This article is intended to provide some guidance as to what happens when you’ve separated, and before any agreement has been reached, your former spouse sells property from under you.
This article applies equally well to anyone who is contemplating doing this, and thinking it will provide them with some sort of advantage in proceedings.
This is a natural expedient many parties come up with (usually without legal advice) when it seems likely they will to make a significant payment to a former spouse in family law proceedings.
Here is a typical case.
Suppose the parties have separated after a marriage of fifteen years, and suppose they have three children. Suppose that throughout the marriage the husband was the primary income earner, while the wife largely took on the role of homemaker and carer of the children.
Two or three years into the relationship, the parties move into a new property. The husband purchases this new property in his own name, and pays for it using funds from the proceeds of sale of the first property.
When the parties separate, the husband stays on in this property, while the wife and children move out of the home to live with the maternal grandparents.
Nothing is finalised yet – there are no final arrangements as to how the parties want to spend time with the children, nor final arrangements as to how the parties propose to distribute the matrimonial assets.
The husband is concerned that the wife might institute Court proceedings.
Now the husband knows that he has significantly more funds than the wife. Both parties have a few bank accounts, some joint, some in their sole names. They have a car each in their own names. They have a few credit cards. But by far the most valuable asset is the house, and the most hefty liability is the mortgage on that house – and that house is in the husband’s name.
Without going into too much detail as to all the factors which go into a Court’s decision-making regarding what percentage of the property pool should go to each party, suffice to say, for the purposes of this hypothetical scenario, that the wife is looking at a likely distribution of over 50% from the net matrimonial pool.
Therefore it is very likely that the husband will be ordered to pay a certain figure to the wife.
It is only natural for the husband to think that he can reduce that figure by transferring the house to his sister. He does so quickly, and substantially under market value. Of course neither he nor his sister really treat this as the sister’s property. The husband still lives in it. He still makes all mortgage payments, pays all rates, and knows that as soon as the Court proceedings have blown over he will simply get his sister to transfer it back to him, and so he will save himself a considerable payout to the wife.
You might think that with the property transferred into the sister’s name, and the transfer complete, the property is out of the wife’s reach, and now must be forgotten about and discounted from the matrimonial pool.
Not so – family law legislation provides an avenue of redress to the wife for precisely this scenario. There is a section in the Family Law Act 1975 which, if a successful application is made, allows the Court to set aside the husband’s transfer to the sister – meaning, the property is returned to the husband.
The section referred to is the following, and the application is referred to by lawyers in shorthand as a “Section 106B Application”:
In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.
Now there are a few matters to be aware of in relation to this section which may not be obvious from a bare reading.
First, in making a Section 106B Application, you will need to join a third party into the proceedings. For the Court to consider all the evidence, and provide procedural fairness to all parties involved, the person who currently owns the property needs to be notified that an application has been made, and they need to have an opportunity to defend their position.
This means that the hearing of the application may take a little longer to set down than usual, as the Court has two stages to consider: first, whether to join the third party to the proceedings; then, after giving the third party time to respond to the application, whether or not the transaction should be set aside.
With reference to the example above, this entails the following:
- The wife’s lawyers file and serve the Section 106B Application on the husband and the sister.
- The Court then joins the sister to the family law proceedings.
- The sister then has an opportunity to file a response.
- The Court then lists the matter for interim hearing, and may well order that the house be returned to the husband.
The other matter to note is that this application is not necessarily appropriate for every single item of property that the husband transfers out.
Suppose the husband also transfers a car worth $50,000 to his sister. This should rightfully be considered as part of the property pool. In this case, however, a Section 106B Application may not be appropriate.
The wife only really needs to set aside a transfer if it is likely to “defeat” her claim. In other words, if there is no way for the husband to pay to the wife the amount she is claiming without selling the house, then the house will need to be returned to the parties so that it becomes an asset that can be sold or transferred to the wife.
On the other hand, the car is worth much less than the house. If the wife is able to receive her full entitlement from the proceeds of sale of the house only, there doesn’t seem to be any real reason to waste time and money filing an application that returns the car to the husband.
What the wife might do in this instance is simply add the car to the matrimonial pool as an “add-back”. This means that, although the car now really does belong to the sister, it is still factored into any calculation as to what percentage of the total matrimonial pool the wife should receive. That way, it doesn’t matter whether the car really belongs to the husband or to his sister, and the proceedings can move on.
Add-backs are properly the subject of another article entirely, so I won’t elaborate too much on them here. But as to Section 106B Applications, it is worth going away with at least the following points:
- Just because someone transfers property out of the matrimonial pool doesn’t mean it can’t be returned.
- The Family Court and the Federal Circuit Court have power to set aside transactions which are likely to defeat an anticipated order.
- A Section 106B Application is not the only way to factor in property which is transferred out of the matrimonial pool.
- If you do want to put on a Section 106B Application, this will involve joining a third party to proceedings, which may cause some delay in the hearing of your application.
Serious thought should be put into any decision to make a Section 106B Application – though handy, it is not appropriate in all circumstances. A party should always be careful about filing applications, as filing a misguided application and losing on the hearing may result in a costs order.
If you are concerned that matrimonial property has been transferred out by your former spouse and you are unsure of your rights, please do not hesitate to contact our office on (02) 9723 8080 for a confidential discussion.