How does the Family Court treat parties’ debts and what happens when there is nothing left?
In some cases, parties can get to the end of a relationship and they are significantly in debt. Possibly, they have enjoyed life too much. This can lead to difficulties in dividing assets, 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 the legal importance of properly distinguishing between personal and corporate liabilities in property settlement proceedings.
This case illustrates how incorrectly attributing a company’s tax debt to the parties personally led to a significant legal error at trial, which ultimately resulted in the original orders being set aside on appeal.
In the event that you need assistance with your family law property matter and debt issue, we suggest that you contact us at 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 initiated 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 as a vehicle to conduct a small business. Although the corporation was owed money by the parties themselves, it also carried a significant tax debt and bank debt, causing the trial judge to determine that 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 that both parties had made equal contributions to the relationship and determined that no adjustment under the relevant provisions of the Family Law Act was necessary.
However, a critical issue arose in how the trial judge treated the corporation’s tax debt. The corporation owed the Australian Taxation Office (ATO) approximately $170,628. Despite acknowledging that the debt was “in the first instance” a liability of the corporation, the trial judge treated it as if it were a personal debt owed jointly by Mr Oldham and Ms Krantz.
This treatment significantly reduced the net asset pool available for distribution. On the basis that no assets remained once this debt was accounted for, the judge concluded the proceedings were “nugatory”.
The judge ordered that the sale proceeds from the parties’ jointly owned property, along with joint savings, be applied first to discharge the tax debt, with any remaining funds to be used to repay other personal liabilities.
Can a corporation’s debt be attributed to personal liabilities?
Mr Oldham appealed the decision. Although many of his grounds of appeal were poorly articulated and lacked substance, the Full Court identified a clear legal error that warranted intervention.
The Court held that the trial judge had erred in law by attributing personal liability to the parties for a debt that belonged solely to a third party: the corporation. As 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 was critical of the primary judge’s reasoning, noting that there was no legal basis for treating the corporate tax debt as a personal liability of the parties. The Court stated unequivocally:
“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 were wrongly deprived of at least $170,628 in cash, which could otherwise have been used to pay down their own personal debts.
The Court also noted that a similar legal error had been made in the recent case Pavlic & Pavlic [2023], where the primary judge incorrectly treated a company’s tax debt as a personal liability of the parties and the decision was also overturned by the Full Court.
How does the Family Court resolve matters immediately and redistribute property?
Rather than sending the matter back to the trial court, the Full Court re-exercised the discretion under Part VIIIAB of the Family Law Act. The Court adopted the primary judge’s findings regarding the parties’ equal contributions and applied proper legal principles in redistributing the property.
The parties’ financial positions were reassessed as follows:
- Mr Oldham (Appellant):
- Assets: $167,600 (including his share of real property sale proceeds, joint savings, and car proceeds).
- Debts: $120,000 (excluding any liability for the company’s tax debt or debts to interveners).
- 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 that Mr Oldham receive $63,000 from the sale proceeds of the jointly owned real property, with the remaining proceeds and joint savings divided equally.
The Court also made it clear that the parties’ personal debts were to be paid from their respective shares, including debts owed under prior consent orders. The appellant was required to indemnify the respondent against any liability relating to the company.
Each party retained their personal chattels.
Final orders and what this appeal means for you
The appeal was allowed, the orders made on 23 May 2024 were set aside, and new orders were made to reflect a proper, legally accurate division of property. No costs were ordered, as both parties were self-represented.
This case is a clear reminder that:
- Courts must respect the legal distinction between personal and corporate debts.
- Mischaracterising a third-party liability can drastically and unfairly affect a property division.
- Even when parties represent themselves, the Court will intervene where there is clear legal error.
How we can help
Here at Rowan Skinner and Associates Lawyers, we support clients navigating complex property settlements, especially those involving business assets or liabilities. If you’re unsure about how your financial structure might affect your settlement, we’re here to help you understand your position and protect your entitlements.
If you are struggling with your current situation, 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.