Mitcham and Mitcham

[2018] FCCA 1613

FEDERAL CIRCUIT COURT OF AUSTRALIA

MITCHAM & MITCHAM [2018] FCCA 1613

Catchwords:
FAMILY LAW – Property – alteration of property interests – almost equal contributions – jointly owned company – significant deficiency of assets compared to liabilities – husband seeks valuation at book value – goodwill of no value – order for the winding up of the business.

Legislation:

Family Law Act 1975, ss.75(2), 79, 106A, 117(1)

Applicant: MR MITCHAM

Respondent: MS MITCHAM

File Number: DNC 286 of 2015

Judgment of: Judge Young

Hearing date: 12 December 2017

Date of Last Submission: 12 December 2017

Delivered at: Darwin

Delivered on: 21 June 2018

REPRESENTATION

Counsel for the Applicant: Ms Farmer

Solicitors for the Applicant: Withnalls Lawyers

Counsel for the Respondent: Mr Barry

Solicitors for the Respondent: Darwin Family Law

THE COURT ORDERS THAT:

1. Each party do all things and execute all documents necessary to wind up the company known as Business A Pty Ltd (“the company”).

2. The proceeds of the sale of the former matrimonial home situated at Property A (“the house”) be distributed as follows and in that priority:

   (a)In payment of expenses of the sale;

   (b)Discharge of all mortgages secured on title;

   (c)The payment of any deficiency of assets over liabilities arising from the winding up of the company.

3. Any surplus of assets after the winding up of the company and the sale of the house is to be divided between the parties so that the wife receives 59% and the husband receives 41% of the assets measured by value according to the table in the reasons for judgment, with each party to retain the chattels listed as being in their possession in the table.

4. The (omitted) portable refrigerator in the husband’s possession be returned to the company or purchased from the company for $1,000.

5. Investment be divided between the parties but if this is not possible or there is no agreement between the parties the investment is to be sold with the proceeds to be divided in accordance with Order 3.

6. The husband is to indemnify the wife against liability for the amount owed by the company to the husband’s father and the wife is to indemnify the husband against liability for the amount owed to the wife’s mother.

7. Pursuant to 90MT(1)(a) of the Family Law Act 1975, whenever a splittable payment within the meaning of section 90ME of the Act becomes available from the husband’s Superannuation Fund account (“the Fund”), the wife is entitled to be paid $48,505 in accordance with the regulations and there is a corresponding reduction in the entitlement of the husband. Noting that:

   (a)The operative time for the purpose of Order 7 is the fourth business day after the day on which a sealed copy of these Orders is served on the Trustee of the Fund.

   (b)Having been accorded procedural fairness in relation to the marking of this Order, this Order binds the Trustee of the Fund.

   (c)The Trustee of the Fund, the husband and the wife, in accordance with the obligations set out under the Family Law Act 1975 and the Family Law (Superannuation) Regulations 2001 shall do all acts and things and sign all such documents as may be necessary to calculate the entitlement of and make payment to the wife in accordance with this Order.

8. In the event that either party should fail, neglect or refuse to sign or execute any deed, document or instrument required to give effect to these Orders, pursuant to Section 106A of the Family Law Act, the Registrar of the Federal Circuit Court of Australia, Darwin Registry shall be authorised to sign and execute any such deed, document or instrument in the place and instead of such party and to thereafter do all things and acts as are necessary to give validity and operation to these Orders.

9. The husband’s application in a case filed on 12 January 2018 be dismissed with the husband to pay the wife’s costs in relation to that application, to be agreed or taxed.

10. The parties have liberty to apply.

11. All extant applications be dismissed.  

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

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT DARWIN

DNC 286 of 2015

MR MITCHAM

Applicant

And

MS MITCHAM

Respondent

REASONS FOR JUDGMENT

1. This is an application for alteration of property interests pursuant to section 79 of the Family Law Act (“the Act”).

2. The parties were married in 1995 and separated in July 2014.  The relationship lasted almost 19 years.  There are two children of the marriage aged 15 and 11 years.  The parties have resolved parenting issues and, while the children were spending the most time with their mother at the time of trial, there is agreement that the children are to transition to an equal time arrangement by the middle of 2018.

3. The parties began their relationship with minimal assets.  The husband owned a motor vehicle, some tools, some shares – the value of which he did not specify – and minimal savings.  The wife said she had savings of $20,000.  The husband did not challenge this claim. The wife said she applied her savings towards a deposit on a rundown house purchased by the parties for $40,000 in Property B, Victoria, at the beginning of the relationship.  It was not in issue that there were joint borrowings to fund improvements to the property.  The husband also claimed that he and his father undertook “extensive carpentry and building work” on the house, presumably as part of the improvements, but no specific evidence of the work was given. How the property was used throughout the relationship was not described in any detail.  It seems it has provided rental income for some years.  It may have secured borrowings for other investments.  This property was sold in November 2016 for $195,000. The net proceeds of sale of $15,710 were divided equally.

4. The parties also purchased investment properties during the marriage but these were sold before trial and the proceeds distributed between the parties by agreement, principally to liquidate debt.

5. A central issue at trial concerned an incorporated business, Business A Pty Ltd, of which the parties are the directors and equal shareholders.  The company operates a business pursuant to a franchise or distribution agreement from an interstate franchisor or distributor.  The business was purchased as a going concern in 2009 for $200,000.  It appears from the company balance sheet at 30 June 2016 (the latest in evidence), where $191,408 is ascribed to “goodwill at cost”, that the bulk of that purchase price was for goodwill.  The owners’ equity in the balance sheet is $39,270.  Whether or not the company actually has any value is thus dependent upon whether the value ascribed to goodwill is realistic.  The wife says it is not because she has been trying to sell the business without success for a considerable period.  She seeks an order that the company be wound up.  If so, there is likely to be a deficiency as liabilities exceed the value of the company’s current and fixed assets.  The husband says the business should be valued according to the figure on the balance sheet and ascribed to the wife’s side of the ledger.  There was no independent valuation evidence about the business.

6. The husband also complained that the wife had increased the company’s indebtedness after separation in a way that constituted a reckless dissipation of a joint asset.  It was not in question that the taxation debt of the company had increased from $9,277 at the time of separation in July 2014 to $110,490 in November 2017.  The wife responded that the increase in tax debt was the result of difficult trading circumstances and that, overall, the company liabilities had decreased by almost $120,000 over that same period.

7. The wife’s evidence that she had unsuccessfully sought to sell the business was not challenged.  The husband’s resistance to the wife’s proposal that the business be wound up and, instead, that it be given its book value and ascribed to the wife in the division of assets appears to me to be unrealistic and, perhaps, opportunistic.  He did not bring forward any evidence of a prospective buyer or any independent evidence that the business had any value.  In the 2017 tax year the taxable income was zero although the company expenses included a wage paid to the wife.  At the time of trial this was, according to her trial affidavit, $1,300 a week or $67,600 year.  

8. The parties largely agreed on the values of the assets and liabilities of the company.  Having regard to these I am satisfied that there is likely to be a significant deficiency of assets compared to liabilities on the winding up of the company.  There was no agreement in the parties’ trial balance sheets about whether the parties were owed money on a directors’ loan account.  The husband asserted that the company owed them $25,540. The amount shown on the balance sheet as at 30 June 2016 is $2,616.  At trial the wife said this was zero.  I will adopt that figure.  The husband said he did not know some liability figures and I accept those put forward by the wife in the balance sheet provided at trial.

9. The parties also agreed on the values for their personal assets and liabilities.

10. The pool and the values are largely agreed as follows.

The pool

Description	Husband	Wife	Joint	Total
Assets
1	Business A Pty Ltd
– Receivables and cash (including cash in Bank 2)	$70,204
Refrigerator in husband’s possession	$1,000
– other plant and equipment	$114,500
– ATO debt	($110,490)
– Overdraft and other business accounts	($102,458)
– Staff entitlements	($12,615)
– Amount owed to husband’s father	($7,643)
– Amount owed to wife’s mother	($5,406)
($52,908)
2	Property A – sale contract price	$640,000
3	Contents Property A	$2,650
4	Bank 5	$85
5	Bank 3	$2
6	Bank 6	$22
7	Bank 7	$351
8	Bank 7	$1,978
9	Investment	$18,517
10	Wife’s shares	$13,441
11	Generator in wife’s possession	$800
12	Quad bike in husband’s possession	$2,000
13	Boat in wife’s possession	$3,000
14	Vehicle 1 in husband’s possession	$11,000
15	Vehicle 2 in husband’s possession	$600
16	Generator in husband’s possession	$4,000
17	Boat in husband’s possession	$18,000
18	Camper in wife’s possession	$8,500
19	Air rifle, shot gun, gun safe and fishing gear in husband’s possession	$3,810
20	Partial property settlement pursuant to orders 28 July 2015	$7,855	$7,855
Total assets	$49,243	$36,621	$605,694	$691,558
Liabilities
21	Bank 7 mortgage Property A	$300,946
22	Rates	$3,197
23	Expected sales costs Property A	c. $20,000
Total liabilities	($324,143)	($324,143)
Net assets	$49,243	$36,621	$281,551	$367,415
Superannuation
24	Husband’s Super P	$112,354
25	Husband’s Super R	$18,167
26	Wife's Super S	$69,518
Total	$130,521	$69,518	$200,039

Contributions

1. The parties appear to agree that contributions were equal during the relationship with the parties performing largely conventional roles.  The husband was the primary income earner and the wife was primarily a homemaker and parent, although from 2009 the wife appears to have been significantly responsible for running the business.  The husband acknowledges that the wife worked very hard in the business.

2. However, after separation the husband alleges that the wife allowed losses to accumulate including an ATO debt that grew from $9,277 in July 2014 to $110,490 in November 2017.  He also points to other liabilities in his trial affidavit.  However, I am satisfied that the picture the husband draws is selective.  He ignores, for example, the reduction in indebtedness in respect of some vehicles and plant and equipment.  A fuller picture emerges from exhibit R1 which shows that company indebtedness decreased from about $362,000 in July 2014 to $242,000 in November 2017 or by about $120,000[1]. Whether or not there was a corresponding improvement in the net asset position is unknown because there was no evidence about the extent of depreciation of the assets which were the object of some of the borrowings.

   [1] The wife’s summary page at Ex R1 contains errors.  The amount in column “Nov – 17”, ignoring cents, should be $242,589. The total of $59,409 ignores the reduction in the “Business Loan”.

3. Although the company’s liability to the ATO significantly increased after separation, I am not satisfied that that should be characterised as waste or recklessness by the wife.  That allegation was not really pursued by the husband and there was no evidence to suggest that the wife’s assertion that poor trading conditions were responsible should not be accepted. 

4. Nevertheless, there are other aspects of the wife’s management of the company that merit notice.  Part of the reduction in indebtedness appears to relate to the reduction in the directors’ loan account from about $57,000 in 2014 to a figure approaching zero in November 2017.  The husband complained that in June 2016 the wife withdrew $40,156 from the business account for her own purposes.  The wife was cross-examined about this issue and it was suggested that the decrease in the company’s indebtedness to the directors reflected drawings by the wife.  The wife appeared to have little financial literacy and her understanding of accounting practices seemed slight. She denied taking any drawings and said she simply relied on an accountant to prepare company financial statements and she did not understand them. She suggested that the reduction in the company’s indebtedness to the directors may have reflected her use of company assets, such as a vehicle, for private use.  The evidence on this subject was far from satisfactory.  I am satisfied that some part of the reduction in the company’s indebtedness to the directors reflects benefits provided to the wife but I am unable to make any finding about the nature of the benefits. I am satisfied that the wife has received, to some degree, the exclusive benefit of a joint asset.   

5. The husband also asserted that the wife sold a company vehicle and retained $4,000 from the sale proceeds for her own use.  This was not challenged.

6. The husband also complained that after separation in 2014 and 2015 the wife increased the indebtedness on the home mortgage loan by redraws to the extent of about $15,000 and in 2016 withdrew about $6,000 from an account that was opened by the wife to receive rents from the Property B property prior to its sale in 2016.  In cross-examination the wife said that about $10,000 of the $15,000 withdrawn was used for purposes associated with the company.  That was not challenged.

7. The husband made other complaints about the wife’s conduct in financial matters following separation.  The wife remained in occupation of the former matrimonial home at Property A and continued to conduct the business from there.  The husband paid $261 being half of the fortnightly mortgage payments, for about a year after separation until October 2015.  It appears he ceased making any contribution to rates and insurance about the same time. 

8. The wife ceased making mortgage payments in October 2017 after, she says, the signing of a contract of sale on the property.  When it became known that this sale had fallen through, an order was made on 12 February 2018 that the wife was to be responsible for mortgage payments until the property was sold.  A new buyer was found in about February 2018, albeit at a somewhat lower price.  At the time of trial the arrears of mortgage were about $27,000.  It was submitted by the husband that this largely reflects the wife’s failure to pay the entirety of the mortgage during her period of sole occupation rather than the half mortgage payments actually paid by her.  It was submitted by the husband that this should be seen as a “negative contribution” by her during the period after separation. It is true that payment of the mortgage during a period of sole occupation of a joint matrimonial asset by the occupant is usually seen as just.  While I generally accept this submission, I note that the property was also occupied by the business owned by the parties and it was necessary for the continued trading of that business. 

9. The wife claimed to have spent $16,498 in preparing the property for sale.  She said that she had paid $21,374 for “all rates, insurance, repairs and maintenance” on the property since October 2014.  This was not entirely true as there were there were arrears of rates at the time of trial.  In my view, this expenditure, which relates to tax and maintenance costs for a joint asset, should properly have been shared.  To the extent that the husband has not contributed to the wife’s expenditure this offsets to a significant degree the matters complained of by the husband in the wife’s management of the company. 

10. I am satisfied that the wife made a greater initial contribution by the application of her savings to the acquisition of the Property B property.  If this is taken into account along with the wife’s expenditure on the Property A property, the disparity is about $16,000 in dollar terms. Given that the process the court engages in in assessing contributions is not an accounting exercise, is approached with a broad brush and financial contributions are given no more weight than non-financial contributions, I find that the contributions are 51% by the husband and 49% by the wife. 

Section 75 (2) factors

1. Both parties are aged 46 years and are apparently in good health. The children, aged 15 and 11 years, are in or moving towards an equal time arrangement.

2. The husband is employed as a (occupation omitted) with a (employer omitted).  He earns $2,596 a week or almost $135,000 a year.  His employer provides him with a house, a motor vehicle and a mobile phone for personal use.  He says he pays tax of $776 a week, giving an after-tax income of $1,820 a week.  He pays child support of $318 a week, although whether this reflects the agreed move to equal time was unclear on the evidence.  

3. According to the husband’s financial statement, his partner earns $954 a week although it is not stated whether this is before or after tax. 

4. Neither party wants to retain the business.  In these circumstances I am satisfied that it is just and equitable that an order be made that the parties take all necessary steps to wind up the company.  The wife will therefore lose her current employment. The wife has an (qualifications omitted) but says she is no longer accredited.  It appears that it has been many years since the wife worked in that industry.  She has also worked part-time as an (occupation omitted) although that also appears to have been many years ago.  It also appears that she was employed, again many years ago, for a period of time operating Business B that the parties purchased.  I accept that the wife’s employment prospects are limited.  The wife gave evidence that her earnings for the tax years between 2013 and 2017 were $22,526, $43,000, $23,317, $21,993 and $53,396.  She asserted that she is unlikely to earn much more than $50,000 a year once the business is wound up.  I accept that estimate.  If the wife earns $50,000 a year or $961 a week she would pay in the order of $150 a week in tax, giving a net income of $811 a week.  If she continued to receive child support at $318 a week (and that may be reduced once the children move to equal time) her effective income will be about $1,129 a week compared to the husband’s effective income of about $1,500 a week plus generous fringe benefits provided by his employer.

1. In my view, these matters merit an adjustment in the wife’s favour leading to an overall division of assets of 59% to the wife and 41% to the husband.

2. In relation to superannuation the wife seeks a splitting order in her favour of the sum of $55,506 which equates to a 62.5%/37.5% split of the superannuation pool in the wife’s favour. I consider that the same section 75(2) factors, particularly the husband’s greater earning capacity, merit a 59%/41% split of superannuation in the wife’s favour. On the present figures that requires a split of $48,505 from the husband’s Super Q superannuation in favour of the wife.

3. The husband also sought an order that the camper in the wife’s possession be transferred to him.  The husband’s evidence, in substance, appeared to be that it required some physical handling and the wife was not strong enough to do it so she would be unlikely to use the camper in future.  Even if that were true, the evidence was not compelling in either direction so I do not propose to make any order disturbing the current possession of that or any other chattel. The portable refrigerator in the husband’s possession is company property and should be paid for or returned to the company.

4. I propose to make orders for the winding up of the business and the distribution of the proceeds of the sale of the former matrimonial home so that the proceeds after payment of debts are distributed in order that the overall distribution is 59% to the wife and 41% to the husband. 

5. On the basis of the assumed values in the balances sheet the distribution would be as follows:

Description	Husband	Wife	Joint	Total
Assets
1	Business A	Wound up
2	Property A	sold
3	Contents Property A	$2,650
4	Bank 5	nil
5	Bank 3	$2
6	Bank 6	$22
7	Bank 7	$351
8	Bank 7	$1,978
9	Investment	Sold/divided
10	Wife’s shares	$13,441
11	Generator in wife’s possession	$800
12	Quad bike in husband’s possession	$2,000
13	Boat in wife’s possession	$3,000
14	ATV in husband’s possession	$11,000
15	ATV in husband’s possession	$600
16	Generator set in husband’s possession	$4,000
17	Boat in husband’s possession	$18,000
18	Camper in wife’s possession	$8,500
19	Air rifle, shot gun, gun safe and fishing gear in husband’s possession	$3,810
20	Partial property settlement pursuant to orders 28 July 2015	$7,855	$7,855
Cash	$281,551
Total assets	$49,243	$36,621	$281,551	$367,415
Liabilities
21	Bank 7 Property A	Paid
22	Rates	Paid
23	Expected sales costs Property A
Total liabilities	nil
Net assets	$49,243	$36,621	$281,551	$367,415
Distribution of $281,551	$101,397	$180,154
Result	$150,640 (41%)	$216,775 (59%)	$367,415
Superannuation
24	Husband’s Super P	$112,354
25	Husband’s Super R	$18,167
26	Wife's Super S	$69,518
Split to wife from Super Q	($48,505)	$48,505
Total	$82,061 (41%)	$118,023 (59%)	$200,039

1. In relation to the Investment the parties may sell that or divide it in conformity with the final orders. 

2. After I reserved judgment in this matter, the contract of sale that had been in place at the time of trial fell through.  It transpired that the purchaser was a company associated with the company that entered into the franchise or distribution agreement with Business A Pty Ltd. The husband said that at the time he signed the contract he did not recognise the nondescript corporate name of the purchaser.  After the sale fell through the parties were able to sell to one of the earlier bidders, albeit at a price reduced from $660,000 to $640,000.  The husband subsequently made an application in a case seeking, among other things, discovery from the wife in relation to the sale and a subpoena to the original purchaser.  It was alleged by the husband that the wife may have been conniving with the prospective purchaser to give the impression at trial that she was no longer able to operate the business when, in reality, she intended to continue to operate the business.

3. I made orders for discovery, for the issue of a subpoena and for the filing of further affidavit material by the wife.  Those orders were complied with.  The wife denied any knowledge prior to the signing of the contract that the purchaser was the national franchisor or distributor of the Business A.  On examination of the subpoenaed material there was no evidence to contradict the wife’s evidence.  It was apparent that the prospective purchaser was interested in continuing to operate the business, although whether with or without the wife was unclear.  The correspondence between the purchaser and the conveyancer indicated that once the purchaser learned that the planning requirements applying to the land would not permit it, as a non-resident owner, to operate the business it rescinded the contract.  The contract was not in evidence but I infer that was permitted by the contract. In summary, there was no evidence that the wife connived with the purchaser or sought to mislead the court.  On the contrary, the transaction appeared to be an arms-length transaction and the prospective or conditional purchaser rescinded once it learned it could not operate the business from the land.  I dismissed the application and reserved the question of costs.

4. The husband’s application was made on the basis of suspicion only. It was a fishing expedition in the sense that the husband had no evidence to support the allegation of connivance between the wife and the purchaser and the application sought to obtain evidence. In my view, this is a relevant matter that merits a departure from the ordinary rule as to costs contained in section 117(1) of the Act. There will be an order that the husband pay the wife’s costs of that application to be agreed or taxed.

I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of Judge Young

Date: 21 June 2018