Knight & Knight - [2007] FamCA 263

FAMILY COURT OF AUSTRALIA

KNIGHT & KNIGHT

[2007] FamCA 263

FAMILY LAW - PROPERTY – EXPERT EVIDENCE – Division 15.5.3 Family Law Rules 2004 (Cth) – Appointment of Adversarial Expert Witness – Valuation of Business
FAMILY LAW - PROPERTY – Partial Property Order – Cost of vehicle
FAMILY LAW - COSTS – Barro Order – Costs of preparation for hearing and further adversarial expert witness

Family Law Rules 2004 (Cth) Division 15.5.3
Family Law Act 1975 (Cth) s 117

Zschokke and Zschokke (1996) FLC 92-693

APPLICANT:

MRS KNIGHT

RESPONDENT:

MRS KNIGHT

FILE NUMBER:

MLF

3163

2002

DATE DELIVERED:

14 February 2007

PLACE DELIVERED:

Melbourne

JUDGMENT OF:

Bryant CJ

HEARING DATE:

14 February 2007

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr R.J. Spicer

SOLICITOR FOR THE APPLICANT:

Septimus Jones and Lee

COUNSEL FOR THE RESPONDENT:

Mr N.A. James

SOLICITOR FOR THE RESPONDENT:

BM Legal

Orders

That pursuant to Division 15.5.3 of the Family Law Rules 2004 (Cth) the wife be granted permission to adduce evidence and tender a report from Mr L, Forensic Accountant and Director of S Accountants, an expert witness appointed by the wife.
That Mr L be provided with all information and documents reasonably requested by him to prepare a valuation of the Respondent Husband’s interest in businesses collectively known as the Knight Family entities referred to as the “businesses”.
That the Respondent Husband do all things necessary to instruct the accountant and/or the Financial Controller of the businesses to provide all financial information and documents sought by Mr L.
That Mr L be entitled to have access to the Knight Family Entities Business premises and be provided with copies of any document or documents reasonably required by him for the purposes of preparing his valuation report.
That a report be filed and served following his investigations, no later than 16 March 2007.
Pursuant to rule 15.69, following the filing and service of the report of Mr L, the parties must arrange for Mr L and Mr H to confer at least fourteen (14) days prior to the Pre-Trial Conference for the purposes of identifying those parts of their evidence that are in issue in the proceedings.
At the completion of that conference, the experts must prepare a joint statement specifying the following matters:
(a)identifying the issues that are agreed and not agreed;
(b)if practicable, reaching agreement on any outstanding issues;
(c)identifying the reason for disagreement on an issue; and
(d)identifying what action, if any, may be taken to resolve any outstanding issues.
A copy of that joint statement must be delivered to all parties and the Applicant must lodge the joint statement with the court at least three (3) clear business days before the Pre-Trial Conference, if all parties intend to tender it by consent at trial as evidence of matters agreed upon and to identify the issues on which evidence will be called.
That within seven (7) days the husband and wife sign all documents necessary to pay the sum of $34,000 from monies held in BM Legal Solicitors Trust account on behalf of the parties to Septimus Jones & Lees Trust Account, such sum to be utilised on account of the costs of the Wife in prosecuting her claims in these proceedings, including the costs of engaging Mr L to assess the husband’s business interests, property and financial resources in the proceedings and the wife’s legal costs.
That the trial judge characterise the said sum specified in Order 9 hereof at trial.
That within seven (7) days the husband and wife sign all documents necessary to pay $11,000 to the wife from monies held in trust on behalf of the parties in BM Legal Solicitor’s Trust account such sum to be utilised by the wife to purchase a motor vehicle.
That the said sum of $11,000 is to be paid to the wife by way of partial or interim property settlement and to be brought into account by her in that sum in the asset pool for consideration at trial.
The parties and their lawyers must attend a Pre-Trial Conference on 20 April 2007 at 9:30am.
Each party file a compliance certificate in accordance with the approved form by 13 April 2007.
The costs of both parties in relation to the proceedings today be reserved.

IT IS NOTED IN CONNECTION WITH THESE ORDERS that the judgment of the Honourable Chief Justice Bryant delivered on the 14^th day of February 2007 will for all publication and reporting purposes be referred to as Knight & Knight.

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLF 3163 of 2002

MRS KNIGHT

Applicant

And

MR KNIGHT

Respondent

REASONS FOR JUDGMENT

The application before me is brought by the wife and filed on 2 February 2007. The matter was listed for hearing before Barry J but has not been reached by his Honour and apparently will not be reached by the time his Honour concludes his list and leaves the registry. That matter is germane to some of the matters that I will have to deal with in considering this matter.
The wife seeks in her application three discrete forms of relief. The first is that pursuant to Division 15.5.3 of the Family Law Rules 2004 (Cth) she wants permission to adduce evidence from an adversarial expert, a Mr L who is a forensic accountant, in circumstances in which a single expert has already been appointed pursuant to the Family Law Rules.
The second order that the wife seeks is an order for security for costs to assist with preparation of the case and her legal costs, colloquially known as a “Barro order”. She seeks the sum of $50,000 from moneys held in trust on behalf of the parties following the sale of the former matrimonial home and another property.
The third order sought by the wife is that she receive from the moneys in trust the sum of $11,000 in order to purchase a motor vehicle. Each of those orders is opposed by the husband, although it is fair to say that his opposition to the money for the motor vehicle was not as vigorously put as his opposition to the first two of the orders sought.
The background to the matter is that the parties separated five years ago and proceedings commenced in May 2002. The matter has already taken a considerable amount of time to come on for hearing; and I am told, without objection, that the funds in trust have over that period diminished from approximately $337,000 to $195,000.
Obviously, over that period the parties have expended a considerable amount on legal fees and also on accounting fees. That, it must be said, is regrettable, in view of the size of the asset pool as it now apparently stands. That is obviously a matter that I will need to take into account when I consider whether it is appropriate to appoint an adversarial expert in addition to the single expert already appointed.
The husband says in his affidavit and his financial statement prepared for the hearing that the net assets of the parties, leaving aside superannuation but taking into account the value of the business, is between 250 and 300 thousand dollars net. He says that, including superannuation, the total value of the assets is nearly $705,000. The wife disputes the value of the business and so is not able to put a precise figure on the asset pool. However, there doesn't seem to be any issue about the value of the other assets or the superannuation. The extent to which the asset pool will be increased, if at all, will be in relation to the valuation of the business.
The business itself is a construction business operated by the husband through a corporate structure which employs a number of tradesmen. The books of account indicate that there are 17 tradesmen employed; the wife asserts there are 35. Whatever the figure is, it is obviously a business of some significance.
The wife, as I have said, is unable to indicate what the value of the business is. The husband indicates that his one‑third interest in the business is worth $205,000; however, included in that sum is a sum of $265,000, which he asserts he owes the business. This would leave, on his calculations, a net deficit of $60,000 for his interest in the business. The wife contends that, as a result of matters which have not been taken into account by the single expert, the business is likely to have a significantly greater and positive value which will overall have a significant effect on the asset pool.
The other significant point in relation to the background of the matter is the orders sought by each of the parties. In broad terms, the wife seeks a splitting order in relation to the superannuation; and as far as the money in trust is concerned, she seeks that the funds in trust be paid to her. Again summarising the position, the husband seeks that the parties retain the assets that they already have and that, apart from superannuation, the wife's entitlement to the net funds of the parties in trust be limited to the sum of $45,000.
There were some submissions made by both parties in relation to the husband's position. For the wife's part, it was contended that the husband's position on its face was unreasonable and that, as she was seeking the sum of $50,000 by way of a Barro order and $11,000 to buy a car, being a total of $61,000, the range between the two was $45,000 to $61,000. It was contended on behalf of the wife that, having regard to the assets and her contribution, it was highly unlikely that she would receive less than $61,000.
The husband, through Counsel, contends that the court must make, in accordance with what the Full Court said in Zschokke and Zschokke (1996) FLC 92-693, a limited investigation of the orders sought. He contends that this was a five‑year marriage, that the husband brought in the vast majority of assets, that the assets have been reduced since separation and that, without a full hearing of the matter, the court on an application such as this could not say on its face that the order sought by the husband was so demonstrably unreasonable that, without a hearing, it would appear that the wife could do better.
Turning first then to the wife's application to have an adversarial expert relied upon. I refer to the Family Law Rules, in particular Division 15.5.3, which deals with permission for an expert's evidence. The relevant rules are rules 15.51 and 15.52, particularly 15.52(3) which sets out the matters that the court must consider when determining whether to permit a party to tender a report or adduce evidence from an expert witness.
Rule 15.51 provides:-
15.51 Permission for expert’s reports and evidence
(1) A party must apply for the court’s permission to tender a report or adduce evidence at a hearing or trial from an expert witness, except a single expert witness.
(2) An independent children’s lawyer may tender a report or adduce evidence at a hearing or trial from one expert witness on an issue without the court’s permission.

Rule 15.52 goes on to state:-
15.52 Application for permission for expert witness
(1) A party may seek permission to tender a report or adduce evidence from an expert witness by filing an Application in a Case (Form 2).
Note 1    A party who files a Form 2 must, at the same time, file an affidavit stating the facts relied on in support of the orders sought (see subrule 5.02 (1)).
Note 2    The court may allow a party to make an oral application (see paragraph (h) in item 3 of Table 11.1 in rule 11.01).
(2) The affidavit filed with the application must state:
(a)whether the party has attempted to agree on the appointment of a single expert witness with the other party and, if not, why not;
(b)the name of the expert witness;
(c)the issue about which the expert witness’s evidence is to be given;
(d)the reason the expert evidence is necessary in relation to that issue;
(e)the field in which the expert witness is expert;
(f)the expert witness’s training, study or experience that qualifies the expert witness as having specialised knowledge on the issue; and
(g)whether there is any previous connection between the expert witness and the party.
(3) When considering whether to permit a party to tender a report or adduce evidence from an expert witness, the court may take into account:
(a)the purpose of this Part (see rule 15.42);
(b)the impact of the appointment of an expert witness on the costs of the case;
(c)the likelihood of the appointment expediting or delaying the case;
(d)the complexity of the issues in the case;
(e)whether the evidence should be given by a single expert witness rather than an expert witness appointed by one party only; and
(f)whether the expert witness has specialised knowledge, based on the person’s training, study or experience:
(i)relevant to the issue on which evidence is to be given; and
(ii)appropriate to the value, complexity and importance of the case.
(4) If the court grants a party permission to tender a report or adduce evidence from an expert witness, the permission is limited to the expert witness named, and the field of expertise stated, in the order.
Note    Despite an order under this rule, a party is not entitle to adduce evidence from an expert witness if the expert’s report has not been disclosed or a copy has not been given to the other party (see rule 15.58).
Rule 15.42 sets out the purpose of Part 15.5 which deals with expert evidence:
15.42 Purpose of Part 15.5
The purpose of this Part is:
(a)to ensure that parties obtain expert evidence only in relation to a significant issue in dispute;
(b)to restrict expert evidence to that which is necessary to resolve or determine a case;
(c)to ensure that, if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single expert witness;
(d)to avoid unnecessary costs arising from the appointment of more than one expert witness; and
(e)to enable a party to apply for permission to tender a report or adduce evidence from an expert witness appointed by that party, if necessary in the interests of justice.

As I perceive my obligation in applying the purpose of the rules, it is to determine, in the interests of justice, whether the wife should be permitted to tender a report from her own expert witness, having regard to:
a.   whether it is necessary to resolve or determine an issue in the case;
b.   whether unnecessary costs will arise from the appointment of more than one expert, and, if so, whether the interests of justice outweigh the costs involved;
c.   considering whether the interests of justice are otherwise met, and in particular whether there would be any delay occasioned by allowing the wife to have an expert, and, if so, whether that is outweighed otherwise by the interests of justice.
The single expert, as I have indicated, who is Mr H of W Accountants, is the second single expert who has been appointed.
The wife seeks to rely on a report from a Mr L, Forensic Accountant and director of S accountants. There is no dispute that Mr L has the appropriate expertise if he were so appointed to carry out the valuation.
Rule 15.49 which deals with appointing another witness indicates in subsection (2) that:
(2) The court may allow a party to tender a report or adduce evidence from another expert witness on the same issue if it is satisfied that:
(a)there is a substantial body of opinion contrary to any opinion given by the single expert witness and that the contrary opinion is or may be necessary for determining the issue;
(b)another expert witness knows of matters, not known to the single expert witness, that may be necessary for determining the issue; or
(c) there is another special reason for adducing evidence from another expert witness.

Mr L has already been assisting the wife in the preparation of her case, in what is often terms the capacity of a “shadow expert”. His instructions were to review various financial documents and provide advice in respect of the businesses known as Knight Construction Pty Ltd, Knight Construction (Vic) Pty Ltd and the associated corporate entities of those businesses. Mr L assisted the wife by advising her in or about late 2004 in relation to the report of the first single expert.
Mr L advised the wife that in his opinion the valuation was fundamentally flawed and suggested she ask a number of question, which he drafted. The questions, which are entitled to be put in accordance with the Family Law Rules, were not answered by the expert. An application was filed in about November 2005 seeking orders that the original expert be excused and a new expert be appointed. Orders were made and a joint letter of instructions to Mr H of W Chartered Accountants was sent in December 2005 and Mr H appointed the single expert.
Mr L in an affidavit which supported the wife's application indicates that he has read a copy of the valuation report prepared by Mr H and that pursuant to instructions from the wife he prepared a list of specific questions for Mr H. Those questions were answered and Mr L has now perused the answers. He says in paragraph 10 of his affidavit:
In my professional opinion, the responses provided by [Mr H] in his letter dated 22 December 2006 do not comply with rule 15.66 of the Family Law Rules 2004. [Mr H] has not answered the substance of the questions put to him nor has he adequately stated the reasons for his objection to answering or inability to answer the majority of questions.
He opines in paragraph 11of his affidavit that:
As the questions have not been satisfactorily answered, it's not in the interests of the wife to accept the value of the businesses and/or the value of the husband's interest in the [Knight] family entities as specified in [Mr H’s] valuation report of 24 October 2006.
Mr L asserts in paragraph 16 that “[t]he report prepared by [Mr H] is fundamentally flawed by virtue of the execution of the valuation method adopted”, and then gives several examples. He asserts that:
(a)[Mr H] has not made any independent inquiries to the number of persons employed by the husband's businesses;
(b)he has made no proper inquiries as to the additional profitability where additional persons are employed by the businesses;
(c)he has made no inquiries as to the amount of cash earnings of the businesses;
(d)he has not conducted due and diligent investigations in respect of the management and consultancy fees paid by the businesses;
(e)when asked for copies of working papers regarding the expense of hire of plant and service fees, he advised that he did not have any working papers; and
(f)he has undertaken an insufficient investigation of key issues relevant to the valuation report.
Mr L concludes by saying that he has:
[C]ontrary opinions to those given by the single expert, having read his answers to the specific questions in relation to many aspects of the valuation report.
It is necessary to look briefly at the letter in which the questions were sought, being a letter responded to by Mr H on 22 December 2006. The wife contends that there are about 35 employees of the business, whereas Mr H has stated that the business currently employs 17 permanent employees. It is contended that Mr H assumes that all salaries other than the husband's are at arm's length and that the average wage for 17 employees is $153,653.
Mr H was asked whether he carried out a detailed investigation of wages expense for 2006 and prior years. His response is that it was not within the scope of his engagement to perform an investigation of the information provided, and as a result that has not taken place. The second question put to him was whether he tested the payroll for wages paid to spouses or other related parties. He responds that he requested details of all related party transactions, which was provided, but it was not within the scope of his engagement to perform testing on related party wages. In relation to the question of whether he tested the payroll for wages paid to the Knight family that were over and above market determined rates, he responded that he reviewed the information provided for reasonableness but did not conduct an investigation to test the wage rates to award‑specific information.

Mr H was asked specifically whether, if there were considerably more employees than 17 - in effect over 35 full‑time employees - then, if that was correct, would it alter his opinion of the size of the business, its position in the market and its effect on the valuation of the business. He responded that if there were more employees it would not affect the valuation of the business as it did not alter the earning capacity of the business, its position in the market or its effect on the valuation. He indicated that the valuation was based on the overall financial performance of the business, as distinct from the number of employees. He indicated, when asked if he was prepared to provide his working papers, that all written information that he received had been made available to the parties.
Mr H was asked about Consultants' fees, as to whom they were paid and the purpose and what reports were given to management, and responded that he had not examined the consultant's fees as it was not within his scope to perform that investigation. He was asked about plant hire, and then responded that an investigation into the expense of the plant hire was not within the scope of the investigation; however, he had been advised that the hire of plant was volatile.
Other questions were put to Mr H about long leave, EBIT, the EBIT earnings model and examination of management fees and adjustments made. Answers to those questions were given. In relation to the balance of the questions, which really related to methodology, he has responded and no objection is taken to his responses. Finally, he is asked about a debit loan to the husband as at three valuation dates and is asked if he has examined the movements in the accounts. His response is that movements in the accounts have not been examined, as it was not within his scope to perform an investigation.
It is clear, in my view, that the dispute that has arisen in this case is really about the factual basis of the material provided to the single expert. It could be reasonably said that it is not so obvious in this case that there is a requirement for a single expert. The husband's Counsel contends that the material being put is speculative. I do not think that is a fair categorisation of it. Although, on the other hand, I do not consider that it is so obvious that there is likely to be a different outcome, as it may be in other cases. Nevertheless, it is a case in which, on balance, I am persuaded that there should be permission for an expert witness to be called and a report tendered on behalf of the wife.
When I consider the matters in section 15.52(3), I take into account the following matters:
a)The purpose of the rules as I have set them out but having regard to my discretion in the end to ensure that the interests of justice are met;
b)The impact of the appointment on the costs of the case are certainly an issue and I have concerns about both the length of time that this matter is taking to come on for hearing, as a result of the parties not being ready for hearing, and the overall value of the asset pool, which is relatively modest. However, as counsel for the wife concedes, the costs of the expert witness on behalf of the wife will certainly be initially borne by her and she clearly accepts the risks that if the result of calling her own expert is not to materially affect the valuation provided by the single expert then that cost will be entirely hers. The husband is not really at any risk of costs if the evidence of the wife's expert does not materially affect the valuation provided by the single expert;
c)The likelihood of the appointment expediting or delaying the case. In the normal course the appointment of the wife's expert would certainly delay the case. However, as I indicated, the case has already not been reached and will not be heard in the next few weeks, as would have been the case otherwise. There will necessarily be a delay prior to its re-listing, and, as Mr L has already done a good deal of work, I would anticipate from the material filed that if there is any further delay occasioned it is not going to add substantially to the delay that has already occurred in this case. I will endeavour to make orders to ensure that whatever has to be done is done with the most expedition that can be achieved.
d)The complexity of the issues in the case. Whilst the issues are not particularly complex, there do remain issues of fact. They may be limited in number but it cannot be said that they are not of any significance. If there are significant matters of fact that have been incorrectly presented, then I accept what counsel for the wife said, that the court may be deceived or misled if evidence is wrongly given. If it is the case that there are factual matters which will impact on the valuation, then the wife would be entitled, in my view, to complain of a potential miscarriage if she were not given the opportunity to explore the value of the business, having regard to appropriate disclosure of facts and in reliance upon facts which were agreed to present the best and accurate position of the business.
Those, in my view, are the relevant matters. Having regard to those matters, I am satisfied that it is appropriate in this case for an expert to be permitted to give evidence on behalf of the wife.
I turn now to the second aspect of the wife's case, which is that she be provided by way of security her costs in the form of a Barro order to prepare the matter for hearing and to meet the costs of the independent expert. I accept that to a significant degree the wife's need for these funds arises as a result of my decision to permit her to call an expert witness; but, as I have said, that may in the end be entirely at her expense.
The wife seeks a sum of $50,000 and sets out the need for this sum in terms of the requirement to pay the expert and her legal fees. There was no issue taken by the husband about the need, particularly if permission was given for her to call an expert or to the amount sought in that respect; nor was there any issue that the wife has a modest income and that the assets of the parties are tied up in the money invested in trust and in the business.
The husband's main argument was centred around what he said would be the wife's position at trial if his application is successful - that is to say, that the amount that the wife would receive would be $45,000 and that the court should not therefore, in accordance with what the Full Court said in Zschokke’s case (supra), make an order which would put the wife into the position where funds were made available to her in excess of that to which she might otherwise be entitled and with a risk that those funds could not be recovered.
The husband contends that when one considers his case, the contributions and length of the marriage in particular, the order that he is seeking is not an order in respect of which it could be said he would not be successful at trial. In particular he refers to the fact that the parties had a five‑year marriage, that he brought in the vast majority of assets and that the assets have been significantly reduced since separation.
I am satisfied that it is appropriate to make an order for the provision of costs, pursuant to section 117(2) of the Family Law Act 1975 (Cth) for the purposes of the wife preparing this matter for hearing. I have indicated that she is entitled to have permission for an expert witness, and she will clearly have to pay for that expert, and she will have to make payment towards her legal costs. It is really the quantum of that figure that I must consider. I do so in the context that the third part of the wife's application is to have the sum of $11,000 paid to her from the moneys in trust for the purpose of buying a car. There was no dispute that her car had been written off and that, as the child of the parties lives with her, she has a need for a vehicle.
Upon indicating to the parties that if I were to make such an order it would clearly be an order which was by way of partial property settlement and would have to be brought back into account in that sum in the asset pool, there was little dispute in the end about whether such an order should be made, and I do propose to make such an order.
I return to the question of the quantum of the funds to be paid to the wife for her costs. In my view, there is substance in what is put on behalf of the husband, in as far as what the wife might ultimately receive is concerned. It is ultimately for a court to determine her share, but I do not think it could be said that the husband's position is so unreasonable that it might not ultimately upon a final hearing be successful.
I note that the assets of the parties have already diminished considerably and for that reason, in my view, the sum paid to the wife, including provision for the motor vehicle, should be no more than $45,000. I propose to make orders therefore that would provide the wife with the sum of $11,000 for the motor vehicle and $34,000 by way of her legal costs. I will leave that sum to be finally characterised by the trial judge, only because it is possible - although unlikely - that if she does not expend all of that money on costs there may be an argument for part of it to be characterised in some other way.

I certify that the preceding forty-two (42) paragraphs are a true copy of the reasons for judgment of the Honourable Chief Justice Bryant

Associate:

Date: 20 March 2007