How does the Family Court treat parties’ debts and what happens when there is nothing left?
In some cases, parties reach the end of a relationship with significant debt. They may have enjoyed life too much. This situation can make dividing assets difficult, especially when business interests are involved.
The recent decision of the Federal Circuit and Family Court of Australia (Division 1) in Oldham & Krantz (No 2) [2024] FedCFamC1A 238 highlights why parties must distinguish between personal and corporate liabilities in property settlement proceedings.
This case shows how attributing a company’s tax debt to the parties personally caused a major legal error at trial. This error led the court to set aside the original orders on appeal.
If you need assistance with your family law property matter or debt issue, contact Rowan Skinner & Associates Lawyers, accredited family law specialists.
How does the joint ownership of a corporation between two parties affect separation proceedings?
Mr Oldham and Ms Krantz were in a de facto relationship from approximately 2011 until their separation in May 2019. In August 2019, Mr Oldham started property settlement proceedings under Part VIIIAB of the Family Law Act 1975 (Cth).
A central asset in dispute was Mr Oldham’s shareholding in a corporation used to run a small business. The corporation owed money to the parties themselves but also had a significant tax and bank debt. The trial judge determined the corporation had no value.
How does a corporation’s tax debt affect the calculation of the net asset pool in separation proceedings?
The trial judge found both parties had made equal contributions to the relationship and decided no adjustment under the Family Law Act was necessary.
However, a critical issue arose in how the judge treated the corporation’s tax debt. The corporation owed the Australian Taxation Office (ATO) about $170,628. Although the judge acknowledged that the debt was initially a liability of the corporation, he treated it as if it were a personal debt owed jointly by Mr Oldham and Ms Krantz.
This treatment reduced the net asset pool available for distribution. Since no assets remained once this debt was counted, the judge concluded the proceedings were “nugatory.”
The judge ordered that proceeds from the parties’ jointly owned property and joint savings first pay off the tax debt. Any remaining funds would repay other personal liabilities.
Can a corporation’s debt be attributed to personal liabilities?
Mr Oldham appealed. Many of his grounds were poorly articulated and lacked substance, but the Full Court found a clear legal error that required correction.
The Court held the trial judge erred by attributing personal liability to the parties for a debt that belonged solely to the corporation. The Full Court explained:
“Such an admirable objective [of ensuring revenue laws are not evaded] must be distinguished from fixing parties with legal liability for the debts of third parties which could never be attributed to them at law.”
The Full Court criticised the primary judge’s reasoning. There was no legal basis for treating the corporate tax debt as a personal liability. The Court stated clearly:
“The corporation’s tax debt could never be the parties’ debt in any circumstances. It was and would remain the exclusive liability of the corporation.”
By misattributing the debt, the parties lost at least $170,628 in cash, which they could have used to pay their own debts.
The Court also noted a similar error in Pavlic & Pavlic [2023], where the primary judge incorrectly treated a company’s tax debt as a personal liability, and the Full Court overturned that decision too.
How does the Family Court resolve matters immediately and redistribute property?
Instead of sending the matter back to the trial court, the Full Court re-exercised discretion under Part VIIIAB of the Family Law Act. The Court adopted the primary judge’s findings on equal contributions and applied proper legal principles to redistribute property.
The Court reassessed the parties’ financial positions:
- Mr Oldham (Appellant):
- Assets: $167,600 (including his share of property sale proceeds, joint savings, and car proceeds).
- Debts: $120,000 (excluding corporate tax debt or interveners’ debts).
- Net Property: $47,600.
- Ms Krantz (Respondent):
- Assets: $123,600 (including her share of sale proceeds, joint savings, a car, and a watch).
- Debts: $13,000.
- Net Property: $110,600.
To equalise the property division, the Court ordered Mr Oldham to receive $63,000 from the sale proceeds of the jointly owned property, with remaining proceeds and savings divided equally.
The Court clarified that personal debts must be paid from each party’s share, including prior consent order debts. The appellant had to indemnify the respondent against any liability related to the company.
Each party kept their personal chattels.
Final orders and what this appeal means for you
The appeal succeeded. The orders made on 23 May 2024 were set aside, and new orders reflected a proper, legally accurate property division. No costs were ordered, as both parties represented themselves.
This case reminds us that:
- Courts must respect the legal distinction between personal and corporate debts.
- Mischaracterising third-party liability can drastically affect property division.
- Even self-represented parties will benefit from court intervention where clear legal errors exist.
How we can help
At Rowan Skinner and Associates Lawyers, we support clients navigating complex property settlements, including business assets or liabilities. If you’re unsure how your financial structure might affect your settlement, we can help you understand your position and protect your entitlements.
If you are struggling, call our team at (03) 9995 9155 for a non-obligation discussion. We service clients in Melbourne, Melbourne Northern Suburbs, such as Northcote, Alphington, Carlton, Fitzroy, North Fitzroy, Kew, and Heidelberg, as well as South Melbourne and South Yarra.
Case: Oldham & Krantz (No 2) [2024] FedCFamC1A 238 (16 December 2024)
Rowan Skinner is a highly skilled family lawyer with over 35 years of experience across various legal roles and jurisdictions. Rowan specialises in resolving family law disputes such as divorce, financial settlements, child custody and domestic violence cases. Through his diverse and extensive experience, Rowan has a deep understanding of the complexities and nuances involved in family law. Rowan is a skilled negotiator and litigator who follows a compassionate and client-focused approach which prioritises helping you navigate what can be an emotional and challenging time.