Atkins & Hunt and Ors
[2017] FamCAFC 79
•28 April 2017
FAMILY COURT OF AUSTRALIA
| ATKINS & HUNT AND ORS | [2017] FamCAFC 79 |
| FAMILY LAW – APPEAL – where certain grounds of appeal were not argued before the trial judge – whether the appellant could argue these grounds by reference to the principles in Metwally – where a significant issue was whether the substantial control exercised by the husband over a company meant that a finding of alter ego should have been made – where the appellant argued that certain loan accounts should not have been included in the assets and liabilities of the parties – where neither argument satisfied the principles in Metwally – where there was no error in the trial judge preferring one single expert witness over another based on the evidence and arguments to which his Honour was directed – where the trial judge’s assessment of s 79(4)(e) failed to take into account relevant considerations and took into account an irrelevant consideration – where this constituted discretionary error on his Honour’s behalf – where the trial judge erred in the circumstances by failing to add back fees paid by the husband for a single expert witness – where doing so reduced the assets available for distribution – where the trial judge added back the parties’ respective payments for legal fees – where an error was made in relation to the amount added back for the husband’s legal fees – appeal allowed. |
| Corporations Act 2001 (Cth) ss 232, 233, 254T |
| Ascot Investments Proprietary Limited v Harper and Another (1981) 148 CLR 337 |
| APPELLANT: | Ms Atkins |
| FIRST RESPONDENT: | Mr Hunt |
| SECOND RESPONDENT: | N Pty Ltd |
| THIRD RESPONDENT: | T Pty Ltd |
| FOURTH RESPONDENT: | H Pty Ltd |
| FIFTH RESPONDENT: | Mr D |
| SIXTH RESPONDENT: | Mr J |
| FILE NUMBER: | SYC | 425 | of | 2012 |
| APPEAL NUMBER: | EA | 171 | of | 2014 |
| DATE DELIVERED: | 28 April 2017 |
| PLACE DELIVERED: | Brisbane |
| PLACE HEARD: | Sydney |
| JUDGMENT OF: | Bryant CJ, May and Murphy JJ |
| HEARING DATE: | 23 and 24 August 2016 |
| LOWER COURT JURISDICTION: | Family Court of Australia |
| LOWER COURT JUDGMENT DATE: | 4 December 2014 |
| LOWER COURT MNC: | [2014] FamCA 1076 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Richardson SC with Mr Stenhouse |
| SOLICITOR FOR THE APPELLANT: | Milevski Family Lawyers |
| COUNSEL FOR THE FIRST RESPONDENT: | Mr Lethbridge SC with Ms Gillies |
| SOLICITOR FOR THE FIRST RESPONDENT: | Robyn Sexton & Associates |
| COUNSEL FOR THE SECOND – SIXTH RESPONDENTS: | Mr S Gray |
| SOLICITOR FOR THE SECOND – SIXTH RESPONDENTS: | HWL Ebsworth Solicitors |
Orders
Grounds 1, 2.1, 2.2 and 5 of the Amended Notice of Appeal filed 31 July 2015 be struck out.
The appeal be allowed.
The orders of Aldridge J made on 4 December 2014 be set aside.
The wife’s application for settlement of property be remitted for re-hearing.
Any application by either party in respect of the costs of the appeal and/or in respect of the costs of Appeal No 158 of 2015 reserved by order of the Full Court on 11 November 2016 shall be filed and served by not later than 4.00pm on 20 May 2017 and shall be accompanied by such written submissions, limited to not more than three pages in length, in support of any such application.
Any written submissions in reply to those filed pursuant to paragraph (5) of these orders shall be filed and served by not later than 4.00pm on 10 June 2017 and shall be not more than two pages in length.
Note: The form of the order is subject to the entry of the order in the Court’s records.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Atkins & Hunt and Ors has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT SYDNEY |
Appeal Number: EA171 OF 2014
File Number: SYC425 OF 2012
Ms Atkins
Appellant
And
Mr Hunt
First Respondent
And
N Pty Ltd
Second Respondent
And
T Pty Ltd
Third Respondent
And
H Pty Ltd
Fourth Respondent
And
Mr D
Fifth Respondent
And
Mr J
Sixth Respondent
REASONS FOR JUDGMENT
BRYANT CJ & MURPHY J
We have had the advantage of reading in draft form the reasons of May J.
We are respectfully unable to agree with May J that the wife is entitled to raise before this court grounds 1, 2.1 and 2.2 which embrace issues not raised at trial. In our judgment, those grounds should be struck out. For the same reason ground 5, which challenges the trial judge’s treatment of the parties’ loan accounts, should also be struck out. It is appropriate that we record our reasons for those conclusions.
We agree with May J that there is merit in grounds 6, 7, 10, 11 and 12 which challenge the trial judge’s s 79(4)(e) assessment and that the appeal should be allowed on that basis. We wish to record separately our reasons for that conclusion.
We also agree with her Honour’s reasons and conclusions in respect of grounds 3 and 4 which challenge the trial judge’s treatment of the parties’ legal fees and the fees for a single expert witness and do not wish to add anything further to what May J has said in that respect.
Can the Wife Agitate Issues not Raised at Trial?
The Context For The Wife’s Arguments On Appeal
A corporate structure involving, relevantly, the husband and his adult children, but not the wife, runs a business. It is a very profitable enterprise. The figures for the financial year preceding the trial reveal a turnover for the business approaching $150 million.
The corporate structure had its beginnings in 1973, some 30 years before the husband and wife married. This is the husband’s fourth marriage. The two proprietary corporations relevant to this appeal are N Pty Ltd and T Pty Ltd. The latter is an investment company whose only investment is its shares in the former. The value of the shares in N Pty Ltd determines the value of the shares in T Pty Ltd. The shareholdings in each corporation are divided into classes. The eight shareholders other than the husband were gifted their shares by the husband. The husband and his adult son are the sole directors of each corporation.
His Honour found, and it is uncontroversial on this appeal, that:
·“… for all practical purposes, the husband controls all of the voting shares in [N Pty Ltd]” (Reasons at [41]);
·“[m]ost unusually”, N Pty Ltd “did not necessarily treat all members of a class [of shareholders] equally. In some years, holders of C class shares received different dividends to other holders of C class shares” (at [42]);
·The shares held by the husband (either in his own right or through T Pty Ltd) can “cause [N Pty Ltd] to pay all of the dividends to one shareholder, which may or may not be the husband or [T Pty Ltd], or otherwise divide them as they see fit” (at [101]);
·“Through his shareholding in [T Pty Ltd] and his own shareholdings the husband completely controls the voting in general meetings of [N Pty Ltd]” (at [120]);
·The husband can “appoint the directors he chooses” (at [120]);
·The husband has “sufficient votes to wind the company up if he chooses” (at [120];
·“[The husband] has, in his complete discretion, determined the payment of dividends from [N Pty Ltd] …” (at [120]);
·“[The husband] alone has determined the amount of the dividends that have been paid and to whom they have been paid” (at [120]);
·“The husband’s ability to control the payment of dividends is fettered to some degree …” by s 254T of the Corporations Act 2001 (Cth) (at [123]);
·The husband’s “substantial degree of control” over the company “remains notwithstanding his assertions that he has stepped back from the business for at least the last three years” and “his position of control remains unaltered” (at [121]);
·The husband can “remove the directors at will …” (at [321]).
His Honour also found, at [178], that the business:
… generated large amounts of cash from time to time and [the husband] used those funds, when available, to minimise the interest payable on the line of credit by depositing them into … the line of credit account secured over [the former matrimonial home].
Sums in excess of $5 million were withdrawn from the line of credit with the corporation’s funds deposited to the line of credit (also at [178]).
Senior counsel for the wife submits before us that “… consistent with [the husband’s] absolute control of the company apart from the formal movements on his loan account declaration of dividends, he has the capacity to take funds of the company, deposit it against personal debt and take all the advantages that go with it”.[1]
[1] Appeal Transcript, 23 August 2016, p 23, line 18-21.
The trial judge rejected the valuation of the husband’s shares proffered by Mr MM, a valuer engaged by the wife, in favour of a valuation proffered by a single expert, Ms LL. Both agreed that the value of N Pty Ltd was $11,147,860. Mr MM valued the husband’s combined shareholding in N Pty Ltd and T Pty Ltd at $6,066,148; the valuation of Ms LL accepted by his Honour posited their combined value at $2,640,981.
The wife’s central contention on appeal is that the nature, degree and extent of the husband’s control of N Pty Ltd (and T Pty Ltd) – described by senior counsel for the wife as both “ultimate control” and “absolute control” – should have led his Honour to conclude that the corporations were the husband’s “alter ego” (ground 1). In that event, it is said that “… there was ultimately no valuation dispute for his Honour to determine as the experts had agreed [N Pty Ltd] had a value of $11,147,860”.[2] It is said as a consequence that his Honour erred in not finding that the husband’s shareholding had that value (ground 2.1).
[2] Appellant’s written summary of argument filed on 11 August 2015, paragraph 10.
The same reasoning underpins an alternative submission founding ground 2.2 that, even absent a finding of “alter ego”, his Honour erred in not attributing a value of $10,919,749 to the husband’s shareholding – a value based on the corporations’ current net assets. The parties had agreed that company valuations would be struck as at 30 June 2013. It was not controversial that retained profits at that date were $10,166,823 and there were reserves of $752,926 – a total of $10,919,749. It is argued in that respect that “[t]he agreed value of the company implicitly demonstrates that there can be no question that [N Pty Ltd] holds assets of a value that enables the satisfaction of the entirety of the retained profits and reserves of the company”.[3]
[3] Appellant’s written summary of argument filed on 11 August 2015, paragraph 11.
In the further alternative, it is contended that his Honour erred in not attributing Mr MM’s value of $6,066,148 to the husband’s shareholdings (ground 2.3).
Deriving from the same or similar arguments, it is contended separately that his Honour erred in the treatment of the husband and wife’s loan accounts within N Pty Ltd (ground 5).
Grounds 1, 2.1 and 2.2: “Alter Ego” and “Total Control” of N Pty Ltd
The foundation for the arguments which underpin grounds 1, 2.1, 2.2 (and 5) is summarised by senior counsel for the wife in his written outline of argument:
Put simply [N Pty Ltd], which was incorporated in 1973 (prior to the 31 December 1981 abolition of death duties in NSW) with structures specifically designed to meet tax implications and death duties and in which his children were at different times allocated non voting shares in the B to H classes at par value is and always has been in his ultimate control and he has been in the position to receive all benefit at his whim.[4]
[4]Appellant’s written summary of argument filed on 11 August 2015, paragraph 5 (footnoted references to the evidence omitted).
That ultimate control is said to be evident from his Honour’s findings and the evidence as to the husband’s use of the corporation’s revenue and assets earlier described. The conclusion said to follow is that his Honour was “bound to recognise that [N Pty Ltd] was the ‘alter ego’ of the [husband] in the sense that that term is understood and with the consequences recognised in the well known passage in the judgment of Gibbs J in Ascot”.[5]
[5] Ibid; Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337, 354-5.
In Mallet v Mallet[6] Gibbs J said:
In many cases the real value of the shares will depend more on [the earning power of the company] than on [the value of its capital assets]. Where, however, the company is merely a convenient means of holding the assets, and the person who owns the shareholding in question is able to put the company into liquidation at will, the real value of the shares will be likely to be the amount which the holder would receive if the company were voluntarily wound up. And since the purpose for which a valuation is made may affect the court’s attitude (Commissioner of Succession Duties (S.A.) v Executor Trustee and Agency Co. of South Australia Limited,[7] pp 373-374), there is much to be said for the view that the court will be more ready to value shares on a liquidation basis in a case such as the present [involving proceedings pursuant to s 79 of the Act] than in a revenue or even in a compensation case.
[6] (1984) 156 CLR 605, 616 – 617.
[7] Footnote added: (1947) 74 CLR 358, cited earlier in the same paragraph by Gibbs CJ.
Of that statement, Warnick J observed in Ramsay v Ramsay[8] “[i]n such cases there is also usually no concern about the ability of the shareholder to realise the value ascribed to the shares”. That, in essence, is what the wife argues here. Echoing what was said by Gibbs J above, the Full Court of this court said in Harrison and Harrison[9] “[r]evenue and taxation cases … have little relevance to the value which a Court, exercising jurisdiction under [the Act] places upon such interests … [t]he value to be ascribed to shares in a family company must be a realistic one, based upon the worth of the shares to the party himself or herself”.
[8] (1997) FLC 92-742, 83,997.
[9] (1996) FLC 92-682, 83,087.
However, as senior counsel for the wife concedes, the pursuit of any such arguments by the wife in this appeal faces the considerable difficulty that they were not arguments run before the trial judge. That is all the more so because, in so far as the values asserted in grounds 2.1 and 2.2 are concerned, no opinion to that effect is contained in any evidence from the wife’s own valuer, much less the single expert valuer.
The written and oral submissions on behalf of the wife concede that the wife did not argue before the trial judge that N Pty Ltd was the husband’s alter ego. Additionally, it was not argued below (as an alternative) that the husband’s degree of control of N Pty Ltd (and T Pty Ltd) was such that he could distribute the whole of the income and assets of the company to himself with the consequence that the value of the shares in N Pty Ltd should be seen as the value of N Pty Ltd’s assets. (Additionally, as will be seen later in these reasons, the point now sought to be made in respect of the loan accounts in N Pty Ltd comprising ground 5 was also not argued before the trial judge).
It is well established that “[w]here a point is not taken in the court below and evidence could have been given there which by any possibility could have prevented the point from succeeding, it cannot be taken afterwards”.[10] The emphasised phrase can be seen in effect repeated in a later statement of the principle by the High Court: “… a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below”.[11]
[10] Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 438 (emphasis added).
[11]Water Board v Moustakas (1988) 180 CLR 491, 497 per Mason CJ, Wilson, Brennan and Dawson JJ (emphasis added). See also, O’Brien v Komesaroff (1982) 150 CLR 310, 319.
There are limited exceptions to that principle: where “all the facts have been established beyond controversy or where the point is one of construction or of law”, the court in its discretion may “find it expedient and in the interests of justice to entertain the point, but otherwise the rule is strictly applied”.[12]
[12]Moustakas, 497 (emphasis added) citing Suttor, above, 438; University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481, 483; Coulton v Holcombe (1986) 162 CLR 1, 7 – 8 and O’Brien, above, 319.
The Family Court is not a court of pleadings, reference to which, including the particulars within them, would otherwise be of assistance in deciding whether an issue was raised for determination at trial. In any event, however, “no narrow or technical view should be taken” of the case run below.[13] And, that view of the case below “… depends on what the [wife’s] case was at the trial, not on a hypothetical construction of what could or should have been the [wife’s] case”.[14]
[13] Moustakas, above, 497.
[14]Whisprun Pty Ltd (formerly North West Exports Pty Ltd) v Dixon (2003) 200 ALR 447, [2] per Gleeson CJ, McHugh and Gummow JJ.
In our opinion, on no view of the wife’s case at trial can it be said that any of the arguments comprising grounds 2.1 and 2.2 (or, separately, ground 5) were part of the wife’s case before the trial judge. Indeed, so much is effectively conceded. The following issues therefore arise:
a)Were “all the facts” necessary to now decide a case of alter ego “established beyond controversy” at trial?
b)Were “all the facts” necessary to now decide that the value of the husband’s shareholding should equate to the liquidation value of the corporation “established beyond controversy” at trial?
c)Alternatively, is either a question of “construction or of law”.
For the reasons about to be discussed, in our opinion, each of those questions must be answered in the negative.
Were Relevant Facts Established Beyond Controversy At The Trial?
(a) Alter Ego
Before answering that first central question with respect to the “alter ego” argument, it is first necessary to address what is embraced by that term.
As has been seen, it is contended on behalf of the wife that its relevant origins can be seen in the well-known passage of Gibbs J’s judgment in Ascot Investments. However, his Honour does not, it should be noted, use the expression “alter ego”; his Honour refers instead to “companies that are mere puppets of a party to the marriage”. In doing so, his Honour draws a distinction between the case before that court and a case where “… [it] might have been different if it had been proved that the directors had refused to register a transfer [of shares] for the sole reason that the husband had asked them not to do so”.[15]
[15]Ascot Investments, 355 (emphasis added).
By reason of their individual memoranda, articles and shareholdings corporations can embrace widely differing measures of control by an individual shareholder. As senior counsel for the second to sixth respondents pointed out by reference to a statement of Lord Reid,[16] if the separate legal personality of a corporation is to be recognised and respected, the expression “alter ego” is not without considerable ambiguity.
[16] Tesco Supermarkets v Nattrass [1972] AC 153, 172.
The expression as used in argument by senior counsel for the wife is synonymous with “lifting the corporate veil” – that is, ignoring the separate legal personality of the corporation. Senior counsel for the second to sixth respondents contends that the doctrine (assuming that it can be described properly as “alter ego”) does not devolve from the indicia of control by a shareholder; corporations where considerable control is vested in a particular shareholder do not per se forego their separate personality.[17] Rather, the concept refers to the company having no existence and direction separate from that of the relevant shareholder; hence the use by Gibbs J of the “mere puppet” metaphor.
[17]See, S & M & Ors [2003] FamCA 1387, [98].
In Sharrment Pty Ltd and Others v Official Trustee in Bankruptcy[18] Beaumont J observed that the trial judge had referred to the “‘reality’ of the situation in terms of Mr Wynyard’s control of the activities of the Wynyard family companies”. Beaumont J went on to say that the trial judge “relied on this, in effect, to ‘lift the veil’ of incorporation so that the court would look through the corporate structure of the family companies to Mr Wynyard and, in this way, treat the companies’ assets as if they were Mr Wynyard’s personal property”.
[18] (1988) 82 ALR 530, 554.
The trial judge’s findings were rejected. Beaumont J held that:
The facts that the companies had little paid-up capital and that Mr Wynyard controlled their affairs do not justify the conclusion that the assets of the companies are, in truth, or “in reality” the beneficial property of Mr Wynyard. Even if Mr Wynyard, as controller of the affairs of the companies, had acted without due regard to the interests of their shareholders or creditors … it would not follow that the property of the companies became the property of Mr Wynyard in some informal way. In such circumstances, the controller may be liable for misfeasance or for breach of fiduciary duty. But it does not follow from the use, or even abuse, of control of the companies’ affairs that their controller acquired any of the companies’ property by some informal process …
To similar effect, a later Full Court of the Federal Court said in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation:[19]
Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company’s separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded … as acts in the law done by that other person.
[19] (1988) 79 ALR 267, 274.
That which was there rejected is, in essence, what the appellant seeks to argue before this Court.
More fundamental to the instant context, however, each of the statements of Gibbs J, Beaumont J and the Full Federal Court just referred to, point to the need for evidence beyond that evident from a corporation’s structure – including its articles, the nature and extent of its shareholdings, and the manner in which dividends have in the past been paid – in order to found a submission (which in any event was not made here) that the corporate veil should be pierced.
Unlike many corporations seen in this court in the context of s 79 applications, N Pty Ltd is not a family company with the husband and wife as directors and shareholders and with the husband having a controlling interest. It is a significant and long-standing trading entity, albeit one born of the husband’s initial endeavours and intentions, the latter of which included classes of shareholdings with particular rights attaching to holdings gifted to his children. One of those children was a director of N Pty Ltd at the time of trial. He had been a director of that corporation (together with the husband) for over 15 years prior to the trial. He was and is active in the day to day running of the business. He gave evidence at the trial. It was not suggested to him at any time that, as a director, he did his father’s bidding or did not otherwise independently exercise his mind in and about his direction of the company.
At [125] of the Reasons, the trial judge recognised the husband’s control of the corporations by reason of his shareholdings. At the same paragraph, his Honour refers to another of the husband’s sons becoming a “principal” for manufacturers whose product the franchise sells. (The husband remained the principal for a particular franchise which is, apparently, the primary component of the business). Having observed that the husband’s control by reason of his shareholding remained irrespective of who a principal may be, his Honour said that in those circumstances “the issue of the direct control of the day to day operations of the group seems to have little relevance” (at [127]).
However, that question may well have had significant relevance if a case of “alter ego” or “mere puppet” had been agitated before the trial judge. The importance of evidence that the other director (or, indeed, perhaps other shareholders) had acted “at the husband’s bidding” was emphasised, for example, by Gibbs J in Ascot.
In our view, it cannot be said that all of the facts upon which the “alter ego” arguments before this court rest were established in the court below. Indeed, many can be seen to not have been referred to at all. It follows that the valuation contended for in ground 2.1 cannot now be the subject of argument.
(b) Valuation of Shares different to Mr MM and Ms LL
Similar considerations to those just discussed apply equally to the wife’s attempt to now agitate for a value different to that for which she contended at trial.
In that respect it should be repeated that the wife was granted leave to rely upon a valuation prepared by a valuer instructed by her, and that both the methodology employed by that valuer, and the valuation thereby derived, is each different from that for which the wife now contends.
Again, the foundation for the wife’s argument is the contended “ultimate control” possessed by the husband by reference to voting rights attached to his shares. The argument is that because all of the facts necessary to establish the degree of control by the husband have been established below, the wife is entitled to argue before this court for a valuation different from that for which she contended below.
The central fallacy in that argument, as it seems to us, is that it assumes that a particular valuation methodology, or a particular valuation, should follow inexorably from the uncontroversial findings and evidence as to the nature and degree of control of the corporation by the husband. It does not, and no evidence, including in particular expert valuation evidence, before his Honour suggests that it did.
The disparity in values and aspects of approach evident from two experts whose expertise is not questioned in these proceedings, is of itself evidence that agreed facts about control emerging from the corporate structure and history of trading can produce different legitimate opinions as to the value of the relevant shareholdings. Of course, alternative factual scenarios postulated to those same experts may have seen differences in their asserted values. Or they may not have. For present purposes the point is that agitating those possibilities and producing evidence in respect of them is the province of a trial and this particular trial included neither.
Further, it has long been recognised that the valuation of shares for the purposes of s 79 proceedings may involve different principles to those informing “true market value” or “fair market value”. Ms LL states specifically that the latter is “the premise of value” adopted by her in arriving at her valuation;[20] Mr MM premises his valuation on the latter.[21] Yet, in the context of these s 79 proceedings, there is no willing vendor and no willing buyer and, indeed, no market. Precisely those sorts of considerations have informed well-settled statements from the Full Court. For example:
We are doubtful, however, whether valuation methods which have been developed for commercial purposes are entirely appropriate for the purposes of family law. The present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse, who either has control after divorce or who stands ultimately to benefit from them or control them after the death of generous parents, as appears to be the case here.[22]
[20] Single Expert Report of Ms LL dated 4 April 2013, paragraph 1.9.
[21] Single Expert Report of Mr MM dated 14 June 2013, page 3, paragraph (i).
[22] Reynolds & Reynolds (1985) FLC 91-632, 80,111-2.
It has also been held for example that “[t]here is no fixed rule as to the proper method of valuation of shares in Family Court proceedings …” and, further that “[w]hilst an expert may thus suggest an approach as being appropriate in a particular case, before accepting it, the Court must come to its own conclusions as to whether that approach is appropriate in the circumstances”.[23] In that respect, Nygh J, citing the High Court in Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd,[24] has said that “… the question of valuation is essentially a matter for the trial Judge”.[25]
[23] Georgeson & Georgeson (1995) FLC 92-618, 81,218.
[24] (1981) 146 CLR 336.
[25] Hull & Hull (1983) FLC 91-360, 78,410.
Again, those principles underscore that agitating relevant possibilities and producing evidence so as to underpin those possibilities is the province of the trial and that is precisely what did not occur in this trial. The corollary is that the factual matters about which there was and is no controversy do not constitute “all of the facts” necessary so as to decide the relevant valuation issues. Those facts do not lead inexorably to the conclusions as to valuation contended for in grounds 2.1 and 2.2. At the very least the valuations now contended for in those grounds, and the factual premises upon which each is based, ought to have been put to each of the respective valuers with the consequent opportunity for them to provide opinion evidence.
Again in our view, in respect of the alternative valuation contended for in ground 2.2, it cannot be said that all of the facts upon which the arguments before this court rest were established in the court below.
The Corporations Act Arguments
Arguments addressing s 254T of the Corporations Act2001 (Cth) are said to support the contentions made by the wife in respect of the husband’s “ultimate control” (or, “absolute control”) of N Pty Ltd. Conversely, arguments advanced by the husband and the other respondents contend that if the husband exercised his control so as to “expropriate the other eight individual shareholders and [T Pty Ltd] of their property in [N Pty Ltd] … [N Pty Ltd] may be in contravention of s 254T and s 232 of the Corporations Act 2001 (Cth).”[26]
[26] Written summary of argument, 2nd to 6th respondents, filed on 8 June 2016, [21].
His Honour found (at [123]) that “[t]he husband’s ability to control the payment of dividends is fettered to some degree by [s 254T]”. The “fetter” there referred to is not otherwise amplified or explained. The wife asserts an inadequacy of reasons as a result.
However, that ground fails for the same reason that arguments as to s 254T (and other sections of the Corporations Act, for example, s 232) are not germane to the issue of whether the wife is entitled to agitate for the value specified in ground 2.2 when no such value was contended for at the trial. In so far as s 254T pertained to issues at the trial, it was raised only in the context of what impact it might have in respect of such control of N Pty Ltd as informed valuations of $6,066,148 and $2,640,981 respectively. Neither that section, nor any other provision of the Corporations Act, was raised at trial in the context of an assertion that the nature and extent of the husband’s control was so total or “ultimate” that the value of his shareholding should be seen as the liquidation value of N Pty Ltd. His Honour made, in effect, passing reference to s 254T because it was of marginal relevance to the value for which the wife contended at trial.
The debate as to the meaning and application of the relevant provisions of the Corporations Act may have relevance to the different question of whether the husband’s control is such that the liquidation value of the company should be seen as the value of his shareholding but that was not an issue run at the trial.
(c) Are “Alter Ego” or the Contended Alternative Values Questions of Law?
Counsel for the second to sixth respondents refers to Winter & Winter[27] where O’Reilly J held “whether a company is the alter ego of a person is a question of fact”. No arguments are advanced to this court to the contrary. Equally, the valuation of shares is a factual conclusion squarely within the province of the trial judge upon consideration of the opinion and other evidence adduced at the trial.
[27] Winter & Winter and Ors [2010] FamCA 933, [83].
Questions of law raised for the first time on appeal might be determined by this court where it is “expedient and in the interests of justice” but “… [t]he expediency of adopting that course may be doubted, when the plea cannot be disposed of without deciding nice questions of fact…”.[28] As we have sought to demonstrate, each of the contentions at the heart of grounds 1, 2.1 and 2.2 cannot be disposed of without determining nice questions of fact which, in this case were not ventilated at the trial.
[28]Connecticut Fire Insurance Co v Kavanagh (1982) AC 473, 480 cited with approval by the High Court in Suttor v Gundowda, above, 438.
Conclusion as to Grounds 1, 2.1 and 2.2
It is beyond doubt that grounds 1, 2.1 and 2.2 pertain to issues that were not agitated at the trial.
It is not established that all of the facts upon which those arguments rest were established beyond controversy at the trial. Indeed, many such facts were not raised at all.
The questions now sought to be decided are questions of fact, not law. It therefore cannot be contended that they should be entertained as questions of law or construction based upon uncontroversial facts.
It is accordingly not open to the wife to pursue grounds 1, 2.1 and 2.2 on this appeal and they should be struck out.
The Treatment of N Pty Ltd’s Loan Accounts: Ground 5
As we have earlier said, the parties were agreed at trial that the valuation of N Pty Ltd should be undertaken by reference to the books of account as at 30 June 2013. At that time there were, relevantly, two loan accounts within that corporation in the names of the husband and wife. The husband owed the company $588,178 and wife owed the company $805,190, a total of $1,393,368.
At trial, the wife disputed that any such monies were owing by her (contending that she had neither sighted nor signed relevant loan agreements and that the husband had spent the company’s money at his will). The trial judge rejected that contention, determining that there was clearly an obligation to repay the company (Reasons [209]-[211]). As a consequence, the loans were included in the balance sheet of the parties’ assets and liabilities as a liability of the husband and wife respectively.
The wife sought an order at the trial that her loan be assigned to the husband pursuant to s 90AE of the Act. The husband said he would give the wife an indemnity in relation to her loan. It was accepted that the wife would not be able to repay the loan (Reasons [314]-[315]). The trial judge made an order pursuant to s 90AE assigning the wife’s loan to the husband.
Ms LL and Mr MM agreed that the loans should be treated as liabilities of the parties for the purposes of the valuation. The reason for that can be seen in Ms LL’s first report. She lists as one of a number of assumptions upon which her valuation is based:
Loans to shareholders and their associates, as defined in Div 7A of Part III of the Income Tax Assessment Act 1936, [“ITAA”] are excluded loans (by virtue of there being, for example, complying written loan agreements in place at each balance date).[29]
Thereafter, in her “Summary of Conclusions” Ms LL said that she had “valued the financial interests of the parties” and, in so doing, included the respective loan accounts as liabilities of the parties. That position, with which Mr MM agreed, is understandable from an expert accounting perspective: loans supported by loan agreements arise because of Division 7A of the ITAA.
[29] Single Expert Report of Ms LL dated 4 April 2013, paragraph 2.2(j).
However, senior counsel for the wife is correct in asserting that the loans may not necessarily be seen in the same way for the purposes of s 79 of the Act.[30] It is argued on behalf of the wife before this Court that the total value of the two loans should not have been included in the assets and liabilities of the parties as a liability of each of them. The argument is that including those loans as liabilities of the parties understates the value of the husband’s interest in N Pty Ltd. That argument, again, devolves from the central argument in relation to the husband’s “ultimate control” of N Pty Ltd (and T Pty Ltd).
[30]See, for example, Biltoft and Biltoft (1995) FLC 92-614; Af Petersens and Af Petersens (1981) FLC 91-095; Rodgers & Rodgers (No 2) (2016) FLC 93-712.
In essence it is said that because the husband has the complete discretion to pay himself dividends, they can be declared in such manner as the husband might, solely, decide. Thus, it is said, the loan in respect of which the husband is substituted for the wife pursuant to s 90AE of the Act can be repaid by N Pty Ltd through the declaration of dividends in a manner, and at a time, of the husband’s choosing.
It is said that the effect is that, while the liabilities have been taken up by his Honour as personal liabilities of the parties thereby reducing the net property to be distributed between them, the debts will be met from corporate rather than personal resources. The argument is said to gain force from the uncontroversial fact that, historically, dividends have been declared (at the instigation of the husband) to reduce or extinguish loan accounts. Senior Counsel relies, analogously on Reynolds.[31]
[31] Above.
Whatever might be, or have been, the merits of that argument, it was not a case advanced before the trial judge. The position of Ms LL (adopted in that respect by Mr MM) was in turn adopted by each of the parties and the two loans were shown as such on the balance sheet put before his Honour by each of the parties. In short, the trial judge adopted the approach each of the parties contended he should adopt in respect of the parties’ respective loans and was not addressed to any contrary conclusion.
If it was to be contended before his Honour that the loans should be treated in a manner different to that for which each party contended, it needed to be argued as such before his Honour and those arguments needed to be based on a factual foundation laid before his Honour. That did not occur. All of the facts necessary to argue the matter for the first time before this court are plainly not “established beyond controversy”. Nor can the point be described as one of law as that expression is used by the High Court in the cases earlier referred to.
Ground 5 should also be struck out.
The Wife’s Contention Based on Mr MM’s Valuation
Ground 2.3 asserts in the further alternative to grounds 1, 2.1 and 2.2 that his Honour erred in not adopting Mr MM’s valuation of the husband’s shareholding.
To the extent that ground 2.3 asserts that Mr MM’s valuation should have been adopted by reference to the husband’s “ultimate control”, it suffers from precisely the same difficulties as those just discussed.
It is clear that Mr MM’s valuation (including that proffered subsequent to reading Ms LL’s reports and discussing the same with her) took account of the significant degree of control exercisable by the husband by reason of his shareholding and its voting rights. For example, he said:
… it is not appropriate for Ms [LL] to value the Husband’s share in [N Pty Ltd] as two distinct share parcels (the A class and the C class) without having regard to the power resulting from the combined share parcel. The Husband (including his 99% interest in [T Pty Ltd]) has in excess of 99% of the voting power in [N Pty Ltd], can control the dividend flow absolutely and can access the underlying value of [N Pty Ltd] by declaring a substantial dividend to himself and/or [T Pty Ltd]. I note that there is not intention to wind up [N Pty Ltd] and it is a going concern.[32]
[32] Single Expert Report of Mr MM dated 26 May 2014, paragraph 51.
The husband’s control of N Pty Ltd (and T Pty Ltd) was central to Mr MM’s valuation and that valuation, cognisant of and based in large measure upon that control, was before his Honour. The challenge posed by ground 2.3 is, then, different in substance to the challenges embraced by grounds 2.1 and 2.2. The wife is entitled to argue ground 2.3 and the question becomes whether appealable error is established.
His Honour observed that “[u]ntil well into the joint cross examination of both experts it seemed to be agreed by them that 25 per cent was the appropriate control premium to be applied” but that, ultimately, it “would be difficult to assert that … there should be a ‘control premium’” in that percentage (at [79]). His Honour concluded ultimately that “Mr [MM] took a completely different approach” to Ms LL (at [88]), and in support of that finding quotes (at [89]) from the Joint Experts Report prepared by the valuers. The approach in that joint report sees both valuers giving importance to the shareholding within the corporations and the rights and degree of control emanating from those holdings.
His Honour analysed the methodology and opinions of each of Mr MM and Ms LL. We can see no error in that analysis. Ms LL offered two alternative approaches to the valuation of the shares. For reasons which his Honour gave, the second of those alternatives was preferred and, similarly, for reasons which his Honour also gave, the opinion of Ms LL was preferred over that of Mr MM.
We are unable to see any error arising from his Honour preferring the evidence of Ms LL over that of Mr MM based on the evidence and arguments to which his Honour was directed.
Is The Trial Judge’s s79(4)(e) Assessment Erroneous?
May J has set out grounds 6, 7, 10, 11 and 12 by which the wife challenges the trial judge’s s 79(4)(e) assessment – the so called “s 75(2) factors”.
His Honour’s assessment was conducted in the context of findings by his Honour that “in 2000 the husband and wife commenced a personal relationship”, married in 2003, and separated in March 2010. His Honour assessed the respective contributions of the parties in the proportion 85 per cent to the husband and 15 per cent to the wife. There is no challenge to that assessment. At [248] of the Reasons, his Honour set out his findings in respect of the property of the parties or either of them. The parties’ “total assets” were found to be $4,828,480. The husband had a superannuation interest in an amount of $1,032,005. (The wife had no superannuation interests). There were addbacks of $813,783. The parties’ liabilities (which included the loan accounts earlier referred to) totalled $4,011,363. Accordingly, his Honour found that the net value of the parties’ property was $2,662,905.
At [273] and following of the Reasons, his Honour deals in turn with each of the matters listed in s 75(2) which his Honour considered relevant. His Honour noted that the husband was then aged 79 and the wife 59. His Honour discussed the health difficulties experienced by the wife and the impact on her past and likely future employment, concluding, at [280]:
Nonetheless, having regard to the disorder diagnosed by [her doctor] the limited work she has undertaken since 2001, her age and her lack of qualifications an adjustment in her favour needs to be made for this factor.
In referring to the commitments of each of the parties necessary to support themselves (s 75(2)(d)) his Honour found, at [282]:
Since the marriage the wife has increased the mortgage on the [Town C Property] [owned by her] to its present value of approximately $351,000. That property is rented. The rent is not sufficient to pay the mortgage. She has, at least according to the husband, an obligation to pay [N Pty Ltd] $808,190. That liability however will be ameliorated by the orders proposed by either party in these proceedings.
His Honour also found, at [283] that “[w]hatever orders are made in these proceedings, the standard of living of the wife is likely to be significantly less than she presently enjoys. This is inevitable”. In particular, as his Honour went on to find, the “large and very comfortable” former matrimonial home in which the wife had been residing post separation “will of necessity need to be sold [and] [t]hat will reduce the wife’s standard of living”.
Within his assessment of s 79(4)(e), his Honour rejected submissions by the wife that family violence asserted by the wife should be taken into account (noting that his Honour’s finding is couched in terms of contributions (at [285] – [291])). His Honour also rejected submissions made by the husband that the wife’s “profligate” spending should be taken into account but considered there was “force in the submission” that the husband had “funded from capital” liabilities in respect of the former matrimonial home occurred by reason of “her insistence [in] remaining” there “after she became aware that its value was substantially less than the amounts secured upon it” (at [298]).
His Honour concluded in respect of the “s 75(2) adjustment”:
300.Taking all of these matters into account I am of the view that there should be a five per cent adjustment in the wife’s favour so that she will receive 20 per cent of the net assets. This is an appropriate division which reflects the parties’ contributions, particularly the husband’s financial contribution and takes into account the matters just mentioned. I also take into account in determining the division the partial property settlement of $200,000 received in 2012, the extensive spousal maintenance the wife has received and the wife’s use of the [former matrimonial home] which required substantial mortgage repayments. I also take into account that any liability that the wife may have to [N Pty Ltd] will be borne not by her, but by the husband.
Interestingly, having reached a conclusion as to the s 79(4)(e) adjustment, his Honour went on to note, under the heading “Form of Orders” that: “[t]he wife, therefore, does not have any significant capacity to contribute to the shortfall in the [former matrimonial home]. The 20 per cent share of the shortfall is $38,023” (at [307]). It should be noted that his Honour there refers to the position emanating from his Honour’s overall s 79 assessment – that is, after the s 75(2) adjustment. His Honour went on to find (at [308]) that “the shortfall will affect her disproportionately more than the husband” such that “[t]he appropriate course to follow is that, by way of an additional adjustment under s 75(2) the husband is to bear any shortfall in the sale of [the former matrimonial home]”.
The “s 75(2) adjustment” considered just and equitable by his Honour is, in dollar terms, approximately $133,000.
The wife contends (ground 11) that this is “manifestly inadequate in light of his Honour’s finding of fact with respect to the earning capacity and financial resources of the appellant and the respondent”. Ground 12 thereafter lists a number of specific considerations said to be directly relevant to the s 75(2) inquiry.
The Full Court has recently commented on the difficulty confronting it when assertions are made as to “manifest inadequacy” of s 75(2) adjustments or assertions that assessments of either that component of the s 79 process or the assessment of the contributions component fall “outside the bounds of a reasonable exercise of discretion”. Each involves a potential tension between a determination that a conclusion is “wholly wrong” and this court substituting its own opinion for that of the trial judge.[33] Here, however, for the reasons which follow, we consider with respect that his Honour has failed to consider relevant considerations in his s 79(4)(e) assessment and has taken account of an irrelevant consideration. As a result, in our judgment discretionary error is established as a consequence.
[33]See Rodgers & Rodgers (No 2) (2016) FLC 93-712; Wallis & Manning (2017) FLC 93-759 and the cases cited in each.
Control and the Dividends Declared to the Husband and T Pty Ltd
In comparing the position of the husband to that of the wife as outlined in [280] of the reasons quoted above, his Honour thereafter said:
281. On the other hand the husband, although significantly older than the wife, has the benefit of his interests in the [Hunt Group] and, importantly retains his control over, all of the voting shares in [N Pty Ltd]. He says that he pays dividends as he wishes. Notwithstanding what the husband describes as the business transitioning to his children, there was no suggestion that his control of the group through his shareholdings would not continue. There was a suggestion that his ability to pay such dividends as he chooses to himself in the future is restricted by s 245T [sic] of the Corporations Act and the growing involvement of his sons in the business. That has not yet been the case, however.
The findings to which we have referred made by his Honour earlier in the reasons recognising the husband’s control over N Pty Ltd and, specifically, control over the declaration of dividends and their amounts, timing and recipients, is in our view extremely relevant to a consideration of s 79(4)(e) and, in particular, s 75(2)(b), (d), (g) and (n).
In terms of those specific provisions of s 75(2), the comparison between the husband’s current and future position and that of the wife is stark. Consideration of the respective income, property and financial resources of each of the parties must be undertaken consequent upon the mooted distribution of property in accordance with the assessed contributions of the parties. On any view, his Honour’s assessment of the contributions of the parties would see the wife in a very difficult financial position. In particular the former matrimonial home would need to be sold; her remaining property of modest value was heavily encumbered and its rental income was insufficient to meet its outgoings. On his Honour’s findings the wife will need to rehouse. The husband would retain the shareholding in N Pty Ltd (and T Pty Ltd) with all of its rights and benefits. The wife’s net position saw her with negligible property after the payment of debts.
Crucially, his Honour was obliged to consider his s 79(4)(e) assessment not merely in percentage terms but by reference to its real impact in dollar terms.[34]
[34] See, for example, Clauson & Clauson (1995) FLC 92-595.
The assessed adjustment of about $133,000 needs to be seen against the manifestation in dollar terms of the findings made at [281] quoted above. The admitted history of dividend declarations to the husband and T Pty Ltd from N Pty Ltd is set out by his Honour at [43] of the Reasons. In the five taxation years preceding the trial, dividends were declared to the husband and/or T Pty Ltd as follows: $825,000 in 2009; $50,000 in 2010; $275,000 in 2011; $74,300 in 2012 and $87,000 in 2013. The average of the amounts declared to the husband and/or T Pty Ltd in those five years is, then, approximately $262,200 annually, an amount approximately double his Honour’s assessed s 75(2) adjustment. In the 13 taxation years preceding the trial, of approximately $2.8 million in declared dividends, the husband and/or T Pty Ltd received approximately $1.65 million. The assessed adjustment is approximately equal to the average dividend declared annually in the 13 years prior to the trial.
The wife was aged 59 at trial; the husband was aged 79. The dollar value of his Honour’s finding at [280] quoted above needed to be seen in the above context if its impact in dollar terms was to be assessed.
The Treatment of the Parties’ Loan Accounts
The parties’ loan accounts and the manner in which they were dealt with by his Honour have already been referred to. As has been seen, his Honour determined ultimately to make an order pursuant to s 90AE(1)(a) of the Act (Order (7) by which N Pty Ltd was ordered to “substitute the husband for the wife in respect of any debt owed by her to it or recorded in its books … and to take all steps to release her from any liability to it in respect of those debts”).
Findings made by his Honour underpinning that order, referenced properly to the requirements of s 90AE, were made after his Honour reached a conclusion in respect of the “s 75(2) adjustment”. Those findings include:
315.It is apparent from the orders that I otherwise propose making in this matter that the wife will not have the means to repay this debt. She will not receive the [former matrimonial home] which will have to be sold to repay the mortgage. There is likely to be a shortfall on its sale.
…
317.The court must next consider that, given the proposed order concerns a debt of a party to the marriage, whether or not it is foreseeable at the time the order is made that the order would result in the debt not being paid in full.
318.As a result of the orders being made in these proceedings the husband will retain his superannuation entitlements and his shares in [N Pty Ltd] and [T Pty Ltd]. He will have net assets of $2,511,680, less any shortfall on the sale of [the former matrimonial home] (and recognising that $344,679 is an addback). Thus even taking into account the further $808,190 of the loan account in the wife’s name he will still have a significant assets [sic].
319.The husband is also in a position to declare dividends to himself or to [T Pty Ltd] as he sees fit, provided it is otherwise proper to do so.
…
321.[Contrary to the submissions made by the husband and the second to sixth respondents] there is no suggestion that the fiduciary and statutory obligations of the directors would compel them to seek the immediate repayment of the loan account from the husband. He may be in a position properly to declare dividends to enable that debt to be paid easily and in any event he could remove the directors at will if they chose to take that course.
In making the order pursuant to s 90AE, his Honour needed, of course, to take account of the interests of the third party, N Pty Ltd. His Honour was alive to that and said:
323.As I have already indicated the husband will have sufficient assets to meet the debt.
324.So much seems to be conceded by the interveners. Accordingly, it is not foreseeable at this time that if the orders sought by the wife are made that order would result in the debt to [N Pty Ltd] not being paid in full. Indeed, as there is no prospect of the wife having sufficient assets or income to repay this debt the proposed order would, if anything, enhance the prospect of [N Pty Ltd] being repaid.
The decision to make an order pursuant to s 90AE of the Act embraces a decision about interference with third party rights. However, the characteristics of the particular third party are plainly an important consideration. Here, the third party had all the attributes of control by the husband about which his Honour had made the findings to which we have earlier referred.
The findings made by his Honour in respect of s 90AE have their corollary in highly relevant s 75(2) considerations: s 75(2)(d) (necessary commitments) and also, for example, s 75(2)(b) (property and financial resources of the parties); s 75(2)(g) (reasonable standard of living); and s 75(2)(n) (the terms of any property order). Section 75(2) was not revisited by his Honour in light of the findings made, and orders contemplated, in respect of s 90AE.
Loan accounts in very significant amounts were taken up as personal liabilities of the parties in ascertaining the property of the parties subject to s 79 orders and which saw the husband responsible for those debts. As has already been pointed out, that approach was consistent with the expert evidence which, in turn, was consistent with the loan agreements which had been executed for the purposes of Division 7A of the ITAA.
Yet, as has also been pointed out, the treatment of those loans in that manner is by no means conclusive of how they should be treated in achieving justice and equity pursuant to s 79 of the Act. As well as the issue earlier referred to, once it was determined that the debts of the parties were to be borne by the husband, the findings made by his Honour as to his degree of control in this particular corporation, in particular in respect of company funds and the declaration of dividends, became an extremely relevant s 75(2) consideration.
The treatment of the loan accounts meant that the net property of the parties available for division between the parties was reduced as a result of those liabilities, and the net property received by the husband reduced similarly. However, by reference to his Honour’s findings as to the matters just mentioned, that liability of the husband can be met entirely by N Pty Ltd emanating from actions entirely under the husband’s control and at a time and in a manner entirely of his choosing. That situation should be contrasted, for example, with an obligation by the husband to pay the full amount of a debt immediately to a creditor entirely independent of the husband and N Pty Ltd.
In our view, those matters are crucially relevant to each of the sub-sections of s 75(2) earlier referred to. We are respectfully unable to see where, or in what way, this highly relevant matter was considered by his Honour in respect of s 79(4)(e) generally, or in the assessment of the dollar value of that assessment more specifically.
We consider, with respect, that his Honour erred by failing to take account of a relevant consideration.
Section 75(2)(o) Considerations
At [169] – [174] and [175] – [179] of the Reasons, his Honour considered issues described respectively as “Loan to [Mr J]” (an adult son of the husband) and “Funds Withdrawn by the Husband”. Neither of those specific matters are referenced to any ground of appeal or, specifically, to the s 75(2) challenge.
In respect of the first of those issues, his Honour found (at [173]);
The submission of the husband that this and similar loans would be reflected in the valuation of that entity making the loan cannot be accepted as applying to this payment because there was no evidence it was a loan, let alone by an entity that recorded the advance in its books.
His Honour went on to find at [174]:
The appropriate course is to recognise this as a payment to the husband’s son from an account for which the husband and the wife are liable and to take it into account, if appropriate, pursuant to s 75(2)(o) of the Act.
Despite that statement, we are unable to see where his Honour addressed that issue at all in considering s 79(4)(e). We consider it a relevant consideration.
In relation to the issue of the “funds withdrawn by the husband”, the wife contended that two amounts totalling $110,000 were withdrawn from the parties’ line of credit which the husband said were deposited to N Pty Ltd were not so deposited. His Honour found, at [179]:
Given the inability of the husband to establish that those funds were received by [N Pty Ltd] it is more probable than not that they were not returned to [N Pty Ltd] and used for some other purpose which remains unknown to the court. This then precludes them from being taken into account as an asset of the parties but are again something that would need to be considered under s 75(2)(o) in due course.
Again, we are unable to see where his Honour addressed that issue in considering s 79(4)(e). Again, we consider it a highly relevant consideration and all the more so given the dollar value of his Honour’s ultimate s 75(2) assessment.
Finally, the wife contends that his Honour’s reference to considering the $200,000 partial property settlement as part of the s 75(2) considerations (at [300] of his Honour’s Reasons earlier quoted) is an error.
It is said that inclusion of this sum as a relevant factor ignores the fact that it was used to pay legal fees which his Honour otherwise added back as against the wife. Consequently, its inclusion as part of the s 75(2) assessment is an irrelevant consideration and we think there is merit in this contention.
Conclusion as to s 79(4)(e)
We consider that his Honour erred in his s 79(4)(e) assessment by failing to take account of relevant considerations and by taking account of an irrelevant consideration.
The appeal should succeed on this basis.
The Other Grounds
We otherwise agree generally with May J’s reasons in respect of his Honour’s treatment of legal fees and expert fees.
Conclusions And Orders
For the reasons we have given, an order should be made striking out grounds 1, 2.1, 2.2 and 5.
For the reasons we have given, the appeal should be allowed.
The consequence is that the orders made by Aldridge J on 4 December 2014 should be set aside.
If this court is to re-exercise the relevant discretions, we must do so on the basis of the evidence before this court at the time of the hearing of the appeal. It is effectively conceded by both parties that this court does not have available to it that evidence and is therefore unable to re-exercise the discretion. Accordingly, we respectfully agree with May J that (as was again effectively conceded before us) we have no option but to remit the matter for rehearing.
We also respectfully agree with May J that orders should be made facilitating the making of any applications for costs and any written submissions in that respect.
MAY J
Introduction
On 4 December 2014 Aldridge J made final property orders as between Ms Atkins (“the wife”) and Mr Hunt (“the husband”). A number of companies and the husband’s family members were party to the proceedings, being N Pty Ltd, T Pty Ltd, H Pty Ltd, Mr D and Mr J.
On 31 July 2015 the wife filed an Amended Notice of Appeal. The wife appeals Orders 1 and 6, which provide as follows:
(1)That the husband is to pay to the wife, within twenty-eight (28) days from the date of these Orders, the sum of $174,747.
…
(6)That upon the completion of the sale of the [B Street] property all existing orders in relation to that property and for spousal maintenance are discharged.
The wife asks that the orders made by the primary judge be varied such that the husband pay her $4,299,226, rather than the sum ordered in paragraph (1) of the orders, $174,747.
The essential contention of the appellant is that a company, N Pty Ltd, with an agreed value of $11,147,860, is so controlled by the husband it should have been included in the balance sheet of assets to be divided between the parties at that figure, rather than a significantly lesser sum based on a valuation of an accountant, the single expert in the matter.
The only order made in relation to N Pty Ltd is Order 7:
(7)That [N Pty Ltd] substitute the husband for the wife in respect of any debt owed by her to it or recorded in its books as being owed to it by the wife and to take all steps necessary to release her from any liability to it in respect of those debts.
At the hearing of the appeal it was conceded at the outset by counsel for the wife that one difficulty with the appeal ground in relation to N Pty Ltd is that it was not the case argued before the primary judge, although it is contended that was always the proper approach.
The question is whether this is one of those rare cases that falls into the category of most exceptional circumstances, where a party will be permitted to raise a new argument after the decision, when there was a failure, either deliberately or inadvertently, to put the argument during the hearing (Metwally v University of Wollongong (1985) 60 ALR 68).
The other issues raised in the appeal include arguments as to whether various liabilities should have been included in the balance sheet, and that an allowance of five per cent of the net pool of property as found by the trial judge for the wife pursuant to section 75(2) of the Family Law Act 1975 (Cth) (“the Act”) was clearly wrong.
The other order appealed provided that upon the sale of the parties’ home, all existing orders for spousal maintenance be discharged.
It is not necessary to deal with the spousal maintenance discharge order specifically, because on 12 December 2016 this Court allowed an appeal from a spousal maintenance order made by another judge on 21 August 2015, that is after the substantive proceedings. The order made by the Full Court remitting the wife’s application to be re-heard will allow the wife’s spousal maintenance claim to be heard. That was one of the orders sought in this appeal.
The ground of appeal remains relevant to the argument that the orders overall were unjust. It is submitted by counsel for the wife that the effect of the orders is that the wife’s financial position is in a deficit of $400,000.
Background
The husband is aged 82 and the wife 62. The parties were married for seven years, they previously lived together for some two years. The husband is involved in various businesses including in sales. He has eight adult children from three previous marriages. Some of those children are involved in his businesses. Two of them were respondents in the proceedings, as noted above. On any view of the evidence, the husband is a man who has access to significant wealth.
The wife has one adult son from a previous marriage, has no qualifications, no income and some difficulties with her health (at [280]).
As there was no suggestion the primary judge inaccurately set out the relevant company structures and the husband’s position and shareholding in them, it is not necessary to repeat in detail those interests at this point. It will be seen that the historical elements of the acquisition of the business interests are of some importance (at [7] – [13]). The nature of the various structures and shareholdings are essential to appreciate the arguments on appeal.
H Pty Ltd is the operating vehicle for the sales business and trades as the “[Hunt Group]”. Its shareholders are N Pty Ltd (80,000 ordinary shares) and I Pty Ltd (20,000 ordinary shares). I Pty Ltd is wholly owned by a company, which is in turn wholly owned by Mr J. N Pty Ltd also holds 800,000 preference shares in H Pty Ltd. H Pty Ltd conducts the business of the Hunt Group, the flagship of which is Franchise 1. Of significance, the husband is the Principal for Franchise 1. The Hunt Group had a turnover of approximately $150,000,000 per annum in the financial year 2013 (at [36]).
T Pty Ltd’s only investment is the shares it holds in N Pty Ltd. The shareholders are the husband as to 99 shares and Mr D, one share. They are also the directors.
At the outset of the reasons of the primary judge it was noted that “a significant dispute between the parties was the value of the [Hunt Group]”. As earlier noted, three of the companies – N Pty Ltd, T Pty Ltd and H Pty Ltd – were parties to the proceedings, as were Mr D and Mr J, the husband’s sons who are directors with the husband of some of the companies.
The parties acquired very little property together. In January 2004 a house property known as the B Street property, was purchased in the wife’s name for $2,000,000. To fund this purchase $1,500,000 was borrowed from Westpac and the balance of the purchase price was provided by a loan from N Pty Ltd. Extensive renovations were undertaken and a further $500,000 was borrowed from Westpac (the “rocket home loan”). The total cost of the purchase and renovation was $2,900,000. The house was valued for the purpose of the trial at $1,800,000 and sold after the trial for $2,170,000. When that figure is compared to the $2,900,000 invested overall, it is clearly a substantial loss.
In 2009, the wife began Business E with a business partner, Mr Q, by borrowing $40,000 secured over a home previously owned by her, at Town C, and with financial assistance by the husband. The business was operated through a company “[Business Z Pty Ltd]”. To provide security for the lease of the Business E premises, a bankers’ undertaking was given over the B Street property and an overdraft of $50,000 was obtained. Business E was a failure, leaving significant debts.
The balance sheet of the assets and liabilities of the parties as found by the trial judge at [248] is as follows:
BALANCE SHEET
Assets
Joint
Wife
Husband
NAB account …32
3,985
Siam Commercial Bank Public Company Ltd account
28,996
Shares in N Pty Ltd
1,327,126
Shares in T Pty Ltd
1,313,855
B Street, Town M
1,800,000
Town C property
350,000
St George Bank Account
518
Golf carts
4,000
Assets Sub Total
2,154,518
2,673,962
Total assets $4,828,480
Addbacks
Joint
Wife
Husband
Legal fees paid by the wife
469,104
Legal fees paid by the husband
344,679
Total Addbacks $813,783
Liabilities
Joint
Wife
Husband
WBC Rocket Home Loan secured over B Street Property
497,097
CBA Loan secured over Town C Property
342,288
WBC Line of Credit secured over B Street property
1,493,020
N Pty Ltd Loan
805,190
N Pty Ltd Loan
588,178
H Pty Ltd loan
139,526
American Express Card
6,064
Loans for Business Z Pty Ltd secured over B Street Property
140,000
Liabilities Sub-Total
497,097
1,287,478
2,226,788
Total Liabilities
$4,011,363
Wife’s superannuation
Husband’s superannuation: Hunt Group Staff Superannuation
1,032,005
Total superannuation
$1,032,005
Total Addbacks
$ 813,783
Total Assets
$4,828,480
Less Total Liabilities
$4,011,363
Net Assets
$2,662,905
The only controversial valuation at trial and on appeal was in relation to N Pty Ltd (including T Pty Ltd). The other major issues for the judge as relevant to the balance sheet were “add backs” for expert and legal fees and the parties’ loan accounts in N Pty Ltd.
The Appeal – Grounds 1 and 2
The grounds of appeal are as follows:
Pool for Division
1.That his Honour erred in principle in failing to find that [N Pty Ltd] was the alter ego of the respondent.
2.That his Honour’s conclusions as to the value of the interest of the respondent in [N Pty Ltd] and his further interest in [N Pty Ltd] through [T Pty Ltd] miscarried as to discretion and fact and his Honour ought have found that the aggregate value of those interests of the respondent was:
2.1. $11,147,860; and,
2.2. in the event that 2.1 is rejected, then $10,919,749; and
2.3.in the event that both 2.1 and 2.2 are rejected, then $6,066,148.
It is necessary to first give some brief description of the companies, the opinions of the two experts and the judge’s key findings relevant to this ground.
N Pty Ltd
As the primary judge explained, Ms LL was appointed in October 2012 by the parties as a single expert. Ms LL was asked to value the parties’ assets, and in particular the husband’s corporate interests. The wife later sought leave to have further evidence provided by another accountant, Mr MM who followed a different methodology to that of Ms LL. The two experts ultimately agreed that N Pty Ltd was valued at $11,147,860, which included the agreed value of H Pty Ltd.
The principle difference between the experts was in relation to how they valued the shares in N Pty Ltd, being those held by T Pty Ltd and the husband (at [41]).
The primary judge described the history and operation of N Pty Ltd. Since its incorporation in 1973 it has operated as an investment company. Its assets consist of land and buildings with a value of $8,700,000. N Pty Ltd holds shares in related companies including H Pty Ltd, and also had loans receivable “from directors and director related parties” (including to the husband and the wife) totalling $3.03 million. The directors are the husband and his son Mr D.
T Pty Ltd and the husband equally hold all of the voting shares in N Pty Ltd (“A class shares”). As the husband owns 99 per cent of the shares in T Pty Ltd, the judge concluded that the husband controls all of the voting shares in N Pty Ltd. Those other classes of shares do not carry voting rights. They are variously held by the husband and his eight children. The shares entitled the holder to receive dividends and participate in a winding up should there be a surplus of assets.
Incorporated in the Reasons is the schedule of dividends declared by N Pty Ltd between 2001 and 2013 (at [43]). The significance of this is twofold. First, to appreciate the amount of money received by the husband as opposed to other shareholders. Secondly, that this distribution formed the basis for Mr MM’s valuation.
The judge noted:
66.The issue between the experts centred upon the premium that should be applied in valuing the shares held in [N Pty Ltd] by [T Pty Ltd] and the husband. This is because [T Pty Ltd] and the husband own all of the voting shares and each holds shares entitling them to receive a dividend. Thus, [T Pty Ltd] and the husband can pay such dividends to themselves as they determine (provided they act properly in so doing). They can also control the company through the appointment and removal of directors or by passing a resolution for the winding-up of [N Pty Ltd].
67.As the husband, for all practical purposes, controls [T Pty Ltd], he also controls the payment of dividends from [N Pty Ltd] and controls appointments to its board of directors.
The experts disagreed about the approach to be applied in valuing the controlling interest held by the husband, by reason of the nature of his shareholdings. It must be emphasised that the experts were not asked to consider whether N Pty Ltd could be valued as if it were wholly owned by the husband or his alter ego. Ms LL referred to the “substantial degree of control” held by the husband, but noted that it was not unfettered (at [7.30] of her report). In particular, there were other directors in T Pty Ltd and N Pty Ltd who could vote against the husband. As the table incorporated in the Reasons at [43] demonstrates, the bulk of the dividends declared by N Pty Ltd have been paid to the husband.
It is unnecessary to discuss in detail the two approaches to the valuation put forward by Ms LL. They are accurately described in the Reasons. Simply stated, Ms LL’s method was based on the capital rights of the shares in a winding up and depended on the allowance for control by the husband. On the first approach, her valuation of the husband’s interest in T Pty Ltd and N Pty Ltd each was $1,086,920 or on the second $1,327,126.
After reference to s 254T of the Corporations Act 2001 (Cth) (“the Corporations Act”) and the limitations that section imposes on the payments of dividends, the judge accepted the higher valuation of Ms LL. Thus in the Balance Sheet there appeared $1,327,136 and $1,313,855 for the value of the husband’s shares in N Pty Ltd and T Pty Ltd.
The valuation of Mr MM was based on the history of the payment of dividends as described in [43] of the Reasons. The value attributed to the husband’s share by Mr MM was $6,066,148. For the reasons clearly and correctly articulated, the judge rejected the opinion of Mr MM. In particular his Honour found, accepting the opinion of Ms JJ:
110.…In the absence of a pattern as to the payment of dividends it is difficult to see how the past can be used to predict the future.
Ultimately, the primary judge found:
120.Through his shareholding in [T Pty Ltd] and his own shareholdings the husband completely controls the voting in general meetings of [N Pty Ltd]. He can appoint the directors he chooses. He has sufficient votes to wind the company up if he chooses. He has, in his complete discretion, determined the payment of dividends from [N Pty Ltd]. He alone has determined the amount of the dividends that have been paid and to whom they have been paid.
121.All these matters indicate a substantial degree of control. This control over the company remains notwithstanding his assertions that he has stepped back from the business for at least the last three years. Even accepting for the present purpose that he is no longer involved in the day to day running of the business his position of control remains unaltered.
Counsel for the wife particularly relied on these findings to submit that the companies were the alter ego of the husband.
The Metwally Problem
The first question is whether it is open to the appellant to now argue Grounds 1 and 2, they not having been the wife’s case at trial. In part, to decide this question it is important to appreciate what was contended by the wife at trial, including the orders sought.
The wife’s case is represented in a number of documents to which we were referred. The balance sheet presented by her lawyers listed shares in N Pty Ltd (including H Pty Ltd) at $3,874,129. The asserted value of the husband’s share in T Pty Ltd was $3,523,566. This was based on a valuation by WW Accountants dated 14 June 2013. Attached to the outline of submissions filed on behalf of the wife was the amended Minute of Orders.
The wife asked for orders that she retain the house, the B Street Property, and that the husband discharge the liabilities on this property. Apart from some relatively insignificant chattels and orders in relation to loan accounts in the companies and indemnities (including tax), the wife asked that the husband pay her a cash sum equivalent to 40 per cent of the net assets of the parties.
It was also asked that until the transfer of the house and payment of the cash sum the husband continue to pay spousal maintenance in the sum of $1,288.77 per week and meet other expenses in relation to the wife’s motor vehicle, outgoings on the home and medical insurance.
It is obvious that the orders sought by the wife are quite different in nature and quantum from those ultimately made by the judge.
The wife contended that the net value of the assets was $8,405,479 and that she obtain an unencumbered property, the B Street Property, valued at $1,800,000 and cash of approximately $1,500,000 being 40 per cent of the net asset pool as contended in her case (including the husband’s superannuation). The wife has no superannuation.
It was submitted that such orders would accord with 20 per cent for contributions across the ten years of the relationship and a further allowance of 20 per cent to reflect the matters said to be relevant in respect of s 75(2). Those included an adjustment by reason of submissions that it had been demonstrated in the proceedings that the husband had undisclosed assets and resources.
The husband asked that the B Street Property be sold and any net balance after the discharge of liabilities be distributed as to 85 per cent to the husband and 15 per cent to the wife, less the discharge by her of the bank guarantee in relation to Business E. The wife had received the sum of $200,000 by way of partial property settlement which was paid to the lawyers on account of their fees. In effect, by the husband’s proposal, the wife would receive nothing further.
Mr Richardson SC argued that this clause means that there is only an entitlement to the extent that discretion is exercised – if it is even exercised. It was therefore submitted that there is in fact no entitlement, particularly in circumstances where the husband is and has always been in complete control of the company (p.22 transcript).
It is also relevant to note:
11.On the winding up of the Company the holder or holders of the said “B” class, “C” class, “D” class, “E” class, “F” class, “G” class and ‘H” class shares shall be entitled to participate pari passu in surplus assets.
Additionally, it was submitted that it is of significance that the shareholders of the B – H classes of shares received those shares as a gift from the husband, and did not pay for them like one would in a more usual company structure.
Counsel for the second to sixth respondents submitted that it was incorrect to use the phrase “alter ego” when describing the husband’s relationship with N Pty Ltd. Counsel referred to Tesco Supermarkets v Nattrass [1971] 2 All ER 127 noting the term alter ego is “…misleading. The person who speaks and acts as the company is not alter. He is identified with the company. And when dealing with an individual no other individual can be his alter ego…” (at 132). It was argued that what the appellant wife was really asserting is that “the doctrine of alter ego should be applied in this case because of the way the company was being … ‘controlled’…” (Appeal Transcript 24 August 2016, p. 101, l.21 – 23). Instead it was submitted the concept of “alter ego” is about who is directing the mind and will of the company and to make this enquiry involves piercing the corporate veil.
It is important to understand the definition and meaning of alter ego. Reference to Ascot, particularly at p. 343, in the judgment of Barwick CJ explains the concept:
Indeed, there has been no suggestion in this case that the appellant's memorandum and articles of association in any relevant respect are invalid. Consequently, the shares in the appellant did not entitle the shareholder to compel the registration of any transfer of a share or shares which he might make.
…
I mean also to indicate that the husband was not shown to be able to treat the company as his own, an alter ego. Though he was managing director, it does not follow that he could exercise the powers of that office for his own personal purposes. The word "control" in this connexion may be ambiguous. The control which is significant here would be the ability to treat the company and its affairs as his own. Control he might exercise in the interests of the company and all its shareholders would be irrelevant.
It should be recalled that the issue in Ascot was whether the Family Court had power to order the company to register the transfer of shares from the husband to the wife (p 354 – 355):
… but it is quite another to order third parties to do what they are not legally bound to do …
The position is, I think, different if the alleged rights, powers or privileges of the third party are only a sham and have been brought into being, in appearance rather than reality, as a device to assist one party to evade his or her obligations under the Act. Sham transactions may always be disregarded. 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 the party, the fact that in form the order appears to affect the rights of the company may not necessarily invalidate it.
…
… Thus, in the present case, the Court must deal with the husband's shares in Ascot Investments as they in fact are, that is, as shares in a company whose memorandum and articles contain a restriction on transfer.
There is no doubt that whether a company is the alter ego of a person is a question of fact (see Winter & Winter [2010] FamCA 933 at [83]). This is because such a decision depends on factual findings as to the nature of the relationship between a person and a company and other interested persons.
As noted above, counsel for the second to sixth respondents, drew attention to the proper definition of “alter ego” and that it could not be correctly used in this case.
While Mr Richardson SC referred the Court to clause 8 of the Articles, Mr Gray submitted that this clause must be read in conjunction with clause 83. This clause sets out powers and duties of the directors of N Pty Ltd. Clause 83(b) notes that the Board of N Pty Ltd may “Appoint and remove or suspend a general manager, managers, secretaries, officers, clerks, agents or servants and fix their duties.” It was submitted that the evidence reveals the husband was not involved in the business, and had not been since at least 2000, and therefore:
So it’s that kind of evidence that talks about this issue of control – one needs to be very careful about that word – and as distinct from the alter ego, which is the directing mind and will of the company and so, in my respectful submission, your Honours, the single element of control is not enough to take my learned friend to the position he wishes to have your Honours find: that this company was the alter ego of Mr [Hunt].
(Transcript of Appeal, 24 August 2016, p 103, l 6 – 11. )
There is no doubt that the other shareholders also have an interest and had these arguments been before the primary judge they would have provided evidence to the court as to their interests, which it is said would have defeated such a case. That the husband is neither a sole shareholder nor the sole director of N Pty Ltd. Other persons have an interest in N Pty Ltd and are entitled to a range of remedies including upon a winding up or a liquidation.
Mr D has been a director of N Pty Ltd since 1998. It was never suggested to him in the trial that he was other than a real director and shareholder.
The argument of the appellant has been raised in a number of other cases. For example, in S & M & Ors [2003] FamCA 1387:
97.A basic premise of company law is that a company is a legal entity separate from its shareholders and directors: Salomon v Salomon & Co Ltd (1987) AC 22. Thus, even where a company has only one shareholder and director, the company nevertheless retains its rights, privileges, duties and liabilities separate from those of its constituent director(s) and shareholder(s), as the case may be. A necessary consequence of this principle is that company property remains separate from that of its director(s) and shareholder(s).
98.However, the alter ego concept for the purposes of proceedings under s 79 of the Act, recognised in Ascot Investments (supra), does not mean in the case of a company that the separate entity doctrine is abandoned. The company remains a separate legal entity and its rights, privileges, duties and liabilities are separate from those of its sole member. It does not mean that a party to the marriage can deal with the interests of the company in a way that is contrary to the general law or the Corporations Act. ….
It is illuminating to consider what possible order the wife might obtain vis-a-vis the company and in so doing consider what was said by French CJ in Kennon v Spry (2008) 238 CLR 366 at 391, remembering that the entity there was a discretionary trust:
68.As to the position of the other beneficiaries, it has long been accepted that in some circumstances the Family Court has power to make an order which will indirectly affect the position of a third party. That acceptance, which predated the enactment of Pt VIIIAA of the Family Law Act, is reflected in the judgment of Gibbs J in Ascot Investments Pty Ltd v Harper. That case concerned the validity of an order in favour of a wife made by the Family Court requiring directors of a company not completely controlled by the husband to register a transfer of shares into her name. It is in that context that the passage relied upon by Dr Spry is to be understood:
"Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it."
The articles of the company in that case gave to its directors a discretion to register or refuse to register a transfer of any shares in the company. The Family Court was found to have no power to direct them as to the manner in which their discretion should be exercised. Giving full effect to the generality of the passage quoted from the judgment of Gibbs J, the case does not stand against the proposition that s 79 would apply in the circumstances of this case where the only property interests are those of the trustee who is a party to the marriage, and where no other beneficiary has any legal or equitable interest apart from a right to due consideration and administration. That, of course, is a right which is a relevant consideration informing the exercise of the Court's discretion as is any indirect effect upon a third party's rights: R v Dovey; Ex parte Ross.
69The preceding conclusion does not involve some general extension of s 79 which would require that it be hedged about with protective discretions of uncertain application to prevent its intrusion into trust arrangements affecting assets foreign or extraneous to those acquired by the parties to the marriage in their own right. So if the husband were trustee of a charitable trust or executor of the will of a friend or client the mere legal title to the assets of such trusts, because of their origins and character, could not be regarded as part of the husband's property as a party to the marriage within the meaning of the Family Law Act. Importantly, in such a trust there could be no power of appointment to his wife and no corresponding equitable right enjoyed by her. The question of a trust involving a combination of purposes and family and extraneous assets does not arise.
(Footnotes omitted)
It is also as well to again recall the decision made in Ascot Investments that the orders of the trial judge were found to be in error (at p. 356):
The orders made against Ascot Investments, and against the directors, imposed on them a duty which they did not owe under the general law, and which was inconsistent with the memorandum and articles of association which bound the husband as a shareholder in that company. They gave to the wife rights, not merely against the husband, but against third parties who were not proved to have been parties to a sham or device. The orders in my opinion went beyond the powers of the Family Court.
It was correctly submitted to us that should the husband by reason of his control of N Pty Ltd simply give to himself all of the assets he would be in contravention of s 254T and s 232 of the Corporations Act. It is also essential to consider the limited orders the court might make in favour of the wife in view of the provisions of s 90AE.
For a number of reasons Grounds 1 and 2.1 must fail. First, the question of whether the company is the “alter ego” of the husband cannot succeed as a matter of law. Voting rights were of course most significant in this case on the question of valuation but cannot in themselves be determinative of the nature of the relationship between the company, the person and other shareholders.
Having regard to settled authority in this respect while appreciating the unusual shareholding in N Pty Ltd, it could not properly be concluded that orders could be made based on the husband’s interest in N Pty Ltd being at full value, ignoring the rights of the other shareholders. An analysis of the company structure and shareholdings together with the Memorandum and Articles of Association could not be interpreted as a matter of fact that the company is the alter ego of the husband.
Ground 1 and 2.1 must fail.
Ground 2 & 9
It is argued in the alternative in Ground 2.2 that a different value should have been found by the judge by reason of the control the husband has of the company as director and through his shares. It is asserted that the husband’s interests in N Pty Ltd should be valued at $10,919,749, the sum of N Pty Ltd’s retained profits and reserves or that Mr MM was correct. The argument in respect of the first contention is set out in [11] - [13] of the summary of argument:
11.The conclusion urged in ground 2.2 does not require a conclusion of alter ego but springs from the express rights attaching to the shares and is demonstrated by both the evidence of the single expert and history. The parties had agreed that valuations would be struck as at 30 June 2013. The respondent’s expert identifies that within [N Pty Ltd] accounts at that date retained profits sit at a value of $10,166,823 and reserves at $752,926, thus in aggregate $10,919,749. The agreed value of the company implicitly demonstrates that there can be no question that [N Pty Ltd] holds assets of a value that enables the satisfaction of the entirety of the retained profits and reserves of the company.
12.By exercise of the control attached to the A class shares the respondent, at will, can distribute to himself the entirety of the retained profits and reserves and this will involve no infringement of the rule that profits are not to be declared from share capital.
13.Ms [LL] makes the point that dividends can not only be declared out of a current year’s profits but can be paid out of past earnings and she accepted that historically the respondent had done so (AB9: 1837 at line 21 and 35) – the table set out in the judgment at AB1:33 demonstrates that this happened in each of the 2007, 2008, 2009, 2011 and 2012 financial years. Any contention that this path would constitute some oppressive conduct or fall foul of any prohibition in s 254T Corporations Act is wrong. It is a conclusion that ignores the express rights conferred upon the respondent and the practical limitations attaching to the value of the shares that he had gifted to his children. It is a consequence of the contract in the constitution relevant to the shares they acquired and is thus not oppressive. Similarly the concept of “fair and reasonable” to the extent that it arises from s 254T(1)(b) Corporations Act falls to be objectively construed in the light of the rights and limitations conferred on other shareholders by the constitution. If this is in doubt, it is made clear by s 254W(2) in its specific terms, to which his Honour did not refer. If there is tension between the two it is resolved by the speciala generalibus derogant rule. Alternatively s 254W(2) qualifies s 254T(1)(b).
Counsel for the second to sixth respondents referred to clause 104(1) of the Articles, which provides that “[t]he Company in general meeting may declare dividends but no dividend shall exceed the amount recommended by the Board.” The board is constituted by the husband and Mr D as directors. Further, clause 106 provides “[n]o dividend shall be paid otherwise than out of the profits.”
It is correctly argued against the first proposition that should the husband attempt to procure N Pty Ltd to pay him that sum “at will” the company would contravene the prohibition contained in s 254T of the Corporations Act that a company “must not pay a dividend unless the payment of the dividend is fair and reasonable to the company’s shareholders as a whole”. (emphasis added).
It is also accepted that it cannot be correct that a director’s discretion to pay dividends overrides the clear statutory requirement that the payment must be reasonable considering the company’s shareholders. Should the husband take such a step it would constitute oppression of the minority shareholders within the meaning of s 232 of the Corporations Act such that they might successfully take action:
232 Grounds for Court order
The Court may make an order under section 233 if:
(a)the conduct of a company’s affairs; or
(b)an actual or proposed act or omission by or on behalf of a company; or
(c)a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d)contrary to the interests of the members as a whole; or
(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
Reference in support of the oppression point was made to Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104. It is undoubtedly correct that the shareholders, even those without voting rights, are protected by ss 232 and 233 of the Corporations Act.
Ground 2.3 also cannot succeed. The primary judge adopting Ms LL’s approach, gave effect to the control premium. The judge clearly appreciated the effect of the husband’s control of the A class shares as can be seen in several quotes earlier in these reasons from the judgment. A decision in relation to valuations is a discretionary one. There was no error in the judge’s discretion in deciding to accept the opinion of Ms LL rather than Mr MM.
Before completing this part of the reasons it is necessary to make brief reference to Ground 9 which is as follows:
That his Honour failed to give adequate reasons as to his consideration of the operation of s 254T Corporations Act and how he brought those matters into account in his determinations.
After setting out the relevant provisions (Reasons [122]) the judge correctly observed that [123]:
The husband’s ability to control the payment of dividends is fettered to some degree by this section.
Further, by reference to his reasons commencing at [65] and concluding at [124] the primary judge accepted the evidence of Ms LL in her second methodology. It could not be said that the reasons were not adequate such that there could be any doubt as to how the judge decided the valuation question and the impact of relevant provisions of the Corporations Act.
The treatment of the Legal and Expert Fees (Grounds 3 & 4)
These grounds challenge the way in which his Honour dealt with the expert and legal fees by adding back the parties’ legal fees into the balance sheet and leaving undisturbed the payment of the experts.
The grounds are as follows:
3.That his Honour’s discretion miscarried in failing to add back the $196,116 that the respondent had paid Ms [LL] (Judgment pa 240) and his failure to do so did not give effect to the conclusion he stated at paras 245 and 246 as he failed to take into account that the respondent’s liability to Ms [LL] had already been paid (and his property correspondingly reduced) whereas the appellant’s liability in respect of Mr [MM] was yet to be met.
4.That his Honour’s discretion miscarried in his determination to addback the whole of the appellant’s paid legal costs whilst failing to take into account her outstanding liabilities of $157,000 which had correspondingly been incurred in meeting those costs.
The expert fees
Ms LL was appointed by the parties as the single expert to value the husband’s corporate entities. The wife sought and obtained leave to adduce further expert evidence from Mr MM, who valued the husband’s interests using a different methodology to that of Ms LL. This resulted in two sets of expert fees:
a)$196,116 due to Ms LL; and
b)$151,967 due to Mr MM.
The trial judge dealt with various amounts the parties sought to add back to the balance sheet commencing at [235] – [247] of the Reasons. His Honour referred to the Full Court decision of Chorn & Hopkins (2004) FLC 93-204 (“Chorn & Hopkins”). It is instructive to set out parts of the decision in Chorn & Hopkins in detail, as they are relevant to both this ground of appeal and Ground 4:
55.This decision appears to confirm the principle that where the payment of legal costs can be regarded as a premature distribution of funds (in which both parties have an interest), it is appropriate to add back those costs as a notional asset. It also confirms the principle that where funds have been borrowed to pay legal fees, and such liability is still outstanding, neither the payment of the fees nor the liability should be taken into account. The decision also supports the proposition that where it is determined that a payment of legal fees should be taken into account as a notional asset, any outstanding liability in respect of those fees should also be taken into account.
56.In summary, we consider that the above mentioned decisions of the Full Court establish that, while the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial Judge, in determining how to exercise that discretion, regard should be had to the source of the funds.
57.If the funds used existed at separation, and are such that both parties can be seen as having an interest in them (on account, for example, of contributions), then such funds should be added back as a notional asset of the party, who has had the benefit of them.
58.If funds used to pay legal fees have been generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance), they would generally not be added back as a notional asset; nor would any borrowing undertaken by a party post- separation to pay legal fees be taken into account as a liability in the calculation of the net property of the parties. Funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post-separation income or acquisitions.
59.Outstanding legal fees themselves are generally not taken into account as a liability.
60.If in the exercise of the discretion, it is determined that legal fees already paid should be taken into account as a notional asset, then normally any liability associated with the acquisition of the monies used to pay the legal fees should also be taken into account.
The primary judge set out the relevant matters pertaining to the expert fees at [240], [242] – [246]:
240.The husband sought to have added back the fees paid to Ms [LL], the single expert in this matter, in the sum of $196,116 and also sought an order that, in due course, the wife reimburse him one half of those fees.
…
242.As Chorn & Hopkins indicates, the source of funds to pay legal fees is a major determinant as to whether those fees should be added back. For the same reasons, the costs of valuations should be treated in the same way.
243.The source of the funds used by the husband to pay Ms [LL’s] fees is not clear. He may have paid them from dividends received post separation or he may have paid them from matrimonial assets to which the wife might be said to have a claim.
244.Ms [LL], although appointed the single expert, had her evidence adopted in its entirety by the husband. Although she formally remained the court’s single expert, in reality there was a significant contest between Ms [LL’s] views on the one hand and Mr [MM’s] on the other.
245.For these two reasons the better course is to treat the costs of the experts as the costs of each of the parties. Thus, an order will not be made that the wife reimburse the husband for one half of Ms [LL’s] fees. It was suggested by the husband that she should, at least, reimburse one half of the expert’s fees up until the time of the order being made for Mr [MM] to give evidence. The quantum of such fees is not known.
246.The choice then is to include both Mr [MM’s] fees and Ms [LL’s] fees as liabilities of each of the parties or exclude them both. I propose to do the latter. Given that Mr [MM’s] fees have not yet paid, that approach would seem to be more consistent with the principles set out in Chorn & Hopkins. Thus the husband will bear the liability for Ms [LL’s] fees and the wife for Mr [MM’s] and neither will appear in the list of assets and liabilities. This seems to be to me, in the circumstances, the approach that is more just.
(Emphasis added)
On appeal, the wife argues that the trial judge erred by failing to add back Ms LL’s fees ($196,116), which were paid by the husband. It is asserted that by failing to do so, his Honour did not account for Ms LL’s fees already being paid “…(and his property correspondingly reduced) whereas the [wife’s] liability in respect of Mr [MM] was yet to be met.”
Counsel for the husband argued that at the trial, the wife apparently adopted the course proposed by the husband and ultimately followed by his Honour. It was therefore submitted the wife could not now advance an argument that his Honour should not have followed that course. Specifically, the following submissions to the judge were relied upon:
Your Honour will see that my client shoulders the burden of dealing with Mr [MM’s] bills. In my submission, the husband should shoulder the burden of dealing with Ms [LL’s] bills, including those that were incurred by way of her performance as a – or in discharge of her obligation as a single expert, because that work, that background work would necessarily be done by any expert that was brought into the case, as it was by Mr [MM]. My client paid for that, and that’s the rationale behind the submission that the husband be responsible for Ms [LL’s] fees …
(Transcript of trial proceedings on 24 June 2014, p.420, ln 26 – 33)
…
So far as the item 47 [wife’s loan for legal fees] is concerned, I accept that it would work an injustice against the husband if liabilities for fees on my client’s part were taken into account when he’s adding back his fees.
So on the basis his fees are added back, I don’t press that as a liability. And likewise, number 49 [wife’s legal fees]. I do press 48 [wife’s fees to Mr [MM]], your Honour. And so far as 50 [wife’s loans for [Business Z Pty Ltd]] is concerned, this was a – [Business E] and the liabilities to which it gave rise was something that was commenced during the course of the relationship, and it didn’t go well, and the debts that arise from that should still be regarded as debts that my client has to bear. So far as the liabilities at items 47 and 49 are concerned [wife’s legal fees], whilst I can’t press them at a balance sheet level, I do make this submission: that your Honour would take into account that there are real liabilities that my client has to meet going forward, if I can put it that way. Excuse me, your Honour.
(Transcript of trial proceedings on 24 June 2014, p. 421, ln 4 – 17)
Of course, as was put to counsel for the husband at the hearing of the appeal, just because the wife adopted a specific course, did not mean the judge was bound to adopt it where to do so might be an error of law.
If the trial judge had decided that the parties be solely responsible for their own expert fees, such a course would have been appropriate if the wife’s contribution to the fees already paid to Ms LL was taken into account. Conversely, if the source of funds used by the husband to pay Ms LL were identified to be from one of the categories described in Chorn and not from joint funds, then the husband’s submissions would have more force.
However, it was never clear what source of funds the husband used to pay Ms LL. It is reasonable to infer that such funds were from the assets the wife could properly claim an interest. Therefore the wife has effectively contributed to half of Ms LL’s fees, and is additionally responsible for all of Mr MM’s fees.
This ground of appeal succeeds. It is easily remedied by adding back the whole of the fees paid to Ms LL, but leaving the wife entirely responsible for Mr MM.
The legal fees
Related to the dispute about the expert fees, is the challenge by the wife to his Honour’s treatment of her legal costs. It can be seen from the balance sheet reproduced at [138] of these Reasons that the primary judge added back legal fees at $469,104 for the wife and $344,679 for the husband. At [238] his Honour explained why he added back the legal fees of both parties:
238.As the parties agree on this approach, which is in accordance with Chorn & Hopkins, legal fees paid by the wife in the sum of $469,104 and legal fees paid by the husband in the sum of $344,679 will be added back. It is noted that the husband’s legal fees paid to date are in fact $403,104 but, as they had been paid, in part from the superannuation fund, they are accounted for in the reduced sum being taken into account as the value of the superannuation fund.
It is important to recall, as previously noted in these Reasons, the wife had received the sum of $200,000 by way of partial property settlement which was paid to her lawyers on account of legal fees.
At [247], the trial judge declined to add back a liability of the wife, being a loan taken out in the sum of $157,000 to pay legal fees, and a further liability of legal fees in the sum of $173,192. The judge noted:
247.The wife sought to have included as a liability a loan for legal fees in the sum of $157,000 and outstanding legal fees owed to her lawyers of $173,192. Ultimately the inclusion of those liabilities was, sensibly, in the light of Chorn & Hopkinsnot pressed but it was submitted that they were “real liabilities that my client has to meet going forward”.
(Emphasis added)
The first step in considering this argument is to understand how the husband paid his legal fees. The table at [248] of the Reasons records that legal fees of $344,679 paid by the husband should be added back. As noted above, at [238] of the Reasons the husband’s legal fees were actually $403,104, but the husband paid his fees in part from superannuation which clearly he can access.
Counsel for the wife in the appeal referred to Exhibit 89. This is a costs memorandum from the husband’s lawyers. It records that the husband’s legal fees were $403,103.90, of which the source of payment were the husband’s credit card, drawings from his superannuation fund in the amount of $58,425.41, and borrowings from other accounts. The memorandum notes the amount of $58,425 was drawn on 7 April 2014.
The problem, as highlighted by counsel, is that the balance sheet date relied on by the experts and the parties was 30 June 2013, so this drawing came post the balance sheet date. Therefore the husband has essentially been given credit twice for that payment of fees, as his Honour has already recognised the reduced superannuation amount. It was argued:
MR RICHARDSON: 58,000 came from superannuation post the balance sheet date and we contend his Honour adjusted that in the wrong direction as indicated. And then from exhibit 96, the $157,000 that his Honour’s talking about, your Honours will see particularised at paragraph (vii). That is the 60, 25, 47, 10 and 15. No challenge that that was the source of the funds. There was a submission put by Mr Lethbridge, in particular, in relation to the 25,000 for the [Business Z Pty Ltd] because of the controversy about that company. But the point is this. That here his Honour was adding back 400-odd thousand dollars of paid legal fees of which $157,000 had been funded by a liability that sat with the wife. And, consistently with paragraph 60 of Chorn v Hopkins, the only logic that would support adding back the whole of the 400-odd would be if one was also taking into account in recognition in the balance sheet of the 157 as well. Or alternately, you discount the 400-odd by the 157 in the first place. But to make the adjustment to the positive side, notionally to remedy the absence from the balance sheet otherwise an asset that would have sat with her doesn’t follow into the recognition of the existence of that liability
(Transcript of Appeal, 23 August 2016, p. 43, ln 8 – 22)
This ground also has merit and the balance sheet could simply be adjusted to create a different amount payable to the wife.
Ground 5
This ground challenges the treatment of the loan accounts in relation to N Pty Ltd, which were valued at nearly $1.4 million.
It was submitted that should the court not accept the argument in Grounds 1 or 2.1, then it is argued that the loan accounts are merely an unsecured liability and should not have been included in the balance sheet. It was properly conceded by Mr Richardson SC that this was not the argument at trial.
The discretion not to take this liability into account at all or alternatively as a s 75(2) matter was submitted to be the proper approach. The factors supporting such an approach are:
a)The factual history of how the loan account had been attended to; and
b)The valuation approach which included consideration of a pari-passu winding up value at some future time.
Unlike the argument in Ground 1, the proposition put forward in this ground amounts to an argument that the judge should have exercised his discretion differently rather than an error of law. In addition, it is not difficult to imagine that had such an argument been before the primary judge, evidence might have been tendered to resist such a result.
This Court should not consider the argument further.
Grounds 6, 7, 10, 11 and 12
By way these grounds, the wife challenges the findings of the primary judge in relation to the s 75(2) factors as follows:
6.The trial judge erred in principle by failing to adequately expose the process of reasoning which led his Honour to conclude at para 300 of Judgment, that there should be an adjustment in favour of the appellant of 5% pursuant to s 75(2) of the Act.
7.That his Honour erred in principle in failing to give adequate reasons explaining the manner in which he had taken into account the additional matters he referred to at para 300 Judgment in circumstances where he had already expressed his conclusions as to the components of division.
…
10.His Honour erred on the facts and his discretion miscarried in taking into account (para 300) in a manner that his reasons do not reveal, but implicitly an adjustment diminishing the award to the appellant, that she had received a partial property settlement of $200,000 when the evidence before him revealed that the whole of those moneys had been expended on legal fees which he had determined to add back as notional property, thus any further adjustment was inconsistent with that determination and unwarranted.
11.The trial judge erred in the exercise of his discretion pursuant to s 75(2) of the Act in that the adjustment made in favour of the appellant was manifestly inadequate in the light of his Honour’s finding of fact with respect to the earning capacity and financial resources of the appellant and the respondent.
12.That his Honour’s discretionary judgment miscarried by reason of his failure to take into account in his consideration of factors relevant to s 75(2) of the Act relevant facts namely:
12.1.that the bundle of rights attached exclusively to the A class shares in [N Pty Ltd], held exclusively by the respondent, conferred a very valuable financial resource that had provided valuable benefits to the respondent and would continue to do so;
12.2.that the parties had enjoyed a very high standard of living which included, inter alia, first class travel, a luxurious home and substantial employed assistance in the home;
12.3.that in truth a substantial portion of the property of the appellant was notional and would be unavailable to contribute to her support, a fact observed at para 305, after he had considered s 75(2) of the Act;
In this appeal (and there is no cross-appeal) there is no challenge to the primary judges’ findings in relation to s 79(4), that is the financial and non-financial contributions of the parties. The judge’s finding in this respect was that these contributions should be assessed as 85 per cent to the husband and 15 per cent to the wife.
The challenge is that the order was not just and equitable by reason of a failure to properly consider, give reasons and give effect to relevant matters contained in s 75(2).
Reference should be made to the following paragraph of the judgment:
300.Taking all of these matters into account I am of the view that there should be a five per cent adjustment in the wife’s favour so that she will receive 20 per cent of the net assets. This is an appropriate division which reflects the parties’ contributions, particularly the husband’s financial contribution and takes into account the matters just mentioned. I also take into account in determining the division the partial property settlement of $200,000 received in 2012, the extensive spousal maintenance the wife has received and the wife’s use of the [B Street Property] which required substantial mortgage repayments. I also take into account that any liability that the wife may have to [N Pty Ltd] will be borne not by her, but by the husband.
The percentage attributed to the wife by reason of s 75(2) was five per cent with the result that she should receive 20 per cent of the net assets as found in the balance sheet. The 5 per cent in dollar terms is $133,000. It is important to have regard to what this meant in real terms:
FORM OF ORDERS
301.The wife will retain and be liable for the following assets and liabilities:
[Town C Property] 350,000
St George Bank Account 518
Golf Cart4,000
Paid Legal fees 469,104
Sub- total 823,622
Less
CBA Loan [Town C Property] 342,288
[Business Z Pty Ltd] 140,000
Sub-total482,288
Net Assets$341,334
302.The husband will retain and be liable for the following assets and liabilities:
NAB Account 3,985
Siam Commercial Bank account 28,996
[N Pty Ltd] shares 1,327,126
[T Pty Ltd] shares 1,313,855
2,673,962
Legal Fees344,679
3,018,641
Superannuation 1,032,005
Sub-total4,050,646
Less
[N Pty Ltd] loan Wife 805,190
[N Pty Ltd] loan Husband 588,178
[H Pty Ltd] loan 139,526
American Express 6,064
Sub-total1,538,958
Net Assets$2,511,680
303.That leaves:
Assets – [B Street Property] 1,800,000
Liabilities – Rocket loan 497,097
WBC loan1,493,020
Totalliabilities $1,990,117
Net($190,117)
304.The net assets of the parties are $2,662,905. Therefore 20 per cent is $532,581. For the wife to receive 20 per cent of the net assets of the parties, having regard to the net assets that she will retain, there needs to be a payment to her of $191,247 ($532,581 less the net assets retained by her of $341,334). This ignores, for the moment, the shortfall on [B Street Property]. From this there will need to be a deduction of one half of Mr [VV]’s fees, as discussed earlier. When $16,500 is deducted the sum the husband is to pay the wife is $174,747.
In the submissions on behalf of the wife, it is contended that the judge failed to take into account the benefits to the husband from N Pty Ltd, especially having regard to the acceptance of a valuation based on a future winding up. In the meantime the husband has the benefit of dividends in the form of a substantial income stream and other indirect benefits from the company. Examples were given at [37] of the written submissions accompanied by references to the evidence.
The matters contained in [300] of the Reasons were correctly considered by the judge. However, it is correct that the substantial benefits flowing to the husband from N Pty Ltd and the other companies were not adequately referred to in the Reasons and could not have been properly taken into account. The judge made an error in this respect which led to orders which in the circumstances are plainly not just and equitable. These grounds must be allowed.
Most unfortunately and for the reasons conceded by counsel for the wife, should this part of the appeal succeed, a rehearing cannot be avoided.
Grounds 8 and 13
It is not necessary to deal with these two grounds, as the wife’s application for spousal maintenance has been remitted for rehearing. However, the effect of these orders further demonstrates that overall the orders made were not just and equitable.
Conclusion and Costs
The appeal must be allowed and regrettably the matter remitted for rehearing. The parties may wish to make an application for costs or applications under the Federal Proceedings (Costs) Act 1981 (Cth). A timetable for such applications together with written submissions is provided in the Orders.
I certify that the preceding two-hundred-and-fifty-one (251) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court (Bryant CJ, May and Murphy JJ) delivered on 28 April 2017.
Associate:
Date: 28 April 2017
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