Commercial Implications of Relationship Breakdown
• October 2004
Changes to Family Law: Binding Third Parties
Upcoming changes to the Family Law Act will allow courts to make orders binding on third parties when addressing property and financial settlements. As of the 17th December 2004, the Family Court-within defined limits-will have the power to make orders that compel third parties, including companies and creditors, to do certain things to meet the requirements of a settlement.
What it means for the Married Parties
Presently, in the event of marriage breakdown, the court will attempt to reach an outcome that is just and equitable in the context of the personal relationship. Under the new amendments the court will continue to seek a just and equitable outcome, not only between the parties to the marriage, but also in the context of a commercial relationship.
In practice this means the court will be entitled to transfer the proportion of debt owed by one spouse, to the other, or otherwise alter the proportions as it thinks appropriate. This will extend to the rewriting of contracts, even where those contracts were entered into prior to marriage. The allocation of debt is meant to aid in determinations of financial equity between the spouses. Before making such an order the court will consider whether to do so is reasonably necessary.
The main purpose of the order must be to effect the division of the property, including debts, which is, in the circumstances, just and equitable. It must also consider any taxation or social security effect on the parties.
In the case of a debt, the court will not make an order to transfer the debt if it is reasonably foreseeable that to make the order would result in the debt not being paid in full. However the courts assessment of a persons ability to pay is less demanding than that of a financial institution.
What it means for Third Parties
The court will be able to direct a third party to act in relation to the property, or alter the rights, liabilities or property interests of a third party. In the case of financial institutions, this may mean changes to loan agreements and deeper involvement in family law disputes.
When considering an order the court will have regard to the interests of the third party, and in relation to debts, the court must give priority to the debt being paid. Therefore an order will not be made if it is reasonably foreseeable that it will result in the debt not being paid in full.
The third party must also be accorded procedural fairness, which should mean they will be given notice of an application for an order, and be given the opportunity to be heard on whether an order should be made, or what kind of order should be made.
The court must also consider:
- The taxation effect on the third party;
- The third party's administrative costs in relation to the order;
- The economic, legal or other capacity of the third party to comply
with the order;
- Any matters raised by the third party or any other matter that the court considers relevant.
Consent Agreements
Ninety-five per cent of family law disputes are resolved by consent agreements, which are made between the parties to the marriage, with no need for a court hearing. Before giving these the force of a court order, the court must consider whether the proposed agreement is proper, just and equitable. What is just and equitable for third parties will presumably be determined by the matters outlined above, including the ability of the parties to pay the debt, taxation and administrative costs, the economic, legal or other capacity of the third party, and any other matters raised or considered relevant.
As these agreements may now alter the rights of a third party, it is likely that they will not only have to be given notice, but that third parties will also have to consent to the agreement. As there is no court hearing in such circumstances, this may present practical problems and the courts will have to remain vigilant in ensuring that third parties have been adequately informed and that their consent to such agreements is real.
In the same way, third parties must be vigilant to ensure that their property rights are not being altered in a way that will expose them to greater risk.
Repossessing Property
The Amendment also allows the court to grant injunctions which may:
- restrain a person from repossessing property of a party to a marriage;
- restrain a person from commencing legal proceedings against a party to marriage.
For example, this will enable a spouse to obtain an injunction to prevent a bank from exercising its power of sale where the other spouse has withheld mortgage payments. It will also apply to both commercial and residential lessors. It will cover a range of creditors who have contractual, common law or equitable rights to property presented as security for a loan. If an injunction is granted, the rights of the spouse will override those of the creditor.
When considering whether to grant such an injunction, the court must have regard to the same factors as if it were making an order binding on third parties when addressing property and financial settlements, as outlined above. These include whether to do so is reasonably necessary, and the main purpose must be to effect the division of the property. It must also consider any taxation or social security effect on the parties, and the third party must be accorded procedural fairness.
Commercial Implications
The changes may have broad implications in the commercial sector, which is reflected by the twelve (12)-month delay allowed by parliament before they come into operation later this year.
Under the new Amendment, the Court will be able to make orders if a third party holds property to which the husband or wife has a legitimate claim. For example, this may allow the Court to effectively deal with:
- Family trusts;
- Family companies;
- Situations where a spouse is the beneficiary of a trust;
- To prevent the exercise of a creditors power of sale.
The Court has long had the power to bind a company controlled by one of the parties to the marriage. However the new powers allow the court to intervene where the husband or wife merely has an interest in a company. This will include the ability to make orders for company directors to transfer shares from one party to the other. The court will also have the power, within limits, to alter contractual terms. However the underlying rights of creditors are protected.
As the definition of 'property' now includes a debt, the potential implications of the changes may be felt most heavily by commercial lenders. It has been suggested it may become a standard term in loan agreements that borrowers must notify lenders of separation and/or the commencement of proceedings in the Family Court.
Furthermore the finance industry may perceive greater risk, despite attempts to secure their rights, in the courts new ability to reallocate debt. This could lead to a change in lending practices to include separation or commencing Family Court proceedings as a default-triggering event. It may also cause concern, because although the court must give priority to the debt being paid in full, its means of testing a parties ability to fulfil their obligations may be less rigorous than that commonly used by commercial lenders. The court only has to look to see if it's foreseeable, at the time which the order is made, that to make the order would result in the debt not being paid in full. It is uncertain if this will include things like credit history, or merely an examination of a party's surplus income over their expenses.
Lenders in particular may now be regular players in family law property proceedings.
Published October 2004. This publication contains general information. It is not intended to be a definitive analysis of legislative or other changes and professional advice should be taken before any course of action is pursued.