The Family Court and Federal Circuit Court can deal with the bankruptcy of a party to a marriage or de facto relationship involved in certain family law proceedings. The impact on parties is complex and legal advice should be obtained as the facts of each case are different. The following can only be an overview.
What type of proceedings are affected?
The Family Court and Federal Circuit Court have jurisdiction in any matter connected with, or arising out of, the bankruptcy of a party to a marriage or de facto relationship in proceedings for:
- property settlement under Section 79 or 90SM of the Family Law Act 1975, and/or
- declaration on interest in property under Section 78 or 90SL of the Family Law Act, and/or
- setting aside property orders under Section 79A or 90SN of the Family Law Act, and/or
- spouse maintenance under Section 72 of the Family Law Act,
- de facto spouse maintenance under Section 90SE, and/or
- enforcement of any of the above orders.
Effect of bankruptcy on bankrupt
Once a party to a marriage or de facto relationship which has broken down becomes bankrupt, his or her property (except some categories of assets such as most household goods, superannuation, some tools of trade and a motor vehicle up to a certain value) is immediately vested (settled) in the trustee in bankruptcy of the bankrupt (the trustee). Once this has occurred, the bankrupt party is no longer able to transfer any property or pursue any entitlement to property settlement. Only the trustee can do that.
Compliance with pre-action procedure not required
Before starting a case in the Family Court of Australia, which involves the Court's jurisdiction under Section 35 of the Bankruptcy Act 1966, it is not necessary to comply with pre-action procedures prescribed by Rule 1.05 of the Family Law Rules 2004.
Trustee can apply to become a party in family law proceedings
The trustee of the bankrupt (the trustee) may apply to become a party to any family law proceedings to which the bankrupt is a party. If the Court is satisfied that the interests of creditors will be affected by the Court making a maintenance order or an order for settlement of property, then the Court must join the trustee as a party to the proceedings.
Effect of the trustee becoming a party in family law proceedings
Once the trustee of the bankrupt (the trustee) becomes a party to the proceedings, the bankrupt is not entitled to make any submissions to the Court about property already vested (settled) in the trustee except with leave (permission) of the Court. This will only be granted in exceptional circumstances.
Competing rights of creditors and non bankrupt party
When deciding what orders to make, the Court must determine the competing rights of the creditors and the non-bankrupt party (to the marriage or de facto relationship). The trustee can present submissions to the Court to protect property to satisfy the claims of the creditors. The non-bankrupt party does not have any priority over the creditors of the bankrupt spouse. Nor do the creditors have any priority over the non-bankrupt party.
Court can order transfer of vested property
The Court can order the trustee of the bankrupt (the trustee) to transfer property, formerly held by the bankrupt party but now vested (settled) in the trustee, to the non-bankrupt party.
This transfer of vested property can be in satisfaction, in whole or in part, of the liability of the bankrupt party for maintenance.
This property, once transferred, will not be available for distribution amongst the creditors of the bankrupt party.
Personal insolvency agreement
If a party to a marriage or de facto relationship which has broken down, who is a party to property or maintenance proceedings, is or becomes a debtor subject to a personal insolvency agreement (a debtor party), then:
- the above information relating to bankrupt parties, applies to the debtor party;
- the above information relating to trustees of bankrupt parties applies to the trustee of the debtor party's property.
Some creditors cannot apply to become a party to family law proceedings
Creditors of the bankrupt party or debtor party (subject to a personal insolvency agreement) whose debts are:
- provable in bankruptcy (the creditors can satisfy the bankruptcy trustee that their debt should be included in the liabilities of the estate of the bankrupt party), or
- covered by the personal insolvency agreement,
cannot apply to become a party to family law proceedings.
Parties must give notice to the Court if...
Parties to financial (property, maintenance, child support) proceedings, including proceedings for enforcement of financial orders, must notify the Court if they:
- are bankrupt or a party to a personal insolvency agreement at the commencement of proceedings;
- become bankrupt or enter into a personal insolvency agreement whilst the proceedings are waiting to be determined.
Bankrupt or debtor party must give notice to his or her trustee if...
A party, who is bankrupt or a debtor subject to a personal insolvency agreement, must notify his or her trustee if he or she becomes a party to financial proceedings in the Family Court or Federal Circuit Court.
Notice to creditors in annulment application
A person applying for an annulment of the bankruptcy of a party to financial proceedings in the Family Court or Federal Circuit Court must give notice of their application to each person they know to be a creditor of the bankrupt. The notice must be served at least 14 days before the hearing date fixed for the application.
Trustee can apply to vary spouse maintenance order
The trustee of a party to a marriage or de facto relationship, who is a bankrupt or a debtor subject to a personal insolvency agreement, can apply to the Family Court or Federal Circuit Court to vary the maintenance order.
Trustee can apply to set aside, or restrain making of, transaction to defeat claim
The trustee of a party to a marriage or de facto relationship, who is a bankrupt or a debtor subject to a personal insolvency agreement, can apply to the Family Court or Federal Circuit Court to set aside or restrain the making of an instrument or disposition that would be defeat an existing or anticipated family law courts' order.
Application to have order set aside under Section 79A or Section 90SN of the Family Law Act
If a court makes a property settlement order under Section 79 or Section 90SN of the Family Law Act, and at the time a party to the proceedings:
- was bankrupt; or
- was a debtor subject to a personal insolvency agreement;
Or after the order was made, a party:
- became bankrupt;
- entered into a personal insolvency agreement,
and a debt due may not be able to be recovered because the order was made, an application can be made to the Court to set the order aside under Section 79A or Section 90SN of the Family Law Act. The following persons can apply:
The following persons can apply:
- a creditor;
- the bankruptcy trustee of the bankrupt party;
- the insolvency trustee of the debtor party subject to a personal insolvency agreement.
The grounds under Section 79A or Section 90SN are limited. Legal advice should be sought before making an application.
Non-bankrupt spouse can apply for injunction against the trustee
The non-bankrupt party can apply to the Family Court or Federal Circuit Court for an injunction (a Court order) to restrain the trustee from declaring or distributing dividends amongst the creditors of the bankrupt or debtor party.
What if costs are ordered?
Unless the Court orders otherwise, a person entitled to costs in a case to which the Bankruptcy Act applies is entitled to costs in accordance with Order 62 of the Federal Court Rules 1979.
What forms to use?
There are nine bankruptcy forms. They are summarised below. When you click on the links titled 'View Form' you will be taken to the form on the Family Court's website.
Bankruptcy - application - View Form
Used by an applicant seeking final orders in a bankruptcy case e.g. an application:
- for issue of a a warrant for arrest of a bankrupt or a debtor;
- against the estimate by the trustee of a debt or liability;
- for annulment of a bankruptcy;
- objecting to the appointment of a person as trustee;
- for acceptance of a trustee's resignation;
- for release of a trustee;
- or, an appeal from a decision of a taxing officer.
Bankruptcy - application in a case - View Form
Used to make an application where a case has already been started e.g. an application for injunction;
- for procedural orders;
- for leave to be heard;
- seeking to discharge a summons;
- when final relief has already been granted (the case has been finalised).
Bankruptcy - notice of appearance - View Form
Used by a person who wishes to:
- be heard (appear) in the proceedings;
- oppose the orders sought;
- take part in an examination.
It provides the details of the person and where documents can be served on that person.
Notice stating grounds of opposition to an application or application in a case - View Form
Used to respond to a Bankruptcy - application or Bankruptcy - application in a case.
Summons for examination - View Form
An order of the Court directed to a relevant or examinable person, to attend the Court at a specified time, to:
- be examined under oath;
- give evidence concerning the affairs of the bankrupt or debtor spouse;
- bring with them and produce at Court any documents listed in a schedule attached to the summons.
Application for summons to examine relevant person or examinable person for examination - View Form
A creditor or trustee of the bankrupt or debtor party can request the Court to issue a summons to a relevant or examinable person for examination under oath concerning the affairs of a bankrupt or debtor party. This application may be heard in chambers or in the absence of the parties.
Notice to creditors of annulment application - View Form
Used by the applicant for annulment of a bankruptcy to give notice of application to creditors.
Bankruptcy- arrest warrant - View Form
Used for the arrest of a bankrupt, where the bankrupt: has without good cause, neglected or failed to comply with:
- an order of the Court;
- an obligation under the Bankruptcy Act;
- concealed property;
- without permission of the trustee, removed property.
Bankruptcy - apprehension warrant - View Form
The Court can direct named persons to apprehend a person who:
- fails to comply with a summons to appear before the Court for examination;
- fails to appear and report from day to day as required by the Court.
That person may be held in jail until he or she appears before the Court.