Dudley and Ryecroft (No 2)

[2020] FamCA 813

FAMILY COURT OF AUSTRALIA

DUDLEY & RYECROFT (NO. 2) [2020] FamCA 813

FAMILY LAW – PROPERTY – Interim – Where the applicant seeks to restrain the respondent from borrowing against property to meet business expenses – Where there is a dispute as to the total value of the property pool – Where the matter is listed for final hearing in three months – Where the proposed borrowings could seriously impact the Applicant’s position with respect to her claim for just and equitable property adjustment – Where the Court finds that the potential prejudice to the applicant’s case outweighs the potential prejudice to the respondent – Where the respondent will be restrained from borrowing any money and from further encumbering or otherwise dealing with any of the business assets without the prior consent of the applicant.

Family Law Act 1975 (Cth)

APPLICANT: Ms Dudley

RESPONDENT: Mr Ryecroft

FILE NUMBER: BRC 7473 of 2018

DATE DELIVERED: 24 April 2020

PLACE DELIVERED: Brisbane

PLACE HEARD: Brisbane

JUDGMENT OF: Forrest J

HEARING DATE: 16 April 2020

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Looney QC with
Ms Fraser

SOLICITOR FOR THE APPLICANT: NR Barbi Solicitor

COUNSEL FOR THE RESPONDENT: Mr Hackett

SOLICITOR FOR THE RESPONDENT: Hirst & Co

Orders

1. That the Respondent is restrained from assisting, facilitating, causing or permitting F Pty Ltd to:

   (a)       Borrow any amount from W Company or anyone else;

   (b)       Further encumber or otherwise deal with its assets;

   without the prior consent of the Applicant.

2. That the Applicant file and serve any written submissions as to costs on or before Friday, 1 May 2020 and the Respondent shall file and serve any written submissions in reply on or before Friday, 8 May 2020.

3. That the Application in a Case filed 23 April 2020 be dismissed.

Note: The form of the order is subject to the entry of the order in the Court’s records.

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

Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).

FAMILY COURT OF AUSTRALIA AT BRISBANE

FILE NUMBER: BRC 7473 of 2018

Ms Dudley

Applicant

And

Mr Ryecroft

Respondent

EX TEMPORE REASONS FOR JUDGMENT

1. These substantive property adjustment proceedings between two former partners to a de facto relationship were commenced by the Applicant in July 2018. The dispute being litigated between this man and woman who once were part of a loving relationship that endured over many years and produced their now adult daughter is not what might be called complex or difficult. In short compass, the Applicant seeks property adjustment that will provide her with property and money equal to 60% of the net assets of the two of them and the Respondent seeks property adjustment that will provide him with property and money equal to 60% of those net assets. In other words, their respective positions are apart by the equal of 20% of the total value of their net assets.

2. By October 2019, whilst waiting in the pending cases list, there had already been three interim applications made and determined in the matter. In December 2019, I determined to list the matter for a three day trial in late July of this year and I made trial directions. Since then, not including the one that was listed to be heard this morning, there have been two more interim applications in the matter. This is the determination of the latest of those that was heard on 16 April. As would be clear now, the parties have each spent many tens of thousands of dollars on their very experienced legal representatives and they are yet to have a trial or finality in their dispute.

3. This latest dispute arose after the Respondent’s solicitors wrote to the Applicant’s solicitors in late March and gave notice that the Respondent was causing one of the companies that he owns and controls to borrow $918,000, most of which was, it was said, to be used as working capital in his property development business. He was required by a previous order made in 2018 to give the Applicant at least seven days’ notice of such proposed new borrowings.

4. In the letter of notice given, dated 30 March 2020, the Applicant was referred to a cash flow statement that the Respondent had annexed to an affidavit he had filed in an earlier interim application made in March and was told “you will see that our client’s legal entities require the sum of approximately $775,744 per annum to stay afloat” and that it was, therefore, absolutely imperative that the Respondent “obtain further loans”. However, the proposed borrowings of $918,000 would result in the Respondent having only $765,000 available for his use. The balance would be used to pay twelve months’ interest at 11.99% in advance, brokerage fees, loan establishment fees, legal fees and the like.

5. The Applicant’s solicitors quickly wrote back on 1 April 2020 raising a few matters and seeking further information. Significantly, they pointed out an apparent material error in the cash flow statement the Respondent was relying upon. Rather than the asserted deficiency of funds being the amount of $775,744 referred to by the Respondent the correct figure in the cash flow statement was a deficiency of $383,000. They also pointed out that the deficiency in funds forecast by the cash flow statement, at the time of the pending trial in this matter in late July, was only $220,000. They then pointed out that the Respondent had access to funds in an already established business loan to meet that forecast shortfall. They asserted that the existing business loan had a limit of $999,999, of which only $295,356 had been borrowed as at 1 February 2020, leaving the balance of those un-borrowed funds available for the Respondent to draw upon. They then asked a number of questions going to the need to borrow that much money and on the particular terms proposed. The letter also conveyed the Applicant’s intention to consider applying to the Court for an injunction restraining the proposed borrowings if the Respondent did not give an undertaking not to proceed with the borrowing until the Applicant was given “the opportunity to consider” the Respondent’s detailed response to those questions.

6. On 3 April 2020, the Applicant’s solicitors caused an Application in a Case to be prepared in which an injunction restraining the Respondent from causing his company to borrow further funds against the mortgage security of any of its property was sought. Before it was formally filed, they sent unsealed copies of the Application and supporting affidavit to the Respondent’s solicitors.

7. On 6 April 2020, the Respondent’s solicitors wrote to the Applicant’s solicitors and provided them with a copy of a letter of offer of finance from a financier dated 3 April 2020. The loan offer was to one of the Respondent’s company with the Respondent listed as a guarantor. The amount being offered was actually only $549,368 at an interest rate of 11.99% per annum, payable in advance for the term of the loan (which was twelve months). Security in the form of first registered mortgages over two units in a Suburb S development (“the P Street Development”) was to be provided. After the interest and expenses, $455,000 was said to be the balance available to the Respondent “at Settlement”. There was no response offered to any of the questions that had been asked by the Applicant’s solicitors in their letter of 1 April, and no explanation offered as to the difference in the amount to be borrowed from the amount originally proposed by the Respondent in his letter of notice of 30 March.

8. Soon after receiving that letter, the Applicant’s solicitors wrote again to the Respondent’s solicitors attaching their earlier correspondence of 1 and 3 April already referred to and repeating the Applicant’s objection to further finance being obtained by the Respondent.

9. Later that same afternoon, the Respondent’s solicitors wrote again to the Applicant’s solicitors. That was a very detailed letter responding to the questions asked by the Applicant’s solicitors in their letter of 1 April and it attached what was described as “an amended cash flow statement prepared by [the Respondent]” as well as an invoice from Energex referred to in the letter. The letter conveyed the Respondent’s opposition to the Applicant’s application to restrain him from further borrowings. It informed of the change in the amount of the proposed borrowings and explained that by the proposed lender’s non-acceptance of the valuations of the unit properties being proposed as security and a reduction in the amount the lender was willing to lend.

10. The letter included an explanation as to why conventional finance at lower interest rates is unable to be obtained, conceded the error that was pointed out by the Applicant’s solicitors in respect of the cash flow statement earlier provided and then explained the significantly amended cash flow statement with assertions that the earlier cash flow statement only included ongoing costs required to keep the Respondent’s entities “afloat” and did not include any of the development costs required to ensure that another proposed development progresses to construction by July 2020 as has previously been planned. The letter also included an explanation as to the reason why the Respondent cannot draw on the loan facility that the Applicant had proposed he draw upon in the letter her solicitors wrote on 1 April.

11. The letter conveyed the Respondent’s intention to proceed, as planned, with the other development, and his assertion that he required the proposed further borrowings to be able to do so.

12. On 7 April, the Applicant’s solicitors wrote to the Court with the Application and supporting affidavit and sought to have the application listed for an urgent hearing. That was referred to my chambers for consideration on 8 April. I was on leave but indicated the matter would be listed for a hearing on 16 April conditional on the Respondent undertaking not to formalise the borrowings before the hearing and determination of the application. That undertaking was forthcoming that same day and the application was listed.

13. On 9 April, the Respondent’s solicitors sent another letter to the Applicant’s solicitors informing them that the Respondent’s accountant had now calculated taxation liabilities pursuant to the Division 7A of the Income Tax Assessment Act 1936 (Cth) that totalled $980,649.

14. On the eve of the hearing, 15 April, each of the parties filed affidavits and the Respondent filed his Response in which he sought the dismissal of the Applicant’s application. Neither party had seen the affidavit of the other party before each party’s affidavit was prepared. The Applicant did see the Respondent’s before she swore her affidavit but her affidavit did not respond to the Respondent’s affidavit. Her affidavit set out factual contentions that she made in response to matters raised in the correspondence her solicitors had received from the Respondent’s solicitors in the period since her first affidavit in support of the Application had been sworn.

15. On the afternoon of 16 April, I heard the Application in a Case using the Microsoft Teams internet video platform. Mr Looney QC appeared with Ms Fraser for the Applicant and Mr Hackett appeared for the Respondent.

The Applicant’s Case

1. The Applicant said, and I do not understand it to be disputed, that the additional expenses identified by the Respondent (over $1 million) between the first cash flow statement he said he relied upon in support of his further borrowings (attached to an affidavit filed 25 March 2020) and the amended cash flow statement annexed to the letter of 6 April are all attributable in their entirety to the development project referred to as the P Street development that he wants to progress now.

2. The Applicant then addressed some of the expenses forecast to relate to that development in the amended cash flow statement. In particular, she focused on Marketing Costs, Sales Commission, Building Approval Costs, Statutory Costs and Fees, Finance Costs and In-house Costs. She set out numerous assertions of fact and opinion in respect of these matters in support of argument that I understand to be that they are not all real expenses likely to be incurred.

3. In their written Outline of Submissions, counsel for the Applicant set out, referencing previous affidavits of both parties filed in earlier applications, a table listing the net assets the Applicant estimates are available to the parties. It was as follows:

Description

Wife

value

Personal

Former home (W)

$2,000,000

Furniture and effects (Joint)

$5,000

Watches (H)

$10,000

Line of credit (W)

-$496,120

$1,518,880

J

1,2 and 3 T Street, Suburb S

$3,000,000

AA Company (3 T Street)

-$490,277

AA Company (1 & 2 T Street)

-$979,955

$1,529,768

F

1-10 P Street, Suburb S

$3,892,500

X Bank

-$298,456

$3,594,044

TOTAL (excluding superannuation)

$6,642,692

Superannuation

Y Company (W)

$16,686

Z Company (H)

$102,000

$118,686

TOTAL BEFORE TAX LIABILITIES

$6,761,378

Tax Liabilities

-$1,741,672

NET TOTAL

$5,019,706

1. The written submissions included reference to the fact that the Applicant has instructed her legal representatives that the negative balance referenced under “Line of Credit” is actually just under $785,000 now as she has drawn down further on that facility since last having sworn to the issue.

2. Mr Looney told the Court at the hearing that the total listed under “Tax Liabilities” did not include an amount of $131,000 being further liability for tax for 2019. He also told the Court that it also did not include the amount of $980,000 being the amounts the Respondent recently informed the Applicant had been calculated as owing to the Tax Office pursuant to Division 7A that I have referred to above. Mr Looney pointed out that taking those figures into account, though I note that the Applicant included in her evidence a letter from accountants disputing the accuracy of the alleged Division 7A debt, the net total of the assets as estimated by the Applicant could potentially be quite a bit less.

3. Taking off $288,888 (the difference in the Line of Credit debit balance), $131,000 and $980,000 (a total of $1,399,880), would have that estimated net asset position at $3,619,826.

4. Mr Looney pointed out that the Applicant seeks property adjustment of 60% of the net value of the property of the parties or either of them. That equals on those figures $2,171,895 of the amount of $3,619,826. He also pointed out that might be as high as $2.8 million if the Division 7A liabilities are not included as debts.

5. The Applicant seeks orders that permit her to retain the $2,000,000 property that is registered in her name. Mr Looney pointed out that there was approximately now $1.25 million in equity in that property. The Applicant has a modest superannuation interest said to be worth $16,686. That would, Mr Looney said, see the wife, if she retained the property in its encumbered state, being entitled to receive a further $900,000 in cash (presuming the Respondent keeps all his own property and superannuation interests) if the Division 7A liabilities are included or up to $1.9 million in cash if they are not.

6. With respect to Mr Looney, I calculate the net total to be $4,599,826 if the asserted Division 7A liabilities are not taken into account and 60% of that to equal $2,759,895. That is $588,000 higher than on the lesser net total of $3,619,826, making it a potential extra cash payment of up to just under $1.5 million.

7. Mr Looney submitted that if that was to come from the Respondent it would have to come from further borrowings or the liquidation of assets by him. On the Applicant’s estimates the P Street development owned by one company is valued at $3,000,000 and secures debt of almost $1.5 million. The properties in the completed development owned by the other company, that is the P Street Development, that it is proposed does the further borrowing are estimated to be valued at $3,892,500 and secure (though not all of them do) a lending facility of $999,999 currently exists against which $298,456 is owing. Mr Looney points out that facility is currently secured against units that are worth twice the value of the total facility. In any event, he concedes there is $3,594,044 in current equity in all of the residential and commercial units still owned in that development by the Respondent’s company.

8. It is against some of this equity that the Respondent wants to now borrow via a new loan using the remaining unencumbered properties owned by that company as security. On those figures, the equity in both the developments is currently $5,123,812 and the tax liabilities assessed and asserted of the Respondent and his companies equal $2,852,672. That leaves $2,271,140 in equity against which the Respondent now wants to borrow a further $549,368 through a new facility with a new third party lender to be secured against currently unencumbered units. 

9. For the Applicant, it is said the following:

   ·The matter is listed for a final hearing on 3 days in late July, just over three months from now;

   ·The evidence does not support a need prior to the trial for the amount of funds proposed to be borrowed where:-

   1.The amount sought is based on cashflow projections made by the Respondent for a 12 month period ending 31 March 2021;

   2.There are errors and anomalies in the cashflows provided;

   3.Some of the cash payments said to be relating to the development will most likely not be incurred prior to trial or may be payable to an entity controlled by the Respondent in any event;

   4.The Respondent has not given proper disclosure of documents or information that relates to the assumptions underlying the cashflows provided;

   5.The respondent has other sources of finance available to him.

   ·The Respondent is proposing to encumber presently unencumbered assets, thus creating further third-party interests in property available for adjustment between the parties.

The Respondent’s Case

1. For the Respondent, it was first argued that as the Applicant had previously sought the same relief and that application had been disposed of by way of Orders made by me on 12 November 2018 and amended with the consent of the parties on 4 December 2018 that she needed to demonstrate a change of circumstances that justifies a revisiting of the previous orders.

2. In those previous Orders the Respondent was restrained from dealing in any way with properties that included the ones now sought to be encumbered, other than in the ordinary course of business and, in any event, the Respondent had to give the Applicant not less than seven days’ notice prior to obtaining any further loan in respect of those properties.

3. Right at this point, I respectfully reject the submission that the Applicant is prevented thereby from making this particular application without demonstrating a change of circumstances. I consider the very reason for the Order requiring the Respondent to give the Applicant at least seven days’ notice of a determination to obtain any further loan in respect of the properties was to give her opportunity to consider her position and to apply, if she considered it appropriate and necessary, to the Court for further interim injunctive relief pending the final trial.

4. Mr Hackett went on to point out the principles by which the Applicant’s application is to be determined, highlighting that the Court is required to consider whether there is a serious question to be tried – that is if the evidence remains as it is, there is a probability that at the trial of the action the Applicant will be entitled to relief – and then questions of the balance of convenience – whether the inconvenience or injury which the Applicant would be likely to suffer if an injunction is refused outweighs or is outweighed by the injury which the Respondent would suffer if the injunction were granted. Broadly, I accept that as correct.

1. Mr Hackett submitted that the first of those enquiries requires the Applicant to establish on this application that if the borrowing she seeks to restrain occurs, she will be at risk of not being able to realise her property settlement at trial. Mr Hackett submitted that the evidence does not establish that and that it is, indeed, to the contrary.

2. He points to the fact that the Respondent only proposes borrowing $549,368 and he submits that it is self-evident on the Applicant’s own figures that she could still achieve the property adjustment she applies for at trial even with the proposed borrowings. Mr Hackett also submitted that what the Applicant’s counsel have not included in the table of assets and liabilities in their written Outline is the amount the Applicant will most probably be taken to have already received by way of part property adjustment, given that she has already drawn on and had access to that sum of $785,000 from the line of credit facility secured against the property registered in her name that she seeks to retain. A substantial portion of those drawings have been used by her to pay the costs of her legal representation in these proceedings I understand and such use of capital, at least, is generally treated as Mr Hackett submitted. What that amount is and whether any further amount will be treated as part property adjustment already received is yet to be determined, though I accept that the Applicant has, as I have already pointed out, spent tens of thousands of dollars on her legal fees already.

3. As things currently stand though, including the Division 7A liability to the Tax Office in the amount of $980,000, as asserted by the Respondent, as set out in the paragraphs above, a further reduction in equity in the existing P Street Development properties (including the ones against which it is proposed to borrow) in the sum of $549,368 would take the remaining equity in those properties and the other proposed P Street development down to a net estimated total of $1,721,772. On the face of it, that appears enough to meet the adjustment Orders currently sought by the Applicant if all those figures, including all three of the separate tax liability figures, are correct, especially if there are substantial further amounts to be treated as part property adjustments already received by the Applicant.

4. However, as I have pointed out above, the evidence adduced by the Applicant shows that she does not currently accept that such a Division 7A liability exists. There is also evidence that the third party lender did not accept valuation evidence provided by the Respondent in respect of the values of the proposed security property, suggesting further reductions in the net value of the asset pool might be forthcoming. The Court was also informed that the single expert accountant tasked with providing opinion as to the value of all the Respondent’s entities has yet to complete that work, leaving open the prospect that the values may not yet be as the parties currently estimate them to be.

5. Additionally, the Respondent’s evidence is that he currently does have available in an X Bank Loan facility an amount of approximately $703,000. He does not say that he cannot draw on those funds. In fact, in his affidavit evidence, he says he does draw on those funds from time to time to meet expenses for his entities. But he says that amount is not enough to meet the costs of his entities between now and the final hearing, suggesting that he does intend to access those funds as well as the proposed additional borrowings, and, secondly, he says that the particular loan facility requires ongoing interest repayments and that although the P Street properties are generating income it is insufficient to meet repayment obligations that they have on the existing loans whereas, by contrast, the proposed loan already includes a large portion for prepaid, deducted interest.

6. Clearly, if he is permitted to borrow the proposed additional amount of $549,368 and is still able to access all of the available funds in the X Bank facility, as he says he is and does, currently existing equity in all of his assets could potentially be further reduced by just over $1.25 million dollars within the few short months between now and the final trial. That would, on current estimates, bring the equity down to around $1,000,000. That would seriously impact, and potentially irretrievably impact, the Applicant’s position with respect to her claim for just and equitable property adjustment and I am certainly not in any position to say right at this point in time that the Applicant has no prima facie prospects of achieving the 60% claim that her counsel tell the Court that she seeks. 

7. The trial is, as I have said, now just three months away. On the Respondent’s own evidence he has access to just over $700,000 in an already existing loan facility and says he draws on that. He says he will need more than that up until the trial and relies on the amended cash flow statement that was provided in early April and is in evidence. I have to say that I am quite troubled, at this point, by the apparent inconsistency in his reliance on 30 March on an earlier cash flow statement to positively assert that his entities needed $775,000 per annum to stay afloat, with that figure actually being a mistake that overstated the amount the document supported, and his present reliance on the amended cash flow statement produced shortly thereafter to assert that the entities actually need just in excess of $1,600,000 per year to stay afloat. At the same time he says he needs nearly $1,000,000 in the period between now and the trial, whilst the Applicant, who has some knowledge of the Respondent’s business dealings, asserts that many of those forecast expenses are overstated or even inappropriately included. Of course, I am not now in a position to make any actual determination about those matters.

8. In the circumstances presented to me, I am satisfied that the potential prejudice to the Applicant’s case for trial presented by permitting the proposed borrowings outweighs the potential prejudice to the Respondent over the next three months by not allowing the borrowings.

9. Accordingly, I make the orders as set out at the beginning of these Reasons upon the undertaking as to damages provided by the Applicant to the Court through her solicitors on Friday, 17 April 2020.

I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Forrest delivered on 24 April 2020.

Associate: 

Date:  5 May 2020