Creditors vs Property (Relationships) Act claims – who should win?

In reviewing the Property (Relationships) Act 1976 (PRA), the Law Commission is asking whether reform is needed to achieve a fairer balance between the rights of creditors and the rights of partners.

So far the response has been thin, although any change affecting creditor rights could have significant implications. These include a need for more comprehensive due diligence upfront or – potentially – for creditors to make claims through the Family Court.

We urge you to engage. Submissions close on 7 February.

Current position

Creditor rights are now largely unaffected by the operation of the PRA. With some specific exceptions, a creditor’s partner’s claim does not compete with, or override, a creditor’s rights to recovery. Equally, a creditor cannot gain the benefit of a debtor’s rights to assets under the PRA.

The Law Commission acknowledges in its issues paper that it has found “little criticism” of this position in its research and preliminary consultation. It also accepts:

  • there are “obvious merits” to upholding creditors’ rights as they will usually have provided goods or services to either or both relationship partners for which they are entitled to payment, and
  • any change to the status quo could have significant implications, including affecting lenders’ credit practices.

These comments suggest that the Commission’s appetite for reform in this area is limited. However, it does ask whether the “absolute priority” now accorded to the creditor’s interests might cause “unfairness” in certain circumstances and whether some rebalancing is desirable. It also asks whether creditors ought to be better protected against transfers that defeat their interests.

The current exceptions

The PRA, in its present form, affects creditors in the following ways:

  • a non-debtor partner has a protected interest in the family home of up to $103,000. Clearly that sum has not kept up with inflation
  • a notice of claim under the PRA can be lodged on the title to land, with a similar effect to a caveat. Security and other interests in the land that were created before the notice remain effective, but interests created after the notice are subject to the claim, and
  • transactions, including agreements between spouses or partners in a relationship, can be prevented or set aside if their purpose or effect was to defeat creditors. However, a time limit applies in some cases.

Unfairness to partners?

The Commission discusses M v ASB. The non-debtor partner had obtained an occupation order in the Family Court. But the notice on the title intended to protect that order was ineffective against the bank; the Court of Appeal held the bank could sell as mortgagee.

The bank’s mortgagee sale was not a transaction intended to defeat creditors, and the bank’s rights arose before the claim by the non-debtor partner.

The Commission asks whether it is fair that a secured creditor should take the full benefit of its security in circumstances where the mortgaged house, owned in one partner’s name, is a family home.

It acknowledges that changes should not be made “lightly”. Allowing family home status to override the rights of a mortgagee holding a registered mortgage may lead to greater cost and complexity in many lending situations.

Unfairness to creditors?

The Commission also identified a potential unfairness to creditors. The Supreme Court, in Felton v Johnson, ruled that creditors must apply to set aside agreements within two years of them being made. The time limit applies where the agreement has the effect of defeating creditors, where that was not the parties’ purpose. That is a different rule to the usual procedure for setting aside transactions that defeat creditors. Ordinary claims, under the Property Law Act, may be made within 6 years; the usual limitation period.

Should the Act (section 47) be changed to protect creditors?

Specific consultation questions

The specific questions asked by the Commission are below, but feedback does not need to be limited by these:

  1. Is the way the PRA treats creditors appropriate or are there specific problems that justify reform?
  2. Should the PRA continue to provide a partner with a protected interest that takes priority against the other partner’s unsecured creditors?
  3. If so, should the protected interest apply to the family home or to relationship property generally?
  4. What should be the extent of the protected interest?
  5. Should the PRA continue to provide partners with the ability to lodge notices of claim in respect of land in which they claim an interest? Why or why not?
  6. Should section 47(2) continue to operate as a limitation period so that creditors must challenge an agreement within a two year period after the agreement was made? Why/why not?
  7. What is the best option for the reform of section 47(2)?
  8. Should a partner’s rights under a settlement agreement take priority over the rights of unsecured creditors?
  9. Are there any circumstances in which a partner’s rights under a settlement agreement should or should not take priority?
  10. If a partner’s rights under an agreement should prevail over creditors, which of the options described by the Law Commission is preferred? Should, for example, the ordinary law of insolvency apply?

Submissions

Submissions can be made online, by email or by post. For details see the Law Commission’s website by 7 February 2018.

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