Finlay and Finlay (No.2)

[2019] FCCA 1119

FEDERAL CIRCUIT COURT OF AUSTRALIA

FINLAY & FINLAY (No.2) [2019] FCCA 1119

Catchwords:
FAMILY LAW – Property settlement – long marriage – interim valuation orders made in relation to various matrimonial entities – husband seeks winding up of entities and discharge of valuation orders – wife seeks that valuation orders be enforced.

Legislation:

Family Law Act 1975, s.8(3)

Applicant: MS FINLAY

Respondent: MR FINLAY

File Number: NCC 3061 of 2015

Judgment of: Judge Betts

Hearing date: 5 November 2018

Date of Last Submission: 8 March 2019

Delivered at: Newcastle

Delivered on: 1 May 2019

REPRESENTATION

Counsel for the Applicant: Ashley Bithrey

Solicitors for the Applicant: East Coast Family Lawyers

Counsel for the Respondent: Julie Kearney

Solicitors for the Respondent: Powe & White Family Lawyers

ORDERS:

1. The husband’s Application in a Case filed 7 May 2018 is dismissed.

2. The husband’s costs of and incidental to his Application in a Case filed 7 May 2018 are reserved.

3. The solicitor for the wife is authorised to immediately uplift the material produced under subpoena by … Accountants and provide a copy to Mr A of ….

4. The wife’s Response to an Application in a Case filed 26 October 2018 is otherwise dismissed.

5. The wife’s costs of and incidental to her Response to an Application in a Case filed 26 October 2018 are reserved.

6. The proceedings are adjourned to 9.30am on 9 August 2019 for Directions Hearing.

   NOTING THAT:

   on the next court date, the parties will be expected to inform the court:

   (a)that financial disclosure is complete;

   (b)that all outstanding valuations are complete; and

   (c)what steps – if any – will be required for the parties to be able to attend mediation in a genuine attempt to resolve these proceedings.

IT IS NOTED that publication of this judgment under the pseudonym Finlay & Finlay (No.2) is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT NEWCASTLE

NCC 3061 of 2015

MS FINLAY

Applicant

And

MR FINLAY

Respondent

REASONS FOR JUDGMENT

Background:

1. These are cumbersome property settlement proceedings between husband and wife brought pursuant to the provisions of Part VIII of the Family Law Act 1975 (“the Act”).  They arise following the 2014 breakdown of the parties’ twenty (20) year marriage.

2. I am presently asked to determine the parties’ competing interim applications. Broadly, the husband seeks to discharge some earlier valuation orders made three (3) years ago in respect of various matrimonial entities.  The husband seeks to wind up the entities instead.  He also wishes to be able to access some limited joint moneys still remaining in his solicitor’s trust account so as to meet any winding-up and related expenses.

3. The wife opposes this course.  She seeks orders that will facilitate the completion of the outstanding valuations. In the meantime she opposes any further depletion of the moneys held in trust; she wishes to utilise those moneys to pay for a mediation in an effort to resolve the dispute.

4. Mediation was in fact ordered nearly two (2) years ago but has not yet been able to take place.  This is largely due to the incomplete valuations.

5. The proceedings have thus far progressed rather slowly.  On either party’s proposed orders the proceedings will hopefully progress one step closer towards resolution.

Litigation history:

1. The competing interim applications need to be considered in their proper context.

2. By way of background, at separation the husband retained possession of a one third (1/3) interest in a business known as “…”.  This business was effectively operated by the husband in an equal partnership with two (2) other business partners.  The partners conducted the business via a corporate entity – Business.  The husband and his partners were equal one third shareholders.  For convenience I will simply refer to this entity as “Business”.

3. Business Conducted business at a workshop at Property B (“the Property B property”).  The Property B property was owned by the husband and his business partners via another corporate entity - BUSINESS C Pty Ltd (New South Wales) of which the husband and his business partners were equal one third shareholders.  There was an associated unit trust, the BUSINESS C Unit Investment Trust.  For convenience I will simply refer to this entity as “BUSINESS C”.

4. The husband held his shareholdings in Business and in BUSINESS C via a corporate entity of his own - Business D Pty Ltd (“Business D”).  The husband was the sole director and shareholder of Business D.

5. In turn, Business D acted as trustee for the husband and wife’s family trust, known as the Finlay Family Trust (“the family trust”). 

6. During the marriage, Business would pay a monthly dividend to Business D.  In his capacity as director of Business D, the husband would then distribute that income to the husband and wife through the family trust.

7. This arrangement continued in the initial period after separation.  However, upon the wife serving the husband with her Initiating Application in December 2015, the husband promptly and unilaterally negotiated a sale of his “Business” and “BUSINESS C” interests to his business partners.

8. The husband only revealed this on the first return date (10 February 2016), when he filed his response material.  In that material he deposed that he had, in January 2016, negotiated a sale of his[1] shares in Business and BUSINESS C, and his units in the related BUSINESS C Unit Trust[2] to his business partners (or their respective entities) for a total consideration of $75,000.00.  The husband revealed that he had also resigned as a director of Business and BUSINESS C.  The husband’s evidence was that the disposal was at arms’ length, that he was in poor health at that time and unable to work.

   [1] Or Business D’s

   [2] Also described in the evidence as the BUSINESS C Unit Investment Trust.  For convenience I will refer to it in this judgment as the BUSINESS C Unit Trust

9. Given the wife’s concerns, on 29 February 2016 she filed an Application in a Case.  Amongst other things, she sought inter alia to restrain the husband from selling or disposing of the shares in the relevant entities. In the alternative, she sought that any such disposals be set aside pursuant to s.106B of the Family Law Act.

10. On 21 March 2016, the husband proceeded with settlement notwithstanding; Business D received the $75,000.00. 

11. Some three (3) days later, on 24 March 2016, the proceedings came back before the court.  On that date, orders were made that the sale proceeds of $75,000.00 be paid into the trust account of the husband’s solicitors, Powe & White. 

12. The relevant order provided inter alia:

    2.  The husband is restrained and an injunction is granted restraining him from:

    (a) doing any acts or things to effect the sale or transfer or other disposal or alienation of his shares in the companies Business…BUSINESS C…or Business D…or any of them, without the prior written consent from the wife…

13. In applying to wind up Business D, the husband is now seeking the discharge of this order.

14. On 14 April 2016, the parties entered into consent orders which included the valuation orders. 

15. Relevantly, the orders provided, inter alia:

    1.Within 14 days of the date of this order, the husband’s solicitor is to provide the solicitor to the wife the names of three valuers to be appointed to value the following entities in accordance with rule 15.09 of the Federal Circuit Court Rules 2004:

    1.1    Business D…as at 30 June 2015;  and

    1.2   the Finlay Family Trust as at 30 June 2015.

    …

    7.To give effect to the valuations being undertaken, the parties are to do all acts and things necessary to:

    7.1provide any such document and/or particulars as requested by a valuer,

    7.2provide reasonable access to any item or property subject to the valuation;

    7.3follow all reasonable requests provided to them by a valuer.

    …

    11.In the event that the wife obtains a valuation with respect to Business…and the BUSINESS C Unit Trust, to the extent that he can, the husband must provide:

    11.1 any such document and/or particulars as requested by the valuer;  and

    11.2follow all reasonable requests provided to him by the valuer.

16. The wife separately wanted to obtain valuations of the business interests disposed of by the husband.  He acquiesced.  This was specifically recorded in a Notation to the consent orders as follows:

    12.The wife will instruct a separate valuer to that appointed pursuant to these orders to value the husband’s interest in Business Services Pty Ltd and the BUSINESS C Unit Trust as at 31 December 2015.

17. Pursuant to the orders of 14 April 2016:

    (a)the parties jointly engaged … Forensic Accounting to value Business D and the family trust in June 2016;

    (b)the wife engaged … Services to undertake the valuation of Business and the BUSINESS C Unit Trust in August 2016. 

18. In May 2017 the matter was back before the court at which time it was ordered that the parties participate in private mediation at their equal cost.  By that stage, the $75,000 originally held in trust had dwindled to around $25,000.00 or thereabouts (some of which had been spent on valuation costs).  The orders specifically noted that the … valuation was expected within 4 - 6 weeks and that the remaining trust moneys may be drawn down by the parties to meet the mediation costs. 

19. The valuations were delayed; so too was the mediation.

20. In August 2017 the husband filed an Application in a Case in which he sought to access the moneys still remaining in trust in order to meet various trust outgoings.  The wife opposed this course and the matter proceeded to interim hearing. 

21. On 6 February 2018, the court made orders dismissing the husband’s Application. 

22. The proceedings continued to limp onwards.

23. The … valuation became stalled because Ms E required additional information from the husband, including an explanation from him as to various alleged discrepancies which Ms E has thus far identified as between the financial accounts of the various entities. 

24. The … valuation became stalled because they advised the wife that they required a real property valuation of the Property B property.  But despite the wife’s written request, neither Business nor BUSINESS C would permit the wife’s valuer to access the Property B property.

25. On 7 May 2018, the husband filed his present Application in a Case seeking discharge of the valuation orders and winding-up.  This application was set down for interim hearing on 5 November 2018. 

26. The wife filed her Response on 26 October 2018.

The interim hearing on 5 November 2018:

1. When the matter first came before me on 5 November 2018, there were a number of other “live” issues that have since become redundant.

2. The first was the husband’s application for joinder of the wife’s daughter to the proceedings on the basis that she allegedly held matrimonial funds. 

3. That aspect of the matter was resolved by way of consent orders on 5 November 2018 and requires no further elaboration.

4. Another issue was that the wife’s Response sought further financial specific disclosure from the husband, together with an order that the husband instruct his accountant to answer relevant queries raised by … Forensic Accounting in relation to the stalled valuation. 

5. At the interim hearing the husband in fact consented to those orders.

6. The other major live issue at the interim hearing was that the wife had applied for joinder of Business and BUSINESS C - purely so that an order could be made for her valuer to access their Property B property.  Business and BUSINESS C vigorously opposed their joinder. 

7. This dispute between the wife, Business and BUSINESS C was subsequently resolved by way of a consent order on 23 April 2019.  Essentially those parties have agreed that the wife’s valuer is to access the Property B property at an agreed time; neither Business nor BUSINESS C are to be joined as parties.

8. The only matters remaining for determination were the husband and wife’s competing interim applications referred to in paragraphs 2 and 3 of these Reasons.

Documents and evidence relied upon by the parties:

1. At the interim hearing, the husband’s counsel Mr Bithrey relied upon:

   (a) the husband’s Application in a Case filed 7 May 2018;

   (b) the husband’s affidavit of 7 May 2018;

   (c) the husband’s short supplementary affidavit of 8 May 2018. 

2. The wife’s counsel Mrs Kearney relied upon:

   (a) the wife’s Response filed 26 October 2018;

   (b) the wife’s affidavit filed 26 October 2018;

   (c) the wife’s Financial Statement filed 26 October 2018;

   (d) the interim orders made on 24 March 2016 and 14 April 2016;

   (e)various subpoenaed documents which became exhibits in the   proceedings; and

   (f) the orders and reasons for judgment of his Honour Judge Middleton of 6 February 2018.

Consideration of the competing applications:

1. At first blush, the husband’s application is deceptively straightforward.

2. He submits that Business D is insolvent. 

3. The husband’s evidence is that Business D has had ongoing, serious cashflow problems since 2016.  The husband deposes that, in order to stay afloat financially:

   (a)around March 2016, Business D had been forced to borrow $23,000.00 from a neighbour;

   (b)during 2017, Business D had to borrow another $20,500.00 from the husband’s friend, Ms F;

   (c)in December 2017, the husband had had to personally refinance Business D’s loan in respect of a Transit Van because the company did not have the financial capacity to meet the loan repayments for the van or the vehicle outgoings.

4. The husband’s evidence is that Business D presently has less than $50 in the bank. 

5. The husband’s supplementary affidavit of 8 May 2018 annexes a letter from his accountant confirming that Business D and the family trust are no longer trading; stating that Business D is no longer able to meet its debts as and when they fall due and is technically insolvent.  The accountant suggests that Business D ought not to continue trading and should be wound up; in the accountant’s view it would be preferable to voluntarily liquidate Business D rather than place it into formal administration.

6. Additionally, the husband deposes that Business D’s disposal of the $53,000 from trust to date may potentially engage Division 7A of the Income Tax (Assessment) Act – triggering additional income tax liabilities.

7. As a director of Business D, conscious of his corporate duties and responsibilities, the husband accordingly submits that he does not want it to trade, or continue to trade, insolvently.  

8. His case is that, rather than continuing with what has already proven an expensive valuation process, a winding-up of both Business D and the family trust will in fact result in their true value being realised - as cash. 

9. The husband also submits that, rather than continuing with what has already proven an expensive valuation process, a winding-up of both Business D and the family trust will in fact result in their true value being realised - as cash. 

10. Adding weight to the husband’s submission is that neither party wants to retain Business D or the family trust going forward, the proposed winding up is the easiest and most reliable way in which to arrive at the current value of the entities for the purposes of the proceedings.

11. The wife disputes the husband’s evidence and assertions.

12. She is suspicious about the alleged loans to Business D made by the husband’s neighbour and made by Ms F.  It is common ground that neither loan is documented.  Adding to the wife’s suspicion is the fact that Ms F has since entered into an intimate relationship with the husband.

13. The wife does not concede the validity of the alleged debts to the neighbour or to Ms F; the wife opposes selling off assets to pay out those alleged debts as part of a winding up.  Nor does she want to risk dissipating the remaining trust moneys at this stage for winding up purposes.

14. As for the letter from the husband’s accountant, the wife points out that this is a ‘bare’ opinion only - in that the accountant’s letter does not properly set out the factual basis for his opinion.  There is some force in that submission.  That said, the accountant is inferentially aware of the financial affairs of the relevant entities, and the husband himself gives evidence as to their financial circumstances.

15. In short, the wife does not accept or trust the husband’s figures, or the accountant’s assessment. 

16. In this respect, the wife points to the various alleged discrepancies as between the accounts of the relevant entities which have thus far been identified by Ms E to date.  The husband was not initially forthcoming in relation to explaining those discrepancies.  It was only at the interim hearing on 5 November 2018 that the husband ultimately consented to an order instructing his accountant to provide Ms E with relevant documents and answers.

17. The wife also complains that the specific further disclosure she was seeking - and which was consented to by the husband on 5 November 2018 - should have been provided earlier.  I agree.

18. The husband also failed to comply with the orders of 6 February 2018 which required him to file and serve an updated Financial Statement within fourteen (14) days.  He has never in fact filed an updated Financial Statement.

19. In the circumstances the court accepts the wife’s argument that the husband does not come to court with “clean hands”.[3] 

    [3] The Federal Circuit Court is a court of equity: s.8(3) of the Federal Circuit Court of Australia Act 1999.

20. In paragraph 29 of the Reasons for judgment of his Honour Judge Middleton dismissing the husband’s earlier application to access the remaining trust moneys to meet Business D’s outgoings,[4] his Honour poignantly said:  

    As to whether it would be just and equitable to make such an order, it is a fact that the husband by his unilateral actions has placed Business D in this position.  It was his decision to purchase a transit van, and it was his decision to sell the shares in entities that provided income to Business D.

    [4] Handed down on 6 February 2018

21. With respect, the force of his Honour’s observations at that time remain undiminished.  The husband’s proposed winding up may potentially result in a dissipation of the remaining trust moneys.  In my view, such dissipation is not appropriate - at least at this time - given the husband’s unilateral actions. 

22. The wife in fact wishes to utilise the remaining trust funds for the costs of the mediation ordered on 22 May 2017.  The court respectfully considers that this would be a wise and appropriate use of those funds in the interests of justice. 

23. In my view it is not appropriate to discharge the valuation orders in circumstances where the remaining obstacles to the valuations would seem now to have been removed.  This is particularly do where the relevant orders were made by consent and where significant work has already been undertaken.  

24. Ms F was specifically asked to value both Business D and the family trust on both a “winding up” and on a “going concern” basis.[5]  If I accede to the husband’s application and simply wind up the entities now, then I would effectively be dismissing the consent valuation order of 14 April 2016, wasting the moneys that have been spent on the valuation process to date. 

    [5] I refer to the relevant correspondence to and from Ms E, which were admitted as exhibits at the interim hearing

25. Moreover, if I discharge the valuation orders, I would effectively be rendering obsolete paragraph 4 of  the interim orders consented to on 5 November 2018, which was in these terms:

    Within fourteen (14) days of the date of these Orders the Husband shall instruct … Accountants to forthwith provide to … Forensic Accounting any and all documents and answer all queries made by … Forensic Accounting in relation to the valuation of the Finlay Family Trust and Business D Holdings Pty Ltd.

1. In truth, it would be the court’s expectation that, as a result of the interim orders that have recently been made, the court-ordered valuation processes should now be able to be completed in the near future.  At that time the parties’ financial position should become much clearer.

2. In the end I accept the wife’s submission that the previously-agreed valuation process ought to be given the opportunity to be properly completed as she seeks.  It is my view that Business D and the family trust ought to be valued as soon as possible. 

3. In this respect, the wife’s Response specifically sought liberty to release to … the material produced under subpoena by the accountant for Business and BUSINESS C - namely “…”. 

4. “…” did not formally object to the subpoena.  Business and BUSINESS C only opposed providing the wife with any further information above and beyond what had already been provided under subpoena. 

5. In the circumstances I consider it appropriate that the wife have the liberty she seeks, given that the documents are relevant and are intended to be provided to … to assist them in finalising that valuation.

6. I therefore dismiss the husband’s application for winding up at this time and for discharge of the earlier valuation orders and injunctions.  Upon receipt of the valuations, the husband may renew his winding up application if a winding up is what is recommended or advised.

7. Upon receipt of the valuations, the husband may renew his winding up application if a winding up is what is recommended or advised.

8. I intend to reserve costs at this stage.

9. On the next court date, the court expects that disclosure will be complete and that the valuations will be complete.  The court also expects to be advised what steps – if any – will be required for the parties to be able to attend mediation in a genuine attempt to resolve these proceedings.

10. The matter needs to keep moving towards a resolution.

Conclusion:

1. The court makes the orders set out at the commencement of these Reasons.

I certify that the preceding seventy-seven (77) paragraphs are a true copy of the reasons for judgment of Judge Betts

Date: 1 May 2019