C.S.R.& F and M Pty Ltd
[2007] FMCAfam 477
•24 July 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| C.S.R. & F & M PTY LTD | [2007] FMCAfam 477 |
| CHILD SUPPORT – Enforcement of child support – meaning of ‘child support debtor’ – operation of s.72a of Child Support (Assessment) Act 1989 – whether s.72a can be issued with respect to debt owed to company controlled by chid support debtor. PRACTICE AND PROCEDURE – Jurisdiction of Federal Magistrates Court – power to grant declaratory relief – whether declaratory relief appropriate – appropriate terms for a declaration. |
| Child Support (Registration & Collection) Act 1986 ss.72a, 72c, 104(1), 105 Child Support (Assessment) Act 1989 ss.106, 107, 141 Constitution 1901 s.51(xxxi) Family Law Act 1975 ss.4(1)(b), 55a, 92, 78, 79, 80(k), 90aa, 90ae, 90af, 90ak, 105, 106b, 113, 114, 123 Family Law Rules 2004 r.123 Federal Magistrates Act, 1999 s.16 |
| Alcaine v Alcaine and Abrahams (Unrep, Sydney SYD9879/94, 20 March 1997, Nicholson CJ, Ellis and O'Ryan JJ) Ashton v Ashton [1986] FamCA unrep10; (1986) FLC 91-777 Aussie Airlines Pty Ltd v Australian Airlines [1996] FCA 813 Bailey v Bailey, Re [1990] FamCA unrep129; (1990) FLC 92-117 BP v KS [2002] FamCA 1454; (2003) FLC 93-157 Friss v Friss [2000] FamCA 824 Ireland v Ireland (1986) FLC 91-731 Manning v Manning (1977) FLC 90-298 Money v Money [1986] FamCA unrep672; (1986) FLC 91-700 Ostasheen Pty Ltd v Deputy Registrar Child Support [1998] FamCA 68; (1998) FLC 98-001 Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 The Queen v Lavender [2005] HCA 37; (2005) 222 CLR 67 Smith v Smith (1979) FLC 90-642 W & W [2006] FamCA 163 |
Glover, “Discretionary trusts, fiduciary duties and the Family Law Act: Has the Family Court acted beyond power?” (2000) 14 AJFL 184
Puig, “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine” [2000] MurUEJL 32
| Applicant: | CHILD SUPPORT REGISTRAR |
| First Respondent: | F |
| Second Respondent: | M PTY LTD (ACN XXX XXX XXX) |
| File number: | DGM 293 OF 2002 |
| Judgment of: | Riethmuller FM |
| Hearing date: | 24 May 2007 |
| Date of last submission: | 24 May 2007 |
| Delivered at: | Melbourne |
| Delivered on: | 24 July 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr St John SC |
| Solicitors for the Applicant: | Australian Government Solicitor |
| The First Respondent appearing in person |
| The First Respondent appearing as Director of the Second Respondent |
ORDERS
That the application for declarations in relation to the operation of section 72a of the Child Support (Registration and Collection) Act 1988 be dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
DGM 293 OF 2002
| CHILD SUPPORT REGISTRAR |
Applicant
And
| F |
First Respondent
| M PTY LTD (ACN XXX XXX XXX) |
Second Respondent
REASONS FOR JUDGMENT
This is an application for the enforcement of a child support debt presently in the sum of $21,414.58 made up of:
a)child support at $16,867.72;
b)Consolidated Revenue debt $290.78; and
c)penalties $4256.08.
The parties have agreed as to the terms of the orders to be made in this case for the purpose of securing and enforcing the debt.
I am asked by the parties to make a declaration in the following terms:
Any money owing to the second respondent at law, in equity or by statutory enactment, is money owing to the first respondent for the purposes of s.72a of the Child Support (Registration and Collection) Act 1988 and the applicant be at liberty to recover any such money.
In this case the Second Respondent company's shares are all beneficially owned by the first respondent. (Whilst there are presently 20 per cent of the shares registered in the name of a third party, it is accepted by all concerned that these are held on trust for the first respondent. The third party has eschewed any interest in the shares and has not participated in the litigation.)
The company is the trading entity through which Mr F operates his business. The company owns a backhoe that is subject to a security in favour of a financier, Esanda Finance Corporation Limited. The company continues to operate as a trading entity.
It was argued on behalf of the Child Support Registrar that the company is the ‘alter ego’ of the first respondent and that therefore orders could be made directly against the company as if it were the respondent, notwithstanding its separate legal identity under the Corporations Law. Mr St John SC argued that orders were now routinely made against companies that were the ‘alter ego’ of litigants in family law matters. In support of these propositions Mr St John SC relied upon Ascot Investments Pty Ltd v Harper [1981] HCA 1; (1981) 148 CLR 337, Gould and Gould; Swire Investments Pty Ltd [1993] FamCA unrep627; (1993) FLC ¶92-434; Collins v Collins [1987] FamCA unrep56; (1987) FLC ¶91-800; Custodio v Pinto (2006) FLC ¶93-279; and Daniels & Bell [2007] FamCA 152. As a consequence, Mr St John SC argued that a declaration should be made declaring that money owing to the company is money owing to the payer for the purposes of s.72a of the Child Support (Registration and Collection) Act 1988.
Power to grant declaratory relief under the Child Support Acts
The Federal Magistrates Court has jurisdiction in relation to matters arising under the Child Support (Registration Collection) Act 1986 as a result of s.104(1) of the Act. Section 105 provides for the application of the Family Law Act1975 as follows:
105 [Application of Family Law Act] (1)The Family LawAct 1975 (other than Part X of that Act), the standard Rules of Court and the related Federal Magistrates Rules apply, subject to this Act and with such modifications as are prescribed by the applicable Rules of Court, to proceedings under this Act (other than proceedings under subparagraph 113(c)(i)) as if:
(a)the proceedings were proceedings under that Act;
(b)the proceedings were proceedings instituted under that Act;
(c)a court having or exercising jurisdiction in the proceedings were a court having or exercising jurisdiction under that Act;
(d)a decree made in the proceedings were a decree made under that Act;
(e)matters arising in the proceedings were matters arising under that Act; and
(f)any other necessary changes were made.
(1A)In the application of subsection (1) to proceedings under this Act in relation to a child, references in paragraphs (1)(a) to (e) (inclusive) to the Family Law Act 1975 are to be taken to be references to Part VII of that Act.
(2)Where any difficulty arises in the application of subsection (1) in or in relation to a particular proceeding, the court exercising jurisdiction in the proceeding may, on the application of a party to the proceeding or of its own motion, give such directions, and make such orders, as it considers appropriate to resolve the difficulty.
There are also general powers conferred on the Court when exercising jurisdiction under the Child Support (Assessment) Act 1989 to make declarations with respect to the specifics of an assessment and the entitlement to an assessment (see ss.106 to 107 of the Child Support (Assessment) Act), however these sections do not cover the circumstances of this case.
The more general powers of the Court under s.141 of the Assessment Act do not provide a general power to make a declaration, nor do they appear to be engaged when the proceedings are simply for enforcement under the Child Support (Registration and Collection) Act.
Power to grant declaratory relief under the Family Law Act 1975
The only relevant power to make declarations under the Family LawAct1975 is that contained in s.113 as follows:
113 [Proceedings for declarations] In proceedings of the kind referred to in paragraph (b) of the definition of matrimonial cause in subsection 4(1), the court may make such declaration as is justified.
Section 4(1) provides the relevant definition for para (b) of definition of matrimonial cause:
4. [Interpretation] (1) In this Act, the standard Rules of Court and the related Federal Magistrates Rules, unless the contrary intention appears:
…
"matrimonial cause" means:
…
(b) proceedings for a declaration as to the validity of:
(i) a marriage; or
(ii) a divorce; or
(iii) the annulment of a marriage;
by decree or otherwise; or
Section 113 does not provide a power to grant declaratory relief that is sufficiently broad to cover the circumstances of this case. Other limited powers to grant declaratory relief in areas unrelated to child support or maintenance appear in ss.55a, 78 and 92 of the Family Law Act1975.
It has been established that the Family Law Act provides no power to make a declaration as to the death of a spouse (see Manning v Manning (1977) FLC 90-298), nor, without more, the power to make declarations as to the value of particular property or a declaration that a certain amount of money is payable by one person to another: see Smith v Smith (1979) FLC 90-642.
In Money v Money [1986] FamCA unrep672; (1986) FLC 91-700 the Full Court approved the dicta of Lindenmeyer J in Smith v Smith (1979) FLC 90-642 at 78,363-4 that:
The only provisions of the Act which specifically give the court power to make declarations are sec. 78 and 113, but the latter is clearly not applicable to these proceedings, nor, in my opinion, is the former. Section 78, as indicated above, is related to definition para. (ca), and empowers the court to declare the existing title or rights of the parties in respect of “property”. Whilst the definition of “property” contained in sec. 4(1) of the Act as explained by the Full Court in In the Marriage of Duff and Duff (1977) FLC ¶90-217 is wide enough to include a chose in action, such as an enforceable right under an agreement, sec. 78 assumes the existence of the property and is aimed at resolving disputes between the parties to a marriage in relation to the title to that property. An application of the kind now before me seeks a declaration of the existence of property (viz. that one party owes the other a certain sum of money) and not a declaration of the parties’ rights in relation to some existing property. Thus it is not within the section.
Certainly sec. 80(k) would be wide enough to empower the court to make a declaration in a appropriate case, but as the Full Court of this court said in In the Marriage of King and King (1977) FLC ¶90-299 at p.76,580. sec. 80 is not itself a substantive head of power but only an ancillary one. The substantive head of power must therefore be found elsewhere in Pt. VIII. That section therefore is of no assistance to the applicant in these proceedings.
In Custodio & Pinto [2006] FamCA 941; (2006) FLC ¶93-279 Finn J refused a summary dismissal application in a case where the wife sought declarations. However, it is apparent that the power to make declarations was not argued, nor is it clear that the use of the term ‘declaration’ was intended to mean a grant of declaratory relief rather than a finding of fact. This is apparent in para [58] where her Honour refers to findings rather than declarations.
It is sometimes argued that the power to make ‘orders’ provided in s.80(k) of the Family Law Act 1975 may include declaratory relief. However, even if the term ‘orders’ were given such a broad interpretation, that power is limited to cases where the Court is exercising its powers under Part VIII of the Family Law Act (which relates to property and spousal maintenance applications).
The Family Law Rules 2004 provide for declarations as to the amount of child support owing, presumably in reliance upon the rule-making power of the Family Court under s.123 of the Family Law Act 1975. Whether s.123 provides sufficient power for rules to be drawn creating a power to grant declaratory relief (even in the limited circumstances of child support) is not a question that must be answered in these proceedings as those rules do not apply in these proceedings in the Federal Magistrates Court.
Power under Federal Magistrates Act 1999
The Federal Magistrates Court has power, pursuant to s.16 of the Federal Magistrates Act 1999, to make declarations of right:
16 [Declarations of right](1) The Federal Magistrates Court may, in relation to a matter in which it has original jurisdiction, make binding declarations of right, whether or not any consequential relief is or could be claimed.
(2) A proceeding is not open to objection on the ground that a declaratory order only is sought.
I proceed on the basis that as a result of s.16 of the Federal Magistrates Act the Court has powers to make declarations of right in the terms provided by that section. However, this is not an unlimited power, as was summarised by Lockhart J in Aussie Airlines Pty Ltd v Australian Airlines [1996] FCA 813 where his Honour said:
For a party to have sufficient standing to seek and obtain the grant of declaratory relief it must satisfy a number of tests which have been formulated by the courts, some in the alternative and some cumulative. I shall formulate them in summary form as follows:
The proceeding must involve the determination of a question that is not abstract or hypothetical. There must be a real question involved, and the declaratory relief must be directed to the determination of legal controversies: In Re Judiciary and Navigation Acts (1921) 29 CLR 257. The answer to the question must produce some real consequences for the parties.
The applicant for declaratory relief will not have sufficient status if relief is 'claimed in relation to circumstances that [have] not occurred and might never happen': University of New South Wales v Moorhouse (1975) 133 CLR 1 per Gibbs J. at 10; or if the Court's declaration will produce no foreseeable consequences for the parties: Gardner v Dairy Industry Authority (NSW) [1977] 52 ALJR 180 per Mason J. at 180 and per Aickin J. at 189.
The party seeking declaratory relief must have a real interest to raise it: Forster v Jododex Australia Pty Limited (1972) 127 CLR 421 per Gibbs J. at 437; and Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438 per Lord Dunedin at 448.
Generally there must be a proper contradictor: Russian Commercial and Industrial Bank at 448; and Ainsworth per Brennan J. at 596.
The Child Support Registrar’s claim
The application of the Child Support Registrar is, in essence, that in cases where the legal person owed money is an ‘alter ego’ or ‘puppet’ of the child support debtor then a notice may issue under s.72a of the Child Support (Registration and Collection) Act 1988 as if the entity that is the alter ego is the child support debtor. Whilst the argument of the Child Support Registrar was simply that the declaration should be made to allow for enforcement, it appears to me that it is only open to the court to make the declaration if either:
a)The term ‘child support debtor’ in s.72a should be read as including any entity that is an ‘alter ego’ or ‘puppet’ of the child support debtor; or
b)The legal personality of the ‘child support debtor’ and the ‘alter ego’ or ‘puppet’ should be conflated for the purpose of the operation of s.72a.
Effect of s.72a of the Child Support (Registration and Collection) Act 1988
The starting point for any interpretation must be a careful review of the terms of the section, which is as follows:
72a[Registrar may collect child support related debts from a third person] (1) The Registrar may give written notice to a person:
(a)by whom money is due or accruing, or may become due, to a child support debtor; or
(b)who holds, or may subsequently hold, money for or on account of a child support debtor; or
(c)who holds, or may subsequently hold money on account of some other person for payment to a child support debtor; or
(d)who has authority from some other person to pay money to a child support debtor;
requiring that person to pay to the Registrar:
(e)if the amount of money is more than the amount specified in the notice as the amount of the debtor’s support debt–an amount equal to the amount of the support debt; or
(f)if the amount of money is equal to or less than the amount of the support debt–that amount of money; or
(g)if the notice specifies an amount of money that is to be paid out of each payment that the notified person becomes liable, from time to time, to make to the debtor–that amount until the support debt is satisfied.
(1A) A notice given under subsection (1) requires the notified person to continue to make payments in accordance with that subsection until the support debt is satisfied.
(2) A person who refuses or fails to comply with a notice under subsection (1) is guilty of an offence.
Penalty: $1,000.
(2A) Subsection (2) does not apply if the person has a reasonable excuse.
(2B) Subsection (2) is an offence of strict liability.
(3) A notice:
(a)must specify a day, not being a day before the money becomes due or is held, on or before which the money is to be paid; and
(b)may be varied by the Registrar specifying a later day for making a payment under the notice.
(4) Subsection 4k(1) of the Crimes Act 1914 does not apply in relation to anything required to be done under subsection (1).
(5) If the Registrar gives a notice under subsection (1), the Registrar must provide a copy of the notice to the child support debtor.
(6) A notice is taken to be provided under subsection (5) if the Registrar sends the notice to the last address of the person known to the Registrar.
(7) A notice is taken to have been given to the Commonwealth, a State or a Territory if it is served on a prescribed person.
(8) If a person is convicted of an offence against subsection (1), the court may, in addition to imposing a penalty on the person, order the person to pay to the Registrar an amount that is not more than the amount, or sum of the amounts (as the case may be), that the person refused or failed to pay to the Registrar.
(9) A person who makes a payment in compliance with a notice under subsection (1) is taken to have made the payment under the debtor’s authority or the authority of any other person concerned and is indemnified in respect of that payment.
(10) If:
(a) the Registrar gives a notice under subsection (1); and
(b)before the person to whom the notice is given complies with it, payment of the amount due by the debtor is made;
the Registrar must immediately give the person written notice of that payment.
(11) For the purposes of this section, where:
(a)a person has paid money to a co operative housing society in respect of the issue of withdrawable shares in the capital of the society; and
(b)the co operative housing society has not repaid the money;
the money is taken to be:
(c)if the money is repayable on demand–due by the co operative housing society to the person; and
(d)in any other case–money that may become due by the co operative housing society to the person.
(12) For the purposes of this section, if, apart from this subsection, money is not due, or repayable on demand to a person unless a condition is fulfilled, the money is taken to be due, or repayable on demand (as the case may be), to the person even though the condition has not been fulfilled.
(13) In this section:
child support debtor means a person who is liable to pay a child support debt or a child support related debt.
child support related debt, in relation to a person, includes:
(a)the amount of penalty (if any) imposed under section 67 in respect of that debt; and
(b)any costs ordered by a court to be paid to the Commonwealth in respect of an offence committed by the person against this Act or the Assessment Act; and
(c)any amount ordered by a court, upon the conviction of a person for an offence against this Act or the Assessment Act, to be paid by the person to the Registrar.
co operative housing society means a society registered or incorporated as a co operative housing society or similar society under a law of a State or Territory.
person includes a partnership and any Commonwealth, State or Territory public authority (whether incorporated or unincorporated).
support debt means a child support debt or a child support related debt.
In Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, McHugh, Gummow, Kirby and Hayne JJ discussed the approach to be taken to statutory interpretation, saying:
[69] The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole". In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that "the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed". Thus, the process of construction must always begin by examining the context of the provision that is being construed.
[70] A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflicting provisions will often require the court "to determine which is the leading provision and which the subordinate provision, and which must give way to the other". Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.
[71] Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision. In The Commonwealth v Baume Griffith CJ cited R v Berchet to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent". (footnotes omitted)
Context of the Provision
The provision is contained within the Child (Registration and Collection) Act 1989, which is part of a statutory scheme for the administrative assessment and enforcement of child support. The objects of the Child Support (Registration and Collection) Act 1989 are set out in section 3:
3. [Objects of Act] (1) The principal objects of this Act are to ensure:
(a)that children receive from their parents the financial support that the parents are liable to provide; and
(b)that periodic amounts payable by parents towards the maintenance of their children are paid on a regular and timely basis; and
(c)that Australia is in a position to give effect to its obligations under international agreements or arrangements relating to maintenance obligations arising from family relationship, parentage or marriage.
(2) It is the intention of the Parliament that this Act shall be construed and administered, to the greatest extent consistent with the attainment of its objects, to limit interferences with the privacy of persons.
Section 72a is contained within ‘Part V - Payment and Recovery of Child Support Debts’. Part V provides a range of administrative processes whereby the payment of child support is encouraged (by, for example, the imposition of penalties when payment is late), indirect payments are credited or accounted for, methods by which the Child Support Registrar may recover child support administratively, and a right to apply to the court to set aside transactions made for the purpose of defeating child support obligations. This part follows on from Part IV which provides administrative processes for collection of child support from salary and wages.
It is clear that the purpose of Parts IV and V is to provide a range of administrative processes for the collection of child support such that resort to the court is a matter of last resort, reserved for a small minority of cases. However, it is also clear that one of the purposes of the Act is to enable the Child Support Registrar to bring court proceedings to enforce child support debts, if the administrative processes are insufficient.
Textual analysis
The term ‘child support debtor’ is given a clear definition in s. 72a(13) referring to ‘a person who is liable to pay a child support debt or a child support related debt’. This definition does not refer to related legal entities, nor legal entities that the person liable to pay the debt has control over. There is nothing in the Act that makes related entities directly liable to the Child Support Registrar.
None of subsections 72a(1)(a) to (d) extend beyond the power to obtain money owed, or payable directly to the child support debtor. The only situation in which the section extends beyond these simple direct relationships is that covered in s.72a(11) relating to interests in cooperative housing societies. That s.72a(11) was inserted into the section leads to a conclusion that s.72a(1) was intended to cover only the relationships specified, and not be given a broader reading.
Once the section is engaged failure to comply with the section attracts not only civil liability, but criminal penalties. These penalties may be imposed upon persons who are not liable to pay child support, nor ever party to the events leading to the notice. The interpretation of statutes that impose penalties was recently considered by Kirby J in The Queen v Lavender [2005] HCA 37; (2005) 222 CLR 67 where his Honour summarised the effect of modern authorities as follows:
[88] In the past, including in this Court, it has been conventional to say that, where one has been left in real doubt as to the meaning of a penal provision, that provision will be construed strictly and in favour of the person potentially affected by the provision. This rule was originally conceived in the seventeenth century as a means of mitigating the harshness of penal legislation, breach of which often attracted the death penalty. Since that time, the rule has been transplanted and applied in various other legislative contexts, such as legislation purporting to impose taxation, or to interfere with the enjoyment of, or to take away rights to, private property.
…
[94] The ordinary rules of construction are now first applied, including in the ascertainment of the meaning of penal and taxing legislation. In such categories, as much as anywhere else, it is the duty of a court to ascertain, and give effect to, the purpose of the legislature as expressed in the language enacted by Parliament. To some extent the demise in the attractiveness of the former rule of construction has followed the recognition by courts of the legitimacy of modern Parliaments, elected as they now are by universal suffrage. Artificial categories and exceptions are now less in favour than they formerly were. Nevertheless, somewhat like the contra proferentem rule (the occasionally useful principle of construction of insurance and like documents) the principle suggesting a stricter approach to the interpretation of penal legislation may sometimes prove useful when ambiguity seems intractable. (footnotes omitted)
Payments made pursuant to a notice under the section are taken to be made with the authority not only of the child support debtor, but also ‘any other person concerned’: s.72a(9). This appears to give any third party the protection of deemed authority in sufficiently wide terms that it would operate to provide similar protection in situations where there were declarations in the nature of that sought here.
Thus, the literal terms of s.72a(1) and (11) tell strongly against a broad reading of the term ‘child support debtor’. That the section also imposes criminal sanctions does not lead to a narrow reading, however, it does weigh against a reading of the provision beyond its plain terms. However, the fact that s.72a(9) may provide adequate protection for the person paying the debt is a factor in favour of the interpretation sought.
If one considers the practical operation of the section difficulties may ensue if the phrase ‘child support debtor’ were interpreted as including an ‘alter ego’ or ‘puppet’. If this were the correct interpretation then the section would, at least theoretically, operate whether or not a declaration had been made by a court that the third party was an ‘alter ego’ or ‘puppet’. The person receiving a notice under the section would, in many cases, have no knowledge as to whether the necessary state of control by the actual child support debtor over the third party existed. Others with a practical interest in the third party (such as company creditors) would have no notice. If the third party was not the ‘puppet’ or ‘alter ego’ of the child support debtor the notice would be a completely unjustified interference with their property rights. If, in practice, the extended meaning of the section contended for by the Child Support Registrar required applications to the court for declarations to support notices in cases involving ‘alter egos’ or ‘puppets’ this would have the effect of requiring court applications before utilizing a process that is otherwise designed to be administrative.
Family companies and conflation of legal identity
It is well established that a company is a separate legal entity from its director and shareholder, even if there is only one director and shareholder: see Salomon v A. Salomon and Company Limited [1897] AC 22 and Lee v Lee's Air Farming Ltd [1961] AC 12. It is also well accepted that the directors and office bearers of the company have obligations to the company under the Corporations Law and in equity (for example fiduciary duties).
The weight of authority is against the conflation of legal entities. Even with respect to wholly owned corporate subsidiaries conflation of legal identity has not been permitted: see Walker v Wimborne (1976) 137 CLR and Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 where companies in a ‘group’ maintain their separate legal identity, as Mason J said:
[23] … it can scarcely be contended that the provisions of the Act operate to deny the separate legal personality of each company in a group. Thus, in the absence of contract creating some additional right, the creditors of company A, a subsidiary company within a group, can look only to that company for payment of their debts. They cannot look to company B, the holding company, for payment (see Walker v. Wimborne (1976) 137 CLR 1, at p 6 ).
In Puig, “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine” [2000] MurUEJL 32 the author reviews the effect of the separate legal entity doctrine concluding:
[24] The question of whether the negative aspects of the decision in Salomon's case outweigh the good ones is best left unanswered for it is far too broad. One is inclined towards the view that the principle of separate legal entity established in Salomon's case has been instrumental in the development of modern capitalism and the immense social and economic wealth which it has generated. The House of Lords extended the principle so far as to cover small private enterprises. This move has had several negative consequences over time. However, it is also true that these have been largely neutralised by joint legislative and judicial action.
[25] Indeed, "the legislature can forge a sledgehammer capable of cracking open the corporate shell." And, even without statutory assistance, the courts have often been ready to draw aside the veil and impose legal liability on members and directors where to apply the Salomon principle strictly would lead to injustice, inconvenience or damage to government finances.
[26] Similarly, it should be pointed out that, following Salomon's case, all Australian jurisdictions, in a desire to ameliorate legal facilities for small commercial enterprises, introduced provisions for private companies into their corporate law. Experience since Salomon's case demonstrated that there was no reason why the benefit of limited liability should apply only to groups of business entrepreneurs. The Corporations Act takes this to its logical conclusion and sanctions the registration of one-person companies. In 1995, the First Corporate Law Simplification Act amended the Corporations Act to permit a proprietary company to be set up with one or more shareholders. Under another amendment, the minimum number of directors needed to be designated in a proprietary company was cut from two to one. Moreover, the Corporations Act states that any sort of company, not just a proprietary company, may be established with only one member and may continue to exist with only one member (section 114). It would appear then that the overall balance is positive and that the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good decision. (footnotes omitted)
In family law proceedings the ‘the corporate shell’ has not been quite so resilient when cases involve family companies. In Ascot Investments Pty Ltd v Harper [1981] HCA 1; (1981) 148 CLR 337 Gibbs J (as his Honour then was) considered the extent to which a company’s separate legal identity could be conflated with that of a director and shareholder in family law proceedings, saying:
[19] The authorities to which I have referred establish that in some circumstances the Family Court has power to make an order or injunction which is directed to a third party or which will indirectly affect the position of a third party. They do not establish that any such order may be made if its effect will be to deprive a third party of an existing right or to impose on a third party a duty which the party would not otherwise be liable to perform. The general words of ss. 80 and 114 must be understood in the context of the Act, which confers jurisdiction on the Family Court in matrimonial causes and associated matters, and in that context it would be unreasonable to impute to the Parliament an intention to give power to the Family Court to extinguish the rights, and enlarge the obligations, of third parties, in the absence of clear and unambiguous words. It can safely be assumed that the Parliament intended that the powers of the Family Court should be wide enough to prevent either of the parties to a marriage from evading his or her obligations to the other party, but it does not follow that the Parliament intended that the legitimate interests of third parties should be subordinated to the interests of a party to a marriage, or that the Family Court should be able to make orders that would operate to the detriment of third parties. There is nothing in the words of the sections that suggests that the Family Court is intended to have power to defeat or prejudice the rights, or nullify the powers, of third parties, or to require them to perform duties which they were not previously liable to perform. It is one thing to order a party to a marriage to do whatever is within his power to comply with an order of the court, even if what he does may have some effect on the position of third parties, but it is quite another to order third parties to do what they are not legally bound to do. If the sections had been intended to prejudice the interests of third parties in this way, it would have been necessary to consider their constitutional validity.
[20] 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.
[21] 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. To take two obvious examples, the Family Court could not compel a husband to assign to his wife a lease without obtaining the necessary consent of the lessor, and could not order the transfer to a wife of land owned by a husband free of mortgage, when in fact the land was mortgaged to a third party. 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. (emphasis added)
Sham Transactions
It is well accepted that a finding of a ‘sham’ is a finding that a state of affairs is brought into being in appearance rather than in reality: See Ascot Investments at 354. As a result the effect of a finding of a sham is that the property is not in fact owned by the person who appears to own it on the documents but owned by another. More recently in Equuscorp Pty Ltdv Glengallan Investments Pty Ltd [2004] HCA 55; 218 CLR 471 the High Court said:
[46] … "Sham" is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences [Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449].
This is a very different situation to a finding that a company or trust is an ‘alter ego’ or mere ‘puppet’ of a child support payer. The distinction between a ‘sham’ and an ‘alter ego’ or ‘puppet’ is clearly explained by Fogarty J in Gould and Gould; Swire Investments Pty Ltd (1993) FLC ¶92-434 (at p. 80,432-3):
… the description of an entity as the “alter ego” or “puppet” of a person really denotes something different [to a “sham”]. Correctly described, it is not an assertion that is a “counterfeit, a façade or a false front”. Rather, it describes an actual situation although as a matter of law or practicality the actions of the other entity may be capable of and may in fact be controlled by the party in question. For example, a party may establish a trust over which he or she exercises control. It may be correct to describe that trust as the alter ego or even perhaps the puppet of that party, but it would not be correct to describe its existence or its ownership or control of property as a sham. Transactions entered into by it under which it deals with its property by, for example, a transfer of property to a third party would not be a sham transaction.
The decision in Daniels & Bell [2007] FamCA 152, one of the cases relied upon by counsel for the Child Support Registrar, did not involve an application for a declaration based upon a claim that the company was the ‘alter ego’ or ‘puppet’ of the child support payer. Rather, the case was concerned with findings that certain transactions or arrangements were a ‘sham’. The Federal Magistrate in that matter had made a finding that he regarded:
[39] … the transaction (not the trust creation) in acquiring, operating and otherwise managing the property through the trust as an attempt to disguise the true position – namely that the property is in all respects the property of [the father]. (quoted at [150])
Where findings are made that the property of a trust or company is only registered in the name of the trust or company as a sham, and in truth and reality is the property of the party, then orders can be made directly against the company or trustee requiring the correction of the title documents, and such other steps as may be necessary to ensure that the relevant property is held on terms reflecting the ‘truth and reality’ of the ownership rather than the sham transaction.
There is nothing about the facts of this case to show that the company’s operation of the business is a sham.
Alter Egos
A finding that an entity is a person’s ‘alter ego’ or ‘puppet’ is simply a factual finding as to the nature of the relationship between a person and a company, trust, or another person. If such a factual finding is made then, at least for the purpose of property proceedings under the Family Law Act, the property of the ‘alter ego’ or ‘puppet’ will be included in the pool of matrimonial assets as ‘property’ or taken into account as a ‘financial resource’ for the purpose of s.79 of the Family Law Act.
Notably, orders that are made under s.79 of the Family Law Act requiring a party to a marriage to exercise their control over the ‘alter ego’ or ‘puppet’, relate only to the net assets of the entity. The property of the entity is property which the party to the marriage would be able to obtain if they chose to collapse the legal or commercial structure that they control. As such, property orders of the type contemplated in Ascot Investments would not ignore the real debts or liabilities of the ‘alter ego’ or ‘puppet’.
Importantly, there are real limits on the circumstances where such orders would be made. The issue, with respect to trusts, has been the subject of attention in the academic literature: see, for example, Glover, “Discretionary trusts, fiduciary duties and the Family Law Act: Has the Family Court acted beyond power?” (2000) 14 AJFL 184, and more recently, Stephens & Stephens [2007] FamCA 680.
The form of orders ultimately made, however, are generally not orders directly against the company or trust, but rather, orders against the party requiring them to take all reasonable steps necessary to ensure that the company or trust either divests itself of the particular asset, registers share transfers, or the like. To the extent that orders made against a party to a marriage require them to take steps in their capacity as a director or trustee which affect the interests of third parties, (the company, trust, or other shareholders) they are orders that the Court has power to make in circumstances where there is a finding that the company or trust is the ‘alter ego’ or ‘puppet’ of the party: Ascot Investments Pty Ltd v Harper [1981] HCA 1; (1981) 148 CLR 337. Examples of orders made against a party to a marriage requiring them to exercise their powers in such circumstances can be found in Ashton v Ashton [1986] FamCA unrep10; (1986) FLC ¶91-777; Re Bailey v Bailey [1990] FamCA Unrep129; (1990) FLC ¶92-117; Alcaine v Alcaine and Abrahams (Unrep, Sydney SYD9879/94, 20 March, 1997, Nicholson CJ, Ellis and O'Ryan JJ); Friis v Friis [2000] FamCA 824; and Stevenson v Maloney [2003] FamCA 1387. In BP v KS [2002] FamCA 1454; (2003) FLC ¶93-157 Warnick J discusses this difference at [81] to [93].
The difficulties that these limits have created in property proceedings under the Family Law Act led to the enactment of Part VIIIaa to allow for orders directly against third parties in cases involving property proceedings under s.79 of the Family Law Act.
Specific powers to make orders affecting rights of third parties
Part VIIIaa of the Family Law Act provides specific powers for the purpose of making orders directly against, and affecting the property rights of, persons who are not parties to a marriage.
It was argued by Mr St John SC that in this case the Court could have recourse to the powers of Part VIIIaa, based upon the comments of the Full Court in Ostasheen Pty Ltd v Deputy Registrar Child Support [1998] FamCA 68; (1998) FLC ¶98-001.
In Ostasheen the Full Court (Finn, Kay and Maxwell JJ) concluded that all of the powers under the Family Law Act were available to the Court in exercising jurisdiction to enforce child support under the Child Support (Registration and Collection) Act. In Ostasheen's case the Full Court referred to s.105 of the Child Support (Registration and Collection) Act, confirming that the powers under the Family Law Act, and the provisions of the Family Law Rules, did apply to child support enforcement proceedings as a result of that section (although noting that Part X of the Family Law Act, is specifically excluded by that section).
Whilst s.105 and Ostasheen confirm that the powers available to the Court under the Family Law Act are available in hearing and determining child support enforcement cases, it is not clear how this would allow the Court to exercise the powers provided for in Part VIIIaa in a child support case. Section 90aa of the Family Law Act specifically provides:
90aa [Object of this Part] The object of this Part is to allow the court, in relation to the property of a party to a marriage, to:
(a)make an order under section 79 or 114; or
(b)grant an injunction under section 114;
that is directed to, or alters the rights, liabilities or property interests of a third party.
Section 90ae relevantly provides:
90ae [Court may make an order under section 79 binding a third party] (1) In proceedings under section 79, the court may make any of the following orders:
(a)an order directed to a creditor of the parties to the marriage to substitute one party for both parties in relation to the debt owed to the creditor;
(b)an order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor;
(c)an order directed to a creditor of the parties to the marriage that the parties be liable for a different proportion of the debt owed to the creditor than the proportion the parties are liable to before the order is made;
(d)an order directed to a director of a company or to a company to register a transfer of shares from one party to the marriage to the other party.
(2)In proceedings under section 79, the court may make any other order that:
(a)directs a third party to do a thing in relation to the property of a party to the marriage; or
(b)alters the rights, liabilities or property interests of a third party in relation to the marriage.
Similarly, s.90af provides:
90af [Court may make an order or injunction under section 114 binding a third party] (1) In proceedings under section 114, the court may:
(a)make an order restraining a person from repossessing property of a party to a marriage; or
(b)grant an injunction restraining a person from commencing legal proceedings against a party to a marriage.
(2) In proceedings under section 114, the court may make any other order, or grant any other injunction that:
(a)directs a third party to do a thing in relation to the property of a party to the marriage; or
(b)alters the rights, liabilities or property interests of a third party in relation to the marriage.
(3) The court may only make an order or grant an injunction under subsection (1) or (2) if:
(a) the making of the order, or the granting of the injunction, is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and
…
The proceedings in this case do not involve orders under s.79, nor injunctions to effect a division of property between the parties. Section 90af(3) makes it clear that the powers provided by this division are limited to cases about property division under s.79. As Kay J said in AS & GW & AH [2006] FamCA 432
[7] In aid of the powers under Part VIIIaa, the Court can issue injunctions to restrain, effectively, the collection of the debt, either pending the proceedings or post the proceedings, but it must do so by giving consideration to the matters that are set out in ss 90af(3) and (4).
See also H& H [2006] FamCA 167; (2006) 36 Fam LR 64 at [79] and Christie & Christie & Ors [2007] FamCA 125 at [81]; W & W [2006] FamCA 163 at [22].
It must also be noted that s.90ak provides that the court can not make an order under Part VIIaa if it would not be on ‘just terms’, as a result of the Constitutional limitation on legislative power in s.51(xxxi): see H & H [2006] FamCA 167; (2006) 36 Fam LR 64 at [81].
It does not appear to me Part VIIIaa provides any additional powers in support of the declaration sought in this case.
Conclusions on ‘alter egos’
I do not find that the cases dealing with matrimonial property under s.79 of the Family Law Act justify the declaration sought in this case. The limited interference with the rights of third parties in the way contemplated by Ascot Investments (supra) falls far short of the terms of the declaration sought. The declaration would operate directly against the company, not simply require the director to take various steps, and may have real consequences for the creditors of the company.
Power to set aside transactions
Mr St John SC relied upon cases dealing with s.106b (formerly s.85) of the Family Law Act. Section 106b provides for a legal right to set aside transactions with third parties that are made to defeat existing or anticipated orders under the Family Law Act, even if the third party is not an ‘alter ego’ or ‘puppet’: Gould and Gould; Swire Investments Pty Ltd (1993) FLC ¶92-434. The powers provided in s.114 of the Family Law Act may be exercised by the court in cases under s.106b: Collins v Collins [1987] FamCA unrep56; (1987) FLC ¶91-800. The section creates a right against a person not a party to the marriage in limited circumstances: It does not grant an unlimited general power to make orders against third parties.
Whilst s.106b is limited to the Family Law Act, an equivalent provision appears in s.72c of the Child Support (Registration & Collections) Act. The Registrar does not argue that this case falls with s.72c.
Section 106b of the Family Law Act and s.72c of the Child Support (Registration & Collections) Act provide specifically for claims against third parties: section 72a does not. The provisions creating a cause of action allowing for orders setting aside transactions intended to defeat claims are available on their own terms: they do not enlarge the powers provided for in s.72a. I do not find the cases dealing with these sections of assistance in dealing with the operation of s.72a in this case.
Terms of the declaration sought
A further difficulty that confronts the Child Support Registrar is the form of the declaration sought. As originally drawn, the declaration would have affected the company’s rights for an undefined time into the future with respect to presently unquantifiable liabilities, even though the shareholding of the company may change, and the company's obligations to others, particularly creditors of the company, may alter significantly. It could not be appropriate to make such a declaration.
During the course of argument Mr St John SC suggested that the declaration be limited to money owing to the first respondent as at the date of the proceedings or order. This appropriately limits the time for which the declaration operates. It does not, however, overcome the problems set out above, namely that the declaration would be directly interfering with the property of a third party and those in business relationships with the company.
Traditional enforcement remedies are available to the Child Support Registrar to obtain a result similar to the limited form of declaration sought, but without potentially impacting upon rights of others with respect to the company. The Child Support Registrar could obtain orders to be appointed receiver of the shares in the company, and then exercise the voting rights to gain control of the company. Once in control of the company, provided that the company’s other obligations under the Corporations Law were satisfied (such as not trading insolvently) a dividend could be declared, and then attached using a s.72a notice.
Conclusion
If the Child Support Registrar seeks to extend the breadth of his powers in the nature of those set out in s.72a of the Child Support (Registration and Collection) Act in the manner sought in this declaration, specific legislative provision would be required, probably in a similar nature to the provisions of Part VIIIaa of the Family Law Act, or the anti-avoidance scheme provisions of the taxation legislation.
I therefore decline to make the declarations sought.
I certify that the preceding sixty-three (63) paragraphs are a true copy of the reasons for judgment of Riethmuller FM
Deputy Associate: Averil Tan
Date: 24 July 2007
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