Kostres & Kostres
[2008] FMCAfam 1124
•17 October 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KOSTRES & KOSTRES | [2008] FMCAfam 1124 |
| FAMILY LAW – Property proceedings – financial agreement – whether binding and enforceable. FAMILY LAW – Binding financial agreement – construction thereof. |
| Family Law Act 1975, ss.4, 71A, 75, 79, 90B, 90DA, 90G, 90K, 90KA |
| Black & Black [2008] FamCAFC 7 J and J [2006] FamCA 442 In the Marriage of Blackman(1998) 22 Fam LR 416; FLC 92–791 Taylor v Johnson (1983) 151 CLR 422 In the Marriage of Drew(1985) 10 Fam LR 87; FLC 91–601 CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 79 ALJR 1724 Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 Rich v ASIC (2003) FLC 93-171 Harding v Lithgow Corporation (1937) 57 CLR 186 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 184 CLR 355 |
| Applicant: | MR KOSTRES |
| Respondent: | MS KOSTRES |
| File Number: | BRC 2799 of 2007 |
| Judgment of: | Wilson FM |
| Hearing date: | 7 September 2007 |
| Date of Last Submission: | 7 September 2007 |
| Delivered at: | Brisbane |
| Delivered on: | 17 October 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr Hodges |
| Solicitors for the Applicant: | James Noble Family Law |
| Counsel for the Respondent: | N/A |
| Solicitors for the Respondent: | Barry & Nilsson Lawyers |
ORDERS
The wife shall, within seven (7) days from the date hereof, file and serve a separation declaration complying with s.90DA Family Law Act1975.
Subject to compliance by the wife with Order 1 hereof, within 30 days of the date hereof, the wife shall pay to the husband the sum of $123,985.48, being the amount due to him pursuant to the terms of a binding financial agreement made between the parties on 9 January 2002.
If either party wish to make any application as to costs that party shall, within 14 days make file and serve an application together with any affidavit evidence in support thereof and written submissions pertaining to the issue of costs.
If the wife fails to comply with Order 1 hereof, the husband shall be at liberty to re-list the matter for the making of orders pursuant to s.79 Family Law Act.
IT IS NOTED that publication of this judgment under the pseudonym Kostres & Kostres is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRC 2799 of 2007
| MR KOSTRES |
Applicant
And
| MS KOSTRES |
Respondent
REASONS FOR JUDGMENT
The applicant husband, now aged 55, and the respondent wife, now aged 63, were married on11 January 2002. They separated in June/July 2006. There are no children of the marriage. The parties are unable to agree of the division of their matrimonial property, and each seeks orders to that end. There is an issue as to whether the parties’ property is to be adjusted by orders made pursuant to s.79 Family Law Act1975, or whether the parties have made a binding financial agreement, pursuant to Part VIIIA of the Act, and their property should be adjusted according to the terms of that agreement.
By his amended Application filed 27 August 2007, the husband seeks the following orders:
(1)That in full and final settlement of all financial issues arising from the marriage:
(a)The husband be paid by the wife in an amount being one half of the net interests of the parties in the [W] Aged Care and Pensioners Accommodation business and assets owned by that business and assets of the associated entities including the real estate owned by the [Z] Family Trust and in the unit situate at 1101 Property S or alternative;
(b)If the wife is unable to make such payment pursuant to Order (a) hereof the business [W] Aged Care and Pensioners Accommodation and associated property be sold and from the net proceeds of sale the husband be paid an amount being one half of the parties interests in such business and associated property and the unit situate at 1101 Property S.
(2)That the wife be restrained and an injunction be granted restraining the wife from dealing with in any manner whatsoever the property referred to in order 1 hereof or lease the unit situate at 1101 Property S without the written consent of the husband first had and received.
(3)Such further or other order that the court deems meet.
(4)That the wife pay the husband’s costs of and incidental to the application.
Although no amendment was made to the application, at the commencement of the final hearing, counsel for the husband handed to the Court a document that reads:
That the financial agreement is not binding on the parties (or either of them) or is otherwise unenforceable because:
i)At the time the parties entered into the financial agreement they both were of the belief that the husband was an undischarged bankrupt and such fact was not disclosed in the financial agreement
ii)The effect of the belief in the husband’s bankruptcy in terms of the financial agreement could not and or was not explained to him in the context of s.90G of the Family Law Act
iii)It would otherwise be unconscionable for the husband to be bound by the financial agreement given the matters in (i) and (ii) herein and the fact that the consequences of his signing the financial agreement with his belief of bankruptcy was not know to him nor explained to him.
The husband’s proposed orders were:
(1)That within 30 days the wife pay to the husband the sum of $486,985.
(2)That the husband retain as his sole entitlement all property and chattels presently in his name and or possession save for the leased motor vehicle which shall be returned to the wife when payment is made in terms of 1 herein.
(3)That the wife retain as her sole entitlement all property presently in her name and or possession including any interest she has in property owned by any trust.
(4)That in default of payment as provided for in 1 herein the aged care business, the Property P property and Unit 1101 Property S be sold and after payment of usual sale costs and discharge of any mortgage secured on the said properties and capital gains tax, the husband receive the sum of $486,985 less any CGT representing 50% of the property referred to herein.
(5)That the parties jointly engage Onus Maynes to prepare an estimate of CGT to be incurred if order 4 becomes operative and share equally such cost.
(6)The wife provide to Onus Maynes such documents as he requests to enable to calculate the estimated CGT.
(7)That the manner of sale shall be as follows:
(i)The real estate and business shall be listed as to price, manner of sale and agent/broker as agreed between the parties and failing agreement within 7 days as nominated by the chief executive officer of the real estate institute of Qld or such equivalent person.
(8)If either party fails or neglects to sign any document to give effect to these orders an officer of the court shall have power to sign on behalf of such defaulting party pursuant to s.106A of the Family Law Act.
By her Response filed 23 November 2006, the wife seeks the following orders:
(1)That by way of property settlement, the property situated at 1101 Property S be sold and the net proceeds from the sale be divided equally between the parties.
(2)That each party retain all items of property in their name or control as at the date of this Order.
(3)That the husband pay the wife’s costs of and incidental to this matter.
(4)Such further and other Order that this Honourable Court deem met.
In an amended Response filed by leave after the evidence was completed, the wife sought the following orders:
(1)That pursuant to section 90G(2) or section 79 of the Family Law Act 1975 the property situated at 1101 Property S be sold and the net proceeds from the sale be divided equally between the parties.
(2)That pursuant to section 90G(2) or section 79 of the Family Law Act 1975, subject to order number 1 above each party retain all items of property in their name or control.
(3)That the husband pay the wife’s costs of and incidental to this application on an indemnity or standard basis.
(4)Such further and other Order that this Honourable Court deem meet.
At the commencement of the final hearing, counsel for the husband sought to have the Response summarily dismissed on account on alleged non-compliance with s.90DA of the Act. I refused the application for summary dismissal, but the ability of the wife to maintain a case based on the alleged financial agreement remained a live issue throughout the hearing.
Thus, although the parties’ formal court documents may not necessarily reflect it, the parties argued and the court is required to decide the following issues:
a)Whether the agreement made between the parties is a ‘financial agreement’;
b)Whether the financial agreement is binding on the parties;
c)Whether the financial agreement should be set aside;
d)Whether the financial agreement can be enforced.
It is only if the agreement between the parties is a financial agreement that is binding on them, that Part VIII of the Act, including ss.79 and 75(2) does not apply: s.71A(1) of the Act.
The parties both executed an agreement dated 9 January 2002. It provides:
a)It was made in contemplation of their marriage on 11 January 2002 (Recital A);
b)In Schedule A those assets of the wife are set out;
c)In Schedule B those assets of the husband are set out;
d)By clause 3:
“[Ms Kostres] and [Mr Kostres] agree that the ownership of the assets set out in Schedules A and B hereto will remain separate throughout their marriage although each will permit the other to use what they have. Each party shall pay their own costs for the maintenance and repair and all outgoings in relation to their respective assets. Each party shall be entitled to retain for their own respective use and benefit any income or benefit received from their respective assets”
e)By clause 6:
“[Ms Kostres] and [Mr Kostres] agree that in the event that the marriage should end that the assets of each of them alone or jointly shall be dealt with as follows:-
a) The assets set out in Schedule A shall remain the property of [Ms Kostres];
b) The assets set out in Schedule B shall remain the property of [Mr Kostres];
c) Any assets of whatsoever kind or nature acquired during the relationship from joint funds shall be divided equally between [Ms Kostres] and [Mr Kostres];
d) Any assets acquired by either party from their own moneys shall remain the property of that person;
e) [Ms Kostres] and [Mr Kostres] shall retain for their own use their respective right, entitlement and interest in and to any superannuation or life policies owned by them”
f)By clauses 8 and 9 that before the agreement was signed each received independent legal advice as certified in Annexures “A” and “B” to the agreement (each being a “certificate” by the solicitor who provided each of the parties with legal advice);
g)By clause 10, that the agreement was a financial agreement for the purposes of s.90B of the Act.
In my view, the document is plainly a financial agreement as that term is defined in s.90B(1) of the Act.
Section 90G of the Act, as it was when the parties made the financial agreement, is in the following terms:
“90G When financial agreements are binding
(1) A financial agreement is binding on the parties to the agreement if, and only if:
(a) The agreement is signed by both parties; and
(b) The agreement contains, in relation to each party to the agreement, a statement relates has been provided, before the agreement was signed by him or her, as certified in an annexure to the agreement, with independent legal advice from a legal practitioner as to the following matters:
(i) The effect of the agreement on the rights of that party;
(ii) Whether or not, at the time when the advice was provided, it was to the advantage, financially or otherwise, of that party to make the agreement;
(iii) Whether or not, at that time, it was prudent for that party to make the agreement;
(iv) Whether or not, at that time and in the light of such circumstances as were, at that time, reasonably foreseeable, the provisions of the agreement were fair and reasonable; and
(c) The annexure to the agreement contains a certificate signed by the person providing the independent legal advice stating that the advice was provided; and
(d) The agreement has not been terminated and has not been set aside by a court; and
(e) After the agreement is signed, the original agreement is given to one of the parties and a copy is given to the other.”
The financial agreement is signed by both parties. Clauses 8 and 9 of the agreement comply with s.90G(1)(b) of the Act. The annexures to the agreement comply with s.90G(1)(c) of the Act. Neither party submitted that s.90G(1)(e) of the Act had not been complied with. The financial agreement has not yet been terminated. I will deal, in due course, with whether this court should make an order for its termination.
Thus, on its face, the financial agreement satisfies all of the requirements of s.90G of the Act, and is therefore binding.
In Black & Black [2008] FamCAFC 7 the Full Family Court held that a strict interpretative approach and strict compliance with the requirements of s.90G was required before the court should accept that its jurisdiction under Part VIII of the Act has been ousted.
In that case, at [46], the Full Court left open the question whether an amendment made to the agreement after the legal advice was given and certificate signed, was sufficient to vitiate the financial agreement. In this case, the only amendment that I can perceive from the face of the document is to the date of its execution (the interlineation in clause 9 of the name of the solicitor who provided the husband with advice, aside). Neither party submitted that this alteration had any effect to the validity of the agreement.
Counsel for the husband argued that the certificates provided by the solicitors that are annexed to the agreement do not in substance comply with s.90G(1)(b) of the Act. At the time both parties executed the agreement, both believed that the husband was still an undischarged bankrupt. That belief was mistaken. The husband was made bankrupt, on his own petition, on 26 March 1998. He was discharged from bankruptcy, by operation of law, on 26 March 2001. However, the husband gave evidence, which I accept, that when the financial agreement was signed he believed he was still an undischarged bankrupt and that his bankruptcy ran for six years. For the purpose of the present argument, it is not the correctness but the genuineness of the husband’s belief that is germane.
The wife too, probably as a result of being told by the husband that he had been declared bankrupt believed that he could not own property for seven years.
Thus, it was common ground that when the parties each took their independent legal advice, neither told their respective solicitor that they believed (albeit incorrectly) the husband was an undischarged bankrupt.
Counsel for the husband argued that had the solicitor who advised him been told that he was an undischarged bankrupt, her advice may have been different, and at the least she would have done a search to ascertain whether or not he was an undischarged bankrupt. Had it been discovered that he was not in fact bankrupt, the husband says:
a)He would not have refused to sign the financial agreement;
b)He would have insisted that subsequent purchases of property were put into his name as well as the wife’s.
In short, counsel for the husband submitted that the husband was precluded from acting differently because the advice given to him was on a mistaken premise, and was deprived of the opportunity to seek that properties subsequently purchased be registered in his name as well as the wife’s.
The solicitor who advised the husband was not able to give evidence at the final hearing, and no submission was made that any adverse inference should be drawn. The solicitor was ill and unable to attend.
The husband accepted that he did not tell the solicitor who advised him that he was labouring under the belief that he was an undischarged bankrupt. Thus, the only inference open for me to draw is that the advice given to the husband by the solicitor was premised on the husband not being a bankrupt. Therefore, it was in fact given on the correct factual premise, because although the husband believed he was bankrupt, in fact he was not.
The difficulty with the husband’s argument is that s.90G does not, by its terms, place any relevance on the quality or correctness of the advice given to a party. All that is required is that the party receives advice, a certificate to that effect is provided, and the party acknowledges receiving the advice.
In my opinion, s.90G deals with the formal requirements of a binding financial agreement. It is not open to a party to argue that the substance of the advice given was incorrect, or given on a false premise (unless perhaps, this was known to the other party to the marriage, who could be said to have acted unconscientiously in reliance on the mistaken belief of the other. That however, is a different matter, and is best addressed when consideration is given to s.90K of the Act). If the advice was wrong (in the sense of being given negligently, or in breach of retainer) the party to the marriage has rights elsewhere. If the advice was correct, then it is difficult to see how the party has been disadvantaged. That is particularly so where, as here, the husband gave evidence that he would still have signed the agreement.
Further, for reasons that I will shortly develop, the husband’s alleged loss of opportunity is not related to the binding effect of the financial agreement. Rather, it is related to his continuing to act on a mistaken belief that he was bankrupt and that property could not be registered in his name. That is an entirely different issue to whether the financial agreement is binding. As will become apparent, it does not matter in which party’s name as asset is purchased, it is the contributions to its acquisition that is important. Thus, the opportunity to be named as an owner of an asset is irrelevant unless the husband contributed to its acquisition.
In my opinion, the financial agreement made between the parties is binding.
Section 90K(1) of the Act provides:
(1) A court may make an order setting aside a financial agreement or a termination agreement if, and only if, the court is satisfied that:
(a) the agreement was obtained by fraud (including non‑disclosure of a material matter); or
(aa) either party to the agreement entered into the agreement:
(i) for the purpose, or for purposes that included the purpose, of defrauding or defeating a creditor or creditors of the party; or
(ii) with reckless disregard of the interests of a creditor or creditors of the party; or
(b) the agreement is void, voidable or unenforceable; or
(c) in the circumstances that have arisen since the agreement was made it is impracticable for the agreement or a part of the agreement to be carried out; or
(d) since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and, as a result of the change, the child or, if the applicant has caring responsibility for the child (as defined in subsection (2)), a party to the agreement will suffer hardship if the court does not set the agreement aside; or
(e) in respect of the making of a financial agreement--a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable; or
(f) a payment flag is operating under Part VIIIB on a superannuation interest covered by the agreement and there is no reasonable likelihood that the operation of the flag will be terminated by a flag lifting agreement under that Part; or
(g) the agreement covers at least one superannuation interest that is an unsplittable interest for the purposes of Part VIIIB.
In Black & Black and in J and J [2006] FamCA 442 the Court emphasised the use by the legislature of the words “if, and only if”. It seems, therefore, that s.90K(1) provides a ‘code’ of the circumstances in which an otherwise binding financial agreement can be set aside.
The financial agreement was not obtained by fraud. The circumstances in s.90K(1)(aa), (d), (f) and (g) of the Act are not enlivened in this case.
Counsel sought to argue that the wife has engaged in unconscionable conduct in seeking to rely on the agreement. That is, it is argued that subsequent to the making of the agreement both parties contributed to the acquisition of properties which, because of the mistaken belief of the parties as to the capacity of the husband to own property, were put into the wife’s sole name. It is argued that it would be unfair if the wife was able to rely on the agreement to deprive the husband of an interest in those properties. Whether or not that is correct (which I very much doubt) it is not to the point. Section 90K(1)(e) specifically refers to unconscionable conduct in respect of the “making” of a financial agreement. No such conduct was pointed to. The wife’s state of mind as to the husband’s bankrupt status was as a result of what she was told by the husband. There is no evidence that the wife in any way acted unconscionably in respect of the making of the financial agreement. If the husband in fact contributed to the acquisition of properties, and the financial agreement applies, he has rights pursuant to clause 6(c) thereof. It does not matter in whose name the properties are registered.
Does the mutual mistake of the parties as to the husband’s bankrupt status make the financial agreement void, voidable or unenforceable? A contract is not always ineffective merely because both parties are mistaken: Carter, Peden & Tolhurst, Contract Law in Australia, 5th ed, para [20-02]. Indeed, the learned authors go so far, at [20-06] to say “cases in which a contract has been held void on the ground of common or mutual mistake are virtually unknown, at least in Australian law.”
Section 90KA of the Act provides:
The question whether a financial agreement or a termination agreement is valid, enforceable or effective is to be determined by the court according to the principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts, and, in proceedings relating to such an agreement, the court:
(a) subject to paragraph (b), has the same powers, may grant the same remedies and must have the same regard to the rights of third parties as the High Court has, may grant and is required to have in proceedings in connection with contracts or purported contracts, being proceedings in which the High Court has original jurisdiction; and
(b) has power to make an order for the payment, by a party to the agreement to another party to the agreement, of interest on an amount payable under the agreement, from the time when the amount became or becomes due and payable, at a rate not exceeding the rate prescribed by the applicable Rules of Court; and
(c) in addition to, or instead of, making an order or orders under paragraph (a) or (b), may order that the agreement, or a specified part of the agreement, be enforced as if it were an order of the court.
It has been said that “the legislature, having adopted the language of the law of contract, intended to adopt also the legal concepts encapsulated by that language”: In the Marriage of Blackman(1998) 22 Fam LR 416; FLC 92–791 at 84,874 .
Perhaps recognizing this, counsel for the husband called in aid equity to argue that the wife ought not to be permitted to enforce the agreement.
In Taylor v Johnson (1983) 151 CLR 422 at 432, the majority justices stated:
“ . . . a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.”
That is plainly not the case here. There was no mistake about the subject matter of the financial agreement. There was a mistake as to the bankrupt status of the husband. The wife did not deliberately set out to ensure that the husband laboured under his mistake, for her own benefit. Both parties laboured under the same mistaken belief. If anything, it was the husband who created the confusion, by failing to make any enquiry as to his bankrupt status, before signing the financial agreement, and before properties were purchased.
Further, the husband’s evidence was that if he was aware of his true status as a discharged bankrupt he would still have signed the agreement in the same terms. His complaint is that he allowed subsequent purchases to be put into his wife’s sole name because of his mistaken belief. In my view, that is not sufficient to render the agreement voidable or unenforceable. The wife did nothing to contribute to the husband’s ignorance of his correct legal status. She did not unconscionably, as that term is properly understood.
Further, if the agreement is not susceptible to being set aside, the question arises as to whether the court should resist its enforcement because it would operate unconscionably against one party. If the agreement is valid and binding, it should operate according to its terms. Simply because one of the parties made a bad bargain does not mean that it would be unconscionable for the other party to enforce the agreement. The doctrine of unconscionability looks to the conscience of the party whose rights are sought to be affected. Should the wife, because of something she has said or done, be prevented from enforcing the financial agreement according to its terms? Nothing could be pointed to by counsel for the husband that would invoke equity’s assistance. In reality, the husband (and the wife) made the agreement, and entered into transactions because of the husband’s belief that he was still a bankrupt. Enquiry by the husband would have corrected his erroneous belief. He failed to make any such enquiry.
I do not consider that the financial agreement is either voidable or unenforceable.
Section 90K(1)(c) of the Act is in the same terms as s.87(8)(d) of the Act. In In the Marriage of Drew(1985) 10 Fam LR 87; FLC 91–601 Fogarty J said that s.87(8)(d) is directed to those cases where some event renders it impracticable for some significant part of the agreement to be carried into effect. At page 92 his Honour expressed the view that the subparagraph was akin to the doctrine of frustration although it was phrased in somewhat wider terms than the doctrine. His Honour did not consider the precise ambit of the sub-paragraph.
The real property at Property P, upon which the aged care facility operated by the parties is situated, is owned by the wife as trustee for the [Z] Family Trust. The Trust Deed was not put into evidence. It was provided to Mr Onus Maynes, an accountant who provided expert evidence as to the value of the aged care business. In his report
Mr Maynes says, presumably accurately, that the [Z] Family Trust is a “discretionary trust”. The wife is the appointor and the trustee of the trust. The primary beneficiaries of the [Z] Family Trust are the wife, the husband, Mr G.C., Mr R.C., Mr A.K. and Mr D.K.. These are the children of the parties and are all adults.
The husband seeks an order that transfers to him one half of the value of the assets of the [Z] Family Trust. The trustee is not, in her capacity as such, a party to the proceedings.
The land at Property P is the most valuable asset potentially forming part of the matrimonial pool. Ownership of it and the operation of the aged care facility are inextricably linked, according to Mr Maynes. My concern is that enforcement of the financial agreement according to its terms would not take into account the asset that is trust property. That is, the land upon which the aged care facility is operated would remain a trust asset. The wife as trustee could presumably be expected (if the terms of the trust deed so permit) not to make any future distributions of capital or income to the husband or his children. There are other questions that were not addressed by the parties. Is the business worth as much if the land is not owned by an entity associated with the parties? Can the business be sold to a third party, but the land retained by the trust? If the business is sold, how will the debt secured against the trust asset be paid? If the land is sold by the trust, does the business have any, and if so what, value?
This leads to the enquiry whether “any assets acquired during the relationship from joint funds” can encompass the land at Property P, or at a different level of enquiry, the parties’ respective beneficial interests in the [Z] Family Trust.
On one interpretation clause 6(c) of the financial agreement does not require the asset to be purchased in the name of either party. However, it plainly contemplates that the “asset” can be divided between the parties. As two of a class of primary beneficiaries, the parties do not have the right to title of the Property P property. As the justices of the High Court observed in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 79 ALJR 1724 at [15] the term ‘discretionary trust’ does not have a constant, fixed normative meaning. This follows from the joint judgment in Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at [8]:
“In submission upon the appeal, the term “discretionary trust” was used as an overall description of the trusts for which the Deed of Settlement provided. The meaning of this term is disclosed by a consideration of usage rather than doctrine, and the usage is descriptive rather than normative. Accordingly, a “discretionary trust” is not a component of the doctrinal divisions by which there is determined the formal and essential validity of trusts. For this purpose, divisions are made between express trusts, implied or resulting trusts, and constructive trusts, between purpose trusts and non-purpose trusts, between trust powers and bare powers, and between testamentary trusts and settlements inter vivos. On the other hand, “discretionary trust” has no fixed meaning and is used to describe particular features of certain express trusts.”
One would need to know the terms of the trust to ascertain whether any party had an entitlement to either capital or income from the trust, or whether they, as with other potential beneficiaries, depended on the absolute entitlement of the trustee to determine distributions. It would also need to be known whether there was any default provision if the trustee did not exercise her power by a given date. None of those matters are disclosed to the Court.
Another matter to which consideration needs to be given is the extent to which the wife, as trustee of the [Z] Family Trust, is entitled to exoneration or recoupment from trust assets. The P Property property is encumbered by a mortgage to the National Australia Bank securing a loan with a balance of $552,500 (exhibit 1). The wife and her son G.C. guaranteed the loan. As I understand the evidence, their guarantees were secured by mortgages on their respective real estate assets at Property K and Property M. The aged care business also operated an overdraft that is secured against the Property P property. If it could be argued that the Property P property was capable of being shared between the parties, how would these liabilities be dealt with?
“Property” is a defined term in s.4(1) of the Act:
“. . . means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.”
As Dickey, Family Law, 5th ed, points out at p 486:
“Because “property” for the purposes of the Family Law Act does not include a mere hope or expectancy, it does not include one particular type of “interest” (here in the sense simply of a potential or probable benefit) which is enjoyed by a large number of people today. That is the interest of a beneficiary under a discretionary trust. . .
The only strict interest that a beneficiary has under a discretionary trust is the right to require the trustee to exercise his or her discretion properly and to otherwise administer the trust (citing Gartside v Inland Revenue Commissioners [1968] AC 553 at 617-8; In the marriage of Stacy (1977) 31 FCR 34 at 47-9; In the marriage of Hauff (1986) FLC 91-747 at 75,443; In the marriage of Spellson (1989) 96 FLR 7 at 24, 27). A beneficiary under a discretionary trust has no right to require a trustee to exercise his or her discretion in the beneficiary’s favour, otherwise the trust would not be a discretionary trust.”
I should add that I do not consider that anything said in CPT Custodian Pty Ltd v Commissioner of State Revenue, including the High Court’s reiteration (at [25]) of the statement of Griffith CJ in Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 497 affects my conclusion. It is one thing to speak of ownership for the purpose of revenue legislation; it is quite another to presume, for the purposes of ss.4(1) and 79 of the Act, that because the beneficiaries of a discretionary trust have no entitlement to ownership of the trust property, that the trustee should be taken to have both legal and equitable title, and deemed to be the ‘owner’ of the asset. This is because, even if that were so, the ‘owner’ would still hold the asset subject to the trust.
Under s.79(4)(e) of the Act, by reference to s.75(2)(b) of the Act, the Court could take account in property settlement proceedings that one or both of the parties is a beneficiary under a discretionary trust: Dickey, supra, at 599. If the financial agreement is operative, that course is not open. The agreement must apply, according to its terms.
Because of the nature of a ‘discretionary’ trust, an order cannot be made that the trust property of the [Z] Family Trust be divided equally between the parties.
It would only be impracticable for the financial agreement to be carried out if the trust property was “an asset acquired during the relationship from joint funds”.
In my view, the better construction of clause 6(c) of the financial agreement is that to be caught the asset should be personally acquired by one or other or both of the parties to the agreement. In those circumstances, it would not extend to cover assets purchased by one of the parties in their capacity as a trustee. Accordingly, I would conclude that the assets of the [Z] Family Trust are not captured by the terms of the financial agreement. The trustee will continue to hold that asset on the terms of the trust.
Even if I were unsure of that outcome, the Property P property was not acquired using the joint funds of the parties. It was accepted during argument that “joint funds” should be construed to mean funds to which each party made a contribution. It was accepted that there was no need for their contribution to be equal. The purchase of the Property P property was wholly financed by a loan from the National Australia Bank. Clause 6(c) of the financial agreement focuses on how the particular asset is ‘acquired’. The P Property property was ‘acquired’ on its purchase from the previous owners. The husband made no contribution to the purchase of the asset. It is beside the point that the loan repayments were made from the business of the aged care facility to which the husband made an undoubted contribution. If it was found that part of those funds was contributed by the husband (due to his efforts in assisting to run the business) they were not contributed to the acquisition of the asset, but rather to the repayment of a loan.
In my view if the Property P property is not caught by the financial agreement, as I conclude, then it is not impracticable for the agreement to be carried out.
It follows that I conclude that the financial agreement is binding and should not be set aside.
In the Family Law Amendment Bill 2000 Further Revised Explanatory Memorandum at paragraph 153 it is stated, in relation to what became s.90G of the Act:
“153. All of these criteria will have to be met in order for a financial agreement to be binding. If an agreement is binding, a court will not be able to deal with the matters with which the agreement deals. If an agreement is not binding, a court will be able to deal with the matters with which the agreement deals. A court will be able to deal with any property or financial resources of the parties that have not been dealt with by a binding financial agreement between them.”
Can I separately make orders with respect to the Property P property? As the mere expectations of the parties under the [Z] Family Trust are not ‘property’ there is no property left to be adjusted under s.79 of the Act. In those circumstances, although each party may have a financial resource available to them, it is of no consequence, if there is no property to adjust. If the financial agreement applies, there is no property left for me to make orders in relation to.
Section 90DA of the Act provides:
(1) A financial agreement between 2 people, to the extent to which it deals with:
(a) how, in the event of the breakdown of the marriage, all or any of the property or financial resources of either or both of them at the time when the agreement is made, or at a later time and before the termination of the marriage by divorce, is to be dealt with; or
(b) the maintenance of either of them after the termination of the marriage by divorce;
is of no force or effect until a separation declaration is made.
(2) A separation declaration is a written declaration that complies with subsections (3) and (4).
(3) The declaration must be signed by at least one of the parties to the financial agreement.
(4) The declaration must state that:
(a) the parties have separated and are living separately and apart at the declaration time; and
(b) in the opinion of the parties making the declaration, there is no reasonable likelihood of cohabitation being resumed.
(5) In this section:
"declaration time" means the time when the declaration was signed by a party to the financial agreement (or last signed by a party to the agreement, if both parties to the agreement have signed).
"separated" has the same meaning as in section 48 (as affected by section 49).
The husband argues that because no separation declaration has been made, the financial agreement cannot be relied upon by the wife.
There is nothing in the Explanatory Memoranda nor in the second reading speeches that assists in the interpretation of the last phrase of s.90DA(1) of the Act.
I was informed by counsel that the section was inserted into the Act as a consequence of the decision of Rich v ASIC (2003) FLC 93-171.
The question arises as to whether the requirement for a complying separation declaration is a critical part of the right of the wife to rely on the binding financial agreement, or whether it is a procedural pre-condition to the enforcement of that right. This distinction assumes importance if, for example, a separation declaration does not currently exist. If the existence of a declaration forms part of the entitlement to rely on a financial agreement then, in the absence of a declaration prior to the wife bringing her proceedings (in this case, by way of Response to the husband’s Application), the wife cannot rely on the financial agreement. On the other hand if it is merely procedural, the court can fashion orders subject to the wife filing a complying declaration.
The distinction is somewhat analogous to that adverted to by Dixon J in Harding v Lithgow Corporation (1937) 57 CLR 186 at 195, of a notice being a condition of suit, a procedural matter not going to the validity of the title to enforce the liability but only to the mode of enforcing it, or the fulfilment of a preliminary procedural condition.
There is no prescribed form for the separation declaration. Section 90DA does not specify a time by which a separation declaration must be made. The section does not require the party making the declaration to state that it is made pursuant to s.90DA of the Act. The section provides that the financial agreement is of no force or effect “until” the separation declaration is made. To my mind that carries with it the consequence that once a complying separation declaration is made, the financial agreement is given full force and effect. Its operation is effectively suspended until the complying declaration comes into existence. The use of the word ‘until’ as opposed to, for example, ‘unless’ evinces a temporal element to the requirement for a separation declaration. The financial agreement remains in force and is binding, but cannot be enforced by either party until such time as a complying declaration is executed. This conclusion is reinforced in that there is nothing in s.90G, which deals with whether a financial agreement is binding, requiring a separation declaration. That may be, of course, because the agreement is binding immediately upon its execution, perhaps whilst the parties are married. That highlights the difference that must be drawn between the efficacy (and binding nature) of the agreement and its enforcement. Section 90DA goes to the latter. Section 90G goes to the former.
In my view there is no complying separation declaration in evidence in this case. The affidavit of the wife filed 16 August 2007 states:
“3. We separated finally in June 2006.
4. The marriage subsisted 4 ½ years although there were periods of separation in that time.”
Whilst this may arguably satisfy s.90DA(4)(a) of the Act, it does not satisfy s.90DA(4)(b). There is no such statement. Having regard to the decision of the Full Court in Black & Black I interpret the word “must” in s.90DA(4) as mandatory (to use the old fashion term eschewed by the High Court in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 184 CLR 355).
Curiously, during his final address the solicitor for the wife stated:
“I have a letter that can be handed to – well it has been handed to my friend regarding section 90DA. I don’t put it in evidence. I don’t want to do that, but there is that. Any orders that can be made, can be made subject to that.”
Counsel for the husband did not address this issue any further. He tacitly accepted that a separation declaration had been given to him. Put another way, he did not submit that the further document given to him did not comply with s.90DA of the Act. What then is the effect of the absence of a separation declaration in evidence, but where one might in fact exist? Should the Court proceed to decide the case as if there was no binding financial agreement, or should the Court decide the case as if the agreement is binding, but make the orders conditional upon the wife proving, by affidavit, that a settlement declaration has been made?
In my view, on a proper construction of s.90DA(1) of the Act, the existence of a separation declaration is a procedural matter. It need not exist at the commencement of the proceedings, nor even at the commencement of the final hearing. However, the entitlement to enforce the financial agreement is contingent upon such a document coming into existence. To construe the section otherwise would give rise to potentially anomalous results. If proceedings were commenced by one party to the marriage for property settlement orders, and the other party filed a Response relying on the existence of a financial agreement, would the court strike out that Response if the separation declaration did not exist at the date of the filing of the Response, but was provided to the Court on the hearing of the strike –out application? I think not. If a party failed to advise his or her legal adviser of the existence of a financial agreement until part way through a hearing, would that party be precluded from relying on the agreement, if a separation declaration was then executed? I think not. Whilst there may be costs considerations stemming from the failure to properly comply with s.90DA until late in the proceedings, I do not think a court would preclude a party from relying on an otherwise binding financial agreement.
Therefore, I propose to deal with the matter on the basis that there is a binding financial agreement, but make the enforcement of my orders contingent on the filing of an affidavit exhibiting a separation declaration. If no such affidavit is filed within the period of time allowed for that purpose, I will proceed to make orders pursuant to s.79 of the Act.
The solicitor for the wife submitted, and I accept it to be correct, that there are relevantly seven assets that need to be considered:
a)The property at Property K;
b)The property at Property M;
c)The property at Property P;
d)The business [W] Aged Care Facility;
e)Unit 1101 Property S;
f)Unit 515 Property S;
g)A boat.
It is irrelevant under the terms of the financial agreement in whose name an asset is registered (provided it is in the name of one of the parties). What is important is how the asset was acquired, and whether one or both parties financially contributed to its acquisition.
I have already concluded that the property at Property P, being an asset of the [Z] Family Trust, is not caught by the financial agreement.
The properties at Property K and Property M must, according to the terms of the financial agreement, remain with the wife.
Under the terms of the financial agreement, the husband is given no credit for work he carried out to renovate the wife’s properties. Valuations were obtained of the various properties, and of the additional value attributable to the work the husband carried out. None of that evidence is relevant to the decision that the court must make applying the terms of the financial agreement.
I accept the submission from counsel for the husband that there was no evidence of the value of the boat, or how it was acquired. It should therefore be ignored.
The business of the aged care facility was acquired pursuant to a contract dated 14 June 2002. Settlement of the contract was made conditional upon the contemporaneous settlement of the purchase of the Property P land. The wife was the named purchaser under the contract to purchase the business.
The wife says that the total monies borrowed to facilitate the purchase were $669,521.10. The purchase price of the business was $100,000. The purchase price for the land was $552,500. The additional borrowings were to pay for acquisition costs, such as stamp duty and legal expenses.
The wife says that she paid a $10,000 deposit towards the purchase of the business. I accept her evidence in that regard. The husband made no initial financial contribution.
The initial purchase of the business of [W] Aged Care Hostel was therefore facilitated by funds provided by the wife, and from borrowings in the wife’s name.
The solicitor for the wife accepted, in his final address, that a property was caught by clause 6(c) of the financial agreement if both parties contributed to the repayment of the loan initially used to acquire the property. It was accepted that because the income produced by the business and paid to both parties was used to make repayments on the loan pertaining to Unit 1101 “Property S” the husband was entitled to a share of that property.
If the concession was properly made (as to which see my Reasons at paragraph 56, above), it is difficult to see why both parties did not contribute to the acquisition of the aged care business, or at least to the creation or enhancement of the goodwill of that business. Both parties worked in the business. The loan for the business and the Property P land was serviced from the business income. That conclusion is reinforced when it is realised that both parties have contributed to the creation of a significant asset – the goodwill of the business.
Mr Maynes stated:
“As the property and the business are substantially inter-related I consider it appropriate to value the “[W]” facility including both the property and the aged care and accommodation business undertaken at those premises on a consolidated basis.”
Mr Maynes valued the business as a going concern at $313,500; and the goodwill of the business at $180,000.
Mr Maynes assessed the maintainable earnings of the business on an ungeared basis at $63,000 per annum. He then valued the business on a capitalisation of earnings basis using a multiplier of 3.3 times. This valued the business at $210,000. By deducting from this figure the value of the plant and equipment leaves the value of goodwill at $180,000. To arrive at the value of the business as a going concern,
Mr Maynes has performed the calculation set out at paragraph 10.1 of his first report.
I accept that both parties worked in the business and contributed to the generation of goodwill. I do not accept that the husband contributed nothing to the business. As stated earlier, for an asset to be caught by clause 6(c) of the financial agreement, the contributions of the parties do not have to be equal. The wife accepts that the husband did some maintenance of the facility, and that he cooked meals. He has, for some time, conducted the business on a week about basis with the wife.
When asked what was involved in running the business the wife said that they employed one lady for 3 hours a day to do some cleaning “and the rest of the day [Mr Kostres] and I carried on”. In her evidence the wife regularly used “we” in connection with the business: “of course we were going to make it work”, “that’s why we bought it”.
The question is whether the running of the business and the consequent generation of goodwill is the acquisition of an asset from joint funds. $90,000 of the $100,000 purchase price for the business was apportioned to goodwill. It is not known whether this was an apportionment based on any particular evidence, but in the absence of evidence to the contrary it should be taken to be accurate. If I accept that the parties were effectively partners in the business each was entitled to one half of the profit generated by the business. The parties in fact had equal drawings from the business (apart from a short period when the husband was recuperating from surgery). They used their drawings to pay off debts and for living expenses. However, the profit of the business was not entirely consumed by drawings. In my view, by working in the business the husband and the wife generated the income of the business. This income was “joint funds”. The parties used their joint funds to acquire the business in the sense of building up the goodwill, and repaying debt associated with the business.
I note that in Schedule 4 to Mr Maynes’ report there is a reference in the 2004 financial year to goodwill being written off to the extent of $4,500. There was no explanation for this. In the balance sheet for the 2006 financial year goodwill was still valued, presumably on an historical cost basis at $90,000. It is unclear how this could be if some goodwill was written off.
Putting these uncertainties to one side, if the goodwill of the business was $90,000 when the business was purchased, and is now $180,000 as assessed by Mr Maynes, an asset has increased in value due to the parties’ operation of the business. Could this increase in value be said to be the acquisition of an asset? Goodwill, being an intangible asset, could reasonably be said to be ‘acquired’ by the parties continuing to operate the business successfully. It is, according to Mr Maynes, a function of profitability. That is, as profitability increased, additional goodwill was acquired. Profitability of the business was only achieved by the efforts of both parties. In that sense, I conclude that the increase in value of the goodwill of the business was acquired from the joint funds of the parties.
It is not possible for me to make any findings as to the parties’ contribution to overall value of the business, because, as Mr Maynes says at paragraph 10.1 of his report, his value of the business brings in the value of the Property P property, the debt secured against the property and monies owed by the trust to the wife. It is simply not possible to separate out these matters so as to enable a calculation of the husband’s contribution to the overall growth in value of the business itself.
As I have said, the wife conceded that the husband was entitled, pursuant to the terms of the financial agreement, to one half of the net value of Unit 1101 “Property S”.
That unit has been independently valued at $315,000. The most recent bank statement put into evidence (exhibit 1) states that the balance of the loan secured against that property was $157,029.03. The equity in the property divisible between the parties is $157,970.97.
Unit 515 “Property S” was purchased by the wife as trustee for the [C] Family Trust. The wife gave evidence that was not disputed that the trust was a ‘discretionary trust’ and that the wife and her children were the potential beneficiaries under the terms of the trust. The property is worth $365,000, and has a debt secured against it of $332,235.06. The net equity is therefore $32,764.94.
The problem with including this property as covered by the terms of the financial agreement is the same as for the Property P property. Even if the unit could be said to have been acquired using joint funds it cannot be equally divided between the parties.
I conclude therefore that the two assets that are capable of division between the parties have a combined value of $247,970.97. Each of the parties is entitled to one half of this sum, or $123,985.48.
As all of the properties are registered in the name of the wife, or of a trust, I consider the most efficient way of resolving the matter is to order the wife to pay the husband that sum of money. If the wife either will not or cannot comply with such an order one or more of her properties will have to be sold. To now order the sale of an asset, for example, Unit 1101, would cause the parties to incur selling costs that would diminish the overall sum available to be paid to the husband. The wife will enjoy any future capital gain of the property.
I do not propose to make orders now for the default sale of a particular property as the parties may wish to adduce evidence as to which should be sold in the event that the payment required to be made is not. Hopefully that situation will not come to pass.
I will give the parties leave, if they so wish, to make submissions as to costs.
I certify that the preceding one hundred and two (102) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 17 October 2008
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