Case: Rambaldi (as Trustee of Bankrupt Estate of Volkov) v Volkov [2008] FCA 1957
Outcome: followed
summary the case of the respondent is as follows: The Carrara property was jointly owned by Mr Jensen and the respondent. The applicant makes no challenge to the financial arrangement of 22 January 2002, nor is it pleaded that the financial agreement was not one to which Part VIIIA of the Family Law Act applies, or that the agreement failed to comply with requirements of the Family Law Act . In the absence of such a challenge it is not open to the applicant to have the transfer effected by Mr Jensen of his former half interest in the property declared void. By force of the financial agreement the respondent became equitable owner of the land. Under the Family Law Act : financial agreements can only be set aside by the Family Court under s 90K ; financial agreements can only be terminated by the parties pursuant to s 90J ; financial agreements have a special status by reason of the provisions of the Family Law Act . In Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217 the Full Court of the Federal Court held that the effect of consent orders of the Family Court made under s 81 of the Family Law Act pursuant to which the Family Court ordered that the husband transfer his half interest in jointly-owned land to the wife was that the Family Court orders themselves vested in the wife all of the husband's equitable estate in the land. The Full Court also held that the transfer by a person having a bare legal title perfected the title of the equitable owner of the property, was not a transfer of property within the meaning of s 121 of the Bankruptcy Act . The application by the Official Trustee should have been to the Family Court to set aside the orders under s 79A of the Family Law Act . In these proceedings the critical divesting event with respect to the Carrara property was the financial agreement, which resulted in the equitable estate in the Carrara property passing to the respondent in January 2002. The actual transfer, executed by Mr Jensen on 28 August 2002, was of no significance because Mr Jensen had already divested himself of his interest in the property pursuant to the financial agreement. If the matter is dealt with by the Family Court, both the interests of the respondent and the creditors can be brought into account. The present proceedings are calculated to bring only the interests of creditors into play. If the transfer to the respondent of the interest in the matrimonial home is to be set aside, the whole matter will have to be reviewed, and that review can only occur in the Family Court. To hold otherwise runs contrary to Mateo . In Macks v Edge [2006] FCA 1077 ; (2006) 156 FCR 302 Besanko J declined to transfer proceedings by a trustee under s 120 and s 121 of the Bankruptcy Act to the Family Court but primarily because of the lateness of the application. His Honour reached no conclusion as to any of the legal issues involved. The decision of Ryan J in Rambaldi (as Trustee of Bankrupt Estate of Volkov) v Volkov [2008] FCA 1957 is authority for the proposition that if a trustee in bankruptcy seeks to utilise s 121 of the Bankruptcy Act in the context of any existing financial agreement, the trustee needs to confront the financial agreement itself. The Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) amended the term "maintenance agreement" in the Bankruptcy Act to delete the term "financial agreement". This simply means that the automatic exemption of financial agreements from the operation of s 120 of the Bankruptcy Act was removed it does not have the effect of declaring that the fact that a transaction occurred in pursuance of a financial agreement ceases to have any relevance. Financial agreements continue to retain all the protection that the Family Law Act expressly or implicitly provides. The amendment does not envisage the circumvention of s 90K of the Family Law Act by applications made with respect to "trust transfers". In any event, the exemption in favour of financial agreements only ever applied to claims made with respect to s 120 it never extended to claims under s 121. The applicant's case More recently in Rambaldi (as Trustee of Bankrupt Estate of Volkov) v Volkov [2008] FCA 1957 a trustee in bankruptcy of the estate of a husband sought orders in the Federal Court setting aside the transfer of property from the husband to the wife prior to the husband's bankruptcy. The husband and wife had entered into a financial agreement which acknowledged the desire of the parties to make provisions to "recognise existing equitable interests" in those real properties. The Court found that the husband had held certain property on a constructive trust for the sole benefit of the wife prior to execution of the financial agreement. In relation to other property in relation to which the financial agreement purported to create and transfer to the wife an equitable interest, the Court considered the application of s 123(6) and s 121 of the Bankruptcy Act . Although Ryan J analysed the position prior to the 2005 amendments to both the Bankruptcy Act and the Family Law Act , for reasons I explain later in this judgment I consider that the reasoning in Rambaldi [2008] FCA 1957 in respect of the application of s 121 is useful in these proceedings. Specifically, his Honour found that: an equitable interest in the relevant property arose only following execution of the financial agreement between the parties pursuant to s 90C of the Family Law Act ; section 123(6) and s 121 of the Bankruptcy Act were relevant; the financial agreement, as a maintenance agreement, was prima facie entitled to the protection against invalidity afforded to it by s 123(6) of the Bankruptcy Act , however that protection was subject to s 121 of the Bankruptcy Act ; the financial agreement clearly effected a transfer, by a person who later became a bankrupt, of property to the non-bankrupt spouse. The main purpose of the bankrupt in entering into the financial agreement was to prevent the property becoming divisible among his creditors or to delay the process of making it available for division among his creditors; the non-bankrupt spouse provided no consideration for the transfer in the sense identified in Official Trustee v Lopatinsky [2003] FCAFC 109 ; (2003) 129 FCR 234 ; and the only consideration provided by the non-bankrupt spouse was the entry into the financial agreement, however because of the application of s 121(6) this was of no value for the purposes of s 121 of the Bankruptcy Act . Findings I do not accept Mr Griffin QC's interpretation of the decision in Mateo as submitted namely that if the financial agreement and the transfer are separated, the second part of the transaction is not a "transaction" within the meaning of s 120 and s 121 of the Bankruptcy Act because the relevant estate has already been transferred by force of the financial agreement (cf TS p 48 ll 27-38). Rather, as submitted by Mr McQuade, I consider the correct approach to be that in considering an application under s 120 and s 121 of the Bankruptcy Act , the Court considers the creation or transfer of the interest which is sought to be avoided, not the provision in the legal document (or other mechanism) which has created it. To illustrate this principle I need look no further than Rambaldi [2008] FCA 1957. The respondent in these proceedings claimed that Rambaldi [2008] FCA 1957 is authority that an applicant seeking to set aside a transaction pursuant to a financial agreement needs to "confront the financial agreement itself". However the clear outcome in Rambaldi [2008] FCA 1957 was that the Court set aside the purported equitable interest in the relevant property sought to be created by the financial agreement, not the financial agreement itself (cf [2008] FCA 1957 para [47]). While the terms of the financial agreement in Rambaldi [2008] FCA 1957 were clearly critical to the questions whether the relevant provisions of the Bankruptcy Act were satisfied and accordingly whether the interest of the non-bankrupt spouse should be set aside, the orders of the Court in Rambaldi [2008] FCA 1957 with respect to the financial agreement were limited to the validity of the creation of an interest in land purportedly created by the financial agreement. This outcome did not require an order that the financial agreement be avoided pursuant to s 120 or s 121. I consider that similar principles apply in the case before me. Whether the "transfer" in this case was the creation of an equitable interest in the Carrara property in favour of the respondent, or the actual transfer effected by the form 1 (an issue I need not resolve for the purposes of this notice of motion) the transfer can nonetheless be the subject of challenge pursuant to s 120 or s 121 of the Bankruptcy Act without the applicant being required to make application to set aside the financial agreement executed by Mr Jensen and the respondent. I consider that this approach is consistent with the findings of this Court in Macks v Edge [2006] FCA 1077 ; (2006) 156 FCR 302 and Rambaldi [2008] FCA 1957 , as well as the Full Court in Mateo [2003] FCAFC 26 ; (2003) 127 FCR 217. The position is less clear in relation to s 121 of the Bankruptcy Act . Unlike s 120 , s 121 makes no mention of maintenance agreements (or financial agreements). As I have already observed in this judgment, s 123(6) specifically provides that subject to s 121 , nothing in the Bankruptcy Act invalidates, inter alia , a transfer made by the debtor before bankruptcy pursuant to a maintenance agreement. It therefore follows that a transfer of property pursuant to a maintenance agreement by a debtor who subsequently became bankrupt could be challenged by a trustee in bankruptcy pursuant to s 121. As I have also noted in relation to s 120 , s 5 of the Bankruptcy Act now excludes financial agreements from the definition of maintenance agreement. This is a curious outcome, the reason for which is not clear. In my view a reasonable and logical explanation is that submitted by Mr McQuade for the applicant, namely that in the absence of a specific exemption for transactions undertaken pursuant to a financial agreement, such transactions are capable of being the subject of application by the trustee in bankruptcy of the transferor pursuant to s 121 of the Bankruptcy Act . Indeed this was the position prior to the 2005 amendments and in this respect there is (as I indicated earlier) particular relevance to the decision of Ryan J in Rambaldi [2008] FCA 1957 , where his Honour accepted that a trustee in bankruptcy could apply pursuant to s 121 of the Bankruptcy Act to set aside an interest in real property following a financial agreement between parties to a marriage. (Another possible explanation, namely that the effect of the 2005 amendments to the Bankruptcy Act resulted in financial agreements being excluded from the operation of s 121 , in my view is completely anomalous and has no merit.) Conclusion