Binding Child Support Agreements during the Pandemic – Are they enforceable?

Background

The parties met and commenced their relationship in 2005, married in 2007 and separated in or around March/May 2012. They were divorced in 2014. The father is currently 47 years old and the mother is 42 years old.  They have one child together who is currently 11 years old.

When the parties met, the father was earning approximately $70,000 per annum.  In or around 2010, the father became a senior manager at a new company and was earning approximately $140,000 net of tax plus bonuses, shares and a car allowance of approximately $25,000 per annum.

After the parties separated, they entered into a Binding Child Support Agreement dated 16 April 2012., which provided for the father to pay, inter alia, the mother the sum of $1,350 per month by way of periodic child support. This amount was to increase at 2% at the beginning of each year staring from 1 January 2014.

In or around November 2013, the father was dismissed from his employment as a senior manager and commenced employment at another company some two years later.

During his new employment, the father’s role involved changing the structure of the business (”the company”). The company manufactures and supplies products to international businesses and 90% of this business was made up of manufacturing products for international business and 10% was supplying goods for local businesses via a local distributor.

On 4 June 2015, the father and his de facto partner (now wife) purchased the company for the sum of $30,000 and they inherited that company’s liabilities in that acquisition. After the purchase, the father did not receive an income but received dividend payments of approximately $80,000 from the company by way of “pro-rata loan payments”.

In or around 2016, the father made an application to set aside the agreement on the basis that his company had incurred significant debt. The mother contended that until COVID-19 the father’s company was turning over $6 million per annum.

Over the course of the matter, the father presented evidence from his financial advisor’s that the company had been “technically insolvent” which included net working capital deficiency, trading losses, creditor repayment arrangements, inability to access credit and lack of alternate sources of capital.

By the end of 2018, the father’s financial position was marginal notwithstanding his ability to address the immediate insolvency concerns of the company. In or around 2019, the company began to recover from its financial position.

When the pandemic hit, the father’s international manufacturing aspect of the company had been significantly impacted. By 27 March 2020, all international orders had been cancelled and he had to stand down over 100 casual employees. Only several employees were retained.

Due to this significant downturn in the profits of his business, the father filed an amended application to have the Binding Child Support agreement set aside pursuant to section 136 of the Child Support (Assessment) Act 1989 and he sought that any outstanding liabilities which have been accruing since his Initiating Application in 2016, be extinguished. The mother opposed the application.

Exceptional circumstances

Section 80CA(1) of the Child Support (Assessment) Act stipulates that a binding child support agreement must not be varied. However, pursuant to section 136 the Court may make an order to set aside a Binding Child Support Agreement, if the party who is making the application can demonstrate that there have been “exceptional circumstances” which give rise to the party (or the child) suffering “hardship” if the agreement is not set aside.

His Honour considered several cases when analysing whether the pandemic is an “exceptional circumstance” as well as the New Shorter Oxford English Dictionary definition of the word “exceptional” and the overall intention of the Child Support (Assessment) Act 1989.

His Honour noted that “it is not intended that binding agreements should be set aside lightly. This amendment restricts the scope for the setting aside of binding child support agreements, by specifying that exceptional circumstances relating to one of the children or parties to the agreement must have arisen since the making of the agreement, and that the child or party would suffer hardship if the agreement were not altered or set aside.” 

After careful consideration, His Honour decided that “exceptional” means “unusual” or “out of the ordinary or “unusual or extraordinary”, “special”, unique” or “uncommon” or “unprecedented” or “very rare” and it is something that is not “regularly or routinely or normally encountered”.

Hardship

His Honour then considered the meaning of “hardship” pursuant to section 44(3) of the Family Law Act (Cth) which states that hardship involves a“hardness of fate or circumstances; severe suffering or privation” or “a condition that bears hard upon one; severe toil, trial, oppression or need; to cause to suffer privations”.  His  Honour also referred to, inter alia, the decision of Aldridge J In the marriage of Whitford and Whitford [1979] FamCA 3; (1979) FLC 90-612 [78,144 to 78, 145]  where it was held that “hardship is “akin to such concepts as hardness, severity, privation, that which is hard to bear or a substantial detriment” and means “something more burdensome than ‘any appreciable detriment’”.

Arguments

The father argued that the abrupt closure of international commerce resulted in a loss of 90% of his business and believed that if the international borders did not open immanently, then he was likely going to liquidate his company and declare bankruptcy. On that basis, the father argued that the pandemic was an exceptional circumstance. The mother accepted that the pandemic sufficiently constitutes an exceptional circumstance.

In addition, the father argued that if the agreement was not set aside, that he would suffer significant hardship as he is unable to afford the child support payments due to the wife under the agreement. The father also argued that there was a substantial income disparity between the time that he entered into the agreement compared to his income in 2019.

Conversely, the mother argued that notwithstanding the financial difficulties of the father’s business, he and his now wife have continued to derive a significant income by way of drawings and loans from the company which have not been reflected in their personal financial documents.

Although, the mother agreed that COVID-19 was an exceptional circumstance, she argued that the agreement should be suspended for a period of time rather than set aside until the father’s company was back on its feet. The mother relied on the decision in Venson & Venson (No 2) [2010] FamCA 963 (“Venson (No 2)”) where Austin J “declined to set aside the child support agreement between the parties, on the facts before the Court in that case, but nonetheless held that the decrease in the profitability of the applicant’s company did warrant the child support agreement being set aside for a closed period of time. His Honour therefore, in effect, suspended the agreement for approximately three (3) years.”

The father agreed that the agreement should be suspended if the court did not consider that it was appropriate to set it aside.

Decision

His Honour held that the significant drop in the father’s income as a result of the pandemic was an exceptional circumstance which prevented the father from being able to fulfill his obligations to pay the agreed sum under the under the Binding Child Support Agreement and as a result, the father would suffer hardship if the agreement was not set aside.

His Honour considered the mother’s argument to suspend the decision, however given the absence of any evidence as to how long the impact of the pandemic would last and how that would effect the father’s international trade business, His Honour was unable to determine whether the father’s business would recuperate and he would be able to begin paying child support again at some time in the future. To that end, His Honour set the Child support agreement aside.

If you need assistance with your family law matter please contact the TLFC Family Law Team on 03 8600 9368 or 03 8600 9361 or email Justine Clark at [email protected] and Tina Deburiet at [email protected].