The case of Saklani & Valder [2023] FedCFamC1A 163 (22 September 2023) offers a unique perspective on the legal Implications of third-party creditors in property disputes and how third-party creditors can impact property orders, even after one party's bankruptcy discharge. 

In this case, a third party creditor successfully appealed a decision by Justice Rees dismissing his Section 79A application to set aside Consent Orders entered into by a bankrupt husband and his wife resulting to the transfer of the bankrupt husband’s property to the wife and subsequent transfer by the wife to her son and daughter-in-law. The husband and wife unsuccessfully cross-appealed against the Section 79A order to set aside the Consent order and for them to pay the third party creditor. 

The Full Court's decision, as outlined by Justices Aldridge, Jarrett, and Strum, sheds light on the complexities of property disputes involving third-party creditors. 

Third Party Creditors in Property Disputes: Background and Legal Proceedings

The crux of this case revolved around a third-party creditor who had initiated legal proceedings against the husband in 2013, eventually securing an equitable compensation of $594,028.25. The husband and wife had entered into consent orders in November 2013. But, failed to disclose the third party creditor's claim or the Supreme Court order against the husband.

Following approval of the Consent Orders, the  husband transferred his interest in a property ("the F town property") to his wife. Later, in 2015, the husband declared bankruptcy. In 2016, the court granted the third-party creditor leave to initiate proceedings against the husband to set aside the Consent Orders under Section 79A of the Family Law Act. Importantly, the court also joined the wife in these proceedings.

In 2018, the husband was discharged from bankruptcy. In December 2018, the wife transferred her interest in the F town property to her son and daughter-in-law while retaining a life interest in the property. Both the son and daughter-in-law were also joined in the family law proceedings but chose not to participate.  

At the initial trial, Justice Rees dismissed the third party creditor's Section 79A application to set aside the Consent Orders, stating that the third party creditor ceased to be a creditor upon the husband's discharge from bankruptcy.  

Consequently, the third party creditor was no longer considered a "person affected" for the purpose of Section 79A. However, this decision was successfully appealed in 2021, leading to a re-evaluation of the case. 

In February 2023, the Court set aside the consent orders for non-disclosure, and also revoked the wife’s transfer of the F town property to the son and daughter-in-law. The Court ordered the sale of the property, with the mortgage and sale costs to be covered and for the third party creditor to be paid the $594,258.25 owed by the Husband, subject to earlier orders requiring the creditor to forward any funds received from the Section 79A proceedings to the husband's trustee for the benefit of his creditors. 

Does the Discharge from Bankruptcy Terminate a Creditors Right?

In their appeal, the husband and wife contended that the husband's bankruptcy and subsequent discharge had terminated the creditor's rights under Sections 79A and 106B of the Family Law Act. They argued that these legal provisions ceased to apply to the husband after his discharge from bankruptcy. 

Justice Aldridge addressed this central issue by highlighting that the claim under Section 79A was not about enforcing a remedy against the person or property of a bankrupt in respect of a provable debt. Instead, it constituted a legal proceeding related to a provable debt. In this context, His Honour emphasised that the Commonwealth Legislature permitted creditors to continue pursuing claims under Section 79A. Even after bankruptcy discharge. 

Furthermore, Aldridge pointed out that the debt did not disappear or become extinguished upon the husband's discharge. Rather, it continued to exist, as demonstrated by its capacity to found a proof of debt in subsequent legal proceedings. Therefore, the earlier consent order challenged the right of the third-party creditor to prove the debt in the estate, making her a person affected under Section 79A.   

Consensus among the judges

Justices Jarrett and Strum concurred with Aldridge J's reasoning and endorsed the proposed orders and judgment. Consequently, the parties consented to amending the final orders in the case, and the court dismissed the appeal and cross-appeal. The court also directed the husband and wife to cover the costs of the third-party creditor.  

The Saklani & Valder [2023] case highlights the intricate legal dynamics at play in family law property disputes involving third-party creditors. It highlights that even after a bankruptcy discharge, the rights of third-party creditors under Section 79A of the Family Law Act may persist.  

This case sets a precedent for the importance of addressing the complexities surrounding third-party creditors in property allocation cases, shedding light on the nuances and intricacies of family law as well as the importance of disclosure in family law matters.   

New South Lawyers’ communications are intended to provide commentary and general information. To that end, people should not rely on this communication as legal advice. Accordingly, they should seek formal legal advice for matters of interest arising from this communication.

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