Galleti and Thanos

[2014] FCCA 1382

FEDERAL CIRCUIT COURT OF AUSTRALIA

GALLETI & THANOS [2014] FCCA 1382

Catchwords:
FAMILY LAW – Property – valuation evidence where business is on market for sale – whether liabilities are recoverable.

Legislation:

Family Law Act 1975

Stanford & Stanford [2012] HCA 52

Applicant: MS GALLETI

Respondent: MR THANOS

File Number: MLC 11039 of 2011

Judgment of: Judge McGuire

Hearing date: 28 April 2014

Date of Last Submission: 28 April 2014

Delivered at: Melbourne

Delivered on: 31 July 2014

REPRESENTATION

Counsel for the Applicant: Mr Lennon

Solicitors for the Applicant: Lennon Mazzeo Lawyers

Counsel for the Respondent: Mr Glass

Solicitors for the Respondent: Berry Family Law

ORDERS

1. That the parties do all things and sign all documents necessary to dispose of their interest in [P] Proprietary Limited, trading as [C], and to do so at fair market value, and that the balance proceeds of sale after proper accounting be divided as to 50 per cent to the husband and 50 per cent to wife in respect of their joint interest.

2. That the husband and/or the wife make their best endeavours to recoup the balance of debt outstanding and owing to them from Mr R/[E] Corporation and that any such return on the debt be divided as to 50 per cent to the wife and 50 per cent to the husband.

3. That the balance proceeds of sale of the former matrimonial home sitting in Berry Family Law trust account be divided as to 50 per cent to the wife and 50 per cent to the husband.

4. That each of the parties be solely responsible for and indemnify the other in respect of their personal credit card liabilities.

5. The husband be solely responsible for and indemnify the wife in respect of any outstanding loan to his parents.

6. That in all other respects each party be solely entitled to the exclusion of the other to all items of property, including superannuation entitlements, in each of their possession or control as at the date of these orders.

7. That each of the parties be solely responsible for and indemnify the other in respect of any and all liabilities attached to any of the assets retained by that party pursuant to these orders and in respect of any liabilities incurred by that party since separation in either joint names or in their name alone.

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

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLC 11039 of 2011

MS GALLETI

Applicant

And

MR THANOS

Respondent

REASONS FOR JUDGMENT

Applications

1. In this matter the wife is the applicant for orders for property settlement. This is a sad tale of financial investment and speculation for a young couple within family influenced and involved financial enterprises. The matter also, perhaps, highlights some limitations in the Family Law Act or, better still, the constraints confronting judges under section 79 of the Family Law Act 1975 (“the Act”) which obligates the Court to follow a “no fault” system of consideration regardless of what sympathy any particular judge may feel for one or other of the parties.

2. Each of the wife and the husband seek a 50/50 division of the tangible assets and each to keep their own minimal superannuation entitlements.  They differ significantly as to the nature of the asset pool and as to how the Court should deal with each of the items in that pool.

3. When this matter came before me for trial there were on the record, second, third and fourth named respondents.  The second respondent is a corporate entity involved in running a [omitted] business. The third and fourth respondents are directors of that company, now together with the wife, and where the husband was formally a director.  In a practical sense the husband and wife operated a business known as [C] in [suburb omitted] together with the third and fourth respondents.  The husband and wife jointly held a one-third interest with one-third to each of the third and fourth respondents.

4. No documents have been filed by the second, third or fourth named respondents.  They have taken no part in the proceedings.  They did not attend at the trial.  Within this context, counsel for the husband elected to proceed and to prosecute his case.  In his final submissions, counsel for the husband abandoned any claim against the second, third or fourth respondents for what he had alleged to be the balance of a joint loan obtained by all parties which had been repaid by the applicant and the respondent, but with an alleged obligation owing to them by the second, third and fourth respondents.  The husband had alleged in his case summary that those respondents jointly and severally, owed the applicants $145,721.25.  As I say, that claim was abandoned, at least in this jurisdiction.

5. The fourth respondent is the brother of the wife and it is apparent that the third respondent is perhaps a long-term acquaintance of the wife or her family.

6. The husband is 32 years of age.  The wife is 31.  They commenced a relationship in 2003 and married on [omitted] 2009.  The separation occurred in November 2010.  There are no children of the marriage.

7. The husband is currently in receipt of Centrelink benefits.  His unchallenged evidence is that he suffers from depression due to the circumstances of the marriage breakdown and the alleged failure of the business enterprises.

8. The wife no longer works in the [omitted] business although it continues to operate.  She says that she is now employed in a [omitted] business which is in its infancy and provides her with minimal remuneration.

9. Early in their relationship and prior to their marriage, the husband and the wife entered into a joint venture with [name omitted] who is the wife’s brother and fourth respondent, to build apartments in [suburb omitted].  The husband and the wife assumed residence in one apartment.  They had a mortgage of approximately $380,000.

10. In 2009, the husband and the wife together with the third and fourth respondents purchased the [C] in [suburb omitted].  They did so under a corporate entity known as [P] Proprietary Limited.  The husband was a director together with the third and fourth respondents.  The husband and wife jointly held a one-third interest.

11. The [C] needed substantial renovations and rejuvenation to maximise its potential.  The husband and the wife borrowed a further sum of $150,000 secured against their [suburb omitted] apartment.  The third and fourth named respondents made no further capital contributions.  The improvements were completed and the property operated to a stage of bringing gross income of approximately $26,000 per annum.  The husband himself provided his labours towards the renovations.  The [C] was in full operation as of 30 September 2010.  Shortly thereafter, in November 2010, the husband and the wife separated.

12. In March and April 2011 it seems that the third and fourth named respondents excluded the husband from involvement in the [business] and the company.  At an extraordinary shareholders meeting he was officially removed as a director and replaced by the wife.  This occurred without the husband’s knowledge.

13. The husband and wife then experienced financial difficulties in respect of the mortgage and second loan.  This resulted in the National Australia Bank commencing proceedings for repayment of the total debt and an accompanying overdraft.

14. The wife commenced property settlement proceedings in this court on 6 September 2012.  Interlocutory orders were made on 16 October 2012 for a valuation of the [C] prior to a conciliation conference.  That valuation did not occur and not surprisingly the conference was unsuccessful in resolving the matter.

15. The former matrimonial home was sold in 2013 against a threat of mortgagee sale.  The National Australia Bank obtained payment of the outstanding amount on the “[C] loan” of $145,721.25 together with the overdraft balance of $12,461.15.

16. There was subsequently an agreement between the husband and the wife for a “partial property settlement” whereby each of the husband and the wife took $10,000 from the balance proceeds of sale.  That balance remaining in the solicitors trust account sits at just $11,078.50.

17. Also during their relationship the husband and the wife advanced moneys to a Mr R for a separate property development at [E].  They agree that a sum of $50,000 remains owing to them and is technically an asset of the husband and the wife.  They differ, however, in that the wife says that the $50,000 is not recoverable.  The husband says that the debt should be recoverable and, in fact, seeks an order whereby he transfer his interest in that asset (the debt) to the wife arguing that she would be easily able to recover it with the assistance of her father, who is known to the developer.  The wife’s father, [Mr G] is apparently a Melbourne identity of some notoriety and whom the husband expects could assist his daughter by exerting some influence on the developer.

18. A joint valuation of the [C] business was finally obtained and is before me in an affidavit of a chartered accountant, Mr L, filed 17 April 2004.  Mr L values the business at $606,720.  Mr L was not required for cross-examination on his valuation. 

19. The wife gave evidence that the [C] is and has been on the market for sale but has not yet attracted offers.  She says that the agent anticipates a sale price of approximately $400,000.  The wife says that this should be the valuation for the purposes of my determination.  The real estate agent did not provide an affidavit. 

20. The husband says, generally, that the [C] is a profitable enterprise.  He says that it was purchased after due diligence on the financial statements and that the physical improvements resulted in a gross increase of income during his involvement from approximately $18,000 per week to $26,000 per week.

21. The wife says that the business is in substantial debt.  She says that she was obliged to cease work in the [business] as it could not pay her wages (which she says are outstanding in the sum of approximately $75,000 – but although neither party claims this to be an asset of the marriage).  She could only quantify the debts of the business generally at “a couple of hundred thousand dollars”.

22. Suffice to say that my forensic consideration in this matter was limited by there being no evidence or testing of evidence of the following:

1)   the third and fourth respondents;

2)   Mr L;

3)   Mr R who is the [E] property developer;

4)   [Mr G] in respect of his potential to obtain repayment of the $50,000 in the [E] project; and

5)   Accounting evidence in respect of the business.

The property pool

1. The husband says that the property pool comprises the following:

Assets

Balance proceeds of sale of the former matrimonial home:        $11,078,57

One-third interest in the [C] business (Mr L valuation):            $202,000

Husband’s superannuation:  $10,000

Wife’s superannuation:    $30,0000

Partial property settlement received by husband:   $10,000

Partial property settlement received by wife:   $10,000

Interest in the [E] project:   $50,000

Moneys owed the husband and the wife

by the second, third and fourth respondents

for [C] business overdraft:   $12,361.16

Moneys owed the husband and the wife

by the second, third and fourth respondents

for [C] business renovation loan:   $145,721.25

Husband’s BMW vehicle (leased) :  Nil

Furniture and contents –   nominal

Total: $481,260.98

Liabilities.

Husband’s credit cards:   $15,500.

Wife’s credit cards:   $12,0000

Loan from the husband’s parents:          $45,000

Total: $72,500

NET: $408, 760.98

1. The wife does not take issue with the property pool as set out above save that none of her documents including sworn financial statements make any reference to the husband’s claim of a debt to his parents in the sum of $45, 000 and the orders she seeks do not concede it. Indeed, they do not even mention it.  Notably, however:

   a)the husband has abandoned his claim for repayment of the [C] overdraft ($12,461.16);

   b)the husband has abandoned his claim for contributions by the other respondent’s to repayment of the [C] loan ($145,721.25);

   c)the wife does not concede that the outstanding monies from the [E] project are recoverable; and

   d)the wife does not accept the Mr L valuation but says that the true value is what the [business] will realise on the open market.  She notes that the Mr L valuation was prepared with the assistance of financials as at 30 June 2012 and that there has been a significant downturn in business since that date.  She also says that the valuation was predicated on only some 20 weeks of relevant financial documents.  She urges the court to find that reliance on the Mr L valuation would be unsafe and unsound and that the market should dictate the valuation.

Orders sought

1. The husband seeks a 50/50 division of the parties’ net property on the above pool save for those matters abandoned. 

2. He says that his interest in the [C] (at the Mr L valuation) and the [E] project debt both be transferred to the wife in return for a cash adjustment to him so as to achieve the equal division of net property.  The cash adjustment he anticipates would be $120,581.

3. The wife seeks orders as follow:

   a)that the [C] be sold on the open market and that the parties each receive one-half of their joint one-third share of the net proceeds after payment of all outstanding liabilities of the [business];

   b)that the parties each receive one-half of any of the debt recouped from the [E] project, thereby rejecting any proposal that the benefit of the debt be transferred to her alone;

   c)that the balance proceeds of sale of the former matrimonial home ($11,078.57) be divided equally between the husband and the wife; and

   d)that each party retain their own credit card debts and their superannuation entitlements.

The evidence

1. The wife relied on two affidavits, filed 16 October 2012 and 1 May 2013.  She did not file a further trial affidavit.  She also relied on her financial statement of 6 September 2012.

2. The husband relied on his trial affidavit and financial statement both filed 3 April 2014.  He was not cross-examined on any of his evidence.  He also relied on the affidavit of Mr L, the accountant.  He was not cross-examined.

The relevant law

1. Following the now well-known decision of the High Court in Stanford & Stanford[1], the course of consideration for the court is as follows:

   a)to establish the legal and equitable interests of the parties in property and to attribute value to each item;

   b)pursuant to section 79(2) of the Act, to determine whether it is just and equitable in all of the circumstances to alter the parties’ interests in property;

   c)to consider the contributions of each of the parties, be they direct financial contributions, indirect financial contributions, or non-financial contributions;

   d)to then adjust any determination after the consideration of contributions by reference to any of the relevant factors under section 75(2) of the Act; and

   e)that the overall consideration of justice and equity permeates this consideration process.

   [1] [2012] HCA 52

The value of the [C]

1. On consideration, I prefer the argument of the wife as to the value of the [C].  It is clear that she disputes Mr L’s valuation for the reasons set out above.  He was not called to give evidence to substantiate his valuation.  Obviously, however, his affidavit was read into evidence without challenge. The property is on the market with the assistance of a real estate agent.  The nature of the business and the evidence before me suggests that its true value will be established by the market.  I accept the submission of counsel for the wife that should the husband have concerns as to the arms-length nature of the proposed sale or the financial documents which ground its sale price, then he, as a shareholder, should have recourse under the Corporations Act in another jurisdiction. Generally, although unchallenged, I have concerns about the usefulness of a valuation prepared in 2012 and apparently from limited resource materials.

2. I am not convinced, therefore, that justice and equity is served by the husband’s argument that his interest be transferred to the wife.  I accept her evidence that she is no longer working in the business.  Potentially, she is at some financial peril should orders be made in the terms of the husband’s application. 

3. Whilst I am, of course, mindful of the family involvement in the [C] business, I repeat that the husband’s recourse may well lie in another place. 

The [E] Project debt

1. Similar considerations attach to this asset.  The wife suggests that the debt is not recoverable or not easily recoverable.  The creditor was not brought to Court.  It is difficult to accept the husband’s argument that the wife’s father could influence repayment of the debt without me seeing and hearing from Mr G in Court.

2. The parties agree that the debt is outstanding.  They each agree a 50/50 division of the net property.  It remains open for them to jointly pursue its recovery as best they can. I am not satisfied therefore that justice and equity would be achieved by transferring the benefit of this debt to the wife with the husband receiving his interest and leaving her to recover it.

Balance proceeds of sale

1. Following my determinations in respect of the [C] and the [E] project debt, it is entirely reasonable that this small amount remaining from the equity in the former matrimonial home be divided equally between the parties.

Contributions and section 75(2) factors

1. By reason of each of the parties urging a 50/50 division of the property pool, I infer that neither argues for a loading on either considerations of contributions or those matters under section 75(2) of the Act.

Justice and equity

1. Despite my sympathy for this young couple in what is clearly the unfortunate demise and loss of their finances and investments, and particularly for the husband who obviously feels unjustly excluded from the business, I can only conclude that justice and equity is served by them each receiving one half of whatever remains from the sale of the [C] business and from recouping the [E] debt, if any.  I can only emphasise that the husband has rights and recourse under the corporations legislation if he suspects that the [C] business is to be disposed of at less than proper value.

2. In his statement of assets and liabilities, the husband claims a liability to his parents of $45,000.  It is nowhere particularised. The wife’s material does not mention such a debt. The husband’s trial affidavit makes no specific reference to this liability. His financial statement does reference it.  However, the chronology in the husband’s case outline is silent as to any such loan being provided, as is his own summary of contributions set out in that document. He was, of course, not cross-examined.  The only other possible mention or explanation of such a loan might be found in paragraph 62 of the trial affidavit where he says, under the heading “Future need”:

   I had to borrow extensively from my family and I have also had to obtain superannuation under the hardship provisions.

3. No particular submissions were made to me in closing by either counsel in respect of this liability.  There is no evidence from the husband’s parents.  I cannot be satisfied, therefore, that this is a debt which is or will be pursued. If such a debt was accrued then I cannot be sure when that occurred. With such a dearth of evidence, I can only order that the debt, if there be a recoverable one, be the responsibility of the husband.

I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Judge McGuire

Date: 31 July 2014