‘CLAW BACK’ POWERS IN FAMILY LAW COURT PROCEEDINGS – TRANSACTIONS TO DEFEAT FAMILY LAW ORDERS

By Jack Job, Lawyer

Separation, or the prospect of separation, often leads to concerns about future financial security and may encourage a spouse to dispose of (or consider disposing of) an asset to a third party.

This is commonly seen where a spouse intends to ‘hide’ assets and maximise the property to be retained by them in a Family Law property settlement.

The Court’s Power to set aside transactions to defect Family Law Orders

Pursuant to section 106B of the Family Law Act 1975 (Cth) (the Act), the Federal Circuit and Family Court of Australia (the Court) has discretion to set aside or restrain a party (and that party’s agents) from disposing of that party’s interest in an asset where that disposition is made to defeat, or is likely to defeat, an existing or anticipated Family Law Court Order.

The practical effect of the Court setting aside such a transaction is that the disposition is reversed, and that party’s interest in the disposed asset is ‘clawed-back’ and included in the family law asset pool available for division between the parties.

An application can be made to the Court for an Order under section 106B of the Act once Family Law Court proceedings have been commenced. Who can make such an application is not limited to the parties to those proceedings. Indeed, an application can also be made by a creditor of a party to the proceedings (if that creditor may not be able to recover their debt if the disposition were made), and any other person whose interests would be affected by the disposition.

The party or person who brings an application under section 106B of the Act has the burden of proving the necessary elements to enliven the Court’s jurisdiction, and must then persuade the Court to exercise its discretion in that party’s favour.

In exercising its discretion under section 106B of the Act, the Court must consider the interests of bona fide purchasers or other interested persons and make any order necessary for their interests to be protected. The Court will also consider the circumstances surrounding the disposition as well as the case more generally before making such Orders.

Costs Consequences

If you are a party to an application under section 106B of the Act, or are considering making such an application, it is important that you obtain expert Family Law legal advice in order to avoid adverse cost consequences.

Under Section 106B of the Act, the Court can order a party (or a person acting in collusion with a party) to pay the legal costs of any other party, a bona fide purchaser or other interested person.

For example, if a spouse transfers their interest in a company to their sibling or new partner, it may be necessary to join that person to the Family Law Court proceedings as a third party in order to enliven the Court’s power to set aside that transfer under section 106B of the Act. However, the party seeking to set aside the transfer may be required to pay the legal costs of that sibling or new partner if that party’s application pursuant to section 106B of the Act is unsuccessful.

A case study – the recent decision of Ferguson & Ferguson [2022] FedCFamC2F 1194

Background

In 2001, a Husband and Wife executed documents that transferred their title in their former matrimonial home to the Husband’s adult daughter from a previous relationship (the transfer). In exchange, the Husband and Wife received a life interest in the former matrimonial home. The Husband and Wife separated approximately 18 years after the transfer.

Court Proceedings

The Wife initiated Family Law Court proceedings seeking, amongst other things, orders under section 106B of the Act to set aside the transfer. The case was heard before Judge Betts who found in favour of the Wife and made Orders setting aside the transfer.

In arriving at its decision, the Court acknowledged that both parties signed the transfer documents and the considerable lapse in time between the signing of those documents and the filing of the Wife’s application (approximately 18 years). However, these factors were not fatal to the Wife’s application under section 106B of the Act.

In exercising its discretion, the Court noted the considerable difference in the value of the asset pool if the former matrimonial home was included.

The Court also placed significant weight on the Wife’s state of mind when the transfer documents were signed. In this regard, the Court accepted that the Husband controlled the parties’ finances; that the Husband misled the Wife as to the true effect of the documents; that the Wife’s English comprehension was inferior to that of the Husband (English was the Wife’s second language); and although the parties obtained joint legal advice in relation to the transfer documents, the Wife did not understand this advice, and she was not advised how the transfer could impact her future Family Law entitlements (nor was she encouraged to obtain advice on such matters).

Further, the Court noted that, according to the evidence of the adult daughter, the transfer was intended to defeat any claim against the Husband’s estate by the Husband’s estranged adult son. However, the evidence of the adult daughter also conceded that, at the time the transfer documents were executed, the Husband was concerned that the Wife would claim an interest in the former matrimonial home and leave him homeless.

In light of these factors, the Court held that the transfer was made to defeat, or was likely to defeat, an anticipated Family Law Court Order that would otherwise have been made in the Wife’s favour.

In considering the interests of any bona fide purchasers or other interested persons, the Court noted that the adult daughter received title to the former matrimonial home for no consideration,  and was accordingly not a ‘bona fide’ purchaser.

Significance of the Court’s Findings

The Court’s decision in Ferguson illustrates the significant ‘claw back’ powers of the Court under section 106B of the Act.

It may be that the Court’s decision would have differed if the transfer was made to a bona fide purchaser, and/or the Wife obtained appropriate independent legal advice in relation to the transfer and how that transfer could impact her future Family Law entitlements.

If you require legal advice or representation with respect to your Family Law matters, please contact our highly experienced Family Law Team at MST Lawyers on (03) 8540-0200 or at familylaw@mst.com.au.