Leal & O’Hegarty And Anor

[2014] FamCA 593

FAMILY COURT OF AUSTRALIA

LEAL & O’HEGARTY AND ANOR [2014] FamCA 593

FAMILY LAW – PROPERTY SETTLEMENT IN RELATION TO MARRIAGE – Matrimonial assets – Where there is a dispute between the parties as to the existence and nature of the husband’s interests in corporate entities – Where the wife asserts that the husband put his company into liquidation and set up “phoenix companies” to hide matrimonial assets – Where it is found that the husband holds no legal or beneficial interest in the corporate entities in question.

FAMILY LAW – LEGAL PRACTITIONERS – Misconduct and discipline – unauthorised redaction of subpoena documents held by the Court – Proposal that the matter be referred to the Law Society – Order made that matter be stood over for submissions by solicitor in relation to her conduct.
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APPLICANT: Ms Leal

RESPONDENT:	Mr O’Hegarty
INTERVENERS:	Ms S, O Legal and T Pty Ltd

FILE NUMBER: SYC 3101 of 2012

DATE DELIVERED: 1 August 2014

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Rees J

HEARING DATE: 25 July 2014

REPRESENTATION

THE APPLICANT: In Person – Ms Leal

THE RESPONDENT: In Person – Mr O’Hegarty

SOLICITORS FOR THE INTERVERNERS:	O Legal
COUNSEL FOR THE INTERVENERS:	Ms Kennedy

Orders

IT IS DECLARED

1. That the husband holds no legal or beneficial interest in O Legal or T Pty Ltd.

IT IS ORDERED

1. That leave be given to O Legal, T Pty Ltd and Ms S to be joined to the proceedings only in relation to the question of whether or not the husband has any legal or beneficial interest in the entities operated by those corporations and persons.

2. That the matter has been stood over to 27 October 2014 at 9.30 am, solely for the purpose of submissions by Ms S, or on her behalf, in relation to her conduct of the material produced on subpoena.

3. That the matter be listed for procedural directions for trial on 25 August 2014 at 2.15 pm before the Honourable Justice Rees.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Leal & O’Hegarty and Anor has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER:

Ms Leal

Applicant

And

Mr O’Hegarty

Respondent

And

Ms S, O Legal and T Pty Ltd

Interveners

REASONS FOR JUDGMENT

1. Ms Leal (“the wife”) and Mr O’Hegarty (“the husband”) separated in May 2012. The proceedings currently before the Court were commenced by the filing of an application by the wife on 29 May 2012.

2. The proceedings concern both the parenting arrangements for the parties’ three children and issues of property settlement. The matter came before the Court for the first day of the trial on 12 June 2014.

3. On that day it became obvious that there was a dispute between the parties about the husband’s interest in two corporate entities, O Legal (“O Legal”) and T Pty Ltd (“T Pty Ltd”). O Legal is an incorporated legal firm and T Enterprises is the service company for that entity. Collectively, they will be referred to as “the T entities”.

4. The wife asserts that the husband is the owner, either wholly or partly, beneficially, if not legally, of the T entities. The husband says that he has no interest, either legal or beneficial, in those entities.

5. In order to deal with the issue of whether or not the T entities should be valued for the purpose of the property settlement proceedings, I determined that the matter should be listed for hearing on 25 July 2014 on the issue only of whether the husband had any legal or beneficial interest in the T entities.

6. When the matter came before the Court on 25 July 2014, Ms S (“Ms S”), the Principal Solicitor of O Legal and the sole shareholder in the T entities, sought to be joined as a party to the proceedings in relation to this issue only. That application was not opposed and Ms S and the T entities were given leave to intervene. The interveners were represented in the proceedings by Counsel.

7. The wife in the proceedings before me relied upon an affidavit sworn by her on 31 July 2013 and provided an Outline of Case document. The husband relied upon a number of affidavits filed by him, an affidavit of Ms S and an affidavit of Mr N, to which the Court was referred. His primary reliance however, was upon an affidavit sworn by him on 30 June 2014. In relation to the affidavit of Ms S, the wife indicated that Ms S was required for cross-examination. Ms S was not present and therefore I determined that her affidavit would not be read in the proceedings.

8. No documents were filed by the interveners.

9. In about 2000 the husband commenced practising as a solicitor in an incorporated legal practice known as F Legal Pty Limited (“F Legal”). The practice was continuing at the date of separation and the wife, until shortly before that time, was involved in the management of the practice. The wife is not a solicitor.

10. The husband in his affidavit sworn 30 June 2014 says that by about the middle of 2012, it had become apparent to him that F Legal was not likely to be able to continue trading, given that it was experiencing a sudden and significant downturn in its financial performance.

11. There is an issue between the parties which may be relevant in the final proceedings about the cause of the downturn in trading. The husband blames the wife and alleges that she deliberately contacted clients of F Legal in order to discourage them from continuing to instruct the firm. The wife suggests that the husband deliberately devalued the business as a way of hiding assets from her in the ultimate property settlement. That is not an issue which I can determine in relation to these particular proceedings.

12. It is the unchallenged evidence of the husband that during the period December 2012 until March 2013 no new client work of substance was taken on by F Legal.

13. In December 2012 the Law Society of New South Wales was called into the practice to investigate the removal of $35,000 from the F Legal trust account, the husband says, by the wife. It is the husband’s evidence that from about mid-2012 until March 2013 he was actively involved in consulting with the then current clients of F Legal about transferring their matters to other lawyers and advising and recommending lawyers who might take over the conduct of the matters.

14. One of the matters which hastened the financial difficulties in which F Legal found itself was an action which was undertaken by F Legal against U Pty Ltd in the Federal Court. Those proceedings were unsuccessful and F Legal was ordered to pay costs.

15. Mr M, the solicitor acting for F Legal in the Federal Court proceedings, consulted the husband who advised him in relation to the structure of a legal practice which that solicitor wished to commence. The husband recommended a structure for an incorporated legal practice and prepared, at least, draft documents for the solicitor. That practice was to be known as the V Group.

16. From about July 2012 until about December 2012 the husband participated in the transfer of client files to a legal practice run by the wife’s sister who had previously been employed by F Legal and had managed or worked on client files at the offices of F Legal in a rural NSW town.

17. At the time the parties separated, Ms S was employed as a senior solicitor by F Legal, where she had been working since about January 2008. In 2012 the husband provided Ms S with advice about the most appropriate structure for her to incorporate and ultimately operate a legal practice to be known as O Legal. The structure which the husband recommended was a similar to that which the husband had recommended for the V Group. Once the practice of O Legal was operational the husband oversaw the transfer of client files to O Legal in circumstances where he recommended that firm to clients of F Legal.

18. On 19 March 2013 liquidators were appointed to F Legal. Tendered in the wife’s case was a report of the liquidators dated 28 October 2013. In the report the liquidators note that the company was operating with a working capital deficiency in excess of $2,000,000 as at 19 March 2013 and for several years prior to that. The liquidators note that it appears that the company may have been trading whilst insolvent from at least July 2012. The report to creditors further indicates that there is likely to be a deficiency upon the completion of the liquidation.

19. It is the wife’s case that:

    ·The husband deliberately put F Legal into liquidation in order to defeat her claim;

    ·The husband set up the V Group as a “phoenix company” for the purpose of transferring valuable clients of F Legal to an entity beyond the control of the wife; and

    ·The husband set up O Legal as a “phoenix company” for the purpose of transferring valuable clients of F Legal to that company and defeating the wife’s claim.

THE V GROUP

1. Annexed to the wife’s affidavit was a document, clearly a draft, entitled “Heads of Agreement”. The document detailed an agreement in principle between the V Group and Mr M, who was to be the solicitor director and manager of the V Group and responsible for the day to day conduct of the legal practice of the V Group.

2. Nowhere in that document is there any suggestion that the husband was to play any part in the V Group or that the husband had any interest in any of the entities which formed part of the V Group. The only association between the husband and the V Group was that Mr M was a solicitor with whom the husband had professional dealings, and the husband said that he was retained by Mr M to advise on the appropriate corporate structure to set up the V Group.

3. Nothing in the material which has been relied upon by the wife supports her claim that the husband had any interest in the V Group.

O LEGAL

1. Ms S was a solicitor employed by F Legal. In 2012 the husband provided Ms S with advice about the most appropriate structure to set up an incorporated legal practice which she ultimately named O Legal.

2. The evidence tendered in the husband’s case and in the case of the interveners demonstrates that Ms S is the sole shareholder and director of the T entities and that she holds her shares in each of those entities beneficially.

3. Central to the wife’s allegation that the husband in fact is a beneficial owner of part or all of the T entities is a document entitled “O Legal Information Memorandum.”

4. The document reads in part:

   BACKGROUND

   [Mr O’Hegarty] founded a legal practice in NSW commencing in circa 1997. The first corporate entity was [F Legal] Services that was formed under the New South Wales Corporations Act (repealed). In 2000, as a consequence of legislative changes and initiatives by the New South Wales Law Society, [F Legal] Pty Limited was incorporated (pursuant to the Legal Profession Act New South Wales) (“[F Legal]”). The transition between [F Legal] Services and [F Legal] was seamless.

   [Mr O’Hegarty] (and his employed solicitors) are well respected for the legal services in the fields of commercial litigation involving large-scale contractual disputes, trademarks and intellectual property disputes; insolvency and building & construction law.

   [F Legal] was developed into a very successful enterprise with billings in excess of $4 million in FY 2011, including $2.4 million in legal fees and retained earnings of $773 K.

   Given a number of factors including:

   1.A need to put in place a number of structures dealing with current solicitors remuneration incentives involving, over time taking up shareholdings to ensure their retention;

   2.(And) the complex nature of the ownership structure of [F Legal] (within a series of family trusts);

   3.A desire to ensure the longevity and ongoing profitability of the legal practice long after [Mr O’Hegarty] has retired and / or died for the financial benefit of his family and the other stakeholders (solicitors & investors)

   a restructuring as detailed below is proposed.

   The proposal involves the caseation (sic) of the business operations of [F Legal] sometime early in 2013 and to commence providing legal services in a new legal practice known as [O Legal].

5. The document then sets out the agreement that F Legal will retain its billed work in progress (WIP) and the funds will be used for the purpose of paying creditors and dealing with the various shareholders / trust interests; and that O Legal will take over any unbilled WIP as at 31 December 2012 in respect of client files and will take over existing client matters in respect of ongoing litigations.

6. The document goes on to say:

   In order to provide capital to finance setup costs and ongoing work in progress activities, [O Legal] is seeking to attract $200,000 in new equity. Subject to raising an initial round of $100,000, [O Legal] proposes to begin delivering services in January 2013.

7. Under the heading “People” the curriculum vitae of the husband is set out, concluding with the following paragraph:

   [Mr O’Hegarty’s] role over the coming 10 years (and beyond) will be to focus upon liaising with key clients, overseeing the various commercial litigation matters, and to provide ongoing strategic advice & management to ensure the profitability and longevity of the legal practice.

8. Also set out under the heading “People” is the curriculum vitae of Ms S, two other solicitors who had formerly been employees of F Legal and the business manager who had formerly been the business manager at F Legal.

9. It is not surprising that the wife, having seen that document, formed the belief that the husband had an interest in O Legal.

10. It was the husband’s evidence that he was not the author of the document. The husband said that the purpose of the document was to raise working capital for the new legal practice of O Legal. The husband said that he envisaged that if he were successful in raising capital then he would be in a position to negotiate an initial fee for arranging the capital; that he would, from the perspective of an investor, act as an “elder statesman” so as to minimise, in the minds of investors, the risk of the new business venture; and that he would expect to take a fee, if the venture were successful, for his management role and the provision of referrals to O Legal.

11. The husband relied, in his case, on an affidavit of Mr N (“Mr N”) sworn 6 September 2013. Mr N was not required for cross-examination and his evidence is thus unchallenged. Mr N is a long standing acquaintance of the husband, they having met in 1992. Mr N is the appointer of the O’Hegarty Family Trust and is the God-father of one of the children of the husband and the wife.

12. Mr N deposes that in December 2012 the husband asked him whether he would be interested in being involved in a new legal practice that could potentially be built on those few remaining clients of F Legal who were willing to retain the services of the employed solicitors formerly at F Legal. Mr N says that he said to the husband:

    I would only consider investing in a new business venture if you stayed involved keeping an eye on things and be my point of contact. I don’t know anybody who works for you anymore and I want someone I know I can trust – I am flat out with my other business interests around the world and I cannot afford the time to have any hands-on involvement.

13. Mr N in his affidavit says:

    [Mr O’Hegarty] agreed to this pre- condition that before I would even consider investing, he would need to commit to stay involved in a mentor capacity to protect my (or others in my circle of investors) investment in any new start – up business venture. Consequently I asked [Mr O’Hegarty] to prepare some information and numbers and send them to me to consider and that I would draft that into a document he could wrap the usual legal disclaimer around and use with “friends and family” investors.

14. Mr N deposes that in December 2012 and January 2013 there were a number of email exchanges between himself, the husband and a member of the husband’s staff, reviewing and amending the final calculations and assumptions set out in the proposed Information Memorandum. He deposes that sometime in January 2013 he sent the husband a draft information memorandum which he had prepared, based on the information the husband had provided, and on Mr N’s own knowledge and experience of the Australian legal industry. Mr N deposes that he subsequently finalised the document entitled “Information Memorandum [O Legal]”, referred to earlier in these reasons, and provided it to the husband.

15. Mr N deposes that in late January or early February of 2013 after the capital raising proposal had been considered by himself and others in his investor circle, he advised the husband that he was unable to raise any finance. Mr N gives evidence that he had no email or telephone discussion with Ms S or any of the directors of O Legal because the proposal did not pass the preliminary investigation stage.

16. The evidence of Mr N is consistent with the evidence of the husband.

17. There is no doubt that clients who were formerly clients of F Legal have become clients of O Legal. That is not in itself suspicious given that the solicitors now working at O Legal were formerly solicitors working for F Legal.

18. F Legal was put into liquidation on 19 March 2013 and could not thereafter service its former clients.

19. There is nothing inherently improbable or implausible in the evidence of the husband and Mr N. Mr N’s evidence is unchallenged. I accept their evidence as to the basis on which the husband proposed an involvement with the T entities and I accept that his involvement did not eventuate as he had hoped.

20. The onus of proving that the husband has an interest in the T entities rests upon the wife who asserts it.

21. That onus has not been discharged.

22. I am unable to find that the husband has any legal or beneficial interest in the T entities.

THE DOCUMENTS PRODUCED ON SUBPOENA BY THE NATIONAL AUSTRALIA BANK (“NAB”)

1. One of the wife’s complaints in the course of the proceedings is that documents relating to O Legal produced by the National Australia Bank (“NAB”) pursuant to subpoenas served upon them by the wife have been tampered with.

2. The wife complains that dates and details of transactions, appearing in the bank statements, have been redacted.

3. In an affidavit sworn 6 September 2013, Ms S, who is a solicitor with an unrestricted practising certificate, and the principal of O Legal, deposes (emphasis added):

   In response to paragraphs 21 and 22 of the Applicant wife’s affidavit, O Legal sought and was granted first access to the documents produced by the National Australia Bank Limited for the purpose of redacting any privileged client information. I personally attended the Family Court and inspected the documents myself. It is incorrect for the applicant wife to say that all of the dates, credits, debits, descriptions, transfers and names within the bank statement were redacted. I only redacted those entries that contained privileged client information such as client names, matter numbers and account details. I also redacted all of [O Legal’s] account numbers. I left unredacted an entry with the reference ‘[Mr W]’. The fact that I left this entry unredacted shows that I have nothing to hide.

4. Whatever may have been the understanding of Ms S in relation to the leave granted, her understanding does not accord with the Court records.

5. The Court records show that, on 10 April 2013, objection was taken on behalf of O Legal to documents produced by the NAB on subpoena. On 10 May 2013 a Registrar of the Court made the following order:

   1.I dismiss the objections raised by [O Legal] with respect to production of or access to documents to be produced pursuant to the subpoenas issued to NAB (and others).

   2.Leave is granted to the parties and their legal representatives to inspect documents produced in answer to the subpoena referred to in Order 1 above however I grant [O Legal] the right of first access for 7 days to inspect the said documents for privileged information.

1. It appears from the Court file that Ms S, having been granted the right of first inspection, took it upon herself to significantly deface documents which had been produced by the NAB and were held in the custody of the Court.

2. No application was made on behalf of Ms S or O Legal for the documents to be photocopied and the photocopies redacted so that a record would be preserved of the original documents. As a consequence, it is impossible for the Court, or the wife, to know whether the transactions which were obliterated by Ms S were correctly identified as privileged.

3. No permission was given to Ms S or O Legal to deface the documents which had been produced by the NAB.

4. At the commencement of the hearing before me on 25 July 2014, Ms S and O Legal were represented by Counsel. I raised with Counsel my intention to refer Ms S to the Chief Executive Officer of the Law Society so that her conduct in relation to the material produced on subpoena could be considered by her professional body. That matter has been stood over solely for the purpose of submissions by Ms S, or on her behalf, in relation to that issue to 9.30 am 27 October 2014.

I certify that the preceding fifty-three (53) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Rees delivered on 1 August 2014.

Associate:

Date:  1 August 2014