Family Law and liquidators: how the interplay between Family Law and insolvent trading claims is starting to emerge

Family Law 2 December 2020

Although it may be premature to assess any trends starting to emerge from the COVID-19 pandemic, two recent Federal Court decisions have determined applications pursuant to section 1337H(2) of the Corporations Act 2001 to transfer proceedings from the Federal Court of Australia to the Family Court of Australia.

Yeo, in the matter of Armstrong and Shaw Pty Ltd v Whiteman [2020] FCA 849

In the case of Yeo, in the matter of Armstrong and Shaw Pty Ltd v Whiteman [2020] FCA 849 (Whiteman), liquidators had commenced proceedings in the Federal Court seeking relief concerning the entitlement of the liquidated companies to proceeds of sale of three items of real property.  The liquidators allege that the properties were purchased with, or had mortgages serviced by, money that was provided by the liquidator companies so as to fall within the purview of insolvent transactions.

In particular, the Liquidator had set out in his Affidavit the funds that he had identified as being paid from the liquidated companies towards the purchase of the real properties, as well as to maintain the mortgage secured loans obtained to purchase the properties.  On that basis, the liquidated company claimed to some or all of the proceeds of sale of the properties that were being held on trust.  It is not known whether the Liquidator was seeking to engage any equitable relief in the form of a charge or lien over the proceeds.

In her application to transfer the proceedings to the Family Court of Australia, the de facto wife alleged that she had made significant financial and non-financial contributions towards the acquisition and payments in respect of the properties, and that the third plaintiff’s legal ownership of the properties was intended by the de facto husband to disguise his contributions to, and beneficial interest in, the items of real property [at paragraph 17].

The family law proceedings had commenced in 2017 and were listed for trial in May 2020.   Due to COVID-19 the trial had been adjourned.  It is also relevant to note that the Deputy Commissioner of Taxation is a party to the family law proceedings as an unsecured creditor.

Factors supporting the transfer in Yeo

In deciding to transfer the matter to the Family Court, the Federal Court was persuaded that the matter in the Family Court is substantially ready for trial; that the transfer of the proceedings to the Family Court will ensure that the plaintiff’s in the proceeding can pursue their claims which need to be determined in conjunction with the claims raised by other defendants in the Family Court proceeding; noting that the Deputy Commission of Taxation is also a party seeking an interest in the properties forming the matrimonial dispute; the transfer of the proceeding will avoid any potential Anshun or issue estoppel considerations arising against the parties to the proceedings; and importantly, that a practical ‘nuts and bolts’ managerial approach dictates that the pursuit of interests favour the determination of the proceeding in the Family Court, so as to save unnecessary duplication of costs, and save valuable judicial and other resources.

Shepard, in the matter of Grainpro Pty Ltd in Lick v Bonfante [2020] FCA 1618

Further, an application to transfer was also recently considered in the decision in Shepard, in the matter of Grainpro Pty Ltd in Lick v Bonfante [2020] FCA 1618 (Shepherd).  In Shepard, the Liquidator commenced proceedings seeking declarations and further Orders pursuant to sections 180, 181, 588G, 588M and 1317H of the Corporations Act (insolvent trading claims).

In consideration of whether the insolvent trading proceedings are were to be transferred to the Family Court, the court cited the decision in Yeo, referred to above, and the passage at paragraphs 29 to 30 of the decision where Justice Sanderson noted that:

Section 1337H(2) confers a wide discretion to transfer proceedings where, having regard to the interests of justice, it is more appropriate for the proceeding to be heard by the other Court.  The meaning of the interests of justice in the context of the transfer of proceedings has been considered on many occasions in different statutory schemes.  

Factors supporting the transfer in Shepherd

In deciding to transfer the proceedings under Section 1337H(2) of the Corporations Act, the court noted that the Family Court has jurisdiction to quell the whole controversy between the parties; that entire disputes should be determined in one Court to avoid multiplicity in proceedings, promote efficient management of procedural for all parties; and if the insolvent trading proceedings transferred to the Family Court then liability for a claim for insolvent trading would be considered through the prisms under sections 79 and 90AE of the Family Law Act.

Generally

In both Yeo and Shepherd, the court placed reliance on the principles summarised by Justice McKerracher in Yara Pilbara Fertilisers Pty Ltd (formerly known as Burrup Fertilisers Pty Ltd) v Oswal (No 8) [2015] FCA 49, including at [30]:

[26] As I noted in Commissioner of Taxation v Residence Riverside Proprietary Limited as Trustee for the D& J Discretionary Trust and as Trustee for the D& J Investment Trust [2013] FCA 720 (at [17]), this Court has previously recognised many factors as being relevant to the decision, which will vary in weight from case to case, including:

(1)        The stage of the proceedings in the respective courts;

(2)        The commonality or diversity of the parties;

(3)        The nature of the proceedings;

(4)        The commonality or diversity of issues;

(5)        The risk of conflicting findings of fact or conflicting orders;

(6)        A costs benefit analysis;

(7)        The potential unnecessary drain on judicial and other public and private resources; and

(8)        Whether there is any particular judicial expertise residing in one court of the other.

It appears that the killing ground as to whether the application is successful or not is whether there is a commonality of issues in dispute, whether a failure to transfer will result in a multiplicity of proceedings and whether there is the potential to waste sparse judicial resources should the matter not be transferred.

Conclusion

As demonstrated in the recent cases, the Federal Court is not hesitating on transferring proceedings to the Family Court, namely because the insolvent trading claims in the proceedings are a matrimonial cause such that the Federal Court no longer has jurisdiction to hear the matter.  There is an expectation that upon the removal of the ‘Job Keeper’ government subsidy, that there will be an increase in insolvent trading claims as liquidators seek to widen the pool available for distribution among creditors.  As a final point, and perhaps a point of distinction, one speculates that an application to transfer in proceedings concerning the appointment of a receiver may be treated differently given the rights of a secured creditor.

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