The recent High Court decision in Commissioner for Taxation v Tomaras has brought to public attention provisions of the Family Law Act which allow the court to substitute one spouse for another in relation to their debts.
While she was married, Mrs Tomaras racked up debts of over $250,000 with the Tax Office. When Mr Tomaras was declared bankrupt in 2013, Mrs Tomaras commenced proceedings in the Federal Circuit Court for an alteration of their property interests under Family Law.
s90AE of the Family Law Act allows the courts to make orders affecting the ‘rights, liabilities or property interests of a third party…’ In the context of the Act, ‘property’ includes debts.
The question put before the High Court was whether the Federal Court had the power under the Family Law Act to make an order substituting Mr Tomaras for his wife as the debtor to the Tax Office.
The majority in the High Court found that the Federal Court does have that power, within certain limits prescribed by s90AE.
Whilst Tomaras was a case dealing with debts to the Tax Office, the points raised by the High Court have significance for the credit industry, and business generally.
The case highlights the wide-ranging powers of the courts to substitute one spouse for another as debtors during the course of Family Law proceedings. A creditor could quite easily find themselves ordered by a court to substitute the other spouse as their debtor. How can a creditor protect themselves in such circumstances?
To begin with, s90AE(3)(b) states that these orders cannot be made if they would result in the debt not being paid in full. Kiefel CJ and Keane J in Tomaras go as far as to suggest that if an order for substitution would even ‘enhance’ the risk of the debt not being paid, it is ‘difficult to see’ how the order could be made.
Creditors also have the benefit of s90AE(3)(c), which requires that third parties be accorded procedural fairness, which essentially means they must be notified of the potential change, and given the right to be heard in the application. If a creditor did have reason to believe that a proposed substitution order would result in their debt not being paid, they would be able to become a party to the application and argue against the substitution order.
Whilst Tomaras dealt with an already-existing debt, the sweeping powers of the courts under s90AE to alter ‘rights’ and ‘property interests’ of third parties means that things like personal guarantees could also, potentially, be affected by an order substituting one spouse for another. Since a guarantee is not an actual debt, the protection of s90AE(3)(b) would not necessarily apply. The procedural fairness requirement, however, would still apply, and thus an affected third party could argue against such an order if it believed it would be against its interests.
Although at first glance, the possibility that debts could be transferred between spouses by the courts could be seen as worrying for those in the credit industry, the limits elucidated by the High Court in Tomaras show that there is little to worry about.
*Mark Harley Principal, Boss Lawyers Email: firstname.lastname@example.org
*Callum Woods Law Clerk, Boss Lawyers Ph: 1300 267 711 www.bosslawyers.com.au
March 2019 - FNSCRD501 - Respond to personal insolvency situations - FNS51520 Diploma of credit management