Trustee of Bankrupt Estate in Family Law

Trustee of the Bankrupt Estate of Hicks & Hicks [2016] FamCA 462 (10 June 2016)

The following is annotated:

THE STANDING OF THE TRUSTEE TO BRING THE PRESENT PROCEEDINGS

46. The Trustee is invested with standing to institute the present proceedings pursuant to section 79A(5) of the Family Law Act 1975 (Cth), which provides as follows:

79A(5) For the purposes of this section, if:
(a) an order is made by a court under section 79 in proceedings with respect to the property of the parties to a marriage or either of them; and
(b) either of the following subparagraphs apply to a party to the marriage:
(i) when the order was made, the party was a bankrupt;
(ii) after the order was made, the party became a bankrupt;
the bankruptcy trustee is taken to be a person whose interests are affected by the order.

47. As noted, orders were made pursuant to section 79 on 1 September 2011 and the husband became a bankrupt on 10 April 2012. Accordingly, the Trustee has standing to bring the present application. There was no suggestion to the contrary in the case for the respondent wife.

THE CASE FOR THE TRUSTEE

48. Counsel for the Trustee set out the basis of his claim in an Outline of Case as follows:

The proceedings are for an order under section 79(A) Family Law Act. The basis of that claim is that the consent orders into which the respondents entered on 1 September 2011 were neither just nor equitable as a result of a miscarriage of justice under section 79A(1)(a) or by reason of default in carrying out an obligation under the consent orders under section 79(1)(c) [sic].

49. In essence, the Trustee contended that a miscarriage of justice has resulted from the following circumstances:
    • the husband failed to disclose debts of $606,000 to Mr S and the unsecured creditors listed in his Statement of Affairs, who were allegedly owed a total of $186,832.
    • Mr S was not provided with notice of the Application for Consent Orders. As a person who would be adversely affected by the proposed orders, he should have been provided with such notice.
    • the Court was unable to determine whether the orders were just and equitable in circumstances of such non-disclosure. The Court was unable to assess the effect on any creditor’s ability to recover a debt.
    • the parties in fact were not separated when the consent orders were made on 1 September 2011.
    • in real terms the distribution of the parties’ net property pursuant to the consent orders was generous to the wife, as was evident from the financial position which the husband set out in his Statement of Affairs.
    • both the husband and the wife engaged in “conscious wrongdoing”, in the case of the wife because she was aware of the debt to Mr S and of the non-separation of the parties.
50. The submission of the Trustee was that these matters justify a finding that a miscarriage of justice has occurred and that the consent orders of 1 September 2011 should be set aside pursuant to section 79A. In that event, the Trustee proposed that trial directions should be made in relation to the substantive proceedings pursuant to section 79. The Trustee proposed orders for the sale of the C Town property, with the net proceeds to be held by his solicitor pending further order.

THE CASE FOR THE RESPONDENT WIFE

51. Counsel for the wife rightly submitted that the determination of an application pursuant to section 79A involves a four-step process. The Full Court described the correct procedure in Patching & Patching (1995) FLC 92-585 at 81,797 as follows:

…namely whether there has been a suppression of evidence or “other circumstances” as alleged by the husband, whether that amounted to a “miscarriage of justice”, whether the Court, in its discretion, should “vary the order or set the order aside” and whether it should make another order under section 79: see, for example, McIntyre and McIntyre (1994) FLC 92-468. Recent decisions of the Full Court have emphasised the independent significance of the exercise of discretion which section 79A gives: see Prowse and Prowse (1995) FLC 92-557 and Morrison and Morrison [1994] FamCA 153; (1995) FLC 92-573.

52. Counsel for the wife drew attention to a Full Court decision of Official Trustee in Bankruptcy v Donovan and Donovan and Stevens (1996) FLC 92-703 and stated in his Outline of Case:

Where a party has a significant creditor or has had a significant claim made against him or her, the failure of either party to disclose this to the Court and to give notice of the Family Court proceedings to the creditor will amount to “any other circumstance” giving rise to a miscarriage of justice (see Official Trustee in Bankruptcy v Donovan and Stevens (1996)
FLC 92-703 …)

53. Counsel for the wife submitted, however, that it is not sufficient for the Trustee to establish that there has been a miscarriage of justice, as he bears the onus to satisfy the Court that it should exercise its discretion to set aside or vary the consent orders of 1 September 2011. Counsel for the wife contended that all of the evidence would persuade the Court to exercise discretion in favour of the wife. In final submissions, counsel for the wife said words to the effect: “The wife contends that it is likely that the Court will find a miscarriage of justice because of the failure to notify [Mr S] but discretion should not be exercised to set aside the orders.”

CONSIDERATION

54. Counsel for the Trustee contended that there are “striking dissimilarities” between the husband’s financial representation as set out in the Application for Consent Orders dated 24 August 2011 and his Statement of Affairs of 3 April 2012. The Statement of Affairs appears at pages 66-82 of the annexures to the affidavit of the Trustee sworn on 6 November 2015.
55. The discrepancies in the husband’s purported financial position as set out in these two documents include the following:
    1. In the Application for Consent Orders the husband listed as his assets the Property 1 and Property 2 properties with values of E$350,000 and $255,000 respectively. The husband represented that he held a 100 per cent interest in “the freehold” of these two properties. The husband also included in the Application for Consent Orders a leasehold interest in a property in Country Q with an alleged value of E$450,000. In the Statement of Affairs, however, the husband made no mention of this leasehold interest and stated that the Property 1 “property ownership is under legal dispute”. The husband made no mention of any liability in relation to the Property 2 property in the Application for Consent Orders, yet included a secured debt of $100,000 in the Statement of Affairs.
    2. The husband listed as his assets in the Application for Consent Orders four Country Q bank accounts with a total credit balance of approximately $124,650. These bank accounts did not appear as assets of the husband in his Statement of Affairs.
    3. The husband listed as his assets in the Application for Consent Orders furniture to the value of $75,000, a Commonwealth Bank account with a credit balance of $15,000 and a CommSec account in the sum of $115,000. None of these assets appear in the Statement of Affairs.
    4. There was no mention in the Application for Consent Orders of any liabilities other than two bank mortgages secured on the titles to the Suburb F and C Town properties. In the Statement of Affairs, however, the husband included the secured debt of $100,000 to Mr V and liabilities to Mr S, the wife’s solicitor, a second solicitor and for three credit cards.
    5. In the Application for Consent Orders the husband and wife represented that, upon execution, their respective net worth would be $2,039,150 and $917,500. Obviously the financial position which the husband presented in his Statement of Affairs was far less advantageous, after a time lapse of only some eight months.
56. In the Application for Consent Orders the husband and wife answered “No” to a question: “19. Is there any person who may be entitled to become a party to the case under sub-section 79(10) or sub-section 79SM(10) of the Act?” That response was clearly incorrect on the part of the husband, who was engaged in litigation with Mr S and must have been aware of the imminent defended hearing in the Supreme Court on 8 September 2011.
57. In my view, it is more probable than not that the husband deliberately elected not to disclose information concerning Mr S in the Application for Consent Orders. It is true that he disputed the alleged liability to Mr S, which crystallised into an actual debt only by way of the orders of the Supreme Court made on 8 September 2011. The husband must have been well aware of that potential outcome.
58. In cross-examination the wife said that she knew of the Statement of Claim issued against the husband and was aware that a hearing was fixed in the Supreme Court in late 2011. She said: “I believed that [the husband] had not received money from Mr S and that the cheques went to Mr T. I believed it had no bearing on our consent orders.”

THE DATE OF SEPARATION

59. In the submission of the Trustee “there is compelling evidence that the husband and wife did not separate until some time after 2009.” Counsel for the Trustee relied on the following matters in support of this submission:
    1. Alleged joint use of telephone services by the husband and wife after 2009.
    2. The husband’s use of the Suburb F address on incoming passenger cards when he returned to Australia from trips to Country Q after 2009.
    3. Alleged joint use of credit cards and bank accounts after 2009.
    4. The husband lived at the Suburb F property from time to time after 2009.
    5. The payments amounting to $55,018.75 by the husband to the wife did not appear to be made pursuant to the consent orders.
    6. The husband and wife’s use of the same health insurance fund in 2010 and 2011.
    7. Alleged common business interests.
    8. Events surrounding attempted service of documents upon the husband at the Suburb F property.
60. The Trustee contended that the fact that telephone calls from number … “consistently emanate from the area of [E Street] and [Suburb F] where the family home is situated” demonstrates that the wife regularly made use of this telephone which belonged to the husband. The Trustee suggested that this telephone service was used when the husband was in both Australia and Country Q.
61. Evidence that this telephone number was issued to the husband can be found at page 334 of the annexures to the affidavit of the Trustee of 6 November 2015. Additionally, the Trustee tendered paragraph 16 of an affidavit of the husband sworn on 31 August 2011, in which he referred to “my mobile number …”.
62. In her affidavit of 14 October 2015 the wife deposed “the … [sic] from an unknown date until March 2012 and the start date of the pre-paid mobile is unknown to me”. In her oral evidence, however, the wife said that this number was that of the husband in 2008. She said also in her oral evidence that she used this number between 2008 and the alleged separation date but predominant use was by the husband. The wife said that the telephone with this number has been “mainly” in her possession since 2012.
63. The wife maintained that the husband came to the Suburb F property after 2009 to visit the parties’ daughters and to leave his car for their use when he was in Country Q. The wife conceded that she drove the husband to the airport on some of these occasions.
64. In her affidavit of 14 August 2013 the wife deposed that the husband stayed at the Suburb F property from time to time after 2009. She suggested that he had no money available to him after he was prevented from leaving Australia, until he began to receive the aged pension. The wife contended that she allowed him to stay in the home out of pity.
65. The Trustee relied on the fact that the husband completed eight incoming passenger cards between 20 November 2009 and 27 May 2011 which showed his Australian address as E Street, Suburb F. There was no basis in the evidence for any suggestion that the wife was involved in the husband’s use of the Suburb F address on these documents.
66. The same observation can be made in relation to the fact that the 2010 and 2011 tax returns of the husband and wife showed that they used the same health insurance fund. Further, as was submitted by counsel for the wife, she had no control over what information was contained in the husband’s tax return.
67. The Trustee contended that the husband and wife each used an ANZ credit card in his name between 24 March 2011 and 19 January 2012. It was submitted that there were many transactions in the E Street and Suburb X areas but none on the Central Coast, which is where the husband supposedly lived at that time. The wife conceded that she used this card to make a payment to a plastic surgeon in October 2011, for the benefit of the parties’ daughter.
68. In his affidavit of 6 November 2015 the Trustee deposed that the husband’s ANZ and CBA credit cards were used in “the immediate vicinity” of the Suburb F property between 21 March 2011 and 25 January 2012. As noted, the wife deposed that the husband came to the former matrimonial home to see their daughters and to leave his car for their use after the alleged separation date. As also noted, the wife said that the husband stayed in the premises from time to time after 2009.
69. The Trustee maintained that the husband and wife continued to operate at least two joint bank accounts in 2011. On the evidence of the Trustee, the joint NAB account of the husband and wife was closed on 21 July 2011.
70. The Trustee contended that the husband’s CBA credit card was paid out in full each month prior to September 2011 and that, thereafter, there were increasing debit balances. The Trustee maintained that these increasing debit balances “suggest a concrete plan to enter bankruptcy”, given that the husband allegedly “had cash in Country Q and from the wife.”
71. Counsel for the wife submitted that she and the husband made joint use of these credit cards and bank accounts because there was no “final financial wash up at that stage”. That submission would appear to be correct and it is notable that the Trustee adduced little or no evidence of ongoing joint use of credit cards or bank accounts after the date of the consent orders.
72. The wife said that she and the husband “formed an intention to enter into consent orders” in mid-2011. She said that they “started drafting in early 2011” and that “one reason we waited was the distribution of his father’s estate”. As noted above, the husband’s father died in 2010.
73. The Trustee placed weight on the wife’s apparently conflicting evidence as to whether the husband lived on the Central Coast or at Y Town at various times. I do not consider that this evidence assists the case for the Trustee. The wife said that she made a mistake in her earlier evidence, which she sought to correct in her current affidavit.
74. The Trustee questioned whether payments which the wife made to the husband, were in fact pursuant to the requirement in the consent orders that he receive $55,000 within 28 days. These payments are listed above in paragraph 40 of these reasons.
75. Obviously payments made on 9 August 2011, 15 August 2011 and 26 August 2011, which amounted to $3,380, pre-dated the consent orders. One payment of $3,000 was allegedly made on 1 September 2011, which is the day of the making of the consent orders. Payments totalling $22,838 on 7 September 2011 and 9 September 2011 were made to a barrister who appeared for the husband at the hearing in the Supreme Court.
76. In her oral evidence the wife said that some payments which she described as “cash to [Mr Hicks]” in her list would have been “for bills” but any amounts greater than $1,000 were paid to the husband. It seems strange that amounts for alleged “bills”, without exception, were in round figures and multiples of $100.
77. The Trustee submitted that withdrawals on 12 October 2009 of $9,000 entitled “Cash— to [Country Q]” and 10 December 2009 of $6,500 entitled Cash to [Coutry Q] – – -” from the joint account constituted evidence that the husband and wife had “common business interests”. Similarly, the Trustee sought to attach weight to the fact that in 2010 the husband’s writing appeared on bank statements in the name of an entity known as W Pty Ltd. This company is the holder of a lease of the premises occupied by the Suburb J business and is controlled by the wife. The husband holds no interest in this entity. The 2010 statements of W Pty Ltd were in evidence (pp 1060-1078 of the annexures to the affidavit of Mr Thomas) and, in fact, contained very little handwriting.
78. On 31 January 2012 a process server, Mr Z, attended the Suburb F property. He deposed that the wife said “I am his wife” when he asked the whereabouts of the husband. The wife denied that she said these words and maintained that she stated “I was his wife”.
79. Counsel for the Trustee submitted that the husband referred to the respondent as “my wife” in an affidavit which he swore on 31 August 2011. Only paragraph 16 of that affidavit was in fact in evidence and contains no such reference.
80. As noted above, counsel for the wife said in his final submissions words to the effect:

It is likely that the Court will find a miscarriage of justice because of the failure to notify [Mr S] but discretion should not be exercised to set aside the orders.
I regard the concession of a miscarriage of justice, for the purposes of section 79A, by counsel for the wife as proper and warranted on the basis of all of the evidence.

81. I consider that Mr S was entitled to notice of the Application for Consent Orders, as he was clearly a person who may have “become a party to the case under subsection 79(10) …” The husband was a party to the commercial arrangements with Mr S and he was aware of the hearing listed in the Supreme Court on 7 and 8 September 2011.
82. Having reached that conclusion, it is strictly unnecessary that I determine whether the other matters upon which the Trustee relied are sufficient, individually or collectively, to constitute a miscarriage of justice. Some of these matters, however, could be relevant to the exercise of the discretion whether to set aside or vary the orders of 1 September 2011.

THE EXERCISE OF DISCRETION

83. Counsel for the wife placed reliance upon the circumstances in which the husband incurred the debt to Mr S. It was submitted that she had little knowledge of the husband’s commercial activities in Country Q and no involvement in these ventures. On behalf of the wife, it was submitted that:

On no basis can it be said that the debt owed to [Mr S] was incurred in the course of pursuing a matrimonial objective.
I regard that submission as correct, on the basis of all of the evidence.

84. Counsel for the wife drew attention to a Full Court decision of Prince & Prince (1984) FLC 91-501, in which consideration was given to the appropriate treatment of liabilities in section 79 proceedings. Evatt CJ said:

The assessment of debts and liabilities is not necessarily arrived at by a strictly mathematical or accounting approach in all cases. While some liabilities are charges upon the property which can be accurately assessed at a certain date, others are at large or have not been precisely determined, e.g., tax liabilities … In some cases there are sufficient uncertainties as to the alleged liability to lead the Court to disregard it entirely or partly
(e.g. a loan from a parent of the party not likely to be enforced… Af Petersens (supra); Quirk (1983) (unreported). In other cases, the Court may take the view that because of the circumstances surrounding the incurring of the liability it ought in justice and equity to be wholly or partly disregarded in determining the appropriate order to make under sec.79 as between the parties to the marriage. Such a result could be reached where a spouse had incurred a liability in deliberate or reckless disregard of the other party’s potential entitlement under sec.79 (Kimber and Kimber (1981) FLC 91-085; Kowaliw and Kowaliw (1981) FLC 91-092; Antmann and Antmann (1980) FLC 90-908; Af Petersens (supra)). Complex issues can arise in regard to liabilities to third parties…
Of course, the Court cannot ignore the fact that there is or may be a liability; the effect is simply that it does not consider that the other spouse should be called upon to in effect “contribute” to the liability by having that spouse’s fair share in the parties’ property reduced by virtue of its existence. The effect may be that the party who has incurred the liability will be left to meet it out of whatever funds remain to that party after satisfying the property order made under sec.79 (Af Petersens (supra)).

85. I accept the submission on behalf of the wife to the effect that she had no involvement in the transactions which created the creation of the husband’s debt to Mr S. Further, the document which Mr S prepared provided for the monies advanced by him to be secured on the title to a Country Q property of which the husband was the owner and not the Australian properties. In this circumstance, I am of the view that the wife should not be required to bear any responsibility for this debt.
86. The submission on behalf of the wife was that “if the Court were to accept that she should not be required to contribute to the repayment of the debt to Mr S the exercise of discretion would result in no order being made pursuant tosection 79A. This is for the reason that a reconsideration of the proceedings pursuant to section 79 would not result in a new order more favourable to the husband or the Trustee.”
87. I accept the submission on behalf of the wife to the effect that, in these circumstances, the only additional or different order to be made would be a provision that the wife bear no part of the debt to Mr S. With such an outcome, the Trustee would find himself in no more favourable position.
88. An alternative submission on behalf of the wife was to the effect that the exercise of discretion “would lead to the inevitable conclusion that the only order available would be one more favourable to the wife”. Specifically, this submission was that the wife would be found to be entitled to 60 per cent, rather than 51.37 per cent of the net pool and that the husband would be ordered to be solely responsible for the debt to Mr S.
89. This submission was based on the wife’s income-generating activities throughout most of the parties’ cohabitation; her vastly superior homemaker and parenting contribution and her injection of a sum of $130,281 to the purchase price of the C Town property from her superannuation. Counsel for the wife contrasted these contributions on her part to the husband’s absences from the family and his expenditure of substantial sums in Country Q. There would seem to be some force in these submissions.
90. A further matter upon which counsel for the wife relied as counter-indicative to the exercise of discretion in favour of the Trustee was his delay in commencing proceedings pursuant to section 79A. Mr Thomas was appointed trustee on 10 April 2012 but commenced proceedings some twelve months later on
    3 May 2013. During that period the wife serviced a mortgage secured on the title to the Suburb F property. Her unchallenged evidence was that she has paid approximately $5,000 per month in respect of this liability. The wife deposed that the payout figure of this mortgage stood at $794,931 as at 16 February 2016.
91. An additional submission which was put by counsel for the wife against the exercise of discretion in favour of the Trustee was that “the matrix of the assets has changed so much.” In fact the situation in relation to the Country Q assets is far from clear, despite the enquiries carried out by the Trustee. The extent of the Trustee’s knowledge of the Country Q assets and liabilities was set out in his affidavit of 6 November 2015.
92. Significantly, the Trustee deposed that the ownership of the Property 1 property was still a matter of dispute and in fact that it may have been sold in 2015. In his oral evidence the Trustee indicated that he has been unable to obtain any information concerning bank accounts which the husband may hold in Country Q.
93. In these circumstances, I foresee real difficulties in a court attempting to make just and equitable orders pursuant to section 79A. Almost inevitably, there will be certainty as to the Australian assets and liabilities. By contrast there will be uncertainty, confusion or simply lack of information concerning the assets and liabilities in Country Q.
94. For all of these reasons, I decline to exercise discretion in favour of the Trustee. I will dismiss the Initiating Application filed on 3 May 2013. That being so, it is unnecessary that I determine the wife’s Application in a Case for orders for the sale of the C Town property.