Bankruptcy
From 19 September 2005, the Family Law Courts have jurisdiction (power) to deal with the bankruptcy of a spouse to a marriage 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 Law Courts have jurisdiction in any matter connected with, or arising out of, the bankruptcy of a spouse to a marriage in the following proceedings:
Effect of bankruptcy on bankrupt
Once a spouse becomes bankrupt, his or her property is immediately vested (settled) in the trustee in bankruptcy of the bankrupt (the trustee). The bankrupt spouse 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 spouse (the trustee) may apply to become a party to the family law proceedings. If the Court is satisfied that the interests of creditors will be affected by the Court making a spouse 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 spouse (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 not be granted except in exceptional circumstances.
Competing rights of creditors and non bankrupt spouse
When deciding what orders to make, the Court must determine the competing rights of the creditors and the non-bankrupt spouse. The trustee can present submissions to the Court to protect property to satisfy the claims of the creditors.The non-bankrupt spouse does not have any priority over the creditors of the bankrupt spouse. The creditors do not have any priority over the non-bankrupt spouse.
Court can order transfer of vested property
The Court can order the trustee of the bankrupt spouse (the trustee) to transfer property, formerly held by the bankrupt spouse but now vested (settled) in the trustee, to the non-bankrupt spouse.
This transfer of vested property can be in satisfaction, in whole or in part, of the liability of the bankrupt spouse for spouse maintenance.
This property, once transferred, will not be available for distribution amongst the creditors of the bankrupt spouse.
Personal insolvency agreement
If a spouse, who is a party to property or spouse maintenance proceedings, is or becomes a debtor subject to a personal insolvency agreement (debtor spouse), then:
- the above comments relating to a bankrupt spouse, apply to the debtor spouse;
- the above comments relating to the trustee of the bankrupt spouse apply to the trustee of the debtor spouse.
Some creditors cannot apply to become a party to family law proceedings
Creditors of the bankrupt spouse or debtor spouse 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 spouse), 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:
- re 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 Law Courts.
Notice to creditors in annulment application
The applicant for an annulment of the bankruptcy of a party must give notice of the application to each person known to the applicant 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 spouse, who is a bankrupt or a debtor subject to a personal insolvency agreement, can apply to the Family Law Courts to vary the spouse maintenance order.
Trustee can apply to set aside, or restrain making of, transaction to defeat claim
The trustee of a spouse, who is a bankrupt or a debtor subject to a personal insolvency agreement, can apply to the Family Law Courts to set aside or restrain the making of an instrument or disposition where the result would be to defeat an existing or anticipated order in proceedings under the Family Law Act.
Application to have order set aside under Section 79A of the Family Law Act
If a court makes a property settlement order under Section 79 of the Family Law Act, and at the time a party:
- 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,
an application can be made to the Court to set the order aside under Section 79A of the Family Law Act, where a debt due may not be able to be recovered because the order was made.
The following persons can apply:
- a creditor;
- the bankruptcy trustee of the bankrupt spouse;
- the insolvency trustee of the debtor spouse subject to a personal insolvency agreement.
The grounds under Section 79A are limited. Legal advice should be sought before making an application.
Non-Bankrupt spouse can apply for injunction against the trustee
The non-bankrupt spouse can apply to the Family Law Courts for an injunction (a Court order) to restrain the trustee, of the bankrupt spouse or debtor spouse subject to a personal insolvency agreement, from declaring or distributing dividends amongst the creditors of the bankrupt or debtor spouse.
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 9 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. Eg: 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. Eg: 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 spouse 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 spouse. 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;
has:
- 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.