Chapman and Timms and Ors

[2013] FamCA 761

FAMILY COURT OF AUSTRALIA

CHAPMAN & TIMMS AND ORS [2013] FamCA 761

FAMILY LAW – EVIDENCE – Expert evidence – where the applicant applied for leave to adduce evidence as to the value of a specified entity by way of separate adversarial evidence – orders made granting the applicant and the first respondent leave to tender a report as to the value of the specified entity pursuant to Rule 15.52 of the Family Law Rules 2004 (Cth).

Family Law Rules 2005 (Cth) Rule 15.42, 15.43, 15.44, 15.52

APPLICANT: Ms Chapman

1^st RESPONDENT:

2^nd RESPONDENT

3^rd RESPONDENT

Mr Timms

P Pty Ltd

B Pty Ltd

FILE NUMBER: MLC 582 of 2012

DATE DELIVERED: 10 October 2013

PLACE DELIVERED: Brisbane

PLACE HEARD: Melbourne

JUDGMENT OF: Berman J

HEARING DATE: 7 October 2013

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Sweeney

SOLICITOR FOR THE APPLICANT: Baker Jones Lawyers

COUNSEL FOR THE RESPONDENT: Mr Mellas

SOLICITOR FOR THE RESPONDENT: Amad & Amad

COUNSEL FOR THE 2^ND REPONDENT:

SOLICITOR FOR THE 2^nd RESPONDENT:

COUNSEL FOR THE 3^rd RESPONDENT:

SOLICITOR FOR THE 3^rd RESPONDENT:

Mr Sweeney

Baker Jones Lawyers

No appearance

Cornwall Stodard

Orders

1. That pursuant to Rule 15.52 of the Family Law Rules 2004 (Cth) leave be given to the first respondent to tender a report in relation to the value of P Pty Ltd, providing such report is filed in the proceedings and served on the applicant on or before 4pm on 28 October 2013.

2. That pursuant to Rule 15.52 of the Family Law Rules 2004 (Cth) leave be given to the applicant to file and serve a report in relation to the value of P Pty Ltd providing same is filed and served on or before 4pm on 8 November 2013.

3. That the application in a case filed 3 October 2013 be otherwise dismissed.

4. That the question of costs of an incidental to this application be reserved.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Chapman & Timms and Ors has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT

FILE NUMBER: MLC 582 of 2012

Ms Chapman

Applicant

And

Mr Timms

1^st Respondent

And

P Pty Ltd
2^nd Respondent

And

B Pty Ltd
3^rd Respondent

REASONS FOR JUDGMENT

Introduction  

1. By application in a case filed 3 October 2013 (the application), the first respondent seeks orders that would permit him to adduce evidence as to the value of the entity “[P] Pty Ltd” either by way of separate adversarial evidence from Mr G pursuant to Rule 15.52 of the Family Law Rules 2004 (Cth) or in the alternative by way of the appointment of a single expert witness pursuant to Rule 15.45 of the Family Law Rules 2004 (Cth). In addition the respondent seeks an order restraining the applicant from “closing down, winding up or in any way dealing with business [P] Pty Ltd and her interest in that company”.

2. The proceedings are listed for final hearing on 18 November 2013.  The proceedings had been listed for trial on 12 August 2013 but by my order of 5 August 2013, the date was vacated.  Orders were made for the filing of further documents and in particular that the respondent was given leave to file a further amended response which joined P Pty Ltd as a second respondent and an entity unrelated to the parties namely B Pty Ltd as the third respondent.

3. Valuation issues generally, but in particular in relation to that issue came before me on 12 September 2013 and I made the following relevant orders:-

   1.That further consideration of the trial preparation generally but in the valuation issue of “[C Trademark]” generally and the husband’s [healthcare] clinic be adjourned to 30 September 2013 at 4pm (1 hour allowed).

   2.…

   3.…

   4.The applicant and the first respondent do all things necessary and sign all documents forthwith (but in any event within 7 days of the date hereof) to instruct an appropriate qualified valuation expert as to the value of “[C Trademark]”, with the cost of such valuation in the first instance to be at the joint expense equally of the applicant and the first respondent.

4. The purpose of the further adjourned hearing was to ensure that the valuation of the trademark of “C Trademark” and other issues would be further considered in order to ensure that the matter was made ready for trial.

5. It is against this background that the current application is filed.  It is noted that the applicant has chosen not to file a response on the basis that the matter could be dealt with appropriately by submissions.  The only document filed in support of the applicant’s opposition to the application was an affidavit of Ms A (the applicant’s accountant filed on the morning of the hearing, namely, 7 October 2013).

6. The Court was advised that the parties had agreed upon a single expert valuer to undertake a valuation of the intellectual property comprised in “C Trademark”, and that the valuation process was well underway and would be completed in narrow compass.  It is appropriate to note that I did not require attendance by the third and fourth respondents.

Background

1. It appears that P Pty Ltd was incorporated by the wife in June 1999.  The wife asserts that her only source of income is that which is generated via P Pty Ltd.  The affidavit of Ms A (the applicant’s accountant) describes the use by the applicant of P Pty Ltd in the following manner:-

   4.[Ms Chapman] is using [P Pty Ltd] as a very straight forward personal services income entity and is now abiding by the tax rules that cover this type of trading.  She has one client only and has no contracts with nor does she provide services to any other business or company other than the operators of the [B Group] ([B]  Pty Ltd being the third respondent) who I understand are a party to the current proceedings in the Family Court.  [P Pty Ltd] has no product to sell, no business assets producing income nor any realistic prospect of additional clients.

2. It is further asserted by Ms A that P Pty Ltd can best be described as a “personal services income entity”. As such it is no more than a vehicle by which the applicant supplies her services to the B Group (B Pty Ltd) for which a fee is charged, paid into P Pty Ltd and then dealt with via that corporate structure as opposed to the applicant entering into an employment contract with B Group as a PAYG income earner.

3. It is not suggested by the first respondent that P Pty Ltd has any other client than B Group, but there is a significant dispute as to whether P Pty Ltd holds the intellectual property to “C Trademark”.

4. The applicant asserts that she commenced consulting to B Group in July 1999.  The “C Trademark” trademark was registered in the name of P Pty Ltd and licensed to “B Group” for its sole use.  P Pty Ltd was the registered owner of the trademark and that situation remained until a renewal of the trademark ownership occurred in 2011 when there was a formal assignment of “C Trademark” from Pty Ltd to “B Group”. The first respondent challenges the alleged assignment of the trademark and if it has occurred, then seeks to set aside the disposition to the effect that the trademark would revert to and remain the property of P Pty Ltd.  This is a live and controversial issue in the proceedings.

5. In relation to the purported assignment, the applicant says in her affidavit filed 10 July 2013:-

   18.1    The trademark was in the name of my company as I created it, and registered it and held it as bare trustee for the [B Group].  In my industry, this is not an uncommon occurrence where a … consultant is creating trademarks for clients or when a trademark is assigned to a client for its’ use.

6. As stated, that assertion by the applicant is the subject of strong challenge by the first respondent.  As part of the case to be put by the applicant she relies upon the evidence of Mr D filed 7 August 2013.  Mr D is a director of B Pty Ltd.  His affidavit sets out his evidence as to the history of the relationship between B Pty Ltd and P Pty Ltd.  Relevant to the current application he says as follows at paragraph 22 of the affidavit:-

   22.To my knowledge, neither [Ms Chapman] nor [P Pty Ltd] have ever, in their own right sourced, blended, developed or sold any [Type H foodstuff] branded “[C Trademark]”.  The only involvement [Ms Chapman] or [P Pty Ltd] have ever had in this regard is through the consultancy services provided to [B Pty Ltd]. Whilst [B Pty Ltd] has, in this regard, adopted many of the initiatives by [Ms Chapman], the decision to do so has always been that of  [B Pty Ltd] and [P Pty Ltd] have been remunerated for the services provided.  The total control for the development and marketing of “[C Trademark]” product has always and remains vested solely in [B Pty Ltd].  It has unfetted discretion and control in this regard.

   23. In November 2011, [P Pty Ltd] was put on a fixed retainer of $2,500 per week based on a 25 hour working week, together with an agreement for the payment of an hourly rate in respect of additional hours worked, together with expenses.

7. The first respondent by affidavit filed 3 October 2013 refers to the consent orders made on 5 December 2012 as follows:-

   The parties shall forthwith upon a request from the other, do all such acts and things as may be reasonably required of them to enable the other to undertake a valuation, including cooperating with any valuer or any forensic accountant in relation to any business or other entity in which he or she has an interest, and the costs of such valuation to be borne by the requesting party, and be completed no later than 10 March 2013.

8. Reference was then made to a letter forwarded to Mr F being annexure MT1 to the affidavit.  The point made by the first respondent is that there had already been agreement as to the valuation of P Pty Ltd.  Whilst I accept that is the clear effect of the order made on 5 December 2012, the principle focus was the value to be ascribed to the intellectual property of “C Trademark”.  The issue now is whether, given that a separate process is being undertaken as to the valuation of the intellectual property, there is any efficacy or purpose in valuing the P Pty Ltd entity given the assertion of the applicant (and her accountant) that it does no more than receive income from B Pty Ltd for the services rendered by it via the applicant. 

9. There are two aspects relied upon by the first respondent to support the contention that P Pty Ltd needs to be the subject of a valuation. 

10. At paragraph 22 of the affidavit of the first respondent, reference is made to a loan from P Pty Ltd to B Pty Ltd in the sum of $72,062.14 made on or about 28 June 2005.  It is asserted that the amount is still outstanding.  There is however no dispute on the part of the applicant other than that the liability should be brought to account.  This outstanding amount would not in and of itself justify or support the need for a valuation.

11. The first respondent seeks to justify the need for a valuation based upon the income stream from B Pty Ltd. He asserts that in the period of six years to 30 June 2013 the amount paid by B Pty Ltd to P Pty Ltd is in the sum of $1,383,000.  The broad assertion of the first respondent is that this sum is “way beyond a reasonable payment to [P Pty Ltd] for providing services as a … consultant on a part-time basis to [B Pty Ltd]”.

12. In support of the application, the first respondent relies upon the affidavit of Mr G filed 3 October 2013.  Mr G is a chartered accountant and has generally been instructed by the first respondent to assist him in the litigation.  It was originally proposed by the first respondent that Mr G be considered as the single expert to value P Pty Ltd and the trademark “C Trademark”.

13. For various reasons it was not considered appropriate that Mr G undertake the task as a single expert.  His appointment was the subject of strenuous opposition by the applicant. 

14. I am uncertain as to the extent of material available to Mr G, but in submissions made by counsel on behalf of the first respondent there was no suggestion that in respect of a valuation of P Pty Ltd (but not including the trademark “C Trademark”) that he was in any way hampered in his ability to complete a valuation report. 

15. Mr G sets out the basis in support of a valuation in his affidavit:-

    10. On that basis the $230,000 per annum paid on average to [P Pty Ltd] for … services on an ongoing basis to date well exceeds a reasonable remuneration level of about $110,000 per annum. In my opinion the excess amount has a value being the value of an ongoing income stream which can be capitalised, it is possible that this income stream of $110,000 represents a payment in lieu of royalties for the use of the “[C Trademark]” Concept and name previously owned by [P Pty Ltd].  I note that in the year ended June 30, 2013 [P Pty Ltd] was paid $415,540 by [B Pty Ltd].  In any event regardless of what additional payments represent, the payments are an ongoing income stream which can be capitalised in valuing the business.

16. Counsel for the applicant was highly critical of the matters raised by Mr G in his affidavit. The point was made that in the absence of a value to be ascribed to the trademark of “C Trademark”, what was being sought was to value the income of the applicant arising out of contract to provide consulting services to B Pty Ltd.  As commented on by Ms A, P Pty Ltd is the only client of B Pty Ltd and it is a structure to do no more than receive income from personal exertion.  In her words:-

    There is no goodwill or value in the business as the business cannot be sold to someone else to perform those same duties”.  Her relationship is personal to the one service provider.  By this I mean that if [Ms Chapman] stopped working for the [B Group], then she would not be able to put someone else in her place and continue invoicing as if she was performing the work.  [P Pty Ltd] only earns its income because [Ms Chapman] herself performs the tasks.

17. A further criticism appears to be the apparent valuation methodology that Mr G considers is appropriate referred to in paragraph 10 of his affidavit.  The criticism is based upon an alleged superficial assertion by Mr G that the appropriate methodology is a capitalisation of future earnings.  In short, it is asserted that the average gross income of P Pty Ltd from its contractual arrangement with B Pty Ltd is $230,000 per annum.  If a reasonable salary for the applicant (and her assistant) is $120,000 then there is surplus profit of $110,000.  It is suggested that this would then represent a future maintainable earnings amount which could be the subject of capitalisation. The difficulty with that approach is that such a valuation would not in any event be conducted on a gross income level and there is little or no attempt to bring to account other expenses of P Pty Ltd or indeed, to comment on the criticism raised on behalf of the applicant that P Pty Ltd is nothing more than “a tax structure to earn income from personal exertion”.  It is unlikely that there would be a market for the business, there is no goodwill and realistically, income is only paid by B Pty Ltd because of the particular relationship between the applicant B Pty Ltd and her ability to perform the tasks. In summary, P Pty Ltd could not possibly have a value and therefore leave should not be given.

The Law

1. The purpose of Part 15.5 of the Family Law Rules 2004 (Cth) is to ensure that parties obtain expert evidence only in relation to a significant issue in dispute, to restrict expert evidence to that which is necessary to resolve or determine a case, to ensure that if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single witness and to avoid unnecessary costs from the appointment from more than one expert witness.

2. Rule 15.43 of the Family Law Rules 2004 (Cth) sets out the definitions. In particular, an expert is “defined to be an independent person who has relevant specialised knowledge, based on the persons training, study or experience.”

3. Parties may clearly agree to jointly appoint a single expert witness to prepare a report in relation to a substantial matter in dispute (Rule 15.44(1)).  The position of the first respondent is that P Pty Ltd is an entity that should be valued.  The applicant opposes that proposition.  The difficulty is that Mr G did not prepare a comprehensive valuation notwithstanding that he had the necessary information to do so.  Indeed, the matter is the subject of acknowledgement by the first respondent in paragraph 30 of his affidavit:-

   I seek an order that Mr [G] be able to complete his valuation of [P Pty Ltd] once the valuation of the trademark has been completed by Mr [E] and that I be able to be able to rely on his valuation in these proceedings.  Alternatively, I am agreeable to a single expert being appointed to value [P Pty Ltd].

4. Whilst I am not necessarily satisfied that the valuation exercise to be undertaken by Mr G in respect of P Pty Ltd is necessarily interdependent on the valuation of the “C Trademark” trademark, I must have regard to the purpose of Part 15.5 of the Rules but in particular Rule 15.42 (e) namely:-

   To enable a party to apply for permission to tender a report or adduce evidence from a single expert appointed by that party, if necessary in the interests of justice. 

5. I am obliged to adopt a conservative approach, and whilst I am not at this stage necessarily persuaded by the matters raised in the affidavit of Mr G that there is anything to be valued in terms of P Pty Ltd, it is nonetheless properly a matter for evidence.

6. Whilst Part 15.5 of the Rules clearly places emphasis upon the appointment of a single expert whether by consent or order of the Court, nonetheless there are circumstances where it may be in the interests of justice to allow each of the parties, at their election, to adduce evidence on the topic of valuation.

7. Given the significant uncertainty as to whether there is likely to be any value in respect of P Pty Ltd separate to the value of the trademark, I do not consider it appropriate to put the applicant to the joint expense of a single expert.  It is a matter therefore for the first respondent to undertake the exercise if he elects to do so in circumstances where on the evidence presented in support of the application, the justification is very much at the low end of the scale.

8. I have given consideration to the further adjournment of the application and whether to order that Mr G prepare a more comprehensive valuation report.  To do so however would only occasion further delay and potentially imperil the ability of this matter to be heard and determined as listed.  Accordingly, I propose to make orders that will enable the first respondent to adduce adversarial evidence in respect of the purported value to be attributed to P Pty Ltd and then at the election of the applicant to adduce her own evidence.

The order of injunction

1. The first respondent seeks orders in the following terms:-

   3.That the applicant, her agents or servants be restrained by injunction from closing down, winding up or in any way dealing with the company or business known as [P] Pty Ltd and her interests in the company.

2. The first respondent relies upon paragraph 31 to 36 in support of the orders sought.  In summary, the income stream received by P Pty Ltd from its consulting services with B Pty Ltd is highlighted and reliance is also had upon the Section 106B application namely, that the trademark “C Trademark” will revert back to P Pty Ltd.  It is asserted at paragraph 35 of the affidavit that:-

   It is [P Pty Ltd] that has an agreement with [B Pty Ltd] to provide … services.  There is no suggestion that [P Pty Ltd] has any other asset in terms of stock, in trade or plant and equipment.

3. Counsel for the wife made the strong point that the retention of P Pty Ltd as an entity does not necessarily impact upon the ability of the applicant to further contract with B Pty Ltd to have income directed to a different entity.  To some extent this highlights the fragility of the valuation exercise in respect of P Pty Ltd.  Additionally, Ms A says that:-

   6.It has come to the point now though that with additional fees and the costs of compliance with corporate regulations, that it may be more beneficial for [Ms Chapman] to now cease using the corporate structure as a conduit for earning her income.

1. Whilst it is not necessarily a prerequisite, I note there is no undertaking given by the respondent to be responsible for any losses that might be incurred by the applicant if the injunction is granted.  That is but one matter but by no means the primary issue. Accordingly, I am not persuaded that there is any proper focus for the order of injunction sought by the respondent, nor would there necessarily be any advantage if the order of injunction was granted.  I propose to dismiss order 3 of the application in a case.

Costs

1. The respondent seeks orders that the applicant pay the costs of an incidental to the application.  Whilst I am persuaded that an order should be made that would see the respondent at first instance and the applicant at her election have leave to tender a report or adduce evidence of value of P Pty Ltd, I am not prepared to make an order in terms of the injunction sought.  Whilst I am tempted to make no order as to costs with the effect that each party will bear their own costs of and incidental to the application in a case, it is too early to ascertain the impact, if any, on the proceedings of the valuation issues in respect of P Pty Ltd.  Accordingly, I will reserve costs generally.

I certify that the preceding thirty six (36) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Berman delivered on 10 October 2013.

Associate: 

Date:  10 October 2013