Transfers of property made pursuant to family law financial agreements can potentially be set aside by bankruptcy trustees under sections 120 and 121 of the Bankruptcy Act if certain conditions are met. Section 120 allows trustees to void transfers made within 5 years of bankruptcy for little or no consideration. Section 121 applies if the main purpose of the transfer was to prevent the property from being available to creditors or if the transferor was insolvent. While financial agreements are binding under family law, case law has established they can still be challenged under bankruptcy law. Trustees must consider the potential for subsequent family law claims over the property if a transfer is voided.

1. Article by Georgina King
Applying sections 120 and 121 of the Bankruptcy Act to transfers of property pursuant to family
law financial agreements
Sections 120 and 121 of the Bankruptcy Act 1996 (Cth) (Bankruptcy Act) provide an important avenue for
bankruptcy trustees to in appropriate circumstances setaside a transaction in which a bankrupthas transferred an
interestin property to another party before commencementofthe bankruptcy. For the reasons discussed below,an
area that warrants close attention in relation to sections 120 and 121 of the Bankruptcy Act is whether prior to the
bankruptcy the bankrupt party has entered into a financial agreement pursuant to the Family Law Act 1975 (Cth)
(Family Law Act).
Sections 120 and 121 of the Bankruptcy Act enable trustees in bankruptcy to have declared void transfers of
property:
(a) for no consideration or consideration ofless than marketvalue, which occurred within the 5 year
period leading up to commencement of the bankruptcy; or
(b) where the transferor's main purpose in making the transfer was to prevent the transferred
property from becoming divisible among the transferor's creditors, or to hinder or delay the
process of making property available for division among the transferor's creditors.
The Family Law Act enables parties to a marital or de facto relationship to enter into an agreement,referred to as
a financial agreement,which provides for the way in which all or any property and financial resources ofeither or
both parties is to be dealt with in the event of breakdown of the relationship.The Family Law Act does notimpose
any restriction or requirements on the terms parties mayagree on for how their property is to be dealtwith and the
agreementdoes notrequire courtapproval or any court order to make it binding on the parties.This means thatat
the point of entering into a financial agreement,parties have complete discretion and freedom to agree that some
or all of the property of one party will be transferred to the other party. Such agreements can also be entered into
at any stage either prior to or following breakdown of the relationship.
Given the nature of financial agreements and the discretion parties have regarding the terms,a transfer ofproperty
pursuant to a financial agreement by a party that later becomes bankrupt can easily have characteristics which
render it voidable under sections 120 and 121 of the Bankruptcy Act.
Importantly, despite the sometimes difficultinteraction betweenfamilyand bankruptcylaw and the fact that financial
agreements are given the status of being binding and can only be set aside in certain circumstances under the
Family Law Act, case law establishes that a transfer of property under a Family Law Act financial agreement can
be challenged by a bankruptcy trustee pursuantto sections 120 and 121 of the Bankruptcy Act. Furthermore,it is
not necessaryfor the bankruptcy trustee to challenge or s eek to setaside the financial agreement itselfin order to
rely on sections 120 and 121 to challenge a transfer made pursuant to a financial agreement.
Section 120
The application ofsection 120 to transfers under financial agreements has existed since legislative amendments in
2005 removed the exclusion offinancial agreements from thatsection.Since thattime a transfer in accordance with
a financial agreement will be void against the trustee in bankruptcy if it was done for no consideration or
consideration ofless than marketvalue and it occurred within the period of 5 years prior to commencementofthe
bankruptcy. Given that, as established bycase law,consideration for the purposes ofsection120 is to be assessed
having regard to the normal legal and commercial understanding of that term and not by reference to parties'
contributions to a relationship or the fact that a party has given a forbearance to sue in a financial agreement, a
transfer pursuant to a financial agreement within 5 years prior to commencement of the bankruptcy, will often
potentially fall within the provisions of section 120.
Section 121
A transfer pursuant to a financial agreement will fall within the provisions of section 121 if a person that believes
they are going to or could become bankrupt, enters into a financial agreement with the main purpose of keeping
property transferred under the agreement out of reach of the party's creditors. In this regard it is significant that,
while not the only circumstance in which action under section 121 will succeed, a presumption that the transferor's
main purpose was ofthe type referred to above will apply if it can reasonablybe inferred from all the circumstances
that at the time of the transfer the transferor was, or was about the become, insolvent.
It is importantto note that section 121 sets out a defence whereby a transfer will not be void under that section if
the transferee gave consideration of at least market value for the transfer, and at the time of the transfer the

2. transferee did notknow or could notreasonablyhave inferred certain matters aboutthe mainpurposeofthe transfer
and about the transferor being,or being aboutto become,insolvent. However, while it is importantto be aware of
this potential defence,the defence will frequently not be available given each of the cumulative requirements that
must be met to make out the defence.
Transfer to third party
An issue that will sometimes arise in respect of action by a trustee to challenge a transfer pursuant to a financial
agreement is thatby the stage of potential action by the trustee,the property may have been transferred on by the
non-bankrupttransferee to a third party. This raises the issueofwhether the property may still be recovered by the
trustee.Significantlyin this regard,while sections 120 and121 provide protection to a personwho acquires property
from the transferee in good faith for consideration ofatleastmarketvalue, case law establishes thatthe trustee will
still have a potential claim againstthe non-bankrupt party to the financial agreement for recovery of the proceeds
of the sale to the third party.
Subsequent family law claim over property
A key overall issue to keep in mind in respect of challenging a transfer under a financial agreement is potential
action by the non-bankruptparty in response,to asserttheir rights to the bankrupt's property under the Family Law
Act. Given that once a transfer of property is found to be void, the property the subjectofthe transfer is deemed to
be property vested in the trustee, that property could potentially then be the subjectof a claim by the non-bankrupt
party for an order under the Family Law Act altering the interests ofthe bankruptcy trustee in the vested property.
Whether the non-bankrupt party is likely to take such action, and whether they are likely to succeed in obtaining
such an order, are matters to be taken into account in considering potential action to challenge a transfer under a
financial agreement.
Conclusion
In summary of the above, family law financial agreements entered into by parties prior to one party becoming
bankrupt,warrantclose attention.Transfers ofpropertypursuantto such agreements maybe voidable for a number
of reasons.There are a number ofissues to keep in mind in consideringaction to setaside transfers under financial
agreements however in some circumstances action to have the transfers setaside will be an appropriate measure.
For further information please contact:
Georgina King, Principle, Insolvency and Commercial Litigation
Phone: + 61 2 8226 8772
Email: gk@bre.com.au
Important Disclaimer: The material contained in this publication is intended to prov ide a general guide to the subject matter and is not and nor is it
intended to be adv ice on any specif ic prof essional matter. The ef f ectiveness and accuracy of any prof essional adv ice depends upon the particular
circumstances of each case, and neither the f irm nor any indiv idual author or authors of this publication accept any responsibility f or any acts or
omissions resulting f rom reliance upon the content of this publication.