Darrow & Hamm (No 2)
[2022] FedCFamC1F 961
Federal Circuit and Family Court of Australia
(DIVISION 1)
Darrow & Hamm (No 2) [2022] FedCFamC1F 961
File number: MLC 5090 of 2019 Judgment of: MCNAB J Date of judgment: 8 December 2022 Catchwords: FAMILY LAW – PROPERTY - Small property pool - Property settlement and disbursement - Where there is one child of the de facto relationship - Where the total value of the net asset pool is disputed - Valuation of shares – Where the value was disputed by the applicant – Where there are allegations of sham loans – Whether legal fees paid with funds borrowed from a corporation in which the applicant owns 47.9% of the shares should be treated as an “add back” – Assessment of contributions Legislation: Family Law Act 1975 (Cth) ss 90XT(1)(a), 90SF(3), 90SM, s90ST, s117(1)
Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) r 7.26
Cases cited: Calder & Calder [2016] FamCAFC 36
Candle and Falkner [2021] FedCFamC1A 102 at [58]
C & C [1998] FamCA 143 at [46]
NHC & RCH [2004] FamCA 633
DJM v JLM (1998) 23 Fam LR 396 at [11.6]
Mallet v Mallet (1984) HCA 21 at [77,729]
M & M [1998] FamCA 42 at [2.11]
McMahon and McMahon (1995) FLC 92-606
Norbis v Norbis [1986] HCA 17
AJO & GRO (2005) 191 FLR 317 at [30]
Rankin & Rankin [2017] FamCAFC 29 at [57]-[58]
Stanford & Stanford (2012) 247 CLR 108
Trevi & Trevi [2018] FamCAFC 173 at [30]
Van Der Linden v Kordell [2010] FamCAFC 157
Vass & Vass [2015] FamCAFC 51 at [138]
Division: Division 1 First Instance Number of paragraphs: 146 Date of last submissions: 9 September 2022, 16 September 2022 Date of hearing: 29 August 2022 – 1 September 2022 Place: Melbourne Counsel for the Applicant: Mr Robinson Solicitor for the Applicant: Pearsons Lawyers Pty Ltd Counsel for the Respondent: Mr Sweeney Solicitor for the Respondent: Lander and Rogers ORDERS
MLC 5090 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MR DARROW
Applicant
AND: MS HAMM
Respondent
order made by:
MCNAB J
DATE OF ORDER:
8 DECEMBER 2022
THE COURT ORDERS THAT:
1.Within 180 days, the applicant pay to the respondent $426,049.50 (“the payment”).
2.In the event the applicant fails, neglects or refuses to make the payment in accordance with Order 1 herein, he do all acts and things and sign all such documents as may be required in his capacity as sole trustee for the Darrow Family Trust to sell such a number of shares in E Pty Ltd held in the Darrow Family Trust as may be necessary to meet the balance of the payment and any interest owing under the Rules to the respondent, subject to the restrictions set out in Order 3 and 4 of these orders (“the share sale”).
3.Pending the respondent’s receipt of payment in full and any interest payable under the Rules:
(a)The applicant be and is hereby restrained from selling any shares in E Pty Ltd and/or held by the Darrow Family Trust that are subject of these proceedings, save to meet the payment and any interest payable thereon; and
(b)The applicant be and hereby is restrained from further encumbering the property at J Street, Suburb K in the State of Victoria or drawing down further on its existing mortgage (save to make the payment in whole or part).
4.For the purpose of the share sale:
(a)The applicant be solely liable for, pay, and indemnify the respondent in relation to any capital gains tax assessed to any beneficiary of the Darrow Family Trust or to himself as trustee arising from the share sale;
(b)Unless the respondent provides her prior written consent, the applicant be and is hereby restrained from giving effect to the share sale if such a sale would result in the net sale proceeds being less than the balance of the payment (together with interest under the Rules) then owing to the respondent; and
(c)The applicant provide the respondent with any documents reasonably requested by her relating to the share sale within 2 business days of any request.
5.The applicant retain for his sole use and benefit absolutely, all his right, title and interest in:
(a)Any interest in the following entities:
(i)“E Pty Ltd” trading as L Company;
(ii)L1 Company;
(iii)L2 Company;
(iv)M Company;
(v)N Company
(“the entities”)
(b)The property situated and known a J Street;
(c)Motor Vehicle 1 registration …; and
(d)The contents of any and all bank accounts in his sole name.
6.The respondent retain for her sole use and benefit absolutely, all her right, title and interest in:
(a)Her business, O Pty Ltd including Motor Vehicle 2 motor vehicle registration number …;
(b)The real property situated at and known as P Street, Suburb Q in the State of Queensland, more particularly described in Certificate of Title Reference Number …;
(c)The contents of any and all bank accounts in her sole name; and
(d)All of her personal savings and personal effects.
7.The parties each indemnify the other and keep him or her indemnified in relation to any and all liabilities in his or her respective name.
8.The applicant indemnify the respondent and keep her indemnified in relation to any and all liabilities of the entities or any of them, howsoever arising, including but not limited to tax liabilities.
9.Unless otherwise specified in these orders, save for the purposes of enforcing any monies due under these or any subsequent orders:
(a)Each party shall be solely entitled to the exclusion of others to all property (including choses-in-action) in the possession of such party as at the date of these orders;
(b)Each party shall forego any claim they may have to any superannuation, long service leave, redundancy, retirement and like benefits to or earned by the other;
(c)Each party shall forego any claims they may have to any monies residing in individual bank accounts belonging to the other;
(d)Insurance policies shall remain the sole property of the owner named thereon;
(e)Each party be solely liable for and indemnify the other against any liability encumbering any item of property to which that party is entitled pursuant to these orders; and
(f)Any joint tenancy of the parties in any real or personal property is hereby expressly severed.
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 Darrow & Hamm has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
McNab J:
Introduction
This proceeding comes before the court by way of an Initiating Application filed on 13 May 2019 by the applicant de facto husband seeking parenting and property orders. Parenting matters were settled by consent on the first day of the trial. These reasons deal with the division of property interests pursuant to section 90SM of the Family Law Act 1975 (Cth) (“the Act”).
Mr Darrow (“the applicant”), born 1977, is the applicant de facto husband in these proceedings. Ms Hamm (“the respondent”), born 1976, is the respondent de facto wife. There is one child of the relationship, X, (“X”), born 2016, who is currently aged 6. The parties commenced cohabitation in late 2013, were engaged in early 2016 but did not marry. They separated on 21 October 2018.
The value of the asset pool is disputed. A joint asset pool was provided pursuant to orders of 13 May 2022, with the value of most assets agreed. The primary issue relates to the value of the applicant’s shares in E Pty Ltd, trading as L Company, (“the business”), which was valued by a single court appointed expert and in which the applicant owns a 47.9% shareholding.
The matter was listed for final hearing on 29 August 2022 for nine days for both parenting and property matters. Parenting issues were settled by consent on 29 August 2022, and the property application ran for three days from 30 August – 1 September 2022.
Background
The applicant is 45 years old, and the respondent is 46. The parties commenced their relationship in early 2012, before briefly separating in early 2013. They recommenced the relationship in mid-2013, co-habiting in late 2013. The parties were engaged in early 2016. They separated on a final basis on 21 October 2018.
Their period of cohabitation was approximately 5 years, and they have one child of the relationship, aged 6, who is currently living with the respondent and spending 5 nights a fortnight with the applicant, moving towards an equal time arrangement from the commencement of Term 4, 2024, pursuant to orders made by consent on 29 August 2022.
There were serious allegations involving sexual misconduct made in these proceedings against the applicant, but there has been no adjudication of those issues. There was a notation in the orders made by consent on 29 August 2022 resolving parenting issues that “The mother acknowledges that she does not believe that [X] was sexually abused by any person including the father and that there is no evidence to suggest otherwise”. I mention this to demonstrate the level of tension between the parties. These allegations were part of the case regarding children’s matters which were resolved by consent, and thus do not need to be addressed in these reasons dealing solely with property matters, save to the extent that the nature of the allegations explain to some extent the very high legal fees spent by each party.
The applicant is currently the managing director of E Pty Ltd trading as L Company, a digital company, in which he holds a 47.9% share. He earns an annual salary of approximately $2,890 per week from employment and $210 from rental per his financial statement filed 24 August 2022. He has also utilised substantial loans from his business to fund living and other expenses including legal expenses. At the time of trial, the applicant had either paid or incurred legal fees of $426,392. The respondent had incurred legal fees of $595,608 which she paid through borrowings from her parents. The level of legal fees is astonishing given the parties’ financial circumstances.
The respondent is the director of O Pty Ltd. Her financial statement filed 11 April 2022 indicates that her income is $965 per week comprising of $316 from her business, $61 from rental, $88 from Centrelink, and $500 in maintenance and child support from the applicant.
With regards to the applicant’s share of the E Pty Ltd business, a joint valuer was appointed pursuant to orders made by consent on 18 November 2019. Mr C received joint instructions on 22 September 2020 to value the applicant’s interest in E Pty Ltd, formerly trading as M Company, currently known as L Company.
Mr C provided three reports dated 20 November 2020 (“the first report”), 24 May 2022 (“the second report”) and 22 June 2022 (“the third report”). He also provided amendments on 6 July 2022 pursuant to questions asked under r 7.26 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 by solicitors for the applicant in a letter dated 27 June 2022, and in a letter dated 15 June 2022 from the solicitors for the respondent. All of these reports and amendments are annexed to Mr C’s affidavit filed 18 July 2022. On 18 August 2022, Mr C filed an additional affidavit answering further questions asked pursuant to orders made on 26 July 2022 granting leave for same.
In his reports, Mr C canvassed three different methods of valuation being share price, comparable transactions, and capitalisation of future maintainable earnings. Share price was not relied on after the first report, and he gave evidence that the reason for this was the available evidence of share sales did not reflect what he considered to be a fair representation of the value of the business, given the only information available to him was significantly out of date.
At the final hearing, Mr C valued the applicant’s shares at $1.55 million, being the median point between his valuation range of $1.3 and $1.8 million. The respondent seeks to rely on that assessment of value. The applicant disputes this valuation, and argues the value of his interest is significantly less than $1.55 million. The applicant brought an Application in a Proceeding on 18 July 2022 to adduce adversarial expert evidence as to the value of his shareholding, but that application was dismissed on 26 July 2022 and my reasons for doing so were published that day.
The parties’ Proposals
In closing submissions, the applicant put forward the proposal that there should be no payment or adjustment to the respondent. Indeed, in the orders proposed by the applicant which were attached to final written submissions, he sought orders that the respondent pay $27,596 being a half share of the cost of Mr C valuations and a private family report. He also sought a payment of $42,000 being repayment of a loan paid to the respondent’s mother paid by the applicant on behalf of the respondent.
In the alternative, in the event that the court determined that some money was payable to the respondent, the applicant sought orders that he be permitted to sell some or all of his shares in E Pty Ltd to meet that judgment debt.
In her most recent proposed minute of orders sought, the respondent seeks, among other things, orders that:
(1)Within 180 days of the date of these orders, the applicant pay a sum equivalent of 50% of the value of the net assets; and
(2)In the event that the whole payment cannot be made by the date, the applicant undertake to sell the Suburb K property or his shares in order to meet the payment.
Neither party is seeking adjustment of the real property belonging to the other, being the Suburb K property for the applicant, and the P Street property for the respondent, unless required for the purpose of a just and equitable distribution. If distribution is required to be made in favour of the respondent, the respondent submits it can be done through payment, and in default of payment, transfer or sale of the applicant’s shares in the business, or through sale of the Suburb K property.
When asked how the court should value the shares for the purpose of a distribution, counsel for the respondent submitted that the easiest method would be to sell the shares in order to crystallise their value.
Chronology
Both the applicant and respondent provided to the court a chronology of events in their case outlines prior to final hearing. The chronology relevant to property proceedings is as follows:
Date Event 1976 Date of birth of the Respondent (now aged 46). 1977 Date of birth of the Applicant (now aged 45). Mid-2010 The applicant’s involvement starts with in E3 Pty Ltd. 2011 Applicant purchases Suburb K property, which was his family home prior to this date. His parents have lived in the property since it was purchased by the applicant. Mid-2012 The applicant’s involvement in E1 Pty Ltd, E2 Pty Ltd and E Pty Ltd (now trading as L Company) begins. 2012-2013 Parties commence dating and separate in early 2013. Mid 2013 Parties recommence relationship. October 2013 Parties commence co-habitation. Early 2015 Respondent receives $70,000 in an insurance payout for injuries sustained in 2013. Late 2015 Applicant sells shares in E3 Pty Ltd for $1,125,000. Late 2015 Applicant sells shares in E3 Pty Ltd for $428,210. Early 2016 Parties become engaged. 2016 X is born. 21 October 2018 Parties separate on a final basis. Late 2018 Respondent purchases Suburb Q property with her sister, with funds borrowed from her parents (in which she has a 50% interest). Late 2018 – Late 2019 Applicant sells shares in E Pty Ltd for $358,000. 22 July 2019 Matter comes before Judge Reithmuller and Orders made that Applicant pay to the Respondent $750 for living expenses, $350 per week child support, with a Notation that the Applicant would be selling assets to fund payments. 9 November 2020 Matter comes before Judge Mercuri and is transferred to the Family Court of Australia, as it then was, to be listed on a date to be advised. 11 January 2021 Matter comes before a Deputy Registrar and Orders made that the Applicant is to file any Application in a Case and Affidavit in support in relation to child maintenance and interim parenting by 15 January 2021. 23 February 2021 Matter comes before a Senior Registrar for parenting matters and is adjourned until 7 April 2021. 7 April 2021 Matter comes before a Senior Registrar for parenting matters, where orders made.
Orders made for Respondent to pay $2,500 towards penalties for fines whilst using the vehicle, and spousal maintenance orders of 22 July 2019 reduced from $750 per week to $150.Material Relied Upon
The applicant relied on the following documents for final hearing of property matters:
(1)Amended Application for Final Orders 21/09/2021
(2)Affidavit of Ms R 10/03/2022
(3)Affidavit in Reply of Mr Darrow 26/04/2022 paragraphs [68]-[81]
(4)Outline of Case 25/08/2022
(5)Affidavit of Mr C 18/07/2022
(6)Trial Affidavit of Mr Darrow 26/07/2022 paragraphs [1]-[6], and [279]-[389]
(7)Affidavit of Mr C 18/08/2022
(8)Updated Financial Statement 23/08/2022
The respondent relied on the following documents for final hearing of property matters:
(1)Affidavit of Mr C 17/08/2022
(2)Further Amended Response to Initiating Application 9/08/2022
(3)Affidavit of Ms Hamm 9/08/2022
(4)Affidavit of Mr C 18/07/2022
(5)Financial Statement of Ms Hamm 11/04/2022
(6)Affidavit of Mr T 11/04/202)
(7)Financial statements of the Applicant filed 24 July 2019, 15 January 2021 and 10 March 2022
(8)Outline of Case filed 24/08/2022
The applicant’s witness was the paternal grandmother, Ms R, who appeared in person and gave evidence.
The respondent’s witness was the paternal grandfather, Mr W, who appeared in person and gave evidence.
Both the applicant and respondent were cross examined. The applicant’s cross examination lasted for the better part of a full day, and the respondent’s lasted for half a day.
Both parties cross examined the single expert valuer, Mr C, who appeared via Microsoft Teams.
THE COURT’S APPROACH TO DE FACTO PROPERTY PROCEEDINGS
Section 90SM(3) and (4) of the Act provide that:
(3)The court must not make an order under this section unless it is satisfied that, in all the circumstances, it is just and equitable to make the order.
(4)In considering what order (if any) should be made under this section in property settlement proceedings, the court must take into account:
(a)the financial contribution made directly or indirectly by or on behalf of a party to the de facto relationship, or a child of the de facto relationship:
(i)to the acquisition, conservation or improvement of any of the property of the parties to the de facto relationship or either of them; or
(ii) otherwise in relation to any of that last‑mentioned property;
whether or not that last‑mentioned property has, since the making of the contribution, ceased to be the property of the parties to the de facto relationship or either of them; and
(b)the contribution (other than a financial contribution) made directly or indirectly by or on behalf of a party to the de facto relationship, or a child of the de facto relationship:
(i)to the acquisition, conservation or improvement of any of the property of the parties to the de facto relationship or either of them; or
(ii) otherwise in relation to any of that last‑mentioned property;
whether or not that last‑mentioned property has, since the making of the contribution, ceased to be the property of the parties to the de facto relationship or either of them;
(c)the contribution made by a party to the de facto relationship to the welfare of the family constituted by the parties to the de facto relationship and any children of the de facto relationship, including any contribution made in the capacity of homemaker or parent; and
(d)the effect of any proposed order upon the earning capacity of either party to the de facto relationship; and
(e)the matters referred to in subsection 90SF(3) so far as they are relevant; and
(f)any other order made under this Act affecting a party to the de facto relationship or a child of the de facto relationship; and
(g)any child support under the Child Support (Assessment) Act 1989 that a party to the de facto relationship has provided, is to provide, or might be liable to provide in the future, for a child of the de facto relationship.
As is the case when considering matrimonial property, when considering orders in relation to de facto property, the court is required to consider:
(1)Whether the parties have separated;
(2)The assets and liabilities of each party;
(3)The contributions of each party;
(4)The future needs of each party taking into account the matters set out in subsection 90SF(3) so far as they are relevant;
(5)Bearing in mind all of the foregoing matters, whether it is just and equitable to make any orders altering the interests of the parties in their property; and
(6)What orders, if any, are just and equitable in all the circumstances of the case (Stanford & Stanford(2012) 247 CLR 108.)
Matters in Dispute
The applicant raised the following issues as matters of dispute:
(1)The accuracy of valuation of the applicant’s interest in the business provided by the single expert valuer;
(2)If there is to be a property alteration, whether shares can be included, as they are allegedly the subject of a secured loan;
(3)Whether an order for transfer of the applicant’s shares to the respondent would be appropriate as it would result in them being jointly engaged in a business in circumstances where they are unable to communicate;
(4)The extent to which any debt owed by the respondent to her parents should be included in the balance sheet given the applicant submits there is no prospect of it being repaid;
(5)The extent of the respondent’s contributions, including the extent of her debt at the commencement of the relationship and contributions towards repayment;
(6)The respondent’s future earning capacity;
(7)Whether there should be any alteration of property interests;
(8)Whether the applicant should be reimbursed for the valuations and family reports paid by him in first instance; and
(9)Whether a global approach, or asset-by-asset approach should be taken.
The respondent submits that the following issues are in dispute:
(1)Whether she is to receive a distribution from the applicant, and what percentage distribution should be made;
(2)Whether the shares can be transferred or sold given the applicant claims that they are the subject of a secured loan;
(3)Whether the shares are in fact the subject of a secure loan, or whether the loan agreement is a sham document;
(4)The legitimacy of the loan he received from his mother, and the extent to which it can be included in the balance sheet; and
(5)Whether there can be an add back for certain amounts, including her own legal fees.
Neither party seek a superannuation split.
The Asset Pool
In her written submissions, the respondent submits that the property pool available for distribution is as follows:
ASSET OWNERSHIP VALUE J Street, Suburb K Applicant 100% E $820,000 P Street, Suburb Q, QLD Respondent 50% E $330,000 E Pty Ltd Applicant 47.9% $1,550,000 O Pty Ltd Respondent 100% NIL Interest in L2 Company Applicant 100% NIL Applicant's share of liability owing to E Pty Ltd - 47.9% of $440k Respondent $209,000 Applicant’s legal fees (met from assets which would be otherwise available for division) Applicant $515,000[1] TOTAL $3,424,000 LIABILITIES OWNERSHIP VALUE Combined Mortgages for (S Pty Ltd) 1 J Street Suburb K Applicant 100% E $472,000[2] Loan for P Street, Suburb Q (Personal loan from parents relating to property – not bank secured) Respondent 100% $312,418 ATO Tax Debt (due Oct-22, at which point another payment plan will need to be entered into) Applicant 100% $4,898 ATO outstanding Tax Debt (agreed payment plan in monthly instalments over 1 year period commencing Sep-22) Applicant 100% $5,299 TOTAL LIABILITIES ($794,615) Total net non-superannuation property $2,629,385 Superannuation Superannuation Fund1 Applicant 100% $18,423 Superannuation Fund 2 Applicant 100% $82,036.87[3] Superannuation Fund 3 Respondent 100% $49,448 [1] This is effectively an add back as the husband has borrowed funds in order to pay legal fees.
[2] This is effectively an add back as the husband has drawn down this mortgage by a further $115,000.
[3] This is effectively an add back, as the husband has drawn down this amount.
The respondent, through her counsel, made submissions that the applicant has had access to substantial sums, which he has drawn against assets which would have otherwise been taken into account, including $82,000 from his superfund, a further $115,000 from the mortgage, and $218,000 from the sale of a number of his shares. She seeks an add back for the amount drawn from super as notional recognition that the applicant has had the benefit of these funds, and seeks to include the lower value of the mortgage by notionally including the $115,000 that the applicant has drawn down since 2019.
The applicant submits the asset pool only really consists of three assets, being the Suburb K property, the Suburb Q property, and the business. The value of the first two assets is not in dispute. The asset pool according to the applicant’s submissions is as follows:
ASSET OWNERSHIP VALUE J Street, Suburb K Applicant 100% E $820,000 P Street, Suburb Q, QLD Respondent 50% E $330,000 Shares – E Pty Ltd Applicant 47.9% No value provided TOTAL $1,150,000 LIABILITIES OWNERSHIP VALUE Combined Mortgages for (S Pty Ltd) 1 J Street Suburb K Applicant 100% E $587,000 ATO Tax Debt Applicant 100% E $10,000 Fines Victoria Applicant 100% E $10,000 TOTAL LIABILITIES ($607,000) Total net non-superannuation property $543,000 Superannuation Superannuation Fund1 Applicant 100% $18,423 Superannuation Fund 2 Applicant 100% $30 Superannuation Fund 3 Respondent 100% $49,448 Add Backs The respondent’s half share in the reports owing to the applicant Applicant 100% $27,596 Consideration
The Value of the Shareholding in E Pty Ltd
There are effectively three existing assets of the relationship, these being the Suburb K property, the Suburb Q property and the applicant's shares in the business. The other assets are notional assets that the respondent seeks to be added back and then accounted for in the distribution.
The value the Suburb K property and the Suburb Q property are agreed. The value of the applicant's shares in E Pty Ltd are disputed.
The Business Valuation of Mr C
As set out above, Mr C provided three reports and amendments based on questions asked by the parties under the rules.
His First Report
His reports used three methods of valuation, being share price, comparable transactions, and capitalisation of future maintainable earnings.
Share price is not relied on as an accurate method of valuation after the first report, as he gave evidence that he believed the data on share price was outdated and did not reflect the value of the company.
Comparable transactions relied on two groupings of entities, being comparable companies, and comparable transactions.
Comparable companies are set out in table 7.2.2 of his first report, where he averages their implied Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and revenue multipliers. He then applied a marketability discount of 25% in paragraph 7.2.8, and a size discount at 7.2.16. He derived an EBITDA multiplier of 5.0-6.0, which he then adjusts for assets and debts, arriving at a value range of $1,180,000 to $2,380,000, set out in table 7.3.4.
Comparable transactions are set out in table 7.2.14, and Mr C averaged their implied EBITDA and revenue multipliers. He then discounted the average to a range of 0.8-1.0, and adjusts for assets and debts, arriving at a derived value of $5,090,000 to $7,780,000, set out in table 8.8.
The comparison of these valuation methods is set out in table 9.1, which have an overall range of $1,180,000 to $8,800,000. He averages these numbers and provides a range of $4,800,000 to $6,300,000. He then assigned the shares a proportional value, providing a 15% discount to the applicant’s shareholding for lack of marketability.
The Second Report
Mr C provides two methods of valuation in this report, being share transactions and comparable transactions to derive a multiplier for revenue.
The comparable transaction methods again used comparable companies at table 7.4 and comparable transactions at table 7.17.
The implied revenue multipliers from the comparable companies range from 0.6 to 5.0, with multiple companies below 1.55, and two companies significantly above the others, being Y Company at 3.9 and Z Company at 5.0. He then applies the marketability discount of 25%, and a discount for size of 35% in paragraph 7.15. He derives a revenue multiplier of 1.2.
Comparable transactions are listed in table 7.17, and their averaged implied multipliers arrives at a figure of 1.6. Mr C discounts this to 0.8 by eliminating “notional synergies” and applying a discount for size. The multiplier is then discounted due to considerations set out in paragraph 7.19 to arrive at 0.6 to 0.7. He explains that his discount for synergies is 25% and 35% for size.
Mr C then takes the range of multipliers and applies them, adjusting for assets and debts, to arrive at a value range of $3,300,000 to $4,300,000.
The overall range for the two multiplier methods is between $3,300,000 to $4,300,000. He then discounts the applicant’s shareholding for lack of marketability.
The Third Report
In his third report, Mr C uses the same two methods of valuation, being share price and comparable transactions.
The comparable transactions looks at comparable companies and comparable transactions. He sets out the comparable companies and averages implied revenue multipliers at table 7.4, which range from 0.6 to 5.0. To this, he applies a discount of 25% for lack of marketability, and a discount of 35% for size. He derives a revenue multiplier of 1.2, but does not apply it, and looks at comparable transactions.
Comparable transactions and their implied revenue multipliers are set out in table 7.17, reaching a figure of 1.3. He then discounts this to 0.9 by eliminating notional synergies and applying a size discount. This is then discounted for the considerations set out in paragraph 7.19, arriving at a range of 0.6 to 0.7.
This then is adjusted for assets and debts to reach a range value of $3,300,000 to $4,300,000. This is then discounted by 15% for lack of marketability of the applicant’s shareholding.
Valuation Dispute
In relation to the valuation of the business, counsel for the respondent submits that the valuation of Mr C should be accepted, and if not, the shares ought to be sold in order to crystallise their value. Mr C gave a mid-point value of $1,550,000 in his latest report, which he maintained in cross examination. He gave evidence that his valuation could have been affected by the applicant’s failure to supply certain documents, including the shareholders agreement and a comprehensive cash flow statement. He also gave evidence that the applicant prevented him from talking to certain people, including the chairperson of the shareholder meetings and non-executive director of the business. Due to the limited information available to him about cash flow, Mr C stated in his report that his valuation was based on an assessment of past performance (at C-5 [2.3] of his affidavit filed 18 July 2022).
Mr C’s methodology was challenged by the applicant. Counsel for the applicant submits that the valuation is faulty on account of incorrect and inconsistent multipliers, the inclusion of inappropriate companies for comparison and the exclusion of appropriate data in relation to sales of comparable businesses. Counsel for the applicant submits that the change in discount for marketability between one report and the other is entirely artificial, given no other factors had changed, and thus the numbers were contrived in order to reach an end result that Mr C deemed was appropriate.
Mr C gave evidence that in earlier reports, he believed the discount he had assigned for lack of marketability had been too high, and on reflection, and accepting that he had already made significant discounts for size and synergy, he adjusted the marketability discount. He maintained his opinion that the discount was fair, and the value he assigned was appropriate.
It was put to Mr C that he ought to have discounted at a greater rate for lack of marketability, given the applicant’s shareholding was less than 50%. He responded that he did not consider that appropriate, given 47.9% was a controlling shareholding, and especially given the next largest shareholding was 18%. Thus, he maintained that a 15% discount was fair.
Counsel for the respondent submits that even if the court is minded to agree with the applicant’s submissions that the marketability discount ought to have been greater due to a less than 50% holding, the applicant until recently had held over 50% of shares, which had recently been sold since separation.
Counsel for the applicant submits that the court is entitled to attribute a value to the applicant’s shares if it does not accept the value provided by Mr C.
Calculation of the Value of the Applicant’s Shareholding in E Pty Ltd
In relation to the value of the applicant’s shares, I accept the evidence of Mr C valuing those shares at $1.55 million. Whilst he has attributed different values to those shares in the reports that he has prepared in the course of this litigation - those differences arise because he has been responsive to information that has been provided to him in the course of the process of preparing his evidence for the court.
Where he has chosen a different methodology or approach to valuation, he has done so for reasons that were explained which are rational and based on his experience and expertise.
It is apparent that Mr C's efforts to value the company became more difficult because he was not provided with access to certain non-executive directors who may have been in a position to express an unbiased view about the expected future performance of the company (Paragraphs 2.3 of his report dated 22 June 2022). He was not provided with a budget of the business, despite his request for same.
Doing the best he could with the information that was provided to him, Mr C gave unbiased evidence as to his valuation of the applicant's shares in the business based on the methodology that he considered best suited to that task. On reading his evidence and considering his responses in the witness box, I find that there is a rational basis for opinions expressed.
I did not get the sense that Mr C was simply defending his report when he gave evidence before the court. Mr C gave evidence that was the subject of careful and detailed cross examination. He made concessions where appropriate in relation to whether particular information should have been excluded or included.
One thing that did not occur in the course of Mr C's cross examination was the puttage of particular multipliers that should have been applied and an alternative valuation based on those multipliers. I do not intend that remark or observation to be a criticism of counsel, however Mr C was not asked to consider an alternative valuation of a particular sum or a range of sums based on matters that had been put to him.
This leaves the court limited to the evidence of Mr C based on his written reports and his responses to questions asked in the course of his oral evidence. By written submissions, the applicant contended that the court should embark on a process of recalculation through extracting various discounts for the size of the business which were discussed by Mr C in his first two reports. The difficulty with this approach is that it effectively asks the court to stand in the shoes of the valuer to impose its own valuation when there is no clear evidence of an alternative valuation being established on the evidence.
In those circumstances I do hold that the value of the applicant shareholding in E Pty Ltd to be $1.55 million.
Applicant’s ATO Debts
The applicant submits that these debts relate to income earned and expended in maintaining family and personal expenses post-separation and should therefore be included in the asset pool. In my view, they are an ordinary liability incurred and ought to be included as a liability.
Applicant’s Traffic Fines
The applicant submits this is a debt of the respondent. The respondent disputes this, and submits that the orders of 7 April 2021 for her to contribute $2,500 to pay her portion of these fines determined her responsibility. The applicant argues that these orders do not finally determine the extent of the respondent’s liability and he argues they only show that she contributed to this debt. Thus, the applicant submits this is a debt of the parties and if not included in the asset pool, will have to be met solely by the applicant as the fines are in his name.
In my view, the traffic fines should not be included as a liability. The orders of 7 April 2021 determined the respondent’s liability. She paid the sum of $2,500 to the applicant as per the orders. The balance of the fines are a personal liability of the applicant and should not be included.
Add Back of Legal Fees paid by the Applicant.
When making an order for property settlement, the court is required to have regard to what is just and equitable in the circumstances of each case. This includes whether to exercise a discretion to notionally add back property which has been dissipated prior to the hearing relying on s79/90SM(4) or 75(2)(o)/90SF(3)(r) of the Act. While notional property is not available for distribution at the time of the hearing, it may be required to be accounted for, for the purpose of considering what distribution is just and equitable in the relevant circumstances.
The Full Court in AJO & GRO (2005) 191 FLR 317 at [30] identified three categories where the court has notionally added back property, being:
(1)Legal fees
(2)Premature distribution of matrimonial finds
(3)“Waste” or wanton, negligent, or reckless dissipation of assets
At [39] the court cautioned that an amount should not be added back solely because a party has expended money realised from the disposal of an asset that existed at the date of separation. Rather, it is necessary to look at the reasonableness of the distribution of those funds. Indeed, it is widely recognised that add backs are the exception, and not the norm (C & C [1998] FamCA 143 at [46]; Vass & Vass [2015] FamCAFC 51 at [138]; Rankin & Rankin [2017] FamCAFC 29, [57]-[58]). The court must endeavour to reflect the circumstances of the parties at the time of the trial, recognising that parties do not “go into a state of suspended economic animation” on separation (M & M [1998] FamCA 42 at [2.11]).
In NHC & RCH [2004] FamCA 633 the Full Court at [56] stated it is a matter of discretion for the trial judge whether to notionally add property into the asset pool, and any funds added back must be connected to the marriage/de facto relationship. The Full Court noted in M & M at [2.11] that “reasonably incurred living expenses” will not be added back.
Legal fees are often sought to be added back. The Full Court in DJM v JLM (1998) 23 Fam LR 396 at [11.6] outlined that there is a policy reason for allowing such add backs under the Act:
… s 117 provides that each party to proceedings under the Family Law Act shall bear their own costs unless the court otherwise orders. Failing to add‐back moneys expended by parties on costs frequently has the effect of defeating the policy of s 117 by permitting the pool of available assets for distribution between the parties to be diminished by any moneys that either of the parties have managed to spend on their costs up to the date of trial. …
In Stanford & Stanford, The High Court at [37] held that property settlements must deal with the “existing legal and equitable interests of the parties in the property” (emphasis added), which raised concerns about whether there is still a role for add backs.
Allowing add backs for legal fees is still considered the correct approach, and I refer to the decision of Calder & Calder [2016] FamCAFC 36, in which the Full Court made a definitive statement about add backs at [35]:
The trial Judge proceeded on the basis that he “suspect[ed] that the payment of legal fees can in an appropriate case fall in to the category of circumstances where an add back of the legal fees into the pool is justified”. His Honour’s suspicion accords with well-established authority (see for example NHC and RCH at [55]. If there was any doubt that the position might have changed as a result of what was said in Stanford v Stanford or Bevan & Bevan… that doubt has been removed by what was said by this Court in Vass & Vass.
The more recent decision of the Full Court in Trevi & Trevi [2018] FamCAFC 173 at [30] provides further clarity on the current approach:
Two fundamental premises emerge from AJO and the authorities preceding it. First, "adding back" is a discretionary exercise. When the discretion is exercised in favour of adding back, it reflects a decision that, exceptionally, in the particular circumstances of a case, justice and equity requires it. The second premise is its corollary: in cases that are not "exceptional", justice and equity can be achieved, not by adding back, but by the exercise of a different discretion - usually by taking up the same as a relevant section 75(2) factor.
In Trevi, Murphy J made reference to guidelines suggested by the Full Court in NHC and RCH in relation to determining the appropriateness or otherwise of adding back legal fees:
56. In summary, we consider that the above mentioned decisions of the Full Court establish that, while the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial Judge, in determining how to exercise that discretion, regard should be had to the source of the funds.
57. If the funds used existed at separation, and are such that both parties can be seen as having an interest in them (on account, for example, of contributions), then such funds should be added back as a notional asset of the party, who has had the benefit of them.
58. If funds used to pay legal fees have been generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance), they would generally not be added back as a notional asset; nor would any borrowing undertaken by a party post-separation to pay legal fees be taken into account as a liability in the calculation of the net property of the parties. Funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post-separation income or acquisitions.
59. Outstanding legal fees themselves are generally not taken into account as a liability.
60. If in the exercise of the discretion, it is determined that legal fees already paid should be taken into account as a notional asset, then normally any liability associated with the acquisition of the monies used to pay the legal fees should also be taken into account.
At [32] – [35], Murphy J emphasised that the abovementioned matters set out in NHC were guidelines as opposed to guiding principles of law, and at [36] highlighted the particular nature of the consideration of adding back costs because of the operation of s117(1) of the Act:
[36] Paid legal fees occupy a particular position in the consideration of addbacks by reason of s 117(1) of the Act; a matter not relevant to any other form of expenditure or dissipation of property the subject of an addback claim.
[37] An order failing to addback legal costs is a pre-emptive decision about one party paying the other’s legal costs. The statutorily prescribed default position is that neither party pays all or some of the other party’s costs.
[38] If, contrary to the demands of that section, there is to be a payment of costs, the award is dependent upon a finding of justifying circumstances which, in turn, is dependent upon (non-exhaustive) considerations all of which are informed by antecedent events — for example, whether one party has been “wholly unsuccessful” and “the conduct of the parties to the proceedings”. An award of the costs of trial, if any, is in the usual run of events made after the respective entitlements of the parties to a settlement of property have been assessed and, importantly, any awarded costs are paid from the assessed entitlement to property received by the paying party.
[39] As has been said, legitimate guidelines “guide the exercise of a discretion”; they do not replace it. Guidelines, must “[preserve], so far as it is possible to do so, the capacity … to do justice according to the needs of the individual case”. The decision to addback or not addback paid legal fees remains a matter of discretion. But, a finding that it is just and equitable to not addback an amount of legal fees so paid is a finding that it is just and equitable for the other party to contribute to the costs of the first party in that proportion as part of an overall assessment of the justice and equity governing their property division.
[40] The considerations just referred to are plainly always important and central to the exercise of that discretion in respect of paid legal fees.
[41] The passages from NHC, quoted above, draw a distinction between legal costs met from property that would otherwise be available at trial and legal costs met from funds “generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance)”. The proposition there advanced, that such expenditure “would generally not be added back”, also needs to be seen as a guideline informing the relevant discretion rather than determining it. A further distinction is suggested in NHC between funds generated in that manner and “[f]unds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement”.[4]
[4] See also Candle and Falkner [2021] FedCFamC1A 102 at [58].
In the present case, the respondent is seeking to add back the value of legal fees which have been paid from funds borrowed from the company in which the applicant holds 47.9% of the shares. The applicant has drawn on those funds from an asset to which the respondent has not made a significant contribution to acquiring or maintaining. The evidence does not support a finding that the value of the applicant’s shareholding has significantly diminished as a result of the borrowed funds. The value attributed by Mr C has not been reduced by $515,000 as a result of the borrowing. Table 7.23 and appendix E of his second and third reports refer to the loan to the applicant as an asset of the company that has been taken into account by Mr C when valuing the assets and the applicant’s shareholding. There is a danger that if the court was to add back the sum of $515,000, that amount may be accounted for twice – first as an asset that forms part of the basis of the valuation of the applicant’s shares, and second as an add back. The value of the applicant’s interest in the loan, which at the time that submissions were made, was recorded as $440,000 in $210,760 (being 47.9% of $440,000). Again, where that loan (which is the same loan as the $515,000 loan but in a greater sum because legal fees have increased) has been considered as part of the valuation process as an asset when fixing the applicant’s shareholding at a value of $1.55 million. Adding that back as an additional asset will involve accounting for the same asset twice. I will treat that amount as relevant when considering matters under s 90SF of the Act.
Further, the applicant has been placed in a position by reason of the nature of the allegations that have been made against him, to defend himself. Again, there is no suggestion that he had any alternative source of funds to enable him to pay lawyers. His income is insufficient to meet the costs of legal fees he has incurred. The fact that he has borrowed money from E Pty Ltd to fund his litigation does not significantly impact the respondent, as the loan has been taken into account as an asset, albeit as a surplus asset in the valuation of his interests in that business (see page 14 of the report of Mr C at exhibit C-3 of the affidavit of Mr C filed 18 July 2022).
Mortgage on Suburb K Property
The mortgage is currently $587,000, having increased from $470,000. The respondent submits the lower amount should be included, as the applicant drew monies out in overdraft after separation.
The applicant submits that this money was drawn in order to support the respondent and child, as well as to meet living and legal expenses. Further, the applicant submits that the respondent drew $115,000 from the joint account in the 6 months following separation. Thus, the applicant submits that the expenditure of these monies was by both parties and should not be added back.
I do not propose to add back the sum of $115,000 represented by the increase in mortgage but will consider it when exercising discretion as part of s 90SF(3)(r) of the Act. These are monies expended to pay for ordinary living expenses. The reality is that neither party can afford these legal proceedings, and the applicant has needed to draw down on the mortgage to pay for his living expenses. The applicant provided some evidence of expenditures in the nature of payment to or for the benefit of the respondent in the sum of $306,466.32 between 31 October 2018 and 31 August 2022 (Ex A1).
Debt to Superannuation Fund 2
The respondent submits that the sum of $82,036.87 ought to be added back by the applicant into the pool of superannuation funds. The applicant submits this is another zero sum item, as any debt owed will be offset by the value of the superfund. These monies have been used towards living and other expenses, and the applicant submits they need to be disregarded and not included in the applicant’s superannuation.
No adjustment is sought in relation to the superannuation and therefore I will not take this item into account as an add back. I will take into account the fact that the applicant has had access to these funds as a resource under s 90SF(3)(r) of the Act. As the applicant has submitted, the applicant has had and received the use of these monies and that sum is effectively a debt to himself, I will not treat the amount as a liability on the balance sheet.
Half Share of Reports
The applicant submits that other than the $27,596 half-share of the reports owing by the respondent, no other item should be added back to the asset pool. The respondent’s half-share has been previously ordered to be paid to the applicant, and thus should be adjusted against any monies due by the applicant to the respondent.
I will make an order that the quantum of the half share of the reports be deducted from any percentage distribution ordered to be paid to the respondent. This is to give effect to the orders made by the court on 25 October 2021.
Suburb Q Property (Debt to the Respondent’s Parents)
The respondent’s father, Mr T, gave evidence by an affidavit filed on 11 April 2022 that the respondent and her sister wished to purchase a property together in Suburb Q. The property was purchased at auction for $570,000 on 23 September 2018, shortly before the parties separated. He gave evidence that he and his wife loaned the purchase price of $570,000 plus other costs of the purchase to his children and entered into a loan agreement recording the loan. That loan agreement dated 18 October 2018 recorded the advance of $295,979 to the respondent. The loan agreement provided for the interest rate on the loan to be determined by Mr T in each financial year at a rate not to exceed the residential rate fixed by the ANZ bank. It also allowed Mr T and his wife to waive any part of the interest charges. The following interest has been paid (per para 6 of Mr T’s affidavit):
•financial year ended 30 June 2019 - $8;
•financial year ended 30 June 2020 - $2,791.93;
•financial year ended 30 June 2021 - $2,930.10;
•financial year ended 30 June 2022 (part thereof) – to be completed but estimated to be around $3,500.
Mr T was cross examined. I accept his evidence that this was a genuine loan and he has an expectation that the loan will be paid. I do not think that he has created a sham document. Accordingly, I will treat the loan as a liability in assessing the parties’ asset pool.
The Relevant Approach to Take in Determining the Asset Pool
Counsel for the applicant submits that although the usual approach taken by the court to property settlements is the global approach, in this case where there are only three assets, which are easily identifiable and the relationship is for a short duration, the court ought to adopt an asset-by-asset approach. Under this approach, the applicant submits the parties are required to establish a nexus between their contributions and each relevant asset.
Counsel referred to Norbis v Norbis [1986] HCA 17 and McMahon and McMahon (1995) FLC 92-606, as summarised in Van Der Linden v Kordell [2010] FamCAFC 157 from [107] where the different approaches were summarised. At [110] the court stated:
In McMahon and McMahon (1995) FLC 92-606 the Full court (Nicholson CJ, Ellis and Buckley JJ) discussed when an asset by asset approach may be appropriate. At 82,043:
In our view, the particular circumstances of this case made an asset-by-asset approach preferable to a global approach.
The short duration of and the unhappy nature of the marriage, coupled with the parties' strict division of assets and their method of dealing with them lent itself to an asset-by-asset approach, particularly where they had separately identified another group of assets as joint.
We are conscious of the remarks of Mason CJ and Deane J in Norbis v Norbis (1986) where their Honours indicated that in most cases the global approach is more convenient.
However, it should be remembered that they stressed that they were not to be understood as denying the legitimacy of the trial Judge's ascertainment in the first instance of the financial contributions of the parties by reference to particular assets.
…
One of the reasons why their Honours expressed a preference for the global approach is because it is natural to assess the contribution by a spouse as a homemaker and parent, either by reference to the whole of the parties' property, or to some part of that property as distinct from individual assets.
However, this is not a case where the homemaker and parent contribution looms large and, having regard to the parties' agreement that it should be regarded as equal for the period of the marriage, this presented no obstacle to the adoption of the asset-by-asset approach in this case.
We consider that this is a case which falls conveniently into the class of cases referred to by Wilson and Dawson JJ in Norbis at FLC pp 75,173–75,174; CLR 532–3, when they said:
'If the parties' interests in specific items of property differ or they have made differing contributions, it may be desirable to proceed upon an item by item basis in the division of property between them. In such a case, justice and equity may best be served by treating the items separately for the purpose of determining the proportions in which they are to be divided, particularly if the overall division is to be effected by the transfer or retention of interests in individual assets, as was convenient in this case.'
(Citations Omitted)
In regards to the Suburb K property, the applicant submits that the property was bought prior to the relationship, in 2002 or so. When the parties commenced cohabitation, the applicant submits that the property had a mortgage of around $200,000, and a value of $700,000. The applicant submits that he made greater financial contributions during the relationship, and the respondent should not be said to have contributed to the property in any meaningful way. It is accepted that they never lived in the property.
With regards to the business, the applicant submits that this business predates the relationship, at which point the business had loans owing to it of around $460,000. The respondent says she made contributions to the applicant’s business, however, this is disputed.
Counsel for the respondent submits that a global approach is the standard approach, and there is no reason to adopt a different approach in this matter. Under the global approach, there is no requirement to establish a nexus between assets and contributions.
I will take a global approach, but in doing so I am conscious that the respondent has made very modest contributions to the acquisition of the assets.
In accordance with these reasons, I find the asset pool to be as follows:
Asset Value J Street, Suburb K $820,000 P Street, Suburb Q $330,000 Shares in E Pty Ltd $1,550,000 O Pty Ltd NIL Interest in L2 Company NIL Total $2,700,000 Liabilities Value Mortgage over J Street $587,000 Loan for P Street $312,418 ATO Debt $10,000 Net Non-Super Assets $1,790,582 Superannuation Superannuation Fund1 $18,423 Superannuation Fund 2 $30 Superannuation Fund 3 $49,448 Contributions
In submissions made on her behalf, the respondent cautioned the court from taking an approach that separated contributions into pre-cohabitation, during co-habitation and post separation. Rather counsel for the respondent submitted the court is required to take a holistic approach.
Applicant’s Financial Contributions
The applicant submits that he made significantly greater contributions, initially, during and post-separation. The applicant gave evidence in his trial affidavit at [284] that he brought in total assets of approximately $1,050,000, being the Suburb K property, the businesses, his car and his superannuation. He gave evidence that the Suburb K property had equity of approximately $500,000, but does not provide any documentation to support this assertion.
Counsel for the respondent made submissions that the evidence of the applicant regarding his initial contributions can be given very little weight, given the applicant’s claims of what these contributions were are largely comment, argument and conclusion, not supported by evidence. Specifically, counsel for the respondent points to the fact that no evidence was provided as to the amount of equity in the Suburb K property in 2013. She submits this is relevant to the applicant’s ability to obtain a loan of $203,646 from E3 Pty Ltd as at 30 June 2013, and whether this loan was secured against the Suburb K property, or some other unidentified source.
Similarly, counsel for the respondent disputed the applicant’s claims that E Pty Ltd had some level of equity in 2013. The applicant claims that as at 30 June 2013, the business had net assets of $106,324, made principally of “goodwill” of $169,734 (R2: 2013 Taxation Returns for E Pty Ltd), however the respondent argues there was no evidence as to how that goodwill was valued, and that the alleged value is speculative. Counsel for the respondent noted that this was the only business with any significant assets in 2013, and there is no evidence from which the court can determine its value.
Further, the respondent submits that there is no evidence, other than the applicant’s claims of loans owing, that the other entities incorporated in 2012 had any level of equity in 2013. Counsel for the respondent submits that the applicant’s assertion that the businesses were owed loans totalling $303,646 is not substantiated, since the balance sheets indicate these were not loans capable of being repaid. Counsel submits that it would have been easy to provide evidence as to the value of these businesses at the date of cohabitation, but none has been provided.
Regarding contributions during the relationship, the applicant gives evidence that he sold his interest in a business in 2015, receiving $1,125,000. He also earned an average annual income of $100,000 to $120,000. The contribution of $1,125,000 is properly conceded by the respondent to be a substantial contribution to the relationship (see written submissions in reply at 3W, page 13).
The applicant had access to significant borrowings from the business and the mortgage on the Suburb K property. He gave undisputed evidence that he drew down the mortgage by approximately $380,000 during the relationship to meet household expenses.
With regard to the applicant’s contributions post separation, the applicant submits that he should be recognised for the significant contributions he has made towards the respondent and child’s living expenses of approximately $180,000, including amounts paid pursuant to orders made 7 April 2021.
There is uncontested evidence that the respondent withdrew around $125,000 from the joint account, and has had the benefit of an additional $180,000 worth of child support and spousal maintenance.
The applicant submits that the overall contributions are 80-85% in his favour. The respondent submits contributions should be assessed as 40% in her favour.
Respondent’s Financial Contributions
Regarding the respondent’s initial contributions, it is accepted that the respondent’s initial contributions were limited to her superannuation of $35,000, and her debts of around $82,000.
There is dispute surrounding the extent of the respondent’s debt, and who repaid this debt. Counsel for the applicant submits that the debt to the respondent’s parents of $42,000 predated the relationship, and was repaid primarily by himself, as was the credit card liability that the respondent had predating the relationship.
The respondent was cross examined in relation to who repaid her debts. Counsel for the respondent submits that nothing turns on this issue, as it is accepted that shortly after cohabitation, she received an insurance payout of $70,000, and this roughly equated to her debts. Whether these funds were applied directly to the debt, or applied to the household and joint funds were applied to the debt, is insubstantial.
There was detailed cross examination of the respondent about the extent of her debt at the commencement of the relationship. It was a debt of around $90,000 and some of that may have been discharged by an insurance payout of $70,000 and by some debt forgiveness by her bank (see Ex A4). The court is not in a position, nor is it necessary, to make a precise finding as to the respondent’s level of debt. It is plain that she had very few assets at the commencement of the relationship.
Counsel for the respondent cross examined the applicant about the respondent’s contributions, and his assertions that his contributions overwhelmingly exceed those of the respondent. It is not contested that the respondent was the primary homemaker and primary carer to the child, and had been for the past six years. The applicant acknowledged that he does not see the respondent’s contribution as the primary carer and homemaker to be equal to his own as the primary income earner. The applicant submits that he contributed more than the respondent at every stage of the relationship, listing the assets he had at the commencement compared to the respondent’s debt, his income and borrowings compared to that of the respondent’s during the relationship, and his post separation contributions through child support and maintenance. He submits that as a result of his borrowings to fund both himself and the respondent, he has accumulated substantial debts, which he is now solely responsible for.
The respondent’s evidence with regard to her role and non-financial contributions is set out in her trial affidavit at [124]:
It was agreed between us that [Mr Darrow] and I would “focus on growing the business” and that I would be primarily responsible for helping him and “organising the house” including carrying out the cooking, cleaning, shopping, laundry and other homemaking aspects of our life.
The respondent also set out what she considered to be her contributions in assisting the applicant with his business at [126]-[129] of her trial affidavit. This consisted of her introducing the applicant to third parties who might assist E Pty Ltd, reading proposals, and assisting in arranging social events for employees.
Counsel for the respondent submits that, per Mallet v Mallet (1984) HCA 21 at [77,729]:
The purpose of s79(4)(b) is to give recognition to the position of the housewife who by her attention to the home and the children frees her husband to earn income and acquire assets and also approved the proposition that the contribution made by the wife as a homemaker and parent should be recognised not in a token way but in a substantial way.
Findings Regarding Contributions
Whilst it is the case that the evidence does not provide a conclusive picture or account of the value of the principle assets of the applicant at the commencement of the relationship, it is apparent that the vast majority of assets were contributed by the applicant, and the respondent effectively contributed a small debt at the commencement of the relationship.
The applicant’s efforts were the primary factor in the increase of the value of the assets.
The respondent did make contributions as a home maker and primary carer to the child and has continued to do so since the date of separation.
Whilst there has been substantial argument directed at the issue of the parties’ initial contributions, and much time has been taken to minimise the level of each party's contributions by the other, I find that at the commencement of the relationship the applicant owned a property in Suburb K which is currently valued at $820,000, although no valuation has been obtained (noting that I am not critical of the applicant not doing so given that there must be some limit on the costs and given that there is no serious argument the applicant has not made the vast majority of financial contributions). Plainly that house was an asset of value. Further he had an interest in a business which was generating income sufficient to support him and the respondent. Again there are pragmatic reasons for not having had the business retrospectively valued given that there is no substantial claim made by the respondent that her contributions have substantially increased the value of that business.
The respondent entered into the relationship with modest debts. She worked in her own business and the applicant worked in his with some support from the respondent as set out in her trial affidavit at [126]-[129]. As the wife was running her own business, her capacity to provide greater support would have been limited.
The respondent has made non-financial contributions as a mother and homemaker once the child was born in 2016. The parties separated on 21 October 2018 with the child spending the majority of the time with the respondent due to the high conflict between the parents. On 22 July 2019 orders were made that the applicant pay to the respondent $750 per week for living expenses, and $350 per week child support, along with his directly paying any expenses relating to the respondent’s car. There was a notation on the orders that the applicant would be selling assets to fund these payments.
The parties put forward proposals that were markedly different in relation to how the court should determine the level of contributions and the ultimate adjustment. Having regard to these matters and in particular the short duration of the relationship and the very significant disparity in the financial and non-financial contributions, particularly before the child was born in November 2016, I assess the respondent's contributions at 20%. The respondent’s contributions increased as primary carer once the child was born. The applicant’s financial contributions have continued, some of those contributions have been funded from the financial resources of the parties.
In terms of the financial and non-financial contributions of the parties, I assess those at 80%/20% in the applicant’s favour.
Section 90SF (3) Factors
The parties are both in good health and are relatively young. They are moving towards an equal shared care arrangement with their child in the next few years.
I do take into account as a relevant s 90SF(3)(r) factor the use of matrimonial funds that the applicant has had access to in order to fund legal proceeding and living expenses.
The applicant submits that he and the respondent have a similar earning capacity, however, this is disputed by the respondent.
With regards to the respondent’s earning capacity, the respondent was cross examined about her current employment, and gave evidence that she is very reluctant to leave her business to seek full time employment, despite the prospect of a higher wage, because the flexibility of running her own business is essential to her lifestyle and ability to care for X. She gave evidence that she has a tertiary degree from U University, and has previous work experience in management and marketing. When asked, she estimated that the salary she may be able to achieve if she sought work would vary from $50,000 - $70,000, and could be as much as $150,000 for more senior positions. The respondent said she is dedicated to growing her business and seeking more clients, but it is unlikely her income from her business will exceed $20,000 any time soon. It would appear that the respondent’s prospects of earning a more substantial income would be greater if she took up employment with a third party. I say this given the low level of remuneration she has enjoyed from running her own business prior to having a child.
The applicant pays child support, and will continue to do so.
The applicant submits that the respondent has a significant financial resource through her father, who has loaned her more than $1,000,000, and continues to advance her $3,000 per month. The respondent submits that the extent of the resources available is of “little relevance” as it is the evidence before the court that there is an expectation that the money will be repaid. I accept the respondent’s father’s evidence that he expects the debt in relation to the Suburb Q property to be repaid, but not in relation to the balance of monies lent as there is no evidence as to how the level of funding being advanced to pay legal fees and living expenses will be repaid from any funds presently available to the respondent. I do not expect the respondent’s father will instigate recovery proceedings against his daughter to recover the funds as a debt. Such conduct would run counter to the generosity and kindness he has shown to his daughter in so actively supporting her in these proceedings. The respondent’s parents provide substantial support and have demonstrated a capacity to support. This can be regarded as a financial resource pursuant to s 90SF(3)(r) of the Act, but not to the extent submitted by the applicant.
I accept that the respondent's capacity to earn will be limited because she will have the child in her care nine nights a fortnight. Much of the time that the child spends with the applicant will be during weekends. This will impact on her capacity to earn income through the ordinary working week. She does have qualifications and experience in her chosen field and it would appear that she would have a greater capacity to earn as an employee rather than running her own business. The business has only ever allowed her to earn modest remuneration.
Whilst the applicant has had access to matrimonial funds through borrowings, he is also solely responsible for paying back the loans into the future. He has drawn on superannuation funds to fund living expenses since separation, but those are funds he will be deprived of and he effectively owes that money to himself.
I do not agree with the applicant’s submissions that this is a case where there should be no allowance for the respondent’s needs and future responsibilities which are referred to in s 90SF(3). Balancing the matters that I have canvassed including the applicant’s ongoing liability to meet payments on the loans that he has taken out or increased in order to fund this very expensive litigation and he and the respondent’s living expenses since separation, I find that there should be an allowance of 5% of the asset pool in favour of the respondent.
Just and Equitable Orders
Having regards to the initial contributions which I have discussed and the s 90SF(3) factors, I find that a just and equitable division of the assets of this de facto relationship to be 75%/25% in the favour of the applicant.
Remedies and Form of Orders
Substantial argument was directed to the question of the remedies which might be available to the respondent in the event that the applicant fails to pay to her any amount assessed to be due by orders made by the court. Proposals were made by the respondent that the applicant be required to transfer shares that he holds in E Pty Ltd by proposed orders which are attached to submissions in reply prepared on behalf of the respondent. The respondent sought default provisions firstly for the sale of the Suburb K property in the event that the applicant failed to pay any amount due. The second proposal is that in the event that the sale of the Suburb K property did not satisfy the payment, that the applicant do all things necessary or required to sell such number of shares in E Pty Ltd as may be necessary to meet the balance of the payment and any interest owing under the Rules to the respondent. Further and alternatively, the respondent proposed that the applicant establish a trust to hold shares on trust for the respondent. The terms of the order as follows:
In the event that the Applicant asserts that he is unable to give effect to the Default Share Sale on such price or terms as would discharge his obligations in full under these Orders, the Applicant forthwith do all such acts and things and sign all documents as may be required in his capacity as sole trustee for the [Darrow Trust] to cause X shares to be held by him on trust for the Respondent (the Default Trust), where:
X = Y / Z and
Y is the balance of the payment outstanding together with interest under the Rules as at the date of the establishment of the Default Trust; and
Z is the fair market valuation of [E Pty Ltd] determined by this Honourable Court, divided by 7,564,300
The difficulty with the order is that the terms of that order were effectively proposed by way of reply. There was no substantial argument put by way of submissions. Secondly, the terms the order requires the court to determine a fair market value of E Pty Ltd. There is insufficient evidence before the court to enable it to do this. The evidence before the court is the fair market value of the applicant's shareholding in E Pty Ltd at the time of trial, and at the time of any default.
The report of Mr C of 22 June 2022 (at page 13) put the value of the enterprise at between $3.3 to $4.4 million. The issue would be fixing a value on a tranche of shares to be sold to realize the quantum of the sum ordered to be paid. As can be seen by the methodology adopted to value the applicant’s shareholding, there are discounts to be applied, and the size of any discount will depend on the number of shares that will need to be sold in the event of default. The value would also depend on the status of the business at the date of any default.
I am not minded to order the sale of the Suburb K property in default of the applicant paying any sum ordered as the primary remedy. The applicant’s mother lives there and has made improvements to the property. She is reasonably elderly and the sale of that property would be needlessly disruptive when the applicant has the capacity to sell shares or borrow funds in order to meet the order.
In the circumstances, I will adopt (with modification) the form of orders proposed by the applicant. The alternative – which was accepted by both parties to be open to the court – would be to simply order the payment as a sum of money and for the parties to treat that as a judgment debt and for the respondent to take whatever steps she chooses to recover the money as a judgment debt. I have not taken that course as an order of that kind is likely to lead to further litigation and run contrary to the requirements of s 90ST of the Act, which states that:
…the court must, as far as practicable, make such orders as will finally determine the financial relationships between the parties to the de facto relationship and avoid further proceedings between them.
In the event that the judgment debt remains outstanding because the sale of shares cannot be affected or for some other reason, the respondent has the option to pursue the applicant’s assets like any other creditor.
The applicant sought orders that any amount the court determined to be paid to the respondent should be paid in two years so as to allow for the orderly sale of shares. In my view, 180 days is sufficient to enable this to happen.
Costs
The respondent sought costs of and incidental to an Application in a Proceeding filed on 18 July 2022 by the applicant to adduce evidence from Mr B. By orders made on 26 July 2022, I ordered that the applicant pay the respondent’s costs of and related to that application.
The respondent claimed scale costs of solicitor’s costs in the sum of $6,549.28, and counsel’s fees of $3,320. Given that the court was required to deal with an interlocutory application and the respondent was not required to file evidence and when the written submissions were prepared by counsel, I do not regard all the attendances as necessary to the respondent’s Response to the application. Costs have also been claimed for attendances upon two counsel when, in my view, it was not necessary to consult with two counsel given the nature of the application.
In the circumstances, I fix the respondent’s party/party costs of and material to the application filed 18 July 2022 in the sum of $6,000.
Other Matters
Regarding the claim of settlement by the applicant to be repaid the sum of $42,000 being the repayment of a loan paid to the respondent’s mother by the applicant on behalf of the respondent, the applicant gives evidence at [284] of his trial affidavit that this loan was repaid from the proceeds of sale in E Pty Ltd trading as V Company which sold for $1,125,000. This forms part of the financial contributions made by the applicant which have been accounted for.
Property Distribution
Taking into account orders I have made for cost related to the respondent’s Response to the Application in a Proceeding filed 20 July 2022, and the respondent’s half share of private reports, distributions will be ordered based on the following calculations:
Party Percentage Distribution Alterations Total Plus Super Applicant $1,342,936.50 (75% of $1,790,582) Less $6,000 for costs
Plus $27,596 for reports$1,364,532.50 $1,382,985.50 (74.4%) Respondent $447,645.50 (25% of $1,790,582) Plus $6,000 for costs
Less $27,596 for reports$426,049.50 $475,497.50 (25.6%)
Thus, I will order the applicant pay to the respondent a cash sum of $426,049.50.
I certify that the preceding one hundred and forty-six (146) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McNab. Associate:
Dated: 8 December 2022
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