As you probably know, a Binding Financial Agreement (“BFA”) is a legally binding document that sets out the way some or all of the assets of a couple are to be divided in the event the relationship breaks down. Part VIIIA of the Family Law Act 1975 (“the FLA”) makes provision for financial agreements between married couples whereas Part VIIIAB of the FLA makes provision for financial agreements between couples in a de facto relationship.
It is a common misconception that individuals in financial difficulty can protect their assets and defeat legitimate creditor claims by entering into a BFA. In fact, the legislation specifically prevents its use for such purposes. A further complication arises from the interaction between the FLA and the Bankruptcy Act 1966 (“the BA”).
These are the circumstances we encountered in administering a recent bankrupt estate. Some time ago, the debtor husband was unable to meet his substantial taxation liabilities. The family home was owned jointly with his wife. In an attempt to protect their home, the couple on advice, entered into a BFA transferring the debtor’s interest in the property to his wife for nil consideration. As it turned out, the debtor was able to forestall any recovery action by the ATO by making some payments against his liability. However, the debt to the ATO continued to grow. Finally, the ATO took action and the debtor was declared bankrupt.
On appointment, we carried out property searches flagging the transfer of the debtor’s interest in the property for investigation. It was found that the BFA and the transfer of the property could potentially be attacked on the following bases:
1. Section 90G of the FLA
Section 90G sets out the circumstances in which a BFA is binding on the parties. The requirements are procedural in nature and include the obtaining by each party of independent legal advice and the receipt by each party of a signed statement from the solicitor that the advice was given. The consequence of failing to comply with the legislative requirements may render the BFA capable of being set aside. We decided there was little likelihood of obtaining the required documentation and in any event, the BFA was likely to be set aside under other legislative provisions.
2. Section 90K of the FLA
Section 90K sets out the circumstances in which the Court may set aside a BFA. Subsection (1)(aa) was applicable to the circumstances. It provides for the setting aside of a BFA if the Court is satisfied that:
(i) a party to the agreement entered into the agreement:
(a) for the purpose, or for purposes that included the purpose, of defrauding or defeating a creditor or creditors of the party; or
(b) with reckless disregard of the interests of a creditor or creditors of the party.
Given the wording of the subsection, our attention then turned to the solvency of the debtor. A review of the documents provided by the ATO revealed that at the time the BFA was entered into, the debtor had significant taxation liabilities. The debtor must have been aware of the existence of those debts. There was no evidence to suggest that he had the necessary means to discharge the debts in the short to medium term, other than from the sale of the family home. In fact, the evidence showed that the debts continued to increase.
It followed that in all probability, the debtor was insolvent at the time of entering into the BFA and that his actions in transferring his interest in the property to his wife for nil consideration, fell within the ambit of section 90K. It may also have been relevant to consider whether there was a genuine intent of the parties to separate as the motive for entering into a BFA, although this was not considered in the matter at hand.
As it turned out, we later became aware that prior to entering into the BFA, the debtor had been served with a bankruptcy notice issued on the instructions of the ATO. For some reason, this information was not amongst the documentation provided by the ATO following our appointment.
3. Section 120 of the BA
Subsection 120(1) pertains to undervalued transactions. It provides that a transfer of property by a person who later becomes bankrupt, is void against a trustee if:
(i) the transfer took place in the period five (5) years prior to the commencement of bankruptcy; and
(ii) the transferee gave below market consideration for the property.
Subsection 120(2) provides exemptions to certain transfers, including a transfer to meet all or part of a liability under, inter alia, a maintenance agreement. A maintenance agreement as defined by section 5 of the Act does not include a BFA.
Subsection 120(3) provides that a transfer to a related entity is not void if the transfer took place more than four (4) years before the commencement of bankruptcy and the related party proves the debtor was solvent at the time of transfer.
In our matter, the conditions of subsection (1) were satisfied.
4. Section 121 of the BA
Subsection 121(1) pertains to transfers to defeat creditors. It provides that a transfer of property of a person who later becomes bankrupt is void against the trustee if:
(i) 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; and
(ii) the transferor’s main purpose in making the transfer was:
(a) to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(b) to hinder or delay the process of making property available for division among the transferor’s creditors.
Subsection 121(2) provides that the debtor’s main purpose in making the transfer is taken to be for the purposes of hindering or delaying the process, if it can be reasonably inferred from all the circumstances that at the time of the transfer, the transferor was, or was about to become, insolvent.
The evidence set out in section 2 hereof, was sufficient to form the view that the transfer was void pursuant to section 121 of the BA.
Our legal advice was to the effect that the evidence in support of an application to set aside the BFA was compelling and that it was likely the Court would make an order to that effect pursuant to section 90K(1) of the FLA.
In the alternative, the evidence strongly supported the claim that the transfer of the debtor’s interest in the property was void pursuant to sections 120 and 121 of the BA. As a consequence and because of the operation of section 58 of the BA, the debtor’s interest in the property vested in the Trustee.
We are now in the process of pursuing the wife for the recovery of the debtor’s equity in the property.
We do not know what specific advice was given to the debtor and his wife when entering into the BFA or what caveats, if any, may have been provided when the advice was given. Nevertheless, the foregoing highlights the following:
(i) BFAs can be set aside if not properly implemented;
(ii) BFA’s can be set aside in circumstances where a party to the BFA was insolvent at the time of entry into the BFA or if the purpose of entry into the BFA was to defeat legitimate creditor interests;
(iii) The transactions the subject of the BFA can potentially be set aside under provisions in the BA; and
(iv) The importance of obtaining competent advice in setting up asset protection strategies or dealing with insolvency.
If we can be of assistance, whether it be in relation to personal insolvency or corporate insolvency, then do not hesitate to contact a member of our team for a complimentary obligation free consultation.