Dodds and Dodds and Ors (No. 2)

[2007] FamCA 1625

FAMILY COURT OF AUSTRALIA

DODDS & DODDS AND ORS (NO. 2) [2007] FamCA 1625

FAMILY LAW – PROPERTY – Security for indemnified taxation liabilities

Family Law Act 1975 (Cth)

APPLICANT WIFE: Mrs Dodds

RESPONDENT HUSBAND: Mr Dodds

INTERVENOR:	K Pty Ltd
SECOND RESPONDENT:	S Group Pty Ltd

FILE NUMBER: MLF 3090 of 2006

DATE DELIVERED: 29 November 2007

PLACE DELIVERED: Melbourne

JUDGMENT OF: Brown J

HEARING DATE: 29 November 2007

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr A.I.Strum

SOLICITOR FOR THE APPLICANT: Marshalls & Dent

COUNSEL FOR THE RESPONDENT: Dr B. Orow

SOLICITOR FOR THE RESPONDENT: Harwood Andrews

COUNSEL FOR THE INTERVENOR: Mr T.J. McLean

SOLICITOR FOR THE INTERVENOR: Bazzani Scully Brand

Orders

1. BY CONSENT IT IS ORDERED  in accordance with the Minutes of Proposed Orders sealed and attached hereto  AND IT IS DIRECTED  that such Minutes remain upon the Court file.

IT IS FURTHER ORDERED

1. That to further secure that part of the husband’s obligations pursuant to paragraph (9) of the attached Minutes of Proposed Orders which do not specifically relate to capital gains tax assessed against the wife in respect of the C Street Joint Venture, S Group Pty. Ltd. (ACN …) and the husband as the sole director thereof forthwith sign all documents and do all acts and things necessary to provide to the wife at his expense a fourth mortgage in registrable form over the H Street property to rank in priority after the third registered mortgage over the C Street property. 

2. That all extant applications be otherwise dismissed.

3. That these proceedings be removed from the List of matters awaiting finalisation.

4. That the reasons for judgment this day be transcribed and that copies be made available to the parties.

5. That pursuant to Rule 19.50 of the Family Law Rules 2004 this matter reasonably required the attendance of counsel.

IT IS NOTED that publication of this judgment under the pseudonym Dodds & Dodds is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLF 3090 of 2006

MRS DODDS

Applicant Wife

And

MR DODDS

Respondent Husband

And

K PTY. LTD.
Intervenor

And

S GROUP PTY. LTD. 
Second Respondent

REASONS FOR JUDGMENT

1. This matter came before the court yesterday morning.  The application the court was then asked to determine was, to put it very simply, whether a sum of about $900,000, being the proceeds of a joint venture, should be quarantined from the S Group of companies, or whether it should be made available to assist that Group's ongoing financial ventures.  The joint venturer, K Pty. Ltd. has intervened but its asserted entitlement in these proceedings relates to a rental debt, allegedly due from the S Group, and not to the joint venture proceeds.

2. A number of other orders were sought, to which I need not now refer.  They included applications for lump sum spousal maintenance and a Barro order.

3. The parties spent the best part of two days negotiating.  The court was advised yesterday that the matter had settled but, of course, such advice has no practical effect until the court is asked to make orders, by consent.  Settlements come undone; one must be pragmatic about that. 

4. At the heart of the case was the disbursement of the sum of $900,000.  Was some or all of it to be available to the S Group which, the husband fervently believes, can trade out of its current trouble and go on, as a viable group, to financial success?  Was it to be quarantined from that Group's activity, and thus safe from the consequences of any bankruptcy or administration, or other financial arrangements?

5. The agreement now outlined to me provides for the wife to be paid $375,000 immediately from the funds standing in trust.  The balance, some $525,000, would be available to the husband.

6. The parties have agreed that the wife will receive another $175,000 by February 2008.  Until she receives that payment, she is to receive the sum of $750 a week.  There are also other investments, due to mature in 2012.  When they do, subject to some accounting adjustments, the wife is to get 25 per cent of the then value of those investments.

7. I have not considered all the evidence in great detail.  It is clear from the summary given at the start of yesterday’s proceedings (and, I recall, from involvement I had in this matter at the end of 2006) that cash flow and thus security for the payments due to the wife in 2008 were always going to be vital issues.

8. There is a property in H Street.  The wife is to secure the payment of $175,000, and the payment of $750 per week, by mortgage over that property; that will be a second mortgage.

9. The intervenor is also to receive a sum of money under these orders.  That will also be secured over the H Street property, as a third mortgage.  The sum to be paid to the interveners is not to come out of the money held in trust.

10. The husband has a 28 per cent stake in a company called T Pty Ltd.  Its revenue is a royalty stream.  Its assets are, effectively, intellectual property.  The husband's case is that it is an Australian company; its registered office is here; it has been operating for 20 years, mainly in Melbourne, albeit with some interests overseas; that Mr B, the single expert, valued the husband's shareholding in that company at $420,000; that the wife's witness (Mr R) put it at $280,000.

11. It is submitted by the husband that the husband's interest in that company should be sufficient to provide security for the indemnity he is providing to pay the wife's tax, which brings me to the taxation figures.

12. There are two components of the tax which, in due course, is likely to be assessed as due and payable by the wife.  There will be a capital gains tax component, on the sale of the joint venture property in C Street.  That property was sold in the current financial year.  Self-evidently, the tax will not be due until tax is assessed for this financial year.  As is put by Dr Orow, tax returns for the year 30 June 2008 are routinely prepared for submission in early March or April 2009.  Once a return is filed, the wife could anticipate an assessment.

13. The other component of the wife's tax liability is her personal taxation liability, arising from distributions - as I understand it, in at least a couple of different ways - between 2003 and now.  Tax returns have not been done for that period.  There is nothing unusual in hearing that, in cases such as this.  When the wife completes those tax returns - and one can imagine she might be the target of some pressure from the ATO to do that - she will be swiftly assessed to pay outstanding tax.

14. The wife's submission is that additional funds, sufficient to pay the estimated capital gains tax and her other personal tax should be quarantined and retained from the balance (being the husband’s share) of the $900,000.  He should receive interest on the retained amount.  The wife’s estimation of the tax is about $150,000, so a substantial part of the $525,000 otherwise due to the husband would be withheld. 

15. On behalf of the husband, it is submitted that T Pty Ltd provides sufficient security for the performance by the husband of his obligations to the wife under the orders.  Very much as an alternative, it was put that if the court determined there to be a need for security for that part of her tax debt likely to become due and payable soon, there could be another mortgage or charge over the H Street property.  Patently, that could not take priority over the security offered to the intervener, as that would undermine the terms of settlement.

16. The court cannot be certain of the figures at stake.  The wife's estimate today is that capital gains tax may be some $100,000 to $110,000 and she is likely to be assessed for other personal tax of about $38,000.  On behalf of the husband it is put that the wife's documents show that the capital gains figure is likely to be some $90,000.  Capital gains tax is unlikely to come into account until about May 2009.  The husband is prepared to accept the income tax estimate of $38,000.  On these figures, about $130,000 will be due.

17. As noted by counsel, it is difficult to determine an isolated issue, acting on what might be called small pieces of evidence from a very large package.  The court is not, and cannot be, aware of the basis of the parties’ negotiations and what factors each considered in reaching a settlement. 

18. One option not considered was the potential to quarantine a part of the funds in trust to pay the personal income tax liability of $38,000, which will almost certainly fall due earlier than the balance of the liability.  Dr. Orow’s alternative submission is a variant of that. 

19. I do understand the vulnerability of the wife in these circumstances.  However, having regard to the broad agreement reached about the division of the $900,000, I am not satisfied it would be appropriate to retain $150,000 in trust and disburse to the husband a figure less than three-quarters of the previously agreed amount.  I do not propose to make an order in those terms.  In the circumstances of this case it would be commercially unviable to tie up a liquid asset for that time.

20. I am satisfied the wife should have some further security for the tax which is likely to be due soon.  The thrust of the husband’s material is that the financial position of the group is optimistic.  It is nevertheless reasonable for the wife to feel vulnerable about the indemnities offered.  It is she who will have the obligation to pay the tax, if the husband defaults and security is inadequate.  The personal debt, estimated at $38,000 will be secured against the H Street property, by way of a fourth mortgage.

21. The present security for payment of the wife’s capital gains tax is the charge against the husband’s interest in T Pty Ltd.  I do not propose to order the provision of additional security for the CGT. 

22. As Mr Strum said, when considering the orders the parties seek to have made by consent, the court’s obligation is to make orders which are just and equitable between them.  It can be difficult to determine that issue when the material filed by the parties, prior to the resolution, contains disputed accounts of relevant facts.  The court must acknowledge the commercial realities and the personal realities which lie behind settlements. Settlements are usually pragmatic solutions to avoid continuing litigation and the extensive costs and stress of that litigation, however, additional personal considerations are often relevant.  I am mindful of the costs of this litigation to date.  The court must rely, to a significant extent, on the expertise and experience of those advising the parties when assessing whether the orders proposed are consistent with its obligation to make orders which are just and equitable.  In this case the court can be confident that each of the parties has had access to highly skilled legal advisors, in their solicitors and their counsel.  The court can thus be confident that each is well aware of the consequences of seeking that these orders be made by consent, and of leaving the outstanding issue (the additional security) to be determined, on submissions, by the court.  In those circumstances I am satisfied it is proper for the court to make the orders sought by the parties, together with the order for additional security. 

I certify that the preceding 22 paragraphs are a true copy of the reasons for judgment herein of the Honourable Justice Brown AM.

Associate

Date: 29 November 2007