Adamson & Korac (No 2)
[2022] FedCFamC1F 638
Federal Circuit and Family Court of Australia
(DIVISION 1)
Adamson & Korac (No 2) [2022] FedCFamC1F 638
File number(s): SYC 4996 of 2019 Judgment of: CAMPTON J Date of judgment: 26 August 2022 Catchwords: FAMILY LAW – PROPERTY – Application in a proceeding to join the husband’s partner (or former partner) and a company as parties to the proceedings, and to have that company valued by the single expert forensic accountant – Where the wife contends that the husband’s partner (or former partner) operates the relevant company for the benefit of the husband – Where the wife discloses a prima facie arguable claim against the proposed additional respondents that could not be said “fanciful” – Where the costs of the valuation report is to be shared in unequal proportions between the parties. Legislation: Evidence Act 1995 (Cth) ss 50, 140
Family Law Act 1975 (Cth) ss 78, 79
Federal Circuit and Family Court of Australia (Family Law) Rules 2021 rr 2.50, 3.01
Cases cited: Adamson & Korac [2022] FedCFamC1F 528
Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34
Ebner & Pappas (2014) FLC 93-619; [2014] FamCAFC 229
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55
Hadjiloucas v Crean [1988] 1 WLR 1006
Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] [2010] WASC 223
Mais v Reid (1899) 5 ALR 202
Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265
Sharment Pty Ltd v Official Trustee in Bankruptcy (1998) 18 FCR 449
Stanford & Stanford (2012) 247 CLR 108; [2012] HCA 52
Wayne & Dillon & Anor [2008] FamCAFC 204
Whitford & Whitford (1979) FLC 90-612
Division: Division 1 First Instance Number of paragraphs: 76 Date of hearing: 10 August 2022 Place: Sydney Counsel for the Applicant: Mr Sweeney Solicitor for the Applicant: Farrar Gesini Dunn Counsel for the Respondent: Ms Lioumis Solicitor for the Respondent: Family Law Practice Australia Pty Ltd Counsel for the second and third respondents: Mr Stapleton Solicitor for the second and third respondents: Lander & Rogers ORDERS
SYC 4996 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MS ADAMSON
ApplicantAND: MR KORAC
First RespondentC PTY LTD
Second RespondentMS B
Third Respondent
order made by:
CAMPTON J
DATE OF ORDER:
26 AUGUST 2022
THE COURT ORDERS THAT:
1.The wife be granted leave pursuant to Pt 2.8 of the Federal Circuit and Family Court of Australia (Family Law) Rules2021 (Cth) to amend her final relief in accordance with her proposed Further Amended Initiating Application, being Exhibit 2, such Further Amended Initiating Application to be filed and served within seven days of the date of these Orders.
2.Pursuant to Pt 3.1 of the Rules, C Pty Ltd (“C Pty Ltd”) be joined as second respondent to these proceedings and Ms B be joined as third respondent to these proceedings.
3.The each of the husband, the second respondent and third respondent file and serve any Response to the wife’s Further Amended Initiating Application, including their points of defence, within 14 days of the wife’s compliance with Order 1 herein.
4.By consent, as between the wife, the second respondent and the third respondent, and absent objection by the husband, orders are made in accordance with Exhibit 10, as follows:
(a)Save in the normal course of business (and then only on 14 days prior notice to the Wife), the third respondent in her personal capacity and in her capacity as director of C Pty Ltd, be and is hereby restrained from:
(i)Selling, disposing, transferring, gifting, encumbering or otherwise dealing with the shareholdings in C Pty Ltd;
(ii)Causing the issues of any further share of any kind in C Pty Ltd;
(iii)Alienating any rights attaching to any shares;
(iv)Declaring or paying any dividends;
(v)Alienating or exercising her rights under the Constitution to change the voting rights for any shares issued in C Pty Ltd;
(vi)Selling, disposing, transferring, gifting, encumbering or otherwise dealing with any other assets registered in or held by C Pty Ltd, either solely or jointly with any other person/s, and/or entity/ies including the Franchise Agreement for D Company between K1 Pty Ltd, K2 Pty Ltd, C Pty Ltd and Ms B;
(vii)Resigning from any office holding of C Pty Ltd or making any changes to the office holdings;
(viii)Appointing another director, secretary or shareholder in C Pty Ltd.
(b)That liberty be granted to the wife to relist the matter in the event notice is received pursuant to Order 4(a).
5.Save as provided in these orders, the husband and the wife are to provide 14 days’ notice in writing to the second respondent and third respondent in the event the husband and the wife agree in writing to vary, or make application is to vary, Order 4(h) made on 9 December 2020, such order injuncting the sum $94,091.37 held in the trust account of P Pty Ltd, so as to access any of the said funds and upon receipt of such notice, the second and third respondent have liberty to restore these proceedings on two days’ notice in writing by way of an email to my chambers, copying in all parties and annexing such Minute of Order as to security for costs as they may consider appropriate.
6.Pursuant to r 7.04(1) the parties will forthwith do all things as are necessary to appoint Mr J of Q Company as the Single Expert to prepare a valuation report of C Pty Ltd, including the D Company Franchise, as at 30 June 2022, and a short updating report of the husband’s interests in his trusts and companies as at 30 June 2022, and for the purpose of these orders:
(a)the costs of the valuation report of C Pty Ltd is to be paid in the first instance in the proportion of 65 per cent by the husband and 35 per cent by the wife, the wife’s share to be sourced from the monies in the trust account of P Pty Ltd, with each of the husband and the wife having capacity to seek further contribution from the other to the costs of the C Pty Ltd report from the other at trial; and
(b)the husband is to meet the cost of the report updating the value of his trust and corporate interests in accordance with Order 4 of the orders dated 4 October 2019.
7.In the event there is any failure or neglect the husband neglect to pay the costs of Mr J’s reports as and when they fall due, the wife has liberty to issue such proceedings for enforcement by application to a registrar in accordance with the processes as available within the Pt 11.1 of the Rules.
8.The costs of each party of the wife’s Amended Application in a Proceeding filed 29 July 2022 and any Response to such Application in a Proceedings are reserved.
9.The proceedings are adjourned for case management at 9.30 am on 21 November 2022 by way of Microsoft Teams.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Adamson & Korac has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
CAMPTON J:
Introduction
These are substantive proceedings for property adjustment arising from a marriage between Ms Adamson (“the wife”) and Mr Korac (“the husband”) pursuant to s 79 of the Family Law Act 1975 (Cth) (“the Act”). That relationship commenced in June 1998 and concluded in December 2017 or January 2018.
The proceedings were commenced by way of an Initiating Application filed by the wife on 31 July 2019. They were listed for final hearing before me on 10 and 11 August 2022.
By her Amended Application in a Proceeding filed on 29 July 2022, the wife seeks leave pursuant to r 3.01 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (“the Rules”) to join Ms B and a company, C Pty Ltd (“C Pty Ltd”), as parties to these proceedings. Implicitly, the wife by that application sought leave to amend her final relief pursuant to r 2.50 of the Rules in terms identified in a draft Further Amended Initiating Application (being Exhibit 2). She also sought an order for C Pty Ltd to be valued, and an injunctive order restraining Ms B in her personal capacity and as a director of C Pty Ltd from dealing with C Pty Ltd by way of preservation of property.
The wife’s application for leave to amend her final relief sought was resisted by the husband and the proposed additional respondents. The husband opposed the joinder of Ms B and C Pty Ltd and the valuation of C Pty Ltd as sought by the wife. He neither opposed nor consented to the injunctive orders sought. He sought costs of responding to the wife’s Amended Application in a Proceeding.
Ms B and C Pty Ltd, by their Amended Response to the wife’s Amended Application in a Proceeding filed on 10 August 2022, opposed the joinder application, the injunctive relief sought, and the valuation. They sought costs of responding to the wife’s application. In the event that the joinder application was successful, they sought security for costs against the wife.
These reasons for judgment assume familiarity with my ex tempore judgment delivered on 22 July 2022, being Adamson & Korac [2022] FedCFamC1F 528. The relevant background to the wife’s Amended Application in a Proceeding is recorded in those reasons.
Over the course of the hearing, the relief sought by some of the parties shifted. At the conclusion of submissions, the remaining issues were:
(a)The wife’s application for leave to amend her Initiating Application and the joinder of Ms B and C Pty Ltd;
(b)In the event the wife’s joinder application was successful, it was accepted that C Pty Ltd would have to be valued for the purpose of the s 79 dispute. Issue existed between husband and the wife as to how the costs of a single expert valuation report to be completed by Mr J would be met. The wife estimated those costs would be in the range of $20,000 - $30,000.
In the event the joinder application was successful, the injunctive relief sought by the wife was the subject of compromise in accordance with a Minute of Order produced at the hearing, marked Exhibit 10.
For the reasons that follow, I will grant the wife leave to amend her final relief sought, and hence join C Pty Ltd as the second respondent and Ms B as the third respondent to the proceedings. Consent orders will be made in terms of Exhibit 10. Orders will be made as to a further report being obtained from Mr J, with the costs of that report to be paid in the first instance in the ratio of 65 per cent by the husband and 35 per cent by the wife (the wife’s share to be sourced from the funds held on trust for the parties pursuant to Order 4(h) made on 9 December 2020). The relief of Ms B and C Pty Ltd for security for costs will be dismissed on terms.
The evidence
The wife read and relied upon the following documents:
(a)A Case Outline document filed on 29 July 2022, marked as Exhibit 1;
(b)A proposed Further Amended Initiating Application filed on 29 July 2022, marked as Exhibit 2;
(c)An Amended Application in a Proceeding filed on 29 July 2022;
(d)Two affidavits of the wife, filed on 8 and 13 July 2022 respectively;
(e)An affidavit of Mr R, filed on 8 July 2022; and
(f)An Amended Minute of proposed injunctive relief sought by the wife as against Ms B and C Pty Ltd, being Exhibit 10.
The husband read and relied upon the following documents:
(a)A Case Outline document filed on 9 August 2022, marked as Exhibit 3;
(b)An Amended Response to an Application in a Proceeding filed on 9 August 2022;
(c)Two affidavits of the husband, filed on 8 and 19 July 2022 respectively.
The proposed second and third respondents read and relied upon the following documents:
(a)An Outline of Submissions Document filed on 10 August 2022, marked as Exhibit 4;
(b)An Amended Response to an Application in a Proceeding filed on 9 August 2022;
(c)An affidavit of Ms B filed on 9 August 2022 and exhibits thereto; and
(d)An affidavit of Mr J filed on 9 July 2022.
A number of documents, including schedules produced pursuant to s 50 of the Evidence Act 1995 (Cth) (“the Evidence Act”) were tendered into evidence. The affidavit of Ms B annexed 231 pages of exhibits. It was agreed that for the purpose of my determination, I would only have regard to those documents contained within the exhibits to affidavits that were identified during the course of submissions.
The joinder application
The law
Part 2.8 of the Rules prescribes the process to amend substantive relief sought at any time after a proceeding has been allocated dates for trial. That Part applies to the circumstances of this matter. There is no controversy that the wife has complied with the Part for the purposes of her application for leave to amend.
Part 3.1 of the rules sets out the procedure for the joinder of a party to the proceeding.
Rule 3.01 prescribes:
3.01 Necessary parties
A person whose rights may be directly affected by an issue in a proceeding, and whose participation as a party is necessary for the court to determine all issues in dispute in the proceeding, must be included as a party to the proceeding.
Example:If a party seeks an order of a kind referred to in section 90AE or 90AF of the Family Law Act, a third party who will be bound by the order must be joined as a respondent to the proceeding.
The Rules do not record the exercise of a discretion in joining a party to the proceedings: they mandate that a person who is a necessary party to a proceedings must be joined. Hence I must be satisfied of two conjunctive thresholds, being:
(a)Firstly, that the person who is proposed to be joined has rights that will be directly affected by the proceeding; and
(b)Second, that their participation in the proceedings are necessary to determine all issues in dispute in the proceeding.
If the evidence grounds such satisfaction, the Rules oblige a joinder.
Rule 3.01 reflects longstanding jurisprudence that a party may only be joined to proceedings if they are directly relevant to the outcome of the matter (see Mais v Reid (1899) 5 ALR 202).
The word “necessary” for the purposes of a predecessor of the r 3.01 was described by Warnick J in Wayne & Dillon & Anor [2008] FamCAFC 204, as meaning:
...something more than “useful” or “expeditious”. In my view, if there are available alternative means to joinder to the substantive proceedings, of obtaining from a third person or someone already a party what is needed to allow an applicant for joinder to establish an identified “case”, joinder is unlikely to be “necessary”. However, if a cause of action, recognisable at law, against a “third person” is particularised, then it is at least highly likely that joinder will be “necessary for the court to completely and finally determine all matters in dispute.”
During the course of submissions, I inquired with counsel as to whether the approach to the wife’s case for the purpose of r 3.01 should be considered in similar terms to that taken in respect of an application for leave pursuant to s 44(3) of the Act (see Whitford & Whitford (1979) FLC 90-612). On that approach, consideration should be given to whether the applicant can establish a reasonable prima facie case for relief against the proposed additional respondents, so as to underscore a consideration of the mandatory thresholds identified by r 3.01.
In Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] [2010] WASC 223, Le Miere J helpfully referred to relevant authorities and articulated, in precise terms, why it is necessary for a party seeking to join a third party to litigation to establish an arguable case, in the following terms:
27.The applicant on a joinder application must show that there is an arguable case sufficient to resist the entry of summary judgment by the parties sought to be joined. It would be futile to order that a person be joined as a defendant if the material before the court disclosed that if the person, having been joined as a defendant, applied for summary judgment the application would succeed.
(Citations omitted)
Refusing the wife’s application to amend her relief and hence join C Pty Ltd and Ms B would be to summarily dismiss her case against them. Hence, a cautious approach should be adopted to the wife’s evidence so that it is evaluated at its highest, such that her application for leave would only be refused in the event her substantive claim was so “fanciful” that it was “clear that there was no real question to be tried” (See Ebner & Pappas (2014) FLC 93-619 at [62]).
An examination of the nature of the wife’s proposed claim against the proposed additional respondents and its foundation is necessary to determine the necessity of their joinder.
The wife’s claim against C Pty Ltd and Ms B
The wife’s proposed final relief against C Pty Ltd and Ms B as contained within Exhibit 2 is not grounded from ss 106B or 90AE of the Act. Rather, the wife seeks relief that she submits directly affects the rights of C Pty Ltd and Ms B in two ways, being:
(a)Firstly, she seeks a declaration pursuant to s 78 of the Act that the husband is the beneficial owner of the enterprise trading as “D Company”, held in the name of C Pty Ltd; and
(b)Secondly, she seeks a finding that monies originating from the D Company business were legally and beneficially due to the husband or E Pty Ltd but were instead paid to Ms B or C Pty Ltd.
It was submitted by counsel for the wife that either basis necessitates the joinder of Ms B and C Pty Ltd. Arising from these determinations, the wife seeks that the husband and/or Ms B pay to her an adjusting sum of $850,000.
The Court does not have a discretion in s 79 proceedings to determine that a person is a beneficial owner of property. The Court may find and declare that to be the position, but it will do so based on general legal and equitable principles (Stanford & Stanford (2012) 247 CLR 108 at [37]).
Counsel on behalf of C Pty Ltd and Ms B submitted by way of their Written Submissions that “the relief sought by the wife would not provide her with an effective legal remedy”, in that her “claim that [D Company] is property of the husband is not reasonably arguable”. It was submitted that “there is no apparent basis in law or fact for the Court to find [D Company] is ‘property’ of the Husband for the purposes of an order under s 79 of the Act”.
Although not expressly pleaded, the gravamen of the wife’s case arising from her Points of Claim and the declaration sought above was that a finding as to sham ought to be made. Putting it another way, she contends that the husband’s conduct, in relinquishing the D Company franchise while Ms B simultaneously undertook the scaffolding to acquire that same franchise, was in reality a “sham” transaction (or series of transactions) to defeat or frustrate the wife’s claim for property adjustment. She casts this conduct in the context of:
(a)the husband and Ms B being in an intimate relationship, living together in the same residence for a number of years since her separation from the husband including at the time of the husband surrendering the franchise; and
(b)the husband, subsequent to C Pty Ltd commencing to trade as D Company in different premises down the street from the Husband’s trading location, continuing to attend the D Company premises and (on the husband’s concession) acting as a “mentor” for Ms B in her operation of the D Company business.
A sham transaction is:
(a)a mere façade, behind which activities may be carried on which were not to be really directed to the stated purposes but to other ends (Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, 279 per Windeyer J) ;
(b)is something that intended to be mistaken for something else or that is not really what it purports to be (Hadjiloucas v Crean [1988] 1 WLR 1006, 1019)
(c)steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences (Sharment Pty Ltd v Official Trustee in Bankruptcy (1998) 18 FCR 449, per Shephard);
(d)an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties (Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, 486).
Once established, a finding of sham permits the Court to ignore what might be described as the “primary material regarding the transaction” and enables it to look through the artifice created by the scheme to uncover the reality of the ownership of the enterprise.
The declaration as to a sham is serious in that it is akin to fraud. An allegation of sham ought not be made in the absence of sufficient evidentiary foundation. To establish her claim, the wife will be required at final hearing to discharge the onus identified in s 140(2) of the Evidence Act. That section directs the Court to consider the seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, and the gravity of the consequences flowing from a particular finding when considering whether a fact has been proved to the Court’s reasonable satisfaction. Such reasonable satisfaction should not be produced by inexact proofs, indefinite testimony or indirect inferences (see Briginshaw v Briginshaw (1938) 60 CLR 336 at 361–2).
The wife’s pleaded facts grounding her complaint as to sham are set out in her Points of Claim dated 29 July 2022, contained in Exhibit 2. By way of summary, they include the following:
(a)Throughout the relationship the husband conducted a K Company franchise (D Company) through E Pty Ltd, such business being the primary asset and/or financial resource of the parties;
(b)In 2018, while in a relationship with Ms B, the husband renegotiated the business lease for the office premises from which D Company operated, reducing the term of the lease to cease on 30 June 2020; and
(c)In reducing the term of the lease, the husband knowingly opened up the opportunity for him to rely on a clause of the D Company Franchise Agreement to surrender the franchise two years earlier than its original term;
(d)In forfeiting the franchise agreement, the husband paved the path for Ms B, who was an employee of D Company, to establish her own company, C Pty Ltd, and effectively take over the D Company franchise “without any payment to the husband” (or E Pty Ltd);
(e)That the severance monies paid to Ms B upon the termination of employment from E Pty Ltd in the range of approximately $138,000 to $153,000 closely equates to the value of the monies the husband said he would have had to spend to fit-out a new office premises, had he continued to operate D Company, and is not dissimilar to the costs incurred by Ms B in establishing her business, and that in any event the payment was not owing to Ms B; and
(f)That at the time that the husband exercised an option to terminate the franchise agreement, the D Company was a profitable trading entity.
It is not controversial that Ms B and the husband engaged in a personal relationship subsequent to the husband and wife’s separation in either December 2017 or January 2018. The wife contends that relationship commenced before separation, although that is denied by each of the husband and Ms B. On the husband’s evidence, he and Ms B were in a relationship between September 2018 and March 2020. On Ms B’s evidence, that relationship commenced in May 2018. It was uncontroversial that the husband and Ms B lived in the same residence from sometime in 2018 until July 2020.
The wife contends that the relationship between the husband and Ms B continues to the current time. The evidence she presented to support her contention was adduced by way of a private investigator, Mr R, who has sworn an affidavit in her case. Mr R’s affidavit annexes a 12-page surveillance report dated 10 May 2022, recording photographs of the husband and Ms B seemingly holding hands while walking to the D Company office premises together on 4 May 2022. The husband and Ms B dispute the wife’s contentions and put into issue the evidence of Mr R.
The wife also contends the husband’s ongoing mentorship of Ms B without compensation or any other form of remuneration supports a finding that their relationship is ongoing.
The wife contends that between early 2020 and September 2020, the husband and Ms B acted in concert (or at a minimum, Ms B was complicit in the husband’s conduct) to seamlessly transition the business from the hands of the husband to Ms B. A timeline of that transition is set out in my earlier reasons for judgement, Adamson & Korac [2022] FedCFamC1F 528 at [12]-[23].
The husband and Ms B each contend that the husband is not employed by C Pty Ltd and has no ongoing involvement with D Company, save for the “mentor” role he contends to play for Ms B. That is plainly disputed by the wife, who relies on the evidence of Mr R as to his observations of the husband being present at the D Company office premises on at least two occasions in May 2022. She also adduces evidence of google reviews of D Company which refer to the husband continuing to assist clients of the business. The dates of the google reviews are put into issue by the husband and Ms B.
It was not controversial that the husband gave Ms B notice of her termination of employment on 16 April 2020, and that her employment was to cease on 30 June 2020. By the time she received such notice, Ms B had already incorporated C Pty Ltd and lodged an application with K Company to take over the Suburb G franchise. On Ms B’s own evidence, she continued to conduct work for the husband’s business until September 2020, and was remunerated for that work until October 2020.
It was submitted by counsel for the wife that evidence would establish that Ms B’s enterprise from April 2020 to December 2020 was “propped up” by money received from either the husband or E Pty Ltd. The wife relied on Exhibit 9, being a schedule of commissions received by C Pty Ltd between September 2020 and May 2022. The contents of the document were controversial. That document recorded monies that the wife claims were due to the husband or E Pty Ltd but were paid to C Pty Ltd. Counsel on behalf of the wife submitted that an examination of the transactions reveal a total of $175,252 in commissions payable to E Pty Ltd were paid directly to C Pty Ltd between September 2020 and December 2020, $75,000 of that being paid in September 2020 alone. The wife’s counsel took me to specific entries within the summaries which reflect payments made to C Pty Ltd on settlements that occurred while Ms B was still working for E Pty Ltd.
The husband and Ms B and C Pty Ltd each resist the conclusion drawn by the wife from the payments made to C Pty Ltd after E Pty Ltd ceased trading as D Company.
Ms B said in her affidavit evidence that:
62. At the commencement of me operating [D Company] in September 2020, the majority of commissions received by [C Pty Ltd] were for loans that had been written by [Mr Korac]. This was because I had not commenced writing loans and working as a mortgage broker until September 2020. Over time, the commissions received by [C Pty Ltd] for loans written by [Mr Korac] have decreased significantly. Exhibited at Tab [13] of Exhibit [MB]-1 is a summary table that sets out the total commission paid to [C Pty Ltd] from September 2020 to May 2022, attributable to loans written by [Mr Korac] and me.
Her affidavit evidence implied that payments of this character continued until January 2022, and suggests that Ms B did not commence writing loans through C Pty Ltd until September 2020.
I enquired of counsel for Ms B as to the reason for why Ms B by way of C Pty Ltd received the benefit of commissions paid on loans written by the husband through what, on the case of Ms B and the husband, was a wholly disparate and separate trading entity (E Pty Ltd) by way of a separate and terminated franchise agreement. Counsel replied that the answer was contained in deed of release entered with the franchisor.
I also asked counsel for both the husband and Ms B for the document grounding and verifying supporting why payments were made to C Pty Ltd originating from loans written by the husband through E Pty Ltd while it was operating, it being implicit that K Company would not make such payments unless bound or authorized to do so. Each referred me to a clause in the husband’s deed of release as follows:
2.4 Payments by [K2 Pty Ltd]
(a) The Franchisee acknowledges and agrees that subject to compliance by the Franchisee with the obligations in clause 2.2(a) above, from the Surrender Date:
(i) upfront commissions payable under the Franchise Agreement will only be paid to the Franchisee in respect of loans which settle up to and including the last day of the next month after the Surrender Date;
The husband surrendered his franchise agreement for D Company on 6 July 2020. Read alone, that clause would preclude the husband from receiving commissions in respect of loans that settled after 31 August 2020.
It does not explain why the commissions from loans after that date would have been paid to C Pty Ltd, a wholly unrelated corporate entity.
Beyond the husband’s Deed of Release from the franchise, neither counsel on behalf of the husband or on behalf of C Pty Ltd and Ms B could identify any document explaining this somewhat unusual commercial channel of payments and funding.
Counsel on behalf of the husband did not materially engage with my inquiry as to whether an inference could be drawn that a document may exist explaining this curious flow of monies.
Counsel on behalf of C Pty Ltd and Ms B suggested that it was not open for me to draw an inference from the absence of evidence that there may be a document that exists either supporting or refuting their contention as to why C Pty Ltd received monies apparently payable to the E Pty Ltd. I do not accept that submission. If a document or information exists recording or explaining the foundations for this out of the ordinary flow of funds, on balance, it would be in the possession or control of his clients. It would be either a nonsense or a very serious matter if his clients accepted and retained funds paid without being aware as to the reason they were paid. The assertion by counsel that documents would exist to explain the circumstance but would that they need to be the subject of a subpoena to produce directed to K Company was, in the circumstances of his clients being aware for a number of weeks as to the particulars of the facts asserted by the wife, empty.
There was no evidence before me as to the husband making any enquiries as to a capacity to sell the D Company trading enterprise, or its loan book of trading commission (valued at a discount by Mr J at 30 June 2020 at $531,078), or as to any attempts by him to sell any part of the franchise or loan book with the consent of the franchisor, prior to him relinquishing the franchise agreement. There was no evidence as to even a query being directed to K Company as to the fact or likelihood of any such consent. There was no evidence before me as to the husband making any enquiries of a business broker who could sell the trading enterprise on behalf of the husband.
In his report, Mr J identified that there is a market available to sell loan books of the kind owned by E Pty Ltd. He said that he had not been provided with detailed loan book and commission information for all months of his review period, but said that he was able to opine as to the decline of the value of the loan book around the franchise termination date, being 31 July 2020 without discount, that value being $373,306,387, and six months later at 31 January 2021, being at $331,939,653. It was his evidence that the value of the loan book declines about 22 per cent annually and that it will be reduced to nil in four to five years. Prior to taxation imposts, as at January 2021 was producing trail commissions of about $33,025 per month.
The husband’s Financial Statement filed on 25 June 2022 records that he receives approximately $4,540 by way of trailing payments from the loan book of E Pty Ltd. He deposes in his affidavit filed on 8 July 2022 that the income he receives by way of his company “should be going to the [Australian Taxation Office] liability otherwise [E Pty Ltd] will go into liquidation”. That accuracy of that evidence is a matter for trial.
Each of the above circumstances provides at least inferential support to the amended case sought to be prosecuted by the wife.
The husband and Ms B submitted that the wife’s case is speculative and has little or no prospect of success. It was forcefully submitted that there were a number of practical and discretionary reasons as to why the wife’s application for leave to amend ought to be declined. Those included that:
(a)The unexplained two year delay in the wife’s application to amend and join, especially in circumstances where the wife gives evidence of being significantly engaged in and having knowledge of the D Company enterprise prior to separation; and
(b)The greatly increased complexity by way of disputed issues and the number of parties to the litigation that will result from the wife’s successful application; and
(c)The increased costs to the husband and the wife, and costs to the proposed additional respondents; and
(d)The undesirability of obligations of disclosure being imposed on third parties to the marriage; and
(e)The increased costs of the single expert; and
(f)The unavoidable further delay and uncertainty.
It was submitted that these factors, when coupled with what is otherwise a either a very modest and limited value pool of property of the husband and wife, or on the husband’s case, a circumstance where the value of their liabilities exceeds the value of their assets, the application for joinder of the wife ought to be dismissed.
I am mindful of the imposition as to the joinder of third parties to property adjustment litigation between the husband and wife, and as to the disclosure obligations that would be imposed on Ms B and C Pty Ltd in the event of their joinder, coupled with the costs and inconvenience to them.
I accept that on the untested evidence the wife’s submission, for the purposes of the joinder application and the application for leave to amend, that there was no adequate explanation at this time as to why C Pty Ltd received the fruits of the work and labour undertaken by the husband, both while he operated D Company under E Pty Ltd and thereafter. The wife’s pleaded case on this subject matter cannot be rejected out of hand as extravagant or speculative.
It is to be observed that the determination as to leave to amend and joinder “it is not a decision about whether the claim will succeed but whether there is a reasonable claim to be heard”. For the purposes of the application for leave to amend and joinder, the evaluation of the evidence of the wife at its highest coupled with the deficiencies in the evidence to date of the husband, C Pty Ltd and Ms B does not lead to a conclusion that the proposed amendment to the substantive claim was so “fanciful” that it was “clear that there was no real question to be tried”.
Viewed as a whole, I am satisfied that the wife’s proposed case as against C Pty Ltd and Ms B discloses a prima facie arguable claim against Ms B and C Pty Ltd, in that it raises a number of legitimate lines of enquiry to support her ultimate finding that either:
(a)Ms B holds and operates C Pty Ltd for the husband, or part thereof, and hence that would be declared to be the husband’s property; or
(b)C Pty Ltd or Ms B have been paid monies due to the husband or E Pty Ltd and ought to be required to account for those monies.
Importantly, for all parties, the contentions of the wife and the evidence underscoring them will be the subject of testing at trial, including by way of cross-examination.
In the circumstances of the evidence presented to date I am satisfied that that C Pty Ltd and Ms B have rights that will be directly affected by the proceeding and that their participation in the proceedings are necessary to determine all issues in dispute in the proceeding. I will grant the leave to amend as sought by the wife and the joinder of C Pty Ltd and Ms B as sought.
The Rules recognise that a party who has been joined to the proceedings may subsequently apply to be removed as a party to the proceedings if considered appropriate. In the event that C Pty Ltd and Ms B have been incorrectly joined, then they may achieve some solace by way of costs.
Costs of the valuation report of C Pty Ltd
On 4 September 2019, a Registrar made orders by consent providing for the appointment of a single expert valuer to value the corporate and trust interests of the parties, and for the purpose of such valuation:
4.The Husband shall meet the cost of the single expert accountant at first instance with the wife to reimburse the husband one half of such fee upon [the] making of final orders in this matter.
As an adjunct to her application that C Pty Ltd be valued, the wife sought that the husband meet the costs of such further valuation in similar terms to the consent orders made on 4 September 2019. In submissions, counsel on behalf of the wife contended that the additional costs of Mr J’s further report would be between $20,000 and $30,000. That was not put into controversy by the husband, whose position was that the wife should pay for any further report herself (the report being described as “her folly” by counsel in submissions).
The default position established by r 7.06 of the Rules is that parties to proceedings are equally liable to pay the reasonable fees and expenses of a single expert witness in preparing their report.
The wife submitted that a departure from the default position is warranted in circumstances where the husband has retained what (on her construction) is the parties’ most significant asset, by way of his receipt of the trailing commissions from the grandfathered loan book owned by E Pty Ltd. She contends that the husband has enjoyed the use of that property to meet his living expenses and legal fees. She identifies that the value of that asset reduces every month. Implicitly, it was her argument that the husband has not preserved this valuable asset of the parties and should direct the benefit he receives from that assert to meet the costs of the necessary further expert report in the first instance.
The wife further identifies that she has no source from which to meet the costs of the updated report, that submission being supported by the fact that the mother has the full time care of the parties’ two children. Her Financial Statement records that she receives a salary of aapproximately $1,057 per week ($55,115 per annum) and that the father pays child support of $425 per week.
Counsel on behalf of the husband submitted that the husband does not have capacity to contribute to a further report by Mr J. In support of that contention she relied on the husband’s evidence contained in his Financial Statement and that in his affidavit as to a payment plan he has entered into with the Australian Taxation Office to repay a liability he says is owing to them in the sum of $550,543.
It was conceded by counsel for the husband that the costs of a further valuation report, if they were to be paid by the wife, could in reality only be met by the proceeds of sale held in the trust account of the wife’s solicitor.
The Court’s discretion in relation to costs is broad. Taking into account the above matters as to the parties’ financial circumstances and the matters identified earlier in these reasons as to each of their conduct, I am satisfied that it is reasonable and appropriate for the costs of the Mr J’s expert witness report as to the valuation of C Pty Ltd to be met in the ration of 65 per cent by the husband and 35 per cent by the wife. This order will not prevent either party seeking a greater contribution from the other to the costs of the C Pty Ltd valuation, dependent on the findings made at trial. The capacity of each party is preserved in that monies will still remain held in trust on behalf of the wife to which the husband may have recourse, and the wife if she is successful will have access to funds and property beneficially held by the husband. No submissions were made to vary Order 4 made on 4 September 2019 for the husband to meet the costs of the single expert to value the corporate and trust interest of the parties. The husband ought to meet those costs for the reasons identified early.
If the husband does not comply with these orders, she will have enforcement relief available to her by way of (for example) Div 11.1.4 of the Rules as to third party debt notices to secure the trailing commissions currently received by the husband.
Security as to Costs
Ms B and C Pty Ltd by way of a broad brush estimated their indemnity costs to be incurred in the event they were joined to the proceedings up to the conclusion of a defended trial to be in the range of $85,000 in addition to her costs already incurred.
Counsel on behalf of Ms B and C Pty Ltd accepted that security for their costs existed by way of the funds held in the trust account of the wife’s solicitors, P Pty Ltd sourced from the sale of a property of the husband and wife in circumstances where the husband concedes that the wife will receive not less than $81,398.36 of the injuncted sum by way of a s 79 discretion.
By way of Order 4 of the orders made by consent on 9 December 2020, those funds remain injuncted in that trust account until further order of this Court.
Conclusion
In those circumstances, having allowed the wife’s application for leave to amend her final relief, I will make orders in accordance with the compromise positon recorded in Exhibit 10.
I certify that the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Campton. Associate:
Dated: 26 August 2022
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