Mephiste and Mephiste

FAMILY COURT OF AUSTRALIA

MEPHISTE & MEPHISTE

[2010] FamCA 835

FAMILY LAW – PROPERTY – Value of property – Conflicting evidence – Third Party debts

APPLICANT:

Mr Mephiste

RESPONDENT:

Ms Mephiste

FILE NUMBER:

PAF

1468

2006

DATE DELIVERED:

21 September 2010

PLACE DELIVERED:

Parramatta

PLACE HEARD:

Parramatta

JUDGMENT OF:

Cleary J

HEARING DATE:

2, 3 and 4 August 2010

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Dura

SOLICITOR FOR THE APPLICANT:

Georgiadis & Baker

COUNSEL FOR THE RESPONDENT:

Mr Battley

SOLICITOR FOR THE RESPONDENT:

McDonnell Schroder

Orders

That on or before 4.00 pm on Friday 29 October 2010 the husband, Mr Mephiste, must do all acts and execute all documents submitted by the wife, Ms Mephiste, to transfer to the wife or her nominee all the interest of the husband in the property known as M property being the land in folio identifier … (“the M property”).
That in consideration of and contemporaneous with compliance with order 1, the wife must pay to the husband the sum of $86,425. If the said sum is not paid by 29 October 2010 the wife must pay to the husband interest thereon at the rate prescribed by the Family Law Rules calculated from the due date on so much as is from time to time outstanding.
That the wife must indemnify the husband against any liability for outgoings in respect of the M property referred to in order 1 above and any liability in respect of any mortgage or charge thereon.
That the wife discharge the joint mortgages secured over the M property.
That in the event that the wife fails to make the payment referred to in order 2 herein the M property shall be sold and the parties must do all acts and execute all documents necessary to sell the M property by public auction to be held on or before a date within four (4) months from the date of these orders:-
(a)the reserve price is to be such amount as the parties agree 14 days before the auction and in default of agreement such amount as advised by a director of W Valuations Pty Limited;
(b)until completion of the sale the wife has the right to occupy the property to the exclusion of the husband subject to the wife keeping the property tidy, clean and in repair having regard to its present condition and permitting inspection by agents and prospective purchasers at all reasonable times and paying the following payments:-
(i)council and water rate instalments;
(ii)household building and contents insurance;
(iii)repayments in respect of any mortgage/loans secured on the property;
(c) that the net proceeds of sale be divided as follows:-
(i)to the husband the sum of $86,425 plus accrued interest; and
(ii)to the wife the balance.
That the wife pay to the Commonwealth Bank of Australia the amount of $5,500 to clear the debt owing in respect of the business line of credit account used to finance the businesses known as F Business or FD Business (“the businesses”)
That the husband be declared to be solely entitled to any assets of or proceeds from the business.
That the husband indemnify the wife in relation to all debts arising or claimed to arise from the conduct of the businesses.
That the husband indemnify the wife in respect to any claim by the lessor with respect to the lease of the premises known as Shop 8, to the extent that that debt is ever pursued.
That the husband transfer his interest in the Holden Commodore motor vehicle, registration number … to the wife and the husband must do all acts and execute all documents submitted by the wife to effect that registration.
That the wife be responsible for the debt of $5,700 to S Primary School and S College in respect to the education of the children of the marriage at either or both of those schools.
That the wife shall be responsible for payment of capital gains tax of $16,449 or such other amount as she is assessed to pay arising from the sale of the parties’ property at P.
That each party be declared to be entitled to all other property or resources in their name or possession including but not limited to interest in superannuation except as expressly identified in these orders.

IT IS NOTED that publication of this judgment under the pseudonym Mephiste and Mephiste is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT PARRAMATTA

FILE NUMBER: PAF 1468 of 2006

MR MEPHISTE

Applicant

And

MS MEPHISTE

Respondent

REASONS FOR JUDGMENT

INTRODUCTION

These are competing property applications. A parenting dispute has already been determined in respect of the parties’ two children aged thirteen (13) and nine (9) years.
Ms Mephiste (“the wife”) is the applicant in the proceedings, however, for historical reasons her document entitled “Amended Response to Initiating Application” filed 3 September 2009 contained the orders that she sought.
Likewise Mr Mephiste (“the husband”) was the respondent to the proceedings despite the orders sought being contained in the document titled “Amended Reply” filed 25 August 2009.

BACKGROUND

This was a marriage of approximately ten years. Both parties are in their early 40’s. They married in 1996 and finally separated in mid 2006. The wife, as a single woman, had bought a block of land in R in 1988 and four years later, with finance from her employer, a Bank, constructed a house on that land. After their marriage the parties lived together in the wife’s R property. The husband, as a single man, had borrowed to buy land in K.
In August 1999 the parties borrowed to buy an investment property in P. The following year the husband sold his property in K. The net proceeds were used to repay a debt to the wife’s father and to buy a car.
In 2001 the parties purchased the M property which was the family home at the time of separation. The parties demolished the house on the M property site and built a new home, borrowing to do so.
In April 2004 the R property was sold and the proceeds were used to pay out the debt on the M property. At that point the parties were poised to lead a financially comfortable life with an unencumbered home and an investment property always leased. Their two children were then aged 6 and 3 years.
However, things changed when the parties then decided to set up and operate a retail business. For both parties it would be their first experience of self employment.
In April 2005 the parties borrowed against the M property and the P investment property with a line of credit facility of $150,000 in order to finance a business.
The parties commenced the business known as F Business. This was a retail business and they obtained a joint lease of the premises at Shop 8. For approximately 15 months the parties ran the business together. Tax returns were filed in the joint name of the parties. The husband was responsible for the day to day running of the business and the wife was responsible for the bookkeeping and record keeping. The wife rarely attended the business premises after the initial set up. The work she did was done from home.
It seems retrospectively clear that the business never really prospered. There were soon arguments between the parties about record keeping and finances.
By April 2006 the parties were living separately under the one roof and on 2 July 2006 there was a physical separation of the parties when the husband left the M property and assumed sole control of F Business over the protest of the wife. This action was to have considerable significance in the events that followed and in the way these proceedings were conducted.
Until separation, the parties had, by agreement, drawn $1,200 per week from the business account in order to make mortgage and bill payments in respect of the two properties secured by the bank and also for household and school expenses.
After separation the wife returned to work on a part time basis.
In October 2006 the wife was no longer authorised by the husband to draw the $1,200 per week from the business account for the expenses referred to above. From that time she became solely responsible for the mortgage.
On 7 December 2006 there was an order of the court that the husband pay the shortfall between the rent received for the investment property at P and the mortgage payments to be made to the Commonwealth Bank. The husband was also required to provide the wife with weekly bank internet statements.
In May 2007 the husband changed the name of the business to FD Business. He had obtained a new ABN early that year. The husband continued to run the business as a sole trader. No fresh lease was entered into.
On 22 May 2008 the parties were divorced.
On 5 August 2008 the bank guarantee from the Commonwealth Bank held in favour of the husband was called upon by the lessor.
On 3 November 2008 the husband advised the wife that he had decided to close down the business. The husband proceeded to sell plant, stock and equipment and had ceased to trade by the end of November 2008.
On 15 December 2008 an order was made by this court for the sale of the P property.
Orders were made for proceeds of sale to be deposited into the business line of credit (“BLOC”). The husband used $40,000 from the sale of business assets for personal legal fees.
In July 2009 the P property was sold. The net proceeds of sale were received by the mortgagee bank. A small sum was applied to the BLOC from rent monies in respect of the P property.
On 20 August 2009 a report was filed by Ms B as single expert appointed by the court which annexed a valuation of F Business and FD Business (“the businesses”).
In September 2009 the husband declined to make any payments to the BLOC.
In November 2009 the wife sold her Commonwealth Bank shares for $35,720 and applied $35,000 to the credit of the BLOC.
On 28 November 2008 orders were made by consent for the sale of the husband’s utility and for the net proceeds to be applied to the BLOC. The parties were restrained from withdrawing funds from the BLOC.
On 7 September 2009 orders were made by His Honour Justice Collier that leave be granted to the wife to file and serve an adversarial experts report in respect of an accounting of the receipts and expenses of the businesses for the financial years ending 2007, 2008 and 2009. The hearing of the final proceedings were accordingly adjourned.
The matter came for final hearing on 3 August 2010.
The parties relied on the following documents-
a)Affidavit of the wife sworn 15 July 2010;
b)Affidavit of the wife sworn 30 January 2009;
c)Affidavit of the wife sworn 7 August 2009
d)Affidavit of the wife’s brother Mr S sworn 6 July 2010;
e)Affidavit of the husband sworn 28 July 2010;
f)Affidavit of the husband sworn 4 August 2009;
g)Affidavit of the husband sworn 2 February 2009;
h)Affidavit of the husband sworn 21 November 2009
i)Affidavit of Mr Mephiste Snr sworn 16 January 2009
j)Report of the single expert Ms B; and
k)Valuation of the M property.

THE ISSUES

(1)      What is the significance of initial contributions in the overall assessment of contributions as at separation and hearing?
(2)      In relation to the businesses conducted by the parties:-
a)        which debts are repayable;
b)        what, if any, debts are owed by the business;
c)        to what extent are those debts repayable; and
d)        who should bear those debts?
(3)Should there be an adjustment of interest pursuant to s.75(2) of the Family Law Act in favour of either party?

THE EVIDENCE

The wife

The wife gave her evidence in a straightforward way and made concessions as necessary. For instance, she agreed that she had no complaint about the father’s involvement and ability to care for the children at least for the last two years. She also conceded that she had delayed the sale of the P property in the hopes of being able to refinance it, despite orders for sale.
Considerable time was taken up in the cross examination of the wife by matters involving the wife’s attempt to understand the conduct of the businesses since July 2006. The adversarial report which had been prepared on behalf of the wife had been sought to be tendered into evidence. The husband objected and I upheld that objection on the basis that the report contained no clear conclusion, was not based as to its opinions on the particular expertise of the reporter and was flawed by the inclusion of material learned by the reporter from reading the wife’s affidavit and having conversations with the wife, the contents of which were not fully disclosed.
The cross examination of the wife revealed considerable frustration by her that due to the manner in which records had been kept by the husband and due further to the lack of communication between the parties post separation about the conduct of the business, the wife was never in a position to understand the profitability or otherwise of the business.
The wife conceded that she was not in a position to say what the gross profit would be through any analysis that she had been able to conduct. She further conceded that she was not alleging fraud by the husband.
The wife conceded that she did not consider that there was any bank account held by the husband (or on his behalf) contained undisclosed funds.
I accept that the wife withdrew $60,000 of which she spent $40,000 on legal costs, that sum being brought into account in the joint balance sheet and that she otherwise withdrew $20,000 for household expenses to live on.
I formed the impression that the wife was a careful economic manager. She was unchallenged in her affidavit sworn 30 January 2009 that she had bought land on 14 October 1988, that she had obtained a loan from her employer’s credit union and that she had, at that time, been in a position to pay $12,000 together with stamp duty and legal costs from her personal savings. The wife had repaid that mortgage by the middle of 1992. In December 1992 she remortgaged the property, obtained a staff loan of $96,247 to pay for the construction of a house on the property at R.
By the date of marriage the house had been constructed and there was approximately $70,000 outstanding on the mortgage. This pattern of conduct together with the evidence about the wife’s involvement in setting up the business in 2005 and the evidence of the parties acquiring an investment property suggest that both parties, but particularly the wife, had a keen interest in acquiring assets and developing wealth and that the wife was a careful accountant of all of the parties’ funds until July 2006 when there was separation and the wife was excluded from further involvement in the business.
I accept that the wife made every effort to maintain a home for the children by meeting the mortgage payments and working to support them. I formed the view that it has been hard and perhaps impossible for the wife to accept that the financial future that she had hoped for during the marriage was no longer possible.
I further accept that the wife applied herself to the business from the time the parties started it in April 2005. Her evidence was that she supported the enterprise, did the accounts and in answer to the question:-
Q:“Ms [B] said accounting records were inadequate and substandard”
A:“I agree”
Q“Do you say that they were not inadequate and substandard when you kept them?”
A:“No. There were arguments over record keeping. If he had complied with the system the bookkeeping would not have been inadequate.”
The wife denied that, as the person responsible for the books and administration and dealings with the tax office and the banks, record keeping had been substandard during her time.
In my view there was clearly a decline in the business identified by Ms B[1]:
“Sales have declined materially since the first full year of trading. Overall, sales have declined by 42 percent since 2006.”
[1] Single expert report age 5 para 16
Ms B made it clear that the business structure substantially changed[2]:-
“From 1 April 2005 to around May 2007, [F Business] was operated as a family partnership by [the husband] and [the wife] …. [In] January 2007, a new ABN was created by [the husband] … In or about May 2007, the business operations were moved to a sole trader activity in [the husband’s] personal income tax return. The new trading name of [FD Business] was established [in] May 2007.”
[2] Single expert report page 4 para 11
I find that from 2 July 2006 the husband was exclusively responsible for the running of the business, against the wishes of the wife, and that the husband was responsible for all aspects of record keeping and management. That is not to say that the rapid decline in the profitability of the business falls entirely on the shoulders of the husband. However, it must have been increasingly clear to the husband that the business was not only unprofitable but was being kept up by injections of cash from his father. The wife had no involvement or control over this state of affairs.
It was clear from the evidence of the wife that there was no dialogue between the parties about her financial position:-
Q:“Did you discuss that (reference to financial matters) with the husband?”
A:“No, we were estranged.”
I accept that the wife used savings that had been painstakingly built up in the children’s bank accounts for day to day living expenses.
Unfortunately, the lack of communication between the parties gave rise to a misapprehension in the wife that the business might be profitable which led to the enormously expensive exercise of trying to understand the value of the business.
For his part, the husband, the business having closed, took no step to assist the wife to understand the reason for the failure of the business. It may be that the husband did not understand it himself.
The wife gave evidence about the outstanding fees to the S Primary School which related to the parties’ son, N, from the year 2007 onwards. This is clearly a joint debt of the parties.
The wife gave evidence that over the course of the marriage the husband, in her view, had probably gambled away about $10,000. I am not able to make such a finding. However, if that was so, the level of gambling falls comfortably within the conduct of parties within the shared enterprise of marriage and has no bearing on the division of property.
The wife also gave evidence about the capital gains tax debt which arose from the sale of the investment property at P and the wife’s sale of shares. On the balance of probabilities, I consider that the capital gains obligation has arisen and is a joint debt. This is not merely a potential liability, the property having been sold, and there was no substantial challenge to the obligation of the wife in having to meet the tax debt. In my view the liability is sufficiently certain to be included[3].
[3]In the marriage of DJM and JLM 1998 23 FLR 396 and In the marriage of Page (No. 2 ) 1982 8 FLR 316

The wife’s brother

The wife’s brother, Mr S, was not required for cross examination. Accordingly, his evidence[4] that he had lent the wife $97,421.25 for legal expenses ($83,641.24) and to repay credit card debt ($13,780) was unchallenged. This is clearly post separation debt but is a factor to be taken into account overall. The unchallenged evidence of the wife in her financial statement is that her brother contributes $250 to her weekly expenses.
[4] Affidavit filed 16 July 2010 paras 7 and 8

The husband

The husband gave evidence, in particular about the businesses, which suggested that he had never particularly understood his own accounting system and had been in the habit of providing material to his accountant and assuming that all documents presented to him for signature would be accurate.
The husband’s evidence was that the documents that he provided to his accountant were the bank statements with pencilled codings to explain what various figures represented. The single expert identified mistaken codings. I also accept that the husband, through either his unwillingness or inability to communicate in relation to the financial affairs of the businesses, has put the parties to enormous cost in an attempt, which was ultimately not entirely successful, to understand the failure of the business.

Credit of the Husband

There was cross examination of the husband about applications that he made to obtain credit cards where the husband admitted that he had made false declarations about his level of income, in one case as high as $180,000 gross per annum.
The husband did not appear to be particularly troubled by what he conceded to be dishonesty and agreed that he had been prepared to say what it took to achieve the outcome that he wanted which was access to credit. The husband’s credit was adversely affected by this evidence. I find that on at least three occasions the husband exaggerated his financial position to achieve the granting of a credit card facility without regard to accuracy or honesty.
There was this exchange in relation to declarations about income:-
Q:       “Why say $180,000 and $119,600 as your income?’
A:       “Can’t answer that.”
Q:       “You’re not concerned at all about the obligation to tell the truth.”
A:       “Yep.”
In a further exchange which reflects the husband’s attitude to accuracy there was this:-
Q:“Yesterday your counsel asked about October and November 2006 (a reference to BAS statements)”
A:“Yes.”
Q:“Did you check whether or not the information was correct.”
A:“No.”
Q:“In October 2006 were gross sales $60,677?”
A:“Yes.”
Q:“The BAS statement for October 2006 states sales at $48,716.”
A:“I accept that.”
Q:“You haven’t looked to see why there is a difference?”
A:“No.”
There may have been a further explanation for the husband’s attitude. The proposition was put to the husband that he was not interested in helping the court to understand the disparity identified by Ms B between gross sales and declarations in BAS statements and tax returns. The husband answered that that was not the case but that he had not wished to assist the wife’s position.
I formed the conclusion that the husband generally had a cavalier attitude to financial matters and an indifference to detail and that a willingness to say what it took to achieve his end was also reflected in his repeated requests to his father for financial assistance. Certainly the evidence of Mr Mephiste senior was that in his view, based exclusively on what his son had told him, all monies advanced were for the business and not for personal expenses, legal costs or any other purpose.
When pressed about having done anything to clarify the record keeping or rectify or clarify the way the books had been kept, the husband said he had never been asked. Perhaps unsurprisingly the husband had lost all interest in the business having closed it in November 2008, however, it is his case that debts arising from the business should be borne jointly. However, he has not been willing or able to provide an accurate set of accounts to explain why the business had been unprofitable. Nor has he provided details of the alleged debts.
The wife was not in a position to rectify the situation, to understand the accounts, or to take any step, including closing the business earlier than was done, to improve the parties’ financial position.
Accordingly, I do not consider that the items described as “business rent and consumer claim” should be included in the asset pool nor item 19, Macquarie Bank hire purchase, which represents the amount still outstanding on a car that had been repossessed from the husband.
The husband gave evidence that he had given his brother and sister and family members cash payments for deliveries. He asserted that he had done so out of his own income. There was no way that situation could be investigated. His estimate was that $50 to $100 per week went to his family. That could not be verified.
The husband challenged the assertion of the single expert that cash expenses are paid from undeclared sales income. The picture continued to be unclear.
The husband has paid significant legal fees and the disclosure in Exhibit “H4” suggests that $50,000 plus remains to be paid.
The husband gave evidence about the borrowings from his father. I accept that the husband borrowed money from his father from time to time. I further accept that there is a general expectation by the father that he would repay his father when he was in a position to do so and the evidence of Mr Mephiste senior, which I will come to later in his judgment, was that, although he would “not chase” his son for the money, he had an expectation of being repaid. I consider that this is a loan that is repayable without there being particular terms, however, I do not accept that these loans are a joint debt. The husband and his father agreed that the wife had not been consulted or told about the advances and she was in no position to either know that the further advances were being made or to address the situation of the business being propped up by cash borrowings had she known. All of the monies claimed were advanced post separation and I exclude the debt from the joint asset pool.
I consider that these debts fall in the category of being unlikely to be enforced but of much greater significance is that they were incurred unreasonably[5].
[5]In the marriage of Biltoft 1995 19 FLR 82
I note that the husband agreed that the electricity account and Optus bill were simply domestic bills from his present accommodation. They should not be included in the joint asset pool. On the same basis I exclude the figure for the wife’s CBA credit card from the joint asset pool.
The husband gave evidence that he has been in paid employment since 2009 and is now working. He has the capacity to earn in the vicinity of $45,000 to $60,000 per annum.
The husband conceded that he had ceased paying, pursuant to a court order, the shortfall between the mortgage and the rent on the P investment property. The proposition was put that he ceased paying in January 2008. The husband denied that but the position remains unclear. I accept that the husband was not in a position to meet the payments although he did nothing to rectify his financial situation.
Counsel for the husband made the submission that the business was doomed to fail through under capitalisation from the beginning. Whether or not there is any substance in that proposition it was clear on the face of the records that after the first 12 months the business was ever increasingly unprofitable and in effect Mr Mephiste senior was providing money for his son to live on whilst he conducted a business which was unprofitable.

Mr Mephiste Senior

Mr Mephiste senior was in my view a creditable honest witness. I accept that he had a conversation with his son who he said:-
“When my case with [the wife] is finished and I get some money I will pay you back.”
Mr Mephiste senior was asked why, when his son had said to him on many occasions that the business couldn’t pay its debts, he didn’t ask him:-
“Why don’t you close it down.”
“No, its not a matter for me to say that. That was a matter for my son.”
He agreed he wouldn’t pursue his son if there wasn’t enough money for him to be repaid and he also gave evidence, earlier referred to, that based on what his son had told him, all borrowings were for the business.

Ms B – the expert evidence

Ms B, a chartered accountant, attempted a valuation of the businesses. Ms B came to the conclusion that the business was not profitable and made a qualified assessment of the value of the business as a negative one of $334,802. That is the liabilities exceeded the assets by this amount.
Ms B stated that the reasons for the qualification were in summary[6]:-
a)the bookkeeping for the business is substandard and inadequate;
b)the value of stock remaining at the close of business was not independently assessed;
c)the value of plant and equipment remaining at the close of business was not independently assessed;
d)personal expenditures had been paid from the bank account and were unable to be quantified; and
e)the loan from the Commonwealth Bank, the line of credit, had included personal withdrawals and expenditures.
[6] Single expert report pages 1 and 2, para 4(a) to (e)
Ms B made the following comments as to the critical business operation issues[7]:-
a)that the business was in a shopping centre which was in the process of a major renovation although there could be no quantification of the impact of that on the business.;
b)the economic downturn in 2008 has had an impact on discretionary spending such as purchases;
c)sales in the business had declined materially since the first full year of trading;
d)the gross profit margin of 30 percent equated with industry averages in 2006 and 2007 financial years, however, in 2008 there was a drop in the gross profit margin and it was not clear why the drop had occurred. Ms B again noted that the accounting was “substandard and inadequate.”
[7] Single expert report pages 4 and 5
Ms B noted that she was aware that:-
“some business expenses have always been paid in cash and not included in the profit and loss statement.”
Ms B summed up[8]in the following way:-
“29.I have noted that the bookkeeping for this business is substandard and inadequate. However I consider that a complete audit-type exercise analysing all receipts and payments of the businesses would be an enormous task and ultimately would make no difference to my conclusions regarding the value of the goodwill. … the business would require additional sales in excess of $500,000 in 2008 … to break even. To have any goodwill the sales would need to exceed $1,000,000.
30.I note that only a total analysis of all sales and expenses would allow me to definitively express an opinion as to true profits. However, the magnitude of such work would far outweigh the benefits as, ultimately, it is my opinion that the business was not profitable.”
[8] Single expert report pages 7 and 8
In my view the report which was produced as an adversarial report and was not allowed into evidence is a reflection of both the magnitude and the impossibility of the task referred to by Ms B. Sadly, the wife, in attempting to undertake that exercise, incurred costs which did not in any way advance the state of knowledge.

The Asset Pool

The joint balance sheet (Exhibit “H”), presented at the time of submissions, is as set out together with notes below:-
Assets

Description

Ownership

Wife’s Value

$

Husband’s Value

$

1     [M property]

Joint

590,000

590,000

2     ANZ Bank Account

Husband

800

800

3     2000 Holden Commodore

Joint

4,000

4,000

4     Household Contents

Husband

5,000

5,000

5     Household Contents

Wife

9,000

9,000

~~6.    Unaccounted business income (financial years 2007 and 2008)~~

7     Paid Legal Fees (from sale of business stock)

Husband

40,000

40,000

8     Paid Legal Fees

Wife

40,000

40,000

Total Assets

688,800

688,800

Liabilities

Description

Ownership

Wife’s Value

$

Husband’s Value

$

9     Home mortgage secured over [M property]

Joint

133,600

133,600

10   Staff home loan secured over [M property]

Joint

72,300

72,300

11   Business Line of Credit

Joint

5,500

5,500

12   [S] school fees

Joint

5,700

5,700

13   Loan to [Mr Mephiste Snr]

Husband

171,250

14   HSBC Visa

Husband

22,053

15   Aussie Mastercard

Husband

10,250

16   Westpac Mastercard

Husband

2,501

17   GE Mastercard

Husband

4,839

18   Citibank Mastercard

Husband

9,465

19   Macquarie Bank hire purchase

Husband

14,662

20   Home electricity account

Husband

1,362

21   Optus

Husband

2,226

22   Business debts

Husband

43,701

23   Business rent

Husband

21,844

24   Consumer claims

Husband

1,900

25   Tax debt

Wife

16,449

26   CBA credit card

Wife

5,143

Total Debts

238,692

523,153

Superannuation

Description

Ownership

Wife’s Value

$

Husband’s Value

$

27 Superannuation

Wife

100,091

100,091

28 Superannuation

Husband

51,611

51,611

Total Superannuation

151,702

151,702

Net Pool (including superannuation)

Net Pool (excluding superannuation)

601,810

450,108

317,349

165,647

Notes
Item No.
1.~~There are competing valuations in relation to the value of the former matrimonial home.~~
~~6.The wife contends that the business has failed to properly account for income from the business, [F Business], for the period 1 July 2006 to 30 June 2008.~~
7.The wife contends that the husband has applied the sum of $40,000 from income of the business in or about November/December 2008 towards payment of his legal fees.
8.The husband contends that this sum represents funds retained and/or used by the Wife from joint funds that existed as at the date of separation.
13-24.The wife contends that these debts are post-separation debts of the husband and should not form part of the pool of assets and liabilities. The wife will further contend that in the event that the husband had property recorded and/or banked the “real” income of the business these debts would not have been incurred.
25.The husband disputes this debt.
26.The husband disputes this debt.

____________END OF EXHIBIT____________

On the wife’s figures there would be a net asset pool, excluding superannuation, of $450,108. On the husband’s figures, excluding superannuation, there would be a net asset pool of $165,647.
I have analysed the matter as follows: the total assets of the parties (items 1 to 8) are agreed at $688,800. The liabilities which I take into account as joint debts are as follows:-
a)Item 9, home mortgage secured over M property                  $133,600
b)Item 10, staff home loan secured over M property                  $72,300
c)Item 11, Business Line of Credit  $5,500
d)Item 12, S School fees  $5,700
e)Item 14, part of this debt  $2,500[9]
f)Item 25, tax debt (CGT payable by wife)  $16,449
$236,049
Accordingly, I find the net asset pool, exclusive of superannuation, to be:-
Total assets  $688,800 –
Accepted joint liabilities  $236,049
$452,751
[9] See paragraph 109
The parties each have superannuation as disclosed:-
a)Item 27, superannuation (wife) $100,091
b)Item 28, superannuation (husband) $51,611
$151,702
Accordingly, I find the total net asset pool of the parties is $604,453.
The liabilities I have excluded from the pool as joint debts are as follows:
a)Item 13, loan to Mr Mephiste Snr  $171,250
b)Item 14, HSBC Visa, remainder of balance after
deduction of $2,500 as joint debt  $19,553
c)Item 14, Aussie Mastercard  $10,250
d)Item 16, Westpac Mastercard  $2,501
e)Item 17, GE Mastercard  $4,839
f)Item 18, Citibank Mastercard  $9,465
g)Item 19, Macquarie Bank hire purchase  $14,662
h)Item 20, home electricity account  $1,362
i)Item 21, Optus  $2,226
j)Item 22, business debts  $43,701
k)Item 23, business rent  $21,844
l)Item 24, consumer claims  $1,900
m)Item 26, CBA credit card (wife)  $5,143
The liabilities can be grouped as follows:-

Group A - Loan to Mr Mephiste Snr
Group B – Items 14 to 19 (credit card and hire purchase debt)
Group C – Items 20 and 21 (personal expenses of the husband)
Group D – Items 22 to 24 (“business expenses”)
Group E – Item 26 (personal debt of the wife)
Groups B, C and E are excluded on the basis that they represent discretionary spending by the parties post separation and should not be included as joint liabilities.
No distinction can usually be drawn between marital assets and business assets. Financial losses should be shared, although not necessarily equally, except where there is a course of conduct designed to reduce or minimise the value of assets or one party has acted recklessly, negligently or wantonly with assets the effect of which has reduced their value.[10] In this case financial losses were incurred by the husband post separation in a situation where the wife did not concur in being excluded from the operation of the business and where she was not consulted about borrowings or the ongoing conduct of the business by the husband.
In relation to Group D these liabilities are put forward as debts of the business. There was no evidence from any creditor, through the husband’s evidence or independently, who was pursuing the parties or either of them for the payment of these asserted debts. No notices had been served on third parties and I am not in a position to find whether such “business debts” and “business rents” and consumer claims are legitimate debts, the repayment of which should be ensured by these orders. In such a situation of uncertainty, it would visit injustice on the wife to impute these debts to her ignoring the inequality between them. I regard this category of liability, being unsecured debts, as so vague and uncertain, so unlikely to be enforced, that I disregard them for the purpose of calculating the net asset pool. There is no rule of priority between a creditor and spouse.[11] In the event that full particulars of the debt were available and it was clear that debts were due and payable it is likely that I would have considered that they were the personal liability of the husband in these circumstances. However, given the lack of detail and the absence of any action by the husband to notify unsecured creditors prior to these proceedings, I exclude them from the asset pool and on balance easily find that the financial needs of the wife to house herself and the children easily outweighs any need to provide for the stated liabilities.
It would have been foreseeable for the husband that claims by his creditors may have been entirely defeated by these proceedings and he has not sought to notify them. I infer from this that either there is no debt or the husband is in a position to know that the creditors will not pursue him for the amounts claimed. I am not obliged to afford priority or particular weight to the interests of these alleged unsecured creditors and I do not do so in this case.[12]
In relation to Group A, that is the loan from the father to the husband, I find that this debt exists and represents personal borrowings by the husband to sustain himself during the period 2006 until 2008 when his business was closed down. It is appropriate for the husband to repay this debt to his father from his earnings. The evidence of the husband’s father suggests that there will be sufficient latitude in the relationship between them for this to be done over a period of time, that is assuming that Mephiste Snr will pursue the debt. I am not persuaded that he will. However, on balance I consider that the husband will try to repay his father some, if not all, of the monies outstanding.

[10] Cowaliw and Cowaliw 1981 FLC 91 – 092

[11] Biltotf and Biltoft 1995 FLC 92 - 614

[12] Trustee of the Property G Lemnos and Lemnos & Anor 2009 FLC 93 - 394

THE LAW

Section 79 of the Family Law Act states that:-
“That in property settlement proceedings the court may make such order as it considers appropriate in the case of proceedings with respect to the property of the parties’ to the marriage or either of them – altering the interests of the parties to the marriage in the property.”

Section 79(4) sets out the matters to be taken into account in considering what order should be made under section 79 in property settlement proceedings:-
(a)the financial contribution made directly or indirectly by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties to the marriage or either of them, or otherwise in relation to any of that last‑mentioned property, whether or not that last‑mentioned property has, since the making of the contribution, ceased to be the property of the parties to the marriage or either of them; and
(b)the contribution (other than a financial contribution) made directly or indirectly by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties to the marriage or either of them, or otherwise in relation to any of that last‑mentioned property, whether or not that last‑mentioned property has, since the making of the contribution, ceased to be the property of the parties to the marriage or either of them; and
(c)the contribution made by a party to the marriage to the welfare of the family constituted by the parties to the marriage and any children of the marriage, including any contribution made in the capacity of homemaker or parent; and
(d)the effect of any proposed order upon the earning capacity of either party to the marriage; and
(e)the matters referred to in subsection 75(2) so far as they are relevant; and
(f)any other order made under this Act affecting a party to the marriage or a child of the marriage; and
(g)any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage.

Contributions

The wife made an initial contribution by provision of the home which the parties lived in from the time of marriage. The wife had acquired this asset over the prior eight years by buying the land and borrowing to build the house. The parties accordingly were able to live in the property at R which had a reasonably comfortable mortgage debt of approximately $70,000.
Both parties worked, other than a period when the wife was involved in the full time care at home of the children.
The parties worked to capacity and cared for the children throughout the 10 years of the marriage. Accordingly, I consider the contributions at separation to be 57.5 per cent/42.5 per cent in favour of the wife reflecting the significant initial contribution by her of the property which became the first family home.
Post separation, the wife was in a position of meeting the mortgage and other outgoings on the house alone, for most of the four years between separation and date of hearing. She has had the majority of care of the children. She has continued to work part time and to meet the mortgage. She drew $20,000 from the parties’ account. I am unable to make a finding in relation to the totality of the husband’s drawings for personal expenses. The husband has not been in a position to contribute to the mortgage and has had difficulties in meeting his child support obligations. He has had to rent a property whereas the wife has had the benefit of living in the family home jointly owned.
The husband failed to address the financial difficulties which were deepening with the business and failed to communicate with the wife to obtain her input into what should be done. The husband made payments as ordered in respect of the P property for a period of time but that property ultimately had to be sold. The proceeds were entirely applied to debt.
There was no evidence as to why the husband did not apply any of the income he has received in paid employment since July 2009 to outstanding debts which are said to relate to the closing down of the business. There was no evidence of any civil proceeding against the parties or either of them in respect of business related debts. Nor was there any evidence of any ongoing correspondence about these debts. I find that the debts are not due and payable. I find that the wife on balance made a further contribution in the order of 5 per cent post separation bringing the contribution at date of hearing to 62.5 per cent by the wife and 47.5 by the husband.
Section 75(2) factors
(a) the age and state of health of each of the parties
The husband is aged 42 and is apparently in good health. The wife is aged 43 years and is apparently in good health.
(b) the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment
The wife is employed by a Bank where she has worked for 24 years. She is in part time employment and in her financial statement filed 16 July 2010 she declares $524 in gross salary with an additional government benefit by way of being a family tax benefit of $150 per week. She further declares that she receives assistance from her brother, Mr S, in an estimated average weekly amount of $250 per week to supplement her income. The wife is living in the former matrimonial home in M. She has an interest in superannuation and continues to make a weekly contribution to that fund, presently $26 per week. The wife freely concedes that she has the capacity, and almost certainly the opportunity, to work full time if she applied to do so. The wife presently chooses to do paid work on a part time basis. There seems to be little doubt that the wife can continue in her current employment.
The husband in his financial statement filed 30 July 2010 declares a gross average weekly income of $884 from his employment. The husband has been employed since approximately March 2010. The husband has had other periods of employment with different employers since November 2008 when the business, FD Business, was closed down. The husband has interests in four superannuation funds and is presently contributing to a fund, Macquarie Super, with a weekly amount of $80. The husband receives a family tax benefit of $52 per week. The husband is living in rented accommodation. The husband was consistently in paid employment prior to 2005 when the parties began operating the business, F Business. The husband has the physical and mental capacity to otherwise go on working in his current or similar employment.
(c) whether either party has the care or control of a child of the marriage who has not attained the age of 18 years
The wife has the care of the two children of the marriage, D aged 13 years and N aged 9 years. Both children have lived with the wife since separation. The children spend five nights a fortnight in the care of their father.
(d) commitments of each of the parties that are necessary to enable the party to support: (i) himself or herself; and (ii) a child or another person that the party has a duty to maintain
Neither of the parties have any commitments necessary to enable them to support themselves or others.
(e) the responsibilities of either party to support any other person;
Each party has a responsibility to support the two children, and no other person.
(f) subject to subsection (3), the eligibility of either party for a pension, allowance or benefit under (i) any law of the Commonwealth, of a State or Territory or of another country or (ii) any superannuation fund or scheme, whether the fund or scheme was established, or operates, within or outside Australia and the rate of any such pension, allowance or benefit being paid to either party;
The wife receives a family tax benefit (Family Tax Benefit A and B) of $150 per week. The husband receives a family tax benefit of $52 per week.
(g) where the parties have separated or divorced, a standard of living that in all the circumstances is reasonable
The wife has been unable to maintain a standard of living reasonable in the circumstances without the assistance of her brother who supplements her income on a weekly basis.
(h) the extent to which the payment of maintenance to the party whose maintenance is under consideration would increase the earning capacity of that party by enabling that party to undertake a course of education or training or to establish himself or herself in a business or otherwise to obtain an adequate income
Spouse maintenance is not sought.
(ha) the effect of any proposed order on the ability of a creditor of a party to recover the creditor's debt, so far as that effect is relevant
The parties each have creditors. I have found that the husband has a debt to his father and that it is more probable than not that the husband’s father will not pursue this debt, however, in the event that he does the husband has the capacity to repay the debt from income. The husband’s father has not sought, to date, to recover the debt.
There are other creditors. I have found that there is a joint debt owing to S School and that the mother should be responsible for either repaying that debt or coming to an accommodation with the school in whichever way she can. I have found that there is a joint debt owing on the business line of credit and that the wife should become responsible for that debt or reach an accommodation with the creditor bank in whatever way she is able to do. There are two mortgages secured on the family home at M and the wife will become solely responsible for meeting those mortgage debts and for refinancing.
In respect of other debts asserted by the husband I have accepted the evidence of the husband that the debt to Visa HSBC presently standing at $22,053, that $2,500 represents matrimonial debt incurred prior to separation. The balance of that debt is personal to the husband.
I have also found that debts to Aussie credit card Mastercard, Westpac Mastercard, GE Mastercard and Citibank Mastercard are all debts personal to the husband incurred post separation. The husband has claimed that personal liabilities[13] should be repaid from matrimonial assets. I have found that these debts were incurred by the husband at a time when he was solely responsible for the running of the business having deliberately excluded the wife from involvement and knowledge. Accordingly, there was no evidence from third parties as to the debt and any attempt that had been made to pursue it by the relevant creditors. I have found elsewhere in this judgment that the wife should not be held responsible for those debts, namely, item 54 of the financial statement, outstanding business suppliers etc $43,701, outstanding business premises rent $21,844 and consumer claims $1,900. The effect of these orders is unlikely to have any significant impact on the ability of the stated creditors to recover their debts. It is impossible to know to what extent the debts have been pursued. To the extent that they are pursued in the future those creditors will look to the husband’s capacity to earn income to repay the debts. As I have stated elsewhere in this judgment, I do not consider that on balance the wife should meet such debts incurred without her knowledge or consent. Accordingly, I have considered that her chance to remain in the home with the children outweighs any obligation that she might have to repay debts incurred by the husband post separation in running the business.
[13] Husband’s financial statement para 54
(j) the extent to which the party whose maintenance is under consideration has contributed to the income, earning capacity, property and financial resources of the other party
Spouse maintenance is not sought.
(k) the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration
Not applicable.
(l) the need to protect a party who wishes to continue that party's role as a parent
The wife wishes to continue her role as parent. She has most of the obligation to ensure that the children attend school, complete their homework and participate in extra curricular activities. The wife has been responsible for running and providing a home for the children since separation and there is no doubt that she will continue to do so. It is entirely appropriate for the wife to choose to work part time in order to balance the need to financially support the children against the need to be available to them at a reasonable level given their age. She is likely to continue to work at this level at the very least until N commences high school in 2013.
(m)if either party is cohabiting with another person--the financial circumstances relating to the cohabitation
Neither party is cohabitating with another person.
(n) the terms of any order made or proposed to be made under section 79 in relation to: (i) the property of the parties; or (ii) vested bankruptcy property in relation to a bankrupt party
Not applicable
(na) any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage
The evidence of both parties suggests that child support has been problematic. In paragraph 7 of her Affidavit filed 7 August 2009 at paragraph 7 the wife says:-
“As far as I am aware the respondent has not obtained any employment following the closure of the business. The respondent applied for a review of the child support assessment previously in place the result of which is that now I have received an assessment requiring that I pay the respondent the sum of $14 per week notwithstanding that the respondent was in arrears with child support in the amount of $8,315.59 as at 14 January 2009.”
She goes on to say:-
“I believe that I am unlikely to receive any significant financial support from the respondent with respect to the children in future.”
Clearly the position has changed. The husband now earns $884 gross per week and presumably the wife will in due course receive some child support from the husband. However, at the time of the hearing the husband states in his financial statement filed 30 July 2010 (page 9 part O paragraph 31):-
“child support subject of appeal to SSAT pending decision”
and refers in his financial statement (Part G paragraph 31) $200 per week being paid in child support assessment by CSA under appeal.
The wife in her financial statement filed 16 July 2010 (Part D paragraph 13) declares as follows:-
“arrears as at 13 July 2010 $7,228.86 required to be paid $161 per week actually received nil.”
In the event that the husband continues in paid employment as seems likely the child support position for the wife may improve but to date of hearing and in the past she has been obliged to provide for the children financially and she has done so with the assistance of her brother. I accept the evidence of the wife that her outgoings exceed her income and that she has required this assistance.
(naa) the terms of any order or declaration made, or proposed to be made, under Part VIIIAB in relation to: (i) a party to the marriage; or (ii) a person who is a party to a de facto relationship with a party to the marriage; or (iii) the property of a person covered by subparagraph (i) and of a person covered by subparagraph (ii), or of either of them; or (iv) vested bankruptcy property in relation to a person covered by subparagraph (i) or (ii)
Not applicable.
(o) any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account
In this matter the wife has been unable to learn and understand how the husband was running the business, FD Business. She was entitled to take all of the steps that she did to try and value, and otherwise come to grips with, the facts of that business. Had it been profitable it most certainly would have been a resource in the hands of the husband and, at the very least, a source of income for the husband. Considerable funds were expended on attempts at a second valuation and on legal proceedings in attempting to get the husband to provide relevant information. The oral evidence of the husband suggests that he was unwilling or unable to provide the information and that he perhaps never understood the accounting of the business. I am unable to make a finding about the state of the husband’s knowledge but whether it was inability or unwillingness, it was undoubtedly an unsuccessful business, continued long past the point where it was commercially sensible to do so.
(p) the terms of any financial agreement that is binding on the parties to the marriage
Not applicable.
(q) the terms of any Part VIIIAB financial agreement that is binding on a party to the marriage
Not applicable.
In relation to the section 75(2) factors the parties are sharing the care of their children although they live more of their time with their mother. The mother is working part time in order to meet the needs of the children, aged 13 years and 9 years. I reject the submission of counsel for the husband that this is a lifestyle choice on the part of the wife, rather I conclude that it is the wife balancing the children’s needs for financial support and parental care and supervision.
The wife freely conceded that she was likely to be able to obtain full time work from her present employer. I accept that her choice is made as a responsible parent in the best interests of the children to work part time.
The parties are otherwise in a comparable position and are likely to be in employment with some access to superannuation for the balance of their working lives. The wife presently has a greater interest than the husband but this will change as the husband’s contributions are at a higher level now that he is re-employed.
I consider that there should be an adjustment in favour of the wife in the order of a further 7.5 percent to account for the disparity in income which is likely to continue for at least three years, if not longer, and the disparity in contributions to superannuation which is likely to leave the husband in a strong position in the long term. Accordingly, the net asset pool of $604,453 will be divided as to $423,117 to the wife and $181,336 to the husband.

RESULT OF ORDERS

The wife will retain assets and be responsible for liabilities as follows:-
Assets
(a)       Item 1, M property   $590,000
(b)       Item 3, Holden Commodore  $4,000
(c)       Item 5, household contents  $9,000
(d)       Item 8, paid legal fees  $40,000
(e)       Item 27, interest in superannuation  $100,091
$743,091      $743,091
The wife will be responsible for the payment of the following liabilities:-
(f)       Item 9, home mortgage secured over
M property  $133,600
(g)      Item 10, Staff home loan secured over
M property  $72,300
(h)      Item 11, Business line of credit (“BLOC”)            $5,500
(i)       Item 12, S School fees  $5,700
(j)       Item 25, Tax debt CGT P property  $16,449
$233,549      $233,549
$509,542
The husband will retain assets and be responsible for joint liabilities as follows:-
Assets
(a)       Item 2, ANZ Bank account  $800
(b)       Item 4, household contents  $5,000
(c)       Item 7, paid legal fees  $40,000
(d)       Item 28, interest in Superannuation  $51,611
$97,411        $97,411
The husband will be responsible for the following liability:-
(e)      Item 14, part of the debt to Visa HSBC                  $2,500          $2,500
$94,911
Accordingly, to retain 70 per cent of the assets, the wife will be required to make a payment of $86,425 to the husband:-
$509,542 less
$ 86,425
$423,117
To retain 30 per cent of the assets, the husband will receive the sum of $86,425:-
$ 94,911 plus
$ 86,425
$181,336

CONCLUSIONS

The parties have been left with a limited asset pool and the wife will struggle to maintain a significantly increased mortgage debt if she is able to refinance and retain the house in M.
The husband will be in a difficult financial situation in that he will not have sufficient funds to house himself and is likely to be renting for some time. He may have third party debts to repay.
As a result of the orders I have made, the wife shall retain the property at M, her furniture, car and superannuation.
The husband incurred significant credit card debt post separation for which he will be responsible.
Inn respect of the Visa HSBC, the husband asserted that there had been between $2,000 and $3,000 outstanding at the time of separation and he was not challenged. Accordingly, I include the sum of $2,500 as item 14 HSBC Visa. [14]
[14] see paragraph 85(e)

I certify that the preceding one hundred and nine (109) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cleary

Associate:

Date: 21 September 2010

Townsend and Townsend 1995 FLC 92 - 569

[2010] FamCA 835

21 September 2010

Key Legal Topics

Areas of Law

Family Law

Property Law

Contract Law

Legal Concepts

Remedies

Costs

Damages

Breach

Description	Ownership	Wife’s Value $	Husband’s Value $
1 [M property]	Joint	590,000	590,000
2 ANZ Bank Account	Husband	800	800
3 2000 Holden Commodore	Joint	4,000	4,000
4 Household Contents	Husband	5,000	5,000
5 Household Contents	Wife	9,000	9,000
~~6. Unaccounted business income (financial years 2007 and 2008)~~
7 Paid Legal Fees (from sale of business stock)	Husband	40,000	40,000
8 Paid Legal Fees	Wife	40,000	40,000
Total Assets	688,800	688,800