Cirillo & Cirillo
[2021] FedCFamC1F 118
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 1)Cirillo & Cirillo [2021] FedCFamC1F 118
File number(s): SYC 4192 of 2020 Judgment of: ALDRIDGE J Date of judgment: 8 October 2021 Catchwords: FAMILY LAW – PROPERTY – Interim application – Freezing orders sought against sale proceeds of primary asset – Where the husband has control of the assets – Significant asset pool – Where the husband sought to use the sale proceeds to pay various business expenses – Where the wife sought orders to prevent the dissipation of funds –
Orders made providing for adequate notice to be given to the wife of proposed payments of business expenses –
Partial property settlement.Legislation: Family Law Act 1975 (Cth) ss 75, 79 Cases cited: Cantrell & North and Anor (2020) FLC 93-976; [2020] FamCAFC 175
In the matter of B Pty Limited […] NSWSC …
Jackson v Sterling Industries Ltd (1987) 162 CLR 612; [1987] HCA 23
Marchant & Marchant (2012) FLC 93-520; [2012] FamCAFC 181
Strahan & Strahan (Interim Property Orders) (2011) FLC 93-466; [2009] FamCAFC 166
Division: Division 1 First Instance Number of paragraphs: 56 Date of hearing: 6 October 2021 Place: Sydney (via video link) Solicitor for the Applicant: Mr Reeve of Marsdens Law Group Counsel for the First and Second Respondent: Mr Richardson SC Solicitor for the First and Second Respondent: Boyce Family Law & Mediation ORDERS
SYC 4192 of 2020 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MS CIRILLO
Applicant
AND: MR CIRILLO
First Respondent
B PTY LTD
Second Respondent
ORDER MADE BY:
ALDRIDGE J
DATE OF ORDER:
8 OCTOBER 2021
THE COURT ORDERS THAT:
1.The orders made on 1 October 2021 are varied by the addition of the following orders at the end of Order 3(c):
(d)In payment to the husband or as he directs in writing the sum of $1,500,000 by way of interim property settlement, of which $500,000 is to be used by the husband for the sole purpose of paying legal costs in relation to these proceedings;
(e)In payment of the expenses set out in Schedule A to the report of Mr A dated 22 September 2021;
(f) The balance then remaining to be deposited in a controlled monies account (“CMA”) operated by TT Lawyers (“TT Lawyers”) and, subject to Order 3(g) below, thereafter applied to all business, taxation and other expenses and liabilities properly incurred by B Pty Ltd, the D Trust and/or the husband or entities related to the husband that arise after the date of settlement and for no other reason unless agreed in writing between the parties, or further order of the Court;
(g) That the solicitor for the husband shall provide TT Lawyers and the solicitor for the wife written notification and copies of each invoice in respect of the expenses referred to in Order 3(f) to be paid from the CMA, and TT Lawyers shall be at liberty to apply such funds the CMA as necessary to pay the invoice fourteen (14) days thereafter on the condition that TT Lawyers has received at the time of payment, written notice from the solicitors from the husband that the wife has been provided with copies of the invoices for expenses at the time they were provided to TT Lawyers; and
(h) The husband is to provide to the wife every Monday a copy of the bank statements of B Pty Ltd for the preceding week, and a copy of management accounts within seven (7) days of their production.
2.Liberty to apply on three (3) days’ notice.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Cirillo & Cirillo has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
ALDRIDGE J:
INTRODUCTION
This is the continuation of an application by Ms Cirillo (“the wife”) for freezing orders in relation to the proceeds of sale of a property called “LL Property” by B Pty Ltd (“B Pty Ltd”) as the trustee for the D Trust. Mr Cirillo (“the husband”) is the sole director and shareholder of B Pty Ltd and therefore has control over the D Trust.
B Pty Ltd entered into a contract for the sale of LL Property on 24 September 2021 for a sale price of $78.1 million. Settlement is expected on 30 November 2021.
The wife filed applications on 14 September 2021 and 27 September 2021 seeking freezing orders against the proceeds of sale of LL Property as well as the other assets of the D Trust and an order for a payment to her of $1.5 million as a partial property settlement. The reason for there being two applications seeking substantially the same relief remains opaque.
On 1 October 2021, I made the following orders, essentially by consent:
1. B Pty Ltd be joined to the proceedings as the second respondent.
2.The first respondent is to provide the applicant the contract for sale of the business known as LL Property (“LL Property”) (which trades from the property located at Q Street, Suburb U in New South Wales (“the Suburb U property”)) forthwith in two forms, one with the name of the purchaser and agent redacted and one without. The unredacted version of the contract for sale is, until further order, to be retained by the lawyers acting for the applicant in these proceedings and is to be shown to no other person including the applicant.
3. Pending further order of the Court, that on settlement of the Suburb U property and the business known as LL Property, B Pty Ltd as the trustee for the D Trust, shall not deal with the proceeds of sale, other than in the following manner:
a.In payment of the agent’s commission, marketing and advertising costs, legal and conveyancing costs and any other expense properly incurred in respect of the sale of the property;
b.In payment of all amounts then outstanding to G Pty Ltd as necessary to discharge the mortgage secured by G Pty Ltd against the title to the property; and
c.In payment to the applicant or as she otherwise directs in writing the sum of $1,500,000 in full satisfaction of the first respondent’s obligations pursuant to Order 1 of the orders dated 9 August 2021 in these proceedings.
4.That, without admissions, in the event that the first respondent intends or proposes to sell, transfer, dispose, mortgage or otherwise encumber the property at Q Street, Sydney in New South Wales (“the MM Property”) the first respondent shall provide the applicant with not less than 21 days written notice, along with full particulars and all disclosure documents reasonably requested by the applicant in respect of such proposed transaction before doing any act or thing to enter into such transaction.
5.The parties are to file and serve short written submissions and identify the relevant parts of evidence on which is to be relied on in relation to the outstanding issues, namely being Orders 3.4, 3.5, 3.6, 4 and 5 of the first respondent’s Minute of Order dated 1 October 2021, by 5.00 pm on Tuesday, 5 October 2021.
6.The matter is adjourned for further hearing to 12.00 pm on Wednesday, 6 October 2021.
The parties were unable to agree on the balance of the orders. The husband sought an order that the business expenses of the D Trust and of other entities related to him be paid from the proceeds of sale of LL Property and that he also receive a partial property settlement of $1.5 million. He then proposed a regime by which the funds would be held in trust by a firm of solicitors, with the payment of business expenses permitted after the wife had been given seven days’ notice of the proposed payment. This would afford the wife the opportunity to bring an application to prevent any payment she considered to be an improper dissipation of the funds.
The wife opposed the first two orders, although in her submissions she accepted that some of the business expenses should be paid but queried the quantum and timing of others. She proposed that the balance of the funds be held by her solicitors in trust for the husband and the wife, and to be disbursed only with the written agreement of the husband and wife or by court order. The effect of this order is that, in the event of dispute, B Pty Ltd (or the husband) would be required to bring an application to secure such a payment.
BACKGROUND
In order to understand the applications, it is helpful to place them in a factual context.
The wife contends that the net assets available for division between the parties are $140 million. The husband’s position is that the correct figure is less, but accepts that it is high.
The parties jointly own a property at Suburb P. The wife says it is worth $17.5–$20 million, while the husband says it is worth $38–$40 million. Both parties agree that there is a mortgage on the property of $2 million.
B Pty Ltd as trustee for the D Trust owns four properties, two of which were valued on 6 October 2020 and one on 4 February 2020 as follows:
·LL Property - $66.8 million;
·MM Property - $33.3 million; and
·PP Property - $10.6 million.
The wife asserts that the D Trust owes $20,113,785 to the husband and $53.6 million to G Pty Ltd which holds a mortgage over the assets of the D Trust.
As can be seen from the sale of LL Property for some $11.5 million more than its valuation in October 2020, the above figures must be used with some caution.
B Properties Pty Ltd (“B Properties”) is the trustee for the D Investment Trust which owns several properties in Country H and is said by the wife to have a value of $40 million.
Again, the husband is the sole director and shareholder of B Properties and has control of D Investment Trust.
F Pty Ltd is the trustee for the Cirillo Family Trust (No. 2) and owns the F Property in South Australia. It too is under the control of the husband.
Finally, the wife asserts that the husband himself owns 12 properties in Country H with a value of approximately $9.6 million.
Obviously, at a final hearing, a determination will be made as to what assets are available for division and what value each asset has. For present purposes it is sufficient to proceed on the basis that the net assets available for division total a very large sum, up to $140 million.
As I understand it, whatever those assets may be, the parties accept that an equal division of those assets between them is appropriate.
DISCUSSION
Freezing Orders
It is convenient first to set out the general principles that apply to freezing orders.
In Jackson v Sterling Industries Ltd (1987) 162 CLR 612, Deane J, with the agreement of Mason CJ, Wilson and Dawson JJ, said at 625:
…when an order for the preservation of assets goes beyond simply restraining the defendant from disposing of specific assets until after judgment, it must be framed so as to come within the limits set by the purpose which it can properly be intended to serve. That purpose is not to create security for the plaintiff or to require a defendant to provide security as a condition of being allowed to defend the action against him. Nor is it to introduce, in effect, a new vulnerability to imprisonment for debt, or rather for alleged indebtedness, by requiring a defendant, under the duress of the threat of imprisonment for contempt of court, to find money, which he may or may not have (whether or not at some point of time it may have been available to him), to guarantee to a plaintiff that any judgment obtained will be satisfied. It is to prevent a defendant from disposing of his actual assets (including claims and expectancies) so as to frustrate the process of the court by depriving the plaintiff of the fruits of any judgment obtained in the action.
His Honour added that the order go “no further than to deprive the defendant of possession of them for the purpose of precluding his disposal of them” and that the order “should make clear that the assets will be held on behalf of the defendant until after judgment” (at 626).
It follows that B Pty Ltd should be able to use its funds for the payment of legitimate creditors as the purpose of a freezing order is to prevent improper disposal of assets, but not to create a security interest in favour of the applicant. It follows that the payment of legitimate expenses should be permitted. Ordinarily of course, operating expenses should be paid from income and not capital.
Can the proceeds of sale be used to pay business expenses?
Generally speaking, in the ordinary course, orders under s 79 of the Family Law Act 1975 (Cth) (“the Act”) are framed so as to permit payment of creditors and that if the proposed orders are likely to defeat the interest of those creditors they, at the least, must be given notice of the proceedings (Cantrell & North and Anor (2020) FLC 93-976 at [68]–[76]).
The application of these principles points to the payment of legitimate creditors and that the funds, which will be held in trust, should be so held for the benefit of B Pty Ltd as trustee for the D Trust and not in the names of the husband and wife. As I have noted, both parties accept that a regime should be put in place to deal with appropriate expenses.
In light of that agreement between the parties, it is not necessary to dwell upon the evidence that the wife relies on to demonstrate that the husband tried to conceal the sale of LL Property or that he recently made a costs payment of $800,000 from his funds as a prepayment of sales commission. There is force in the husband’s position that the entry into a contract on 24 September 2021 does not necessarily make a statement made on 22 September 2021 that a sale was being negotiated misleading. Further it appears that the cheque for $800,000 referred to by the wife was, in fact, part of the deposit received from the purchaser of the property and not the prepayment made by the husband as she alleged.
The husband proposes that the expenses set out at ‘Schedule A’ to the report of Mr A, the husband’s accountant, dated 22 September 2021 be immediately paid from the proceeds.
The wife directed her submissions to just three debts owing to:
·Liquor & Gaming NSW of $275,026.65;
·VV Pty Ltd of $327,389.83; and
·TT Pty Ltd of $1,135,588.14.
First, it is not the court’s role to audit and oversee the payment of B Pty Ltd’s creditors where it is apparent on its face that the payment is to what appears to be a genuine third party creditor.
The above three debts are due for gaming tax, rent on the premises of PP Property and legal services respectively, all of which appear on their face to be regular operating expenses.
The documents relied on by the husband demonstrate the lump sum payable for gaming tax is due to the application of COVID-19 relief provisions, as opposed to being collected by direct debit in normal circumstances. There is thus nothing untoward in the payment.
The fact that, as the wife submitted, “there may be negotiations in relation to rent relief ” due to the pandemic, does not mean that the sum of the debt due to VV Pty Ltd identified is not due and payable.
Similarly, the fact that the lawyers who seek to be paid may have acted for the husband is no bar to the payment if it is B Pty Ltd who owes the debt.
The orders will provide for the payment of debts set out in ‘Schedule A’ of Mr A’s report dated 22 September 2021.
The husband wishes B Pty Ltd to pay a tax debt of Cirillo Pty Ltd in the sum of $953,082. The accountant explained that the tax debt arose because profit of the D Trust was distributed to a company which attracted tax at a lower rate than if the distribution were to be made directly to individuals. In that case, it is likely, as senior counsel for the husband surmised, that the company was merely a conduit through which the distribution passed. However, neither the wife nor I have the evidence to confirm that is the position, and accordingly the payment of this tax debt will be subject to the notice provision in the orders.
The question then arises as to what regime is to be put in place as to the debts which will need to be paid in the future. The liability for some, such as the capital gains tax on the sale of LL Property (estimated at $9,216,734) has already been incurred.
The wife submits that it would be wrong as a matter of principle for the capital sum that represents the sale of LL Property to be depleted by the payment of operating expenses and the like which should be paid from income or existing cash reserves.
It may be observed that if debts are properly payable they should be paid regardless of the source. If they are paid from the capital sum as opposed to cash reserves, the effect will be that the cash reserves remains as it was.
The orders proposed by the husband provide for notice to be given to the wife of proposed payments from the fund. Such notice will not be necessary if the debts are to be paid from income or cash reserves, which, as I have said, is the usual course. Payments such as capital gains tax are, of course different.
However, a further measure of comfort can be afforded to the wife by requiring B Pty Ltd to provide her with its bank statements each week, a course which was not opposed by the husband. I will include in that order, a requirement to provide management accounts within seven days of production. This, of course, is not in lieu of ordering disclosure and the husband will accordingly remain obliged to disclose all relevant financial information including tax returns and accounts.
The wife will therefore be able to determine whether the income is sufficient for the payment of its debts.
The wife invited me to find that the husband could not be trusted not to dissipate assets. I do not accept that the evidence, contested as it is, goes that far but, assuming for the present such a risk exists, I consider that the orders that will be made provide sufficient protection against that risk.
B Pty Ltd has operated its business for some time, most of which has been at the sole direction of the husband. The short period of time when it was not under his control (17 September 2018 to 26 June 2020) was explained by Black J (In the matter of B Pty Limited [2021] NSWSC 376). During that time the properties owned by the D Trust have acquired significant value.
I am conscious too, that B Pty Ltd is a trading corporation of some magnitude and that the husband, as its director, is bound by obligations that arise by virtue of that position. It is not appropriate, except in extreme circumstances, for a person who is not a director, to be given a substantial degree of control over a significant part of that corporation’s business activities such as the payment of its creditors.
These matters persuade me that it is not appropriate for the orders to provide for the wife to approve every payment before it is made. Rather, the better course is to provide her with notice of the proposed payment and she can then take appropriate steps to stop it if it is an improper one.
It follows that I will make the orders largely along the lines proposed by the husband but modified as discussed. The orders will provide for the payment of expenses of entities other than B Pty Ltd. If such a proposed payment is not an expense that should properly be paid by B Pty Ltd, the wife will have sufficient notice to prevent its payment.
Should there be a payment of $1.5 million to the husband?
This aspect of the matter calls for the application of s 79 of the Act as discussed in authorities such as Strahan & Strahan (Interim Property Orders) (2011) FLC 93-466 (“Strahan”) and Marchant & Marchant (2012) FLC 93-520. As the determination is made in advance of the final hearing it is a “somewhat imprecise” task and the court should act conservatively (Strahan at [99]).
The property available for division between the parties has been set out earlier. Senior counsel for the husband identified the net value to be in the range of $90–$144 million. The solicitor advocate for the wife did not demur from that proposition.
As I have already said, the parties agree that on a proper application of s 79 of the Act (including s 79(4) and s 75(2)) there should be an equal division of that property.
The wife submitted that the husband does not need $1.5 million, that the husband has failed to pay $500,000 to her as ordered by Harper J on 9 August 2021 and that the payment would be an unnecessary erosion of cash assets.
I was not taken to any authority that requires a person to demonstrate need before a partial property settlement order can be made. I do not accept that need is a necessary precondition to such an order being made.
In any event, the husband points to his Financial Statement filed on 18 June 2021 to demonstrate that he has no income and has only approximately $11,000 of cash in the bank. He has incurred a debt of $276,000 to a litigation funder in relation to these proceedings. If such evidence is accepted, then need is demonstrated. The fact that at earlier and fairly recent times the husband had access to significant funds does not necessarily disprove the husband’s contention that the four month lockdown of the properties in NSW due to the COVID-19 pandemic has had a severe impact on cash flow.
On 9 August 2021, Harper J, being satisfied on the evidence that the husband has the means to do so, ordered him to pay the wife $500,000 within 21 days, to be applied to her legal costs and disbursements. The obligation to make that payment remains. This order will unquestionably provide the husband with the wherewithal to comply with the earlier order.
It is appropriate also to take up the husband’s invitation to limit the use of $500,000 of that sum to the payment of the legal costs associated with these proceedings.
The husband is owed in excess of $20 million by the D Trust under his loan account. He could call for a payment of $1.5 million of that sum and the onus would then be on the wife to try to restrain that payment. The approach adopted by the husband is a preferable course.
The large amount of remaining assets available is “adequate to meet the legitimate expectations of both parties” at the final hearing and the order is “capable of being reversed or adjusted” at that time if necessary (Strahan at [99]). Any “erosion” of cash assets is minor.
I am satisfied that it is just and equitable to make the order sought.
I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Aldridge. Associate:
Dated: 8 October 2021
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