Marriages & Bankruptcy

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There are significant considerations for the Trustee in Bankruptcy in the process of administration in bankruptcy and on the rights of creditors in a bankrupt estate arising from the provisions of the Family Law Act. The Family Law Amendment Act 2003 gave the Family Court the right to make orders in respect of third parties and the bankruptcy and Family Law Legislation Amendment Act 2005 which gives the Family Court and the Federal Magistrates Court extensive powers in relation to property of the bankrupt after it has vested in the trustee.

The 2005 amendments have brought far reaching changes to the interaction of family law and bankruptcy and to property adjustment orders.

Summarising the pivotal amendment, s.79 (1) provides that in property settlement proceedings, the court may make such order as it considers appropriate with respect to:

1. the property of the parties to the marriage by altering the interests of the parties to the marriage in the property; or
2. in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage by altering the interests of the bankruptcy trustee in the vested bankruptcy property.

This section enables the Family Court in the course of property proceedings to make orders in favour of the non-bankrupt spouse or of the parties’ children out of the property that has vested in the trustee.

To exercise that power the Court, as in any property settlement proceedings between spouses who are not bankrupt, is required to consider the financial and the non-financial contributions of the parties made at any times in the relationship, the parties’ contributions as parents and homemakers, the availability of child support, the maintenance factors set out in the Family Law Act 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 that effect is relevant.

The bankruptcy trustee is entitled to apply to be joined in the proceedings in order to petition that court that the interests of the bankrupt creditors may be affected by the making of an order in the property proceedings. As added protection the Family Law Rules requires notice to be given to a bankruptcy trustee or trustee of a personal insolvency agreement that the bankrupt is involved in Family Law proceedings.

The trustee’s position in Family Law proceedings is to ensure that the creditors in the bankruptcy receive the greatest benefit possible from the bankrupt’s estate. The limitation on the trustee is that the best that the trustee can do is to retain the estate that has been vested in it under the Bankruptcy Act.

The Trustee effectively steps into the shoes of the bankrupt for the purpose of making submissions as to how the property of the parties to the marriage is to be divided between the non-bankrupt spouse and the trustee. The Trustee however has difficulties when his rights are contrasted to the rights existing between two non-bankrupt parties. For example, where a party has made the greatest possible contributions (financial, non-financial, direct and indirect as parent and homemaker) whereas the other party has been a poor contributor to the relationship then the first party can seek a greater contribution of the asset pool.

Say however that the first party was a bankrupt spouse then the bankrupt’s estate would only receive the beneficial interest of that bankrupt. The bankruptcy trustee is essentially in the position of fighting a rear guard action. Firstly there is little motivation for the bankrupt to assist the Trustee in submitting to the Court the reasons for an increased distribution based on the contributions made during the relationship. Secondly the court may simply see this case as a vexatious attack on the worth and value of the non-bankrupt party.

Mark Shera, Accredited Family Law Specialist, SJP Law - with thanks to Rob Hamwood, Barrister.

Last Updated: 01.08.2009

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