Recent Family Law Act amendments - the financier impact

By Randal Dennings and Graeme Howatson.

Key Points:
When dealing with the property of a party to a marriage, the Family Court, and related courts can alter the rights, liabilities or property interests of a third party financier.

As a general rule, you wouldn't expect amendments to the Family Law Act 1975 (FLA) to be of any interest to financiers. But the Family Law Amendment Act 2003 (the Act) is an exception. Although the Act was passed by the Federal Parliament in December 2003, the relevant provision, Part VIIIAA, only came into operation on 17 December 2004. One of the reasons for this delay was to give banks and other financial institutions time to prepare for the changes bought about by this new Part.

In this article, we examine the main provisions of Part VIIIAA and what financiers can do to minimise its impact.

Scope of the amendments

Part VIIIAA was added to the FLA to allow the court, when dealing with the property of a party to a marriage, to make an order or grant an injunction that is directed to, or alters, the rights, liabilities or property interests of a third party.

Because "third party" is defined simply as "… a person who is not a party to the marriage", the new Part can apply to any creditor of a party.

Section 90AE sets out the scope of the court's power in matrimonial property proceedings. The section provides that the court may make an order:

• directed to a creditor of the parties to the marriage to substitute one party for both parties in relation to the debt owed to the creditor;
• directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor;
• directed to a creditor of the parties to the marriage that the parties be liable for a different proportion of the debt owed to the creditor than the proportion the parties are liable to before the order is made;
• directed to a director of a company or to a company to register a transfer of shares from one party to the marriage to the other party;
• directing a third party to do a thing in relation to the property of a party to the marriage;
• altering the rights, liabilities or property interests of a third party in relation to the marriage.

Section 90AF gives the court power to:

• make an order restraining a person from repossessing property of a party to a marriage; or
• grant an injunction restraining a person from commencing legal proceedings against a party to a marriage.

Under this section, the court may also make any other order, or grant any other injunction that:

• directs a third party to do a thing in relation to the property of a party to the marriage; or
• alters the rights, liabilities or property interests of a third party in relation to the marriage.

The court's powers under section 90AF may be exercised in proceedings between the parties to a marriage for an order or injunction in circumstances arising out of the marital relationship.

Limitations on the court's power

There are qualifications on the court's powers under section 90AE and section 90AF. The court may only make an order or grant an injunction binding a third party if:

• the order or injunction is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and
• if the order or injunction concerns a debt of a party to the marriage—it is not foreseeable at the time that the order is made, or the injunction granted, that to make the order or grant the injunction would result in the debt not being paid in full; and
• the third party has been accorded procedural fairness in relation to the making of the order or injunction; and
• the court is satisfied that, in all the circumstances, it is just and equitable to make the order or grant the injunction.

The court must also be satisfied that the order or injunction takes into account matters such as the taxation effect (if any) of it on the third party, the third party's administrative costs in relation to the order or injunction, the capacity of the third party to comply with it and any other matter the third party raises.

The requirement that third parties be accorded procedural fairness means that a third party must be notified and be given a right to be heard before the court makes an order or injunction against the interests of the third party.

Other sections of the Act dealing with third party rights provide that:

• the court may make an order for the payment of the reasonable expenses of the third party incurred as a necessary result of the order or injunction;
• the third party, acting in good faith in reliance on an order or injunction made or granted by a court, is not liable for loss or damage suffered by any person because of things done (or not done) by the third party.

What can financiers do?

In the Explanatory Memorandum that accompanied the Act when it was introduced into Parliament, the Government made it clear that it did not believe the Act affected the substantive property rights of financiers and it believed there would be minimal impact on business. Unfortunately, for financiers, sections 90AE and AF of the Act do not reflect this intent. Confirmation of the wide powers available under Part VIIIAA is found in section 90AC, which provides that the court may make an order which overrides any law of the Commonwealth, States and Territories and any provision in any instrument (such as a mortgage or a personal guarantee, for example).

In the face of these powers, is there anything financiers can do to protect their position?

In our opinion, appropriate amendments to loan documentation and risk management criteria, while they will not always be effective, are worthwhile nevertheless.

We suggest that financiers should:

• Review the "material adverse change" clause in loan documentation. Does the clause cover these types of proceedings?
• Review notice provisions. At the very least, the notice clause should require the borrower to notify the lender of the commencement of these types of proceedings.
• Review costs clauses. Although the court has power to make an order for the payment of a financier's reasonable expenses, we believe a specific provision should be inserted into loan documentation to allow the lender to recover the cost of asserting its rights and complying with an order by the court.
• Review indemnity provisions. Check that they allow the financier to recover the cost of responding to an application under sections 90AE and AF and any adverse orders.

From a risk management point of view, financiers should ensure that any notice of an application under section 90AE or AF is identified quickly and handled appropriately so that they are able to respond within the time allowed by the court.

Future developments

In addition, it will be important to monitor future developments. It has been suggested that the constitutional validity of Part VIIIAA may be challenged. Section 90AK has been included in the Act to try to ensure constitutional validity, evoking memories of the Australian film, The Castle. The section provides that the court must not make an order or grant an injunction if it would result in the acquisition of property otherwise than on just terms and be invalid because of section 51(xxxi) of the Constitution. It remains to be seen whether or not a constitutional challenge to Part VIIIAA eventuates.

To date, there don't appear to have been any reported decisions of the court under Part VIIIAA. Future decisions will be valuable because they will provide guidance on the court's interpretation of its powers and the balance it will strike between the rights of parties to a marriage and the rights of third party financiers.

The authors wish to acknowledge and thank Richard Griffiths for his help in providing material for this article.

For further information, please contact Randal Dennings.