Karllson and Karllson
[2014] FamCA 571
•25 July 2014
FAMILY COURT OF AUSTRALIA
| KARLLSON & KARLLSON | [2014] FamCA 571 |
| FAMILY LAW – PROPERTY – Interim Orders – Valuation – where wife sought orders that the parties jointly instruct an expert to value entities – husband’s degree of control over entities unclear – husband asserts only a bare legal right to due administration – issue to be determined at final hearing – valuations to be undertaken and the evidence dealt with at trial – orders made for valuation of entities. |
| Family Law Act 1975 (Cth) s 79, 75 |
| Dillon & Dillon [2012] FamCA 319 |
| APPLICANT: | Mr Karllson |
| RESPONDENT: | Ms Karllson |
| FILE NUMBER: | ADC | 43 | of | 2013 |
| DATE DELIVERED: | 25 July 2014 |
| PLACE DELIVERED: | Adelaide |
| PLACE HEARD: | Adelaide |
| JUDGMENT OF: | Dawe J |
| HEARING DATE: | 15 July 2014 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr Strum |
| SOLICITOR FOR THE APPLICANT: | Mills Oakley Lawyers |
| COUNSEL FOR THE RESPONDENT: | Ms Pyke QC |
| SOLICITOR FOR THE RESPONDENT: | Norman Waterhouse |
Orders
The parties jointly instruct Mr M to include assessment and values of the following in his valuation:
(a) The Karllson Trust and N Pty Ltd; and
(b) The husband’s interests in the Karllson Trust and N Pty Ltd
IT IS NOTED that publication of this judgment by this Court under the pseudonym Karllson & Karllson has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| FAMILY COURT OF AUSTRALIA AT ADELAIDE |
FILE NUMBER: ADC 43 of 2013
| Mr Karllson |
Applicant
And
| Ms Karllson |
Respondent
REASONS FOR JUDGMENT
Introduction
The parties have accumulated significant assets during the course of their marriage. Considerable effort and costs have been expounded by both parties in an attempt to identify and value those assets. This judgment concerns the wife’s attempts to include the Karllson Trust and N Pty Ltd within the valuation of entities collectively known as the Karllson Group.
Background
The husband is 51 years of age and is a self-employed property investor and developer. The wife is 47 years of age and while previously employed as a solicitor she now cares for the parties’ young children.
The parties commenced cohabitation in 2000 and married in 2006. There are two children of the marriage, namely B and C aged 7 and 3 years respectively.
The parties separated in September 2010. The husband left the former matrimonial home. Following separation the children remained in the primary care of the wife but have spent regular time with their father. The parenting arrangements have been the subject of extensive litigation not relevant for the purpose of this judgment.
On 4 January 2013 the wife filed an Initiating Application seeking final orders in respect of both parenting and financial matters. Specifically the wife sought a final property distribution such that the husband pay to the wife 35 per cent of the parties’ total net assets and financial resources in addition to periodic spousal maintenance. The wife subsequently filed an Amended Initiating Application on 6 May 2013 but made no amendments to the final property orders sought.
The husband filed a Response on 11 February 2013 seeking “such alteration of property interests as the Court deemed fit”. The husband also sought orders in relation to the children and other ancillary matters. The Amended Response filed 2 May 2013 did not alter the final property orders sought by the husband.
On 8 March 2013 I made orders by consent that the husband pay the wife $8000 each month during the period of adjournment and that he deposit $120 000 into the trust account of the wife’s solicitors. Consent Orders made on 6 May 2013 provided the husband would deposit an additional $250 000 into the trust account by way of partial property settlement intended to meet the wife’s existing and future legal fees, including the cost of single expert valuations.
On 4 June 2013 orders were made by Registrar Paxton requiring the parties to jointly instruct a valuer to undertake a valuation of all real estate in which the husband has an interest. A further order was made by Registrar Paxton requiring the parties to “confer in relation to the appointment of a single expert to value the husband’s interest in the Karllson Group”.
The parties jointly instructed Mr M in November 2013 to carry out the valuations.
When the matter next came before me on 14 February 2014 Consent Orders were made which included an order for disclosure. Specifically, the husband was to provide within 21 days the following documents:
2.4A copy of the Trust Deed and any amending Deed(s) for the [Karllson Trust] (and it is noted the husband has obtained the consent of his mother to provide these documents);
2.5The detailed movements in the loan accounts (copies of general ledger reports and journal entries) of the husband, his mother and the husband’s father’s estate in all entities in the [Karllson Group] (the husband notes that he believes these have all been provided at least in part for the period 1 July 2009 to 2012), for the period 1 July 2010 to 30 June 2013.
On 15 July 2014 the matter came before me for consideration of the husband’s Further Amended Application in a Case filed 18 June 2014 and the wife’s Amended Response to an Application in a Case filed 4 July 2014. The interim orders sought in the husband’s application were directed primarily to alterations of the existing parenting arrangements. In her response the wife sought parenting orders, spousal maintenance and other ancillary orders including the valuation of particular entities within the Karllson Group.
The balance of the orders sought by both parties were either agreed or adjourned to a later date. I did however hear brief argument in relation to the wife’s application to include the Karllson Trust and the husband’s interest in N Pty Ltd in an on-going valuation report. Relevantly, paragraph 17 of the wife’s response proposed the following order:
That the parties jointly instruct [Mr M] with respect to including in his report an assessment of the value of:
a)The husband’s interest in [N Pty Ltd]; and
b)The [Karllson Trust]
And that the husband provide [Mr M] with the financial statements for both entities from 2010 to 2013.
The husband opposed the carrying out of any valuation in respect of the two entities.
The Entities
A brief summary of the structure of the two entities and their position within the Karllson Group was provided.
The Karllson Trust (“P Trust”) was established in August 1979. It is a discretionary trust. The husband’s 86 year old mother is the appointer of the P Trust. The husband, his sister and the husband’s parents are defined as the primary beneficiaries of the P Trust. The husband’s father is now deceased. Senior Counsel for the wife maintained that Karllson Pty Ltd is also a beneficiary of the P Trust.
O Pty Ltd (“the corporate trustee”) is the trustee of the P Trust. The husband holds one share in the corporate trustee while his mother holds the remaining nine shares. The husband and his mother are the two directors of the corporate trustee.
Senior Counsel for the wife, Ms Pyke QC, referred to N Pty Ltd (“N”) as a “dump company”.
The husband holds 50 of the 360 issued shares in N. The husband’s mother has a governing shareholding. The husband is one of three directors, the other two directors being his mother and sister, Ms E. There remained an issue about whether the husband may have a possible joint interest in N with his mother.
It would appear to be agreed by both parties that there has been cross distributions from the P Trust to N and another entity within the Karllson Group, Karllson Pty Ltd. Senior Counsel for the wife referred to Karllson Pty Ltd as another “dump company”.
Submissions
Both counsel made brief submissions on the issue. Counsel for the husband also provided the Court with a written outline of argument.
On behalf of the wife it was argued that by virtue of the structure of the Karllson Group the husband has the power to distribute the assets of the P Trust funds and that his control over the entities meant his role went beyond that of a mere beneficiary.
Counsel for the wife, Ms Pyke QC, submitted that notwithstanding the husband’s mother is the appointer of the P Trust, the husband has the capacity to influence distributions due to his position as a shareholder and director of the trustee company.
The wife acknowledged the degree of control exercised by the husband over the P Trust and N was an issue properly reserved for the final hearing. However, in the event the entities are included in the asset pool the Court would require a valuation of both N and the husband’s interest in the P Trust to make a just and equitable order under s 79 of the Family Law Act 1975 (Cth) (“the Act”).
Counsel for the husband, Mr Strum, submitted the husband could not control the distributions. He sought to distinguish Kennon v Spry (2008) 238 CLR 366 on the facts, stating the husband only had a mere expectation, or possibility, of distribution.
In his written outline, counsel referred to the decision of Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 to support his argument that as a beneficiary of a discretionary trust the husband was not a beneficiary in the traditional sense but rather a member of a class of persons being the objects of a power. Accordingly, the husband had only a bare legal right to due administration of the trust. The husband submitted the right to due administration was not capable of valuation and the exercise was therefore without merit.
The Law
In Kennon v Spry (2008) 238 CLR 366 the definition of property was considered by the High Court to include a beneficiary’s interest in the assets of a discretionary trust. At 390-391 French CJ stated: (citations omitted):
63.The terms “dry legal title” or “dry legal estate or interest” have sometimes been used to describe the legal estate in property held on trust. The term describes a legal title divorced from any powers or duties. Under the general law such a title could not be treated as property of the trustee. But where a statute is involved in the matter is one on interpretation. Even under the general law, where the legal title is associated with substantial powers or duties, the “dry” metaphor may not be appropriate.
64.The word “property” in s 79 is to be read as part of the collocation “property of the parties to the marriage”. It is to be read widely and conformably with the purposes of the Family Law Act. In the case of a non-exhaustive discretionary trust with an open class of beneficiaries, there is no obligation to apply the assets or income of the trust to anyone. Their application may serve a wide range of purposes. In the present case, prior to the 1998 Instrument those purposes could have included the maintenance or enrichment of Mrs Spry
65.Where property is held under such a trust by a party to a marriage and the property has been acquired by or through the efforts of that party or his or her spouse, whether before or during the marriage, it does not, in my opinion, necessarily lose its character as “property of the parties to the marriage” because the party has declared a trust of which he or she is the trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion.”
However, French CJ also said at 394:
77.The beneficiary of a non-exhaustive discretionary trust who does not control the trustee directly or indirectly has a right to due consideration and to due administration of the trust but it is difficult to value those rights when the beneficiary has no present entitlement and may never have any entitlement to any part of the income of capital of the trust.
The Hon Justice Brereton neatly summarises the position in The High Court and family law: Two recent excursions (2013) 3 Fam L Rev 63 at 64:
…the only property that a trustee has in the assets of a discretionary trust is the bare legal title, which is of no practical value; and the only property that a potential beneficiary has is the right of due administration which – although it is property, in the sense that it is a chose in action – is also of no practical value. This means that, without more, the interest of a trustee or potential beneficiary in a discretionary trust, although they might be within the wide definition of “property”, are of little practical worth when it comes to matrimonial property adjustment. They do not equate to an interest in trust assets…
If the husband’s right to due administration of the P Trust “is of no practical value” then there would appear to be some merit in the husband’s submission that to order the valuation of the named entities would burden the parties with an unnecessary expense.
Notwithstanding a potential beneficiary may not have an interest in the trust assets, “the ability of an appointor to procure a distribution will often be taken into account “as a financial resource within the s 75(2) considerations” (Brereton, at 64).
The Full Court in Grace & Grace (1998) FLC 92-792 discussed the difference between property and financial resource at 84,888:
The Act draws a distinction between “property” and “financial resources”. The court is able to make orders that settle the property of the parties but not their financial resources. Thus, in making orders that settle the property, the court is required to have regard to each party’s financial resources but can only settle the property of the parties, which is in existence…
In Dillon & Dillon [2012] FamCA 319, Cronin J held that the husband was entitled to documents which would allow the wife’s property rights as a beneficiary of a discretionary trust to be valued “regardless of how nebulous they were” and that “how they were valued, was something for the experts to assess”.
Cronin J also considered whether the wife’s rights would be a financial resource:
18.Property is defined in the Act to mean property to which a party may be entitled whether in possession or reversion….the court must look at the property, in its various guises, to which parties have an entitlement. It may be that a party’s “financial resource” is not property in the strict sense but s 75(2)(b) would require that it be considered when ultimately deciding to make any adjustment of the property of the parties.
Conclusion
At this early stage in proceedings, with only limited information before the Court, it would be inappropriate to embark on a consideration of whether the assets held by the P Trust are to be considered “property of the marriage”. This is an issue that will need to be determined at trial.
It is however open to the wife to argue that the husband’s interests in the entities constitute either property or a financial resource. Pursuant to s75(2) of the Act the Court must take into consideration the financial resources of the parties when making an order for distribution of property. That order could not be said to be just and equitable in all the circumstances if the value of the husband’s financial resources remained unknown.
In the circumstances it is therefore entirely appropriate that the valuations of P Trust and N be before the Court. In Kennon v Spry (supra) French CJ acknowledged that while it may be difficult to put a dollar value on such a right, “a valuation might not be beyond the actuarial arts”.
The Court will determine how it deals with that evidence at the final hearing. The fact that valuations are to be carried out does not in itself bring the entities within the “matrimonial pool”.
If the husband is able to demonstrate at the final hearing that the P Trust and N Pty Ltd should be excluded from the assets available for distribution and not considered as financial resources then he will be at liberty to pursue an application for costs.
For the reasons outlined above I make orders that the parties jointly instruct Mr M to carry out valuations of the husband’s interests in the P Trust and N Pty Ltd.
I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Dawe delivered on 25 July 2014.
Associate:
Date: 25 July 2014
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