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Johnson v Felton CA40/04 [2005] NZCA 442; [2006] 3 NZLR 475; [2006] NZFLR 49; (2005) 24 FRNZ 717 (12 September 2005)

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IN THE COURT OF APPEAL OF NEW ZEALAND

_CA40/04

BETWEEN ANNETTE FRANCES JOHNSON Appellant

AND ROBERT ARTHUR FELTON AND NORAH ISOBEL FELTON

First Respondents

AND JAMES GERRARD FLYNN AND MARION EDITH MAE FLYNN Second Respondents

AND DAVID RONALD LEESE Third Respondent

AND COLIN GRAEME SMITH AND CHRISTINA DOROTHY SMITH Fourth Respondents

AND ALAN RAYMOND TUCKER AND MARION JUNE TUCKER

Fifth Respondents

AND CLEAR-SHIELD CHRISTCHURCH LIMITED

Sixth Respondent

Hearing: 14 October 2004 and 11 May 2005

Court: McGrath, Glazebrook and William Young JJ Counsel: D G Hurd and M J Allan for Appellant

D G Smith for Respondents

Judgment: 12 September 2005

_{JUDGMENT OF THE COURT}

A The appeal is allowed. The judgment against the appellant in the

_{High Court is set aside.}

JOHNSON V FELTON & ORS CA CA40/04 [12 September 2005]

B In lieu of the judgment against the appellant in the High Court, there will be judgment for her on the claim by the respondents but without costs.

C There is no order for costs in relation to the appeal. Costs in the

High Court are to be dealt with by that Court.

_REASONS

William Young J (dissenting in part) [1] McGrath and Glazebrook JJ [103]

_{WILLIAM YOUNG J}

Table of Contents

_{Para No}

Introduction [1]

Background

The Johnsons [3]

The 1990 - 1992 estate planning exercise [4] The Clear-Shield business [7] The matrimonial property agreement [11] The events of 1994 [16] The claims by the franchisees [20]

Section 47 of the P(R)A 1976 [25]

The s 47 claim in the High Court

General [26]

The October 2003 judgment [29]

The February 2004 judgment [38] The appeal to this Court [47] Issue estoppel and res judicata [49] Are the franchisees creditors for the purposes of [64] s 47(2) of the P(R)A?

Are the franchisees precluded from obtaining relief under s 47(2) of the P(R)A because they did not challenge the agreement within two years?

A dissenting view [65]

Overview [70] Section 47 – statutory antecedents [81] Section 47 in the relationship property context [84] Evaluation [86]

The relief granted

A dissenting opinion [95]

Mr Hurd’s arguments [97] Other issues [101] Conclusion [102]

Introduction

[1] This appeal concerns a matrimonial property agreement between Mrs Annette Johnson, who is the appellant and her husband, Mr Noel Johnson. In the judgment, under appeal, Venning J upheld a challenge by Mr Johnson’s creditors to that agreement under s 47(2) of the Property (Relationships) Act 1976 (“the P(R)A”) and he made consequential orders in favour of the respondents.

[2] Mrs Johnson now appeals.

Background

The Johnsons

[3] Mr and Mrs Johnson married on 24 August 1972. They remain married and have at all times lived together.

The 1990 - 1992 estate planning exercise

[4] In 1990 Mr and Mrs Johnson were advised by AMP Perpetual Trustee Services (AMP Trust) to take estate planning steps. Mr Johnson was then running a painting contracting business, Auckland Industrial Coatings Limited (AIC). As part of the estate planning exercise, the Johnsons completed a statement of financial position including a statement of assets and liabilities.

[5] By this time, Mr and Mrs Johnson had accumulated a number of assets other than the shareholding in AIC. These assets included the matrimonial home at Riverlea Road, Auckland, a subdivided rental unit at Riverlea Road, a number of factory units, two motor vehicles and a yacht.

[6] The Johnsons partly implemented the advice given by AMP Trust but in December 1992 estate duty was abolished and this brought to an end the need for an estate planning exercise.

The Clear-Shield business

[7] In the meantime Mr Johnson had become involved with another company, Ritec (NZ) Limited (Ritec) which was marketing a product called Clear-Shield. This was in June 1991.

[8] Between September 1991 and 12 July 1992, the present respondents (to whom I will refer as “the franchisees”) agreed to take franchises from Ritec.

[9] On 29 July 1992 a Mr Lennox-King purchased a 50 percent share in both AIC and Ritec. It was agreed that Mr Lennox-King was to manage Ritec while Mr Johnson was to continue managing AIC. Mr Lennox-King began working as managing director of Ritec in or about August 1992.

[10] During the latter part of 1992 and carrying over into 1993, the franchisees were beginning to express dissatisfaction which was addressed primarily to Ritec. No threats of personal litigation were made, at that time, against Mr Johnson.

The matrimonial property agreement

[11] The matrimonial property agreement was concluded on 11 October 1993. [12] In the recitals it recorded:

E. The husband is concerned as to the possible effect of a claim under the Act by the wife on the businesses operated by the husband known as Auckland Industrial Coatings, Clearshield and Ritec and is concerned to remain in control of those businesses to ensure his future earning potential.

F. The wife is concerned to protect her home in the event of any claim by the husband under the Act and to protect her home from market fluctuations associated with the businesses operated by the husband.

[13] The effect of the agreement was that Mr Johnson was left with the shares in AIC and Ritec and Mrs Johnson with what might be regarded as the bulk of the hard assets.

[14] At the time the matrimonial property agreement was concluded the Johnsons’ solicitors made a file note for the purposes of the solicitor providing the independent advice to Mr Johnson:

The division of property between husband and wife results in an asset value to Annette of $730,000 and an asset value to Noel of $685,000. However, in the case of Noel's assets the bulk of that figure is made up of shares in private companies (Auckland Industrial Coatings Limited, Ritec NZ Limited and Clearshield Auckland Limited). These shares have not been professionally valued and represent Noel’s estimation of value but also partly based on sales of shares to a partner in those companies.

Noel’s reason for the matrimonial settlement is to protect the family home, recreational assets and some of the investment properties from potential claims arising out of the conduct of the businesses. There is at the time of executing the Agreement a potential claim against Ritec NZ Limited. At this stage there is no suggestion that that claim will be made personally against Noel nor does such a claim appear possible. However, the contemplated claim has made Noel and Annette believe that there is a need to separate the business assets from what they see as their personal assets.

[15] As noted, on the Johnsons’ figures, Mr Johnson took assets to a value of

$685,000 while Mrs Johnson took assets of $730,000. Ostensibly there was an imbalance of $45,000 in Mrs Johnson's favour. However, if the shares in Ritec and AIC were treated as worthless, the imbalance was much larger, approximately

$590,000.

The events of 1994

[16] In early 1994 Mr Lennox-King agreed with Mr Johnson that AIC should be sold. Mr Johnson negotiated the sale of AIC’s assets to a Mr Ainsley.

[17] Mr Lennox-King’s relationship with the Johnsons broke down shortly after the sale of AIC. Subsequently Mr Lennox-King took legal proceedings against Mr Johnson. The proceedings were settled. There was also a dispute involving Mr Ainsley.

[18] Later, in mid-1994, acting on solicitor’s advice, the Johnsons established the Dunstan Trust. Mr and Mrs Johnson and their children are the beneficiaries. Both Mr Johnson and Mrs Johnson transferred assets into the Dunstan Trust. In Mrs Johnson’s case she transferred the property at Riverlea Road into the trust at a value of $80,000. The value was fixed at $80,000 having regard to a licence to occupy that Mrs Johnson had granted to herself for life in the property. The Riverlea Road property was transferred by Mrs Johnson to the trust subject to that licence.

[19] I note that the Dunstan Trust has subsequently sold the Riverlea Road property free of the licence.

The claims by the franchisees

[20] In 1997 the franchisees commenced proceedings. As part of the original proceedings, the franchisees both sought damages against Mr Johnson and also to have the matrimonial property agreement set-aside.

[21] The claim for damages was dealt with first.

[22] This claim came on for hearing before Goddard J in August and September 1999 and in a judgment which she delivered on 21 December 1999 she found against Mr Johnson on allegations of deceit. She awarded damages in excess of $800,000 against Mr Johnson.

[23] A subsequent appeal against this judgment was heard in November 2000 and dismissed in a judgment delivered on 13 December 2000.

[24] Mr Johnson has since been adjudicated bankrupt but the franchisees have been unable to recover from him the money due to them under the judgment.

Section 47 of the P(R)A 1976

[25] At this point in the judgment it is appropriate to set out s 47 of the P(R)A:

47 Agreements to defeat creditors void

(1) Any agreement, disposition, or other transaction between spouses ... with respect to their relationship property and intended to defeat creditors of either spouse ... is void against those creditors and the Official Assignee.

(2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.

The s 47 claim in the High Court

General

[26] After Mr Johnson was adjudicated bankrupt the Official Assignee was joined as a co-plaintiff.

[27] For reasons associated with the discovery process and claims to privilege made by the Johnsons, Associate Judge Faire decided on 28 May 2003 to split the proceedings with the claim by the Official Assignee being dealt with first and the claims by the franchisees stood over for later determination. His minute of

28 May 2003 records that Mrs Johnson was present at the evaluation conference at which this decision was taken.

[28] The result of the decision to split the claims was that Venning J was required to deliver two judgments, the first in October 2003 (addressing the claim by the Official Assignee) and the second in February 2004 (addressing the claim by the franchisees).

The October 2003 judgment

[29] When the claim by the Official Assignee came on for hearing the Johnsons were not legally represented.

[30] Although a bankrupt, Mr Johnson appeared in support of his personal position. He also wished to appear in support of Mrs Johnson’s interests. Venning J agreed to this course of action. He explained why in his judgment:

[4] ... Although Mr and Mrs Johnson completed the Matrimonial Property Agreement in 1993 they remain living together. Their personal interests are the same for all practical purposes on this application. At my request Mrs Johnson appeared. She confirmed that she was well aware of the proceedings, that she understood the potential effect on her of the orders sought by the Official Assignee but that while she was prepared to give evidence she did not otherwise wish to take an active part. Mrs Johnson confirmed that Mr Johnson could represent her interests.

[31] In his October 2003 judgment, Venning J held that:

(a) For the purposes of s 47 of the Act, the franchisees were creditors of

Mr Johnson as at October 1993.

(b) There was an imbalance of $552,250 between what Mrs Johnson received under the matrimonial property agreement and her actual entitlement. He reached this view by ascribing no value to the Ritec shares and a limited value only to the AIC shares.

(c) The Official Assignee had not proved that Mr Johnson had entered into the matrimonial property agreement with the dominant intention of defeating his creditors.

(d) Although the agreement had the effect of defeating Mr Johnson’s creditors, being the franchisees, the limitation in s 47(2) meant that relief was not available to the Official Assignee because he had not been appointed within two years of the matrimonial property agreement being entered into.

[32] Because Venning J was later to carry through to his February 2004 judgment his conclusion that the franchisees were creditors, it is appropriate to record his reasons:

[26] A preliminary point arises as to who are “creditors” for the purposes of s 47 (1) and (2). The term “creditors” is not defined in the Act. In Walsh v Powell (1982) 1 NZFLR, 103 Hardie Boys J considered the issue. Hardie Boys J concluded that a broad definition should apply to the phrase “creditors” and that the principles applying to creditors for the purposes of the Property Law Act 1952 should also apply to creditors for the purpose of the Matrimonial Property Act. He noted that in the context of the Property Law Act 1952:

In Kerr on Fraud and Mistake (7th ed) p 379 it is said:

The words “creditors and others” in the old Act are, and possibly, the word “creditors” in the new is, wide enough to include any person who has a legal or equitable right or claim against the grantor or settlor, by virtue of which he is, or may become, entitled to rank as a creditor of the latter. The claim may arise out of a tort, as well as out of a contract, express or implied, or other legal obligation.

And the claimant may be considered to be a creditor within the section although his claim had not become payable at the time when the conveyance or settlement was made; and even though it was then merely contingent, as in the case of the rights of the creditor against the surety under a guarantee, before default has been made up by the principal debtor; and although it was then a claim for unliquidated damages in respect of which judgment had not been recovered. For when the extent of the liability is ascertained, it relates back to the creation of the original obligation, as if it had been a debt due and payable to the claimant at that time.

(p 106-107)

[27] Hardie Boys J then noted:

It is clear however that the Elizabethan statute was not narrowly interpreted. “Creditor” was not read merely as “judgment creditor”. The statute was interpreted broadly rather than narrowly.

before concluding:

I respectfully adopt the conclusion of Hutchison J in In Re Proudfoot (a bankrupt) [1960] NZLR 577, 581, that the authorities on the Elizabethean statute should be applied to s. 60 of our Act of 1952. Furthermore, in my opinion the essential wording, and the intent, of s. 47 of the Matrimonial Property Act is such that the same principles are appropriate to it also.

(p 107)

[28] For present purposes then putting the Official Assignee to one side for a moment, the first to sixth plaintiffs in these proceedings are creditors for the purposes of s 47. ...

[33] It is also appropriate to discuss briefly why the Judge found in favour of the Johnsons in relation to the question whether they had intended to defeat creditors. His conclusions on this aspect of the case were expressed in these terms:

[53] In summary, the position as at 11 October 1993 when the matrimonial property agreement was concluded is this. Mrs Johnson was concerned to protect her financial position particularly her family home. Although a number of the Ritec franchisees were expressing dissatisfaction with the operation of the franchises and the support provided by Ritec no legal proceedings had been taken against Ritec and there was no suggestion by any of them of a claim against Mr Johnson personally. The last solicitor’s

correspondence, which went nowhere near making such a threat, was in early 1993 some six months before the agreement. Mr Lennox-King was not, in October 1993 threatening Mr Johnson personally with proceedings. There were issues between Mr Lennox-King and Mr Johnson but that did not prevent them working together in relation to AIC and Ritec for the balance of 1993 and into 1994 including making the decision for the sale of AIC to Mr Ainsley. The disquiet expressed by the franchisees (whose contracts were with Ritec not Mr Johnson personally) and Mrs Johnson’s wish to confirm her personal position caused the Johnsons to take advice. They took advice and on the basis of that made the matrimonial property agreement.

[54] Mr Wylie, an investigating accountant called by the Official Assignee, queried the reasons given by the Johnsons for entering the matrimonial property agreement. However, Mr Wylie’s reasoning was premised on steps taken by the Johnsons particularly in relation to the establishment of the Dunstan Trust well after the matrimonial property agreement had been concluded, and the subsequent transfer of assets to that trust. As he noted however the Dunstan Trust was not formed until June 1994. It was a separate transaction entered some months after the completion of the matrimonial property agreement and at a time when Mr Lennox-King and Mr Ainsley the purchaser of AIC were in dispute with Mr Johnson. That was not the position in October 1993.

[55] I conclude that at the time the matrimonial property agreement was entered in October 1993 Mr Noel Johnson’s dominant intention was to separate his business assets from his personal assets to ensure the protection of matrimonial and other assets as far as possible against the future failure of the businesses. It was not however to defeat creditors. There is no evidence that creditors were threatening Mr Johnson or that Mr Johnson had any reason to consider he would be sued personally. In October 1993 he still considered Ritec was viable. Although the franchisees had a number of issues, they were not threatening to take action against Mr Johnson personally. To the extent that franchisees had complaints and Mr Lennox-King had expressed concerns they were part of the background to the Johnsons entering the agreement, but no more than that.

[34] Not allowed for in this analysis are the three features of the case which, with varying degrees of force, might be thought to throw some doubt on the conclusion reached by Venning J.

[35] The first is that the ultimate findings of liability which Goddard J made against Mr Johnson were based on the tort of deceit. It might be thought that Mr Johnson would have been conscious of having deceived the franchisees and, if so, he would probably have recognised that a time of reckoning would come. In that context Mr and Mrs Johnson were perhaps fortunate that Venning J was influenced by the muted nature of the complaints from franchisees prior to October 1993.

[36] A second factor of significance is the availability of inferences associated with the extent to which the matrimonial property agreement favoured Mrs Johnson. Given the findings made by Goddard J as to Mr Johnson’s deceit vis à vis the franchisees, it would have been open to Venning J to infer a link between Mr Johnson’s awareness of his deceit and the subsequent entering into of an agreement which was so favourable to Mrs Johnson. Interestingly, Venning J’s analysis of the extent to which there was an imbalance between the values of the assets as received by Mr and Mrs Johnson appears in the section of his judgment addressed to whether the agreement defeated creditors which came after the section of his judgment in which he found against the Official Assignee on the s 47(1) claim.

[37] A third significant feature of the case is the incongruity between the reasons for the matrimonial property agreement as set out in its recitals and those recorded by the solicitors. Incongruity of this sort is a well recognised badge of fraud.

The February 2004 judgment

[38] Following the October 2003 judgment, the franchisees pursued their claims against Mr and Mrs Johnson.

[39] In light of the conclusions reached by Venning J in that judgment, the franchisees claimed to be entitled to judgment.

[40] On the other hand Mrs Johnson maintained that the findings of Venning J in relation to the Official Assignee’s claim were not binding on her in relation to the franchisees’ claim and that in any event the franchisees were precluded from obtaining relief by reason of what she claimed was a two year limitation period for such claims provided for by s 47(2). By this stage, Mrs Johnson was represented by counsel.

[41] Venning J described in his February 2004 judgment the way in which it was agreed that the outstanding issues should be determined:

[12] Counsel are agreed that the most expeditious way to deal with the matter is for the Court to invoke the r 418 procedure. I note the rule contemplates determination of a question or questions “before, at or after

any trial or further trial in the proceeding...”. Counsel identified two questions for the Court as follows:

(1) Are the [franchisees] prevented from bringing their claim because it was not commenced within two years of the date of the matrimonial property agreement?

(2) If the answer to (1) above is no, are the [franchisees] entitled to have judgment entered against the second defendant on the basis of:

(a) The findings in the judgment of Your Honour dated

8 October 2003; and

(b) The law relating to res judicata and issue estoppel?

[42] Having noted the questions, Venning J went on:

[13] On reflection, I consider that the order of the questions should be reversed. The first issue really is whether Mrs Johnson is bound by the relevant findings in the judgment of 8 October 2003. If she is then the sole issue for the Court is that framed by the other question, namely whether the [franchisees] are prevented from bringing their claim because it was not commenced within two years of the date of the matrimonial property agreement. That issue was not determined by the Court at the first hearing. It is however a legal issue properly capable of determination on a

418 application. I approach the questions in that way.

[43] On the issue estoppel question Venning J found in favour of the franchisees. He summarised his conclusions in this way:

[26] In summary on the first point the issues determined in the first proceeding that the plaintiffs seek to rely on were necessary findings in terms of the test. There is also sufficient privity of interest between the [franchisees] and the Official Assignee. The findings in the proceedings between the Official Assignee and Mr and Mrs Johnson that the [franchisees] were creditors and that the matrimonial property agreement entered between Mr and Mrs Johnson had the effect of defeating the [franchisees] are binding on Mrs Johnson in the context of the [franchisees’] present claim against her.

[44] He then turned to discuss the second question which he explained in this way:

[27] The real issue, which was not determined finally at the first hearing as it was unnecessary to do so, is whether the [franchisees] are prevented from bringing their claim because it was not commenced within two years of the date of the matrimonial property agreement. It is a question of law, suitable for determination under the r 418 procedure. I have had full argument on it.

[45] After discussing this issue and the considerations associated with it, he found in favour of the franchisees. He summarised his conclusions in this way:

[53] In short I conclude that the effect of s 47 (2) is not to fix the time period within which the creditors or Official Assignee must take proceedings but rather it defines the parties who may challenge the agreement. They are the Official Assignee and creditors, but both must quality within two years of the agreement. In the case of the Official Assignee, he must have been appointed within that time. In the case of creditors, they must satisfy the Court they were creditors of one of the spouses ... during the two years immediately following the agreement.

[46] On the basis of these conclusions and his analysis of the extent to which the interests of the franchisees were defeated by the matrimonial property agreement (which he fixed at $552,250) he granted relief to the franchisees in these terms:

[54] ... As the agreement has the effect of defeating creditors to the extent of $552,250.00 and they were creditors of Mr Johnson within two years of the agreement, the agreement is void against them and they are entitled to the relief sought, namely:

A declaration that the matrimonial property agreement had the effect of defeating creditors;

A declaration that the agreement is void as against the first to sixth plaintiffs;

Judgment for the first to sixth plaintiffs against Mrs Johnson in the sum of $552,250.00.

He also made orders as to interest and costs.

The appeal to this Court

[47] In this Court Mrs Johnson challenged the February 2004 judgment on the basis that the conclusions of Venning J on both issues were wrong. Mrs Johnson also challenged the relief granted by Venning J.

[48] Mr Hurd appeared for Mrs Johnson on the appeal and it is clear that a number of the arguments presented to us were not advanced to Venning J.

Issue estoppel and res judicata

[49] The underlying issue thrown up by this aspect of the case is reasonably straight-forward. Because Mrs Johnson was the successful party in relation to the October judgment, she had no right of appeal to this Court from those aspects of judgment which were unfavourable to her, particularly the conclusions that the franchisees were “creditors” and that the effect of the agreement was to defeat creditors. In those circumstances, it might seem unjust that she is bound by the conclusions reached by Venning J.

[50] The submissions made by Mr Hurd to us were very much focused on this consideration.

[51] His argument was that because the October 2003 judgment in the end turned on fact that Mr Johnson’s bankruptcy occurred more than two years after the entering into of the matrimonial property agreement, Venning J’s conclusions as to the agreement having the effect of defeating creditors were not necessary for his decision.

[52] Mr Hurd cited from Spencer Bower and Turner, The Doctrine of Res Judicata

at para 205:

A decision of fact or law against the party who succeeded will not found an estoppel because it cannot be fundamental to the decision. It would be unjust to make such a decision the foundation of an estoppel, for no appeal is available to the person against whom it was given.

Although the corresponding paragraph in an earlier edition was cited with apparent approval by McKay J in Talyancich v Index Developments Ltd [1992] 3 NZLR 28 at

38 it is too absolute. There is, for instance, high authority to the contrary, see Duedu v Yiboe [1961] 1 WLR 1040, a decision of the Privy Council.

[53] On the other hand, the absence of a right of appeal in relation to the earlier decision may be material in determining whether that decision was sufficiently fundamental to the prior judgment to create an estoppel. This was recognised by May, Balcombe and Woolf LJJ in Re Norway’s Application (No 2) [1990] 1 AC 723 at 743, 752 and 771 - 772 as to whether the Court of Appeal’s decision in earlier and

closely related litigation (known as Norway (No 1) should be held to create an estoppel. The structure of the costs order made in Norway (No 1) could conceivably have given the “successful” parties in that case a right to apply for leave to appeal but the practicalities of the situation were that leave to appeal would not have been given. Accordingly, in Norway (No 2), the Court of Appeal dealt with the issue estoppel arguments on the basis that the successful parties in the earlier case did not have a right of appeal.

[54] When Norway (No 2) reached the House of Lords, the issue estoppel question was neatly side-stepped by the House granting leave to appeal (on the costs question only) in relation to Norway (No 1).

[55] There are three aspects of the present situation which require particular consideration. The first is that the two judgments (ie the October 2003 and the February 2004 judgments) were given in the context of the same proceeding. The second is that they were given by the same Judge. The third is that, in substance, the Official Assignee was representing the interests of the franchisees (who as far I am aware are the only creditors of Mr Johnson) and was represented by the same counsel as the creditors.

[56] In this context it is unrealistic to regard the splitting of the claims as having been intended to result in a situation in which the franchisees and the Johnsons could re-litigate before Venning J issues determined in the first judgment. The Johnsons would fairly have been entitled to resist an attempt by the franchisees to rely on s 47(1) once Venning J found against the Official Assignee on that head of the claim. Likewise, it seems clear that a decision by the Judge on whether the agreement had the effect of defeating creditors could not sensibly have been intended to be re-litigated.

[57] The practicalities of what happened involved Venning J in effect carrying through to his second judgment the relevant conclusions reached in his first judgment.

[58] No-one could be better placed than Venning J to determine whether his conclusions in his October 2003 judgment were “fundamental” to his decision.

[59] This is an area of the law where pragmatic considerations must apply and where broad concepts of abuse of process often come into play, see NZ Social Credit Political League Inc v O’Brien [1984] 1 NZLR 84. For the franchisees to seek to re-open the s 47(1) issue before Venning J would have been an abuse of process. It would likewise be an abuse of process for the Johnsons to seek to re-open matters which Venning J had intended to decide conclusively in his October 2003 judgment. Such re-litigation or re-opening of issues already determined would involve an unacceptable waste of resources and be inconsistent with the role which Venning J was required to adopt as a result of the decision to split the trials.

[60] On the other hand, the considerations which would have made re-litigation of those issues in the High Court an abuse of process are not inconsistent with appellate challenge to those conclusions. On that basis we consider that justice is served if we regard the findings made by Venning J in his earlier judgment as incorporated in the February 2004 judgment. This approach has the practical effect of affording the parties the right to challenge the October 2003 judgment on this appeal.

[61] Interestingly, Mr Hurd had in effect anticipated this conclusion in respect of whether the franchisees can be regarded as creditors. Although his arguments on this question were somewhat oblique, it is clear that he did seek to challenge the Judge’s conclusion on this question as reached in the October 2003 judgment, a challenge which on his “pure” approach to estoppel was not open.

[62] Because the line of thinking set out in [59] and [60] had not been the subject of express argument, we gave notice to counsel of our then preliminary views and invited re-argument (and thus provided, inter alia, the opportunity for the parties to challenge any issues decided against them in the October 2003 judgment). This re-argument, unfortunately took some time to arrange. As it turned out, neither side wished to advance challenges to the findings in the first judgment although that Mr Hurd suggested that our provisional views as to how to address the estoppel issues were wrong in law. Nothing he said, however, persuaded us that our proposed approach was inappropriate.

[63] Accordingly we hold that the Judge was right to treat himself as bound by findings which he found to be fundamental to his October 2003 judgment. Any

potential injustice to Mrs Johnson in terms of appeal rights was addressed by our willingness to allow her to challenge in this Court, if she wished, such findings. Given that she elected not to do so, we see no actual injustice to her in the course which was followed.

Are the franchisees creditors for the purposes of s 47(2) of the P(R)A?

[64] This issue might be thought to have been determined conclusively against the appellant by Venning J’s first judgment and by Mr Hurd’s stand of principle (at the second hearing) at which he disclaimed any entitlement or willingness to challenge the conclusions reached by Venning J in that judgment. But, for the avoidance of doubt, we confirm that we are satisfied that his approach was correct and for the reasons which he has given, see [26] of his judgment.

Are the franchisees precluded from obtaining relief under s 47(2) of the P(R)A

because they did not challenge the agreement within two years?

A dissenting view

[65] On this aspect of the case, I have the misfortune to differ from the other members of the Court. Accordingly, the views expressed in the balance of this judgment are by way of dissent.

[66] As is apparent from what appears in [35] – [37] above, I am puzzled by the decision in favour of Mr and Mrs Johnson on the s 47(1) claim. That decision, however, was not appealed by the Official Assignee. As well it was not challenged by the franchisees on the hearing of this appeal; this despite an opportunity being afforded to them to do so, see [62] above. My reservations as to the correctness of the decision on the s 47(1) claim are therefore of no direct significance and I mention them in the present context for two reasons:

(a) I think it appropriate to record that I am conscious of the risk of allowing my concerns about the s 47(1) issue to affect my approach to s 47(2). I trust that I have managed to do so.

(b) The surprising nature of the s 47(2) finding obscures analysis of where the true merits of the case lie.

The first of these points is too obvious to need elaboration. The second however, is more subtle and requires explanation.

[67] I have a strong view about the merits of the case. Mr Johnson defrauded the franchisees. He then conferred on Mrs Johnson a windfall benefit – one to which she had no entitlement either against him or the franchisees. The practical effect of that transaction has been to defeat the interests of the franchisees as creditors. They can hardly be criticised for not commencing proceedings within two years of the agreement being entered into. By that stage they may not even have realised that they had been victims of Mr Johnson’s fraud and thus had personal claims against him. There is no suggestion that they were aware of the matrimonial property agreement or its practical impact on them at the time (October 1995) the majority conclude they lost their rights to challenge it. In short I see Mrs Johnson’s position vis à vis the franchisees as utterly devoid of merit.

[68] This view of the merits does not depend on what, in a sense, is the collateral question whether Mr Johnson intended to defeat the franchisees when he entered into the matrimonial agreement. Whatever Mr Johnson’s intentions, Mrs Johnson’s position is equally unmeritorious as against the creditors. This is an important point. On the view taken by the majority, this is a very hard case for the franchisees. The unfair result– and I doubt if anyone would seriously dispute its unfairness – is not just a function of a surprising decision on the s 47(1) claim. It is also a direct result of the interpretation of s 47(2) which is favoured by the majority. It is easy and trite to say that hard cases make bad law; but it is perhaps also right to remember that bad law produces hard cases.

[69] I propose now to set out why I think a just result can be achieved by an interpretation of s 47(2) which is consistent with its language, the overall statutory scheme and the principles and policies which should apply in this area of the law.

Overview

[70] Because s 47(2) picks up and incorporates some of the language of s 47(1), it is slightly awkward to follow. Collapsing the language of the two subsections produces the following text:

Any agreement, disposition, or other transaction between spouses or de facto partners with respect to their relationship property that has the effect of defeating creditors of either spouse is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.

The key issue is what meaning is to be given to the words which I have italicised.

[71] The primary argument advanced by Mrs Johnson is that the italicised words mean that proceedings to set aside an agreement must be commenced within two years of it having been entered into. The conclusion of Venning J was that the effect of the italcised language was that only those who acquired the relevant status, either as Official Assignee of one of spouses or a creditor within the period of two years had status to seek the setting-aside of an agreement but that there was no necessity for a challenge to an agreement to be made within two years of its making.

[72] The leading authority is Neill v Official Assignee [1995] 2 NZLR 318 which addressed the precursor to the present s 47(2). The Neills had entered a matrimonial property agreement on 28 March 1989 and Mr Neill was adjudicated bankrupt

18 months later on 5 September 1990. The Official Assignee did not take any steps in relation to the agreement until May 1993, outside the two year period.

[73] As it turned out, this Court held that the agreement in question did not have the effect of defeating creditors at the time it was entered into and the way in which the two year period applied was thus not critical to the outcome of the case. It was, however, addressed in the judgments delivered by Richardson and McKay JJ. The third Judge was Heron J but his judgment is not material for present purposes.

[74] Richardson J stated at 322 - 323:

As I read the limb [now s 47 (2)] it proceeds in two steps. It declares that an infringing agreement “shall be void”. The second step is to fix the duration of the voiding effect as two years after its making, ie the effect is assessed at

the “making” of the agreement and, if that impact actually adversely affects any creditors or the Official Assignee during the two-year period, the agreement is void. In such a case, and as Smellie J concluded, the second limb brings about a voiding as against the Official Assignee (on occurrence of bankruptcy) without the intervention of the Court. Where the agreement is voided during the two-year period, its status in that regard is not affected by failure to commence proceedings within that period.

This passage of the judgment supports the approach taken by Venning J. If all that is required is for the Official Assignee to be appointed during the relevant two year period, all that should be required in the case of creditors is that they were creditors during the same two year period.

[75] On the other hand the judgment of McKay J provides assistance for the argument on behalf of Mrs Johnson. McKay J said at 327:

The two-year period referred to in the section does not define the period within which creditors may be defeated, but the period during which such a defeat will avoid the transaction. Once the two-year period has elapsed without an insolvency or a legal challenge to the transaction, it will be too late to impugn it.

[76] I do not see it as possible to reconcile (at least convincingly) the differing approaches favoured by Richardson and McKay JJ and the issue for us very much comes down to who was right.

[77] Mr Hurd’s argument (and the approach of McKay J in Neill) involve construing word the “void” as meaning “voidable”. If that is what the word means, the effect of the section is that transactions which have the effect of defeating creditors are voidable and may be set aside at the instance of affected creditors who take steps to do so within two years. The case was argued by Mr Hurd on the basis that this could only be effected by the issue of proceedings (which is why he treated the section as creating a limitation defence). But on the underlying logic of his argument, avoidance might be able to be effected in other ways.

[78] The word “void” is sometimes treated as meaning “voidable”. So Mr Hurd’s argument can be reconciled with the words of the section. But given that s 47 is derived in part from s 60 of the Property Law Act 1952 (to which I will refer shortly) and the word “voidable” is used in that section, it would be surprising if whoever

drafted s 47 made the elementary error of using “void” when “voidable” was intended.

[79] The approach taken by Venning J (and that favoured by Richardson J in Neill) can also be reconciled with the words of the section, albeit with some awkwardness. On this basis, the agreement is “void” for a period of two years with the consequence that an Official Assignee appointed within that period or those who are creditors during that period may obtain an order setting aside the transaction.

[80] Given that neither of the conflicting approaches interpretations fits perfectly with the language used in the section, the resolution of the interpretation issue requires analysis of contextual and policy considerations.

Section 47 – statutory antecedents

[81] Of primary relevance in the present context is the law as to fraudulent conveyances. This is now provided for pursuant to s 60 of the Property Law Act

1952 but this section has antecedents in legislation going back to the time of Elisabeth I. There is no doubt that the drafting of s 47 was influenced by s 60 and perhaps as well by the draughtsman’s understanding of the relevant jurisprudence. This jurisprudence is most comprehensively discussed in Kerr on Fraud and Mistake

7^th ed (1952) at 298 - 423.

[82] Unlike s 60 of the Property Law Act, s 47 distinguishes explicitly between an intent to defeat creditors (in s 47(1)) and an effect of defeating creditors (in s 47(2)). That s 60 does not provide specifically for transactions which merely defeat creditors is of little practical significance in most cases as the courts have developed a concept of “imputed fraud” which is so broad as to leave very little scope for a finding that an agreement which defeats existing creditors is not a fraud on those creditors (see Kerr at 310). On the other hand, in the case of subsequent creditors (ie those who become creditors after the impugned transaction), the s 60 cases draw a distinction which is at least akin to that drawn by s 47.

[83] The authorities as to rights of subsequent creditors are addressed in Kerr at

317 - 322. Broadly speaking:

(a) A setting aside of a fraudulent conveyance enures to the benefit of all creditors including subsequent creditors, see Kerr at 317.

(b) Providing a debt which is in existence at the time of the fraudulent conveyance is still unpaid, any subsequent creditor may apply to have the fraudulent conveyance set aside, see Kerr at 318 - 319.

(c) In other cases, the rights of the subsequent creditors are uncertain.

Much depends, so it seems, on whether it can be shown that the debtor has simply repaid existing creditors by replacing them with new creditors. I note that it is commonplace for those who are insolvent to maintain a façade of solvency for sometime. Where that strategy has been adopted, some creditors may be repaid and other people will become creditors in a context where the debtor is nonetheless at all times insolvent. Relief under s 60 would appear to be available in such a situation and also in cases in which actual fraud (as opposed to imputed fraud) can be shown, see Kerr at 321.

Section 47 in the relationship property context

[84] At the time the agreement in question was entered into, s 20 of the P(R)A

provided:

20 Matrimonial property and creditors

(1) Subject to subsection (2) of this section, and except as otherwise expressly provided in this Act,—

(a) Secured and unsecured creditors of a spouse shall have the same rights against that spouse and against property owned by the spouse as if this Act had not been passed; and

(b) All property that would have passed to the Official Assignee on or following the bankruptcy of a spouse if this Act had not been passed (and no other property) shall so pass to the Official Assignee.

(2) Each spouse shall have a protected interest in the matrimonial home, which interest shall—

(a) Where subsection (1) or subsection (2) of section 11 of this

Act applies, be to the extent of the specified sum or one half of the

equity of the husband and the wife in the home, whichever is the lesser:

(b) Where section 11(3) or section 12 of this Act applies, be to the extent of the specified sum or one half of the property or money shared under the section applicable, whichever is the lesser;

and such protected interest shall not be liable for the unsecured personal debts of the other spouse. In this subsection specified sum means [$61,000].

(3) Where, on the bankruptcy of a spouse, the matrimonial home (including a homestead) or, where section 11(2) of this Act applies, the proceeds of the sale of the matrimonial home, pass to the Official Assignee, he shall, after paying—

(a) Any debts secured on the home or, as the case may be, those proceeds; and

(b) Any unsecured debts (other than personal debts) of that spouse,—

pay to the other spouse the amount of his or her protected interest or so much of it as remains after paying those debts.

(4) Where, on the bankruptcy of a spouse, section 11(3) of this Act applies, the Official Assignee shall pay to the other spouse such amount in satisfaction of the protected interest of that spouse as the Court, on application by the Official Assignee or by that spouse, may direct.

(5) The value of the matrimonial property that may be divided between husband and wife pursuant to this Act shall be ascertained by deducting from the value of the matrimonial property owned by each spouse:

(a) Any secured or unsecured debts (other than personal debts or debts secured wholly on separate property) owed by that spouse; and

(b) The unsecured personal debts owed by that spouse to the extent that they exceed the value of any separate property of that spouse.

(6) Where any secured or unsecured personal debt of one spouse is paid or satisfied (whether voluntarily or pursuant to legal process) out of the matrimonial property, the Court may order that—

(a) The share of the other spouse in the matrimonial property be increased proportionately:

(b) Assets forming part of that spouse's separate property be deemed matrimonial property for the purposes of any division of matrimonial property under this Act:

(c) That spouse pay to the other spouse a sum of money by way of compensation.

(7) For the purposes of this section, personal debt means a debt incurred by the husband or the wife, other than a debt incurred—

(a) By the husband and his wife jointly; or

(b) In the course of a common enterprise carried on by the husband and the wife, whether or not together with any other person; or

(c) For the purpose of [acquiring or improving or repairing] the matrimonial home or acquiring or improving or repairing family chattels; or

(d) For the benefit of both the husband and the wife or of any child of the marriage in the course of managing the affairs of the household or bringing up any child of the marriage.

(8) Nothing in this section shall derogate from the provisions of the

Joint Family Homes Act 1964.

[85] The effect of this section, in the present context, is as follows:

(a) To the extent to which an agreement provides for a spouse to receive his or her protected interest (in this case $61,000), it necessarily does not defeat the interests of creditors.

(b) Not all debts of a spouse fell to be taken into account on a division of matrimonial property. This was the effect of s 20(5) - (7) of the P(R)A. So the assets of a spouse whose indebtedness qualified as “personal” under s 20 could be subject to conflicting claims; first by the other spouse whose entitlements on division of the relationship property might be unaffected by the indebtedness; and secondly by creditors (via execution and bankruptcy). Blanchard J in Official Assignee v Prowse [1994] 1 NZLR 225 (HC) held that in this situation rights of the spouse were subordinated to those of creditors. This conclusion really followed from s 20(1)(a). On this approach, an agreement under which a spouse received more than his or her “protected interest” but not necessarily more than what would have been his or her entitlement under the Act (vis à vis the other spouse) could be set-aside.

(c) It follows, a fortiori, that an agreement under which a spouse receives more than his or her “entitlement” under the P(R)A and which is to the detriment of creditors necessarily defeats those creditors.

Evaluation

[86] The practical effect of the Neill decision is that what is now s 47(2) of the P(R)A cannot be invoked unless the effect of the impugned agreement is to produce a situation in which either:

(a) The indebted spouse becomes insolvent; or

(b) His or her existing insolvency is exacerbated.

This is consistent, at least broadly, with the approach taken under the legislation as to fraudulent conveyances, see the discussion in Kerr at 310.

[87] On the findings made by Venning J in the October 2003 judgment, the present case fell into the latter of those two categories. Treating the claims by the franchisees as debts, Mr Johnson at that stage had liabilities which were later quantified by Goddard J at over $800,000 and his ability to meet those liabilities was largely extinguished by the unequal exchange of values effected by the impugned agreement.

[88] Someone who was adapting the language of s 60 of the Property Law Act to the context of the P(R)A and extending its scope so as to catch agreements with a prejudicial effect as well as a fraudulent purpose might well wish to address the entitlements of subsequent creditors. If it is the case that s 47(1) requires proof of what would be regarded as actual fraud in the context of a fraudulent conveyance claim, it might thought to follow that subsequent creditors would be able to claim in any case where a s 47(1) claim had been established. There would therefore be no need to make special provision in s 47 for the rights of subsequent creditors in a case in which s 47(1) had been specifically invoked. On the other hand, given the problems which had arisen in imputed fraud cases with subsequent creditors, and the uncertainty of the law, common sense would have suggested that their position be specifically addressed in s 47(2).

[89] I have already noted that the cases dealing with fraudulent conveyances sometimes were required to distinguish between existing creditors and subsequent

creditors. On the approach to s 47(2) which I prefer, I consider that the drafting proceeds on the basis that subsequent creditors can be subdivided into two sub-classes:

(a) Creditors whose debts arose within two years of the impugned agreement (“sub-class (1) creditors”).

(b) Creditors whose debts arose after the elapse of two years from the date of the impugned agreement (“sub-class (2) creditors”).

[90] In this case, the franchisees are existing creditors and their entitlement to seek relief under s 47 might be thought to be relatively obvious.

[91] On the approach taken by Venning J, s 47(1) can be invoked by all creditors but in the case of subsequent creditors, only those in sub-class (1) can invoke s 47(2). The two year time period operates to exclude claims under s 47(2) by subsequent creditors in subclass (2).

[92] That seems to me to be a perfectly sensible (if perhaps rough and ready) distinction and one which gives real effect to the different wording of the two subsections. It is also well in accord with underlying policy considerations. In the type of case in which s 47(2) is likely to be invoked, it is highly likely that the creditors will not be aware of the property agreement in question until after the expiry of two years from when it is entered into. To construe the section in the manner contended for by Mr Hurd would therefore be likely to detract considerably from its utility. More than that, it would encourage (by rewarding) people situated as the Johnsons were in the early 1990s to conceal transactions from creditors and, as well, to play the system by keeping their creditors at bay for sufficiently long to ensure that when they find out about an agreement it is too late to challenge it. I am of the view that game playing behaviour of this nature should be firmly discouraged.

[93] I am not persuaded that there is any incongruity between the application of the section as I construe it and the insolvency regime. The situation under s 47 on our preferred approach is, in effect, very similar to the corresponding position under s 60 of the Property Law Act. A successful setting aside of an agreement by one

creditor would let in all qualifying creditors. In any event, the section confers rights on both creditors and the Official Assignee and necessarily contemplates the possibility of over-lapping claims.

[94] Accordingly I am satisfied that the approach taken by Venning J on this aspect of the case was right.

The relief granted

A dissenting opinion

[95] On the approach taken by the majority, the issue of relief does not arise as

Mrs Johnson’s appeal as to liability succeeds.

[96] On my approach, of course, Mrs Johnson is liable under s 47(2) and on this approach, Mr Hurd’s challenges to the relief granted remain relevant.

Mr Hurd’s arguments

[97] Mr Hurd challenged the relief granted by the Judge on a number of grounds: (a) He claimed that the Judge was not entitled to grant monetary relief

against Mrs Johnson.

(b) He claimed that the granting of relief to the creditors of Mr Johnson direct against Mrs Johnson was inconsistent with the scheme of the bankruptcy regime.

(c) He prayed in aid s 32 of the Insolvency Act 1967 which stays proceedings against a bankrupt to recover any debt provable in the bankruptcy but permits their continuation with leave of the Court.

[98] The pleadings did not seek relief for a monetary sum. There was, however a prayer seeking, “Such order or orders as are necessary to preserve the [franchisees’]

interest in the matrimonial property”. Given the remorselessness with which the Johnsons have divested themselves of assets, the only way in which relief could have been granted effectively was by way of a monetary award. There is nothing in the judgment of Venning J to suggest that the power to give relief was challenged by Mrs Johnson in the High Court. Indeed an acceptance that there was such jurisdiction might be thought to be implicit in the questions which Venning J was required to determine.

[99] I accept that it may seem unusual that the judgment entered means that the franchisees have side-stepped the Official Assignee. But the possibility that this might happen was necessarily implicit in the order splitting the proceedings to which Mrs Johnson and the Official Assignee were parties. For Mrs Johnson now to maintain that the rejection of the claim by the Official Assignee necessarily precludes the claim by the franchisees involves an unmeritorious change of position. I rather suspect that this apparent side-stepping of the Official Assignee is of no practical moment in the present context. I say this because if there were significant creditors of Mr Johnson other than the franchisee I doubt if the Official Assignee would have been content to go along with course of action.

[100] I do not regard the claim by the franchisees against Mrs Johnson as being within s 37 of the Insolvency Act. If it were, the course which events took in the High Court must be treated as involving the granting of such leave as was necessary. In any event, a point of this nature ought not to be deployed for the first time on appeal.

Other issues

[101] I note the comments made in [151] and [152] of the reasons prepared by Glazebrook J. Mr Hurd did not challenge the quantum assessment as being arithmetically incorrect. In those circumstances, I would not be inclined to interfere with the assessment made by Venning J on the basis referred to in those paragraphs.

Conclusion

[102] Accordingly, I reject all arguments advanced by Mr Hurd in relation to this aspect of the appeal.

McGRATH AND GLAZEBROOK JJ

(Given by Glazebrook J)

Table of Contents

Para No

Introduction [103] The legislative provisions [105] Venning J’s judgment [106] Appellant’s submissions [116] Respondents’ submissions [125] The scheme of the legislation [128] Discussion [134] Conclusion [153] Result and costs [156] Appendix [158]

Introduction

[103] We are in agreement with William Young J’s judgment, apart from the conclusion relating to s 47(2) of the Property (Relationships) Act 1976 (the P(R)A). We do, however, agree with William Young J’s comments on s 47(1) at [34] to [37].

[104] This aspect of the appeal concerns the matrimonial property agreement concluded between Mrs Johnson and her husband on 11 October 1993. The issue is whether s 47(2) of the P(R)A applies to render the agreement void against the creditor respondents. This depends on whether the two year period in s 47(2) of the P(R)A is a limitation period or whether, as found by Venning J, it defines the group of creditors who can challenge the agreement. The relevant background is set out in William Young J’s judgment at [3] to [24] above.

The legislative provisions

[105] In the course of this judgment we refer to various provisions of the P(R)A, the Insolvency Act 1967 and the Property Law Act 1952. The provisions referred to are set out in relevant part in the Appendix to this judgment.

Venning J’s judgment

[106] Venning J, in his judgment of 12 February 2004 (now reported at (2005)

24 FRNZ 83), concluded that the effect of s 47(2) is to define the parties against whom the agreement is void, rather than to fix the time period within which creditors or the Official Assignee must take proceedings. The Judge considered that there is a difficulty with the concept that an agreement may be void for a limited period of time but, at the end of that period, be valid unless a party has taken steps effectively to lock in its void nature.

[107] In his view, this conceptual difficulty does not arise if s 47(2) defines the parties against whom the agreement is void, namely the Official Assignee (if appointed within the two year period) and those who become creditors during the two year period. Both are identifiable and ascertainable parties. His interpretation means that the character of the agreement does not change, as the agreement is void but only against those parties if they exist.

[108] In Venning J’s view, this interpretation is consistent with the decision of this Court in Neill v Official Assignee [1995] 2 NZLR 318 and, in particular, the comments of Richardson J at 322 – 323:

As I read the limb [now s 47(2)] it proceeds in two steps. It declares that an infringing agreement “shall be void”. The second step is to fix the duration of the voiding effect as two years after its making, ie the effect is assessed at the “making” of the agreement and, if that impact actually adversely affects any creditors or the Official Assignee during the two-year period, the agreement is void. In such a case, and as Smellie J concluded, the second limb brings about a voiding as against the Official Assignee (on occurrence of bankruptcy) without the intervention of the Court. Where the agreement is voided during the two-year period, its status in that regard is not affected by failure to commence proceedings within that period.

[109] Venning J rejected the submission that Richardson J, at the end of that passage, was referring only to the position where the Official Assignee was appointed within the two year period as, earlier in the passage, Richardson J referred both to the Official Assignee and to creditors. In Venning J’s view, it follows from Richardson J’s comments that s 47(2) defines the parties who may challenge the agreement. Therefore, all that is required in the case of plaintiff creditors is that they satisfy the Court that they were creditors during the two year period following the

agreement and, in the case of the Official Assignee, that he or she was appointed during the two year period. If these requirements are satisfied, then proceedings to challenge the agreement need not be taken within that two year period.

[110] The other leading judgment in the Neill decision was delivered by McKay J. At 327 McKay J said:

I think the more natural reading of the section, in the absence of any indication of a contrary intention, is to treat both limbs as requiring consideration at the time of the agreement or transaction. I cannot see any purpose which the legislature might have had in mind for wishing to penalise a spouse who entered into an agreement for a property exchange which did not in any way adversely affect the creditors of the other spouse, merely because extraneous events which have happened subsequently have resulted in creditors being worse off than if the exchange had not been made. The two-year period referred to in the section does not define the period within which creditors may be defeated, but the period during which such a defeat will avoid the transaction. Once the two-year period has elapsed without an insolvency or a legal challenge to the transaction, it will be too late to impugn it.

[111] It had been submitted on Mrs Johnson’s behalf that the words “or a legal challenge to the transaction” in the last sentence supported her argument that the creditors must challenge the agreement within two years of it being made. However, Venning J accepted the respondents’ submission that McKay J’s comments referred to above must be considered in the context of his judgment as a whole. When read as a whole the judgment confirmed, in Venning J’s view, that McKay J accepted that the agreement itself was void and that no action by the creditors was required within the two year period to avoid it. At 326, McKay J had said:

Where property is transferred to satisfy a claim under the Act, then the rights which are postponed to creditors by s 20 are replaced by the property transferred. If that is done with the intention of defeating creditors, or if objectively regarded it has that effect, then it will be void for a two-year period.

[112] Venning J observed that Fisher on Matrimonial and Relationship Property

(looseleaf) at [1.48] interpreted s 47(2) in this way:

The two year period during which the effect may be felt runs from the date of the transaction, but it is immaterial whether the Official Assignee or a creditor has commenced proceedings within the time.

[113] Venning J also rejected the public policy arguments put forward by counsel for Mrs Johnson to distinguish the position of the Official Assignee from that of creditors as to the time for commencing proceedings. Counsel had pointed to s 54(1) of the Insolvency Act, arguing that it would be strange if the position of a spouse under s 47(2) was worse than it would be under s 54(1). Venning J said that he was unable to accept that argument. First, s 54(1) refers to a gift being voidable rather than void. Secondly, s 54(2) provides that such a gift may be voidable between two and five years unless the donee can prove the debtor was able to pay his or her debts without recourse to the property which was the subject of the gift. This was not included in s 47, suggesting the focus is different.

[114] Counsel for Mrs Johnson had also argued that there was a need for certainty. In Venning J’s view, certainty is provided by the provisions of s 47(2). Parliament has determined that a period of two years is a sufficient run-off period for a creditor to qualify as affected. Any person who becomes a creditor of a party to the agreement more than two years after the agreement has been made has no claim or ability to challenge the agreement, even if, at the date it was made, it had the effect of defeating creditors. The parties to the agreement thus have the certainty that they are subject to claims in relation to the agreement only by those creditors who were creditors of either spouse within two years of its making.

[115] Venning J also rejected counsel’s submission that third parties dealing with spouses or de facto partners after the date of agreement could be adversely affected if the interpretation argued for by the respondents was accepted. Third parties are, in Venning J’s view, protected by the general law.

Appellant’s submissions

[116] In Mr Hurd’s submission, Venning J’s interpretation of s 47(2) bears little resemblance to the statutory language. He submitted that, on any ordinary reading of the subsection, it is difficult to support the Judge’s interpretation of the phrase beginning “during” as referring not to a period of time, but to the identity of challenging parties. Mr Hurd further submitted that there is no need to define those who can take steps to challenge an agreement. That is made clear by the use of the

phrase “such creditors”. This phrase refers back to s 47(1) and means the creditors of either spouse or de facto partner. Mr Hurd also submitted that a “creditor” for these purposes must be a creditor who is in existence when a s 21 agreement is entered into. He said that counsel had been unable to find any authority for the proposition that a party who has not even given notice of his or her intention to make a claim is a “creditor” for these purposes.

[117] In Mr Hurd’s submission, the situation of the Official Assignee and that of the creditors are quite different. If there is a bankruptcy, there must necessarily have been both creditors in existence and insufficient assets to meet those creditors’ entitlements. There is thus an actual adverse impact on creditors. The mere existence of creditors, however, demonstrates no such thing. Further, in Mr Hurd’s submission, mere inequality of exchange will not of itself defeat the interests of creditors. It will only do so if, following that exchange, the transferor has insufficient assets to meet his or her liabilities. Obviously the position of parties can change over the years. The longer the period between an agreement being entered into and the alleged asset insufficiency occurring, the greater the chance that quite extraneous factors have intervened. It therefore makes sense to allow only a limited period for this impact to have occurred.

[118] Mr Hurd recognised that the outcome cannot be left entirely to events, such as bankruptcy, which are not completely within the control of creditors. A creditor who believes that an agreement has adversely affected his other position and/or that of other creditors must be entitled to commence proceedings challenging the agreement. Those proceedings will determine, objectively, whether the agreement had the requisite effect. If it did, the agreement will be void. Since, however, the agreement is void only for two years from its date, it is logical, in Mr Hurd’s submission, that any proceeding by a creditor alleging such effect must itself be brought within that period.

[119] Mr Hurd referred to the passage, quoted at [110] above, from McKay J in Neill. He submitted that it clearly supported his position and that the attempt by Venning J to distinguish it was simply unsustainable. In addition, Mr Hurd submitted that Richardson J’s judgment did not support Venning J’s position. In Mr Hurd’s submission, Richardson J held that a mere imbalance in assets transferred

under an agreement will not have the effect of defeating creditors. It is a necessary pre-condition for such an effect but not, of itself, sufficient. This is because whether there is an actual adverse impact on creditors will depend upon the financial position of the parties to the agreement. Mr Hurd submitted that Richardson J made it clear that an adverse impact on creditors must arise during the two year period. The occurrence of bankruptcy obviously indicates insufficiency of assets and thus that an adverse effect has resulted from the unequal exchange. In the case of creditors, in Mr Hurd’s submission, Richardson J makes it clear that the duration of the “voiding effect” is two years.

[120] In Mr Hurd’s submission, Venning J’s rejection (in his judgment of

8 October 2003 HC AK CP419/SD97) of the Official Assignee’s claim under s 47(2) because the Official Assignee had not been appointed within two years of the date of the agreement is in accordance with Neill and makes sense in the broader statutory context. For example, it produces a similar outcome to that produced by s 54 of the Insolvency Act, which makes any gift of property voidable against the Official Assignee if the donor is adjudged bankrupt within two years of the gift being made. Mr Hurd submitted that it would be odd if creditors’ rights under s 47(2) were greater than those under s 54.

[121] It was further submitted that to allow creditors to sue for debts directly cuts across s 32 of the Insolvency Act, which stays all proceedings to recover any debt provable in bankruptcy without the Court’s consent. In Mr Hurd’s submission, it would be counter to this section to allow certain unsecured creditors a general right to continue to pursue claims against or affecting a bankrupt. In addition, Mr Hurd submitted that, if Venning J’s judgment is correct, it would mean that bankruptcy is effectively circumvented. If creditors successfully mount a challenge under s 47(2), then property which should have formed part of the bankrupt’s estate is diverted to those creditors who have successfully pursued direct action. This would breach the statutory imperative of equal treatment for all creditors of a particular class. In Mr Hurd’s submission, Venning J’s judgment has the effect of placing individual unsecured creditors of a bankrupt in a better position than the Official Assignee, who represents all unsecured creditors. That makes no sense in policy terms.

[122] There would also be difficulties, in Mr Hurd’s submission, with discharges from bankruptcy. This poses no difficulty where the Official Assignee has exclusive control and responsibility for pursuing debts and dealing with creditors. However, if creditors are permitted to continue to pursue the bankrupt independently of the Official Assignee, the Official Assignee and the bankrupt are, in his submission, placed in most invidious positions. Because the Official Assignee has no control over the claims, he or she must either disregard them and grant a discharge at the appropriate time, or delay discharge until all such claims have been resolved.

[123] It was acknowledged by Mr Hurd that his interpretation of s 47(2) still leaves open the possibility that creditors may have rights to pursue a claim against s 47(2) where the Official Assignee does not. This would occur only where creditors had commenced a challenge to the agreement within two years of it being made and the debtor had subsequently, but outside the two year period, been adjudicated bankrupt. The number and extent of such claims would, however, necessarily be limited. If appropriate, they could easily be accommodated, in Mr Hurd’s submission, by the granting of leave under s 32, subject to appropriate conditions.

[124] Finally and importantly, in Mr Hurd’s submission, the parties to any agreement (and third parties dealing with them) need to know that, after a reasonable period, the agreement will be safe from challenge unless it was one intended to defeat creditors. That, in Mr Hurd’s submission, is the intention and effect of the two year period provided in s 47(2).

Respondents’ submissions

[125] The respondents supported Venning J’s decision, essentially for the reasons he gave.

[126] Mr Smith submitted that the statements made by McKay J in Neill are not related to the question of when proceedings must be commenced. In Mr Smith’s submission, they relate to a different issue. He submitted that McKay J was making it clear that the two year period referred to in s 47(2) determines that it is only creditors who exist during the two year period following the execution of the

agreement who will be able to have that agreement set aside. In Mr Smith’s submission, McKay J was not addressing the question as to when proceedings under the Act may be brought. Mr Smith submitted further that Richardson J’s decision in Neill clearly supports the respondents’ contention.

[127] With regard to the various public policy issues put forward by Mr Hurd, Mr Smith submitted that these have no relevance. In his submission, the Court’s task is merely to interpret and enforce the P(R)A. It is, he said, for Parliament to make public policy decisions.

The scheme of the legislation

[128] We examine first the scheme of the P(R)A as it relates to creditors. Section 20A of the P(R)A preserves the rights of the creditors of a spouse or de facto partner as if the P(R)A had not been passed. This means that, as a general rule, creditors can have no recourse to any latent relationship property claims a debtor may have under the P(R)A. Equally, however, in the event of bankruptcy the property of a bankrupt spouse or de facto partner passes to the Official Assignee without regard to the claims of the other spouse or de facto partner under the P(R)A. There are certain statutory exceptions to the above rule, including the protected interest in the family home - see ss 20B and 20C. See also s 20F.

[129] In Official Assignee v Prowse [1994] 1 NZLR 225 (HC) at 234 Blanchard J analysed the policy underlying the treatment of creditors under the P(R)A in the following way. He said that, where property is vested in one spouse, creditors ought to be able to deal with that person on the same basis as they can deal with an unmarried person. Rights derived entirely under the P(R)A are (subject to the statutory exceptions) subordinated, unless confirmed by a Court order.

[130] It is in this context that s 47 falls to be interpreted. Section 47 is set out in relevant part in William Young J’s reasons at [25]. We agree that s 47(2) is more easily understood if the language of the two subsections is collapsed to produce the text he set out at [70]. For ease of reference, we reproduce that here:

Any agreement, disposition, or other transaction between spouses or de facto partners with respect to their relationship property that has the effect of defeating creditors of either spouse is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.

[131] The first point to note is that s 47 governs all claims potentially falling within it. In this regard, we refer to ss 4 and 4A of the P(R)A and to this Court’s decision in Official Assignee v Williams [1999] 3 NZLR 427. Section 47, however, applies only to agreements, dispositions and transactions relating to relationship property. Gifts of separate property remain subject to the provisions of s 54 of the Insolvency Act - see Fisher at [3.7].

[132] The next point to note is that s 47 applies only to agreements, dispositions or other transactions between spouses or de facto partners. At [1.47] Fisher remarks that, if a Court order under s 25 dividing relationship property can be obtained before any charging order, execution or adjudication in bankruptcy, property vested in the non-debtor party appears to be placed beyond the reach of creditors. It is pointed out that a Court has the power to require service on creditors under s 37 and this can provide a safeguard against collusion but we note that this would depend on the Court being informed of the existence of creditors. We note also that, at [18.63], the authors of Fisher opine that a Court could not refuse to make such an order in relation to property validly due to a party under the relationship property regime, merely on the grounds that this might forestall claims by creditors of the other party. There were, however, no orders made in this case and so we do not need to examine these issues further.

[133] Turning back to s 47, it is clear that the relevant time to consider both limbs of s 47 is the date of the agreement, disposition or transaction in question. The section does not apply if a transfer of assets is made for fully adequate consideration but the settlement of claims under the P(R)A does not count as fully adequate consideration except to the extent the consideration consists of a protected interest under ss 20B or 20C of the P(R)A or of an interest under the Joint Family Homes Act 1984. An interest claimable outside the P(R)A can, however, be relied on as providing consideration. See Neill at 322 and 324 per Richardson J and at 326 and

329 per McKay J, with Heron J agreeing with both judgments.

Discussion

[134] We now turn to a more detailed analysis of s 47(2). The obvious starting point is the words of the subsection. The word “during” clearly sets a time period. The question is to what the time period refers. In our view, on an ordinary reading of the words, the phrase “during the period of 2 years after it is made” qualifies the word “void” and not the word “creditors”. So read, the phrase refers to the time period during which the tainted agreement is voided.

[135] This conclusion is reinforced by the fact that the word “creditors” is coupled with the “Official Assignee”. The phrase “Official Assignee during the period of

2 years” in our view makes no sense. In addition, as pointed out by Mr Hurd, the subsection refers to “such creditors”. This is a reference back to s 47(1) and the phrase “creditors of either spouse”. It cannot sensibly be a reference forward to the phrase “during the period of two years”. In our view, therefore, a limitation period approach is the only fit with the language of the section. If the drafters had intended the section to apply to creditors whose debts arose during the period of two years, then they would, in our view, have used more explicit language. They would also have dealt with some of the consequences of that wording – see at [142] to [146] below.

[136] We acknowledge that this meaning entails a concept of something being void for a limited period of time but this can be explained by the history of the section. The use of the word “void” on its own is not enough, in our view, to override the clear meaning of the wording in the subsection. The choice of wording is likely simply to be a carry over from s 47(1) and the period when the two limbs were not separated into two subsections. As originally enacted, s 47(1) of the Matrimonial Property Act 1976 contained the two limbs in one subsection. The section was amended by the Property (Relationships) Amendment Act 2001, which came into force on 1 February 2002. The amending legislation separated the two limbs into separate subsections but made no significant alterations to the wording used.

[137] Venning J pointed out, in support of his interpretation of s 47, that s 54 of the Insolvency Act uses the word “voidable”. Section 60 of the Property Law Act 1952 (which roughly corresponds to s 47(1) of the P(R)A) also uses the word “voidable”.

We remark that, in the insolvency regime, the word “voidable” may be appropriate because of the discretion under s 58(6) of the Insolvency Act to deny recovery where there is a good faith receipt and an alteration of position. That discretion is also applicable in relation to an alienation of property which is voidable under s 60 of the Property Law Act (see s 58(1) of the Insolvency Act). Section 58(6) has been held not to apply to s 47 of the P(R)A and there is no corresponding discretion in the P(R)A - see Williams at [1], [20] and [24]. It may be that the absence of such a discretion is the reason for the use of the term void in s 47.

[138] We are bolstered in our view that the two year period in s 47(2) is a limitation period by the fact that this interpretation fits more easily into the scheme of the P(R)A itself and the general insolvency regime. Context is important in the interpretation of legislative provisions – see the discussion in Burrows Statute Law in New Zealand (3ed 2003) at 155 - 170.

[139] William Young J, at [89], divides subsequent creditors into two groups: sub-class (1) creditors (those becoming creditors within the two year period); and sub-class (2) creditors (those becoming creditors outside the two year period). He considers that s 47(2) relates to both existing and sub-class (1) creditors but not to sub-class (2) creditors. Particularly where the parties are separated, there seems to us to be little reason to favour the sub-class (1) creditors, who arose after separation, over the interests of the former spouse or partner. We note in any event that Williams suggests that the sub-class (1) creditors may not even be able to challenge the agreement, disposition or other transaction under s 47 - see below at [150]. In any event, there seems to us no logical policy reason why there should be a favouring of sub-class (1) creditors over sub-class (2) creditors. This is particularly so because, assuming insolvency, those earlier sub-class (1) creditors, because of their delay in enforcing their debts, might even be seen in some cases as having played some part in allowing the veneer of solvency to be maintained, lulling the sub-class (2) creditors into a false sense of security.

[140] It must be remembered too that the effect of s 47 is that even agreements that are made to settle legitimate claims under the P(R)A are subject to creditors’ claims, whether the parties are still together or separated. This is because the settlement of claims under the P(R)A is not counted as fully adequate consideration – see at

[133] above. There seems no obvious reason why the interests of creditors should, after a reasonable period has elapsed, be favoured over a spouse or partner who received no more than his or her entitlement under the P(R)A.

[141] In our view, there must come a time when a spouse or partner should be able to feel secure that an agreement can no longer be challenged. This consideration is especially strong when the parties are separated. As a matter of social policy, the trend in family law has been to encourage the “clean break principle” in matters of property and maintenance. This seeks to implement the division of relationship property in a way which is immediate, complete and final - see Fisher at [18.47].

[142] In addition, we consider that creditors of the spouse or de facto partner should be able, after a suitable period, to feel secure that assets are not subject to claw back under s 47. Real complications could ensue, for example, if the spouse or partner had become bankrupt before any challenge was made to the agreement or other transaction. Difficult priority questions could arise. In our view, the rights of third parties cannot be dismissed as easily as Venning J did – see at [115] above. The general law may protect third party purchasers, or mortgagees, for value. It would not afford the same protection to unsecured creditors.

[143] In the Insolvency Act context, a two year period is generally thought to give creditors sufficient time to make their claims - see ss 54 – 57 of that Act. There seems no reason why a longer period is needed in the P(R)A context. We thus accept Mr Hurd’s submission that Venning J’s interpretation does not align well with the general insolvency regime. In our view, the regime under s 47 of the P(R)A mirrors that relating to insolvency generally. As indicated above, s 47(1) aligns with s 60 of the Property Law Act, under which transactions intended to defeat creditors are voidable, but with no time limit. Section 47(2) mirrors ss 54 - 57 of the Insolvency Act, pursuant to which various transactions that took place within set periods of adjudication of bankruptcy can be challenged.

[144] Section 54 of the Insolvency Act, dealing with gifts, is of particular relevance. We agree with Mr Hurd that there is no obvious reason why a spouse or partner who may have received no more than his or her entitlement under the P(R)A should be worse off than a person receiving a gift. Contrary to Venning J’s view, it

is not surprising to us that there is no extension under the P(R)A to five years as there is under s 54(2) of the Insolvency Act, particularly given the clean break principle discussed at [141] above, the fact that an entitlement under the P(R)A does not count as fully adequate consideration and the absence in the P(R)A of the discretion contained in s 58(6) of the Insolvency Act – see at [137] above.

[145] Further, we accept Mr Hurd’s submission that the interpretation favoured by Venning J does not fit easily with other aspects of the insolvency regime. For example, if there has been a subsequent bankruptcy, as in this case, there are major questions over whether or not the funds recovered go into the bankrupt’s estate generally or whether they are reserved for the existing and sub-class (1) creditors as is suggested in William Young J’s judgment. If the recovered money goes to the existing and sub-class (1) creditors, this would compromise the pari passu rule with regard to unsecured creditors. As Mr Hurd submitted, allowing such creditors, as a matter of course, to pursue a bankrupt debtor independently of the Official Assignee also runs counter to s 32 of the Insolvency Act and creates difficulties relating to discharge from bankruptcy.

[146] There are also, in many cases, likely to be major practical difficulties with ascertaining the identity of the existing and sub-class (1) creditors and the amount of their debts. These difficulties would compound depending on the length of time that had elapsed before the agreement or other transaction was challenged. Presumably, under Venning J’s and William Young J’s approach, the s 47(2) protection relates to creditors in the two year period who are still creditors at the time of the action with regard to the same debt, and only to the extent of the balance outstanding at the end of the two year period. This could, in many cases, be very difficult to ascertain, particularly for trade creditors.

[147] Venning J relied heavily in his decision on the comments made by this Court in Neill. We prefer McKay J’s approach in Neill to that of Richardson J, which, as noted by William Young J at [74], tends to favour Venning J’s approach, although Richardson J does refer specifically to s 47(2) (as it now is) as setting “the duration of the voiding effect”, thus arguably envisaging that the agreement, disposition or other transaction may be void only for a period.

[148] McKay J, in the passage quoted at [110] above, makes it clear that, in his view, the two year period is a limitation period. Either there has to be a bankruptcy during the period (which, subject to there having been an effect of defeating creditors, automatically causes the agreement to be void against the Official Assignee) or there has to be a legal challenge initiated by creditors to the agreement or other transaction. We are unable to read McKay J’s comments in the manner urged by the respondents. Neither do we consider, contrary to Venning J’s view, that the earlier passages in his judgment modify McKay J’s very clear statement that what is at issue is a time limit.

[149] Before leaving this topic, we remark that it does not appear to have been decided exactly what the phrase “which has the effect of defeating creditors” means – although there was some discussion of the phrase in Neill at 323 - 324 per Richardson J and at 328 per McKay J. In Williams, the Court declined to elaborate on the meaning of the phrase, as counsel had not made submissions on the issue and it was unnecessary for the determination of the case - see at [27] of that judgment. This was not argued in any depth before us either. It is, however, clear from Williams that it is not sufficient merely that the Official Assignee was appointed within two years of the agreement (as he clearly had been in Williams). There must also be evidence that there were creditors at the time of the agreement, disposition or other transaction that it would have the effect of defeating.

[150] In Williams, although there was evidence that the husband’s financial difficulties had started some seven months before the relationship property agreement had been entered into, there was no evidence of what debts were owed and to whom at the time the agreement was signed – see at [7] of that judgment. This Court held that was fatal to the Official Assignee’s claim but made no further finding on the meaning of the phrase “effect of defeating creditors”. It seems to us, however, that the Court in Williams considered it vital that there be proof of the existence of creditors at the time of the agreement, disposition or other transaction. It may be inferred that the Court considered that, for an agreement to have the effect of defeating creditors, there must have been creditors in existence at the time of the agreement or other transaction and it must be those very creditors who are defeated by a later shortfall. As we did not hear argument specifically on this point, and it is of no significance in this case, we do not make any definitive findings on it. In any

event, the respondents were creditors at the date of the agreement and remain so - see Venning J’s judgment of 8 October 2003, referred to at [120] above.

[151] There is one further matter. We consider that, had Venning J’s interpretation been correct, his calculation of the amount payable to the respondents would have been in error, although we agree with William Young J’s comments at [101] that it would not have been appropriate for us to adjust the amount on appeal.

[152] Venning J calculated that the agreement had delivered to Mrs Johnson

$552,250 in excess of her P(R)A entitlement. It was that amount he awarded to the respondents. Had s 47(2) been engaged, the agreement would have been void to the extent it defeated creditors. This must mean that it would have been void to the extent that it took out of Mr Johnson’s estate assets that would have been available for creditors, but only to the extent that Mr Johnson’s assets were insufficient to meet the claims of the relevant creditors. As indicated at [128] - [129] above, the assets that would have been available to Mr Johnson’s creditors, had the agreement not been entered into, would have been all those assets beneficially owned by Mr Johnson, subject to Mrs Johnson’s protected interest in the family home under ss 20B and 20C of the P(R)A. Assets beneficially owned by Mrs Johnson, or to which she had a claim outside the P(R)A, would not have been available to creditors.

Conclusion

[153] We consider that Venning J was in error when he held that the two year period in s 47(2) identified the class of persons who could claim under the subsection. In our view, the ordinary meaning of the words in that section is that the two year period is a limitation period. This interpretation fits much more easily into the scheme of the P(R)A itself and the general insolvency regime and McKay J’s judgment in Neill also supports that interpretation.

[154] In this case the respondents were creditors at the time of the agreement. There was, however, no manifested adverse effect during the two year period. The Official Assignee was not appointed during that period and the respondents did not take any steps at all during that period.

[155] As the two year period in this case elapsed without an insolvency or a legal challenge to the agreement, or even without any steps being taken to recover the debts, it is now too late for the respondents to impugn the agreement. As a consequence, s 47(2) is not engaged in this case and we would allow Mrs Johnson’s appeal on this point.

Result and costs

[156] As this is the view of the majority the judgment against Mrs Johnson in the High Court is set aside. There will be judgment for her on the claim by the respondents.

[157] As each party has had some success in this appeal there will be no order for costs in this Court. Costs in the High Court can be dealt with by that Court.

Solicitors:

Patterson Hopkins, Auckland for Appellant

Cairns Slane, Auckland for Respondents

APPENDIX

[158] The relevant provisions of the P(R)A are as follows:

4 Act a code

(1) This Act applies instead of the rules and presumptions of the common law and of equity to the extent that they apply—

(a) to transactions between spouses or partners in respect of property; and

(b) in cases for which this Act provides, to transactions—

(i) between both spouses or partners and third persons;

and

(ii) between either spouse or partner and third persons.

...

(4) Where, in proceedings that are not proceedings under this Act, any question relating to relationship property arises between spouses or partners, or between either or both of them and any other person, the question must be decided as if it had been raised in proceedings under this Act. ...

4A Other enactments to be read subject to this Act

Every enactment must be read subject to this Act, unless this Act or the other enactment expressly provides to the contrary.

20A Rights of creditors preserved

(1) Secured and unsecured creditors of a spouse or partner have the same rights against that spouse or partner, and against property owned by the spouse or partner, as if this Act had not been passed.

(2) If, had this Act not been passed, any property would have passed to the Official Assignee on or following the bankruptcy of a spouse or partner, then that property (and no other property) passes to the Official Assignee as if this Act had not been passed.

(3) This section—

(a) is subject to section 20B; and

(b) applies except as otherwise expressly provided in this Act.

20B Protected interest in family home

(1) Each spouse or partner has a protected interest in the family home, which includes,—

(a) where section 11A applies, the proceeds of sale of the family home:

(b) where section 11B applies, the property shared under that section:

(c) where section 12 applies, the money shared under that section.

(2) The protected interest of a spouse or partner is not liable for the unsecured debts of the other spouse or partner, other than an unsecured debt incurred—

(a) by the spouses or partners jointly; or

(b) by the spouse or partner subsequently declared bankrupt, for the purpose of acquiring, improving, or repairing the family home.

(3) The value of the protected interest of a spouse or partner is as follows:

(a) where section 11 applies, the protected interest is to the extent of the lesser of—

(i) the specified sum; or

(ii) one half of the equity of the spouses or partners in the family home:

(b) where section 11A applies, the protected interest is to the extent of the lesser of—

(i) the specified sum; or

(ii) one half of the proceeds of the sale of the family home:

(c) where section 11B or section 12 applies, the protected interest is to the extent of the lesser of—

(i) the specified sum; or

(ii) one half of the property or money shared under the applicable section.

(4) In this section, specified sum means the amount for the time being prescribed under section 53A for the purposes of this section.

20C Payment of protected interest on bankruptcy of other spouse or partner

(1) If, on the bankruptcy of a spouse or partner, the family home (including a homestead) or, if section 11A applies, the proceeds of the sale of the family home pass to the Official Assignee, the Official Assignee must pay to the other spouse or partner the lesser of—

(a) the amount of the protected interest of the other spouse or partner; or

(b) so much of that amount as remains after the Official

Assignee has paid the debts specified in subsection (2). (2) The debts referred to in subsection (1)(b) are as follows:

(a) any debts secured on the family home or homestead or, as the case may be, the proceeds of sale of the family home:

(b) any unsecured debt incurred—

(i) by the spouses or partners jointly; or

(ii) by the spouse or partner subsequently declared bankrupt, for the purpose of acquiring, improving, or repairing the family home.

(3) If, on the bankruptcy of a spouse or partner, section 11B applies, the Official Assignee must pay to the other spouse or partner such amount in satisfaction of the protected interest of that spouse or partner as the Court may direct, on application by the Official Assignee or by that spouse or partner.

20F Application of Joint Family Homes Act 1964

Nothing in sections 20 to 20E derogates from the provisions of the Joint

Family Homes Act 1964.

21 Spouses or partners may contract out of this Act

(1) A husband and wife, civil union partners, or de facto partners, or any

2 persons in contemplation of entering into a marriage, civil union or de facto relationship, may, for the purpose of contracting out of the provisions

of this Act, make any agreement they think fit with respect to the status,

ownership, and division of their property (including future property).

(2) An agreement made under this section may relate to the status, ownership, and division of property in either or both of the following circumstances:

(a) during the joint lives of the spouses or partners: (b) when 1 of the spouses or partners dies.

(3) This section is subject to section 47.

25 When Court may make orders

(1) On an application under section 23, the Court may— (a) make any order it considers just—

(i) determining the respective shares of each spouse or partner in the relationship property or any part of that property; or

(ii) dividing the relationship property or any part of that property between the spouses or partners:

(b) make any other order that it is empowered to make by any provision of this Act.

(2) The Court may not make an order under subsection (1) unless it is satisfied,—

(a) in the case of a marriage or civil union,—

(i) that the husband and wife or civil union partners are living apart (whether or not they have continued to live in the same residence) or are separated; or

(ii) that the marriage or civil union has been dissolved;

or

(b) in the case of a de facto relationship, that the de facto partners no longer have a de facto relationship with each other; or

(c) that 1 spouse or partner is endangering the relationship property or seriously diminishing its value, by gross mismanagement or by wilful or reckless dissipation of property or earnings; or

(d) that either spouse or partner is an undischarged bankrupt.

(3) Regardless of subsection (2), the Court may at any time make any order or declaration relating to the status, ownership, vesting, or possession of any specific property as it considers just.

(4) To avoid any doubt, but without limiting subsection (3), if proceedings under this Act are pending, the Court, if it considers it appropriate in the circumstances, may make an interim order under that subsection for the sale of any relationship property, and may give any directions it thinks fit with respect to the proceeds.

47 Agreements to defeat creditors void

(1) Any agreement, disposition, or other transaction between spouses or partners with respect to their relationship property and intended to defeat creditors of either spouse or partner is void against those creditors and the Official Assignee.

(2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.

(3) For the purposes of subsection (2), an agreement between spouses or partners with respect to their relationship property is deemed to have been made for valuable consideration if—

(a) a situation described in section 25(2) has arisen; and

(b) the agreement is made for the purpose of settling (wholly or in part) their rights under this Act with respect to that property.

(4) Nothing in this section applies to any gift by 1 spouse or partner to the other spouse or partner, if the gift is made on a customary occasion and is reasonable in amount having regard to the donor's means and liabilities.

(5) This section applies regardless of any other provision of this Act.

[159] The relevant provisions of the Insolvency Act 1967 are as follows:

54 Voidable gifts

(1) Any gift of property shall be voidable as against the Assignee if the donor is adjudged bankrupt within 2 years after the making of the gift.

(2) Any gift of property shall, if the donor is not adjudged bankrupt within 2 years after the making of the gift but is adjudged bankrupt within

5 years after the making of the gift, be voidable as against the Assignee, unless the party claiming under the gift proves that the donor was at the time of the making of the gift or at any time thereafter up to his adjudication able

to pay all his debts without the aid of the property comprised in the gift, and that if the gift was a settlement, the interest of the settlor in the property

passed to the trustees of the settlement on the execution thereof.

...

(6) In this section gift means any disposition made otherwise than in good faith and for valuable consideration.

(7) The Court may, if it thinks it just and equitable in all the circumstances, take into account past consideration and treat it as being valuable consideration.

58 Assignee may recover property or value thereof

(1) In any case where, under any of the provisions of section 54 (except subsection (3)) of this Act, sections 56, 57, and 162 of this Act, and section

60 of the Property Law Act 1952, any disposition is voidable as against the Assignee or as against the appointee within the meaning of Part 17 of this Act, if the Assignee or appointee wishes to set aside the disposition, he shall

do so by filing the prescribed notice in the Court and serving a copy thereof on the persons on whom service is required in accordance with regulations

made under this Act.

...

(6) Recovery by the Assignee or appointee of any property or the value thereof (whether under this section or under any other provision of this Act or under any other enactment or in equity or otherwise) may be denied wholly or in part if—

(a) The person from whom recovery is sought received the property in good faith and has altered his position in the reasonably held belief that the transfer or payment of the property to him was validly made and would not be set aside; and

(b) In the opinion of the Court it is inequitable to order recovery or recovery in full, as the case may be.

(7) Nothing in the Land Transfer Act 1952 shall restrict the operation of this section.

[160] Section 60 of the Property Law Act 1952 provides:

60 Alienation with intent to defraud creditors

(1) Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.