Henschel & Sartre (No 4)
[2024] FedCFamC1F 41
•6 February 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 1)
Henschel & Sartre (No 4) [2024] FedCFamC1F 41
File number(s): SYC 6123 of 2020 Judgment of: BERMAN J Date of judgment: 6 February 2024 Catchwords: FAMILY LAW – PROPERTY – Where the trial is part heard – Where the wife now seeks interim orders to update a business valuation prior to the recommencement of the trial – Consideration of whether the updated valuation should be as at 30 June 2023 or 30 December 2023 – Where the husband concedes the 30 June 2023 date – Consideration of AJO & GRO [2005] FLC 93-218 – Consideration of whether the single expert could undertake a report prior to the commencement of the trial – Orders. Legislation: Family Law Act 1975 (Cth) s 79. Cases cited: AJO & GRO (2005) FLC 93-218
Henschel & Sartre (No 3) [2023] FedCFamC1F 1081
Stanford v Stanford [2012] HCA52
Division: Division 1 First Instance Number of paragraphs: 62 Date of hearing: 31 January 2024 Place: Adelaide via MS Teams Counsel for the Applicant: Mr Karras Solicitor for the Applicant: Karras Partners Lawyers Counsel for the Respondent: Ms Gillies SC Solicitor for the Respondent: ATW Family Law ORDERS
SYC 6123 of 2020 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MS HENSCHEL
Applicant
AND: MR SARTRE
Respondent
ORDER MADE BY:
BERMAN J
DATE OF ORDER:
6 FEBRUARY 2024
THE COURT ORDERS THAT:
1.The parties instruct the single expert forensic accountant, Ms T to prepare a complete and formal valuation report in relation to the relevant entities comprising the “B Group” (as identified in her limited scope report dated 6 December 2023) as at 30 June 2023.
2.Within seven (7) days the husband provide to the wife’s solicitors and Ms T, profit and loss reports and management accounts for the B Group for the six (6) month period ending 31 December 2023.
3.If the single expert property valuer, Mr LL, considers he is able to do so, he be jointly instructed to express an expert opinion as to the fair market rental of the property known as H Street, Suburb J, New South Wales (“the Suburb J property”).
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 has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
Berman J
INTRODUCTION
Ms Henschel (“the wife”) and Mr Sartre (“the husband”) remain engaged in highly protracted litigation in respect of settlement of property. The proceedings commenced as a final hearing on 4 December 2023 however, as a result of the joint position of the parties that there were outstanding valuation issues which, unless resolved, would not enable the trial to proceed, the hearing was adjourned part-heard for ten days commencing 26 February 2024.
The opportunity given to the parties of a further ten days to complete the hearing is such that it was reasonable to assume they were keen to complete the final hearing and had a high level of confidence that outstanding valuation issues could be resolved or agreed.
Without attempting to minimise the complexity of the proceedings, the focus of valuation issues relate to the following assets:
(1)N Street, O Town, New South Wales (“the O Town property”);
(2)V Street, Suburb W (“the Suburb W property”);
(3)H Street, Suburb J (“the Suburb J property”); and
(4)The value of the financial interests of the parties in the following B Group entities:
(a)B Pty Ltd;
(b)B3 Pty Ltd;
(c)B2 Pty Ltd;
(d)B4 Pty Ltd;
(e)B7 Pty Ltd;
(f)B5 Pty Ltd; and
(g)Mr Sartre & Ms Henschel Family Trust (“the [S] & [H] Family Trust”).
By Application in a Proceeding sealed 9 January 2024, the wife seeks the following orders:
1.The single expert forensic accountant, [Ms T], is instructed by the Court to prepare a complete and formal valuation report in relation to the relevant entities as identified in her Limited Scope Report ([B Group]) dated 6 December 2023 as at 30 June 2023.
2.The single expert forensic accountant, [Ms T], is instructed by the Court to prepare a complete and formal valuation report in relation to the relevant entities as identified in her Limited Scope Report dated 6 December 2023 as at 31 December 2023.
3.The husband do all acts and things necessary to forthwith provide to [Ms T] all documents and information requested by her in furtherance of her formal valuation reports as at 30 June 2023 and 31 December 2023, including such information as identified in the letter forwarded by [Ms T] to Karras Partners Lawyers dated 18 December 2023.
4.The single expert property valuer, [Mr LL], be instructed by the Court to additionally express an expert opinion as to the fair market rental of the property known as [H Street], [Suburb J], as at the date of his updating report.
By Response to Application in a Proceeding sealed 29 January 2024, the husband opposes the orders sought by the wife.
It is appropriate to note that the order of 6 December 2023 contemplated the possibility that the parties may seek further interlocutory orders and accordingly, an order was made that any Application in a Proceeding was to be filed by no later than 19 December 2023 for hearing on 24 January 2024, with liberty to vacate.
The interim proceedings do not concern valuation issues in respect of the O Town and Suburb W properties.
Even though the husband’s position is to oppose the orders sought by the wife, it is now conceded that Ms T should prepare a formal valuation report as to the interests of the parties in the various entities in the B Group as at 30 June 2023 and, to the extent as may be required, the provision of a joint letter of instruction and further necessary documents as may be requested. There remains some uncertainty as to whether Ms T has sufficient time prior to the recommencement of the trial to complete the valuation task.
There still remains opposition by the husband to the balance of the wife’s Application in a Proceeding seeking a formal valuation as at 31 December 2023 and the production of documents necessary to enable that task to be completed.
WIFE’S APPLICATION IN A PROCEEDING
For the purposes of the trial that commenced on 4 December 2023, Ms T had not been able to prepare a formal valuation report in relation to the value of the B Group as at 30 June 2023 but rather she provided the parties with an indicative valuation report dated 6 December 2023 (“the limited scope report”).
The wife alleges that the husband has been recalcitrant in his preparedness to provide documents as sought by Ms T. As a result, Ms T only “had limited time and limited materials on which to form” an opinion and did not have the opportunity to “undertake all of the approaches, methods and procedures, including resource documents and additional information and explanations that are reasonable an informed third party would” need to discharge her professional obligation.[1]
[1] Ms T's Limited Scope Report dated 6 December 2023.
The husband denies that he has in any way been obstructive to the valuation process and contends that any delay in the presentation of necessary material to Ms T arises from the necessary documents either not being available or not being in a concluded form.
I am not in a position to determine if and where any difficulty lies particularly in circumstances where there is broad agreement that Ms T either has or will soon have all that is necessary for her to finalise a formal valuation report as at 30 June 2023. Whether that exercise can be achieved in a timely fashion such as to enable the retention of the trial date is yet to be determined and the parties are awaiting an advice from Ms T.
The limited scope report of 6 December 2023 provides a relevant foundation to the determination of the wife’s application for an extension of the valuation of B Group to 31 December 2023.
An important observation by Ms T is set out in the following paragraphs of the limited scope report:
5.2It is evident that the operations of the Business continue to be supported in FY2023 by the ‘satellite’ companies [B2 Pty Ltd], [B4 Pty Ltd] and [B7 Pty Ltd], with [B5 Pty Ltd] managing the construction of the [building] on the [Suburb J] Property.
5.3According to the documents provided, the Business operated by [B Group] and [B3 Pty Ltd] recorded a 16% increase in sales to customers, with combined revenue growing from $17.51 million to $20.32 million in FY2023 (refer Appendix 5.3). This revenue result was broadly equivalent to that achieved in FY2021 largely by [B Group] alone; [B3 Pty Ltd] has since grown to contribute 48% of revenue in FY2023.
5.4The gross profit margin (after direct costs) of [B Group] itself also improved in FY2023, from -3.0% to 13.5%. This indicates that the rate of rise in import costs and delays experienced in the supply-chain have abated somewhat since FY2022. At the same time, in FY2023, inflation and labour cost have remained high relative to prior years. In FY2022, government grants in relation to the Covid-19 pandemic ceased and so in FY2023, [B Group] has not had the benefit of such grants. In broad terms, in FY2023, [B Group] has been unable to restore the gross profit margin to that achieved in past years, which was regularly in the 25% to 28% range during the six years to 30 June 2021.
(Citations omitted)
In relation to B Group, Ms T considers the valuation approach and the adequacy of documents received for the purpose of the limited scope report and summarises the position in the following paragraphs:
5.14As I have not been provided with any profit or cash flow forecasts for the Business, I am unable to value it on the basis of the discounted cash flow methodology. Instead, I consider that it is still appropriate to value the Business at first instance having regard to the capitalisation of FME method.
5.15Having made the necessary adjustments to reported earnings that are detailed and explained in Appendix 5.3, the adjusted EBITDA of the Business in FY2022 and FY2023 is negative. On this basis, the capitalisation of FME method is also not appropriate to use to value the Business as at 30 June 2023.
5.16In my opinion it is still the case that, while the trading performance of the Business is improving, if it continues to trade in its present form and with the existing overhead structure, it is at risk of failure before the future earnings of the Business can be restored to pre-FY2022 levels on a maintainable/sustainable basis, if that can in fact be achieved.
(Citations omitted)
Ms T noted that in relation to B3 Pty Ltd, there was a 40 per cent increase in sales in FY2023 which represented sales revenue growing from $7.03 million to $9.83 million albeit with a gross profit margin decline from 5.8 per cent to 4 per cent.
Ms T was of the opinion that B2 Pty Ltd was not a trading entity and as such, a valuation should be conducted on the basis of net tangible assets. A significant consideration as to the value of B2 Pty Ltd focusses on the value of the Suburb J property which Ms T brought to account at $9.75 million noting that the property had been the subject of a devaluation from $13.44 million.
By letter dated 18 December 2023,[2] Ms T confirmed that she would be available to undertake a formal valuation report of B Group as at 30 June 2023 providing that she received the documents identified in (a) to (m) inclusive, providing that the documents were made available by no later than 26 January 2024. It is conceded that the deadline for the provision of documents to Ms T has now passed. Whether Ms T is able to complete the formal valuation of B Group as at 30 June 2023 awaits her further advice.
[2] Affidavit of Ms QQ dated 20 December 2023 at annexure “E”.
Ms T also seeks information for the rent paid by B Group in relation to its occupation of the Suburb J property. Ms T frames the request as follows:[3]
(i)The amount of rent that B Group would have paid in relation to the Suburb J Property in FY2022 had it paid rent at commercial rates during the period from when the business commenced operating from that site (in January 2022, as we understand it).
[3] Affidavit of Ms QQ dated 20 December 2023 at annexure “E”.
The issue of what might be considered as fair rent for the Suburb J property and the extent to which a “commercial” rate of rent as opposed to the rent currently being paid by B Group may have relevance to the valuation of the Suburb J property and therefore the interests of the parties in the B Group.
The importance of a fair market rental for Suburb J as identified by Ms T underpins the further orders sought by the wife namely, that Mr LL, property valuer, “additionally express an expert opinion as to the fair market rental of [Suburb J]”.
The husband argues that whilst documents are able to be provided to Ms T for the purposes of a formal valuation as at 30 June 2023, the further request by the wife for a raft of further documents including management accounts and draft annual accounts, which are necessary for Ms T to conclude a formal valuation as at 31 December 2023, is opposed.
Whilst noting that as at the date of the husband’s affidavit filed 29 January 2024, he was opposed to the wife’s application that Ms T value the B Group as at 30 June 2023 and 31 December 2023, the basis of the husband’s opposition has relevance.
The contention of the husband is that the accountant’s advice suggests that the management accounts from the internal accounting system are not reliable and before they could be used for any reasonable or proper purpose they would need to be reviewed, reconciled and finalised.
The husband sets out some of the reasons as to why the management accounts may not be reliable at paragraph 28 of his affidavit filed 29 January 2024.
A further aspect is the cost both of the further work to be undertaken by Ms T and the quote that he has been given by the accountants for the preparation of the documents as requested.
Simply put, the husband considers that he is not in a financial position to be able to pay or financially contribute to the cost of collating the required material and the additional costs as foreshadowed by Ms T.
The husband opines that a valuation as at 31 December 2023 would require a stocktake which is not ordinarily undertaken either on a monthly or half yearly basis.
The husband does not consider that the wife’s request for a formal valuation as at 31 December 2023 is either reasonable or indeed feasible. The documents sought would require a significant amount of additional work incurring unnecessary cost.
LEGAL PRINCIPLES
The parties seek orders pursuant to s 79 of the Family Law Act 1975 (Cth) (“the Act”). The Court is required to make such orders as are appropriate in respect of the property of the parties or either of them. In Stanford v Stanford (2012) FLC 93-518 the High Court found that a court may make an order that alters the interests of the parties to the marriage in that property.
It is self-evident that before orders can be made that alter the interests of parties in property, the interests must be identified.
AJO & GRO [2005] FLC 93-218 supports the proposition that the value to be brought to account on behalf of the parties is best to be considered as at the date of hearing or at some time reasonably proximate thereto. Each case may require separate consideration if circumstances exist that would suggest a reason for an earlier date to be considered but unusual.
It is a reasonable assessment of the wife’s application that she seeks to have the most contemporaneous valuation in respect of the separate interests of the parties as is reasonable in the circumstances.
The husband does not disagree with the proposition but rather contends that there is a limit to the valuation exercise which must be informed by cost in undertaking the valuation process and whether the exercise is warranted or even necessary.
As discussed, the husband agrees that there should be a formal valuation of B Group as at 30 June 2023 but that it is onerous both in terms of the effort that would need to be expended and the cost of same to artificially value the business at 31 December 2023.
It is a reality in an accounting sense that tax returns and financial statements are required in respect of each financial year and are not usually available or easily able to be brought into existence until the end of the relevant financial year. A further factor is that a valuation as at 31 December 2023 represents a snapshot in time and is inherently unreliable in that the following six months, up to 30 June 2024, may bring to account different trading factors than the period to 31 December 2023.
As such, the extent to which a court should require a valuation to be contemporaneous with the date of hearing is to be determined by a consideration of the justice of the case.
In relation to a company or business where the valuation exercise requires completed financial statements and tax returns, there will always be a lag between the completion of documents necessary for the previous financial year with uncertainty of what is yet to occur.
VALUATION APPROACH
Without being proscriptive of the valuation approach that may be adopted by Ms T in respect of future valuations, it is reasonable to find that Ms T first considered the capitalisation of Future Maintainable Earnings (“FME”) as a reasonable first methodology and if not appropriate in circumstances where the entity to be valued was not profitable, then the focus is upon an asset backing valuation.
It is a reasonable observation that the capitalisation of FME is widely used and involves the determination of market value by multiplying expected future maintainable after tax accounting profits by the price earning ratio.
The FME methodology requires a consideration of past trading and profitability in order to predict the future trading of the business and therefore ascribe a value.
It is assumed for the application of a FME valuation approach that the business will enjoy a steady growth in profitability consistent with an extended trading history.
It is a feature of this case that the husband considers B Group suffered badly during the Covid-19 period and is struggling to recover its profitability and therefore financial liability.
The wife is mistrustful of the husband and points to the significant growth in the business over the last financial year.
In summary, the wife considers that the profitability of B Group has been exponential and given such a significant increase in profit, it must result with either a return to profitability, and therefore likely to be reflected in an increase in value, or at the very least represents a good indicator as to future profitability.
It is for this reason that the wife seeks a formal valuation as at 31 December 2023. The wife speculates, and likely anticipates, that even the more limited period of six months trading will be highly relevant in Ms T observing a return to profitability and therefore increasing the value of the interests of the parties in the B Group.
The husband would argue that there has been a history of losses and poor trading, that a single year of profit or growth is not a reliable indicator of future profit and therefore reflected in an increased valuation in B Group and in any event, a FME valuation approach requires some level of certainty in terms of future profitability based upon a stable and steady history.
CONCLUSION
Whilst the parties have agreed that Ms T should complete a formal valuation as at 30 June 2023, I do not think it is reasonable nor even practicable for Ms T to undertake a formal valuation as at 31 December 2023. I consider that there is merit in the husband’s argument that the proposed further valuation is a snapshot in time and may produce an unfair or more likely, unreliable valuation outcome.
That does not mean that the trading period to 31 December 2023 is without utility or assistance.
The appropriate valuation approach to be adopted is likely to be informed by an assessment of current and future profitability as opposed to an asset backing valuation, I consider it reasonable that documents able to be readily available to the husband for the period to 31 December 2023 be provided to Ms T so that when she is called to give her evidence she can provide assistance to the Court as to the reliability of her valuation as at 30 June 2023.
Ms T sent a letter to the wife’s solicitors dated 13 October 2023 concerning a valuation of B Group. Whilst the focus of the letter relates to an indicative valuation as at FY2023 as opposed to a formal valuation, Ms T considers what would be required for an indicative valuation and sets out documents that would be of assistance to her as follows:[4]
2.In my experience, management accounts are often but not always available for medium sized business such as this; it depends upon the financial information that management considers essential for running their business on a day-to-day basis and how many people are involved in the executive/reporting functions.
In this case, in the absence of management accounts to 31 December 2022, I received monthly Profit & Loss Statements for [B Group], [B3 Pty Ltd], [B2 Pty Ltd], [B4 Pty Ltd] and [B7 Pty Ltd] for the nine months to 31 March 2023. These are more relevant for valuation purposes than management accounts for the six months to 31 December would have been because they are a better reflection of the potential results for the full fiscal year of FY2023.
[4] Husband's affidavit filed 29 January 2024 at Annexure “A”.
Accordingly, whilst inadequate, to enable Ms T to undertake a formal valuation of the B Group as at 31 December 2023, the provision of profit and loss statements and management accounts to 31 December 2023 would enable Ms T to be confident as to whether the valuation report as at 30 June 2023 is a reliable indicator of value for the purposes of the proceedings.
I propose to order that the husband provide to Ms T profit and loss statements and management accounts for the period ending 31 December 2023.
RENTAL FOR SUBURB J PROPERTY
Ms T has had regard to the Suburb J property and its value. It is a relevant consideration for the purposes of the valuation of the B Group either in respect of an FME valuation approach being adopted should Ms T form the view that there is a reliable level of profitability going into the future for the group or if not, then the Suburb J property would form a significant component of the assets of the B Group for the purposes of an asset backing valuation.
Ms T has sought information as to the likely commercial rent available for the property. Ms T has made the request not with the intention of conducting her own valuation of the real property but rather to assess the extent to which the rent paid by one entity comprising the B Group to the entity that holds the Suburb J property is commercial and therefore reasonable.
The arrangement in respect of the rental of the Suburb J property is not an arm’s length transaction. As such, the request by Ms T is reasonable and underpins the basis for the wife’s application seeking an order that Mr LL be instructed to express an expert opinion as to the fair market rental of the property.
As at the date of judgment 15 December 2023 in Henschel & Sartre(No 3) [2023] FedCFamC1F 1081, I found that in order to attempt to quell the controversy between the parties as to the value of the Suburb J property, taking into account uncertainty arising from the state of the construction, development and improvements to the factory premises, Mr LL should revisit the valuation of the Suburb J property.
As a result, Mr LL has reinspected the Suburb J property prior to the Christmas break and by letter to the parties’ solicitors dated 24 January 2024, he confirms that he has completed a full report to draft stage however, he seeks further instructions for the following reasons:[5]
I do however believe I need further instructions on a joint basis from yourselves, as building works are not complete, with several items of significant capital cost outstanding, and effectively are beyond the level of my professional expertise to determine as to costs to complete. The building is however occupied and operational, by the husband’s company. It would be my opinion that a final occupancy certificate recognising works complete to DA approval would not be obtainable. Thus I would have to suggest either I’m instructed to value the property on an “as if complete” basis, or alternatively a quantity surveyor or similarly qualified professional is instructed to provide an expert report as to the cost to complete, which I can then use in my valuation report.
My further opinion would be that in its current state of completion, the [Suburb J] property could not be offered for lease on typical commercial terms on the open market, and a likely tenant of a building of this size and nature, would be unlikely to accept the commercial risk of signing a lease over in its current state and with no final approval granted.
[5] Wife’s tender bundle, page 80.
Whilst I do not ignore the implications on the ability of the trial to remain as listed to commence on 26 February 2024, in circumstances where Mr LL may not be able to provide a satisfactory valuation of the Suburb J property which therefore may hinder the ability of Ms T to complete her valuation of the B Group, the only matter that I am required to consider is whether there should be an assessment of appropriate commercial rent applicable to the occupation of the Suburb J property.
To a significant degree, it is a matter for Mr LL. If following his inspection, notwithstanding that the building works have not been completed, Mr LL is able to provide an opinion as to a commercial rent, then it is appropriate that he should do so.
I make orders as appear at the commencement of these reasons.
I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Berman. Associate:
Dated: 6 February 2024
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