Directors, Trustees and Creditors in the Family Court:
The Family Court’s Powers to Bind Third parties.

The Family Court is a court created by statute. Its powers are derived from The Constitution. Its powers as against third parties are limited to matrimonial causes. The term “matrimonial cause” is not defined in The Constitution but it is defined in the Family Law Act. It is a concept so central to the Act that it has been revised and expanded many times: The variations were tabulated by O’Ryan J in Hunt v Lederer.

In the Hunt litigation two applications were brought and heard together. The first was for the trial judge to answer a series of questions concerning the validity of the Part VIIIAA amendments and the second, related, application was for a summary dismissal based on the contention that Part VIIIAA is invalid.

When bringing a constitutional challenge to this or any Act one generally needs deep pockets and a tough hide.

The Court’s power to bind third parties are wide:

1. The Court may bind third parties indeed generally fourth, fifth and more;
2. The new Part has effect notwithstanding any other law or instrument of any kind including wills, deeds, contracts and the articles of any company
3. The discretion exercised under s79 is, itself, very wide;
4. The rights of third parties which the Court may make the subject of orders are unlimited and according to Mr Reynold’s SC’s argument in Hunt include social or moral rights, civil rights, the right to approach the Courts (I will turn to these shortly).

The Hunt litigation was ultimately resolved however not before application was made to the High Court for special leave. The litigation concerned a company known as Primo Meats. The company had three shareholders Andrew who founded the business, Paul his nephew and John Hunt who started out as an employee and went on to become a shareholder. The articles had a last man standing provision and also provided a right to acquire any shares which were going to be sold or transferred to be offered to the remaining shareholders at a preferential rate. The wife a stranger to the company argued that the husband should be obliged to acquire hald Andrew’s shares upon Andrew’s death which occurred after the proceedings had been commenced.  

It will be for others to say what might have been however Mr Brereton S.C. as he then was has opined:

“But the new provisions go much further, in authorizing the discretionary variation of existing rights. While s 106 B is part of the court’s armamentarium to protect its undoubted matrimonial causes jurisdiction against attempts to defeat it, the new provisions will have much wider effect. A law conferring on a divorce court power to alter the rights of third parties in this way might well be thought to exceed the bounds of what is reasonably incidental to legislation with respect to matrimonial causes, and thus to be constitutionally valid”[1].

The Honourable J Ellis A.M has said that:

“Respectable arguments, however, can be advanced to both demonstrate and challenge the constitutional validity of the new Part. I would not seek, at this stage, to predict the outcome of such a challenge in the High Court”[2].  

In his talk to the paper however Mr Ellis, was more expansive. Although I don’t have an exact note of what he said his doubts as to constitutional validity related to the s90 AE 2 which states 

(2)  In proceedings under section 79, the court may make any other order that:

(a)  directs a third party to do a thing in relation to the property of a party to the marriage; or

(b)  alters the rights, liabilities or property interests of a third party in relation to the marriage.

It must be said that the words “In relation to the marriage” cast a very wide net indeed, especially when it remembered that the rights, liabilities or property interests were, prior to the s 79 Order under contemplation those of a third party.

When dealing with the Special Leave point in Hunt, Heydon J said:  

“The questions of constitutional validity are important. They are also questions which are fairly arguable both ways. None of the respondents to the special leave applications have advanced contrary argument and all appearances are submitting appearances on their part.

It is true that if the challenges to validity were upheld now, this would dispose of the proceedings in their entirety against persons other than the former husband. However, the application should be dismissed without prejudice to the applicant’s rights to make further applications once proceedings before Justice O’Ryan are concluded and an appeal to the Full Court is decided.

That is so for the following reasons. First, Justice O’Ryan has not decided whether the orders claimed should be made. It is possible that he may decide the former wife’s claims by granting her relief which does not depend on the impugned provisions. To grant special leave now would be to entertain points which may turn out to have been moot.

Secondly, so far as the Full Court is not faced with earlier decisions of its own, its opinions would be valuable. Family law is a specialised field in which the experience of the Family Court is much greater than that of this Court, particularly so far as consideration of the constitutionality of the impugned provisions would be assisted by considering their potential practical operation.

Accordingly, the applications are dismissed..

The constitutional arguments like Snow White are not dead but only sleeping.

In Biltoft the Court held:

“Notwithstanding the general practice which has developed, the Court has indicated that it may properly determine not to take into account or to discount the value of an unsecured liability in certain circumstances. Such liabilities would include but are not limited to a liability which is vague or uncertain, if it is unlikely to be enforced or if it was unreasonably incurred.”

In Biltoft it was further held in that regard, that:

“There is no requirement that the rights of an unsecured creditor or a claim by a third party must be considered and dealt with prior to the court making an order under s79, nor is there a rule of priority as between a creditor claimant and a spouse. Those rights, however, cannot be ignored. They must be recognised, taken into account and balanced against the rights of a spouse.” [emphasis added]

In Biltoft the Full Court approved the judgment of Nygh J in Af Petersens and Af Petersens in which it was held:

“...nor, as has been pointed out earlier, is there anything in the decision of the High Court in Ascot Investments Pty Limited v Harper & Harper to suggest that this court cannot make an order dividing the assets of the parties because such a division might hamper a third party in his or her chances of recovery of a debt.”

In the recent case of Worsnop the facts were briefly these:

1. The marriage was a bigamous one
2. The husband had accumulated a massive tax debt of in excess of 12 million
3. The wife was unaware of the tax debt Rose J found that: “the wife was neither complicit in the failure by the husband to disclose taxable income, nor did she have knowledge of it or ought to have had such knowledge”.
4. The husband advised the ATO of his tax debt after separation
5. The parties had led a high standard of living which Rose J likened to that of the “Arabian Nights”
6. The tax debt was greater than the parties assets
7. The husband had transferred the home to the wife prior to separation for $1.

Rose J held that

"The critical issue that arises is the question of priorities, that is to say, the priority which should be given to satisfaction, so far as it is possible to do so, of intervenor’s claim in relation to the outstanding tax indebtedness of the husband as opposed to claims of the wife."

The outcome of the case was that the wife retained the former matrimonial home. The judgment has been appealed. May I offer the following considerations should you find yourself involved in a case where a third party debt is being asserted or resisted:

1. Consider whether or not to intervene;
2. Consider the “depth” of that intervention;
3. Consider the extent to which the debt is
   • Documented;
   • At arms length;
   • Enforceable
4. You should give thought to the extent to which your client had notice of the debt. There are points in Worsnop which could readily have been resolved against the wife. It appears that the trial judge was impressed by the wife’s lack of awareness of the mounting tax problem and also her complaints to the husband that his spending was reckless;
5. Consider your client’s broader moral claim to be excluded from liability.

These were property settlement proceedings between Mr and Mrs K, the wife sought leave to amend her application to join six new respondents and to claim further relief against some third parties already respondents. Some of the third parties were trustee corporations and some were, with the husband in some instances, among appointors of discretionary trusts, of which the husband was a member of the class of beneficiaries.

The wife, by the proposed amendments, sought some rather vague relief as follows:

"6. That pursuant to s 90AE(2)(a) and/or s 90AE(2)(b) of the Family Law Amendment Act 2003, each of… [the directors]…jointly and severally do all such acts and things and execute all such documents to cause the trustees of the trusts referred to in paragraph 5 hereof to make a capital distribution within 60 days of the date of this order in favour of the husband in such sum as the court may deem appropriate."

7.That the husband  hold such sums distributed to him pursuant to paragraph 6 hereof upon trust for the wife and forthwith upon receipt of the said sum, pay such sum to the wife or at her direction.

The vagueness of the order which was sought, along with the inadequate evidence which she led did her no favours at all.

After giving a history of the litigation up to that point (including the fact that the proceedings had to be adjourned so that notices could be issued under the Constitution to each of the Attorneys) the  Court said:

“The ultimate question is whether, on the approach agreed by the parties, Part VIIIAA could arguably have supported the orders sought by the wife, on the wife’s material then before the court and any non-contentious facts material to the claim.

The Court further held at 113 -114 : 

“When s 90AE(2) is read in conjunction with s 90AE(3), s 79, and Part VIIIAA generally, it is clear that what is contemplated is not some arbitrary invasion of the rights of a third party but an alteration of those rights where they are sufficiently connected to the division of the property between parties to a marriage.

Any doubt about the sufficiency of the connection between s 90AE(2) and the marriage or divorce and matrimonial cause power is removed by the presence of s 90AE(3) which relevantly provides that the Court may only make an order under s 90A(2) if the making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage.

…

The  Court cited with  approval at page 12,  Gould v Gould; Swire Investments Ltd (1993) FLC 92-434 Fogarty J (with Nicholson CJ and Finn J agreeing) said (at 80,451):

I conclude, consistently with Buckeridge and Barro, that the correct procedure, where an applicant in proceedings under the Family Law Act seeks relief against a person who is a stranger to the marriage or relationship, is to name that person as an additional respondent in the proceeding and set out the nature of the claim and the basis of it in the ordinary way in the application. (emphasis added)

Their Honours also said: 

Of relevance to the procedure adopted in the instant case, Fogarty J had also earlier said (at 80,448):…good case management and fairness to the parties, in particular to a third party, suggest that in appropriate circumstances the claim against a third party, or more particularly the jurisdictional base of that claim, be determined as a preliminary issue where it is appropriate and practical to do so. … Morgan J had before her no statement of claim or equivalent; only the orders which the wife wished to add and an affidavit of the wife, in which the wife said:

5. The personal financial circumstances of the husband and I are relatively modest. ….

That otherwise, the husband and I, throughout our marriage, always considered his hard work and dedication as a pivotal member of the [K] Group would pay off and, provide us with a stake in the Group that would, in effect, represent our superannuation. In fact, on different occasions during the course of our marriage, the husband advised me that he would be retiring at age 45 with “a nest egg” which grew during the marriage from $1M to $2M. The husband left me in no doubt that he and I would share in the financial rewards of the [K] Group which became extremely successful in the latter part of the 1990’s.

The [K] Group is a global organisation involved in the [mining industry], supplying highly technical equipment and plant as well as construction of the various processing plants. …

As a family we enjoyed a high standard of living which, from time to time, was subsidised by lump sums of money which I believed to have been sourced from overseas and from companies within the Group.

In our opinion, that evidence was insufficient to found the proposed claim under s 90AE against the third parties.”

Of course, their Honours do not stop to say what evidence would be sufficient, they only say that Mrs B’s was not. If I had devised a pleading which could meet every exigency I probably wouldn’t be delivering this paper. It seems to me however that I can provide some advice as to “pleading” generally in the Family Court:

1. Normally one’s client is the best weapon in the armoury, there is no substitute for taking from her a detailed account of all the facts and circumstances;
2. Although the cases of sham and alter ego do not set out the outer reaches of the new part they do set out circumstances where a Court has been attracted to actions against third parties;
3. You will notice that the extracts from Ms. B’s affidavit do not show, even in a tangential way, that the husband had any particular personal or professional links to any of the directors or trustees that she sought to join;
4. You will also notice that the wife provides no basis for finding that the husband had ever received any distribution from the trusts in question;
5. You will also notice that the Trust Deed was annexed;
7. You will also notice that it was not asserted that the husband was anything other than a discretionary beneficiary of the trust which was under consideration.

This is not to say of course that by pleading the case differently that the wife would have obtained a different result. Hindsight is a wonderful thing. However it is respectfully suggested that at least parts of the affidavit were prone to be.

Recite facts. Conclusion that most family trusts are property in the hands of the trustee party if, as usually occurs, the trustee could transfer the whole of the assets to the trust to the wife.

Whilst costs do not necessarily follow the event in the Family Court costs did follow the event in and the costs considerations in cases concerning third parties are undoubtedly different to those which might obtain in other matters in that Court.

A Form 13 Financial Statement is an onerous and invasive document. There is no rule to say that a third party must complete one.  What must be disclosed is set out at Rule 12.02.

There is no obligation for a parent to provide a will.

Rule 13.1.2 states that Division 13 does not apply to non parties to a marriage except to the extent that the party’s financial circumstances are relevant to an issue in dispute.

Chambers