Midgley & Midgley
[2022] FedCFamC1F 444
•21 June 2022
Federal Circuit and Family Court of Australia
(DIVISION 1)
Midgley & Midgley [2022] FedCFamC1F 444
File number: HBC 523 of 2019 Judgment of: CARTER J Date of judgment: 21 June 2022 Catchwords: FAMILY LAW – PROPERTY –whether valuations of company owned property should be updated – whether forensic audit of the husband’s company should be conducted. Legislation: Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) rr 7.02, 7.04 Division: Division 1 First Instance Number of paragraphs: 69 Date of last submission: 14 June 2022 Date of hearing: 14 June 2022 Place: Melbourne (via videolink) Counsel for the Applicant: Ms Kate Mooney SC Solicitor for the Applicant: McVeity Dean Lawyers Counsel for the Respondent: Mr David Brown QC Solicitor for the Respondent: Pigdon Norgate Family Lawyers ORDERS
HBC 523 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MS MIDGLEY
Applicant
AND: MR MIDGLEY
Respondent
order made by:
CARTER J
DATE OF ORDER:
21 JUNE 2022
THE COURT ORDERS THAT:
1.Within 14 days of these orders the husband provide to the solicitors for the wife copies of the following documents as are in his power, possession or control:
(a)finance contracts, bank statements, invoices and receipts for payments made by the husband to:
(i)M Business in the sum of $506,000; and
(ii)N Business and the sum of $3,050,164.70.
(b)all business and personal bank statements, loan statements and credit card statements (save for those already provided) from 1 April 2017 to the date of this order;
(c)records of any investments including stocks, shares, share options and margin lending accounts in which the husband has any legal or beneficial interest in the period 1 April 2017 to the date of this order;
(d)all executed lease agreements for the equipment identified as being hired as set out in the list marked Annexure “A” to the wife’s Amended Application in a Proceeding filed 22 March 2022;
(e)itemisation of the expenditure classified as “directors loan” on the 2020 financial statements for the Midgley Group for the description as to the date of each loan payment, amount of each loan payment, purpose of each loan payment and to whom the payments were made;
(f)the financial statements for Q Pty Ltd for 30 June 2017 and 30 June 2021, R Pty Ltd for 30 June 2020 and 30 June 2021 and T Pty Ltd for 30 June 2021;
(g)contracts (whether pending or completed) for all purchase or sale of real estate as and from 21 May 2021 to the date of this order; and
(h)all current leases for rental income or rents paid to the husband or any entity in which he has an interest.
2.By way of enforcement of Order 1.2 of the orders made by consent on 2 December 2020 within 14 days of the date of this order, the husband pay to the wife the sum of $5,412.18.
3.Within 14 days of this order, the husband provide to the solicitors for the wife:
(a)the integrated client portal statements with the Australian Taxation Office for each entity in which he has an interest from 30 June 2017 to date; and
(b)documentary evidence of the debts as required by Order 1(e)(i) of the orders made by consent on 16 June 2021.
4.The sum of $14,129.09 withdrawn by the husband from the ANZ bank account holding the residual funds of the proceeds of sale to S Pty Ltd be retained by the husband as a part property distribution.
5.Pursuant to Rule 7.04 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth), Mr V of W Pty Ltd is appointed a single expert to conduct a forensic audit of the Midgley Group and associated entities, as and from April 2017.
6.For the purposes of the forensic audit:
(a)within 14 days the parties are to provide a joint letter of instruction to Bentleys Tasmania;
(b)the husband shall provide to Mr V or his nominated agent/s access to all records and documents, in written or digital form, as may be requested by him from time to time; and
(c)the parties shall equally share the costs of the forensic audit and report at first instance, with the ultimate determination as to costs being reserved to the final hearing.
7.Forthwith upon the completion of the audit and provision to the parties of the auditor’s report:
(a)the parties jointly instruct AA Company to provide updated valuations of the real properties listed in annexure “B” to the wife’s Amended Application in a Proceeding filed 22 March 2022 with such valuations to be completed not more than three months prior to the parties attending a private mediation;
(b)the wife attend to payment of the retainer invoice issued by Y Accountants dated 1 February 2022, being invoice number 85871; and
(c)the wife sign and provide to Y Accountants their retainer agreement provided on 1 February 2022.
8.The Amended Application in a Proceeding filed 22 March 2022 and the Response to an Application in a Proceeding filed 10 May 2022 be otherwise dismissed.
AND THE COURT NOTES THAT:
A.The proceedings remain listed on 5 July 2022 at 10:00am for mention before the Honourable Chief Justice Alstergren.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Midgley & Midgley is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
JUSTICE CARTER
Introduction
The interim application and response currently before the court are:
(a)the wife’s Amended Application in a Proceeding filed on 22 March 2022; and
(b)the husband’s Response to an Application in a Proceeding filed on 10 May 2022.
Regrettably there have been a multitude of interim applications and hearings in this matter. I note these proceedings were commenced in 2019. Valuations have not been completed, mediation has not yet occurred and there have been ongoing disputes about discovery and various interlocutory matters.
The matter is listed for mention hearing on 5 July 2022 before Chief Justice Alstergren. Both the parties say they are keen for the matter to progress to a mediation and if it does not settle, then on to a final hearing. However the wife asserts there are further interlocutory matters that need to be attended to before any meaningful negotiations can be had. Most significantly, she seeks an order that there be an audit conducted in relation to the group of entities controlled by the husband prior to the valuation of those entities being undertaken.
Brief background
The husband is 46 years old. He is a businessman. The wife is 45 years old. She is employed as a health technician. The parties commenced living together in around 1998/2000 and were married in 2003. The parties have two children, Z who is 17 and X who is 15 years old. The parties separated in 2017. The wife continues to reside in what was the family home at C Town in Tasmania.
During the relationship the parties were involved in property development. They purchased, developed and sold properties through various entities in the Midgley Group (“the Midgley Group”) during their marriage and the husband continues to do so post separation. The husband also operated various other businesses through the group. The husband is now the sole director and secretary of all the companies in the group.
The husband issued the substantive proceedings on 17 September 2019. As already observed, the parties have had multiple court appearances. Their legal fees must be considerable. The orders made to date include orders for discovery, for mediation, for the husband to pay various mortgages, outgoings and expenses on properties, for the husband to pay spousal maintenance to the wife and other expenses on her behalf, together with orders governing the mechanism for the application of the proceeds of sale and an order restraining the husband from increasing his director’s loan.
For the purposes of this interlocutory application, the relevant orders that have been made provide inter alia as follows:
(a)on 9 December 2019 consent orders were made providing for a single expert to value the Q Pty Ltd (“the Q Pty Ltd”), the plant and equipment of the Q Pty Ltd and all real estate and motor vehicles in the names of either party, or registered to the Q Pty Ltd:
(i)AA Company was to be appointed to provide valuations of real estate if the parties did not agree otherwise;
(ii)Mr P or Ms BB were to be appointed to value the Q Pty Ltd unless otherwise agreed; and
(iii)Ms CC was to be appointed to value the plant and equipment.
The parties subsequently agreed Ms BB would provide the valuation of the Q Pty Ltd. I understand the costs of that valuation will be between $50,000 and $62,000. Senior Counsel for the husband said Ms BB anticipated being able to complete a report within four weeks of receiving material.
(b)on 2 December 2020 consent orders were made providing at Order 1.2 that the husband pay a number of expenses, including “council rates, water rates, insurance, maintenance costs and landscaping materials” for the B Street, C Town property.
(c)on 16 June 2021 there were further consent orders governing the application of the proceeds of sale of the business purchase agreement between the Midgley Group and S Pty Ltd. Order 1 of those orders provided:
(i)specific “business items” were to be paid from the proceeds upon the condition that the husband’s lawyers provide to the wife “documentary evidence” of the item, together with written certification from the husband’s lawyers “that the debt is a true debt of the company incurred in the ordinary course of business and remains due and owing”;
(ii)any residual funds were to be placed in a separate bank account by the husband who was directed to provide the wife ongoing electronic viewing access to the account; and
(iii)any further payments from those residual funds were only to be used “to pay costs, fees, liabilities, expenses and similar (including but not limited to taxation and GST liabilities and employee entitlements…)”, on the same conditions being the production of documentary evidence and certification as to the liability being genuine.
Notwithstanding that the orders for the valuation of the Q Pty Ltd were made 18 months ago, it is yet to be completed. There were also delays with the preparation of the valuation prepared by Ms CC although as best I can tell there is some dispute as to the reason for that delay.
AA Company have now provided valuations of all but one of the properties, being the DD property. The valuations that have been completed are now approximately 12 months old.
The wife asserts that there have been significant issues with the orders governing the application of the sale proceeds. In particular, she says the husband has failed to attend to the payment of some of the business items, including the asserted monies owing to the Australian Taxation Office. She also says she has not been provided ongoing electronic access to the account, which is conceded by the husband. He says since that order was made, the bank has informed him such access to one specific account cannot be made available to the wife.
The wife says further that the “documentary evidence” produced by the husband in relation to the liabilities has not resulted in the production of the source documents. Rather, she is provided with an internally produced spread sheet. Given the high level of distrust in the matter, it is not surprising that the wife does not accept the veracity of such internally produced documents, and seeks instead actual source documents.
Matters that currently require determination
Some of the matters that were sought by the wife in her Application in a Proceeding are no longer pressed. Similarly, some of the orders sought by the husband are not being pursued. Notably the husband is not pursuing his application that various orders providing for him to pay spousal maintenance and various other property and personal expenses be discharged. Nor is he pursuing his application to discharge orders restraining him from increasing his director’s loan without the prior consent of the wife.
There are also a number of matters in relation to discovery that properly and sensibly appear to be now be agreed, to which I shall shortly turn.
The matters that remain to be determined at this interim stage are:
(a)whether there should be orders made requiring the husband to reimburse the wife for outgoings she has paid in relation to the B Street, C Town property, being monies for the rates and maintenance costs the husband was required to pay pursuant to Order 1.2 of the orders made 2 December 2020;
(b)whether there should be updated property valuations of real estate held within the Midgley Group, and if so who should prepare those valuations; and
(c)whether there should be a forensic audit conducted of the Midgley Group and associated entities, or whether there should be orders made compelling the wife to pay the retainer to Ms BB so that she can proceed to conduct a valuation of the Midgley Group without the preparation of an audit.
The parties agreed that the matter before me should proceed by way of submissions only. Obviously I cannot make findings of fact where there are issues in dispute at this interlocutory stage. The hearing was conducted by Microsoft Teams. There were some issues with the audio however these were reasonably easily overcome.
The wife relied on:
(a)her Amended Application in a Proceeding filed 22 March 2022;
(b)her affidavit filed 22 February 2022; and
(c)her affidavit filed 7 June 2022.
Queen’s Counsel for the husband did not outline the documents relied upon. I have, however read and had regard to the following documents filed on behalf of the husband;
(a)his Response to an Application in a Proceeding filed 10 May 2022;
(b)his affidavit filed 10 May 2022; and
(c)his Financial Statement filed 10 May 2022.
Both parties supplied chambers with tender bundles. I have not had regard to any of the documents in those bundles. Senior Counsel for the wife referred to a few pages, but did not seek to tender those pages. Queen’s Counsel for the husband did not refer to any of the documents within his client’s tender bundle.
Discovery
As indicated, the dispute in relation to discovery was significantly resolved. Some of the documents the wife sought be produced by the husband had been produced prior to the hearing before me on 14 June 2022.
In relation to the balance of the documents sought, it became apparent during the course of submissions there was general agreement regarding the orders sought by the wife as to disclosure. Queen’s Counsel for the husband noted, however, that his instructions were that a number of the documents sought had already been provided, and that the wife’s requests for disclosure have been persistent, unnecessary and onerous. He also noted that some of the documents sought may not be relevant, or properly particularised. However, in the interests of transparency, and to ensure the matter continues to move forward, the husband did not oppose the orders sought by the wife as set out at paragraphs 1(a)(i) and (ii),1(c)-(e), 1(g)-(i) and 1(k) of the wife’s Amended Application in a Proceeding in relation to such of those documents as are within his power, possession or control.
Queen’s Counsel for the husband further noted that the completed returns for R Pty Ltd, T Pty Ltd and EE Pty Ltd as sought in paragraph 1(h) had already been forwarded, but would be provided again, if that has not already occurred.
Enforcement
There were three parts to the wife’s application for enforcement.
Firstly, in relation to the orders sought at paragraph 6 of the wife’s Application in a Proceeding it became apparent during the course of submissions those orders were not opposed. Queen’s Counsel for the husband indicated there was no opposition in relation to orders for the provision of the client portal statements with the Australian Taxation Office, noting that his instructions were that the information had already been provided. It also appears to me that the order sought by the wife for the documentary evidence of the debts referred to in Order 1(e) of the orders made 16 June 2021 to be provided within 14 days is appropriate. I note Queen’s Counsel for the husband did not raise any objection to that time frame.
Secondly, the wife sought that the husband reimburse her the sum of $5,412.18 together with interest of $164.62 being monies she has paid for the council rates and pool maintenance for the B Street, C Town property. It is plain that the husband is obliged to pay those funds, as that is what is required of him pursuant to Order 1.2 of the orders made by consent on 2 December 2020. I note that those orders do not specify that those payments are to be made as and when they fall due, but it seems to me that is clearly what is implied in the order.
Whilst it is a modest amount, I accept that the wife is entitled to expect payment to her when orders have been made for that to occur. In my view, it is not appropriate for the husband to fail to make a payment pursuant to orders of this court, and then assert the court ought leave that to be adjusted at trial on the basis that the quantum is modest.
In the circumstances, I am satisfied it is appropriate that an order be made requiring husband to immediately pay to the wife the sum of $5,412.18. I will leave aside the question of interest, if any, which can be determined at a final hearing if necessary.
However, in light of the modest amount sought to be recovered, I am not prepared at this stage to make orders for the sale of a property in default of that amount being paid to the wife as was contemplated in her Application in a Proceeding. Sensibly, Senior Counsel for the wife did not press for orders imposing a sale in default at this time.
Lastly in relation to enforcement, the wife sought an order that the husband forthwith repay the sum of $14,129.09 held in a separate bank account with the ANZ. The funds in that account are the residual proceeds of the sale to S Pty Ltd, which were the subject of orders made by consent on 16 June 2021 to which I have referred. As observed, those orders set out how those sale proceeds were to be distributed, and the mechanism for such distribution. The husband appeared to concede he should not have used the funds as he did. However, he asserts that he does not currently have the funds or resources to repay the funds.
Rather than requiring those funds be immediately repaid to the account, it appeared during the course of submissions that both parties accepted that this issue could be dealt with on an interim basis by treating those funds as a part property payment in favour of the husband. Accordingly, I will make orders to that effect.
Valuations
It is the wife’s application that an updated valuation should be prepared on all properties owned either personally by the parties, or owned by any of the various entities within the group. She further proposed that the parties engage FF Company as the single expert to provide those valuations.
Queen’s Counsel for the husband conceded that the valuations of real estate personally owned by the parties ought to be updated at this time. The DD property, whilst owned by various companies within the group, is yet to be valued, and it is agreed that will need to be completed.
Queen’s Counsel for the husband opposed an order that the updated valuations be prepared by anyone other than AA Company. AA Company were named as the single expert valuer pursuant to orders made on 9 December 2019, and have already provided the parties with a number of valuations of the personal and corporate property as at mid-2021.
Queen’s Counsel for the husband otherwise opposed updated valuations of all other real estate held by the various entities. That opposition was on the basis that the valuation be prepared by Ms BB is of the parties’ interest in the Midgley Group as at 30 June 2021. Accordingly, it was submitted that obtaining updated reports of the corporate real estate would be superfluous to the exercise to be undertaken by Ms BB, as the valuations already obtained are accurate as at mid-2021.
I do not agree that there is no utility in updated valuations being obtained. It seems to me likely to assist the parties in their overall settlement negotiations if the parties also have updated valuations of the various properties. The valuations they currently completed are already around 12 months old, and will be even older by the time they attend for a mediation.
I accept, of course, that updated values of the properties cannot simply be ‘pasted in’ to the valuation of the Midgley Group as at 30 June 2021 – using current valuations for the properties, but all other figures as at 30 June 2021. However, the updated valuations may assist Ms BB in understanding and evaluating the overall ‘health’ of the entities, particularly in circumstances where the property market may be in a period of significant volatility.
Accordingly, I am of the view that updated valuations should be prepared in relation to properties owned personally by the parties and held by the Midgley Group, with such valuations to be completed as close to the parties’ mediation as practicable.
In relation to the wife’s application to change the valuer from AA Company to FF Company, the wife deposes she has no confidence in AA Company to prepare the updated valuations. She says they have engaged in unilateral communications with the husband, and she asserts there have been some delays in obtaining the valuations so far.
I am not satisfied the wife’s concerns amount to a proper basis to now appoint FF Company as the single expert. She has not, for instance, produced any evidence that challenges the substance of any of the many valuations they have already undertaken. I am also concerned that appointing FF Company may further increase the already substantial legal fees the parties must have incurred to date.
Whether there should be an audit of the Midgley Group before Ms BB commences her valuation of the parties’ interest in the group
The last issue requiring my determination is whether there should be an audit of the Midgley Group prepared now, with Mr V appointed as a single expert to prepare that audit, as sought by the wife. That is opposed by the husband. He seeks orders the wife be compelled to forthwith pay Ms BB’s retainer fee, and sign her fee agreement, so that the valuation of the Q Pty Ltd can be commenced.
The purpose of the rules governing the appointment of single experts is set out at Rule 7.02 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) (“the Rules”) which provides, in part, as follows:
(a)to ensure that parties obtain expert evidence only in relation to a significant issue in dispute;
(b)to restrict expert evidence to that which is necessary to resolve or determine a proceeding...
When considering whether to make an order appointing a single expert, rule 7.04(2) of the Rules provides in part that the court may take into account “any matters relevant to making the order, which may include…”:
(a)the overarching purpose of these Rules…and the purpose of this Part…;
(b)whether expert evidence on a particular issue is necessary;
(c)the nature of the issue in dispute…
Senior Counsel for the wife articulated numerous concerns regarding the business accounts and financial statements, pointing in particular to significant discrepancies and inconsistencies between various documents and the husband’s alleged lack of candour in these proceedings to date. The wife is also concerned that the husband is operating the business entities in such a way as to diminish its own assets, to benefit the husband and his lifestyle. She says there have been considerable difficulties and delays in securing disclosure from the husband. She also says that documents uncovered as a result of subpoenas issued on her behalf have revealed purchases and sales about which she was unaware, as well as documents in which the husband has declared the group has a significantly larger value than he asserts in these proceedings. In those circumstances, it is submitted that any valuation prepared without an audit first being conducted is likely to lack probity.
The concerns articulated include:
(a)amongst subpoenaed documents, the wife found a document putting the group’s value at over $55,000,000;
(b)the farm and vineyard at DD property, owned by the group, does not appear to have any farm expenditure, profit or loss. She said the husband’s parents – who he deposed do some maintenance on the property – are paid a salary and drive vehicles owned by the group;
(c)there are substantially different versions of financial statements for entities within the group for the same period;
(i)for the financial years ending 30 June 2017 and 2018 it was submitted that the versions of the Midgley Group 2 Profit and Loss statements provided to the GG Loan Business, and produced under subpoena, differed substantially from those provided to the wife in the course of these proceedings.
(ii)the documents provided to the mortgage fund record the net profits of Midgley Group 2 as $2,824,662 in 2017 and then $3,568,172 in 2018. The net assets for those years were recorded as $3,028,445 and $4,322,028 respectively.
(iii)conversely, in the documents produced to the wife in these proceedings, the net profits were recorded as $1,003,565 in 2017, and show a net loss of $936,669 in 2018. The net assets in 2017 were stated as $936,436 and a negative net asset pool of $2,973,345 was recorded in 2018. These figures are obviously significant lower than those in the documents provided to the mortgage fund.
(iv)it was asserted there are similarly significant differences in the net profits in the various versions of the statements for W2 Business and Midgley Business 3 in 2018. The annexure to the wife’s affidavit setting out these differences are not the source documents, but a summary of the differences in the documents. No objection was made to this.
(v)similarly, the wife asserts that she has seen three versions of the Profit and Loss statement for the Midgley Group 2 for the year ending 30 June 2020. Two were provided to her, by the husband. One was provided to S Pty Ltd, annexed to the sale contract. Those provided to the wife show net operating losses of between $1,428,146, and $3,850,994. The statement provided to S Pty Ltd showed a net operating profit of $2,963,658.
(vi)Senior Counsel for the wife noted that none of the versions are marked as being drafts. She said it is concerning that the different versions of the statements appear to vary depending upon the intended recipient of the document. That is, the husband has asserted higher profits and assets when presenting documents to his lender and a purchaser than he is now asserting for the purposes of these proceedings.
(d)the husband has provided disparate versions of anticipated subdivision costs for the HH Street properties. To the lender, as discovered in the subpoenaed material, the husband asserted the anticipated costs for stage 4 would be $348,000 and for stage 5, $268,000. To AA Company – who are appointed to value the property – he asserted those costs would be $1,000,000 and $832,000 respectively. This is a threefold increase in anticipated costs;
(e)the husband’s personal tax return was amended such that his income was significantly reduced in the year the parties’ separated. Post separation, the husband has continued to enjoy a lifestyle that is well beyond his asserted income. He asserts his taxable income is now around $182,428. It was asserted on behalf of the wife that post separation, the husband has not received trust distributions, but instead, increasingly used director’s loans and undeclared company drawings to fund what was described as his lavish lifestyle and create company debt. The wife says she has concerns that company funds are used to make payments towards the husband’s director’s loans. She says further that there are multiple, unexplained transfers of funds from company bank accounts which she says may well indicate the business paying personal expenses on behalf of the husband. According to the wife, this includes apparent payments by the business to repay a loan on the husband’s personal property in Sydney, totalling around $134,000. She said she has been unable to reconcile these payments against the husband’s director’s loan accounts. Additionally, she says the loan repayments on the husband’s vehicles total around $400,000 per year. Again, the wife deposes she has been unable to find corresponding entries in the director’s loan accounts. She says these matters mean that the financial statements of the entities are not a reliable record of the operations of the business;
(f)the wife asserts the husband has not been upfront regarding a number of issues, and has failed to meet his obligations as to full and frank disclosure. That includes – she says:
(i)his failure to keep her advised of the sale to S Pty Ltd;
(ii)his failure to inform her that there are now proceedings on foot against the group by S Pty Ltd;
(iii)his failure to disclose the existence of R Pty Ltd and EE Pty Ltd, the latter which apparently owns assets that were purchased by an entity within the group. She only discovered the existence of the entity EE Pty Ltd from an invoice regarding truck sales provided to her solicitors on 9 May 2022. She said that company was formed on 19 May 2021. No financials had been provided to her regarding that company by 7 June 2022 and as she did not know about it, it was not included in the list of entities to be considered by Ms BB;
(iv)his denial that he purchased a Motor Vehicle 1; and
(v)his failure to disclose the existence of $25,000,000 worth of assets to Ms CC who prepared the valuation of the plant and equipment.
(g)the husband has not complied with the orders directing the application of the S Pty Ltd sale proceeds and the production of information accompanying any payment out of those funds. In particular, she says it appears he is prioritising other payments over and above liabilities to the Australian Taxation Office. She further deposes that she has identified almost $3,000,000 of payments from the account holding the proceeds for which she has not been provided the bank statements or documentary evidence of the liability being paid. Additionally, the husband used funds from the S Pty Ltd sale to pay council rates on his personal property, and to pay legal fees, despite the clear orders of the court governing the application of those monies and the mechanism for any payments from it.
It is asserted that all this alleged obfuscation and alleged failures to make proper disclosure provides a foundation for the wife’s significant concern that the information the husband will provide to Ms BB will not be accurate or complete.
It was submitted on behalf of the wife that Ms BB will not ‘look behind’ the documents with which she is provided. Accordingly, if the documents provided are inaccurate or do not reflect what is in reality occurring within the Q Pty Ltd, her valuation will be unreliable. The parties will then be unable to engage in meaningful discussions.
In relation to the scope of the proposed audit, Senior Counsel for wife the asserted all the entities needed to be included as the concerns regarding non-disclosure and discrepancies in accounts and statements cover the entire group.
The court was advised the potential costs of the audit were between $50,000 and $150,000.
Queen’s Counsel for the husband strongly opposed the orders sought for an audit. He emphasised that the parties are now at a position where they can imminently engage in meaningful mediation. The valuations of the corporate real estate for the year ending 2021 are all completed save for one property. The financial statements of all the entities are completed for that year. Those property valuations and financial statements can then be provided to Ms BB, who has indicated her valuation can be completed within a month of her being provided with the relevant documents. The valuations of the personally held real estate, he said, can be updated presumably quite quickly.
Queen’s Counsel for the husband further submitted it was premature to make an order now for an audit to be undertaken. He said that there is a disquieting level of mistrust cannot be a basis for the ordering of an audit.
In response to the submission that the husband had previously estimated the parties’ pool as being in excess of $55,000,000, the husband said that document was prepared in October 2019. At that time he said the document “reflected expectations based on the acquisition of a business known as [JJ Company].” However, he said the actual earnings “were well below the projected earnings” and the business failed and the assets were sold. That explanation was not accepted by the wife.
In relation to the concerns the wife expressed about the versions of the financial statements, Queen’s Counsel for the husband said there is nothing unusual in this, given the number of entities in the group. He said these are dynamic documents, drafted and then adjusted and amended as information from the various entities within the group is updated. I note that in his affidavit the husband further said that once the groups’ “overall operating position has been defined”, there are “cost allocations and revenue recognition decisions that are made…for tax efficiency” although “[t]he net position of the [Midgley Group] is unaffected”. He deposed further that the financial statements provided to S Pty Ltd “were prepared as an abridged set of financial statements recognising the revenue streams, workforce and assets to be utilised by [S Pty Ltd]”.
In regard to the documents provided to the GG Loan Business, the husband deposes that he works closely with the fund, and that they understand “the intricacies of how our business operates.” He said that they are provided with draft financial statements within three months of the end of each financial year, with final versions provided around March the following year. Queen’s Counsel said that the group of entities could not be expected to remain stable in what over the last few years has been a remarkable set of circumstances. What is relevant, he said, is the actual document that is provided to the Australian Taxation Office.
In relation to the discrepancy in the husband’s income, Queen’s Counsel for the husband said it was totally explainable, and acceptable to engage with authentic accounting procedures to produce a favourable tax outcome. He said the concerns in this regard – in relation to his client’s income four years ago – amount to a “foundation for nothing”. Moreover he said the husband’s drawings are completely independent of what Ms BB is to determine.
In relation to the assertions that he has not complied with the orders regarding the application of the S Pty Ltd proceeds, the husband contends that there was no positive obligation to use the funds to meet the liabilities outlined. Rather, he said the orders provided for a procedure to be adopted when the company chose to pay any of the listed liabilities. In his affidavit the husband deposed “[g]iven the financial position of the companies, we carefully manage our creditors….All previous activity in the business over the past 24 months has been consistent with our carefully managed strategy to pay down debt”.
As to the wife’s assertions about non-disclosure, those allegations are denied by the husband. As are her assertions that he has misused company funds, or that there are transfers and transactions that cannot be reconciled. He maintains that his director’s loan accounts are properly maintained, and managed and all transactions accurately recorded. However, in my view, it is difficult to see how a dispute as to the use or misuse of company funds, or whether director’s loan accounts have been accurately maintained can be unravelled except through an audit process.
In relation to the allegations that there is missing plant and equipment, the husband says he has now explained the discrepancies in the depreciation schedules and provided extensive disclosure to the wife. He said he has explained that $7,700,000 of assets were sold, some were stolen, some incorrectly recorded and $12,000,000 disposed of. I anticipate those described as being ‘incorrectly recorded’ include the items asserted to have been hired equipment, but which were then subsequently sold by the group. However, Senior Counsel for the wife said those explanations were insufficient without any evidence being provided, for instance, as to how the funds from sales or disposition of equipment were applied.
Queen’s Counsel for the husband asserted that the other matters relied upon by the wife are not relevant to the question of the audit. He said if there are concerns regarding the plant and equipment and valuation undertaken by Ms CC, the wife should put questions to Ms CC. He said these matters do not impact Ms BB’s assessment. However, in my view, taken as whole, the issues raised by the wife do impact whether the court should be concerned that inaccurate information will be provided to Ms BB.
Ultimately, it was Senior Counsel’s submission that none of the material relied upon by the wife could be regarded as coming close to satisfying the court that his client has engaged in such a degree of duplicitous chicanery that the accountant would be disabled from undertaking a proper valuation of the group.
Additionally, Queen’s Counsel said Ms BB is a highly skilled and experienced valuer. He said she is given significant power to enquire into and ask questions of the parties. She will also require the production of documents during the preparation of her valuation to satisfy herself that she has obtained the information she needs to produce a robust valuation. Additionally, Queen’s Counsel for the husband submitted that once the valuation is completed, the wife will have the opportunity to ask questions of Ms BB. It would be incorrect, he said, to assume that Ms BB would be blind to, or unconscious of the concerns raised by the wife.
Queen’s Counsel for the husband said these processes may well produce a comprehensive and reliable valuation. To embark upon an audit at this stage – without the parties first having the benefit of receiving and assessing the valuation to be completed by Ms BB – will, according to Senior Counsel for the husband, cause the parties considerably more costs, and further delay a case that has already travelled very slowly. He said accordingly, that to order an audit now would be inconsistent with the proper management of the litigation and entirely unnecessary.
As already noted, this is an interim application. I cannot make findings in relation to matters in dispute. On balance, however, I accept the submission by Senior Counsel for the wife, that taken cumulatively, if correct, the concerns raised by the wife are such that it is appropriate for orders to be made appointing a single expert to conduct an audit of the Midgley Group.
It is of concern that it appears the husband has at various times produced statements for the entities with significantly different figures depending on the audience for whom the statement has been produced. It may be that the husband’s explanations are correct – but without an audit being conducted, it is difficult to know. Similarly, if the wife is correct about the husband’s misuse of corporate funds to fund his lifestyle and if she is correct that there are serious discrepancies in the director’s loan accounts, these matters can only properly be unravelled by way of an audit. The matters raised regarding potential obfuscation and a lack of full and frank disclosure also heighten the court’s concerns that information provided to the valuer, without having first been audited, will not be accurate or complete
Whether the documents to be provided to Ms BB accurately reflect the operations of the group, such that a robust and reliable valuation can be completed, is a significant issue in dispute. An audit of the group does appear to me to be necessary to resolve that controversy. The issues and concerns as outlined by Senior Counsel for the wife are substantial and significant, and in my view, there is a real likelihood that the concerns articulated by the wife would not be properly understood or uncovered in the valuation process. The role of auditor is of course quite different to that of a valuer.
Whilst the conduct of an audit will cause some delay, and will be at great expense to the parties, I have significant concerns that without it, the parties are unlikely to resolve their dispute. There may be further delays and expenses, if the wife challenges Ms BB’s valuation, or an audit is subsequently ordered. A further valuation may then be required. In my view, it is likely that whilst costly, an audit report will greatly assist the parties in their negotiations.
Further, in the event the matter proceeds to trial, an audit is likely to reduce the issues at trial and the documents that would need to be tendered. Without an audit being conducted, it is likely that significant court time will be engaged with attempts to conduct a forensic examination of the operations of the group and the husband’s use of the entities, and their assets, dissecting multiple transactions and examining inconsistencies in various documents.
Ultimately, if the wife’s concerns are not borne out by an audit, the court can reconsider whether she ought bear the entire financial costs of the conduct of it. The reverse of that can also be considered.
In relation as to who should be appointed to conduct the audit, Ms BB advised the wife’s solicitors she was not prepared to conduct both an audit and a valuation. I note that Queen’s Counsel for the husband did not suggest that Mr V did not have the requisite qualifications to conduct an audit of the group. That is, he did not make any submissions to the effect that if an audit was ordered, that Mr V would not be an appropriate person to be appointed as the single expert. The husband’s objections to Mr V were that he did not provide a time frame, and that his estimate of costs was very broad. Given the issues in dispute, neither of those observations are surprising. Senior Counsel for the wife said that her instructions were Mr V anticipated being able to provide a report within three months. That is, of course, in part dependent on how quickly he is provided access to documents he requests.
In the circumstances, I am satisfied that it is appropriate that Mr V be appointed as the single expert to conduct the forensic audit of the Midgley Group at the equal expense of the parties at first instance.
For all of the foregoing reasons, I make the orders as are set out.
I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Carter. Associate:
Dated: 21 June 2022
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