It's Not Always in the Family by TurksLegal

It’s not Always “in the Family” By Lisa Dorman | June 2011 Area of Expertise | Commercial Disputes & Insolvency

Summary A recent decision of the Federal Court has examined the complicated relationship between the Family Law Act and the Corporations Act1. It is clear that using processes available under the Family Law Act will not save transactions if they were entered into to defeat provisions of the Corporations Act designed to protect the rights of creditors.

Who Does This Impact? The case has impact for Insolvency practitioners and those contemplating property law settlements under the Family Law Act.

What Action Should Be Taken? Careful analysis should be given concerning the transfer of property, particular trust property, using processes under the Family Law Act if done in the context of insolvency.

The Facts On 26 April 2006, Terry Van Der Velde and David Stimpson were appointed liquidators of Riby Pty Ltd (‘Riby’) pursuant to an order made in the Supreme Court of Queensland. From 12 May 1999 to 17 May 2006, Riby was the sole registered proprietor of a property located at 15 Brookvale Drive Underwood (the ‘Property’). It was also the registered proprietor of the Jade Trust. At all material times, Mr Ross Hastings was the sole shareholder and director of Riby. Mr Hastings was married to Ms Ng. On 17 February 2007, a sequestration order was made against his estate. Mr Hastings and Ms Ng were the beneficiaries of the Jade Trust. It was common ground that Riby held the Property as trustee of the Jade Trust. On 17 May 2006, Ms Ng became the registered proprietor of the Property. The transfer was for an amount of $254,914.16. The property was valued at $330,000 as at the date of transfer. No other consideration was paid by Ms Ng. At first instance, the liquidators sought to set aside the transfer of the Property to Ms Ng. It was asserted that the transfer was a void disposition pursuant to section 468 of the Corporations Act (the ‘Act’), as it occurred after the commencement of the winding up of Riby. Alternatively, the liquidators contended that the transfer was an insolvent transaction, a transaction made for the purpose of defeating creditors, an unfair loan to Ms Ng and an unreasonable director-related transaction. Ms Ng opposed the relief sought on the following grounds:

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It’s not Always “in the Family” by Lisa Dorman

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in October 2005 she commenced proceedings pursuant to the Family Law Act 1975 for property orders.

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Mr Hastings agreed to the application and signed terms of settlement on 23 November 2005.

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Pursuant to those terms, Ms Ng was to receive the Property, together with another property located nearby.

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Consent orders were made by the Family Court on 20 December 2005.

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Ms Ng then decided she could not afford to retain the other property and accordingly, applied to the Family Court to vary the orders so that they referred only to the Property.

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Further consent orders were made on 10 April 2006 consistent with the amendment proposed by Ms Ng.

Riby was not a signatory to the consent orders although it was identified in both documents as the trustee of the Jade Trust. The orders provided for Mr Hastings, as sole director and shareholder of Riby, to cause the transfer to Ms Ng, all of the right, title and interest of the Jade Trust in the Property. Ms Ng alleged that the trustee of the Jade Trust was changed by her to her own company Meownco Pty Ltd, in November 2005. (This was inconsistent with the orders made in the Family Court proceedings.)

The decision at first instance Greenwood J found that the transaction, being the transfer of the Property from Riby to Ms Ng, and the consent orders entered into by Mr Hastings and Ms Ng which provided for the transfer, resulted in the creditors of Riby being prejudiced by the disposition at undervalue. His Honour also found as follows: •

All of the events, being the consent orders made in the Family Court proceedings in December 2005 and the subsequent orders in April 2006, took place when Riby was unable to pay its debts as and when they fell due, or after the appointment of the liquidator. These transactions also took place within the six month period ending on the relation back date of 24 March 2006 (that is from 24 September 2005 to 24 March 2006).

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The actual transfer of the Property took place on 17 May 2006, after the appointment of the liquidator to Riby.

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The agreement to transfer the Property and the transfer itself, were entered into by Riby through Mr Hastings, for a purpose of removing the Property from the reach of creditors and thus for the purpose of defeating the rights of creditors on a winding up of the company.

His Honour found that the agreement to transfer and the transfer contravened sections 588FE(2),(3), (4), (5) and (6A) of the Act and accordingly, the transactions were void. Furthermore, the transfer of the property on 17 May 2006 was rendered void by operation of section 468 of the Act.

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It’s not Always “in the Family” by Lisa Dorman

The appeal Ms Ng appealed against the decision of Greenwood J. In her appeal Ms Ng relied on the following propositions which were ultimately found to be incorrect: •

The winding up provisions of the Act did not apply to the winding up of a trustee company or assets held in trust by such company.

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A trustee has no right to an indemnity from trust assets other than pursuant to the terms upon which trust property is held.

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Any breach of the trust deed will deprive the trustee of its right to an indemnity.

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The trustee’s right of indemnity under the trust deed of the Jade Trust cannot be exercised against trust property in the possession of a beneficiary.

Ms Ng asserted that the transfer was a ‘valid distribution of trust property to a beneficiary by the trustee in its absolute discretion in accordance with the Trust Deed’2.

The decision In dealing with each of the grounds of appeal, the Court found: •

The proposition that the Act did not apply because ‘the subject matter of the litigation was not a corporate property but a trust property and the appellant was an individual who was a beneficiary of a family trust’ was misconceived3. In particular, the liquidator may have to perform the trustee’s duties. The liquidator of an insolvent trustee may enforce any right of indemnity out of trust assets.

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There was evidence before the Court that Riby incurred liabilities as trustee of the Jade Trust. To that extent, Riby was entitled to an indemnity out of trust assets and a lien over them to enforce such indemnity. This right exists pursuant to section 65, 71 and 72 of the Trusts Act 1973(Qld) regardless of any contrary intention appearing in the relevant trust deed.

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Section 468 ‘strikes at all dispositions, even if they are otherwise lawful’4. The finding does not necessarily exclude persons having claims against Riby as trustee from asserting them in the winding up.

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Had the terms of settlement been agreed to after the winding up order, they may, subject to the operation of the Family Law Act, have been avoided pursuant to section 468. However, only the transfer occurred after the making of the order. Legal title remained with Riby until 17 May 2006, and accordingly, it retained its right of indemnity at that time.

The Court made particular comment on the orders made in the Family Court and the impact of those orders in light of the liquidation of Riby. In particular, the Court found:

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The orders of the Family Court stand as orders of a superior court. Such orders may only be set aside by that Court or by the High Court. The operation of such orders should not be interfered with to the extent they are binding on parties to those proceedings.

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Section 79 of the Family Law Act gives power to the Family Court to make orders with respect to the property of the parties to the marriage, or either of them, including orders which alter the interests of those parties in property. There are no particular provisions which relate to corporate insolvency.

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Section 90AA of the Family Law Act provides that the object of Part VIIIAA of that Act, is to allow the court to make an order under section 79 that is ‘directed to, or alters the rights, liabilities of property interests of a third party’.

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Section 90AC(1) of that Act provides that that part of the Act has effect despite anything to the contrary set out in any other law, trust deed or instrument. Section 90AC(2) provides:

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Without limiting sub-section (1), nothing done in compliance with this Part by a third party in relation to a marriage is to be treated as resulting in a contravention of a law or instrument referred to in subsection (1).

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While section 90AC is difficult to reconcile against section 588FA, 588FB and 588FDA of the Act, section 588FA specifically provides that a transaction is an unfair preference if it satisfies the requirements of that section and ‘even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court’.

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Relevantly, the consent orders signed in the Family Court proceedings purported to be between Mr Hastings, Ms Ng and Riby but Riby did not execute them. The orders were not directed to Riby or the trustee of the Jade Trust. Clause 1 of the orders required Mr Hastings, as sole director and shareholder of Riby, to ‘do all acts and sign all documents as are necessary to cause the transfer…’ but did not require Riby to cause the transfer.

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Riby was entitled to a right of indemnity in respect of any outgoings incurred in administering the Jade Trust, and consequently held a lien over the Property to enforce that right. Those rights were not trust assets. The order made by the Family Court did not require the transfer to Ms Ng of the right of indemnity of the lien. Accordingly, the Court concluded that the orders did not affect Riby’s right to indemnity out of the assets.

Conclusion This decision should give comfort to liquidators and creditors of entities if those entities disposed of assets prior to the appointment of the liquidator. While the existence of consent orders in Family Law proceedings may not make the clawing back of property simple, Courts will examine the circumstances in which the orders were made and whether the substance of such orders is in itself voidable under the Act.

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It’s not Always “in the Family” by Lisa Dorman

End notes 1 Kym Hon Yoke Ng –v- Van Der Velde [2011] FCAFC 35 2

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Paragraph 50

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For more information, please contact: Lisa Dorman

Partner T: 02 8257 5734 lisa.dorman@turkslegal.com.au

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