Third parties, family companies and the Family Court
Where a company is wholly owned and controlled by a party or parties to a relationship, the long reach of the Family Court’s powers as between the parties is sufficient in most instances to regulate and direct the parties’ operation of the company and to adjust the parties’ proprietary interests in the family company.
The Family Court has the power to restrain a party from using his or her powers of control over a company to the detriment of the other party to the relationship. Part of the reason the Family Court has been given this power is to ensure that one of the parties does not unilaterally embark upon a course of conduct with the sole purpose of diminishing the pool of assets available for division between the parties in a property settlement.
If necessary, this can extend to issuing of an injunction requiring a party to exercise his or her powers of control over a company in a particular way. The purpose is to protect the interests of the other party to the relationship.
Invariably, this may affect or interfere with the rights of unrelated third parties.
An example of this is where, in one case, a party to a marriage was successful in obtaining an injunction retraining her husband from exercising his voting rights as a director and shareholder of a family company to sell the matrimonial home which the company owned. The fact that such an injunction might affect the duties the husband owed to third parties such as company creditors, in his role as company director, did not stop the Court making the Order.
However, the Family Court’s power where unrelated third parties have an interest in a family company are limited. In this regard, the Family Court cannot make an Order:
1. where its effect will be to deprive the third party of an existing right; or
2. that imposes on such a party, a duty which the party would not otherwise be liable to perform.
These limitations are necessary to ensure that third party interests are not treated as subordinate to the interests of a party to the relationship. They are also necessary to ensure that Family Court Orders do not operate to the detriment of the legitimate interests of the third party where they clash with or come up against the interest of a party to the relationship.
As such, the Family Court’s ability to deal with family companies involving third party interests will generally include (but will not be limited to):
1. setting aside transactions that are designed to defeat a claim by a party to the relationship (pursuant to section 106B of the Family Law Act);
2. making a finding that a third party is the alter-ego of a party to the proceedings;
3. making a finding that the third party is a sham brought into being in appearance rather than reality as a device to assist one party to evade his or her obligations under the Family Law Act;
4. making a finding that the third party is the puppet of a party to the marriage/de facto relationship (for example, where the company is completely controlled by one party to the relationship) so that in reality, an order against the company is an order against the party;
5. granting injunctive relief;
6. making orders against the third party if the third party is in effect, an accomplice of a party to the relationship whose actions are designed to assist one spouse and disadvantage the other; or
7. making a declaration (pursuant to section 78 of the Family Law Act) that the spouse be declared the equitable owner of certain property held by the company.
In summary, if the alleged rights, powers or privileges of a third party are merely a sham, brought into being in appearance rather than reality, or are created as a device to assist one party to evade his or her obligations under the Family Law Act 1975, the transaction may be disregarded. The Court may also Order an injunction to restrain the third party from activity in a certain way to ensure that the rights of the party to the relationship are not affected detrimentally.
Similarly, if a company is completely controlled by one party to a marriage, so that in reality an order against the company is an order against that party, the fact that in form the order appears to affect the rights of the company will not necessarily invalidate that Order.
It is important that parties who own and operate a family company are aware of their obligations and duties when the Family Law Act is enlivened by a separation and property settlement. It is even more important for each party to be aware that the Family Court has the powers to make Orders that can affect companies and related third party interests.
For further advice regarding how your rights or the rights of third parties may be affected by family law proceedings, please contact the team at Damien Greer Lawyers.