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Fraudulent Conveyances: Options for a project [1994] NZLCPUP 1

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FRAUDULENT CONVEYANCES: OPTIONS FOR A PROJECT

L aw Commission
June 1994

_CONTENTS

Page

Executive Summary: Fraudulent Conveyances ii

I Introduction 1

IIPreliminary Research 1

Current law on fraudulent conveyances 1

Law and economics aspects 2

Protection of the debtor' s family 3

Overseas law reform 4

IIIOptions for a Project 7

Reform already proposed 7

Two options 8

Option (1) 8

Option (1): evaluation 9

Option (2) 10

Option (2): evaluation 10

IVSummary 11

EXECUTIVE SUMMARY: FRAUDULENT CONVEYANCES

1 The Commission is concerned with the practice of individuals, often professionals or business people, transferring their assets into trusts or to their family or friends prior to entering into business, partnership or some other activity which carries a risk of liability. This may result in unfairness when creditors cannot, at some later date, gain access to those assets to have debts owed to them satisfied.

2 The current law seem inadequate to deal with this problem. The main provision which enables gifts or other dispositions to be overturned (at a time when the debtor is not bankrupt) is s 60 of the Property Law Act 1952. However, s 60 has not been applied to the situation where the person is solvent at the time of disposing of the property and continues to be solvent for sometime afterwards.

3 The Commission is therefore considering a project which would investigate ways of extending s 60 to enable dispositions, made before an individual was under the risk of liability, to be overturned.

4 In considering an extension of this type other issues arise. One particularly important issue is the extent to which the law should protect the family of an individual, in order to provide for their basic needs, from the creditors of that individual. This relates closely to fraudulent conveyances because a common motivation for these dispositions is to protect an individual' s family from the individual' s creditors.

5 The Commission is considering the following two alternative options for a project on fraudulent conveyances:

Option (1)

⋅Comprehensively review s 60 with a view to extending it considerably so that creditors may challenge dispositions of assets by a debtor which occur at an early stage or which take place over a period of time as part of a process of " salting away" , if the debtor or the debtor' s family continue to have access to these assets.

Option (2)

⋅Review s 60 as described in option (1), and

⋅address the broad question of to what extent should assets be protected, against the debtor' s creditors, for the purpose of meeting the needs of the debtor' s family.

6 Option (1) is narrower, it would involve focusing mainly on s 60. Option (2) is somewhat broader, it would involve looking into matrimonial property law and insolvency law.

I INTRODUCTION

1 The basic purpose of a project in this area is to deal with the unfairness which results when individuals divest themselves of assets in anticipation of entering business or undertaking some activity which carries a risk of liability. Creditors are often unable, at some later date, to gain access to those assets to have debts owed to them satisfied. There is evidence of considerable public concern, and some political concern, about the use of devices which allow the debtor to continue to live in comfort after incurring substantial debts which will never be paid. This concern is well-founded since the law appears powerless to prevent these devices.

2 This is intended as a background paper to inform the Commission and those with whom we consult of

⋅the preliminary research which has been done, and

⋅the options for a possible project which are being considered.

II PRELIMINARY RESEARCH

Current law on fraudulent conveyances

3 The main provision relating to fraudulent conveyances is s 60 of the Property Law Act 1952. The Law Commission has a particular interest in the section. It reviews the machinery provisions of the section in its forthcoming report: A New Property Law Act. Essentially s 60 provides that a conveyance made with the intent to prejudice a creditor or creditors is voidable at the instance of a creditor prejudiced by it. In addition there are other provisions which enable transactions to be overturned but they are much more restricted in their application: s 47 Matrimonial Property Act 1976 (only covers agreements relating to or dispositions of matrimonial property between spouses within 2 years of bankruptcy); and the voidable transactions provisions in the Insolvency Act 1967, Companies Act 1955 and the Companies Act 1993 which in most cases only apply to transactions within 1 or 2 years of bankruptcy or liquidation.

4 Section 60 and similar fraudulent conveyance provisions in other jurisdictions are said to be derived from the Statute of Elizabeth of 1571 (13 Eliz c5). Section 60 is in virtually the same terms as, and hence seems to have come directly from, the now repealed s 172 of the Law of Property Act

1925 (UK).

5 A survey of the case law under s 60 indicates that the provision has only infrequently been used in New Zealand to overturn dispositions carried out, before embarking on business or other activity, to provide a safety net in case of future liability. However, the possibility of it being applied

in such a situation is not necessarily precluded. In an early English case the Court overturned a settlement made, for the purpose of protecting the transferor and his family, at a time when he was about to enter into a speculative business venture (Mackay v Douglas [1872] UKLawRpEq 96; (1872) LR 14 Eq 106). Such an order need not be related to any existing indebtedness of the business. The courts accept that someone who becomes a creditor subsequent to the relevant disposition can claim relief under the

section (L E Borrell & Son Ltd v Hulena unreported, 19/10/90, Master Williams QC, HC, Wellington, CP526/90).

6 However, the difficulty in the situation with which we are concerned would be in proving intention to defraud. In general it is said that the question of intent is one of fact and the courts seem willing to infer fraudulent intent from the surrounding circumstances. It is accepted that an intention to prejudice creditors by putting assets partially or wholly beyond their reach is an intention to defraud for the purposes of the section (Re Hale (a bankrupt) [1989] 2 NZLR 503, 508). But our search has not so far revealed a case which applies the principle to a person who is solvent at the time of the disposition and continues to be solvent for some time afterwards.

7 Causation is also an underlying factor in determining whether a debtor had the intention to prejudice future creditors. In terms of s 60, a creditor must have been prejudiced by the disposition in order to take an action. Some of the early English cases support the proposition that, if the necessary result of a disposition is to defeat a creditor' s claim, then the debtor must be taken to have intended this result (eg Freeman v Pope [1877] UKLawRpCh 103; (1870) 5 Ch D 538). The proposition was later rejected as being too broad (Re Wise, ex parte Mercer [1886] UKLawRpKQB 72; (1886) 17 QBD 290). It makes sense that there should be some link between an earlier disposition and any prejudice later suffered by a creditor. For example, what if a debtor makes a gift at a time when he or she is solvent and faces no immediate prospect of incurring liability but some years later the debtor becomes insolvent due to an unexpected happening (eg the discovery of substantial fraud by a fellow partner in a law firm)? In such a case it may be more logical to treat the untoward event, rather than the gift, as being the reason for the prejudice suffered by debtor' s creditors.

8 In its present form s 60 is not sufficiently clear and therefore does not provide a strong basis for attacking the type of dispositions with which we are concerned. See, however, para 29 for a discussion of the limited reform which the Commission is about to recommend.

Law and economics aspects

9 There is some literature containing analysis of fraudulent conveyance law from the perspective of laws and economics. There seem to be two theories. One, which is loosely labelled a " contractarian" account, asserts that, even if there were no fraudulent conveyance provisions, most debtors and creditors would agree to fraudulent conveyance provisions in their loan agreements anyway and therefore having the provisions enacted saves negotiation costs (Baird and Jackson,

" Fraudulent Conveyance Law and Its Proper Domain" (1985) 38 Vand LR 829). The other theory also favours fraudulent conveyance law but apparently on the basis of some sort of externality (Rose-Ackerman, " Inalienability and the Theory of Property Rights" (1985) 85 Colum LR 931). The problem identified is that, without fraudulent conveyance law, debtors would behave in an opportunistic manner by giving away their assets prior to bankruptcy.

10 However, the material brings out some points in relation to the broader costs and benefits to society of fraudulent conveyance law. A potential macroeconomic benefit is that, to the extent that creditors perceive that fraudulent conveyance law reduces the risk involved in lending, the law may result in a lower cost of credit. Against this, if fraudulent conveyance law is over-protective or unduly broad, it could potentially cause harm to the wider economy in the following ways:

⋅It may unduly restrict risk-taking on the part of those in business. However, any averseness to risk could be seen as a consequence of the duties and obligations imposed by the law generally (eg the provisions imposing personal liability on directors in the Companies

Act 1993) rather than a consequence of an extended fraudulent conveyance law. Nevertheless, this point may have some validity if fraudulent conveyance law is used to overturn corporate transactions. In the United States, fraudulent conveyance statutes have been used as a basis to attack leveraged buy-outs (see: Fogelson,

" Toward a Rational Treatment of Fraudulent Conveyance Cases involving Leveraged

Buyouts" (1993) 68 New York University LR 552).

⋅It may lead to greater reluctance and uncertainty in transactions between parties due to perceived risk of transactions being overturned. This is less of a concern in relation to commercial transactions because these would usually not have a prejudicial effect on creditors and would therefore tend not to be challenged. However, it certainly could be a concern in relation to transactions involving family members, friends, or other related parties

(ie non-arms length transactions) where the likelihood of challenge is greater.

⋅It would reduce the incentive for creditors to do the monitoring which they are capable of. This point really applies only to those creditors, such as banks, who have the ability to monitor their debtors. Ongoing monitoring is simply not feasible for many creditors, like small businesses, or for those to whom a debtor has incurred liabilities in tort or restitution.

11 A limitation of the material, for our purposes, is that it does not focus on the situation where the conveyances are mainly to the detriment of future rather than present creditors. Much of the analysis applies only in respect of voluntary creditors who give credit before the relevant conveyances are carried out.

Protection of the debtor' s family

12 There are important related questions as to whether the family of a debtor should be protected from the effects of debtor' s liability and if so how much protection should be given. The basic conflict here is between the interests of the debtor' s family in having their basic needs provided for and the interests of the debtor' s creditors in having their claims satisfied.

13 The provisions of the current law which provide protection for the family of a debtor are contained in the Matrimonial Property Act 1976 and the Joint Family Homes Act 1964. Section 20 of the Matrimonial Property Act gives each spouse a protected interest in the matrimonial home of

$58,000 or one half of the equity of the married couple in the home, whichever is the lesser. The interest of each spouse is protected against the unsecured personal creditors of the other spouse. The Joint Family Homes Act provides a similar level of protection for homes settled as joint family homes. In general terms, settlement puts the family home beyond the reach of unsecured creditors of either spouse to the extent that the home does not exceed a certain value ($58,000).

14 Section 20 of the MPA was introduced for the sole purpose of providing a modest degree of protection and security for the family (see NZ Parliamentary Debates, vol 408, 1975, 4567: Hon David Thomson) while the JFHA had, in addition, other purposes relating to the avoidance of death duties and giving equal rights of possession, enjoyment and ownership in the family home for each spouse.

15 There is a clear link between these provisions and issues relating to fraudulent conveyances because the motivation for many such conveyances (especially the kind with which we are concerned) is to protect the debtor' s family against the claims of the debtor' s creditors. The extent and adequacy

of the protection for the debtor' s family provided by the law (Matrimonial Property Act and the Joint Family Homes Act), then, needs to be examined. The extent to which these provisions are found to provide more or less protection than is needed would influence one' s view of how far creditors should be able to void dispositions made to protect the family of a debtor.

16 It seems that s 20 of the MPA (and maybe even the JFHA) and the policy behind it needs to be reviewed. One particularly unsatisfactory aspect is that these existing protections are unavailable where there is a de facto relationship. Also there are complexities in this area such as the interaction between the MPA and JFHA, and the possibility of a spouse being taken for some purposes as having an equitable interest in the matrimonial home over and above the protected interest provided for by the MPA. Any fundamental review along these lines would need to extend to the rules relating to the enforcement of judgment debts and bankruptcy, and how they resolve the competing claims of the non-bankrupt or non-debtor spouse and creditors.

17 The issues arising in this area are also linked to insolvency law, and it may be that the more fundamental policy questions should be addressed as part of the Justice Department' s planned review of insolvency. We need to consider whether it is possible to separate out certain defined issues relevant to fraudulent conveyances without unduly affecting the insolvency review.

Overseas law reform

Fraudulent conveyances generally

18 There are a number of law reform reports dealing with fraudulent conveyances. The most interesting one is that of the Ontario Law Reform Commission which deals with the topic as part of the law relating to the enforcement of judgments debts: Report on the Enforcement of Judgment Debts and Related Matters (1983) Pt IV. The Commission proposed a change in the approach of fraudulent conveyance law from focusing on the intent of the debtor to looking at the effect of the transaction. If a transaction has the effect of defeating, hindering, delaying, or defrauding creditors, then it can be impeached under the proposals. This is a significant change which would make it much easier for creditors to attack prior transactions of the debtor. Interestingly, the Commission also recommended that only existing creditors (those who became creditors before the relevant transaction) should have standing to apply to the court to impeach the transaction. The Commission took the view that, because those who become creditors subsequent to a transaction, or transactions, taking place could investigate the financial circumstances of the debtor before extending credit, they should be taken to have lent on the basis of the debtor' s financial position at the time. Even though that type of investigation is not feasible for all creditors, it was thought that the risk of debtors having divested themselves of their assets before incurring debt should be borne by these creditors.

19 The most substantial effort on fraudulent conveyances appears to be the Law Reform Commission of British Columbia Report on Fraudulent Conveyances and Preferences (LRC 94, January 1988). In comparison with the nature of the reform we are contemplating, the British Columbia proposals are very conservative. Therefore the report has limited utility for our purposes. The main aim of their reform was to modernise the Fraudulent Conveyance Act 1979 (BC). The provision proposed by the British Columbia Law Reform Commission is restricted in the following ways:

⋅at the time of the transfer the debtor must have been insolvent, rendered insolvent by the disposition, or been on the eve of insolvency;

^{⋅only present creditors may claim relief; and}

⋅relief must be claimed within one year of the transfer.

20 The Scottish Law Commission and the Australian Law Reform Commission have looked at fraudulent conveyance law in the context of insolvency law. The ALRC reviewed s 121 of the Bankruptcy Act 1966 (Cth) which relates to fraudulent dispositions (see ALRC, General Insolvency Inquiry R 45, Canberra, 1988, pp 280-283). The exercise was basically one of updating and improving aspects of the provision, and no major changes were proposed. The basic approach of requiring that the disposition be made with an intent to defraud is retained. To make it easier to prove such an intention, it was proposed that three further factors should be added to the matters which the court should take into account. These were:

⋅the debtor' s solvency at the time of, and immediately after, the disposition;

⋅ whether the debtor was engaged or about to engage in business for which the remaining assets were unreasonably small, and;

⋅whether the debtor intended or believed that debts would be incurred beyond his or her ability to pay.

(These factors correspond with the three situations of " constructive" fraud developed in the United

States law of fraudulent conveyances.)

21 The Scottish Law Commission report, Report on Bankruptcy and Related Aspects of Insolvency and Liquidation (SLC 68, Edinburgh, 1982) mentions fraudulent conveyance law briefly. The Commission proposes a provision for challenging, during insolvency, transactions for inadequate consideration.

The relationship between fraudulent conveyance law and professional liability

22 Professional liability is an area which needs to be considered carefully in relation to fraudulent conveyances. It relates closely to fraudulent conveyances because a common motive for disposing of one' s assets, in the situation with which we are concerned, is to protect oneself against potential liability as a professional. The situation of unlimited liability which some professionals (eg lawyers and accountants) face is often the main reason why professionals transfer their assets to a family trust or into the ownership of their spouses, children or relatives. Therefore, it is often in this context that the concern over the ability of individuals to shelter assets from their creditors arises. It should be noted that the reform which we are contemplating would considerably extend the reach of fraudulent conveyance law beyond what has been proposed in other countries.

23 There are a number of reports and discussion papers of various types which look at professional liability. An important theme underlying these reports is the question of what balance should be struck between the obligations of professionals and the rights of those they serve. Listed below is an outline of the important points to come out of these reports:

⋅The problem of unlimited liability faced by certain professions gives rise to:

-the threat of high damages awards, and

-insufficient professional indemnity insurance to cover all potential liability.

^{⋅The potential and actual effects of unlimited liability (especially if it stems from the collapse of a}

large firm) are:

-loss of people from the profession and (in the future) a reluctance to join partnerships;

-encouragement to divest oneself of one' s assets (fraudulent conveyances);

-defensive professional practices.

⋅Some proposed solutions are:

-statutory caps on liability;

-permitting limited liability incorporation;

-compulsory professional indemnity insurance.

⋅There is particular concern over the potential liability of auditors. (See Department of Trade and Industry, Professional Liability: Report of the Study Teams (1989) and Company and Securities Law Review Committee (Australia) Report to the Ministerial Council on the Civil Liability of Company Auditors (1986))

24 The New Zealand Law Society is looking at professional indemnity insurance and limitation of liability. The professional indemnity committee is working on a proposal for a compulsory professional indemnity scheme. In relation to limitation of liability, the NZLS committee is working with the New Zealand Society of Accountants on a joint proposal. They are looking at the options of statutory caps and limited liability incorporation. Developments in this area are taking place in Australia as well, with the New South Wales and Western Australian Parliaments considering legislation on statutory caps on liability.

25 We need to keep a close eye on these developments. In terms of policy, fraudulent conveyances cannot be divorced from questions of professional liability. Given that unlimited professional liability seems to be a strong motivating factor behind many conveyances, it may that any extension of fraudulent conveyance law would not be acceptable unless some limitation on professional liability were put in place. As indicated by the Wellington District Law Society seminars held in September last year, on protecting one' s assets, the view of many in the profession seems to be that transferring assets to family members or into a trust are justifiable means of protecting oneself from professional liability. When it is considered that this liability can arise through no fault, involvement or knowledge on one' s own part this attitude is understandable.

26 Fraudulent conveyance law does not increase a professional' s liability. It ensures that the liability will, if at all possible, be met out of assets which should properly be regarded as the professional' s property. Assuming that professional liability can be appropriately limited, there will still be a place for fraudulent conveyance law. It will apply to those who do not meet the legal conditions on which the privilege of limited liability is given; for example, a requirement that a debtor must act responsibly towards creditors if there is a risk of insolvency. Such conditions require a strong incentive - that is, an effective debt enforcement system - to ensure they are observed.

Protection of the debtor' s family

27 Some law reform reports have looked at issues relating to the protection of the debtor' s family from creditors. The California Law Revision Commission published a report, Recommendation relating to the Liability of Marital Property for Debts (1983). The report focuses on questions concerning the extent to which the community property and separate property of each spouse should

be available to satisfy debts owed separately by each spouse and those owed jointly. (There is a useful discussion of various systems utilised in different states). The Commission recommends continuing the " management" based system subject to certain exceptions to protect the basic needs of the spouses. Broadly, under this type of system a creditor can reach property over which the debtor spouse has management and control - in practice this generally means that a substantial amount of the separate property of each spouse can be accessed as well as the community property.

28 In Australia, the Family Law Council in its report, The Interaction of Bankruptcy and Family

Law: A Report to the Minister of Justice (Australian Government Publishing Service, Canberra, June

1992), looked at the conflicts arising between family law and bankruptcy law. The report examines how the law resolves the competing claims of the non-bankrupt spouse and family and the bankrupt' s unsecured creditors. In such situations, bankruptcy law and family law often apply simultaneously. The recommendations made were designed to identify and resolve these conflicts, and achieve a fair balance between the competing interests.

III OPTIONS FOR A PROJECT

Reform already proposed

29 To a limited extent, reform of fraudulent conveyance law is already being proposed by the Commission in ss 63 to 69 of the Commission' s draft Property Law Act (as part of the Commission' s project on rewriting the Property Law Act 1952), which are a rewrite of the current s 60. The new sections may perhaps make it somewhat easier to overturn a disposition because they specify the three situations of constructive fraud developed in United States fraudulent conveyance law and contained in the US Uniform Fraudulent Transfer Act. This means that it is not necessary to prove actual intent to defraud creditors if the elements of one of the constructive fraud situations can be proved. These situations are where the debtor, has made a disposition, and

⋅was insolvent at the time or became insolvent as a result of the disposition, or

⋅was engaged in, or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the nature of the business or transaction, or

⋅intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay. (Section 65)

This is an improvement on s 60 of the present Act because it makes explicit the situations in which the courts should infer an intent to defraud creditors. Nevertheless, the changes would not substantially change the existing law, but merely put into statutory form some of the common law glosses on the section. For example, the second situation described above is exactly the type of situation that existed in the case of Mackay v Douglas [1872] UKLawRpEq 96; (1872) LR 14 Eq 106 in which the court accepted that an intent to defraud should be inferred.

30 These changes may extend the reach of the law slightly but probably not enough to enable creditors to attack many transactions carried out before the risk of liability has arisen. A brief survey of the cases in the United States has not revealed any where the creditors have successfully obtained relief if dispositions were carried out at a very early stage or in the situation where assets are slowly " salted away" over a period of time.

Two options

31 The motivation, then, for a project in this area is to deal with the problem of individuals being able to protect themselves from the adverse effects of liability and harm the interests of their creditors by disposing of their assets. Set out below, in brief terms, are two ways of approaching a project in this area:

(1)Comprehensively review s 60 with a view to extending it considerably so that creditors may challenge dispositions of assets by a debtor which occur at an early stage or which take place over a period of time as part of a process of " salting away" , if the debtor and the debtor' s family continue to have access to these assets.

(2)Review s 60 as described in option (1) and, in addition, deal with the broad question of to what extent should assets be protected, against the debtor' s creditors, for the purpose of meeting the needs of the debtor' s family.

32 Option (1) is narrower and would involve focusing almost exclusively on fraudulent conveyance law. Option (2) is broader and would involve looking into matrimonial property law and insolvency law.

Option (1)

33 This option would focus on ways of extending s 60. One approach would be to introduce provisions which deem dispositions to family members or dispositions where the debtor retains the use and enjoyment of property to have been made with the intention of defeating creditors. Another approach would be to move away from intent as the basis for the provision and instead focus on the effect of a transaction, for example by providing that any transaction which has the effect of hindering, delaying, defeating or defrauding creditors may be challenged (as recommended by the Ontario Law Reform Commission).

34 This option would essentially involve evaluating which is the best method of extending s 60. The core issues or areas which would need to be considered are described below:

⋅How far back in terms of time should the law enable prior transactions of the debtor to be overturned? For instance should it be possible to overturn a transaction undertaken many years before the debtor incurred any liability? This involves deciding where to strike the balance between the interests of creditors in obtaining satisfaction of debts owing to them and the interests of debtors in being able to deal with their property

and plan their estates as they please.

⋅Should the law treat certain types of transactions differently? There are two aspects here:

-Some transactions, because of the surrounding circumstances, are more likely to be prejudicial than others and therefore may need to be treated differently under the law. Obviously, transactions between family members are an example of this.

-Exemptions may be justified in some cases, for example, for gifts given on customary occasions or in satisfaction of moral obligations. It may be possible to have

a general exemption for gifts given where the debtor does not retain any interest or control over the property gifted.

⋅The effect of overturning a transaction, on a third party who relies on its validity, will need to be considered. The effect will often vary according to the type of party involved. For example, the consequences maybe more severe for a private individual than for a company.

⋅Should a welfare provider (such as the Department of Social Welfare) have standing to apply under the section and, in addition, to share in the benefit if a creditor makes a successful application? The problem here is that benefits or legal aid may often be paid to someone who has deliberately disposed of their assets. In respect of welfare beneficiaries, s 74 of the Social Security Act 1964, gives the Social Security

Commission power to reduce or refuse to pay any benefit if an applicant has deprived himself or herself of property or income. We may want to investigate whether this provision effectively deals with the problem.

⋅In terms of the broader economic or societal effects, there are two aspects worth considering:

-Would an extension of fraudulent conveyance law cause undue uncertainty and insecurity because of an increased risk that transactions will be voided and if so what detrimental consequences would follow?

-How are debtors or potential debtors likely to respond? It may be that a change may simply encourage those whom we are aiming to catch to develop more sophisticated methods of protecting their assets from the effects of future insolvency.

Option (1): evaluation

35 The viability of this option depends on whether we can manage the link with the areas of professional liability and protection of the debtor' s family.

36 As already pointed out, the topic is closely linked with that of professional liability. Professionals who cannot limit their liability, or adequately insure against the contingency of liability, can at present make use of family trusts to insulate their families from some of the adverse consequences. These trusts are subject to the law of fraudulent conveyances, but it is unlikely that a trust of longstanding will be successfully attacked.

37 The balance would be upset if the law of fraudulent conveyances were significantly extended. Any proposal to do that, not made in conjunction with changes to the law of professional liability, could be strenuously opposed. This would increase the risk that any recommendations made by the Commission would not be enacted.

38 But the Commission should not attempt to deal with professional liability as part of the proposed project. It raises issues relating to the nature of the services which the various professions provide which are quite different from the types of issues which arise here. Including it here would change the focus of the project away from the original concern. We could proceed with option (1) on the assumption that problems in this area will be dealt with separately.

39 Similar comments apply in relation to the link with the need to provide some protection for

the debtor' s family. We cannot proceed with option (1) unless we know that the issues in this area and the current provisions (especially s 20 of MPA) are being reviewed. Many of the transactions with which we are concerned are intended as a means of protecting the debtor' s family in case the debtor incurs liability in the future. Therefore the extent to which the needs of the debtor' s family should be provided for and how to achieve the desired level of protection need to be examined. Presumably the Department of Justice is, or will be, dealing with this in the context of either matrimonial property or insolvency. Even then, we would need to consult with the Department on the substance of what they are likely to recommend because it could affect the type of provision we want to recommend. It may be that any proposals we make would need to be contingent on reform of s 20 of the MPA.

Option (2)

40 The reasoning behind option (2) is to address some of the more fundamental policy issues which have just been outlined and which must be taken into account in resolving the immediate problem. Defining the exact boundaries of this option is difficult because the issues relate to a number of different areas: matrimonial property, insolvency and the enforcement of debts. There does not seem be any one clearly defined area of law which we can focus on. Broadly this option would involve:

⋅Reviewing s 60 as described in option (1); and

⋅Reviewing the existing law relating to protection of the debtor' s family from creditors of the debtor.

We would need to:

-consider, in terms of policy, the extent of the protection which should be given the debtor' s family,

-review ss 20, 23 and 25 of the MPA, and

-review the procedures relating to the enforcement of debts and bankruptcy from the point of view of protecting the interests of the debtor' s family.

Option (2): evaluation

41 The advantages of this option are that the Commission would be able address some of the causes underlying the problem (ie inadequate protection for the debtor' s family) and explore some of the main policy issues underlying the problem.

42 The main problem with this option is that it would involve looking at parts of matrimonial property law and insolvency law, areas which are themselves in need of review. In terms of matrimonial property, we need to know whether the Department is planning a major review of the present system or merely improvements and updating (such as extending it to de factos). If the former is planned, then the Commission cannot proceed with this option because any provisions which provide for the needs of a debtor' s family must fit into and be part of the broader matrimonial property regime.

43 In terms of insolvency, this option would involve examining some of the procedures relating to bankruptcy. We would need to consult closely with the Department so as to clearly work out the

boundaries between our project and what the Department is doing or is planning to do on insolvency. It may be possible for us to look at certain clearly defined parts of the law in a way which fits with the Department' s wider review. This would require ongoing consultation.

IV SUMMARY

44 At this stage the project team has not come to a firm conclusion on whether the Commission should proceed with a project in this area and if so which option should be undertaken. The pros and cons of each option, as we see them, are summarised below.

Option (1)

Pros:

⋅The principle underlying s 60 is fundamental to the concept of personal liability. It has wider application than the corresponding provisions of bankruptcy law. Therefore it is appropriate to review this as a separate exercise from a review of the Insolvency Act

1967.

⋅The scope of the project and its purpose would be narrow and clearly defined. Therefore, it would be relatively small and could be done in a relatively short period of time.

⋅The project would not overlap with any reviews planned by the Justice Department in the areas of matrimonial property and insolvency.

Cons:

⋅We would not be able to look into closely related issues relating to protection of the family of a debtor and therefore we would not be able to deal with any of the causes underlying the immediate problem.

⋅Our proposals may be dependent on reform being undertaken in the relation to professional liability and matrimonial property.

Option (2)

Pros:

⋅This matter lies at the intersection of family law and insolvency law. Two opposed policies have to be reconciled, namely the policy of protecting the family and the policy of ensuring that debts are paid. These policies have a force of their own which are likely to be overemphasised in a review of either of the individual pieces of legislation (Insolvency Act 1967 and Matrimonial Property Act 1976). A more balanced

solution is likely if the matter is considered as a separate exercise.

⋅We would be able to look into issues relating to protection of the family and hence may be able to deal with some of the causes underlying the immediate problem for the law of insolvency.

^{⋅As a result of being able to look more broadly at some of the causes underlying the problem the}

quality of our proposals may be improved.

Cons:

⋅It would be difficult to clearly define the limits of the project.

⋅The project would overlap with the Justice Department' s planned review of matrimonial property law and insolvency law.

⋅Any proposals we would make which relate to protecting the family would need to be consistent with any reforms the Department may propose in the area of matrimonial property.

⋅As with option 1, our proposals may be dependent on reform being undertaken in relation to professional liability.