I’m broke, baby: bank­rupt­cy and the right to lit­i­gate fam­i­ly law proceedings

It is not uncom­mon for you and your for­mer part­ner to find your­self in tight finan­cial cir­cum­stances fol­low­ing sep­a­ra­tion. You, or your part­ner, may well feel like you are broke. But what hap­pens when things go beyond being broke? 

The recent Fam­i­ly Court deci­sion of Sloan & Sloan looks at how pro­ceed­ings are affect­ed when one spouse (whether mar­ried or de fac­to) becomes bank­rupt after pro­ceed­ings are com­menced in the Fam­i­ly Court. 

What is Bankruptcy?

Bank­rupt­cy is a legal process which takes place when a per­son can­not pay their debts as and when they fall due. It is gov­erned by the Bank­rupt­cy Act 1966 (Cth). Upon bank­rupt­cy, a trustee is appoint­ed by the Aus­tralian Finan­cial Secu­ri­ty Author­i­ty to man­age the bank­rupt estate and man­age any assets and pay­ments to creditors. 

In Sloan & Sloan, the hus­band became bank­rupt dur­ing pro­ceed­ings for par­ent­ing and prop­er­ty orders. The issue was whether or not the hus­band could con­tin­ue with his appli­ca­tion, which he brought before becom­ing bankrupt. 

Bank­rup­t’s prop­er­ty and right to litigate

Sec­tion 58 of the Bank­rupt­cy Act 1966 (Cth) pro­vides that the hus­band’s prop­er­ty (being any asset owned by him) held at the time of bank­rupt­cy and dur­ing the peri­od of bank­rupt­cy, vests in the trustee. The def­i­n­i­tion of prop­er­ty which applies under the Bank­rupt­cy Act does not extend to all rights to litigate. 

Bank­rupt­cy in the Fam­i­ly Law Act

Sec­tions 79 and 90SM of the Fam­i­ly Law Act 1975 (Cth), which deal with the alter­ation of prop­er­ty inter­ests after the break­down of a mar­riage or de fac­to rela­tion­ship, pro­vide for the involve­ment of the bank­rupt­cy trustee in lit­i­ga­tion to the extent that the lit­i­ga­tion involves vest­ed bank­rupt­cy prop­er­ty. It is not uncom­mon for fam­i­ly law pro­ceed­ings to involve the bank­rupt­cy trustee as a par­ty, and for prop­er­ty set­tle­ments to effec­tive­ly be nego­ti­at­ed (or lit­i­gat­ed) between the trustee and the non-bank­rupt spouse. 

Rights of action which do not pass to a trustee

The Full Court of the Fam­i­ly Court in the mat­ter of O’Neill stat­ed a bank­rupt spouse may ini­ti­ate and pros­e­cute pro­ceed­ings for prop­er­ty orders dur­ing the course of bank­rupt­cy, how­ev­er pur­suant to s58(1)(b) of the Bank­rupt­cy Act 1966 (Cth), any prop­er­ty acquired would vest in the trustee (save for a lim­it­ed class of exempt property). 

In Sloan & Sloan, Gill J stat­ed that the right to lit­i­gate fam­i­ly law prop­er­ty pro­ceed­ings does not vest in the trustee because such a right is per­son­al to the bank­rupt, except where the pro­ceed­ings affect the quan­tum of the bank­rupt estate. 

Prac­ti­cal­ly speak­ing, this means that while a bank­rupt spouse may com­mence pro­ceed­ings under the Fam­i­ly Law Act, any prop­er­ty set­tle­ment obtained by the bank­rupt par­ty will become the prop­er­ty of the bank­rupt­cy trustee and be applied to meet their debts. 

Sec­tion 60 of the Bank­rupt­cy Act – stay of legal proceedings

Sec­tion 60 of the Bank­rupt­cy Act 1966 (Cth) pro­vides that civ­il legal pro­ceed­ings com­menced by some­one who then becomes bank­rupt are stayed until the trustee advis­es of a deci­sion in writ­ing regard­ing whether the action will be pros­e­cut­ed or discontinued. 

If the trustee has not made this elec­tion with­in 28 days of receipt of notice of the action from the oth­er par­ty to the pro­ceed­ings, the trustee is deemed to have aban­doned the action. This is why many fam­i­ly law mat­ters which involve a bank­rupt par­ty involve the trustee as a par­ty to the pro­ceed­ings – this is effec­tive­ly a means for the trustee to secure prop­er­ty from which to sat­is­fy debts. 

Gill J not­ed in Sloan & Sloan that the ​“unwel­come” con­se­quence of s 60 of the Bank­rupt­cy Act 1966 (Cth) was that fam­i­ly law pro­ceed­ings relat­ing to par­ent­ing were also stayed in the event of bank­rupt­cy due to the ​“blan­ket effect” of the provision. 

Sloan & Sloan was adjourned and the trustee was even­tu­al­ly joined as a par­ty to the pro­ceed­ings and direct­ed for the par­ent­ing and prop­er­ty pro­ceed­ings to continue. 

Whilst s 60 of the Bank­rupt­cy Act 1966 effec­tive­ly stays par­ent­ing pro­ceed­ings, the trustee does not become involved in the par­ent­ing pro­ceed­ings – the par­ent­ing pro­ceed­ings con­tin­ue to be lit­i­gat­ed between the par­ents only.

My for­mer part­ner is about to be declared bank­rupt – what do I do?

If you become aware that your for­mer part­ner is about to be (or has recent­ly been) declared bank­rupt, this may have a sig­nif­i­cant impact on your prop­er­ty pro­ceed­ings and/​or set­tle­ment. It is impor­tant that you obtain legal advice as soon as pos­si­ble as to your options and how to min­imise any impact on you. 

Swaab’s fam­i­ly law team can pro­vide you with spe­cial­ist legal advice about the impact of bank­rupt­cy on your fam­i­ly law matter.