When insolvency practitioners meet Family Law

In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2 (2 February 2022)

Rees J made orders pursuant to s 588FF(1) allowing the claw-back of property previously owned by the company that had been transferred to its two directors and shareholders.

In the liquidation of family companies, liquidators should be alive to the erroneous practice of company assets having been treated as part of a matrimonial asset pool, which her Honour described as regrettably, “not unusual”.

Further, orders in the Family Court can only bind companies in certain circumstances, and so liquidators should seek to be heard if they become aware of such proceedings.

A separated husband and wife were directors and shareholders of a company that owned four properties, the net equity in which was about $2.16 million.

By 2014, the company was in financial difficulty and facing a building defects claim exceeding $3 million.

The couple also owned seven properties in their own names, but yet in that year, they agreed on a partial property settlement under s 79 of the Family Law Act 1975 (Cth), only in respect of the four companies owned by the company.

Consent orders were made in the Local Court, in which the wife would transfer to the husband “all her rights title and interest” in two of the properties owned by the company, and her husband would, likewise, do the same in respect of the other two properties.

This was despite the exceedingly obvious fact that neither the husband nor the wife owned those properties such as to enable them to transfer any interest in such – the company owned those properties. The company was not a party to the consent orders.

The company later transferred those properties to each of the husband and wife. After mortgages were discharged, the company seemingly used the equity to repay a poorly documented “Shareholder’s Loan Account” by advancing $991,961.42 to the directors.

Eventually, an unanswered statutory demand put the company into liquidation in 2016.

The liquidators’ application

The liquidators sought orders to claw-back the properties, under s 588FF(1) in respect of “a transaction of the company” that is voidable because of s 588FE of the Act.

The husband and wife argued that the property transfers and the repayment of the “Shareholder’s Loan Account” were not transactions of the company.

They relied on a 2003 decision, known as Official Trustee in Bankruptcy v Mateo. In that case, a husband transferred his interests in property to his wife in accordance with consent orders made by the Family Court. The husband subsequently became bankrupt and the trustee in bankruptcy sought to recover the husband’s interest in the property from the wife. The Full Federal Court found that a transfer of property under consent orders made under s 79 of the Family Law Act was not a “transfer of property by a person... to another person” within the meaning of section 121(1) of the Bankruptcy Act 1966 (Cth).

Rees J found that s 121 of the Bankruptcy Act was materially different from s 588FF, which does not refer to “transfer of property by a person” but to a “transaction of the company”. In any event, the 2014 consent orders were ineffective to transfer a beneficial interest in the four properties from the company to the husband and wife. Her Honour concluded that the property transfers and the loan repayment were “transactions” of the company, and that the 2014 consent orders would not stand in the way of relief.

Her Honour also emphasised that s 90AE of the Family Law Act only permits orders binding on third parties (such as a family company), if that third party is accorded procedural fairness in relation to the making of the order and it is just and equitable to make the order. Only then does s 90AC of the Family Law Act provide that such orders may override other laws and agreements.

Her Honour accepted that, thanks to its failure to keep financial records under s 286 of the Corporations Act (the Act), the company was presumed to be insolvent under s 588E(4) of the Act, or was otherwise, in fact, insolvent when the properties were transferred.

Her Honour concluded that transfer of the properties were unreasonable director-related transactions (s 588FA(6A)), uncommercial transactions (s 588FB(1)) unfair preferences (s 588FA(1)), hence making orders under s 588FF(1) for the re-transfer of the properties. The repayment of the shareholder’s loan account was, among other things, an unfair preference which the directors were obliged to repay to the company and for which they could lodge a proof of debt.