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19 September, 2005. BFLAA is intended to resolve the tension that previously existed between bankruptcy trustees on the one hand, and the rights of a non-bankrupt spouse on the other. Changes to the powers of the Family Court - generally

The amendments enable concurrent family law and bankruptcy proceedings to be brought together in the Family Court, to ensure that all relevant issues affecting the interests of competing parties (for example, of creditors and non-bankrupt spouses) are determined at the same time.

The Family Court will have the power to deal with proceedings for property settlement and spousal maintenance, in circumstances where a bankruptcy trustee has been appointed.

The Family Court will also have the power to make orders that have the effect of altering the interests of the bankruptcy trustee in property that has vested in the bankruptcy trustee by reason of the bankruptcy. It should be noted, in this regard, that not all property will vest in the bankruptcy trustee: for example, the bankrupt’s superannuation benefits will not vest.

Under section 79(1) Family Law Act 1975 (“FLA”), the Family Court will also have the power to order a bankruptcy trustee to settle or transfer property to a non-bankrupt spouse or child.

The bankruptcy trustee will be able to defend claims to vested bankruptcy property made by spouses, however will not be able to start proceedings in the Family Court.

Amendments made to the non-avoidance section of the FLA, section 106B, also give creditors standing to apply.

If bankruptcy occurs prior to separation

The non-bankrupt spouse may seek to have his or her interest in the vested bankruptcy property recognised and seek a distribution from that part of the property that has not already been distributed by the bankruptcy trustee.

If bankruptcy occurs after separation but before the making of a final Family Court Order

A non-bankrupt spouse now has the right to seek Orders in the Family Court for property settlement against the bankrupt spouse’s bankruptcy trustee.

A non-bankrupt spouse will be able to give notice of a claim against the assets collected by the bankruptcy trustee and will be able to bring an injunction application against the trustee to prevent, for example, the trustee from distributing the property. The Court will have the power to grant an injunction against a bankruptcy trustee preventing the trustee from distributing dividends to the creditors of a bankrupt spouse.

A trustee must be joined in property or spousal maintenance proceedings if:

The Trustee has applied to be joined; or

The Court is satisfied that the interests of a bankrupt’s creditors may be prejudiced by the making of an order.

If a trustee is a party to proceedings, the bankrupt spouse will not have the right to make submissions regarding the vested bankruptcy property, except in exceptional circumstances.

Pursuant to a new section 72(2) FLA, the non-bankrupt spouse will also be able to apply for spousal maintenance, even though the other spouse is bankrupt. In such proceedings, the Court will have the ability to satisfy a spousal maintenance claim by ordering the transfer to the non-bankrupt spouse of vested bankruptcy property.

If bankruptcy occurs after separation and after the making of a final Family Court Order

Trustees will have standing under section 79A FLA to apply to set aside final Property Orders and will also be able to apply to have spousal maintenance orders varied under section 83(1A) FLA.

If the Orders have not yet been implemented, the “relation back” principle of the Bankruptcy Act may continue to apply.

Binding Financial Agreements

Under BFLAA, the definition of a “maintenance agreement” in the Bankruptcy Act has been narrowed to exclude binding Financial Agreements. Maintenance agreements enjoy the privilege of being exempt from the application of the “relation back” or “clawback” provisions of the Bankruptcy Act – that is, where the Trustee can recover certain property transferred by a bankrupt to another person prior to bankruptcy. The new amendments strip financial agreements of that privilege and Trustees can now use the “clawback” provisions of the Bankruptcy Act to recover property transferred pursuant to a financial agreement prior to bankruptcy.

A new act of bankruptcy has been created, to apply where a person is rendered insolvent as a result of transferring assets pursuant to a binding financial agreement.

These amendments to the FLA follow “the Jodie Rich amendment” in December 2003, which gave a spouse’s creditor (eg government departments, ASIC and the ATO) standing to apply to set aside binding Financial Agreements.