The risk of lending to parties in a relationship

Relationship breakdowns very often throw up taxation issues and not only as a result in a redistribution of assets between the separated parties. These taxation issues are not always obvious to the parties and can surface after a property settlement has been finalized. Failure to deal with all taxation issues at the time the assets are being divided can have disastrous consequences for either one or both of the parties.

The married woman’s special equity is a principle enunciated by the High Court in the 1939 case of Yerkey & Jones. The later case of Garcia v National Bank of Australia has ensured its survival such that it is still good law.

The case of Valla & Buchanan & Ors earlier this year was a test of this principle. While it was ultimately a win for the bank, it is a timely reminder to credit providers of the very wide reach of the third party provisions of the Family Law Act.

In this case, the husband and wife had been customers of a bank for many years and operated a business together. They, in conjunction with the husband’s parents had bought and sold a number of properties with husband’s parents over a number of years.

In mid 2008, the parties sold one of the properties they owned in their own right. They used the proceeds to reduce their debt to the bank and in December 2008 sought approval from the bank to have the husband’s parents removed as guarantors and the parents’ home released as security. The security previously provided by the parents was to be transferred to the parties’ home. The parties also sought an increase in their loan facility that was to be secured by their home.

The bank agreed and the husband and wife signed the security and loan documents for these changes in December 2008. The bank then increased the loan facility that was now secured by the parties’ home. The husband then withdrew $550,000 and used it to repay the loan from his parents. He did this without the wife’s prior knowledge.

By early 2009, the parties fell into arrears with the loan repayments and the bank commenced recovery proceedings in July 2009. The wife then applied to the Family Court for an injunction against the bank to prevent it from proceeding with its recovery proceedings.

The wife also sought an order that the bank release the mortgage registered over the family home and release the wife from any liability regarding the loan. The wife argued the Garcia defence. She claimed she did not know what documents she signed in December 2008 and that the bank acted unconscionably by not explaining the effect of the documents she was signing and not offering her the opportunity to obtain independent legal advice.

The wife also alleged an alternative claim that the husband had unduly influenced her to sign the documents.

The wife succeeded with her application for the injunction against the bank at the interim hearing. The bank chose not to appeal this decision.

At the final hearing the Court made a number of findings in relation to the credibility of the evidence the wife gave at trial. The Court accepted the evidence of the bank officers and the husband and rejected the wife’s evidence. The Court found that the wife was well aware of the nature of the transaction and its purport and effect.