Hackshaw & Hackshaw
[2010] FamCA 1123
•10 December 2010
FAMILY COURT OF AUSTRALIA
| HACKSHAW & HACKSHAW | [2010] FamCA 1123 |
| FAMILY LAW – PROPERTY SETTLEMENT – Section 79 property orders – Financial contributions of the parties – Add back considerations – Where the wife alleges waste and extravagances – Where the wife claims notional adjustment should include “lost opportunity costs” – Where the husband concealed from the wife property purchases made during the marriage – Where husband altered a document – Whether husband provided full and frank disclosure – Where disagreement between parties as to value of property – Where disagreement between three expert valuers as to value of trust – Valuation of business – Where significant variation in assessment of future maintainable earnings – Section 75(2) considerations – Matrimonial pool to be split 62.5/37.5% in favour of the wife |
| Evidence Act 1995 (Cth) Family Law Act 1975 (Cth) Family Law Rules 2004 (Cth) |
| Antmann and Antmann (1980) FLC 90-908 MacGregor v MacGregor [1996] FLC 92-710 The Commonwealth v Milledge (1953) 90 CLR 157 |
| APPLICANT: | Mr Hackshaw |
| RESPONDENT: | Ms Hackshaw |
| FILE NUMBER: | BRC | 10904 | of | 2007 |
| DATE DELIVERED: | 10 December 2010 |
| PLACE DELIVERED: | Brisbane |
| PLACE HEARD: | Brisbane |
| JUDGMENT OF: | Murphy J |
| HEARING DATE: | 24-27 May 2010 & 13 July 2010 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr Hamwood |
| SOLICITOR FOR THE APPLICANT: | Robert W Blank & Associates |
| COUNSEL FOR THE RESPONDENT: | Mr Kirk of Senior Counsel |
| SOLICITOR FOR THE RESPONDENT: | Lehns Lawyers |
Orders
As and by way of settlement of property, pursuant to s 79 of the Family Law Act 1975 (as Amended)
IT IS ORDERED THAT
The property and superannuation interests of the parties as determined in the Reasons for Judgment delivered contemporaneously herewith, be divided between the parties such that the wife receive 62.5% of the total and the husband receive 37.5% of the total.
IT IS FURTHER ORDERED THAT
Not later than 42 days from the date of this order, the parties shall file, by forwarding by joint email addressed to Murphy J’s Associate, agreed minutes of order giving effect to these orders and the Reasons for Judgment published contemporaneously herewith, failing which agreement the matter be listed at a time and date to be appointed for the making of such orders.
In the event that the matter is re-listed in accordance with the previous paragraph of these orders, each party shall file and serve not later than 7 days prior to such date, Minutes of Orders sought by them giving effect to these Reasons.
IT IS NOTED that publication of this judgment under the pseudonym Hackshaw & Hackshaw is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)
| FAMILY COURT OF AUSTRALIA AT BRISBANE |
FILE NUMBER: BRC 10904 of 2007
| MR HACKSHAW |
Applicant
And
| MS HACKSHAW |
Respondent
REASONS FOR JUDGMENT
The relationship between the parties to these s 79 proceedings commenced when they were each in their late teens and ended some 32 years later when they separated in the middle of 2006. The parties are in dispute as to how a settlement of property ought be effected between them.
The parties started with virtually no assets, and, by dint of their respective efforts within this particular marriage partnership, their estate is now valued, at its most conservative assessment, in excess of $6 million.
The core of the current dispute emanates from the fact that the wife asserts that the estate should be regarded as roughly double that figure, and that the husband should be credited with having already received a significant proportion of that estate.
Unsurprisingly, the parties agree that their contributions to the date of separation should be regarded as equal – although the wife caveats that position in the event that arguments made by her in respect of the size and value of the estate are rejected by the court.
Factual Context
The parties married in 1976, having cohabited for about 18 months or so prior to that time. They separated in June 2006. There are two children of the marriage, a daughter born in 1978 (32), and a son born in 1982 (28).
Each of the parties worked remuneratively in differing capacities until each started their own businesses at different times. The husband worked in a number of activities, including truck driving and selling real-estate, but, since about the end of the 1980’s, has focussed on building his own business. It is unchallenged that this business has been a very successful enterprise.
The wife has also been employed remuneratively in a number of activities including nursing and teaching, before commencing her own business as a sales agent in about 2001. It, too, has been successful. Mostly, the wife’s remunerative employment has been full-time, with relatively short interruptions co-incidental with the birth of each of the parties’ two children.
The husband was born in 1955, and is currently aged 55. The wife was born in 1955 and was aged 54 at trial.
The circumstances of the marriage can be seen to have been marked by hard work by each of the parties in each of the activities earlier described. Equally, the relationship can, in s 79 terms, be seen to have been unremarkable until approximately five years or so ago, when the husband turned his attention to acquiring, and subsequently improving, real property in regional New South Wales.
The acquisition of a property by him in that area (“the Z farm”) occurred in March 2004. That purchase occurred, it can be found, without the knowledge of the wife. The contract, signed in March 2004, settled in about June 2004. About 12 months later, the husband purchased a second property at Z. Again, this property was purchased by him, in his own name, without the knowledge of the wife.
Some 12 months or so after that, the parties separated, and approximately three months later, in about September 2006, a reference by the husband to “his farm” provoked the wife into commencing an investigatory process in respect of the property transactions just described. In February 2007, the husband purchased a third property at Z, for about $1,760,000 and, some six months or so after that, the current proceedings were instituted by him.
The Property of the Parties or Either of Them – Issues and Contentions
The short outline just described will make clear that a central issue in these proceedings is the determination of “the property of the parties, or either of them”, within the meaning of s 79, and the value of that property.
In written submissions each of the parties outlined their contentions by reference to a document which sets out the areas of agreement and dispute between the parties. Subsequently, in oral submissions, assertions and counter-assertions were made by reference to an amended version of that document which became Exhibit E in the proceedings.
It is helpful and appropriate to incorporate into these Reasons that part of Exhibit E which sets out both the agreement between the parties and their respective assertions, and counter-assertions about those matters where they disagree. (The question-marks within the document set out below are as per the Exhibit and the Schedule is, for ease of reference, reproduced with two Item 43s as appear in the Exhibit).
[Exhibit E]
Summary of Property Resources and Liabilities
| Wife’s Value ($) | Husband’s Value ($) | ||
| Real Property | |||
| 1. | [U property] (W) | 1,075,000 | 1,075,000 |
| 2. | [V property] (W) | 1,150,000 | 1,150,000 |
| 3. | [W property] (W ½) | 215,000 | 215,000 |
| 4. | [X property] (H) | 425,000 | 425,000 |
| 5. | [Y property] (H) | 940,000 | 940,000 |
| 6. | [Z1] } (H - Value $450,000) } | 450,000 | 450,000 |
| 7. | [Z2] } See addback of (H - Value $600,000) } money spent } on farms | 600,000 | 600,000 |
| 8. | [Z3] (W - Value $1,850,000) } | 1,850,000 | 1,850,000 |
| Business Interests | |||
| 9. | [Hackshaw] Family Trust (H), including the trust interest in: · [Hackshaw A] Pty Ltd · [Hackshaw B] Pty Ltd · [Hackshaw C] Pty Ltd · [Hackshaw D] Pty Ltd · [Hackshaw E] Pty Ltd · [Hackshaw F] Pty Ltd · [Hackshaw G] Pty Ltd | ||
| (The value by Mr [ST] is $924,879 plus goodwill of $136,000 = $1,060,879) | 2,111,272 | 413,595 | |
| 10. | [Hackshaw Properties] Pty Ltd (H) - [Mr NC’s] value includes livestock ($25,954) plant ($84,800) and motor vehicles ($18,500) relevant to addback for money spent on farm - Value of carry-forward tax losses from farm operation ([Mr NC’s] value after deducting intended use by Husband for 2009 Year) - Motor Vehicle (Ford Crew Cab) excluded Valuation | 340,229 188,994 31,150 | 340,229 Nil 31,150 |
| 11. | [Hackshaw & BN] Partnership (H 67%) | 42,772 | 42,772 |
| 12. | [Hackshaw & MA] Partnership (H 50%) | 64,420 | 64,420 |
| 13. | [Hackshaw & RJ] Partnership (H ?%) | 32,253 | 32,253 |
| 14. | [Hackshaw] Pty Ltd (H) | 2 | 2 |
| 15. | [S] Pty Ltd trading as [S Business] (W 50%) | 99,934 | 99,934 |
| 16. | Loans to/by [Hackshaw] Family Trust (H) | (360,327) | (360,327) |
| Personal Property | |||
| 17. | Furniture : [U property] (W) | 20,156 | 20,156 |
| 18. | Boat Shed – [U property] (H) | 2,750 | 2,750 |
| 19. | Jewellery (W) | 16,085 | 16,085 |
| 20. | Diver’s Watches (x2) (H) (and another to be valued) | 6,350 + | 6,350 |
| 21. | Furniture : [X property] (H) | 7,194 | 7,194 |
| 22. | Fishing Rod Collection (H) | 21,632 | 21,632 |
| 23. | Boat and Trailer (H) | 5,160 | 5,160 |
| 24. | Book Collection (H) | 208,300 | 208,300 |
| 25. | Furniture : [Z1 property] (H - Value $4,620) - farm add back | 4,620 | 4,620 |
| 26. | Gun collection | 3,900 | 3,900 |
| 27. | Wine collection | 7,538 | 7,538 |
| Bank Accounts | |||
| 28. | Suncorp Metway : Account No. […]81 (W) | 2,800 | 2,800 |
| 29. | Suncorp Metway : Account No. […]12 (W) | 6 | 6 |
| 30. | Suncorp Metway : Account No. […]55 | Nil | Nil |
| 31. | Husband’s Bank Accounts Suncorp No.743 $ 163 Suncorp No.659 $ 396 Ord Minet $ 690 Bendigo No.675 $5,046 | 6,295 | 6,295 |
| 31A | Husband’s Solicitors’ Trust Account (see Amended Costs Notice) | 40,576 | 40,576 (?) |
| Other Assets | |||
| 32. | Shares REM Resources 400 Shares (H) | 88 | 88 |
| Superannuation | |||
| 33. | [Hackshaw] No. 1 Super Fund (H) | 1,044,638 | 1,044,638 |
| 34. | [Hackshaw] Super Fund (W) | 105,071 | 105,071 |
| 35. | Q Super Defined Benefit (W) | 51,847 | 51,847 |
| 36. | Q Super Accumulation (W) | 72,165 | 72,165 |
| Liabilities | |||
| 37. | Suncorp Mortgage (A/C 969) (the Farms) (H) ($1,849,164) - relevant to farm addback | (1,849,164) | (1,849,164) |
| 38. | Suncorp Line of Credit (A/C 1448) (H) | (273,293) | (273,293) |
| 39. | Suncorp Mortgage (A/C 3920) ([X property]) (H) | (275,707) | (275,707) |
| 40. | Heritage Mortgage ([W property]) (Wife) | (162,443) | (162,443) |
| 41. | Heritage Line of Credit (Wife) - all legal fees | (298,197) | (298,197) |
| 42. | ANZ Credit Card (Wife) - all legal fees | (12,197) | (12,197) |
| 43. | Tax liability - Wife | (4,376) | (4,376) |
| - Husband (now asset) | 51,139 | 51,139 | |
| Net Actual Pool | 8,058,632 | 6,131,385 + 40,576(?) | |
| Notional Adjustment for Wasted Farm Expenditure by Husband | |||
| - Calculated by Wife 4,728,354 | |||
| - Adjust for farm assets included in pool | |||
| · Value of 3 farms (2,900,000) | |||
| · Debt on [Z2] 1,849,164 | |||
| · Livestock (25,954) | |||
| · Plant (84,800) | |||
| · Motor Vehicles ($18,500 + $31,150) (49,650) | |||
| · Chattels ([Z1]) ( 4,620) | |||
| · Available tax losses (188,994) | |||
| 3,323,500 | |||
| · Deduct tax benefit from losses (used) (1,126,525) | |||
| · Add opportunity cost for this sum over up to 6 years ([Mr NC]) 773,999 | |||
| 2,970,974 | 2,970,974 | Nil | |
| 11,029,606 | |||
| Other Notional Adjustment | |||
| 43. | Legal fees paid - by Husband (the Husband alleges $268,590 (?) from post-separation earnings) - by Wife ($90,371 from post-separation savings and earnings) | 512,456 432,468 | 193,866 (?) 341,394 (?) |
| 44. | Extravagances of Husband (January 2005 to May 2009) | 550,000 | Nil |
| Net Notional Pool | 12,524,530 |
The Central Issues
The disagreements between the parties can be referenced to a number of specific central issues:
·The value of the Hackshaw Family Trust (essentially comprising the husband’s financial services business) reflected in the schedule in a disparity of about $1.7 million and representing figures arrived at by different experts. As noted in the schedule, a third valuation (from the single expert valuer, Mr TS) puts the value of the Trust at $1,060,879.
·The value of tax losses capable of being carried forward in the corporate entity referred to, representing a difference of about $189,000 was initially in dispute. Agreement was ultimately reached about this issue. The agreement sees a tax refund of about $51,000 and is included as the last item before the calculation of “Net Actual Pool”.
·Expenditure said to have been incurred by the husband in respect of the farms purchased by him without the knowledge of the wife, said to result in a “notional adjustment” of about $3 million.
·Legal fees of the parties and whether they ought be added back. That issue is reflected in items 31A and (the second) item 43, where the central dispute is whether those legal fees ought be seen as being paid from post-separation earnings and, as a result, it is said, ought not be “added back” to the property of the parties. The difference is in the region of $500,000.
·An item described as “extravagances” of the husband (Item 44) - referred to during the course of the trial as “leisure expenses” - is said to be added back because the expenditure amounts to “waste” as that concept is referred to in earlier authorities. The amount claimed exceeds $500,000.
“Notional Adjustments” – Overview and Derivation
It can be seen that the wife seeks to “add back” to the divisible property sums already expended. Those sums fall into two broad categories: farm expenditure alleged to be “waste” and “extravagances” (otherwise called “leisure expenses”).
As can be seen from the Schedule above, the first category consists of amounts spent by the husband on the three properties at Z in respect of which there is a “top line” figure of $4,728,354 seen in the Schedule at Item 43 (the first of the two). That figure was agreed between the parties as the total expended by the husband in respect of farm expenditure. The process by which, ultimately, that figure was agreed, and issues relating to disclosure preceding it, will be explained below.
Before embarking upon that, it is to be first noted that, from that agreed figure there is deducted amounts already accounted for in the Schedule (thereby avoiding “double counting”). Added to it is a figure of over three-quarters of a million dollars said to be a “lost opportunity cost”.
The latter is a calculation performed by an accountant, Mr NC, engaged by the wife. Mr NC’s evidence, including in respect of the “opportunity cost” calculation will be referred to in more detail below. By way of overview, the calculation of “opportunity cost” can be explained as a calculation of what money is said would now be available for distribution had it not been spent on the farms and had been, instead, invested in what the wife asserts is an appropriate manner. The corollary is that the wife alleges that the husband has effectively distributed to himself in the form of capital expenditure on the Z properties sums that have not borne (and, the wife alleges, were never realistically going to bear) fruit in improved value of the properties.
Once the “opportunity cost” and “double count” figures are removed (together with used tax losses – again to be dealt with below), the remaining figure of around two million dollars represents, in effect, an “after the event audit” of expenditure, calculated consequent upon a long, difficult (and extremely expensive) process of inquiry conducted by the wife. That same process has produced a listing of what is referred to in the Schedule (Item 44) as “extravagances”, which were referred to during the trial as “leisure expenses”.
Disclosure and the Path to Agreement as to Amount of Farm Expenditure
The wife alleges recalcitrance on the part of the husband in disclosure and in discovery of documents. Submissions seeking an adverse finding about the husband’s credibility are founded, in large part, upon that asserted recalcitrance.
The Family Law Rules 2004 and earlier decisions of the Full Court of this court could not make clearer the breadth and sanctity of the general duty of disclosure. It finds cogent and clear expression in Rule 13.01:
13.01(1)Each party to a case has a duty to the court and to each other party to give full and frank disclosure of all information relevant to the case, in a timely manner. [emphases added]
A number of things about the Rule and the duty, clearly evident in the words highlighted, should immediately be noted. The sanctity of the duty is underlined by it being a duty owed to the Court as well as to the other party. Its breadth is emphasised by the requirement for disclosure to be both frank and “full” and by reason of its applicability to all information relevant to the case. Expedition is emphasised. In addition to those matters, it is very important to emphasise that the duty relates to disclosure of “information”; it is not a duty confined to the production of documents.
The duty can be cumbersome. That is all the more so where significant business interests are involved. So be it. The duty does not alter as a result. But, factors such as those may alter the means by which the duty is complied with. It is open to a party to suggest (and if necessary, make application) so as to provide sensible and cost-effective means of complying with the duty. Proportionality is central to the purposes of the Rules as is made explicit within them.
But, and this is important, it is never open to a party to either ignore the duty and its consequent responsibilities, nor to obfuscate, dissemble or to comply less then comprehensively and conscientiously with the duty (and the Rules about it more generally).
It is important to emphasise specifically in this case that the husband could have been in no doubt about his duty. He was at all times represented by a solicitor and, more particularly, the husband was present in court when the importance of the duty and his obligations pursuant to it were each emphasised by me in interlocutory proceedings.
Having said all of those things, it must also be noted that the duty is not without boundaries. Leaving aside issues of privilege and the like, the boundaries of the duty are marked out by the central underlying criteria of relevance, a concept illuminated by, and circumscribed by, the issues joined between the parties the subject of the litigation.
Clarifying the boundaries of relevance can create difficulties in a court without pleadings and, moreover, a court without pleadings which forestalls the filing of sworn material until shortly prior to the final hearing. While it is true that the court’s “first day process” has, as a central focus, the determination of the issues in dispute, there are cases, and this is one, where that process does not define with sufficient precision the particulars of a claim (as that expression is generally understood in civil litigation) so as to provide a sufficiently solid foundation upon which to come to firm interlocutory determinations about issues such as disclosure.
Further, in certain cases – and, again, this is one – the issues just referred to can be seen to be exacerbated by what might be described as a tension inherent in the Rules.
Rule 1.04, sets out the main purpose of the Rules and underlines the necessity to resolve cases “in a just and timely manner” and at a cost “that is reasonable in the circumstances”. In that vein, the court is required to apply the Rules (Rule 1.07) in a way that, among other things, is proportionate to the issues in a case, their complexity and the likely cost of the case.
That underlying theme is also emphasised by the requirement for parties to comply with the pre-action procedures which, in turn, underline the “principle of proportionality and the need to control costs because it is unacceptable for the costs of any case to be disproportionate to the financial value of the subject matter of the dispute”.
Those obligations co-exist with the central underlying obligation to make full and frank disclosure as earlier outlined. Issues in respect of disclosure are frequently sought to be resolved in interlocutory proceedings. Very frequently, the court is not (and cannot be) fully cognisant of the issues in a way which would be apparent with pleadings and proper particulars.
An example of the problems that can be created is evident here. A request for information and documents so that one party might compile what is, in effect, an audit can be seen, at first blush, to be a request for irrelevant information. An “audit” might, in the usual course, be opposed not only by reasons of proportionality, but by reason of the fact that the s 79 enquiry is broad-based, and mathematical precision has been eschewed (an approach “unambiguously endorsed” by the High Court - see Norbis v Norbis (1986) 161 CLR 513). In addition to those matters, a claim for “add backs” should, as a matter of principle, be seen to be “exceptional” (see eg C v C [1998] FamCA 143 and the discussion below).
Equally, however, in circumstances where, exceptionally, a claim for add back might legitimately be made, production of information and documents relevant to that issue might properly be required as relevant.
The course of interlocutory proceedings in this case reflects that discussion. The wife initially sought that the husband provide, by affidavit, a list of all farm-related expenses. That course was opposed. In an effort to meet the obligations of proportionality and to better identify the issues in dispute, the court ultimately ordered that the wife prepare summaries of expenses to which the husband was ordered to respond.
The husband sought to deal with that order by providing calculations of his expenditure done by his accountant Mr NH. That produced significant conflict between the parties that, despite attempts to have experts confer and the like, had not been resolved by the commencement of the trial.
Indeed, it was only resolved ultimately toward the end of trial, but, even then, not without a time and costs imperative intervening. Toward the conclusion of the trial, it became apparent that the two accountants were unlikely to reach agreement without further time being accorded to the process of discussion between them. Sensibly, the parties and their legal advisors conferred with each of those accountants and ultimately, on 13 July 2010, a document was tendered jointly (marked as Exhibit J1) in which the parties agreed that:
1.That the Notional Adjustment for Farm Expenditure by the Husband, will be taken as $4,728,354.00 and this will be included in the summary of property, resources and liabilities to be annexed to the written submissions of Senior Counsel for the wife.
That figure, then, became the “top line” figure used to found the “Notional Adjustment” contained in Exhibit E earlier quoted.
The Parties’ Evidence and Credibility
The parties each assert that the credibility of the other is tainted. Specific aspects of the evidence (or lack of evidence) are addressed in that respect. Some preliminary observations should first be made.
During the course of her oral evidence, the wife gave evidence which I consider to be particularly telling in the context under discussion. The wife painted a picture of her intended future with the husband that involved a very comfortable post-retirement lifestyle together, centring around a home and, in particular, what might be described as luxury boats. Unfortunately for the wife, that picture was not, it seems plain, shared by the husband. However, the husband, as I find, did not disabuse the wife of that picture, nor indicate to her in any meaningful way that his post-retirement picture was a very different one.
In my view, what emerges clearly from the evidence, is that the husband envisaged a post-retirement lifestyle that centred around a firmly established passion for trout fishing (fly fishing) and, in pursuit of that passion, a rural lifestyle based around Z in Northern New South Wales - a lifestyle that might be seen to be associated with his passion.
It also seems abundantly clear that the husband saw he and the wife leading markedly separate lives post-retirement and, probably, a formal separation. For example, he asserts that from, it seems, as early as about the mid-1990s, the relationship was what might be described as a relationship of convenience, with the parties already, by that stage, leading somewhat separate lives with several separations. For her part, the wife asserts that any such picture of their relationship is false. She says that until separation in mid-2006, the relationship was an essentially harmonious one.
My strong suspicion is that the difference in the parties’ accounts is more attributable to differences in perceptions and expectations, than it is to an attempt by either party to obfuscate or present a false picture.
Objective evidence – essentially unchallenged – can be seen to support that assertion. For example, it seems to me plain that the husband’s pursuit of leisure activities (and specifically fly-fishing and its attendant components) might be seen by him as him pursuing a separate “agenda” within the relationship to that of the wife, yet, at the same time, it is common ground that the parties went on a substantial overseas holiday together to Europe and Dubai in December 2005, only some six months or so prior to their final separation.
The activities of the husband might, from the wife’s point of view, be seen to be the pursuit by the husband of his own interests in the context of a long relationship, whilst at the same time, allowing the parties together to pursue a joint project such as the overseas trip just referred to. I strongly suspect that, if the wife thought that the parties were moving steadily apart, she sought to deny it to herself, and, in that, she was bolstered by both the husband’s participation in joint activities and the ostensible and outward signs of a relationship. If (as seems apparent from his evidence) the husband considered that the parties had a very different relationship to that described and embraced by the wife (whether, as he asserts, from the mid 90s or, in fact, later) it was not, in my judgment, a view of the relationship that he shared with the wife either by words or actions.
Secondly, it seems to me plain from the evidence, that the husband and the wife each pursued their separate business activities independent of the other. That is to say, during the relationship the husband took little interest in the wife’s business activities – at least in the sense of seeking knowledge about the financial components of the business – and, so too the wife insofar as the husband’s business is concerned.
In that commercial context, it seems to me that, again, there was a significant degree of “separateness” about the way the parties conducted those respective enterprises. I find that the wife knew little about the husband’s business pre-separation, and, in turn, the husband knew little about the wife’s business. Equally, I find that, prior to these proceedings, neither sought to obtain information or knowledge about the other’s business activities.
I find that the husband bought the first two of three blocks comprising the Z farm without the wife’s knowledge. So much, I think, the husband, ultimately effectively conceded (although I took him to deny any pejorative use of the words “secret” or “secretive”). I find that, contrary to his evidence, he made no real attempt to tell the wife of the purchases or the details surrounding them. Nor did he seek to make the wife aware of the nature or amount of any expenditure in respect of the properties.
I do not, however, necessarily ascribe any particular or sinister motive to that, save that, in my view, it is a manifestation of a view of the relationship he had, which he did not seek to share with the wife, and a manifestation of the separateness of the parties’ commercial lives.
The Cheque Butt
Considerable reliance is, understandably, placed upon the husband’s admission that he altered a photocopy of a cheque butt for $12,000. The photocopied cheque butt was provided to the wife during what I find to be a generally recalcitrant process of disclosure and production of documents by the husband.
It is contended on behalf of the husband that, despite this admission in respect of the cheque butt, that it “relat[ed] to an expenditure that was partially in relation to farm expenses and partially to private expense” and that, in terms of his credit, it can effectively be disregarded because “he did not attempt to tamper with the original document” because “it is difficult to discern what financial or other advantage he might have expected to, or could ever have gained by this subterfuge, other than the satisfaction of spreading a little confusion in the ranks of the wife’s legal team”.
The explanation offered by the husband in that respect is plainly unsatisfactory. In my view, it ignores two important matters.
First, it ignores the fact that the admitted alteration of the cheque butt occurred for the specific purpose of presenting an inaccurate picture, not only to his former wife of 30 years, but to a person with whom he was involved in litigation. It also, as a result, presents an inaccurate position to the court. The submission on behalf of the husband ignores, in my view, the earlier-discussed centrally important role of proper (i.e. “frank”) disclosure in litigation in this court.
Secondly, the argument ignores the fact – considered by me to be extremely important – that, in interlocutory proceedings before me, the husband sought to limit disclosure to no earlier than June 2006, particularly with respect to the relevant bank account. The husband’s Disclosure Undertaking is dated 2 March 2009 (Exhibit W5). The falsified copy of the cheque butt was made a relatively short time after he signed that Undertaking on 2 March 2009.
On the same day as that undertaking was signed by the husband, his solicitor advised the court (it must be presumed on instructions) that there were “no cheque butts”. That was said in response to a formal request by the wife for the production of cheque butts and other documents dating back to January 2004. The solicitor said, on the husband’s instructions and on his behalf, “It’s been a matter of close discussion and investigation with my client. He says there aren’t cheque butts”.
That statement is manifestly false. Not only were there cheque butts, but, in respect of the cheque butts disclosed, one was intentionally altered by the husband. In a later affidavit, the husband says that he ought to have made clear that “most (not all) transactions were by electronic means”. This is an unsatisfactory “explanation”.
Understandably enough, the husband’s conduct in falsifying a copy of a cheque butt was the subject of extensive cross-examination. The husband’s explanation was that he was “annoyed with the wife and her solicitors and “did it to get up their noses”. He said that this purpose was effected because he had previously disclosed to them a copy of the unaltered cheque butt. In fact, this explanation was also manifestly false; he had not done so.
The cheque butt was, in fact, in part-payment of services provided to the husband by a prostitute. Whilst one might, perhaps, have thought that this might have provided a motive for the husband’s conduct, it was not a motive asserted by him.
The falsified copy of the cheque butt can be seen to form the foundation of an ultimate assertion on behalf of the wife that the financial records produced by the husband to the businesses’ accountant (Mr NH), and the expenditure recorded within them, cannot be relied upon by the court as accurate. It is argued that support is given to that central proposition by reference to matters contained in the evidence that are somewhat floridly described in written submission on behalf of the wife, as “habitual lies” of the husband.
It is accepted by the husband that he has informed his business associates and others that he had been in the army and had been shot. This is, as he accepted in the witness box, false; he has never been in the army. It is also accepted by the husband, that he informed the Z Shire Council, (the local authority responsible for the farm properties) that he was a “qualified engineering surveyor (army trained)”. Each component of the statement is false. Similarly, he has denied assertions by the wife, based on investigations carried out by her, that he had used prostitutes. Again, that denial is, as the husband now admits, plainly false.
A rhetorical question is posed in the written submissions of the wife:
It would be naive in the extreme for the wife to believe that she has uncovered all of the husband’s “scull-duggery” and we do question how it could possibly be that the husband expended so much on the farms, and so little remains to be seen… has the balance been lost or is it that the $3m or thereabouts that we seek to add back been secretly tucked away by the husband? He will refute this and say “look at the documents” but he has demonstrated how easy it is for him to falsify documents and even if we checked all of the 10,000 copy documents with the originals, the truth may not be revealed. How easy would it be to “launder” funds – pay $55,000 to the earth-moving contractor and get in return $50,000 in cash – there are all sorts of devices available to those who want to cheat, and the husband has demonstrated he is one of those.
It is asserted generally on behalf of the husband that “nothing in the husband’s behaviour in [the contexts just described] indicates a propensity to lie in order to obtain a financial advantage”. But, lies are made no less lies merely because no direct link or causative connection can necessarily be found between the lie (or the combination of lies) and a financial (or, indeed, other) result. Indirect benefit can sometimes be harder to find, but no less valuable to the liar.
So, too, the submission again ignores, in my view, the seriousness of the fact that at least one falsity was perpetrated within the context of litigation.
The matters referred to on behalf of the wife are, in my view, sufficient to give rise to significant concerns about the credibility of the husband generally. I have sought, in particular, to underscore what I consider to be the profound importance of falsifying a document which is given, not only to a party in litigation, but to a former marriage partner of some 32 years. So too, the specific matters earlier referred to can give rise, in my view, to a finding that, where the husband considers truth to be inconvenient, it can be ignored.
However, speculation does not take the place of findings based upon fact. A general concern about credibility does not necessarily give rise to a finding impugning documents forming part of a commercial enterprise. The husband’s business has been for some time overseen by an accountant whose credibility was never questioned - and who, in my view, was a truthful, disinterested witness. Of course it is true that transactions might occur in the manner submitted by Mr Kirk, but the suspicions of trained people with integrity might be seen to be raised and no such general proposition of the type earlier referred to was put to Mr NH, nor does the evidence suggest a basis for any such specific assertion.
The falsification of the copy cheque butt occurs in circumstances (albeit, in my view, immoral and reprehensible circumstances) that reveal it as the only document relating to financial activities that is demonstrated to be false. It relates to the payment to a prostitute and the original, unaltered, document had been disclosed and was not falsified. A finding that money has been “secretly tucked away” or that there is further or systematic “skull-duggery” or that funds have been “laundered” involves a series of very serious allegations, including, in some cases, an allegation of criminal behaviour. The relevant standard of proof that would be required to make findings of that type must be borne in mind.
I am not prepared to conclude, on the evidence before me, that findings should be made as contended by senior counsel for the wife that the husband has engaged generally in behaviour of that type.
But, I do propose to treat with very considerable circumspection, assertions by the husband which are unsupported by other evidence.
The wife, too, is asserted to lack credibility by reference to specific aspects of her evidence. It is submitted, on the husband’s behalf, that the wife “clearly is prepared to lie to obtain a financial advantage” and, in that asserted respect, her conduct is sought to be distinguished from that of the husband. Specific reference is made to a document which became Exhibit H6. It is asserted that the document evidences the wife making a false representation in circumstances where she knew it to be false, and where it was relied upon by her to gain financial advantage, “or to the detriment of the person providing the advantage or both”.
Exhibit H6 is a letter on the letterhead of the wife’s business (S Business) addressed to a tour company, which asserts that both the husband and wife are “employees of [S Business]”. Those statements were made in order to obtain a discount in respect of certain services (I gather a wholesale price by reason of the wife “being in the industry”). The statements are untrue; the husband is not an employee of S Business and, apparently, has never been.
Similarly, it is submitted that, in listing the husband’s “leisure expenditure” forming the foundation for a submission that such expenditure should be added back as “waste”, the wife has been “careless with the truth and with concepts of basic fairness”. An example is given of her including in the Schedule as a claimed add back the deposit of $9,000 paid to the stakeholder for the purchase of the husband’s unit at X “in circumstances where a cursory examination of documents in her possession would have disclosed the true nature of that payment, is either, at best, grossly negligent, at worst mischievous, and disingenuous”.
Written submissions on behalf of the husband go on to suggest that “the court could properly infer that she would seek to gain a financial advantage through an add back which was demonstrably incorrect, in the hope that her deception might not be discovered” and that “the same observation applies to her concession that in the leisure schedules, she added back every restaurant expense incurred by the husband from 1 January 2005 to 31 May 2009 and every identified expenditure in relation to alcohol over that entire period”.
The expenditure just referred to is included in what, in effect, amounts to an “ex post facto audit” by the wife of historical expenditure. Such a process is fraught with difficulty. Indeed, in the vast majority of cases, it is to be avoided for all of the reasons identified by earlier authorities, reference to which will shortly be made. Issues such as those asserted here by the husband as central to the wife’s credibility will almost always intrude into a process of that type. It is but one of the reasons that the approach is, generally speaking, to be avoided and, indeed, why add backs are “the exception and not the rule”. These issues will be addressed below when considering the so-called “leisure expenditure” claim by the wife.
The statement contained in Exhibit H6 is, it seems, made by a person within in an industry designed to obtain a discount which she herself would be entitled to but which (inferentially) was not available to a non-employee of the wife’s business. It is false.
A lie is a lie and moral judgments may be made about the making of it. But, the issue for this court is, as it seems to me, the extent to which a lie might be directly related to a finding about a fact, or about credibility generally. In that respect, the nature or extent of untruth is a relevant matter.
I consider the false assertions by the husband about military service or engineering/surveying qualifications say as much about his personality or sense of self worth as they do about his general integrity. So, too, whatever the morality of it, the apparent obtaining of a wholesale price from a person already within an industry pales significantly by comparison to falsifying a document the existence of which had been denied to a court.
I reject the submissions just referred to as indicative of either general dishonestly, or disingenuousness, on the part of the wife. I similarly reject the ultimate conclusion urged on behalf of the husband that “where there is a conflict between the evidence of the husband and the wife in relation to financial matters, the wife’s evidence could not be accept unless independently corroborated by unimpeachable evidence”.
In the witness box, the wife struck me as an essentially honest witness, and I am not, generally speaking, disinclined to believe her evidence. So, too, I was at pains to observe the husband while he was giving evidence. For the reasons given earlier, the husband’s specified conduct in and about the conduct of this litigation cause me to regard his evidence with considerable circumspection, but I did not form an adverse impression of him as a witness under cross-examination. I am satisfied that I should not reject the totality of his evidence in respect of each issue; I do not draw what I consider to be the long bow urged upon me by counsel for the wife.
“Notional Adjustments” and “Add backs” - Principles
The assertion by the wife that more than $4 million should be added to the “pool” of property is in respect of property (in one form or another) that no longer exists. The inclusion of something that does not exist would appear to run contrary to the terms of the Act; the s79 remedy lies (if at all) in respect of “the property of the parties or either of them”. Yet, binding authority exists for the proposition that dissipated property may be included notionally in the “pool” available for division in certain circumstances.
The wife places reliance upon a number of earlier decisions of the Court (for example Townsend &Townsend (1995) FLC 92-569 in respect of what might be described as a “premature distribution of property”; Kowaliw & Kowaliw (1981) FLC 91-092 in respect of what might conveniently be described as “waste” and Chorn & Hopkins (2004) FLC 93-204 in respect of the circumstances in which paid or pending legal fees are, or are not, added back to the pool of assets).
It is, necessary, then, to examine the principles which underlie the circumstances in which property which does not exist as at the date of trial might nevertheless be included (notionally) as part of the property to be divided between the parties.
Mr Hamwood, who appears with Mr Balzamo for the husband, contends, in written submissions, that the husband “respectfully adopts the analysis and observations of [me] as to the nature and limitations in relation to add backs that is contained in the unreported decision of Kouper v Kouper (No. 3) [2009] FamCA 1080, at paragraphs 91-113 inclusive of that case”. Mr Kirk SC, counsel for the wife, also refers in his written submissions to that decision, and in particular to five questions outlined at paragraph 108 of that judgment.
Those questions, and the principles discussed more generally in that case, constitute a respectful attempt by me to crystallize principles emerging from a number of earlier decisions of the Full Court which bind me. I make it clear that I am, in this case, relying upon the principles as understood by me set out at those paragraphs (together with paragraph 90).
Given the specific reliance placed upon it by Mr Kirk, it is probably appropriate to quote here paragraph 108 of that judgment:
108.Whilst, clearly enough, the authorities make it plain that the manner in which any dissipation of funds should be dealt with is a matter for the trial judge’s discretion, and accepting that the discretion ought not, of course, be fettered, it nevertheless seems to me that (leaving aside the issue of paid legal fees) the authorities indicate that the issue can, conveniently, be approached by reference to five questions:
(a) Is it contended that property (including money), that would otherwise be available for distribution between the parties if a s 79 order is made, has been dissipated with a consequential loss to the property otherwise potentially divisible between the parties at the date of trial?;
(b) If so, is it alleged that the dissipation of property was in respect of things other than what, in the particular circumstances of this particular marriage, can be classified as “reasonable living expenses”?;
(c) If it is asserted that any loss to the divisible property results from dissipation of property other than in respect of such expenses, why is it asserted that the result should be a sharing of that loss by the parties other than equally?
(d) If it is contended that this be the result, why should there be an add back (which brings to account, dollar for dollar, such past expenditure in current dollars) as distinct, for example, from there being an adjustment being made pursuant to s 75(2)(o)?; and
(e) How should either any “add back”, or adjustment pursuant to s 75(2)(o), be quantified?
In the context of the arguments of the parties later to be referred to, it is also important, I think, to include the following paragraphs of what was said in that earlier case as they are important to the ultimate findings to be made here:
109.It will be seen that, excluded from that dissection, is a reference to any such losses being taken up in the assessment of contributions. The concept of “negative contributions” has effectively been eschewed by an early Full Court (and, generally, by the court since):-
In our view, there is no room for such a consideration in para (a), (b) or (c) of section 79(4). It would be relevant in this context for the Court to take into account that the burden of contribution of one party was increased because the other party failed to made (sic) such contribution as was reasonably expected of him or her…
(Antmann and Antmann (1980) FLC 90-908 at 75,744)
110.Despite the reference to “contributions” in the passage just quoted, the same Full Court went on to say (ibid), “The fact that a party has committed “waste” of the matrimonial assets may be a relevant fact or circumstance under para (o) of s 75(2) in an appropriate case”. As has been seen, that statement finds reflection, nearly twenty years later, in the judgment of a different Full Court in Browne v Green.
111.Reference to those earlier authorities reveals that the answer to the third of the questions just outlined [at par 108] might be, “because the party’s expenditure was ‘reckless’ or ‘wanton’ or ‘negligent’ or ‘wasteful’”.
112.Those categories are, of course, convenient descriptors of circumstances in which justice and equity might demand an “add back”, but the consistent theme of the authorities is to the effect that it is the subsequent question to which attention must be directed – by reference to the particular circumstances of the particular marriage - rather than an examination of whether particular conduct might be classified in one manner or another.
113.Put another way, the task is not to examine conduct for the purposes of fitting it within a particular description, or to reward the prudent and punish the imprudent. Rather, the task is to examine and make findings about the particular circumstances surrounding expenditure and to determine, within that context, the manner in which overall justice and equity indicates the diminution in the pool ought be treated.
Further, for the purposes of the current case, it is also important to include some additional statements made in that case which were not identified by either counsel but which, in my view, are also very important for the ultimate decision here:
115.Nevertheless, the potential for significant injustice remains where a sum, particularly a large sum … is added back in the manner contended for.
…
121.A distinction can, in my view, be drawn readily between, on the one hand, cases where a party has, through control of monies or assets to which the party has an entitlement, derived for him or herself a benefit (even a temporary “benefit” – for example where monies are wasted on gambling) which results in a diminution in the divisible pool and, on the other hand, a case where that sole control has led to investments which have proved to be unsuccessful and to the benefit of neither party.
122.The latter situation admits, in my view, of more circumspection about a finding that a party has, to use the words of the former Chief Justice in Townsend, “distribute[d] to himself an asset in which the wife had a legitimate interest”.In that respect, the Full Court in Browne v Green observed:
52 …[the trial judge’s] reasons for this conclusion [that the husband should bear solely the losses in the investment] were that the husband was the initiator of, and had control of, the project. However, we do not consider that these facts of initiation and control of a particular venture could, at least on their own, warrant a departure from the guideline that economic losses, as well as economic gains, incurred in a marriage should, as a general rule, be shared…
53 …There can be little doubt that, had the [investment] succeeded, the wife would have sought to share in the fruits of that success and there would seem to be no reason why she would not have been entitled to do so. It is this last-mentioned consideration, being that the parties generally expect to share the economic profits of a marriage, which, in our view, requires that there should be good and substantial reason for departing from the principle that where there are economic losses incurred in a marriage, those losses should be shared, absent any negligence, recklessness or deliberate dissipation of assets by one party….
…
124.The investment in [the relevant business] was, like many business ventures, speculative. It involved risk. There is no evidence before me of any business plans, budgetary predictions, assessment of the market and the like at the commencement of that, ultimately, very successful, enterprise. The husband seeks, in effect, to make precisely this point by urging that the monies emanating from the sale of his interest in T Business was spent in pursuit of other entrepreneurial activities, and otherwise expended legitimately by him, in pursuit of economic advantage from which, ultimately, he contends, it was intended the wife (and their child) would benefit and in which they would ultimately share.
125.The wife counters with assertions that his conduct can be properly described as “reckless” or “wanton” or “negligent” by reason of the failure to take the sorts of steps that a reasonably prudent person would take in seeking to properly assess the risks associated with the expenditure of any monies. The wife was, it is said, effectively at his economic mercy.
…
128.In my view, many of the investments [made by the husband] might be seen as markedly imprudent, particularly where prudence could have seen a very significant capital sum cautiously invested for the benefit of the (admittedly separated) parties and, in particular, their child.
129.But, given that the task is to assess justice and equity – as distinct from performing a tracing or accounting or mathematical exercise – it is important, in my view, to place the investments and expenditure into a context.
The Value of the Trust
There is no issue in these proceedings that the property within this trust can be treated as property of the husband which can be made subject to s 79 orders; at issue is the value of that property.
Three experts gave separate opinions as to the valuation of the trust. In essence, what was being valued was the husband’s substantial business. It is a business with a head office and eight branches throughout Queensland. All of the valuing experts were accountants. Mr TS was the court-appointed single expert. Mr NC was the wife’s valuer and Mr PB the husband’s. Leave was given for the parties to rely upon reports from each of the latter two accountants. Each prepared more than one report and gave oral evidence.
Mr NC prepared on behalf of the wife a “critique” of the reports of each of Mr TS (Exhibit W1) and Mr PB (Exhibit W2). Mr TS responded to Exhibit W1 in a further report shortly prior to the commencement of the trial on 26 May, 2010.
The valuation of the Trust as at the date of trial ultimately asserted by each of the valuers differed significantly. There are also differences between earlier values adopted by each of Mr PB and Mr TS and those relied upon by each of those two experts at the date of trial.
The respective valuations are summarised as follows:
Mr PB
Mr TS
Mr NC
25.06.08
$4,173,010
21.10.09
$337,994
21.10.09
$1,060,879
28.01.10
$2,111,272
25.05.10 $413,595
(mid-point of his range)
Mr PB’s Valuation
Mr PB’s first valuation was based on an assessment of future maintainable earnings (with some normalisations) which were, in turn, based on the then 2010 budget forecasts with respect to the branches within the Hackshaw group. In his second report (Exhibit H12), Mr PB explains that an alternative calculation has been performed:
… on the basis that branches are either wound up in an orderly manner (loss making) or continue as a going concern (profitable) with a reduced overhead calculation. An orderly breakup valuation methodology would result in a gross value, prior to the adjustments noted below, for the Trust of $377,936 to $449,253.
Neither Mr TS nor Mr NC adopt the latter approach. In his first valuation, Mr PB capitalised future earnings in the case of profitable branches and capitalised future projected losses in the case of non-profitable branches. Again, that was not an approach of either of the other two valuers.
In the second report, Mr PB’s value is “a combination of net asset value and ongoing concern value, depending on which provided the greater amount”. In other words, the assumption in the second report is that “… the [hypothetical purchaser] would seek to retain the profit-making branches and get rid of the loss-making branches”. Mr PB conceded that if that assumption had founded his first report he “would have achieved a much higher valuation than [he] did achieve”. The second methodology was adopted, Mr PB agreed, because “…the business is not going as well as [he] had anticipated”.
A net effect of the different approaches, as Mr PB agreed, is that a business which is now performing worse (as he perceives it) than when his original valuation was prepared is worth, on his valuation, more than when it was more profitable. I was not convinced by Mr PB’s explanation with why that should be so.
Further, Mr PB has used the budget forecast as the basis for arriving at a figure for future earnings. Shortly prior to trial, Mr PB was given updated actual figures but admitted that he “… didn’t do a great deal [with them]. I didn’t do any real revision. I took [the business’s accountant] Mr [NH’s] [budget forecast] figures on face value”.
In his original report, Mr PB said of future maintainable earnings that:
5.7My estimate of the future for maintainable earnings is based on the forecast earnings of [the Hackshaw Group] for the year ended 30 June 2010 as provided by the company.
5.8I have adopted the future maintainable earnings for the year ended 30 June 2010 to reflect the effect of restructuring changes to personnel undertaken during FY2009.
5.9In arriving at FME and to ensure that it is a reasonable reflection of the underlying earnings power of each business, I have considered the following:
(a)the historical operation and financial performance for the period from FY2007 to FY2009;
(b)the operational and financial performance of each business compared to its competitors;
(c)the nature and quantum of any adjustments to normalised profits…;
(d)the forecast operational and financial performance of each [branch of the] business for the period for FY2010;
(e)the outlook for Australian economy and the relevant industry effecting [the Hackshaw Group]; and
(f)the risk profile of [the Hackshaw Group] including specific company strengths, risks, opportunities and threats.
At 3.8 of that report, Mr PB says:
Total revenue has decreased 48.2% from FY2008 to FY2009. During FY2009, [the Hackshaw Group] lost Bankwest as a panel client and in August 2009 [it] lost National Australia Bank.
Whilst, as I have indicated, Mr PB makes reference to a comparison between forecast earnings and the previous performance of the business, no attempt has been made, as I see it, to place the forecast/s (even, for the moment, assuming their accuracy) in the context of those earlier figures, or to place those figures within the business’s historical [ie pre-2007] earnings. Moreover, as the passage from Mr PB’s evidence just referred to reveals, the forecasts used were not compared to actual figures, nor an assessment made of whether any variations ought be made to the assumptions underpinning the valuations.
In respect of the second valuation, I am not persuaded that the basis for it adopted by Mr PB can be safely relied upon. In simple terms, I am not persuaded that the hypothetical purchaser would approach the task of determining a fair purchase price to pay for this business by adopting the methodology employed by Mr PB.
Within his report, Mr PB also refers to home-loan approval figures and says that “the number of monthly home-loan approvals in Queensland increased for the tenth straight month in June 2009 to a seasonally adjusted 14,015”. He goes on to say (at para 2.15) that, “as interest rates increase and the first-home-buyers grant is reduced, it is expect that Queensland will see a decline in the number of home-loan approvals going forward”.
Mr PB also refers to the potential impact of competition, referring in particular to “property valuers facing increased competition from lower-cost models such as […] computer prepared researched/generated reports provided for a fee, starting at $45”, and postulates an increase in the number of automated reports in Australia. He concludes, “[a]s at the valuation date, industry drivers indicate that the industry is facing downward pressure in revenues from a forecast climb in the number of home-loan approvals, [automated reports] and a limited supply of qualified [personnel].”
As will emerge, these factors described by Mr PB also play a significant part in the analyses conducted by each of Mr TS and Mr NC.
The Debate between Mr TS and Mr NC
The differences between Mr TS and Mr NC can be explained by differences in the premises to which a common methodology (future maintainable earnings for the Hackshaw group as a whole), and similar capitalisation rates, are applied.
Mr Kirk SC submits in respect of the valuations of Mr TS and Mr NC that:
… the capitalisation rate difference [45% Mr NC and 50% Mr TS] is insignificant save that it is part of the dramatic change by Mr [TS] from future maintainable earnings of $2,112,578 [in June 2008] to achieve a value of $4,173,010. His current position … is future maintainable earnings of a meagre $400,000 with a cap rate of 50% [producing a present value of $1,060,879] …
The essential differences between Mr NC and Mr TS can, I think, be illustrated by reference to the following passages from the evidence. First Mr Hamwood had this exchange with Mr NC:
MR HAMWOOD: … So, really, I mean the fundamental difference between your valuation, Mr [TS’s] valuation, Mr [PB’s] valuation, is that you say that the downturn that the [Hackshaw] business is currently suffering is really in the nature of a temporary setback. Is that your evidence - - - That’s correct. It’s part of a cycle, yes.
And, later:
…So, in essence you don’t accept the rationale that Mr [TS] puts out in his valuation, and Mr [PB] also adopts, for explaining the decrease in business available to this particular firm; is that correct? - - - I don’t accept it, no. …
It was then said to Mr NC:
… see Mr [PB] and Mr [TS] were both quite specific that there has been a shift in the manner in which … services are marketed in this economy. There has been a concentration of lenders back into the big four [banks]. There is a computerisation of [services]. There has been a shift in how the services are provided in that the banks now outsource to entities, like […] who have their own [personnel] on the panel?
The thrust of Mr NC’s evidence is that he does not accept that these factors will impact significantly upon profit into the future and, thus, the valuation of the Hackshaw business.
Mr NC arrived at his figure for the future maintainable earnings of this business by reference to a “cycle” of activity and “ups and downs” in revenue and profitability which, he asserted, were present in the industry generally, and specifically in this particular business. By reference to that cycle, he weighted the earnings of the business so as to provide what he asserts to be a more accurate picture of the business’s future maintainable earnings.
An essential difference between that approach and the approach of Mr TS (whose approach is shared, in that respect, with Mr PB) can be seen in this exchange with Mr TS:
MR HAMWOOD: Mr [TS], is it fair to say that as between you and Mr [PB], there is a high degree of correspondence as to how you approach the valuation task? … You both adopted budgeted figures? - - - Yes, … we did use budgeted figures, yes, on an earnings basis, we adopted budgeting figures – each of us.
Yes, and you adopted those budgeted figures because you took the view that the environment in which this business had been continuing to operate had changed so significantly that the previous years figures gave you really no assistance in determining the likely future earning capacity. That’s essentially it? - - - Yes, and the future maintainable earnings is what I was – had in my mind I needed to do and I felt that the results for the prior years had – because of events that have happened, are no longer relevant.
The written submissions on behalf of the husband seek to, as it were, synthesize the valuations of Messrs TS and PB. It is true, as submitted, that each relies upon current figures and that each put aside earlier, much more profitable, figures for the business. The ultimate difference in final valuation figures arrived at by Mr PB and Mr TS is also, it is said, explained by “… the difference in their treatment of inter-entity loans and liabilities …”.
But, by reason of the matters earlier mentioned, I feel significantly less comfortable in relying upon the valuation of Mr PB. In addition, I accept the submission made on behalf of the wife in respect of Mr PB’s valuation that it contains the three errors referred to in the written submissions of Mr Kirk.
As has been observed, Mr TS and Mr NC have used the same underlying methodology and a similar capitalisation rate. But, the basis for their calculation of future maintainable earnings differs significantly. As has been seen, at the core of that difference is a central disputed proposition: the significant downturn in revenues and profits after the 2008 financial year is aberrant and the business will return to something like its past profitability as part of a cycle (Mr NC) versus the downfall being indicative of a significant (permanent) change in the business which is predictive of significantly lower future revenues and profitability (Mr TS).
Of this central contest, and the dilemma it poses for the court, Mr Kirk says in written submissions:
No only was this task confronting the accountant in assessing FMPs, but it is the underlying problem for your Honour to resolve. Crystal ball gazing is hardly a judicial pursuit, but it is difficult to design a more appropriate approach… in these uncertain times, all that can be “expected” is the “unexpected”.
Each of the experts conceded something similar in evidence – that is, the task here is made particularly difficult by reference to a number of factors that increase the usual difficulties and uncertainties in prediction associated with the central task of assessing future profits. The predictive task is to assess the value that is more consistent with doing justice and equity in the context of s 79 proceedings. I recognise the potential for injustice inherent in this difficult predictive task.
One such potential injustice is identified in an assertion in the written submissions on behalf of the wife:
When these proceedings are over, the husband will resume his role as “rainmaker” and the profitability will return to where it was for so many past years. That would grow the [Hackshaw] good-will from $136,000 currently assessed by Mr [TS], back to the $3.7 million assessed by him in 2008. That is a $3.6 million turnaround in respect of which the husband will take the lot.
But, of course, the potential for injustice exists also for the husband. If Mr TS (and Mr PB) is each correct about the future of the business, the significantly higher valuation posited by Mr NC, creates a significant potential for injustice to the husband.
I turn, then, to consider a number of factors which can be seen to inform the opinions of Mr TS and Mr NC and their respective ultimate assessment of future maintainable earnings. They include:
· the reliability of budget forecasts given by the company’s accountant, Mr NH;
· the impact of the Global Financial Crisis (“GFC”) and whether its effects are still being felt;
· the business’s operating environment – has it changed such that there will likely be an adverse impact on revenue/profits into the future;
· whether Gross Domestic Product (“GDP”) and housing finance statistics (among others), point to conclusions about future revenues for this business;
· the potential for growth in the use of computer-generated or “automatic” services;
· whether the coincidence of lack of revenue/profit with the breakdown of the marriage and this litigation is due, in significant part, to a lack of effort on the part of the husband (who describes himself as the “rainmaker” for the business);
The Husband’s Effort
It can be observed that there is a coincidence between a drop-off in revenue/profit and the breakdown of the marriage and the institution of these proceedings. But, there is also such a coincidence with the GFC. Each of the experts agree that the GFC impacted adversely; the disagreement is whether its impacts are still being felt. The husband was responsible for managing the business through that crisis, which also roughly coincided with this litigation.
The wife’s submissions, in this respect, rest essentially on the general assertion as to the adverse view that this court would take of the husband’s credit urged by the wife. I have referred to, and made findings about, this issue above.
It seems to me that a number of factors point away from a conclusion that lack of effort is productive of the downturn in the revenues/profit. They include:
· the Group is geographically diverse, and the figures from branch to branch are also diverse. The alleged decrease in effort does not produce a uniform fall in performance across the group;
· as the wife’s submission as to budget forecasts emphasise, in some cases, some branches have performed significantly better than the budget forecast;
· the drop offs in figures are produced, at least in part, at a time coinciding with the GFC which, all experts agree, impacted adversely on the business;
· there are inconsistencies in the performance of sources of work for the group (for example, reductions in work from Wizard Home Loans; Westpac and Rams, but a solid level of work from Bendigo Bank Commercial). The reduction in work is not “across the board”.
Looking at the evidence as a whole, I am not persuaded that I should make a finding that a lack of effort by the husband, coincidental with this litigation, is a basis for the fall-off in revenue and profit.
It follows equally that I am not persuaded that, upon the conclusion of these proceedings and the carrying out of the orders made, there will be the application by the husband of “pre-litigation effort” different to that employed by him post-2008, or that any such different effort by “the rainmaker” will produce significantly increased revenue or profitability.
In the witness box Mr TS accepted that there exists the possibility that, as counsel for the wife put it, “if the rainmaker stops making rain, at least for a couple of years until these proceedings are out of the way…” there could be a return to the pre-2008 levels of revenue and profitability. But, in response, Mr TS said “I don’t know that it effects my assessment of value, because, as I said earlier on, if the business if not there, it’s not there”. I prefer Mr TS’s view.
Statistics, “GFC”, automated services and a Changing Business Environment?
Mr NC said in evidence that, at the time of his report, he thought that the GFC was over. Mr TS disagreed that the impact of the GFC had ended. I doubt whether, in any event, expert accountants have the expertise to opine upon macro-economic matters such as these. (Indeed it might be asked does anyone truly have the expertise to offer such an opinion?)
Before referring to the evidence in that respect, it is necessary to refer to a matter raised in cross-examination by Mr Kirk. Counsel put to Mr TS that a weighted average (as contended for by Mr NC) was something referred to in the “valuation texts”. Specific reference was made to “Lonergan” (a reference to that author’s work, The Valuation of Businesses, Shares and Other Equity, Business and Professional Publishing). I propose to refer briefly to that text. In doing so, I make it clear that I am very aware of what was said by the Full Court in Patsalou v Patsalou (1985) 18 FamLR 426.)
Lonergan says (3rd Edition, page 7):
Owing to the complexities and interrelationships of the meaning of “value”, the purpose of a valuation and the methodologies used, and the information available, only rarely will two different valuers value the same business, or shares in the same company, at precisely the same amount. This subjective component, although mitigated by professional judgment and experience, can never be eliminated. [emphasis added]
and at page 35:
… This process of determining the FMP of a business is clearly not a “mechanical” exercise and requires a high level of commercial judgment.
Macro-economic expertise aside, I accept that the “commercial judgment” which might be brought to bear by an expert accountant can be referenced to general and specific economic conditions. I consider, though, that in approaching the essentially subjective task of ascertaining a reliable figure for future maintainable earnings, the following evidence of Mr TS is important:
MR KIRK: Well, the impact of the GFC in Australia has been minimal compared to the impact it’s had elsewhere, for many other countries? --- You mistake where I’m coming from. I’m saying that what you need to do is to not look at the global or the Australia-wide overall impact of the GFC. It’s – perhaps to put it in another way, to me, it’s like – I had a client several years ago, with an apple orchard near Stanthorpe, surrounded by big apple orchards. There was a tornado went straight through almost along his boundary – just wiped out his apple crop. Everyone – all his people both sides – had a boomer year. He went broke. Now, what I’m saying, is there was a selectively – it impacted very differently, and it impacted very badly on the property industry, initially – on the property financing industry, initially, because of what – of the root causes of the prices. And that was a lack – a complete lack of finance available for residential mortgage-backed securities. Stopped – stopped dead. And that caused – and that was the major source of income – source of finance for most of the non-bank financial institutions and indeed, it was a major source of finance for the major banks, and hence the need to shore up the major banks with the government guarantee. And that’s why RAMS itself, had to sell itself at a bargain basement price.
MR KIRK: Well, do you really know that, or is that just guess? --- That’s a guess. That’s newspaper talk, yes.
Thank you. Can I just ask you --- ? --- Let me finish.
I thought you had. Sorry? --- No. No.
Hoping you had? --- No. So the very basis of your questions, to my mind, are not relevant. You’re focussing on – and as I’ve said about Mr [NC’s] report – the very basis of where he’s focussing is not relevant, because he hasn’t addressed what’s happened to this business and what’s happened to this industry and why it’s happened to the industry [emphasis added to accord with oral emphasis].
The focus given by Mr TS to specificity, can be seen reflected in Lonergan at page 33:
First, what are FMP? Next year’s profits, current year’s profits, prior year’s profits, or an average of the last few years? While all of the above answers have been used as a means of estimating FMP in practice, the technically correct answer is that level of profits which (on average) the business can expect to maintain in real terms, notwithstanding the vagaries of the economic cycle.
This amount is commonly (but not always correctly) assessed as being either adjusted current year profits, or adjusted next year profits. These figures are commonly used as proxies for FMP because of the inherent subjectivity in determining what level of profits are maintainable and because of the difficulty and inherent subjectivity in assessing FMP in comparable sales (where generally much less information about the composition of the reported profits, and about future prospects, are available).
Allowance must, of course, be made for the effect of inflation on prior years’ profits. The selection of an appropriate maintainable profits figure is a matter of judgment depending on the circumstances. For example, a company may be in a position of short-term decline as a result of industry pressures or internal management problems. In such a situation, it is important to adopt a longer term view so as to discount any short-term irregularities in the company’s profitability.
Too many FMP-based valuations are flawed in that they automatically employ historical profits as a proxy for FMP without undertaking sufficient critical examination of past performance and likely future events. An understanding of the future of a business is essential for an accurate valuation, yet is omitted when historical profits are used in isolation. [emphases added in each case]
I don’t suggest that either Mr TS or Mr NC have conducted their respective valuations in ignorance of the matters there discussed, or, indeed, have failed to consider any or all of those matters. The passage highlights, though, to my mind at least, the importance of making a judgment about factors specific to the particular business that is being valued, and the need to carefully assess factors specific to that specific business within, of course, the wider economic and commercial circumstances in which the business finds itself.
A factor in the broader economic environment identified as potentially referrable to this specific business, is the assertion by the husband, adopted, in effect, by Mr TS, that external economic circumstances, including the GFC, have caused a concentration in lending with the “big 4 banks” with a concomitant reduction in the sources of work for this business.
In that respect, it is observed (and it appears uncontroversial) that the vast bulk of this business’s work is in residential financial services. It was put to Mr NC, but not accepted by him, that:
Mr [PB] and Mr [TS] were both quite specific that there has been a shift in the manner in which [financial] services are marketed in this economy. There has been a concentration of lenders back in to the big 4. There is a computerisation of valuation. There has been a shift in how the services are provided, in that the banks now outsource […].
The issue derives importance because Mr TS places this different “operating environment” at the centre of his opinion upon which his earnings assessment is based. He says: “in the current case, it’s clear that the operating environment in which the business operates has changed so much that past results will bear no relationship whatsoever to the future”. That opinion is central to the adoption by Mr TS in his second report of very recent earnings as a basis upon which to predict future earnings. He says “the only likely guide to the future is the current year operating budget/results”.
Mr NC says that Mr TS “… doesn’t explain why that environment has changed dramatically, because I know that the [particular] industry has not changed materially”. He goes on to say that the only change that he can see is that which is explained by “the cyclical part and some effect of the GFC”.
In his report Mr NC refers to the increase in the share value of a large financial services business called KE Business. When asked whether the comparison “offers the court some assistance as to what should be happening with [Hackshaw]”, Mr NC responded “that [it] should help the court in showing what the only publicly-available information one has, of a firm which is in the [financial services] business and [if] nothing else, how they have coped with it during the six-months when the GFC was on, and the last six months after the GFC”. As a result, Mr NC says, the comparison with KE Business is “a useful comparison to show trends”.
It was put to Mr NC, that 75% of KE’s business is non-residential (in sharp distinction to the Hackshaw Group); that the Hackshaw Group had a shrinking state footprint, while KE Business had a national footprint; and that of the 25% of KE’s services that are residential, 90% of that 25% is sourced from the “Big 4” banks. In response to the latter, Mr NC said that he couldn’t see the relevance because “if 90% of [the] [KE] [business] is sourced from the “Big 4” banks, it gives [Hackshaw] the opportunity to source from all the other banks that [KE] is not sourcing from”. I don’t share Mr NC’s view of the irrelevance of this factor.
While Mr NC says that, in writing a “critique” of Mr TS’s report (the “critique” became Exhibit W2) he used KE Business to “illuminate trends”, it seems to me that he seeks to draw a more direct comparison with KE Business in that report than what he was prepared to concede in the witness box. For example, in his report, Mr NC says:
I am somewhat perplexed why a firm which has been in existence since 1990 and which claims to be the largest independent [financial services] firm in Queensland serving the housing finance market and the resumption market, has not been able to recover from the GFC and matched to some extent the results of [KE Business].
I am not satisfied that KE Business provides a useful comparison with the Hackshaw business, insofar as it is used to support the contention that the downturn in the Hackshaw business is not specific to it. I consider that Mr NC uses KE Business in that way, despite down-playing that comparison in oral evidence.
I am not persuaded by Mr NC’s evidence that the impact of factors such as Hackshaw not being on any panel for the “Big 4” lenders; the increased trend in automated services and the outsourcing of work to other entities, are not (each and all) matters with the potential to impact upon this specific business in the way postulated by Mr TS.
The point is also made on behalf of the wife that explanations in reply to the wife’s summaries of expenditure provided in accordance with the earlier order made by me, were left, in significant part, to the witness box. The criticism is valid. The husband’s attitude was, in my view, arrogant and cavalier. He was, in effect, contemptuous of the wife’s process and plainly annoyed by it. Of course, his attitude appears to forget that the process was court ordered.
Arguments by the husband on this issue reflect, in part, arguments advanced on his behalf in relation to the farm expenditure, for example, that his expenditure was, in effect, an extension of lavish historical expenditure. It is submitted:
The husband’s application of the fund at his disposal was, as the wife implicitly conceived in, for example, pars 175-177 of her affidavit in chief, along the same lines as he had expended his income prior to separation. It cannot be plausibly asserted on behalf of the wife that whereas the husband was entitled to spend up to half a million dollars on his book collection prior to separation and presumably in the three years to separation, expenditures of this nature from an income stream he continued to receive, would no longer be acceptable post-separation.
Specifically in respect of leisure expenditure it is submitted on behalf of the husband that the wife does “not particularise or provide any basis for a determination by the court as to what is reasonable”. That is, as I take the submission, a figure is produced by the wife which is (plainly I would have thought) a level of expenditure extraordinary by “usual standards” (to the extent there is such a thing) but it is not referenced to what is a “usual” level of expenditure within this particular marriage and its particular circumstances. This particular marriage, certainly at least in its later years, was marked by very high income and a lavish lifestyle.
A further specific example is given in the written submissions on behalf of the husband:
The deficit in the wife’s argument in this regard is that first she did not particularise or provide any basis for the Court could (sic) determine the reasonableness of the calculation of what she said was a reasonable level of income or expenditure for the husband. Secondly, particularly in respect of her assertion that the husband’s expenditures on fishing trips were unreasonable, she did not provide any evidence in circumstances where the husband clearly engaged in fishing trips throughout 2005, to the knowledge of the wife, and the latter part of 2006, that this level of expenditure was inconsistent with his previous levels of expenditure. One would have thought that if there were any substance in this proposition, particularly in relation to the fishing trips, the evidence could have readily been obtainable.
It was the husband’s case that he engaged in fishing trips in precisely the same way since about 2000. The wife’s own case in her affidavit of evidence in chief at paragraphs 93.6 to 93.9, is that she herself organised fishing travel for the husband in 2003, 2004, 2005 and 2006. Her assertions that she believed or understood that a man who in 2005 had income of $2.2 million travelled to New Zealand and stayed in hostel accommodation are simply implausible.
It is not contended, as I understand it, that any assets were utilised in meeting the expenditure calculated. Secondly, it is not contended, as I understand it, including what was put and not put to the experts, that the revenues/profits of the husband’s business (and thus its value) were diminished by any such expenditure (noting that the experts all adjusted for an owner’s salary of $250,000 per annum). Thirdly, the wife was in receipt of her own income stream from her own business (albeit significantly less than the husband’s).
The picture that emerges from the evidence is of a husband earning significantly greater amounts than the wife. That income was spent lavishly and freely by the husband. The wife did not have access to it post-separation. The wife met her expenses from her own (significantly less) income. She also provided not insignificant sums to the parties’ 27 year old son who resides with her. Her lifestyle was comfortable, but her expenditure was very significantly more modest than that of the husband. The husband spent very large sums of money from a very large income, which such sums were spent on himself and were not available to the wife.
I am not convinced that the facts and circumstances here point, as a matter of principle, to the adding back of the funds identified by the wife. I repeat, in that respect, my reliance upon the principles collated in Kouper referred to earlier in these reasons.
Even if the expenditure might be classified as “wasteful” or “reckless” or “wanton”, there is, here, no identified impact upon “the property of the parties or either of them”. There has been no “premature distribution of property”. The money has not come from an identified fund which, it might be argued, would in all likelihood have been part of the property of the parties or either of them for division between them pursuant to s 79.
It is submitted by the husband:
47.It is argued in the wife’s case that [the husband’s] income stream ought in some way have been quarantined or preserved by the husband for the benefit of the wife or that post-separation he is in effect a trustee in respect of some notional entitlement of the wife to this income stream. There is, it is submitted, little support for this proposition in the authorities. To the contrary, provided that neither party is exposed to hardship by reason of want of support from the income stream of the other party, it is usual to permit each party to apply their post-separation income in the manner which they consider appropriate.
48.It is submitted on behalf of the husband that the case law does not support the proposition that there is a positive onus on either party to ensure that their post separation application of their income adheres to some abstract and unascertainable level of “reasonable living expenses”, in default of which they will be treated as trustees of the balance for themselves and the other party.
It might be thought that these submissions have echoes in statements by the Full Court in C v C [1998] FamCA 143 at par 46:
46.Whilst not seeking to place a fetter upon the exercise of discretion of a trial judge in individual cases, it seems to us that the concept of adding monies reasonably disposed of back into the pool ought to be the exception rather than the rule. The parties are entitled to reasonably conduct their affairs post-separation in a manner that is consistent with properly getting on with their lives. …
There is, though, a disquieting sense of unfairness that, toward the very end of, and after the end of, a very lengthy marriage partnership, one of the marriage partners should have access to, and use, very considerably more than the other. A strong feeling of unfairness should, as it seems to me, trouble a Court that is charged, relevantly, with doing justice and equity in the distribution of property at the end of a marriage – particularly a very long marriage.
Attempting to meet unfairness, or to do justice and equity, must also take account of the fact, as it seems to me, that (a) the statutory task is directed to the “property of the parties or either them” and “notional property” might seem somewhat antithetical and (b) if an “add back” is made (i.e. “notional property” is included in the pool) that, of itself, has the potential to create significant injustice to the party allotted the added back sum. (This issue is discussed in Kouper, earlier referred to).
In that respect Counsel of the husband places reliance upon a decision of the Full Court in Gollings v Scott [2007] FamCA 397. (Finn, Kay and Boland JJ, 17 October 2006). The Full Court said:
68.As a general rule, once the parties have separated, subject to obligations of maintenance and support, and subject to the type of considerations described in Kowaliw (1981) FLC 91-092 relating to waste, each party is entitled to get on with his or her life independent of the other. The husband would be free to go about spending the money he earned post-separation and the furtherance of his relationship with Ms Y if he chose to do so, providing that at the same time he properly met his obligations towards his wife and children for their due support. It would not normally be appropriate some years after separation, to require each of the parties to account for any monies they had spent post-separation, so as to determine whether or not that expenditure was reasonably necessary for their own self-support, and to the extent that it was not, to determine whether it would be proper to add it back into the pool of assets available for division between the parties…
69.The ultimate resolution in the manner in which the monies spent by the husband in furtherance of his relationship with Ms Y should be categorised in this case, is not without difficulty. It might well have been said by the trial judge as appropriate that some allowance be made in favour of the wife under s 75(2)(o) for the husband having effectively gifted $70,000 to Ms Y in the comparatively short period between separation and trial, particularly as this sum included the husband’s long service leave entitlement acquired during the marriage. But at the same time the magnitude of the gift needs to be viewed in light of the general economic circumstances of the parties, which included the husband earning between $700-$800,000 a year over that period and making generous provision for the wife and children from his income. The law imposed no further obligation upon him to continue to accumulate assets during that period, and he was in a sense free to do with his income as he pleased.
In this case, even if I was persuaded – which I am not – that the expenditure could be described as “waste” as that expression is used within the authorities, justice and equity is, in my judgment, not done by adding back this sum in the manner urged. I decline to add the figure to the property.
However, the reality of the parties respectively chosen post-separation lives, might well have ramifications for other aspects of the s 79 process, including, for example, post-separation contributions or s 79(4)(e), each of which topics will be addressed below.
Legal Fees
The Full Court in NHC & RCH (2004) FLC 93-204 held that the treatment of funds used to pay legal fees is, ultimately, a matter requiring the exercise of a trial Judge’s discretion. Suggesting principles that might affect the exercise of that discretion, the Full Court held, at pars 56-60:
56. 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.
57.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.
58.If funds used to pay legal fees had 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; … 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.
59.Outstanding legal fees themselves are generally not taken into account as a liability.
60.If in the exercise of discretion, it is determined that legal fees already paid should be taken into account as a notional asset, then normally any liability associated with the acquisition of the monies used to pay the legal fees should also be taken into account.
Included in the schedule earlier set out, at Item 38, is a liability being a line of credit for $273,293. The husband accepts that, of that borrowing, $193,866 has been applied by him to legal expenses. The husband concedes that the liability having been taken into account, there ought be an add back of that sum. At Item 43 (the second of the two) that sum is reflected in the right hand column.
It will be seen by reference to that item, that the wife alleges that an additional $318,590 ought also be added back by reason of her assertion that these are legal fees paid from funds that “existed at separation” which were such that “both parties can be seen as having an interest in them”.
As has been seen, it has been held that the amount might not be added back (consequent upon a decision about the justice and equity of the situation) if the legal fees had been “generated by a party post-separation from his or her own endeavours or received in his or her own right…funds generated from assets or businesses to which the other party has made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post-separation income or acquisitions”.
The second matter listed at Item 43 sees a disparity between the amount added back in respect of the wife’s legal fees. The notation at that item is inserted by counsel for the wife. It reflects the submission by her counsel at the later hearing at which oral submissions were received that, if the Court was against counsel’s primary submission that the $193,866 should not be included in the add back, then the $90,371 figure is said by the wife to come from post-separation savings and earnings by the wife and ought therefore be deducted from the add back.
The wife contends:-
The husband’s case is that he paid his legal expenses from his post-separation earnings, but if that was so, he should have to demonstrate that it came from what the experts have described as his “commercial salary of $250,000 per annum” and not that it came from the profits of the [Hackshaw] business, which had been built up during the course of the marriage. The husband alone took/applied the business profits and those are not “his” post-separation earnings. As we have demonstrated in section 4.6, the husband “consumed his earnings in his lifestyle activities”.
In respect of that submission, and in this context generally, I refer again to the decision in Gollings & Scott and, specifically, the extracts earlier quoted. Insofar as the submission might be seen to be of general application, it seems to me that where (as would appear to be the case here by reference to the profit and loss accounts of the business) the profits of the business have not been diminished directly by the business paying for, for example, the husband’s legal fees, the extent to which both the husband and the wife participate in the profits of the business is in fact being taken up by reason of the profits forming the basis of the value of it. That is, while the husband might be spending from the profits of the business, he is not spending them as his money because they remain the business’ profits and the potential to share in the profits (to the extent that they are represented in the business’s value) remains.
In this particular case, however, I consider the evidence less than satisfactory in terms of providing a firm foundation for the requisite findings necessary to found an ultimate decision whether to add back or not. Each of the parties had a business from which they derived income, and had, at least some, expenses met. Each of the businesses form part of a pool, such that the other party can share in each as an asset to the extent determined appropriate. Each of the parties have incurred significant liabilities to commercial lenders in respect of legal fees. The total amounts incurred are not markedly different. The liabilities in respect of them are included in the liabilities listed in the schedule.
Doing the best I can on the state of the evidence, it seems to me that the most just and equitable outcome here is to include (ie add back) the whole of the expenditure on legal fees incurred by each of the parties and to deduct all of the liabilities just referred to.
The Property of the Parties or Either of Them
The parties have each, without further reference in argument, adopted a “one pool” approach, by including the amount of superannuation interests with the property of the parties. In light of the nature, form and characteristics of the respective superannuation interests; the length of the parties’ relationship; and the contributions to superannuation made within it, I consider that approach appropriate and I adopt it. (See Hickey v Hickey and the Attorney General for Australia [2003] FLC 93-143.)
For ease of reference, the schedule of property and superannuation interests earlier set out has been condensed by incorporating into totals, the property, liabilities and superannuation interests agreed, and, separately, listing those items in respect of which findings have earlier been made.
The “property of the parties or either of them” within the meaning of s 79, together with their “superannuation interests” as defined (and the amount of those interests) is, as I find, as follows:
(a) Agreed property, superannuation and liabilities $
Real property 6,705,000
Business Interests (120,946)
Personal Property 297,335
Bank Accounts 9,101
Other Assets 88
Superannuation 1,273,721
Liabilities (2,824,238)
Agreed Net Total 5,340,061(b) Findings $
Business Interests:9. Hackshaw Family Trust 1,060,879
10. Hackshaw Properties Pty Ltd 371,379
Personal Property:
20. Diver’s Watches 6,350
Bank Accounts
31A. Husband’s Solicitors’ Trust Account (Ex J2) 40,576
Notional Adjustments
Wasted Farm Expenditure 0
Wasted Opportunity 043. Legal Fees of husband 512,456
Legal Fees of wife 432,46844. Extravagances of husband 0
TOTAL NET POOL $7,764,169
Contributions
Each of the parties contend that contributions to the date of separation should be assessed as equal. The concession, made in the context of the marriage partnership of over thirty years, is in my view consistent with the evidence and appropriate.
The husband contends that a number of matters ought see his post-separation contributions being assessed as greater than the wife’s. Those matters are summarised in the written submissions made on his behalf:
71.It is submitted there should be an adjustment in terms of contribution in favour of the husband by reason of his management of the parties’ business interests post-separation.
Those submissions refer to the “ongoing burden of the management of the [Hackshaw] business through some of the most difficult financial times in living memory” and refers to the fact that those contributions have been made in circumstances “where the breakdown of the marital relationship left him alienated from both of this children and where he has continually struggled with a substance abuse disorder”.
The written submission on behalf of the wife address the components of that submission (primarily by reference to the case outline document filed on behalf of the husband) and it is convenient to address the issue in the same manner.
The first is that the husband “has conserved the value of the parties’ assets by applying the proceeds of shares and convertible notes to the purchase of real-estate, thereby avoiding a potential loss of value of the shares and convertible notes”. The wife’s submission is, in essence, that, save for the Babcock and Brown investment, there is insufficient evidence to sustain that finding. I agree with that submission.
In respect of the submission that the husband “has maintained and increased the value of the parties’ equity by paying down non-deductible borrowings from the proceeds of asset sales” it is asserted that “the sale of an asset and the payout of borrowings with the net proceeds” does not “maintain and increase parties’ equity”. I agree with that submission.
In respect of the submission identified as “the husband maintained and improved the [Z farming] properties for the purpose of creating a viable cattle farming operation, and has applied thereto his post-separation income in a tax-effective manner” the wife’s submissions refer to the expenditure by the husband, asserted by them to be “waste” earlier referred to, and says that the submission that the income has been applied in a “tax-effective manner” must mean that the husband “wants credit for using up the farm tax losses”. In respect of the matter directly referred to in the ultimate written submissions made on behalf of the husband, the general submission contained in the written submissions on behalf of the wife is that:
In the almost four years since separation the husband has presided over a substantial reduction in the value of the property pool, and in particular, the [Hackshaw Group] business. The wife has continued to operate her [sales] agency, although her health has been impacted by the revelations of what the husband did during the latter years of co-habitation.
For the reasons earlier expanded upon, I do not, with respect, consider that it is correct that the evidence reveals “a substantial reduction in the value of the property pool” as submitted by counsel for the husband. That submission makes, as it seems to me, the assumptions I have earlier referred to which, as I have earlier held, are not open as inferences on the evidence before me.
It is certainly true to say that the Hackshaw business has reduced in value. However, I have made a specific finding that that is not due to any lack of effort in the post-separation period by the husband. Moreover, I have made a number of findings that factors external to the business (not the least of which is the GFC) have also impacted adversely on the valuation of this business.
In my view, there is no evidence before me to suggest that the extremely high levels of expenditure by the husband earlier referred to has diminished the value of the business or, indeed, the property pool.
In, what I take to be, in effect, an alternative submission, the wife contends that a different approach to the assessment of contributions ought be taken if the Court is “not persuaded to add back the farm and extravagance expenditure”. The submission is: “your Honour ought reduce the husband’s contribution weighting to take into account what he has done and such could not justify a 50/50 division of the pool when he has so significantly reduced [it] by his action”.
That submission is preceded by the statement that “… we are conscious that the Full Court has frowned on the use of the term ‘negative contribution’.” In Antmann and Antmann (1980) FLC 90-908, for example, the concept of “negative contributions” was specifically eschewed. While making that acknowledgment, it seems to me that counsel nevertheless, makes, by the submission just referred to, a submission for precisely that.
In Kennon v Kennon (1997) 22 FamLR 1 the Full Court, in again eschewing the notion of “negative contributions” spoke, instead, of one party’s contributions having been made “more onerous” (by, in that case, a course of violent conduct perpetrated by the husband – see in particular at 24.)
I reject the wife’s submissions framed in that way. They assert “negative contributions” by the husband, a concept not justified by authority. Further, if intended in “the sense expounded in Kennon,” I do not consider that there is evidence before me which justifies a finding of “more onerous” post-separation contributions by the wife.
It seems to me that each of the parties managed their respective business interests (in which, it might be noted as a result of the earlier concession and finding, the other party had a 50% interest) consistent with the roles that each of them adopted during the course of the relationship, including after its cessation. I consider that each party did so as best they were able in the very difficult environment which confronted all businesses for much of the relevant timeframe. That is, I find that each of the parties contributed to the best of their respective abilities “within their respective spheres”.
I consider, however, that a finding which is plainly open to me and should be made, is that the husband has spent extremely large sums of money, including during a time when the business was experiencing difficulty as a result of the factors to which I have earlier referred, in the post-separation period (as well as in the very late stages of the marriage, it might be added) from the monies available to him whether received by way of salary, trust distributions, dividends or the like. The husband had a capacity to access very significant sums of money and in fact did so. He did so to the exclusion of the wife over a period at the end of a very long marriage partnership and without, at first, knowledge by her of the use of those moneys and, in any event, knowledge by her of the extent of the expenditure.
It seems to me that “the justice of the case” requires those matters to be “taken into account” pursuant to s 75(2)(o).
I reject the husband’s assertions that contributions by him in the post-separation period (either as alleged or at all) call for recognition in his favour; I repeat, the parties each contributed to the best of their capacities within their respective spheres.
Conclusion as to Contributions
For the reasons earlier referred to, I consider that the contributions of each of the parties during the period from the commencement of their relationship to the date of trial, should be assessed as equal.
Section 79(4)(e) – The “Section 75(2) Factors”
The husband is currently aged 55, born in 1955. The wife is also aged 55 years, born in 1955. Each runs a successful business (albeit businesses that, historically, have produced significantly different levels of profit and income).
There is no evidence to suggest that either party is now, or likely to be in the future, incapable of carrying out remunerative employment. The husband expressed, in evidence, a desire to retire, but in my view, this does not affect his capacity to earn income in the context under consideration.
The “income, property and financial resources of each of the parties” ought be considered in light of the mooted division of property consequent upon an assessment of the contributions of each of the parties earlier referred to. Each will receive, as a result of an equal division, in excess of $3.5 million (noting that in respect of each party, that figure includes, substantial legal fees.
The valuation of the Hackshaw business reveals a common assumed “commercial salary” for the husband of $250,000 per year. The Financial Statement of the wife, filed at the commencement of 2010, reveals an income of just under $80,000 per year. The commercial salary adopted by each of the three valuers pertains in each of their most recent valuations. That is, it pertains notwithstanding the significant fall off in profits enjoyed by the business. The evidence reveals that, historically, the husband has had available to him sums significantly in excess of $250,000 (when reference is had to dividends, trust distributions and the like). Indeed, it appears to be conceded that at various times, the husband was effectively earning in excess of $1 million per year.
On the husband’s own evidence, within a reasonable timeframe (which, all else being equal, coincides with an age at which retirement might seriously be contemplated), the husband expects to earn from the farm properties about $400,000 per year. Thus, the husband himself postulates a significant prospect of him having a very substantial income stream (in the region of five times higher than the wife’s current income) at a time when age and desire might otherwise dictate cessation of his involvement in business interests and the potential for a consequent reduction in income.
So, too, the husband postulates, on his own evidence, the prospect of a continuation of the (already occurring) capital gains in respect of the value of the properties comprising the farms. On his case, he will solely retain the benefit of both the anticipated income stream and the further capital gains. Whilst, as I have earlier said, I do not consider that a mathematical computation ought apply in respect of this, or any other, component of the s 75(2) assessment (or, indeed to the s 75(2) adjustment as a whole).
I also consider very important the matter earlier referred to when discussing the valuation of the trust. Whilst I have ultimately relied upon the evidence of Mr TS in establishing a value for that business based on what I consider to be safer predictions about the future profitability of the business and the application of an appropriate capitalisation rate, I nevertheless consider that justice requires me to take into account the prospect which I do not regard as either fanciful or minimal (see Malec above) that the business’s future might be more profitable than that postulated by Mr TS.
Again, the role of this factor in any overall s 75(2) adjustment is not, in my view, capable of mathematical calculation, nor is it appropriate to “value” any such component of the s 75(2) process. However, I consider this aspect, too, highly significant in arriving at an overall adjustment.
Having identified each of those matters, justice and equity also make it necessary, however, to take into account the fact that the predictive nature of the assessment raises alternative possibilities (which I regard as less likely but also neither fanciful or improbable) that the husband’s current rosy picture of the future profitability of the farming enterprise (and, for that matter, it’s prospective capital gain) might not ever eventuate. So, too, Mr TS’s projection of future profits might be closer to correct than not. In addition, the ordinary contingencies impinge: the husband’s future health and continuing capacity to earn income; the wife’s similar capacity and future continued impacts from the GFC, to name but a few.
In my view, however, the matters earlier identified are integral to an ultimate conclusion that a substantial adjustment to the wife is called for pursuant to s 79(4)(e).
In assessing the quantum of any such adjustment, authority requires that I give consideration to the “real impact” of any such adjustment in dollar terms (eg In the Marriage of Clauson [1995] FLC 92-595 at 81,911).
Adjustments pursuant to this sub-section are traditionally expressed as a percentage. However, any such “adjustment” is productive of a disparity between the two parties. It is the latter which, in my view, gives a better understanding of the real impact of any such adjustment.
In my judgment, an adjustment in favour of the wife of 12.5% (that is to say a disparity between the parties of 25%), which equates to an adjustment of just under one million dollars and a disparity of about $1.94 million is, in my view, required in order to do justice and equity between the parties.
Just and Equitable – The So-Called “Fourth Step”
The mooted overall assessment, then, would see the wife receiving 62.5% of the parties’ property and superannuation interests, and the husband 37.5%. Those percentages equate to the wife receiving about $4.85 million and the husband about $2.91 million. Disparity between the overall ultimate entitlement of the parties is represented by 25% of the net pool, or, in dollar terms, about $1.94 million.
The written submissions on behalf of the wife suggest that there are but two contentious matters with respect to the orders which the wife is seeking, namely a superannuation split of all of the husband’s present superannuation entitlement and a transfer of the Y property. Submissions are made in respect of each.
However, the precise terms of the orders sought by the parties are, of course, dependent upon the entitlement which each of those submissions assert. The ultimate conclusion arrived at by me does not accord with either party’s submission in that respect. The result arrived at by me might well result in the need for financial re-arrangements and there may be the potential for those re-arrangements to occur in a tax-effective way for each of the parties.
I propose, as a result, to afford the parties (and their respective advisers) the opportunity to arrive at orders giving substance to the findings and result contained in these reasons.
I am aware that, if there is to be an appeal, it will need to be made against orders as distinct from reasons. I consider that, if there is to be an appeal, the parties should have the opportunity to do so as soon as possible, rather than waiting for formal orders to be made giving effect to the mechanics of the ultimate finding.
Accordingly, I propose to make orders giving effect to these reasons, but to not include the relevant transfers of property or other components of the order until such time as agreed minutes are received.
I record my apologies to the parties for the delay in delivering these reasons which I had hoped to have delivered before now.
I certify that the preceding three hundred and eighteen (318) paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Murphy delivered on 10 December 2010.
Associate:
Date: 10 December 2010
6
3
3