L & L
[2005] FamCA 335
•10 May 2005
[2005] FamCA 335
FAMILY LAW ACT 1975
IN THE FULL COURT
OF THE FAMILY COURT OF AUSTRALIA
AT SYDNEY Appeal No. EA 2 of 2004
File No. CAF 821 of 2000
IN THE MATTER OF:
L
Appellant Wife
- and -
L
Respondent Husband
REASONS FOR JUDGMENT
CORAM: Finn, Holden and Strickland JJ
DATE OF HEARING: 6 May 2004
DATE OF JUDGMENT: 10 May 2005
APPEAL SUMMARY
MATTER:L and L
APPEAL NUMBER: EA 2 of 2004
(CAF 821 of 2000)
CORAM:Finn, Holden and Strickland JJ
DATE OF HEARING: 6 May 2004
DATE OF JUDGMENT: 10 May 2005
CATCHWORDS: FAMILY LAW – APPEALS – Property settlement – Determination of the pool of property – Whether the trial Judge erred in including in the pool as a liability a group tax debt owed by a company controlled by the husband – No error found – Whether the trial Judge erred in including as a liability a mortgage debt arising from the husband’s failure to continue to pay that mortgage despite contrary assurances – No error found – Whether the trial Judge erred in failing to include rent received by the husband from particular properties and a liability arising from the husband’s failure to pay rates in relation to those properties – No error found – Whether the trial Judge erred in his valuation of a company controlled by the husband and, in relation to the valuation, whether the trial Judge erred in admitting into evidence a report provided by the husband’s accountant which contradicted figures in a application of the husband for finance and in relying on draft accounts after indicating that he would not do so – No error found – Whether the trial Judge erred in making no order concerning the parties’ stored furniture in relation to which both parties had applied for an order that the furniture be sold – Interests of justice require an order for the sale of the furniture.
Caselaw cited:
Prince & Prince (1984) FLC 91-501
Chorn v Hopkins (2004) FLC 93-204
Marker [1998] FamCA 42
Jordan v Jordan (1997) FLC 92-736
Nelson v Nelson (1995) 184 CLR 53
Appeal allowed insofar as necessary to make orders for the sale of the furniture. Appeal otherwise dismissed.
Directions made for the filing of submissions in relation to costs.
This is an appeal by the wife against an order for property settlement made by Coleman J on 28 November 2003. His Honour’s order gave effect to his conclusion stated in paragraph 130 of his reasons for judgment that:
the parties should share their net assets of $1,019,945 in shares of 52.5 percent to the husband and 47.5 percent to the wife…(producing) respective entitlements of $535,471.125 and $484,473.875
Scope of the appeal
Apart from a complaint concerning his Honour’s failure to make any order concerning the parties’ furniture, the wife’s appeal is directed solely to his Honour’s calculation of the net asset pool of the parties. According to the calculations annexed to the wife’s summary of argument, the net value of the parties’ assets should have been found to be $1,851,454 rather than $1,019,945 as found by his Honour.
There is no complaint concerning his Honour’s conclusion that such net assets should be divided 52.5 percent to 47.5 percent in favour of the husband. That division was based solely on the parties’ contributions; it apparently having been common ground before his Honour that no adjustment under s75(2) of the Family Law Act 1975, should be made.
Relevant Background
Given the limited scope of the appeal, it is only necessary by way of factual background to say that the husband (born 1947) and the wife (born 1953) commenced cohabitation in 1993, married in 1995 and finally separated in April 2000, and to record the following findings made by his Honour (which have some relevance to the grounds of appeal):
14.When co-habitation commenced, the husband had … interests in a number of corporate entities, the most enduringly relevant of which was [S] Pty Limited (“S Pty Ltd”). The husband was self-employed in or through [S Pty Ltd] and related corporate entities, a situation which continued throughout the parties’ co-habitation.
…
17.In 1998 the parties exchanged contracts to purchase a farming property [in rural NSW] ….
18.In 1999 the husband established a corporation [B] Pty Limited (“[B Pty Ltd]”). [S Pty Ltd] and its related corporations were operating at that time.
19.In June 1999 the parties completed the purchase of [the property in rural NSW], …. The parties occupied [that property] until their final separation. The husband has continued in occupation of the property since the final separation.
20.In January 2000 the wife purchased a property … in the ACT in her sole name…
21.On 27 March 2001 an administrator was appointed with respect to [S Pty Ltd]. The company has since been placed in liquidation. On 29 March 2001, the husband caused the company [P] to be incorporated. [The company P] acquired the assets of [S Pty Ltd] from the liquidator of [S Pty Ltd] and, to some extent at least, carries on business activities analogous to those previously undertaken by [S Pty Ltd].
The pool of assets as found by the trial Judge
The trial Judge recorded his findings in relation to the net assets of the parties in the following table which appears in paragraph 43 of his judgment:
Assets
Liabilities
Equity in [the property in rural NSW]
$904,000
H
… ski lodge
$15,000
H
Cars
$22,000
H
$14,000
H
$10,000
H
$6,000
H
$1,600
H
$500
H
$8,000
H
Farm equip
$19,900
H
Cattle
$60,000
H
Household
$46,425
H
Watch collection
$30,000
H
Superannuation
$29,500
H
[The company P]
$144,450
H
BMW
$5,000
W
Furniture
$53,555
W
Equity in the ACT property
$96,000
W
Superannuation
$62,015
W
Total assets
$1,527,945
Credit card debts
H
-$40,000
Personal loans
H
-$17,000
[S Pty Ltd] debt
H
-$67,000
RM
H
-$70,000
Boral
H
-$56,000
Wesfarmers
H
-$26,000
ATO
H
-$213,000
Credit card debts
W
-$19,000
Total liabilities
-$508,000
Total net assets
$1,019,945
It is unnecessary that we refer to his Honour’s reasoning in relation to any of the items included in, or to any item omitted from the above table, save in so far as such reasoning has relevance to a ground of appeal.
Before turning to consider the grounds of appeal, we mention that the wife’s Notice of Appeal contained nine grounds of appeal but her Counsel abandoned ground two at the hearing of the appeal.
Ground 1: The tax debt liability of the husband
By ground 1 it is asserted that his Honour erred “in including as a liability to be taken into account in calculating the nett assets of the parties for division, the debt of the husband to the Australian Taxation Office, being a debt which arose after separation relating to non-remission of group tax by [B Pty Ltd].”
His Honour explained his reasons for including as a liability in his calculation of the net property of the parties the taxation debt incurred on account of the non-remission of group tax by B Pty Ltd in the following way:
38. There is no issue that the husband owes the Australian Taxation Office $213,000 in respect of [B Pty Ltd]. The husband’s evidence suggests that these were instalments of tax deducted from employees’ wages but not remitted to the ATO, the husband’s evidence being that the monies were used by and for the business.
39. Despite the deficiencies in the husband’s evidence in relation to the circumstances surrounding the ATO debt, and the absence of a good deal of evidence of a commercial nature in relation to the husband’s business activities generally, such circumstantial evidence as there is, particularly that of the administrator in respect of the failure of the [S Pty Ltd] group, suggests that, however inept his endeavours may have been, the husband’s explanation for the incurring of this liability cannot be rejected.
40. The husband asserts that, to the extent that the funds may have been remitted to the ATO, other creditors for which the husband was or would be liable would not have been paid. His overall financial position would thus not have changed. Absent evidence of any improper use of the funds by or at the discretion of the husband, and there is no such evidence, this assertion is hard to reject. As the authorities make clear, the Court does not apply a test of strict liability to the commercial success or otherwise of a person in the husband’s position. It has not been affirmatively demonstrated in these proceedings that the husband’s conduct was so commercially inept, and should have been seen by him to have been so, as to render appropriate visiting upon him the totality of the liabilities which currently exist by virtue of the failure of [S Pty Ltd] and its related entities or the impact on the husband or corporations currently existing of such failure.
41. On the evidence before the Court, one could speculate as to the reasons for [S Pty Ltd’s] failure. It is unhelpful, and potentially dangerous, to do so. All the Court needs to and does record is that the failure of the [S Pty Ltd] group and the current level of indebtedness of the husband has not been shown to be referable to acts or omissions of the husband of a kind which would, following decisions of the Court such as Kowaliw and Kowaliw (1981) FLC 91-092, justify disregarding the tax debt in whole or part for the purpose of calculating the net assets of the parties. It is to be remembered, that the [S Pty Ltd] group provided substantial funds for the parties during co-habitation and that there is no suggestion on behalf of the wife that, whatever the figure, the assets of [S Pty Ltd’s] successor should be ignored. The inconsistency in seeking to bring in on the one hand the assets of a corporate structure or network whilst excluding liabilities referable to it is readily apparent. The Court accordingly has regard to the tax debt of $213,000.
In support of ground 1 it was submitted by Counsel for the wife that the effect of his Honour including the tax debt ($213,000) as a liability in calculating the net value of the parties’ assets was that the wife would bear 47.5 percent of that debt. It was submitted: that this was not just and equitable given that although B Pty Ltd had been incorporated in 1999 (prior to the parties’ separation), it had not traded until the 2000/2001 year which was after the parties’ separation in April 2000; that the wife was not a director of B Pty Ltd; that she had had no role in the decision not to remit the group tax; and that she had derived no benefit from the decision.
It was further submitted that his Honour appeared to say in paragraphs 40 and 41 of his judgment that unless a finding of commercial recklessness on the part of one party is made, all debts whether incurred before or after separation should be taken into account in calculating the net assets of the parties. It was submitted that such an approach would be erroneous, and that the correct approach is that where a party incurs liabilities post separation which liabilities that party had an obligation to pay, that party cannot visit a share of the liability on the other party by having it deducted from the gross assets of the parties particularly in circumstances where the party who incurred the liability has had the income to meet the liability but has apparently chosen not to do so.
The only evidence which appears to have been before his Honour concerning the operations of B Pty Ltd and the group tax which it had failed to pay, were the following passages from the husband’s affidavit sworn on 22 October 2003 and from the transcript of the cross examination of the husband:
Affidavit of husband sworn on 22 October 2003
5. The plant and equipment owned by [S Pty Ltd]was sold to me by the administrator for the sum of $90,000. I borrowed those funds from a friend who used to be a business partner…. I also used income from [the company P]. I paid for the equipment in a piece meal fashion. I subsequently established a company known as [the company P] of which I am the sole director and shareholder. The company manufactures principally pre-cast concrete panels and road barriers. That company has no employees. The workers in that company are employed by [B Pty Ltd] of which I am the sole director and shareholder. I was advised by my accountants to establish the two companies in that way. [The company P] pays a service fee to [B Pty Ltd] and [B Pty Ltd]uses those funds to pay the employees. My salary is $40,300 gross per annum.
6.[The company P] commenced trading in May 2001. My accountants have prepared draft tax returns and profit and loss documents for the company, however, they have not yet been completed. No tax return has yet been submitted for the company. The balance sheets appear to show that the company is not trading at a profit however I am able to meet the company’s bills. It is not trading insolvently. I am hopeful that for the year ended 30 June 2004 that the company will be profitable. Any profit that I receive from the company in this financial year will be used to pay some of the debts that exist and that I will incur if I am able to retain the farm…
8.I currently have the following liabilities:
…
8.7 In addition [B Pty Ltd] owes the tax office $213,000 for which I am personally responsible as the Director. Those debts have accumulated since the company was established. It has been unable to pay tax.
Transcript 30/10/03,p 664-666:
[SOLICITOR FOR THE WIFE]: You allege in your affidavit, your recent affidavit that there is a debt owed by [B Pty Ltd] to the Taxation Department---? [HUSBAND] Yes
[SOLICITOR FOR THE WIFE]: and that you are liable for that debt?--- yes
[SOLICITOR FOR THE WIFE]: I think you say that’s about $213,000?--- That’s personally liable, yes.
[SOLICITOR FOR THE WIFE]: In paragraph 8.7 of your affidavit, sworn 22 October, you say:
In addition, [B Pty Ltd] owes the tax office $213,000 for which I am personally responsible as the director.
[HUSBAND]: Yes.
[SOLICITOR FOR THE WIFE]: Those debts have been accumulated since the company was established. It has been unable to pay tax?--- Yes
[SOLICITOR FOR THE WIFE]: What sort of tax is this?--- Group tax. Group tax and other tax debt. It’s a debt, it’s a substantially group tax.
[SOLICITOR FOR THE WIFE]: It’s tax on wages---? Yes
[SOLICITOR FOR THE WIFE]: ---with employees. As you described in your affidavit, the [B Pty Ltd] supplies the labour force for [the company P]?--- That’s correct.
[SOLICITOR FOR THE WIFE]: That includes your labour?--- Yes
[SOLICITOR FOR THE WIFE]: So the $213,000 represents, does it, group tax that’s been deducted from the wages of employees and not paid to the taxation---? That’s correct.
[SOLICITOR FOR THE WIFE]: You said in an affidavit in May 2001, that:
[B Pty Ltd] hasn’t traded.
That was 2 years ago. So do I assume that [B Pty Ltd] or that tax debt has accumulated since then?---Yes, that’s correct.
[SOLICITOR FOR THE WIFE]: In the last 2 years?--- That’s correct.
[SOLICITOR FOR THE WIFE]: So what happened to that money that was deducted from wages?--- Money remained in the business.
[SOLICITOR FOR THE WIFE]: So how do you say that that’s a personal debt, rather than a company debt?---Sorry?
[SOLICITOR FOR THE WIFE]: Why do you say that’s your personal debt, rather than a company debt?--- Since – since about, in the last 2 years, tax law changed to – to hold directors accountable and responsible. It’s basically as a result of, I believe, Ansett and ---)
[SOLICITOR FOR THE WIFE]: That’s the advice you’ve had, is it?--- Sorry?
[SOLICITOR FOR THE WIFE]: The advice you’ve had that you’re personally liable for?---Yes
[SOLICITOR FOR THE WIFE]: I presume that that’s if the company doesn’t or can’t pay it?--- That’s correct.
[SOLICITOR FOR THE WIFE]: The Barina motor vehicle which ---
HIS HONOUR: Just before you leave that, it’s quite unclear to me from your cross-examination, is that issue, that liability in contention or not? Your cross-examination gives me no clue at all as to what your position is.
[SOLICITOR FOR THE WIFE]: The existence of the debt but the number is not in contention, whether it, in these proceedings, is a debt that you are required to visit on the total asset pool, gross asset pool,---
HIS HONOUR: So the existence of the debt is not in contention?
[SOLICITOR FOR THE WIFE]: $213,000
HIS HONOUR: What about his assertion, and the evidence he’s given would’ve been objectionable had you not listed it in cross-examination but you did and it’s in, what do you say about his evidence as to his liability? Is that in issue or not? You haven’t put it in issue.
[SOLICITOR FOR THE WIFE]: I’m aware that he’s been (indistinct) so I couldn’t.
HIS HONOUR: So there’s no issue that he is personally liable and there’s no issue as to quantum?
[SOLICITOR FOR THE WIFE]: That’s right.
HIS HONOUR: Right.
[SOLICITOR FOR THE WIFE]: The issue is as to whether it’s factored into the mathematics in this case.
HIS HONOUR: Very well.
We note that there was some re-examination of the husband about the amount of $213,000 owing to the Tax Office. But that evidence has no relevance to the issue with which we are concerned.
While we acknowledge that another Judge may have reached a different conclusion to that reached by his Honour on the very scant evidence concerning the unpaid group tax, we are nevertheless satisfied that it was open to his Honour to reach the conclusion that he did, being that this tax liability should be taken into account effectively as a joint liability of the parties. We consider that this conclusion was open to his Honour against the background of the husband’s evidence of the arrangements between B Pty Ltd and the company P, and also the fact that the value of the company P was taken into account as an asset of the parties. The fact that the company P and B Pty Ltd were effectively carrying on the business of the S Pty Ltd group which his Honour found had “provided substantial funds for the parties during cohabitation” was also highly relevant.
Another crucial factor is that the submission of the Appellant was dependent on the evidence establishing that the husband had the financial ability to meet the debt at the relevant time. However, this was not established. Indeed, it was not even put to the husband that he had been commercially inept, or that he had pocketed the money, or otherwise used it for his own purposes, and his Honour of course rejected the figures contained in the husband's finance application.
While it is obviously necessary for trial Judges to take considerable care in deciding whether or not to take into account a liability incurred by a party after separation when calculating the net value of the property of the parties available for distribution between them, it has to be remembered that the exercise of the discretion in each case will depend on the facts of that case as they can be found on the basis of the available evidence. (See generally the observations of Evatt CJ in Prince & Prince (1984) FLC 91-501 at 79-076-7, and more specifically the discussion of the treatment of a post-separation tax liability in Chorn v Hopkins (2004) FLC 93-204 at paragraphs 71-72).
Finally in connection with this matter, we make it clear that we do not read Coleman J as saying (as was contended by Counsel for the wife) that unless there is a finding of commercial recklessness all debts be they incurred before or after separation should be included in the calculation of the net value of the parties’ property. We read all of his Honour’s comments as being made in the context of the facts in, and thus limited to, the circumstances of this particular case.
Grounds 3, 6, 7 and 8: other liabilities not paid and income used by the husband in the separation period
Grounds 3, 6, 7 and 8 are also all concerned with matters occurring during the separation period, being: the husband’s failure to make certain mortgage payments on the property in rural NSW which was the former matrimonial home and the husband’s home after separation; his retention of the rents received from certain properties of the parties; and his failure to pay rates on certain of those properties. The precise terms of these grounds are as follows:
3.His Honour erred in including as a liability to be taken into account in calculating the nett assets of the parties for division, the sum of $118,000, being part of the mortgage debt owed to the National Australia Bank secured over the former matrimonial home which accrued because the husband ceased, contrary to assurances, to pay mortgage payments after April 2001 notwithstanding that he continued to live in the property.
6.His Honour erred in failing to bring to account as a notional asset the sum of $32,276 representing the rent on the cottage owned by the parties, which rent had been received by the husband after April 2001 and retained by him.
7.His Honour erred in failing to bring to account as a notional asset the sum of $59,000 being one half of the rent on one … property [in Q] which the husband received as cash after separation.
8.His Honour erred in failing to bring to account as notional property the sum of $64,522, being the Council rates on the … properties [in Q] which were deducted from the proceeds when those properties were sold, the husband having failed to cause the payment of those rates from his business and/or rent receipts for those properties.
19. It will be convenient, at least for the most part, to deal with these grounds as a group because of the manner in which the trial Judge dealt with these subject matters as can be seen from paragraphs 94 of his judgment which is in the following terms (with emphasis added):
94. On behalf of the wife it was asserted that the husband should pay to her $59,000 “representing one half of the difference between the housing loan currently outstanding on the [property in rural NSW] and loan as it would have been had the husband paid mortgage instalments after April 2001”, together with a further sum of $16,138 “representing one half of the rent on the cottage received by the husband after April 2001”, a further sum of $29,500 “representing one half of the rent on the [one … property [in Q] received by the husband after April 2001”, and a further sum of $32,261 “representing one half of the outstanding council rates on the … properties in [Q] at the time of their sale”.
As his Honour indicated in this paragraph and also as emerges from the relevant grounds of appeal, the wife had sought at trial (in her “Minute of Orders Sought”) that the husband pay:
(c) … the Wife the further sum of $59,000 representing one half of the difference between the housing loan currently outstanding on the [property in rural NSW], and the loan as it would have been had the Husband paid mortgage instalments after April 2001;
(d) The further sum of $16,138 to the Wife representing one half of the rent on the cottage received by the Husband after April 2001;
(e) The further sum of $29,500 to the Wife representing one half of the rent on [one] … property [in Q] received by the Husband after April 2001;
(f) The sum of $32,261 to the Wife representing one half of the outstanding council rates on the … properties [in Q] at the time of their sale;
Some background to these claims by the wife can be found in the following passages from her affidavit (sworn 24 October 2003):
20.We finally separated when I left the [property in rural NSW] in April 2000. [The husband] has continued to live in the [property in rural NSW]. He has stopped paying the mortgage instalments on the property as at April 2001 but continued to receive all of the rent from the cottage on the property. The mortgage debt currently stands at about $405,000…
21.There is a cottage on the property which was rented out during our occupation… [The husband] has received all of the rent since separation. He has not accounted to me for those monies nor explained what he has done with them. Through his solicitors he said he would pay the rent into the mortgage but he has not done that for several years…
Specifically in relation to the mortgage on the former matrimonial home property in rural NSW, the wife relied before his Honour on the evidence of an accountant that the mortgage debt (which stood at $496,000 at trial) would only have been $287,450.76 had the mortgage been paid by the husband after April 2001 as the wife claimed the husband had agreed to do. There was thus an increase of some $129,000.
His Honour dealt with these claims by the wife, which he had described in paragraph 94 of his judgment (quoted above), in the following global way:
95. The figures thus referred to essentially emerge from the evidence before the Court. The issue is whether the husband should bear responsibility in respect of those non-payments or receipts, as sought by the wife, or whether, as was asserted by the husband, those receipts and/or non-payments should rest where they have fallen. This involves a consideration of the capacity of the husband to have paid, or cause to be paid, the liabilities which were not met as and when they arose and an examination of the use made by the husband of the rental which he received from the cottage or second residence on [the rural NSW property] and other funds the fate of which he controlled.
96. Cross-examination directed to the husband in relation to the rentals received by him from time to time, and his representation with respect to such rentals, particularly to [a finance company], whilst confirming that the husband last paid monies into the mortgage account in April 2001, does not advance the wife’s case in relation to the husband’s capacity subsequent to April 2001 to have met the commitments of the parties to the NAB as well as the commitments of [S Pty Ltd] and the other corporations through which the husband’s business, and source of income, was conducted. Nothing in cross-examination of the husband suggested that the rental monies received from the second house on [the rural NSW property] was applied for inappropriate purposes, nor did any cross-examination of the husband suggest that he was living a lifestyle which was excessive, inappropriate or otherwise rendering criticism of him appropriate. Nothing raised in cross-examination supports any inference that the husband’s stewardship of funds received by his business was reckless, or even negligent.
97. The circumstantial evidence is instructive in relation to this issue. The husband’s draft tax return for the year ended 30 June 2002 reveals a net loss for the year of $1,307. His draft return for the year ended 30 June 2001 suggests a taxable income for that year of $8,574. The husband’s tax return as lodged for the year ended 30 June 2000 suggests a taxable income for the year of $8,990 whilst for 1999 his taxable income was $6,735. These figures contrast starkly with his taxable income in the three previous tax years ($70,647, $64,072, $41,016). The only other year for which a tax return for the husband is available, 1993, reveals a taxable income of $56,929. No cross-examination of the husband provides a basis for regarding his returns as inaccurate.
98. In Kowaliw and Kowaliw (1981) FLC 91-092, Baker J was:-
“… of the opinion that evidence of wantonness or recklessness having economic consequences is clearly a matter which the Court may take into account pursuant to the provisions of sec. 75(2)(o).
If a party has acted in the manner to which I have referred earlier either by:
(a) embarking upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets, or
(b) acting recklessly, negligently or wantonly with matrimonial assets the overall effect of which has reduced or minimised their value,
then such conduct in my view and the economic consequences which flow therefrom are clearly matters to which the Court may have regard pursuant to the provisions of sec. 75(2)(o).
If, on the other hand, losses of a financial kind have been suffered by the parties to a marriage in the course of the pursuit of matrimonial objectives, such as the gaining of income or the acquisition of assets whether the liability for such losses be joint or several then, in my view, such losses should be shared by the parties (although not necessarily equally) and taken into account when altering property interests.” (at 76,645)
99. In the circumstances of this case, the Court concludes that the evidence suggests that husband’s conduct in relation to the payment of the liabilities of the parties, and of the business in the post separation period more closely accords with the second of the situations discussed by Baker J in Kowaliw and Kowaliw (supra) than with either of the scenarios described in paragraphs (a) and (b) of his judgment. The absence of cross-examination of the husband to suggest otherwise is significant in this regard, as is the draft report of the liquidator of [S Pty Ltd], which was annexed to the husband’s affidavit sworn 22 May 2001 and admitted into evidence without objection. Some passages from that report shed useful light on this issue.
100.In April 2001, the administrator of [S Pty Ltd], in his report pursuant to s 439A(4) of the Corporations Law recorded that:-
“The director of the Company [the husband] attributes the reason for the company’s failure to the following events;
Ø Rectifications of defects for the [a particular road construction project]…. Works were approved by the contractor … but rejected by the head contractor of the project …. The rectifications resulted in the company incurring bad debts in the sum of $488,000 in the 1999/2000 financial year.
Ø The slowdown of work in the construction industry associated with the completion of the Olympic Games facilities.
Ø The cancellation of the hotel development in … NSW due to the change in [road planning]. The value of this project was estimated to be $800,000.” (page 2)
101. The administrator recorded that he agreed with the “director’s reasons for the company’s failure” adding that “the failure of the company can also be attributed to a lack of working capital”.
102. At the time of the administrator’s report, assets of [S Pty Ltd] at book value totalled $1,950,488. Liabilities (including loan accounts of the husband of $858,105) totalled $2,448,814. It is apparent from the comments of the administrator in relation to the assets of the company that realisation of the assets of the company at book values was, at best, problematic in a number of instances. Regrettably, no final report by the liquidator has yet materialised. There is no suggestion that this is the fault of the husband. There is no suggestion that the liquidator’s final report will improve the fate of the husband’s loan account in [S Pty Ltd]. Absent evidence to suggest that the husband wilfully failed to meet liabilities at a time when he had the capacity to do so, it is difficult against the background which the evidence reveals to suggest that he should be visited with the consequences of failing to pay such outgoings.
103. The picture emerges of a man who was endeavouring to save a business which he had operated, with the wife’s knowledge and consent, for many years. Other than by applying “strict liability” for his acts, or omissions, it has not been established that the ultimate failure of the business was referable to the husband’s conduct of the [S Pty Ltd] group. Had the business been worth a substantial amount today the wife would properly be claiming with respect to it. Indeed that is precisely the position which applies at present, the wife asserting that the successor to the old business be included at the value she asserts and that she be awarded half of it. The Court does not propose adjusting the net asset pool by virtue of the receipt of rent from the cottage by the husband in the post separation period or the failure by him to meet liabilities as and when they fell due in that period.
The complaint is that the approach taken by his Honour was not the correct one to follow, but we consider that it was justified having regard to the following observations by the Full Court in the unreported decision of Marker [1998] FamCA42, which are quoted by the Full Court in its recent decision of Chorn & Hopkins (at paragraph 42):
2.10It is well settled that save in exceptional circumstances a trial
Judge should deal with the property as at the date of the hearing and make adjustments taking into account the various matters set out under s.79. (Wells v Wells (1977) FLC 90-285; Wardman v Hudson (1978) FLC 90-466; In the Marriage of Geyl 7 Fam LR 219) However, the particular justice of the case may make it appropriate to notionally add back assets which have been demonstrated to have been dissipated either during the marriage or post-separation. Normally it is necessary to demonstrate an appropriate basis for doing so, for example by wastage such as gambling or extravagant living. (Kowaliw v Kowaliw (1981) FLC 91-092; Fane-Thompson v Fane-Thompson (1981) FLC 91-053; Winnel v Winnel (1984) FLC 91-580; Townsend v Townsend (1995) FLC 92-569; Doherty v Doherty (1996) FLC 92-652) …
2.11 There seems to be no appropriate basis for notionally adding back moneys that existed at separation but which have been subsequently spent on meeting reasonably incurred necessary living expenses. Neither the Family Law Act nor the case law require that parties go into a state of suspended economic animation once their marriage breaks down pending the resolution of their financial arrangements. Parties are entitled to continue to provide for their own support. Whether any expenditure so incurred is reasonable or extravagant is a matter that can be determined by the trial Judge.
In any event, it is important to note in connection with these grounds directed to the husband’s receipt of rents and failure to pay mortgage instalments and rates in the separation period, that (apart from some cross-examination which was directed to the fact of the non payment of the mortgage instalments and to the fact of the receipt of rent from certain properties and which gave rise to some further evidence in re-examination from the husband) there was no cross-examination of the husband concerning the use he had made either of the rents received or of the monies not used to pay the mortgage or the rates.
Grounds 4 and 5: the valuation of the company P
Grounds 4 and 5 are directed to the trial Judge’s adoption of a value for the husband’s company, P, of $144,450, being the value of the net tangible assets of the company (as was the husband’s case) rather than a value of $409,121 being a value based on future maintainable earnings (as was the wife’s case). The terms of grounds 4 and 5 are as follows:
4.His Honour erred in finding that the value of the company P was $144,450, being the value of the nett tangible assets of the company, rather than the $409,121, being its value on a future maintainable earning basis.
5.His Honour erred in permitting the husband to adduce evidence of the value of his business which:
(a)Was filed out of time; and
(b)Contradicted representations made by the husband to a lending body for the purposes of obtaining a loan, which loan the husband asserted to the Court he proposed to use to repay the debts of the parties and purchase the wife’s interest in the former matrimonial home.
As we understand these grounds as drafted and the submissions made in support of them, the only reasons why it is asserted in ground 4 that his Honour erred in accepting the net tangible asset valuation (put forward by the husband) as opposed to the future maintainable earnings valuation put forward by the wife, are the reasons contained in ground 5.
So far as the first of those reasons is concerned we did not understand Counsel for the wife to strongly press the assertion that the trial Judge erred in permitting the husband to rely on a valuation of the company, P, “out of time”. But even if we are wrong in our understanding of the position of Counsel in this regard, we consider there is no substance in that complaint. As Counsel for the respondent husband submitted, the fact that there was sufficient time for the accountants for both parties who had prepared the valuations to confer regarding their respective valuations, together with the requirements of procedural fairness, support the conclusion that the trial Judge did not err in receiving the husband’s valuation.
Of greater substance is the complaint in ground 5 that his Honour should not have admitted into the evidence the report of the husband’s accountant for the reason that it relied on material which contradicted figures in a financial application submitted by the husband to a finance company (for the purpose of obtaining finance to buy the wife’s interest in the former matrimonial home), and on which the wife’s accountant had had to rely.
In support of this complaint the wife relied on the following statement by Chisholm J in Jordan v Jordan (1997) FLC 92-736 at 83,927:
When a party has made representations of fact to third parties and has gained advantage from so doing, it is open to the Court in subsequent proceedings under S.79 of the Family Law Act to decline to accept from that party evidence which contradicts those representations.
It was submitted by Counsel for the wife that the principle stated by Chisholm J was particularly apposite in the circumstances of the present case where the husband did not produce any tax returns beyond 2001, nor any current bank balances for any of his business entities, and produced only draft financial statements for 2002 for his principal business entity, the company P.
The complaint is also made that during the course of the trial his Honour indicated that he would not be relying on draft accounts, yet that is precisely what his Honour did by accepting the valuation of the husband's valuer, Ms D.
In his judgment his Honour explained the competing valuations and the basis on which they had been prepared in the following comprehensive way (emphasis added):
66.On behalf of the wife it was asserted that the value of [the company P] was $409,121. That was in reliance upon the opinion of [Mr S], a chartered accountant, articulated in a valuation report attached to [Mr S’s] affidavit of 27 October 2003. It is apparent from the valuation which he prepared that [Mr S] adopted the valuation methodology known as “future maintainable earnings”. The figures upon which he proceeded for the financial years 1999 to 2002 produced an annual “reported net profit” of $135,010 on average, excluding “the normal adjustments that are normally applied in determining future maintainable earnings which include adjustments for financing costs, tax depreciation and costs peculiar to the owner”. These adjustments were not made “due to the lack of detailed information to work with”. [Mr S] applied a capitalisation rate of 33 per cent before tax to such trading results.
67.It is apparent from the documents attached to [Mr S’s] report that the material relied upon for that purpose was material produced for, or on behalf of the husband, as the husband readily admitted in cross-examination, for the purpose of an application for finance to [the finance company]…
68.… There is no doubt, as he readily conceded in cross-examination, that [Mr S] proceeded … without regard to any published financial accounts or financial statements of any of the relevant entities.
69.The husband relied upon evidence by [Ms D] … who, in a report dated 28 October 2003, compiled a table of the trading results for the corresponding years with respect to [S Pty Ltd], [the company P], [B Pty Ltd], … the trustee of a family trust which held two parcels of commercial property which were heavily encumbered and another corporation … [PDC], which has not traded for a period or to an extent that impacted upon the figures produced. [Ms D] derived her figures from the published accounts and tax returns or drafts thereof for the entities to which she referred. Consolidating those results produced totals for the four years to which [Mr S] had regard ($398,691) (1999), $234,445 (2000), $2,733 (2001) and ($563,417) (2002). Averaged for that period, ($181,232.50) resulted.
70.Whereas [Mr S] therefore relied upon net average pre-tax profits of $181,232.50, [Ms D’s] figures would suggest the base figure for any consideration of net maintainable earnings to be a substantial loss. There is no doubt that such figure would not support a valuation based on future earnings.
His Honour then referred to the correspondence which would constitute a joint statement of the experts and to the clarification of matters which resulted from the cross-examination of the experts (emphasis added):
71. By an exchange of emails, [Mr S] and [Ms D] conferred and produced what can be regarded as an Order 30A Report. The areas of disagreement between the two experts were clarified and narrowed as a consequence of such conference.
[Mr S] commented that:-
“I agree with [Ms D] that the appropriate valuation method to adopt would be net tangible assets where the business currently [sic] and would continue to have trading losses as it may reasonabl[y] be expected that the business is absent of any significant or super nett profit required to determine goodwill. The present and future trading results would need to be reviewed to consider normal add backs as noted in point 1 to ensure that the asset backing is the applicable methodology.”
[Ms D] responded that:-
“Whilst it is acknowledged that the add back process would need to be performed on the figures contained in the financial statements, the overall position shows such significant losses that it is unlikely that the add backs would result in a profitable position.”
[Ms D] joined issue with [Mr S’s] suggestion that “it is not the normal practice to rely upon draft accounts or a draft tax return for valuation purposes” by suggesting that “in the absence of final information (and 2003 figures), I believe it is relevant to consider the draft information in establishing the overall trend of the trading performances of the business” and that, notwithstanding those limitations “there is a clear trend in the prior five years of trading that cannot be ignored”. Neither expert suggested that reliance upon figures which did not derive from any accounting documents, or the result of any accounting process, were part of “the normal practice” for valuation purposes.
72. [Ms D’s] concluding comment that:-
“it appears [Mr S] is agreeing with my proposal to value the business on the basis of net tangible assets provided the trend of losses shown in the information summarised in my report still exists in the final return – subject to an “add back” process to which I also agree”
sharply focuses the pivotal issue for the Court to determine.
73. Brief cross-examination of each of the accountants clarified a number of matters. Sensibly, [Mr S] did not suggest he could substantiate his opinion other than by reference to the figures which he was instructed to rely upon. He conceded that the net asset backing was the “more likely way to go” if [Ms D’s] contentions with respect to maintainable earnings were correct. Understandably, [Mr S] did not know and could not know whether, within the figures he was instructed to rely upon, certain costs, including remuneration for the proprietor, had been allowed or provided for. [Mr S] confirmed that he had not ever seen the liquidator’s report with respect to [S Pty Ltd].
74.[Mr S] conceded that he had never made any independent inquiry as to the basis of the figures upon which he relied in arriving at his evaluation of the husband’s interests. [Mr S] confirmed that he could not independently demonstrate a history of profits of the current “business” of the husband.
75.It is no criticism of [Mr S] to record these observations. [Mr S] himself readily and frankly conceded the flaws in his methodology. As an expert, [Mr S] did what he was asked: to provide a valuation based upon information supplied. There is no basis for rejecting [Mr S’s] opinion as to the value of the husband’s corporate interests if the material upon which his opinion is based is reliable. Conversely, if the data upon which [Mr S] proceeded was, through no fault of his, unreliable, then his expert opinion cannot be given any weight by the “ultimate trier of fact”, no matter how sound his application of his expertise to the data he was supplied might have been (see Makita (Australia) Pty Ltd v Sprowles [2001] 52 NSWLR 705).
76.In brief cross-examination of [Ms D], nothing emerged to suggest that she was partisan, or that the figures upon which she relied were in any way inaccurate or otherwise unreliable. Objectively, if a consideration of the valuation dispute were to be confined to the matters to which reference has thus far been made, there is little doubt that [Ms D’s] methodology, net asset backing, would have to be preferred to that of [Mr S]. This is particularly so having regard to the undeniable fact that [S Pty Ltd] went into liquidation and that it went into liquidation as a result of trading activities not involving impropriety, financial improvidence or other conduct worthy of criticism on the part of its controller, the husband.”
Having then made reference to the report to creditors by the administrator of S Pty Ltd and to the fact that the company P had largely taken over the business previously conducted by S Pty Ltd, his Honour concluded that:
… it is difficult to suggest that [the company P] will necessarily prove successful.
His Honour next referred to the fact that the company P was producing about $100,000 a year in the husband’s hands. Importantly for present purposes, his Honour then said:
81. Save for one matter, there is no rational basis for concluding, by the application of principles of valuation to the evidence, and to what the evidence fails to reveal in this case, that [the company P] has a value in excess of its net tangible assets. The figure relevant in that regard has been referred to.
82.Counsel for the wife relied upon the decision of the High Court in Nelson v Nelson (1995) 184 CLR 53, and in particular upon passages of the judgment of McHugh J to support his contention that [Mr S’s] valuation should be preferred notwithstanding the matters discussed above. In essence it was asserted that the husband could not, having represented to [a finance company] the earnings of his business to have been as recorded earlier, and relied upon by [Mr S] for the purpose of these proceedings, resile from those figures. It was asserted that to do so would be to allow the husband, in effect, to “found his cause of action on illegal or immoral acts”. It is material in this context to note that the husband is not seeking to found a “cause of action” but rather to avoid having those figures used against him as the basis of valuation.
Then having endeavoured to distinguish Nelson, his Honour continued:
86.If, which the Court does not accept is necessarily the case, Nelson v Nelson (supra) is relevant for present purposes, the circumstances do not justify denying the husband the opportunity to rely upon the evidence with respect to his business and holding him to the figures represented to [a finance company]. There is no evidence before this Court that, whatever immorality or illegality might be thought to attach to the husband’s representations to [the finance company], such purpose or purposes was or were achieved or fulfilled. Moreover, as a reading of the documentation relevant to the application for finance makes abundantly clear, [the finance company] was relying upon a valuation of real estate obtained by it and the application to such valuation of a lending ratio which, in its commercial judgment, it deemed to be “safe”. There is a material distinction between representations of the kind discussed in Nelson’s (supra) case and representations to an arms length lender well able to make its own inquiries and/or require verification or validation of the figures represented to it.
87.There can be no doubt that the husband is estopped from denying that he made the representations relied upon by [Mr S] to [the finance company]. Indeed, the husband has not sought to deny that he did make those representations. The issue is whether, in all the circumstances, he should be bound by the representations for the purpose of valuing his business. As has been explained, the evidence before this Court points so overwhelmingly to so doing being unfair and producing a valuation of the business which cannot be justified, as to render such an approach harsh and unjust.
88.It might be remembered in this context, that the wife had, in documents filed on her behalf in this Court, made representations which could be considered inconsistent with her assertions in relation to the beneficial ownership of the [ACT] property. As the Court’s discussion of that issue also makes clear, the impact of previous representations must be assessed having regard to the totality of the evidence surrounding them in the light of the Court’s conclusions as to the credibility or otherwise of the maker of such representations.
89.Even if, contrary to the conclusions recorded above, it was permissible to rely upon the husband’s representations to [the finance company] in the valuation exercise, as has been pointed out, and was readily conceded by [Mr S], the evidence of the return to the operator of a business is not evidence of the value of the business itself. It is well recognised in valuation practice that a return to the proprietor or operator of a business for his or her efforts in and on behalf of the business is an adjustment made to the returns of businesses. As the learned authors of Principles and Practice of Valuation (Murray J.F.N., 5th ed, Commonwealth Institute of Valuers, 1973) confirm “the owner [of a business undertaking] is entitled to a reasonable salary for his efforts, and the amount so deductible will be indicated by those payable to the managers of similar undertakings, bearing in mind that the owner of the business usually will devote more time to it than would a manager” (at 357). Such an allowance is said by the learned author to be an adjustment to “normal trading or profit and loss accounts” for the purpose of “ascertaining past profits for valuation purposes”. The reason for so doing is that adjustments of that kind are necessary to determine the “true profit arising out of the business” (at 356). The market value of an enterprise is clearly influenced by the time and effort of a proprietor, or someone on his or her behalf must deviate to it, and the remuneration payable to him or her for doing so.
90.There are cases where it is appropriate to refuse to allow a party to resile from representations previously made. In the circumstances of this case, the Court does not consider that having regard to reliable and unchallenged figures as the basis of valuation is unjust or otherwise impermissible. Accordingly, the Court regards the value of the husband’s interest in [the company P] as the net asset backing value of its assets, namely $144,450.”
It will thus be seen that his Honour gave thorough and detailed consideration to the existence of the so-called “contradicted representations” made by the husband as to the earnings of his business. It is also apparent that, despite there only being draft accounts available, the evidence was overwhelming that the business was not profitable and nor was it likely to be. Nothing either on the evidence before his Honour or in any authority relied on before him or before us, has persuaded us that he was wrong in the conclusion which he reached concerning the valuation of the company P.
Conclusion in relation to all grounds other than ground 9
We have thus concluded that, apart from ground 9 which concerns his Honour’s failure to make an order concerning the parties’ stored furniture, none of the grounds of appeal before us have been established, and on that basis the appeal would have to be dismissed.
Ground 9: the stored furniture
Ground 9 asserts that his Honour:
…erred in failing to make orders with respect to the sale of the furniture in storage. Both parties sought orders for the sale of those items, and His Honour’s declining to make orders (para 133) leaves the issue of those assets unresolved.
In paragraph 133 of his judgment (to which reference is made in ground 9) his Honour said:
133.Whilst Practice Directions Statements filed in the Registry refer to a dispute with respect to furniture storage, no evidence adduced before the Court provides a basis for the Court making orders with respect to such furniture, if any, as is thus held. The absence of submissions in that regard at the completion of the trial suggests the issue to have dissolved or otherwise ceased to be one in respect of which the Court’s adjudication was sought by either party.
We understood it to be the position of the wife before us that even though the furniture in question was now in the possession of the husband, an order should now be made for its sale with a division, according to the 52.5 percent – 47.5 percent percentage division determined by his Honour. We understood the husband to oppose any orders now being made on the basis that his Honour’s conclusion in paragraph 133 was open to him.
In our view it is perfectly understandable that his Honour reached the conclusion which he did in paragraph 133 given the following exchange between himself and the solicitor for the wife at the commencement of the trial:
Transcript 29/10/03 p 597
[SOLICITOR FOR THE WIFE]…However, there are in storage with a [storage company] …, a large quantity of furniture which, as I understand it, was located in [a Canberra] property but could not be accommodated in the [rural NSW] property which, when the parties sold [the Canberra property] and bought the [rural NSW property], which I think was in 1999 and it would that that furniture has been left in storage left in storage since then and would seem has significant value.
[HIS HONOUR]: Has it been valued?
[SOLICITOR FOR THE WIFE]: It has not been valued. My friend and I will continue to have discussions about how the Court should deal with that. There have been some exchanges about that but at this stage I’m not able to say to the Court whether there’s any common ground as to how that should be approached.
Nevertheless we think that the interests of justice require that we intervene and make an order for the sale of the furniture and the division of the proceeds (after deduction of any costs of storage and of sale) in the proportions of 52.5 percent to 47.5 percent in favour of the husband.
We have included reference to a deduction for the costs of storage because pursuant to liberty given to both parties to make further submissions in relation to any further evidence which they might wish to adduce in the event of a re-exercise of the discretion, the husband submitted that in the event of a re-exercise, he would want to adduce “updating” evidence with respect to the cost of storage. However given that we were informed by Counsel for the husband at the hearing of the appeal, that the furniture was by that time in the possession of the husband, we cannot see how there could be “updating” evidence concerning the cost of storage.
Nevertheless, we will include in our orders provision that, should any dispute arise in relation to the items of furniture which were in storage or the costs of that storage, then that dispute be listed before the trial Judge for determination by him.
It will therefore be necessary that we allow the appeal to this limited extent.
Costs of the appeal
It was agreed at the conclusion of the hearing of the appeal that the costs of the appeal should be the subject of written submissions following the delivery of our judgment in respect of the appeal. Accordingly we will make the necessary directions.
Orders
That the Order made by the Honourable Justice Coleman on 28 November 2003 be varied to add the following paragraph:
“That the parties cause the furniture and any other chattel which was in storage … as at 29 October 2003 (being the date of the commencement of the hearing before the Honourable Justice Coleman) to be listed for sale, with the proceeds of such sale (after deduction of the costs of sale and of storage) to be divided between the parties in the proportions of 52.5% to the husband and 47.5% to the wife; and that in the event that any dispute should arise in relation to the furniture or chattels in such storage or in relation to the costs of such storage, then such dispute shall be listed before the Honourable Justice Coleman for determination by him.”
That save as provided in Order 1 of these Orders, the appeal against the Order of the Honourable Justice Coleman of 28 November 2003 be dismissed.
(a) That each party be at liberty to file and serve any written submissions in relation to the costs of the appeal within 28 days of the date hereof.
(b)That each party have a further 28 days in which to file and serve any written submissions in answer to any submissions filed by the other party.
(c)That each submission have endorsed on the cover sheet the date on which a copy of that submission was served on the other party.
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