The recent decision of Barre v Barre [2021] FamCA 101 explores the complicating effect bankruptcy may on Family Court proceedings in the context of enforcing a Binding Financial Agreement
By Sian Harding, Law Clerk, Jacob Cripps, Law Clerk and Alicia Hill, Principal
The recent decision of Barre v Barre [2021] FamCA 101 explores the complicating effect bankruptcy may have on otherwise on Family Court proceedings in the context of enforcing a Binding Financial Agreement.
The parties
The case involved several parties, including Mr and Ms Barre (a pseudonym) who were married between 2005 and 2015.
Prior to their marriage Mr and Ms Barre entered into a Binding Financial Agreement (BFA) in accordance with section 90B of the Family Law Act.
Barre Pty Ltd was also joined as a party to the proceedings, with the Husband being sole shareholder and director of the company.
Finally, Ms Gilliam was joined by consent as she was a creditor of the husband for an amount agreed to be $228,000 and may have advanced funds to Barre Pty Ltd.
Ms Gilliam commenced her own proceedings against the husband seeking a declaration that a de facto relationship had existed between them from June 2016 and December 2018.
Background and progression of proceedings
The proceedings commenced in 2016 by the wife’s filing of an Initiating Application in the Federal Circuit Court. This Application was further amended on 3 April 2017 and 11 April 2017. In the 11 April 2017 Application the wife sought that the BFA be set aside, or that in the alternative orders be made for the sale of two properties, the D Street and G Street properties. She also sought superannuation splitting orders and a child support departure order.
On 3 May 2017 the parties entered into consent orders providing for the sale of G Street with the net proceeds to be held in a Controlled Monies Account (CMA) in the name of the wife’s solicitors, and injunctions preventing the husband or Barre Pty Ltd from dealing with the proceeds, the wife providing the usual undertaking as to damages. The net sale proceeds transferred to the CMA was $779,190.47.
There were various interlocutory applications relating to the release of the CMA funds. Ms Barre’s mother filed a notice of intervention along with Ms Gilliam claiming to be creditors of the husband and potentially Barre Pty Ltd. By consent $25,000 was released to Mr and Ms Barre, Ms Gilliam and Ms Haynes (the wife’s mother). There were further hearings to deal with various applications in the case and on 21 November 2019 the parties consented to orders releasing $130,000 from the CMA to Ms Haynes. The hearing of the same date resulted in orders where $70,000 was released to the husband and $50,000 to Ms Gilliam. At this point, the amount remaining in the CMA was approximately $118,707.
Throughout this period the husband changed solicitors numerous times before finally proceeding as a self-represented litigant in the two months leading up to the final hearing, and the final hearing itself.
Harper J observed that whilst there was ‘some evidence’ that the husband suffered from bipolar, it was not clear and there were no submission made as to the impact that this had on his capacity to self-represent, nor was any request for adjournment made by the husband. On 7 January 2020 Ms Gilliam also became self-represented.
Prior to the final hearing parties also became aware that Mr Barre was the subject of a Creditor’s Petition issued by his previous solicitors. In reciting the events of the narrative of the proceeding in the lead up to the trial, Harper J characterised them as being “bedevilled by forces of disorder and delay” generally as a result of the husband’s continuous changing of lawyers and failure to file evidence in accordance with directions, and the frequent interlocutory applications.
The trial itself was affected by delay, with the proceedings being adjourned to 7 February 2020 due to the husband’s need for medical attention.
On 7 February 2020 the parties returned to court and the husband produced a medical certificate stating that he was unfit for Court proceedings for a period of two weeks. The solicitor for the wife submitted that the matter should proceed by way of written submissions as this would reduce the levels of anxiety for the husband. They did however identify that it was imperative for the proceedings to conclude by 3 March 2020, being the date on which the husband’s bankruptcy proceedings were before the Federal Circuit Court.
The Court made orders for the husband and Ms Gilliam to file and serve written submissions by 19 February 2020 and for the wife to file and serve written submissions in reply by 26 February 2020, however this timeline was not adhered to by the husband nor Ms Gilliam.
Ms Gilliam made an Application in a Case on 6 April 2020 seeking orders for the release of $45,000 to her from the CMA. Barre Pty Ltd also made an Application in a case on 19 April 2020 seeking the release of this amount to Ms Gilliam, and the remaining balance to be released to Barre Pty Ltd. Barre Pty Ltd also applied for orders that the wife instruct her lawyers not to contact or share information from either the matrimonial or defacto proceedings (between Ms Gilliam and the husband) with any person not party to the proceedings, and in particular his past lawyers, Q Lawyers.
Following further interlocutory hearings, on 9 June 2020 orders were made for the balance of the CMA to be paid to Barre Pty Ltd and for Barre Pty Ltd to then pay $35,000. As Harper J identified “unfortunately, even this did not stabilise the shifting sands of these proceedings”. A month later on 9 July 2020 a Notice of Address was filed on behalf of the Trustee in Bankruptcy for the husband following the husband being made bankrupt on his own petition.
Issues
The court identified as the main issues in dispute
- The implementation and enforcement of the BFA;
- The consequences of the Husband’s bankruptcy and in particular
- Whether the husband’s bankruptcy affected the jurisdiction of the court, and in particular whether proceedings under Party VIIIA of the Family Law Act are “property settlement proceedings” for the purposes of s 35 of the Bankruptcy Act;
- Whether the husband’s bundle of rights under the BFA are choses in action and thus property that vests in the Trustee
- Whether s 86 of the Bankruptcy Act applied;
- Whether an undertaking given to the Court by the husband to pay the mortgage secured against the D Street property can be enforced by an order for the payment of money by the husband;
- Whether a child support departure order should be made against the husband while he is bankrupt;
- Whether the Court has jurisdiction to make a superannuation splitting order; and
- Whether the Court can and should compel the husband and the wife to take steps as directors of the self-managed superannuation fund.
This case note will focus primarily on items 2 to 4 (being ancillary to item 1), and provide a summary of the Court’s findings with respect to the other issues in dispute.
Decision
The application of s 86 of the Bankruptcy Act
The Court, with little discussion, accepted the submission of the wife that s 86 of the Bankruptcy Act has no application to the dealings with the wife and husband, as there is no evidence that the wife is claiming to prove a debt in the Husband’s bankruptcy.
Consequences of the Husband’s bankruptcy – the operation of ss 60(2) and (3) of the Bankruptcy Act
Sections 60(2) and (3) of the Bankruptcy Act outline that
(2) “An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action”; and
(3) “If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.”
Harper J summarised past authority that the broad operation of these provisions means that in the event the trustee has not made an election to prosecute the current proceedings, they are first stayed and then abandoned if it is after 28 days of the notice being served.
The Court was first required to consider whether the present proceedings could be considered ‘an action commenced by a person who subsequently [became] bankrupt’. Harper J identified that the husband’s response to the wife’s initiating application constituted an action commenced by the husband. This was due to the effect of numerous provisions in the Bankruptcy Act. Firstly, s 60(5) of provided that for the purpose of s 60(2) and (3) the word ‘action’ means ‘any civil proceeding, whether at law or in equity’. The Act identifies at s 21(2A) that the Family Court of Australia is a court of law and equity. Section 4 of the Act defined proceedings as a proceeding in a court, including cross proceedings, and Harper J emphasised that the Response filed in the Family Court falls within this definition.
The Court then considered whether an election had been made concerning any of the Husband’s claims for the purpose of s 60(2). Harper J identified that there was no election made by the Trustee evidenced, and the election must also be in writing, which had clearly not occurred here. Therefore, the stay on the Husband’s action remains in effect. He also noted that the deemed abandonment of the action pursuant to section 60(3) only occurs if the Trustee does not make an election within 28 days of notice of the action being served. Although the Trustee had knowledge of the action, having filed a Notice of Address for Service and outlined that he did not propose to agitate any matter for debate pending the delivery of judgement in the proceedings, knowledge alone does not constitute notice. Notice requires that a document being a notification is served upon the Trustee by another party to the proceeding. This did not occur here.
Consequently, the 28 days the Trustee has to make an election had not yet begun to run, and the Husband’s action remained stayed. Meanwhile, the wife’s application to enforce the BFA filed with the Court remained on foot, and the court retained jurisdiction over the matter.
Whether the property had vested in the Trustee by force of section 58(1) of the Bankruptcy Act
Section 58(1) of the Bankruptcy Act effects involuntary assignment of a bankrupt’s property. As a result of the husband’s bankruptcy it was necessary for the Court to identify what exactly had been assigned to the Trustee to allow for precise orders that accord with the BFA.
Property of the bankrupt is defined as property divisible among the bankrupt’s creditors and any rights and powers in relation to that property that would have been exercisable by the bankrupt if they had not become a bankrupt, pursuant to section 5 of the Bankruptcy Act.
As Harper J identifies, property such as the husband’s fee simple interest in the D Street property clearly vests in the Trustee, and the Trustee holds this interest in equity pursuant to section 58(2) of the Bankruptcy Act with the option to register his interest.
However, the following rights require more in depth analysis as to whether they constitute ‘property’ that may vest under section 58:
- The husband’s right to litigate enforcement of the BFA through general law contractual principles imported into section 90KA of the Family Law Act; and
- The bundle of rights to performance, benefits and entitlements enjoyed by the husband under the BFA.
The Court acknowledged the historical controversy regarding a right to litigate as constituting property, and followed the reasoning of Hogan J in Southern & Southern and Ors [2019] FamCa 1002 to conclude that the right to litigate enforcement of the BFA vested in the Trustee upon the husband’s bankruptcy.
Hogan J emphasised that the right to seek an order regarding a financial agreement under the Family Law Act is based on or arises out of the existence of the BFA itself rather than any marriage. The BFA is a legislatively created and defined contract between the parties to it, and the effect is to oust the application of Party VIII of the Family Law Act (which provides the court jurisdiction when a marriage is entered into, to make orders it considers appropriate regarding the alteration of property interests irrespective of any breakdown of the marriage).
The existence of the BFA determines the property of a bankrupt, and therefore must be regarded as being connected to the bankrupt’s property. The right to apply for an order under Part VIIIA of the Family Law Act regarding financial agreements is a right that affects the quantum of the bankrupt’s estate, is of value to creditors, has implications for the bankrupt’s estate, arises out of the bankrupt’s existing rights under the financial agreement and is a right that could be turned to a profit for the benefit of the bankrupt’s estate. This combined with the fact that the Trustee has a sufficient interest in such a right to litigate is persuasive that such a right is a chose in action that can be considered property for the purpose of section 58 of the Bankruptcy Act.
Regarding the bundle of rights of performance, benefits and entitlements under the BFA can be considered choses in actions and therefore property, Harper J concludes that they are ancillary to the husband’s interest in the real property outlined above, and therefore are present interests ‘incidental to the real property if the husband’ and vest in the Trustee. The rights particularly identified by Harper J are:
- the rights of performance in bringing about the sale of separate or shared property;
- benefits in the form of entitlements to separate property;
- entitlements to an equal division of net proceeds of sale of certain property; and
- reimbursement of lump sum payments towards mortgages or contributions to separate or shared property.
Conclusion
This case highlights that a BFA may not protect assets in the event of a marital breakdown.
Ms Barre was ordered to sell the C Street property and pay disbursements in order of:
- Real estate agent expenses;
- Legal fees;
- Discharge of the Mortgage;
- Capital gains tax;
- Payment of $202,701, $32,310 and $39,946 to herself; and
- Half of the remaining balance to the Trustee in Bankruptcy of Mr Barre.
Furthermore, this case underscores the potential for divorced couples to still be liable for company debts if they both have a stake in the company. While Ms Barre held no shares of the company, she was found to be liable for $449,000 from the liquidator. This is due to the proceedings being set under Part VIIIA of the Act, not Part VIII. The power to make orders pursuant to section 90G(2) does not assist because it is limited to orders thought necessary for the enforcement of the BFA.
Finally, debts from the divorce were also expected to be used to pay company creditors. An example of this is the proceeds from the sale of the D Street property. This indicates that in bankruptcy declarations, creditors have some significant overreach and can access personal financials as powered by s 35 of the Bankruptcy Act.
If you have any queries, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au
