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Bankruptcy Body Unable to Set Aside Binding Financial Agreement

In the case Official Trustee in Bankruptcy & Galanis and Anor (2017) FLC 93-760, the Full Court dismissed an appeal by the Official Trustee in Bankruptcy (“Official Trustee”) against orders made by the Family Court of Australia. The Official Trustee sought to set aside a financial agreement made between a divorced husband and wife. The Trustee’s application was deemed to fall outside the definition of “matrimonial cause” because the husband was a discharged bankrupt and the Official Trustee was not a government body.

Facts

In 2008, the husband became bankrupt and the Official Trustee was appointed to administer his estate, which included his interest in the matrimonial home purchased with his wife in 2002.  The Official Trustee lodged a caveat over the property claiming the husband’s beneficial interest in the property.

The husband was later discharged from bankruptcy. In 2011, he separated from his wife. Then in February 2013, the husband and wife entered into a financial agreement (“the agreement”) under section 90D of the Family Law Act 1975 (“FLA”).

The agreement stated that:

  • The wife held a 60% interest in the property, the husband held 40%;
  • The husband did not contribute to the purchase of the property;
  • The mortgage over the property had been increased by $100,000 to pay the husband’s various liabilities;
  • The wife had made all the mortgage repayments;
  • As a result of her contributions, the wife would receive the entire beneficial interest in the property.

Under the agreement, the husband transferred his title and interest in the matrimonial home to the wife.

In July 2013, the Trustee applied to the Federal Circuit Court of Australia (“FCCA”) seeking to have the agreement set aside. They sought to rely on section 90K of the FLA, claiming that the agreement was entered into for the purpose of defeating creditors of the party or recklessly disregarding the interests of the creditors of the party. In January 2014, the wife brought an action to dismiss the Official Trustee’s application. She claimed that the FCCA lacked the jurisdiction to hear it because the application was not a “matrimonial cause” as defined in section 4(1) of the FLA.

Legal issue

Did the FCCA have jurisdiction to determine the Official Trustee’s application which sought to set aside the agreement under section 90K of the FLA? In determining this, the Court had to consider the definition of “matrimonial cause”. This included considering the meanings of “bankruptcy trustee of a bankrupt party to the marriage” and the “government body acting in the interests of a creditor” in section 4(1) and 4A of the FLA.

Decision

At both first instance and on appeal, the FCCA found that the Official Trustee did not have standing to bring proceedings to set aside a financial agreement under section 90K of the FLA. The Court ruled that in the definition of “matrimonial cause”:

  • “bankruptcy trustee of a bankrupt party to the marriage” means a trustee of an undischarged bankrupt; and
  • “government body acting in the interests of a creditor” does not include the Official Trustee, which is a separate entity from the Commonwealth.

Making a comparison with the Australian Securities and Investment Commission (ASIC), the Court noted that the liabilities of ASIC are liabilities of the Commonwealth, whereas the Official Trustee is personally liable for the acts done or not done as a trustee.

If the husband did have an interest in the property at the time of his bankruptcy, the Official Trustee would be eligible to pursue an action in the NSW Supreme Court or the Federal Court of Australia. However, the FCCA did not have the jurisdiction to determine the matter and dismissed the Official Trustee’s appeal, ordering the Official Trustee the pay the wife’s costs.

What is the utility of this case?

This case must be remembered where the Official Trustee in Bankruptcy seeks to set aside a Binding Financial Agreement, as they may not have standing to do so if the agreement is made subsequent to the bankrupt’s discharge.

 

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