Binding Financial Agreements and Bankruptcy

Binding Financial Agreements and Bankruptcy

Introduction

Part VIIA of the Family Law Act 1975 (Cth) (“FLA”) is an extremely important portion of legislation which has had wide reaching impact on Australian families. In particular it provides for four (4) types of financial agreements between married couples:

  1. Before marriage (s 90B of the FLA);
  2. During marriage but before separation (s 90C of the FLA);
  3. During marriage but after separation (s 90C of the FLA); and
  4. After divorce (s 90D of the FLA).

Part VIIIAB of the FLA is equally as important as it provides for three (3) types of financial agreements between de facto couples:

  1. Before a de facto relationship commences (s 90UB of the FLA);
  2. During a de facto relationship (s 90UC of the FLA); and
  3. After a de facto relationship ends (s 90UD of the FLA).

Any agreement entered into before marriage must be made in anticipation of marriage otherwise the agreement has no effect. Further, any agreement entered into whilst in a de facto relationship automatically terminates upon marriage.

Binding Financial Agreements

A binding financial agreement (“BFA”) usually includes the following:

  1. How property and financial resources are dealt with;
  2. Maintenance;
  3. Matters “incidental or ancillary to” the above matters; and
  4. Other matters.

The parties do not require consent or approval from the Court to prepare a BFA. In fact, BFA’s are prepared in order to avoid the Court’s interference into the mutual agreements made between the parties.

However, in order for a BFA to be enforceable, the following requirements must be met (pursuant to s 90G (married couples) of the FLA and section 90UJ (de facto couples) of the FLA):

  1. The agreement must be in writing and signed by both parties;
  2. The parties have signed a statement specifying that they have received independent legal advice from a lawyer in regards to specific matters;
  3. Certification from the lawyers which is attached to the agreement;
  4. The agreement is not to be terminated or set aside; and
  5. A signed copy is given to each of the parties to the agreement.

Provided all the steps are taken above, the Court should not scrutinise the BFA to ensure that it is just and equitable. The Court would only tend to set aside a BFA if there were fundamental flaws with the BFA.

The drafting of BFA’s is now one of the main avenues for claims against lawyers for professional negligence.

Binding Financial Agreements and the Bankruptcy Act 1966 (Cth)

Although BFA’s are binding and exclude the jurisdiction of the Family Court, the transfer of property that takes place under the BFA may be challenged under the provisions of the Bankruptcy Act 1966 (Cth) (“BA”).

Trustees are able to set aside BFA’s entered into under the provisions of the FLA, either between a spouse or de facto couple, pursuant to sections 120 or 121 of the BA.

Section 120 or 121 of the BA permit a trustee to void a transfer of property in circumstances where the transfer was for less than market value consideration or no market value consideration or, in the alternative, there was an intention to defeat creditors. Whilst the onus will be on the trustee to have the transfer set aside, the conclusion can be drawn from all the relevant circumstances and on the balance of probabilities.

Section 120 of the BA – Undervalued transactions

Often a Bankrupt might be inclined to transfer assets to a related party for less than market value before bankruptcy to remove them from ownership and ultimately to avoid creditor realisation. In general, if this occurred within five (5) years before the date of bankruptcy, the transaction may be void against the trustee.

The elements of section 120 of the BA are as follows:

  1. That there has been a transfer of property by a person who later becomes bankrupt;
  2. The transfer took place in the period commencing five years before the commencement of the bankruptcy and ending on the date of the bankruptcy;
  3. The transferee gave no consideration for the transfer; or
  4. The transferee gave consideration of less than market value of the property.

An example of this transaction would be where a debtor sells his or her share in the family house to his or her spouse for $1.00 or “natural love and affection”.

Section 120(3) is a defence to an action under section 120(1) of the BA and provides that a transfer is not void if, in the case of a transfer to a related entity of the transferor the transfer took place more than four (4) years before the commencement of the bankruptcy and the transferee proves that, at the time of the transfer, the transferor was solvent.

Pursuant to section 120(3A) of the BA, the trustee can presume that a transferor was insolvent if books were not kept, unless of course the transferor can effectively rebut this.

There is no obligation to prove intent on the part of the transferor or transferee. It is merely necessary to prove that there was no consideration provided for the transfer or the transfer was of less value than the market value f the property at the time of the transfer.

Section 121 of the BA – Transfers to defeat creditors

A transfer of property by a person who later becomes a bankrupt (“transferor) to another person (“transferee”) is void against the trustee in the transferor’s bankruptcy if:

  1. The Property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred:
  2. The Transferor’s “main purpose” in making the transfer was:

1. To prevent the transferred property from becoming divisible among the transferor’s creditors; or

2. To hinder or delay the process of making property available for division among the transferor’s creditors.

The words “main purpose” invokes an intention which may be necessarily inferred. The transferor’s “main purpose” might be a difficult thing for a trustee to prove or disprove.

The trustee may need to consider that the transferor’s “main purpose” may be to make provision for his or her spouse and/or children and also for the purpose of defeating creditors. The bankrupt would be unlikely to admit that the “main purpose” of the transfer was to defeat creditors. Accordingly, the trustee would need to look at the objective evidence of the surrounding circumstances leading up to the transfer, the alleged genuineness of the separation, solvency and any communications between the transferee and transferor and any professional advisors.

The BA protects transfers where the transferee acted in good faith. Pursuant to section 121(4) of the BA, the transferee may defeat an action to void a transfer if the following can be established:

  1. That the consideration given for the transfer was at least as valuable as the market value of the property;
  2. The transferee did not know and could not reasonably have inferred that the transferor’s main purpose was to defeat creditors; and
  3. The transferee could not have reasonably inferred that, at the time of the transfer, the transferor was, or was about to become insolvent.

Case Law

In Sutherland v Byrne – Smith [2011] FMCA 632, a de facto couple executed a financial agreement and then subsequently purchased a property together. After two years of being in a relationship together, the couple separated and sought to rely on the financial agreement to transfer the share from the male partner to the female partner. After a few months, the male partner filed a debtor’s petition.

The Court examined the contributions to the acquisition of the property and found the transfer (in relation to the male partners’ contribution to the property) void against the trustee pursuant to section 120 of the Act.

Conclusion

It is imperative that legal practitioners advise their clients appropriately when entering into BFA’s of the pitfalls which may arise if the transferring spouse or de factor subsequently becomes bankrupt.

The rules relating to clawing back assets of bankruptcy are complex and detailed advice should be sought in relation to specific circumstances and/or intentions.

JHK Legal has previously acted on behalf of married couples, de facto couples and bankrupts in relation to BFA’s and has previously acted on behalf of trustees in relation to section 120 and 121 of the BA transactions.

If you have any specific questions or require any assistance with any bankruptcy matter you may be involved in, please do not hesitate to contact our office.

Author: Karla Attwells

Published: January 2015

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