Changes to Family Law will impact on business
By Tom Altobelli
Some imminent changes to Family Law will have a significant impact on business.
As from 17 December of this year, Courts having powers under the Family Law Act 1975 will be able to make orders that bind parties other than just the husband and wife in cases before the Courts.
Orders and injunctions under the Family Law Act can be made that are directed to, or after the rights, liabilities or property interests of, a third party.
This law defines a third party to mean “a person who is not a party to the marriage” and thus includes anyone doing business with a husband or a wife, whether directly or indirectly. It certainly includes companies, partnerships and trusts where either spouse has an interest or receives a benefit, irrespective of whether that spouse has control. Potentially, this law reaches even further. This quite dramatic change reverses a 1981 High Court decision which greatly curtailed the Court’s power to make orders binding third parties.
The potential impact on lenders to married couples is profound. The Court will be able to order to a lender to substitute who is the borrower, and to change the proportion in which liability is held.
There are protections offered to third party including lenders, but often these will only be invoked after the third party has actually joined the proceedings. This may be inconvenient and costly to business, but the risk of not joining the proceedings is that a third party’s rights may be diminished.
The strongest concerns expressed about this legislation during the consultation stage was from the Australian Bankers’ Association and the Investments and Financial Services Association. Amongst their concerns was that a lender’s commercial judgement was potentially to be substituted by the discretionary judgement of a Family Court, perhaps leading to credit risk. Arguably, the protections offered by legislation do not go far enough. All lenders, commercial or otherwise, may have cause for concern.
Impact of changes
The law of contract is certainly being rewritten as a result of these changes. These new provisions basically enable the Court to re-write contracts that were entered into at earlier times when there may have been no hint of a marriage breakdown – indeed, there may have been no marriage at all.
Concerns also exist about the constitutional validity of these changes, although there are existing Family Court decisions that tend to suggest these charges are within power.
Equally profound may be the impacts of this law on asset protection planning, as it will become even more difficult to create ‘family-law-proof’ asset structures.
Following on from these changes, the Family Law Amendment Bill 2004 proposes to actually grant to creditors and third parties the right to become a party to proceedings for property settlement if the making of an order would affect them e.g. if a creditor would not be able to recover his or her debt. By becoming a party to the proceedings, the third party can ask for orders to protect their interest such as an order for payment of a debt or repayment of a loan, or for a security not to be changed.
These changes were influenced by the Family Court’s decision on ASIC-v-Rich. In that case, ASIC had applied to the Family Court to set asidea Binding Financial Agreement entered into by Mr and Mrs Rich at a time when their financial circumstances was in a state of flux as a result of a corporate collapse.
ASIC failed in its attempt as the Court held that it did not have the power to set aside the Agreement at the behest of a third party such as ASIC. An amendment was passed late in 2003 giving creditors standing to set aside these Agreements, and the current proposal will take that one step further, to give standing in property proceedings generally. Businesses and their advisors will need to give careful consideration as to whether they should join family law proceedings, or whether they are better off remaining aloof.
Finally, the Bankruptcy and Family Law Amendment Bill 2004 will change the face of bankruptcy. It proposes to grant to non-bankrupt spouses the rights to claim under the Family Law Act for property settlement and maintenance.