A binding financial agreement (BFA) under the Family Law Act will not necessarily survive the scrutiny of a Trustee in Bankruptcy.
In accordance with s. 120(1) of the Bankruptcy Act 1966 (the “Act”), a transfer of property made by a transferor who later becomes bankrupt is void against the trustee in bankruptcy if:
- the transfer took place within 5 years before the commencement of the bankruptcy; and
- the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property; and
- none of the exceptions in ss. 120(2) or 120(3) apply.
The application of this provision of the Act was recently considered in respect of a transfer made pursuant to a binding financial agreement (“BFA”), which is an agreement covering the division of property pursuant to the Family Law Act 1975 in the event of a relationship break-down.
Sometimes, such agreements are known as “prenuptial agreements” – but they can be made at any time, even during a marriage or after a break-down.
The Federal Court, in a case involving the author as the Trustee in Bankruptcy, recently considered the matter, in:
Cooper v Fernihough, in the matter of the bankrupt estate of Phillip George Fernihough  FCA 727
Following an alleged separation between Mr and Mrs Fernihough, they entered into a BFA on 29 May 2013. Pursuant to the terms of that BFA, Mr Fernihough promised to transfer to Mrs Fernihough his interest in the matrimonial home, at Pearsall, Western Australia.
The consideration for the transfer included Mrs Fernihough relinquishing any present or future claim against Mr Fernihough for spousal maintenance.
It should be noted that Mr Fernihough’s name remained on the certificate of title as a joint registered proprietor.
Mr Fernihough entered bankruptcy (via a creditor’s petition) on 11 July 2017. But the ‘act of bankruptcy’, which is deemed to be the commencement of the bankruptcy, was 15 May 2017.
The Trustee of Mr Fernihough’s bankrupt estate commenced proceedings to seek declarations that:
- the transfer of Mr Fernihough’s interest in the property by the couple’s BFA was void under s. 120 and/or s. 121 of the Act; and
- Mr Fernihough’s share in the property vested in the Trustee in Bankruptcy under s. 58 of the Act.
The Trustee also sought orders for the sale of the property and for the net proceeds to be distributed between himself as Trustee and Mrs Fernihough as co-owner.
The Federal Court considered the following:
The BFA that triggered the supposed transfer of the property was entered into by the couple on 29 May 2013. As mentioned above, Mr Fernihough’s bankruptcy was deemed to commence on 15 May 2017. So, the supposed transfer was just short of 4 years before commencement of bankruptcy.
Under s. 120(3)(a) of the Act, a transfer is not void against the Trustee in the case of a transfer between related entities (as was the case with Mr and Mrs Fernihough), if:
- the transfer took place more than 4 years before the commencement of the bankruptcy; and
- the transferee proves that at the time of the transfer, the transferor was solvent.
This exception was held not to apply, as the transfer took place less than 4 years before commencement of Mr Fernihough’s bankruptcy.
Did the s. 120(2)(b) maintenance agreement exemption apply?
Transfers are not void under s. 120(1) if they are to meet all or part of a liability under a ‘maintenance agreement’ or a ‘maintenance order’.
The phrase ‘maintenance agreement’ is defined in s. 5(1) of the Bankruptcy Act to exclude a financial agreement within the meaning of the Family Law Act. Therefore, the BFA was not a ‘maintenance agreement’ and the exception in s. 120(2)(b) did not apply.
Was there a transfer?
The supposed ‘transfer’ of property was also considered. The Trustee submitted that the only transfer that had occurred was Mr Fernihough’s equitable interest in the property, as the transfer form had not been signed and lodged with the Lands Titles Office.
The Court considered whether there was any transfer of any property for the purposes of s. 120(1) of the Act.
The Court looked in detail at the terms of the BFA and considered that the transfer of property provision was void under s. 90E of the Family Law Act as it did not specify the value of spousal maintenance that was relinquished as consideration for the transfer.
Therefore, there was no ‘transfer’ for either s. 120 or 121 of the Bankruptcy Act to void.
As there was no transfer, the Court determined that Mr Fernihough’s interest in the property continued to vest in the Trustee.
With respect to the sale of the property, the Court considered that Mr Fernihough’s creditors’ interests were not necessarily superior to Mrs Fernihough’s and as such, provided Mrs Fernihough with the opportunity to make an application under the Family Law Act for orders before the Trustee could sell the property.
The dispute between the Trustee and Mrs Fernihough has since resolved – resulting in Mr Fernihough’s creditors receiving a dividend of 100 cents in the dollar.