Can Consent Orders Be Set Aside Because of the Failure To Notify a Significant Third Party Creditor of the Forthcoming Proceedings?

If both parties to consent orders conspire to suppress the existence of a third party debt in their application for orders, what is likely to be the outcome? 

In the case discussed below, a deception was perpetrated by a husband and wife to defeat a rightful claim by a creditor of the husband.

Normally non-disclosure impacts the relative position of the two parties involved. However, in the circumstances posed, neither party is being disadvantaged relative to the other, and neither party would be looking to have the consent orders set aside. Nevertheless, failure to disclose such a material fact means that the consent orders have been obtained on false information, in this case, for the purpose of avoiding a creditor’s claim. Such an act will potentially justify an order that varies or sets aside the consent orders.

Case example

In the recent case of Cantrell & North & Anor (2020) FamCAFC 175, the Full Court of the Family Court heard an appeal in which a couple had entered into consent orders which transferred the former matrimonial home to the wife alone. The NSW Supreme Court later declared that the transfer was void against a creditor of the husband under s37A of the Conveyancing Act 1919 (NSW) and set aside the orders.

The creditor was owed $381000 plus interest by the husband. The debt referred to a commercial litigation judgment against him. The consent orders meant that he no longer had any property in Australia. The wife retained the matrimonial home where she had lived for 20 years. In their application for consent orders, the couple had stated that there were no creditors entitled to become a party to the proceedings.

The Supreme Court ordered the appointment of a receiver to sell the matrimonial home. The wife argued that the Court was wrong in setting the consent orders aside because it had not considered whether the same orders would have been made, having taken into account her homemaking and welfare contributions if proper disclosure had been made at the time. 

Appeal

In her appeal, the wife argued that the Court could only act if the orders that should have been made, based on proper disclosure, would have resulted in substantially different orders to those that were made.

What did the Full Court decide?

The Full Court did not accept the wife’s contention that they must consider what orders would have been made had full disclosure been made. This was because the “creditor had been deprived of his or her right to intervene in the proceedings and assert whatever rights they might have”. If the Court has been misled, then the orders “made ... on a false basis ... cannot be permitted to stand”.

Procedural fairness

As regards procedural fairness, the Court reiterated that a significant creditor or claimant must be given notice of any property settlement proceedings. This is essential so that they may exercise their rights. 

If a creditor has not received notification of the “proceedings and where the debt has not been disclosed to the Court, thus affecting the right to recover it, the process leading to the consent orders being made is ... invalid and unacceptable”.  Neither is it acceptable or appropriate that the Court should be used as “the vehicle by which the legitimate rights of third party creditors should be defeated or delayed”.

Was there a miscarriage of justice?

In assessing whether there had been a miscarriage of justice, the Full Court suggested that making a comparison between the orders made and those that might have been made given full disclosure may be involved. However, the “denial of procedural fairness of the kind just discussed”, by not providing a substantial creditor notice of the proceedings, is sufficient in itself to amount to a miscarriage of justice justifying the setting aside of the original orders.

The appeal was dismissed by the Full Court.

The importance of full and proper disclosure

When making an application for consent orders, both parties must make full and proper disclosure. This includes any material debts or claims against them by a third party. 

Ensuring procedural fairness

To ensure procedural fairness, any significant claimants should be given notice of the property settlement proceedings. The claimant then has the opportunity to delay the proceedings or obtain an order that acknowledges their rights.

Failure to disclose significant debt

Failing to disclose a significant debt can result in wrongfully obtained consent orders and can meet the statutory criteria to vary or set aside the orders. 

The Court did accept that there was precedent supporting the wife’s contention that, in many cases of non-disclosure, the Court ought to consider whether it has made sufficient impact on the orders. However, these cases have involved non-disclosure between the parties, rather than collaboration between them, so as to defeat a third party owed a substantial sum by one of the parties.

Denial of procedural fairness

In sum, a substantial creditor must be given proper notice of the application for orders, so they have the opportunity to protect their rights. Failure to do so amounts to the denial of procedural fairness by taking away their right to recover the debt owed to them. Such a failure to disclose and notify the creditor can result in a miscarriage of justice that warrants the setting aside of the consent orders.

In general, the disclosure responsibilities can be a complex area of law and expert advice is recommended. There are potentially significant consequences and sanctions if it is later found that any aspect of disclosure was materially incorrect, including the possibility of consent orders being set aside.

Contact our Family Lawyers in Sydney, NSW

Szabo & Associates Solicitors are experts in all matters relating to family law and are here to help with all aspects of your property settlement. Please contact us if you wish to discuss your duty of disclosure, or need advice on formalising your agreement. Complete the online contact form or call us on 02 9281 5088.