WHEN THREE'S A CROWD
IN MARRIAGE BREAKDOWN
Helen Mastos, Solicitor
INTRODUCTION
A not unusual scenario - a
husband and wife dream of owning a home in which to raise a family. They borrow
the funds to enable them to achieve this dream from their bank, with the loan
secured by a mortgage against the home. A few years later, the husband starts
his own business and the bank lends him the funds to enable his business to
expand, the further loan being secured by the original mortgage. The wife,
after obtaining legal advice, signs all relevant documents as required by the
bank.
Fast forward several years - the
husband and wife have separated and proceedings have been issued in the Family
Court of Australia seeking orders relating to the property of the marriage. The
bank, has seen this situation many times before and waits on the sidelines
waiting for the dispute to be resolved. If the home is to be sold, it awaits
the proceeds of sale to satisfy all loans secured by the mortgage before it will
discharge the mortgage. It has no interest in and is not involved in the
proceedings
Since 17 December 2004, Part
VIIIAA of the Family Law Act 1975 has significantly altered the role of
banks and other financial institutions in Family Court proceedings to the point
where they can no longer afford to be bystanders
Although the Family Court
previously had the power to bind third parties to decisions, the traditional
view has been that it could not make an order adversely affecting the rights of
a third party. The amendments, however, clearly state that the object of the
changes is to allow the Family Court to make orders or grant injunctions
directed to or altering the rights, liabilities or property interests of third
parties.
THE CHANGES AND
IMPLICATIONS
Of particular concern to lending
institutions, the Court now has the power to make any of the following orders:
1. The substitution of
one party to the marriage for both parties in relation to a debt. Such an order
may result in one spouse being substituted for both in relation to a liability.
2. The substitution of
one party to the marriage or both parties in relation of a debt owed by one
party. Such an order may result in one spouse being substituted for the other
under a guarantee; and
3. An alteration of the
proportion of liability for a debt owed by the parties to the marriage. Such an
order may result in the severance of joint liability under a mortgage
The amendments also enable the
Court to make any order directing a third party to do anything in relation to
the property of a party to the marriage, including altering the rights,
liabilities or property interests of a third party in relation to the marriage.
Further, the amendments enable
the Court to make an order restraining a third party from repossessing property
of a party to a marriage and to grant an injunction restraining a person from
commencing legal proceedings against a party to a marriage.
THE HANDBRAKE
The legislation gives some
comfort to financial institutions in that it restricts the Court’s powers to
circumstances where:
1. the making of the
order is reasonable necessary or reasonably appropriate and adapted to effect a
division of property between the parties to the marriage; and
2. if the order concerns
a debt of a party to the marriage, it is not foreseeable at the time the order
is made that to make the order would result in the debt not being paid in full;
and
3. the third party has
been accorded procedural fairness in relation to the making of the order. This
primarily means that the third party must be notified and given the right to be
heard before any order is made against their interest; and
4. the Court is satisfied
that in all the circumstances it is just and equitable; and
5. the Court is satisfied
that the order takes into account certain matters, one of which is the capacity
of a party to the marriage to repay the debt after the order is made.
The safeguards were referred to
in Samootin v Wagner & Anor [2006] FamCA 432. In that case, the Federal
Magistrates Court was asked by the wife to grant an injunction against third
parties restraining them from commencing or continuing bankruptcy proceedings
against her, although she admitted that the debt was hers. The application was
initially refused and the wife appealed the decision to the Full Court. The
Full Court also refused the application and in its decision, referred to the
legislative safeguards. The Court found that it would not be proper to grant
the injunction as the debt incurred by the wife was not directly related to the
relationship between the husband and the wife. This case indicates that the
Court will be conservative in its interpretation of the amendments and will not
grant injunctions readily.
PRIORITY OF LEGISLATION
The amendments override any other
law as well as anything in a trust deed or other instrument. Accordingly,
lending institutions cannot amend their security documents to protect them from
orders being made under these provisions. Neither can they find solace in any
State legislation.
CONSTITUTIONAL VALIDITY
A challenge by third parties to
the constitutional validity of these provisions was been dismissed firstly by
the Family Court. The third parties then applied directly to the High Court for
special leave to appeal the decision (Slazenger v Hunt [2006] HCA Trans
472 (1 September 2006)). The High Court dismissed the application without
prejudice to the third parties’ rights to make a further application once the
Family Court proceedings were finalised and an appeal to the Full Court
decided. The High Court noted that the Family Court had not yet decided whether
the orders sought should be made, therefore to grant special leave at that point
may be premature. It was also stated that the opinions of the Full Court would
be valuable as the experience of the Family Court in the area of family law was
greater than that of the High Court and the provisions potential practical
operation may need to be considered.
COSTS
Third parties may be comforted to
some extent in relation to costs. The legislation provides that where an order
has been made or an injunction granted, the Court may make such order as it
considers just for the payment of the reasonable expenses of the third party
incurred as a necessary result of the order or injunction. In doing so, the
Court must take into account the principle that parties to the marriage should
bear the reasonable expenses of the third party equally.
Despite this provision in the
Act, our firm recently acted for a lending institution before the Federal
Magistrates Court where the Court decided that the institution ought to bear its
own costs of the proceeding. This decision is currently the subject of an
appeal to the Full Family Court.
SUMMARY
Although Part VIIIAA may appear
on its face to be far reaching in effect, the extent to which the Court will
apply the provisions to the detriment of lending institutions is still to be
seen.
For further information,
please contact Helen on +61 3 9609 1535 or email
hmastos@rk.com.au
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