Family Court in charge: the impact of Family Court orders on external administrations

Background

In July 2012, Ms Megalos (Wife) commenced proceedings in the Family Court of Australia against Mr Katsaros (Husband) for orders for adjustment of property interests under the Family Law Act 1975 (Cth) (Family Court Proceedings). The Wife joined, amongst others, C Pty Ltd and D Pty Ltd (collectively, the Companies) which were associated with the Husband.

On 7 December 2012, the Family Court made orders by consent in the Family Court Proceedings (Consent Orders) that (amongst other things):

1. the Husband was to pay into a trust account in the name of the Wife the sum of $500,000 (Settlement Sum) with an initial sum of $300,000 to be paid from the proceeds of the sale of a property owned by C Pty Ltd (Property C);
2. any shortfall following the sale of Property C was to be paid out of the proceeds of sale of a property owned by D Pty Ltd (Property D);
3. the Settlement Sum was to be used to purchase a townhouse to be developed by or on behalf of the Husband (New Property); and
4. the New Property was to be registered in the name of the Wife to be used as accommodation for the Wife and the child of the Wife and Husband until such time as the child turned 30.

Prior to the Consent Orders being made, the Wife and the Husband had signed another minute of proposed consent orders (Minute). The terms of the Minute were slightly different to the Consent Orders. Importantly, the Minute proposed to bind D Pty Ltd, notwithstanding that D Pty Ltd was not a party.

On 10 July 2014, the Wife filed an application in the Family Court seeking orders for enforcement of the Consent Orders (Enforcement Proceedings).

On 9 August 2014, a sequestration order was made against the estate of the Wife and Mr Calas was appointed as the trustee in bankruptcy of the Wife’s estate (Trustee). On 9 December 2014, the Family Court granted leave for the Trustee to continue the Enforcement Proceedings.

On 22 August 2014, the Companies were placed into liquidation and Mr J was appointed as liquidator of each of the Companies (Liquidator).

The Liquidator subsequently sold Property C and Property D (Properties) and held monies following the sale of the Properties.

The Enforcement Proceedings

The Trustee contended that the effect of the Consent Orders, or in the alternative, the agreement on which those orders were based, was to create an equitable charge or lien in favour of the Wife over the proceeds of sale of Property D (Proceeds).¹ Consequently, the Proceeds were payable by the Liquidator to the Trustee as trustee for the bankrupt estate of the Wife.

On 9 December 2015, Benjamin J:

1. held that the Consent Orders created an equitable interest in favour of the Wife in relation to Property D (the Charge);²
2. held that the Liquidator took Property D subject to the subsisting and existing equitable interests of the Wife created by the Consent Orders;³ and
3. made an order (amongst others) that any monies held by the Liquidator following the sale of the Properties were held on trust for the benefit of the Trustee for the bankrupt estate of the Wife.

Federal Court proceedings

The Liquidator subsequently commenced proceedings in the Federal Court of Australia, contending that the Wife, Husband and D Pty Ltd had agreed to settle the Family Court Proceedings on terms which included the creation of the Charge (evidenced by the Minute) and that the Charge, or the agreement to create the Charge, constituted an unreasonable director-related transaction. The Liquidator sought a declaration that the Charge was void and unenforceable.

Relevant legislative provisions

A ‘transaction’:

1. can include, amongst other things, a conveyance, transfer or other dispositions of the property of a company, and the incurring of an obligation to make such a disposition to, amongst others, a close associate of a director of a company;⁴
2. is an ‘unreasonable director-related transaction’ if it is made to a recipient in circumstances where a reasonable person in the company’s circumstances would not have entered into the transaction;⁵ and
3. may be an unreasonable director-related transaction regardless of whether a transaction was made pursuant to a court order.⁶

The reasonableness of entering into a transaction is determined at the time a company actually enters into the transaction and depends on the facts of the case.⁷

Outcome

The Liquidator’s application was dismissed.

Moshinsky J of the Federal Court held that there was no evidence to support the Liquidator’s contention that the Minute illustrated an intention between the Wife, Husband and D Pty Ltd to create the Charge (particularly in circumstances where D Pty Ltd was not a party to the Minute). Secondly, that even though D Pty Ltd had agreed to the Consent Orders, the Liquidator had not established that the parties had agreed to create the Charge. Thirdly, the Liquidator did not establish that the Charge was unreasonable in the circumstances.

Fourthly, Moshinsky J stated that it would not be appropriate for the Federal Court to make a declaration that the Charge was an unreasonable director-related transaction in circumstances where it would conflict, or appear to conflict, with the orders made by another court. Rather, if the Federal Court was satisfied that the Charge was an unreasonable director-related transaction, the proceedings should be transferred the proceedings to the Family Court for a final determination.

Lavan comment

This case illustrates the effect that Family Court proceedings can have upon companies in external administration and the administration of bankrupt estates. Insolvency practitioners should be mindful of any overarching disputes in the Family Court and seek advice as to whether such proceedings may impact on the external administration of a company and/or the administration of a bankrupt estate.