Getting your due credit

Tucked away quietly in the Property (Relationships) Act 1976 is Section 47 (s47). Under-utilised and under-celebrated, it relates to separation agreements that have been entered into by parties to a relationship (i.e. a husband and wife), in order to defeat creditors – or an agreement that has the effect of defeating a creditor.

“For example, the wife may act as a guarantor for her company,” says Harriet Krebs, solicitor at K3 Legal. “To keep that company’s assets out of reach of its creditors, the wife may, as part of the separation agreement, transfer the assets to her husband. At that stage, it becomes out of reach of the creditors.”

“Essentially, when creditors invoke the Act, it allows Courts to deem that part of a separation agreement void,” says Krebs. “It’s a really useful piece of legislation, but it’s tended to be overlooked as creditors have traditionally sought restitution via the High Court rather than the Family Court.”

Toni Brown, Director of K3 Legal, agrees that when a relationship property agreement is disadvantaging creditors, they need to proceed through the Family Court instead, as that Court has exclusive jurisdiction over the Act which governs relationship property agreements.

“The Family Court has the necessary functions required to apply to s47,” says Brown.

The primary difficulty lies in determining whether the creditor has standing as an applicant under the Act. After all, the Act primarily relates to dealings between a couple about their relationship property.

“At first glance, this would limit the ability of creditors to commence proceedings against parties to a relationship property agreement,” says Krebs. “However, given the Act has been amended numerous times, and s47 has remained throughout, it is clear that Parliament’s intent is to enable creditors to use this as a tool to recover debts.”

However, the application of s47 is not always clear cut, with creditors also relying on two separate sections on the act, which provide them access to the Act and therefore to s47.

“For creditors to be eligible to file under s47, the applicant must have standing, be a creditor in accordance with s47, and a couple’s relationship property agreement must have been made with the intention of, or have the effect of, defeating creditors,” says Krebs.

The Court, in Regal Castings vs Lightbody, established that the creditor must demonstrate there was an intention to defeat their claim. While Regal Castings was decided in relation a different Act, there are significant parallels between that provision and s47.

“In Regal Castings, intention to defraud, per s60, was equated with circumstances which show there must have been knowledge that the creditors would be hindered, delayed, or defeated in their rights of recourse to the property concerned,” says Krebs. “In which case, the debtor must be taken to have intended to defeat the creditor’s claim. The Court did not consider the intention to mean the debtors wish or purpose, it does not require an actual or dominant intention to defeat the creditor’s claim.”  

However, the current leading decision on s47 was made prior to the decision in Regal Castings. The Court of Appeal in The Official Assignee v Johnson, endorsed the dominant intention approach. It was held that there must be an actual intention to defeat creditors and the Court emphasised the seriousness of such an allegation.

“Given the Regal Castings decision, I think we’ll probably see the Johnson decision eventually up for review,” says Brown. 

TRE Limited v [W] & [G] et Ors* was one case that Brown notes might have set future precedents had it been resolved in court.

As part of the case, the judge considered the application made by the applicant creditor, who sought a declaration that a s21A agreement entered into by the first and second respondents was void and had been entered into to defeat TRE’s claim to particular assets. TRE obtained without notice s43 restraining orders to prevent the sale of property which had been purchased with the proceeds of sale of the relationship property.

The respondents sought to dismiss the proceedings and discharge the “without notice” restraining order that had been obtained by TRE, and they were subsequently varied by consent.

“There were some questions around whether or not the respondents were in a relationship when these decisions were made, and ultimately it was settled out of court,” explains Brown. “But it’s still telling that the laws can be leveraged this way, and I suspect we’ll see more similar cases moving forward.” 

*Names have been changed