Bankruptcy after Final Family Law Orders are made but prior to compliance: Does the horse bolt?

The interplay between family law and bankruptcy can be difficult to navigate.  The series of decisions in Rahman & Rahman, provide a unique snapshot into the difficulties caused where there are overseas assets, and insolvent party, the risk of the insolvent party absconding from Australia, and desperate attempts by a party to avoid compliance with Final Orders.

Rahman & Rahman [2020] FamCAFC 279

By way of short background:

1. The parties participated in a Final Hearing. The Court found that:

(a) The husband had amassed without the wife’s knowledge the sum of $580,000 through drawing down on the mortgage encumbering the family home and transferring the funds to Lebanon to keep them out of the wife’s reach;

(b) These funds represented the property that was available for division between the parties.

2. On 10 February 2012, the Family Court made Final Orders providing that the husband:

(a) Pay the wife the sum of $377,000; and

(b) Pursuant to s 114(5), be restrained from leaving Australia until he made the payment.

3. The husband appealed the Final Orders made on 10 February 2012, which was dismissed by the appellate court.
4. In October 2013, after his unsuccessful appeal, the husband declared himself bankrupt on his own creditors’ petition. The substance of his creditors’ petition was that there were creditors of $378,010, of which the wife was owed $377,000.
5. In October 2016, the husband was discharged from his bankruptcy. He had not complied with the Final Orders by paying the wife the sum of $377,000.
6. In May 2017, the husband filed an application that sought to discharge the restraint on his ability to leave Australia. The husband argued, unsuccessfully, that the amount owed to the wife merged in his bankruptcy and that, upon his discharge, the liability to pay his wife was extinguished and as such, there was no longer any proper basis upon which a restraint should be imposed upon his freedom of movement.  A decision dismissing this application was made on 13 March 2020. The husband appealed that decision (the First Appeal).

7. For completeness, it is also relevant to note that in April 2020, the wife also filed an Initiating Application seeking a superannuation splitting order. The husband also appealed the first instance decision, subsequently filing an appeal (the Second Appeal).
8. This case note will only deal with the First Appeal.

The First Appeal dealt with the court’s rejection of the husband’s application to discharge the restraint on his movement.  Presumably, the husband wanted to flee to Lebanon.  In order to arrive at its determination, the appellate court, comprising of Strickland, Ainslie-Wallace and Austin JJ, had to determine, in substance, whether the husband was still required to pay the wife the sum of $377,000 under the Final Orders.

In arriving at its decision:

1. The court was faced with the situation whereby the husband had declared bankruptcy after dividing the parties’ property under s 79. As an editorial comment, the court is usually faced with making order in relation to a non-bankrupt spouse under s 79, so as to remove property from the hands of the bankrupt and into the hands of the non-bankrupt spouse.
2. Upon bankruptcy, property of a bankrupt vests in the trustee in bankruptcy unless it is exempt, say under s 59A of the Bankruptcy Act 1966 (BA) or s 116 of the BA. In this case, the court was concerned with the application of the s 59A of the BA, which says that:

Sections 58 and 59 have effect subject to an order under Part VIII or VIIIAB of the Family Law Act 1975

3. The Final Orders made on 13 February 2012 was an order under Part VIII and had the protection of s 59A. This means that the judgment was not a provable debt and separate to the husband’s bankruptcy. In relation to this, the Full Court said at 11 that:

‘An order made under Pt VIII of the Act overrides the vesting provisions of the  Bankruptcy Act , regardless of whether the Pt VIII order was made before or after the debtor became bankrupt (Oliver v Malanos [2011] FCA 1354; (2011) 199 FCR 136 at [38]–[40], [61]–[62]; Trustee of the Property of G Lemnos, A Bankrupt & Lemnos and Anor [2009] FamCAFC 20; (2009) FLC 93-394 (“Lemnos”) at [59]–[60], [200]–[202]).’

4. The Husband argued that the family law order he pay the wife the sum of $377,000 was a ‘money judgment’ and therefore a provable debt in the husband’s bankrupt estate. This would mean that, if the court accepted this argument, that the wife would have no priority among any unsecured creditors and below those as ranked under s 109 of the BA.  In putting this proposition, the husband attempted to rely upon the decision in Trustee for the Bankrupt Estate of N Lasic & Lasic [2009] FamCAFC 64; (2009) FLC 93-402.  The Full Court rejected this and reasoned ‘that nothing said generically about bankruptcy  principles in Lasic contradicts what was said more specifically in Lemnos about spouses’ rights being no longer subordinated to creditors’ right’.’
5. The court went on to say that:

(a) As noted above, the Final Orders were separate from the husband’s bankrupt estate through the operation of s 59A of the BA.  The husband was therefore always separately liable to pay the wife and make good the Final Orders;

(b) When the husband was discharged from his bankruptcy, he was discharged from only the provable debts.  The Final Order was not a money judgement, by virtue of s 59A, and therefore not provable.  Compliance with the Final Order remained live until the husband made payment to the wife in satisfaction of the Final Order;

(c) Accordingly, there was no error with the trial judge’s decision to dismiss the husband’s application to discharge the restraint.

Conclusion

The decision is a helpful reminder as the protection that a family law order provides to a non-bankrupt spouse, and the type of mechanisms that can be employed to compel someone to make payment.

Further information

If a bankruptcy is looming in respect of a party to family law proceedings, it is important that specialist advice is obtained as soon possible.  Advice should also be sought regarding asset protection mechanisms available if contemplating high-risk business activities.  If you would like to arrange an initial, no cost consultation with one of our Family & Relationship lawyers, please call our office on (03) 5273 5227, or get started now with our tailored online preparation tool.