Bankruptcy can have significant effects upon family law proceedings and it is not uncommon for the Federal Circuit and Family Court of Australia to deal with property matters involving a bankrupt estate.
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Bankruptcy
Bankruptcy is the process whereby a person cannot pay their debts when such payments fall due. In Family Law proceedings, when a party becomes bankrupt, control of their property and income transfers to the trustee of the estate. However, some property, such as superannuation, household goods, motor vehicles and trade tools (all up to a certain amount), are excluded.
A party who is bankrupt must notify the Court in Family Law proceedings. This means that notification must be either at the commencement of proceedings, or at any time during the proceedings.
The trustee of the bankrupt estate
When a party declares bankruptcy, a trustee is appointed by the Australian Financial Security Authority to manage and administer the bankrupt estate. This is set out under section 58 of the Bankruptcy Act 1966. If a party is bankrupt at the time family law proceedings are on foot, the property pool may be adjusted accordingly to reflect this. The trustee must be served with all existing Court documents relevant to the proceedings and asked whether they wish to be heard as a party to the proceedings. This process is set out under sections 79(11) and (12) of the Family Law Act.
If the trustee wishes to be joined as a party,the bankrupt party will likely lose standing to make submissions as to vested property, butwill likely retain standing to make submissions as to non-vested property (such as motor vehicles, superannuation, and property in the name of the non-bankrupt spouse).
If the trustee does not wish to be a party to the proceedings, then the matter can proceed as usual between the parties.
Where one party is bankrupt in a family law proceeding, it would be useful to examine the case of Redmond & Redmond and Anor [2014] FamCA 678. Here, it was discussed that the bankrupt party can seek orders allowing them to retain all property, besides the vested bankruptcy property and the property belonging to the non-bankrupt party. It was held that the Court cannot order either spouse to transfer to the trustee any property. However, the Court can order the trustee to surrender property to the parties, provided that the transaction would be just and equitable.
To put it simply, the property can be divided into three pools: the bankrupt estate, the non-vested property (such as the bankrupt’s party superannuation) and the non-bankrupt party’s property. Because there are usually three pools, any deal needs to be tri-party, unless the bankruptcy trustee does not wish to be heard. This process is dealt with under section 79 of the Family Law Act.
Protection of the non-bankrupt party
The non-bankrupt party usually does not have priority over the creditors. The Court must examine the competing rights to determine priority. However, the non-bankrupt party can apply to the Court for an injunction to restrain the trustee from distributing the property of the estate to the creditors before the property settlement is settled.
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