Hackford & Hackford
[2021] FamCA 406
•18 June 2021
FAMILY COURT OF AUSTRALIA
Hackford & Hackford [2021] FamCA 406
File number(s): SYC 7358 of 2012 Judgment of: HANNAM J Date of judgment: 18 June 2021 Catchwords: FAMILY LAW – PROPERTY – Final property settlement – Where there are no assets of value available for division – Where the wife contends that the husband’s business is an asset for distribution – Where the husband’s business has been valued by an expert as being of nil value – Where the parties separated their financial affairs almost 10 years ago – Where the husband contends that application should be dismissed – Where it is not just and equitable to make a property division order – Application dismissed.
FAMILY LAW – COURTS AND JUDGES – Disqualification – Apprehension of bias – Waiver – Where the wife contends that comments made regarding the value of the husband’s business give rise to an apprehension of bias – Where wife contends that adverse findings in an earlier judgment give rise to an apprehension of bias – Application of the two-step test in disqualification applications on the ground of apprehension of bias – Application dismissed.
Legislation: Family Law Act 1975(Cth) ss 75(2), 79 Cases cited: Bevan & Bevan [2013] FamCAFC 116
Chorn & Hopkins (2004) FLC 93-2014; [2004] FamCA 633
Ebner v Official Trustee in Bankruptcy 205 CLR 337; [2000] HCA 63.
Hackford & Hackford [2016] FamCA 295
Johnson & Johnson [2000] HCA 48; 201 CLR 488
Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48.
Omacini & Omacini (2005) FLC 93-218; [2005] FamCAFC 104
Stanford v Stanford (2012) 247 CLR 108
Tong & Niem [2020] FamCAFC 27.
Trevi & Trevi [2018] FamCAFC 173
Number of paragraphs: 120 Date of hearing: 6-8 October 2020 Place: Parramatta Counsel for the Respondent: Mr Harper Solicitor for the Respondent: Monrado Legal Solicitor for the Applicant: Mr Whittemore ORDERS
SYC 7358 of 2012 BETWEEN: MS HACKFORD
Applicant
AND: MR HACKFORD
Respondent
ORDER MADE BY:
HANNAM J
DATE OF ORDER:
18 JUNE 2021
THE COURT ORDERS THAT:
1.The wife’s amended Application for an adjustment of the party’s property interests filed 19 September 2018 is dismissed.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to 17.02 Family Law Rules 2004 (Cth).
IT IS NOTED that publication of this judgment by this Court under the pseudonym Hackford & Hackford has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
HANNAM J:
INTRODUCTION
About ten years ago, the parties (“the wife” and “the husband”) separated after a marriage lasting 20 years.
Following their separation the husband commenced parenting proceedings in the Federal Magistrate’s Court, as the Federal Circuit Court was then known, in relation to the parties’ three children. The wife also commenced parenting proceedings in Singapore where she was then living and the Australian parenting proceedings were discontinued. The wife then initiated proceedings for property settlement orders in December 2014 in this Court. The parenting dispute was determined in Singapore in May 2015.
After the wife returned to Australia with the three children in May 2015, the husband commenced parenting proceedings in this Court and those proceedings received priority. In October 2016 an order was made bifurcating the parenting and property proceedings.
After the parenting proceedings in this Court were finalised in June 2017 there were further delays in hearing this property application due in the main to a lack of preparedness by the parties. In 2020 the final hearing was also delayed as a result of the restrictions associated with the COVID-19 pandemic, especially as the husband was at that stage self-represented and it was necessary to wait until the restrictions were lifted for a face-to-face hearing to take place.
The party’s positions in relation to financial matters changed over time. Ultimately, in the final hearing before me the wife sought an order that the husband transfer to her all of his interest in a company which owns and operates his business, contending that such an order will bring about a just and equitable settlement of their property interests.
The husband contends that the parties effectively have no property interests of any value and even if such property does exist, it is not just and equitable to alter their respective existing interests. He seeks that the wife’s application be dismissed.
The question for me to determine is whether the parties have any property interests of value to adjust, and if that is found to be the case, whether it is just and equitable to make such an adjustment and if so, the terms of that adjustment.
On the first day of the trial the wife also made application that I recuse myself from the final hearing on the basis of apprehended bias. I dismissed the application at the time and indicated that I would include reasons for that dismissal in these Reasons. Accordingly, this judgment also deals with that recusal application.
BACKGROUND
The wife who is 48 and the husband who is 50 were married and began living together in June 1995. At the time both parties were working for an institution in Sydney and were each earning a modest income. Neither party brought any asset of significance to the marriage.
Over the course of their 20 year marriage, the parties had three children. Their eldest child is now an adult and the other children are teenagers.
In 2001 the parties purchased a property in a Sydney suburb for $300,000 and this became the family home. Both parties contributed to the small deposit of about $5000 and a loan of about $290,000 was obtained and secured by a mortgage over this property. The repayments on the loan were paid by the institution.
In June 2002 both parties ended their employment with the institution and the husband began working in a customer service/technical position. After leaving their employment the parties assumed responsibility for their home loan mortgage repayments.
After leaving the institution the wife trained in allied health. She and the husband subsequently established a number of businesses.
In April 2004 the parties, or at least the wife, established the first of these businesses. The business which was incorporated in 2005 became known as K Pty Ltd and at this time both parties became directors and equal shareholders.
The parties give vastly different accounts of each other’s contribution to the establishment and operation of K Pty Ltd. There appears to be no dispute however that the business was successful, so much so that in late 2006 the parties opened a second similar business known as L Pty Ltd. It is common ground that extensive renovation work was undertaken on the property that was leased for L Pty Ltd but virtually all other matters related to the establishment and operation of this business are in dispute.
In May 2007 an investor unrelated to the parties purchased 10% of L Pty Ltd for $100,000 or provided a loan in this amount to this company.
In 2007 the parties also sold their family home and some of the proceeds of the sale were used to discharge the mortgage. The parties are in dispute about the way in which the balance of proceeds was spent. It is uncontested that they did not purchase another family home and that they and their children lived in various rented homes until the eventual breakdown of their marriage.
In about 2008 the parties incorporated another entity, M Pty Ltd through which the wife earnt an income, writing educational manuals related to allied health. She also continued to engage in instruction in these practices herself. Although there are also many matters in dispute in relation to this business it appears to be agreed that the wife was primarily responsible for its establishment and growth.
In 2011 the husband began negotiations for the sale of a L Pty Ltd franchise to a childhood friend of the wife (“the wife’s friend”) which was to be opened in New Zealand. The wife’s friend signed a letter of intent on 1 July 2011 which began the negotiation process. Despite the fact that the parties’ relationship was still intact at this time, the wife claims to have been unaware that the husband had commenced negotiations with her friend regarding the purchase of a franchise. As with all other matters relating to the parties’ business ventures, there is significant dispute between them in relation to the franchise business.
In August 2011 the parties separated and the husband moved into separate premises at their rented accommodation. The parties’ three children who were then all aged 10 and under remained living in the main premises with the wife. At this time the wife registered a new business known as N Business and opened a bank account in the name of this business. At around the same time (although the husband was then unaware) the wife also began negotiations with the wife’s friend in relation to the purchase of the franchise in New Zealand.
Under cross-examination the wife agreed that as at September 2011 the M Pty Ltd business was going well. She also agreed that as at this date she was solely in control of the decisions about that business. When asked about the husband’s observations of the company accounts at that time the wife answered that as she was the sole director he should not have had access to “my company accounts”.
In October 2011 the wife travelled with the three children to an Asian country for the purposes of a holiday and to make enquiries into potentially establishing a business there. After she arrived the husband was contacted and arrangements were made for the children to return to Australia, and for the husband to travel to Country P for the purpose of marriage counselling.
There is no dispute between the parties that in October 2011 they had several days’ discussions about their future arrangements in Country P and on 13 October 2011 they each signed documents which effected a transfer of the wife’s interest in L Pty Ltd to the husband and the husband’s interest in K Pty Ltd to the wife. Each party also resigned as director from the company in which they no longer held an interest. Neither party received any legal advice prior to entering into this arrangement. At this time the parties also reached an agreement about parenting arrangements whereby the children were to live with the wife and spend overnight time with the husband on weekends.
Although the wife deposes to L Pty Ltd being worth significantly more than K Pty Ltd at the time of the transfer and it is effectively her case that she was disadvantaged in the split of their business assets, no evidence as to value of the respective businesses at the time of transfer was adduced in these proceedings.
The parties’ financial arrangements following separation in October 2011
After the meetings in Country P and transfer of assets to one another both parties appear to have accepted that their marriage was at an end. After they each returned to Australia the husband moved from the separate premises located at the family home to a new home in a different suburb.
As the financial arrangements following the separation in October 2011 are central to each party’s respective case, this issue will be dealt with in more detail in this background.
According to the husband, he and wife first talked about a separation of their financial affairs from as early as 5 August 2011 when he moved to separate premises at the home which the family were then renting. The wife also deposes that the parties separated on this date and that on the same day she created the business N Business.
It is the husband’s case that both the intention and the effect of the agreement reached in Country P in October 2011 was that the parties ceased operating businesses together and formally separated their financial affairs.
The wife deposes that when she returned to Australia from Country P in October 2011 she then discovered for the first time that K Pty Ltd had been given an eviction notice from its premises and had significant debts. She deposes to closing this business in the same month for this reason and then to “trying” to establish a new similar business at a different location. It appears that such a business was established and did operate for some time because she also deposes to closing that new business in December 2012.
Under cross-examination the wife was asked about all of the businesses in which the parties were involved. She agreed that there were two M Pty Ltd companies (M Pty Ltd and N Business) and that she retained both on separation and both were subsumed into N Business. According to her affidavit she continued to operate this business herself until December 2012. The wife agreed under cross-examination that she subsequently took the assets from N Business and moved them into another company and then subsequently moved those assets to a further company.
When cross-examined, the wife confirmed that as at October 2011 she was of the view that what was happening in M Pty Ltd was none of the husband’s business and that she was running her own business. When it was put to her that she did not tell the husband where the money from this business was going the wife said “we were operating separate business” (sic) “neither of us told each other anything”.
In her affidavit the wife also deposes to undertaking some other business ventures on her own account after October 2011. In particular she deposes to travelling to New Zealand for about two months from November 2011 for the purpose of helping the her friend establish a business and entering into a franchise agreement with the friend for these purposes. She deposes to receiving $60,000 in payment from this friend in November 2011 pursuant to the franchise agreement and to incorporating another business in New Zealand in relation to this venture which was subsequently deregistered. Under cross-examination the wife said that at the time she “signed up” her friend to her company (which she said occurred in December 2011) that was a company solely controlled by her.
The husband incorporated a new company, Q Pty Ltd or “the husband’s company”) on 31 January 2012. Although it is not clear from the husband’s affidavit, I understand that he contends that the business operated by his company is not the same as the Q Pty Ltd business while the wife contends they are one and the same.
There is no dispute that the parties then moved to Singapore from June 2012. Although they did not consider themselves to be in an intact relationship at the time, they were attempting to see whether a reconciliation between them was feasible.
The wife deposes that after she moved to Singapore in June 2012 she had difficulties in managing the K Pty Ltd business in Sydney while living overseas. The husband also deposes to the wife flying back and forth to Australia “trying to sort out her businesses in Australia and working part time in Singapore”. (emphasis added)
According to the wife’s affidavit she held a number of positions in Singapore including as a business development manager. In her affidavit she deposes to earning $20,000 a month from May 2012 and in oral evidence asserted that she earned approximately $300,000 per year in the business development position. Under cross-examination she agreed that she had an interest in two businesses in Singapore but denied owning a fifty per cent shareholding in one of them, a matter to which she continued to deny even after being shown records of the Singapore’s business registration body which records such a shareholding.
Both parties appear to have regarded the period from June 2012 until October 2012 as a period in which they were attempting to reconcile and save their marriage. They also both agree that this did not occur and that on 17 October 2012 the husband returned to live in Australia and thereafter the wife and children continued living in Singapore.
Under cross-examination the wife agreed that at this stage, October 2012, she had sole control of two companies, being K Pty Ltd (which by this stage had changed its name to add the name of the suburb in which it was then operating) and N Business. The wife agreed that this last mentioned company was engaged in the business of preparation of educational manuals. She reluctantly and after obfuscation agreed that this was the same business in which she had been engaged between January 2009 and December 2011.
Following the husband’s return to Australia despite the steps taken by the parties to separate their financial interests, in November 2012 the wife withdrew $28,500 from the L Pty Ltd business account, even though she was no longer a director of the company that owned that account. The wife retained these funds and L Pty Ltd was reimbursed by the bank for the unauthorised withdrawal.
The wife continued to live in Singapore with the children after the husband’s departure in October 2012 and there was no further mingling of the parties’ financial interests. The wife continued to earn a good income in Singapore and received additional benefits through her employment other than her salary, such as payments towards the children’s school fees and rental accommodation.
From May 2013, the husband paid child support as assessed, though there is a dispute between the parties about the reliability of his payments at this time.
The wife returned to Australia in July 2015 and supported herself through Centrelink payments and working in the fitness industry with which she was familiar. The husband continued to pay child support until the wife deregistered the Child Support Assessment in September 2016.
Pursuant to orders made in July 2015 (“the July 2015 orders”) with the consent of the parties, upon her return to Australia the wife moved to the husband’s rented premises with the children. Although the husband was to move elsewhere he was required to pay rent for his family and some outgoings, as well as payment of the children’s school fees and other associated costs for them and spousal maintenance of $400 per week under these orders.
The parties were divorced in August 2015.
The husband ceased paying spousal maintenance of $400 per week on 14 September 2015.
The wife and family remained at the rented premises and the husband continued to pay the rent until about March 2016.
The wife’s application for interim spouse maintenance was dismissed in November 2016.
In June 2017 the parties’ parenting dispute was resolved by orders made with their consent that provide for the wife to have sole parental responsibility for the children and for the children to live with her. Under those orders the eldest child was to spend time with the husband according to her wishes and the younger children were to spend time with the husband as agreed between the parties, or failing agreement as determined by the wife. I understand that none of the children have spent time with the father since these orders were made.
The wife deposes that from November 2017 to the present, her only means of financial support other than a business venture between February and May 2019, has been Centrelink payments and rent assistance. However, under cross-examination it was revealed that she had other jobs since returning to Australia in 2016 and 2017. The wife is now studying at a tertiary institution to gain professional qualifications.
Since his return to Australia in October 2012 the husband has continued to manage the business operated by Q Pty Ltd (which was 90% owned by him at the time he swore his affidavit and when the business was valued) but which he solely owned at the time of final hearing.
THE LAW AND DISCUSSION
The approach to the determination of an application for property settlement orders is set out in Stanford v Stanford[1] (“Stanford”) which was considered in detail by the Full Court in Bevan & Bevan[2] (“Bevan”).
[1] (2012) 247 CLR 108.
[2] [2013] FamCAFC 116.
The starting point is a consideration of “whether it is just and equitable to make a property settlement order by identifying, according to ordinary common law and equitable principles the existing legal and equitable interests of the parties in the property”[3].
[3] Stanford & Stanford (2012) 247 CLR 108 at [37].
This involves identifying the existing interests and then considering whether having regard to the particular circumstances before me, it would be just and fair to make orders for the alteration of property interests.
If I do determine that justice and equity requires an adjustment of the party’s property interests I should next consider the matters set out in s 79(4)(a) to (c) of the Family Law Act 1975 (Cth) (“the Act”), that is the financial and non-financial contribution made by the parties to the property and to the welfare of the family constituted by the parties.
I must then consider the remainder of the matters in s 79(4) including the matters referred to in sub-section 75(2) so far as they are relevant, and determine on this basis whether there should be a further adjustment to the parties’ contribution-based entitlements.
Finally, I must then consider the justice and equity of the proposed orders. As was said in Bevan (supra) at [86], the just and equitable requirements is “not a threshold issue, but rather one permeating the entire process”.
What are the existing interests of the parties?
Any application for adjustment of property interests begins with an examination of the existing property interests of the parties. The wife’s case is that she has no legal or equitable interest in any property. In the Financial Statement she relies on in these proceedings, dated 25 September 2019 she deposes to owning no property other than household contents to the value of $1000 and having a negligible sum ($67) in superannuation interests.
In his Financial Statement filed 2 October 2020 the husband deposes to owning a car valued at $7000 and $500 in household contents. He has two superannuation interests totalling $18,577. The husband also has a small amount ($665) in a bank account. The most contentious item in this property dispute is the husband’s business. As explained earlier in these Reasons the husband has been conducting that business solely on his own account since October 2011 or at the very least late 2012.
A number of contentions are made by the wife in relation to this business which are interrelated. At various stages in the final hearing it was contended on the wife’s behalf that as the husband’s business is effectively the same business that he and the wife previously conducted together it should be treated as a joint matrimonial asset to which the wife has as an entitlement. It is contended on behalf of the husband that his business is not the same business that he and the wife previously conducted together prior to separating their financial interests in October 2011 and even if it were treated as a joint matrimonial asset the court would be satisfied that the wife has not made any contribution to it. In any event the husband contends that it should not be included in the Balance Sheet for distribution as it has no value.
All property, regardless of ownership is considered in property settlement proceedings and I am at this stage identifying the current interests of each of the parties and determining whether it is just and equitable to alter those interests. It can be assumed that if such an adjustment is made then any contribution of the wife to the husband’s business and any argument about entitlement will be considered at the appropriate time.
Valuation of the husband’s business
The second and most significant contention in relation to the husband’s business relates to valuation.
The husband’s business was valued by an expert engaged by the parties (“the valuer”) on two occasions, first in November 2017 (“the expert’s first valuation”) and on a second occasion in July 2019 (“the update valuation”).
In the expert’s first valuation the husband’s 90 per cent share in the company Q Pty Ltd which operates the business was valued at $199,100 and a “loan account-liability” of ($91,995) was noted. In the updated valuation the husband’s business is valued at nil.
The expert explained in his valuation reports that he adopted the “fair market value” methodology for valuing the husband’s business. He explained this methodology as follows:
The appropriate methodology for a trading business is to calculate Future Maintainable Earnings and apply an appropriate capitalisation multiple to the Earnings before tax to calculate the value of the business. The value of Net Tangible Assets employed in the business are then deducted from the value of the business to determine the value of the Goodwill. If the resulting value for Goodwill is nil, then the net asset backing basis of valuation is used. Where an entity has no trading operations but there is no intention to wind up that entity, then the appropriate valuation methodology is the net assets backing basis.
In valuing the business for the update valuation the valuer had regard to the Profit and Loss account for the husband’s business for the five years prior to 30 June 2019 and observed that turnover was basically fairly steady over the period.
In calculating the adjusted net profits of the business the valuer considered that the results for the 2018 and 2019 years were the best guide to future performance as they encompassed the periods in which the business operated in new premises. He set out various adjustments he made to the reported profits and the reasons for those adjustments.
For the purposes of his valuation the valuer considered that the average of two years adjusted profits is the best indicator of Future Maintainable Earnings (FME)
The valuer summarised the Balance Sheet of the company as an annexure in his report and set out the way in which he calculated the Net Tangible Assets (NTA) employed in the business.
The valuer then considered the Balance Sheet values as at 30 June 2019 with certain exceptions which he explained and ultimately valued the net assets of the company at a negative $15,232. He valued the husband’s then 90 per cent ownership of the issued shares in the company as nil.
Under cross-examination by the wife’s lawyer the expert agreed that in preparing his valuation he relied entirely on the published accounts for the company as prepared by the husband’s accountants. He agreed that if it were the case that the husband “had been paying a great number of personal expenses from the company without them appearing in the accounts” this would change his valuation as such personal expenses should be added back to the profit and loss account for the business.
When cross-examined the expert was also asked to explain the other valuation method that he had referred to in his valuation reports known as “value to the owner”. The expert explained that where there is no ready market for a business then the value to owner is an amount that the owner would be prepared to pay for the business rather than relinquish it. This method of valuation was not further explored under cross-examination of the witness.
The expert is a director of a company which practises as public and forensic accountants. He holds a Bachelor of Economics with a Major in Accounting and a Master of Business Administration with a Major in Finance. He has been a certified practising Accountant for over 35 years and in the course of his professional activities prepares valuations of businesses for various purposes including family law proceedings. The valuer was appointed as the expert in these proceedings with the consent of both parties. Under cross-examination there was no challenge made to his opinion other than through asking some hypothetical questions with which he agreed, to the effect that he would have come to an alternate valuation for the company if he were provided with a different set of accounts.
The husband’s counsel submits that as there were no challenges made to the basis upon which the valuer carried out his valuation the valuer’s evidence should be accepted.
Although I understand that the wife does not take issue with the valuer’s method of valuation, she takes issue with the valuer’s conclusion that the business has nil value. So far as I understand the wife’s case, it is contended on her behalf that the husband gave untruthful evidence in denying that the business paid for various personal expenses. It is her case (on the basis of the hypothetical questions put to the expert valuer) that had the valuer known the truth about the business paying for the husband’s personal expenses, he would have valued the business differently.
The husband did give clear evidence that the source of the funds for various personal expenses including legal expenses, rent and the like was a bank account in the name of his business. He made it equally clear that his accountant was well aware of the source of these payments when preparing the company accounts and that the accounting system he used for the purposes of his personal expenses and the business clearly differentiated between personal and business expenses.
It is submitted on behalf of the husband that he did not deny that monies used for personal purposes came from his business account. He also gave unchallenged evidence of keeping an accounting system which accounted for his personal expenses as opposed to the company’s expenses and provided this to his accountant each year for the purposes of preparing the business accounts. He submits that there is no evidence to suggest that the company met various private expenses which thus casts doubt on the profit and loss accounts for the company and ultimately the valuer’s valuation.
The wife’s contentions appear to be based upon the proposition that payment of expenses from a particular bank account inevitably leads to the conclusion that the holder of that account ultimately bears the cost of the particular expense. This proposition completely disregards the husband’s evidence about his account keeping which was unchallenged.
I have no reason not to accept the husband’s evidence as to these matters. There is also no basis to reject the valuer’s opinion as to value. His answers to hypothetical questions take the issue nowhere in the absence of evidence that casts doubt on the profit and loss accounts for the company.
The second argument advanced on behalf of the wife in support of a contention that I should reject the expert’s valuation of the husband’s business as nil is based on the valuer’s reference to an alternate means of valuing a business known as “value to owner”. The expert in oral evidence basically repeated the content of his reports as to this method of valuation and this matter was not further explored under cross-examination.
When raising this issue in the course of final oral submissions it was contended on behalf of the wife that due to the husband’s reluctance to admit that the company is worth anything to him then the only way to properly determine its value is to put it on the market. In my view this is not a basis to reject the evidence of the expert valuer. In short I accept his expert opinion that the husband’s business has no value.
Add backs
It is submitted on behalf of the wife that an amount of $220,442 should be “added back” to the matrimonial property for distribution and credited to the husband. This sum comprises payments of at least $119,429 said to have been paid by the husband’s business to the husband’s legal representatives for legal costs in the proceedings and $101,013 for the husband’s personal rent for the period March 2013 to February 2019 said to have also been paid by the husband’s business. The contention of the wife in this regard is related to her arguments as previously discussed, that the husband’s business has been paying for purely personal expenses and that the husband’s business is essentially the same as that operated by the parties jointly prior to about October 2012. Accordingly it is submitted by the wife that the funds used by the husband for personal purposes were essentially joint monies and for this reason should be “added back” to the parties’ property interests and credited to the husband. .
In considering this contention there is no doubt that the much of the funds sought to be added back and credited to the husband came from a bank account in the name of the company which operates the husband’s business (and employs him). In his Costs Disclosure Notice the husband discloses legal costs in the sum of $272,568 and that the source of the funds was personal income earnt over eight years, loans from friends, money drawn from superannuation and $115,000 in the form of a loans from Q Pty Ltd, matters which were not challenged under cross-examination.
As previously discussed at some length, there appears to be no dispute between the parties that after October 2011 each of them were engaged in separate businesses, some of which they had operated together prior to this date. I do not understand the basis of the wife’s contention that she is in some way entitled to any income that may have been generated by the husband’s business after it was operated through a new entity incorporated in January 2012. This was not developed in submissions and in her own words from October 2011 “we were operating separate businesses”. There is a plethora of evidence that indicates that after October 2011 (or at least after June 2012 when the wife moved to Singapore) there was no further mingling of the parties financial affairs (other than the wife’s unauthorised withdrawal of funds from the husband’s business account if it can be characterised that way) and each party continued to earn an income separately through their own efforts after this time.
A recent Full Court authority dealing with add backs is Trevi & Trevi[4] ("Trevi"). In that case Murphy J for the majority considered the line of authority dealing with this issue and in particular Omacini & Omacini[5] ("Omacini") where the Full Court summarised that addbacks fall into "three clear categories". These are where the parties have expended money on legal fees, where there has been a premature distribution of matrimonial assets, or where there has been "waste" or wanton, negligent or reckless disposition of assets. His Honour observed that two fundamental premises emerge from Omacini (supra) and the authorities preceding it, that "adding back" is a discretionary exercise which should only be exercised where justice and equity requires it and that in cases which are not exceptional justice and equity can be achieved by the exercise of a different discretion, usually by taking up the same as a relevant section 75(2) factor.
[4] [2018] FamCAFC 173.
[5] (2005) FLC 93-218; [2005] FamCAFC 104.
Murphy J went on in Trevi (supra) to add that further propositions must be added to those just discussed in respect of paid legal fees which is a particular category of addback of its own. In this regard his Honour referred in particular to what the Full Court had to say in Chorn & Hopkins[6] ("Chorn") at [56] and following:
In summary, we consider that the above mentioned decisions of the Full Court establish that, while the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial Judge, in determining how to exercise that discretion, regard should be had to the source of the funds.
If the funds used existed at separation, and are such that both parties can be seen as having an interest in them (on account, for example, of contributions), then such funds should be added back as a notional asset of the party, who has had the benefit of them.
If funds used to pay legal fees have been generated by a party post separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance), they would generally not be added back as a notional asset; nor would any borrowing undertaken by a party post-separation to pay legal fees be taken into account as a liability in the calculation of the net property of the parties. Funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post separation income or acquisitions.
[6] (2004) FLC 93-2014; [2004] FamCA 633.
Murphy J said in Trevi (supra) that the delineations referred to in Chorn (supra) such as "the funds used existed at separation…such that both parties can be seen as having an interest in them" or "funds used to pay legal fees have been generated by a party post-separation from his or her own endeavours" cannot be seen as determinative in the exercise of discretion but, rather as informing it. His Honour also referred to the reason why paid legal fees "occupy a particular position in the consideration of addbacks" being the presence of section 117(1) of the Act which means that a failure to add back legal costs will amount to a pre-emptive decision about one party paying the other party's legal costs where it is appropriate in all the circumstances for such an addback to be made.
I accept the submissions made on behalf of the husband that from at least October 2012 there was complete financial separation between the parties and each party was in control of the assets which they took from the relationship. There is no basis upon which it could be concluded that any payment from the bank accounts of the husband’s business for his personal expenses including the payment of legal fees amounted to him using joint funds for his own purposes. For this reason there is no basis upon which these sums should be added back and credited to the husband.
Accordingly, the only property interests which may be the subject of an adjustment of interests, if that it be occur are as follows.
·Husband’s car - $7000
·Husband’s business – Nil
·Husband’s bank savings - $665
·Husband’s superannuation interests - $18,578
·Wife’s superannuation interests - $67
In the course of final submissions it was confirmed that no adjustment of either party’s superannuation interests was sought with the result that the value of the only property available for distribution is $7665.
It was also ultimately agreed in final submissions that there were no matrimonial liabilities. Initially it appeared that the main contention relied upon by the wife in relation to the justice and equity of adjusting the parties’ property interests was that she should not be required to pay any share of asserted liabilities. However, it was ultimately conceded that there was virtually no evidence about those contended liabilities and significant doubt as to whether they existed at all.
The first of these contended liabilities were loans made some years ago to the parties. It is agreed that prior to separation in 2011 various loans had been made to the parties by mutual associates or friends but no steps have ever been taken to recover those loans and there is no evidence that this is likely to occur. Similarly, there was said to be a debt to a private school at which at least one of the children was enrolled about which there was also no evidence, but the parties seemed to agree related to a period prior to August 2011. No steps have been taken by the school to enforce this debt which the parties also appear to agree must have been written off. There had also been a previous joint bank account which was apparently overdrawn over ten years ago but that the bank had also taken no steps in relation to this liability. For all of these reasons the parties agree that there are no liabilities which should be treated as extant for the purposes of property adjustment.
There is also no dispute between the parties that as a result of various orders previously made in the course of the proceedings the wife owes the husband $7978 being $6050 for her share of an expert’s report relating to the parenting proceedings, and $1928 for her share of each of the valuation reports for the husband’s business.
Is it just and equitable to alter the parties’ property interests?
The husband’s case is that it is not appropriate to make any orders to adjust the parties’ property interests and the wife seeks orders that the husband transfer the entirety of his interest in his business to her.
In summary the wife disputes the opinion of the expert that the husband’s business has no value, and contends that it would not be just and equitable to leave the business in the hands of the husband.
I have great difficulty dealing with the wife’s contentions about her contribution to the property interests of the parties when I accept the expert opinion that the value of the only property in existence is nil.
Even if the nil value of the husband’s business is disregarded for the purposes of considering the wife’s argument, there is no evidence to support her contention that she made any contribution to that business. Even if it were also accepted that the business trading under the name of Q Pty Ltd is effectively the same as L Pty Ltd there is no evidence about the value or even profitability of L Pty Ltd at the time the parties separated their financial affairs upon which an assessment about contributions could be made. There was some evidence adduced by the wife of gross turnover of this business at around that time of separation of the parties’ financial matters. In the absence of any other evidence concerning expenses, outgoings or liabilities I am unable to find as the wife contends that the husband retained the more profitable of the businesses the parties had previously conducted together prior to separation or that the equity in the L Pty Ltd business, if any, was effectively carried over to the husband’s new business.
The principal submission made on behalf of the husband is that there is little utility and no necessity to adjust the party’s respective property interests to achieve justice and equity between them as the asset pool is effectively of negative value, when the wife’s debt to the husband of $7978 is taken into account.
I also accept the other submissions made on behalf of the husband in support of his ultimate contention that it is not just or equitable to make a property adjustment in the circumstances of this case. First, I accept the wife’s very clear evidence (consistent with the husband’s case) that she drew a line in the sand about the parties’ future involvement in one another’s business ventures from October 2011 (or possibly as late as October 2012) and at that time considered that the parties would pursue their business interests separately and so far as her businesses were concerned, she exercised sole control over them.
I also accept that one of the relevant matters to take into account is the impact of the orders sought by the wife on the husband whose livelihood depends upon him continuing to run his business. Put simply, it is submitted that although the husband’s business is not a valuable asset, it is a reflection of his earning capacity or income stream as it is through the business that he earns his living. I accept the submission that it would not be just and equitable to effectively take this business from the husband who has run it for eight years and give it to the wife who has had no involvement in it and has demonstrated a capacity to earn far more than the husband in any event. This is especially the case in circumstances when following the separation of the parties’ financial affairs the wife solely made decisions about the companies she retained (and the husband had no input into those decisions) and she now seeks to have an input into decisions in relation to the business that the husband retained.
As can be seen by the foregoing discussion, I consider that the two most relevant factors in relation to the threshold issue are the current value of the only asset for distribution being nil and the decisions that the parties made about ten years ago in relation to the way that they would arrange their financial affairs in the future. In these circumstances and for the reasons explained I do not consider that it is just and equitable to adjust the parties’ property interests and accordingly the wife’s application for property settlement orders is dismissed.
THE RECUSAL APPLICATION
As indicated, on the first day of the final hearing the wife made an application that I recuse myself from determining the property dispute on the basis of apprehended bias.
This application was made after a couple of hours had been spent at the commencement of the hearing identifying the various documents relied on by the parties, in interchanges between the bench and legal representatives about the party’s contentions and dealing with objections to large portions of each of the party’s affidavits.
According to the authorities[7] any such application requires two steps, the first of which is the identification of what it is said might lead a judge to decide a case other than on its merits. In this regard, the application was in the words of the wife’s lawyer based on the following:
It’s on the basis that this morning you’ve made various statements about the business being worth nothing. It’s also on basis (sic) that in the spouse maintenance application, which is a year or two ago, you made adverse findings of credit against my client.
[7] Ebner v Official Trustee in Bankruptcy (“Ebner”) 205 CLR 337; [2000] HCA 63 and the line of cases that follow
In other words, it was identified that statements I made in the course of the proceedings that morning to the effect that the husband’s business had been valued by the expert at nil and adverse credit findings said to be contained in Reasons for Judgment dealing with an application for spousal maintenance in November 2016[8] were the matters said to give rise to an apprehension of bias.
[8] Hackford & Hackford [2016] FamCA 295
The husband opposed the wife’s application that I recuse myself and submitted that whatever rights the wife may have had in this regard had been waived and that in any event nothing that I had said in the judgment in relation to spousal maintenance or in the course of the interchanges between the bench and counsel of the first day of hearing would form the basis of a successful recusal application.
Has the wife waived her rights to make a recusal application?
The first issue that must be considered given the delay between one of the matters said to ground the application for recusal and the making of that application is the question of waiver.
The issue of waiver was recently explored by the Full Court Tong & Niem[9] which applied the High Court decision of Michael Wilson & Partners Ltd v Nicholls[10] where the plurality said at [76]:
It is well established that a party to civil proceedings may waive an objection to a judge who would otherwise be disqualified on the ground of actual bias or reasonable apprehension of bias. (It may well be that the principle extends to criminal proceedings but that issue need not be considered.) If a party to civil proceedings, or the legal representative of that party, knows of the circumstances that give rise to the disqualification but acquiesces in the proceedings by not taking objection, it will likely be held that the party has waived the objection.
[9] [2020] FamCAFC 27.
[10] (2011) 244 CLR 427; [2011] HCA 48.
In Tong & Niem (supra) the Full Court said that the question of waiver involves a "fact based inquiry" and the question to be answered is whether the application for disqualification was made as soon as reasonably practicable.
The wife’s counsel was unable to assist through submissions in relation to the question of the wife’s acquiescence for a period of about four years to a matter that was said to ground the application for disqualification. Although I was unassisted by submissions, it was clear from the history of the proceedings that there were many opportunities for the wife to have sought that I recuse myself from hearing on the basis of a reasonable apprehension of bias after November 2016 when the judgment in question was delivered. There was simply no basis to conclude that the application for disqualification based on this matter was made as soon as reasonably practicable.
In these circumstances I considered the wife’s application only to the extent that it was based on the comments made in the course of the final hearing prior to the evidence commencing.
In accordance with authorities previously referred to, the second of the steps to be taken in an application for recusal is an articulation of the logical connection between the matter that is said might lead a judge to decide a case other than on its merits and the feared deviation from the course of deciding the case on its merits.
In the course of his submissions which I understand were directed towards the second step, the wife’s lawyer submitted that my comment that “the business is worth nothing just based on [the valuer]’s report” caused the wife to “fear that you are biased towards to her husband’s case”.
Although the wife’s lawyer subsequently clarified that he did not contend that I was actually biased the tenor of her application generally (albeit that it was mainly direct to the November 2016 judgment) was to the effect that these comments may cause an apprehension that the case will be decided in the husband’s favour
When considering the second step the High Court has also said that the fair minded lay observer:
Is taken to be reasonable and the person observed is a professional judge whose training, tradition and oath or affirmation require [the judge] to discard the irrelevant, the immaterial and the prejudicial.[11]
[11] Johnson & Johnson [2000] HCA 48; 201 CLR 488 per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ at [12].
Further, in the same case the High Court said at [13]:
Judges, at trial or appellate level, who, in exchanges with counsel, express tentative views which reflect a certain tendency of mind, are not on that account alone to be taken to indicate prejudgment. Judges are not expected to wait until the end of a case before they start thinking about the issues, or to sit mute while evidence is advanced and arguments are presented. On the contrary, they will often form tentative opinions on matters in issue, and counsel are usually assisted by hearing those opinions, and being given an opportunity to deal with them.
In these proceedings the fictional observer would be aware that the expert appointed with the parties’ consent in these proceedings had valued the husband’s business at nil and that this was a matter which the wife sought to challenge. The fictional observer would also be aware that the parties had been locked in litigation for many years and that it was somewhat unusual for there to be an application for an adjustment for property interests where the principal asset was said by an expert to have no value. Further, the fictional observer would be aware that it is not unusual for the trial judge at the commencement of the trial to identify the nature of each of the parties’ contentions especially where that was not entirely clear from the outlines of case that had been filed.
Finally, while it is arguable that my comments about the value of the husband’s business (when that expert evidence had not been tested) may cause the wife to apprehend that I may decide an issue or her application adversely to her, this is not the relevant test.
As Mason J said in Re JRL: Ex parte CJL[12] at [5] :
….It needs to be said loudly and clearly that the ground of disqualification is a reasonable apprehension that the judicial officer will not decide the case impartially or without prejudice, rather than that he [or she] will decide the case adversely to one party. There may be many situations in which previous decisions of a judicial officer on issues of fact and law may generate an expectation that he is likely to decide issues in a particular case adversely to one of the parties. But this does not mean either that he will approach the issues in that case otherwise than with an impartial and unprejudiced mind in the sense in which that expression is used in the authorities or that his previous decisions provide an acceptable basis for inferring that there is a reasonable apprehension that he will approach the issues in this way. In cases of this kind, disqualification is only made out by showing that there is a reasonable apprehension of bias by reason of prejudgment and this must be "firmly established": Reg. v. Commonwealth Conciliation and Arbitration Commission; Ex parte Angliss Group; Watson; Re Lusink; Ex parte Shaw. Although it is important that justice must be seen to be done, it is equally important that judicial officers discharge their duty to sit and do not, by acceding too readily to suggestions of appearance of bias, encourage parties to believe that by seeking the disqualification of a judge, they will have their case tried by someone thought to be more likely to decide the case in their favour.
[12] [1986] HCA 39; (1986) 161 CLR 342.
Having regard to each of the matters that must be attributed to the fair minded lay observer and applying the relevant law to those matters I was not satisfied that the matters identified would give rise to the apprehension in the fictional observer that I would determine the case other than on its merits and accordingly the application was dismissed.
For all of the foregoing reasons I make the orders set out at the forefront of this judgment.
I certify that the preceding one hundred and twenty (120) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Hannam. Associate:
Dated: 18 June 2021
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