Martin & Newton
[2011] FamCAFC 233
•9 December 2011
FAMILY COURT OF AUSTRALIA
| MARTIN & NEWTON | [2011] FamCAFC 233 |
| FAMILY LAW – APPEAL – PROPERTY – appeal by the husband from property settlement and adult child maintenance orders – where the trial Judge included in the pool of assets for division all of the funds of a company in which the husband was the sole shareholder and director – where the bulk of the assets of the company were derived from grants provided by a pharmaceutical company and a philanthropic foundation in support of the husband’s research – where the husband had intermingled the financial affairs of the company with his own personal finances – the trial Judge failed to have regard to the husband’s substantial contributions of personal funds to the company and hence his entitlement to use some funds for personal purposes– appellable error found. |
| Family Law Act 1975 (Cth) s 4(1), s 75(2), s 79 |
| Clauson and Clauson (1995) FLC 92‑595 Kennon v Spry (2008) 238 CLR 366 |
| APPELLANT: | Mr Martin |
| RESPONDENT: | Ms Newton |
| FILE NUMBER: | PTW | 402 | of | 2006 |
| APPEAL NUMBER: | WA | 15 | of | 2010 |
| DATE DELIVERED: | 9 December 2011 |
| PLACE DELIVERED: | Perth |
| PLACE HEARD: | Perth |
| JUDGMENT OF: | Bryant CJ, Thackray and Strickland JJ |
| HEARING DATE: | 11 April 2011 |
| LOWER COURT JURISDICTION: | Family Court of Western Australia |
| LOWER COURT JUDGMENT DATE: | 5 August 2010 |
| LOWER COURT MNC: | [2010] FCWA 82 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Dowding SC |
| SOLICITOR FOR THE APPELLANT: | Carr & Co |
| COUNSEL FOR THE RESPONDENT: | Mr Wilson SC |
| SOLICITOR FOR THE RESPONDENT: | Kim Wilson & Co |
Orders
The application in an appeal filed by the appellant on 1 April 2011 seeking to adduce further evidence be dismissed.
The appeal be allowed.
Orders 3 and 11 of the orders made by the Honourable Justice Moncrieff on 5 August 2010 be set aside.
Orders 12, 13 and 14 of the orders made by the Honourable Justice Moncrieff on 5 August 2010 be set aside, this order to take effect upon the commencement of the rehearing.
The matter is remitted for re-hearing as soon as possible by a Judge of the Family Court of Western Australia other than the Honourable Justice Moncrieff.
Within twenty-one (21) days the appellant file and serve submissions in support of any application for costs.
Within twenty-one (21) days thereafter the respondent file and serve submissions in response to the submissions filed on behalf of the appellant in relation to costs.
Within seven (7) days thereafter the appellant file and serve submissions, if any, in response to the submissions filed on behalf of the respondent in relation to costs.
IT IS NOTED that publication of this judgment under the pseudonym Martin & Newton is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT PERTH |
Appeal Number: WA 15 of 2010
File Number: PTW 402 of 2006
| Mr Martin |
Appellant
And
| Ms Newton |
Respondent
REASONS FOR JUDGMENT
Bryant CJ & Thackray J
Introduction
By Notice of Appeal filed on 24 August 2010, the husband has challenged property settlement and adult child maintenance orders made by Moncrieff J on 5 August 2010.
The trial Judge found the assets, excluding superannuation, were worth $5,170,089. He found contributions to those assets were equal, but made a 12.5% adjustment in favour of the wife on account of s 75(2) of the Family Law Act 1975 (Cth). Although the husband therefore received only 37.5% of the assets, he retained superannuation worth $1,084,709, whereas the wife retained superannuation worth only $45,919.
The major controversy at trial concerned the appropriate treatment of the assets of a company (“P Company”), of which the husband is the sole shareholder and director. The bulk of the P Company assets, which were found to be worth $2,796,026, were derived from grants provided by a pharmaceutical company and a major philanthropic foundation to support the internationally renowned research of the husband and his present wife.
This appeal challenges the trial Judge’s decision to treat all of P Company’s funds as available for distribution between the husband and his former wife. The husband contends that he is legally and/or morally obliged to expend the funds on the research purposes for which they were provided, and that they should therefore have been excluded from the pool of assets.
The controversy is complicated by two main factors. The first is the way in which the husband has intermingled the financial affairs of P Company with his personal finances. The second, and associated, complication arises from advice the husband received from the former accountant of P Company, who stood charged with theft at the time of trial.
The husband contends that P Company now faces a large tax liability which was not taken into account by the trial Judge, although the prospect of such a liability was alluded to at trial. He seeks to introduce, as further evidence in this appeal, an affidavit of an accountant who calculates that P Company will have an additional taxation liability of $345,122 (excluding penalties and interest).
The husband also seeks to introduce further evidence from the accountant of the taxation and other consequences associated with compliance with the orders, and in particular the order requiring him to pay $1,248,484 to the wife. It is the husband’s contention that if this evidence is introduced, and accepted, it will be seen that the outcome is manifestly unjust.
In the event we find appellable error in the trial Judge’s treatment of P Company, we consider it will be unnecessary to deal with the tax issues as raised in Ground 8 and in the further evidence sought to be tendered, nor will it be necessary to deal with the appeal concerning the maintenance order. We therefore propose to deal first with those aspects of the appeal which relate to the treatment of the P Company funds.
Brief background
The husband, a health professional, was aged 51 at the time of trial.
The wife, also a health professional, was aged 46 at the time of trial.
The husband and wife were married in 1989 and separated in January 2005.
There are four children of the marriage, who were aged 19, 16, 15 and 11 at the time of judgment. They all live with the wife.
The husband remarried soon after his divorce from the wife in April 2006. His present wife, Dr B, is also a health professional. At the time of trial, they had one child, born in 2006, and were expecting another.
Dr B has four children of a prior relationship, who were aged 19, 17, 14 and 11 at the time of judgment. The three youngest reside with her.
In April 2007, the wife filed an application for property settlement and spousal maintenance, which she later amended to seek child support orders. Following a lengthy hearing, Family Law Magistrate Duncanson made interim orders on 18 December 2007 dealing with spousal maintenance and child support, as well as parenting issues raised in the husband’s response.
The dispute concerning parenting orders was settled, but the remaining issues were heard by Moncrieff J over five days in June 2010. The judgment giving rise to this appeal was delivered on 5 August 2010.
Ground 1 – treating P Company’s assets as available for distribution
The first ground of appeal asserts that the trial Judge “erred in finding that the value of [P Company] should be an asset available for distribution at $2.796 million”.
P Company was formed by the husband in May 2000, after making a major breakthrough in his research. P Company has been the recipient of substantial funds provided by third parties to assist the husband to continue his research. P Company has also received funds from other sources, including from the personal exertions of the husband.
The trial Judge found that “the most significant dispute between the parties was as to the value to be ascribed to [P Company] and whether the same should be treated as the property of the husband”. Senior counsel for the husband submitted that in identifying the issue in this way, his Honour “did not state the issue for determination as precisely as he might have done”.
In making that submission, senior counsel noted that the husband had, in fact, contended for a higher value of P Company than had the wife ($2,935,404 versus $2,796,026). More importantly, senior counsel drew attention to the joint schedule of assets and liabilities provided at trial, which required the parties to state the areas of dispute concerning the asset pool. The schedule recorded the husband’s contention that all of the assets of P Company “will be required to meet ongoing research obligations”.
Senior counsel for the husband submitted that the main issue was therefore not whether the P Company assets should be treated as “property of the husband”, but rather whether “the monies represented by the value of [P Company] were property available for division”. Put more colloquially, senior counsel submitted, as he had done at trial, that the real question was whether the P Company assets were available to the husband to “go off to the Bahamas”. He said that if they were not, then they ought not to have been treated as available for division.
Ground 1 challenges the trial Judge’s ultimate findings on this topic, which are set out below:
179Whilst I acknowledge the submissions made by learned Senior Counsel for the husband that the work undertaken by the husband is of great social value and that there was a sense of obligation, he could not point to or identify any legal obligation that required the husband to do anything with the funds reposed in [P Company] other than as he elected. That is the essence of property and notwithstanding submissions about the moral position of the husband, there is no claim against those funds that would be recognised as a matter of law.
180I find therefore that [P Company] is an asset of the husband and is properly included in the assets and liabilities schedule as an asset to be taken into account in these proceedings.
The challenge to these findings requires an understanding of:
· the husband’s employment, research and sources of funding;
· the involvement of the husband’s present wife in the work of P Company;
· the way in which P Company funds have been used for personal purposes;
· the recent creation of a new corporation to separate the husband’s personal finances from the research funds; and
· the accounting practices employed by P Company’s former accountant.
In setting out material relevant to these matters we have relied on the findings of the trial Judge and on uncontroversial material in the Appeal Books.
The husband’s employment, research and sources of funding
The husband qualified as a health professional prior to the marriage, but completed his further qualifications after the marriage. He pursued a career in research and has worked in the public sector since graduating in 1988. The husband’s excellence in his field was recognised by a fellowship which enabled him to undertake research overseas. He remains employed in the public sector and, at the time of trial, was the Director of the A Institute at Y University (“the University”).
The husband has been the sole director and shareholder of P Company since its formation in May 2000. The name of the company combines words associated with the husband’s major research discovery.
The husband described P Company’s activities in the following terms:
(a) It provides medical services [at an address in W, a suburb in Perth].
(b) It provides consulting, laboratory and research services for pharmaceutical and diagnostic services.
(c) It has purchased and now rents of [sic] the [property in Perth suburb, E].
(d) It provides private medical and pathology services for [W Company] up to a limit of 25% of my annual full-time salary as clinical academic in a public teaching hospital. (Husband’s affidavit, 19 January 2009, para 41).
The husband described P Company’s sources of income as follows:
(a) It generates interest from monies invested in a bank account conducted by the company. These monies are principally derived from research grants.
(b) It charges consulting fees to the pharmaceutical industry.
(c) It conducts a private clinic every 2-3 weeks from private rooms in [W, a suburb in Perth]. …My fees are all bulk billed and charged via [P Company].
(d) [P Company] receives income from the [H Services] for private pathology services. (Husband’s affidavit, 19 January 2009, para 42).
The husband originally secured research funding from the company, D Company. Over a period of time, D Company made a number of grants to P Company. The husband’s association with D Company involved him travelling overseas to forge international academic collaborations. (Husband’s affidavit, 19 January 2009, para 43).
The husband’s research achieved international recognition, which led to discussions with representatives of the M Foundation. The result was a commitment by the M Foundation to make a substantial grant to further the husband’s research. The husband’s unchallenged evidence was that in order to comply with US law, the M Foundation “required that the grant be managed by way of a sub-grant between [the] University (the principal recipient of the grant) and [P Company]”. The funding arrangements were therefore ultimately reflected in separate agreements between the M Foundation and the University, and between the University and P Company.
In 2004, the M Foundation made a grant to the University of US$9,792,730. The grant monies were expressed to be for the period 15 December 2004 to 14 December 2008, and were to be paid as follows:
a)US$5,455,140 on 6 January 2005;
b)US$1,327,200 on 5 March 2006;
c)US$1,485,250 on 5 March 2007; and
d)US$1,525,140 on 5 March 2008.
The terms of the grant, which were contained in a letter dated 8 December 2004 from the M Foundation to the Vice Chancellor of the University, were accepted by the University on 21 December 2004. The letter specified various “milestones”, and provided that each of the four payments would be made only upon those milestones being met.
The M Foundation letter provided for five annual reports from the University, with the final report being due on 1 December 2009. Although not noted by the trial Judge, the letter provided that “in the event that all grant funds are not expended by the date of the final report, [the] University agrees to provide additional annual financial and narrative reports until all grant funds are expended”. The letter otherwise provided that “any grant funds, or any income earned on those funds, that are not spent or committed for the purposes of the grant, must be returned to the Foundation”.
We observe that the letter also provided that “the Foundation encourages [the] University, whenever feasible, to deposit the grant funds in an interest-bearing account and requires that all interest earned on the declining balance…be applied to the purposes of the Project”.
The letter from the M Foundation expressly nominated the husband as the project’s “Principal Investigator”. It went on to provide that he was to “be responsible for the overall direction of the project as well as the performance or oversight of the scientific and technical aspects of the project…[and] for ensuring that [the] University obtains patient consent and maintains patient confidentiality regarding its work on the project”.
The letter from the M Foundation recorded that the original proposal made by the University had indicated that the University “may expend a portion of the grant funds for sub-grantees or sub-contractors (“Subs”) who will assist in the completion of the Project, including [P Company]…”. Although the letter immediately went on to provide the “grant is not earmarked for any specific Sub”, it later went on to record that the “grant contemplates a separate agreement between [the] University and [P Company] for the royalty-free license to [the] University of [specified data]”. The letter then referred to arrangements to be made between the University and P Company for ownership of any intellectual property generated in the project.
As contemplated by the terms of the letter, the University and P Company entered into a “License and Services Agreement”. The trial Judge summarised the agreement, which was executed by the husband on 3 March 2005, as providing for P Company to grant to the University:
…a non exclusive, world wide, royalty free, fully paid up irrevocable license for use of certain [P Company] software and data, and placed upon [P Company] obligations to provide certain services in support of [the University’s] obligations under the [M] Foundation grant. The agreement set out milestones and specified the dates and amounts of payments that [the University] would make to [P Company].
The trial Judge recorded that provision was made in the License and Services Agreement “for the survival of licences upon termination of the agreement and for the early termination of the agreement in the event the grant from [M] Foundation was terminated pursuant to the terms of the grant agreement between [the University] and [M] Foundation”. His Honour noted that, unlike the agreement between the M Foundation and the University, there was no provision in the License and Services Agreement “for the repayment of [unspent] grant funds or stipulation as to their future use”.
The trial Judge also noted that the License and Services Agreement had a term of seven years, commencing on 15 December 2004. Notwithstanding that the term was for seven years, the agreement provided for only four annual payments, each of US$400,000, to be made to P Company by the University on 11 January 2005, 8 March 2006, 8 March 2007 and 8 March 2008. It will be observed that this schedule involved payments being made shortly after receipt by the University of the (much larger) payments that were to be made by the M Foundation. In fact, the payments from the University were always made well after the due date. The funds were received by P Company in December 2005, October 2006, December 2007 and January 2010 (the last being very late because the payment due to be made by the M Foundation in March 2008 was postponed when the project was deferred to allow milestones to be met). (Husband’s affidavit, 19 May 2010, para 26).
In May 2006, P Company entered into a Laboratory Services Agreement with D Company. This involved P Company receiving, screening and reporting on 1,800 samples at a specified price per sample. The anticipated revenue to P Company pursuant to the agreement was US$261,000. The work was undertaken; however, there is no reference in the P Company accounts to the income derived. We will later refer to the husband’s evidence about this, it being sufficient to record here that his explanation was that P Company acted simply as a “conduit” between D Company and the University for this contract.
On 20 October 2006 the A Institute (“the Institute”) was established by the University. The husband was seconded, pursuant to an agreement with his employer, W Company, to be the Director of the A Institute from 1 July 2007 to 30 June 2012, on the basis that the University would pay half of his remuneration costs. Prior to the secondment, the husband had been employed full-time by W Company at C Hospital, but afterwards he was required to be at the hospital for only 20% of the time, with the remainder to be spent at the Institute.
The trial Judge recorded the husband’s evidence that the Institute had annual expenses of $3.9 million and a staff of 40. The Director of Commercialisation at the University, Dr Z, confirmed that the Institute had been created to carry out specific research. She deposed that the “Institute is a non-profit organisation”, although she added that “it is intended that in the future the Institute will engage in some commercial activity to create revenue which will be applied to fund the purchase of equipment and to cover staff remuneration and patent maintenance costs”. (Affidavit of Dr Z, 13 May 2010, paras 14, 15, 16 and 17).
The University had undertaken a fundraising campaign to establish the Institute and, ultimately, to provide it with purpose built accommodation on the University campus. It received tens of millions of dollars in government and philanthropic funding for this purpose. In February 2009 the University successfully applied to L Statutory Authority for a further $5 million to assist in completing the new accommodation. The application noted that:
To date all experimental and clinical work has been carried out on the [C] Hospital campus. However, existing accommodation is no longer adequate to support the current research and clinical activity that has arisen from the recent funding grants, most notably from the [H] Program Grant and the [M] Foundation. To enhance the effective delivery of results on these grants, additional investment in scientific infrastructure and a single facility is urgently required.
Dr Z gave evidence that the new building was being fitted out in the month before the trial, although the research staff had begun moving from the Institute’s existing premises into the new building in January 2010. (Affidavit of Dr Z, 13 May 2010, para 13, and see also the husband’s affidavit, 19 May 2010, para 30, where he said that “the staff will complete their move to the new building in the next 2 to 3 weeks”).
Although not referred to by the trial Judge, the application to L Statutory Authority for funds for the new building included P Company in the list of “partners” who had “committed in-kind support” (the others being the University and C Hospital, along with D Company and another pharmaceutical company, both of which had “provided scientific support and support for commercialisation”). P Company was referred to in the list in these terms (our emphasis added):
·The spin-off company [P Company] has supported:
· salaries
· PhD fellowships
· equipment purchases
·projects and free software licences in return for any improvements in its intellectual property.
Dr Z gave evidence concerning contracts which were being finalised at around the time of trial governing relationships between the relevant parties following the Institute’s move to its new premises. These comprised:
·“[P Company]/[I] Intellectual Property Revenue Sharing Agreement” between the University, the Government Minister, P Company and the husband, which was designed to address ownership of intellectual property rights relevant to screening procedures to be developed at the Institute after the relocation (see recital I to the draft agreement);
·“[P Company] Contract Services Agreement” between the University, P Company and the husband governing services the University had agreed to allow P Company to provide to third parties at the Institute (see recital F to the draft agreement);
·a “Governance Agreement” that Dr Z anticipated would be entered into between the Government Department, P Company and the University.
Dr Z recorded that although the negotiations concerning these contracts had been ongoing since 2007, “the settling of the intellectual property and commercial services agreements are almost completed”, with the former having been “finalised”, subject to any amendments required by the Government Department. (Affidavit of Dr Z, 13 May 2010, paras 21, 27 and 28). Copies of both of these draft contracts were annexed to Dr Z’s affidavit.
Dr Z did not annex to her affidavit a copy of the proposed Governance Agreement, noting that there were a number of matters “yet to be finalised”. These included the husband’s “key performance indicators as the Director of [the Institute]”. The other matters that were said to have not yet been finalised included the key performance indictors of the Institute itself. (Affidavit of Dr Z, 13 May 2010, para 32).
The husband gave evidence at trial that although the draft contracts were “in the final phases of agreement”, he had not yet signed them because if the wife succeeded in her claim against the P Company funds, he would not be able to deliver on his “commitments to the [M] Foundation to fulfil the obligations under the grants”, and that he would not be “able to fulfil the onerous commitments that I would be doing by signing these contracts”. (Transcript, 3 June 2010, pages 29, 30 and 33). Later in his cross-examination, the husband also said:
Well, I absolutely have to sign those agreements in one form or another, but if there is some profound implication from these proceedings, then it may be that I will have to somehow find some way of modifying that because I can’t sign to meet obligations to the Institute and [the University] that I can’t fulfil if there was a very adverse finding from this proceedings. (Transcript, 4 June 2010, page 42).
In re-examination, which occurred a week later, the husband said he was now under “extreme pressure” to sign the contracts, claiming that “according to the federal government submission for funding” the Institute was not meant to take up occupation of the new building until the documents were signed. When asked, having reflected on that, when he intended to sign the documents, the husband said he “really will have no choice but to sign them next week”. (Transcript, 9 June 2010, page 19).
The trial Judge referred to the provisions of the intellectual property and services contracts, but he failed to discuss the terms of the governance agreement, which he mistakenly found had not been tendered into evidence. We will later discuss the reasons for, and ramifications of, this error. It is sufficient for present purposes to record what we see as potentially important elements of the agreement referring to the husband, and his obligations.
The parties identified in the draft Governance Agreement were the University and the Government Minister. The draft indicates that at the time it was prepared it was anticipated that the new premises for the Institute at the University would be completed by mid 2009, whereupon the research activities would move from the “constrained” space it then occupied at C Hospital. One of the recitals to the agreement referred to the new premises as being “intended to be a multi centre facility of which the Centre is the flagship under the directorship of [the husband]”.
The draft Governance Agreement expressly provided for the appointment of the husband as the inaugural Director to “lead and promote the activities of the Institute”. (Clause 4.2). It made reference to an intellectual property sharing agreement to be entered into between the University, the Government Department, P Company and the husband (Clauses 1.1(15) and 8.1(c)). Reference was also made to “the Services Agreement” (Clause 8.1(c)), although that expression was not defined.
The draft Governance Agreement provided that it was intended by the parties (i.e. the University and the Government Department) that the Institute would operate at no cost to either of them, and that all its activities would be funded by revenue from “research grants…contract services and other commercial revenue generated by the Institute and…by the [Intellectual Property] Agreement and the Services Agreement; and any other revenue that may be generated by the activities of other researchers, centres or groups located at the Institute”. (Clause 8.1).
The draft Governance Agreement noted that the parties agreed that:
…in the immediate term following the establishment of the Institute, it may be that the Institute is not fully funded from the revenue sources itemised above, and that the Board may approve strategies (including both short and long term strategies) for achieving self-funding…as soon as reasonably possible. (Clause 8.1).
Clause 9 provided for key performance indicators (KPIs) for the Institute to be set out in Item 4 of the Schedule. Item 4 of the Schedule (which was in square brackets and highlighted to show it was subject to negotiation), read as follows: “obtain sufficient ongoing research grant money and other revenue to cover the ongoing costs of the Institute, publication of articles etc etc”.
Clause 9.2 provided that “the appointment of the Director is subject to the Institute…meeting KPIs”. Clause 9.3(1) went on to provide that in the event the KPIs were not met, the University, at its discretion, could terminate the appointment of the Director.
The involvement of the husband’s current wife in P Company
The husband’s current wife, Dr B, is a health professional. She is a Professor at Y University and has an international reputation as a researcher in her fields of expertise. Since moving to Perth in 2006, she has worked not only at the University, but also at public hospitals, as well as continuing her own research.
The husband commenced using Dr B’s research findings in his own work some years before he and the wife separated. He described their discoveries in their separate fields of enquiry, and their later collaboration, as “like two people both winning a lottery and the convergence of those two prizes was a bonanza”. (Transcript, 4 June 2010, page 15).
At the time Dr B migrated to Australia in June 2006, P Company received a Consultancy and Research Support Grant from D Company Australia for a total amount of $682,500, payable over three years. It is the contention of both the husband and Dr B that this money was provided for the purpose of supporting Dr B’s research work after her arrival in Australia.
The husband gave evidence that the D Company funds had to be channelled through P Company because Dr B was still in overseas at the time the contract was negotiated, but the work was to be done in Australia, where the money was to be disbursed. (Transcript, 3 June 2010, page 22). We note that it was D Company Australia that provided the funds, whereas the Laboratory Services Agreement mentioned earlier was with a British associate, D Company UK. To avoid confusion with other D Company projects and funding, we will refer to the project presently under discussion as the “D Company Australia project” and the funder as “D Company Australia”.
The terms of the D Company Australia project were contained in a letter from D Company Australia, which the husband signed on behalf of P Company on 17 July 2006. The letter indicated that its purpose was “to set out the arrangements under which [D Company Australia] agrees to fund [P Company]…for a three year period commencing 1 May 2006 to 30 April 2009…”. The budget and payment schedule attached to the letter provided for six payments of $113,750 to be made at the commencement of the project, and six monthly thereafter, with the final payment to be made on 1 November 2008.
The first two paragraphs of the D Company Australia letter are set out below:
1.In consideration for [D Company Australia] funding [P Company] as set out below, [P Company] agrees to provide the services to [D Company Australia] and its affiliated companies as set out in the attached Schedule 1 of this letter. It is acknowledged that all work undertaken under this Agreement will be associated with [a specific research area] and will include significant input (as assessed by [D Company Australia]) from [the husband] and [Dr B] currently employed by [P Company].
2.[D Company Australia] agrees to fund [P Company] in the sum of $682,500 (plus GST). Funding will be payable in six instalments (as set out in Schedule 2) against tax invoices supplied to [D Company Australia] by [P Company].
Schedule 1 contained a description of the services to be provided by P Company under the contract. Paragraph 1 comprised a “dot point” statement of the work required. Although there was no indication of who would be required to undertake or supervise this work, we note that much of it related to “[a research procedure]”. The husband gave unchallenged evidence that “all of the various [research procedures] and all the other things described in this contract are very specific to Dr [B’s] experience”. (Transcript, 3 June 2010, pages 69, 74 and 75 and see the husband’s affidavit, 19 January 2009, para 50) The husband also described how he had accompanied Dr B around the world, minding their baby, whilst she undertook work required under the contract. (Transcript, 3 June 2010, pages 69 and 75).
Paragraph 2 of the Schedule noted that “[the husband] & [Dr B] will provide expert advice to [D Company] on matters relating to [a specific research area]”. It seems this was a modest part of the $682,500 project since the schedule went on to provide “the cumulative total time spent on matters other than those specified above [i.e. in paragraph 1 of the schedule] will not exceed 10 days”.
Paragraph 3 of the Schedule also provided for “other research projects as may be agreed by [the husband], [Dr B] and [D Company Australia]”.
The funds received from D Company Australia pursuant to this contract were, with one exception, not separately identified in the annual accounts of P Company, but instead lumped together with all other “Grants received”. The one exception was the 2006/07 accounts which disclosed receipt of income of $227,500, described as “Consulting & Research – [Dr B]”. The same accounts also show, as an expense, “Consultants fees Provision” in the same amount, $227,500.
Dr B included the $227,500 in her 2007/08 taxation return, as a result of which she incurred a large tax liability. (Transcript, 3 June 2010, page 68). The husband said this payment had been made to Dr B on the basis of legal and accounting advice, but observed that it had not been “cost-effective” because of the taxation consequences. (Transcript, 3 June 2010, pages 44, 66, 78 and 80).
The husband and Dr B both gave evidence that the funds Dr B had received from the D Company consultancy had been used in November 2007 to reduce the mortgage on the home in Suburb F they had acquired in 2006, although each referred to the reduction in the mortgage as being in the sum of $250,250, not $227,500. (Affidavit of Dr B, 19 January 2009, para 29; husband’s affidavit, 19 January 2009, para 68(g) and see also Exhibit 22).
The P Company annual accounts also disclose receipt of income paid as honoraria. Both the husband and Dr B are regularly invited to attend conferences and other events for which they usually receive honoraria and/or reimbursement of expenses. It is unnecessary to descend into the detail of the evidence, save to note that Dr B was not challenged on her assertion that the honoraria she received in 2006/07 were paid into P Company. The 2006/07 accounts disclose income in P Company from honoraria of $14,677, but they do not indicate the breakdown of this between Dr B and the husband.
The evidence is unclear concerning the extent to which Dr B provided the honoraria of $56,129 received by P Company in 2007/08 and the honoraria of $163,068 in 2008/09, since not only is there no breakdown, but also Dr B gave evidence that at least some of the honoraria she received in 2007/08 “will be returned by me personally”. (Affidavit of Dr B, 19 January 2009, para 35). After the formation of X Company in July 2009 (as to which see below) honoraria for both Dr B and the husband were paid into that company.
Save for the honoraria and the funds from D Company Australia, there is no evidence that any of the funds received by P Company were specifically paid on account of Dr B’s efforts or were earmarked for her use. Save for the one large D Company Australia payment, there is also no evidence that Dr B received any wage or salary from P Company for consultancy work. Dr B and the husband acknowledged, however, that P Company had met Dr B’s travel costs, some of which were reimbursed. (Transcript, 4 June 2010, page 5 and transcript, 9 June 2010, page 34).
The use of funds by P Company for purposes other than research
The husband acknowledged he had used P Company funds for personal purposes. He contended this was appropriate because a portion of his personal income had been paid into P Company (at least until the formation of X Company). He also claimed that a loan account had been operated to distinguish between personal and business income and expenses (Transcript, 3 June 2010, pages 20, 21 and 83 and see also the submissions made by senior counsel for the husband at transcript, 3 June 2010, page 11).
To the extent that P Company funds representing the grant monies were used for purposes other than research, the husband’s contention was:
· property acquired was acquired in the name of P Company;
· other funds had merely been borrowed by him and have since been repaid;
· he had acted in accordance with the advice of P Company’s former accountant.
The way in which P Company’s funds were used for personal purposes led the trial Judge to conclude there was no merit in what he understood was the submission that P Company was in essence a “charitable institution”. The topic is very important, and we will now record what we see as the relevant facts concerning the use of P Company’s funds for purposes other than research.
Acquisition of the property in suburb E
P Company purchased a residential unit in suburb E in 2006. The purchase price of $730,000 was funded by moneys held on deposit by P Company and by a loan of $180,000 from Dr B. The loan from Dr B has since been repaid by P Company. Although not noted by the trial Judge, the husband gave evidence that he had also used P Company funds to furnish and decorate the unit. (Husband’s affidavit, 19 January 2009, para 49).
In explaining why P Company had acquired the unit, the husband claimed that the former accountant had “suggested that to diversify the investments held by [P Company] the money should be held in real estate until such time as it was required to fund activities required to meet the obligations arising from the grant”. (Husband’s affidavit, 19 May 2010, para 70).
The trial Judge found that prior to the unit being let, the husband and Dr B (and their children) lived there between January and August 2006. Nothing turns on the fact that the evidence indicates that Dr B did not arrive in Australia until June 2006. We note, however, that the P Company accounts for 2005/06 do not disclose any rental income for the period in which the husband occupied the unit. Rental income only appears in the accounts after the property was let to unrelated parties.
The unit in suburb E has increased significantly in value since its acquisition by P Company. By the time of trial it was worth $1,250,000.
Support in acquiring the home in suburb F
P Company funds were used to assist the husband and Dr B to acquire their new home in suburb F in September 2006. The trial Judge recorded that the deposit of $50,000 and stamp duty of $90,432 were borrowed from P Company. His Honour did not record that the husband borrowed a further $50,000 from P Company to cover the purchase price at settlement. (See husband’s affidavit, 19 January 2009, at paras 68(c) and (e) and also Exhibit 22).
P Company also provided an additional $180,000 to assist in the acquisition of the home in suburb F. However, this was part of a “round robin” arrangement by which Dr B forgave repayment of the $180,000 she had lent to P Company toward the purchase of the unit in suburb E. In other words, it was Dr B, and not P Company, that made this payment. (Affidavit of Dr B, 19 January 2009, para 28(b)). Although senior counsel for the wife in his closing address at trial doubted that the $180,000 was paid by Dr B, his Honour did not accept that submission because he found that the $180,000 had been repaid. (Reasons, para 160). There was no evidence to suggest this loan had been repaid in any other way than as part of the financing of the property in suburb F.
Interest free advance to reduce mortgage on property in suburb F
It is noteworthy that the trial Judge did not mention much more substantial borrowings from P Company that were utilised for a significant period to reduce the balance on the mortgage on the property in suburb F. In fairness to his Honour, these loans were not the subject of any cross-examination or specific comment at trial. In making this observation we have taken the reference in submissions to the husband borrowing money “to pay out the mortgage” as being a reference to the $55,000 loan discussed below.
As these additional borrowings were also not the subject of comment in the submissions made on appeal we hesitate to make any reference to them. However, given the nature of an appeal under s 94 of the Family Law Act 1975 (Cth), and given the magnitude of the borrowings, we intend to record the way the evidence unfolded, which may explain why these loans were overlooked.
The husband swore an affidavit in June 2007 which was relied upon before Magistrate Duncanson. Paragraphs 173(a) to 173(e) detailed the funding of the home in suburb F, including the borrowings from P Company we have mentioned totalling $190,432. These paragraphs created the impression that the husband had personally contributed $357,228, when in fact he had contributed nothing – apart from what he had borrowed. This false impression was unhelpful to the husband’s case, since it was his position that only Dr B had contributed money (other than borrowings) to the acquisition of the home. We should also record that his Honour recognised the error during the hearing, and the true position emerged. (Transcript, 4 June 2010, page 71).
In any event, having painted the misleading picture to which we have referred, the husband went on to say, in paragraph 173(f) of the June 2007 affidavit:
The balance of the purchase price (approximately $1,328,000.00) was borrowed from the Commonwealth Bank. I have subsequently borrowed a further $55,000.00 [sic] from [P Company] and transferred this to the home loan on the [property in suburb F] to reduce interest payments.
On 19 January 2009, the husband swore what became his primary affidavit at the trial before Moncrieff J. Paragraph 68 described the funding of the home in suburb F. This repeated, word for word, what had been said in paragraphs 173(a) to 173(e) of the 2007 affidavit. It also repeated the first sentence of paragraph 173(f) (which we have set out above), but the second sentence was omitted. In its place was a further paragraph, which referred to the $250,250 payment made by Dr B in November 2007 in reduction of the mortgage.
The husband’s affidavit of January 2009 then went on to say:
69.[Dr B] and I are joint owners of the [property in suburb F] and joint mortgagors with the CBA. [Dr B] and I repaid $1,140,432 from our mortgage redraw facility on the [property in suburb F] to the [P Company]…account on 13 January 2009 and $100,000 from [Dr B’s] monies…to the [P Company]…account also on 13 January 2009. This repaid all the monies that had been borrowed from [P Company] to purchase the [property in suburb F].
The affidavit was silent as to why $1,240,432 had been repaid to the P Company account in circumstances where the husband had referred only to a total of $190,432 being borrowed from P Company to acquire the home in suburb F (and to a subsequent loan of $55,000 to reduce the mortgage, albeit reference to this had been omitted in the January 2009 affidavit).
The need to repay P Company as much as $1,240,432 was only provided late in the husband’s oral evidence. In the course of re-examination, the husband’s senior counsel tendered a document (Exhibit 22), which the husband agreed had been prepared by him, containing “an analysis of how the various moneys were paid for the purchase of [the property in suburb F]”. In his closing address, senior counsel for the husband referred to this document as having been “drawn from the affidavits”. (Transcript, 9 June 2010, pages 13, 14 and 55).
As we have already recorded, the affidavits expressly referred to only one loan from P Company to reduce the mortgage, namely the $55,000 mentioned in the affidavit of June 2007 (which was not in evidence before Moncrieff J until tendered by the wife). Exhibit 22 indicates the loan was, in fact, $550,000, and that it had been taken out on 13 October 2006, which was the day after settlement. Thus, although the husband and Dr B had borrowed $1,328,000 from the Bank to complete the purchase, a significant portion of this was immediately offset by the borrowing from P Company. (This fact had obviously emerged in the proceedings before Magistrate Duncanson in 2007, since in paragraph 75 of her Honour’s reasons she had set out the correct position).
Exhibit 22 also revealed that, on 27 December 2007, an additional $500,000 was borrowed from P Company to reduce the mortgage. At this stage, therefore, the balance owing on the mortgage would only have been about $278,000 [$1,328,000 – ($550,000 + $500,000)].
The $1,240,432 repaid by the husband and Dr B on 13 January 2009 therefore represented the $190,432 borrowed from P Company at the time of the purchase of the home in suburb F, together with the loans of $550,000 and $500,000 taken in October 2006 and December 2007 to reduce the mortgage.
Three matters are worthy of mention.
First, there was no indication in the 2006/07 or 2007/08 accounts that such substantial funds had been lent to the husband. On the contrary, the 2006/07 accounts showed, as a liability, “Loans to [sic] directors [sic]” of $46,573. The same item in the 2005/06 accounts was shown at $33,050 and the figure in the 2007/08 accounts was $2,071.
Secondly, there is no indication anywhere in the evidence, including in the accounts of P Company, that the husband and/or Dr B paid any interest on the borrowings which ultimately totalled $1,240,432.
Thirdly, the borrowings were repaid on 13 January 2009, six days before the husband swore his substantive trial affidavit and his Financial Statement (and six days before Dr B swore her affidavit).
Improvement of the home in suburb F
Improvements were made to the home in suburb F after it was acquired by the husband and Dr B. The husband was unable to recall how these had been funded, but volunteered that he could find out. He said “a lot of work was done to create office space upstairs” and that anything to do with the office had been “charged to [P Company]”. (Transcript, 4 June 2010, pages 79 and 80).
Support of husband’s mother and employment of a nanny
The trial Judge referred to the husband’s evidence that P Company contributes $132 per fortnight to the support of the husband’s elderly mother. We note that the husband also gave evidence that “[P Company] also employs my mother” (husband’s affidavit, 19 January 2009, para 48), but it was not clear whether the $132 per fortnight that she received was in the form of a wage.
The trial Judge did not refer to the husband’s evidence that P Company employs a full time nanny for the children in his home. (Husband’s affidavit, 19 January 2009, paras 48 and 97(k)).
Provision of motor vehicles
The trial Judge referred to P Company providing the motor vehicle used by Dr B. He did not refer to the husband’s January 2009 affidavit in which he described a schedule of expenses he had prepared containing an allowance for motor vehicle expenses “incurred for personal use and which are not paid by [P Company]”. On the other hand, the accounts of P Company contain no information to indicate whether the husband has ever made any contribution to the vehicle expenses.
P Company also provides the husband’s car. (Husband’s affidavit, 19 January 2009, para 48). The wife’s car, which was purchased prior to separation and retained by her after separation, was also owned by P Company. (Wife’s affidavit, 19 January 2009, paras 436, 437 and 438).
X Company
On 2 July 2009, the husband and Dr B registered a company known as X Company, which the husband said was “created to provide distinction between the [P Company] work I conduct with [the University], the [M] Foundation and other organisations and the other private [X Company] work undertaken by Dr [B] and me”.
The husband went on to say, “[P Company] continues to conduct all work which relates to the [M] Foundation and fulfilment of its obligations pursuant to the agreement signed between the [M] Foundation and [the University] and the sub agreement between [the University] and [P Company]”.
The husband described the new company as receiving income for Dr B and him from the following sources:
· government payments;
· private income from employment with S and L Services; and
· honoraria. (Husband’s affidavit, 17 May 2010, paras 74, 76, 77 and 78).
The accounting practices of P Company
Our examination of P Company’s accounting practices will focus on the way in which the P Company accounts dealt with (or in some cases failed to deal with):
· the funds received from D Company and from the M Foundation, via the University;
· the intermingling of the husband’s and P Company’s finances; and
· the funds paid by D Company Australia, said to have been for the support of Dr B’s own research.
P Company’s accounting practices have been under scrutiny since at least the time of the proceedings before Magistrate Duncanson in 2007. Senior counsel for the wife forcefully submitted during that hearing that the grants received should have been disclosed as income of P Company, and the husband’s borrowings from P Company should have been treated as deemed dividends, and hence taxable in his hands (absent any evidence of a loan agreement pursuant to Division 7A of the Income Tax Assessment Act 1936 (Cth)).
Extracts from the transcript of the 2007 trial concerning P Company’s accounting practices were read into the record at the 2010 trial by senior counsel for the wife. (Transcript, 1 June 2010, page 4 and following). The husband had responded to questions at the 2007 trial by saying that he had acted at all times in accordance with his professional advice. He did, however, acknowledge that he had “a great deal of disquiet about the tax implications” raised by senior counsel for the wife, and said he would take up the matter with the accountant. (Transcript, 31 August 2007, page 80). The accountant was also cross-examined during the 2007 trial. He defended his treatment of the grant funds received by P Company as not being income of the company on the basis of the husband’s advice that the money was repayable. (Transcript, 19 October 2007, pages 123, 124, 125 and 126).
The P Company accounts had always been prepared on the basis that grant funds were treated as a liability, rather than as income. Accordingly, when funds were expended on research, this was not reflected as an expense in the accounts, but rather as a reduction of the liability. The one exception concerned the expenditure of funds on maintaining the patents protecting the husband’s inventions/discoveries. The patents were owned by P Company, and were therefore shown as an asset. Any expenditure on maintaining the patents was treated as an increase in the book value of that asset. (Affidavit of P Company’s bookkeeper, Ms T, 2 June 2010, para 4).
Because of the decision to treat income and expenditure in this fashion, the accounts of P Company did not reveal the extent of grants received in each year, nor the amount of expenditure on research purposes. All that can be gleaned from the accounts is the annual movement in the “Grants received” item.
The accounting practices of P Company came under scrutiny again when a Single Expert was commissioned to value the company. The Single Expert, whose report was published in February 2008, took the same view as had been taken by senior counsel for the wife at the 2007 trial, namely that the grants should have been treated as income, not as a liability. His valuation was prepared on that basis, although he did not make any allowance for any taxation liability that might accrue in the event the accounts were recast and the taxation returns amended to reflect this different approach.
Notwithstanding the view expressed by the Single Expert, the P Company accounts for 2007/08 and onwards were prepared in the same way as they had been previously. The husband maintained this was done on the advice of the former accountant. He said:
What [the former accountant] explained to me many, many times over was that the money was received but had to be used into the future and that when the money was expended for that purpose, that was the point at which legally the money passed to [P Company]. He explained that to me over and over again, arguing that because the money had not passed that the issue that [senior counsel for the wife] had raised in court, namely, that I should have been submitting a division 7A. I don’t quite, to be honest, understand exactly what that is, because I’ve never done it, but he told me that the reason I didn't need to do it was because the money was to be expended in the future and he was treating it in that way. He told me that repeatedly and I got subsequently a letter which confirmed that advice. So, when I did see the [Single Expert’s] report and I was very disturbed by that, but I have to say because [the Single Expert] had not had any direct communication with [P Company’s former accountant] or myself or had any instructions from our side that I could tell, I wasn’t sure if they were really fully informed of the nature of the thing. So, really at that point it was [2:1] and I was really confused until recent events where we got yet another opinion. (Transcript, 3 June 2010, page 26).
The letter to which the husband referred, which was said to confirm the approach adopted by the former accountant, was dated 24 November 2008, and was received as Exhibit 15. The husband volunteered (transcript, 3 June 2001, page 26) that the chartered accountant who provided this letter of advice worked in the same firm as P Company’s former accountant, although we note this is not reflected on his letterhead.
Although the husband said he had accepted the advice of the former accountant, he gave evidence that he had become concerned with the difficulties he had experienced in obtaining documents and advice from the accountant leading up to the trial. He had then (on 27 April 2010 while he was overseas) learned that the accountant might be facing charges for theft. Upon returning home, the husband had been able to arrange a meeting with the accountant, and on the same day (14 May 2010) he met with another accountant, Mr G. Mr G informed the husband that the methodology of treating grant income as a liability was incorrect, and that P Company was therefore facing a substantial taxation liability. It should be noted that this advice was received just two weeks before trial.
Although the trial commenced on 1 June 2010, the 2008/09 P Company accounts were not in evidence at the start of the hearing. These were not introduced until near the end of the trial, when they were tendered by the wife. These accounts showed, under “Current Liabilities”, an amount of $1,150,405 as “Grants received”. This was consistent with the longstanding methodology of treating grants as liabilities. There was no reference in these accounts to any moneys owed to Dr B.
On the first day of trial, senior counsel for the wife tendered accounts for P Company purporting to show the position of the company as at 31 March 2010 (Exhibit 1). These were said to have been disclosed to the wife in the week before trial. The accounts had been prepared by P Company’s former accountant after his recent meeting with the husband. They were received into evidence expressly on the basis that they could be treated as no more than draft accounts prepared by the former accountant, and on the basis that the husband did not assert their correctness. (Transcript, 1 June 2010, page 40).
This set of accounts disclosed, amongst “Current Liabilities”, an amount of only $650,405 for “Grants received”. It will be noted this was $500,000 less than the figure given for the same item in the 2008/09 accounts. However, in this set of accounts there was a new item amongst the liabilities, namely “Loan – [Dr B] (D Company Grant)” at a value of $500,000. In other words, part of the “liability” for “Grants received” had been converted into a debt to Dr B.
This new set of accounts also disclosed, amongst “Current Liabilities”, an item described as “Loans to directors” at a figure of $992,541. Neither the husband nor his senior counsel were able to advise of the basis upon which the accountant had included this liability. Senior counsel for the husband said that clarification had proved impossible because the “dud accountant” had been “off the air” following the emergence of the criminal charges. (Transcript, 1 June 2010, page 22).
On the second day of trial, senior counsel for the husband advised that, overnight, Ms T, the husband’s personal assistant, who was employed by the University and who is P Company’s bookkeeper, had prepared a “credible” set of accounts under the supervision of Mr G. (Transcript, 2 June 2010, pages 3, 4 and 8). These accounts, struck at 31 March 2010, were tendered by consent (Exhibit 4).
This fresh set of accounts no longer treated the grant monies as a liability, but made reference, for the first time, to “Trade Creditors” of $455,000. The figure was explained in Ms T’s affidavit of 2 June 2010, in which she said:
The balance sheet records trade creditors of $455,000 which is the amount owned [sic] to Dr [B] for grant monies from [D Company] which was a consultancy paid to her for her services and which she requested to be placed with [P Company]. This is treated as a liability to her.
Dr B had made no mention in her affidavit of being owed any money by P Company. The annual accounts of P Company had hitherto made no mention of Dr B being owed any money, save for the “Consultants fees Provision” in the 2006/07 accounts and the $180,000 loan she had advanced at the time of acquisition of the property in suburb E.
The accounts prepared by Ms T also disclosed that P Company had $492,853 in one bank account and $1,306,153 in another. This was in contrast with the draft accounts prepared by the former accountant, which showed P Company as having had only $1,099,912 in bank accounts at 31 March 2010.
As Ms T’s accounts are the only set which treat the research grants as income, they are also the only accounts which purport to reveal P Company’s expenditure. Ms T, who was not required for cross-examination, deposed that the expenses had been taken from records she kept in the first nine months of 2009/2010. (Affidavit of Ms T, 2 June 2010, para 6). The expenses totalled $317,574. The profit for P Company in the nine month period was $233,275; however, the income contained in the accounts included the final instalment of the grant from the M Foundation, in the sum of $461,361. (Transcript, 4 June 2010, page 18 and AB 2013).
The trial Judge’s reasons relevant to Ground 1
We turn now to consider the trial Judge’s reasons, focussing at this point on findings relevant to Ground 1.
Having set out relevant background, and the orders sought, the trial Judge reproduced the joint schedule of assets and liabilities prepared in accordance with his direction. Many of the items were agreed, and to the extent there were disputes, those were briefly identified in the joint schedule.
Included in the joint schedule was a table dealing with P Company’s assets and liabilities. We need not concern ourselves with the detail, it being sufficient to record that:
· the value of the assets contended for by the husband was $2,935,404, and by the wife (and ultimately accepted by the trial Judge) $2,796,026;
· the wife’s figure for P Company took as its starting point the report of the Single Expert concerning the value of P Company at 30 June 2007;
· the wife’s figure then adjusted the Single Expert’s valuation to take account of the increase in value of the property in suburb E since 15 November 2007 ($225,000) and the increase in cash held by P Company in its bank accounts in the same period ($1,221,026);
· the wife’s figure made an allowance for taxation payable by P Company of $70,000, with it being noted in the schedule that this was based on evidence given by Ms T.
The trial Judge then recorded the matters in dispute. Given the parameters of the appeal, it is sufficient to note that his Honour said:
13 The most significant dispute between the parties was as to the value to be ascribed to the company [P Company] and whether the same should be treated as the property of the husband. There were secondary disputes as to the calculation of the value of [P Company] and whether that valuation should include realisation costs, capital gains tax, and an allowance for taxation in the year ending 30 June 2010, and, further, whether the husband’s current wife, Dr [B], had an entitlement of $455,000 from the company.
Having recorded further background information, much of which we have mentioned, his Honour discussed the affidavits relied upon. Most of this discussion concerned the unsatisfactory state of the evidence relating to the taxation position of P Company and the way in which the accounts of P Company had been drawn by the former accountant (who, his Honour noted, was facing criminal charges). It is sufficient to observe that his Honour recorded:
· the husband’s position was that “the monies received by way of grants, and held in [P Company], should not be treated as an asset of the parties”;
· Ms T was not required for cross-examination, although his Honour described some of her evidence as “second-hand”;
· the Single Expert, who had prepared the P Company valuation, was not required for cross-examination.
His Honour concluded this part of the discussion by saying:
66Whilst the situation regarding the accounting evidence is entirely unsatisfactory, it would seem that, given the position taken by the parties on the common assets and liabilities schedule, there is a basis for finding a value for [P Company], at least in gross terms, putting aside the lingering uncertainty of any past or future tax liabilities as well as the ultimate treatment of the entity.
His Honour next dealt with credibility. He found that on matters of substance, wherever there was a conflict, he preferred the evidence of the wife. He recorded his view that “the husband, and to a lesser extent, Dr [B], were most unimpressive witnesses”. In doing so, he said that the husband’s senior counsel had, “quite property reminded me that I should be slow to find against a witness on credit where they did not give ‘answers in that clipped way lawyers like in litigation’, referring me to a similar caution embraced in earlier authorities”. After quoting from one such authority, his Honour continued his discussion of the husband’s credit by saying:
71The husband maintained a position throughout the trial that he had an obligation to the [M] Foundation, which I will discuss later. When being cross-examined about the nature of his obligation, his requirements to report and the connection with grant monies the husband answered, “I imagine [my emphasis] I could be required”. The husband maintained a position that was vague at best and in terms of his obligations, appeared incapable of accepting a proposition as to their nature, notwithstanding that it had been clearly stated by one of his witnesses.
72The husband’s delay and hesitation in giving his answers was more, in my finding, than mere caution. The husband prevaricated, obfuscated and, in my finding, was quite openly evasive with statements that he made about the nature of his obligations, which appeared to shift throughout the trial from being legal to moral obligations, all being obligations “in the nature of research”. His evidence about the treatment of the funds in [P Company] was entirely unsatisfactory, as was his claimed naivety about the structuring of accounts. The husband, on the one hand, entered into evidence detailed forward budgets for the Institute and for [P Company], but claimed ignorance about other financial transactions, for example, his entitlements to honoraria and arrangements made for speaking commitments, when quite clearly they were issues that were alive at trial and alive on the face of the accounts.
73The husband is a director of a significant research facility. He has, according to Dr [Z], been involved in the preparation and submission of an application bid for funding and planning for the Institute. A copy of the draft contract being negotiated between the husband and others with respect to the sharing of intellectual property rights was attached to the affidavit of Dr [Z]. However, the draft governance agreement and the husband’s obligations under that agreement were not offered as evidence.
74The husband is clearly a highly intelligent and well respected individual who carries significant responsibilities, both administrative and functional. His naivety about financial matters was, in my finding, contrived, and his attempts, at any seemingly appropriate opportunity, to hide behind the claimed defective advice of [his former accountant] were opportunistic. He avoided answering questions that he clearly did not wish to answer.
75Where there was evidence about the domestic arrangements of the parties, I find that the husband was unwilling to make concessions to the wife or recognise appropriately the contributions made by her, or at best, was highly reluctant to do so and did so only when significantly pressed by Senior Counsel.
His Honour then went on to find that, “Dr [B], also a person of significant intellect, adopted a similar, but less severe, approach to her evidence, albeit she is a ‘lesser player’ in these proceedings”.
Finally, in dealing with issues of credit, his Honour recorded that he accepted the evidence of Dr Z.
Having described the “four step” property settlement process, his Honour set out his findings in relation to issues concerning the asset pool, all of which he said were “relatively minor”, apart from those related to P Company.
The first “pool” issue of relevance to this appeal is that set out under the heading, “Husband’s share of mortgage secured over [the home in suburb F] – husband’s share to bring contributions to equal with [Dr B]”.
The trial Judge recorded that the position advanced by the husband at the outset of the trial was that his share of the mortgage on the home in suburb F should be greater than one-half to take “into account payments already made by [Dr B] towards the acquisition of the property”. This was a significant issue because, as his Honour recorded, the husband was contending that his responsibility for the mortgage should be $894,652 whereas the wife’s position was that he should be assessed as liable for only one-half, namely $554,171.
His Honour then went on to refer to earlier affidavits filed by the husband and Dr B in which each indicated their responsibility for the mortgage over the property in suburb F was for one-half of the balance. His Honour noted that this continued to be the position up until at least 26 May 2010, when the husband’s Papers for the Judge were filed, still indicating that he was responsible for one-half of the mortgage.
His Honour noted that, at some stage after the filing of the Papers for the Judge, the husband had decided his liability pursuant to the mortgage should be significantly greater than that of Dr B. His Honour said:
90He purports to reach this conclusion on the basis of what he says were disproportionate initial contributions from Dr [B] including, it would seem, the sum of $250,250 that was paid from [P Company] to Dr [B] as a consultancy fee in the financial year ending 30 June 2008. Dr [B] deposes in her January 2009 affidavit as follows:
“I am a joint mortgagor with [the husband] with the CBA. The current balance under [mortgage on the property in suburb F] is $1,159,774.60. On 13 November 2007 I contributed my 2008 consultancy fee from [P Company] of $250,258 to reduce the mortgage balance from $803,706.52 to $553,456.52.”
We pause here to note that the reference by Dr B to the mortgage balance being $803,706 in November 2007 was a further, albeit oblique, disclosure of the fact that there had been a significant reduction in the amount owing (courtesy of the $550,000 loan from P Company we discussed earlier).
In any event, his Honour continued:
91Whilst Dr [B] held herself out as being solely entitled to receive those funds, Magistrate Duncanson found in her earlier consideration of the matter…that:
“One half of the consultancy fee of $227,000 paid by the company to Dr [B] should be attributed to him” [although the amounts differ between her Honour’s findings and the affidavit of Dr [B], each is referring to the same payment].
92The issue of Dr [B’s] entitlements to consultancy fees from [P Company] is a matter that I will consider later in these reasons. Clearly, however, her Honour was of the view that that payment belonged beneficially to Dr [B] and the husband equally and her findings as to that remain unchallenged.
93Further, it would appear that funds from [P Company] had been used to make improvements to the [property in suburb F] insofar as they related to the “office” portion of the property and whilst there have been no physical additions undertaken to the [property in suburb F], there have been some improvements, although the husband could not quantify the same, nor was he clear about the source of funds other than [P Company’s] contribution to the office.
94I find that the assertion of a disproportionate liability to the mortgage is a recent invention by the husband contrived to advantage him in the proceedings. It is not supported by the evidence of Dr [B] or the earlier evidence of the husband and accordingly I proposed to only accept the liability as at 50% of the mortgage debt for the purposes of determining the pool of assets.
Having then dealt with other, “relatively minor” issues, the trial Judge then turned to deal with the husband’s interest in P Company. We have already set out much of the material to which his Honour referred.
In describing the arrangements relating to the funds from the M Foundation, his Honour recorded that the University “applies a portion of those grant monies so received in discharge of its contractual obligations with [P Company]”. However, his Honour went on to find:
118Despite representations on behalf of the husband to the contrary, there is no direct contractual link between either the husband or [P Company] and the [M] Foundation.
His Honour then recorded that the husband had said in his January 2009 affidavit:
By 30 June 2008 [P Company] had received grants pursuant to the Licences and Services Agreement amount to US$800,000. It is my understanding (and based on the advice of my accountant) that these monies are not received by [P Company] so long as the work required of [P Company] is yet to be undertaken or completed. The [M] Foundation or [the] University do not require a specific audit of the way funds are applied by [P Company], however the obligations on [P Company] specified in the subcontract between [the] University and [P Company] must be met. This includes an obligation on [P Company] to assist [the] University to meet all of the milestones of the overall project. All of the overall project milestones, including the [P Company] obligations, have been met to date. This has involved me in meeting with members of the [M] Foundation by teleconference and personally to present progress of the project. The meeting of all of the milestones was facilitated by the suspension of the overall project grant payments and extension of the term of the project by one year.
The trial Judge then went on to record other evidence of the husband, relating to the M Foundation, contained in a supplementary affidavit sworn shortly before trial, which his Honour said “should have been included in his first affidavit”. We have already set out that evidence, which goes to matters of chronology and to the content of the agreements between the M Foundation and the University, and between the University and P Company. In setting out relevant portions of the contracts, his Honour reiterated that there “is no contractual relationship between the [M] Foundation and [P Company]”.
His Honour, having observed that “the payments due to [P Company] have now all been made, the last being in January 2010”, went on to recite from the husband’s supplementary affidavit in which he said:
The obligations of both [the University] and [P Company] will continue after the final grant payment. The remaining milestones, as described in the contract have to be met and [P Company] has to maintain the relevant patent (pursuant to the sub license) [referred to above]. Further reports and assessments on the progress of the project are to be provided to the [M] Foundation.
The trial Judge then referred to the husband’s evidence concerning the establishment of the Institute and the “detailed forward estimates of income and expenditure” of the Institute annexed to the husband’s affidavit showing annual expenditure of $3.9 million.
His Honour next recited the following paragraphs from the husband’s affidavit, which deal with the funding of the Institute:
Even if all our research applications next year are successful the maximum income we can expect is approximately $2,100,000. This does not allow for the inevitable increase and research activity and related costs that will occur in the new building.
As a result the Institute will have a significant net operating loss over the next two to three years at least while research grant and commercial or pharmaceutical company derived income streams are re-established and a more diverse source of income secured.
[P Company] will have to support more of the wages and other expenditure than it has in the past to ensure that the shared obligations of [P Company] and the Institute to the [M] Foundation, [research] community and [D Company] funded projects continue to be met and for the human capital and accumulated skills and experience of the Institute and [P Company] to be maintained.
His Honour continued:
140The husband then in his affidavit goes on to express a concern that future expenditure for [P Company] was not considered by the single expert in the valuation dated 29 February 2007 [sic - the reference by the trial Judge to the report being dated February 2007, not February 2008, replicates an error in the husband’s affidavit]. As I remarked earlier, the single expert was not required for cross-examination and accordingly was not afforded the opportunity to comment on the projected budgets of the Institute or [P Company], nor the representations made by the husband about forward obligations through [P Company].
141At paragraph 41 the husband swears:
“The contracts between [the University] and [P Company] which are currently being finalised and which are annexed to the affidavit of [Dr Z] also placed substantial financial and other obligations on [P Company].”
142Significantly, the agreements annexed to Dr [Z’s] affidavit were drafts and were unsigned. The husband’s position being that he had not signed the agreements pending finalisation of the current proceedings, although he could not offer any clear explanation as to why, other than to suggest that a finding that [P Company] was property in his hands, may adversely affect his ability to comply with the agreements.
His Honour then referred to Dr Z’s evidence about P Company receiving a licence fee of US$400,000 from the M Foundation grant over a period of four years, and to the paragraph in Dr Z’s affidavit in which she said:
To the best of my knowledge [the husband] uses the funds received for the license fee to top up the payment of staff salaries, to fund his travel and to purchase materials and other costs associated with the research for which the grant was given.
Commenting on that assertion, his Honour said:
144Although objection was not taken to the paragraph, it would seem that the deponent was unable to give direct evidence about the use of [P Company’s] funds once paid.
His Honour then referred to Dr Z’s evidence about the agreements then being negotiated between the University and P Company. He noted that one of the agreements placed obligations on P Company:
To grant [the University] a worldwide, non-exclusive, royalty free, irrevocable right to use any and all of
(1)background intellectual property for internal research purposes and for commercial purposes to the extent that may be required under any service or other agreement with [P Company] and any related purpose; and
(2)background intellectual property to the extent that such background intellectual property is incorporated in any improvement.
The trial Judge went on to record that the draft agreement “further provides as to the treatment of commercialisation of any intellectual property and revenue share from such commercialisation”.
His Honour also noted that the draft “[P Company] Contract Services Agreement” permitted “[P Company] to provide contract services at the Institute to third parties with [P Company] to meet its own direct costs in the provision of those services”. His Honour went on to recite the definition in the contract of P Company’s “direct costs in relation to any customer agreement”. He further recorded that “customer agreement” was defined to mean, “any agreement between [P Company] and a third party entered into in accordance with the terms of this agreement for the provision of the contracted services of the Institute”. The trial Judge noted that the agreements provided “no contractual obligation upon [P Company] to contribute to the projected shortfall in revenues by the Institute”.
His Honour then continued:
149The husband in his evidence described the relationship between [P Company] and [the University] as [P Company] being the “commercial arm” of [the University] and acting as a “firewall”, although he did not seek to define those terms in a practical sense.
150Significantly however, there is no contractual obligation upon [P Company] to contribute to the projected shortfall in revenues by the Institute.
151The uncertainty about the use of grant funds and [P Company’s] obligations was extended by the supplementary statement dated 2 June 2010 by Dr [Z]. She says in her supplementary statement:
“[The] University has a duty to ensure that [P Property] expend the money it has received under the terms of the sub-contract for [research] activity.”
In her evidence she accepted that the milestones had been reached and it was anticipated that the final milestone would be reached in the near future.
152She then goes on to add:
“If [P Company] does not fulfil these requirements then [P Company] would be required to repay the money to [the] University.”
and further that:
“[The] University may be obliged to repay money to the [M] Foundation if the obligations detailed in the contract or sub-contact are not met.”
153[The University’s] obligation to repay funds to the [M] Foundation are specified in the agreement between the [M] Foundation and [the University]. As I have observed earlier, there is no agreement between the [M] Foundation and [P Company]. Similarly, there is no agreement between [the University] and [P Company] in evidence that indicates that [P Company] would have a liability to repay monies that have been paid to it upon the achievement of milestones for [the University].
154In the course of her cross-examination Dr [Z] indicated that she had been at [the University] for a period of three years. Any information that she could offer about the negotiation of the contact between [the University] and the [M] Foundation and [the University] and [P Company], other than her interpretation of the agreement itself, must of its essence therefore be second-hand.
155She accepted that any agreement between [the University] and [P Company] was collateral to [the University’s] agreement with the [M] Foundation. The position with the [M] Foundation contract is that there is one more report to be produced, although there “may be [my emphasis] an obligation to continue reporting”.
156Insofar as [the University] was concerned, her evidence was that [the University] has made payment to [P Company] on its invoices on the basis that it was satisfied that [P Company] had achieved its obligations. She says there had been no complaint by [the University] about [P Company’s] performance, and further, that [P Company’s] obligations to [the University] cease once the final report is provided, with [the University] having to extend the contract to create a further obligation.
157In cross-examination as to whether in those circumstances the husband would request more money, she replied that she thought that unlikely because of the prestige associated with the [M] Foundation and as a matter of reputation. She accepted however that the obligation upon the husband was a moral one and not a legal one.
158The husband is his cross examination, as follows, could not direct the court’s attention to any contractual agreement between [P Company] and the [M] Foundation:
“[Counsel for the wife]:
Is [P Company] sir a signatory to the agreement between the [M] Foundation and [the University]?
[The husband]:
No
[Counsel for the wife]:
Where in this Licence and Services Agreement do I find any obligation on [P Company] to report to the [M] Foundation?
[The husband]:
Well the reporting is, the relationship is that [P Company] is in a contract with [the] University and [the] University has to report thence to the [M] Foundation.
[P Company] does not have any reporting obligations directly to the [M] Foundation.
[Counsel for the mother]:
So when sir you say that the [M] Foundation has to be satisfied, they have to be satisfied sir, I put it to you, not by [P Company] but by [the University], correct.
[The husband]:
Ah, yes, they ...
………………..
Wilson, SC:
Well look sir, can I put it to you that you in fact have no obligation to the [M] Foundation through [P Company].
[The husband]:
Ah, I, ah yeah I must have, I must I, I do have
[Counsel for the mother]:
Where, where do I find the obligation, you say you must have, where do I find that obligation?
[The husband]:
Well, I have certain obligations. For example under the sub-contract one of the requirements when the sub-contract was established was that I sub-license the patent that was held by [P Company] to the [M] Foundation and that sub-license can be sublicensed to anyone around the world including our competitors to be used for the good, for the general good of [research] and I have to therefore within [P Company] maintain the relevant patents into the future and service the [research] community more generally...”.
The husband also said this in response to a question concerning any ongoing legal obligation that the University had to support P Company:
Well, [the University] is not liable for [P Company], and that is one of the attractions of having a commercial arm. A lot of what this is about is about [the University] firewalling themselves from the risk. You know these complex negotiations, contracts, indemnities essentially I, as sole director, to get this activity going had to form a company, had to enter into these contracts and really without firewalling the State and [the University] from those risks, this couldn’t have been done. (Transcript, 3 June 2010, page 39).
In our view, the husband had provided a reasonable explanation of what he meant by calling P Company the “commercial arm” of the Institute. Whether his evidence as to its status was accepted was another issue. One of a number of matters that might have assisted his Honour to determine whether this was an accurate representation was the fact that P Company’s bookkeeper was actually an employee of the University. She deposed to the fact that “although my salary comes from [the University] in the first instance, it is invoiced and paid for by [P Company]”. (Affidavit of Ms T, 2 June 2010, para 1). It may also have been useful for his Honour’s attention to have been drawn to the fact that in the funding application to L Statutory Authority, P Company was described by the University as “the spin-off company” – which although itself an imprecise term, could arguably be seen as providing some small support for the assertion that P Company is not perceived as an entity entirely separated from the Institute.
We also consider as misplaced his Honour’s criticism of the husband for not offering any “clear explanation” for not having signed the draft agreements “other than to suggest that a finding that [P Company] was property in his hands may adversely affect his ability to comply with the agreements”. We accept the submission that this, in itself, was a clear explanation. The draft agreements were intended to govern the operation of the Institute and to define the husband’s role as the Director, including obligations in relation to securing funding to ensure the financial survival of the enterprise. If indeed the husband was believed when saying that he proposed to cover 75% of the shortfall of the Institute from P Company’s funds, then it would clearly be a concern to him that his capacity to make this contribution could be adversely impacted by orders which assumed P Company funds were available for distribution.
The significance of the Governance Agreement having been tendered
The final matter we intend to discuss relevant to Ground 1 is the trial Judge’s finding that the Governance Agreement had not been tendered in evidence. Given that the document was only an unsigned draft, it might be thought little turns on it; however, his Honour considered it important enough to record that the document had not been tendered when making findings about credibility.
The draft Governance Agreement was in evidence, albeit tendered very late in the trial. We are unsure whether his Honour overlooked the document altogether (it was handed up in a bundle of many other documents), or whether he thought it was not the document that had been mentioned in the evidence because neither the husband nor P Company was shown as a party to the agreement. In any event, the agreement, which was (at least in its draft form) between the University and the Minister for the Government Department, did contain provisions which we see as having some impact on matters relevant to Ground 1 since they could be seen as providing some corroboration of key assertions on which the husband relied; namely:
· the move to the new premises was designed to get the research activities away from the “constrained” space in which it had previously operated;
· the husband had the pivotal role as director of the “flagship” of the Institute, in which capacity he was expected to “lead and promote the activities of the Institute”;
· the intention of the University and the Government Department that the Institute would operate at no cost to either of them;
· the acknowledgement that the initial funding may be insufficient to meet the Institute’s expenses, and the need to cover the shortfall;
· that there were expectations of the husband to raise funds to support the Institute, and that his role as the Director could be dependent upon him meeting key performance indicators related to fundraising.
The draft Governance Agreement was another part of the evidence which needed to be assessed in determining whether it was likely the husband would keep the P Company funds for his personal use, rather than for research.
Ground 1 - conclusion
In the course of our discussion we have identified a number of ways in which we respectfully consider the trial Judge erred. Out of fairness, it must be immediately recognised that his Honour was placed in an almost impossible position because of the most unsatisfactory way in which the trial proceeded. The Court was faced with a veritable moving feast of accounts and schedules as the husband struggled to get his case into order, although as his Honour properly recognised, this may partly have been beyond the husband’s control because of what had happened to his accountant. (Reasons, para 314).
Having found merit in Ground 1, it is strictly unnecessary for us to consider the remaining grounds of appeal relating to the property settlement orders. Nevertheless as they raise discrete issues, we do propose to discuss those grounds complaining about the s 75(2) adjustment.
Before discussing those further grounds, we should record that we have now had the benefit of reading in draft the judgment of Strickland J, in which his Honour discusses the point in the process of property adjustment at which it is appropriate to take into account the justice and equity of the outcome.
In the course of his discussion, Strickland J refers to the decision of the Full Court in Hickey & Hickey & Attorney-General for the Commonwealth of Australia (2003) FLC 93-143 at 73,386 which, following a long line of authority, set out a “preferred approach” to the determination of an application under s 79. That approach involves four interrelated steps. The final step is to consider the effect of the findings concerning contributions and the matters in s 79(4)(d) - (g) and s 75(2) and resolve what order is just and equitable in all of the circumstances. However that approach is not legislatively mandated, and as the Full Court said, is simply the preferred approach. This is because it will be sufficient, in most cases, to have regard to the overall justice and equity of the orders after determination of the asset pool, consideration of contributions and assessment of the relevant s 75(2) matters.
But in our view, there is no requirement that the justice and equity of the order, as prescribed by s 79(2), must only be considered at the fourth (and last) stage. In our view, the requirement to make an order that is just and equitable permeates the entire decision making process, and it is not impermissible to consider it at an earlier point if the particular case requires it. We consider this is such a case.
Whilst it appears there may have been a good case for advancing that the funds from the research grants came as a result of the contributions of the husband and to a lesser extent Dr B, the husband chose not to present his case on that basis. However attractive an argument based on contributions may appear, it was not advanced at trial and thus not before us.
Nevertheless, the question of whether it was just and equitable to divide the assets of P Company without regard to the likelihood of the husband applying all or part of them to future research work was a matter which should have been addressed at some stage in the process. It did not have to await the “fourth step” and could have been considered, for example, when deciding whether to treat the pool of property on a global basis or asset by asset. Had it been considered at that stage, the trial Judge may have accepted the proposition of senior counsel for the husband that the P Company assets should not be treated as available for distribution, and hence should be removed from the pool.
Reasons relevant to s 75(2) factors
The trial Judge discussed the s 75(2) factors at paragraphs 274 to 320 of his reasons. It is unnecessary for us to refer to all of the many matters on which his Honour touched in the course of his discussion.
In dealing with the parties’ capacity for employment, his Honour noted that:
279The husband remains in full-time employment in the public … sector with a right to earn a further 25% of his public [sector] salary in private practice. Additionally, the husband has the ability to earn honoraria and has been able to generate a significant income from that source in the past.
280The husband has the significant financial benefit of [P Company].
In dealing with the responsibilities of either party to support any other person his Honour said:
288…I accept that the husband does contribute towards the support of his elderly mother, although it would seem that the bulk of that support comes from [P Company’s] resources and does not impose a significant burden upon the husband.
In dealing with the superannuation his Honour noted the husband’s entitlements were “significant” whilst the wife’s were “modest”. His Honour continued:
291The husband had proposed a very modest superannuation splitting order, effectively as to less than 10% of his entitlements. The wife did not seek a superannuation splitting order but sought rather that I factor into the orders an overall adjustment that takes into account the parties’ respective superannuation entitlements.
292Given the extent of the husband’s superannuation entitlements, and were I to proceed on the basis of his proposed orders, the differential between the parties’ superannuation resources is properly reflected in an adjustment, particularly given the desire of the husband to retain the most significantly valuable part of this asset.
In dealing with s 75(2)(n), namely the terms of orders proposed to be made under s 79, his Honour said:
308 The husband will have, subject to how he structures the payment, a significant obligation to repay either a third party lender or [P Company], depending how he chooses to structure his arrangements, particularly with [P Company]. The husband may, subject to how he structures his arrangements with [P Company], have a tax liability. As I have earlier remarked, there is no evidence as to what that may be, or how the husband would propose to structure any borrowing. I do not disregard the potential burden that these orders will place upon the husband. The husband will, however, have the benefit of the resources of [P Company] and his not inconsiderable future superannuation benefits and earning potential, as I have already noted.
His Honour concluded his discussion of the s 72 adjustment by saying:
317The factors relating to the income and superannuation imbalance between the parties and the wife’s ongoing commitment to care for the parties’ children weigh the balance in favour of the wife, although to some extent they are offset as a consequence of the orders I propose to make which will move toward restoring the balance.
318I am satisfied, however, that there should be an adjustment in favour of the wife to allow, particularly having regard to the income imbalance between the parties for the short to medium term whilst the wife completes her qualifications and commences her practice as a [specialist health professional], and whilst the children remain dependant on the wife’s capacity to care for them in a physical sense, accepting that each of the parties will contribute to their children in a financial sense.
319 Further, as I have foreshadowed, there should be an adjustment to recognise the significant disparity in the superannuation entitlements of the parties.
320 Overall I am satisfied that there should be an adjustment to the extent of 12.5% in favour of the wife.
Ground 2 – failure to give adequate reasons for s 75(2) adjustment
By this ground it is asserted that “the learned trial judge erred by failing to fulfil the duty to give reasons in relation to the section 75(2) adjustment”. It was submitted in support of this ground that quite apart from the specific complaints contained in other grounds of appeal, it was not possible to discern the reasoning “from the face of the judgment”.
We did not understand this ground to be strongly pressed, and in any event we consider it has no merit. The trial Judge meticulously considered the relevant s 75(2) factors in a discussion extending over six pages. In concluding there should be a 12.5% adjustment in favour of the wife, his Honour explained that he particularly had regard to the “income imbalance” between the parties; the wife’s ongoing commitment to the care of the children; and the significant disparity in the parties’ superannuation entitlements.
The path of his Honour’s reasoning can be clearly discerned. The real issue is whether he erred in arriving at his conclusion. This requires consideration of the more specific grounds of appeal to which we will now turn.
Ground 4 – double counting of value of P Company in s 75(2) adjustment
We propose to discuss the more specific complaints in Grounds 4 and 5 before discussing the general complaint in Ground 3.
By this ground it is asserted that “the learned trial judge erred in making a s 75(2) adjustment by double counting the value of [P Company]”. This complaint focuses on the findings that “the husband has the significant financial benefit of [P Company]” and that “the husband will, however, have the benefit of the resources of [P Company]”. (Reasons, paras 280 and 308).
It was submitted by senior counsel for the husband that his Honour’s finding concerning P Company being available to the husband:
was not open to the learned trial judge because it constitutes double dipping in circumstances where the full (and in the husband’s submissions, far more than the full) value of [P Company] is already divided between the parties by reason of the contribution-based entitlements…[by which it was found that contributions to all the assets were equal].
In response, senior counsel for the wife submitted there had been no “double dipping” because “the methodology the single expert used to value [P Company] was net asset backing and not future maintainable profits” and, as a consequence of that valuation method having been used, the “husband’s substantial income was not taken into account in the valuation”.
It was therefore submitted by senior counsel for the wife that it was open to the trial Judge to make the s 75(2) adjustment in circumstances where:
(i)the husband’s income from [C] Hospital was $360,000 per year, from [the University] $48,246 per year, from honoraria ($56,128 in 2008 and $163,067 in 2009), from his private practice (not quantified by the trial judge) and an anticipated cash surplus in [P Company] for the 9 months to 31 March 2010 (not 2012, as stated) of $233,275.46…
(ii)the husband’s present wife’s income was $320,480 as at 30 June 2009… She also earns honoraria through the entity [X Company]…
(iii)the s75(2) adjustment excluded the husband’s superannuation valued at $1,084,709;
after a 16 year marriage with 4 children left primarily in the physical care of the wife, given the husband’s work & travel commitments.
We observe that the evidence indicates the honoraria referred to in paragraph (i) of this submission were earned by Dr B, as well as by the husband. We further observe that the “cash surplus” of $233,275.46 incorporated the final M Foundation payment, and hence had already been included in the pool of assets for distribution.
In any event, we consider there is merit in the proposition that, in referring to the “significant financial benefit of [P Company]” when considering the s 75(2) adjustment, the trial Judge appears to have taken the value of P Company into account twice. His Honour had already included the entire assets of P Company in the asset pool, and the effect of his contribution finding was that the wife would receive an amount equivalent to the value of half of those assets. She therefore had as much of “the financial benefit of [P Company]” as did the husband.
We do not accept that the evidence provided a basis for concluding that P Company would have an income stream that was not reflected in the value of its assets. Apart from the unit in suburb E and money in the bank, P Company had no assets from which it could earn income save for the patents.
The Single Expert’s report found that “future economic benefits (in the form of earnings or cashflows) have yet to emerge from the patents”. Furthermore, the husband was not challenged on his evidence that the “patents themselves do not generate any income and are not of any value, however, they require capital expenditure to be maintained”. Nor was he challenged on his evidence that the cost of maintaining the patents was approximately $70,000 per annum. (Husband’s affidavit, 17 May 2010, paras 51 and 53).
Dr Z gave evidence that the University had discontinued negotiations with the husband to acquire the patents after it received “an intellectual property due diligence report” which indicated that the University “would be unlikely to receive a commercial return” from the patents. (Affidavit of Dr Z, 13 May 2010, paras 34, 36 and 37, and see also the due diligence report by the patent attorneys at AB 1208).
P Company’s only sources of income had been:
· the grant moneys (with no guarantee of any further funds from these sources);
· interest earned on funds in the bank (largely sourced from the grants);
· rent from the property in suburb E (which was included in the valuation);
· personal exertions of the husband and Dr B (and his Honour had already taken into account, at paragraph 279, the husband’s capacity to earn income from his own exertions).
It is true that the draft agreements foreshadowed an opportunity for P Company to earn income from contract services at the Institute’s premises; however, there was no evidence to indicate the likelihood of any income being generated, or the extent of any possible profit. P Company had been able to undertake such work in the past, but the accounts show no income ever being received from such work. On the contrary, the only previous contract referred to in the evidence was the Laboratory Services Agreement with D Company, and the husband was not challenged on his evidence that the entire income from that contract had been received by the University.
For these reasons, we accept his Honour erred in treating the retention of the P Company assets as part of the husband’s settlement as constituting an advantage for him which weighed in the balance in the assessment of the s 75(2) factors.
Ground 5 – making a s 75(2) adjustment without taking into account the dollar amount represented by the percentage adjustment
By this ground it is asserted that the trial Judge erred in making the s 75(2) adjustment without having regard to the dollar amount it represented.
We accept that his Honour did not expressly indicate in his reasons the dollar amount reflected by the 12.5% adjustment, which of course brought about a disparity of 25% between the parties. We also acknowledge that the authorities indicate that the focus in making the s 75(2) adjustment should be on “the real impact in money terms”: Clauson and Clauson (1995) FLC 92‑595 at 81,911. Although it is therefore desirable for a trial Judge to state the dollar amount represented by a proposed s 75(2) adjustment, it is not compulsory.
It will be recalled that although his Honour included the parties’ superannuation entitlement in the pool of assets, when the time came for division of the pool, the superannuation was excluded. The adjustment for s 75(2) was therefore made by reference to the “net pool of assets (excluding superannuation)”. As his Honour correctly calculated, the pool, excluding superannuation, was worth $5,170,089. Had his Honour recorded the dollar value of the adjustment it would have been seen that the 12.5% adjustment amounted to $646,261 (creating a disparity of $1,292,522).
In our view, the trial Judge’s failure to refer to the dollar value of the 12.5% adjustment does not constitute appellable error. Apart from the fact that this is not a compulsory step in the process, there can be no doubt his Honour was alive to the practical effect of his decision.
The trial Judge identified the practical effect of his orders at two different places in his reasons. His Honour did so first when considering whether the proposed outcome was “just and equitable”. He set out what each party would receive in the settlement, noting that the result would be that the husband would need to pay the wife $1,248,484. He had earlier recorded the burden that the orders would be likely to place on the husband, and had briefly alluded to ways in which the husband might satisfy the order for a monetary payment. Then in the concluding paragraph of this part of his reasons, his Honour again identified, in both percentage and dollar terms, the share of the property the wife would be receiving, and the amount the husband had to find to bring about that result.
There is accordingly no merit in this ground.
Ground 3 – s 75(2) adjustment manifestly unjust and excessive
By this ground it is asserted that the trial Judge erred in making a s 75(2) adjustment that was manifestly unjust and excessive.
In considering this ground it must be remembered that the husband had superannuation entitlements worth $1,038,790 more than those held by the wife. As we have explained, these were not treated as property, and were taken into account only in making the s 75(2) adjustment. Given the vast disparity in the superannuation entitlements, we consider the adjustment of 12.5% (or $646,261) was within the range of discretion, particularly taking into account the disparity in income earning capacity, as found by the trial Judge, and the fact the wife had primary responsibility for the children.
Given the conclusion we have reached that the entire matter must be remitted for rehearing because of the success of the complaint in Ground 1, it is unnecessary for us to express any view as to the impact of the error we have identified in the trial Judge double counting the value of P Company in the s 75(2) adjustment. On a rehearing, the discretion in relation to the s 75(2) adjustment would be at large.
Grounds 6, 7, 8 and 9
Given our conclusion that the entire matter must be remitted, there is no need to discuss the remaining grounds of appeal. In particular, no useful purpose would be served by us trawling through the many relevant issues concerning the taxation matters, since no doubt these will be presented in a far more satisfactory way when the matter proceeds to trial again.
The order for adult child maintenance will need to be considered again in light of what, potentially, could be a very different outcome of the property proceedings. Whilst expressing no concluded view on one of the issues presented to us on that topic, we consider that the safer course on the rehearing would be for the child who is the subject of that application to provide an affidavit dealing with his capacity to earn income.
The outcome of the appeal
We propose to allow the appeal. We have already indicated we intend to remit the matter for rehearing, since it is clearly impossible for us to redetermine the outcome, given the absence of findings about the probability of the husband expending the P Company funds on research.
We express the hope that the parties may be able to resolve the issues by negotiation, but in the event they cannot do so we would hope arrangements could be made for the rehearing to occur as soon as conveniently possible.
We do not intend to leave issues associated with the adult child maintenance order “in limbo” pending the rehearing. We propose to order that the current order remain in force pending further order.
We indicated at the hearing that we would receive submissions on costs after our reasons are published. Those submissions should be brief and should address the propriety of granting costs certificates for the appeal and rehearing.
We will dismiss the application to rely upon further evidence as that evidence was directed to matters which we have not needed to address.
Strickland J
Introduction
I have had the considerable benefit of reading the reasons for judgment of the Chief Justice and Thackray J. I agree that the appeal should be allowed, but not for all of the reasons expressed by the Chief Justice and Thackray J.
There is no need to repeat the relevant facts of this case, and the essential parts of the trial judge’s reasons for judgment have been referred to in the reasons of the Chief Justice and Thackray J.
Ground 1
For my part, save and except for one matter, I do not consider that the trial judge made any error in his treatment of the P Company assets. I agree entirely with what his Honour said in paragraphs 179 and 180 of his reasons for judgment, namely:
179.Whilst I acknowledge the submissions made by learned Senior Counsel for the husband that the work undertaken by the husband is of great social value and that there was a sense of obligation, he could not point to or identify any legal obligation that required the husband to do anything with the funds reposed in [P Company] other than as he elected. That is the essence of property and notwithstanding submissions about the moral position of the husband, there is no claim against those funds that would be recognised as a matter of law.
180.I find therefore that [P Company] is an asset of the husband and is properly included in the assets and liabilities schedule as an asset to be taken into account in these proceedings.
The one matter in respect of which I do consider the trial judge made an error is in his failure to exclude from the assets of P Company to be taken into account one half of the remaining funds held by P Company from the funds received from D Company Australia. This money should properly have been treated as being money belonging to the husband’s current wife, Dr B.
There can be no question that the assets of P Company are property within s 4(1) of the Family Law Act 1975 (Cth) (“the Act”), and more specifically, apart from the monies just referred to as belonging to Dr B, those assets are the property of the husband, and to the extent that the Chief Justice and Thackray J say otherwise, I cannot agree with them. For example, in my view the comparison of the husband to a trustee of a charitable trust or the executor of a will as referred to by French CJ in Kennon v Spry at 392, is misconceived. In this case the husband has both the legal and beneficial interest in the shares that he holds in P Company and the value of those shares is the value of the assets in P Company, save and except though for our purposes, the funds in effect belonging to Dr B. The husband is not a trustee or an executor who merely has the legal title.
There can also be no question that those assets are able to be taken into account in the proceedings and they are available for distribution between the parties. However, it is at this point that I depart again from the reasons of the Chief Justice and Thackray J.
Their Honours accept, as I do, that it was open to the trial judge to conclude:
a) The funds in P Company are at the husband’s disposal and within his control;
b) There was no specific legal obligation requiring the husband to do anything with the funds in P Company other than as he elected;
c) There was no claim against the funds in P Company that would be recognised as a matter of law.
However, their Honours have found that in light of the husband’s case being that he intended to use the P Company funds on research, his Honour erred in failing to make a finding of the probability of the husband carrying out that intention. Unfortunately, I cannot agree with this finding. For my part once a conclusion is made that the assets are the property of the husband and he can use those funds as he pleases, that is the end of the matter.
It is said that the husband has a moral obligation to expend the P Company funds on research, and that “the legislative scheme … is cast sufficiently widely to allow the court to take account of moral obligations.” Again though I cannot accept that proposition. With respect it cannot be justified by suggesting that it is akin to addressing the justice and equity of the outcome to take into account moral obligations. The question of the justice and equity of the outcome, is a question to be addressed at the fourth stage of considering a dispute over property settlement (Hickey & Hickey & Attorney-General for the Commonwealth of Australia (Intervener) (2003) FLC 93-143) and is not something to be addressed when making findings as to the pool of assets that are available for distribution. Indeed, I have serious doubts that moral obligations would even be able to be taken into account at the fourth stage. As the Full Court has said on a number of occasions the fourth stage is not an opportunity to make a further adjustment; it is an opportunity for the judicial officer to determine finally how, in reality, a just and equitable order might be achieved based on the circumstances of the case before him or her (see in this regard Norman & Norman [2010] FamCAFC 66 and Teal & Teal [2010] FamCAFC 120).
Thus, with respect, it is not open to suggest that taking these funds into account “would offend justice and equity”.
One further matter. I do not agree that the trial judge, in finding that the assets of P Company were property available for distribution, has relied solely on the circumstance that the donor of the funds had not put in place “sufficient legal safeguards to guarantee [the funds were] expended on the intended purpose”. In my view that finding was justifiably made not only on the basis of there being no legal (contractual) obligation on the husband to use the funds in a particular way, but also because of how he applied some of the funds, namely for his personal purposes.
In relation to the latter issue, although there was evidence that the husband had provided some of the P Company funds himself, to my mind it was impossible, given the unsatisfactory nature of that evidence, to compartmentalise that and proceed on the basis that in using the P Company funds or some of the P Company funds for his own purposes he was merely using the funds that he had provided. As the Chief Justice and Thackray J correctly point out, the trial judge failed to have regard to this fact and that may constitute appealable error, but it still does not take away the force of the husband’s use of some of the P Company assets for personal purposes when considering the question of whether those assets should be available for distribution between the parties.
In the circumstances I cannot agree with the Chief Justice and Thackray J that “having accepted the husband had a moral obligation to expend the [P Company] funds on research, his Honour should have proceeded to assess the probability of him doing so”, and I add, with a view to excluding those assets from the asset pool to be taken into account depending upon that assessment. In my view, to repeat, the question of whether a moral obligation exists and whether or not that obligation is likely to be carried out cannot prevent a finding that the P Company assets were property available for distribution between the parties. That is not to say though, and I will elaborate on this when I address ground 3, that any moral obligation that the husband was subject to is irrelevant for all purposes.
Turning to the funds held by P Company from the D Company contract, I agree with the conclusion of the Chief Justice and Thackray J that his Honour erred in including all of those funds in the asset pool for distribution. However, the error is in failing to act on the concession made by the senior counsel for the wife that it was open to find that one half of those funds could properly be treated as being money belonging to Dr B. I do not subscribe to the alternative error suggested by the Chief Justice and Thackray J that his Honour should have proceeded to consider whether the balance of the money would be spent on research.
Thus, in relation to ground 1 I find that the trial judge erred but only to the extent that he included in the asset pool for distribution between the parties all of the funds held by P Company from the D Company contract.
Ground 2
I agree with the conclusions of the Chief Justice and Thackray J as to this ground. His Honour gave ample reasons for his findings as to a s 75(2) adjustment, but the issue is whether he erred in any or all of those findings.
Ground 4
I also agree with the Chief Justice and Thackray J that it is necessary to address the specific complaints in grounds 4 and 5 before discussing the general complaint in ground 3.
With ground 4 I agree that his Honour “erred in treating the retention of the [P Company] assets as part of the husband’s settlement as constituting an advantage for him which weighed in the balance in the assessment of the s 75(2) factors”. Thus, this ground of appeal has merit.
Ground 5
I do not need to dwell on this ground either. I agree entirely with the conclusions of the Chief Justice and Thackray J that there is no merit in this ground, and I adopt their reasons for that conclusion.
Ground 3
Here, I must again depart from the conclusions of the Chief Justice and Thackray J. Ironically though that is because in my view the trial judge failed to take into account at this point the moral obligation that the husband undoubtedly had to use the P Company funds for research. That factor falls to be addressed fairly and squarely under s 75(2)(o) of the Act, namely as a fact or circumstance which the justice of the case requires to be taken into account. The trial judge also needed to assess the probability of the husband expending the funds on research and he failed to do that.
On this basis alone the s 75(2) adjustment that the trial judge made can be said to be “manifestly unjust and excessive”.
Like the Chief Justice and Thackray J, given that I have reached the conclusion that the entire matter must be remitted for rehearing because of the partial success of the complaint in relation to ground 1, and the success of the complaints in grounds 4 and 3, it is unnecessary for me to express any view as to the impact of the errors identified in the latter two grounds. On a rehearing, the discretion in relation to the s 75(2) adjustment would be at large.
Grounds 6, 7, 8 and 9
Once again I agree with the treatment of these grounds by the Chief Justice and Thackray J. In particular, I agree that given there is appealable error sufficient to require the matter to be remitted for rehearing, it is unnecessary to address the tax issues or the further evidence sought to be led by the husband. It is to be hoped that those issues and the evidence in relation to them will be presented in a far more satisfactory way on the rehearing.
I make one further comment. In considering not only whether the orders that his Honour proposed were just and equitable, but also in addressing s 75(2)(n), namely the terms of the orders for property settlement, his Honour seems to proceed on the basis that all of the assets of P Company are available to the husband for personal purposes. That may very well be going too far, again though, not from the point of view of whether these assets are available for distribution, but in relation to how a moral obligation is taken into account under s 75(2)(n) or even s 79(2) if it is available to be taken into account there.
Conclusion
To repeat, I too would allow the appeal and I would remit it for rehearing. It is impossible for us to re-exercise the discretion, particularly given the absence of findings under s 75(2)(o) as to the probability of the husband expending the P Company funds on research.
I also agree with the proposal of the Chief Justice and Thackray J as to the issue of adult child maintenance.
Before concluding these reasons I also want to add to the comments by the Chief Justice and Thackray J on the choice by the husband not to challenge the findings of the trial judge as to the respective contributions of the parties. In my view that is where the issue of the nature of the P Company funds should have properly been aired.
I certify that the preceding three hundred and seventy two (372) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court (Bryant CJ, Thackray and Strickland JJ) delivered on 9 December 2011.
Associate:
Date: 9 December 2011
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