Ledarn and Ledarn
[2013] FamCA 858
FAMILY COURT OF AUSTRALIA
| LEDARN & LEDARN | [2013] FamCA 858 |
| FAMILY LAW – PROPERTY – Dispute over who should retain business – Division of interests having regard to wife retaining business – Section 75(2) factors considers. Injunction sought by wife to prevent husband competing with her – Injunction declined. |
| Family Law Act 1975 (Cth) |
| Bevan & Bevan [2013] FamCAFC 116 |
| APPLICANT: | Ms Ledarn |
| RESPONDENT: | Mr Ledarn |
| FILE NUMBER: | MLC | 6423 | of | 2010 |
| DATE DELIVERED: | 1 November 2013 |
| PLACE DELIVERED: | Melbourne |
| PLACE HEARD: | Melbourne |
| JUDGMENT OF: | Cronin J |
| HEARING DATE: | 18, 19, 20, 21, 22, 25 February 2013 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr Geddes Qc with Mr Wood |
| SOLICITOR FOR THE APPLICANT: | Taussig Cherrie Fildes |
| COUNSEL FOR THE RESPONDENT: | Mr Mawson Sc with Mr O'shannessy |
| SOLICITOR FOR THE RESPONDENT: | Aughtersons |
Orders
That the wife retain to the exclusion of the husband, the business known as the Ledarn Group.
That the husband and wife sign all necessary documents to give effect to these orders.
That the assets of the parties as defined in paragraph 115 of the reasons for judgment this day be divided as to the husband 57.4 percentage and as to the wife, 42.6 percentage.
That the parties draw the minutes necessary to give effect to these orders.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Ledarn & Ledarn 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 MELBOURNE |
FILE NUMBER: MLC 6423 of 2010
| Ms Ledarn |
Applicant
And
| Mr Ledarn |
Respondent
REASONS FOR JUDGMENT
The main dispute between Mr Ledarn (“the husband”) and Ms Ledarn (“the wife”) concerns who should retain the business. Each wants it.
In addition to the question of the retention of the business is that of how (and on what basis) their various interests in property should be altered.
In my view, the proper order and one which is just and equitable is for the wife to retain the business and for there to be an appropriate adjustment otherwise in property and a payment in cash in favour of the husband.
In seeking the business, the wife also seeks an injunction against the husband preventing him from continuing doing what he would say he has always done in the business if she is successful in retaining it. In other words, the wife wants to prevent the husband competing with her. In this business, the husband was responsible for the original design of the unique product that has made the parties so much money. The role of the wife was very much that of managing the administration. Should the Court restrain the husband doing what he says he does well?
The husband originally sought similar injunctive orders but in final address, doubted the Court’s power to make such an order or make it in this particular case. In my view, on the balance of convenience and other considerations to which I shall return, an injunction is not proper in this case.
Background
The applicant wife is 53 years of age and described herself as the managing director of a group of entities which collectively run the family business.
The respondent husband is 54 years of age and described himself as company director.
Together, the parties married in 1980 and thereafter had four children who are now aged between 31 and 23 years.
The successful business background of the parties was not an accident. Originally, the husband was employed in the motor vehicle industry and the wife worked for a municipal council. The husband had a small equity in a house but otherwise, neither party had any assets of significance.
In 1991, the husband began a business from home hiring motor vehicles and then began selling vehicle accessories. To support the family, the husband worked as a tradesman. Thereafter, the business expanded and premises were rented. The husband developed his own range of accessories for motor vehicles and became a distributor for a large manufacturer of automotive accessories. The husband then developed further products and to use his words, “the business boomed”.
The husband developed another accessory which is now internationally renowned. As these developments took place, the parties incorporated entities, acquired and built factory premises and used their profits to acquire other property.
With the increased business activities came the purchase of land on which a large house was built. It was later sold to enable the purchase of a larger home. It was there that the marriage broke down and the parties separated.
In 2003, well before separation, a dispute occurred with the Australian Taxation Office about the deductibility of superannuation payments for the parties. The Australian Taxation Office assessed the husband with tax of over $1 million. He resigned all corporate positions, filed a debtor’s petition and became a bankrupt. During the ensuing three years of bankruptcy, the husband continued in all aspects of the business as normal whilst the wife managed the administration. It can be seen throughout the various corporate structures that the husband’s name rarely appears and generally not in positions of control or ownership.
The expansion of the business does not appear to have been affected by the husband’s bankruptcy and for the ensuing years, the wife alone remained in legal and effective control of the relevant entities. The taxpayers of Australia missed out on the tax but the parties’ wealth continued to be amassed as they operated the business as if nothing had happened.
By 2008, the parties’ business was not only successful but growing to such an extent that they purchased another factory premises on the other side of the street to which they were conducting the main operation. Prior to the husband’s illness, the global financial crisis had begun and it ruptured their export business.
Undeterred, the husband successfully focussed on sales in Europe, Africa and the Middle East.
One of the issues in this case concerned the alteration of legal interests. Those interests can only be altered if it is just and equitable to do so. Neither party addressed the bankruptcy issue as having anything to do with that determination so I shall ignore it but government should examine how these situations arise and endeavour to rectify them with legislation.
The husband’s bankruptcy led the parties, but particularly the wife, to restructure the corporate entities. They did this with the assistance of accounting advice. Despite being discharged from bankruptcy, the husband and wife left the structures largely untouched.
It was the wife’s case that the husband had distanced himself from the operation of the business in recent years whilst he interested himself in non-business activities. It was the husband’s case that the wife too had branched out into other activities but had done so at a time when the finances of the business needed attention and as a consequence, what he would have the Court accept was that her management was poor administration. That meant in his view, there were huge financial losses and significant tax penalties. Each of those issues needs to be considered. Before doing so, what is apparent from the evidence is that the structures gave most of the control of this enterprise and its associated trusts to the wife.
Although there is an intricate web of companies and trusts, each party presented their case on the basis of a distinction between trading entities and non-trading entities. Whatever that may be, there is a complicated web of interconnected companies and trusts. It is helpful to look at just what the legal position currently is in relation to control particularly from the husband’s perspective.
There are numerous entities some of which have other family members either as directors or as members of superannuation funds or as beneficiaries of the trusts. I propose to concentrate here however on the husband.
The husband is a member of the Ledarn X Superannuation Fund and a member of the S Superannuation Fund. The husband is one of four directors of Ledarn Nominees Pty Ltd which is the trustee for the S Superannuation Fund. I conclude therefore that he has a minority role and certainly little control.
The husband is a primary beneficiary of the Ledarn Family Trust No 8, the trustee of which is V Holdings Pty Ltd. Of that trustee, the wife is the director.
The other trust in which the husband is a primary beneficiary is the Ledarn Family Trust. It owns 100 per cent of the shares in G Pty Ltd of which the wife is the sole director. However, the trustee of the Ledarn Family Trust is Y Pty Ltd. That company shows that the wife is the director as well.
Thus, in respect of the beneficiary entitlements (if any) in either of those trusts, the husband is very much at the whim of the wife because she controls the trustees.
G Pty Ltd is the core business company of which the wife is sole director. The business was predominantly conducted by that company and it owns all shares in F Pty Ltd which is the trustee for the F Trust. In that company, the husband and wife are directors. G Pty Ltd also owns all of the shares in AA Pty Ltd in its capacity as the trustee for the AA Unit Trust. In respect of that company, both husband and wife are directors.
What can be seen from those pictures is that the wife has the dominant legal control of the major corporate bodies. She has the dominant role in each of those entities. That affects the “equity” that the parties have in their various assets because, if the assets were again restructured in favour of the husband, there would be significant tax. So too, if there are assets to be transferred to the parties individually, tax consequences will be significant. It may be that satisfying the orders I propose will require sales of real properties and even the business itself. Each or any of those steps may have tax consequences.
Before turning to the non-trading interests, it is helpful to reflect on why subsequent to the husband’s discharge from bankruptcy, he did not resume some control over assets significant to his interests but rather, left them with the wife. It becomes important because the husband asserted that the wife had been incompetent as a financial manager in her role as the Chief Executive Officer of the business.
In his evidence, the husband said that the first time he had an “inkling” anything was wrong, was after separation. That stands in stark contrast to his own health problems and his non-core-business activities around that time. His evidence was that the parties purchased property at X and he said in his affidavit that it was justified at the time on the basis that it was to be used as a research and development property. It struck him as odd however that the wife only wanted the property for a horse stud farm and he protested. Despite his protests, the purchase went ahead.
One plausible explanation which I accept for the problems of the husband which gave rise to his distraction from the business was his own health.
When separation occurred in May 2009, a significant dispute arose about each party’s role. It was the husband’s case that the wife had not acted in the parties’ joint interest. It was the wife’s case that the husband’s health by that time had broken down to such a degree that he was suffering depression, had contemplated suicide, was violent towards other people and had become disruptive in his behaviour within the business. He was hospitalised in 2009. Thus, it was the wife’s case that after separation, the entities and the enterprise went on under her management and she called upon the Court to give her credit for that.
In 2005, the husband attempted suicide. In 2009, he was admitted to hospital for three weeks as an involuntary patient and in that same year but obviously after being discharged from hospital, he made another attempt on his life. The medical records produced in evidence indicated that the husband was suffering a major depressive disorder. The risks associated with his illness were described as him having a long-standing history of aggression and poor anger control. Doctors in 2009 referred to the risk to others including the husband’s threats to kill the wife, his problems of domestic violence, his fleeting thoughts of suicide and his disruptive behaviours. That was consistent with the sorts of complaints that some of the staff had made.
In May 2009, the hospital where the husband had been admitted noted that he had been brought in by the police after he made threats to kill himself as well as family members during an argument. The doctors noted that this had been going on for a number of years.
The medical records also showed that the family had endeavoured to get some medical help for the husband and that he had not kept appointments other than with his local medical general practitioner. He was on various forms of medication. He was reported at the time as having difficulties sleeping and was unable to think clearly.
The genesis of the2009 problem was recorded in the hospital records as a marital break-up.
In October 2010 when the notes of the general medical practitioner were produced, the doctor noted a long history of anger problems which fluctuated. He was described as throwing things, smashing things and threatening to burn the house down. When challenged about it all, the husband was unable to remember much.
All of this was occurring at a time when the business was under the legal control of the wife. Whilst there were clearly activities outside of the business involving both parties, the business seemed to tick along.
It is useful to examine what the financial position was during this period. The husband was ill, distracted and away from the business at various times. So too was the wife but she not only had the legal control, she had a significant workforce. It was contentious in the proceedings as to which staff were loyal to whom and who would follow which owner. I consider the Court should not delve into that because the valuers seem to have assumed that the business is an on-going concern and no particular staff member was so integral that a loss would affect the value.
The parties had relied on substantial involvement from expert valuers one of whom was Mr K. Mr K is a partner in the accounting firm of DD Pty Ltd and was engaged by the parties as the single expert witness.
In a report attached to an affidavit and filed on 8 February 2013, Mr K noted that the aggregated net profit before interest and tax in the financial year ended 30 June 2009 was $2.5 million. In 2010 it plummeted to $273,000. In the following financial year, that is 30 June 2011, it climbed back up to $2.26 million. In 2012 it remained around the same figure of $2.15 million.
The aberration in the figures was clearly the year ended 30 June 2010. Before I turn to the explanation for that year, it is a matter upon which I make a significant finding, that in the other three of the four years, the adjusted aggregate net profit exceeded $2 million. This indicates that in the year ended 30 June 2009, the husband’s illness which undoubtedly was causing havoc in a personal sense within the family, did not affect the business bottom line. The question then remains as to why the 2010 year was so bad. Mr K noted that the aggregated sales in 2009 were just over $9.5 million but the following year they plummeted to $5.7 million or a drop of about 40 per cent. In the ensuing two years, they climbed back up again. Mr K noted that in the year ended 30 June 2010 the overheads costs were at levels higher than that incurred in the previous year but the business appeared to have the capacity to service turnover well in excess of what was achieved during the year ended 30 June 2010. The wife’s explanation for the unusual year which must be reflected in the sales rather than the bottom line was the global financial crisis. Whilst there is little doubt that there were significant problems associated with payments of debt and letters of demand from not only bankers but also the Tax Office, nothing the wife could have done would have affected the gross sales issue if indeed as I find, the cause was the global financial crisis.
The wife’s capacity as financial manager
The wife strongly disputed the husband’s assertion that she had comprehensively failed to manage the business subsequent to separation. The Australian Taxation Office raised a large bill for outstanding tax. By April 2011, there was $2 million outstanding for the years prior to 2011. There is a certain irony in the husband’s criticism of the wife about not paying the tax when, previously, he had avoided it by entering into bankruptcy.
The wife pointed to the fact that a monthly arrangement had been made with the Australian Taxation Office and kept. Despite a corporate statutory demand by the Australian Taxation Office, various imposed penalties, late payments, a payment plan and company garnishment order, the wife denied any “disastrous” financial position. She attributed the problem to a liquidity shortfall yet pointed to a profit which was not borne out by the trading results. She acknowledged that profits had not gone back to the 2009 level. The “liquidity shortfall” was undoubtedly caused in part by the drop in sales but that did not seem to affect the parties’ and indeed the wife’s personal expenditure and lifestyle. Properties were acquired and the mortgage payments were met one way or the other, from the business. This expenditure is more appropriately dealt with under the “add-backs” concept than by consideration of the wife’s management.
The Australian Taxation Office was not the only creditor chasing the parties. The mortgage relating to the wife’s house was with the National Australia Bank and remained unpaid. A default notice demanding $2.67 million was sent but there were also others. The financial position looked dire yet there is no evidence that had the husband been in charge, there would have been any different position. Productivity dropped and the explanation was the global financial crisis. 2010 was the worst year on record yet despite that, significant amounts of money were drawn from the business by the parties. Various properties were acquired and drawings continued to be drawn. In the six months period in 2010, $500,000 was paid to the children of the parties for various things including their own house mortgage payments.
A retrospective comparison of the growth in wealth
In January 2007, the property and business entities of the parties showed assets totalling about $13 million. By January 2013, those same entities although perhaps in different guises, totalled about $27 million if I take into account the value of the business as argued by the wife at $10 million. That sum of $27 million obviously is vague and not taking into account unforeseen liabilities and what might happen if the assets have to be transferred to the husband. I therefore do not accept on a very broad brush generalisation, that the activities of the wife over the period of the substantial time when the marriage was in significant trouble and for the period subsequent to separation, that the wife was less than diligent.
Such was the husband’s focus on contentious issues to prove that the wife was a poor manager that he isolated a number of matters concerning “add-backs”. Much of that related to expenditure by the wife or losses associated with two properties and expenditure on the parties’ children. Looking first at some of those contentious issues, the following becomes relevant.
The contentious issues
Luxury vehicle acquistions
There was an argument by the husband about the wife’s use of business funds particularly for the parties’ children. One example was that at the time of separation, the husband bought luxury motor cars for the children. The wife maintained in evidence that the husband did the buying and her role thereafter was to organise the finance. All of those had consequential losses and the husband attributed those to the wife.
The wife led evidence that in January 2009, the parties’ son Z was bought a luxury vehicle. It was fully financed. She pointed to the husband’s signature on the contract for the purchase whilst she conceded that she arranged the finance.
In March 2009, a luxury vehicle was acquired for the parties’ daughter Q. The invoice produced showed the husband having signed for the purchase and the wife organising the finance. This was the usual practice.
It was the husband’s evidence that over a number of years, the wife had bought expensive items for the children contrary to his wishes. He maintained the wife simply ignored him. He said the wife gave the children whatever they wanted. He described the wife as indulging the children contrary to his approach of teaching them financial discipline.
In cross-examination of the wife, senior counsel for the husband put to her that the husband would say that he had little or no involvement with the purchases of the children’s cars. However, when he was cross-examined, he said that he had no recollection at all of being involved. When pressed however, he said he suspected the wife had forged his signature.
The implausibility of this evidence ought to be obvious. He had known before the hearing began that the wife asserted that the purchases had involved him and the documents would no doubt have been readily available. It was the husband’s evidence that he had no recollection of these purchases. To then assert the documents had been forged by the wife was implausible. I do not accept his evidence on this point.
Although it was evidence relating to the wife’s use of funds for herself, it is noticeable that in June 2010, she acquired a luxury motor car which she drove on a daily basis. It too was acquired on the same financing arrangements.
There were other add-back issues relating to the children. The husband’s summary of argument asserted that between July 2009 and September 2012, the amount of $1.8 million was taken by the wife “apart from and in excess of property loan payments”. Cross-examination by senior counsel for the husband elicited from the wife that she had authorised or paid the children $348,000 in 2011, and $977,800 in 2012. There was more precise detail put to the wife which she accepted had been calculated by one of the expert accountants in the proceedings. She said there was a “need” to support the children. There was some corroboration of the discussion between the parties about that and in particular one of the daughters, in an email written by the wife in May 2012. This was all about the parties’ daughter needing significant dental expenses. The dispute arose as to who would pay and that led to the email. Such was the relationship of the parties at that time that they did not even agree on that payment. The husband’s evidence was that he was required to pay it because Q had moved in to live with him. The difficulty seems to have been the prioritisation by him of his money. He conceded he had run out of money to pay at that time but that was after his overseas travel and his own personal expenditure.
Various houses were bought for the children and no expense seems to have been spared. The husband’s counsel quantified the house-related expenses as $634,700. These were not included as part of the add-back argument. Two of the children worked for the parties although both had resigned in the period of what appears to have been the crisis in the marriage relationship. It was the wife’s evidence that she intended to invite them back if she was in control of the business.
At its highest, the unilateral expenditure (as distinct to what I have found about the houses and the cars), indicates that the husband objected philosophically that these monies were spent at a time when he was either ill or distracted by his own extra-curricular activities. During those periods of time, the wife continued to manage the business. It was also part of a pattern where the children enjoyed benefits and there did not seem to be any consultation between the parties about how money should be distributed. On the balance of probabilities, I find that it was part of the parties’ way of life to provide extensively for their children even if they had different philosophical views about that after the marriage broke down. The identification of the money as having been distributed to the children also does not assist me. It may have been for a variety of purposes but all of it seems to have come out of the loan account.
One exception to the issue of expenditure on the children arose more or less as a concession by the wife that if I was to take into account that the unilateral actions of the wife ought not be forced upon the husband, the Court should make an allowance for what was reasonable. I agree that an adjustment needs to be made for what the wife conceded were her controlled drawings to which I shall turn but there is little doubt that significant money went to those children. The wife calculated that on the history from 2007 through to 2009, an average could be seen to have been spent in the years prior to separation. It was said that over the three years, the average turned out to be about $871,000 per year. I find that because of the lifestyle of the parties and their children which gave rise to the expectation, the allowance should be made because of the protestation of the husband even if it is on the basis that his relationship with his children is currently poor.
Save as to the exclusion for the reasonable expenditure, I find there is otherwise no basis to treat the acquisitions and/or loan repayments as anything other than normal parental largesse by both parents and as such, they should not be “added back” but rather ignored.
Before looking at the wife’s expenditure, I turn back to the question of what it is that the husband has under his control. This is the non-trading entity assets. Here, it is helpful to make a comparison between what the wife has and what the husband has.
The husband owns PP property which has been valued at about $1.6 million but which is heavily mortgaged. Its equity is about $124,000. That aside, the husband has a modest horse float.
The wife however owns C property which has been valued at about $380,000 but it too is mortgaged. The equity in that is about $137,500. The wife also has E property which is valued at $1.6 million but encumbered to the extent of about $1.47 million. The equity in that is therefore about $133,000.
The wife also has the RR property which has been valued at $2.67 million and mortgaged to the extent of $2 million with an equity therefore of about $670,000.
It can therefore be seen that in respect of purely property-type assets in the name of the parties, the wife has about $940,000 whereas the husband has only $142,000.
Having regard to the size of the assets that the parties agreed upon and even taking into account the argument to which I shall turn in a moment about the value of the business, it is clear that the bulk of the assets of these parties lies within the entities other than their legal interests.
The trading and non-trading entities have property interests over and above the business itself. All of those were controlled by entities under which the wife is either the sole director or a director with one of the other children.
It can be seen therefore that the bankruptcy of the husband, his health difficulties around the time of separation and the wife’s continued management for the last few years has not resulted in significant losses in a capital sense but rather, the parties have done extremely well. Where the problem lies is in the wife’s unilateral action which could not be described as just part of her business activities.
I discerned the following issues had to be considered:
· What value should be ascribed to the business?
· How should what was described as “premature distributions” be treated? The husband said the wife had distributed to herself and for her benefit $6.48 million whilst the wife said she had distributed $2.1 million;
· One of the properties acquired was NP property which was acquired during the wife’s control and its loss of value thereafter was large. The husband argued that this was a folly of the wife and should not affect his entitlements;
· As earlier described, the various distributions were made through the entities to the four children of the husband and wife. It was the wife’s argument that both parties had made those distributions and therefore they should be ignored but the husband’s position was they should be seen as distributions at the hand of the wife and not adjusted against his entitlements.
· Arising out of those issues were questions of how to assess the contributions of each party and how to treat potential tax liabilities depending upon who received what and how much.
· Finally, should any injunction be made about the parties competing with one another?
The prospective positions of the parties
The husband sought to retain:
· The trading entities including all plant, equipment, motor vehicles and intellectual properties;
· Both real properties upon which the trading entities operated;
· His residence at PP property;
· Five investment properties three of which were owned by the major corporate entity controlling the business, one belonged to a superannuation fund and another was where his mother lived;
· A variety of chattels and memorabilia;
· An entitlement to his member account in the S Superannuation Fund of $1,752,563 to be effected by way of a superannuation splitting order but he did not want the fund itself;
· The Ledarn X Super Fund.
The husband sought that the wife retain:
· All of the non-trading entities save for the one which is the registered proprietor of one of the two business premises;
· The former matrimonial home at WK;
· Three real properties which are owned by the SSuperannuation Fund;
· A variety of real properties at C, RR, U and BB;
· A variety of chattels;
· The wife’s luxury motor vehicle.
The husband also sought that on the basis of an equal division of the assets and taking into account the “add-backs” from the premature distributions by the wife, in addition to the assets above, the wife also had to pay him $918,321.
The complicated nature of those assets was intended to reflect, from the husband’s perspective, an equal division of the recognised assets.
The wife sought that she retain:
· The G Pty Ltd entity and all of its variety of real properties subject to the existing encumbrances;
· The corporate entity known as HX Pty Ltd.
The wife also sought orders for the sale of properties at O, C, E, Uand for the net proceeds to be divided equally between them. She also sought orders that gave her effective control of all of the entities which owned the various real properties and in which there were trusts.
The wife then set out the various properties that each of the parties should retain and that there should be a superannuation splitting order.
Along the litigation pathway to trial, there were a number of disputes and applications all of which were based on conduct with each party accusing the other of damaging the business, alienating staff, removing property or denying the other party access to funds. The valuation exercise of ascertaining what the parties had was complicated and expensive. There were complaints about compliance with orders. After many hours of work, the case began with both parties represented by Senior Counsel who severely and sensibly curtailed and contained the dispute to relevant issues.
An immediate dispute when the trial began arose because despite an agreed valuation for the business of about $8 million, the wife’s case was opened on the basis that it was worth $10 million to her and she would take it at that value. That led to an argument from the husband to the effect that the wife could not do that because it was tantamount to “bargaining” with the Court. Whilst there is a obiter dicta to say that such an approach should not occur, there is no reason why the Court cannot attribute a value to owner which is higher than the agreed valuation.
The valuation of the business
Both parties’ arguments have substance depending upon whether it is important to only have one value used in a “pool” or whether the Court can use different figures for two different outcomes.
Senior counsel for the wife drew attention to the obiter dicta of Stephen J with which Aickin J agreed in R v Lusink and Anor; Ex parte Shaw (1980) 32 ALR 47; (1980) FLC 90-884. That was a case where an open offer to resolve a case about maintenance was made before the evidence began and it was made in the presence of the judge. Stephen J doubted the desirability of that saying that the judge might find it difficult to put out of his or her mind an offer which appeared unreasonable at the time it was made. In other words, a bias would infect the determination because of the subjective rejection of the offer as being unreasonable. Stephen J described the process as “tantamount to an invitation” to “engage in the bargaining process”, to the detriment of the judge’s proper functions.
Two questions must be asked. First, was this bargaining by the wife? Secondly, even if it was, does it distract attention from the proper functions of the Court?
In my view, it probably was bargaining or trying to make the wife’s position more attractive but the value is still something for the Court to decide on the evidence. Here, the “offer” would have the effect of making more money available to the husband if the wife satisfied the other issues that enabled the Court to decide she should retain the business. In my view, it is important to examine how the value of something affects the just and equitable outcome.
The object of the valuation exercise is to have some yardstick by which to judge whether the ultimate alteration of interests in property is fair.
The determination of the value to be applied is essentially a matter for the trial judge (Hull and Hull (1983) FLC 91-360). The purpose of the evidence is to enable the trial judge to form his or her own independent judgment on the matter by the application of “appropriate principles” (Lenehan and Lenehan (1987) FLC 91-814). The trial judge has to satisfy himself or herself by the application of those principles that whatever figure is ascribed to the property, it is an appropriate value (Borriello and Borriello (1989) FLC 92-049).
Normally, the primary test is the hypothetical prudent purchaser but it is conceivable and often seen in family law cases that the commercial or capital value of the shares in a company do not reflect the value for the particular spouse who controls or retains them after separation particularly where that party stands to benefit from those entitlements after the conclusion of the relationship (see Reynolds and Reynolds (1985) FLC 91-632).
Whichever value a trial judge ascribes to the shares in a company, the value must be realistic having regard to what the person who is retaining them intends to do with them. Here, there is no question that the wife intends to retain the business and to continue to make money from it.
It is possible to conceive of a situation therefore where the value to one party is quite different to another. The fact that both valuers agreed on a value may also be irrelevant if the methodology they used is designed to take into consideration that the hypothetical purchaser is contemplating continuing to trade rather than a winding up or a sale of a business. Whilst the usual concept of value for market disposal purposes can be and usually is the appropriate figure, in my view, that ought not be applied here because it is not the wife’s intention to sell and she clearly indicates that this business is worth much more to her than that hypothetical value ascribed by the valuers. What is important is that the value is just and equitable to both parties (see the observations of Mason J in Mallet and Mallet [1984] HCA 21; (1984) 156 CLR 605).
Once it is determined that the wife should retain the business and not so on the ground that she is the highest bidder but rather that justice and equity justifies giving it to her, the value she ascribes to it becomes the appropriate value. She knows what she can earn from it and should she so desire, ultimately obtain from it on a disposal.
As witnesses, each was keen to portray the history as they perceived it. I am satisfied that the wife was a better witness. She was able to recall facts much more accurately than the husband. She had a better understanding of the administration of the business and had liaised with the accountant regularly. For his part, leaving aside distractions by his own endeavours which took him away from the business and control of it, the evidence shows the husband’s mental health was not good at various times including to a point of his hospitalization. Those difficulties led to him not recalling things as well as the wife. That said, each was very bitter and angry with the other but ultimately, the wife was the more stable and accurate historian. She has continued to maintain control over the business in trying circumstances including having to deal with the husband’s absence whilst at the same time managing with staff who were really responsible for the operations of the business. It is predominantly because of those facts I consider the wife should retain the business as it currently is. I find the wife has a much better understanding of the needs of the business and how it operates.
Part of the husband’s argument, which I do not accept, as to why he should retain the business was the wife’s mismanagement on a number of issues that I have already addressed.
In my view, there is no prejudice to the husband once the Court has determined that the wife should retain the business, the figure of $10 million should be used and I intend to apply that figure accordingly.
“Add-backs”
For the expenditure, it was the husband’s case that the wife had drawn $826,000 more than the total permissible monthly amounts pursuant to an order made in 2010 during the period from July 2009 to December 2012.
In his evidence, the husband correctly asserted that the wife had exceeded the monthly payment to which she was entitled under an order of the Court. The spreadsheet relied upon by the husband showed that in the 2010 financial year, the wife overdrew her entitlement (ignoring legal fees) by $179,500, in 2011 by $432,000, $172,000 in the following year and for the six month period ending December 2012, $30,800. Having regard to the restrictive nature of the October 2011 order, these sums cannot be ignored. This money does not appear to be replicated in other assets in the parties’ names or in the balance sheets of the various entities. I have concluded therefore that these monies have been used on the wife’s lifestyle. They total about $812,000 and as I have foreshadowed, cannot be ignored. That is because the parties themselves had agreed to restrict their expenditure by orders. The wife flouted that and the husband complained. To simply ignore the money spent as having disappeared would not be just and equitable to the husband. Had the money remained where it should have, there would be now more to divide.
Such payments have sometimes been treated as being notionally added to the divisible assets because they were a premature distribution (see Townsend and Townsend (1995) FLC 92-569 or wastage (see Kowali and Kowali (1981) FLC 91-092). These do not fit into that category. This was money which the parties acknowledged came from the business enterprise which had been their joint venture.
The authorities with respect to the approach of the Court are varied. Guidelines have been formulated over time in a number of authorities concerning issues surrounding notional add-backs (see the authorities referred to in Lovine & Connor and Anor [2012] FamCAFC 168 at 101).
As the Full Court said in Lovine, the disposition of an issue concerning these notional add-backs is one of the exercise of a discretion within a discretion. The discretion is as to the manner in which the money is to be treated within the overarching discretion of determining just and equitable orders under s 79.
In Bevan and Bevan [2013] FamCAFC 116 the Full Court observed:
We observe that “notional property”, which is sometimes “added back” to a list of assets to account for the unilateral disposal of assets, is unlikely to constitute “property of the parties to the marriage or either of them”, and thus is not amenable to alteration under s 79. It is important to deal with such disposals carefully, recognising the assets no longer exist, but that the disposal of them forms part of the history of the marriage – and potentially an important part.
It was not just contentious that the wife had drawn more than her designated entitlement for lifestyle expenses. I cannot therefore ignore the money that the wife took.
NP Property
In 2003, a property was acquired which the wife described as being used as a breeding facility for horses. Insofar as this was a business, it was not successful. Importantly, this was not something in which the husband had any involvement. Losses for tax purposes were made each of the years 2010, 2011 and 2012. When cross-examined, the wife agreed that the simplistic picture outlined in her evidence was not entirely accurate. She used the property to ride and work horses and the breeding of horses was not happening. The losses for tax purposes included significant expenses for a manager. When questioned why so much was going to a manager when horses were not being bred and she was only working or riding the horses, the wife said that there were a lot of horses and despite the business inactivity, the horses still had to be maintained. She said that management was part of that operation. Almost $500,000 went in that enterprise.
The gestation period of this case to trial was long and arduous. The husband had sought to have the horses on the wife’s property valued. The wife was accused of not producing them for valuation purposes but she was adamant that they were brought to NP for that exercise. The valuer was not called to give evidence so I am unable to discern whether the comprehensive exercise was undertaken or not. The books of account of what looked like a hobby farm were unhelpful. According to the wife, the balance sheet which simply had a description of “stock” included the horses. It was not until 2008 that horses were specifically recorded.
Then in 2009, another property (the BB property) was bought many kilometres away from where the parties lived. The wife’s explanation was that it was purchased to reduce costs of stabling and fodder and it had some extra facilities on it. It was also near the manager’s residence. All of this was done without the husband’s involvement or indeed, knowledge. I accept this was a business of the wife. It was undertaken at a time when the marriage was breaking down and I find that at that time, each party was using the largesse of the business for their own activities. It was not a folly in the sense of wastage or wonton and negligent use of funds; on the contrary, it was the wife simply using her own entitlements without consultation with the husband. The difficulty was that it exacerbated the decline in the overall financial position as earlier mentioned but I do not find on the evidence that financially, things would have been better under the husband’s control. Indeed, senior counsel for the husband reminded the wife that it was her case that the husband’s health was such that he would not have remembered what he was told and she added that there were periods where he was mentally unstable. Against that, the wife said that the money lent by the main corporate entity for these activities was done with the husband’s agreement. She said, and the husband did not deny, he was with her when one of the properties was found. She maintained that he was doing his own thing and not interested in what was going on. At that time, although there had been problems in the marriage, the parties were still together. The husband’s focus was, according to the wife, on renovating properties rather than on the motor vehicle business. All of that left the main business under staff control.
In all of this, the wife relied upon her accountant to make the decisions that she did. Accordingly I do not find that it was a folly.
E Property
The wife is the registered proprietor of a 33 acre property at E. It has been on the market for over a year. It was originally valued at $1.8 million but an offer of $1.75 million was made for it by a purchaser who wanted a delayed settlement of six months. The husband opposed the sale and now its value has dropped to $1.6 million. This evidence was not particularly helpful. The wife admitted the husband had asked for proof of the details and she had not provided them. She conceded that the husband could not be responsible for a failure to obtain a concluded contract.
The approach to the treatment of the wife’s expenditure
Thus as I indicated, the husband’s position was that there had been these premature distributions which totalled very close to $6.5 million. Most of that came in respect of the loss said to have occurred in NP property and the distributions to the children. It was the wife’s position that if there were such things as premature distributions, they should at the most amount to $2.1 million on the basis of her having drawn more than the $12,000 per month that she was entitled to pursuant to the court orders and adjustments had to be made for losses that were made on the BB property and adjustments for the reasonable distribution to the children.
In my view, there is much to be said for that approach. It is not fair to simply treat the BB purchase, albeit unilateral by the wife, as something that must be debited against her entitlement when there were ultimately tax adjustments that created equity in the various entities. The losses on NP are too difficult to simplistically describe as attributable to the wife having regard to what each party was doing at the time.
Accordingly, having regard to the authorities to which I have referred, it would not be appropriate to simply add back into a pool of assets a notional sum such as $2.1 million proposed by the wife but it is important to take it into account because the husband would otherwise be disadvantaged even if he must take some responsibility for his absence of control not only legally by not having taken back control of the entities after his discharge from bankruptcy but also his own frolics away from the business when his focus was on property development. I find an adjustment is necessary in respect of $2.1 million but not the amount argued by the husband of $6.5 million. I return to this subject in paragraph 125 below.
Proposals
The wife proposed that the husband receive in addition to the PP property where the equity was $124,000 and his horse float, the transfer of entities which controlled or owned real property at HC, MD, the factory at S2 and a property at IC. Save for the last property, all three others were heavily mortgaged and therefore the equity including IC was otherwise about $3.65 million.
The wife then said the husband should have adjustments of $1.869 million in his favour. The difficulty with that is that the husband does not want S2 property if indeed he does not have the business.
It seems to me that the only solution to that problem is that I determine the entitlements of the parties on a percentage basis of an overall finding of their total assets and to the extent that the parties cannot quickly come up with a solution as to how that outcome is achieved bearing in mind that I shall make an order that the wife be entitled to retain the business through its structure, the various assets will be sold and no doubt, that will trigger the various taxation implications for the parties.
The wife also proposed that the husband retain the member benefits that he had in the various superannuation funds with adjustments to be made (presumably) for transferring out the interests of the other members. This would have meant that the husband would have received about $6.5 million. Here again, the husband was not interested in the fund itself. That too creates a problem.
Leaving aside the other adjustments for tax on the entities, if that sort of settlement was achieved, the husband would end up with about $12.16 million in assets out of a “pool” of assets of about $27 million which indeed is about 45 per cent. However that ignores any adjustment for “premature distributions” which the husband put at $6.5 million and the wife argued, at worse, she had advanced to herself somewhere around the $2.1 million. On the basis of accepting that the wife’s adjustment should be $2.1 million, and that the husband would receive what the wife was offering, he would only be receiving 42 per cent of the assets. In my view, some adjustment would still have to be made in the husband’s favour.
The husband proposed an equal division of the “asset pool” but that was to include “premature distributions” as I have mentioned. He wanted that to be $6.5 million. His proposed orders sought that he retain the trading entities and some real properties and superannuation and there be a further superannuation splitting order such that he retain the term deposits of about $1.7 million in the S Superannuation Fund.
If those orders were made out of an existing “pool” of $27 million, added to which he sought the notional addition for add-backs, he would end up with about 59 per cent taking into account the sworn valuation for the trading entities at about $8 million as against what the wife sought. Because I do not intend to take the business at $8 million nor the add-backs at $6.5 million, a careful examination has to be undertaken as to what the husband was actually endeavouring to achieve. Had he sought those orders but not on the basis of what he said the assets of the parties were, he could be receiving as much as 68 per cent of the parties’ assets.
In my view neither of the approaches of the parties is just and equitable.
The approach to the division of the assets can be either on an asset by asset basis or globally. The parties approached this in both ways but wanting individual assets transferred to receive a percentage outcome. In my view, having regard to the duration of the marriage, their joint efforts and their approaches to this litigation, the global approach is the fairest way. I take into account in saying that the legal interests largely favour the wife. The wife was contact to approach the overall division globally.
What is the approach to a determination?
In Stanford v Stanford (2012) FLC 93-495, the High Court provided a reminder that the pivotal role in s 79 is to determine first whether there ought be an alteration on the basis of justice and equity of the legal and equitable interests of the parties. The unusual feature of this case is that because of the husband’s bankruptcy, the wife has retained the legal control of most of the assets through the corporate entities but it was never suggested that some form of alteration of interest should not be made in favour of the husband having regard to the duration of the relationship and the efforts that he had made. Accordingly, I find it is just and equitable to make an order altering the interests of the parties.
As the High Court said in Stanford (supra) apart from the principle just mentioned, the determination of an outcome begins with the identification of existing property interests. The discretion then conferred by the statute must be exercised in accordance with legal principles and not on some assumption that the parties’ interests are or should be, different from those determined by common law and equity. The final step of course is that the determination must take into consideration the matters set out in s 79(4) of the Act with some emphasis on s 79(4)(e).
In this case, I find the interests of the parties or either of them both directly and indirectly in all of the property which I have treated as belonging to them but rounding the figures off as follows:
Husband’s personal assets
PP Property $1,640,000
Less mortgage 1,545,000 $95,000
Float 18,000
Wife’s personal assets
C Property 380,000
Less mortgage 242,000 138,000
E Property 1,600,000
Less mortgage 1,466,000 134,000
RR Property 2,675,000
Less mortgage 2,004,000 671,000
… Boat Pen 120,000
The Trading Entities 10,000,000
Plus surplus assets 443,000 10,443,000
The non-Trading Entities
(On a net asset basis
but taking into account the
G Pty Ltd overdraft and accounting
Fees on the trading entities) 9,844,000
Non-Super Assets 21,463,000
Superannuation interests
S Superannuation Fund 4,758,000
Ledarn X Superannuation Fund 2,069,000
28,290,000
Liabilities at this stage
Australian Taxation Office 1,300,000
Net Equity for contemplated division $26,990,000
The adjustments
For the reasons I have set above, it will be evident that I have not added into the assets of the parties any of the so-called add-backs nor have I made any adjustment for the partial distribution to the husband but I will take all of those into account under s 75(2)(o).
Submissions
The husband
It was the position of senior counsel for the husband and I suspect supported by the wife that when ultimately a decision is made about how the assets should be divided, the respective accountants should be given an opportunity to work out a way of doing it most tax-effectively. Having regard to the delay in delivery of these reasons, there are clearly mortgages that have moved as well as the crystallization of taxation liabilities. Further adjustments may need to be made for what the parties have drawn in excess of their existing entitlements under orders.
I propose therefore to make a division based upon a formula that I shall set out below.
Senior counsel for the husband indicated at the outset that his client had a fervent wish to retain the business. Notwithstanding his submission during the trial about how the business should be valued and the inappropriate method used by the wife which he described as bargaining with the Court, he said that the husband would retain the business at whatever value the Court determined. The complexity of that course is also something that would need to be taken into consideration if that order was made but I have not made that the reason as earlier articulated for indicating that the wife can retain the business. It is indicative however of the complexity of the parties’ financial position such that it is almost impossible for me to make an alteration of property interests without there being a consequential domino effect. I again therefore propose to give the parties an opportunity to address the division of the assets in the most efficacious way.
Senior counsel for the husband dealt with the add-backs in some detail. He referred me to the Full Court decision in Omacini (2005) FLC 93-218 referring to the usual problems that arise when assets no longer exist. For the reasons earlier mentioned, it would be artificial because of the flow-on effects of such an approach in areas such as taxation and loss of interest to simply add-back money. I will take into account in this case however that the wife has had at least $2.1 million more than as had the husband and that that money is no longer reflected in the $26.99 million or $27 million to which I have referred above. In my view that is a proper way of dealing with the level of expenditure and the losses incurred by the wife. In my view that can be done by the adjustment that I propose to make. I propose to use the $27 million figure.
Senior counsel for the husband went through all of the figures pointing to what the husband had always asserted was the wife’s frolic in relation to the NP property but as I earlier indicated, I do not accept that the mathematical approach is a fair way of looking at that.
In relation to the wife’s proposal, senior counsel for the husband addressed the issue of the wife retaining the business but transferring the S2 property to the husband. He submitted that it was the clear position of the husband that if the wife retained the business then the factory was of no use to the husband at all. There is some support for that logic having regard to the concern expressed by the single expert witness about the notional rent that the business was actually charging itself for the use of the premises. In my view if the wife cannot maintain the business and the premises and borrow sufficient funds to pay out the husband or transfer to him real and/or personal assets, there will inevitably be a sale to crystallize the husband’s entitlement. Senior counsel for the husband also raised the issue of the superannuation fund. He pointed to the fact that it was the wife’s position that the husband retain that fund and that she be paid out $500,000. The husband’s position was that he did not want that fund itself but that the proper way to address the matter was to enable its member account to be transferred accordingly. I agree with the husband’s proposition but again, will allow the parties to attempt to make those adjustments.
It is noticeable in the enormous accounting exercises undertaken by the parties that the S Superannuation Fund has a number of real property assets as well as a significant sum of money on a term deposit. To the extent that the husband desired to take his member account, he could do so. The balances of those accounts in 2011 were just over $3 million for the husband and $1.5 million for the wife. Paying out the term deposit to a fund of the husband’s choice or alternatively if he was retiring, paying it to him, would enable a significant part-satisfaction of his member account. The other assets appear to be hard assets in property and they too could be transferred subject to taxation implications to satisfy the husband’s entitlements.
The wife
Senior counsel for the wife examined in some detail the evidence of the husband much of which related to the details of his health and his absence from the business. The husband was not a good witness and I agree with senior counsel for the wife that in relation to some of the contentious issues, I should be very cautious about his evidence.
Senior counsel for the wife also addressed the issue of legal fees, premature distributions of property and wastage. He drew the Court’s attention to the decisions in Kowali (supra), Chorn and Hopkins (2004) FLC 93-204, Ceriani [1998] FamCA 143, Polonius & York [2010] FamCAFC 228 and Lovine& Connor and Anor [2012] FamCAFC 168. All of those decisions point to the fact that it is ultimately a matter for the trial judge to decide how the just and equitable result is achieved and there are a number of courses open. In my view, having regard to the complexities of this case, the size of the assets of the parties and the way in which they have structured their business, the only fair way is to take into account the fact that the wife has had the benefit of significant funds to do as she wished much of which was given to the children excessively and I accept that the appropriate course of action is for me to contemplate an adjustment whereby the wife has had the benefit of $2.1 million more than the husband.
The adjustment must take into account the use of the business funds by the wife for her personal expenses for lawyers and accountants and that has been made clear in the adjusted figures that I ultimately accept come to $2.1 million.
Superannuation
Superannuation assets are clearly distinguishable from non-superannuation assets. The question is the use to which those assets can be put that is important. The parties in this case have treated them for tax purposes as a deductable item and have significant wealth as a consequence. Each of the parties is of an age where they could in the future retire on significantly comfortable superannuation entitlements. Notwithstanding the obvious distinction between a superannuation entitlement and a personal asset, there is no reason for me in this case to treat those superannuation funds as any different from the other assets. Indeed, that is exactly how the parties approached the matter by adding them all into one pool.
Contributions
There was little dispute in this case that this was a marriage of long duration where both parties had created a business which had largely managed itself in the latter part of the marriage. Evidence was given about the role of various members of staff with the wife taking the overriding role of administration manager. During the last few years of the marriage, I find that the husband was distracted either by other interests such as property development or by illness which then gave rise to an inability for him to have a significant role. Both parties were distracted by other activities. In the husband’s case it was property development and travel and in the wife’s case, her interests in horses.
Nothing I heard in evidence would justify a conclusion that the parties had contributed other than equally by their efforts but as I have earlier indicated, some adjustment should be made in the husband’s favour having regard to the fact that the wife took more than her entitlement.
In making that statement, I take into account the duration of the marriage. Clearly the husband made the life of the wife and the family difficult from about 2009 if not earlier by virtue of his health situation. The evidence suggests that things were beyond his control so to the extent that threats were made and damage was done, I would not find that his actions were malicious. It is part of the ebb and flow of a marriage partnership that each party takes the good and the bad. The absence of the husband from the business might be seen as some form of justifiable sick leave. Whilst he was doing those sorts of things, he was also acquiring property and it would seem, was involved in decisions in relation to some of the assets that were purchased. The wife too was fortunate to have a business created by the husband’s entrepreneurialship many years ago and she too had the luxury of having staff who enabled her to be absent from the business whilst she pursued her horse interests. Notwithstanding she was severely criticised by senior counsel for the husband about the absence of an explanation for livestock in the balance sheet relating to the NP property, I have little doubt that both of these parties relied upon accounting advice and had the benefit of the corporate structures over many years. There is no better evidence than the husband’s bankruptcy to establish that.
Even subsequent to separation, the wife might be seen to have continued her contributions in the management of the business but in my view, having regard to the duration of the marriage, I would not find there is any justification for any adjustment in that regard.
I earlier mentioned the provisions of s 79(4) of the Act. Leaving aside s 79(4)(e) all of the considerations of the matters there set out would justify a finding that the parties have contributed equally to the $26.99 or $27 million.
It is s 79(4)(e) which draws attention to the mandatory provisions of s 75(2) that requires consideration in this case.
Section 75(2) reads as follows:
(2) The matters to be so taken into account are:
(a) the age and state of health of each of the parties; and
(b)the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment; and
(c)whether either party has the care or control of a child of the marriage who has not attained the age of 18 years; and
(d)commitments of each of the parties that are necessary to enable the party to support:
(i) himself or herself; and
(ii)a child or another person that the party has a duty to maintain; and
(e)the responsibilities of either party to support any other person; and
(f)subject to subsection (3), the eligibility of either party for a pension, allowance or benefit under:
(i)any law of the Commonwealth, of a State or Territory or of another country; or
(ii)any superannuation fund or scheme, whether the fund or scheme was established, or operates, within or outside Australia;
and the rate of any such pension, allowance or benefit being paid to either party; and
(g)where the parties have separated or divorced, a standard of living that in all the circumstances is reasonable; and
(h)the extent to which the payment of maintenance to the party whose maintenance is under consideration would increase the earning capacity of that party by enabling that party to undertake a course of education or training or to establish himself or herself in a business or otherwise to obtain an adequate income; and
(ha)the effect of any proposed order on the ability of a creditor of a party to recover the creditor's debt, so far as that effect is relevant; and
(j)the extent to which the party whose maintenance is under consideration has contributed to the income, earning capacity, property and financial resources of the other party; and
(k)the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration; and
(l)the need to protect a party who wishes to continue that party's role as a parent; and
(m)if either party is cohabiting with another person--the financial circumstances relating to the cohabitation; and
(n)the terms of any order made or proposed to be made under section 79 in relation to:
(i) the property of the parties; or
(ii)vested bankruptcy property in relation to a bankrupt party; and
(naa)the terms of any order or declaration made, or proposed to be made, under Part VIIIAB in relation to:
(i) a party to the marriage; or
(ii)a person who is a party to a de facto relationship with a party to the marriage; or
(iii)the property of a person covered by subparagraph (i) and of a person covered by subparagraph (ii), or of either of them; or
(iv)vested bankruptcy property in relation to a person covered by subparagraph (i) or (ii); and
(na)any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage; and
(o)any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account; and
(p)the terms of any financial agreement that is binding on the parties to the marriage; and
(q)the terms of any Part VIIIAB financial agreement that is binding on a party to the marriage.
I find that there is no reason for me to be concerned about the age and state of health of the parties not only in terms of their working life and ability but also their secure future. Whilst the husband’s health has certainly been questionable over the last few years, he was adamant that he was going to continue to work. The age of the parties is such that each of them could if they wished soon retire from the workforce and each would have sufficient assets to make their respective futures comfortable.
The list of assets to which I have earlier referred would indicate clearly that the income, property and financial resources of each of the parties in the future will be secure. Even if there is a sale of the businesses, the parties will still be millionaires.
Neither of the parties has the care and control of children nor specific commitments that require them to support persons other than themselves. Neither is entitled to any benefits from the taxpayers’ perspective.
As can be seen above, the Court is obliged to take into account the standard of living that is reasonable. It goes without saying that neither of these parties will be in straightened circumstances.
I want to return to the question of earning capacity because in my view, that is a significant issue in this case.
In her financial statement filed in July 2012, the wife showed that she had a weekly income of $13,860 or $720,000 per annum. Of that, $13,654 per week came from the family trust. In other words, the family trust was distributing $710,000 per year. In that same financial circumstances statement, she said that her expenses included two notable things. The first was mortgage payments of approximately $250,000 per annum and second, her loan repayment obligations on behalf of various companies which amounted to $1.18 million per annum. Thus, the average weekly income of $13,860 was not a true reflection of her financial position.
To the extent that the husband was no longer a party to the business and not entitled to any distributions from the trust, one could conclude that apart from his own labour in the businesses to which I shall turn in a moment, he would otherwise have only the income that he would draw from the properties that he receives in this settlement.
It was always the wife’s case that she was required to make payments on behalf of G Pty Ltd as well as the various other accounts set up for the companies and trust that made up the Ledarn Group. The treatment of those payments was obviously an accounting nightmare and the parties spent considerable sums on experts. Importantly however, they had the benefit of those structures for tax purposes. When the parties decided to have an interest in property away from the business, they would simply use the resources of that business as it was reflected in the various trading and non-trading account and the accountant would then have to make adjustments as to what was taxable and what was not. Much of the money that seemed to be declared as profit was put into the wife’s loan account and it was from that account that the children’s payments were made.
Mr K, the single expert witness, wrote in December 2012 that for the year ended 30 June 2012, the income derived by the parties could be seen as $631,926 for the wife and $132,908 for the husband. Those sums were made up of distributions from the Ledarn Family Trust in the case of the husband and two salaries totalling just on $60,000. On the basis that the wife retains the business, each of those distributions in whatever form they may have taken in the past, will no longer be made to the husband. On the other hand, the wife took a distribution from theF Employee Retention Trust of $303,720 in the 2012 year as well as a distribution of $309,214 from the Ledarn Family Settlement. On the basis again that the wife retains those as she currently has in her control, her income situation is going to be significantly greater than the husband. On the assumption that the bulk of the income is derived from the business or indirectly through the non-trading entities, there is little doubt that the wife will be significantly better off in the immediate few years from an income stream. The income stream has clearly been taken into account in the valuation of the $10 million value of the business.
In Mr K’s evidence, he went through the fluctuations in the profits of the business and noted that on the basis of excluding the 2010 year as an aberration, the average of net profit before tax after adjustment would amount to approximately $2.13 million. Even as late as September 2012, the sales were significantly around the amount that they would normally be. Thus for the valuation purposes, Mr K worked on an estimated future maintainable profits before interest and income tax to amount to approximately $2.135 million per annum. In his capitalisation calculations, Mr K took into account that the major names of the business were well-known and well-regarded and they were seen as leaders in the industry. He then said that there had been some threats to the business including an international business that attempted to copy the product. He said that senior management had to be constantly vigilant in protecting the intellectual property of the business. That led to an issue of what the husband has been doing because it is his intention apparently, to set up in competition with the wife if he does not receive the business.
When Senior Counsel for the husband opened his client’s case, it was put that the husband asserted that three-quarters of the design work had been his but indeed a number of examples relied upon by the wife were, in his view, faulty. In cross-examination, the husband was adamant that all of these products came from his design which satisfied Australian design standards.
When his evidence focussed on the new company, the husband responded vaguely to questions. When asked whether he had designed a particular item, all he could say was that it looked like it. He had not tried to verify what the wife was asserting to be products sought to be registered by him.
When asked about the new entity, he acknowledged that it had been registered in August 2011. When asked whether the director and secretary was a Ms Z, he replied that she was. Senior counsel for the wife asked whether this person was otherwise known as “…” but the husband replied that he had no idea. As to whether Ms Z had a background in design and relevant products, the husband replied that she had not. This particular person was described by the husband as his housekeeper.
The husband conceded that he had not put any of his new designs into production because he did not have any money to do so.
I find therefore that whilst the designs might have been attributable to the intellectual skills of the husband, they were really part of the business enterprise. Having regard to the concession made by the husband that he was made bankrupt, the problem of his entitlement to retain any intellectual property becomes somewhat clouded. On any view however, the profit of the business arising out of these products was a joint effort by the parties over a number of years.
Should the retention by the wife of the business entitle her to an injunction precluding the husband from competing with her?
Each party had a different view about not only the power to make an order but also whether it was proper to do so. Subsequent to the reservation of judgment, submissions in writing were received from both parties.
Counsel for the wife (not counsel conducting the trial) addressed the issue of a proposed “five year non-compete obligation”. He submitted that at common law, all covenants in restraint of trade were prima facie, void against public policy. He submitted that the party asserting the restraint, in this case the wife, had to justify it on the grounds of reasonableness. As he observed, the High Court of Australia has confirmed there is an interest of the public not just the parties, to be considered. Counsel presumed the power of property alteration would extend to an order for the sale of a business or the distribution of assets in specie. With that submission, I agree. The power of the Court to alter parties’ interests is wide and discretionary (see Mallet v Mallet (supra)).
Counsel for the wife submitted that each case had to be considered on its merit but in this case, the husband was akin to the vendor of a business whose goodwill created or enhanced the value. Counsel pointed to the risk for the business of having a large single customer having 50 per cent of the sales. That risk had been identified by the two expert valuers. The problem of the valuation and risk just mentioned becomes more difficult because of the submission by the wife that the Court should treat the value to her regardless of the value attributed to it by the valuers.
Nothing in the valuation evidence however referred to any restraint but the Court would be entitled to assume that it was contemplated on the basis of the evaluation of the risk associated with losing that major customer.
Counsel for the husband observed that contracts for sale of a business without a restraint would normally affect a minimal price. That makes sense. It was further submitted that the restraint had to be focussed on existing contracts or customers and also products in development. The logic behind that was that the purchaser needed time to ensure that the business could “stand on its own feet”.
It was submitted that a trader was not entitled to be protected against mere competition but rather the competition in respect of the supply of the goods. As was said by Lord MacNaughton in Trego v Hunt [1896] AC 7 at 24, the seller may not sell the custom and steal away the customers.
Counsel submitted that it was in the public’s interest to promote competition but also for the orderly resolution of matrimonial disputes which required the parties to have certainty in their dealings. There is substance in that if the party who does not receive the business then seeks an adjustment because of disparity of capital, income or earning power.
It was therefore submitted that an injunction of the type sought by the wife was not void against public policy.
Counsel on behalf of the husband acknowledged the power of the Court lay in s 114 of the Act. I agree. Here, however, it was submitted that it would be improper and unjustifiable to impose such a restraint on the husband. Counsel for the husband agreed with the submission of counsel for the wife about the common law position. Thus, the husband’s position was that a restraint of trade was only reasonable if there was a genuine interest requiring protection, the activities restrained were not wider and for no longer or geographically wider than necessary to protect the interest (see Jaddcal Pty Ltd v Minson (No 3) [2011] WASC 362.
It was submitted that the wife had to establish an identifiable interest calling for protection. The authorities speak of the bargaining of the parties. The husband’s position was that this was not a bargained position but rather one imposed upon him by the Court. In addition, the husband, if ordered, was transferring the entities rather than the goodwill of them.
Counsel observed that the wife already had the goodwill of the business as an owner. If the wife was arguing that she was acquiring the goodwill, she had to prove it was reasonable to protect her interest in preserving the customer connection. It was submitted that the wife had not established that the customer connection would be adversely affected if restraints were not imposed particularly where the husband had, on the wife’s case, been “disinterested” in the business. Thus, it was argued that the product was one which held a reputation and the business was acknowledged as being the industry leader. It was therefore said on the husband’s behalf that he faced formidable barriers to entry into the market. As was indicated by the valuer, it would take time for the husband to get into the market during which, the wife had plenty of time to cement her position.
The husband’s position was that there was ambiguity about the wife’s position and her proposed restraint for five years was not only artificial but arbitrary. Thus, it was submitted, the wife had not made out a case for an injunction.
The provisions of s 114 of the Act permit the Court to make such order as it considers proper with respect to the matter to which the proceedings relate, including, and therefore not only, an injunction in relation to the property of a party. Is it proper to restrain the husband from competing with the wife assuming at all times that there is a need to protect her interest in the property of the business? The purpose of the power in s 114 is to prevent the abuse or frustration of the processes or indeed the remedies of the Court. The power exists not to create additional rights but to protect the process from abuse in relation to the enforcement of orders (see Jackson and Sterling Industries Limited [1987] HCA 23; (1987) 162 CLR 612).
In this case analysing all of the submissions and the evidence, the question remains whether the refusal of an injunction would mean that the Court’s alteration of property interests in favour of the wife for value even on the basis of what she attributed to it, would be thwarted. What is being provided in this case to the wife is the property for which she is paying value. To thwart that intended alteration of property interests, there must be some evidence of the damage that would be done if the injunction was not granted.
It was the wife’s submission that both parties had built the business from “scratch” and that this was indeed a “sale” because it arose out of a divorce proceeding where the interests of the parties were being separated permanently. It was said on the wife’s behalf that the functional scope of such an order would be limited to products presently sold and serviced by the business. Against that, it was the wife’s evidence that the major customer is happy to negotiate the contract with whomever takes over the business. If that is so and I have no reason to doubt it, the wife will have a significant contract to supply products with the major customer of the business into the foreseeable future and the husband faces a formidable task in breaking into that field.
I find therefore that with the wife in control of not only the business name but its property, plant and equipment and also staff, the prospect of the husband breaking into that market seems remote.
I return then to the evidence of Mr K. In addition to his statement that this was a well-known and well-regarded business, Mr K pointed out for the purposes of his calculations that the business was heavily reliant upon the one customer. I have already referred to that. He said it had traditionally a very good business relationship with this customer and the current agreement had expired. It was the wife’s position that the customer will sign with her if she has the business. That was significant optimism. Mr K then said:
Given the reputation, length of time the business has operated and investment required, there are significant barriers to entry for any new competitor.
Mr K then said that although there could be significant change in management roles depending upon who received the business, senior management would likely continue.
All of those matters gave Mr K the view that this was a secure business and that led in turn to the figures that the parties were calculating for the purposes of the trial which ultimately led to an agreement of just over $8 million. The wife’s optimism however is much greater than that and that is why she says it is worth $10 million to her. Bearing in mind the formidable barriers that the husband would face, I have taken the view that there is a justification for an adjustment in his favour in the pool of $27 million because the wife will be able to pick up the sorts of figures mentioned above and while she will have to pay the husband out and support the business, her future is very secure based upon the expert views of Mr K. The husband too was very optimistic about his chances of competing notwithstanding the pessimism of Mr K but I propose to make an adjustment which will be the equivalent of approximately one year of net profit before tax over and above the 50 per cent of the existing assets to account for what I perceive will be a significant disparity in the parties’ income. I secondly intend to make a further adjustment of approximately $1 million being approximately 50 per cent of the money that the wife has had to the exclusion of the husband and taking into account an adjustment back because the husband has had a partial distribution of property. It is neither necessary or proper that there be a precise mathematical calculation here but to indicate how I propose to exercise my discretion for an adjustment in favour of the husband, I have set out my logic.
Both of the foregoing matters fit within the discretionary requirements of s 75(2)(b) and (o).
I appreciate that the assets will largely vary depending upon what assets have to be sold and the most efficacious taxation consequences for the parties. But on the basis of an asset pool of $27 million, and more importantly the assets I have set out in these reasons, I propose to give the husband $1 million from the wife’s share on the basis that she has already had an disposed of significant assets as earlier mentioned but to otherwise give the husband $2 million more than the wife extra over and above that $1 million to make the adjustment for the purposes of s 75(2).
The question of the disparity between the parties is the best way to see whether the outcome is just and equitable. On the basis of that analysis, if the asset pool was $27 million, an equal division would be $13.5 million. From the wife’s share $1 million should be taken for her having had the benefit that the husband has not had. That will reduce her entitlement to $12.5 million and increase the husband’s to $14.5 million. I propose to make a further adjustment of $1 million from the wife’s share so that there is a $2 million disparity to take into account earning capacity.
Accordingly, because of the variable values, I propose to use percentages and I divide the assets when ultimately precisely known as 57.4 per cent to the husband and 42.6 per cent to the wife.
I shall hear the parties on the question of the precise orders in due course.
I certify that the preceding One Hundred and Seventy Two (172) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cronin delivered on 1 November 2013.
Associate:
Date: 1 November 2013
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