The long arm of family law – clawing back assets that have been scooped out of the ‘pool’

So you’ve separated and don’t really want your ex-spouse or de facto partner to be able to claim against that house you bought out of your hard-earned savings. After all, you were the one who went to work each day and earned that money. It seems reasonable that you should be able to do what you like with it, doesn’t it?

Upon a first consultation with a lawyer, many clients have raised the possibility of transferring property owned by them to a friend or relative, or to some other acquaintance, so that the client no longer ‘owns’ that property. The client then queries how a former spouse could claim against something that neither party to the relationship ‘owns’ anymore.

Relevant legislation and case law

It is important to realise that the Family Law Act and various court decisions require the Federal Magistrates Court and the Family Court to follow a procedure when deciding how to divide up a couple’s property interests. Essentially, that process is based on the parties’ respective contributions, whether financial or non-financial. The court needs to work out the ‘pool of assets’, which must include all of the assets owned by the parties regardless of how they came about. After working out how the property pool is comprised, the court will then look at how those assets came into being and consider the various contributions made by both parties to the accumulation of the assets.

Therefore, it is not appropriate for a party to take it upon him or herself to transfer ownership of a property or other asset that they don’t want to have included in the asset pool.

The Family Courts are well aware of attempts by parties to reduce the asset pool and prevent access to a property by claiming they have sold, gifted or simply transferred that property to another party.

The Family Law Act itself has provisions which deal with this situation.

Section 106B ‘Transactions to Defeat Claims’ is the key provision when it comes to attempts by parties to reduce the asset pool and dispose of property that should be included in any proceedings. The section provides for as follows:

Section 106B(1) –  in proceedings under this Act, the Court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by a direction in the interest of, a party, which is made or proposed to be made, to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat such an order.

The word ‘disposition’ is defined in section 106B(5) to include a sale and a gift. That section also defines ‘disposition’ to include ‘the issue, grant, creation, transfer or cancellation of, or a variation of the rights attaching to, an interest in a company or a trust’.

There are some limitations on the use of the section. In order to apply to set aside or restrain the making of a disposition, proceedings under the Act must already be in place. However, the filing of an application for an order under section 106B(1) is not limited to the parties. An application may be made by a party to the proceedings, a creditor to a party to the proceedings (if the creditor would not be able to recover his or her debt if the instrument or disposition were made), or any other person whose interests would be affected by the making of the instrument or disposition. This is clear from section 106B(4AA).

There have been many cases that have dealt with section 106B (and its predecessor, the former section 85). Transactions which have fallen foul of section 106B include the following:

• transferring property from the name of a party to another person;
• transferring property from the name of a party to a proprietary company or a trust;
• a mortgage given over a property;
• forgiving a debt; and
• the deposit of a passbook and withdrawal slip in consideration of advances.

Some recent cases have raised some further examples of when a party might be caught under section 106B.

In Mitty & Mitty [2010] FamCAFC256, it was noted that, in earlier proceedings, the Judicial Registrar had ordered the husband to pay his former wife’s solicitors an identical amount to that which he paid to his own solicitors for legal costs. The husband subsequently borrowed money from his sisters and those funds were credited to his solicitor’s trust account in his name. When the husband authorised the transfer of funds to his solicitor’s general account for the purpose of paying a tax invoice, the wife made an application to set aside that transaction.

The primary judge reasoned that, as the money could only have been removed from the solicitor’s trust account and paid into their general account in circumstances where the husband had authorised the transfer, this constituted a disposition ‘by or on behalf of’ the husband. Notably, the fact that the source of the funds was not from the matrimonial assets but were the product of a loan did not make the payment any less a disposition within the meaning of section 106B of the Family Law Act 1975.

When the husband’s sisters lent money to the husband, those funds became his property, they were deposited into the solicitors’ trust account in his name, and he caused them to be paid in their entirety without directing one half to the wife pursuant to the ‘dollar for dollar’ order. As the husband’s actions were contrary to the requirements of the Judicial Registrar’s interim order and found to have been made in an attempt to defeat it, the wife’s application to set aside the transaction was successful and the husband’s appeal against that decision was dismissed.

In Binns & Binns [2011] FLC98-057, Federal Magistrate Harman found that the power under section 106B to set aside transactions was imported into the Child Support (Assessment) Act 1989. Although he had only child support proceedings before him, he decided that section 100 of the Child Support (Assessment) Act 1989 operates to cause all provisions of the Family Law Act to apply to such proceedings.

Mr Binns had not paid any child support for his two disabled children for seven years. Evidence showed that Mr Binns had successfully engaged in property development over the years. The court was satisfied that the respondent was fully aware of the proceedings regarding child support and that his actions would be likely to defeat claims in the current proceedings. Mr Binns had failed to produce income tax returns, bank account statements, evidence of withdrawals, and documents in relation to the sale of property for the purpose of calculating child support. Mr Binns had transferred the sum of $290,000 to his brother who deposited the funds into an account in his name rather than in Mr Binns’ name. The Court saw this as a wilful act to ensure that the funds were removed from the Court’s reach and the proceedings frustrated.

The Court ordered that the money that had been transferred to the brother be paid to the Court, setting aside the transaction and bringing the funds back into account, the value of which was then an asset of Mr Binns for child support purposes.

Who is the third party? Is he or she a bona fide purchaser?

There have been many cases regarding transfers of properties to third parties and whether or not a third party is a bona fide purchaser and truly independent of the party effecting the transfer. Where the transferee is a company or trust, courts are entitled to look behind the company structure and ascertain who really exercises control over that entity.

Our advice

Simply put, there is no advantage to a party transferring property to a third person in response to, or in anticipation of, a claim by their spouse under the Family Law Act. Apart from ordering the return of the funds or reversal of the transfer, the Court might simply ‘add back’ the money into the pool. For example, if property has been transferred to another party or used for the benefit of a party to the proceedings, the Court may credit that spouse with already having received the benefit of that asset and incorporate the value of that asset into that party’s share of the overall asset pool (which would then also include the ‘added back’ amount).

The better course of action is to highlight any contributions that you have made to the accumulation of assets so as to maximise your entitlements to a share of the asset pool. To attempt to, or to actually, dispose of assets or gift them to a third party will only make you look bad in the eyes of the court and that could then colour all of the proceedings, regardless of other relevant issues.

Before signing a transfer or setting up that account in your cousin’s wife’s name, we recommend that you seek legal advice. The Family Law team of Cooper Grace Ward is available to assist with all property settlement and other family law enquiries.

Contact the family law team on 07 3231 2444 for more information.