Finlay & Finlay (No 3)
[2021] FCCA 592
•26 March 2021
FEDERAL CIRCUIT COURT OF AUSTRALIA
Finlay & Finlay (No 3) [2021] FCCA 592
File number(s): NCC 3061 of 2015 Judgment of: JUDGE BETTS Date of judgment: 26 March 2021 Catchwords: FAMILY LAW – property settlement proceedings – dispute as to length of relationship – dispute as to whether husband disposed of business interests at an undervalue – proper treatment of undervalue sale – s 79(2)(o) – consideration of circumstances surrounding sale – consideration of s 106B of the Family Law Act – just and equable outcome Legislation: Family Law Act 1975 (Cth), pt VIII
Evidence Act 1995, s 140
Cases cited: Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Hickey v Hickey & Attorney General for the Commonwealth of Australia (Intervener) (2003) FLC 93-143
Stanford v Stanford (2012) FLC 93-518
Jones v Dunkel (1959) 101 CLR 298
Kowaliw & Kowaliw (1981) FLC 91-092
Port of Melbourne Authority v. Anshun Pty Ltd (1981) 147 CLR 589
Clayton v. Bant [2020] HCA 44
Robb & Robb (1995) FLC 92-555
Number of paragraphs: 256 Date of hearing: 1, 2 and 3 September 2020 Place: Newcastle Solicitors for the Applicant East Coast Family Lawyers Counsel for the Applicant Mr Rugendyke Solicitors for the Respondent Powe & White Family Lawyers Counsel for the Respondent Mr Tregilgas ORDERS
NCC 3061 of 2015 BETWEEN: MS FINLAY
Applicant
AND: MR FINLAY
Respondent
ORDER MADE BY:
JUDGE BETTS
DATE OF ORDER:
26 MARCH 2021
THE COURT ORDERS THAT:
1.All prior property orders and restraints are discharged.
2.The net non-superannuation property of the parties as determined by the court in these reasons for judgment is to be divided as to seventy-five percent (75%) to the Wife and twenty-five percent (25%) to the Husband. The court will hear further submissions from the parties as to the appropriate form of order (including default sale orders) to give effect to this division NOTING THAT both parties seek to retain the S Street, Suburb G property.
3.The Wife shall retain the funds standing to the credit of East Coast Family Lawyers Trust Account as her sole and absolute property and within seven (7) days of the date of these orders, the Husband and Wife shall do all acts and things and sign all documents as are necessary to direct East Coast Family Lawyers to pay such monies to the Wife.
4.The Wife shall retain the funds standing to the credit of Powe and White Family Lawyers Trust Account as her sole and absolute property and within seven (7) days of the date of these orders, the Husband and Wife shall do all acts and things and sign all documents as are necessary to direct Powe & White Family Lawyers to pay such monies to the Wife.
5.Pursuant to section 90XT(1)(a) of the Family Law Act1975, whenever a splittable payment becomes payable in respect of the superannuation interest of MR FINLAY, in the Finlay Family Super Fund (the “Fund”) that:
(a)MS FINLAY shall be entitled to be paid an amount calculated in accordance with Part 6 of the Family Law (Superannuation) Regulations 2001 using the base amount of $46,067: and
(b)There be a corresponding reduction in the superannuation interest of MR FINLAY to whom the splittable payment would have been made but for this order;
(c)The operative time for this superannuation split is the fourth business day after service of signed and certified orders on the trustee of the fund;
(d)Having been accorded procedural fairness in relation to the making of the above order, this order binds the Trustee of the Fund.
6.Within twenty-eight (28) days, or such later time as agreed between the parties in writing:
(a)the parties, in their capacity as directors of H Super Pty Ltd as trustee for the Finlay Family Superannuation Fund, are to cause any necessary meeting/s to be held in accordance with the rules of the company and/or the fund so as to give effect to these orders and to comply generally with any applicable superannuation law/s;
(b)the parties are to do all acts and things so as to roll out or transfer the Wife’s interest in the Finlay Family Superannuation Fund to such other superannuation fund as the Wife nominates in writing – provided always that the nominated superannuation fund is a complying fund pursuant to the applicable superannuation regulations;
(c)contemporaneously with (b) above, the wife is to resign as a director of H Super Pty Ltd, transfer her shareholding in H Super Pty Ltd to the husband (or as he directs), and resign as a member of the Finlay Family Superannuation Fund;
(d)contemporaneously with (c) above, the husband will indemnify the wife and keep her indemnified against any past or future liability in relation to H Super Pty Ltd and the Finlay Family Super Fund including but not limited to any director’s liability.
7.From the date of these orders and unless otherwise specified in this order except for the purposes of enforcing payment of any money due under these or any subsequent order:
(a)Each party shall be solely entitled to the exclusion of the other to all property in the possession of such party as at this date including any jewellery, furniture, furnishings, shares and motor vehicles.
(b)Moneys standing to the credit of the parties in any bank accounts to be the property of the party in whose name such bank account is held.
(c)Each party hereby forgoes any claims they may have to any superannuation benefit to or owned by the other. The party in whose name any such policy of superannuation or insurance stand shall be deemed to be the owner and beneficiary of such policy to the exclusion of the other.
(d)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 this order.
(e)Each party is solely liable for debts in the name of that party.
8.That:
(a)Each party shall do all acts and things reasonably required by the other including the signing or execution of all necessary documents to give effect to the provisions of this order within 14 days of being requested to do so.
(b)If either party refuses or neglects to sign or execute and return a document within 14 days of a written request to do so then the Registrar of the Newcastle Registry of the Federal Circuit Court is hereby appointed under section 106A of the Family Law Act1975 to sign or execute such document upon the filing of an affidavit of a solicitor on behalf of the requesting party deposing to the said neglect or refusal.
(c)A defaulting party shall pay the other party’s taxed costs of and incidental to such request and production of documents to the Registrar.
9.The court will hear from the parties on the question of costs.
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 under the pseudonym Finlay & Finlay (No 3) is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
JUDGE BETTS
INTRODUCTION & LITIGATION HISTORY
These are property settlement proceedings between Ms Finlay (“the wife”) and Mr Finlay (“the husband”) arising out of the breakdown of their marriage.
The parties commenced cohabitation in 2001, married in 2003 and finally separated on 1 February 2014. There are no children of the marriage; each party has children from previous relationships.
There is a dispute about the overall length of the relationship in that the wife asserts that their de facto relationship commenced not in 2001, but back in 1995 when they first cohabited. For reasons which will follow, I am satisfied that 2001 is the relevant commencement date.
Post-separation the parties engaged in some settlement negotiations. But these broke down as the wife was seeking valuations of their various business interests, while the husband stonewalled.
On 25 November 2015, the wife filed her Initiating Application in which she specifically sought valuation orders. On 2 December 2015 the husband was served.
Before proceeding further, it is helpful to set out the husband’s relevant business interests at that time:
(a)the husband and his two business partners, Mr J and Mr K, operated “L Pty Ltd”, a mobile business. The business was conducted via a corporate structure, L Pty Ltd, of which each partner was a director and equal shareholder. In these reasons I will refer to the company and/or its business as “L Pty Ltd”;
(b)the husband had a proprietary company, D Pty Ltd (“D Pty Ltd”), through which the husband would invoice L Pty Ltd for his labour. Upon payment, D Pty Ltd would then distribute that income through the husband and wife’s family trust (“Finlay Family Trust”) of which D Pty Ltd was the corporate trustee. (Mr J and Mr K each had like arrangements. Mr J’s company was M Pty Ltd which acted as trustee for the J Property Trust. Mr K’s company was K Pty Ltd which acted as trustee for the K Family Trust);
(c)L Pty Ltd leased a workshop at Suburb B from another related entity, C Pty Ltd. The husband, Mr J and Mr K were each a director and equal shareholder of C Pty Ltd;
(d)C Pty Ltd in turn acted as corporate trustee for the C Pty Ltd Unit Trust. The units in the C Pty Ltd Unit Trust were held equally by the Finlay Family Trust, the J Property Trust and the K Family Trust. In these reasons I will collectively refer to C Pty Ltd and the C Pty Ltd Unit Trust as “C Pty Ltd”.
On the first return date, 10 February 2016, the husband disclosed to the wife that he had just sold his effective one third interest in L Pty Ltd and C Pty Ltd to Mr J and Mr K for $75,000.
The wife was suspicious about the hasty nature of the sale and its timing. She was concerned that the husband had sold his interests too cheaply.
On 29 February 2016 the wife filed an Application in a Case seeking to restrain the husband from selling or disposing of his business interests; in the alternative she sought that any sale transactions be set aside pursuant to s 106B of the Family Law Act.
Notwithstanding the wife’s application, on 21 March 2016 the husband and his business partners / entities executed various Deeds to formalise the sale. The $75,000 figure was paid to D Pty Ltd the same day.
When the matter was next before the court on 24 March 2016 the parties consented to an interim order that the $75,000 be held in trust. The wife’s s 106B application was never pressed.
On 14 April 2016 the parties consented to an order that the remaining entities, D Pty Ltd and the Finlay Family Trust, be valued by a single expert – later agreed to be Ms E. The orders noted that the wife intended to engage her own valuer in respect of the value of the husband’s former one third interest in L Pty Ltd and C Pty Ltd at the time of disposal. The wife engaged Mr A of ... Valuations to prepare that valuation.
Both valuers sought information and assistance from the husband and/or from his accountant. The husband was a reluctant participant; he took 9 months for instance to return a questionnaire submitted to him by Mr A. Lengthy delays ensued.
In May 2017 the parties consented to an order for private mediation. But by August 2017 with the valuations still incomplete and no mediation date in sight, the husband filed an Application in a Case seeking disbursement of some of the remaining trust moneys to meet the operating expenses of D Pty Ltd and/or the Finlay Trust. (By that stage the trust moneys had dwindled to around $25,000 as a result of an agreed distribution of $15,000 to each party, and agreed deduction of various valuation and related litigation expenses.)
The husband’s Application in a Case was dismissed and the litigation limped onwards.
Ms E’s valuation became stalled as she needed additional information and clarification of various discrepancies she had identified in the accounts. Mr A’s valuation became stalled as he required a real estate valuer to inspect and value the Suburb B property – but L Pty Ltd and C Pty Ltd were refusing access.
On 14 May 2018 the husband filed an Application in a Case seeking winding-up of D Pty Ltd and the Finlay Family Trust as well as discharge of the earlier valuation orders. The wife opposed this; she sought orders to facilitate completion of the valuations – including that the husband provide Ms E with the missing information as well as an order for joinder of L Pty Ltd and C Pty Ltd purely for the purposes of allowing her valuer to gain access to the Suburb B property.
On the hearing date (5 November 2018) the husband consented to orders that he provide Ms E with the required information. There was a heated debate about joinder of L Pty Ltd and C Pty Ltd, later resolved by way of a consent order for the wife’s valuer to be given access to the Suburb B property. The husband’s applications to wind up D Pty Ltd and the Finlay Family Trust were unsuccessful.
Ultimately, after years of delay, the valuations of Ms E and Mr A were finally able to be completed.
Ms E’s valuation was uncontroversial but Mr A’s valuation came in at around $720,000 – nearly ten times more than the sale price negotiated by the husband.
The husband vigorously disagreed with that figure. For the first time in the proceedings, he decided to obtain his own expert valuation evidence. To that end he engaged Mr N, who asserted that Mr A’s figure was materially overstated.
The mediation, so long delayed, was unsuccessful. Thee matter had to go to trial.
At trial, the true value of the husband’s former interests in L Pty Ltd and C Pty Ltd were a major issue. Relying on Mr A’s evidence, the wife’s case is that the sale was significantly undervalue and that the circumstances were such that the sale was a negligent, reckless or wanton disposal of matrimonial property and thus “waste” in the sense identified by Baker J in Kowaliw & Kowaliw (1981) FLC 91-092.
The husband’s case is that he sold his business interests for their fair value. But he contends that if there was an undervalue sale, then there should be no finding of “waste” in any event.
THE TRIAL
The trial proceeded from 1 - 3 September 2020.
The wife relied upon:
(a)Outline of Case Document filed 27 August 2020;
(b)Further Amended Initiating Application filed 2 July 2020;
(c)Trial affidavit of the wife filed 2 July 2020;
(d)Financial Statement of the wife filed 2 July 2020;
(e)Affidavit of Mr A (and annexed Valuation Report) filed 18 October 2019.
The wife had also relied upon an affidavit of Mr O, who had prepared a single expert valuation of the parties’ property at S Street, Suburb G. But as the parties ultimately adopted his valuation figure, there was no need for that affidavit to be read.
The husband relied upon:
(a)Outline of Case Document filed 28 August 2020;
(b)Further Amended Response filed 20 August 2020;
(c)Trial affidavit of the husband filed 12 August 2020;
(d)Financial Statement of the husband filed 26 August 2020;
(e)Affidavit of Mr P filed 12 August 2020 (the husband’s expert valuer in respect of the husband’s former real property at LL Street, Suburb Q);
(f)Affidavit of Mr R filed 26 August 2020 (the accountant for L Pty Ltd and C Pty Ltd);
(g)Affidavit of Mr N (and annexed valuation letter / report) filed 12 August 2020.
The parties also tendered various exhibits which will be referred to as relevant. These included a Joint Statement prepared by Mr A and Mr N (exhibit 1) and the valuation report of Ms E (exhibit 3).
There were various objections to evidence.
Most significantly, the wife objected to the whole of the affidavits of Mr R and Mr N. Both affidavits were late; the trial directions required that they be filed by 2 July 2020. The affidavit of Mr R in particular was filed less than a week out from trial.
Mr R had only been contacted about providing an affidavit after the timeline for filing had already passed. This was inexplicable given that the relevant transactions had occurred years earlier. Moreover, the content of his affidavit was controversial and its late filing made it impractical for the wife to subpoena and review his relevant business records.
In the circumstances, allowing the husband to rely upon Mr R’s very late affidavit would have created insurmountable prejudice to the wife. Accordingly I refused leave for the husband to rely upon Mr R’s affidavit.
As for Mr N, his evidence comprised:
·his affidavit and annexed letter/report referred to above;
·his contribution towards the Joint Statement which he co-authored with Mr A (exhibit 1).
The wife objected to Mr N’s evidence in its totality.
There were multiple bases of objection, including that Mr N’s evidence did not meet the necessary requirements for expert evidence identified by Heydon JA (as his Honour then was) in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. The wife also complained that Mr N had relied upon inadmissible hearsay evidence.
The husband submitted that Mr N’s evidence was relevant to the valuation of L Pty Ltd and C Pty Ltd and that any alleged defects in his evidence should be matters of weight rather than admissibility. He pointed to exhibit 1 and to the fact that Mr N and Mr A had jointly conferred to prepare that document.
I had a number of concerns about Mr N’s evidence.
In my view, the process by which he was instructed was inherently unfair to the wife. He was given verbal instructions from the husband’s solicitor – there was no formal letter of instruction. Thus Mr N’s instructions were opaque, in marked contrast to the instructions provided to Mr A.
The letter/report annexed to Mr N’s affidavit was not a free-standing expert valuation. Mr N himself only described it as “a letter commenting on the valuation prepared by ... Business Valuations”. In my view, Mr N had effectively been asked to write a critique of Mr A’s valuation report, to find any potential flaws in it and so reduce the valuation figure.
Not having prepared a formal business valuation report of his own, Mr N had not been obliged to comply with the relevant industry standard (APES 25 - Valuation Services).
Turning to the substance of Mr N’s initial report / letter, there were three (3) major points of disagreement with Mr A:
(a)Mr A had made an “allowance for owner’s remuneration” which Mr N thought was too low. However as Mr N admitted that he was not a remuneration expert, he lacked the necessary expertise to express that opinion.
(b)Mr N disagreed with Mr A as to the proper treatment of some related party loans which were repayable at the time of the sale, but the repayment of which had been forgiven by the husband in consideration of the $75,000 sale price.
(c)In particular, the Finlay Family Trust was owed $338,290 by L Pty Ltd and $60,885 by C Pty Ltd. Mr A’s valuation incorporated the book value of those loans on the basis that they were assets.
(d)Mr N disregarded the value of the loans on the basis that Mr R had apparently instructed him that the loans had effectively been “written off” and were not now recoverable. Mr N adopted that position.
(e)With respect, Mr N’s approach faces problems both as to form and substance.
(f)In terms of form, Mr R’s statements to Mr N were inadmissible hearsay.
(g)In terms of substance, it is irrelevant whether or not the related party loans were agreed to be written off. Up to the point that the husband agreed to forgive repayment, the loans were repayable; the loans were therefore assets which comprised part of what the husband was disposing of; they were part of the overall value of what the husband was selling / disposing of / relinquishing.
(h)Mr N’s letter/report suggested that a “minority interest” discount was applicable. But he did not say what that discount should be. Moreover, he did not sufficiently set out the relevant background facts and assumptions as required by Makita & Sprowles. However, Mr N did correct that aspect of his evidence in the Joint Statement (exhibit 1) to which I will now turn.
As for the Joint Statement, in my view Mr N’s contribution to that document was also tainted by the process by which he had been engaged.
Mr A had provided a transparent and detailed valuation report; Mr N had given only a “preliminary comment”. Yet in the course of preparing the Joint Statement, Mr N went on to challenge Mr A’s report across multiple fronts, going far beyond Mr N’s initial report and in a way that was procedurally unfair to the wife.
In circumstances where that Joint Statement was only prepared on 26 August 2020, less than a week prior to trial, it would have been unjust for me to permit Mr N’s opinions in that document to be admitted.
In the result, I excluded Mr N’s initial letter/report, and his evidence set out in the Joint Statement, save for Mr N’s evidence concerning the appropriate “minority interest discount” to be applied to Mr A’s valuation figure. In my view, that particular issue of expert evidence had been properly “joined”, particularly where Mr A had ultimately accepted that a discount could be appropriate.
THE LAW
These proceedings are governed by the provisions of Part VIII of the Family LawAct1975 (“the Act”).
In these Reasons, I will adopt the following approach:
(a)Firstly, I will identify and value the property, liabilities and financial resources of the parties (the “Balance Sheet”);
(b)Secondly, I will consider whether it is “just and equitable” to make a property settlement order;
(c)Thirdly, I will identify and assess the respective contributions made by each of the parties towards the net assets pursuant to s 79 of the Act. For convenience, each party’s respective contributions–based entitlement will be expressed in percentage terms;
(d)Fourthly, I will identify and assess the relevant factors set out in s 75(2) of the Act. I will also consider any relevant matters pursuant to s 79(4)(d), s 79(4)(f) and s 79(4)(g). Having done so, I will then determine what (if any) adjustment ought to be made to each party’s respective contributions-based entitlement;
(e)Lastly, I will consider the effect of my findings and proposed orders so as to satisfy myself that any proposed property settlement order I am contemplating is “just and equitable”.
This pathway is derived from the Full Court’s decision in Hickey v Hickey & Attorney General for the Commonwealth of Australia (Intervener) (2003) FLC 93-143, adapted to take into account the High Court’s decision in Stanford v Stanford (2012) FLC 93-518.
STEP 1 – THE BALANCE SHEET
The parties substantially agreed upon the Balance Sheet; it was tendered as exhibit “2”.
I have reproduced it below. The asterisked items were not agreed and my reasoning follows.
Assets
Ownership Description Value Joint S Street, Suburb G NSW $ 450,000 Wife Proceeds of sale T Street, Suburb U (in trust East Coast) $ 57,700 Wife Motor Vehicle 1 - X $ 50,000 Husband Motorbike 1 $ 12,000 Wife V Bank savings account end ...09 $ 228 Wife ANZ savings account end ...78 $ 4,921 Husband Westpac savings account end ...08 $ 1,492 Wife Westpac savings account end ...92* N/A Husband D Pty Ltd and Finlay Family Trust $ 37,500 Husband Motorbike 2 $ 10,000 TOTAL $ 623,841
Add-backs
Ownership Description Value Husband Proceeds of sale of caravan, Motorbike 3* N/A Husband Shortfall in value of sale of one third interest in L Pty Ltd and C Pty Ltd* N/A
TOTAL N/A
Liabilities
Ownership Description Value Husband Westpac personal loans x 2 * $ 20,000 Wife W Bank Leasing $ 50,922 TOTAL $ 72,922
Superannuation
Member Name of Fund / Type of Interest Value Husband Finlay Family Superannuation Fund / SMSF $ 350,450 Wife Finlay Family Superannuation Fund / SMSF $ 202,974 Wife Super Fund X/ Accumulation $ 32,727 TOTAL $ 586,151
To summarise from the Balance Sheet:
(a)the net non-superannuation assets = $550,919;
(b)the superannuation assets = $586,151;
(c)the total net assets including superannuation = $1,137,070.
I turn now to the non-agreed items. I will deal with the sale of the husband’s business interests last, as it is the most significant and contentious issue.
Wife’s Westpac Savings Account ending ...92:
The wife contended for a value of “N/K” (not known) and the husband contended for a value of “N/A” (not applicable).
I cannot find any evidence as to this particular bank account or its supposed balance. It seems to be irrelevant.
Proceeds of sale of caravan, Motorbike 3:
For each of these items the wife contended for a value of “N/K” (not known) and the husband contended for a value of “N/A” (not applicable).
The evidence establishes that the caravan was sold before the parties separated and that the sale proceeds were applied towards the purchase of the husband’s Motorbike 1 and the wife’s Motor Vehicle 1.
The husband sold the Motorbike 3 at or around the time of separation but I am satisfied that the sale proceeds were applied towards the reasonable expenses of the parties.
The motorcycle is one and the same as the husband’s Motorbike 2 which is now included as a separate item in the Balance Sheet. Over time, the motorcycle had disappeared from his Financial Statements filed in these proceedings but in the witness box he accepted that he still owned it and its value was ultimately agreed.
Husband’s Westpac personal loans x 2:
The husband has two (2) Westpac personal loans totalling $58,977.
However, that figure includes post-separation loans which were predominantly for his own legal fees, accounting fees and to meet other personal expenses.
That said, the wife concedes that some of the loan amounts are in fact referable to marital assets or expenses and should be included in the Balance Sheet. In particular, she concedes the figure of $20,000. Of that figure, some $11,965 relates to D Pty Ltd’s purchase of a Van, the value of which vehicle forms part of the value of D Pty Ltd which the husband will be retaining and so it is appropriate that the associated personal loan for that vehicle be taken into account. The other $8,035 represents a reasonable allowance for the accounting fees incurred by the husband in respect of the business entities.
Faced with the wife’s concession as to the $20,000 figure, the husband’s counsel had no submissions to make. The wife’s figure is entirely appropriate.
Shortfall in value of sale of husband’s business interests to his former partners:
For reasons that I will now explain, I am comfortably satisfied that the husband sold his business interests for substantially less than their true value. But I do not propose to add-back the lost value as a notional asset in the Balance Sheet. The evidence does not permit me to ascribe an exact value that I could add-back. I propose to deal with the undervalue sale by way of s 75(2)(o) adjustment, consistent with each counsel’s submission.
To recap, the husband sold his one third interest in L Pty Ltd and C Pty Ltd for an agreed sale price of $75,000. He also relinquished repayment of some related entity loans as referred to earlier.
In essence, the value of what the husband sold / relinquished consisted of:
A.the value of his shareholding in L Pty Ltd;
B.the value of the husband’s units in C Pty Ltd;
C.the value of the forgiven loans which would otherwise have been repayable by L Pty Ltd to the Finlay Family Trust;
D.the value of the forgiven loans which would otherwise have been repayable by C Pty Ltd to the Finlay Family Trust.
A - The value of the husband’s shareholding in L Pty Ltd
This was the subject of vigorous debate.
Mr A valued L Pty Ltd on a future maintainable earnings (“FME”) basis as at 31 December 2015. His calculations are set out in page 4 of his valuation report:
L Pty Ltd
Capitalisation of Future Maintainable Earnings Method
Future Maintainable Earnings: $387,831
Capitalisation Multiple: 2.75
Equals Enterprise Value: $1,066,535
Add: Surplus Net Operating Assets: $0
Add: Non-Operating Assets of the Entity: $1,137,287
Less: Non-Operating Liabilities of the Entity: ($903,770)
Equals Value of Total Equity of Company: $1,300,052
On this basis, he calculated that the husband’s one third shareholding was worth $433,350.
Mr A’s detailed FME calculations are set out in Appendix A to his Valuation Report (pages 41 – 42) and will be annexed to these reasons for the sake of completeness.
Mr A’s figures require some further exploration given the issues raised at trial.
Mr A arrived at an FME figure by considering the financial statements of L Pty Ltd in the financial years 2012 – 2016. The 2016 figure was an estimated projection based on the financial information available as at 31/12/15. This was an appropriate cut-off date as the sale price had in fact been negotiated between the husband and his business partners on 18/01/16.
In arriving at an FME, Mr A’s first line item was L Pty Ltd’s earnings before interest and taxes (“EBIT”) in each of those financial years. He then made some notional upwards and downwards adjustments to better reflect the true profitability position.
The downwards adjustments included a notional allowance for reasonable director’s remuneration, which he calculated at $100,000 per annum in FY 2016 which he then retrospectively deflated in each of the preceding financial years.
Ultimately he arrived at an adjusted EBIT figures of $844,727 in FY 2012, $655,076 in FY 2013, $379,441 in FY 2014, $359,256 in FY 2015 and an estimated figure of $307,469 for FY 2016. He weighted the years differently to arrive at his base EBIT figure of $387,831 to which he then applied a multiple of 2.75 to arrive at an enterprise value of $1,066,535.
The husband’s counsel specifically challenged the FME figure.
He suggested that an FME of $387,831 was unrealistically high. He pointed to the decreasing adjusted EBIT / profitability of L Pty Ltd over the period FY 2012 – FY 2016, and the fact that the FME figure selected by Mr A was in fact 28% higher than the 2016 adjusted EBIT figure.
I reject those complaints. While it is true that the adjusted EBIT figure was declining over those years, Mr A clearly weighted those financial years differently so as to avoid distorting the results. He gave only 5% weighting to FY 2012 and to FY 2013, he gave 25% weighting to FY 2014, 35% to FY 2015 and 30% to FY 2016. I accept Mr A’s evidence that his methodology took into account the business performance of L Pty Ltd as a whole. It would be artificial to seize upon the FY 2016 figure on its own; there is a broader context.
Mr A was adamant that L Pty Ltd was a financially healthy business. I accept his evidence that, having reviewed the accounts, he considered that the cost of employees had been increasing disproportionately as a ratio of sales, such that a hypothetical incoming purchaser would have seen a real potential to increase profitability by reducing labour costs.
But ultimately Mr A’s adjusted EBIT / FME figures cannot in fact be sustained. This is because, like Mr N, Mr A conceded that he was not a remuneration expert. His $100,000 allowance for reasonable director’s remuneration was inadmissible; it was not expert evidence. As that allowance formed a component of the adjusted EBIT / FME figures, those figures must all fall away. The appropriate multiplier – which was also contentious – falls away with it.
Mr A’s suggested goodwill figure of $295,375 also falls away. (He had arrived at that figure by starting with the enterprise value on an FME basis ($1,066,535) and subtracting the net operating assets figure ($771,160)).
But while Mr A’s valuation on an FME basis could not be sustained, his evidence was of assistance to me in a number of respects.
Most significantly for present purposes, he was still able to value L Pty Ltd on a “net assets” basis. In so doing he arrived at the following figures:
Ordinary net operating assets $ 771,160
Add Net non-operating assets $1,137, 287
Subtract non-operating liabilities ($ 903,770)
Net asset value of company $1,004,677
Husband’s one third shareholding $ 334,892
Though not formally conceded by the husband, the above figures were uncontroversial.
The husband only challenged the $334,892 figure in two real ways:
· he suggested that a minority interest discount should be applied;
· he suggested that tax would have been payable on the husband’s sale of his shares in L Pty Ltd.
The sale of a minority interest in a business enterprise would ordinarily warrant a discount on the basis that any incoming purchaser would not be acquiring managerial and financial control. Mr A’s initial valuation report had made no allowance for any such discount; he explained in the witness box that he had not been asked to consider that aspect.
Mr N had contended that a 35% discount was appropriate. But he also conceded that, the lower the goodwill component of value, the lower the risk to the purchaser of a minority interest - so that the appropriate discount would be lower.
The upshot of their joint conference was that Mr A conceded that a 20% discount may be appropriate if one were to be applied. But Mr A was at pains to emphasise that, in his view, the valuation could be being tilted too far towards the perspective of the purchasers rather than the vendor. Here, Mr Finlay went straight to his fellow partners to negotiate a sale; he never attempted to sell his share on the open market. Mr A suggested that in the circumstances, rather than applying a minority interest discount, in fact Mr Finlay’s shareholding may potentially have had an additional “value to owner” component which was being overlooked.
Ultimately the court ought to apply an objective test as to value. In my view, the fair market value should be determined objectively, by reference to the hypothetical vendor and purchaser, each of whom are willing but not anxious to affect the sale. In my view it is appropriate to apply a minority interest discount. But given that there is no goodwill component in the $334,892 figure I consider that a 20% discount is appropriate as suggested by Mr A. Mr N would put the discount somewhat higher but I prefer Mr A’s evidence on this point.
This brings the value of the husband’s shareholding down to $267,913.
The second issue relates to tax on the sale of the shares.
I accept Mr A’s evidence that small business tax concessions applied. As the shares had been owned for more than 12 months, there would be an automatic 50% reduction in the tax payable, and then another 50% deduction would be applicable on the basis that the shareholding was an “active asset”. Thus, the taxable amount would have been $66,978, being 25% of the figure of $267,913.
I also accept Mr A’s evidence that the tax burden could have been reduced by the husband rolling additional money into his superannuation fund.
In the end I cannot make an exact finding as to what tax would have been payable. On a worst case scenario the husband might have paid 45c in the dollar, the highest marginal rate applicable in the 2016 financial year. This would have been $30,140.
On this basis, I calculate that the bare minimum value of the husband’s one third shareholding in L Pty Ltd was effectively $237,773 after allowing for a minority interest discount and applicable tax at the highest marginal rate.
The true value is more likely than not to have been higher than this. Mr A in particular was emphatic that this was a successful business in exchange for which a prudent vendor would have demanded some goodwill payment rather than merely selling their interest on the basis of the bare underlying asset value of the entity. I was generally impressed by his evidence and on balance I consider that his view is correct. But the evidence does not permit me to ascribe a particular goodwill figure.
B – The value of the husband’s units in C Pty Ltd:
Mr A’s calculations of value were as follows:
C Pty Ltd Unit Trust
Net Tangible Assets Method
Land & Buildings at Independent Value: $850,000
Add: Other Assets at Book Value: $36,372
Less: Loan from L Pty Ltd: ($812,640)
Less: Loans to Unitholders: ($182,654)
Equals Total Net Tangible Assets: Negative ($108,922)
On this basis it was agreed that the net value of the husband’s one third share was ($36,307).
C – Value of forgiven loans otherwise repayable by L Pty Ltd to Finlay Family Trust:
At the time of the husband’s sale, L Pty Ltd owed $338,290 to D Pty Ltd on account of unpaid invoices. In a practical sense the invoices represented unpaid labour of the husband. Upon receipt, D Pty Ltd would have distributed that money through the Finlay Family Trust.
It was common ground that tax was payable on the $338,290 figure. The issue at trial was whether or not the tax would already have been paid so that no deduction for tax was warranted. The husband submitted that there should be a deduction for tax. The wife submitted that there should not.
Whether or not tax had already been paid turns on whether D Pty Ltd and the Finlay Family Trust paid tax on a “cash” basis (ie. upon payment of its invoices) or on an accruals basis (upon issuing its invoices). If on a “cash” basis then tax would be deducted; if on an accruals basis then it would not be.
The wife submitted that the husband carried the onus of proof as he had control of the company and the trust at the relevant time. It was submitted that the husband’s failure to call evidence warranted the court drawing the inference that he could not in fact have called evidence to assist his case: Jones v Dunkel (1959) 101 CLR 298.
The husband submitted that the wife carried the onus of proof as she was the party prosecuting a “waste” argument against the husband.
The wife and the husband were both company directors of D Pty Ltd up until early 2014. It seems to me that either of them could have called specific evidence on point. Both parties went to substantial effort to obtain valuation evidence and neither of them were able to clarify the issue. The highest the evidence gets is what the husband told Mr N, which is consistent with a “cash” basis:
I can only recall that Mr K’s private company where profits from L Pty Ltd would be paid into was on a different accounting system to D Pty Ltd or M Pty Ltd. Mr K’s company was on an accrual type accounting system and I was on a payg system.”
(underlining by me; taken from a document which appears as part of annexure “H” to the wife’s trial affidavit at page 59 but not the subject of any cross-examination at trial.)
In the end, as the wife is prosecuting a “waste” argument it seems to me that I should take a conservative approach and proceed on the basis that tax would have been payable at the highest marginal rate of 45c in the dollar.
This brings the after-tax figure down to a minimum of $186,059.
D - Value of forgiven loans otherwise repayable by C Pty Ltd to Finlay Family Trust:
At the time of the husband’s sale, C Pty Ltd owed $60,885 to the Finlay Family Trust.
Again there is a question about whether tax would have had to be paid on this figure and I am unable to resolve that on the evidence. But at its highest the tax would have been 45c in the dollar; this brings the after-tax figure down to a minimum of $33,486.
E – Conclusion as to the overall value of what the husband sold:
On the basis of the above analysis, the net after-tax or effective value of what the husband sold for $75,000 was an absolute minimum of $421,011. Given that the sale price was $75,000 the minimum loss was $346,011. I am comfortably satisfied as to this finding: s 140 of the Evidence Act 1995. I am also of the view that the true loss is likely to have been substantially higher. My figure makes no allowance for the additional value of any goodwill in L Pty Ltd, and it assumes a “worst case” scenario in terms of tax – some of which would likely have been able to be avoided by proper tax planning, including for instance making deposits to superannuation as identified by Mr A.
On any view, the husband’s sale resulted in a substantial “loss” to the parties.
STEP 2 – IS IT “JUST AND EQUITABLE” TO MAKE A PROPERTY SETTLEMENT ORDER?
A property settlement order pursuant to Part VIII of the Act can only be made where the court is satisfied that it would be “just and equitable” to make such order.
In this case some of the assets were held jointly. Some assets were kept separate, including for instance the parties’ respective bank accounts.
The parties now find themselves unable to continue to mutually enjoy the use of the assets. The parties jointly contend that it would be just and equitable for the court make a property settlement order.
In the circumstances I am satisfied that it would be just and equitable to make a property settlement order.
STEP 3 – ASSESSING AND WEIGHING THE RESPECTIVE CONTRIBUTIONS OF THE PARTIES
Consistent with how the case was presented at trial, I will assess the parties’ respective contributions on a “global” basis across both species of assets, ie. the superannuation assets and the non-superannuation assets.
Relationship commencement date:
Before considering initial contributions I need to first explain why I have found the relevant commencement date of the relationship to be 2001, rather than when the parties first cohabited in 1995.
I accept the wife’s evidence that the parties did first commence a de facto relationship around 1995 when the wife and her children (5yo Mr Y and 3yo Ms Z) moved into the husband’s home at LL Street, Suburb Q. The husband’s daughter Ms AA (13yo) also lived full-time at the LL Street, Suburb Q property, while his younger daughters Ms BB (11yo) and Ms CC (8yo) stayed there on alternate weekends.
The husband was at that time working in a DD Company franchise with his later business partners; the wife was working part-time. She was not receiving any regular child support from her childrens’ father, with whom her children spent time on alternate weekends.
The LL Street, Suburb Q home was in need of some fairly significant renovations. The husband conceded that it was “not in excellent condition”.
In 1998 the wife commenced her health care studies at University. The combination of both parties working, running a blended family household and maintaining a relationship proved too stressful for the parties. The wife and her children moved into their own rental property nearby.
In my view the parties decided to live separately in 1998 for a reason; their de facto relationship had broken down.
The parties had very modest assets at that stage; neither of them sought any property settlement from the other. They had not been living together for very long; while the wife inferentially assisted the husband in his care of Ms AA (and to a lesser extent his other children), the husband inferentially assisted the wife in the care of her children including by providing them with accommodation and financial support.
The parties still maintained a relationship of sorts in the 1998 – 2001 period. The wife deposed that a romantic relationship continued and that the parties stayed at each other’s houses whenever they were child-free. Though initially deposing that the parties spent only “occasional” weekends together, the husband conceded “most weekends” in the witness box. He also conceded that it was “possible” that they went on couples’ outings together, including going on holidays.
But I find that their intimate personal and familial relationship only resumed the character of a de facto relationship in 2001 when the parties recommenced cohabitation. The parties lived separately and apart from 1998 - 2001; they structured their intimate relationship around their respective childcare responsibilities during that timeframe; and they maintained separate finances. The wife’s affidavit is silent as to any alleged financial, non-financial, parenting or homemaking contributions she may have made in respect of the husband’s property in the 1998 – 2001 period. The husband likewise does not claim to have made any relevant contribution towards the wife’s property. There was no joint property.
While I could aggregate the earlier cohabitation period of 1995 – 1998 with the later 2001-2016 period, doing so seems to be an entirely artificial, if not arbitrary, exercise. I do not consider that the earlier period of the de facto relationship between 1995 and 1998 has any material relevance, particularly given that there was not a de facto relationship between 1998 and resumption of cohabitation in 2001.
Initial Contributions:
The major asset in 2001 was the husband’s LL Street, Suburb Q property.
According to the affidavit of Mr P, the home was worth $190,000 as at 1 July 2001. The “comparative sales” valuation approach adopted by the valuer is a well-accepted approach. It is not an exercise in exactitude; it involves questions of discretion and expert judgment. And here he properly conceded that, as a result of the change of ownership, he had been unable to inspect the full interior and exterior of the property. But this is not fatal to his opinion. Even if he had been able to inspect the property, it would not have been the same as inspecting the property back on 1 July 2001. Any retrospective valuation will suffer from the disadvantage that a valuer cannot travel back in time and conduct the sort of thorough inspection ordinarily undertaken for the purposes of a “present day” valuation.
I did have some concerns about the reliability of his valuation of the property as at 1998 because he was clearly told the property was “in excellent condition” at the time when the husband admitted it wasn’t. But no such concerns arise about the 2001 figure by which time the home renovations were either completed or close to completion.
In the end I accept Mr P’s $190,000 figure. The mortgage balance was $126,000 in round terms, meaning that the husband’s equity in the property was about $64,000.
The husband also had a proprietary company, Finlay Pty Ltd, through which vehicle he conducted an DD Company franchise. The business seems to have had no value above and beyond the income the husband was able to derive from it, and arguably the customer base that “followed” the husband when he left DD Company and created L Pty Ltd. The husband earned around $75,000 per annum from the business
The husband also owned a Motor Vehicle 2, a Motor Vehicle 3, a Motorbike 3, a Motorbike 4 and a boat.
The husband also had some superannuation, which he estimates was valued at approximately $50,000. That figure is uncorroborated and in my view it is unreliable given that his super balance had only grown to $50,447 some eight (8) years later in 2009 when he rolled that amount into the self-managed super fund. I do not accept that the husband had any substantial superannuation at commencement of cohabitation.
The wife had a motor vehicle.
Both parties must have had some furniture and personal effects which were inferentially of limited value.
Contributions during the relationship:
As a broad statement, throughout the relationship the husband was the primary breadwinner and the wife the primary homemaker and parent for their respective children.
The wife’s two children lived with the parties, as did the husband’s older daughter Ms AA. His younger children spent time in the household on alternate weekends. The wife did the school drop-offs, took the children to appointments etc.
The family initially lived in the LL Street, Suburb Q property.
Having just completed her health care degree, the wife took up paid employment as a full-time health care worker at the Employer EE. Over time she dropped back to part-time work. While she was a health care worker the parties kept their bank accounts separate.
The husband initially operated his DD Company franchise until around 2003 when he decided to venture out on his own with Mr J and Mr K. (I note also that Mr J was his former brother-in-law from his first marriage.)
Together the three of them established L Pty Ltd; their own business L Pty Ltd was thus born. Each of them contributed the initial capital and labour. At first the business was operated out of a garage under Mr J’s house. As the business grew, they rented some premises at Suburb FF.
The husband and his partners took with them an existing DD Company client base. Things quickly soured between them and DD Company who litigated against them in an attempt to enforce a restraint of trade clause/agreement. This clause had apparently been circumvented by the husband and his business partners adopting a “round robin” arrangement whereby each of them would service clients of the other – so that none of them serviced their own clients. Notwithstanding, I accept the wife’s evidence that the litigation ended up costing the husband around $30,000. As a result, money in the family household was “tight” for a time. The wife’s health care income was applied for the benefit of the family, including helping the husband meet his child support payments, to pay for the groceries and general living expenses.
The wife assisted L Pty Ltd by doing some bookwork for the first several years, saving accounting costs.
L Pty Ltd expanded and became a successful business.
In late 2005/2006 the parties purchased a real property at S Street, Suburb G for $349,000. They paid a deposit of $12,500 and the rest was borrowed from Westpac. It was initially intended to be a rental property and for tax purposes the property was treated as an asset of the Finlay Family Trust. The husband’s LL Street, Suburb Q property was used as security.
The parties later decided to sell the LL Street, Suburb Q property and move into S Street, Suburb G. The wife repainted the interior of the LL Street, Suburb Q home, which was sold in early 2008 for $330,000.
The LL Street, Suburb Q mortgage must have been very modest at that time as the husband netted $312,547. Those moneys were applied to discharge the S Street, Suburb G mortgage; the parties were debt-free.
The S Street, Suburb G property was somewhat run-down and the parties set about renovating it before they moved in. The renovations cost around $120,000 and were funded out of the husband’s business income. The parties installed a new roof, new veranda, new kitchen, new plumbing and wiring, new floor coverings, new bathroom, constructing a driveway, retaining wall, construction of a new carport, shed repairs, and installation of a new water tank and associated plumbing work.
The parties did do some of the work themselves. The wife removed wallpaper, did some painting work, gutted the bathroom in preparation for the remodelling. She and the husband planted an orchard and cleared the river bank of rubbish and weeds.
Around 2009 the husband and wife had established their own, self-managed Finlay Family Superannuation Fund (“the SMSF”). They incorporated H Super Pty Ltd which acted as trustee for the SMSF. The wife initially rolled $47,046 into the fund; the husband rolled over the $50,447 referred to earlier.
Thereafter the husband made the bulk of the superannuation contributions towards the SMSF on behalf of both parties, utilising income via L Pty Ltd and/or D Pty Ltd. Those contributions were distributed equally between the parties’ member accounts.
By 2010 the wife seems to have been experiencing burnout or depression. She stopped work and commenced taking anti-depressants. Her savings were soon depleted; thereafter the husband gave her access to a debit card linked to his bank account and she effectively received an allowance to meet the household expenses.
L Pty Ltd continued to thrive and in 2011 the husband and his business partners established C Pty Ltd and the C Pty Ltd Unit Trust through which they acquired the Suburb B property.
In 2013 the parties separated for several months; the wife remained living at the S Street, Suburb G property while the husband rented a home. They then reconciled for a number of months, during which the husband was suggesting that the wife go back to work. In November 2013 she returned to work as a health care worker at a local hospital.
The parties finally separated in February 2014 when this time the wife vacated the S Street, Suburb G property.
Post-separation contributions:
The husband has managed the SMSF, depositing the fund balance into bank accounts in a conservative manner so as to preserve the fund. The husband has had sole use and occupation of the S Street, Suburb G property, which is mortgage-free.
Within days of separation, at a time when both parties were emotionally raw, the husband presented documents for the wife to resign as director of D Pty Ltd. I accept her evidence that he told her to sign so that she wouldn’t have to worry about taxes and the like, that she was “in a bit of a panic” at the time and that she signed them without any legal advice or awareness of all the potential consequences. In a practical sense, the wife thereafter ceased to have any involvement with the business entities. The husband took practical and financial responsibility for them.
Both parties were very stressed at the time the wife signed these documents; I do not consider that the husband was being devious or difficult. He just wanted to get on with things and avoid complications. At that stage he was himself taking anti-depressants.
The wife herself conceded that in the few years leading up to separation the husband had been unhappy and had been having interpersonal difficulties with “everybody” including his business partners. She had also taken him to hospital on one occasion when he had heart palpitations.
Around the time the wife moved out of the home, she told the husband she wanted to buy her own home with her daughter Ms Z. To assist her with a deposit, the husband withdrew $45,000 from D Pty Ltd and paid it to the wife.
The wife then purchased a property at Suburb U for $507,500. It was purchased jointly with her daughter Ms Z. They took out a $482,000 mortgage to fund the purchase.
Through much of 2014 and into 2016 the husband also paid $350 per week to the wife, which was applied by her towards the mortgage. Nonetheless, she was unable to properly support herself without drawing down the mortgage as she wasn’t working for much of that time and needed money to cover her living costs including utilities, rates and the like.
In October 2014 the husband paid the wife an additional $80,000 lump sum at her request. Inferentially these moneys originated from L Pty Ltd or D Pty Ltd. This significantly assisted the wife but she still lacked any reliable income and her redraws continued.
Notably Ms Z only made one (1) mortgage repayment of $1,100 in May 2015. In that sense, the wife appears to have been subsidising Ms Z’s occupation/ownership of this property.
In early 2016 the husband stopped the $350 weekly payments. He was himself about to stop working for L Pty Ltd and had no job to go to from late March 2016.
The wife and Ms Z immediately struggled to make the mortgage repayments. Between December 2014 and April 2016 the wife had drawn down a total of $41,600 from the Suburb U mortgage in order to meet her living expenses. After that time, the wife did not have enough income to support herself and make repayments, so Ms Z then begun making mortgage repayments instead.
Meanwhile, having left L Pty Ltd, the husband soon found himself in financial difficulty.
The interim orders of Judge Middleton of 24 March 2016 provided for the $75,000 sale proceeds to be paid into trust by consent. On 14 April 2016 the parties consented to an order that each of them receive an interim distribution of $15,000. (The balance in trust has since been expended on valuation and related fees for the litigation.)
The parties expended their respective distributions; in the wife’s case she applied the money towards the costs of foot surgery in 2016 and 2017.
The husband’s deposits to the wife’s member account in the SMSF came to a halt.
In 2016, the husband borrowed $23,000 from his neighbour Mr GG so that he could meet various expenses of D Pty Ltd and the Finlay Family Trust. In exchange the husband did some unpaid work for Mr GG.
In October 2016 the husband suffered a heart attack.
The husband re-partnered with Ms F. In 2017 she loaned him $20,500, in exchange for which he did some unpaid work for her.
The husband’s financial situation remained unsustainable; he had to get back to work and by August 2017 he had obtained employment at Employer HH where he has remained.
His heart has continued to cause him angst; he has had a number of further hospitalisations with chest pain throughout 2017 and 2018.
The wife’s financial situation at Suburb U also became unsustainable. She (and Ms Z) decided to move to Town JJ in 2018 as the wife found herself unable to keep redrawing on the Suburb U mortgage any longer; she was struggling to make ends meet. She had only been working 1 - 2 shifts per week as she was suffering panic attacks and hyperventilating while at work.
She and Ms Z moved to Town JJ in early 2018 and then decided to sell the Suburb U property. Unhelpfully the wife did not tell the husband about the sale; when he found out he lodged a caveat. The caveat was later withdrawn by agreement and $57,700 of the sale proceeds were placed into trust where they remain.
The husband has since unsuccessfully applied to wind up the Family Trust and D Pty Ltd. I accept that he has had the inconvenience and expense of managing those entities and their associated running and administrative costs.
The wife has made employer contributions towards her own Super Fund X. She has gone on to work as a health care worker in Town JJ.
Overall assessment of contributions
The overall relationship length was in the order of 12 – 13 years.
The husband’s initial financial contribution was superior. During the relationship his financial contributions were superior in relation to both the superannuation and non-superannuation assets. The wife’s homemaking and parenting contributions were superior to the husband’s.
Post-separation, the husband provided the wife with some lump sums, enabling her to buy the Suburb U property which, regrettably, she could not afford to keep.
The husband had sole use of the former matrimonial home and had the ongoing conduct of the remaining business entities.
In July 2020, the husband withdrew $20,000 in total from the self-managed super fund by way of coronavirus relief. But even so, his superannuation contributions in relation to the self-managed fund were superior to those of the wife overall.
The husband has made no contributions toward the wife’s Super Fund X.
The husband sold his business interests to his partners at a substantial loss which I will deal with pursuant to s 75(2)(o).
In the exercise of my discretion I would assess contributions as 55% - 45% in the husband’s favour across both species of assets, save for the wife’s Super Fund X in respect of which the husband has no contributions-based entitlement.
STEP 4 – ADJUSTMENTS ON ACCOUNT OF SECTION 75(2) FACTORS
Before proceeding further, I have found that the parties’ respective contributions-based entitlements are:
(a)Wife
· 45% of net non-superannuation assets = $247,914
· 45% of self-managed superannuation fund = $249,041
· 100% of Super Fund X = $ 32,727
· Sub-total = $529,682
(b)Husband
·55% of net non-superannuation assets = $303,005
·55% of self-managed super fund = $304,383
·Sub-total = $607,388
It is against this backdrop that I must assess the section 75(2) factors.
The Wife was born in 1966 and is presently 54 years old, turning 55 this year. She is a health care worker. After moving to Town JJ she initially worked in the Employer EE but she found that too stressful and in early 2020 she left that job.
She has since taken up part-time health care work in a community health care role in Town JJ. She enjoys her work and intends to keep on in that role “for a good many more years”. She earns approximately $50,000 per annum, with her income exceeding her expenses by around $150 per week. She lives in her new partner’s home, paying him board and buying groceries. I accept her evidence that she does not know his income as they keep their finances separate.
The wife’s health is somewhat fragile. She clearly seems to have suffered from some depression and anxiety over the years, which was evident both during the relationship and post-separation. She also takes medication for hypertension.
The husband was born in 1962 and is presently 58 years old, turning 59 shortly. He is employed as a “labourer” by Employer HH. His role involves making machine parts, which he is proficient at, and he earns a gross income of $850 - $1,100 per week, averaging out at $950. He is probably over-qualified for this role given his past experience and skillset. Interestingly, he is also a qualified tradesman although he does not seem to have worked in that role during the marriage and I do not think it is realistic to expect him to do so in the future.
The husband has ongoing concerns about his heart and he takes a number of medications to assist. His heart is regularly monitored and his medical advice is to avoid stressful situations, not smoke and limit his intake of alcohol and caffeine. I accept his evidence that he does not consider that he is in a position to return to self-employment as he does not want to deal with the stress.
In my view, both parties have a capacity to keep working into the foreseeable future. The risks of either of them becoming restricted in their work, or otherwise unable to work, appear to be about equal having regard to their states of health and past work histories. I also consider that both will keep working for as long as they reasonably can and that both will try to limit their stress levels.
Neither party has an obligation to support any children under 18.
Neither party is in receipt of a Centrelink benefit.
The parties are each able to financially support themselves, though both are under financial pressure.
The length of the marriage has not affected the parties’ income-earning capacity so much as the effluxion of time and the fact that each of them has gotten older.
Both parties have re-partnered. The husband lives with Ms F but, like the wife, the husband keeps his finances separate from those of his partner.
I am mindful of the need for each party to maintain a reasonable standard of living into the future.
Neither party seeks a maintenance order from the other.
There are no issues relating to child support, bankruptcy or possible non-payment of creditors. There are no relevant Binding Financial Agreement/s in place.
In my view, none of the above matters warrant an adjustment in either party’s favour.
I turn then to section 75(2)(o) – “any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account.”
The husband’s undervalue sale squarely engages this subsection. The wife seeks to invoke it in order to reduce the husband’s property entitlements in respect of what property remains.
The husband submits that this would not be just. He says he did not understand the accounting situation at the time of the sale; that from his understanding the inter-entity loans were “paper” loans only and did not reflect the reality of the situation. His affidavit refers to the different ways in which each of the directors used to invoice L Pty Ltd for their work and that those invoices were not always paid in full or even at the same time; in short that there was a lack of transparency in the accounts and that the true situation did not always match the “paper trail.”
His affidavit also asserts that he was concerned about the trading environment for L Pty Ltd at the time, the declining profitability in recent years, as an onsite service industry which supplied and installed heavy machinery, the mining sector formed an important customer base for L Pty Ltd. The husband was concerned about uncertainty surrounding the future trading environment particularly given potential environmental issues around the future approval of new coal mines.
He was also concerned about the lack of marketability of his minority interest and fearful of falling into some long-term conflict with his partners who he did not think had significant means to buy him out. He did not want a protracted sale process and was eager to avoid conflict with his partners; he did not want a repeat of his previous unhappy split from DD Company.
He says that, overall, his decision to sell was reasonable, particularly given the stress he was under at the time and his health issues.
I accept the husband’s evidence that at no time did he knowingly set out to sell his interests at an undervalue.
But that is not the end of the matter.
In the well-known and often cited decision of Kowaliw, Baker J held that for most couples, marriage is an economic partnership wherein both should share in the economic fruits of the marriage, though not necessary equally. But his Honour drew a distinction in the case of financial losses incurred by the parties or either of them in the course of the marriage, where one of the parties had embarked on a course of conduct designed to reduce or minimise the effective value or worth of the assets, or where one of the parties has acted recklessly, negligently, or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value.
In this case I am comfortably satisfied that the husband’s sale of his business interests could be characterised as negligence bordering on recklessness.
Throughout 2014 and most of 2015, the parties had been exchanging disclosure documents and attempting to negotiate a settlement of the dispute through their solicitors. The husband was well aware that the wife was seeking valuations prior to negotiating the sale. Her position could not have been clearer – she needed to know what their value was before she could agree on a settlement.
Having “stonewalled” the wife for months, upon being served with the wife’s Initiating Application on 2 December 2015, I accept that he was stressed. He was fearful that if he kept working in the business that he might experience a physical or mental breakdown.
I accept that from his perspective, the husband thought he had no reasonable alternative but to leave the business. He was acting honestly.
But honesty is not the same as reasonableness.
The husband had no real idea of what his interests in L Pty Ltd and C Pty Ltd were in fact worth. He admitted to Mr A that “I didn’t have anything to do with the accounting side of the business”: page 73 of Mr A’s Valuation Report, which is annexure “C” to his affidavit.
Notwithstanding, on 18 January 2016 the husband gave his business partners a letter proposing that:
Due to the ongoing downturn in the business, differing opinions in our business direction, personal relationships & for my own personal health, I wish to tender my resignation as director of L Pty Ltd & will take up the purchase offer as discussed over the last few months.
A meeting was convened the very same day. The upshot was the following written agreement signed by the husband and his partners:
(a)We feel it is appropriate to document your proposal to us on the 18th January 2016, so we all understand the arrangements and the offer that you have put forward for our consideration. It is obvious that you are unhappy with the running of the business, and along with your health issues, we believe it is the best for all parties. Therefore we do accept your proposal to resign from the relevant entities and will pay you the sum proposed by you of $75,000.00 in total for your shares in L Pty Ltd.
(b)We also accept your proposal to release you and D Pty Ltd Pty Ltd from all company debts, associated debts, responsibilities, past and current Director liabilities, warranties and liabilities of L Pty Ltd and C Pty Ltd; in a tradeoff that you and D Pty Ltd Pty Ltd release L Pty Ltd from all monies owed to you, and that you also release C Pty Ltd from any monies that may also be owed to you.
(c)It is understood that you have made these decisions and put forward your proposal without duress or pressure from either Mr K or Mr J. It is also noted that this is the second time in the last 5 years, that you have considered the idea to sell your shares. L Pty Ltd needs to move on from this uncertainty and unharmonious environment to ensure we can maintain our staff and continue to trade as a business.
(d)At the time of calculating the monies owed to D Pty Ltd Pty Ltd and the share of the debt that D Pty Ltd would be responsible for, are both between $270,000 and $280,000.
(e)Bearing these figures in mind and the restructuring required, pressure and stress, downturn in business, and our industry uncertainty with the mining sector, we believe your proposal is fair for all parties, and ensures the separation is clean and certain, and allows us to maintain our current employees for the time being and continue on with the business.
The wife was not advised at the time about these discussions or the agreement reached. The husband’s explanation was “We weren’t talking.” The urgent sale negotiations took place against the backdrop of the wife’s written request over many months to obtain a valuation, which he had stonewalled. The husband knew, or should reasonably have known, that the wife had an interest in the negotiations that were taking place.
On 5 February 2016, ASIC formally received and registered the husband’s resignation as a director and share transfers.
The husband did not have a real understanding of the accounting side of the business, but he did have a personal accountant who he trusted, Mr KK. In February 2016 the husband met with Mr KK to obtain advice about setting up new company and trust structures for the purposes of establishing his own separate business.
Yet the husband never asked Mr KK’s advice either prior to the agreement of 18 January 2016, or at their February 2016 meeting, as to the value of the business interests of which he was disposing. This was a failure on his part to take reasonable care to preserve matrimonial assets.
In my view, had Mr KK’s advice been sought, he would have strongly cautioned the husband against it – on the face of the financial statements alone and without any formal valuation process. On the face of the 2015 financial statements, L Pty Ltd had net assets of $992,843 of which the husband had an effective one third interest. Moreover, the inter-entity debt situation was not “neutral” as seemingly set out in recital (d) of the 18 January 2016 agreement. L Pty Ltd owed $338,290 to the Finlay Family Trust and C Pty Ltd owed $60,885. Both were enforceable loans.
In the witness box, Mr A had this to say about recital (d) of the agreement:
“Honestly I don’t understand it”.
The sale could potentially have been rescinded or avoided by the husband as late as February 2016 when he met with Mr KK. The formal Deeds of Agreement, and payment of the $75,000, did not occur until later on 21 March 2016. But even if it was too late to avert the sale by the time the husband met with Mr KK in February, there is no sound reason why the husband could not have asked Mr KK’s advice prior to 18 January 2016.
The husband’s “defence” that he did not understand the accounts is itself the reason why he should reasonably have sought Mr KK’s advice before entering into the sale agreement.
Even allowing for some stresses and exigencies surrounding the husband’s sale, including his anxiety to avoid further litigation and his concerns about his health, he still failed to undertake even the most basic assessment of the value of what he was selling. This was an entity which, according to their advertising material, operated a 24 hour a day, 7 day a week, 365 day a year business. It had a fleet of nine mobile vans. It was a significant undertaking. To use Mr A’s example, this business he was selling was not a small “coffee shop”.
The husband in fact was acting as the proverbial anxious seller, failing to make even the most basic due diligence enquiries in respect of what was a significant business enterprise.
The appropriate s 75(2)(o) adjustment in the wife’s favour on account of the undervalue sale is inherently a discretionary question.
The husband did not intend an undervalue sale. In negotiating the sale, the husband should not be held to the standard expected of a “trustee” for the wife, nor is she entitled to expect exactitude from the husband in terms of negotiating the sale price. She had herself assigned her interest in the relevant entities to the husband just after separation for no monetary consideration because she did not want the stress associated with her ongoing involvement in the entities, with possible tax entanglements and other liabilities.
But even allowing for the husband’s personal circumstances, the melancholy reality is that he significantly undersold his business interests in a way that has greatly financially disadvantaged both parties.
The husband’s counsel submitted that, even if these matters are true, there ought be no adjustment to the wife on the basis that, having filed a s 106B application to set the sale transaction/s aside, the wife ought to have prosecuted it and availed herself of this remedy.
This would of course have involved joinder of the husband’s business partners / related entities, at a time when the wife had no evidence as to value. It would likely have been an expensive and highly litigious exercise. So much is clear from the wife’s difficulty in merely gaining approval for her valuer to access the Suburb B property.
From a practical perspective it would have been unreasonable, if not oppressive, to expect the wife to prosecute the s 106B application.
I also reject the husband’s submission that the wife’s failure to prosecute that application means that she is estopped from seeking a s 75(2)(o) adjustment by reason of the High Court’s well known decision of Port of Melbourne Authority v. Anshun Pty Ltd (1981) 147 CLR 589.
By way of postscript, since I reserved judgment the High Court has recently handed down its decision in Clayton v. Bant [2020] HCA 44, which was an appeal from the Full Court of the Family Court in which the wife’s property settlement and spousal maintenance claim against the husband had been permanently stayed on the basis of a “family law” decision of a foreign court.
In that case the High Court clarified that Anshun estoppel arises where an applicant brings a claim in the instant proceedings in circumstances where it was unreasonable for the applicant not to have brought that claim in earlier proceedings between the parties.
The High Court also referred to claim estoppel (formerly known as cause of action estoppel) which arises where the claim pursued by the applicant in the instant proceedings has already been finally determined as between the parties by another court. No claim estoppel arises here.
In my view no Anshun estoppel arises either. It was not unreasonable for the wife to decide not to pursue the s 106B application in the current proceedings. It was open to her to instead seek an adjustment against the husband under s 75(2)(o). By doing so she “took her chances” that sufficient assets would still be available to enable her to receive a just and equitable share of the property.
There has to be an economic consequence to the husband’s undervalue sale pursuant to s 75(2)(o). It would be unjust to proceed any other way.
In my view it would be appropriate to make an adjustment to the wife of thirty percent (30%), of the non-superannuation property. This is an effective “uplift” to the wife of $165,275 which is just under half of the minimum “loss” on sale and in my view is “just” having regard to all the circumstances. It is a conservative figure in that it is likely to be less than what she might otherwise have expected to receive had the sale been for the true value. But equally, the husband never set out to sell at a loss and the $165,275 of notional money will be coming out of his share of the remaining property as real money. This is a “double whammy” for the husband.
Separately, the husband contended for a s 75(2)(o) adjustment in respect of his financial support to the wife’s children on the basis of Robb & Robb (1995) FLC 92-555. I have factored this into my earlier contributions assessment; for transparency I record that I have factored the husband’s Robb & Robb contributions into his 55% contributions figure. They make up 2% of that figure. This is on the basis that the husband’s financial and other support of the wife’s children exceeded the wife’s financial and other support of his children.
As a result of the s 75(2)(o) uplift, I accept that the husband ends up with much less available “cash” than the wife but in my view this is an unavoidable consequence of his unfortunate decision to sell in the manner he did.
STEP 5 – ENSURING A JUST AND EQUITABLE OUTCOME
On the basis of the above analysis, the wife is entitled to seventy-five percent (75%) of the non-superannuation assets and the husband is entitled to twenty-five percent (25%). The self-managed superannuation fund is to be split so that the husband receives fifty-five percent (55%) and the wife forty-five percent (45%). The wife is to otherwise retain her own Super Fund X.
In a practical sense the wife will be retaining net non-superannuation assets of $413,189, self-managed superannuation of $249,041 (which will require a splitting order to her out of the husband’s interest in the amount of $46,067), together with her Super Fund X of $32,727.
The husband will be retaining net non-superannuation assets of $137,730 and self-managed superannuation of $304,383. As the husband presently holds net non-superannuation property of $40,992 the wife will have to make a cash payment to him of $96,378.
In my view this is a just and equitable outcome in the unfortunate circumstances of this case.
CONCLUSION & ORDERS
Unhelpfully, each party seeks to retain the S Street, Suburb G property. The husband lives there and ordinarily it would be appropriate for him to continue doing so.
A difficulty arises in that the husband’s proposal to retain S Street, Suburb G was contingent upon him having to pay the wife $137,500. Even then, he included a default order for sale in case it was necessary. This is no doubt prudent; he also owes $55,000 in legal fees to his lawyers.
To retain S Street, Suburb G, the husband will now have to pay $351,262 to the wife given that she will otherwise hold net non-superannuation assets of $61,927. Raising such money in the usual way from a bank may well be impossible. But the husband may be able to do so somehow.
The wife’s proposal to retain S Street, Suburb G involved no cash payment to the husband at all. But on my orders she will in fact need to pay him $96,378.
One would think that the wife would be in better borrowing position than the husband given the much smaller amount she would have to borrow. But this is not necessarily so; she will still have to meet her legal costs of around $112,000.
In short, the wife may in fact seek the immediate sale of S Street, Suburb G, in which case there is no utility in making the husband vacate. Or perhaps both parties will want it sold, I simply do not know.
Ordering a party to vacate their home, even at the end of a hearing, is a serious step – particularly where it may be possible for the husband to pay the wife her cash entitlement under these orders. Therefore, out of an abundance of caution I am going to invite the parties to make further submissions as to the exact orders now to be sought by them in light of these reasons for judgment (including default sale orders as appropriate). Obviously such submissions are without prejudice to their respective rights to appeal this decision if they wish.
I am concerned about the wife’s form of superannuation order. Effectively she proposes to split her entire interest in the SMSF to the husband in the first instance; there is then a 45% split in her favour at a later time when he himself receives a splittable payment.
In the meantime the parties would have to jointly manage the SMSF through the trustee company, which in my view is problematic. It would leave the parties financially entangled to an extent incompatible with the “clean break” principle set out in s 81 of the Act.
I much prefer the husband’s form of order which involves an immediate split to the wife of a base figure (which on my orders is $46,067), and that she promptly roll out her interest in the fund. This is much more consistent with s 81 and in my view fairer to both parties. I have however made some self-explanatory amendments to the husband’s draft order in the interests of clarity. Hopefully it will not be necessary, but if any issues do arise concerning my proposed superannuation orders then I will permit the parties to make further submissions as necessary.
I will also hear the parties on the question of costs.
I certify that the preceding two hundred and fifty-six (256) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Betts. Associate:
Dated: 26 March 2021
MR A’S FME CALCULATIONS APPENDIX A (APPENDIX A OMITTED)
Key Legal Topics
Areas of Law
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Family Law
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Civil Procedure
Legal Concepts
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Costs
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Remedies
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Procedural Fairness
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Jurisdiction
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Res Judicata
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Statutory Construction
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