McKercher and McKercher
[2008] FMCAfam 9
•22 January 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| McKERCHER & McKERCHER | [2008] FMCAfam 9 |
| FAMILY LAW – Property – determining which assets and liabilities should be included the asset pool – value of business – contributions – twenty year relationship – agreement to continue partnership after separation – both parties in breach of partnership agreement. |
| Family Law Act 1975 (Cth) ss.75, 79 Federal Magistrates Act 1999 (Cth) s.45 |
| Lee Steere (1985) FLC 91-626 Ferraro (1993) FLC 92-335 Clauson (1995) FLC 92-595 Hickey (2003) FLC 93-143 Coghlan (2005) FLC 93-220 Russell v Russell (1999) FLC 92-877 Jones v Dunkel (1959) 101 CLR 298 Chorn & Hopkins (2004) FLC 93-204 Cerini [1998] FamCA 143 (8 October 1998) Omacini & Omacini (2005) FLC 93-218 Milankov and Milankov (2002) FLC 93-095 Hayne and Hayne (1977) FLC 90-265 |
| Applicant: | SCOTT DAVID MCKERCHER |
| Respondent: | LEANNE MCKERCHER |
| File number: | HBC 278 of 2007 |
| Judgment of: | Roberts FM |
| Hearing dates: | 30 and 31 August 2007 |
| Date of last submission: | 31 August 2007 |
| Delivered at: | Launceston |
| Delivered on: | 22 January 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr P Welch |
| Solicitors for the Applicant: | Philip Welch |
| Counsel for the Respondent: | Ms C Gibson |
| Solicitors for the Respondent: | Zeeman Kable & Page |
ORDERS
That LEANNE McKERCHER (“the Wife”) transfer to SCOTT DAVID McKERCHER (“the Husband”) any interest that she may have in:
(a)the partnership business previously trading as “S D & L McKercher” (“the partnership”);
(b)the Harley-Davidson motorcycle currently in his possession; and
(c)any household possessions currently in his possession (other than a green leather lounge suite referred to in Order No. 4 hereof).
That the Husband transfer to the Wife:
(a)the Holden Astra currently in her possession; and
(b)any household possessions currently in her possession.
That within fourteen (14) days the Husband must deliver to the Wife or her nominee in good order and condition the green leather lounge suite removed by him from a container in January 2006 and not returned by him contrary to an Order of the Family Court of Australia of 24 August 2006.
That within fourteen (14) days the Husband must provide to the solicitors for the Wife an executed Withdrawal of Caveat with respect to Caveat M125601 registered against the title of John Becker comprised and described in Certificate of Title Volume 46374 Folio 63 together with a cheque made payable to the Recorder of Titles in a sum sufficient to enable the registration of that Withdrawal of Caveat.
That the said John Becker is released from any undertaking that he may have given not to dissipate or deal with a sum of fifty thousand dollars ($50,000) advanced to him by the Wife.
That the Husband is to pay, indemnify the Wife and keep her indemnified from:
(a)any remaining liability to the Australian taxation Office arising from the operation of the partnership, including but not limited to his personal income tax and a debt previously owed to Access Solutions; and
(b)a debt to Johnson Breward Brown in the approximate sum of one thousand six hundred dollars ($1,600) for accounting services.
That save as to costs all extant applications are otherwise dismissed.
AND THE COURT DECLARES
That subject to Order No. 7 hereof these Orders are intended to finally determine the financial relationships between the Husband and the Wife and avoid further proceedings between them.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT LAUNCESTON |
HBC 278 of 2007
| SCOTT DAVID MCKERCHER |
Applicant
And
| LEANNE MCKERCHER |
Respondent
REASONS FOR JUDGMENT
The issues
The main issue in this matter is how the property of the applicant, SCOTT DAVID McKERCHER (“the Husband”) and the respondent, LEANNE McKERCHER (“the Wife”) should be divided between them. However, in order to decide that issue, it is necessary to determine which assets and liabilities should be included in the property pool for division.
It is clear that this matter has come to court for a decision because the parties did not finalise an agreement that they each thought had been reached in the latter half of 2005. I shall refer to that in more detail below.
Background
The parties lived together for approximately twenty years between 1984 and 2004. They were married in 1995. Both parties have re-partnered.
The parties are both 44 years old. They have two daughters, who are now independent adults. However, when the parties separated in 2004, both girls were living with the Wife and the younger daughter was still at school.
The Husband is a builder. The Wife works as a carer in an aged care facility.
The parties were partners in a building business. The Husband did the building work and the Wife was responsible for the bookwork of that partnership business. She also worked at the aged care facility at which she is still working.
The parties had sold their home shortly before they separated and they had agreed to rent premises. However, the Husband decided that he would not move into those rental premises when the Wife and their two daughters moved in.
After they separated, the Wife was concerned about the continuation of their financial relationship in the partnership, so she had a lawyer draw up an agreement which both parties signed (“the partnership agreement”). It provided for the continuation of the building partnership on the basis that the Husband continued the building work and the Wife continued doing the bookwork. Among other things, the partnership agreement provided that neither party would take any personal drawings from the business apart from:
·payment of each party’s weekly rent;
·payment of $200 per week towards each party’s living expenses; and
·payment of their personal electricity, telephone, motor vehicle registration and insurance accounts.
The partnership agreement also provided that they were each able to give the other a month’s notice in writing of an intention to terminate the partnership.
Both parties breached the partnership agreement. In this regard:
·the Wife’s terminated the partnership without giving the Husband appropriate notice.
·the Husband formed a company as a vehicle to conduct the building business without telling the Wife. That company also took over some contracts that were clearly assets of the partnership.
In June 2005 the Wife instructed a different solicitor to write to the Husband about property matters. The Husband now says that he did not then obtain any legal advice, but he stated in an e-mail to the Wife’s solicitor at the time that he had done so. Whether he was legally advised or not, it is clear that both parties believed that they had reached an agreement at that time about the disposition of their property and the basis of that agreement was set out in a letter sent by the Wife’s solicitor to the Husband on 2 August 2005. That agreement can be summarised as follows:
a)That all the business debts of the partnership were to be paid from that part of the proceeds of sale of their former matrimonial home that were then deposited with Tasmanian Perpetual Trustees, with any balance to be paid to the Wife.
b)That a sum of $20,000 was to be left deposited with the National Australia Bank until 30 June 2006, at which time it was to be paid to the Wife.
c)That an overdraft in the sum of $20,000 was to be paid from funds held in a National Australia Bank term deposit.
d)That the Husband was to retain a Toyota Landcruiser, a Harley Davidson motorcycle and all plant and equipment of the partnership.
e)That the Wife was to retain a Holden Astra.
f)That the Wife was to retain household contents.
g)That the parties each would retain their own superannuation entitlements.
In that letter, the Wife’s solicitor indicated that it would be necessary to finalise the agreement by an Application for Consent Orders (to be lodged with the Family Court of Australia). She pointed out that the application would need to detail all the assets and liabilities of both parties. She requested information from the Husband about his financial situation and indicated that, when he provided that information, she would prepare a draft Application for Consent Orders.
The Husband did not reply to that letter or provide the information requested. However, on 20 September 2005 the net proceeds of the sale of the party’s former matrimonial home were transferred from a joint account with Tasmanian Perpetual Trustees to an account in the control of the Wife. Each party signed a joint letter of instruction addressed to their conveyancing solicitors in order to authorise that payment. It stated:
Could you please transfer the……fund over into solely Leanne McKercher’s name, as SD & L McKercher have separated….
Could you please write the cheque out to Leanne McKercher with any other interest due and post it to her.
Thereafter the relationship between the parties deteriorated. That was primarily because:
·the parties were not communicating with each other effectively;
·the Husband apparently did not obtain any legal advice; and
·the Husband did not communicate effectively with the Wife’s solicitor.
It is therefore not surprising that not much happened for a time. However, during the January 2006 long weekend the Husband removed a container full of chattels that the parties had previously agreed would be retained by the Wife. That was clearly a low point in the parties’ relationship, which is also not surprising, especially as the Husband said in cross-examination that his reason for taking the container was to make the Wife angry.
It is clear that the Husband believes that the Wife did not pay some of the debts of the business. However, it is also clear that he has retained a sum of $20,000 that was to be paid to the Wife - see paragraph 11(b) above.
The Husband commenced these proceedings in the Family Court of Australia in June 2006.
On 24 August 2006 orders were made by consent that the Husband return to the Wife all the chattels that he had removed and that the Wife retain and not otherwise dissipate or deal with a sum of $50,000, being the remaining funds in her control. Neither party complied with the spirit or letter of those orders, in that:
·the Husband did not return all the chattels required of him; he kept a green leather lounge suite and other chattels that he said in cross-examination were “his”; and
·the Wife allowed her new partner to use the $50,000 to secure the property in which they are now living.
On 19 February 2007, his Honour Benjamin J. made orders:
·requiring the Wife to provide the Husband with evidence that she had placed a caveat over the title to her partner’s property in order to secure an equitable interest worth $50,000; and
·transferring the proceedings to this Court.
What the parties are seeking
The orders that the Husband seeks can be summarised as follows:
·That the parties each retain their own superannuation.
·That the Husband retain his Harley Davidson motorcycle.
·That the Husband retain the business.
·That the Husband be responsible for his debt to his partner.
·That the Wife transfer all her interests in any assets of the partnership to him.
·That the Wife be responsible for payment of any tax liability of either party arising from their involvement in the partnership.
·That the Wife be solely responsible to pay the accountants’ account for tax work on behalf of the partnership.
·That the Wife pay a debt originally owed to Access Solutions but now owing to the Australian Taxation Office.
·That the Husband be responsible for paying any liability resulting from a line of credit jointly with his current partner.
·That the Husband transfer to the Wife any interest he may have in a 2003 Holden Astra.
·That within 7 days the Wife pay to the Husband the sum of $50,000 contemporaneously with the Husband providing a withdrawal of caveat.
·That the Wife pay his costs.
The orders that the Wife seeks can be summarised as follows:
·That the Husband retain any interest in the business (including any real estate upon which he is currently building).
·That the Husband retain his Harley Davidson.
·That the Husband be responsible for all outstanding debts of his building company and the partnership.
·That the Husband transfer to the Wife his interest in the Holden Astra and the chattels taken by him but not yet returned pursuant to the consent order of 24 August 2006 (including a green leather lounge suite).
·That the Husband provide an executed withdrawal of caveat together with sufficient funds to register it.
·That the Husband pay her costs.
Relevant law
The Court’s approach to the determination of an application for the adjustment of property interests has been well established by authority[1]. It is essentially a multi-step process to:
a)identify the property, liabilities and financial resources of the parties (usually at the time of the hearing);
b)evaluate the contributions made by the parties as defined in section 79(4)(a) to (c) of the Family Law Act 1975 (“the Act”); and
c)consider the matters referred to in section 75(2) of the Act, if they are relevant.
[1] See Lee Steere (1985) FLC 91-626, Ferraro (1993) FLC 92-335, Clauson (1995) FLC 92-595, Hickey (2003) FLC 93-143 and Coghlan (2005) FLC 93-220.
In determining what orders the Court should make under section 79, the Court must also be satisfied that it is just and equitable in all the circumstances to do so.[2] This has often been referred to as the “fourth step”.
[2] See section 79(2) and Russell v Russell (1999) FLC 92-877.
Documents relied upon
The Husband relied upon:
·An amended application filed 19 March 2007.
·A trial affidavit filed 4 May 2007.
·A financial statement filed 6 June 2006.
·An affidavit of his partner filed 9 May 2007.
He had been relying upon an affidavit of a chattel valuer, however the parties were able to agree on chattel valuations during the course of the hearing so it was not necessary for that affidavit to form part of the evidence.
The Wife relied upon:
·A Response filed 25 August 2006.
·A trial affidavit filed 16 July 2007.
·A financial statement filed 8 August 2006.
I should say at this point that the parties’ trial affidavits were unnecessarily voluminous, especially that of the Husband. It appears to me that the parties were carrying out the process of discovery through their trial affidavits, rather than as an interlocutory process. Indeed, it became very clear during the hearing that normal interlocutory processes had not been properly conducted. In my view, this matter is one where a proper process of discovery would have been appropriate under section 45 of the Federal Magistrates Act 1999 in the interests of the administration of justice, primarily because of the level of distrust between the parties in relation to financial matters.
The asset pool
It is clear that the parties’ counsel had different views about the approach that I should adopt in determining the extent of the asset pool.
Counsel for the Husband wanted me to look at the asset pool now and notionally add back into that pool the sum of $132,617 that the Wife received in September 2005, being the proceeds of sale of their former matrimonial home. He also suggested that I should include a negative value for the business retained by the Husband. That negative value is arrived at by using a “balance sheet” approach of simply deducting the book value of the liabilities from the book value of the assets of the business. The business balance sheet at June 2007 as prepared by the Husband’s partner (who is an accountant) suggests that there is a negative equity in the business of nearly $75,000.
Counsel for the Wife suggested that I should take a “snapshot” approach by looking at the assets and liabilities at the time that the parties separated their financial affairs in accordance with their agreement in or about September 2005.
Although the approach suggested by counsel for the Wife is not an approach that is often adopted, there are a number of reasons why I prefer that approach in this particular case. Those reasons are as follows:
a)
A “balance sheet” valuation of the business is too simplistic.
I say that because the balance sheet for the Husband’s business (prepared by his partner)[3] relates to the end of June 2007.
It includes real estate that has not been properly valued. Further, no value is attributed to goodwill of the business.
b)In court proceedings such as these, businesses are often valued by accountants using a number of methodologies, which include those referred to as “dividend based”, “earnings based”, “asset based”, “discounted cash flow” and “market comparison” methodologies. No jointly obtained valuation was provided to the Court in relation to this particular business, notwithstanding that the partnership agreement required that one be obtained if “the parties have not otherwise resolved financial matters between them”. Considering that the Husband’s new partner is an accountant and she and the Husband have been together since very shortly after the parties separated, I infer that the Husband must have decided that it was not in his interests to provide a proper valuation of his business to the court.[4]
c)For a number of years the business was able to provide an income capable of supporting the parties and their children at a reasonable standard of living. While the business now appears to be generating less taxable income, I was not satisfied with the explanation that this is because the Husband is now using a company structure as the vehicle for this business. In my experience, people do not generally use company structures to run businesses unless it is in their overall interests to do so.
d)The Husband clearly consented to the Wife having complete control of the funds that were previously under the control of their jointly instructed conveyancing solicitors. However, he also expected the business debts (including his income tax liability) to be paid out of those funds. I shall refer to that more below.
[3] Exhibit “H1”
[4] See Jones v Dunkel (1959) 101 CLR 298
It therefore seems to me to be appropriate to take a “snapshot” of the assets and liabilities at the time that the parties distributed those amongst themselves in or about September 2005. However, the “snapshot” that I adopt will not be quite the same as that suggested by the Wife’s counsel.
The assets
Superannuation: The parties are agreed that the Husband is to retain his superannuation with a value of $19,678 and the Wife is to retain her superannuation with a value of $10,144. Although the Husband’s interest is worth nearly twice that of the Wife’s, neither interest is very large so it is appropriate to include them both in the same asset pool as the non-superannuation assets.[5]
[5] See Coghlan (2005) FLC 93-220
The business: As is mentioned above, the court has not been provided with a proper valuation of the business. In June 2005 the Wife's solicitors wrote to the husband setting out various matters in relation to property. That letter suggested that the business was worth $50,000 and the Husband did not directly challenge that in the reply that he sent by e-mail. While I note that he claims not to have had any legal advice at that time, his evidence when cross-examined was that he had discussed that correspondence with his partner (who is a Fellow of the National Institute of Accountants). Although his partner said that she had not discussed such matters with him, I prefer his evidence.
The evidence is clear that in the years prior to their separation of business was capable of generating taxable income of between $50,000 and $60,000 per annum. In my view, it is therefore quite appropriate to attribute a value of $50,000 to the business that has been retained by the Husband.
The funds retained by the Wife: In February 2006 the Wife had approximately $83,000 left from the sale proceeds of the former matrimonial home and she transferred those funds to her partner's account. By November 2006, that balance had reduced to $50,122. It is the Wife's view that that sum of approximately $50,000 should be included in the asset pool.
In Chorn & Hopkins[6], Finn, Kay and May JJ appear to have endorsed the remarks of Nicholson CJ, Ellis, Kay JJ in the unreported decision of Cerini[7], when they quoted paragraph 46 as follows:
Whilst not seeking to place a fetter upon the exercise of discretion of a trial judge in individual cases, it seems to us that the concept of adding monies reasonably disposed of back into the pool ought to be the exception rather than the rule. The parties are entitled to reasonably conduct their affairs post-separation in a manner that is consistent with properly getting on with their lives.
[6] (2004) FLC 93-204
[7] [1998] FamCA 143 (8 October 1998)
In Omacini & Omacini[8], Holden, Warnick and Le Poer Trench JJ said at paragraph 39:
Her Honour seems to be saying that the mere fact that a party has expended money realised from the disposition of assets that existed as at the date of separation, will result in that expenditure being added back “in the usual way” as a premature distribution of assets with nothing more. If that is what her Honour is saying, in our view, she is being unduly simplistic. In our opinion, it was a necessary requirement for her Honour to examine and make some assessment of the reasonableness or otherwise of the expenditure.
[8] (2005) FLC 93-218
In a document headed “private and confidential”[9] the Wife sets out her expenditure after she transferred $83,000 to her partner’s account. In view of what was said in Cerini and Omacini, I am of the view that the expenditure needs to be examined to assess its reasonableness. For the reasons set out below, I am of the opinion that the following items of expenditure were not reasonable (at least to the extent that the Husband should not be expected to “contribute” to the expenditure). They should therefore be added back into the asset pool:
·Gifts of $5,000 and $1,700 to a grandchild and adult child respectively are excessive;
·Similarly, $1,543 for the payment of an adult child's telephone account is excessive; and
·There is no reason why the Wife's legal costs of $1,635 should be regarded as a reasonable deduction when determining the asset pool.
[9] Part of Annnexure 7 to the Husband’s affidavit.
Quite coincidentally, when these sums are added back to the sum of $50,122 that the Wife had left on 12 November 2006, the total is exactly $60,000. I propose to include that sum in the asset pool.
The Wife was supposed to receive an additional $20,000 on the 30th June 2006. Had she done so, the balance to be included would be $80,000. However, the Husband retained those funds instead. I am therefore of the view that the additional $20,000 should be included in the asset pool, but on the Husband's side of the ledger.
To their credit, the parties were able to agree upon the other assets to be included in the asset pool, so the total asset pool to take into account is as follows:
Husband’s superannuation
$19,678
Wife’s superannuation
$10,144
Business retained by Husband
$50,000
Funds retained by Wife
$60,000
Funds retained by Husband
$20,000
Husband’s household contents
$3,000
Wife’s household contents
$3,000
Wife’s jewellery
$6,975
Wife’s Holden Astra
$13,000
Husband’s Harley-Davidson
$11,500
Total
$197,297
The liabilities
The parties have a debt that they are required to pay to the Australian Commissioner of Taxation in the sum of $8,410. That was clearly a debt of the business, which was previously payable to another business known as “Access Solutions”. Indeed, the amount owing is only half of the original debt, because the Wife paid “her half” in May 2006. The parties had clearly agreed to discharge business debts from the proceeds of the sale of their home, so it is a little difficult to understand why the Wife did not pay the full amount. Clearly, the remaining $8,410 is a liability that I should properly take into account.
Arising from their involvement in the partnership, the Husband incurred an income tax liability of $13,624. The Wife did not pay that, and that clearly irritated the Husband. I am not surprised by his irritation because he made it clear in his e-mail of 25th of June 2005 that the Wife was to pay the debts of the partnership “including any future taxation liabilities”. In my view, that $13,624 is a liability that should also be taken into account.
At some stage, there was a liability to the Australian Taxation Office (ATO) in the sum off $1,182. However, the evidence of the Husband’s partner was that at the time of the hearing some of that had been remitted. She was not aware of what was still owed. In the overall picture, any balance still owing is obviously small, so I intend to apply the maxim de minimus non curat lex and ignore it in determining the asset pool[10].
[10] For a discussion of the de minimis principle see Milankov and Milankov (2002) FLC 93-095
Because of some errors in the accounts as they were presented to the partnership accountants, it was necessary to incur a further liability to those accountants. In my view, that account for $1600 should also be included in the liabilities to be taken into account.
Consequently, the total of the liabilities to be taken into account is $23,634, making the net value of the asset pool $173,663.
Contributions
The parties were in a relationship for approximately twenty years and neither appears to dispute that they each worked hard. The Husband was a builder and the Wife did the books. When the children were old enough, the Wife obtained employment outside the home
It is not hard therefore to conclude that during the period of cohabitation they each contributed equally. Indeed, the Husband conceded during cross examination that they had each contributed equally.
For a time after separation each of them contributed towards the business in exactly the same way that they had done prior to separation – the Husband was the builder and the Wife was the book-keeper.
However, the Wife’s greater contributions after separation were as a homemaker and parent. She still had one child at school and the Husband conceded that after separation neither of the children had ever stayed with him overnight. In addition, he paid little by way of Child Support. In my view, the Wife should receive some credit for this post-separation contribution to the welfare of the family unit and that credit should result in an adjustment of 5% in her favour.
In short, if this matter was to be decided on contributions alone, the Wife would receive 55% and the Husband 45% of the net asset pool.
Sub-section 75(2) factors
The parties are each aged 44 years and appear to be in reasonable health.
Both parties are in employment and are capable of earning incomes to support themselves. Although the Husband has a greater income earning capacity from the business, I have included a value for the business in the asset pool which takes account of that, so no further adjustment is warranted on account of that greater income earning capacity.
Currently, neither party has any legal commitment to support either of their children, or any other person.
Both parties have re-partnered and are sharing accommodation with those new partners. Their new partners are both capable of earning reasonable incomes.
In my opinion there should be no further adjustment on the basis of sub-section 75(2) of the Act.
Conclusions
I conclude from the above that the net asset pool should be divided on the basis of 45% to the Husband and 55% to the Wife.
The Husband's entitlement to 45% of the net asset pool of $173,663 is $78,148. He has the following:
His superannuation
$19,678
Business retained by him
$50,000
Funds retained by him
$20,000
His household contents
$3,000
His Harley-Davidson
$11,500
Total
$104,178
If the Husband is to discharge the liabilities totalling $23,634, his net assets would be worth $80, 544. That is $2,396 in excess of his 45% entitlement.
However, it should be borne in mind that assessing the property entitlements of separated spouses is very rarely an exercise of mathematical or accounting precision. In Hayne and Hayne, Pawley J said:
In matters such as this one cannot approach the problem with an eye for meticulous detail. It should rather be dealt with broadly so that the end result can be said to be just and equitable.[11]
[11] (1977) FLC 90-265 at p. 76,415
In my view, the appropriate way to adjust for the Husband’s apparent small excess over his entitlement is for the Husband:
·to return to the Wife the green leather lounge suite that he retained contrary to orders of the Family Court of Australia; and
·to be liable for any small amount payable to the ATO as referred to at paragraph 45 above.
I am further of the view, that such a settlement is appropriate overall and is just and equitable within the meaning of section 79(2) of the Act. I will therefore make orders to give effect to what is set out in these Reasons.
I certify that the preceding sixty three (63) paragraphs are a true copy of the reasons for judgment of Roberts FM
Associate:
Date: 22 January 2008
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