Heng & Xiang (No 2)
[2022] FedCFamC2F 589
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Heng & Xiang (No 2) [2022] FedCFamC2F 589
File number: DNC 412 of 2019 Judgment of: JUDGE YOUNG Date of judgment: 9 May 2022 Catchwords: FAMILY LAW - property - alteration of property interests - where contributions of the parties are relatively equal - where there are significant liabilities - where the husband used a line of credit to trade shares - where the husband did not consult the wife - where the wife asserts the trading was reckless - where the value of the shares rapidly decreased - where the shares were sold at a significant loss - whether the husband's conduct amounted to reckless conduct – Court satisfied the husband’s conduct amounted to reckless conduct - Court satisfied the husband should bear the share trading losses Legislation: Family Law Act 1975 (Cth) ss 90SM, 90SF
Work Health and Safety (National Uniform Legislation) Act 2011 (NT)
Cases cited: Kowaliw & Kowaliw (1981) FLC 91-092 Division: Division 2 Family Law Number of paragraphs: 32 Date of hearing: 3, 4 and 5 November 2021, 4 February 2022 Place: Darwin Counsel for the Applicant: Ms Giacomo Solicitor for the Applicant: Ms Czislowski of Ward Keller The Respondent: Appearing on his own behalf ORDERS
DNC 412 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: MS HENG
Applicant
AND: MR XIANG
Respondent
ORDER MADE BY:
JUDGE YOUNG
DATE OF ORDER:
9 MAY 2022
THE COURT ORDERS THAT:
1.The properties at B Street, Darwin and C Street, Suburb D are to be sold and, after discharge of liabilities, the net balance is to be paid to the applicant (hereafter the “wife”) and (in respect of the wife’s sister’s interest in C Street, Suburb D) to the wife’s sister.
2.The wife may choose the order, timing and manner of sale of those properties and is to ensure the payment of all liabilities in respect of the properties pending sale.
3.The sum presently held in the Ward Keller Trust Account is to be paid to the wife or at her direction.
4.The wife is to retain the any credit balance in the CBA offset account and the ANZ account.
5.The wife is to be responsible for the payment of the ANZ line of credit and to indemnify the respondent (hereafter “the husband”) against liability for it.
6.Each party it to retain the motor vehicles, tools, household contents and personal effects in their possession.
7.Each party is to retain their present superannuation interests without alteration.
8.In the event that the husband fails to execute any such document or do any such act or thing then required of him within 7 days after the documents have been provided to him for that purpose then upon proof by affidavit of such refusal or neglect the Registrar of the Federal Circuit and Family Court of Australia may sign on his behalf and execute all necessary documents or other instruments and do all such acts and things necessary to give effect to these terms of the orders.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under a pseudonym Heng & Xiang has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
JUDGE YOUNG:
This is an application for alteration of property interests pursuant to section 90SM of the Family Law Act 1975 (Cth) ("the Act"). The applicant (whom I will call “the wife”) is 41 years old. She is employed as a customer service officer in a business and earns about $69,000 a year. The respondent (whom I will call "the husband") is 42 years old and works as a salesperson. He earns about $112,000 a year.
The parties began living together in 1998 and separated in July 2019 after a somewhat more than 20 year relationship. The parties have two adult children. The children are largely independent, although the husband said that he subsidises their rent as they currently live with the paternal grandparents in Sydney.
The items in the property pool and their valuations were agreed. Consent orders provided for the sale of the real estate and other assets of the parties. Not all of those assets have been sold yet but the parties did not seek any adjournment. The parties are agreed on the value of their superannuation accumulation accounts.
During the relationship the parties accumulated a significant property portfolio made up largely, if not entirely, of residential property, mostly residential units. Unfortunately, for the parties the liabilities secured against the properties are almost equal to the combined value of the properties. The husband said that the parties had been "caught" by the downturn in the Darwin property market in recent years. Some of the properties have been sold pursuant to consent orders and other sales, particularly of the husband’s shares, have resulted in significant capital losses for the husband. He has accrued capital losses of $65,280 to offset against future GGT liability.
The wife adduced evidence that her capital gain (after 50% discount) for the 2021 financial year will be $158,474. Her evidence did not say what amount of tax was payable in respect of the capital gain but her overall tax assessment, including tax on her income, was $68,406. The accountant who gave evidence for the wife was not asked to identify the tax referable to the capital gain and I am forced to make the best estimate I can.
The wife's position was that all of the parties’ property after deduction of liabilities (which will be mainly cash after the sale of properties is complete) should be paid or transferred to her. The wife also sought a splitting order in her favour of 12.8% of the husband’s superannuation to compensate, if the superannuation were to be “equalised”, for the husband’s withdrawal of $20,000 after separation. The husband sought orders that after payment of all liabilities, the net proceeds of sale of the properties be divided equally between the parties and that they each retain their current superannuation interests which at trial were, in the case of the wife, $66,852 and, in the case of the husband, $62,342.
The justification alleged by the wife for her position was what she claimed the husband had “squandered” the assets of the parties through what was described as the husband's “financial misbehaviour”. This description arose from the husband's use of a $400,000 line of credit to purchase shares. The purchases were of a speculative nature in the sense that the shares were not “blue chip” and the husband seems to have been hoping for a reasonably rapid capital gain. Arguably, the investments, or some of them, merit the description incautious or even reckless. The primary example was said to be the husband’s purchase of shares in a business, Company E, for about $286,000 between 2017 and 2018. The value of the Company E shares fell in 2020 as a result, according to the husband, of the COVID-19 induced share market slump and at the time of the consent orders for sale of assets in 2020 the shares were worth about 50% of their purchase price. The husband said that the value of the shares was now four times their purchase price and, but for the orders of the court, the parties would have made a good profit.
Despite the husband’s assertion that the share trading losses were the result of unforeseen events or bad timing, I am satisfied that some of the husband’s share trading was imprudent and reckless. At the time of the parties’ separation the line of credit had been fully expended and interest was payable at variable rates but around $1,700 or $1,800 a month. The husband lost his job around the time of the separation and was thus unable to service the interest payable on the line of credit. After separation the husband made withdrawals from the joint account of about $35,000 to pay the interest, until the wife sought an order freezing accounts. The inability to meet the interest payments made the sale of shares necessary, resulting in a consent order for sale of shares and consequent losses. As mentioned, this coincided, according to the husband, with the COVID-19 induced share market fall in 2020. Regardless, the imprudence or recklessness of the husband was the extent of his use of the line of credit to purchase shares and his failure to foresee the risk of being compelled to sell the shares at a disadvantageous time if he were unable to pay the interest on the line of credit. Where the husband used only borrowed funds to purchase the shares and there was no buffer if he lost the ability to service the line of credit, whatever the state of the market, sale of the shares would become necessary. Disaster was foreseeable and losses predictable.
The losses through the husband’s share trading, according to his 2020 tax return, were $364,071. In addition, the wife said the sum of about $35,000 taken from the parties’ joint account to pay interest on the line of credit should be added to this direct trading loss, in total about $400,000. After the proceeds of sale of all shares and other assets were applied to it, the debt for the line of credit stood at about $83,000 at the time of trial.
The wife argued that this loss should be treated as waste, equal to or exceeding the value of the remaining property, meriting the transfer of all the parties remaining assets to her.
Credibility
The central credibility issue was the degree of knowledge of the wife of the husband's share trading. The wife said she had no knowledge that the husband had used the line of credit for speculative and/or ultimately bad share investments. The husband said that while he did not consult the wife about particular transactions or share purchases she was, in broad terms, aware that he invested in shares. The wife, in substance, argued that the husband’s share investments were not approved by her and constituted something in the nature of a conversion of joint assets to the husband's own use. It was submitted that, in those circumstances, the losses should be entirely borne by the husband.
I am satisfied that the husband was domineering in relation to financial decisions. I am satisfied he did not feel it necessary to take the wife into his confidence or consult her in relation to particular transactions. An example of particularly high-handed conduct on the part of the husband followed the receipt by the wife of about $142,000 in 2018 for the redemption of an entitlement to future weekly payments of compensation under the Work Health and Safety (National Uniform Legislation) Act 2011 (NT) following a work injury. The day after this money was received into the parties’ joint account the husband used the money to purchase a tranche of Company F shares. He conceded that he did not consult the wife. These shares appear to have been sold since but there is no evidence about the profit or loss on the transaction.
Another significant financial transaction that was the subject of evidence was the construction of a block of units at C Street, Suburb D. The husband owns a 50% interest in the property and the wife's sister the other 50%. The husband originally purchased the land with the wife’s brother intending to build units but the brother was unable to obtain finance so his interest was transferred to the wife’s sister. It is not in contention that the wife has an interest in the property with the husband, notwithstanding that her name does not appear on the title. Consent orders were made earlier in the proceedings that the wife’s sister was to receive the rents from the property and apply them to payment of the mortgage.
As part of the financing arrangements for the C Street, Suburb D property, the ANZ Bank extended, as has been mentioned, a line of credit of $400,000 to the husband, the wife and the wife's sister, apparently on a joint liability basis. According to the financing documents, the line of credit was extended for the purpose of real estate acquisitions. There is no evidence that the wife or the wife's sister used the line of credit in any way. However, the husband used the line of credit as, as noted, to purchase shares.
I find it implausible that the wife's sister would have consented to the use of the line of credit by the husband in the way he used it. It would be irrational for her to do so because she was, and is, exposed to a liability without any commensurate acquisition of an asset, as the shares were all acquired in the husband's own name. Nevertheless, she was aware of the line of credit and the husband’s ability to use it.
Similarly, I am satisfied that the wife, although not specifically aware of the husband's share acquisitions, was in a general sense aware that a line of credit was extended and that it was open to the husband to use it. Simple prudence would have suggested that she make enquiries about the use of the line of credit from time to time. However, as with her sister, she did not do so, presumably because she trusted the husband to invest appropriately.
I am satisfied that the wife, whatever her general understanding of the parties’ finances, was somewhat financially naïve and was content to leave many major, if not all, financial decisions to the husband. I suspect his domineering nature would not have welcomed any questioning by the wife of his financial decisions notwithstanding that, in retrospect, many of them appear to have been poor. Overall, I do not accept, as the husband asserts, that the wife had full or even significant knowledge of the husband's financial dealings, particularly his share acquisitions using the line of credit. I do not find him to be credible on that point. However, I generally found the husband to be reasonably reliable, although defensive and unresponsive at times, in his evidence. In relation to the wife I do not accept that she had no knowledge whatsoever of the husband's financial dealings. I consider the more likely explanation is that she was content to let the husband make decisions and did not question him. I accept that she had no specific knowledge of the husband's share trading and acquisitions. I accept that she did not realise the husband's acquisitions using the line of credit were speculative, imprudent and reckless. I am satisfied she was imprudent in failing to inquire.
Contributions
I find that, subject to the remarks I will make about the husband’s share trading, the contributions of the parties were approximately equal. The parties owned minimal assets at the beginning of the relationship. Both parties appear to have worked hard throughout the relationship and raised two children. I accept that after separation the wife played a significant role in preparing various properties for sale including cleaning, renovation and the like when the husband was unavailable after separation to assist because he was resident in Sydney. Ordinarily I would make a small adjustment in the wife's favour for this of about 2.5 % (a 5% differential) but having regard to my conclusion about contributions overall it is not necessary to make further reference to this.
Another factor relevant to contributions is the wife receipt of her workers’ compensation payment. There was no evidence about the components of this payment but the workers’ compensation scheme under the Work Health and Safety (National Uniform Legislation) Act 2011 (NT) is primarily an income maintenance scheme based on the worker’s pre-injury weekly income. Sometimes, a worker entitled to continuing weekly payments of compensation will redeem, by way of compromise, their estimated future entitlement to weekly payments as a discounted capital sum. This seems to have been the basis of the payment to the wife. Additionally, compensation for permanent incapacity or impairment is sometimes available under that Act but there is no evidence that this was a component of the payment to the wife in this case.
If the wife received compensation payments by way of income maintenance, whether weekly, in a lump sum for past loss of income or by redemption of a future entitlement to income this is conceptually much the same as receipt of income from work and would not, as such, merit treating the payment differently to such income. On the other hand, compensation or damages for pain and suffering, permanent loss of earning capacity or permanent impairment and similar are usually treated solely as the contribution of the injured party. There is no evidence that such compensation or damages have been paid to the wife.
In respect of the acquisition of non-superannuation assets the area of most dispute was the husband's share trading losses. The husband said he has a qualifications in finance. He would appear to be familiar with share trading, to some degree. He said he researched his share acquisitions before acquiring the shares. While there was no specific evidence of the make-up of the husband’s share portfolio many of the shares appeared to have been speculative or at least volatile. One example was the Company E shares mentioned above. Other acquisitions often seem to have been followed by sale shortly after, in the nature of, if not day trading, then short-term trading. There was little or no evidence of diversification of the share-holding or other prudent measures.
As noted, after the parties’ separation the husband moved to Sydney. It seems he was unemployed for a period and was unable to service the monthly interest charge in relation to the line of credit. It also appears there may have been shortfalls between rents received and mortgage payments in respect of some of the investment properties. Consequently, on 28 April 2020 orders were made by a Registrar by consent for the sale of assets, including the investment properties and shares, with a view to reducing liabilities. The sales coincided with the COVID-19 induced share market slump. The sale of the Company E shares, for example, resulted in a loss of more than $140,000 and overall the shares were sold at a loss. According to the husband’s capital gains tax (“CGT”) work sheet attached to his 2020 income tax return his share trading losses, which crystallised at the time of sale in April and May 2020, were $364,071. The surplus after sale of some of the parties’ other assets were applied to reduce the indebtedness for the line of credit but, as mentioned, some $83,000 remains owing on the line of credit.
While the parties may ultimately break-even on the sale of the investment properties or even make a small profit, losses and profits have varied across the portfolio. The wife has a potential CGT liability for the 2020/21 financial year. Her accountant gave evidence that she estimated the wife’s total tax liability, including income tax liability, as about $68,000 but she did not give evidence about the component representing CGT in respect of the investment properties. My estimate is that the CGT liability portion is about $50,000. In my view, this part of the wife’s estimated tax liability for capital gains on matrimonial assets should be seen as a matrimonial liability determining the net assets available for distribution.
Although the sale of some items of real estate may have involved a loss it was not suggested that these investments were reckless or that the losses were due to anything other than the vicissitudes of the market. As noted, the wife submitted the husband’s share trading losses should be treated differently.
The property pool
The parties agreed on a balance sheet and values[1]:
[1] Figures rounded to nearest dollar.
Assets Wife Husband Total 1.
B Street, Darwin $349,500 $349,500 $699,000 2.
50% interest C Street, Suburb D, NT $1,128,000 3.
Funds held in Ward Keller Trust Account from husband’s tax refund $43,166 4.
CBA Offset Account BSB … Account *…16 $5,402 $5,402 $10,804 5.
ANZ BSB … Account *…87 $189 $189 $378 6.
CBA BSB … Account *…87 $4,995 7.
Westpac BSB … Account *…85 $Unknown 8.
CBA BSB … Account *…13 $Unknown 9.
Company G Shares $Nominal 10.
Wife’s Motor Vehicle 1 $4,000 11.
Wife’s Motor Vehicle 2 $1,500 12.
Husband’s Motor Vehicle 3 $9,800 13.
Tools $2,000 14.
Household Contents $3,000 Assets subtotal $365,586 $1,541,057 $1,906,643 Liabilities 1.
Bank K BSB … Account *…77 $361,593 $361,593 $723,187 2.
CBA BSB … Account *…06 $413 $413 $826 3.
ANZ BSB … Account *…17 $0 $0 $0 4.
50% interest - ANZ BSB … Account *…11 $850,283 $850,283 5.
ANZ Line of Credit BSB … Account *…48 $41,902 $41,902 $83,804 6.
CBA Diamond Awards Credit Card *…80 $0 7.
Wife’s 2020/21 Tax Liability $68,407 Liabilities Subtotal $472,315 $1,254,191 $1,726,506 Net Assets ($106,729) $286,866 $180,137 Superannuation 1. Wife’s Super Fund H $66,852 2. Husband’s Super Fund J $62,342 Total superannuation $66,852 $62,342 $129,194 Financial resources 1. Husband’s accrued capital tax losses $65,280 Contributions
How to treat the husband’s share trading losses?
In Kowaliw & Kowaliw (1981) FLC 91-092 at 76,643 - 4 Baker J discussed the general principle relating to financial losses caused by the conduct of one of the parties. He said:
As a statement of general principle, I am firmly of the view that financial losses incurred by parties or either of them in the course of a marriage whether such losses result from the joint or several liability, should be shared by them (although not necessarily equally) except in the following circumstances:
a)where one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets; or
b)where one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimise their value.
The general principle has not changed.
I am satisfied the husband’s conduct and his use of the line of credit to purchase shares was speculative, imprudent and reckless. While I am satisfied the wife was not entirely blameless, because she imprudently failed to enquire, I am satisfied the overwhelming responsibility lies with the husband and he must bear the financial burden of the share trading losses. The net assets of the parties are worth about $180,000 according to the agreed balance sheet. But for the losses caused by the husband the net asset value of the parties would have been about $580,000. If, on the basis of an equal contribution, each party received 50% of the net asset value each would be entitled to about $290,000. As the value of the net assets remaining for distribution is less than the losses caused by the husband, I am satisfied that the wife should be seen as having made the overwhelming contribution, which expressed as a percentage I consider to be 100%, to the remaining assets, apart from his tools and household effects. However, I propose to order that she is to pay the liability for the ANZ Line of Credit, the debit balance of which is about $83,000, and indemnify the husband. The amount held in trust deriving from the husband’s tax refund is to be paid to the wife.
The parties have also modest accumulation superannuation accounts and, in my view, the account balances should be seen as reflecting their approximately equal contributions so that no contribution based adjustment is required.
Section 90SF(3)
Having regard to the matters discussed above I am not satisfied the matters under s 90SF(3) of the Family Law Act 1975 (Cth) are relevant and I do not propose to make any adjustment for them.
The orders will provide for the sale of the remaining properties at B Street and C Street, Suburb D and, after discharge of liabilities, the net balance will be paid to the wife. The wife may choose the order and timing of sale of those properties. The liabilities in respect of the B Street property are likely to exceed the sale proceeds but the proceeds of sale of C Street, Suburb D is likely to produce a surplus so some negotiation with the relevant institutions may be required. She is to retain any credit balance in the CBA offset account and the ANZ account. She is to be responsible for the payment of the line of credit and to indemnify the husband against liability for it.
Each party it to retain the motor vehicles in their possession.
I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Young. Associate:
Dated: 9 May 2022
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