this formula for superannuation may seem unfair because it gives more weight to pre-cohabitation contributions to superannuation than are often allowed for pre-cohabitation contributions to other property. It also ignores other factors which were referred to by the Full Court in Coghlan & Coghlan (2005) FLC 93-220 at p 79,646:

In the context of a consideration of the matters [in s 79(4), FLA] … the following matters may well be relevant: the relationship between years of fund membership and cohabitation; actual contributions made by the fund member at the commencement of the cohabitation (if applicable), at separation and at the date of hearing; preserved and non-preserved resignation entitlements at those times; and any factors peculiar to the fund or to the spouse’s present and/or future entitlements under the fund.

While over time the “value” of pre-cohabitation contributions to other property usually falls (eg Bremner & Bremner (1995) FLC 92-560; Pierce & Pierce (1999) FLC 92-844), the West & Green formula increases the “value” of pre-cohabitation contributions.

Even where the West & Green formula is not used, family law courts frequently “quarantine” pre-separation contributions to superannuation in a way which they do not usually do with respect to other contributions, such as the equity in a home at the time of cohabitation. For example, in Ritter & Ritter [2014] FCCA 2640, there was unchallenged expert evidence as to the value of the husband’s pension at the commencement of cohabitation. O’Reilly J quarantined this figure and gave the husband full credit for the dollar value of this contribution.

Disputes about the date of valuation of superannuation usually relate to the weight to be given to post-separation contributions. Assets are usually valued as at the date of trial. Post-separation contributions affect the percentage division of the overall pool and any contributions made or assets acquired after separation are not usually “quarantined” at their full value. Usually, if there are children of the marriage, contributions to the family after separation offset contributions by the primary income earner to property, including superannuation after separation. For example, Spiteri & Spiteri (2005) FLC 93-214.

M & M

In M & M (2006) FLC 93-281, the Full Court seemed to be trying to close the door on formula approaches. It considered that the cases in which formulas can be usefully applied to an adjustment of non-superannuation assets, taking into account contributions to superannuation, were rare. Despite this statement, formulaic approaches have continued to be used. Using the West & Green formula to assess the wife’s contributions to the husband’s superannuation, the trial judge in M & M found that the wife made an equal contribution to 13/20ths of it. She was therefore entitled to over $330,000. However, the trial judge only awarded the wife $80,000 from the non-superannuation.

The strength of the Full Court’s criticisms of formulaic approaches was diminished by its finding that it could not order a superannuation split as neither party sought one. It also referred to other advantages for not splitting superannuation in this case. It adjusted for the husband’s pension entitlement by giving the wife a greater share of the non-superannuation. The most the wife could secure for her $330,000 “contribution” to the husband’s superannuation was about $158,000, being the husband’s equity in the home. This was about double the amount ordered by the trial judge and less than 50% of the West & Green formula was used as a rough rule of thumb.

Palmer & Palmer

The Full Court of the Family Court in Palmer & Palmer (2012) FLC 93-514 allowed the wife’s appeal against a decision of a Federal Magistrate on the grounds that he had erred in assessing the wife’s interest in the parties’ superannuation. The Federal Magistrate awarded the wife a figure of $260,000 which, together with her superannuation, gave her $286,988 of superannuation. This represented approximately 32% of the total superannuation of the parties or, disregarding the wife’s superannuation, approximately 30% of the husband’s superannuation. The Federal Magistrate did not explain his reasons for arriving at this figure. The Full Court said that it was impossible to determine what weight the Federal Magistrate gave to the husband’s pre-relationship contributions and how he arrived at the figure of $260,000.

The Federal Magistrate also made an error of fact when he found that some of the husband’s superannuation, valued at $864,386, was attributable to post-separation contributions by the husband. In fact, the husband’s superannuation was valued at the date of separation and there was no evidence as to its value at the time of the hearing two years later.

The husband argued that the value of his superannuation to be included in the pool should be determined at the time of separation so that 62% of the total value of his superannuation of $864,386 was attributable to the relationship, or $535,920. The Full Court said that the husband’s argument was “superficially attractive”. However, the Federal Magistrate had not purported to explain the result on that basis. The Full Court also noted that the Federal Magistrate had a valuation of the husband’s interests in 1993, which was the date of the marriage and about a year after cohabitation commenced. This valuation had been properly prepared and was the only evidence as to pre-cohabitation values. The Full Court said (at para 55) that the proper approach was:

His Honour was obliged to consider the totality of the parties’ contributions to the superannuation and non-superannuation assets, to take account of any relevant factors under s 75(2) and then to consider whether the overall result he arrived at was just and equitable.

Lester & Lester

In Lester & Lester [2014] FamCAFC 209 after an 18 year marriage and four children the pool of almost $1m was divided by the trial judge so that the wife received net assets of about $746,000 including superannuation of $312,000 (being about 77% of the pool including virtually all of the non-superannuation property) and the husband received net assets of about $223,000 of which his remaining superannuation was about $198,000. The husband’s 23% of the pool was overwhelmingly constituted by superannuation. The husband’s appeal was allowed.

The husband sought that the order that his superannuation be split so as to give $158,000 of it to the wife, be set aside and the parties property would, as a consequence, be divided as to approximately 61% to the wife and 39% to him.

The Full Court upheld the finding of the trial judge that the contribution-based entitlements of the parties were 52%/48% in favour of the wife, but found that it could not discern a proper basis upon which it could be determined that an adjustment of 25% in favour of the wife for s 75(2) factors was appropriate. The Full Court found that the appropriate adjustment for s 75(2) factors in favour of the wife was in the range of 8–10%. While the trial judge correctly gave weight to the significant disparity in the parties’ incomes and earning capacities and the wife’s sole responsibility for the day-to-day care of the four children, the husband also paid significant child support.

However, also relevant (at para 80) was:

“Worthy of even greater weight is the fact that the husband will receive his property settlement as superannuation. It will be a number of years before the husband is able to access his superannuation, with the probability being that, whereas the wife has capital assets which are immediately available to her and at least provide her with the comfort of a home (plus superannuation), the husband is left with a modest income and no tangible assets from which he must in effect start again, without there being any clear prospect that he could ever manage to acquire a home of his own.”

Pensions in the payment phase

Pensions in the payment phase pose particular challenges to the Family Law Courts. The parties and the courts wrestle with the concept of giving a lump sum value to an entitlement which may never be commuted into a lump sum. This may be because either:

• once the payment phase of the pension has commenced, the pension cannot be converted to a lump sum
• the particular fund only pays a pension and never pays a lump sum, eg federal judiciary pensions.

In some cases, a splitting order may no longer be ineffective if the non-member dies. Prior to the enactment of the Judges & Governors-General Legislation Amendment (Family Law) Act 2012, the spouse of a judge could obtain an order for a split of the pension but those payments could not commence until the judge retired. The non-member spouse can now have a separate interest benefit created.

Some pensions are referrable to a capital sum which can easily be identified. Other pensions are not. The valuation process gives a capital value to a pension even if the member can never receive a lump sum (Coghlan and Coghlan (2005) FLC 93-220, Edwards & Edwards (2009) FLC 93-409).

Pursuant to s 90MT(2), the valuation under the Family Law (Superannuation) Regulations 2001 must be used if the superannuation is being split by a court order. However, it need not be used if the superannuation is not being split or the split is effected by a financial agreement.

The correctness of many of the cases discussed below which involve the valuation of a pension in the payment phase has been thrown into doubt by the Federal Court in Campbell v Superannuation Complaints Tribunal [2016] FCA 808. Justice Logan heard an appeal from the Superannuation Complaints Tribunal. He held that Mr Campbell’s vested entitlement to an invalidity pension was, for the purposes of the Family Law (Superannuation) Regulations 2001, an “accumulation interest”. Mr Campbell was receiving invalidity benefits under the Military Superannuation Benefits Scheme (MSBS). He applied for information about his superannuation interest under the MSBS under s 90MZB of the Family Law Act 1975 using a superannuation information form. The Commonwealth Superannuation Corporation (CSC) provided two responses: one with respect to his preserved benefit which was in the growth phase and one with respect to the invalidity pension which was in the payment phase.

Mr Campbell objected to receiving information with respect to his invalidity pension and argued that it was not superannuation. The Federal Court accepted that it was superannuation. It was not disputed that MSBS was a superannuation fund within the meaning of the SIS Act and thus, within the definition of s 90MD of an “eligible superannuation plan”. That definition is “an interest that a person has as a member of an eligible superannuation plan”.

However, the Federal Court found that the invalidity pension was not a defined benefit interest as reg 5(2) removed it from the scope of reg 5(1) because the pension was “only payable on invalidity”.

Regulation 5(2) states:

(2) A superannuation interest, or a component of a superannuation interest, is not a defined benefit interest for these Regulations if the only benefits payable in respect of the interest, or the component, that are defined by reference to the amounts or factors mentioned in subregulation (1A) are benefits payable on death or invalidity.

The effect that determination of Mr Campbell’s invalidity pension as an accumulation interest rather than a defined benefit interest on its value was not set out in the judgment. Logan J remitted the matter to the Superannuation Complaints Tribunal.

Craig & Rowlands

The Full Court in Craig & Rowlands (2013) FLC 93-535 considered an appeal by the husband and concluded that appealable error was demonstrated because the Federal Magistrate:

• failed to demonstrate an appreciation of the different character or real nature of the DFRDB in the final stage, together with the necessary assessment of whether the orders were just and equitable.
• double counted the DFRDB by determining the parties’ entitlement to it in one separate pool, then having regard to it again as a s 75(2) factor in the division of the other pool.

Strickland J said in relation to the double counting issue (at para 123):

At the very least, having taken the benefit into account as its capitalised value (and allocating a percentage entitlement to the wife) it was double-dipping to then take it into account under s 75(2) of the Act.

May and Forrest JJ said (at para 70):

The Federal Magistrate correctly used the capital ‘value’ of the DFRDB fund and then discretely decided the entitlement to it by each party and the s 75(2) impact of such a finding in isolation. The Federal Magistrate then took the husband’s DFRDB into account in deciding the s 75(2) considerations which might apply flowing from the property division of the other pool. There was a double count. As importantly, the Federal Magistrate failed to demonstrate an appreciation of the ‘different character’ of the DFRDB in the final stage, together with the necessary assessment of whether the orders were just and equitable.

In both instances, the Full Court concluded that appealable error was demonstrated. See also Semperton & Semperton [2012] FamCAFC 132.

Janos

In Janos & Janos [2013] FamCA 846, the property pool was modest and the husband’s superannuation was the most significant part of it. The husband was aged 58 and in receipt of an invalidity pension of $900 per week. It had been valued at $631,767 for family law purposes. At aged 60, he could commute the whole of his pension entitlement to a lump sum of $225,000 or commute part of it only.

The Family Court accepted that there should be a notional add-back of certain assets to the property pool, as the husband had either wasted assets or given no explanation as to how they had been dissipated. The adjusted property pool, including the add-backs and using the commutation value for the superannuation rather than the family law value, was only $305,640. The Family Court said (at [39]):

Otherwise the valuation obtained is a capitalisation of a future income stream which, if included in the asset pool, would result a distortion in relation to the available assets of the parties for division.

For the wife to receive 60% of the property pool, she was entitled to a superannuation split of 80% of the commuted lump sum. Although that would reduce the husband’s income in circumstances where the wife, aged 49, had an income of $60,000 per annum, the husband was in receipt of workers’ compensation payments of about $28,600 per annum. There was no evidence to support his assertion that he had no capacity for employment following his recovery from heart surgery. He would receive the balance of his superannuation pension indexed for life.

The Family Court, in relying on the commutation value of the pension rather than the family law value, said (at [164]):

The capitalised value of the pension is significantly in excess of its realisable value on commutation.

Russo & Wylie

In Russo & Wylie (2016) FLC 93-747, the Full Court said that the difficulties faced by the trial judge in dealing with the husband’s Military Superannuation Benefit Scheme defined benefit interest (“MSBS benefit”) were compounded by the fact that both parties asked him not to make a splitting order in relation to the benefit and they each took different approaches to dealing with it. The husband sought that it be excluded from the pool but the wife sought that it be included.

The pension was $33,531.16 per annum indexed and had been valued at $416,804 for family law purposes. The Full Court referred favourably to the distinction made between the exercise of the property power under s 79(4) and 75(2) (in this case, as it was a de facto relationship, s 90SM(4) and 90SF(3). The Full Court upheld the trial judge’s approach, which was that:

• the husband’s pension was not property available for distribution (whilst the wife’s was)
• the parties made equal contributions to the pool of $1,554,236
• the wife received 7% ($103,000) for s 90SF(3) factors.

This approach meant that the wife was left with approximately $200,000 more in available assets than the husband.

The Full Court said (at [54]):

Whilst, of course, orders under s 90MT must be made judicially, there is nothing in either s 90MS or s 90MT that evinces an overarching obligation to make orders that are just and equitable regardless of the wishes of the parties. It is to be recalled that it is implicit in the parties’ requests that the court make orders other than superannuation splitting orders that the parties accepted such orders would be just and equitable.

Welch & Abney

In Welch & Abney(2016) FLC 93-756, the Full Court allowed the appeal of the wife against the manner in which the trial judge dealt with her non-commutable Total & Permanent Disability Pension (TPD). The grounds upon which the wife’s appeal succeeded were that the trial judge fell into error in the following respects:

(a) by adopting, as the present value of the TPD pension, the capitalised amount determined pursuant to s 90MT(2) Family Law Act. This value (or, more accurately, “amount”) is mandated solely for the purpose of a splitting order of a superannuation interest being made. No splitting order was made by the trial judge and therefore the trial judge was not required to use that value or amount

(b) by disregarding the evidence of the single expert as to the TPD pension entitlement being considered in a similar manner to earnings from employment, and that expert’s evidence as to the different nature of the TPD pension entitlement from normal superannuation interests

(c) as a consequence of (a) and (b), ignoring the imposition of taxation upon the TPD pension and making orders which left that substantial burden entirely with the wife

(d) as a consequence of (a) and (b), ignoring contingencies operative upon the TPD pension and making orders that left those contingencies entirely with the wife and, conversely, relieved the husband of any impact of them.

The TPD pension was paid to the wife in monthly gross sums liable to taxation. The wife could not commute any part of the pension into a capital lump sum. It was not a guaranteed fixed-term or life-time pension. Its continued receipt was subject to conditions. She was 49 years of age at the time of trial and she might continue to receive the pension until she attained the age of 65 years. However, her continued receipt of the pension was contingent upon her continued survival, and upon medical assessments from time to time confirming her continued incapacity for gainful employment and the wife not in fact undertaking gainful employment. The single expert confirmed that if the wife ceased to be eligible to receive the disability pension “tomorrow”, then his calculation of the disability pension amount would be a “nil” value.

The Full Court followed Semperton & Semperton [2012] FamCAFC 132 and Hayton v Bendall [2010] FamCA 592 where the courts emphasised that it was important to consider the “nature, form and characteristics” of the superannuation interest.

The effect of the trial judge’s orders where the capital value of the TPD pension was ascribed a value of almost $980,000 (or 34.8% of the total of the parties’ combined property interests), was that the wife received net non-superannuation property of $368,608 whilst the husband received $1,119,111. The majority of the wife’s 60% entitlement was constituted by the capital value ascribed to the TPD pension.

The Full Court also found that the trial judge fell into error by not considering the wife’s contributions to the TPD pension. If her pension was to be taken as part of a global assessment of contributions and its value equated to 34.8% of the trial judge’s determination of the overall pool, it was an error for the trial judge to find that the wife’s contributions were only “modestly greater” than those of the husband. The matter was remitted for re-trial.

Goudarzi & Bagheri

In Goudarzi & Bagheri [2016] FamCA 205 the husband was receiving a pension of $3,068 per week. It was valued at $2.03m, which was equivalent to about 14% of the property pool. The court did not deal with it as an asset, but as a financial resource. This was because it was payable over the lifetime of the husband, whatever that period was, and was not presently available as a lump sum. A s 75(2) adjustment of 20% was made in the wife’s favour, the majority of which was on account of the husband’s pension. Her total property entitlements were determined at almost $8m and the husband retained $6.5m of property plus his pension.

Surridge

In Surridge & Surridge [2015] FamCA 493, Foster J adopted a two-pool approach with the wife’s pension being a discrete second pool and the parties’ other superannuation and non-superannuation assets being in the primary pool. The wife was in receipt of a hurt on duty pension under the Police Regulation Superannuation Act 1906 (NSW). She received a pension of $900 net per week increasing to about $1,000 per week net at the time of trial. Foster J referred to the difficulty of assessing contribution-based entitlements to the type of superannuation interest held by the wife and quoted favourably from Watts J in Schmidt & Schmidt [2009] FamCA 1386. In Schmidt, the court assessed the wife’s contribution to the husband’s hurt on duty pension entitlement at 10%. The parties were together for seven and a half years and the husband was in the police force for just over 21 years prior to his retirement.

In Surridge, the wife was aged 46 and her eligible service period commenced in June 1987. They commenced a relationship in 1991 and married in 1996. They separated in August 2012.

Foster J found that the wife was employed prior to cohabitation for nine years with the police force. He seems to have made an error here. They married nine years after she started with the police force but cohabitation commenced about four years after she started with the police force. The value of the wife’s future pension was determined according to fund specific factors at $1,022,821. No lump sum was payable in the future to her but the effect of a splitting order was to allow an immediate lump sum to be paid to the husband or for a rollover of that lump sum to another superannuation fund or a combination of the two. The effect of any spitting order was to commensurately reduce the wife’s pension.

His Honour found that the wife’s contribution-based entitlement to the income stream was overwhelming and it was difficult to find any contribution-based entitlement of the husband. The pension was in effect unearned income, indexed and payable during the wife’s lifetime. The consequence of any splitting order of the pension entitlement was to commensurately reduce the wife’s pension and procure an immediate cash payment to the husband leaving the wife with the reduced periodic income.

His Honour found that a modest adjustment of 5% in relation to the wife’s pension was appropriate in favour of the husband which equated to an approximate lump sum of about $20,000. The outcome of the orders was that the wife had a cash equivalent of about $1,621,250 from the primary pool less an adjustment of $20,000 in favour of the husband from the pension pool leaving a net figure of $1,601,250. She otherwise retained her pension intact. The husband had an entitlement of $993,050 including the $20,000 adjustment of the wife’s pension.

Contributions to the primary pool were assessed as equal. A s 75(2) adjustment of 12½% was made in favour of the wife who had the continuing care of the children aged 16 and 15 with little prospect of financial support from the husband. The s 75(2) adjustment also took into account unexplained funds received and disbursed by the husband of $800,000.

On appeal in Surridge & Surridge (2017) FLC 93-757, the Full Court found that Foster J’s approach to the wife’s hurt on duty pension was erroneous, even though both parties urged him to adopt that approach. Even though no ground of the wife’s appeal referred to the error, their Honours considered it to be “a matter of significance and is productive of injustice. We consider ourselves bound to correct it” (at [13]). The Full Court found that it was not just and equitable to make a splitting order in respect of the wife’s pension and stated (at [34]):

The failure to consider any of these important considerations and, conversely, to take up the gross value of the wife’s pension in the manner in which his Honour did, has resulted in the miscarriage of the trial judge’s discretion leading to orders which are unjust to the wife.

The Full Court found (at [27]) that it was not just and equitable to make a splitting order with respect to the wife’s pension. Indeed, there was “… a compelling case for not doing so”. The reasons for this conclusion were:

1. Importantly, the property and superannuation interests of the parties permitted justice and equity to be achieved without such an order. The wife had only a possible residual capacity for some form of future part-time employment, her pension income of $50,000 per annum was modest and she had the continuing full-time care of two children, one of whom was only 12 and had little prospect of receiving child support or other financial assistance from the husband, although he had a significant earning capacity.
2. Once the trial judge determined not to make a splitting order, there was no requirement to value the interest (s 90MT).
3. The wife could never receive the calculated lump sum amount in specie. Nor could she commute any part of the pension to a lump sum. Her only entitlement was to an income stream for so long as she remained entitled to receive the pension. If no splitting order was to be made but an assessed percentage entitlement was attributed to the lump sum on account of the husband’s contributions (even if those contributions were assessed to be modest as the trial judge considered them to be) the husband was receiving a lump sum entitlement from a lump sum that the wife could never receive.
4. The pension was taxed, but the scheme-specific methodology by which the capital sum was calculated referred to the gross amount of the pension.
5. If the wife’s pension was to be included in the parties’ assets and liabilities, even if part of a separate pool, her very significant contributions to it needed to be considered and the trial judge did not do so.
6. The proper way to deal with the wife’s pension was under s 79(4)(e) as income in the hands of the wife.

There was no actuarial assessment of the “value” of the projected income stream of the husband of $340,000 per annum based on his earning capacity (as he had chosen not to work, his projected income was irrelevant), to compare to the lump sum calculation of the wife’s pension income stream.

The Full Court increased the wife’s entitlements overall to 75% by way of a s 79(4)(e) adjustment of 25%, mainly because of large transactions made by the husband which were unexplained and significantly depleted the pool, although they could not be precisely quantified because of the husband’s attempt to mislead the wife and the court.

Conclusion

It is difficult to reconcile Singerson & Joans with such cases as Eufrosin. Perhaps the answer lies, unsatisfactorily for legal practitioners and clients, in the wide discretion which can be exercised under s 79 as emphasised by the Full Court in Dickons & Dickons and Bolger & Headon quoted earlier in this paper. However, in the future this will hopefully be addressed by the use of “comparable cases” as confirmed by the Full Court in Wallis & Manning (2017) FLC 93-759.

In the world of superannuation, there has recently been a complete turn-around in the manner in which courts deal with pensions in the payment phase. If they cannot be converted to a capitalised sum which can be split, they are now usually viewed as a financial resource and looked on as income rather than property.

© Copyright – Jacqueline Campbell of Forte Family Lawyers. This paper uses some material written for publication in CCH Wolters-Kluwer Australian Family Law and Practice. The material is used with the kind permission of CCH Wolters-Kluwer.

Jacky Campbell, November 2017

Introduction to Wolters Kluwer Australian Family Law Act 1975 book

Introduction

Foreshadowed major legislative changes to financial agreements and other aspects of the Family Law Act 1975 did not eventuate in the past 12 months, but the changes to that Act and the Family Law Rules 2004 were sufficient to mean that there have been many changes to this Book. The most significant amendments relate to the Rules regarding subpoenas in the Family Court and the section of the Act which deal with the structure and administration of the Family Court.

Administration of the Court

The Courts Administration Legislation Amendment Act 2016 designated the Federal Court of Australia (including the National Native Title Tribunal), the Family Court of Australia and the Federal Circuit Court of Australia as a single administrative entity under the Public Governance, Performance and Accountability Act 2013 and a single statutory agency under the Public Service Act 1999.

In summary, this Act:

• established shared corporate services functions for the 3 courts;
• maintained the responsibility of the heads of jurisdictions in relation to the business and administrative affairs of their respective courts;
• provided for a Chief Executive Officer (CEO) for each head of jurisdiction to assist with the management of administrative affairs;
• provided that the CEOs also hold the position of Principal Registrar;
• provided for the Federal Court CEO to have responsibility for managing the shared corporate services, with the requirement for consultation;
• provided that the Federal Court CEO is the accountable authority for the administrative entity and the agency head for the statutory agency.

Most changes took effect from 1 July 2016 but giving the CEO the position of Principal Registrar will commence on 1 July 2018.

The Explanatory Memorandum to the bill states that the measure “formed part of the package of reforms aimed at streamlining and improving the financial sustainability of the Federal Courts”. The objective was to “generate efficiencies through the establishment of shared corporate services functions for the courts to reduce unnecessary duplication”. The administrative burden on each court was reduced by consolidating finance, human resources, information technology, property and operations arrangements. The Act was not intended to “affect the substantive rights of court users”. Each head of jurisdiction maintains responsibility in relation to the business of the courts and managing the administrative affairs of their respective courts, with administrative affairs defined to exclude corporate services.

The corporate services of the Family Court and the Federal Circuit Court which were merged for 1 July 2016 are defined in s 38A(1B) Family Law Act and s 89(1)(2A) Federal Circuit Court of Australia Act 1999 as

(a)     communications;

(b)     finance;

(c)     human resources;

(d)     information technology;

(e)     libraries;

(f)      procurement and contract management;

(g)     property;

(h)     risk oversight and management;

(i)      statistics;

(j)      any other matter prescribed by a determination under subsection (5).

Consequential amendments were also made to the Family Law Rules as the Chief Executive Officer now combines the former positions of the Chief Executive Officer and the Principal Registrar of the Family Court.

The CEO of the Family Court, in his submission to the Senate Standing Committee & Legal Constitutional Affairs, expressed concerns about:

• the loss of control by the Court over its information technology system including the Court’s case management system (Casetrack) and the Commonwealth Law Courts Portal (Comcourts);
• the lack of constraints on the exercise of the power by the CEO, with only a requirement to “consult” with the heads of jurisdiction;
• the absence of criteria for how decisions are to be made;
• the lack of provision for any governance and accountability arrangements between the heads of jurisdiction such as a board-like structure;
• the potential conflict of interest which may arise when the CEO of one Court can make decisions that affect the 3 courts.

The CEO of the Family Court recommended to the Committee that to address these concerns the following changes be made:

1. Two of the three heads of jurisdiction must agree on any decisions that will affect the operating processes of the Courts.
2. Any decisions affecting the operating processes of the Courts or relating to expenditure over $500,000 must be communicated to the heads of jurisdiction in writing with reasons for the decisions reached.
3. Decisions made that do not comply with points 1 and 2 above are voidable.
4. At least once per annum the heads of jurisdiction of the Federal Court, the Family Court and the Federal Circuit Court are to meet with the Chief Executive Officer and the Chief Executive Officers of their respective Courts to set policy for the coming 12 months for implementation by the Chief Executive Officer, with the Chief Executive Officer being responsible for providing heads of jurisdiction with a proposal for operations during the next 12 months at least 14 days prior to the meeting.
5. Any dispute between the heads of jurisdiction about policy which cannot be resolved between them is to be resolved by the Attorney General in consultation with three heads of jurisdiction.

The Law Council of Australia, in its submission, was primarily concerned with the impact on the Federal Circuit Court, but also with the resourcing of both the Family Court and the Federal Circuit Court. It welcomed the bill, but communicated concerns about the capacity of the Federal Circuit Court to fulfil its role as an intermediate federal court, delays in the Family Court, and the lack of judicial resources in both Courts. The Law Council expressed a need for increased funding and the appointment of additional judges in each of the Federal Circuit Court’s jurisdictions in a timely manner. The Federal Circuit Court’s significant workload, increasing under its expanding general jurisdiction, has made this requirement a critical one, according to the Council.

The concerns and recommendations of the CEO of the Family Court and the Law Council of Australia have largely not been addressed.

Service of subpoenas

Amendments to the Family Law Rules have been made which follow on from the 2015 amendments in the Family Law Amendments (Arbitration & Other Measures) Rules 2015. The 2015 amendments introduced a process for the administrative release of documents produced pursuant to Subpoenas to Produce Documents issued in the Family Court.

The process is streamlined by providing that the manner of service of subpoenas for production can be by ordinary service rather than by hand. This distinction means that personal delivery to the named person is no longer required. Also, the amendments expressly allow for an alternative method of service of subpoenas for production to be agreed upon between the issuing party, each other party and each interested person. In practice, even before the amendments, the issuing party and the person being served sometimes agreed on a manner of service being different to that provided for in the Rules. The new rule, perhaps, makes the process of varying the method of service unnecessarily complex as the issuing party must now obtain the consent of each other party as well as the named person being served. The costs saved in using an alternative method of service agreed upon by the named person might be outweighed by the communications necessary to obtain consent from each other party.

The requirement to file an Affidavit of Service before filing a Notice of Request to Inspect in relation to subpoenas to produce documents has been removed. Complying with the Rules regarding service is, however, still necessary. In practice, compliance is now confirmed by the solicitor indicating this on the Notice of Request to Inspect.

Trial Management Hearing

The term ”first day of trial’ has been replaced by “trial management hearing”. This makes it easier to explain the court processes to clients. The process itself has not changed, but the trial management hearing is more clearly identified as a separate date with a different purpose than the trial itself.

The purpose of the trial management hearing is set out in r 6.08(1) of the Family Law Rules as:

“ (a)     for the presiding Judge, with the assistance of the parties and their legal representatives, to discuss and identify the orders sought and issues in dispute between the parties arising from the applications before the court; and

(b)     in the ordinary course, to hear and determine any interlocutory issues or interim applications that are outstanding on the date of the trial management hearing, or to make appropriate arrangements for the determination of those applications; and

(c)     in a parenting case – to receive evidence, including from the family consultant in the case; and

(d)     in a financial case – to consider the balance sheet; and

(e)     to consider and determine a plan for the trial.”

If evidence is taken at the trial management hearing, the Judge who presided at the trial management hearing must also preside at the trial.

Insolvency Law Reform Act amendments

The Insolvency Law Reform Act 2016 commenced operation in two stages: the first stage on 1 March 2017 and the second stage on 1 September 2017. The first stage of the reforms was concerned primarily with the registration and discipline of insolvency practitioners. The second stage relates to insolvency administration processes.

As a result of these reforms, there have been changes to the Family Law Rules to update references to provisions of the Bankruptcy Act which have been repealed or replaced.

In addition, the Family Court has harmonised its Rules relating to bankruptcy cases with those of the Federal Court and the Federal Circuit Court.

The amendments also provide for transitional provisions for matters commenced before the Insolvency Law Reform Act commenced.

Trans-Tasman Proceedings

The general delegation of powers to deputy registrars by reference to powers under Chapter 26A of the Rules in relation to subpoenas in Trans-Tasman proceedings has been removed. Instead, the particular powers delegated to deputy registrars are specified. The purpose of this amendment was to align the approach in the Family Law Rules with the approach of the Federal Circuit Court Rules 2011.

Costs

The scale of costs was increased by 1.7% from 1 January 2017. Costs for family law proceedings in the Federal Circuit Court of Australia have also increased and apply to work done or services performed after 3 August 2017.

Prima facie evidence

Many Commonwealth Acts have been amended to substitute the phrase “prima facie evidence” for “evidence” where a certificate can be produced to facilitate the proof of a matter. This change was made to s 56(3) Family Law Act, which relates to divorce orders. Under this section, if a divorce order has taken effect any person is entitled, on application to the Registry Manager of the court in which the divorce order was made, to receive a certificate signed by the Registrar of that court that the divorce order has taken effect.

As a consequence of the amendment, the certificate under s 56(2) is, in all courts (whether exercising federal jurisdiction or not) and for all purposes, prima facie evidence of the matter specified in the certificate. Prior to the amendment, the certificate was simply “evidence” of the matter specified in the certificate.

Future Reforms

The major changes to rectify the difficulties with the current provisions in the Family Law Act dealing with financial agreements appear to have been deferred by the Federal Government. The Bill currently before Parliament which deals with family law issues, does not include major changes regarding financial agreements. The Civil Law and Justice Legislation Amendments Bill 2017 does, however, contain significant and numerous reforms including:

1.         Establishing the Family Court as a Court of law and equity;

2.         Amendments to s 44 of the Act in relation to leave to initiate property and maintenance proceedings out of time;

3.         The ability of parties to disclose that an offer can be made, without disclosing the terms of the offer;

4.         New offences relating to international child abduction;

5.         Clarifying the roles of family counsellors and family consultants;

6.         Re-numbering Part VIIIB, which is the Part dealing with superannuation.

Conclusion

Many of the amendments to the contents of this Book relate to the administration of the Family Law Courts. The impact of these changes is difficult to predict and it will probably take some time for the manner in which lawyers and clients deal with the Family Law Courts to be affected.

More immediate in their impact on day-to-day practice have been the changes to the Family Law Rules with respect to subpoenas and the increase in the Scale of Costs.

A bill which includes extensive changes to the Act is likely to be passed by Federal Parliament later this year. Presumably, this will result in comprehensive consequential amendments to the Rules of both Family Law Courts.

Jacky Campbell, November 2017

Hot cases in Family Law 2017

Even before the delivery of the judgment by the High Court in Thorne & Kennedy on 8 November 2017, a financial agreement case, there have been major developments under the Family Law Act 1975 (FLA) in case law in 2017. This paper covers:

1. Wallis & Manning – contributions and comparable cases.
2. Calvin & McTier – property acquired after separation.
3. Surridge & Surridge – hurt on duty pension.
4. Official Trustee in Bankruptcy v Galanis – standing of a trustee in bankruptcy.
5. Bondelmonte & Bondelmonte – High Court parenting case.
6. Bernieres & Dhopal – commercial surrogacy.
7. Thorne v Kennedy – High Court

1. Wallis & Manning (2017) FLC 93-759 – contributions and comparable cases

In university law courses, the importance of precedents is emphasised – ratio decidendi and obiter dicta are prevalent phrases. Bewilderingly, family lawyers advising clients are confronted with the breadth of the court’s seemingly unfettered discretion and unpredictability of outcomes. The Full Court in Wallis & Manning (2017) FLC 93-759 gave some hope that a more consistent approach may be adopted in the future. In addition, the Full Court had to deal with the assessment of contributions where significant contributions were made on behalf of the husband at the beginning of a long marriage.

The law before Wallis & Manning

In cases like Fields & Smith (2015) FLC　93-636, the Full Court seemed to confirm that earlier cases could not be relied on as a guide to decision-making. Bryant CJ and Ainslie-Wallace J said, in relation to the use by the trial judge of a table of comparative cases prepared by the husband’s counsel:

“The problem with the table is that it gives no indication of the relevant facts in the particular cases … With all due respect to his Honour, the table can only form the glibbest of comparisons, and although it may be a seductive tool, it cannot illuminate the valuing and weighing of contributions in this particular case and carries with it the danger, if relied upon, of detracting from the individual requirement to make orders that are just and equitable in an individual case.”

Bryant CJ and Ainslie-Wallace J considered that the apparent reliance on the table by the trial judge may have led him into error and acted as a fetter to the exercise of his discretion. The third member of the bench, May　J, also allowed the appeal, but did not refer to the offending table. She was critical of the trial judge for ignoring the wife’s post-separation contributions.

Professor Patrick Parkinson has written some thought-provoking articles about discretion. For example, in “Why are decisions on family property so inconsistent?” (2016) 90 ALJ 498 at 518, Professor Parkinson said, “the idea that the discretion of the trial judge is so open-ended, and that the exposition of principles and guidelines … would unlawfully fetter the discretion of the judge, is a misunderstanding of the judicial discretion … In the exercise of judicial discretion, the trial judge needs to draw upon principles and standards which find their origin in law, rather than in the objective values of the individual trial judge”.

Professor Parkinson drew upon the High Court in Norbis v Norbis (1986) FLC 91-712 and quoted Mason & Deane JJ, who said (at 75,174):

“With all respect to those who think differently, we believe that the sound development of the law, in this area as in others, is served best by following the tradition of the common law. The genius of the common law is to be found in its case-by-case approach. The decision and reasoning of one case contributes its wisdom to the accumulated wisdom of past cases. The authoritative guidance available to aid in the resolution of the next case lies in that accumulated wisdom. It does not lie in the abstract formulation of principles or guidelines designed to constrain judicial discretion within a predetermined framework. There is no reason to think that the traditional approach, when applied in the family law area, leads to arbitrary and capricious decision-making or that it leads to longer and more complex trials.”

The reference to “arbitrary and capricious decision-making” in Norbis was echoed by the High Court in Stanford v Stanford (2012) FLC 93-518 which referred to the risk of “palm tree justice” and said that the Court has a wide discretion, but that it must be exercised in accordance with the legal principles laid down in the FLA.

Wallis & Manning – the use of comparable cases

In Wallis & Manning, although not conceding that Fields & Smith dictated that comparable cases could not be relied upon, Thackray, Ainslie-Wallace and Murphy JJ relied on Norbis and said:

“While recognising the fact that no two cases are precisely the same, we are of the view that comparable cases can, and perhaps should far more often, be used so as to inform, relevantly, the assessment of contributions within s 79 ….

The word “comparable” is used advisedly. The search is not for “some sort of tariff let alone an appropriate upper and lower end of the range of orders which may be made”. Nor is it a search for the “right” or “correct” result: the very wide discretion inherent in s 79 is antithetical to both. The search is for comparability – for “what has been done in other (more or less) comparable cases” – with consistency as its aim.”

The Full Court analysed a number of cases and compared factors such as the length of the relationship, and the nature, form and characteristics of the contributions made by the parties, including the timing of contributions. The analysis of each case was very detailed and very lengthy. By contrast, the Full Court said that the table in Fields & Smith was inadequate as it only summarised cases by setting out matters such as the length of the relationship, the size of the pool and the number of children post-trial; summarised contributions in single words such as “modest”, “some”, “minor”, “negligible” and “significant”; and gave outcomes in percentage and dollar terms.

It is early days, but hopefully the acceptance of “comparable cases” will bring more predictability to family law property settlements.

Contributions

The parties were married for 27 years and their three children were all adults by the end of the marriage. The net property was about $1.91m, consisting predominantly of three pieces of real property upon which the parties conducted a farming business. The husband’s father gifted to the parties a half share of a farming property two years after marriage, and another farming property one year later. The trial judge assessed contributions 70% / 30% in favour of the husband and gave the wife 10% for s　75(2) factors. Judgment was not delivered until three years after the trial.

The wife appealed, arguing that the trial judge gave excessive weight to the contributions by the husband’s father and insufficient weight to her contributions. The wife argued that it should be inferred from the reasons for judgment that the trial judge wrongly considered that the farming land at Property W was part of the gifts by the husband’s father. This was important because the historical gifts were a central determinant of the contributions assessments. The inordinate delay in the delivery of the judgment strengthened the wife’s arguments.

The Full Court considered there was merit in the wife’s submissions. The trial judge confused the manner of acquisition of the various properties; the extent and timing of the husband’s father’s gifts were erroneously taken into account in assessing contributions, and the inordinate delay in the delivery of judgment impacted upon how the errors expressed under the heading “contributions” were viewed by the Full Court. The Full Court said (at [86]):

“What might otherwise be regarded as, for example, infelicities in expression in a judgment timeously delivered (when the evidence is fresh in the mind of the judge) or, for example, an erroneous transposition of findings earlier made in the judgment, should not safely be subject to the same assumptions when judgment is delivered three years after the hearing. As but one example of the issues that intrude when there is an inordinate delay in the delivery of reasons and omissions are apparent, it is not known whether the “background” component of the reasons was written a long time earlier or later than the “contributions” section of the reasons.”

The Full Court allowed the appeal, provided an opportunity for the parties to provide further submissions, and re-exercised its discretion. It considered in detail a number of comparable cases to which it had been referred by the parties and others which it considered to be comparable. The Full Court assessed contributions as 57.5% / 42.5% in the husband’s favour, being a disparity of 15% or about $294,000. After taking into account s　75(2) factors at 7.5%, the property was divided equally between the parties.

2. Calvin & McTier (2017) FLC 93-791 – property acquired after separation

The husband in Calvin & McTier (2017) FLC 93-785 received a substantial inheritance 4 years after separation. The trial judge dealt with the property globally and divided all the property, including the husband’s inheritance, so that the husband received 65% and the wife 35%.

The husband appealed. He argued that the inheritance should not have been included in the property to be divided, but did not contend that if the inheritance was properly available for division, that the percentage division of 65/35 was erroneous.

The parties had an 8 year relationship and 1 child. The child was cared for equally by the parties on a week about arrangement. The husband brought significantly more assets into that relationship than the wife.

The wife commenced proceedings 3½ years after the divorce and was given leave under s　44(3) to pursue a property settlement claim.

The trial magistrate found that the net value of the assets and resources to be divided between the parties was $1,340,319 of which, in percentage terms, the remaining inheritance of $430,686, accounted for approximately 32%. Contributions during the relationship were found to be equal. The trial magistrate assessed contributions as 75%/25% in the husband’s favour and made a 10% adjustment in favour of the wife for s 75(2) factors to reflect, in particular, the disparity in the parties’ incomes and earning capacities.

One of the grounds of the husband’s appeal was “the degree of ‘connection’ – or, more accurately, the lack of connection – between the inheritance and the parties’ matrimonial relationship”. The Full Court rejected the husband’s argument that the High Court’s judgment in Stanford v Stanford (2012) FLC 93-518 supported Guest J’s dissenting judgment in Farmer & Bramley (2000) FLC 93-060 in which Guest J required that contributions have “fractional contemporaneity”. The Full Court concluded that the Court retained a discretion as to how to approach the treatment of property acquired after separation and could have included the inheritance amongst the property to be divided and　deal with all the property globally, or dealt with it separately but still assess contributions and s　75(2) factors. The appeal was dismissed.

The Full Courts in Holland & Holland [2017] FamCAFC 166 and Widmann & Widmann [2017] FamCAFC 602 approved Calvin & McTier.

3. Surridge & Surridge (2017) FLC 93-757 – hurt on duty pension

In Surridge & Surridge [2015] FamCA 493, Foster J adopted a two-pool approach with the wife’s pension being a discrete second pool and the parties’ other superannuation and non-superannuation assets being in the primary pool. The wife was in receipt of a hurt on duty pension under the Police Regulation Superannuation Act 1906 (NSW). She received a pension of $900 net per week increasing to about $1,000 per week net at the time of trial. Foster J referred to the difficulty of assessing contribution-based entitlements to the type of superannuation interest held by the wife and quoted favourably from Watts J in Schmidt & Schmidt (2009) FamCA 1386. In Schmidt, the court assessed the wife’s contribution to the hurt on duty pension entitlement at 10%. In Schmidt, the parties were together for 7½ years and the husband was in the police force for just over 21 years prior to his retirement.

In Surridge, the wife was aged 46 and her eligible service period commenced in June 1987. The parties commenced a relationship in 1991 and married in 1996. They separated in August 2012. Contributions to the primary pool were assessed as equal. A s 75(2) adjustment of 12½% was made in favour of the wife who had the continuing care of the children aged 16 and 15 with little prospect of financial support from the husband. The s 75(2) adjustment also took into account unexplained funds received and disbursed by the husband of $800,000.

Justice Foster found that the wife was employed for 9 years with the police force prior to cohabitation. He seems to have made an error here. They apparently married nine years after she started with the police force but had 4 years of cohabitation before their marriage.

The value of the wife’s future pension was determined according to fund specific factors at $1,022,821. No lump sum was payable in the future to her but the effect of a splitting order was to allow an immediate lump sum to be paid to the husband or for a rollover of that lump sum to another superannuation fund or a combination of the two. The effect of any spitting order was to commensurately reduce the wife’s pension.

The wife’s contribution-based entitlement to the income stream was found by Foster J to be overwhelming and it was difficult to find any contribution-based entitlement of the husband to it. The pension was in effect unearned income, indexed and payable during the wife’s lifetime. The consequence of any splitting order of the pension entitlement was to commensurately reduce the wife’s pension and procure an immediate cash payment to the husband leaving the wife with the reduced periodic income.

His Honour made a modest adjustment of 5% in relation to the wife’s pension in favour of the husband which equated to an approximate lump sum of about $20,000. The outcome was that the wife had a cash equivalent of about $1,621,250 from the primary pool less an adjustment of $20,000 in favour of the husband from the pension pool leaving a net figure of $1,601,250. She otherwise retained her pension intact. The husband had an entitlement of $993,050 including the $20,000 adjustment of the wife’s pension.

On appeal, in Surridge & Surridge (2017) FLC 93-757, the Full Court found that Foster J’s approach to the wife’s hurt on duty pension was erroneous, even though both parties urged him to adopt that approach. The Full Court considered it (at [13]) to be “a matter of significance and is productive of injustice. We consider ourselves bound to correct it”. The Full Court found that it was not just and equitable to make a splitting order in respect of the wife’s pension. Indeed, there was “… a compelling case for not doing so” (at [27]).

The reasons for this conclusion were:

1. Importantly, the property and superannuation interests of the parties permitted justice and equity to be achieved without such an order. The wife had only a possible residual capacity for some form of future part-time employment, her pension income of $50,000 per annum was modest and she had the continuing full-time care of two children, one of whom was only 12, and had little prospect of receiving child support or other financial assistance from the husband, although he had a significant earning capacity.
2. Once the trial judge determined not to make a splitting order, there was no requirement to value the interest (s 90MT).
3. The wife could never receive the calculated lump sum amount in specie. Nor could she commute any part of the pension to a lump sum. Her only entitlement was to an income stream for so long as she remained entitled to receive the pension. If no splitting order was to be made but an assessed percentage entitlement was attributed to the lump sum on account of the husband’s contributions (even if those contributions were assessed to be modest as the trial judge considered them to be) the husband was receiving a lump sum entitlement from a lump sum that the wife could never receive.
4. The pension was taxed, but the scheme-specific methodology by which the capital sum was calculated referred to the gross amount of the pension.
5. If the wife’s pension was to be included in the parties’ assets and liabilities, even if part of a separate pool, her very significant contributions to it needed to be considered and the trial judge did not do so.
6. The proper way to deal with the wife’s pension was under s 79(4)(e) as income in the hands of the wife.

There was no actuarial assessment of the “value” of the projected income stream of the husband of $340,000 per annum based on his earning capacity (as he had chosen not to work, his projected income was irrelevant), to compare to the lump sum calculation of the wife’s pension income stream.

The Full Court increased the wife’s entitlements overall to 75% by way of a s 79(4)(e) adjustment of 25%, mainly because of large transactions made by the husband which were unexplained and significantly depleted the pool on top of the other s　75(2) factors in the wife’s favour. They could not be precisely quantified because of the husband’s attempts to mislead the wife and the court.

In Goudarzi & Bagheri [2016] FamCA 205 the trial judge dealt with a pension in the payment phase (which was not a hurt on duty pension) as a financial resource. On appeal in Goudarzi & Bagheri (No 2) [2017] FamCAFC 190 the Full Court said this was a permissible, but not the only, approach to pensions in the payment phase. This seems to limit the impact of Surridge to hurt on duty pensions, and possibly particular hurt on duty pensions, or at least make it uncertain as to whether the approach taken in Surridge extends beyond those types of pensions to all pensions in the payment phase.

4. Official Trustee in Bankruptcy v Galanis (2017) FLC 93-760 – standing of trustee in bankruptcy

The ability of a trustee in bankruptcy to set aside a financial agreement after the husband was discharged from bankruptcy was considered by the Family Court in Official Trustee in Bankruptcy & Galanis [2014] FamCA 832 and by the Full Court of the Family Court in Official Trustee in Bankruptcy & Galanis (2017) FLC 93-760; [2017] FamCAFC 20. The Official Trustee was unsuccessful both before the trial judge and on appeal.

The matrimonial cause under consideration was (eab) of s　4 which gives the court power to deal with (eab) “third party proceedings (as defined in s　4A) to set aside a financial agreement.”

The trustee argued that it had standing to bring the proceedings as it was a “government body” within s 4A(1)(b)(iii) which provides:

“(1) For the purposes of paragraph (eab) of the definition of matrimonial cause in subsection 4(1), third party proceedings means proceedings between:

(a) any combination of:

(i) the parties to a financial agreement; and…

(b) any of the following:

(i) a creditor

(iii) a government body acting in the interests of a creditor;

being proceedings for the setting aside of the financial agreement on the ground specified in paragraph 90K(1)(aa).”

Section 90K(1)(aa) enables financial agreements to be set aside because a party entered into the agreement for the purpose (or one of the purposes) of defrauding a creditor or with reckless disregard for that creditor’s interests.

The trial judge, Rees J, found that the Official Trustee was not a government body but a statutory trustee. She also found that it would be completely anomalous if one category of trustee (the Official Trustee) were advantaged by the right to make an application under the FLA where another trustee, who was not the Official Trustee, did not have that right.

The trustee also argued that the matter was a “matrimonial cause” within s 4(1)(cb) being:

“(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 …”

Although the husband was discharged from bankruptcy under s 149(1) Bankruptcy Act (“BA”) and the bankruptcy had ended, the bankrupt still had some ongoing obligations to the trustee. The trustee retained the right to make claims against the bankrupt in certain circumstances, limited by s　127(1) BA:

“After the expiration of 20 years from the date on which a person became a bankrupt, a claim shall not be made by the trustee in the bankruptcy to any property of the bankrupt, and that property shall, subject to the rights, if any, of a person other than the trustee in respect of the property, be deemed to be vested in the bankrupt, or a person claiming through or under him or her, as the case may be.”

In determining whether a trustee in bankruptcy could initiate proceedings against a discharged bankrupt at any time prior to the expiration of 20 years after bankruptcy, Rees J considered the Explanatory Memorandum to the 2005 amendments to the FLA and the BA and concluded that the term “bankrupt party” in s 4(1)(b) did not mean a party to a marriage who had been discharged from bankruptcy and said (at [49], [52]):

“The emphasis appears to be on closing off the avenue, which may have previously existed, that allowed a debtor to alienate property using a financial agreement so as to make that property unavailable, to his or her trustee in bankruptcy, for the payment of creditors. …

If the legislature intended that the provisions of the Act would apply to give jurisdiction to the Family Court of Australia to deal with proceedings between a party to a marriage and the trustee in bankruptcy of a discharged bankrupt, then those words could have been included.”

Rees J dismissed the trustee’s application and ordered that the trustee pay the wife’s costs on a solicitor/client basis.

The Full Court in Official Trustee in Bankruptcy & Galanis (2017) FLC 93-760 agreed with the trial judge and noted (at [457]):

“As we pointed out at the commencement of these reasons, and as was accepted by the parties, in this case the Official Trustee can pursue its claim against the wife in other courts without any need to set the agreement aside. What is in issue in this case is whether the Court has jurisdiction in determine the trustee’s claim to set the financial agreement aside.”

The Full Court contrasted Australian Securities & Investments Commission (ASIC) with the Official Trustee. ASIC is a Commonwealth entity for the purposes of the Public Governance, Performance & Accountability Act 2013. Section 18AA BA states that the Official Trustee is not a Commonwealth entity.

The Civil Law & Justice Legislation Amendment Bill 2017 includes proposed amendments to the BA, to clarify that the Family Court has bankruptcy jurisdiction when a trustee in bankruptcy applies to set aside a financial agreement.

5. Bondelmonte & Bondelmonte (2017) FLC 93-765 – High Court parenting case

This appeal to the High Court concerned orders made for the return of two boys to Australia from New York, where they remained after the conclusion of a holiday with the father, in breach of a parenting order which had been made by the Family Court of Australia. The father’s appeal was particularly concerned with:

1. The way in which the trial judge had taken into account the children’s wishes;
2. The interim living arrangements for the children upon their return to Australia.

The two boys were aged nearly 17 and nearly 15 at the time the interim orders were made by Watts J on 8 March 2016. Their sister was nearly 12 years of age.

In January 2016, despite the father not providing the period of notice required by the 2014 parenting orders, and under some pressure from him, the mother reluctantly agreed to allow the two boys to travel to New York for a holiday with the father. The girl was not included in the holiday. The boys were flown by the father, business and first class, to New York on 14 January 2016. By 25 January 2016 the father had decided that it was in his financial interests to remain in the United States rather than to return to Australia. On 29 January 2016 his solicitor informed the mother’s solicitor that the father had decided to live indefinitely in the United States and that the boys would remain with him.

The mother filed an application for the return of the boys, in addition to proceedings brought in the United States under the Hague Convention (which did not apply to the elder boy because of his age). The father did not seek any changes to the 2014 parenting orders and sought only to resist the mother’s application.

The evidence of the father was that the boys had each expressed a desire to remain living with him in New York. He wanted the hearing to be adjourned so that an expert in New York could interview the boys and provide a report as to their wishes.

If the primary judge decided that they should return to Australia, a major question was where the boys should live on their return. This question was complicated by a number of factors. The father did not say whether he would return to Australia in the event that orders were made for the boys’ return. It was therefore not known whether the boys could live with him. The elder boy had been living with his father for some time after his parents’ separation and was effectively estranged from the mother, although she had attempted to maintain contact with him. The younger boy was living with the father, although he divided his time between the mother and father; and the daughter remained living with the mother but spent weekends with the father. The evidence was unclear as to the amount of time that the two youngest children were spending with each parent.

Accepting that one or both of the boys might elect not to live with her, the mother advised the Family Court that she would not oppose the boys living with the father’s mother, a course which the ICL appeared to consider acceptable.

The matter could not be resolved on the first hearing date before the trial judge and was adjourned. Counsel for the father filed further evidence of conversations with the father’s mother, to the effect that, due to her frailty, she was unable to care for the boys. The father made no submissions as to alternative possible living arrangements for the boys.

Two further options were considered by the primary judge to meet the contingency that the father did not return to Australia and the boys chose not to live with the mother. They were reflected in the orders made by the trial judge, who ordered that, in the event that the father returned to Australia with the boys, they could continue to live with him. If he did not return, the boys were to live with the mother if they chose to do so, or they could live in accommodation provided by the father together with paid supervision services, to which the mother consented in writing. Alternatively, each of the boys could live separately with the mothers of respective friends of theirs. The boys’ mother had obtained undertakings from the respective mothers, who each agreed to accommodate a boy. Collectively, these orders were referred to as “the interim parenting orders”.

Statutory provisions

The following relevant statutory provisions are in the FLA:

Section 60B(1) – The objects of the Part are to ensure the best interests of children are met by reference to certain criteria, which include ensuring that parents fulfil their duties, and meet their responsibilities, concerning the care, welfare and development of their children.

Section 60B(2) – The principles underlying the objects in s　60B(1) are that children have the right to know and to be cared for by both parents and a right to spend time with both parents on a regular basis.

Section 60CA – “In deciding whether to make a particular parenting order in relation to a child, a court must regard the best interests of the child as the paramount consideration.”

Section 64C – “A parenting order in relation to a child may be made in favour of a parent of the child or some other person.”

Section 65D – “In proceedings for a parenting order, the court may, subject to sections 61DA (presumption of equal shared parental responsibility when making parenting orders) and 65DAB (parenting plans) and this Division, make such parenting orders as it thinks proper.”

Section 60CC　- Section 60CC(1) – Requires the court to consider the matters set out in s 60CC(2) and (3), in determining what is in the child’s best interests.　Section 60CC(2)(a)　relevantly provides that a primary consideration is “the benefit to the child of having a meaningful relationship with both of the child’s parents”.　Section 60CC(3)　provides for additional considerations, which include:

“(a) any views expressed by the child and any factors (such as the child’s maturity or level of understanding) that the court thinks are relevant to the weight it should give to the child’s views”.

Section 60CC(3) states other additional considerations which are relevant:

• the nature of the relationship of the child with each of the parents (s 60CC3(b)(i))
• the likely effect of any changes in the child’s circumstances, including the likely effect on the child of any separation from his or her parents and any other child with whom he or she has been living (s 60CC(3)(d)(i) and (ii))
• whether the practical difficulty and expense of spending time with a parent will substantially affect the child’s right to maintain personal relations and direct contact with both parents on a regular basis (s 60CC(3)(e))

Section 60CD(2) – “The court may inform itself of views expressed by a child:

(a) by having regard to anything contained in a report given to the court under s 62G(2); or

(b) by making an order under s　68L for the child’s interests in the proceedings to be independently represented by a lawyer; or

(c) subject to the applicable Rules of Court, or by such other means as the court thinks appropriate.

Section 60CE – “Nothing in this Part permits the court or any person to require the child to express his or her views in relation to any matter.”

Section 65C – “A parenting order may be applied for by:

(a) either or both of the child’s parents;

(b) the child; or

(ba) the grandparent of the child; or

(c) any other person concerned with the care, welfare or development of the child.”

The High Court stated (at [29], – [30]) that the issues to be determined were:

• the trial judge wrongly discounted the boys’ views about remaining in New York because he formed an adverse view of the father’s actions
• the trial judge was required to put in train a process by which the boys’ views as to each of the alternative living arrangements, and in particular their possible accommodation with other families, could be ascertained.
• whether parenting orders could be made in favour of strangers to the proceedings who had not made an application for those orders themselves.

In relation to the importance of a child’s views, the High Court said (at [34], [38]):

“The focus placed by the father upon the prescribed consideration stated in s　60CC(3)(a)　tended to elevate the views expressed by a child to something approaching a decisive status. In some cases, it may be right, in the exercise of a primary judge’s discretion, to accord the views expressed by a child such weight, but　s 60CC(3)(a)　does not require that course to be taken. They are but one consideration of a number to be taken into account in the overall assessment of a child’s best interests.

The terms of　s 60CC(3)(a)　itself may be taken to recognise that, whilst a child’s views ought to be given proper consideration, their importance in a given case may depend upon factors such as the child’s age or maturity and level of understanding of what is involved in the choice they have expressed. Children may not, for example, appreciate the long term implications of separation from one parent or the child’s siblings. Section 60CC　requires that attention be given by the court to these matters.”

The Full Court considered that the trial Judge took into account the boys’ views and the effects of the boys’ views and concluded that they were best dealt with through the intervention of the family consultant in Australia, via the mechanism which had already been established by the 2015 orders. The trial judge declined to have a “wishes report” undertaken in New York because he doubted its utility. He considered that the views expressed by the boys had been “contrived” by the father.

The father argued that adverse comments made by the trial judge about him, necessarily detracted from a proper consideration of the boys’ views and the paramount consideration of what was in the boys’ best interests.

The High Court considered that the father’s conduct was relevant to the children’s best interests (at [39]):

“It would have been remarkable if the primary judge had not commented upon the father’s conduct. It involved a breach of the 2014 parenting orders and it had the potential to undermine the possible relationships that family members might have in the future, a matter to which the processes put in place by the 2015 orders had been directed. Furthermore, the father’s flagrant disregard of the parenting orders was a matter relevant to the child’s best interests under　s 60CC(3)(i).　It evinced an attitude towards the responsibilities of parenthood that, if left unchecked, would likely send a poor message to boys who, on the evidence, were highly impressionable.”

However, the High Court rejected the argument that the trial Judge was motivated to give less weight to the boys’ expressed preference to stay in New York because of the father’s actions.

The father submitted that a dispositive parenting order could not be made before the views of the child were known concerning the particular parenting order. The High Court disagreed (at [43], [44]):

“Section 60CC(3)(a), whether or not read in conjunction with the other provisions in　Pt VII, neither expressly nor impliedly requires the court to seek the views of a child. It requires that the views which have been “expressed” by a child be considered. The term “consider” imports an obligation to give proper, genuine and realistic consideration but this cannot affect or alter the terms of the provision so as to require a child’s views to be ascertained.

Section 60CD(2)　provides a mechanism by which the court may inform itself of the views expressed by a child, but it does not do so in terms which would oblige the court to do so in every case. It certainly would not oblige the court to do so in the case of interim, temporary arrangements and in respect of each aspect of a parenting order affecting a child.”

It was relevant that the orders made for where the children would live upon their return from New York were interim orders and the arrangements temporary. Interim orders do not, of course, require as intense examination by the Court as final orders.

The High Court (at [46]) referred to the urgency of the return of the boys to Australia, in part because the boys were due to return to their schooling in Australia. It was not necessary to seek the views of the boys on every aspect of the interim orders affecting them, which, in any event, were hardly likely to assist the Court. It was clear “that the ascertainment of the boys’ views on these matters was not statutorily mandated.”

The trial judge took steps to ascertain the boys’ views, by leaving in place the 2015 orders concerning the family consultant, who could ascertain them after the boys’ return to Australia.

Parenting orders – “any other person”

The other contentions raised by the father were that the Family Court could not make a parenting order in favour of strangers to the proceedings where those people had not made an application and where there was no evidentiary basis to establish that they came within the list of possible applicants in s　65C.

The ICL’s response was that s 65C refers to a person’s standing to bring an application for parenting orders. The persons referred to in the order were not applicants for parenting orders. They were persons in whose favour such orders were made on the application of the mother. Section 64C provided that a parenting order may be made in favour of a parent of the child “or some other person”. The High Court agreed with these submissions.

The father submitted that there was simply not enough known about those persons to justify the making of that parenting order. The High Court rejected this argument and said (at [51]):

“Far from being strangers to the Family Court, the Court had information that the persons were mothers of longstanding friends of the boys; the Court had undertakings from the mothers to offer “nurturing and care” and to implement arrangements for monitoring homework and transport to and from school respectively; and the Court was aware of the proposed sleeping arrangements of the boys. It may be that more information would be desirable before making a long term parenting order in favour of such third parties. But, as has been emphasised, the present case concerned the making of interim orders in circumstances of some urgency. Plainly, in those circumstances, there was sufficient evidence to ground the making of [the] order …”

6. Bernieres & Dhopal (2017) FLC 93-793 – commercial surrogacy

The commissioning parents to a surrogacy arrangement appealed against the trial judge’s failure to make the orders which they had sought, namely:

• declarations of parentage in relation to the child pursuant to s　69VA FLA
• leave to apply for a step-parent adoption pursuant to s　60G.

The Full Court clarified whether declarations of parentage can be made in commercial surrogacy arrangements. There have been different views adopted by single judges in cases such as Dennis and Anor & Pradchpet [2011] FamCA 123, Dudley & Chedi [2011] FamCA 502 and Ellison and Anor & Karnchanit [2012] FamCA 602.

Background

The parties entered into an international commercial surrogacy arrangement. The husband’s sperm was used with ovum donated anonymously. The child’s DNA was matched with the husband’s DNA and a finding of the “relative chance of paternity” of 99.995% was made. The child received an Australian Certificate of Citizenship by Descent and an Australian passport. The birth mother consented to this.

Statutory provisions

60H(1) If:

(a) a child is born to a woman as a result of the carrying out of an artificial conception procedure while the woman was married to, or a de facto partner of, another person (the　other intended parent); and

(b) either:

(i) the woman and the other intended parent consented to the carrying out of the procedure, and any other person who provided genetic material used in the procedure consented to the use of the material in an artificial conception procedure; or

(ii) under a prescribed law of the Commonwealth or of a State or Territory, the child is a child of the woman and of the other intended parent;

then, whether or not the child is biologically a child of the woman and of the other intended parent, for the purposes of this Act:

(c) the child is the child of the woman and of the other intended parent, and

(d) if a person other than the woman and the other intended parent provided genetic material – the child is not the child of that person.

60H(2) If:

(a) a child is born to a woman as a result of the carrying out of an artificial conception procedure; and

(b) under a prescribed law of the Commonwealth or of a State or Territory, the child is a child of the woman;

then, whether or not the child is biologically a child of the woman, the child is her child for the purposes of this Act.

60H(3) If:

(a) a child is born to a woman as a result of the carrying out of an artificial conception procedure; and

(b) under a prescribed law of the Commonwealth or of a State or Territory, the child is a child of a man;

then, whether or not the child is biologically a child of the man, the child is his child for the purposes of this Act. …

60H(6) In this section:

This Act　includes:

(a) the standard Rules of Court; and
(b) the related Federal Circuit Court Rules

The words “artificial conception procedure” are defined in s 4 of the Act as including:

1. 1. artificial insemination; and
   2. the implantation of an embryo in the body of a woman.

Regulation 12C provides that, for the purpose of s 60H(1)(b)(ii), the　Status of Children Act　is prescribed. In relation to s 60HB(2),　s 14　of that Act is prescribed (reg 12CA). There are no laws prescribed in relation to s 60H(3).

60HB(1) If a court has made an order under a prescribed law of a State or Territory to the effect that:

(a) a child is the child of one or more persons; or
(b) each of one or more persons is a parent of a child;

then, for the purposes of this Act, the child is the child of each of those persons.

Regulation 12CAA of the Regulations sets out the prescribed laws referred to in s 60HB(1), and for Victoria it is again the　Status of Children Act.

The Full Court noted that s 60HB as introduced into the FLA in 2008 at the same time as s 60H was amended by the substitution of a new s 60H(1).

The Revised Supplementary Explanatory Memorandum accompanying the　Amending Act explains these amendments in terms (quoted at [47]):

“76. This item repeals s　60H(1) and substitutes a new s　60H(1) that deals with both married and opposite and same-sex de facto couples. Opposite-sex de facto couples were previously covered in s　60H(4). This subsection is repealed.

77. These changes will mean that s　60H(1) applies, as well as to married couples, to current or former de facto partners who are of the same-sex and to current or former de facto partners who are of different sexes where children are born as a result of artificial conception procedures. This would mean that female same-sex de facto couples would be recognised as the parents of a child born where the couple consent to the artificial conception procedure and one of them is the birth mother. In addition, genetic material from other than the couple must be used with the relevant donor’s consent. The provision provides that the child is to be the child of the woman giving birth and her de facto partner. …

81. New s　60HB deals with children born under surrogacy arrangements. It provides that where a court order has been made under a prescribed law of a State or Territory relating to the parentage of a child that order will determine the parentage of the child.”

Section 69VA – “As well as deciding, after receiving evidence, the issue of the parentage of a child for the purposes of proceedings, the court may also issue a declaration of parentage that is conclusive evidence of parentage for the purposes of all laws of the Commonwealth.”

The Full Court said in relation to s 69VA (at [50] – [51]):

“This section is in that part of the Act (Part VII) where a number of general provisions dealing with parentage, presumptions and declarations of parentage appear, and the obvious question is whether specific sections such as ss 60HB and 60H prevail over these general provisions where they conflict. The answer to that question is assisted by the rule of statutory construction known as　generalia specialibus non derogant.　That provides that if there is a specific section or sections of the Act that apply, then that section or those sections prevail, particularly where, as here, the specific sections, namely s 60HB and the amended s 60H were enacted after the general (Commissioner of Taxation v Hornibrook　[2006] FCAFC 170;　(2006) 156 FCR 313).

The proposition that ss 60H and 60HB prevail over the general provisions can also be supported by a consideration of the meaning and effect of those two sections. As Chief Judge Thackray explained in　Farnell & Anor and Chanbua　(2016) FLC 93–700 at [143];　[2016] FCWA 17　at　[231]:

“Sections 60H and 60HB, at least to the extent that they expressly determine the status of children coming within their ambit, would be rendered meaningless if they were not interpreted to displace the presumptions in Division 12 [of the Act]. It should also be noted that ss 60H and 60HB appear in Subdivision D of Division 1 of Part VII, which is entitled “Interpretation – how this Act applies to certain children”. I conclude that while the rules of maternity and paternity in ss 60H and 60HB are not expressed as non-rebuttable presumptions, in effect they are, and they therefore trump the rebuttable Division 12 presumptions. (Footnotes omitted)

We agree with that interpretation.”

The Full Court referred to Ryan J in Mason who expressed (at [33]) a:

“preliminary view that for the purposes of the Act, the 2008 amendments evince an intention by Parliament that the parentage of children born as a result of artificial conception procedures or under surrogacy arrangements will be determined by reference to those provisions and not the general parentage provisions. This interpretation achieves, on a state by state (and territory) basis, a uniform system for the determination of parentage.”

Ryan J said that the effect was that unless an order is made in favour of the applicant pursuant to state law, the provisions of the FLA did not permit the Court to make a declaration of parentage in his favour. She agreed with Watts J in　Dudley and Anor & Chedi　[2011] FamCA 502, who determined that ultimately state law will govern the determination of parentage of children born under surrogacy arrangements and that state law will be recognised by federal law.

The Full Court agreed with Ryan J’s preliminary view, and said (at [53]):

“Significantly this interpretation does not leave it open to find that where, as in Victoria, the relevant State legislation does not apply to the particular circumstances of the case, that lacuna can be filled by recourse to　s 69VA.　That is the approach though that Johns J in Green-Wilson & Bishop　[[2014] FamCA 1031] where her Honour reasoned as follows (at [44]):

“In circumstances where the state legislation is silent with respect to the determination of parentage of children born of commercial surrogacy procedures (which are not prohibited in Victoria), I am satisfied that it is appropriate to make a declaration with respect to a child born of such procedures who is now living in Victoria. To do otherwise would be to elevate public policy considerations (as to the efficacy or otherwise of commercial surrogacy arrangements) above a consideration of the welfare of children born of such arrangements. In my view, the interests of the child must outweigh such public policy considerations.”

The Full Court said (at [54]):

“In our view it is not possible to discard the plain meaning of legislation where public policy considerations may not be seen to be in the best interests of the children affected.”

In relation to s 60H, the Full Court said (at [57]) that although “theoretically　s 60H　could apply to a surrogacy arrangement, a close consideration of the section reveals otherwise”. On its plain meaning, s　60H(1) did not make the commissioning parties the parents of the child. It was designed to cover conventional artificial conception arrangements where the birth mother and her partner were to be the parents of the child.

The commissioning parents argued that the words “the other intended parent” in　s 60H(1)　must be “read down so as to require the other person (being the ‘other intended parent’) to intend to be the parent of the relevant child”. In other words, interpreting that phrase as a substantive provision rather than a definitional provision. This approach was rejected by Watts J in　Re　Michael: surrogacy arrangements　[2009] FamCA 691. The use of those words in　s 60H(1)　was considered in extenso (at full length) by Thackray CJ in　Farnell who, after examining the debates in Hansard when the　Amending Act　was introduced into Parliament in 2008 concluded (at [220]):

“Hansard provides no support for the proposition that Parliament countenanced the possibility that a man and woman who commissioned the birth of a child, whether in Australia or overseas, would be afforded the status of a parent of that child without a court order made under state surrogacy laws. It is equally untenable to suggest that Parliament, in referring to “intended parent” in s 60H(1), had in mind the husband or partner of a woman who had agreed to be a surrogate mother.”

The Full Court concluded (at [62] – [65]) that s 60HB specifically addresses the position of children born under surrogacy arrangements, leaving s 60H to address the status of children born by means of conventional artificial conception procedures. The plain intention of s　60HB is to leave it to each of the States and Territories to regulate the status of children born under surrogacy arrangements, and for that to be recognised for the purposes of the Act. In other words, s　60HB covered that field. As a result, s　69VA was not available because s　60HB covered the field, and s　60H did not apply. The unfortunate result was that the parentage of the child was in doubt. No order had been made under the relevant State legislation (and nor could there be). There was no question that the father was the child’s biological father, but that did not translate into him being a parent for the purposes of the FLA. Further, the mother was not the biological mother, and thus was even less likely to be the “legal parent.”

In relation to s 69VA the trial judge considered that reliance upon s 69VA for the declaration was of no assistance as it was not an independent source of power.

The Full Court (at [69]) agreed with the approach of the trial Judge and also Johns J in　Green-Wilson & Bishop [2014] FamCA 1031. It was “not open to fill the legislative vacuum identified by Johns J by judicial interpretation; it could only be done by legislation.”

In the alternative, the appellants sought a declaration under s 67ZC that each of them was a parent.

67ZC(1) “In addition to the jurisdiction that a court has under this Part in relation to children, the court also has jurisdiction to make orders relating to the welfare of children.”

67ZC(2) “In deciding whether to make an order under subsection (1) in relation to a child, a court must regard the best interests of the child as the paramount consideration.”

The Full Court said (at [703]) that “the literal meaning of s 69ZH(2) of the Act is that for s 67ZC to apply the child must be ‘a child of a marriage’.”

The definition of “child of a marriage” is in s 60F(1):

60F(1) “A reference in this Act to a child of a marriage includes, subject to subsection (3), a reference to each of the following children:

(a) a child adopted since the marriage by the husband and wife or by either of them with the consent of the other;
(b) a child of the husband and wife born before the marriage;
(c) a child who is, under subsection 60H(1) or section 60HB, the child of the husband and wife.

Importantly, s 60F(4A) provides:

“To avoid doubt, for the purposes of this Act, a child of a marriage is a child of the husband and of the wife in the marriage.”

Therefore, the child in this case was not within the definition in s 60F(1). The commissioning parents argued that the definition in s　60F(1) was not exhaustive and could be extended such that s　67ZC could apply where it was necessary to ensure the welfare of the child.

Whilst the Full Court accept that the definition in s　60F(1) was not exhaustive, it was not apparent how s 67ZC could be utilised to expand that definition that the child could be found to be a child of a marriage.

Although a number of judges at first instance could have applied s 67ZC to advance the welfare of children who were not children of a marriage (e.g. Re Alex (Hormonal Treatment for Gender Dysphoria)　(2004) FLC 93–175;　Re Lucy (gender dysphoria)　[2013] FamCA 518), as

Re　Lucy　demonstrated, the application of s 67ZC to children other than children of a marriage was not without controversy. The Full Court distinguished these cases (at [79]):

“However, we have found that in relation to children born under surrogacy arrangements, the intent of the legislature is that s 60HB covers the field, and is the operative provision in the Act concerning parentage of those children. The effect of this is that even if in some respects s 67ZC could arguably apply to the child here, in relation to parentage, this general provision could not prevail over the specific provision, namely s 60HB. Moreover, the application of s 67ZC is not at large; if it were, there would be no need for s 60H, s 60HB, or even s 69VA.”

A further impediment was that the appeal was conducted without a contradictor. It was therefore (at [80]):

“not the vehicle to address the larger question of whether s 67ZC could permissibly be applied to a child who is not a child of a marriage.”

The Full Court concluded that s 67ZC could not be utilised to make a declaration of parentage, but for different reasons than the primary judge who had proceeded on the basis that s　67ZC only applies where the child is a child of a marriage, whereas the Full Court’s finding was based on the circumstance that s 60HB covers the field. Although his Honour was correct in concluding that s　67ZC could not be utilised to make a parenting declaration, the outcome was correct for reasons other than his Honour expressed.

Leave to adopt

The commissioning parents also submitted that the primary judge erred in failing to find it was in the best interest of the child for them to be given leave to adopt.

The relevant provision is s　60G of the FLA, which provides:

60G(1) “Subject to subsection (2), the Family Court, the Supreme Court of the Northern Territory or the Family Court of a State may grant leave for proceedings to be commenced for the adoption of a child by a prescribed adopting parent.”

60G(2) “In proceedings for leave under subsection (1), the court must consider whether granting leave would be in the child’s best interests, having regard to the effect of paragraph 60F(4)(a), or paragraph 60HA(3)(a), and of sections 61E and 65J.”

The commissioning parents sought leave to apply for a step-parent adoption, but complained that the trial judge failed to address that application. The Full Court agreed that the judge did not address the question in the balance of his reasons for judgment, after identifying it earlier as an issue before the court.

Prima facie, there was merit in this ground of appeal. However, the transcript revealed a different story. The primary judge only needed to address　s 60G　if there was a declaration of parentage in favour of the commissioning father, but not in favour of the commissioning mother. As a declaration was not made in favour of either party, on the commissioning parents’ own case the primary judge was not obliged to address the application pursuant to　s 60G.

In any event, for　s 60G　to apply there must be a “prescribed adopting parent”. In　s 4(1)　a “prescribed adopting parent”, in relation to a child, is defined as:

“a. a parent of the child, or

b. the spouse of, or a person in a de facto relationship with, a parent of the child; or

c. a parent of the child and either his or her spouse or a person in a de facto relationship with the parent.”

Neither party came within that definition.

Following the hearing of the appeal, and pursuant to orders allowing them to do so the commissioning parents provided written submissions addressing the question of whether the commissioning father was a “parent” for the purposes of s 60G. The commissioning parents conceded that under the Status of Children Act he was not a parent but suggested he was a parent for the purposes of the Adoption Act 1974 (Vic) or the dictionary definition of “parent” applied by the Full Court in　Tobin & Tobin　(1999) FLC　92–848 could be utilised.

The Full Court could not discern a definition of a “parent” for the purposes of the Adoption Act, and using the dictionary definition of a “parent” overlooked that what needed to be addressed was whether the commissioning parent was a “parent” within s 60G. Not only was the dictionary definition of no assistance, but also the meaning of “parent” under the Adoption Act, if it could be discerned, was of no assistance.

Whilst the Full Court has now clarified the law with respect to making parenting orders with respect to overseas surrogacy arrangements, it has conceded that there is a lacuna – a legislative gap – for these children. Effectively, they are left without any legal parents.

7. Thorne & Kennedy [2017] HCA 49; (2017) FLC 93-807 – Duress, undue influence, unconscionability and a “bad bargain”

In its first examination of financial agreements, the High Court in Thorne v Kennedy [2017] HCA 49; (2017) FLC 93-807 set aside two financial agreements, casting considerable doubt on the viability of financial agreements which are a bad bargain for one of the parties. Unanimously, the High Court set aside the two agreements for unconscionable conduct. The plurality also set them aside for undue influence. It was unnecessary to decide whether there was duress.

This paper was not intended to cover that decision, which was handed down 7 days before this presentation, but it is certainly a “Hot Case” of 2017. A more detailed explanation of the decision is

given in my article, “Thorne v Kennedy – Has the High Court hung financial agreements out to dry?” which can be accessed from http://www.wolterskluwercentral.com.au/category/legal/family-law/

The wife’s lack of free choice, which gave rise to the plurality upholding the trial judge’s finding of undue influence, was based on the following findings of the trial judge:

1. Her lack of financial equality with the husband;
2. Her lack of permanent status in Australia at the time;
3. Her reliance on the husband for all things;
4. Her emotional connectedness to their relationship and the prospect of motherhood;
5. Her emotional preparation for marriage; and
6. The “publicness” of her upcoming marriage.

In relation to unconscionable conduct, the plurality (and the other 2 judges separately in minority judgments) referred favourably to the trial judge s’ findings that the wife’s powerlessness and lack of choice but to enter into the agreements pointed inevitably to the conclusion that she was at a special disadvantage. The husband was aware of the wife’s special disadvantage and it was, in part, created by him:

1. He created the urgency with which the pre-nuptial agreement was required to be signed and the haste surrounding the post-nuptial agreement and the advice upon it.
2. She had no reason to anticipate an intention on his part to insist upon terms of marriage that were as unreasonable as those contained in the agreements, even though she knew in advance that there was to be some type of document.
3. The wife and her family members had been brought to Australia for the wedding by the husband and his ultimatum was not accompanied by any offer to assist them to return home.

The High Court plurality said these matters increased the pressure which contributed to the substantial subordination of the wife’s free will in relation to the agreements. The husband took advantage of the wife’s vulnerability to obtain agreements which, on the uncontested assessment of the wife’s solicitor, were entirely inappropriate and wholly inadequate.

For the purposes of this paper, perhaps the most important aspect of the judgment is the attitude of the High Court to “a bad bargain”. Whilst the Full Court of the Family Court has, in relation to s　90G(1A) said that parties are free to enter into “a bad bargain”, the High Court did not agree that in relation to s　90K “a bad bargain” will always be upheld, and considered that a bad bargain may contribute to it being set aside. The terms of the agreement were so unfavourable to the wife – a bad bargain – and the plurality considered those terms to be relevant to a finding of undue influence. It said (at [56]) that the trial judge:

“was correct to consider the unfair and unreasonable terms of the pre-nuptial agreement and the post-nuptial agreement as matters relevant to her consideration of whether the agreements were vitiated. Of course, the nature of agreements of this type means that their terms will usually be more favourable, and sometimes much more favourable, for one party. However, despite the usual financial imbalance in agreements of that nature, it can be an indicium of undue influence if a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of this nature.”

The plurality set out factors which it identified as being relevant to whether a financial agreement should be set aside for undue influence (at [60]):

1. Whether the agreement was offered on a basis that it was not subject to negotiation;
2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
3. Whether there was any time for careful reflection;
4. The nature of the parties’ relationship;
5. The relative financial positions of the parties; and
6. The independent advice that was received and whether there was time to reflect on that advice.

The decision raises many questions.

Conclusion

Until Thorne v Kennedy, perhaps the most important case delivered in family law this year was Wallis & Manning. It is comforting that the Full Court is reflecting on and trying to improve the predictability of judgments and put some constraints around the breadth of judicial discretion.

Most of the cases dealt with in this paper lead to more questions than they answer. Even in Bernieres & Dhopal, in which the Full Court was quite decisive in its dismissal of the commissioning parents attempt to be the child’s legal parents, as the Full Court said, there was “a　legislative vacuum” with respect to the child’s parentage.

The breadth of the impact of Surridge is unresolved. The assessment of initial contributions and post-separation contributions is, as determined in Calvin & McTier and Wallis & Manning, still discretionary. The standing of a trustee in bankruptcy to set aside a financial agreement was stated clearly to be not under the FLA, but under the BA – a rather unsatisfactory outcome given the aims of the 2005 amendments to harmonise bankruptcy and family law. Bondelmonte is perhaps the only case which gives clear guidance.

A detailed analysis of Thorne & Kennedy, is beyond the scope of this paper. However, legal practitioners are likely to be more wary of advising client entering into financial agreements where there is unequal bargaining power and it is a “bad bargain” for one of the parties.

© Copyright – Jacqueline Campbell of Forte Family Lawyers and Wolters Kluwer/CCH.　This paper uses some material written for publication in Wolters Kluwer/CCH Australian Family Law and Practice.　The material is used with the kind permission of Wolters Kluwer/CCH.

Jacky Campbell, November 2016

Hot cases in Family Law 2016

In the last 12 months or so there have been some significant cases under the Family Law Act 1975. Those dealt with in this article cover:

• Spousal maintenance – Hall
• The definition of “financial resource”
• Life expectancy – Fontana
• A lottery win early in the marriage
• Add-backs
• Bankruptcy basics
• Whether a financial agreement can be both a s 90B and a s 90UC financial agreement
• Redundancies, LSL and personal injury damages
• Valuing funds in the payment phase
• Campbell

High Court on spousal maintenance and financial resources – Hall v Hall (2016) FLC 93-709

In a rare foray into the Family Law Act 1975 (FLA), and an even rarer foray into the entitlements of parties to an order for spousal maintenance and particularly interim spousal maintenance, the High Court granted special leave to the wife to appeal against a decision of the Full Court of the Family Court.

The High Court considered:

• The meaning of “financial resources” in s 75(2)(b), and particularly whether “financial resources” in s 75(2)(b) was confined to present legal entitlements; and
• Whether it was open on the evidence before the Full Court for it to find that the wife was able to support herself adequately within s 72.

The trial judge in Hall & Hall (No 3) [2013] Face 975 ordered that the husband pay to the wife interim spousal maintenance of $10,383 per month together with school fees and related expenses for the children. The husband was also paying the mortgage, rates, taxes and utilities on the former matrimonial home. His total payments for the wife and children were $28,000 per month.

At trial and in the appeals, the issue was not the husband’s ability to pay spousal maintenance under s 72 FLA, but the ability of the wife to support herself.

The wife’s father had died in 2009, but probate had not been granted. The wife had not produced a copy of her father’s Will and she said she did not know the particulars of her late father’s estate. There was no evidence before the court as to any asset, financial resource or income to which the wife might be entitled. The trial judge said that the absence of information about the nature and extent of any interest of the wife in the estate of her late father meant that no such interest could be take into account as a financial resource of the wife in determining the wife’s application for maintenance.

The husband attempted to subpoena the Will of the wife’s late father. The subpoena proceedings were reported as Hall & Hall and Anor (Objection to subpoena) [2014] FamCA 407. The objections were dismissed. An affidavit was sworn by a solicitor acting for one of the brothers and filed in support of the brother’s opposition to disclosure of the Will. The solicitor said there were concerns for the personal safety of the family and for that reason an application for probate had not been made and the production of the Will was opposed.

The property dealt with in the Will included shares in companies within the V Group. The V Group was one of the largest business enterprises in South Australia. Under the Will, all of the father’s shares were given to the wife’s brothers and none were given to the wife apart from some which she had received prior to her father’s death.

One clause of the Will related to the wife. The wife’s father expressed the ”wish” that the wife should receive from the V Group a lump sum payment of $16,500,000 on the first to occur of a number of specified events. One of the specified events was that the wife and the husband divorced. The father also expressed a “wish” that the wife should receive from the V Group annual payments of $150,000 CPI indexed until the date (if any) that the lump sum payment of $16,500,000 was made. The husband’s case in the High Court concentrated on the “wish” for annual payments of $150,000 to the wife.

The wife deposed that she had recently spoken to one of her brothers who had explained the contents of the Will to her. She stated that she had “not received any income or capital payment from my late father’s estate.”

The husband applied to discharge the maintenance order under s 83(1)(c) to discharge the order on the basis that there was “just cause for so doing”. These proceedings were reported as Hall & Hall (No 3) [2014] FamCA 406. His application was dismissed.

The husband sought leave to appeal to the Full Court of the Family Court. At the hearing in the Full Court, which was reported as Hall & Hall [2015] FamCAFC 154, the wife adduced further evidence, being a letter from one of her brothers explaining that neither the $150,000 annual payments nor the lump sum payment of $16,500,000 were to be paid to the wife and that as executor the brother had no obligation to the wife in respect of these amounts. The letter re-emphasised the voluntary nature of the payments as wishes of the wife’s father.

The Full Court found there was evidence that demonstrated that the wife was able to support herself adequately as she would have received the payments of $150,000 per annum from her brothers if she requested it. There was nothing in the evidence to suggest that any such request, if made, would have been denied. The Full Court considered that the fact that her brothers had provided her with luxury motor vehicles indicated that she had a good relationship with them.

The Full Court granted the husband leave to appeal, allowed the appeal and discharged the interim maintenance order retrospectively from the date the maintenance order was made – over one and a half years previously.

The wife sought leave to appeal to the High Court. She had two broad grounds of appeal:

• A failure of process
• Substantive reasoning

The failure of process argument was that the wife’s ability to request the V Group to make a voluntary annual payment to her was not raised by the husband at first instance. She said that she had met and defeated his argument that she had a legal entitlement to the payment. If it had been apparent that the husband was alleging that she was able to request that the V Group make a voluntary annual payment, she would have placed further evidence before the court on that issue.

The substantive reasoning argument was:

(a) It was not open on the evidence to infer that the voluntary annual payment would have been made to her if she requested it.
(b) Even if it was established that the voluntary annual payment would have been made to her if she requested it, that did not constitute a proper basis for concluding that she was able to support herself adequately within the meaning of s 72(1). Her ability to obtain a voluntary payment by asking for it was not a “financial resource” within the meaning of s 75(2)(b) and the Full Court did not and could not form an opinion that it was a fact or circumstance which the justice of the case required to be taken into account so as to bring it within s 75(2)(o).

The High Court majority rejected the failure of process argument. There was no ambiguity in the husband’s argument before the Full Court that the inference should be drawn that the annual payment of $150,000 would be given to the wife if she chose to ask her brothers for it. The inference was more readily drawn given the wife’s failure to adduce evidence about it. The wife was fully aware of the risks of running her case on the basis she did.

The term ”financial resources” was defined by the High Court, so as to extend to potential sources of financial support if the factual inquiry supported that the source could reasonably be expected to be forthcoming were the party to call on it. The majority said (at para 56):

“Here, on the Full Court’s finding of fact, the annual payment from the Group was a financial resource of the wife so as to be a matter within s 75(2)(b). The payment was available to her if she asked for it. The availability of the payment was the subject of specific provision in the father’s will. The making of the payment was at least a moral obligation of the wife’s brothers, who were in any case well-disposed towards her.”

The High Court majority found that the annual payment was also relevant under s 75(2)(o), saying (at para 58):

“Because it bore centrally on the ability of the wife to support herself adequately, the availability to the wife of the annual payment from the Group was also a fact or circumstance in respect of which it was open to the Family Court to form the opinion that the justice of the case required that it be taken into account.”

The emphasis by the High Court on the “moral obligation” of the wife’s brothers was curious, given the criticism expressed by the High Court majority in Stanford v Stanford (2012) FLC 93-518 about the Full Court of the Family Court’s finding (at para 12 of the High Court) that :

“… the many years of marriage [of the parties] and the wife’s contributions demand that those moral obligations be discharged by an order for property settlement.”

The High Court majority said in Stanford (at para 52):

“Whether it was just and equitable to make a property settlement order in this case was not answered by pointing to moral obligations. Reference to “moral” claims or obligations is at the very least apt to mislead.”

It is difficult to reconcile the attitude of the High Court to moral claims in Hall with those expressed in Stanford. Although the High Court was dealing with a property claim under s 79 in Stanford, and in Hall it was dealing with whether a maintenance order ought to have been discharged, the wording of the relevant legislative provisions in both cases made reference to it being “just” and there was a legislative pathway for the court to follow in each case which did not include “moral” obligations of the parties or third parties.

There was a strong dissenting judgment by Gordon J in Hall. Matters which Gordon J said (at paras 72–78) counted against the drawing of the inference were:

• The wife was not provided with a copy of the Will when her father died;
• The wife was not provided with a copy of the Will when she asked for one after separation;
• The wife had not received any income or capital from her father’s estate;
• The brothers’ conduct suggested an unwillingness to disclose the contents of the Will to the wife and to comply with their father’s stated wish in relation to their sister;
• There is a difference between having a good relationship with someone and being willing to give them large sums of money on a regular basis;
• At best, if the wife made a request for payment, that was only an “intermediate step” to the payment being made;
• There was a distinction between the capacity of the Group to pay and the willingness of the brothers to cause it to pay; and
• A finding that two luxury vehicles had been purchased by the brothers personally for the wife was different to the Group making a voluntary annual indexed payment of $150,000 net of tax.

Justice Gordon concluded (at para 91):

“However, it cannot be said that the father’s wish … was a source of financial support which, if the wife requested, the wife could reasonably expect would be available to her to supply a financial need.”

The proceedings in the Family Court continued after the High Court decision. The husband applied unsuccessfully to discharge the orders that the wife have sole use of the former matrimonial home and that he pay the outgoings of the home. These proceedings were reported in Hall & Hall (No 4) [2016] FamCA 746. The husband asserted that the financial circumstances of the wife had changed because the contents of the Will were known, and that the wife was entitled to a gift of $16.5 million and annual payments of $150,000. The wife relied upon material annexed to her most recent affidavit which clearly indicated that the executor of her father’s estate and her brothers who controlled the V Group, would not make the voluntary payments to the wife. The trial Judge found that the financial resources to which the husband referred (the wife’s entitlement or financial resource arising from her late father’s estate) were not available to the wife at that time.

Lottery win during a relationship – Elford & Elford (2016) FLC 93-694

Elford & Elford involved a lottery win by the husband of $622,842 in January 2004, about a year after cohabitation of slightly less than 10 years commenced. He topped it up with savings of $27,000 and the sum of $650,000 remained intact in the husband’s bank account at the end of the marriage. At the start of the relationship, before the lottery win, the wife had superannuation and non-superannuation property of about $130,000 and the husband had $535,000. The net pool at the end of the relationship was about $1.4 million.

The trial judge found that the Wife was entitled to 10% of the pool. The husband in Elford never intended the weekly purchase of lottery tickets to be “a joint matrimonial purpose”. Judge Roberts said:

“In my view, it is not only “the nature of the parties’ relationship at the time the lottery ticket was purchased” that sets this case apart from so many of the decided “lottery winnings” cases; it is also the manner in which the husband and the wife conducted their financial affairs after those winnings were received by the husband in 2014. Those winnings were placed into an account in the husband’s sole name and that is where they remain to this day. The parties also kept all their other finances separate for the entirety of their relationship.

In view of those circumstances, I consider it appropriate to treat the husband’s lottery winnings of $622,842 in January 2004 as a contribution by the husband alone.”

The Full Court dismissed the appeal.

Roberts J effectively treated the husband’s lottery win as Kay J’s gold bar in Aleksovksi & Aleksovski (1996) FLC 92-705. The Full Court said that the trial Judge’s approach was consistent with Eufrosin & Eufrosin [2014] FamCAFC 191, although in that case the wife’s lottery win was after separation.

So, what does Elford mean for the erosion principle? Has the principle that over time, initial contributions lose value, itself been eroded? Have such cases as Bonnici & Bonnici (1992) FLC 92-272, Burke & Burke (1993) FLC 92-356 and Pierce & Pierce (1998) FLC 92-844 been over-ruled?

The approach taken by the trial Judge in Elford is similar to that of Justice Guest in a dissenting, notorious judgment in Farmer & Bramley (2000) FLC 93-060 where he said:

“Although there need not be a specific nexus between the property and the contribution, they both must occupy the same time and space, that is, have parallel or fractional contemporaneity.”

In Elford the early contribution of the lottery win by the husband was not offset by any later contributions of the wife. The finding of fact that the parties kept their finances quite separate during the relationship, and to a large degree, their finances, was very important. This is also consistent with the asset by asset approach of Norbis v Norbis (1986) FLC 91-712. For a recent instance of the more usual global or holistic approach to contributions by the Full Court see Singerson & Joans [2014] FamCAFC 2

Jacky Campbell, March 2016

Polygamous marriages recognised under Australian law—but not gay marriages

In 2004, Prime Minister John Howard amended the Marriage Act 1961 (Cth) to expressly restrict the ability of couples to marry, unless they are a heterosexual couple. In Ghazel & Ghazel [2016] FamCAFC 31, the Full Court of the Family Court of Australia considered the question of whether an unintended consequence of the amendments was to invalidate polygamous and potentially polygamous overseas marriages. These marriages were recognised as valid prior to 2004, if they were valid in the country in which the marriage occurred.

Status of polygamous marriages under the Family Law Act

Although not discussed in Ghazel, polygamous marriages are recognised under the Family Law Act 1975. Section 6 of that Act provides:

“For the purposes of proceedings under this Act, a union in the nature of a marriage which is, or has been at any time, polygamous, being a union entered into in a place outside Australia, shall be deemed to be a marriage”.

Section 88E(4) of the Marriage Act 1961 protects the application of s 6 Family Law Act from the operation of Pt VA Marriage Act. Pt VA governs the recognition of foreign marriages in Australia. This means that orders can still be sought under the Family Law Act in relation to a polygamous marriage which is invalid for the purposes of the Marriage Act.

Background

Mr Ghazel was born in Iran and Mrs Ghazel was born in England. They married in Iran in 1981 according to the law of that country. That law permitted a husband, subject to certain conditions, to take up to 3 additional wives. Although this was Mr Ghazel’s first marriage, the parties’ marriage in Iran was “a potentially polygamous marriage”.

The parties moved from Iran to England, and in late 1981, they went through another marriage ceremony at an English Registry Office. On the English marriage certificate the parties were described as “bachelor” and “spinster”.

In 2003, Mrs Ghazel and the 2 children of the marriage migrated to Australia. Mr Ghazel followed in 2005.

In 2008, the parties filed a joint application for divorce in Australia. The application only referred to their marriage in England. A divorce order was made by the Federal Magistrates Court of Australia (as it then was) in early 2012.

In August 2013, in proceedings initiated in Iran by Mrs Ghazel (apparently to determine how it was that Mr Ghazel was able to marry again in Iran allegedly without Mrs Ghazel’s consent), an Iranian Court concluded that the Iranian marriage between Mr and Mrs Ghazel was still in existence.

The Family Court proceedings

In November 2014, Mrs Ghazel filed an application in the Family Court of Australia seeking an order that the marriage between herself and Mr Ghazel in 1981 in Iran be declared valid in accordance with s 88D Marriage Act.

Mr Ghazel opposed the making of the declaration.

Justice Hogan delivered reasons for judgment, in which she confirmed that the definition of “marriage” was “the union of a man and a woman to the exclusion of all others voluntarily entered into for life” as set out in s 5(1) of the Marriage Act.  Pursuant to Pt VA of that Act, foreign marriages that are recognised as valid under the local law where the marriage took place are recognised as valid in Australia (s 88C(1)).

Justice Hogan concluded, however, that the definition of “marriage” in s 5(1) meant that a marriage solemnised in a foreign country must be monogamous for it to be recognised as valid in Australia, and therefore polygamous marriages were not recognisable in Australia. As the Iranian marriage of Mr and Mrs Ghazel was “potentially polygamous”, it was not recognised as valid in Australia.

The Appeal

Mrs Ghazel appealed to the Full Court of the Family Court. The Attorney-General for the Commonwealth was invited by the Full Court to intervene, and he did so.

In Mrs Ghazel’s written and oral submissions, she contended that the case was a test case with wide ramifications. If Justice Hogan was correct, all married couples moving to Australia whose marriages were celebrated in countries where the local law permitted polygamous marriages, upon changing domicile to Australia became “un-married”.

The Commonwealth’s position was that “a potentially polygamous marriage”, which would have been recognised under Pt VA before the Marriage Amendment Act 2004 (“the 2004 amendments”), continued to be recognised. However, the Commonwealth accepted there was strength in the arguments against this recognition.

The Commonwealth’s case started from the position as it was prior to the 2004 amendments. The provisions of Pt VA included a “default recognition rule”. Section 88C provides that Pt VA applies to foreign marriages, where the marriage was recognised as valid under the relevant foreign law at the time it was solemnised, or is so recognised at the time at which the validity of the marriage falls to be determined. Foreign marriages which are within s 88C(1) are recognised as valid in Australia pursuant to s 88D(1), and that primary rule applies unless one of the exceptions in s 88D(2)-(5) applies. The exceptions include that the parties were in a “prohibited relationship” or the consent of either of the parties was not a real consent.

A “potentially polygamous marriage” is not expressly included in the exceptions to the primary rule of recognition although it might be thought, as canvassed by the Commonwealth, that the exception contained in s 88D(2)(a), that one of the parties to the marriage was at the time of the marriage married to another person, included a “potentially polygamous marriage”. However, the Commonwealth argued that this exception, which is described as “a first in time rule”, only precludes recognition of the second marriage, not the first “potentially polygamous marriage”.

The question before the Full Court was whether the 2004 amendments changed this position.

In relation to the wording of s 88B(4) – which was inserted by the 2004 amendments – the Commonwealth relied on the words “to avoid doubt” in the new definition of “marriage”. The Commonwealth posed the question as to what was the “doubt” which was being addressed. At that time, “marriage” included “a potentially polygamous marriage”. The doubt which was being addressed by Parliament was whether “marriage” extended to unions between a man and a man or a woman and a woman. This interpretation was supported by the extrinsic Parliamentary materials. The Explanatory Memorandum, the second reading speech and the Parliamentary debates were entirely focused on the issue of same-sex marriages, and none made reference to polygamous marriage.

The Commonwealth also relied upon the fact that the 2004 amendments did not alter s 88A, which provides that the object of Pt VA is to give effect to The Hague Convention on the Celebration and Recognition of the Validity of Marriages. The 2004 amendments did, however, remove the possibility of foreign same-sex marriages being recognised under the Marriage Act. If the 2004 amendments were intended to alter the position with respect to polygamous and potentially polygamous marriages, the Commonwealth argued that the intention would have been very clear in the text of the amending legislation and in the various extrinsic Parliamentary materials, but no such intention was manifested.

The Full Court of the Family Court accepted the arguments of the Commonwealth and made the declaration as to validity sought by the wife.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, December 2015

Which country? The “clearly inappropriate forum” test in Australian family law

In deciding whether Australia should exercise jurisdiction in proceedings under the Family Law Act 1975 (“the Act”) , the usual test is whether or not Australia is a “clearly inappropriate forum”.

The application of the “clearly inappropriate forum” test was recently considered in Deslandes & Deslandes^[1]. In that case, the parties lived in France for 5 years, sailed around the world for 4½ years and later lived in Australia for about 4 years.

The parties had entered into a prenuptial agreement – a marriage contract in France pursuant to French civil law, importing the regime for property settlement prescribed in Articles 1536 to 1543 of the French Civil Code. The husband contended that the wife’s Australian proceedings for a property settlement were “an abuse of process” and/or that the proceedings ought be stayed on forum grounds.

What is the “clearly inappropriate forum” test?

Where proceedings are on foot in the Family Court, notwithstanding that the Court might have jurisdiction, applying the test of forum non conveniens might require those proceedings to be stayed. The test is whether the Family Court is a clearly inappropriate forum and to maintain the Australian proceedings would be vexatious or oppressive^[2].

There is a heavy onus on the party seeking that an Australian Court decline to exercise jurisdiction. This was explained by Deane J in Oceanic Sun Line Special Shipping Co Inc. v Fay ^[3]  in a statement of principle that was adopted by the High Court in Voth v Manildra Flour Mills Pty Ltd ^[4]. . Deane J said that the power of a court in Australia to order the dismissal or a stay of proceedings properly within jurisdiction on forum grounds was:

“a discretionary one in the sense that its exercise involves a subjective balancing process in which the relevant factors will vary and in which both the question of the comparative weight to be given to particular factors in the circumstances of a particular case and the decision whether the power should be exercised are matters for individual judgment and, to a significant extent, matters of impression. The power should only be exercised in a clear case and the onus lies upon the defendant to satisfy the local court in which the particular proceedings have been instituted that it is so inappropriate a forum for their determination that their continuation would be oppressive and vexatious to him. Ordinarily, a defendant will be unable to discharge that onus unless he can identify some appropriate foreign tribunal to whose jurisdiction the defendant is amenable and which would entertain the particular proceedings at the suit of the plaintiff. Otherwise, that onus will ordinarily be discharged by a defendant who applies promptly for a stay or dismissal if he persuades the local court that, having regard to the circumstances of the particular case and the availability of the foreign tribunal, it is a clearly inappropriate forum for the determination of the dispute between the parties …”

Kent J noted that even if he found that a French court was the “more appropriate” forum, that did not result in the conclusion that Australia was a “clearly inappropriate” one. He had to determine whether the Australian proceedings were “vexatious or oppressive” in the sense identified by the High Court in Voth before staying the Australian proceedings. He quoted Deane J in Oceanic, which statement was adopted by the majority of the High Court in Voth:

“… once it is accepted that the adjectives “oppressive” and “vexatious” are not to be narrowly or rigidly construed and are to be applied in relation to the effect of the continuation of the proceedings rather than the conduct of the plaintiff in continuing them, the continuation of proceedings in a tribunal which is a clearly inappropriate forum would, in the absence of exceptional circumstances being established by the plaintiff … be oppressive or vexatious to such a defendant if there is some available and appropriate tribunal in another country … [the test] cannot, however, properly be seen as a “more appropriate forum” test since the mere fact that a tribunal in some other country would be a more appropriate forum for the particular proceeding does not necessarily mean that the local court is a clearly inappropriate one”.^[5]

In Navarro & Jurado,^[6] the Full Court of the Family Court considered these principles in the context of competing divorce proceedings in Australia and Costa Rica. In Deslandes, Kent J considered that the separate judgments of Thackray and O’Ryan JJ in Navarro, taken together, provided a comprehensive review of the authorities on the issue of forum in a family law context. Thackray J said in Navarro that:

“… the focus must be “upon the inappropriateness of the local court and not the appropriateness or comparative appropriateness of the suggested foreign forum.”^[7]

O’Ryan J helpfully explained the distinction between the “clearly inappropriate forum” test applied in Australia, and the “more appropriate forum” test which applied elsewhere, as follows:

“The two tests are not identical and the difference lies in the emphasis placed on the appropriateness of the local forum rather than the appropriateness of any available foreign forum. The clearly inappropriate test avoids a mere comparison between the competing forums and focuses on the extent to which the continuation of the proceedings in the Australian court should be regarded as inappropriate. The question of whether an Australian court is a clearly inappropriate forum requires attention to be directed to the inappropriateness of that court and not to the appropriateness or comparative appropriateness of the foreign forum.” ^[8]

Applying the “clearly inappropriate forum” test to the facts in Deslandes

When applying the “clearly inappropriate forum” test to the facts in Deslandes, Kent J said (at para 22) that whether or not Australia was a “clearly inappropriate forum” depended on an assessment of the following (non-exhaustive) factors (derived from Lord Goff’s factors in Spiliada, approved in Voth and added to in Henry:

“(a)    Factors of convenience and expense, such as the location of witnesses;

(b)    Whether, having regard to their resources and understanding of language, the parties are able to participate in the respective proceedings on an equal footing;

(c)     The connection of the parties and their marriage with each of the potential jurisdictions and the issues on which relief may depend on those jurisdictions;

(d)    Whether the other potential forum will recognise Australian Orders and vice-a-versa and the ease of enforcement in each country;

(e)    Which forum may provide more effectively for a complete resolution of the matters involved in the parties’ controversy;

(f)     The order in which each of the proceedings were instituted, the stage which they have reached and the costs incurred in each jurisdiction;

(g)    The governing law of the dispute;

(h)    The place of residence of the parties;

(i)     The availability of an alternative forum; and

(j)     Any legitimate juridical advantage to litigating in either jurisdiction”.^[9]

In Deslandes, the parties’ assets were located in Australia. The assets included:

1. A yacht, which the husband valued at $300,000;
2. A Queensland Treasury bond of $750,000; and
3. The business interests of each of the parties via their respective businesses or corporations.

Kent J, referring to some of the connecting factors in Australia, said^[10]:

“Plainly enough, in circumstances where both parties are resident in Australia and have been now for some years; and both parties plan to remain living in Australia; it cannot be said that matters of convenience or expense, including the location of any necessary witnesses, renders Australia a clearly inappropriate forum”.

He noted that significant additional cost and expense would be involved in the parties participating in proceedings in France (where they did not live) in comparison to participating in proceedings in Australia (where they lived).

A matter of central importance was that the husband sought parenting orders under the Act. In Kemeny & Kemeny, ^[11] the Full Court held that although the Family Court may be a “clearly inappropriate forum” to litigate one matrimonial cause (such as where property orders had been made by an overseas court) it may nonetheless properly exercise its jurisdiction with respect to others (such as parenting matters, or with respect to property located in Australia). However, it was important to recognise (e.g. Henry), that the matters in dispute between the husband and the wife arising out of the matrimonial relationship, and consequent upon its breakdown, were part of a single controversy.

In Deslandes, Kent J considered that it was contradictory for the husband to contend that the Australian Court was “a clearly inappropriate forum” for property matters, when he had invoked the Family Court of Australia’s jurisdiction by applying for parenting orders. The husband’s application for parenting orders brought into focus the important principle that resolving issues between the parties after marriage breakdown was a single controversy arising out of the same substratum of facts. To determine parenting issues in Australia, whilst there were proceedings in France to determine financial issues, was plainly vexatious and oppressive to the wife.

Relevance of the French pre-nuptial agreement

The husband pointed to the parties’ pre-nuptial agreement made pursuant to the French Civil Code and his consequent juridical advantage in having financial issues determined in France. Importantly, Kent J noted that the pre-nuptial agreement did not include any clause or term to the effect that the parties submitted exclusively to the courts of France to determine any financial issues; or any agreement that the parties could not bring proceedings other than in France. In other words, the parties did not include in their agreement any promise not to sue in a foreign jurisdiction. Such a clause might have supported an injunction in aid of such a promise.

Kent J said the fact that the parties had an overseas pre-nuptial agreement was not necessarily ignored in property proceedings under the Act. It might, for example, provide an important source of evidence as to the initial contributions by each party.

Kent J concluded that juridical advantage was not the major factor, saying:

“Put another way, the factor of any legitimate juridical advantage to the husband of litigation in France is overwhelmed by the other factors referred to. In particular, Australia provides more effectively for a complete resolution of the matters involved in the parties’ controversy and the connection of the parties and their marriage with Australia, as referred to, results in the conclusion that Australia cannot be said to be a clearly inappropriate forum.”^[12]

Conclusion

The decision of Deslandes provides a useful summary of the law applied in determining forum disputes and how the “clearly inappropriate forum” test is applied in matters under the Act.In Deslandes the factors which were particularly important were:

1. The costs involved if the property proceedings were dealt with in France as opposed to Australia;
2. The fact that the husband, although seeking that the property proceedings be determined in France, also sought parenting orders in Australia; and
3. The French pre-nuptial agreement was not relevant to the question of forum because the agreement did not include any provisions about that issue.

Jacky Campbell, December 2015

Which country? New Zealand vs Australia—a special case

The “forum non conveniens” test does not apply when determining which forum should determine a family law dispute when the contest is between Australia and New Zealand. An example of the application of the test which applies to these forum disputes occurred in Nevill & Nevill.^[1] In that case, the wife issued property proceedings in Australia. The husband issued property proceedings in New Zealand and sought a stay of the wife’s Australian proceedings.

The husband and wife were New Zealand citizens. They met in New Zealand and commenced cohabitation in New Zealand in 2003, later marrying. They had one child, who was born in New Zealand in 2006. They separated in June 2013 in Australia, about six months after they had relocated to Australia from New Zealand. There was a dispute as to whether or not the relocation was permanent.

The wife had a trust in New Zealand and it was not in dispute that the proper law of the trust was the law of New Zealand. One of the assets of the trust included the parties’ former matrimonial home with an estimated value of NZD $1,200,000. The husband also had a trust, which held most of his entitlement to shares in a business. The wife contended that the husband’s interest in the business was valued at over NZD $12 million. There was also no dispute that the proper law of the husband’s trust was the law of New Zealand.

Kent J drew the parties’ attention to the existence of the Trusts (Hague Convention) Act 1991 (Cth) and said that the parties stated positions appeared to be consistent with that statute.

The wife’s proceedings were under the Family Law Act 1975 (Cth). The husband’s proceedings were pursuant to the Property (Relationships) Act 1976 (NZ) in the Family Court of New Zealand. He sought to have his proceedings transferred to the High Court in New Zealand, as he had initiated separate proceedings there with respect to his trust.

The parties made submissions to the Family Court of Australia on the basis that the applicable law was the “clearly inappropriate forum” test. However, Kent J noted that the forum issue was to be determined by reference to the question of whether the New Zealand Court “is the more appropriate court to determine those matters” within the meaning of s 19(2) of the Trans-Tasman Proceedings Act 2010 (Cth) (“the Trans-Tasman Act”).

The Trans-Tasman Act forum test

The test for an application to stay an Australian proceeding on forum grounds is set out in

s 17(1) of the Trans-Tasman Act which provides:

“A defendant in a civil proceeding in an Australian court may apply to the court for an order staying the proceeding on the grounds that a New Zealand court is the more appropriate court to determine the matters in issue”.

A stay of the Australian proceeding can be ordered by an Australian court on an application under s 17(1) if it is satisfied that a New Zealand court, in accordance with s 19(1):

“(a)    has jurisdiction to determine the matters in issue between the parties to the proceeding; and

(b)    is the more appropriate court to determine those matters”.

Both parties conceded the s 19(1)(a) issue.

The matters to be considered by the Australian court in determining whether a New Zealand court is the more appropriate court under s 19(1)(b) are listed in s 19(2):

“(a)    the places of residence of the parties or, if a party is not an individual, its principal place of business;

(b)    the places of residence of the witnesses likely to be called in the proceeding;

(c)    the place where the subject matter of the proceeding is situated;

(d)    any agreement between the parties about the court or place in which those matters should be determined or the proceeding should be commenced (other than an exclusive choice of court agreement to which s 20(1) applies);

(e)    the law that it would be most appropriate to apply in the proceeding;

(f)     whether a related or similar proceeding has been commenced against the defendant or another person in a court in New Zealand;

(g)    the financial circumstances of the parties, so far as the Australian court is aware of them;

(h)    any matter that is prescribed by the regulations;

(i)     any other matter that the Australian court considers relevant;

and must not take into account the fact that the proceeding was commenced in Australia”.

Kent J referred to the decision of Brereton J in Re Featherston Resources Limited, Tetley v Weston,^[2] where he considered the relevant provisions of the Trans-Tasman Act in the context of the Corporations Act 2001 (Cth). Brereton J noted (at para 51) that, whilst the power conferred by s 17 is discretionary, “… it would be an exceptional case, if there is one at all, in which being satisfied that the New Zealand court had jurisdiction and was the more appropriate one, the Court would not stay the Australian proceedings”. Kent J agreed with this statement. Brereton J pointed out that the test directed attention to the more “appropriate”, not the more “convenient”, court. Whilst convenience was an important consideration, it was not determinative.

Consideration of the s 19(2) factors

Kent J considered the mandatory considerations in s 19(2) in the context of Brereton J’s observations.

In relation to s 19(2)(a) – the places of residence of the parties – Kent J observed that whilst both parties were resident in Australia, the possibility of joining, or the potential need to join, the New Zealand based trustees of the husband’s trust could not be excluded. Their joinder might be required to ensure effective interim or final relief or enforcement.

In relation to s 19(2)(b) – the places of residence of the witnesses likely to be called in the proceeding – both the husband and the wife, being the most obvious witnesses, were resident in Australia. New Zealand was where the other possibly relevant witnesses lived, so there was some prospect of necessary witnesses based in New Zealand being required,

In relation to s 19(2)(c) – the place where the subject matter of the proceeding was situated – the subject matter of the proceeding was situated essentially in New Zealand.

There was no suggestion of any agreement between the parties about the Court or place where proceedings consequent upon the breakdown of their marriage were to be determined in accordance with s 19(2)(d).

Regarding s 19(2)(e) – the law it was most appropriate to apply in the proceeding – Kent J considered that there were two possible interpretations of this provision. On a narrow view, all that was required was to compare the extent to which an Australian court, in the Australian proceeding, would consider it appropriate to apply Australian law or foreign law in the proceeding. Essentially this involved looking at the extent to which it might be appropriate to apply foreign law, rather than the law of the forum to the proceedings if they proceeded in the local forum. This narrow interpretation was inapplicable to this case, as a court exercising jurisdiction under the Family Law Act applied Australian law to the determination of the dispute and could adjust the property rights of the parties regardless of any rights acquired or vested in them under foreign law. See, for example, In the Marriage of Hannema,;^[3] Cain & Cain,^[4] and Gilmore & Gilmore.^[5]

A wider interpretation of the provision focuses on the law that it would be most appropriate to apply to the particular dispute in issue, having regard to the circumstances in which that dispute arose. Kent J said:

“That is, having regard to connecting factors with each country, whether it would be more appropriate for the law of New Zealand than that of Australia to apply to determination of issues consequent upon the breakdown of the marriage”.^[6]

Kent J considered that the wider interpretation commended itself, having regard to the express reference in s 17(1) of the Trans-Tasman Act to the more appropriate court to determine the matters in issue. His Honour considered all the connecting factors to New Zealand, as against the connecting factors with Australia.

The wife emphasised the juridical advantage to her of her property settlement claim being determined in Australia as distinct from a determination of the husband’s proceedings in New Zealand. There were two aspects to her argument. Both parties submitted that in New Zealand there would, or may be, issues as to the extent to which the husband’s trust formed part of the parties’ “relationship property”. That trust held the most valuable assets owned or controlled by either or both of the parties. If the trust was part of the “relationship property”, the trust would be subject to division on the basis that each party had prima facie an equal entitlement. The second aspect of her argument was that New Zealand’s family law was currently “in disarray” in terms of conflicting approaches as to how discretionary trusts and the interests in discretionary trusts were to be considered. She compared this to what was submitted to be the now clear and established approach under Australian family law, following in particular, cases such as the High Court’s determination in Kennon v Spry.^[7]

Kent J was not satisfied that New Zealand’s law was unclear, much less that it met the description of being “in disarray”, as contended by the wife’s counsel. He was also not persuaded that any perceived juridical advantage to any party in one forum, even if one existed, rendered the law of that forum “most appropriate to apply in the proceeding” within the meaning of s 19(2)(e), or was even relevant to that consideration. Kent J saw no merit

“… in the contention that an Australian court is more appropriate than a New Zealand court because the party invoking the jurisdiction of the Australian court has some juridical advantage, procedural or substantive, by so doing. That necessarily means disadvantage to the other party”.^[8]

Kent J observed “… the need to treat issues between husband and wife arising out of the matrimonial relationship and its breakdown as a single controversy, is a principle of central importance”.^[9]

Any parenting, child support or spousal maintenance issues would have been part of the same single controversy as the property settlement proceedings. The principle to treat the matters as a single controversy might lead to a conclusion that, irrespective of where the parties had lived for the greater part of their married lives and the location of their assets, the proper law to apply was Australian law. However, in Nevill, no issues were raised other than the property settlement proceedings. The parties had apparently resolved their other issues in the three year period between final separation and the institution of the Family Law Act proceedings.

The facts which Kent J said “loomed large” in his judgment were:

 “(i)     The parties are both New Zealand nationals and they lived for the greater part of their married life in New Zealand, having commenced cohabitation there in January 2003 and marrying there in January 2005. Conversely, the marriage relationship (prior to final separation) only subsisted for some six months after the parties came to Australia in January 2013;

(ii)     The parties accumulated their existing property or the property interests of either of them predominately [sic] whilst they pursued their married life together in New Zealand;

(iii)    The property of the parties or either of them is substantially situated in New Zealand. There are obviously substantial property interests involved;

(iv)    The wife’s trust, which predominately [sic][ owns or controls the vast majority of what may be conveniently described as the wife’s assets (including the real property that was the parties’ former matrimonial home in City F) is a New Zealand trust with a corporate trustee which is New Zealand based;

(v)    The husband’s trust, which overwhelmingly in terms of value owns or controls the vast majority of property interests which are the focus of these proceedings, is a New Zealand trust with New Zealand trustees including both an individual resident in New Zealand and a corporate trustee;

(vi)    Neither party has acquired any asset of any significance in Australia beyond personal items;

(vii)   All, or predominately [sic] all, events referred to by either party in their respective evidence to date (accepting that to be preliminary) as to the acquisition or improvement of property or property interests (and historical real property transactions during the course of the marriage) occurred in New Zealand, and some of these are seemingly in dispute”.^[10]

Overwhelmingly, Kent J found that the connecting factors to be considered under s 19(2)(e) tended to favour the conclusion that the law of New Zealand was the most appropriate law to apply to the determination of property issues consequent upon the breakdown of the parties’ marriage.

In relation to s 19(2)(f), a related or similar proceeding had been commenced against the defendant or another person in a court in New Zealand. Kent J noted that the wife had acceded to the jurisdiction in New Zealand by filing an unconditional defence in the proceedings the husband instituted pursuant to the Property Relationships Act 1976 (NZ).

The financial circumstances of the parties so far as the Australian court was aware of them, were relevant by virtue of s 19(2)(g). Each party had filed a financial statement and affidavit setting out the substantial property interests they each held. In summary, Kent J found that both parties appeared to have substantial financial means available to them to pursue proceedings in either jurisdiction.

There did not appear to have been any matters prescribed by regulations pursuant to s 19(2)(h).

In relation to “any other matter” that the Australian court considered relevant under s 19(2)(i), there was no evidence that matters of convenience, delay or expense had any role in considering the outcome of the application, beyond those to which reference had already been made.

His Honour concluded:

“The subject matter of these proceedings is property overwhelmingly situated in New Zealand. There are potential aspects relating to the trust law of New Zealand, in particular as regards the husband’s trust and his pursuit of proceedings for the declaratory relief in relation to the husband’s trust that potentially have a connection with property settlement proceedings. The parties’ marriage subsisted for most of its duration in New Zealand and overwhelmingly in New Zealand as compared with Australia. In my judgment the nature and subject matter of the issues in dispute between the parties and the inter-relationship between those issues and New Zealand, render the Family Court in New Zealand (or the High Court if the proceedings are transferred there) the more appropriate court within the meaning of the Act. The discretion under s 17(1) of the Act thus enlivened, there is no reason not to conclude, in circumstances where a New Zealand court has jurisdiction and appears to be the more appropriate court to determine the matters in issue between the parties, that these proceedings ought be stayed”.^[11]

His Honour made an order permanently staying the Australian proceedings.

Conclusion

Lawyers need to be aware that the usual “forum non conveniens” test does not apply in forum disputes between Australia and New Zealand.

Nevill is a good illustration of the application of the relevant legislation including how the factors to be considered under that legislation are applied.

Jacky Campbell, November 2016

Introduction to Wolters Kluwer Australian Family Law Act 1975 book

Every year there are obvious amendments to family law legislation, but also many other pieces of legislation which do not, by reference to their name, alert family lawyers to their relevance. These amendments are, of course, incorporated into the online version of the Autsralian Family Law Act 1975 with Regulations and Rules as they occur. This hard-copy of the 34^th edition includes amendments relating to s 121 Family Law Act 1975, the Court Security Act, orders for delivering up of travel documents, the merging of the services of the Family Court and Federal Circuit Court with the Federal Court, arbitration, subpoenas, surrogacy and the costs scale in the Family Law Rules 2004.

The major changes to the Family Law Act 1975 with respect to financial agreements and other matters proposed by the Family Law Amendment (Financial Agreements & Other Measures) Bill 2015 were stalled at the Senate Committee stage and, due to the calling of a Federal Election, the future of the Bill is uncertain. These proposed amendments are not, therefore, included in this edition.

Another change in this edition is that, by popular demand, the full Federal Circuit Court Rules 2001 are included, not just the part dealing specifically with family law matters.

As this book becomes bigger with the expansion of the Family Law Act and associated Rules and Regulations, the comprehensive index at the end of the book is useful, but the Cross-Referencing Table is a very practical guide. This Table lists the sections of the Family Law Act cross-referenced to the relevant Regulations, Rules, cases and the commentary in Australian Family Law & Practice. In this edition the Cross-Referencing Table has been moved so it is easier to find. It is now located at the start of the book.

Surrogacy

As the number of applications for parenting orders to the Family Law Courts in relation to children born under surrogacy arrangements is increasing, the Family Law Rules were amended, commencing 1 January 2016 to ensure that the court has sufficient evidence to determine these applications. These Rules apply to applications not covered by the various State and Territory schemes, so primarily overseas surrogacy arrangements which will usually be commercial arrangements.

The evidence required is set out in r 4.34 – 4.36:

1. A copy of any surrogacy agreement
2. Evidence of the personal circumstances of the applicant including in relation to the surrogacy arrangement.
3. Evidence of the personal circumstances of the surrogate mother including in relation to the surrogacy arrangement.
4. Evidence of the identity of the child.
5. Evidence about the relevant law in the child’s birth country.

At the first hearing date of the application the court must:

1. Make procedural orders.
2. Consider an order for the appointment of an independent children’s lawyer.
3. Consider ordering a family consultant to prepare a family report.
4. Consider whether a condition in s 65G(2) has been met. Section 65G deals with the making of a parenting order about whom a child lives with or the allocation of parental responsibility by consent in favour of a non-parent. Section 65G(2) provides:

“The court must not make the proposed order unless:

(a)   the parties to the proceedings have attended a conference with a family consultant to discuss the matter to be determined by the proposed order; or

(b)   the court is satisfied that there are circumstances that make it appropriate to make the proposed order even though the conditions in paragraph (a) are not satisfied.”

An application for a parenting order cannot be made by filing an application for consent orders. It must be commenced by an Initiating Application (Family Law) (r 10.15(3)).

Arbitration

Although the Family Law Act provides for parties to use arbitration by consent, this dispute resolution process has been rarely utilised in family law matters. The Family Law Regulations 1984 deal with the conduct of arbitration and the registration of awards. The Family Law Rules 2004 have now been amended to address certain gaps, particularly regarding disclosure and subpoenas. According to the Explanatory Memorandum to the Family Law Amendment (Arbitration and Other Measures) Rules 2015, the gaps “were seen as impediments to efficacious arbitration”.

Each party has a duty to the arbitrator and to each other party to give timely, full and frank disclosure of all information relevant to the arbitration including information about the parties’ financial circumstances (r 26B.01).

The rules relating to subpoenas in arbitrations are generally consistent with subpoenas for court proceedings.

The main amendments are:

1. To state that each party has a duty to the arbitrator and each other party to given timely full and frank disclosure of relevant information including financial information.
2. To specify the process for the production, inspection and copying of documents.
3. To specify the use of the documents produced.
4. To specify the process for objection to production due to claim of privilege or inability to produce the document.
5. To specify the process for applications by a party or an arbitrator for orders relating to disclosure.
6. To provide for disclosure of documents by electronic communication.
7. To permit an application for a court order if the cost of complying with the duty of disclosure would be oppressive.
8. To specify the process for issuing a subpoena to give evidence in an arbitration
9. To specify the process for production, inspection and copying of documents in relation to subpoena for production.
10. To provide for the consequence of non-compliance with a subpoena.
11. To state the procedure for an arbitrator to refer a question of law under s 13G of the Act to the court for determination.
12. To state the requirements for referral of other matters to the court that ordered the arbitration.
13. To require an arbitrator to notify the court that ordered the arbitration of certain matters when an arbitration has ended and an award has been made.
14. To specify the requirements for service of a Form 8 application to register an arbitration award pursuant to Reg 67Q(2) of the Regulations.
15. To provide that an arbitrator may search and copy the court record relating to the case.

Orders for delivery up of travel documents

Amendments have been made to the Australian Passports Act 2005. The term “passport” has been replaced in many sections of that Act with the term “travel documents”. An “Australian travel document” is defined in s 6 of that Act as “an Australian passport or a travel-related document”.

Section 67ZD Family Law Act 1975 has been amended to give a Family Law Court the power, if it considers there is a possibility or threat that a child may be removed from Australia, to order an Australian travel document or a passport or other travel document issued by the government of a foreign country to be delivered up to the court.

The Passport Act was also amended to ensure that the reference to “parental responsibility” in that Act is consistent with the concept and its use in the Family Law Act to remove any confusion as to who is required to consent to a child leaving on an Australian travel document.

Section 121 – Publication of court proceedings

An amendment has been made to s 121 Family Law Act, which is the section restricting publication of Court proceedings. A further exception has been added to s 121(9):

“(aa)  the communication of any pleading, transcript of evidence or other document to authorities of States and Territories that have responsibilities relating to the welfare of children and are prescribed by the regulations for the purposes of this paragraph.”

This additional exception applies to communications made on or after the commencement of s 121(9)(aa). The exception confirms that as such disclosure is not disseminated to the public or to a section of the public it is not a breach of s 121.

Regulation 19A Family Law Regulations 1984 is new and prescribes authorities for the purpose of s 121(9)(aa). They are:

(a)        for New South Wales – the Department of Family and Community Services;

(b)        for Victoria – the Department of Health and Human Services;

(c)        for Queensland – the Department of Communities, Child Safety and Disability Services;

(d)        for Western Australia – the Department for Child Protection and Family Support;

(e)        for South Australia – the Department for Education and Child Development;

(f)        for Tasmania – the Department of Health and Human Services;

(g)        for the Australian Capital Territory – the Department of Community Services;

(h)        for the Northern Territory – the Department of Children and Families.

Court Security Act 2013

The Court Security Act 2013 allows courts to appoint security officers or other court officers to exercise a range of security powers. Security orders can be made in circumstances where there is an ongoing risk of significant disruption to those courts or a risk of violence affecting persons or property connected with a court covered by that Act. These orders are restraining or protection type orders which restrict the behaviour of a specified person in or around court premises, or in relation to a member or officer of the court. The Family Court of Australia, the Family Court of Western Australia and the Federal Circuit Court of Australia are all covered by this Act.

Amendments to the Family Law Act give appeal rights with respect to orders made by the Family Court of Western Australia and clarify the process of varying and revoking court security orders.

Merging of courts’ corporate services

As of 1 July 2016, the corporate services functions of the Federal Court, Family Court and Federal Circuit Court are shared, with the CEO of the Federal Court being responsible for managing the corporate services of each of the 3 courts with a requirement to consult each of the heads of jurisdiction and the other CEOs. The Federal Circuit Court is to be given its own CEO rather than share one with the Family Court. From 1 January 2018 the Family Court CEO and the Family Court Principal Registrar will be merged. The Explanatory Memorandum to the Courts Administration Legislation Amendment Act 2016 states that the merging of the court’s corporate functions is expected to deliver efficiencies to the courts of $9.4m over the six financial years to 2020-2021 and ongoing annual efficiencies of $5.4m from that time.

Subpoenas

The amendments to the Family Law Rules bring the process for production and inspection of documents in line with that under the Federal Circuit Rules 2001, thereby streamlining the process and reducing the number of court appearances. When a subpoena is issued an administrative production day is set rather than listing a hearing date. Inspection can occur provided there has been service, compliance by the named person, the absence of any objection and the issuing party files a notice of request to inspect. Automatic copying of child welfare, criminal, medical and police records is prohibited. Medical records may be inspected by the person whose records they are, prior to inspection by the parties, their lawyers and independent children’s lawyer, in order to determine whether to object to inspection or copying.

Any objections are listed for hearing by the court.

Costs

The costs in Schedule 3 of the Family Law Rules were increased by 3% from 1 January 2016.

Conclusion

The recent amendments to the Family Law Rules are designed to streamline processes, particularly in the areas of arbitration, parenting applications with respect to surrogacy applications, and subpoenas. Recent amendments to the Family Law Act, such as with respect to s 121, and the delivery up of travel documents, clarify and tidy up the existing law, rather than make substantive changes.

Jacky Campbell, November 2015

Introduction to CCH Australian Family Law Act 1975 book

Introduction

Legislative change in family law has been unusually slow in the past 18 months which has allowed time for the Family Law Courts to consider and consolidate their approach to recent legislative and judicial changes.

Since the last edition of this book, there have been two sets of amendments to the Family Law Rules 2004, and one set each to the Federal Circuit Court Rules 2001 and to the Family Law Act 1975. The major changes have been to the Rules of both Courts, some of which are summarised here.

Notice of Risk and Notice of Abuse

In the Federal Circuit Court, a new Form 1 Notice of Risk replaced the former Form 4 from 12 January 2015. This form has been piloted in South Australia since 4 February 2013. The report on the pilot noted:

The comparative statistical information gathered in the pilot indicates that throughout Australia there is currently a general lack of compliance with the legislative requirements in respect to the reporting of risk.

This finding was consistent with anecdotal feedback from Judges indicating there was a significant level of non-compliance with the requirement to file a Form 4. This under-reporting of risk was an issue of real concern, particularly as most parenting applications are issued in the Federal Circuit Court.

The new form specifically identifies a wider range of risks than the previous Form 4. This will be very useful for litigation in person including the mental illness of a parent, drug and alcohol abuse and serious parental incapacity.

A person who files an application or response seeking parenting orders must also file a Notice of Risk, regardless of whether the person believes that there is any risk to the children (r 22A.02).

The Notice of Risk can be filed by an “interested person”. This is defined by reference to the Family Law Act, and can be a party, an independent children’s lawyer or a person described in the Family Law Regulations. The Regulations do not currently prescribe anyone.

The Notice of Risk must set out particulars of the facts and circumstances on which each allegation (if any) set out in the Notice is based (r 22A.06). An affidavit in support must be filed if there are allegations in the Notice. The affidavit must state the evidence relied on to support each allegation (r　22A.02(2)).

The Notice of Risk in the Federal Circuit Court Rules differs from the new Notice of Child Abuse, Family Violence or Risk of Family Violence under the Family Law Rules in name, content and form number. The Family Law Rules form is still known as a Form 4 while the Federal Circuit Rules form is now a Form 1.

The Form 4 is much longer than the Form 1. The Form 1 is also simpler to complete and asks for boxes to be ticked, such as whether an allegation has been made that a party to the proceedings or another person relevant to the proceedings, suffers mental ill health, abuses drugs or alcohol, or suffers a serious parental incapacity. However, details of the allegations must still be given.

Family Violence Orders

The Federal Circuit Rules have been strengthened in relation to notification to the Federal Circuit Court of a family violence order. A party to a proceeding who is seeking a parenting order relating to a child, must file a copy of any family violence order affecting the child or a member of the child’s family (r　22A.08(1)). If a copy of the order is not available, a written undertaking must be made to file the order within a specified time.

Family Reports

Prior to the recent amendments to the Federal Circuit Rules, if a Family Report was prepared in accordance with an order made under r　23.01A, the Federal Circuit Court was limited in its ability to deal with the report. For example, copies could only be given to each party, or the party’s lawyer, and to any independent children’s lawyer. Following the amendment of r　23.01A, the Court may give copies of the report to any of:

• a party, a lawyer for a party, or an independent children’s lawyer, in the proceeding
• a children’s court (however described) of a State or Territory
• a prescribed child welfare authority (within the meaning of the Family Law Act)
• an authority established by or under a law of a State or Territory for the purposes including the provision of legal assistance
• the convenor of any legal dispute resolution conference

These amendments are consistent with recommendations contained in the March 2014 report by Professor Richard Chisholm AM – The Sharing of Experts’ Reports Between the Child Protection System and the Family Law System. This report recommended that court rules be amended to make it explicit that the courts can make orders allowing the disclosure of reports to appropriate bodies in the child protection system and to legal aid bodies.

Where Federal Circuit Court Rules are insufficient

A new r 1.07 in the Federal Circuit Rules largely replicates r 1.21 of the Federal Court Rules 2011. The utility of including such a rule was considered in Thompson & Berg [2014] FamCAFC 73 where the husband argued that the Federal Circuit Court Rules were insufficient or inappropriate and therefore the Family Law Rules should apply with respect to the requirements of parties to engage in pre-action proceedings.

The Full Court said (at paras 51-2):

However, mere silence does not mean a court’s rules are insufficient or inappropriate. As Nygh J said in　Rubie & Rubie　(1991) FLC 92-253　at [78, 699], a question arises whether the omission of a rule on the point “… is an insufficiency or a defect, without which the Court cannot effectively operate, or whether it is a provision which, for reasons of policy or even sheer neglect, the Court has not seen fit to adopt.

As a general approach, a court would be slow to conclude that its rules are insufficient or inappropriate where the court has rules of court that:

• form a coherent whole;
• include statements of purpose or objects; and
• provide for the court to give directions in cases of difficulty or doubt (e.g. r 1.09 FLR, r 1.21 FCR).

The Full Court noted (at para 53) that the Federal Circuit Rules did not include a provision equivalent to r　1.09 Family Law Rules or r 1.21 Federal Court Rules 2011 which “are supplementary to other rules and stand with them in an attempt to ensure that the courts have all the requisite power in their own rules to conduct and conclude proceedings.”

Other amendments to the Family Law Rules

An amendment was made to the Family Law Rules so that the seal of the Court may now be attached to a document, not only by hand or by electronic means, but also “in any other way” (r 1.22). A coversheet must be attached to all documents that are not forms but nonetheless are required to be filed (r 24.01(1)(h).

The Rules were amended to enable the court to produce a certificate stating whether a person is or has been the subject of a vexatious proceedings order (r 11.04). The procedure for requesting the certificate is also set out.

An amendment to r 24.13(1) allows a child welfare officer to search the court record relating to a case and inspect and copy a document if the case affects, or may affect, the welfare of a child.

The inadvertent repeal of Schedule 2 Family Law Amendment Rules 2011 (No. 2) was rectified. This inserted Chapter 27 into the Rules which applies to cases to which the Trans-Tasman Proceedings Act 2010 applies.

Conclusion

The most significant amendment to the Rules of both family law courts was the introduction of a new Notice of Risk in the Federal Circuit Court and a Notice of Child Abuse, Family Violence or Risk of Family Violence in the Family Court. One impact of the new Rules in the Federal Circuit Court for notifications of risk of family violence and abuse is that the Court is far more aware of such matters. There will be practical and legal challenges for the Court in dealing with these increased notifications.

Jacky Campbell, November 2013

Introduction to CCH Australian Family Law Act 1975 book

Introduction

The most sweeping change to the legislation in this book since the publication of the last edition was the renaming of the Federal Magistrates Court of Australia as the Federal Circuit Court of Australia. This received widespread publicity. Less publicised was the insertion of two further Parts into the Family Law Act 1975 (“the Act”). There are now 28 Parts to the Act. The original version of the Act passed by Federal Parliament in 1975, had only 12 Parts. The new Pts XI and XIB cover suppression and non-publication orders, and vexatious proceedings.

Federal Circuit Court of Australia

The Federal Circuit Court of Australia commenced to operate on 12 April 2013. On that day, the former Federal Magistrates of the Federal Magistrates Court of Australia became Judges of the Federal Circuit Court of Australia. The Federal Magistrates Court Rules 2001 were renamed as the Federal Circuit Court Rules 2001. As a result of these changes numerous consequential but minor amendments were required to the legislation in this book.

Suppression and non-publication orders

The Access to Justice (Federal Jurisdiction) Amendment Act 2012 (“the 2012 Amendment Act”) introduced a scheme for all four Federal Courts including the Family Court and the Federal Circuit Court, for the exercise of those Courts’ powers to make:

• Suppression orders – which prohibit or restrict the disclosure of information, by publication or otherwise in proceedings; and
• Non-publication orders – which prohibit or restrict the publication of information in proceedings.

According to the Explanatory Memorandum to the 2012 Amendment Act, the aim is to ensure that suppression and non-publication orders are only made where necessary on specific grounds, taking into account the public interest in open justice, and in terms that clearly define their scope and timing.

The Family Law Act has a new Pt XIA which deals with suppression orders and non-publication orders. Prior to the 2012 Amendments, the Family Court already had power to make such orders under s 34 of the Act and under that Court’s implied powers. Section 34 provided that the “Court has power…to make orders of such kinds…as the Court considers appropriate”. Section 121(1) is still in the Act. This section restricts the publication or dissemination to the public or to a sector of the public by any means, of any account of any proceedings or part of any proceedings under the Act, that identifies a party to the proceedings or person who is related to or associated with a party to the proceedings or a witness to the proceedings. The exceptions are set out in s 121(9).

Under s 102PB of the 2012 Amendment Act, s 34 of the Act (and the similarly worded s 15 of the Federal Circuit Court of Australia Act) can no longer be used to prohibit or restrict the publication or other disclosure of information in connection with proceedings.

The new Pt XIA and s 121 are intended to operate in parallel. The interaction of s 121 and Pt XIA was explained in the Explanatory Memorandum:

Hence, a party or witness to proceedings under the Family Law Act 1975 could apply for an order prohibiting the publication of information that would otherwise be publishable because it fell within one of the exceptions in s  121(9).  In other words, an order under Pt XIA could, in a particular case, extend the prohibitions on publishing identifying information set out in s 121.

Additionally, under the provisions of Pt XIA, a suppression or
non-publication order could also cover other kinds of information not relating to the identity of a party or witness to proceedings.  This is because s 102PF sets out additional grounds for making suppression or non-publication orders, such as when the order is necessary to prevent prejudice to national security

It will be possible, therefore, for a court to make an order prohibiting the publication of certain information under Pt XIA, even though the publication of that information is not an offence under s 121. 

Section 121 will continue to apply to create an offence for the publication of identifying information that is not subject to one of the exceptions in s 121(9) of the Family Law Act 1975.  Since orders will only be made under Part XIA that will further prohibit publication (not relax the requirements under s 121), these provisions can operate together without being inconsistent.  As such, these provisions are intended to operate side-by-side and not interfere with each other.

A non-publication order means:

an order that prohibits or restricts the publication of information (but that does not otherwise prohibit or restrict the disclosure of information)(s 102P).

A “party to proceedings” is widely defined and includes “any person named in evidence given in proceedings” (s102P). “Publish” is defined in s 102P to mean:

disseminate or provide access to the public or a section of the public by any means, including by:

(a)          publication in a book, newspaper or magazine or other written publication; or

(b)          broadcast by radio or television; or

(c)          public exhibition; or

(d)          broadcast or publication by means of the internet.

A suppression order is defined in s 102P as “an order that prohibits or restricts the disclosure of information (by publication or otherwise).”

In deciding whether to make a suppression order or a non-publication order, the Court “must take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice.” (s 102 PD).

By making a suppression order or a non-publication order, a court may, under s 102PE(1), prohibit or restrict the disclosure of:

(a)     information tending to reveal the identity of or otherwise concerning any party to or witness in the proceedings or any person who is related to or otherwise associated with any party to or witness in the proceedings; or

(b)     information that relates to the proceedings and is:

                            (i)          information obtained by the process of discovery; or

                           (ii)          information produced under a subpoena; or

                          (iii)          information lodged with or filed in the court.

The Family Court is also empowered by s 102PE(2) to make such orders as it considers appropriate to give effect to an order under s 102PE(1). According to the Explanatory Memorandum, this gives courts the clear power to make a “take down” order. A “take down” order directs a publisher to remove certain information the subject of the suppression or non-publication order. It could, for example, be directed to website publishers or individuals who had posted content on the internet.

The grounds for making a suppression or non-publication order are one or more of the matters set out in s 102PF:

(a)     the order is necessary to prevent prejudice to the proper administration of justice;

(b)     the order is necessary to prevent prejudice to the interests of the Commonwealth or a State or Territory in relation to national or international security;

(c)     the order is necessary to protect the safety of any person;

(d)     the order is necessary to avoid causing undue distress or embarrassment to a party to or witness in criminal proceedings involving an offence of a sexual nature (including an act of indecency).

Section 102PK(1) imposes a penalty for an offence of imprisonment for 12 months, 60 penalty units or both. A person who breaches a non-publication or suppression order can either be punished for committing an offence under s 102PK(1) or for contempt of court, but not for both. Pt XIIIA does not apply to a contravention of an order under s 102PE. Pt XIIIA is a separate regime for failing to comply with orders made under the Act (other than those involving children).

Vexatious Proceedings

The 2012 Amendment Act introduced a new framework for the four Federal Courts when dealing with “vexatious proceedings” brought by persons who have frequently instituted or conducted vexatious proceedings in Australian Courts and tribunals, or who are acting in concert with others who have done so. The intention is to harmonise laws across Australia and to discourage forum shopping. Western Australia, Queensland, the Northern Territory and New South Wales have enacted similar legislation. The 2010 Amendment Act means that the legislative authority to support the exercise of the power of courts to deal with vexatious litigants is clearer and more comprehensive.

A new Pt XIB was inserted into the Act. The definition of vexatious proceedings includes:

(a) proceedings that are an abuse of the process of a court or tribunal; and

(b) proceedings instituted in a court or tribunal to harass or annoy, to cause delay or detriment, or for another wrongful purpose; and

(c) proceedings instituted or pursued in a court or tribunal without reasonable ground; and

(d) proceedings conducted in a court or tribunal in a way so as to harass or annoy, cause delay or detriment, or achieve another wrongful purpose (s 102Q).

The threshold which needs to be met before an order can be made is set out in s 102QB(1). The court must be satisfied that:

(a)     a person has frequently instituted or conducted vexatious proceedings in Australian courts or tribunals; or

(b)     a person, acting in concert with another person who is subject to a vexatious proceedings order or who is covered by paragraph (a), has instituted or conducted vexatious proceedings in an Australian court or tribunal.

The types of orders which can be made are set out in s 102QB(2).

(a) an order staying or dismissing all or part of any proceedings in the court already instituted by the person;

(b) an order prohibiting the person from instituting proceedings, or proceedings of a particular type, under this Act in a court having jurisdiction under this Act;

(c) any other order the court considers appropriate in relation to the person.

An applicant subject to a vexatious proceedings order seeking leave to institute proceedings, must file an affidavit, as required by s 102QE(3), which:

(a) lists all the occasions on which the applicant has applied for leave under this section; and

(b) lists all other proceedings the applicant has instituted in any Australian court or tribunal, including proceedings instituted before the commencement of this section; and

(c) discloses all relevant facts about the application, whether supporting or adverse to the application, that are known to the applicant.

Section 118 was repealed and a new s 118 excludes the parts which are dealt with in Pt XIB. The new s 118 simply provides:

“The court may, at any stage of proceedings under this Act, if it is satisfied that the proceedings are frivolous or vexatious:

(a) dismiss the proceedings; and

(b) make such order as to costs as the court considers just.”

Therefore, the making of an order that a litigant is vexatious, is dealt with entirely under the new Pt XIB.

Transfer of proceedings from courts of summary jurisdiction

The $5 million monetary limit on family law magistrates in the Magistrates Court of Western Australia has been removed. Like judges of the Federal Circuit Court whose monetary limit was removed on 1 July 2006, they can hear cases of unlimited financial value.

Minor changes were made regarding the transfer of cases from courts of summary jurisdiction.

Amendments to Federal Circuit Court Rules

A new costs schedule applied from 12 April 2013.

A new schedule 3 to the Federal Circuit Court Rules includes one extra rule from the Family Law Rules which applies to the Federal Circuit Court by virtue of r 1.05 of the Family Circuit Court Rules. This is r 6.15 of the Family Law Rules which deals with the progress of a property case or an application for the enforcement of a financial application after the death of a party.

Amendments to Family Law Rules

A new costs schedule was introduced and applied from 1 January 2013. A new Pt 22.10 has been inserted which applies to costs orders in appeals.

New rules apply as a result of the insertion of Pts XIA and XIB into the Act. Rule 11.04(1) provides:

If the court is satisfied that a party has frequently started a case or appeal that is frivolous, vexatious or an abuse of process, it may:

(a)       dismiss the party’s application; and

(b)       order that the party may not, without the court’s permission, file or continue an application.

An order under r 11.04(1) can be made of the court’s own motion or on the application of a party, the Registry Manager of the Family Court of Australia or the Executive Officer of the Family Court of Western Australia. (r 11.04(2)). The applicant must have had a “reasonable opportunity to be heard” (r 11.04(3)).

The matters to be covered in an affidavit under r 5.19(e)) in support of an application to suppress a judgment have been expanded to include evidence relating to one or more of the grounds in s 102PF(1) of the Act on which the application is made.

Conclusion

The past year has not been as difficult as previous years for legal practitioners practising in family law to keep up with legislative changes. Although the name change to the Federal Circuit Court of Australia means that there have been many minor changes, the operation of the legislation is not substantially affected.

The insertion of new Pts XIA and XIB into the Act are important. Although these issues do not arise every day legal practitioners need to know that they are there.

Jacky Campbell, November 2012

Introduction to CCH Australian Family Law Act 1975 book

Introduction

During the past 12 months there have been two major changes to the Family Law Act 1975 (“the Act”), two sets of changes to the Family Law Rules 2004 and to the Family Law Regulations 1984 and one set of changes to the Federal Magistrates Court Rules 2001. Other legislation has made relatively minor changes to the legislation in this Book. The changes to the Act, being the family violence amendments and the retrospective validation of orders with respect to de facto financial matters, are the most significant and also led to consequential changes to subordinate legislation.

Family violence amendments

The Family Law Legislation Amendment (Family Violence and Other Measures) Act 2011 (“the Family Violence Act”) responded to reports received by the Government into the 2006 family law reforms and how the family law system deals with family violence. The Family Violence Act amendments commenced on 7 June 2012 and largely apply to proceedings commenced on or after that date. The key amendments made by the Family Violence Act aimed to, as set out in the Replacement Explanatory Memorandum to the Bill:

• prioritise the safety of children in parenting matters
• change the definitions of ‘abuse’ and ‘family violence’ to better capture harmful behaviour
• strengthen adviser’ obligations by requiring family consultants, family counsellors, family dispute resolution practitioners and legal practitioners to prioritise the safety of children
• ensure the courts have better access to evidence of abuse and family violence by improving reporting requirements; and
• make it easier for state and territory child protection authorities to participate in family law proceedings where appropriate

The definition of “abuse” was amended to:

• Remove the requirement for “an assault including a sexual assault” of a child to be an offence under the law of the State or Territory in which the assault occurs
• Include “causing the child to suffer serious psychological harm”
• Include “serious neglect of the child”

The definition of “family violence” was also broadened. It was previously defined in s 4(1) as “conduct, whether actual or threatened, by a person towards, or towards the property of, a member of the person’s family that causes that or any other member of the person’s family reasonably to fear for, or reasonably be apprehensive about, his or her personal wellbeing or safety.”

The new definition in s 4AB(1) is “violent, threatening or other behaviour by a person that coerces or controls a member of the person’s family (the family member), or causes the family member to be fearful.” Examples include (but are not limited to):

“(a)  an assault; or

(b)  a sexual assault or other sexually abusive behaviour; or

(c)  stalking; or

(d)  repeated derogatory taunts; or

(e)  intentionally damaging or destroying property; or

(f)  intentionally causing death or injury to an animal; or

(g)  unreasonably denying the family member the financial autonomy that he or she would otherwise have had; or

(h)  unreasonably withholding financial support needed to meet the reasonable living expenses of the family member, or his or her child, at a time when the family member is entirely or predominantly dependent on the person for financial support; or

(i)  preventing the family member from making or keeping connections with his or her family, friends or culture; or

(j)  unlawfully depriving the family member, or any member of the family member‘s family, of his or her liberty” (s 4AB(2)).

A child is exposed to family violence “if the child sees or hears family violence or otherwise experiences the effects of family violence” (s 4AB(3)). Examples are listed in s 4AB(4) and include seeing or hearing an assault by a member of the child‘s family towards another member of the child‘s family and being present when police or ambulance officers attend an incident involving such an assault.

The primary considerations for determining what is in a child’s best interests were amended so that:

1. The Court must give greater weight to s 60CC(2)(b) (“the need to protect a child from physical or psychological harm from being subjected to, or exposed to, abuse, neglect or family violence”) than to s 60CC(2)(a) (“the benefit to the child of having a meaningful relationship with both of the child’s parents”).
2. The so-called “friendly parent” provision (s 60CC(3)(c)) was removed. This stated that one of the additional considerations was “the willingness and ability of each of the child’s parents to facilitate, and encourage, a close and continuing relationship between the child and the other parent.” It was removed because of concern that parties were reluctant to allege child abuse or family violence in case they were seen as unwilling to facilitate the child’s relationship with the other party. The replacement provisions, s 60CC(3)(c) and (ca), look at the extent to which each of the child‘s parents has taken, or failed to take, the opportunity to participate in making decisions about major long-term issues in relation to the child, to spend time with the child and to communicate with the child and the extent to which each of the child‘s parents has fulfilled, or failed to fulfil, the parent‘s obligations to maintain the child.
3. The requirement that a family violence order was only relevant if it was a final order or the making of it was contested was removed. Relevant inferences can now be drawn under s 60CC(3)(k) from the nature of the order, the circumstances in which the order was made, any evidence admitted, any findings made by the court and any other relevant matter.

Section 60D sets out the obligations of an adviser in relation to the best interests of a child. “Adviser” is defined to include a legal practitioner, a family counsellor, a family dispute resolution practitioner or a family consultant. An adviser giving advice or assistance to a person about matters concerning a child or Pt VII must:

“(a)  inform the person that the person should regard the best interests of the child as the paramount consideration; and

(b)  encourage the person to act on the basis that the child‘s best interests are best met:

(i)  by the child having a meaningful relationship with both of the child‘s parents; and

(ii)  by the child being protected from physical or psychological harm from being subjected to, or exposed to, abuse, neglect or family violence; and

(iii)  in applying the considerations set out in subparagraphs (i) and (ii)–by giving greater weight to the consideration set out in subparagraph (ii)”.

These obligations arise even for proceedings commenced but not finalised prior to 7 June 2012 (item 45 of the Family Violence Act) although most other amendments do not apply to those proceedings.

Section 67ZBB sets out the Court’s obligations if a Form 4 Notice of Child Abuse or Family Violence is filed. The Court must consider if any interim or procedural orders should be made to enable appropriate evidence to be obtained as expeditiously as possible, to protect the child or any of the parties and to deal with the issues raised by the allegation as expeditiously as possible.

In conducting child-related proceedings, the court must ask each party whether the child has been, or is at risk of being, subjected to, or exposed to, abuse, neglect or family violence and whether a party has been, or is at risk of being, subjected to family violence (s 69ZQ(1)(aa)). The court must deal with the matter appropriately and decisions which the court must make are listed in the same sub-section.

Section 117AB was removed from the Act due to concern that it acted as a disincentive to reporting family violence or child abuse because of the prospect of a mandatory costs order if a false allegation was made.

Schedule 2 of the Family Violence Act contains other amendments to the Act including:

• Clarification of the Family Court’s power to dismiss appeals and to delegate procedural applications in appeals to Registrars
• Including an extensive list of witnesses for affidavits in s 98AB
• Clarifying that parentage testing orders and parentage declarations are not parenting orders
• Providing Family Court Judges with a rule-making power relating to bankruptcy proceedings transferred to the Family Court under s 35A Bankruptcy Act 1966 (Cth).

Retrospective Validation of Orders

The Family Law Amendment (Validation of Certain Orders and Other Measures) Act 2012 “Validation Act” retrospectively validated “affected orders” being orders made by the Family Law Courts with respect to de-facto financial causes before the relevant proclamation was made on 11 February 2012 for all States and Territories except Western Australia.

On 5 February 2009 the Family Law Amendment (De Facto Financial Matters & Other Measures) Act 2008 was proclaimed by the Governor-General with a commencement date of 1 March 2009 with respect to certain items. The commencement date of the balance of the Amendment Act was triggered by the commencement of these items. This was intended to give exclusive jurisdiction to the Family Law Courts in all State and Territories which had referred their powers with respect to de facto financial causes.

However, s 40(1) of the Act requires that the jurisdiction of the Family Court not be exercised except in accordance with a Proclamation under that section. Section 40(2) provides that the Governor-General may, by proclamation, fix the date from which the relevant jurisdiction can be exercised by the Family Court.   Section 31(1)(aa) confers jurisdiction on the Family Court with respect to “matters arising under this Act in respect of which de facto financial causes are instituted under this Act”.

Specific reference ought to have been made in a proclamation but this did not occur prior to the commencement of the de facto provisions. The appropriate proclamation was made on 11 February 2012 but it was not retrospective.

The Federal Magistrates Court was also affected by the oversight. Under s 40A of the Act, the Federal Magistrates Court cannot exercise jurisdiction in, say, New South Wales, if the jurisdiction it seeks to exercise is not capable of being exercised by the Registries of the Family Court in New South Wales.

The problem did not apply to Western Australia as the Family Court of Western Australia continues to exercise State power over de facto relationships. However, the Validation Act retrospectively validated certain orders of the Family Court made on appeal from Family Law Magistrates in Western Australia between 1 July 2006 and 21 October 2011. A Proclamation ought to have been made in 2006.

The Validation Act:

(a) declared that the rights and liabilities of all persons affected by orders made during the period before 11 February 2012 were the same as if the Proclamation had been made when it should have been made;

(b) excluded liabilities arising from convictions for offences relating to de facto financial causes from the retrospectivity;

(c) ensured that if new orders were made on the basis that the affected order was or might have been invalid, the retrospectivity did not revive the affected order.

(d) ensured that if an order was declared or held to be invalid or to have been made without power before the commencement of the Validation Act, the order was not revived;

(e) respectively validated orders made on appeal from Family Law Magistrates in Western Australia;

(f) removed s 40(1) and 40(2) from the Act and replaced them with a new s 40(1). Regulations are now used to specify a date from which the jurisdiction of the Family Court must not be exercised in specified States or Territories. This helps ensure that similar oversights do not occur in the future.

From 21 April 2012 the Family Law Amendment Regulation 2012 (No 2) commenced. This Regulation was introduced under s 40(1) of the Act to restrict the exercise of the Family Court’s jurisdiction.

The Family Court cannot exercise jurisdiction under s 31(1)(c) concerning matters arising under the law of a territory (other than Northern Territory) including adoption of children. The Family Court has never been able to exercise this jurisdiction and the Regulation maintains this limitation. The Regulation also restricts the Family Court from exercising a large proportion of the jurisdiction conferred on it under the Act in Western Australia, the Cocos (Keeling) Islands and Christmas Island. Due to s 40A of the Act, the restrictions in the Regulation limit the exercise of jurisdiction by the Federal Magistrates Court.

Amendments to the Family Law Rules

The Family Law Amendment Rules 2012 (No.1) included the following amendments to the Rules:

1. Further defined the nature of court events, the recording of which is prohibited.
2. Introduced a Statement of Truth for an application for consent orders.
3. Made rules necessary or convenient to implement the amendments made by the Family Violence Act.
4. Implemented a streamlined approach to the filing and storing of electronically filed large documents attached to affidavits.

Rule 5.19 Family Law Amendment Rules 2011 (No 2) sets out matters to be included in an affidavit in support of an application and to suppress publication of a judgment. The Court anonymises all judgments in accordance with s 121 of the Act, but most judgments are published on the Family Court website and on www.austlii.edu.au as well as by CCH and other legal publishers.

Before making an order, the Court will consider such matters as whether there is a public interest in suppressing or not suppressing publication, why further anonymisation is not sufficient and whether a summary of the judgment should be publicly available if publication is suppressed.

Parties to an Application for Consent Orders no longer need to swear or affirm an affidavit. Instead, they only need to sign a Statement of Truth which does not require the signature of the party to be witnessed (r 10.18(a)).

New definitions were inserted into the Dictionary to the Family Law Rules. The definition of “court event” was expanded to include “an attendance with a single expert witness performing the functions of a single expert witness”. The definitions of “expert”, “expert witness” and “single expert witness” were moved from r 15.43 to the Dictionary but were not changed.

Rule 1.19 prohibits the photographing or recording by electronic means of hearings, trials, conferences, attendances on a family consultant, single expert or person who is in the court premises.

Rule 2.04D was amended to prescribe a Notice of Child Abuse or Family Violence (Form 4) for the purposes of s 67Z(2) and s 67ZBA(2). The person filing the Form 4 must file an affidavit or affidavit setting out the evidence on which the allegations in the Form 4 are based, by no later than the time the Form 4 is filed.

Filing a Notice of Child Abuse or Family Violence in appropriate cases is also required for cases commenced before 7 June 2012 if a party alleges that there has been family violence by one of the parties or there is a risk of family violence by one of the parties. If no Notice was filed before 7 June 2012, one must be filed and the Court must treat the allegation as if s 67ZBB applied.

Procedures were introduced to alert the Court to allegations of family violence and to how the allegations have been dealt with in the orders, when a Court is making consent orders. If the orders are presented during a hearing or trial, each party or lawyer:

“(a) must advise the court whether the party considers that the child concerned has been, or is at risk of being, subjected to or exposed to abuse, neglect or family violence;

(b) must advise the court whether the party considers that he or she, or another party to the proceedings, has been or is at risk of being subjected to family violence; and

(c) if allegations of abuse or family violence have been made must explain to the court how the order attempts to deal with the allegations.” (r 10.15A(3)).

For any other application, each party or a lawyer:

“(a) must certify in an annexure to the draft consent order whether the party considers that the child concerned has been, or is at risk of being, subjected to or exposed to abuse, neglect or family violence;

(b) must certify in the annexure whether the party considers that he or she, or another party to the proceedings, has been or is at risk of being subjected to family violence; and

(c) if allegations of abuse or family violence have been made- must explain in the annexure how the order attempts to deal with the allegations”. (r 10.15A(3)).

Rule 15.12(7) addresses lengthy affidavits filed electronically by requiring that if an affidavit and associated documents total more than 50 pages:

• each document must be filed as an exhibit to the affidavit
• each document must be served with the hard copy of the affidavit
• a hard copy of each exhibit must be filed with the court at least 48 hours before the court event in which the affidavit is to be relied on.

Federal Magistrates Court Rules Amendments

The Federal Magistrates Court Amendment Rules 2012 (No 1) primarily:

• facilitate the Family Violence Act
• enable ordinary service by email
• amend the costs schedule
• amend the enforcement provisions in r 25B, particularly with respect to child support.

Commencing 1 June 2012, r 13.04 was amended. Prior to that date, in an application for a parenting order by consent, the parties were required to advise the Court whether any of the following allegations were made in the proceedings:

(a) allegations of child abuse or neglect, or a risk of child abuse or neglect;

(b) allegations of family violence or a risk of family violence;

(c) allegations of mental ill-health that is alleged to adversely impact on parenting capacity;

(d) allegations of serious parental incapacity;

(e) any other allegation involving a risk to the child (r 13.04A(2)).

The new r 13.04A(2A) requires each party to advise the court (similarly to s 692Q(1)(aa)):

“(a) whether the party considers that the child concerned has been, or is at risk of being, subjected or exposed to abuse, neglect or family violence; and

(b) whether the party considers that he or she, or another party to the proceedings, has been, or is at risk of being, subjected to family violence.”

If an allegation has been made under r 13.045A(2) or a party advises the court of any concerns mentioned in subrule (2A), “the parties must explain to the court how the parenting order attempts to deal with the allegation” (r 13.04A(3)).

Proceeds of Crime

State and Territory proceeds of crime orders were given the same recognition under the Act as orders under the Proceeds of Crime Act 2002. These amendments apply to proceeds of crime orders or applications for forfeiture orders made at or after commencement, but apply to proceedings under the Act regardless of whether the proceedings under that Act commenced before or after the order or application was made. The Proceeds of Crime Authority replaced the Director of Public Prosecutions as the relevant authority.

Conclusion

At the time of publishing this Book, the Family Violence Act amendments had only just commenced. It is not yet known whether they will have the effects sought by the legislators. The general expectation is that there will be considerable litigation about the interpretation and application of the amendments.

After a year in which there were major changes to the Family Law Act, in the coming year there is an expectation of further significant legislative change. Whilst a merger of the Family Court and the Federal Magistrates Court is no longer proposed, the Attorney General, Nicola Roxon, has announced that the name of the Federal Magistrates Court will change. There is also likely to be changes in the types of matters dealt with by each court which will presumably result in significant changes to the Rules of both Courts.

Jacky Campbell, May 2017

Wrangling over Rover—who gets the dog after a relationship breakdown?

Dogs, cats and other pets are often treated as members of the family, more so than in the past. This trend is particularly obvious with dogs. The cost of, and demand for, designer dog breeds like cavoodles and labradoodles is high. They are given human names like Lucy or Charlie – not Rover or Fido – and are more likely to live inside than outdoors as they did in the past.

But who should keep the pet when a relationship breaks down? In parenting disputes, arguments about where the pet lives may reflect the parents’ fears and desires about where the children live. Sometimes, disputes about who retains the pet appear similar to disputes about children, with competing proposals for sole residence, shared care and spending time with the pet. The recent case of Downey & Beale [2017] FCCA 316 illustrates how pet disputes are decided.

Do the courts often deal with pet disputes?

Disputes about pets are rarely decided by Family Law Courts in Australia. A major impediment is that the sentimental value of the pets significantly outweighs their monetary value.

One rare example was Jarvis & Weston [2007] FamCA 1339. There was a brief discussion about whether there was jurisdiction to make orders with respect to the child’s dog. Moore J decided that whether she was exercising accrued, associated, inherent or parens patriae jurisdiction, the dog was to travel between the houses of the parents with the child.

What principles apply?

Judge Harman seemed to relish the opportunity in Downey & Beale to consider how the Family Law Act 1975 applied to pets. He was well-prepared, having delivered at least one conference paper on the topic.

Some parties think that disputes about pets should be decided in accordance with the best interest principles, and look to the checklist of factors in s 60CC Family Law Act. However, these principles apply to disputes about parenting arrangements for children. In Downey & Beale, Harman J applied the property settlement principles laid out in s 79 of the Family Law Act.

The dispute in Downey & Beale

The parties had negotiated the settlement of their property dispute except for one item, being the ownership of the dog. The wife sought an order that the husband transfer the registration of the dog to her. Harman J said (at [12]):

“Nothing that is contained within these reasons is intended to depart from legal principle, nor intended to be in any way flippant. I am conscious of that, opined by Roger Caras, “dogs are not our whole life, but they make our lives whole”. I am completely empathetic with the importance this issue holds for the parties and conscious that the parties and each of them may consider this sentient creature, this living being, as fundamentally important to them.”

There was no evidence as to the dog’s value and the breed was not reported. The parties did not argue that the worth of the dog was monetary, and Harman J said (at [19]):

“His worth is their love and affection for the creature as they express it.”

In accordance with Stanford v Stanford (2012) FLC 93-518, Harman J examined the existing legal and equitable interests of the parties in the dog.

There was no dispute that the purchase price was paid by the husband but Harman J said that this did not determine who owned the dog. The parties disagreed as to the circumstances in which the purchase was made. Each asserted that they were the owner of the dog. Harman J referred to the Companion Animals Act 1998 (NSW) which gave some guidance as to ownership. That Act imposes obligations upon owners of companion animals, including to register the dog’s ownership within 6 months of acquisition. There was no dispute that this did not occur. Harman J issued s 128 certificates under the Evidence Act 1995 to protect the parties regarding their evidence. He did this because it was a criminal offence to fail to register a companion animal.

There was no controversy that following the marriage of the parties that the dog lived with the parties jointly and that following separation the dog lived solely with the wife. The wife also relied on her payment of the veterinary bills and the purchase of items for the dog. She produced veterinary bills addressed to her and which described her as “owner”.

The husband registered the dog in his name 8 months after separation, and after the wife had given notice in her affidavit that she asserted ownership of the dog.

Section 7 of the Companion Animals Act provides a definition of “owner” being the person by whom an animal is ordinarily kept or the registered owner. According to that definition, after 4 November 2016, being the date that the husband registered the dog as his, he was the owner. At any time prior to the date of registration, the person by whom the animal was ordinarily kept was the owner, and that was clearly the wife.

Harman J considered the issue of contributions under s 79 of the Family Law Act. Although the husband contributed the funds to the purchase of the dog prior to the marriage of the parties, the wife had clearly made contributions to the maintenance and improvement of the asset. Veterinary bills addressed to the wife at her address at her parents’ home were not conclusive proof as to where the dog lived, but clearly demonstrated that the wife was responsible for the maintenance and upkeep of the dog to the extent of attending to veterinary appointments and payment.

Harman J could not see how the s 75(2) factors could assist or apply. He said (at [45]):

“It beggars belief to contemplate how s 75(2) of the Family Law Act 1975 would be of assistance in this determination, unless one were to place some value upon love and affection. One would hope in this neo-liberal world that we have not yet come to the point where even love and affection are commoditised.”

He considered that perhaps a service animal, such as a Seeing Eye dog, might make s 75(2) relevant but it was not relevant in this case. He did not refer to s 75(2)(c) which requires a consideration of “whether either party has the care or control of a child of the marriage who has not attained the age of 18 years”, but arguably this might have been a factor if the parties had children. In any event, each party argued their cases on the basis of ownership.

The wife also gave evidence that irrespective of who paid for the dog, it was purchased for her as a gift. Harman J did not venture into the territory of jurisprudence regarding gifts and equitable relief. He was already satisfied that the wife was the owner of the dog, had possession of the dog and had contributed to the dog, so that it was not appropriate for any order to be made varying ownership of the dog.

Orders were made to:

• Dismiss the application of the husband for an order adjusting interests in property with respect to the chattel comprised of the dog (name omitted).
• Pursuant to s 78 of the Family Law Act declare the wife as the owner of the dog as and against the husband.
• As far as necessary, require the husband to do all things necessary to cause the registration of the former matrimonial dog (name omitted) to be transferred into the wife’s name alone.

What next?

Despite Downey & Beale, it is unlikely that we will see a flood of pet disputes decided in Family Law Courts in Australia, given the vast numbers of parenting and property disputes awaiting determination and the limited judicial resources available. Most judges view disputes over pets in the same way as disputes over furniture and other chattels – trivial matters which are a waste of judicial resources – despite the potentially heavy emotional impact on one of the parties of an unfavourable outcome.

However, the case provides some useful guidance for family lawyers and family dispute resolution practitioners, to help parties resolve pet disputes without litigation.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, December 2015

Which country? Child abduction proceedings, undertakings and maintenance orders

International mobility continues to increase through greater travel and work opportunities, and the number of cases dealt with by the Family Law Courts continues to increase exponentially. The difficulties involved with resolving financial disputes at the end of a relationship are often more complicated if there are children. Parties often want to return to their “home” country and take any children with them.

If a child is removed from a Hague Convention country to a country which has acceded to the Hague Convention on Civil Aspects of Child Abduction (“the Hague Convention”) or retained in another Convention country, the Hague Convention aims to have the child returned to the forum from which the child was removed and parenting proceedings determined in that forum.

The Hague Convention sets out the prerequisites to the Hague Convention being invoked and the defences upon which the removing parent can seek to rely. It does not set out the relationship between child and spousal maintenance orders or the undertakings which the left behind parent may be required to make, by the court making the return order, to ensure the “soft landing” of the child and the removing parent.

In Sibly & Cassidy [2015] FamCA 912, the Family Court of Australia determined the parties’ competing applications for a property settlement and in doing so considered whether Canadian maintenance and cost orders should be enforced or discharged. It was also an interesting example of how the Convention is applied. Sometimes the brevity of a judgment can make it difficult to understand the full reasons why orders were made. Reading the numerous Canadian judgments about this family helps to better understand the ultimate outcome in Australia. This article draws on both the Australian and the Canadian judgments.

Sibly & Cassidy – the Australian proceedings

In Sibly & Cassidy the Family Court of Australia discharged the maintenance and child support orders made in Canada and discharged the arrears. The Canadian Courts accepted undertakings by the husband in the Hague Convention proceedings, and later made orders with respect to ongoing child support and spousal maintenance in favour of the wife. In between the Canadian proceedings and the 2015 Australian proceedings, the wife had unsuccessfully sought orders that the child R be able to live with her and the child K for 6 months in Canada (Cassidy & Sibly [2011] FamCA 933) and that the child R live permanently in Canada (Cassidy & Sibly [2012] FamCA 245).

The country in which the parties were principally resident during the course of their relationship was not clear from the judgment. The parties met in Australia in 2002, started cohabitating in 2004 and married in Australia in 2005, but the two children were born in Canada (one born after separation). The husband visited Canada at various times and the wife resided in Australia from time to time. A significant proportion of their assets were in Australia. The husband was an Australian citizen, ordinarily resident in Australia and present in Australia.

The wife was expecting the parties’ second child, K, when she travelled to Canada in September 2009. K was born in Canada, lived with the wife in Canada and had spent limited time with his father since his birth. The child R returned to Darwin, Australia to live with the husband, following orders made by the Supreme Court of Canada under the Hague Convention. The wife did not return to reside in Darwin and K lived with her in Canada.

The wife commenced proceedings for an alteration of property interests in the Family Court of Australia in September 2013.

In Sibly & Cassidy, the wife was not working and had the sole care of one of the children of the marriage. The husband was working and had the care of the other child. The Family Court of Australia, exercising its powers under the Family Law Act 1975 (“the Act”), discharged the Canadian spousal maintenance order in favour of the wife and her entitlement to child support under Canadian law was offset against her child support liability under Australian law with respect to R. She received only a very modest property settlement: a few chattels and $10,000 of the husband’s superannuation. The husband retained the bulk of his superannuation and his half interest in a house. His superannuation had increased in the period after separation in late 2009/early 2010 from approximately $49,000 to approximately $75,000. The wife retained substantial funds at separation, but had spent them on legal fees. It was a 5 year marriage with 2 children, but the court referred to it as a “short relationship”, although a marriage of that length with children is not generally considered to be “short”.

It seemed as if there may have been a punitive aspect to the outcome for the wife in that she had been found by the Canadian courts to have abducted the child R. The wife’s skills and work history were not recorded in the Australian judgment, which makes it difficult to understand the justification for the Australian property orders and the discharge of the Canadian maintenance and child support orders in her favour. The wife did not seek a significant property settlement in her favour. She sought the superannuation split that she ultimately received and a cash payment of about $10,000. She sought to maintain the Canadian child support and spousal support orders in her favour and had opposed the husband’s stay application, which was successful, in Cassidy & Sibly [2015] FamCA 335. The Australian Child Support Agency had been garnishing the husband’s wages for about 2 years.

Sibly & Cassidy – the Canadian Hague Convention proceedings

The litigation in Canada covered such matters as:

• whether the husband should be required to give undertakings, and what undertakings, if R was returned to Australia;
• whether R should be returned to Australia, as the wife raised various defences to the Hague Convention;
• the wife’s maintenance application with respect to herself and the children;
• a costs application by the husband;
• an unsuccessful appeal by the wife;
• a successful application by the husband to vary the return orders to enable him to collect the child R rather than for the wife to travel back to Australia with the child;
• interim orders for K to remain in the custody of the wife, for the husband to pay child support for K, that he pay spousal maintenance and a costs order in the wife’s favour which was credited towards the costs she was required to pay the husband in connection with the Hague Convention application.

In the undertaking proceedings the wife unsuccessfully sought that the husband give up his residence in favour of herself and the children. This application was refused, primarily because the husband owned the residence with his brother. She also sought, based on the husband’s income of $42,000 per year, that the husband pay the wife $2,000 per month and that the husband pay the airfares and other reasonable travel expenses for the wife and the 2 children from Canada to Darwin. The husband proposed that he accompany R back to Darwin and he was prepared to pay those travel costs. The Court found that the wife’s proposal to travel to Darwin with the 2 children would cost less than the husband’s proposal. Although the evidence showed that the husband had a very good relationship with R, the Court found that it was better for R to travel to Australia with his mother and brother as he had been in the sole care of the wife for 2 years. The Court realised that there was an element of unfairness in requiring the husband to bear the costs of returning R to Darwin, but believed it was the only practical order. The Judge was not prepared to make an ongoing support order for the wife and the children but ordered that the husband pay $4,000 to the wife before the wife’s departure to Australia.

The Hague Convention proceedings – Defences by the wife

The defences which the wife raised under the Hague Convention were:

1. The wife was not habitually resident in Australia before she flew to Canada with the child R in 2009 and that her habitual residence is, and always was, Canada. She said that the husband’s habitual residence is, and always was, Australia. There was evidence that she had connections with Canada. For example, she maintained her fully furnished residence, filed income tax returns in Canada, received Canadian child tax benefits and GST credits, held an Ontario drivers licence and health care card and declared her Australian income on her Australian tax return.
2. There was a grave risk that the child’s return would expose him to physical or psychological harm or otherwise place him in an intolerable situation.
3. That the husband had acquiesced in the wife’s retention of the child when he lived with the wife and the children in Canada after he brought his application under the Hague Convention.

The Canadian Court found that there was significant evidence that the wife’s habitual residence was Australia. She had permanent residency in Australia, she had an Australian job, pension, bank account, drivers licence and medical coverage. She made plans for pregnancy care for the second child in Australia well after her departure date, she had friends in Australia, she had a gym membership and had booked a return flight to Australia for November 2009.

The judge agreed that R was probably too young for the court to meaningfully enquire into whether R had become acclimated to Australia but disagreed with the submission on behalf of the wife that the child’s activities in Australia were of no consequence. Those activities were of assistance in determining the parents’ intentions. Prior to R’s removal from Australia he had completed the third of the four terms of his school year, was involved in swimming lessons, was involved with his mother in a playgroup, had bonded with his paternal grandparents and his uncle and had a group of young friends. All these matters pointed to a finding that his parents had formed a settled intention to stay in Australia as a family, even if their stay was not necessarily permanent. The child had a strong and readily perceptible link to Australia.

The Canadian Court found that the wife had not abandoned her residence in Canada. Maintaining her connections with Canada was consistent with Australia being the wife’s habitual residence. Habitual residence did not equate to domicile. The test for habitual residence was not so high that the Court had to find that the wife had abandoned Canada and never intended to return to live there.

The Supreme Court also rejected the defences of acquiescence and intolerable situation.

Sibly & Cassidy – the later Canadian proceedings

The Canadian judgments reveal that the parties met in Australia whilst the wife was working as a geologist, which work she had also done in Canada. She had tertiary qualifications and relatively recent work experience as an information technology coordinator. At various times during their relationship there were issues for each of the parties as to their ability to work because of the expiration of the appropriate visas in whichever country they were living in at the time. Sometimes they were both working, at other times they were both unemployed and at other times one party was working while the other stayed home and cared for the child R. The wife was not permanently R’s sole caregiver.

The home in which the parties had lived whilst they lived in Australia was half-owned by the husband and half-owned by his brother which gives a better understanding about why the Canadian courts refused the wife’s request to live there pursuant to an undertaking by the husband related to the Hague Convention proceedings. The husband had made a substantial initial contribution to the purchase price. The parties and the child lived on the top floor whilst the husband’s brother lived on the main floor.

In January 2011, the Supreme Court of Canada made orders in relation to child support and spousal maintenance to be paid by the husband to the wife. The husband was also ordered to pay the wife’s costs. The wife had already been ordered to pay the husband’s costs of the Hague Convention proceedings.

There were further proceedings in Canada which resulted in orders being made in January 2014 that the wife have final sole custody of K and that the husband pay to the wife child support and spousal support at higher rates than previous, taking into account his income and the Child Support and Spousal Support Advisory Guidelines. Orders were also made to ensure that the orders were enforceable in Australia.

Legislation relevant to the recognition of the Canadian orders

The Full Court of the Family Court of Australia recently approved the statement of the role of undertakings in Hague proceedings in Wolford & Attorney-General’s Department (Cth) [2014] FamCAFC 197. The Full Court in Wolford referred to McDonald and Director General, Department of Community Services NSW [2007] FamCA 1400; (2006) FLC 93-297 where the role and application of undertakings and conditions made pursuant to reg 15(1)(c) of the Family Law Regulations 1984 on an application for a return order was addressed. In McDonald the Full Court cited Re M (Abduction: Undertakings) [1995] 1 FLR 1021 at 1025 where Butler-Sloss LJ explained the role of undertakings. Butler-Sloss LJ said (at 27):

“It is perhaps helpful to remind those engaged in Hague Convention applications about the position of undertakings or conditions attached to an Art 12 order to return. Such requirements are to make the return of the children easier and to provide for their necessities, such as a roof over the head, adequate maintenance, etc, until, and only until, the court of habitual residence can become seized of the proceedings brought in that jurisdiction.”

The Act provides for the recognition of foreign orders. Pt XIIIAA of the Act is entitled International Conventions, International Agreements and International Enforcement. Sections 110, 110A and 111A deal with the overseas enforcement of maintenance orders.

In s 110(1), a “reciprocating jurisdiction” is defined as a country, or part of a country, outside Australia declared by the regulations to be a reciprocating jurisdiction for the purposes of this section. Countries or parts of countries can also be jurisdictions with restricted reciprocity.

Section 110(2) states that the Family Law Regulations may make provision for and in relation to:

“(a)    the registration in, and enforcement by, courts having jurisdiction under this Act of maintenance orders made by courts or authorities or reciprocating jurisdictions or of jurisdictions with restricted reciprocity;

(aa)  the institution and prosecution, by an officer of a court having jurisdiction under this Act, a prescribed authority of the Commonwealth, of a State or Territory, or of another country or a part of another country, or a person for the time being holding a prescribed office under a law of the Commonwealth, of a State or Territory, or of another country or a part of another country, in his, her or its discretion, of proceedings:

(i)  on behalf of the person entitled to moneys payable under a maintenance order made by a court or authority of a reciprocating jurisdiction or of a jurisdiction with restricted reciprocity, for the enforcement by a court having jurisdiction under this Act of that maintenance order; or

(ii) for the making of orders for the confirmation of provisional orders made by courts of reciprocating jurisdictions or of jurisdictions with restricted reciprocity, being provisional orders referred to in paragraph (d); …

(c)   the making of orders (including provisional orders) for the variations, discharge, suspension or revival of maintenance orders registered in accordance with regulations under this section or of maintenance orders or provisional maintenance orders transmitted to other jurisdictions in accordance with regulations under this section, and the effect in Australia of orders under this paragraph;

(d)   the making of orders for the confirmation of provisional orders made by courts in reciprocating jurisdictions or in jurisdictions with restricted reciprocity, being provisional maintenance orders or provisional orders varying, discharging, suspending or reviving maintenance orders, and the effect in Australia of orders under this paragraph; …”

Schedule 2 of the Regulations indicates that pursuant to Reg 25, Ontario is a reciprocating jurisdiction.

Section 110A provides that the Regulations may make provision for and in relation to the registration and enforcement in Australia of overseas maintenance agreements or overseas administrative assessments of maintenance liabilities.

Section 111A provides that the Regulations “may make such provision as is necessary or convenient to enable the performance of the obligations of Australia, or to obtain for Australia any advantage or benefit, under the Convention on the Recognition and Enforcement of Decisions Relating to Maintenance Obligations …”

Section 66E(1) of the Act restricts courts exercising jurisdiction under the Act from making a child maintenance order if application for an administrative assessment of child support can be made. Section 66E(3) provides that s 66E(1) does not apply to proceedings under regulations made for the purposes of sections 110 or 111A.

The Family Court also considered Chapter 13 of the Interjurisdictional Support Orders Act 2002 of Ontario. The regulations pursuant to the Ontario Act indicated that the Commonwealth of Australia was a reciprocating jurisdiction under the provisions of the Ontario Act.

Consideration of s 79(4) matters

In determining the parties’ competing applications under s 79 of the Act for a property settlement, the court was required to consider the contributions of the parties (financial, parenting and homemaking) and the other matters listed in s 75(2). The wife conceded that for the period 2004 to 2009 the contributions of the parties were equal. She did not have any health issues which prevented her from seeking employment. She was studying, but said she might look for work once K started school.

In June 2007 the husband used $80,000 of his savings to purchase a one-half interest in a house for $200,000. The wife made no direct financial contribution towards the purchase. When the parties resided in Canada from time to time, they lived in properties owned by the wife’s family.

During the trial the parties agreed that the Court should consider the contributions of the parties, both financially and non-financially, during the relationship as equal. However, Dawe J found that the original contribution of the husband’s savings to the home was significant.

After the parties’ separation, considerable costs were incurred by the parties in legal fees and travel costs. Most of the legal costs were incurred due to the wife’s travel to Canada with R, her refusal to return to Australia and her appeal from the order that R be returned to Australia.

The parties had net assets, mainly in Australia, of $184,200 which primarily consisted of the husband’s equity in a home he owned with his brother. The parties’ debts to each other for child support, souse maintenance and legal costs and to other people for legal costs were not included in these calculations. In addition, the husband had superannuation of about $75,000.

Dawe J took into account the following matters:

• There had been considerable money spent on legal fees and travel costs associated with the Hague Convention proceedings in which the husband was successful. The husband had spent over C$57,000 in Canada and had also had substantial legal fees in Australia. The wife had spent at least C$100,000 on legal fees. Both parties had borrowed money to fund the litigation. They has also depleted assets to pay their legal costs;
• The debts due by both parties in relation to child support orders and spouse maintenance orders, together with the specific order of the Canadian Court requiring the wife to pay the husband’s legal costs;
• The husband’s substantial initial contribution of approximately A$120,000;
• The income earning capacity of both parties;
• The ongoing responsibilities of each of the parties to care for a child of the marriage;
• The short period of cohabitation;
• The husband’s contribution to the increased value of the superannuation since the separation.

Was it just and equitable to alter the parties’ legal and equitable interests?

Before making a s 79 order, the Court had to be satisfied that it was just and equitable to alter the parties’ legal and equitable interests as required by the High Court in Stanford. Considering the length of the marriage and the contributions of the parties during the period they resided together, the steps taken since separation and the impact upon the financial circumstances of the parties, Dawe J considered (at para 120) that it was just and equitable for a s 79 order to be made (Stanford v Stanford [2012] HCA 52; (2012) FLC 93-518).

It was also just and equitable for the Court to take into account when considering whether s 79 orders should be made:

1. The Canadian orders for child support, spousal support and costs,
2. The Australian child support assessment, and
3. The Court should deal with these outstanding debts and finalise the financial arrangements between the parties where possible.

Dawe J discharged the unpaid child and spousal support orders made in Canada and reduced the liabilities owing to nil, including any penalties and interest. The costs payable by the wife to the husband under the Canadian Hague proceedings were also discharged. An order splitting the husband’s superannuation so that there could be a payment to the wife’s fund of $10,000 was made. Certain personal items of the wife were to be delivered by the husband to the wife when she next visited Darwin. Orders were made that the parties have no child support liability to each other.

The husband retained the equity in the real estate, which was an asset that he had acquired using funds which he owned prior to the relationship with the wife. He retained the bulk of his superannuation, which had increased substantially since the parties’ separation.

Conclusion

Sibly & Cassidy is a property settlement case, but it illustrates the ability of Australian courts to discharge child support and spousal maintenance orders made by overseas courts which are enforceable in Australia. The Hague Convention proceedings and the costs incurred in those proceedings, and the Canadian proceedings more generally, were significant in the context of a relatively modest asset pool.

Dawe J took a practical approach with the objective of finalising the financial relationship between the parties. This involved giving significant weight to the husband’s initial contributions, which were largely to a home in which he and one of the children of the marriage lived and #.

The writer thanks Louise Fairbairn of Forte Family Lawyers for her helpful comments in an earlier draft of this article.

Jacky Campbell, April 2016

Bankruptcy, financial agreements and the rights of creditors

The Full Court of the Family Court of Australia in Grainger & Bloomfield^[1]  considered the standing of a creditor to apply to set aside a financial agreement after the debtor spouse became a bankrupt. Shortly prior to the bankruptcy, the bankrupt spouse transferred her legal title in the home to her husband, which left the creditor unable to recover as there were little or no assets in the bankrupt estate.

Background Facts

Mrs Grainger purchased an unencumbered property at E in Queensland in 2007 with funds provided by her husband, Mr Grainger. From 2008, Mrs Grainger borrowed amounts totalling $2.6 million from a bank. The loan was secured by a mortgage over the E property.

As a result of proceedings in the Queensland Supreme Court between Mrs Grainger and Ms Bloomfield (arising out of business arrangements between them), Mrs Grainger became a judgment debtor to Ms Bloomfield for $2,100,000 in late 2011. On or about 14 October 2012 a bankruptcy notice was served on Mrs Grainger in respect of that judgment debt.

On 1 November 2012 Mr and Mrs Grainger entered into a financial agreement under s 90C (during marriage) of the Family Law Act 1975 (“FLA”). Under the agreement, Mrs Grainger transferred her interest in the E property to Mr Grainger subject to the mortgage.

Mrs Grainger was served with a creditor’s petition in December 2012. She became a bankrupt on a debtor’s petition in January 2013. Ms Bloomfield lodged a proof of debt in respect of her judgment debt with Mrs Grainger’s trustee in bankruptcy.

Applications

In January 2014 Ms Bloomfield filed an initiating application in the Federal Circuit Court naming Mr and Mrs Grainger as respondents and seeking orders under s 90K of the FLA to the effect that:

• under s 90K(1)(aa)(i), the financial agreement between Mr and Mrs Grainger be set aside;
• under s 90K(3), Mr Grainger transfer the E property (free of the mortgage) to the bankrupt estate of Mrs Grainger, or alternatively pay to that estate a sum equal to the market value of the property as at the date of transfer.

Ms Bloomfield also sought a declaration to the effect that the agreement was not binding under s90G of the FLA.

Mr Grainger sought that all, or parts, of the statement of claim filed by Ms Bloomfield in support of her initiating application be struck out, or alternatively that the proceedings be dismissed (in whole or in part).

Neither Mrs Grainger or her trustee in bankruptcy took any part in the proceedings before Judge Cassidy or before the Full Court.

Proceedings before the trial judge

On 24 September 2014, Judge Cassidy of the Federal Circuit Court made orders striking out:

• certain paragraphs of the statement of claim (being those in support of the claim for the declaration that the financial agreement was not binding).
• the paragraph of the initiating application in which that declaration was sought.

Ms Bloomfield’s application, to the extent that it sought orders under s 90K(1)(aa) and s 90K(3), remained on foot. Judge Cassidy also ordered a transfer to the Family Court.

The appeals and leave to appeal

The Full Court of the Family Court granted both parties leave to appeal against the interim orders. Mr Grainger said that three questions were raised. Ms Bloomfield phrased the three questions differently, but they were similar in substance. Mr Grainger’s questions were:

Q1  Where a party to a financial agreement has become bankrupt, does a creditor of the bankrupt have standing to apply to set aside a financial agreement or seek relief under s 90K(3)?

Q2  Does the power in s 90K(3) to make orders adjusting the rights of persons extend to adjustments other than for the purpose of substantially restoring the position existing before the financial agreement?

Q3  In seeking to set aside a financial agreement under s 90K may a creditor rely on any grounds other than the ground specified in s 90K(1)(aa)?

The trial judge answered Q1 as yes, Q3 as no and refused to determine Q2.

 Relevant statutory provisions

Section 90K(1) sets out the grounds for setting aside a financial agreement. The relevant subsections relied upon by Ms Bloomfield were:

“A court may make an order setting aside a financial agreement … if, and only if, the court is satisfied that:

(a)     the agreement was obtained by fraud (including nondisclosure of a material matter); or

(aa)   a party to the agreement entered into the agreement:

(i)    for the purpose, or for purposes that included the purpose, of defrauding or defeating a creditor or creditors of the party; or

(ii)   with reckless disregard of the interests of a creditor or creditors of the party; or …

(b)     the agreement is void, voidable or unenforceable …”

A “creditor” for the purposes of s 90K(1)(aa) is defined in s 90K(1A) to include “… a person who could reasonably have been foreseen by the party as being reasonably likely to become a creditor of the party”.

Also relevant was s 90K(3), which deals with the rights of a party or “any other interested person” in the event that a financial agreement is set aside:

“A court may, on an application by a person who was a party to the financial agreement that has been set aside, or by any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of persons who were parties to that financial agreement and any other interested persons”.

Jurisdiction in relation to married or formerly married persons is conferred under the “matrimonial causes”.^[2] The definition of “matrimonial cause” is in s 4(1). The definition includes:

“(eab)  third party proceedings (as defined in section 4A) to set aside a financial agreement;”

The definition of “third party proceedings” in s 4A for the purposes of paragraph (eab) is proceedings between:

“(a)    any combination of:

(i)    the parties to a financial agreement; and

(ii)   the legal personal representatives of any of those parties who have died;

(including a combination consisting solely of parties or consisting solely of representatives); and

(b)    any of the following:

(i)    a creditor;

(ii)   if a creditor is an individual who has died—the legal personal representative of the creditor;

(iii)  a government body acting in the interests of a creditor;

being proceedings for the setting aside of the financial agreement on the ground specified in paragraph 90K(1)(aa) …”

For the purposes of s 4A, a “creditor” is:

“(a)    a creditor of a party to the financial agreement; or

(b)    a person who, at the commencement of the proceedings, could reasonably have been foreseen by the court as being reasonably likely to become a creditor of a party to the financial agreement.”

and a government body is:

“(a)    the Commonwealth, a State or a Territory; or

(b)    an official or authority of the Commonwealth, a State or a Territory.”

Therefore, for a court to have jurisdiction in proceedings to set aside the agreement under s 90K(1)(aa), the proceedings must be between the parties to the agreement and either a creditor of one of those parties or “a government body acting in the interests of a creditor”. It was not contended before the Full Court that a trustee in bankruptcy was within the definition of “a government body” in s 4A.

The FLA was amended in 2003 to give a creditor standing to apply to set aside a financial agreement. Sections 90K(1)(aa) and 90K(3) (and related s 4A and new paragraph (eab) of the definition of “matrimonial cause” in s 4(1)) were inserted into the FLA. These amendments were intended to overcome the problems raised in ASIC and Rich & Rich,^[3] by clarifying the rights of a creditor to apply to set aside a financial agreement.

Significant amendments were made to both the FLA and the Bankruptcy Act 1966 (“the BA”) in 2005. Two of the three objectives of the amendments, according to the Explanatory Memorandum, were to:

“(a)    address longstanding issues concerning the interaction between family law and bankruptcy; and

(b)    prevent the misuse of financial agreements as a means of avoiding payment to creditors …”.

The amendments included:

• giving the Family Law Courts the power to make orders with respect to vested bankruptcy property in relation to a bankrupt party to a marriage;
• allowing a trustee in bankruptcy to be a party to s 79 proceedings;
• introducing a new act of bankruptcy where a party became involved as a result of a transfer of property pursuant to a financial agreement.

 The appeal

Question 1: Does a creditor of a bankrupt have standing under s 90K(1)(aa) or s 90K(3)?

The first, and apparently novel question was whether a creditor of a bankrupt party remained “a creditor” for the purpose of s 90K(1)(aa) or an “interested person” for the purpose of s 90K(3), and thus could apply for relief under those sub-sections. It was accepted by the parties that if a person had standing as a creditor to apply to set aside an agreement under s 90K(1)(aa), that person was also an “interested person” entitled to apply for orders under s 90K(3).

Ms Bloomfield phrased this question as whether a “creditor” entitled to commence a third party proceeding was a “creditor” in the broad or ordinary meaning of that word, or whether it was limited to a creditor before a sequestration order was made against that party.

Mr Grainger argued that on Mrs Grainger’s bankruptcy, Ms Bloomfield ceased to be a “creditor” within the meaning of s 4A or an “interested person” within the meaning of s 90K(3), and accordingly ceased to have standing for the purposes of an application under either s 90K(1)(aa) or s 90K(3). Mr Grainger relied on the specific provisions of the BA, and the public policy considerations underlying it, for his essential submission that once bankruptcy intervened, no action could be taken by a creditor against the debtor to enforce the creditor’s debt. The creditor’s rights were confined to proving the debt in the bankruptcy, to sharing in the distribution of the bankrupt’s estate, and to ensuring the proper administration of the estate by the trustee. It was for the trustee to take action, where appropriate, to recover property the bankrupt disposed of prior to the bankruptcy. The creditor was not an “interested person” for the purposes of s 90K(3), because any relief that might be obtained on the setting aside of the agreement benefited the whole of the bankrupt estate, not just as an individual creditor.

Although not discussed in detail in the judgment, orders are rarely made allowing creditors to be or continue as parties to, proceedings (under the FLA or otherwise), or to remain parties, following the bankruptcy of one of the parties for the purposes associated with the recovery of the debt. Generally, as envisaged by s 58 and s 60 BA, fresh proceedings cannot be commenced against the bankrupt and existing proceedings are stayed. Section 58(3) provides:

“Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a)   to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b)   except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

Section 60(1) provides:

“The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit: …

(b)   stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection, against the person or property of the debtor:

(i)    in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt ….”

Leave to continue or commence proceedings against a bankrupt can only be given to the creditor by a court exercising bankruptcy jurisdiction under s 27(1) BA. There is, therefore, an absolute bar on the enforcement of a remedy under s 58(3)(a) BA except as otherwise provided in the BA.^[4] The meaning of the proviso, which is the only “out” for the creditor, do not appear to have been tested despite there being a significant number of cases on the meaning of s 58(3)(b) where the reliance on any exception could have been pleaded in the alternative. For example, in Fraser v Commissioner of Taxation & Official Trustee^[5] the creditor succeeded in her application under s 58(3)(b) because her s 79A application under the FLA was characterised as a “legal proceeding” not “the enforcement of a remedy”.

The application of Fraser was not discussed in Grainger, although it was referred to briefly.

Ms Bloomfield argued that on the bankruptcy of the debtor the status of a creditor as a creditor did not change; rather only the remedies available to the creditor to enforce the debt change by virtue of the provisions of the BA. A creditor remained a creditor for purposes of s 90K(1)(aa) and an “interested person” for the purposes of s 90K(3) of the FLA.

The Full Court said that the definitions of “creditor” in s 4A(2) and in s 90K(1A) did not assist it to answer the question. The Full Court referred to the revised Explanatory Memorandum to the Bankruptcy and Family Law Legislation Amendment Act 2005 and said that s 79(10A) qualified the operation of s 79(10) so that a creditor could not be a party to property settlement proceedings if a party to the proceedings was a bankrupt (to the extent to which the creditor’s debt was a provable debt under the BA) or was a debtor subject to a personal insolvency agreement (to the extent to which the creditor’s debt is covered by the personal insolvency agreement). The amendments aimed to ensure that the trustee in bankruptcy represented the interests of all creditors in property settlement proceedings.

When Pt VIIIAB, which concerns financial matters relating to de facto relationships, was inserted into the FLA by the Family Law Amendment (De Facto Financial Matters and Other Measures Act) 2008 (Cth), it contained similar provisions in s 90SM to s 79(10) and s 79(10A). Pt VIIIAB also provided for financial agreements between persons in de facto relationships, which were of virtually identical effect to the provisions of Pt VIIIA, including s 90UM which provides for the setting aside of financial agreements in identical circumstances to those in s 90K in relation to creditors. The Full Court concluded:

“Given these various legislative initiatives, the better view must be that it is the legislative intention that, unlike the position of a creditor in relation to property settlement proceedings, the entitlement of a creditor to apply to set aside a financial agreement under s 90K(1)(aa) or s 90UM(1)(b) does not cease on the bankruptcy of the debtor, who is a party to the agreement”^[6]

The Full Court found support for the conclusion that it was possible for a creditor to commence or continue proceedings against a bankrupt in respect of a provable debt in s 58(3) of the BA which provides:

­       “Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor …

(b)   except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

The Full Court recognised that the court’s leave was necessary for a creditor to commence proceedings to set aside a financial agreement under s 90K(1)(aa) (or s 90UM(1)(b)), but that did not detract from the conclusion that the BA itself envisaged a creditor commencing or continuing litigation against a bankrupt in respect of a provable debt.

The Full Court concluded that Ms Bloomfield had standing as a creditor to apply under s 90K(1)(aa) of the FLA to set aside the agreement, and also under s 90K(3) of the FLA to seek ancillary orders (subject to a grant of leave under s 58(3)(b) of the BA).

Question 2: The extent of the power in s 90K(3)

The second question related to the extent of the power under s 90K(3) of the FLA which provides:

“A court may, on an application by a person who was a party to the financial agreement that has been set aside, or by any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of persons who were parties to that financial agreement and any other interested persons.”

Mr Grainger contended that the power in s 90K(3) “is consequential on the setting aside of a financial agreement, in order to reverse transactions affected under that agreement, or to make adjustments to achieve a restoration in substance” and it did not permit a creditor to prosecute other causes of action as between the husband and wife or third parties.

Ms Bloomfield contended that the power in s 90K(3) was a power “to make such orders as it considers just and equitable for the purpose of preserving or adjusting the rights of the parties to the financial agreement or other interested persons” and was not limited in the way the appellant contended.

In support of the more restrictive interpretation of s 90K(3), Mr Grainger relied on the decision of Burnett FM (as his Honour then was) in Reamy & Milne.^[7] In Reamy, judgment creditors of a party to a de facto relationship sought to set aside a financial agreement between the parties to the de facto relationship (entered into at the time of the trial which resulted in the judgment debt) pursuant to s 90UM(1)(b) of the FLA. Section 90UM(1)(b) is in virtually identical terms to s 90K(1)(aa). Similarly, s 90UM(6) is in virtually identical terms to s 90K(3).

Burnett FM refused the application of the parties to the de facto relationship for summary dismissal of the creditors’ application saying:

“In conclusion I consider s 90UM gives rise to a discretion in that the relief contended for cannot be automatically provided upon satisfaction of the requisite intention. From the material it appears that the applicants have demonstrated a prima facie case and sufficiently strong to resist an application for summary dismissal. The evidence however is not sufficient to warrant the relief contended for although further inquiry may establish such other facts as are necessary to support the inference.”^[8]

Mr Grainger contended that his Honour held, correctly in his opinion, that the power in s 90UM(6) was a “discretionary power for restoring the parties to the former status quo”, while Ms Bloomfield contended that if his Honour did so hold, he was wrong in law and his decision should be overturned.

At trial, Judge Cassidy appeared to depart from the approach taken by Burnett FM in Reamy. Mr Grainger submitted that setting aside the agreement would return the parties to a status quo where the wife’s trustee in bankruptcy would take the E property encumbered with a mortgage and that the utility of proceeding was not obvious in terms of a remedy for the creditor. Ms Bloomfield argued that s 90K(3) was broader. Cassidy J considered that while Burnett FM’s reasoning was attractive and, unless it was clearly wrong, it was likely to be applied by other judges in relation to s 90UM(6), the section under consideration was s 90K(3). It was unclear why he distinguished s 90K(3) from s 90UM(6), as the wording is in virtually identical terms. He found that the analysis in Reamy was not determinative of the issues in Grainger. It was an issue that should be taken to a hearing to fully explore submissions on the extent of the power under s 90K(3).

Furthermore, the trustee in bankruptcy was still a party to the proceeding even though he had elected not to participate in that part of the proceeding. Cassidy J did not consider that she could give summary judgment on the basis that s 90K(3) was a power limited to returning the parties to their positions prior to the agreement and therefore the orders the applicant sought would not be available. Ms Bloomfield was entitled to argue the breadth of the s 90K(3) power at the trial.

To the extent that Cassidy J considered that there was some difference between s 90UM(6) and s 90K(3), the Full Court pointed out that she was in error. Otherwise, Cassidy J did not err in the approach she took to s 90K(3). The Full Court said, therefore, that the trial judge was not wrong in permitting, in the exercise of her discretion, the s 90K(3) issue to go to trial.

The Full Court thought it might be useful for it to make observations about s 90K(3) (and its counterpart s 90UM(6)) given that it appeared “that to date there has been no decision of any court in relation to the scope of the powers in s 90J(3)”.^[9] The Full Court observed that s 90K(3) had some similarities to s 87(9)(b) of the FLA, which was concerned with a court’s powers when it revokes an approval by a court of a s 87 maintenance agreement. Section 87(9) provides:

“Where the approval of a maintenance agreement under this section is revoked by a court:

(a)   the agreement ceases, for all purposes, to be in force; and

(b)   the court may, in proceedings for the revocation of the approval or on application by a party to the agreement or any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of the parties to the agreement and any other interested persons;

and, in exercising its powers under paragraph (b), the court shall have regard to the ground on which it revoked the approval of the agreement”.

The Full Court noted there had been little exploration of s 87(9), with the only authority it could find of any assistance being Re Chemaisse; Federal Commissioner of Taxation (Intervener)^[10] where the Full Court observed that it was unnecessary and inappropriate to consider the wider questions raised by senior counsel for the wife relating to the interpretation of s 87(9)(b).^[11] The facts involved a fraud perpetrated upon the Court and whatever may be the appropriate exercise of the discretion in other cases, there was really no other proper exercise of the discretion open to the trial judge as s 87(9)(b) specifically required the court to have regard to the ground of revocation.

The Full Court in Grainger considered that the “observations of the Full Court in Chemaisse can be read as cautioning against an over-expansive application of a provision such as s 87(9)(b) or s 90K(3). But they also suggest that the application of such a provision will depend on the particular facts of the case in which the provision is to be applied”.^[12]

As the facts in Grainger had yet to be found, the Full Court did not consider it appropriate to say more regarding the operation of s 90K(3) in the context of this appeal against a refusal of a summary dismissal order. The Full Court agreed that the primary judge was correct in refusing in the context of a summary dismissal application, to determine the scope of the preservation and adjustment powers in s 90K(3).

Question 3: In seeking to set aside a financial agreement is a creditor limited to the s 90K(1)(aa) ground?

Ms Bloomfield contended that once she had invoked the court’s jurisdiction pursuant to s 90K(1)(aa) to set aside the financial agreement, she was entitled to rely on other grounds in s 90K(1) as a basis for her application to set aside the agreement, in particular the ground contained in s 90K(1)(b), being that “the agreement is void, voidable or unenforceable”. She claimed that the agreement was “unenforceable” pursuant to s 90K(1)(b) as it did not comply with the requirement in s 90G(1)(b) of the FLA for each party to the agreement to have had independent legal advice about certain matters before entering the agreement, because of an alleged lack of independence on the part of a solicitor, Mr P, who provided advice to Mrs Grainger before she entered into the agreement. This was, in any event, a broader view of s 90K(1)(b) as agreements which do not comply with s 90G(1)(b) are found not to be binding under s 90G(1)(b), rather than set aside under s 90K(1)(b).

However, Ms Bloomfield’s status in the proceedings, if she had status, was to seek orders under s 90K(1), not under s 90G(1).

Mr Grainger contended that a creditor can only challenge a financial agreement on the ground set out in s 90K(1)(aa), because of the content of the definition of “third party proceedings” in s 4A of the FLA and the reference to that definition in paragraph (eab) of the definition of “matrimonial cause” in s 4(1) of the Act. The trial judge accepted this.

The Full Court agreed and said:

“It will be seen that an essential element of the definition of ‘third party proceedings’ …. We can only say that we are at a loss to understand how it can be asserted in circumstances where the statute permits a creditor of a party to a financial agreement to apply to set aside the financial agreement on one specified ground, that the accrued jurisdiction (or indeed, the associated jurisdiction which was also pressed, albeit faintly, before us) would permit the creditor to apply to set aside the financial agreement on any other ground provided in the Act.

Put simply, the purpose of the accrued jurisdiction is to permit a party, or parties, to obtain all remedies available to that party, or parties, in the one proceeding in relation to a particular matter. It cannot confer on a party additional remedies under a statute that are not otherwise conferred by that statute on that party.”^[13]

The cross appeal was also dismissed.

Conclusion

In Grainger & Bloomfield the right of a creditor to apply to set aside a financial agreement after the bankruptcy of the creditor spouse was confirmed. However, the creditor was limited to arguing the s 90K(1)(aa) ground in applying to set the agreement aside and was unable to rely on s 90G(1) and argue that it was not binding as being void, voidable or unenforceable under s 90K(1)(b).

This decision has significant impact for creditors and for couples where one spouse is bankrupt. The rights of a creditor to apply to set aside a financial agreement have been confirmed by the Full Court of the Family Court to survive a spouse’s bankruptcy.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, April 2016

The rights of trustees in bankruptcy and s 75(2)(ha)

Trustees in bankruptcy are often pessimistic about how they will fare in proceedings under s 79 Family Law Act 1975 (“FLA”).

The recent case of Grainger & Bloomfield^[1] is likely to increase this pessimism. The impact of s 75(2) in the determination of claims under s 79 when one party is bankrupt may be less than indicated in previous decisions of the Family Law Court.

What is the s 79 process?

The court must be satisfied that it is just and equitable to alter the legal and equitable interests of the parties in property^[2]. Whilst the trustee may want an alteration of the interests in the property of the non-bankrupt spouse, in practice it is more likely that the court will find it is just and equitable to alter the interests of the parties in relation to the vested bankruptcy property. If one party is bankrupt, the interests of a bankruptcy trustee in the vested bankruptcy property can be altered^[3].

When determining what alteration of property interests is appropriate, the court must consider contributions and s 75(2) factors. The s 75(2) factors are sometimes incorrectly referred to as the “future needs” of the parties, although they cover a wider range of matters including age, earning capacity, the duration of the marriage and the level of child support. The court must still consider contributions and s 75(2) factors.

How are the interests of a trustee in bankruptcy relevant to s 79?

A trustee in bankruptcy may argue that it should be considered in the determination of “legal and equitable interests” under s 79(1). Doubt has been cast, however, by the Full Court of the Family Court on whether unsecured liabilities are legal or equitable “interests” which can be altered under s 79^[4]. Despite this doubt, in many cases where neither party is bankrupt, the parties and the court agree that certain debts be deducted from the gross property pool when calculating the property available for division between the parties in line with the Biltoft & Biltoft ^[5] line of authority. If the unsecured debts are taken into account in the determination of the property pool, a trustee in bankruptcy will not need to rely on the contribution assessment and s 75(2) factors, except in relation to its fees and expenses.

If the debts which the trustee is seeking to be paid are not paid from the gross property pool, the trustee in bankruptcy will need to seek to retain as much vested bankruptcy property as possible, and perhaps claim property of the non-bankrupt spouse, relying on legal and equitable principles to establish the bankrupt’s “interests” in property, relying otherwise on s 79, or relying on both. The opportunity to rely on legal and equitable principles is, however, beyond the scope of this article.

In relying on s 79, the trustee must establish the bankrupt’s contributions and that there should be a s 75(2) adjustment in favour of the bankrupt and/or the trustee.

Problems that arise for a trustee in bankruptcy in the assessment of contributions and s 75(2) factors include:

• The bankrupt may be unco-operative and not be prepared to give any evidence to establish the bankrupt’s entitlements so as to maximise the property which vests in the trustee;
• The bankrupt may be aligned with the non-bankrupt spouse and give evidence that assists the non-bankrupt spouse;
• The bankrupt may be considered by the court to have sole responsibility for the financial losses resulting in the bankruptcy. Financial losses and debts are generally shared between the parties to a relationship (although not necessarily equally), except:
  • “where one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets, or
  • where one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value.”^[6].

The prospects of the non-bankrupt spouse being successful in claiming that property which has vested in the trustee should be transferred to the non-bankrupt spouse is increased by the ability of the non-bankrupt spouse to argue for an adjustment under s 75(2). The only factor among the 19 factors listed in s 75(2) which appears to be of any relevance to the trustee is s 75(2)(ha). Section 75(2)(ha) refers to the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt. The other factors favour the non-bankrupt spouse, although arguably s 75(2)(o), which is a “catch-all” provision – “any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account”. However, it is not a true “catch-all” phrase and the ejusdem generis rule is applied to narrow the interpretation of s 75(2)(o) to only cover matters similar to those listed in s 75(2).

It is generally accepted that, unless the bankrupt is likely to achieve an annulment, the s 75(2) factors are not relevant to the bankrupt. The extent to which s 75(2)(ha) covers the interests of a trustee as opposed to simply those of creditors may, however, be re-considered following the decision of the Full Court of the Family Court in Bloomfield & Grainger.

Examples of cases where the rights of the trustee were considered under s 75(2)(ha)

In Pippos & Pippos^[7], debts incurred by the husband post-separation led to his bankruptcy. Burr J gave the wife 5% for s 75(2) factors. He said he would have given her 10%, but the factors in her favour were partially balanced by those which favoured the trustee in bankruptcy under s 75(2)(ha) and (n) (the terms of any order proposed to be made under s 79 in relation to the property of the parties or the vested bankruptcy property of a bankrupt party) and the regard he must have to the husband’s creditors’ ability to recover their debts. He did not seem to consider it relevant that the debts were incurred by the husband post-separation.

In West & West ^[8] the trustee sought that the home be sold and the net proceeds of sale be divided equally between the wife and the trustees. The trustee’s costs and fees were over $60,000 where the original debt was $10,000. The wife offered to pay the original debt. The wife had made the majority of the contributions to the property of the parties and the welfare of the family and the court ordered that the property (including superannuation) be divided 85%/15% in favour of the wife. The trustee was severely hampered by the absence of evidence on behalf of the husband as to his contributions.

The Federal Magistrate considered it relevant under s 75(2)(ha) that the creditors were unlikely to receive a dividend from any monies which the court ordered the trustees be entitled to receive out of the matrimonial property. He said:

It would be perverse if the wife and children were “forced from their home” and the operation of those relevant provisions of that legislation in relation to “the Trustees’ costs” meant RACV Finance would remain out of pocket.^[9]­

In Lasic & Lasic,^[10] the husband’s trustee in bankruptcy sought to set aside consent orders made between the husband and the wife. The pending litigation by Mr M was not disclosed to the court. The trial Judge relied on s 75(2)(ha) and required the wife to pay $319,081 to Mr M, a creditor, who had sustained serious injuries as a result of being shot due to the negligence of the husband and the parties’ son. On appeal, in Trustee for the bankrupt estate of Lasic & Lasic^[11], the Full Court understood the trial Judge’s concern that if the husband’s entitlement was paid to the trustee, Mr M would receive nothing. Reluctantly, the Full Court concluded that ordering a direct payment by the wife to Mr M was not within the trial Judge’s power. The matter was remitted for re-trial.

In Trustee of the Property of G Lemnos & Lemnos^[12] the husband’s trustee successfully appealed against property orders which required that the former matrimonial home, which had vested in the trustee, be sold and the net proceeds divided equally between the trustee and the wife. Contributions were assessed as equal at the date of the trial. The equity in the home was about $2-2.5 million and the husband’s bankrupt estate had debts of about $6 million.

The Full Court of the Family Court held that the interests of unsecured creditors did not automatically prevail over the interests of the non-bankrupt spouse, and their competing claims must be balanced in the exercise of the wide discretion conferred by s 79. The wife argued that the husband wasted assets by acting recklessly and negligently in completing his tax returns, an act wholly within his knowledge. For twelve years he claimed outgoings on a property which was usually his primary residence. The majority found that the husband’s conduct was not within the exceptions to the waste principle in Kowaliw^[13] as it was not designed to diminish the value of the matrimonial assets, but to increase them. The wife received the benefit of the funds which flowed from the husband’s conduct, and it was neither just nor equitable for her to escape all responsibility for payment of the primary tax.

The majority in Lemnos allowed the appeal because of the trial Judge’s treatment of the primary tax burden as “waste”. The minority allowed the appeal because of the way the trial Judge applied s 75(2)(ha). By ordering that the wife receive 50% of the equity in the home, the trial Judge gave priority to the wife over the unsecured creditors. The unsecured creditors were owed approximately $6 million. They received the same dollar amount as the wife, or about 20% of their claims. In finding that the husband should satisfy the tax debt from his resources, the majority said that the trial Judge had already decided the issue which s 75(2)(ha) directed him to consider (the effect of any proposed order or the ability of a creditor to recover the creditor’s debt) when coindiering the s 75(2) factors earlier. Both the trial Judge and the Full Court considered that the wife in Lemnos should share some responsibility for the primary tax.

Financial Agreements – trustee’s rights to set aside

At first glance, financial agreements are, arguably, not as secure for the parties as consent orders if bankruptcy is a possibility. Transfers pursuant to court orders are protected by s 59A Bankruptcy Act 1966 (“BA“), but transfers pursuant to financial agreements do not have the same protection. Consent orders have the approval of the court and, provided there has been full disclosure of the debts and notice to third party creditors, they will be difficult for a trustee to set aside.

Following ASIC v Rich^[14], amendments were made to the FLA and the BA to give greater protection to the position of the trustee in bankruptcy and creditors with respect to a financial agreement. These amendments included:

• Creditors have standing to apply to set a financial agreement aside^[15]
• It is an act of bankruptcy if a person becomes insolvent as a result of a transfer or transfers made under a financial agreement^[16]
• The claw back provisions in the BA can be used to recover property transferred under a financial agreement^[17]
• A separation declaration must be made before a financial agreement comes into force or takes effect if it relates to property or financial resources^[18]

In Official Trustee in Bankruptcy & Galanis^[19], Rees J found that the trustee in bankruptcy of a discharged bankrupt did not have standing under s 90K(1)(aa) FLA to apply to set aside a financial agreement made subsequent to the bankrupt’s discharge. The trustee appealed. An application for the hearing of the appeal to be expedited was dismissed in Official Trustee in Bankruptcy & Galanis^[20]. Rees J considered some of the broader questions of the respective standing of creditors and trustees in bankruptcy during bankruptcies.

Those questions were considered further by the Full Court in Grainger & Bloomfield^[21]. For a court to have jurisdiction in proceedings to set aside the agreement under s 90K(1)(aa), the Full Court said that the proceedings must be between the parties to the agreement and either a creditor of one of those parties or “a government body acting in the interests of a creditor”. It was not contended before the Full Court that the Official Trustee was within the definition of “a government body” in s 4A, although this was argued and rejected in Galanis.

Prior to Bloomfield & Grainger, s 75(2)(ha) FLA was generally read so as to include the “trustee in bankruptcy” within the term “creditors”. However, other parts of the FLA expressly refer to “trustees in bankruptcy”, and “trustees in bankruptcy” and “creditors” in separate sections. The rights of trustees and creditors to intervene in s 79 proceedings are dealt with in s 79(11) and s 79(10) respectively. Section 79A entitles both the trustee in bankruptcy and the creditors to apply to set aside s 79 property settlement orders in certain circumstances under s 79(5) and (6) and s 79A(4) respectively.

Trustees and s 75(2)(ha)

Prior to Bloomfield & Grainger, s 75(2)(ha) FLA was generally read so as to include the “trustee in bankruptcy” within the term “creditors”. However, other parts of the FLA expressly refer to “trustees in bankruptcy”, and “trustees in bankruptcy” and “creditors” in separate sections. The rights of trustees and creditors to intervene in s 79 proceedings are dealt with in s 79(11) and s 79(10) respectively. Section 79A entitles both the trustee in bankruptcy and the creditors to apply to set aside s 79 property settlement orders in certain circumstances under s 79(5) and (6) and s 79A(4) respectively.

The narrow interpretation of s 90K(1)(aa) to exclude the interests of creditors supports a narrow reading of s 75(2)(ha) to exclude the rights of the trustee in bankruptcy. The literal or ordinary meaning of s 75(2)(ha)^[22] is that s 75(2)(ha) does not cover trustees in bankruptcy. As there is no ambiguity, there is no place for looking at the purposive approach^[23] or the extrinsic materials^[24]. The wording of the section speaks for itself, particularly where other sections of the Act expressly refer to the rights of trustees in bankruptcy.

There are, however, two possible interpretations of s 75(2)(ha) if this narrow approach is adopted:

1. As in West and Lasic, where any payment to the trustee in bankruptcy could not have resulted in any dividend being paid to the creditors, s 75(2)(ha) is irrelevant. If there is to be a dividend to the creditors rather than all monies in the bankrupt estate being used to pay the trustee’s fees and expenses including legal costs, then s 75(2)(ha) is relevant;
2. As the trustee in bankruptcy is representing the interests of creditors, and the creditors do not have the right to bring proceedings to enforce recovery of their debts, s 75(2)(ha) is totally irrelevant to the s 79 process. This approach is even narrower.

Conclusion

Trustees in bankruptcy are understandably wary of how they will fare in FLA proceedings. The recent decision of Bloomfield & Grainger is likely to increase their concerns that outcomes favourable to trustees are difficult to achieve.

The wide interpretation of s 75(2)(ha) to include the interests of a trustee in bankruptcy (as representing the interests) of creditors appears inconsistent with Grainger & Bloomfield whether a narrower reading of s 75(2)(ha) will be adopted, and how narrow this reading will be, is unclear.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, March 2015

Stanford, bankruptcy and unsecured liabilities—options and opportunities

The High Court decision of Stanford v Stanford^[1] has implications for trustees in bankruptcy and non-bankrupt spouses who are parties to property proceedings under s 79 Family Law Act (“FLA”). This paper explores some of the possibilities, challenges and opportunities raised by one of the rare occasions when the High Court has deliberated on what s 79 means.

Stanford reminds legal practitioners that there are other avenues for the parties, rather than simply relying on establishing contributions and s 75(2) factors as part of a s 79 claim.^[2] The existing legal and equitable interests of the parties must be identified before they can be altered. If the Family Law Courts give greater emphasis to legal and equitable interests than it generally has done in the past, this could change the legal landscape for both trustees and non-bankrupt spouses. Considering “just and equitable” as a preliminary matter, arguably gives more opportunities for trustees in bankruptcy to try to retain or to recover property of the parties to the marriage to pay debts owed by the bankrupt.

Since the judgment in Stanford was handed down, the courts and lawyers have had to re-consider the four steps and notional property. This process is continuing and it may be some time before there is some clarity. An issue which has received less attention is unsecured liabilities. They are relevant, not only where one party is bankrupt, but to most relationships. Credit cards debts, loans from family members and unsecured trade and personal debts are common. Post-Stanford it is relevant to whether unsecured liabilities are legal and equitable interests which can be altered under s 79.

2005 Amendments

The Bankruptcy and Family Law Legislation Amendment Act 2005 (“2005 Amendments”) is often seen as disadvantageous to trustees. A trustee cannot institute s 79 proceedings against a non-bankrupt spouse as a means of trying to enlarge the assets in the bankrupt estate available for creditors whereas a non-bankrupt spouse can bring a s 79 application to try to increase their entitlements by claiming against property which has vested in the trustee. Therefore, unless the non-bankrupt spouse issues proceedings or proceedings have already commenced at the time of the bankruptcy, a trustee trying to increase the property available to the creditors is left only with the options of a claw-back under s120, 121 or 122 of the Bankruptcy Act 1966 (“BA”) or under s 106B of the FLA or trying to claim an equitable interest in the non-bankrupt spouse’s property. If, however, the non-bankrupt spouse institutes proceedings, the trustee can try to argue that some of the bankrupt’s debts should be paid from property of the non-bankrupt spouse. The non-bankrupt spouse can proceed under s 79 against property which has vested in the trustee. The prospect of the non-bankrupt spouse being successful is increased by the ability of the non-bankrupt spouse to argue for an adjustment under s 75(2). The only factor among the 19 factors listed in s 75(2) which is of any relevance to the trustee is s 75(2)(ha), which refers to the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt.

Another problem for the trustee can be whether the bankrupt is willing to co-operate with the trustee. The bankrupt’s evidence can be essential to maximise the assessment of contributions in favour of the bankrupt (and therefore the trustee) and minimise the assessment of s 75(2) factors in favour of the non-bankrupt spouse. The bankrupt may be co-operative, either motivated by the vengefulness which motivates some other separated spouses, or a desire to achieve an annulment of their bankruptcy.

The court must make an appropriate order, if it is just and equitable to do so. Many of the reported cases involve debts which are much greater than the property pool, so there is no prospect of them all being paid in full and no opportunity for the bankrupt to achieve an annulment.^[3] An interesting question is whether the overwhelming size of the liabilities relative to the value of the property of the parties and the trustee does or should influence the court in determining whether it is just and equitable to make an order.

Constructive trust claims have always been important for non-bankrupt spouses involved in proceedings in courts other than the Family Law Courts, as property held by the bankrupt upon trust for another person is not property which is divisible amongst the creditors of the bankrupt under the “BA”.^[4] Post Stanford, non-bankrupt spouses and trustees in bankruptcy ought to consider all possible legal and equitable interests. Whilst the 2005 Amendments have generally been interpreted to place the s 79 claims of non-bankrupt spouses above the legal and equitable interests of trustees and creditors, the situation post-Stanford is not yet clear.

The Stanford decision

The case involved an elderly couple involuntarily separated by circumstances. The wife required nursing home care and died during the course of the proceedings. The High Court upheld the husband’s appeal against an order for a payment to the wife’s estate after the husband’s death. The majority allowed the husband’s appeal primarily on the ground that the Full Court of the Family Court did not address the requirements for making orders after a party’s death. The minority agreed, but did not deal with the broader issues under s 79.

The High Court majority rejected the husband’s argument that a s 79 order can only be made if the parties have separated. In a de facto relationship, the property rights and interests of the parties cannot be enlivened under s 90SM unless and until there is a breakdown of the relationship. Consistently with the referral of powers by the State and Territories with respect to de facto relationships, s 90SM(1) expressly only covers “property settlement proceedings after the breakdown of a de facto relationship”.

What is the proper approach to s 79?

Stanford reminds us to look at the Act. One of the major 2005 amendments was to 79(1). In matters involving a bankrupt spouse s 79(1) says:

The court may make such order as it considers appropriate…

(b) 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 either or both of the parties to the marriage or the bankruptcy trustee to make for the benefit of either or both of the parties to the marriage [but not the trustee] such settlement or transfer of property as the court determines.

The manner in which the court must exercise the power under s 79(1) is set out in s 79(2):

The court shall not make an order under this section unless it is satisfied that, in all the circumstances, it is just and equitable to make the order.

Section 79(4) requires the court to take into account certain matters such as contributions and the matters listed in s 75(2) (which include incomes, earning capacities, care of children and the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt) so far as they are relevant in “considering what order (if any) should be made”.

The High Court warned:

To conclude that making an order is “just and equitable” only because of and by reference to various matters in s 79(4), without a separate consideration of s 79(2), would be to conflate the statutory requirements and ignore the principles laid down by the Act.^[5]

Contrary to the usual authority and practice of the past, the High Court majority rejected the notion that s 79(2) was a step to be undertaken at the end of the process. The majority said that whether it is “just and equitable” to make an order under s 79(2) arises before the court looks at s 79(4), rather than after looking at s 79(4). Section 79(2) and s 79(4) are separate inquiries and the “two inquiries are not to be merged.”

In determining applications under s 79, the High Court set out three fundamental propositions that “must not be obscured”:

1. Identify the existing legal and equitable interests of the parties as if they were not married without reference to their possible entitlements under s 79. The court must then consider whether it is just and equitable to alter the parties’ interests;
2. Section 79 is a broad power, but that does not mean unguided judicial discretion or “palm tree justice”;
3. There is no starting assumption that a party has the right to a s 79 order.

In relation to the first proposition, the existing interests of a trustee must be ascertained, not simply the interests of the spouses. The High Court’s view makes sense as interests cannot be “altered” under s 79(1) unless the court first identifies those interests. An example arising from Stanford is the possibility that the wife may have had an interest by way of a constructive trust in the husband’s home. This equitable interest could have been identified before the Family Court decided whether or not it was just and equitable to make s 79 orders. If the wife had an equitable interest, the Court could have simply declared under s 78 FLA that the wife had an interest by way of a constructive trust and the extent of that interest. An alteration of the parties’ interests under s 79 may not have been just and equitable after their existing rights had first been determined.

The High Court majority in Stanford did not directly consider or confirm the validity of the “four step” approach.^[6] Under the “four step” approach, a trustee usually achieved its best possible outcome if it successfully argued that the bankrupt’s debts should be paid from the property pool under step 1 (where the asset pool was identified and valued), prior to the balance of the property pool being divided between the non-bankrupt spouse and the trustee. Trustees were often at a disadvantage regarding the assessment of contributions and s 75(2) factors under steps 2 and 3, because:

• The bankrupt may have gambled or otherwise wasted assets in a manner which meant the non-bankrupt spouse had no responsibility for the debts;^[7]
• The non-bankrupt spouse often denied knowledge of debts such as tax debts although the non-payment of those debts had benefited the non-bankrupt spouse and children. Lack of knowledge can be important in determining whether the non-bankrupt spouse should be held liable with respect to penalties and interest, but perhaps not for primary tax;^[8]
• The future needs of the non-bankrupt spouse and children often significantly increase the entitlements of the non-bankrupt spouse. The only matter among 19 matters listed in s 75(2) of any relevance to the trustee is s 75(2)(ha), which refers to the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt.

The “just and equitable” requirement and intact relationships

The High Court majority considered that the just and equitable requirement of s 79(2) is “readily satisfied” if the parties are, as the result of a choice made by one or both of the parties, no longer living in a marital relationship.

An involuntary separation, as occurred in Stanford, is not enough of itself for it to be just and equitable to make a s 79 order. The court must be satisfied that it is just and equitable to make a s 79 order. Whether the courts may determine that it is just and equitable to make an order where one of the parties is bankrupt but the parties are not separated, is as yet unclear.

One of the immediate questions which arises is whether non-bankrupt spouses will more frequently apply for a property settlement even though their marriages are intact where their spouse faces bankruptcy. Under the FLA, parties to a de facto relationship or marriage can seek orders which have the outcome that the creditors of one of the parties will not be paid or may not be paid. A Family Law Court is able to make the orders, provided creditors are on notice of the proposed orders and do not oppose them. The orders can be made even if the creditors oppose them, if the court finds that it is appropriate to do so. If parties provide full disclosure of creditors to the court, and notice to creditors of the proposed s 79 orders, the orders will be difficult for a trustee to set aside later under s 79A FLA.

The requirement that it is just and equitable to make an order is more difficult to satisfy in intact marriages as they still have the “common use of the property”,^[9] however, there have been few cases to date.^[10]

In a pre-Stanford decision, the court refused to make s 79 orders in intact marriages in McCormack & McCormack and Peakes & Peakes [2009] FMCAfam 1250. Two wives and their husbands’ trustees in bankruptcy sought orders for the transfer of half interests of properties to the wives from their husbands’ trustees in bankruptcy. The aim was apparently to avoid paying stamp duty on the transfers. The wives were not separated from their husbands and the court refused to make the orders sought.

Wilson FM held:

It is difficult to see how those transactions arise out of the marital relationship. They arise from a commercial dealing that has failed. The fact that one party to a marriage is purchasing an interest in property (in which he or she already holds an interest) from the trustee in bankruptcy of the other does not, to my mind, mean that the proceedings arise out of the marital relationship.^[11]

The Federal Magistrate did not consider the purpose for which the s 79 orders were sought, but refused to make the orders on jurisdictional grounds (which following Stanford may not be a valid argument). The court could also have refused because the orders were sought for an improper purpose, being to avoid payment of stamp duty on a land transfer. Orders which have the effect of avoiding liability to a revenue authority^[12] may be orders which are not just and equitable to make in an intact marriage.

What is a legal or equitable interest?

The pre-Stanford practice was to list “property of the parties” and “financial resources”. The requirement post-Stanford is to list all legal and equitable interests and this seems broader. At first, glance, “equitable interests” includes constructive trusts, resulting trusts and estoppel interests. “Legal interests” may be narrowly defined as legal entitlements to property, but a broader view may encompass, for example, the parties’ contractual and tortious rights and liabilities, including unsecured liabilities.

An “interest” is defined in Osborn’s Concise Legal Dictionary:

A person is said to have an interest in a thing when he has rights, titles, advantages, duties, liabilities connected with it, whether present or future, ascertained or potential, provided they are not too remote.

That dictionary defines equitable interests but gives no definition of legal interests. It defines an equitable interest as a right recognised and enforceable only according to the rules of equity. It talks about rights in personam and in rem. In the Lexis-Nexis Encyclopaedic Australian Legal Dictionary an “equitable interest” is defined more narrowly as:

An interest in property enforced and created by equity in the situation where it would have been unconscionable for the legal owner of the property to retain the benefit of the property.

It goes on to define a “legal interest” as:

The legal, as opposed to beneficial, interest in property. Under the system of common law and equity, the legal title in property can be separated from its beneficial interest. .

Lexis-Nexis says, in contrast to Osborn, that a “legal interest” is a right in rem (i.e. it is enforceable against anyone), while an equitable interest confers only a right in personam.

Applying Stanford to recent cases

Non-bankrupt spouses who have benefited from the actions of a bankrupt spouse, whether or not they conspired together to defeat creditors, may find s 79(2) in its new format a greater hurdle to jump when trying to keep assets away from the trustee. It is revealing to look at cases involving bankruptcy which pre-date Stanford and speculate how they might be decided now.

In Commissioner of Taxation and Worsnop^[13] the Commissioner of Taxation appealed against an order that the former matrimonial home in the wife’s name be sold and the net proceeds of sale be divided equally between the wife and the Commissioner. The only substantial asset was the home worth $4.75 million. There was conflicting evidence as to the wife’s knowledge of the husband’s tax avoidance but the trial Judge accepted that the wife did not know and it could not be said that she ought to have known. The husband had transferred his interest in the home (then worth $1.5 million) to the wife for only $1.00 about 5 or 6 years prior to separation, at around the time the husband changed his business activities.

The trial Judge made no adjustment in favour of the wife for s 75(2) factors although she had the primary care of 4 children aged between 1¾ and 13 years and this affected her earning capacity. The s 75(2) factors in her favour were off-set against the husband’s tax indebtedness as a factor in the Commissioner’s favour under s 75(2)(ha). The wife had no knowledge of the debt, which was by then about $13 million.

In balancing the competing claims of the wife against the Commissioner, the Full Court found that the trial Judge appreciated the critical features of the exercise, and said:

In our view, the Commissioner of Taxation is in a position distinguishable from that of a commercial creditor. Commercial creditors have a choice about to whom they extend credit. On the other hand, the position of the Commissioner as a creditor of taxpayers is of a completely different origin. The onus is on taxpayers to make full and proper disclosure to the Commissioner of Taxation. The Commissioner does not extend credit at all, but becomes a creditor by virtue of the conduct of the affairs of the taxpayer.^[14]

The Full Court of the Family Court upheld the 50/50 split of the net pool. Although the wife had benefited from the husband’s avoidance of tax, neither the trial Judge nor the Full Court completely absolved her from responsibility for the debt.

In light of Stanford, was the order that the Commissioner only receive 50% of the net proceeds of sale just and equitable? If the court had determined the parties’ legal and equitable interests in the property first, would it have found that the wife was not entitled to retain a half-interest in the home? Was the finding that the wife lacked knowledge of the debt sufficient to deny the Commissioner’s right to be paid when the wife had benefited from the non-payment of tax?

In Trustee of the Property of G Lemnos & Lemnos^[15] the husband’s trustee successfully appealed against property orders which required that the former matrimonial home, which had vested in the trustee, be sold and the net proceeds divided equally between the trustee and the wife. The trial Judge found that the wife had contributed directly to the matrimonial home through her income (from distributions received by her from the family trust which received income from the husband’s legal practice) and by signing a guarantee. Contributions were assessed as equal at the date of the trial. The husband was re-assessed for income tax for the period 1991-2002. A sequestration order was made against him in 2006 and the parties separated in July 2007. At the time of the trial the equity in the home was about $2-2.5 million and the husband’s bankrupt estate had debts of about $6 million.

The Full Court of the Family Court held that the interests of unsecured creditors did not automatically prevail over the interests of the non-bankrupt spouse and their competing claims must be balanced in the exercise of the wide discretion conferred by s 79. The wife argued that the husband wasted assets by acting recklessly and negligently in completing his tax returns, an act wholly within his knowledge. For twelve years he claimed outgoings on a property which was usually his primary residence. The majority found that the husband’s conduct was not within the exceptions to the waste principle in Kowaliw,^[16] as it was not designed to diminish the value of the matrimonial assets, but to increase them. The wife received the benefit of the funds which flowed from the husband’s conduct, and it was neither just nor equitable for her to escape all responsibility for payment of the primary tax.

The majority in Lemnos followed the Full Court of the Family Court in Johnson & Johnson^[17] where it was said “unless there were compelling circumstances to the contrary, a just outcome demanded that the wife take the good with the bad” and that unless “the husband was on a frolic of his own and acting contrary to the wife’s express wishes” there was no reason for the trial Judge to leave the husband with the burden of the tax penalties. The majority in Lemnos allowed the appeal because of the trial Judge’s treatment of the primary tax burden as “waste.” The minority allowed the appeal because of the way the trial Judge applied s 75(2)(ha). By ordering that the wife receive 50% of the equity in the home, the trial Judge gave priority to the wife over the unsecured creditors. The unsecured creditors were owed approximately $6 million. They received the same dollar amount as the wife, or about 20% of their claims. In finding that the husband should satisfy the tax debt from his resources, the trial Judge had already decided the issue which s 75(2)(ha) directed him to consider (the effect of any proposed order or the ability of a creditor to recover the creditor’s debt) under step 3 of the four step process.

The majority in Lemnos, unlike in Johnson, accepted that the husband was “on a frolic of his own” but did not accept that the wife’s lack of knowledge or complicity in the husband’s wrongful deductions determined whether she should share responsibility for the payment of primary taxation on his income during the marriage. The statement in Johnson, that spouses should generally “take the good with the bad,” had even more force when applied to allocating responsibility for primary taxation, rather than tax penalties. Both the trial Judge and the Full Court considered that the wife in Lemnos should share some responsibility for the primary tax. Following Stanford, was it just and equitable for any order to be made that allowed the wife to be able to claim against the home which had solely vested in the trustee? Was it just and equitable that the creditors received only 20% of their claims?

Unsecured liabilities

For the purposes of s 79, a distinction is not often made between creditors with judgment debts and those without. The position of unsecured creditors has not been considered in depth post-Stanford. If the debts of creditors without judgments are taken into account in determining the net pool of interests available for alteration by the Court between the parties under s 79, a creditor which may be unable to substantiate its claim, may receive priority over the legitimate interests of a party to the marriage under s 79. However, if those creditors are ignored, the legitimate debts owed to third parties may not be paid at all. Is that just and equitable? The priority given to unsecured liabilities (if any) in family law proceedings becomes more important if one party is bankrupt.

A “debt” is defined simply under the BA to include a “liability”. In the distribution of a bankrupt estate, a creditor lodging a proof of debt is not required to have judgment against the bankrupt. Provided the claim is admitted by the trustee, the debt will be paid pari passu (in proportion) with other debts if there is property to distribute. Creditors with or without judgment debts rank equally.^[18] In fact, a creditor cannot obtain judgment after bankruptcy.^[19]

Debts provable in bankruptcy are defined widely under the BA as:

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 his discharge by reason of an obligation incurred before the date of the bankruptcy are provable in his or her bankruptcy.^[20]

A trustee can admit or reject a proof of debt in whole or in part or require further evidence in support of it.^[21] A trustee may require a statutory declaration to be lodged by a creditor to substantiate the proof of debt.^[22] There is a right of review of the decision of the trustee.^[23] Debts are not proved until admitted by the trustee.^[24]

A bankrupt is not released from all provable debts. A bankrupt is still liable, for example, for debts incurred by fraud, such as some Centrelink debts, and debts incurred under a maintenance order.^[25] Debts which are not provable debts include debts incurred after the date of bankruptcy and HELP debts under the Higher Education Support Act 2003 (Cth).^[26]

With respect to provable debts, the bankrupt has no direct liability to the creditors, but has obligations under the BA, including possibly making contributions from income. As far as the creditors are concerned, upon bankruptcy the creditors no longer have a right of action for the debt. The debts merely give the creditors the right to prove in the bankrupt estate.^[27]

In contrast to the BA, neither “debt” nor “liability” are defined in the FLA. A debt does not fall easily within the definition of “matrimonial cause” in s 4(1) of the FLA which talks about “property”. The problem of the absence of any reference to debts and liabilities in the matrimonial causes is exacerbated by the extended definition of “matrimonial cause” in s 90AD. For the purposes of Pt VIIIAA (and by implication, for no other purposes) a debt owed by a party to a marriage is treated as property under para (ca) of the definition of matrimonial cause in s 4 and in s 114(1)(e).

The Full Court in Biltoft & Biltoft^[28] set out the general practice prior to Stanford of dealing with liabilities which has largely continued post-Stanford:

A general practice has developed over the years that, in…applications pursuant to…s 79, the Court ascertains the value of the property of the parties to a marriage by deducting from the value of their assets the value of their total liabilities…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…^[29]

The Full Court stated with respect to the rights of unsecured creditors as against a spouse:

Notwithstanding the general practice which has developed, the Court has indicated that it may properly determine not to take into account or to discount the value of an unsecured liability in certain circumstances. Such liabilities would include, but are not limited to a liability which is vague or uncertain, if it is unlikely to be enforced or if it was unreasonably incurred …Thus, although there is a general rule. .., the rule is not absolute, 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 s 79, 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.^[30]

Referring back to the discussion earlier in this paper of the definition of legal and equitable interests, is an unsecured liability a legal or equitable interest? An “interest” is a “thing” (using Osborn’s definition) which seems a broad enough concept to suggest that it can be a liability. Bevan & Bevan^[31] was the first Full Court case to consider the nature of unsecured liabilities after Stanford. The Full Court seemed to take a narrow approach, but the later case of Layton & Layton seemed to look at interests more broadly.

Justice Finn put the problem in these terms in Bevan & Bevan:

These reminders that the jurisdiction under s 79 is a jurisdiction to alter individual interests in title to property and that there is no community of property in this country, might also call into some question the current practices in relation to the treatment of property which is no longer in existence but which one party has had the use of (the so called “addbacks”), and perhaps also of the unsecured liabilities of one or both parties. It may well be that these matters should more strictly be considered in making findings under s 79(4)(e) (i.e. s 75(2)), or in an extreme case, when considering the question under s 79(2) as to whether it is just and equitable to make any order under s 79. But these questions do not arise in the present case, and are thus for another day.^[32]

Much has been written and discussed about the impact of Stanford on add-backs and notional property and it is beyond the scope of this paper to consider them. However, very little has been written about how unsecured liabilities are considered post-Stanford and the cases are only starting to explore the options.

The Full Court, in a bench which included Justice Finn, looked at the issue of unsecured liabilities in Layton & Layton.^[33] The husband appealed against the trial Judge’s refusal to “add-back” to the pool a joint loan of $50,000 taken out by the parties to meet the legal costs of the wife’s son in criminal proceedings. The husband argued that it was agreed that the wife would be solely liable for the debt and the wife conceded that she arranged to have the loan statements sent to her sister’s address.

The Full Court considered that there was substance in the husband’s complaint that the trial Judge’s reasoning was inadequate as to why she ignored the fact that the wife had apparently had the sole use of the funds. The trial Judge’s findings as to the purpose of the loan suggested that the wife should be the party responsible for the loan. The Full Court said:

It may well be, of course, that in light of certain of the observations made by members of the Full Court in their judgments in Bevan & Bevan … (which were delivered subsequently to her Honour’s decision in this case and to the hearing of this appeal), that it would not have been appropriate for her Honour to treat the loan funds in question as “notional property” to be added back to, or included in, the property available for distribution between the parties. But however that may be, it would seem on the basis of the evidence to which we were taken, and have earlier recorded, that justice and equity would require that the wife’s use of these loan funds should have been taken into account in some way in favour of the husband either as a contribution by him or as a matter under s 75(2)(o) of the Act. It might even have been open to a court on a proper analysis of the evidence, to have concluded that the sum of $50,000 representing the loan funds was a debt which the wife owed to the husband and which should have been repaid out of the net proceeds of the sale of the matrimonial home.^[34]

The Full Court seemed to take a broad view of the definition of legal and equitable interests so as to encompass the possibility that there may be a contract between the parties as to the payment of a debt. In practical terms, this may mean that the parties have agreed that both parties will use a credit card or incur an electricity or telephone debt in the sole name of one of the parties and that it will be paid from the incomes and/or property of both parties.

The Full Court left open the option of dealing with the debt as, for example, a contractual issue if an add-back was not appropriate.

In Stone & Elliott^[35] the husband argued that the “pool” should be identified at the so-called “first step” and his debts (personal loan and crystallised tax bill) that related to a period during the relationship and after it ceased but when he was still making mortgage payments, should be given priority in payment from the net proceeds of sale of a real property. Neville J noted that no legal (or any other) reason was given as to why priority should be given to the payment of the unsecured debts.^[36]

The husband opposed funds being repaid to the second respondent (the wife’s mother). Neville J found that a contract existed between the second respondent and the parties. He also found for the second respondent on the basis of estoppel. For example, the husband acknowledged the regular repayments made to the second respondent over some time.

After referring to Bevan and Biltoft, Neville J said:

None of the qualifications to which the Full Court referred is evident on the facts here. Indeed the contrary is true: the liability is not vague or uncertain; and the second respondent has taken formal steps (in these proceedings) to recover it.^[37]

The second respondent’s debt was given priority for payment whereas the other debts of the parties were taken into account in determining the property pool.

In Devopoulos & Devopoulos^[38] Loughnan J rejected the argument that the husband’s tax debt was vague and uncertain. The quantum of the debt was set out in a Statement of Claim in the Supreme Court of New South Wales as $789,506.61 as at February 2012 and as at 17 December 2012 the debt stood at $923,433.46 according to the ATO Portal. Although Loughnan J was satisfied that the debt was owed to the ATO, he did not include it in the balance sheet setting out the net pool of assets for division between the parties.

Loughnan J listed it as a debt solely of the husband because:

• no meaningful explanation was provided for the husband’s failure to lodge tax returns, pay his tax or keep the wife advised about the potential liability;
• the principal debt had been paid and the balance seemed to be penalties and interest;
• the wife had agreed to pay almost $300,000 of joint funds to discharge the main debt;
• the ATO did not object to the approach proposed by the wife.

Jarrett J in Simon & Simon^[39] was dealing with net equity in a home of $185,000. The wife had a personal loan of $7,000. The husband had unsecured creditors of $76,600. The wife had superannuation of about $11,000 and the husband had about $32,000.

There was sufficient equity in the real property to pay the husband’s unsecured creditors in full. The husband said that the debts were mainly incurred by him for family purposes. In those circumstances, if the husband was not bankrupt, Jarrett J said that they would have been paid from the gross pool and the rest of the net assets divided between the parties.

Jarrett J considered that it was arguable:

…that given the circumstances, the Court would be justified in approaching the case on the basis that the pool of assets for division is the net pool after payment of the first respondent’s unsecured creditors. Given the surplus that would exist if the matter was not complicated by the bankruptcy, the debts due to the unsecured creditors would be accounted for in the process undertaken by the Court.^[40]

However, the matter was not argued in that way and Jarrett J did not consider it further.

The parties’ contributions were assessed as equal. There was evidence from the husband’s father that the $150,000 interest free loan was intended to benefit both parties so it was not caught by the Kessey & Kessey^[41] and Gosper & Gosper^[42] line of authority. A 15% adjustment under s 75(2) was made, primarily because the wife had the care of a 15 year old child and received minimum child support. The adjustment would have been larger but the unsecured creditors were a factor against the wife under s 75(2)(ha).

An example of a case where the Court refused to deduct a liability from the property pool to be divided between the parties is Hagan & Gerald.^[43] The parties had been separated for five years. The husband asserted that he had been unable to pay his tax as it fell due for three financial years since separation. He owed about $40,000 and submitted that the debt had arisen because of the amounts spent by him for the benefit of the wife and the children including money paid by him when the children were in his care.

The Court found that the husband failed to demonstrate that he had been unable to pay his tax. For example, in the 2012 financial year the family trust had received $596,584 and he paid $146,682 of this for the benefit of the wife and the children. He was left with $449,902 from which to pay his income tax and living expenses. As in other years, he had chosen to spend his income and not pay his tax. In these circumstances it was not just and equitable to treat the husband’s tax as a joint liability.

Identifying equitable interests

In light of the greater emphasis placed on equitable interests at the outset of the s 79 process, there is more scope for both trustees in bankruptcy and non-bankrupt spouses to utilize equitable principles to achieve a more favourable outcome. An understanding of equitable interests is therefore crucial for family law practitioners, and the following section seeks to provide a refresher on the equitable concepts of estoppel, constructive and resulting trusts, as well as provide a number of case examples. Equitable interests and remedies which are not considered in this paper but may be relevant include equitable accounting, equitable liens and specific enforcement. The question of whether an equitable interest arises at the time it is imposed by a court order or at an earlier time is beyond the scope of this paper.

Estoppel

Estoppel operates to prevent a party from denying or asserting something if it would be unconscionable to do so. The elements, as set out in Walton’s Stores (Interstate) Ltd v Maher^[44] are as follows:

• The plaintiff assumed that a particular legal relationship existed between the plaintiff and the defendant, or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship;
• The defendant induced the plaintiff to adopt that assumption or expectation;
• The plaintiff acted or abstained from acting in reliance on the assumption or expectation;
• The defendant knew or intended him to take that action or inaction;
• The plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and
• The defendant failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.

The High Court recently revisited the nature of estoppel in the context of a relationship breakdown, in Sidhu v Van Dyke.^[45] The appellant lived with his wife on a homestead on a rural property they owned as joint tenants. The respondent lived in a cottage also located on the rural property, approximately 100 metres away from the homestead. The respondent and the appellant formed a romantic relationship, and over the course of a number of years the appellant promised the respondent that he would arrange for the land to be subdivided (including procuring his wife’s consent), and ensure that the portion of land containing the cottage was placed into the respondent’s name. The respondent acted in reliance on this promise, to her detriment. The specific detriment suffered was found to arise from the maintenance and improvement work carried out by her on the rural property as well as the loss of opportunities to obtain a higher income from full time employment. The High Court did not, however, rely on the Supreme Court finding that the respondent lost the opportunity to obtain a property settlement from her former husband. The appellant and his wife ultimately refused to convey the property to the wife, and did not do all things required to subdivide the land.

The High Court found that estoppel was enlivened and upheld the Supreme Court of New South Wales decision that the appellant be held to the representations made to the respondent. In doing so, the High Court undertook a useful look at the concept of reliance, and in particular the sufficiency of proof of detrimental reliance required to ground an estoppel claim:

• The claimant wore the legal burden of proving she was induced to rely upon the representation.
• A presumption of reliance does not arise from the mere fact that a party enters into a contract after a material representation was made to them. To the contrary, the court made it clear that to refer to any “presumption of reliance” in the context of equitable estoppel fails to recognize that it is the conduct of the representee induced by the representor which is the very foundation for equitable intervention, although the conduct of the representor need not be the sole inducement operating on the mind of the representee.^[46]
• Reliance is a fact to be found; it is not to be imputed on the basis of evidence which falls short of proof of the fact.

As to the relief available to the claimant, the Court reiterated that the measure of relief is not limited to the value of the promise. However, the detriment was of such an extent and involved sufficiently life-changing decisions so as to warrant performance of the promise.

The High Court did not look at the effect of the decision on the appellant’s wife although she presumably may have argued that her position was relevant if she and the appellant were separated.

In the recent decision of the Full Court of the Family Court in Vadisanis & Vadisanis and Anor,^[47] the husband’s mother intervened in property proceedings between the husband and wife, seeking the recognition and repayment of a number of loans and advances of funds made both to the husband solely and the parties jointly. One of the arguments raised by the wife against the intervener was that the intervener’s conduct gave rise to a promissory estoppel preventing her from enforcing the terms of a loan agreement. In particular, the wife alleged that the husband’s mother:

• On several occasions said that the money was not to be repaid;
• In continuing to advance money to the parties and in not seeking repayment of the loans until after the parties separated, had conducted herself in a way that led the wife to understand that no money was owing or, at least, she was not liable to the intervener for a loan on which was accruing compound interest.

It is unclear from the judgment the detriment which the wife asserted, however for the purpose of the appeal the Full Court found that the wife’s assertion of estoppel was not adequately addressed by the trial judge, and his failure to do so was an appealable error. Although the Full Court expressed reservations as to the merits of the wife’s argument it emphasized that it could not have been argued that “the equitable estoppel point was so lacking in merit that it was unworthy of his Honour’s consideration.”^[48]

A question which may arise is whether a trustee in bankruptcy is bound by an estoppel against the bankrupt personally. The property of the bankrupt does not include property held by the bankrupt upon trust for another person, but equitable interests generally are not specified.^[49] Despite the wording of the BA, the trustee is bound by the equitable obligations of the bankrupt.^[50] Arguably, an alleged promissory estoppel against a bankrupt should operate to bind the trustee, and by extension a trustee can also seek to raise an estoppel on behalf of the bankrupt.^[51] However, it would be difficult for the trustee to assert that the bankrupt “relied to his detriment” on the promise as it would require the cooperation of the bankrupt to give the right evidence, as well as divulge to the trustee the conversations and other evidence which give rise to the promise.

The trustee is at a disadvantage in that estoppel cannot oust the jurisdiction of the Court pursuant to Pt VIII of the FLA.^[52] Accordingly, the trustee cannot argue an estoppel on behalf of a bankrupt spouse to prevent the non-bankrupt spouse from seeking a Pt VIII order.^[53] But can the trustee argue that the non-bankrupt spouse is estopped from denying that a debt should be paid? It should be noted that in Bevan, the wife was able to rely on the husband’s representations made 18 years previously that she be able to keep all the property in Australia to prevent the making of a property division order. The husband signed a power of attorney to facilitate her doing this, however shortly prior to the expiration of the 12 month period after their divorce was final the husband issued property proceedings. In finding in favour of the wife, the Full Court relied on Stanford rather than a finding of estoppel, although the distinction was not completely clear.

Resulting trusts

A resulting trust arises:

• By operation of law where the acquisition and legal ownership of an asset do not reflect the contributions to the purchase price made by another.
• In the absence of evidence as to intention to the contrary and the operation of the presumption of advancement.
• It is presumed that the person providing the purchase monies did not intend the legal owner to take beneficial ownership. For example, where two people have contributed to the purchase price of an asset in unequal shares, it is presumed that a resulting trust is created in the proportions in which they contributed the purchase money.^[54]

The existence of a resulting trust may be displaced by the presumption of advancement, which arises in relationships where the person providing the purchase money is under an obligation to support the person who holds the legal title. Thus, for example, where a parent makes a contribution of funds to a child (including an adult child), in the absence of any evidence to the contrary, that contribution will be treated as a gift as opposed to a loan or acquisition of equity. In the context of a marriage, if a property is purchased by one spouse entirely but the other spouse is registered as the legal owner, it is presumed that the contributing spouse intended the other spouse to take the property beneficially. Accordingly, that spouse will hold both the legal and equitable interests in the property.

Both the presumption of a resulting trust and the presumption of advancement can be rebutted by evidence of the actual intention of the purchaser at the time of purchase. This is to be ascertained by “evidence of the acts and declarations before or at the time of purchase or so immediately after it as to constitute a part of the transaction.”^[55] In Vadisanis, this meant that evidence of loan agreements entered into, and conversations following the advance of funds, were of no assistance to the intervener seeking to rebut the presumption of advancement.

In Crafter and Ors & Crafter and Ors^[56] the Full Court of the Family Court considered the beneficial ownership of assets legally owned by the husband and wife, but where it was asserted by the husband’s family that they did so as trustees for other family members. Adding to the complexity was that the contentious assets had been purchased some 20 years prior. The Full Court upheld the trial judge’s refusal to give consideration to the existence of a resulting trust, as the purchase prices for the contentious assets were largely met from loans from unrelated parties. The fact that the husband’s mother advanced $10,000 after the date of settlement of the purchase did not establish the existence of a resulting trust as not only was it advanced following settlement, but it was also caught by the presumption of advancement.

In The Trustees of the Property of John Daniel Cummins v Cummins,^[57] the High Court considered the circumstances where a resulting trust arises in respect of a matrimonial relationship where one party is bankrupt, and in doing so gave significant weight to the rights of a trustee. The parties were not separated. The wife received an inheritance prior to the marriage which was at least partially used for the parties’ first property purchase. Later, the parties purchased vacant land as joint tenants. The bankrupt paid one-quarter of the purchase price and his wife paid the balance. They built a house on the land using joint funds and jointly borrowed funds. In 1987 the bankrupt transferred his half interest in the home to the wife. She paid stamp duty on the transfer but did not pay the monetary consideration stated on the transfer.

The bankrupt was a barrister who did not lodge tax returns for about 40 years. He became bankrupt in December 2000 owing tax of about $1 million. The bankrupt and his wife separated in 2002. The trustee sought to challenge the transfer of the husband’s interest in the property pursuant to s 121 BA. The wife argued that in the event that the transfer was void, she still beneficially owned a portion of the bankrupt’s legal interest by way of a resulting trust arising from her contributions to the purchase and construction costs. The trustee was successful before a single Judge of the Federal Court, unsuccessful before the Full Court of the Federal Court and successful in the High Court.

The High Court found that in a traditional marriage it is often “a purely accidental circumstance” whether money is contributed by a party to the purchase of the home or to living expenses. It concluded that in 1987 the wife’s beneficial interest in the home did not exceed her legal interest before the transfer. After the legal transfer, her beneficial interest remained at 50%. The trustee was, therefore, entitled to 50% of the equity in the home.

Cummins was a useful development for trustees. It enables trustees to seek to recover one-half of an asset owned solely by the non-bankrupt spouse, even where the trustee has no claim to the asset pursuant to the BA or on the basis of the existence of a constructive trust in favour of the bankrupt. It is perhaps even more important following Stanford, which emphasised that the existing legal and equitable interests of the parties are a starting point in the s 79 exercise.

However, as was demonstrated in Official Trustee in Bankruptcy & Brown,^[58] neither a trustee (nor a bankrupt spouse) can rely on an inference of joint beneficial ownership automatically arising. In Brown, the property was registered in the sole name of the non-bankrupt spouse. The trustee relied on Cummins to claim a 50% interest in the property on the basis of a resulting or constructive trust. Driver FM (as he then was) accepted the principle from Cummins that:

Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one-half interest in the property regardless of the amounts contributed by them.^[59]

However, he went on to distinguish Cummins, in that he did not accept that the parties had a “traditional matrimonial relationship”. Instead, he determined the interests of the parties, not under the FLA, but as a joint venture relying on such High Court cases as Baumgartner v Baumgartner,^[60] Muschinski v Dodds^[61] and, particularly the mathematical approach taken to contributions in Calverley v Green.^[62] The Court ordered that the wife receive 67% of the net proceeds of sale based on her equitable interest and that the trustee receive the balance.

Constructive trusts

A constructive trust arises by operation of law where, having regard to the circumstances of the case, it would be unconscionable for one party to rely, as against the other party, on legal title to property as representing the actual interests of the parties.^[63] In this sense, constructive trusts can be differentiated from resulting trusts as their formation is not dependent on the intentions of the legal owner of the property. They are also less restrictive in that the events that give rise to a constructive trust can arise after the acquisition of the asset.

In the context of a marriage, a constructive trust may arise, for example, where although a property is registered in joint names, one party has made overwhelming contributions to the property and there is nothing to suggest that party intended the other to benefit from this. As mentioned above, in Stanford, the wife may have been able to assert a beneficial interest in the husband’s home by way of a constructive trust, by virtue of her non-financial and homemaking contributions to the property.

In Sui Mei Huen v Official Receiver for Official Trustee in Bankruptcy,^[64] the husband and wife had acquired the matrimonial home as joint tenants. After separation, and approximately 2 years prior to the husband’s bankruptcy, the husband and wife signed an agreement providing for the wife to own 100% of the matrimonial home, although the title was not changed. The Full Court of the Federal Court gave effect to the agreement between the parties. The wife was successful in obtaining a declaration that the trustee’s half interest in the matrimonial property was held on constructive trust for her. In reaching this decision, the Full Court addressed the appropriate application of the Cummins principle, stating:

There is nothing in the joint reasons for judgment in [Cummins] to suggest that the presumed intention in favour of an equitable joint tenancy of the matrimonial home can never be displaced by an express or constructive agreement between the husband and the wife or by the enforceable creation by one of a trust in favour of the other of his or her presumed joint interests.^[65]

The Full Court found that the presumption of an equality of equitable interests was rebutted.

In Official Trustee in Bankruptcy v Lopatinsky^[66] the Full Court of the Federal Court found that the non-bankrupt wife had made a disproportionate share of the payments due under a mortgage which she and her husband had jointly given over property although the husband and wife “pooled” their incomes so as to enable mortgage instalments to be paid. The Full Court held that a constructive trust should be imposed to reflect the proportions to which each of the parties had contributed in excess of or below his or her 50% liability to discharge the mortgage debt. The wife had received 81% of the net proceeds of sale. The Full Court accepted that her entitlement was greater than 50% and remitted the matter back to the trial Judge to determine the extent of her equitable interest.

In Re Sabri; ex parte Brien^[67] the Family Court considered whether the trustee in bankruptcy took the husband’s interest in the property subject to the wife’s interests pursuant to a constructive trust. The husband and wife entered into consent orders in the Family Court providing for the husband to transfer his interest in the property to the wife in exchange for a payment of money. Two months later, the husband was made bankrupt, having committed an act of bankruptcy the year prior. Rather than seek to set aside the orders pursuant to s 79A, the trustee challenged the transfer of the husband’s legal title in the property to the wife. The trustee argued that the orders only permitted the husband to transfer his “right, title and interest” in the property, which at the time of transfer was subject to his pending bankruptcy pursuant to the act of bankruptcy he had already committed. In refusing to void the transfer, the Court found that the wife’s financial and non-financial contributions to the marriage gave rise to a constructive trust in favour of the wife prior to the claw-back or relation-back period. As to the date an interest in a constructive trust arose, Chisholm J stated:

it is open to a court, where justice and equity so require, to treat an interest arising under a constructive trust as dating from a time prior to the court proceedings.^[68]

In Draper v Official Trustee in Bankruptcy,^[69] the husband and wife held the property as joint proprietors, although both asserted that at all times the beneficial interest in the property was held by the wife (the non-bankrupt spouse) pursuant to a constructive trust. The trustee rejected this claim. The Full Court held that the Federal Magistrate, in finding in favour of the trustee, had ignored the fact that the mortgage repayments were paid solely from the wife’s salary. The matter was remitted for rehearing and an equitable accounting.

It should however be noted that, consistent with Cummins, the mere repayment of a mortgage debt does not, without more, give rise to a constructive trust. This was demonstrated in Holden v Santosa,^[70] the non-bankrupt spouse unsuccessfully argued the existence of a constructive trust with respect to the matrimonial home. Federal Magistrate Hartnett (as she then was) found that a constructive trust could not exist simply because the non-bankrupt spouse solely made the mortgage repayments and paid the costs of other outgoings.

Where a bankrupt spouse has contributed income toward the maintenance and/or mortgage of a property following bankruptcy, the trustee may be able to argue that a constructive trust ought to be applied in its favour, as in effect, the bankrupt’s contributions (which may have otherwise become part of the assets available for distribution among creditors) has created equity in the property, which equity is property which vests in the trustee.^[71]

Practical implications

Post-Stanford, the trustee and the non-bankrupt spouse have increased options. Practical matters the trustee or the non-bankrupt spouse can consider include:

1. Identify the existing legal and equitable interests as if the spouses were not married.
2. Can it be argued that it is just and equitable to alter these interests or that it is not just and equitable to do so?
3. Should a s 78 declaration be sought in preference to a s 79 order?
4. Is it better not to invoke the FLA jurisdiction at all?
5. Look at contributions and other matters under s 79(4) and s 75(2);
6. Check the timing when debts were incurred – pre or post-separation?
7. What are the nature of the debts and to what extent did the non-bankrupt spouse benefit from them?
8. What was the non-bankrupt spouse’s knowledge of them?
9. Is there a contractual basis for the alleged debts? If so, who is liable? For what? When? What documents establish them?
10. Do any equitable interests or remedies apply?
11. Should an application be made to set transactions aside under either the FLA or the BA. There are different requirements under each Act;^[72]
12. Assess the total debts (including the trustee’s fees and expenses) and the likely legal costs relative to the available property.

Conclusion

Stanford presents opportunities for trustees and non-bankrupt spouses to argue for a better outcome. A s 79 order may not be made as it may not be just and equitable to make one. Alternatively, it may be just and equitable to make an order which differs from the order which might have been made pre-Stanford. Where one party is bankrupt the importance of setting out the legal and equitable interests of the parties cannot be understated. Then, it must be determined whether it is just and equitable to make an order altering those interests under s 79(2). In the absence of a precise definition of “just and equitable” it is open for trustees to argue that where a non-bankrupt spouse has received benefits from the debts incurred by the bankrupt, it is just and equitable that they be paid. A non-bankrupt spouse may not be absolved of liability even if they did not know of the debts and could not be expected to have known. A non-bankrupt spouse’s interest may need to defer to a contractual liability to pay an unsecured creditor or the non-bankrupt spouse may be estopped from denying that the debt should be given priority. Looking at the precise nature of the debt and its purpose may be more important than before Stanford.

An examination of the legal and equitable interests of the parties, including trust claims by either spouse or the trustee and contractual obligations, may result in a different outcome than assessing contributions and s 75(2) factors under s 79 than occurred prior to Stanford. It is too early to say whether these increased opportunities will lead to increased successes by either trustees or non-bankrupt spouses. However, it is an opportunity for the Court to look at what priority should be given to the contractual or other claims of creditors as against the discretionary claims of a non-bankrupt spouse under s 79 and the discretionary nature of claims in equity by a non-bankrupt spouse or a trustee in bankruptcy.

Jacky Campbell, February 2015

When family law meets bankruptcy

Background

Before 2005 trustees and non-bankrupt spouses were often engaged in races to commence or complete litigation in different courts. The Bankruptcy and Family Law Legislation Amendment Act 2005 (“the 2005 Act”) applies to bankruptcies for which the date of bankruptcy was on or after 18 September 2005. The solution was ostensibly simple, that all disputes be decided by the Family Court, but the 2005 Act did not give clear direction to the Courts as to how to resolve disputes. There are now sufficient cases to give clearer, but not definitive, advice as to possible outcomes.

The position has been complicated more recently by the High Court decision of Stanford v Stanford (2012) FLC 93-518. When applied to cases where trustees in bankruptcy and non-bankrupt spouses are parties to property proceedings under s 79 Family Law Act (“FLA”), Stanford reminds legal practitioners that there are other avenues for the parties, rather than simply relying on establishing contributions and s 75(2) factors as part of a s 79 claim. The existing legal and equitable interests of the parties must be identified before they can be altered. If the Family Law Courts start to give greater emphasis to legal and equitable interests than it generally has done in the past, this could change the landscape for both trustees and non-bankrupt spouses. Also, considering “just and equitable” as a preliminary matter, arguably gives more opportunities for trustees in bankruptcy to try to retain or to recover property of the parties to the marriage to pay debts owed by the bankrupt.

Since the judgment in Stanford was handed down, the courts and lawyers have had to re-consider whether the “four steps” commonly used in the past to implement s 79 still apply, and whether “notional” property or add-backs can be considered. This process is continuing and it may be some time before there is clarity. An issue which has received less attention is unsecured liabilities. They are relevant to the parties’ financial circumstances, not only where one party is bankrupt, but to most relationships. Credit card debts, loans from family members and unsecured trade and personal debts are common. Post Stanford, it is relevant whether unsecured liabilities are legal or equitable interests which can be altered under s 79.

Most de facto couples who separated after 1 March 2009 are now covered by the FLA, subject to jurisdictional hurdles such as the length of cohabitation and the place of cohabitation. In this paper, the sections of the FLA which apply to de facto couples are not stated. There are usually, but not always, equivalent sections in the FLA.

Brief overview of bankruptcy

Upon bankruptcy, the bankrupt’s property vests in the trustee in bankruptcy under s 58 Bankruptcy Act 1966 (“BA”). The exceptions are property which is exempt under s 116 BA. The most important of these are:

• superannuation although payments into superannuation made to defeat creditors can be clawed back under s 128B or 128C BA;
• most household goods (s 116(2)(d));
• motor vehicle with equity of up to $7,500;
• tools of trade worth up to $3,650;
• property held by the bankrupt on trust;
• property transferred under a maintenance order (s 123(6) FLA);
• property dealt with in orders under Pt VIII or Pt VIIIAB FLA.

The bankruptcy may be considered to have commenced before the date of bankruptcy – perhaps 6 months or more. The property in the bankrupt estate may be expanded by:

• transfers of property (made prior to the bankruptcy by a spouse who is later bankrupted) to a non-bankrupt spouse, may be property of the bankrupt (and therefore part of the bankrupt estate) under s 58(1) if made after the date of bankruptcy;
• transfers of property (including pursuant to court orders or financial agreements) may be set aside under the claw-back provisions, particularly:
  • s 120(1) – transfers by the bankrupt are void against the trustee if within 5 years of the start of the bankruptcy and there was no consideration or it was less than the market value of the transfer;
  • s 120(3) – transfers are not void against the trustee if they occurred more than 2 years before the start of the bankruptcy and the transferee proves that at the time of the transfer, the transferor was solvent;
  • s 120(5) – transfers relying on a family relationship, marriage or de facto relationship, promise to marry or partner and love or affection as consideration are excluded as market value consideration;
  • s 121 – transfers are void if the main purpose was to defeat creditors (s 121(1)(b)). The main purpose is taken to be the purpose in s 121(1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become insolvent (s 121(2));
  • s 122(1) – a transfer of property by a person who is insolvent (the debtor), in favour of a creditor, is void against the trustee in the debtor’s bankruptcy if the transfer:

–               had the effect of giving the creditor a preference, priority or advantage over other creditors; and

–               was made within a certain period, usually 6 months before the bankruptcy commenced

• • s 128B and 128C – superannuation contributions made on or after 28 July 2006 may be clawed back if the contributions were intended to defeat creditors.

Exemption of trust property

In cases involving a bankrupt party there are often arguments about whether property is held on trust and is therefore exempt property. An example of such a case is Oliver v Malanos [2011] FCA 1354, where the Federal Court upheld an appeal by the former husband of the bankrupt from a decision of the Federal Circuit Court. The respondent was the trustee of the wife’s bankrupt estate. The parties were in dispute over a bank account in the joint names of the parties of approximately $400,000. The trustee contended that about $200,000 was property of the bankrupt which vested in the trustee at the commencement of the bankruptcy. The husband argued that all of the funds were held in trust for the benefit of the children of the marriage.

The Family Court had made consent orders in 2008 for the sale of the former matrimonial home and the division of the proceeds of that sale between Mr Oliver and Ms Fung. Importantly, orders 5 and 6 were:

5. Following completion of the sale of the property, each of the parties shall deposit into a fund to be created the sum of $200,000 for the payment of all education expenses including tertiary school fees for the children of the marriage…

6. The fund for the education of the children referred to in order 5 shall be in the name of the Husband and shall be managed and administered by him, subject to the Wife’s right to receive accounts for the fund upon request from time to time.

Ms Fung became bankrupt in 2009. Mr Oliver sought a declaration in the Federal Circuit Court that certain funds were held on trust for the education expenses of the children pursuant to the Family Court orders. This was opposed by the trustee who, consistently with a demand issued under s 129(4A) BA, asserted that approximately half the funds in the bank account were beneficially owned by Ms Fung at the time she became bankrupt and hence vested in the trustee. Mr Oliver said that he and Ms Fung exhibited an intention that the $400,000 left in the joint bank account be held on trust in favour of their children. Further, or in the alternative, Mr Oliver argued that the effect of the orders was to alter the parties’ property interests so as to vest legal title to $200,000 for the purposes of the trust. He disputed the trustee’s argument that he and Ms Fung had failed to comply with order 6 by not establishing a separate account to hold the moneys to be applied for the benefit of the children.

The trustee argued that the consent orders did not express an intention that the fund to be created for the children was a trust fund and that the joint account did not meet the description envisaged for the fund to be established under the Family Court orders. The joint account was used for a number of purposes unrelated to the education of the children.

The Federal Circuit Court held that order 5 created an enforceable liability at an uncertain time following completion of the sale of the former matrimonial home, for Mr Oliver and Ms Fung to pay $200,000 from the proceeds of that sale into a fund for the benefit of their children. The order was imperfect in that the obligation to pay did not arise until after the completion of the sale of the property and the obligation to pay did not arise within any particular time after that completion. The orders did not expressly create a trust and, until the fund was created, it was hard to see how there could be one.

The Federal Court upheld the appeal primarily on the grounds that the vesting provisions in the BA were subject to orders under s 79 FLA and that a trust had been validly created.

Overview of the 2005 Amendments

The 2005 Act gave the Family Court power to make s 79 FLA orders about property which has vested in a trustee in bankruptcy. The court can order that property, otherwise available for distribution to creditors, be transferred to the non-bankrupt spouse.

The general rule under the BA that property vests in the trustee at the date of bankruptcy (s 58 BA) is subject to property settlement and spousal maintenance orders (s 59A BA). Section 116(2)(q) BA provides that property of the bankrupt is exempt if, under a Pt VIII FLA order, the trustee is required to transfer that property to the spouse of the bankrupt. Section 116(2)(r) refers to orders under Pt VIIIAB FLA.

The 2005 Act is often seen as disadvantageous to trustees. A trustee cannot institute s 79 proceedings against a non-bankrupt spouse as a means of trying to enlarge the assets in the bankrupt estate available for creditors whereas a non-bankrupt spouse can bring a s 79 application to try to increase their entitlements by claiming against property which has vested in the trustee. Therefore, unless the non-bankrupt spouse issues FLA proceedings or FLA proceedings have already commenced at the time of the bankruptcy, a trustee trying to increase the property available to the creditors is left only with the option of a claw-back under s120, 121 or 122 of the BA or trying to claim an equitable interest in the non-bankrupt spouse’s property. If, however, the non-bankrupt spouse institutes FLA proceedings, the trustee can try to argue that some of the bankrupt’s debts should be paid from property of the non-bankrupt spouse or seek that a transaction be set aside under s 106B FLA, which may be easier to achieve than under the BA.

The prospects of the non-bankrupt spouse being successful in claiming property which has vested in the trustee is increased by the ability of the non-bankrupt spouse to argue for an adjustment under s 75(2). The only factor among the 19 factors listed in s 75(2) which is of any relevance to the trustee is s 75(2)(ha), which refers to the effect of any proposed order or the ability of a creditor of a party to recover the creditor’s debt. The other factors favour the non-bankrupt spouse. Prior to Stanford, the trustee only rarely improved its position under the FLA and often went backwards (eg. West & West [2007] FMCAfam 681; Malta & Malta (No 3) [2008] FamCA 748. But cf Reua & Reua [2008] FamCA 1038).

Another problem for the trustee is whether the bankrupt is willing to co-operate with the trustee. The bankrupt’s evidence can be essential to maximise the assessment of contributions in favour of the bankrupt (and therefore the trustee) and minimise the assessment of s 75(2) factors in favour of the non-bankrupt spouse. The bankrupt may be totally unco-operative. Alternatively, the bankrupt may be very co-operative, perhaps motivated by vengefulness or by a desire to achieve an annulment of their bankruptcy.

Many of the reported cases involve debts the total of which are much greater than the gross property pool, so there is no prospect of them all being paid in full and no opportunity for the bankrupt to achieve an annulment (e.g. Johnson & Johnson [1999] FamCA 369; Trustee of the Property of G Lemnos & Lemnos (2009) FLC 93-394; Commissioner of Taxation and Worsnop (2009) FLC 93-392). An interesting but unresolved question is whether the overwhelming size of the liabilities relative to the value of the gross property pool does, or should, influence the court in determining whether it is just and equitable to make an order and if so, what order.

The “just and equitable” requirement and intact relationships

The High Court majority in Stanford considered that the just and equitable requirement of s 79(2) is “readily satisfied” if the parties are, as the result of a choice made by one or both of the parties, no longer living in a marital relationship.

By contrast, an involuntary separation as occurred in Stanford, is not enough of itself for it to be just and equitable to make a s 79 order. The High Court said it is possible for a court to be satisfied that it is just and equitable to make a s 79 order if the parties are involuntarily separated. Whether the courts may determine that it is just and equitable to make an order, where one of the parties is bankrupt but the parties are not separated, is as yet unclear. This issue does not arise in de facto relationships as a breakdown of the relationship is expressly required before jurisdiction can be exercised under the FLA.

Creditors and trustees in bankruptcy may be concerned about parties in intact marriages obtaining court orders to the detriment of creditors and trustees. The requirement that it is just and equitable to make an order is probably more difficult to satisfy in intact marriages as they still have the “common use of the property” (at paras 42 and 44 of Stanford). Pre Stanford cases dealing with this question include McManus & McManus, Dessau J, unreported, 21 March 1997; Neale & Neale (1991) FLC 92-242; Jennings v Jennings (1997) FLC 92-773; Sterling & Sterling [2000] FamCA 1150; Conti & Conti [2008] FMCA 1156; Stanley & Stanley (No 2) [2009] FamCA 432 and Polik & Polik [2012] FamCA 335.

In a pre-Stanford decision, the court refused to make s 79 orders in intact marriages in McCormack & McCormack and Peakes & Peakes [2009] FMCAfam 1250. Two wives and their husbands’ trustees in bankruptcy sought orders for the transfer of half-interests of properties to the wives from their husbands’ trustees in bankruptcy. The aim was apparently to avoid paying stamp duty on the transfers. The wives were not separated from their husbands and the court refused to make the orders sought. The Court refused to make the orders on jurisdictional grounds which may no longer be valid following Stanford. However, the court could also have refused because the orders were sought for an improper purpose, being to avoid payment of stamp duty on a land transfer. Orders which have the effect of avoiding liability to a revenue authority may be orders which are not just and equitable to make in an intact marriage (eg. Redman & Redman [2012] FamCA 364).

Unsecured debts

For the purposes of s 79, a distinction is not often made between creditors with judgment debts and those without. The position of unsecured creditors has not been considered in depth post-Stanford. If the debts of creditors without judgments are taken into account in determining the net pool of interests available for alteration by the Court between the parties under s 79, a creditor which may be unable to substantiate its claim, may receive priority over the legitimate interests of a party to the marriage under s 79. However, if those creditors are ignored, the legitimate debts owed to third parties may not be paid at all. Is that just and equitable or appropriate? The priority given to unsecured liabilities (if any) in family law proceedings becomes more important if one party is bankrupt.

A “debt” is defined under the BA to include a “liability”. In the distribution of a bankrupt estate, a creditor lodging a proof of debt is not required to have judgment against the bankrupt. Provided the claim is admitted by the trustee, the debt will be paid pari passu (in proportion) with other debts if there is property to distribute. Creditors with or without judgment debts rank equally (Subject to certain exceptions in s 108, 109 and 109A BA). In fact, a creditor cannot obtain judgment after bankruptcy s 58(3) BA.

Debts provable in bankruptcy are defined widely under s 82(1) of the BA as:

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 his discharge by reason of an obligation incurred before the date of the bankruptcy are provable in his or her bankruptcy.

The bankrupt may have obligations under the BA to creditors, including possibly making contributions from income. However, the debts merely give the creditors the right to prove in the bankrupt estate (Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at para 4 per Gibbs CJ, Murphy, Brennan and Dawson JJ) and the creditors can no longer pursue payment from the bankrupt directly.

A bankrupt is not released from all provable debts. A bankrupt is still liable, for example, for debts incurred by fraud, such as some Centrelink debts, and debts incurred under a maintenance order or child support assessment (s 153(2)). Debts which are not provable debts include debts incurred after the date of bankruptcy and HELP debts under the Higher Education Support Act 2003 (Cth) (s 82). An order under s 79 FLA, unlike a maintenance order, which is a provable debt (e.g. Langer & Griffin [2013] FamCAFC 170) and cannot be enforced by the non-bankrupt spouse without leave under s 58(3) BA.

In contrast to the BA, neither “debt” nor “liability” are defined in the FLA. A debt does not fall easily within the definition of “matrimonial cause” in s 4(1) of the FLA which talks about “property”. The problem of the absence of any reference to debts and liabilities in the matrimonial causes is exacerbated by the extended definition of “matrimonial cause” in s 90AD. For the purposes of Pt VIIIAA (and by implication, for no other purposes) a debt owed by a party to a marriage is treated as property under para (ca) of the definition of matrimonial cause in s 4 and in s 114(1)(e).

The Full Court in Biltoft & Biltoft (1995) FLC 92-614 set out the general practice prior to Stanford of dealing with liabilities, which has largely continued post-Stanford (at p82,124):

A general practice has developed over the years that, in…applications pursuant to…s 79, the Court ascertains the value of the property of the parties to a marriage by deducting from the value of their assets the value of their total liabilities…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…

The Full Court stated with respect to the rights of unsecured creditors as against a spouse (at p 82,127-8):

Notwithstanding the general practice which has developed, the Court has indicated that it may properly determine not to take into account or to discount the value of an unsecured liability in certain circumstances. Such liabilities would include, but are not limited to a liability which is vague or uncertain, if it is unlikely to be enforced or if it was unreasonably incurred …Thus, although there is a general rule. .., the rule is not absolute, 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 s 79, 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.

The pre-Stanford practice was to list “property of the parties” and “financial resources”. The requirement post-Stanford is to list all legal and equitable interests and this seems broader. But is an unsecured liability a legal or equitable interest? At first, glance, “equitable interests” includes constructive trusts, resulting trusts and estoppel interests. “Legal interests” may be narrowly defined as legal entitlements to property, but a broader view may encompass, for example, the parties’ contractual and tortious rights and liabilities, including unsecured liabilities.

An “interest” is defined in Osborn’s Concise Legal Dictionary as:

A person is said to have an interest in a thing when he has rights, titles, advantages, duties, liabilities connected with it, whether present or future, ascertained or potential, provided they are not too remote.

That dictionary defines an equitable interest as a right recognised and enforceable only according to the rules of equity. It talks about rights in personam and in rem. In the Lexis-Nexis Encyclopaedic Australian Legal Dictionary an “equitable interest” is defined more narrowly as:

An interest in property enforced and created by equity in the situation where it would have been unconscionable for the legal owner of the property to retain the benefit of the property.

It goes on to define a “legal interest” as:

The legal, as opposed to beneficial, interest in property. Under the system of common law and equity, the legal title in property can be separated from its beneficial interest.

Lexis-Nexis says, in contrast to Osborn, that a “legal interest” is a right in rem (i.e. it is enforceable against anyone), while an equitable interest confers only a right in personam.

An “interest” is a “thing” (using Osborn’s definition) which seems a broad enough concept to suggest that it can be a liability. Bevan & Bevan (2013) FLC 93-545 was the first Full Court case to consider the nature of unsecured liabilities after Stanford. The Full Court in Bevan took a narrow approach, but in the later case of Layton & Layton [2014] FamCAFC 126 the Full Court seemed to look at interests broadly.

Justice Finn put the problem in these terms in Bevan & Bevan (at 160):

These reminders that the jurisdiction under s 79 is a jurisdiction to alter individual interests in title to property and that there is no community of property in this country, might also call into some question the current practices in relation to the treatment of property which is no longer in existence but which one party has had the use of (the so called “addbacks”), and perhaps also of the unsecured liabilities of one or both parties. It may well be that these matters should more strictly be considered in making findings under s 79(4)(e) (i.e. s 75(2)), or in an extreme case, when considering the question under s 79(2) as to whether it is just and equitable to make any order under s 79. But these questions do not arise in the present case, and are thus for another day.

In Layton, the Full Court, in a bench which included Finn J, looked at the issue of unsecured liabilities. The husband appealed against the trial Judge’s refusal to “add-back” to the pool a joint loan of $50,000 taken out by the parties to meet the legal costs of the wife’s son in criminal proceedings. The husband argued that it was agreed that the wife would be solely liable for the debt and the wife conceded that she arranged to have the loan statements sent to her sister’s address.

The Full Court considered that there was substance in the husband’s complaint that the trial Judge’s reasoning was inadequate as to why she ignored the fact that the wife had apparently had the sole use of the funds. The trial Judge’s findings as to the purpose of the loan suggested that the wife should be responsible for the loan. The Full Court said (at para 38):

It may well be, of course, that in light of certain of the observations made by members of the Full Court in their judgments in Bevan & Bevan … (which were delivered subsequently to her Honour’s decision in this case and to the hearing of this appeal), that it would not have been appropriate for her Honour to treat the loan funds in question as “notional property” to be added back to, or included in, the property available for distribution between the parties. But however that may be, it would seem on the basis of the evidence to which we were taken, and have earlier recorded, that justice and equity would require that the wife’s use of these loan funds should have been taken into account in some way in favour of the husband either as a contribution by him or as a matter under s 75(2)(o) of the Act. It might even have been open to a court on a proper analysis of the evidence, to have concluded that the sum of $50,000 representing the loan funds was a debt which the wife owed to the husband and which should have been repaid out of the net proceeds of the sale of the matrimonial home.

The Full Court seemed to take a broad view of the definition of legal and equitable interests so as to encompass the possibility that there may be a contract between the parties as to the payment of a debt. In practical terms, this may mean that if parties have agreed that both parties will use a credit card of which one party is the primary card holder or incur an electricity or telephone debt in the sole name of one of the parties, that their agreement that the debt will be paid from the incomes and/or property of both parties is enforceable.

In Stone & Elliott [2014] FCCA 181 the husband argued before Neville J that the “pool” should be identified at the so-called “first step” and his debts (personal loan and crystallised tax bill) that related to a period during the relationship and after it ceased but when he was still making mortgage payments, should be given priority in payment from the net proceeds of sale of a real property. Neville J noted that no legal (or any other) reason was given as to why priority should be given to the payment of the unsecured debts.

The husband opposed funds being repaid to the second respondent (the wife’s mother). Neville J found that a contract existed between the second respondent and the parties. He also found for the second respondent on the basis of estoppel. For example, the husband acknowledged the regular repayments made to the second respondent over some time.

After referring to Bevan and Biltoft, Neville J said (at para 115):

None of the qualifications to which the Full Court referred is evident on the facts here. Indeed the contrary is true: the liability is not vague or uncertain; and the second respondent has taken formal steps (in these proceedings) to recover it.

The second respondent’s debt was given priority for payment whereas the other debts of the parties were taken into account in determining the property pool.

In Devopoulos & Devopoulos [2014] FamCA 224 Loughnan J rejected the argument that the husband’s tax debt was vague and uncertain. The quantum of the debt was set out in a Statement of Claim in the Supreme Court of New South Wales as $789,506.61 as at February 2012. As at 17 December 2012 the debt stood at $923,433.46 according to the ATO Portal. Although Loughnan J was satisfied that the debt was owed to the ATO, he did not include it in the balance sheet setting out the net pool of assets for division between the parties.

Loughnan J listed it as a debt solely of the husband because:

• no meaningful explanation was provided for the husband’s failure to lodge tax returns, pay his tax or keep the wife advised about the potential liability;
• the principal debt had been paid and the balance seemed to be penalties and interest;
• the wife had agreed to pay almost $300,000 of joint funds to discharge the main debt;
• the ATO did not object to the approach proposed by the wife.

Jarrett J in Simon & Simon [2013] FCCA 432 was dealing with net equity in a home of $185,000. The wife had a personal loan of $7,000. The husband had unsecured creditors of $76,600. The wife had superannuation of about $11,000 and the husband had about $32,000.

There was sufficient equity in the real property to pay the husband’s unsecured creditors in full. The husband said that the debts were mainly incurred by him for family purposes. In those circumstances, if the husband was not bankrupt, Jarrett J said that they would have been paid from the gross pool and the rest of the net assets divided between the parties.

Jarrett J considered that it was arguable (at para 70):

…that given the circumstances, the Court would be justified in approaching the case on the basis that the pool of assets for division is the net pool after payment of the first respondent’s unsecured creditors. Given the surplus that would exist if the matter was not complicated by the bankruptcy, the debts due to the unsecured creditors would be accounted for in the process undertaken by the Court.

However, the matter was not argued in that way and Jarrett J did not consider it further. He assessed the parties’ contributions as equal. There was evidence from the husband’s father that the $150,000 interest free loan was intended to benefit both parties, so it was not caught by the Kessey & Kessey (1994) FLC 92-495 and Gosper & Gosper (1987) FLC 91-818 line of authority. A 15% adjustment under s 75(2) was made primarily because the wife had the care of a 15 year old child and received minimum child support. The adjustment would have been larger but the unsecured creditors were a factor against the wife under s 75(2)(ha).

An example of a case where the Court refused to deduct a liability from the property pool to be divided between the parties is Hagan & Gerald [2013] FamCA 714. The parties had been separated for five years. The husband asserted that he had been unable to pay his tax as it fell due for three financial years since separation. He owed about $40,000 and submitted that the debt had arisen because of the amounts spent by him for the benefit of the wife and the children including money paid by him when the children were in his care.

The Court found that the husband failed to demonstrate that he had been unable to pay his tax. For example, in the 2012 financial year the family trust had received $596,584 and he paid $146,682 of this for the benefit of the wife and the children. He was left with $449,902 in that year to pay his income tax and living expenses. As in other years, he had chosen to spend his income and not pay his tax. In these circumstances it was not just and equitable to treat the husband’s tax as a joint liability.

The Full Court of the Family Court in Puddy & Grossvard (2010) FLC 93-432 was clear that both s 79(10)(a) and s 75(2)(ha) refer to debts which are uncontroversial. Coleman J said (at para 61):

However, I am not convinced that the combination of these sections provides a jurisdictional basis for entertaining the liquidator’s claim. These provisions enable a creditor to intervene in proceedings in the circumstances referred to in s 79(10)(a), and oblige the court in such circumstances to have regard to the matter identified in s 75(2)(ha). There is a material distinction between being a “creditor” and asserting an indebtedness which is disputed. A jurisdictional basis other than s 79 thus needs to be enlivened in order for the court to entertain disputed debt claims.

Warnick and Boland JJ said at (paras 102-3):

We agree with Coleman J that there is power within the terms of the Family Law Act 1975 (Cth) (“the Act”) to make an order that a party to a marriage pay an amount to a creditor, whether that creditor is a party or not. However, we doubt that, leaving aside the accrued jurisdiction, there is power to bind a creditor, even if party to the property settlement proceedings, to accept, in satisfaction of a debt, less than the full amount, or to determine the merits and/or quantum of a creditor’s claim.

In short, in our view, the principles enunciated in Biltoft & Biltoft (1995) FLC 92-614 and the terms of s 79(10) and s 75(2)(ha) of the Act are directed to the questions of the right to, and the prospect of, recovery by creditors of their debts, not to the proof of those debts, against one or other or both of the parties to the marriage, where liability is in issue.

The liquidator relied on accrued jurisdiction. It raised, but did not pursue using Pt VIIIAA as a possible source of jurisdiction.

In the past, the Family Court was particularly concerned to ensure that revenue authorities, such as the Australian Taxation Office and State Revenue Offices, were paid (eg. Chemaisse and Chemaisse (1988) FLC 91-915). Priority was often given to tax debts over the non-bankrupt spouse and other unsecured creditors (Hannah & Hannah; Tozer & Tozer (1989) FLC 92-052). However, Coleman J in Lemnos & Lemnos (2009) FLC 93-394 considered that the Australian Taxation Office no longer had priority over other creditors due to the Insolvency (Tax Priorities) Legislation Amendment Act 1993. Among other amendments, s 123(5) BA was deleted. This section protected payments of tax. The trial Judge, Le Poer Trench J, for different reasons, agreed. He said (cited at para 127 of the Full Court’s judgment):

I have some concern with the outcome of this case insofar 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.

Section 75(2)(ha) FLA

The 2005 Act added s 75(2)(ha) to the FLA, requiring 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.” However, the interests of creditors are only one factor amongst many to be considered under s 75(2). The interests of creditors are not given more or less weight than other factors under this section.

In Lasic & Lasic [2007] FamCA 1188 the husband’s trustee in bankruptcy sought to set aside consent orders made between the husband and the wife. Under the orders the husband’s interests in 6 jointly owned pieces of real estate were transferred to the wife. The wife conceded that the inference was open that the consent orders had been entered into to avoid the payment of a possible damages award against the husband, such that the making of the orders was a miscarriage of justice. The trial Judge relied on s 75(2)(ha) and required the wife to pay $319,081 to Mr M, a creditor, who had sustained serious injuries as a result of being shot due to the negligence of the husband and the parties’ son.

On appeal, in Trustee for the bankrupt estate of Lasic & Lasic (2009) FLC 93-402, the Full Court understood the trial Judge’s concern that if the husband’s entitlement was paid to the trustee, Mr M would receive nothing. Reluctantly, the Full Court concluded that ordering a direct payment by the wife to Mr M was not within the trial Judge’s power.

In Orchard & Orchard [2008] FamCA 979, Dessau J acceded to the submissions by the husband’s trustee about s 75(2)(ha) that she should consider it relevant that the husband’s superannuation was exempt under s 116(2)(d)(iii) BA. The trustee wanted the wife to receive a superannuation split and Dessau J ordered one. She said (at paras 93-4):

The effect of the order is that the wife shall not receive further assets immediately. She has received some, but I am conscious that the balance of her share of the settlement will be in superannuation that she cannot yet access (she is 48 years old). However, she is housed and financially secure with Mr W. She moves into the future secure, and this gives her own financial resource.

The effect of the order is the opportunity for the husband’s creditors to be satisfied, as he shall retain the non-exempt asset.

The Full Court in [2009] FamCAFC 90 dismissed the wife’s appeal.

In Malta and Malta (No 3) [2008] FamCA 748 Cronin J refused to take superannuation only into account as a s 75(2) factor as the parties submitted. The wife’s petitioning creditor was a party to the proceedings as the bankruptcy petition had been transferred to the Family Court. Cronin J discussed s 75(2)(ha) and refused to make an adjustment under s 75(2), saying (at paras 112 and 117):

I have contemplated the problem set out in s 75(2)(ha) relating to the orders I make in relation to creditors. In relation to the wife, it would clearly seem that there is nowhere near enough in the entitlement of the wife to enable her to satisfy all of her creditors. On the other hand, I have been told that the husband has a debt to the Australian Taxation Office of something in the vicinity of $2 million and there is no prospect that he will be able to pay that. Whether anybody bothers to enforce that debt is a matter beyond my control…

One of the difficult issues in this case having regard to the bankruptcy jurisdiction that I am being asked to exercise is the fact that any order I make in favour of the wife may very well end up in the hands of a very few people particularly having regard to the costs of the petitioning creditor. As such, to make an adjustment of a modest sum in favour of the wife in this case would have little, if any, value for the wife. Her sum on all of the evidence I have seen, will end up in the hands of the creditors. Even so, there is little between the parties of difference when I balance up all of those factors. In my view, there is no basis for an adjustment under s 75(2) of the Act in this case.

In Pippos & Pippos [2008] FamCA 542, debts incurred by the husband post-separation led to the husband’s bankruptcy. Burr J gave the wife 5% on account of s 75(2) factors. He said he would have given her 10%, but the factors in her favour were partially balanced by those which favoured the trustee in bankruptcy under s 75(2)(ha) and (n) and the regard he must have to the husband’s creditors’ ability to recover their debts. He did not seem to consider it relevant that the debts were incurred post-separation.

In West & West [2007] FMCAfam 681 there was no evidence by the husband of any contributions by him to the purchase of the former matrimonial home. The court was satisfied that the wife had made the majority of the contributions to the party’s property and that the property (including superannuation) ought be divided 85%/15% in favour of the wife. In relation to contributions and s 75(2) factors the trustee was severely hampered by the absence of evidence on behalf of the husband.

The Federal Magistrate considered it relevant under s 75(2)(ha) that the creditors were unlikely to receive a dividend from any monies which the court ordered the trustees be entitled to receive out of the matrimonial property. He agreed with the submissions on behalf of the wife and said (at para 111):

It would be perverse if the wife and children were “forced from their home” and the operation of those relevant provisions of that legislation in relation to “the Trustees’ costs” meant RACV Finance would remain out of pocket.

In Commissioner of Taxation & Worsnop (2009) FLC 93-392 the Commissioner of Taxation appealed against an order that the former matrimonial home be sold and the net proceeds be divided equally between the wife and the Commissioner. The only substantial asset was the home worth $4.75 million. The husband had transferred his interest in the home (then worth $1.5 million) to the wife for only $1.00 about 5 or 6 years prior to separation, at around the time the husband changed his business activities. There was conflicting evidence as to the wife’s knowledge of the husband’s tax avoidance but the trial Judge accepted that the wife did not know and it could not be said that she ought to have known. The tax debt was by then about $13 million. The trial Judge made no adjustment in favour of the wife for s 75(2) factors although she had the primary care of 4 children aged between 1¾ and 13 years and this affected her earning capacity. Her s 75(2) factors were off-set against the husband’s indebtedness to the ATO as a factor in the Commissioner’s favour under s 75(2)(ha).

In balancing the competing claims of the wife against the Commissioner, the Full Court found that the trial Judge clearly appreciated the critical features of the exercise, and said (at para 86):

In our view, the Commissioner of Taxation is in a position distinguishable from that of a commercial creditor. Commercial creditors have a choice about to whom they extend credit. On the other hand, the position of the Commissioner as a creditor of taxpayers is of a completely different origin. The onus is on taxpayers to make full and proper disclosure to the Commissioner of Taxation. The Commissioner does not extend credit at all, but becomes a creditor by virtue of the conduct of the affairs of the taxpayer. As seen, Rose J gave “…much weight to the fact that the outstanding tax indebtedness of the husband is a debt to the Crown and implicitly there is a public interest issue”, though he also recognised that the Commissioner had no priority over the wife’s claims.

The Full Court of the Family Court upheld the 50/50 split of the net pool. Although the wife had benefited from the husband’s avoidance of tax, neither the trial Judge nor the Full Court completely absolved her from responsibility for the debt.

In the light of Stanford, was the order that the Commissioner only receive 50% of the net proceeds of sale just and equitable? If the court had determined the parties’ legal and equitable interests in the property first, would it have found that the wife was not entitled to retain a half-interest in the home? Was the finding that the wife lacked knowledge of the debt sufficient to deny the Commissioner’s right to be paid when the wife had benefited from the non-payment of tax?

In Trustee of the Property of G Lemnos & Lemnos (2009) FLC 93-394 the husband’s trustee successfully appealed against property orders which required that the former matrimonial home, which had vested in the trustee, be sold and the net proceeds divided equally between the trustee and the wife. The husband was re-assessed for income tax for the period 1991-2002. A sequestration order was made against him in 2006 and the parties separated in July 2007.  The trial Judge found that the wife had contributed directly to the matrimonial home through her income (from distributions received by her from the family trust which received income from the husband’s legal practice) and by signing a guarantee. Contributions were assessed as equal at the date of the trial. The equity in the home was about $2-2.5 million and the husband’s bankrupt estate had debts of about $6 million.

The Full Court of the Family Court held that the interests of unsecured creditors did not automatically prevail over the interests of the non-bankrupt spouse, and their competing claims must be balanced in the exercise of the wide discretion conferred by s 79. The wife argued that the husband wasted assets by acting recklessly and negligently in completing his tax returns, an act wholly within his knowledge. For twelve years he claimed outgoings on a property which was usually his primary residence. The majority found that the husband’s conduct was not within the exceptions to the waste principle in Kowaliw (1981) FLC 91-092 as it was not designed to diminish the value of the matrimonial assets, but to increase them. The wife received the benefit of the funds which flowed from the husband’s conduct, and it was neither just nor equitable for her to escape all responsibility for payment of the primary tax.

The majority in Lemnos followed the Full Court of the Family Court in Johnson & Johnson [1999] FamCA 369. The report of Johnson in Austlii is incomplete. Quoting from Johnson the Full Court said in Lemnos (at para 244) “unless there were compelling circumstances to the contrary, a just outcome demanded that the wife take the good with the bad” and that unless “the husband was on a frolic of his own and acting contrary to the wife’s express wishes” there was no reason for the trial Judge to leave the husband with the burden of the tax penalties.

The majority in Lemnos allowed the appeal because of the trial Judge’s treatment of the primary tax burden as “waste.” The minority allowed the appeal because of the way the trial Judge applied s 75(2)(ha). By ordering that the wife receive 50% of the equity in the home, the trial Judge gave priority to the wife over the unsecured creditors. The unsecured creditors were owed approximately $6 million. They received the same dollar amount as the wife, or about 20% of their claims. In finding that the husband should satisfy the tax debt from his resources, the majority said that the trial Judge had already decided the issue which s 75(2)(ha) directed him to consider (the effect of any proposed order or the ability of a creditor to recover the creditor’s debt) under step 3 of the four step process.

The majority in Lemnos, unlike in Johnson, accepted that the husband was “on a frolic of his own” but did not accept that the wife’s lack of knowledge or complicity in the husband’s wrongful deductions determined whether she should share responsibility for the payment of primary taxation on his income during the marriage. The statement in Johnson, that spouses should generally “take the good with the bad,” had even more force when applied to allocating responsibility for primary taxation, rather than tax penalties. Both the trial Judge and the Full Court considered that the wife in Lemnos should share some responsibility for the primary tax.

Following Stanford, was it just and equitable for any order to be made that allowed the wife to be able to claim against the home which had solely vested in the trustee upon the husband’s bankruptcy?

A case in which the trustee improved its position was Reua & Reua [2008] FamCA 1038. Before the trial commenced, the trustee and the wife each held property of about $320,000. The husband’s unsecured creditors were owed $233,860 and contingent unsecured creditors claimed about $850,000.   The wife sought to retain all the assets vested in the trustee. The husband sought an equal division of non-vested property between himself and the wife, and that the trustee pay unsecured creditors from the trustee’s share. The trustee sought that the wife and the trustee each retain the property they currently owned. Stevenson J said (at paras 69, 96-7):

Principally, these liabilities are thus pre-separation debts or amounts spent on the construction of various properties. I see no reason to exclude any of these unsecured debts in the calculation of the value of the net pool of property…

The orders sought by the wife would mean that no unsecured creditor could recover its debt. She sought to retain the property which she holds and to take all of the property vested in the Trustee. There would thus be no funds available to the Trustee from which he could pay any of the creditors.

The orders sought by the husband would mean that the unsecured creditors would be paid. The orders sought by the Trustee would permit him to discharge the debts to the unsecured creditors, from the property presented vested in him.

Stevenson J ordered a 65%/35% split of the vested and non-vested property so that the wife paid the trustee the sum of $118,892.

Setting aside orders and transactions

The ability of creditors and the trustee to use s 79A was considered in such cases as Semmens v Commonwealth of Australia & Collector of Customs (1990) FLC 92-116 and the Official Trustee in Bankruptcy v Donovan (1996) FLC 92-703. A creditor’s standing to apply to set orders aside under s 79A was further clarified by the 2005 Act. Section 79A(4) provides that a creditor of a party is taken to be a person whose interests are affected by the order if the creditor may not be able to recover their debts because the orders was made. Under s 79A(5), a trustee is taken to be a person whose interests are affected by a s 79 order if, when the order was made, one of the parties to the marriage was a bankrupt or a party became bankrupt after the order was made.

If the trustee is a party to proceedings under the FLA, the Court may set aside or restrain the making of an instrument or disposition:

• which is made or proposed to be made by or on behalf of, or by direction or in the interests of, the bankrupt; and
• which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order (s 106B(1A) FLA).

In practice, s 106B orders are made more readily than orders under the clawback provisions under s 120-122 of the BA.

Financial agreements

Financial agreements are not as secure for the parties as consent orders if bankruptcy is a possibility. Transfers pursuant to court orders are protected by s 59A BA. Consent orders have the approval of the Court and, provided there has been full disclosure of the debts and notice to third party creditors, they will be more difficult for a trustee to set aside than a financial agreement entered into by the parties in private.

Following ASIC v Rich (2003) FLC 93-171, amendments were made to the FLA and the BA to protect the position of the trustee in bankruptcy and creditors with respect to a financial agreement. These amendments included:

• creditors have standing to apply to set a financial agreement aside (s 90K (1A))
• it is an act of bankruptcy if a person becomes insolvent as a result of a transfer or transfers made under a financial agreement (s 40(1)(o) and s 40(7) BA)
• the claw back provisions in the BA can be used to recover property transferred under a financial agreement (s 40(1)(o) and s 120 BA)
• a separation declaration must be made before a financial agreement comes into force or takes effect if it relates to property or financial resources (s 90DA(1) FLA)

In Official Trustee in Bankruptcy & Galanis [2014] FamCA 832, Rees J found that the trustee in bankruptcy of a discharged bankrupt did not have standing to apply to set aside a financial agreement made subsequent to the bankrupt’s discharge.

Cummins and equitable principles

In The Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6, the bankrupt and his wife purchased vacant land as joint tenants in 1970. The bankrupt paid one-quarter of the purchase price and his wife paid the balance. They built a house on the land using joint funds and jointly borrowed funds. In 1987 the bankrupt transferred his half interest in the home to the wife. She paid stamp duty on the transfer but did not pay the monetary consideration stated on the transfer. The bankrupt was a barrister who did not lodge tax returns for about 40 years. His tax liability in 2000 was almost $1,000,000. He became bankrupt in December 2000. The bankrupt and his wife separated in 2002. The trustee in bankruptcy was successful before a single Judge of the Federal Court, unsuccessful before the Full Court of the Federal Court and successful in the High Court.

The High Court found that in a traditional marriage it is often “a purely accidental circumstance” whether money is contributed by a party to the purchase of the home or to living expenses. It concluded that in 1987 the wife’s beneficial interest in the home did not exceed her legal interest before the transfer. After the legal transfer, her beneficial interest remained at 50%. The trustee was, therefore, entitled to 50% of the equity in the home.

Cummins was a useful development for trustees in bankruptcy. Its impact was not watered down by the 2005 Act. Its importance is perhaps even greater following Stanford which emphasised that the existing legal and equitable interests of parties are a starting point in the s 79 exercise.

In Official Trustee in Bankruptcy and Brown [2011] FMCA 88 the property was registered in the sole name of the non-bankrupt spouse. The trustee relied on Cummins. Driver FM accepted that the case had to be decided with due regard to the dicta in Cummins, in particular (at para 71) where the High Court quoted from Professor Scott’s The Law of Trusts, 4th ed (1989), vol 5, §454 at 239:

Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one-half interest in the property regardless of the amounts contributed by them

However, Driver FM distinguished the case before him, saying (at para 30):

I have no difficulty in accepting that Ms Brown did not hold the property solely for herself but also held it on trust for Mr Daevys in recognition of the contribution he made to its acquisition, maintenance and improvement. It is certainly open to me to find, as the Official Trustee contends I should that the property was held jointly by Ms Brown and Mr Daevys. However, I do not accept that this case must be determined in conformity with the High Court decision of Cummins v Cummins. First, this case can be distinguished from Cummins on the basis that the purchase of the Property by Ms Brown occurred prior to the marriage and without any apparent intention to assist Mr Daeveys to defeat his creditors. It was no doubt convenient for Mr Daevys to conceal his interest in the Property from the Official Trustee until after his discharge from bankruptcy, in the mistaken belief that he could thereby withhold that asset from his creditors That, however, was Mr Daevys’ scheme, not Ms Brown’s.

The Court treated the contributions by the parties to the property, not under the FLA, but as a joint venture relying on such cases as Baumgartner v Baumgartner (1987) 164 CLR 137, Muschinski v Dodds (1985) 160 CLR 583 and, particularly the mathematical approach taken in Calverley v Green (1984) 155 CLR 242. The Court ordered that the wife receive 67% of the net proceeds of sale and that the Official Trustee receive the balance. The trustee had sought a 50%/50% division.

A Cummins type argument relying on Calverly v Green was unsuccessfully argued by the wife in Pascoe v Nguyen in [2007] FMCA 194, which was upheld on appeal by the Full Court of the Federal Court in Nguyen v Pascoe [2007] FCAFC 181.

Other cases which have considered equitable principles include Holden v Santosa [2011] FMCA 251 where the non-bankrupt spouse unsuccessfully argued, inter alia, that there was a constructive trust and Official Trustee in Bankruptcy v Draper [2006] FCAFC 157 where the matter was remitted to the Federal Magistrates Court for rehearing and an equitable accounting.   In Sui Mei Huen v Official Receiver for Official Trustee in Bankruptcy [2008] FCAFC 117 a declaration was made that the trustee’s half interest was held on constructive trust for the non-bankrupt spouse. The Full Court of the Federal Court said (at para 78):

Whether a constructive trust exists is assessed by circumstances existing at the time when the property is acquired though events after its acquisition are not irrelevant … and its existence does not depends upon the intention of the parties.

Bankrupt’s standing in FLA proceedings

The right to issue s 79 proceedings is a right in personam, which therefore does not vest in the trustee. However, if there are s 79 proceedings already on foot at the date of the bankruptcy, or the non-bankrupt spouse issues s 79 proceedings, the bankrupt is not a necessary party to the proceedings. A bankrupt loses the right to make submissions regarding vested bankruptcy property if a trustee in bankruptcy is a party to property settlement proceedings. The bankrupt must seek the leave of the court to make submissions (s 79(12)). Leave can only be granted in exceptional circumstances (s 79(13)). The bankrupt can, however, as of right, make submissions about property which has not vested, such as superannuation. These submissions may, of course, indirectly deal with vested property.

In Reua & Reua [2008] FamCA 1038 Stevenson J found that there were “exceptional circumstances” because:

1. There was no opposition to the granting of leave by the wife and the trustee in bankruptcy.
2. The husband sought relief in respect of non-vested property so he was a participant in the proceedings anyway.
3. The husband had knowledge of the circumstances in which many of the unsecured debts were incurred. Although the husband’s evidence was useful to the court and the trustee, the bankrupt could have been a witness without being a party.

None of these seem to be “exceptional” circumstances in the sense otherwise used in the FLA.

In Pacelli and Hopkinson [2010] FMCAfam 1248, the wife and the husband’s trustee in bankruptcy entered into final consent orders as to property. The orders omitted to deal with the husband’s superannuation interest of about $13,000. The bankrupt’s main argument that he had standing was that he was a “a person affected” by a s 79 order and that the order could be set aside under s 79A(1)(a) as there had been a failure to disclose relevant information.

Burnett FM found that the pre 2005 law that s 79 rights of a bankrupt were a personal right was unaffected by the bankruptcy and still applied with respect to property which had not vested in the trustee (see also Blake & Blake [2011] FMCAfam 796). The argument that, as a matter of construction, s 79A(5) specifically excluded a bankrupt from pursuing rights in respect of non-vested property was rejected.

Arguably, the trustee may have done better if the superannuation was included in the pool and the bankrupt’s interest was split 100% to the wife. Burnett FM suggested, however, that if the wife formally abandoned any claim to the bankrupt’s superannuation and the bankrupt persisted in his s 79A claim, an application for security for costs by the trustee and the wife would be viewed favourably by the court.

In Freer & Freer [2008] FamCA 131 the bankrupt sought that the Family Court proceedings be stayed pending the final determination of Supreme Court proceedings which appeared close to resolution. There was, however, no evidence of the likely settlement and whether the settlement sum would be sufficient for the husband to pay out his judgment debts and obtain an annulment of his bankruptcy. Although any damages received in the Supreme Court proceedings might enlarge the asset pool, the wife did not seek to claim against them.

Strickland J said (at para 17):

Thus the effect of making the orders sought by the husband would provide no advantage to the husband in terms of the asset and liability pool. The only advantage is that he would be babe to run his own case. However, there would be significant prejudice to the wife. I am told that, in effect, the assets for division are the former matrimonial home and shares in accompany. I am told … that the husband resides in the home … and thus the wife would be prevented from accessing one of the major assets of the marriage which would be the subject of the property settlement proceedings for many years to come. In the meantime, though, on that scenario the husband would presumably continue to reside in the matrimonial home and he would be the one who would enjoy the benefit of that asset.

If s 79 proceedings are issued by a person who subsequently becomes bankrupt, the trustee has 28 days after being served with notice of the action, to elect to prosecute or discontinue the action (s 60(2) BA). If an election is not made within 28 days, the trustee is deemed to have abandoned the action (s 60(3)).

If the trustee does not prosecute the action, the bankrupt can apply under s 178 BA to be able to continue with the action (e.g. Trent & Rowley [2014] FamCA 447).

If orders are made under s 79 during the period of a party’s bankruptcy, and the bankrupt is entitled to an interest in property pursuant to those orders, that interest is “after-acquired property” under s 58(1)(b) BA and it immediately vests in the trustee.

Conclusion

The insertion of s 75(2)(ha) means that in the s 79 process, the interests of creditors is one of the factors to be considered. In practice though, it appears to be given no more weight than the other factors and creditors may lose out against a non-bankrupt spouse with significant s 75(2) factors, such as being on a low income with young children.

Parties to the marriage and trustees in bankruptcy need to remember that the BA still applies and that the trustee can use BA principles to protect and enlarge its interests. The claw back provisions, such as s 120 and 121 BA and a Cummins type argument are available in addition to s 79 arguments and s 106B FLA applications.

Under the FLA the court has the power to make such orders as:

• that property which vested in the trustee at the date of bankruptcy be transferred to the non-bankrupt spouse
• that a debt which is part of the bankruptcy be paid from property which has not vested in the trustee in bankruptcy
• that the non-bankrupt spouse receive some or all of their entitlements in superannuation so that there is more non-exempt property available for the trustee

Although not discussed in this paper, at some stage it would be helpful if the Full Court reconsidered Kowaliw & Kowaliw (1981) FLC 91-092 and gave clearer guidance as to which debts are “debts of the marriage” to be paid from the “property of the parties” when calculating the net pool.

It is likely that the development of the law relating to the rights of bankruptcy trustees and non-bankrupt spouses will depend upon whether unsecured liabilities are found to be a legal or equitable interest which can be altered under s 79.

© Copyright – Jacqueline Campbell of Forte Family Lawyers and CCH. This paper uses some material written for publication in CCH Australian Family Law and Practice. The material is used with the kind permission of CCH.

Jacky Campbell, January 2013

Stanford—implications for trustees in bankruptcy

The recent High Court decision of Stanford v Stanford (2012) FLC 93-518 has possible implications for trustees in bankruptcy involved in or contemplating property proceedings under s 79 Family Law Act (“the Act)”. The facts of the case and its general implications are set out in another article by the writer on CCH Law Chat at Family Law Resources http://www.lawchat.com.au/index.php/stanford-the-high-court-decision-by-jacky-campbell-forte-family-lawyers/.

The “four step” approach which the Family Law Courts have used for many years to determine applications for alteration of property interests under s 79 was not expressly approved by the High Court, which said that whether making an order was just and equitable must be determined first, before considering the other matters in s 79. Considering “just and equitable” as a preliminary matter rather than last, as has been the practice, arguably gives greater opportunity for trustees in bankruptcy to try to retain or to recover marital property to pay debts owed by the bankrupt. The High Court also said that the existing legal and equitable interests of the parties must be identified before they can be altered. If the Family Law Courts give greater emphasis to equitable interests than it generally has done in the past, this could also assist trustees.

The Bankruptcy and Family Law Legislation Amendment Act 2005 (“2005 Amendments”) is often seen as disadvantageous to trustees. A trustee cannot institute s 79 proceedings against a non-bankrupt spouse as a means of trying to enlarge the assets in the bankrupt estate available for creditors whereas a non-bankrupt spouse can bring a s 79 application to try to increase their entitlements. The trustee is often forced to simply defend an application by a non-bankrupt spouse claiming property vested in the trustee. Only rarely can the trustee improve its position and it often goes backwards. The post-Stanford environment offers opportunities for trustees to seek to maintain their positions, and in some circumstances, perhaps to improve it.

The Stanford decision

The case involved an elderly couple involuntarily separated by circumstances. The wife required nursing home care and died during the course of the proceedings. The High Court upheld the husband’s appeal against an order for a payment to the wife’s estate after the husband’s death. The majority allowed the husband’s appeal primarily on the ground that the Full Court of the Family Court did not address the requirements for making orders after a party’s death. The minority judgment agreed, but did not deal with the broader issues under s 79.

The High Court considered two main issues:

• Whether an order for alteration of property interests can be made under s 79 if parties are not separated or are “involuntarily” separated. The High Court majority held that a s 79 order can be made in these circumstances if it is just and equitable to do so.
• The proper approach to determining an application under s 79. The High Court majority emphasised that it is important to read and apply the Act. In particular, it warned against “conflating” the requirements of s 79 and highlighted that the court must first consider whether it is just and equitable to make the order.

As the case did not involve a “standard” separation, there is likely to be debate about the extent to which the views expressed by the High Court change the law or change the law to any significant extent.

Do parties have to be separated for s 79 orders to be made?

The High Court majority rejected the husband’s argument that a s 79 order can only be made if the parties have separated. In a de facto relationship, the property rights and interests of the parties cannot be enlivened under s 90SM unless and until there is a breakdown of the relationship. Section 90SM(1) expressly only covers “property settlement proceedings after the breakdown of a de facto relationship”. The High Court refused to imply this limitation into s 79.

Prior to Stanford there was uncertainty as to whether s 79 orders could be made in intact marriages. It is now clear that s 79 orders can be used by parties who are not separated to re-arrange their affairs with the approval of the Family Law Courts, provided it is just and equitable to do so. The High Court did not exclude from this principle, parties who are still living under the one roof. If parties provide full disclosure of creditors to the court, and in some circumstances, notice to creditors, these orders will be more difficult for a trustee in bankruptcy to set aside later than a financial agreement (which does not require court approval). The Family Law Courts require disclosure of the proceedings to creditors who may be affected by a s 79 order. Failure to do so may mean the order is at risk of being set aside under s 79A of the Act.

Although creditors and trustees in bankruptcy may be concerned about parties in intact marriages living under the one roof obtaining court approval of orders to the detriment of creditors and trustees, this is unlikely to be a significant risk. The requirement to disclose creditors to the court is a significant barrier. In addition, the requirement that it is just and equitable to make an order is likely to be more difficult to satisfy in intact marriages.

What is the proper approach to s 79?

The High Court majority gave guidance as to the proper approach to be taken to an application under s 79. It emphasised the importance of referring to the wording of the Act. The precise wording of s 79 is therefore important to understanding the High Court’s views. Section 79(1)(a) gives the court power to:

make such order as it considers appropriate…in the case of proceedings with respect to the property of the parties to the marriage or either of them – altering the interests of the parties to the marriage in the property…

The manner in which the court must exercise the power under s 79(1) is set out in s 79(2) which provides:

The court shall not make an order under this section unless it is satisfied that, in all the circumstances, it is just and equitable to make the order.

Section 79(4) requires the court to take into account certain matters such as contributions and the matters listed in s 75(2) (which include incomes, earning capacities, care of children and the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt) so far as they are relevant in “considering what order (if any) should be made”.

The High Court warned:

To conclude that making an order is “just and equitable” only because of and by reference to various matters in s 79(4), without a separate consideration of s 79(2), would be to conflate the statutory requirements and ignore the principles laid down by the Act.

At first glance this appears to be consistent with existing authority and practice, but the High Court majority rejected the notion that s 79(2) was a step to be undertaken at the end of the process. The majority said that whether it is “just and equitable” to make an order under s 79(2) arises before the court looks at s 79(4), rather than after looking at s 79(4). Section 79(2) and s 79(4) are separate inquiries and the “two inquiries are not to be merged.”

In determining applications under s 79, the High Court set out three fundamental propositions that “must not be obscured”:

1. Identify the existing legal and equitable interests of the parties as if they were not married without reference to their possible entitlements under s 79. The court must then consider whether it is just and equitable to alter the parties’ interests;
2. Section 79 is a broad power, but that does not mean unguided judicial discretion or “palm tree justice”;
3. There is no starting assumption that a party has the right to a s 79 order.

The pre-Stanford practice was to list only “property of the parties” and “financial resources”. The requirement to list all legal and equitable interests seems to be broader. Equitable interests include constructive trusts, resulting trusts and estoppel interests. A broader view of “legal interests” may also be required. Contractual claims (including overseas pre-nuptial agreements and part performance of contracts) and tortious claims (e.g. personal injury claims) may be relevant.

The High Court’s view makes sense as interests cannot be “altered” under s 79(1) unless the court first identifies those interests. The High Court majority said that the legal and equitable interests of the parties must be identified as if the parties were not spouses, so without reference to their possible entitlements between each other under s 79. An example arising from Stanford is the possibility that the wife had an interest by way of a constructive trust in the husband’s home. This was an equitable interest which the Family Law Court should have identified before deciding whether or not it was just and equitable to make s 79 orders. If it had done this, the Court could have simply declared under s 78 that the wife had an interest by way of a constructive trust and the extent of that interest. It may not have decided not to make s 79 orders which altered their interests if it was not just and equitable to do so.

The “four step” approach which operated before Stanford and was used by the Family Law Courts and legal practitioners when making s 79 orders required the Court to:

1. Identify and value the asset pool
2. Assess contributions under s 79(4)(a)-(c)
3. Take into account the matters listed in s 79(4)(d)-(g) including the s 75(2) factors
4. Determine whether the orders are just and equitable under s 79(2).

The High Court majority in Stanford confirmed that the “just and equitable” requirement of s 79(2) is a separate and distinct requirement of s 79 but did not confirm the validity of the “four step” approach. Under the “four step” approach, a trustee usually achieved its best possible outcome if it successfully argued that the bankrupt’s debts were liabilities to be paid from the total property pool under step 1, prior to the balance of the property pool being divided between the non-bankrupt spouse and the trustee. Trustees were often at a disadvantage in arguing steps 2 and 3, because:

• The bankrupt may have gambled or otherwise wasted assets in a manner which meant the non-bankrupt spouse had no responsibility under Kowaliw and Kowaliw (1981) FLC 91-092;
• The non-bankrupt spouse often denied knowledge of debts such as tax debts although the non-payment of those debts had benefited the non-bankrupt spouse and children;
• The future needs of the non-bankrupt spouse and children significantly increased the entitlements of the non-bankrupt spouse. The only matter among 19 matters listed in s 75(2) of any relevance to the trustee is s 75(2)(ha), which refers to the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt.

It is unclear how the three “fundamental propositions” outlined by the High Court majority relate to the “four step” approach (if at all). Is s 79(2) a first step or is it a threshold issue before embarking on a consideration of the rest of s 79? Is s 79(2) considered again as a separate step, with reference to s 79(4) or otherwise? Are there now only 3 steps or are there 5 steps with s 79(2) as both a first step and a fifth step and perhaps also permeating the other steps? Did the High Court, by not referring to the “four step” process and emphasising the importance of the wording of the Act, reject the notion of a process involving structured steps?

The “just and equitable” requirement

The High Court majority considered that the just and equitable requirement of s 79(2) is “readily satisfied” if the parties are, as the result of a choice made by one or both of the parties, no longer living in a marital relationship. In those circumstances:

It will be just and equitable to make a property settlement order in such a case because there is not and will not thereafter be the common use of property by the husband and wife. … That is, any express or implicit assumption that the parties may have made to the effect that existing arrangements of marital property interests were sufficient or appropriate during the continuance of their marital relationship is brought to an end with the ending of the marital relationship. And the assumption that any adjustment to those interests could be effected consensually as needed or desired is also brought to an end. Hence it will be just and equitable that the Court make a property settlement order. What order, if any, should then be made is determined by applying s 79(4).

By contrast, an involuntary separation as occurred in Stanford, is not enough of itself for it to be just and equitable to make a s 79 order. The High Court said it is however, possible for a court to be satisfied that it is just and equitable to make a s 79 order if the parties are involuntarily separated.

The High Court majority said that in relation to “just and equitable” it is not possible “to chart its metes and bounds.” In other words, it is not possible to chart the boundaries of what is just and equitable.

It is possible that there may be other circumstances where it is not “just and equitable” to make a s 79 order even if one or both parties initiated the separation. Possible circumstances include:

• Where the parties kept their financial affairs separate;
• After a very short relationship;
• Where an overseas pre-nuptial agreement sets out how the parties will order their affairs in the event of a separation;
• Where the rights of a third party (e.g. a creditor) will be impinged by an alteration of property interests;
• Where the recognition of legal and equitable interests is consistent with the way the parties ordered their affairs during the relationship and no further adjustment is appropriate.

A case in which the court refused to make s 79 orders in an intact marriage was McCormack and McCormack and Peakes and Peakes [2009] FMCAfam 1250. Two wives and their husbands’ trustees in bankruptcy tried to obtain orders for the transfer of half interests of properties to the wives from their husbands’ trustees in bankruptcy. The aim was apparently to avoid paying stamp duty on the transfers. The wives were not separated from their husbands and the court refused to make the orders sought.

Wilson FM held (at para 4):

It is difficult to see how those transactions arise out of the marital relationship. They arise from a commercial dealing that has failed. The fact that one party to a marriage is purchasing an interest in property (in which he or she already holds an interest) from the trustee in bankruptcy of the other does not, to my mind, mean that the proceedings arise out of the marital relationship.

The Federal Magistrate did not consider the purpose for which the s 79 orders were sought, but refused to make the orders on jurisdictional grounds. It is possible that the court could also have refused because the orders were sought for an improper purpose, being to avoid payment of stamp duty on a land transfer. Orders which have the effect of avoiding liability to a revenue authority or other creditor are likely to be orders which are not just and equitable to make in an intact marriage.

In circumstances where parties are not separated, once the court has identified the equitable and legal interests of the parties, it may not be just and equitable to make any order under s 79 altering those interests. Although not all of the following were articulated in Stanford, possible matters to consider include:

• Whether the needs of a party can be met by a maintenance order
• Whether future contributions by either party are likely
• Whether a separation is possible or likely
• Whether the use of “common property” continues
• The impact on the parties individually of a s 79 order
• Contributions and other matters in s 79(4) and s 75(2)
• The impact on third parties such as creditors and any trustee in bankruptcy
• Whether there is justification for a party to be relieved of the responsibility for a debt

Areas of uncertainty

There will undoubtedly be a period of uncertainty while the Family Law Courts and legal practitioners grapple with the meaning of Stanford and how to implement it. The practical problems include:

1. Will the court make a final determination of the legal and equitable interests of the parties and their values before assessing matters under s 79(4)? Or will parties simply state their claims? Perhaps the courts will take a different approach to matters where third parties are involved and make a more detailed examination of the legal and equitable interests of all the parties, including any third parties, before moving on to find that it is just and equitable to alter those interests? In matters involving only the parties to the marriage where they are separated and no longer have mutual use of property, a determination of their rights without reference to s 79 may be a shorter process. It will be easier to find that it is just and equitable to alter those rights.
2. Will there be an expanded role for s 78 declarations as to property interests? In some situations, once the court makes declarations as to “existing title or rights in respect to property” under s 78 it may not be just and equitable to make s 79 orders altering those interests.
3. How will s 106B applications proceed, particularly if there is no existing property? Section 106B empowers a court to undo a transaction entered into which defeats an existing or anticipated s 79 order. The question as to whether an application under s 106B is determined before or after the court decides to exercise power under s 79 is unresolved. The requirement to consider whether it is just and equitable to make a s 79 order before embarking on the rest of the s 79 process, makes this issue more complex. Is it just and equitable to make a s 79 order when the only possible property about which an order can be made is property which has been transferred to a third party?
4. Will s 79(2) as a first step or threshold step mean that greater weight is given to the rights of third parties (including creditors), the existence of an overseas pre-nuptial agreement, to the difficulties of enforcing orders against overseas assets, the complexities of a s 106B application or the likely costs to be incurred by the parties relative to the size of the pool before a court decides that it is just and equitable to make a s 79 order?

Applying Stanford to recent cases

Non-bankrupt spouses who have benefited from the actions of a bankrupt spouse, whether or not they conspired together to defeat creditors, may find s 79(2) in its new format a greater hurdle to keeping assets away from the trustee. It is revealing to look at cases involving bankruptcy which pre-date Stanford and speculate as to how they might be decided now.

In Commissioner of Taxation and Worsnop (2009) FLC 93-392 the Commissioner of Taxation appealed against an order that the former matrimonial home in the wife’s name be sold and the net proceeds of sale be divided equally between the wife and the Commissioner. The only substantial asset was the home worth $4.75 million. There was conflicting evidence as to the wife’s knowledge of the husband’s tax avoidance but the trial Judge accepted that the wife did not know and it could not be said that she ought to have known. The husband had transferred his interest in the home (then worth $1.5 million) to the wife for only $1.00 about 5 or 6 years prior to separation, at around the time the husband changed his business activities. The trial Judge made no adjustment in favour of the wife for s 75(2) factors although she had the primary care of 4 children aged between 1¾ and 13 years and this affected her earning capacity. The s 75(2) factors in her favour were off-set against the husband’s tax indebtedness as a factor in the Commissioner’s favour under s 75(2)(ha). Although the wife had no knowledge of the debt, which was by then about $13 million, the trial Judge gave it weight at this step.

In balancing the competing claims of the wife against the Commissioner, the Full Court found that the trial Judge appreciated the critical features of the exercise, and said (at para 86):

In our view, the Commissioner of Taxation is in a position distinguishable from that of a commercial creditor. Commercial creditors have a choice about to whom they extend credit. On the other hand, the position of the Commissioner as a creditor of taxpayers is of a completely different origin. The onus is on taxpayers to make full and proper disclosure to the Commissioner of Taxation. The Commissioner does not extend credit at all, but becomes a creditor by virtue of the conduct of the affairs of the taxpayer.

The Full Court of the Family Court upheld the 50/50 split of the net pool. Although the wife had benefited from the husband’s avoidance of tax, she was held to have no responsibility for the debt. Was the order that the Commissioner only receive 50% of the net proceeds of sale just and equitable? If the court had determined the parties’ legal and equitable interests in the property first, would it have found that the wife was not entitled to retain a half-interest in the home? Was the finding that the wife lacked knowledge of the debt sufficient to deny the Commissioner’s right to be paid when the wife had benefited from the non-payment of tax?

The rights of a non-bankrupt spouse as against a trustee were given significant weight by the High Court in The Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6. The parties were not separated. The wife received an inheritance prior to the marriage which was at least partially used in their first property purchase. Later, the parties purchased vacant land as joint tenants. The bankrupt paid one-quarter of the purchase price and his wife paid the balance. They built a house on the land using joint funds and jointly borrowed funds. In 1987 the bankrupt transferred his half interest in the home to the wife. She paid stamp duty on the transfer but did not pay the monetary consideration stated on the transfer. The bankrupt was a barrister who did not lodge tax returns for about 40 years. He became bankrupt in December 2000 owing tax of about $1 million. The trustee was successful before a single Judge of the Federal Court, unsuccessful before the Full Court of the Federal Court and successful in the High Court.

The High Court found that in a traditional marriage it is often “a purely accidental circumstance” whether money is contributed by a party to the purchase of the home or to living expenses. It concluded that in 1987 the wife’s beneficial interest in the home did not exceed her legal interest before the transfer. After the legal transfer, her beneficial interest remained at 50%. The trustee was, therefore, entitled to 50% of the equity in the home. The wife said the home was worth $2 million. It was encumbered by a loan of about $950,000. The approach taken by the High Court in Cummins is consistent with the High Court’s statements in Stanford that equitable interests as well as legal interests should be identified.

In Official Trustee in Bankruptcy and Brown [2011] FMCA 88 the property was registered in the sole name of the non-bankrupt spouse. The trustee relied on Cummins. Driver FM accepted that he had to consider Cummins, but he distinguished it. He determined the interests of the parties, not under the Family Law Act, but as a joint venture relying on such High Court cases as Baumgartner v Baumgartner (1987) 164 CLR 137, Muschinski v Dodds (1985) 160 CLR 583 and, particularly the mathematical approach taken to contributions in Calverley v Green (1984) FLC 91-565. The Court ordered that the wife receive 67% of the net proceeds of sale and that the trustee receive the balance. The trustee had sought a 50%/50% division. The reliance by the court on equitable principles and the determination of those interests is perhaps consistent with the approach that can be expected following Stanford.

Pre-Stanford cases in the Family Law Courts which have considered equitable principles and the rights of trustees include Holden v Santosa [2011] FMCA 251 where the non-bankrupt spouse unsuccessfully argued, inter alia, that there was a constructive trust. In Official Trustee in Bankruptcy v Draper [2006] FCAFC 157 the matter was remitted to the Federal Magistrates Court for rehearing and an equitable accounting. In Sui Mei Huen v Official Receiver for Official Trustee in Bankruptcy [2008] FCAFC 117 a declaration was made that the trustee’s half interest was held on constructive trust for the non-bankrupt spouse. The Full Court of the Federal Court said (at para 78):

Whether a constructive trust exists is assessed by circumstances existing at the time when the property is acquired though events after its acquisition are not irrelevant … and its existence does not depends upon the intention of the parties

In Trustee of the Property of G Lemnos and Lemnos (2009) FLC 93-394 the husband’s trustee successfully appealed against property orders which required that the former matrimonial home, which had vested in the trustee, be sold and the net proceeds divided equally between the trustee and the wife. The trial Judge found that the wife had contributed directly to the matrimonial home through her income (from distributions received by her from the family trust which received income from the husband’s legal practice) and a guarantee. Contributions were assessed as equal at the date of the trial. The husband was re-assessed for income tax for the period 1991-2002. A sequestration order was made against him in 2006 and the parties separated in July 2007. At the time of the trial the equity in the home was about $2-2.5 million and the husband’s bankrupt estate had debts of about $6 million.

The Full Court of the Family Court held that the interests of unsecured creditors did not automatically prevail over the interests of the non-bankrupt spouse and their competing claims must be balanced in the exercise of the wide discretion conferred by s 79. The wife argued that the husband wasted assets by acting recklessly and negligently in completing his tax returns, an act wholly within his knowledge. For twelve years he claimed outgoings on a property which was usually his primary residence. The majority found that the husband’s conduct was not within the exceptions to the waste principle in Kowaliw, as it was not designed to diminish the value of the matrimonial assets, but to increase them. The wife received the benefit of the funds which flowed from the husband’s conduct, and it was neither just nor equitable for her to escape all responsibility for payment of the primary tax.

The majority followed the Full Court of the Family Court in Johnson and Johnson [1999] FamCA 369 where it was said “unless there were compelling circumstances to the contrary, a just outcome demanded that the wife take the good with the bad” and that unless “the husband was on a frolic of his own and acting contrary to the wife’s express wishes” there was no reason for the trial Judge to leave the husband with the burden of the tax penalties. The majority allowed the appeal because of the trial Judge’s treatment of the primary tax burden as “waste.” The minority allowed the appeal because of the way the trial Judge applied s 75(2)(ha) which requires the court to consider the effect of any proposed order on the ability of a creditor to recover the creditor’s debt. Having ordered that the wife should receive 50% of the equity in the home, the trial Judge gave priority to the wife over the unsecured creditors. The unsecured creditors, owed approximately $6 million, received the same dollar amount as the wife, or about 20 % of their claims. By finding that the husband should satisfy the tax debt from his resources, the trial Judge had already decided the issue which s 75(2)(ha) directed him to consider under step 3.

The majority in Lemnos, unlike in Johnson, accepted that the husband was “on a frolic of his own” but did not accept that the wife’s lack of knowledge or complicity in the husband’s wrongful deductions determined whether she should share responsibility for the payment of primary taxation on his income during the marriage. The statement in Johnson, that spouses should generally “take the good with the bad,” had even more force when applied to allocating responsibility for primary taxation, rather than tax penalties. Although the wife in Lemnos shared responsibility for the primary tax, was it just and equitable for the responsibility to be limited to the primary tax and for her not to share responsibility for the tax penalties? Would this have been decided differently after Stanford?

What next?

Post-Stanford, the trustee has increased options. In particular, it may try to rely on the existing legal and equitable interests of the parties to the marriage and the trustee, and argue that it is either not just and equitable to make an order altering those interests, or that it is just and equitable to do so.

Practical steps the trustee can do include:

1. Identify the existing legal and equitable interests as if the spouses were not married and how it can be argued that it is just and equitable to alter these interests or that it is not just and equitable to do so. Possible equitable and legal claims by the trustee against the non-bankrupt spouse outside of s 79 should not be ignored;

2. Look at contributions and other matters under s 79(4) and s 75(2);

3. Check the timing of when debts were incurred – pre or post-separation? Look at the nature of the debts and the extent to which the non-bankrupt spouse benefited as well as the non-bankrupt spouse’s knowledge of them;

4. Consider whether an application should be made to set transactions aside under either the Family Law Act or the Bankruptcy Act? There are different requirements under each Act and the Family Law Act requirements may be easier to satisfy;

5. Assess the total debts (including trustee’s fees and expenses) and the likely legal costs relative to the total assets.

Conclusion

Stanford presents opportunities for trustees to argue for a better outcome. A s 79 order may not be made as it may not be just and equitable not to make one. Alternatively, it may be just and equitable to make an order which differs from the order which might have been made pre-Stanford.

Although the High Court did not appear to confine its views to the unusual factual circumstances of the case, the Family Law Courts and lawyers may argue to restrict its impact. Despite some uncertainties of interpretation, the High Court majority gave some clear directions as to dealing with applications under s 79. It is important to first set out the legal and equitable interests of the parties. This is an aspect of the judgment which is of particular importance for trustees. Then, it must be determined whether it is just and equitable to make an order altering those interests under s 79(2). In the absence of a definition of “just and equitable” it is open for trustees to argue that where a non-bankrupt spouse has received benefits from the debts of the bankrupt, it is just and equitable that they be paid. A non-bankrupt spouse may not be absolved of liability even if they did not know of the debts and could not be expected to have known.

There may be a greater focus on balancing the possibility of leaving existing interests as they stand and making declarations under s 78 that the interests exist, rather than altering the interests under s 79. The High Court might be saying that the Family Law Courts and legal practitioners have only been paying lip service to the just and equitable requirement of s 79(2) by merely considering it in passing after considering s 79(4) at length. It may be given greater weight in the future. The fate of the “four step” approach is unclear.

In any event, the High Court emphasised that the principles set out in the Act must be carefully followed. It is insufficient to simplistically summarise s 79 without referring to the actual words used in the Act.

There are opportunities arising from Stanford for trustees to achieve better outcomes in the Family Law Courts than they generally have in the past. It is too early to say whether these increased opportunities will lead to increased successes.

Jacky Campbell, June 2016

The Baby Gammy case

Recently, the Family Court of Western Australia delivered judgment in the “Baby Gammy” case. Although colloquially called the “Baby Gammy” case, the Court was asked to determine the parenting arrangements which were in the best interests of Pipah (Baby Gammy’s twin sister).The lengthy judgment of almost 800 paragraphs and 190 pages is reported as Farnell & Anor and Chanbua^[1], so reading it is not for the fainthearted.

Thackray CJ found that s 90H(1) Family Law Act 1975 did not apply to surrogacy procedures, that Pipah was not a “child of a marriage”, and that the state legislation applied.

The surrogate wanted Pipah to live with her, Baby Gammy and her husband in Thailand. Thackray CJ refused that application and, in doing so, he debunked a number of media myths. For example, he found that the Farnells did not abandon Gammy and did not seek access to Gammy’s trust fund for Pipah’s welfare needs or for their legal costs.

Thackray J also took the opportunity to express strong views on surrogacy, which are quoted later in this article.

Although not relevant in this case, the Family Court of Australia, now has set out in the Family Law Rules 2004, the evidentiary requirements and procedures for surrogacy cases.

Orders made

In making his decision Thackray CJ recognised that Gammy appeared to be thriving in the care of Mrs Chanbua and her extended family. However, in relation to Pipah, he said:

“I have decided that Pipah should not be removed from the only family she has ever known, in order to be placed with people who would be strangers to her, even though I accept they would love her and would do everything they could to care for all her needs.”

The Family Court of Western Australia made orders giving the Farnells equal shared parental responsibility of Pipah and for Pipah to live with them. The surrogate/birth mother, Mrs Chanbua, and the Farnells are required to keep each other informed about Pipah’s welfare and engage Pipah in important Buddhist events.

The Registrar of Births Deaths & Marriages was directed to register Pipah’s birth to show her surname as that of Mrs Chanbua’s maiden name and her parents as Mrs Chanbua and Mrs Chanbua’s husband. The Registrar was permitted to record on the birth certificate, if he considered it appropriate, that the Farnells had equal shared parental responsibility.

The Farnells and Mrs Chanbua are required to keep each other informed of their contact details. The Farnells may, if they wish, provide Mrs Chanbua with copies of Pipah’s school reports, photographs of themselves and Pipah and presents for Gammy.

Contact between the two families electronically or face-to-face is as agreed between the families from time to time.

A safety plan was put in place for Pipah, given Mr Farnell’s history of child sexual abuse.

The Orders were made on the basis of the court having formally found that the Farnells:

1. did not abandon Gammy in Thailand;
2. did not seek to access Gammy’s trust fund for Pipah’s welfare needs or to meet their legal costs; and
3. never applied to the court for access to Gammy’s trust fund for any purpose.

Thackray J’s views on surrogacy

In his judgment, Thackray J took the opportunity to express strong views on surrogacy, including criticism of the immigration law, which were not harmonised with the laws of the rest of the country. If he had heard the earlier, he may have ordered that Pipah return to live in Thailand with her birth mother and brother. He said:

“It should be apparent that I have approached this dispute from the perspective of what would be best for Pipah. The decision should therefore not be interpreted as indicating any form of approval of commercial surrogacy. While I accept my orders may be seen as encouragement to other couples to beg forgiveness rather than seek permission, the outcome might have been very different had the dispute come before me much earlier in Pipah’s life. At that point, it may well have been decided it was in her best interests to return to live with her birth mother and twin brother.

The appalling outcome of Gammy and Pipah being separated has brought commercial surrogacy into the spotlight. Quite apart from the separation of the twins, this case serves to highlight the dilemmas that arise when the reproductive capacities of women are turned into saleable commodities, with all the usual fallout when contracts go wrong. The facts also demonstrate the conflicts of interest that arise when middlemen rush to profit from the demand of a market in which the comparatively rich benefit from the preparedness of the poor to provide a service that the rich either cannot or will not perform.

This case should also draw attention to the fact that surrogate mothers are not baby-growing machines, or “gestational carriers”. They are flesh and blood women who can develop bonds with their unborn children. It is noteworthy that no evidence was provided about the long-term impact on mothers of giving up children they carried, and there was no evidence of the impact on the children themselves. Nor was there any expert evidence of the impact on the other children of birth mothers who would have seen their mother pregnant, and perhaps felt the baby move in her belly, only to find that the baby never came home from hospital. Did those children wonder who would be the next to be given away? And what of their feelings of grief and loss if they were misled into believing the baby had died?

I accept it is for others to decide whether the manifest evils associated with overseas commercial surrogacy can be overcome by importing the problem into Australia, even though such suggestions have been made as a result of what happened to “baby Gammy”. It is also for others to determine whether even a “first world” country can provide a regulatory regime sufficiently robust to protect the interests of surrogate mothers and the children they bear …

The arrangement leading to the births of Pipah and Gammy would never have been put in place had it not been for the fact that a department of the Australian Government provided assurances that the children would receive citizenship and automatic entry to this country. Such assurances could not be provided if the citizenship laws were harmonised with all the other laws of this country. Effective law reform therefore does not have to involve the legalisation of commercial surrogacy to encourage would-be parents to buy locally-grown children. Equally, it could involve amendment of the citizenship laws to align them even more clearly with existing state laws. A fundamental policy decision is required.”^[2]

Family Law Rules 2004 – requirements of surrogacy applications

As the number of applications for parenting orders to the Family Law Courts in relation to children born under surrogacy arrangements is increasing, the Family Law Rules were amended, commencing 1 January 2016 – so after most of the Baby Gammy case had been heard – to ensure that the court has sufficient evidence to determine these applications. These Rules apply to applications not covered by the various State and Territory schemes, so primarily to overseas surrogacy arrangements. These will usually be commercial arrangements.

The evidence required is set out in r 4.34 – 4.36:

1. A copy of any surrogacy agreement
2. Evidence of the personal circumstances of the applicant including in relation to the surrogacy arrangement.
3. Evidence of the personal circumstances of the surrogate mother including in relation to the surrogacy arrangement.
4. Evidence of the identity of the child.
5. Evidence about the relevant law in the child’s birth country.

At the first hearing date of the application the court must:

• Make procedural orders.
• Consider an order for the appointment of an independent children’s lawyer.
• Consider ordering a family consultant to prepare a family report.
• Consider whether a condition in s 65G(2) has been met. Section 65G deals with the making of a parenting order about whom a child lives with or the allocation of parental responsibility by consent in favour of a non-parent. Section 65G(2) provides:

“The court must not make the proposed order unless:

(a)     the parties to the proceedings have attended a conference with a family consultant to discuss the matter to be determined by the proposed order; or

• (b)     the court is satisfied that there are circumstances that make it appropriate to make the proposed order even though the conditions in paragraph (a) are not satisfied.”

An application for a parenting order cannot be made by filing an application for consent orders. It must be commenced by an Initiating Application (Family Law)^[3], so the evidence and procedures set out in the Rules are followed.

Conclusion

The Baby Gammy case demonstrated how complex overseas surrogacy arrangements are, and some of the many things that can go wrong. It is also a further example of a case where a Family Law Court was not prepared to just rubber-stamp arrangements as being in a child’s best interests. The case was heard over 7 days and resulted in a lengthy judgment. The introduction of procedural and evidentiary requirements into the Family Law Rules, combined with the strong statements of judges in several cases, including the Baby Gammy case, are a reminder that parents should not embark on overseas surrogacy arrangements thinking that they are guaranteed to obtain parenting orders in Australia.

©  Copyright – CCH and Jacqueline Campbell.  This paper uses some material written by the author for publication in CCH Australian Family Law and Practice.  The material is used with the kind permission of CCH.

Jacky Campbell, February 2014

Surrogacy—tip toeing through a legal minefield

Understanding inconsistency in the law between states in Australia presents problems for practitioners and their clients. Navigating the many legal barriers facing those desperate for a child, who battle bureaucracies and the legal systems of Australia and other nations, is a major challenge. There is also a significant amount of misinformation available to clients about the surrogacy processes both within Australia and internationally. This paper aims to demystify and shed light on the murky world of international, altruistic and commercial surrogacy and the less murky but still complex jurisdictional issues of surrogacy arrangements entered into in Australia.

Surrogacy in Australia

Surrogacy in Australia is a state regulated altruistic surrogacy regime, with varying levels and types of regulation and bureaucracy. Common to all States (with the exception of the Northern Territory, which is the only jurisdiction to have no surrogacy regime) is a prohibition against commercial surrogacy.  The Northern Territory relies upon South Australian based IVF services and therefore picks up some aspects of South Australian law by default.

The system adopted in all States and Territories for the transfer of parentage is a post-birth system, requiring a court order in a State or Territory Court after the birth of the child provided certain requirements are met. The planning for this must be done pre-pregnancy. This is in contrast with surrogacy arrangements entered into overseas by couples who are resident in Australia, usually commercial in nature. These are generally dealt with by the Family Court and the outcomes are less predictable.

Relevant legislation

There is a wide range of legislation in Australia which impacts on surrogacy and parentage arrangements. A useful table summarising this legislation was prepared by Stephen Page of Harrington Family Lawyers. It is reproduced below with his permission:

A table summarising the differences in the legislative regimes is at the end of this paper.

Process

The process for commissioning parents^[1] to enter into a surrogacy arrangement in Australia varies between States and Territories, but can be roughly summarised as follows:

• They must first locate a person willing to act as a surrogate who meets the legislative requirements, and engage an authorised Assisted Reproductive Treatment (“ART”) provider. Given the restrictions on advertising for a surrogate and the ban on commercial surrogacy, this is one of the biggest hurdles faced by commissioning parents. Most States and Territories have a ban on publication so the people who use internet forums to find a surrogate may be committing an offence. Newspapers seem unaware that the prohibition on publication is the same as under s 121 of the Family Law Act 1975. In most jurisdictions the surrogate is required to be at least 25 years of age and already have children of their own.
• They must undergo counselling. In all States and Territories, both the commissioning parents and surrogate parents must undergo counselling sessions prior to commencing treatment, however this requirement can be waived in particular circumstances.
• They must obtain legal advice. In all States and Territories bar the Australian Capital Territory, both sets of parents must receive legal advice regarding their respective legal rights, entitlements and obligations and the consequences of the surrogacy arrangement. This requirement can be waived in particular circumstances.
• In Victoria and Western Australia, approval must be obtained from the regulatory body after approval by the relevant IVF clinic. In practice, this means that waiver of the requirements for counselling and legal advice is unlikely to occur as they will be required by the IVF clinic.
• Once the child is born, the surrogate mother is considered to be the child’s parent. If the surrogate has a partner and that partner consented to the procedure, that partner will also be considered at law to be the child’s parent. To replace the surrogate parents with the commissioning parents as the child’s legal parents, an application to the State or Territory Court must be made. In Victoria this is referred to as an Application for a Substitute Parentage Order. There are a number of matters the Court must be satisfied of prior to making the order. For example, in Victoria, before making the order the Court must be satisfied that:
  • Making the order is in the best interests of the child.
  • The surrogacy arrangement was commissioned with the assistance of an ART provider.
  • The Patient Review Panel approved the surrogacy arrangement before the surrogacy arrangement was entered into.
  • The child was living with the commissioning parents at the time the application was made.
  • The surrogate parents did not receive any material benefit or advantage from the surrogacy arrangement.
  • The surrogate mother freely consented to the making of the order.

A practical difficulty arises with respect to this final stage, as in most States and Territories the application cannot be brought until 28 days after the child’s birth and must be brought within 6 months of the child’s birth. An application outside of these dates requires the leave of the Court. As a result, everyone is left in a “limbo” period, where the commissioning parents have the care of the child while the legal responsibility for the child rests with the surrogate parents. In practical terms, this means that the surrogate parents need to be readily contactable to ensure they can authorise any medical treatment. Another option is to have a Medical Treatment Power of Attorney. In rare cases, it may be necessary to apply to the Family Court for an urgent order for parental responsibility to be made in favour of the commissioning parents pending the making of a parentage order in the State or Territory court.

Once an order is made with respect to a child born as a result of a surrogacy arrangement under a prescribed law of a State or Territory, to the effect that the child is a child of one or more persons and that each of one or more persons is a parent of a child, that order applies for the purposes of the Family Law Act^[2]and therefore for other purposes such as social security and immigration.

Complications

Because of the disparity between the various State and Territory legislative mechanisms for regulating surrogacy arrangements, complications can arise where, for example, the commissioning parents and surrogate live in different jurisdictions or a Parentage Order is sought to be made in a State or Territory other than the one in which the child was born. Some States have addressed this by introducing legislation that recognises interstate Parentage Orders. For example, in New South Wales, s 25B of the Births, Deaths and Marriages Registration Act 1995 (NSW) provides that if an interstate Parentage Order is made in relation to a person who has a birth certificate issued in New South Wales, that interstate Order may be registered in New South Wales. In most States and Territories a Parentage Order will not be granted unless both the commissioning and surrogate parents live in that State or Territory, the procedure is commissioned with an ART provider in that State or Territory, and the child is born in that State or Territory.

In light of these problems, and the challenges faced by international commercial surrogacy, it may be time to adopt a unified, national approach to surrogacy arrangements. This sentiment was echoed by the Honourable Nahum Mushin, former Justice of the Family Court, at a seminar titled “Surrogacy and Adoption: Pitfalls and Promises” hosted by Monash University on 2 October 2013. He posed the question whether all surrogacy arrangements ought to be brought under the Family Law Act.

The Commonwealth Attorney-General’s Department has issued the Family Law Council with terms of reference in relation to parentage and surrogacy. Their findings and submissions were due to be released in December 2013. The international legal community is also looking at the problems. It is possible that in the future a Hague Convention will deal with international surrogacy.

Ban on Commercial Surrogacy

Commercial surrogacy is banned in Australia. The definition of a “commercial surrogacy agreement” differs between States and Territories, however the common theme is that the surrogate mother is not to receive a material benefit or advantage for entering into a surrogacy agreement.

There is a range of exceptions for allowable costs associated with the surrogacy arrangement, and each State and Territory has differing views as to what monies can legally be reimbursed to the surrogate. For example, in Victoria the Assisted Reproductive Treatment Act 2008 (Vic) provides for the surrogate parents to be reimbursed for the “prescribed costs” actually incurred by them as a direct consequence of entering into the surrogacy arrangement. “Prescribed costs” are defined as:

• Any reasonable medical expenses that are not recoverable under Medicare, health insurance or another scheme;
• Legal advice obtained as required under the Act; and
• Travel costs related to the pregnancy or birth.

There are further costs that do not fall into the category of “prescribed costs” in Victoria but which nonetheless do not appear to offend the legislation, so long as the costs have been actually incurred, are directly related to the surrogacy and the reimbursement of these costs does not put the surrogate parents in a better financial position than they were before they entered into the surrogacy arrangement. These include costs of life insurance, disability insurance and health insurance for the surrogate mother, costs of maternity clothes and loss of wages.

Tasmania has a detailed list of allowable expenses which includes travel, accommodation and actual loss of earnings for specified periods. By contrast, in South Australia, the only allowable expenses are those connected with the pregnancy, the birth or care of the child, counselling or medical services in connection with the surrogacy agreement, and legal services in connection with the agreement.

Precisely what expenses are covered and how they are calculated is uncertain. For example, are travel costs calculated on the Australian Taxation Office rate? Must medical expenses be authorised by a doctor or can they be recommended by a pharmacist, physiotherapist, naturopath or other health professional? If the commissioning parents incur expenses looking after the surrogate’s children, are these offset against the costs incurred by the surrogate? If there is a dispute about expenses, are the surrogate’s legal costs of the dispute covered?

It is advisable to check the legislation applying to the specific jurisdiction in question as what constitutes allowable costs varies, as does the definition of “commercial surrogacy agreement”.

International Commercial Surrogacy

It is difficult to access statistics about the number of Australians choosing to enter into international surrogacy arrangements, however it is clear that the number is rising. The number of Australian citizenship applications lodged on behalf of minors has increased significantly in India and Thailand, two of the most popular countries for Australians entering commercial surrogacy arrangements. Applications for Australian citizenship by descent for children born in India increased from 126 in 2008 to 519 in 2012. Applications for children born in Thailand increased from 297 in 2008 to 459 in 2012.^[3] Anecdotal evidence indicates that the primary cause of this increase was a combination of the availability and relative affordability of international surrogacy coupled with the paucity of reproductive options available in Australia due to difficulties accessing donor eggs and/or surrogates.

Immigration law

Family lawyers need to be aware that they cannot give family law advice in relation to international surrogacy in isolation from a referral to an immigration lawyer for immigration advice. Immigration advice can only be given by migration agents. People who practice as unregistered migration agents in Australia are breaching the law and may be fined up to $6600 or imprisoned for up to 10 years.

The immigration issues vary depending on:

• The jurisdiction in which the surrogacy arrangement was performed, and the laws regarding the issuing of a birth certificate in that jurisdiction.
• The genetic material used to create the child.
• The information given by the commissioning parents on the application for a birth certificate.

Immigration laws in the country in which the birth took place are also relevant. For example, India has introduced visa regulations which require medical visas to be applied for by people going to India for the purpose of surrogacy arrangements. A letter from the Australian Government is also required. The letter must state that Australia recognises surrogacy and that the child will be permitted entry into Australia as a biological child of the commissioning couple.

Parents of children born overseas must apply for either Australian citizenship by descent or a permanent visa for the child. It must be disclosed at the time of making the application whether the child was born via a surrogacy arrangement.

A child is eligible for citizenship by descent if at the time of birth they had a parent who was an Australian citizen. In surrogacy arrangements where the genetic material of one or both commissioning parents was used, this requirement is readily satisfied by a DNA test. Where there is no biological relationship with the child and one or both of the commissioning parents, further evidence must be provided to demonstrate that a parent-child relationship existed at the time of birth between the child and the commissioning parents.

The Immigration Department has listed the following non-exhaustive list of factors indicating a parent-child relationship:

• A formal surrogacy agreement was entered into before the child was conceived.
• The lawful transfer of parental rights occurred in the country in which the surrogacy took place, before or at the time of the child’s birth.
• Evidence that the commissioning parent/s inclusion as a parent on the birth certificate was done with that parent’s prior consent.
• Evidence that the commissioning parent/s was involved in providing care for the unborn child and/or the mother during the pregnancy, for example, emotional, domestic or financial support and making arrangements for the birth and prenatal and postnatal care.
• Evidence that the child was acknowledged socially from or before birth as the Australian citizen’s child.

Criminal law

In the majority of States and Territories, the ban on commercial surrogacy applies only to surrogacy arrangements occurring in that State or Territory, and does not have extra-territorial effect. The three exceptions to this are New South Wales, the Australian Capital Territory and Queensland. A person ordinarily resident in these States or Territories (or domiciled in New South Wales) will have committed an offence if they enter into a commercial surrogacy arrangement, regardless of where the arrangement was entered into. Further, whilst most States and Territories make it an offence for any person to enter into or facilitate a commercial surrogacy arrangement, in Victoria and South Australia the offence is only committed by the person who receives a material benefit or advantage, rather than the person supplying the benefit.

Although there are no statistics to support this, from personal experience as Victorian legal practitioners, it is not uncommon to receive enquiries from prospective commissioning parents living in New South Wales or Queensland as to the definition of “ordinarily resident” and “domiciled”. Their plan appears to be to relocate temporarily to Victoria and from there enter into an international commercial surrogacy agreement. Fortunately for those people, they sought legal advice first.

Moral concerns

Lawyers are not arbiters of morals, but it is impossible to ignore the ethical conundrums posed by commercial surrogacy, particularly where it takes place in jurisdictions that are poorly regulated, do not have adequate protections for surrogates and children and the risk of exploitation is high.

Beyond the general distaste associated with children being dealt with as a commodity, it appears that the majority of women agreeing to be surrogates in third world countries are extremely poor and have limited education. However, is it more “morally right” to use a United States surrogate and pay, say, $200,000 in total for the surrogate’s fee, legal fees, IVF and medical expenses, but know that the surrogate has had proper legal advice and medical care? Why is that better than paying for a surrogate in a third world country who may have greater need of the money? These are value judgments considered by the public, judges and those looking to enter into commercial surrogacy arrangements.

Whatever viewpoint is taken, it is clear that the current regulatory environment appears to be largely defective in that it is characterised by uncertainty and leaves children born as a result of international surrogacy arrangements in a legal void regarding their parentage and nationality unless and until Family Court orders are made. The criminalisation of overseas commercial surrogacy by New South Wales, Queensland and the ACT appears to have been a largely ineffective deterrent, perhaps due in part to the ‘mixed messages’ sent by the Australian Government in relation to international commercial surrogacy. In particular, the Australian Government has condemned commercial surrogacy on an international level^[4], yet it appears to be indirectly encouraging it by granting citizenship by descent to children born as a result of