NETTLER & NETTLER
[2009] FamCAFC 185
•13 October 2009
FAMILY COURT OF AUSTRALIA
| NETTLER & NETTLER | [2009] FamCAFC 185 |
| FAMILY LAW – APPEAL – PROPERTY – Whether the trial Judge erred in his valuation of a business – Application of “highest and best use” principle – Where the trial Judge adopted one valuer’s methodology over another despite demonstrated errors made by that valuer – Adequate reasons provided by the trial Judge for preferring the valuer’s evidence FAMILY LAW – APPEAL – STATUTORY PROVISIONS – Family Law Act 1975 (Cth) s 75(2) – Whether trial Judge properly considered the consequences of a possible sale of a substantial business asset on the wife’s earning capacity FAMILY LAW – APPEAL – CONTRIBUTIONS – Whether the trial Judge adequately took into account the wife’s initial contribution – Whether the trial Judge erred in finding equal contributions to the business in circumstances where the wife made the greater direct contribution – trial Judge considered husband’s indirect contribution and greater income received by the wife for her post-separation contributions FAMILY LAW – APPEAL DISMISSED – Costs submissions ordered |
| Family Law Act 1975 (Cth) |
| Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1980) 146 CLR 336 House v The King (1936) 55 CLR 499 Mehmet and Mehmet (No 2) (1987) FLC 91-801 Robb and Robb (1995) FLC 92-555 Spencer v Commonwealth (1907) 5 CLR 418 |
| APPELLANT: | Ms Nettler |
| RESPONDENT: | Mr Nettler |
| FILE NUMBER: | PAF | 1206 | of | 2005 |
| APPEAL NUMBER: | EA | 151 | of | 2007 |
| DATE DELIVERED: | 13 October 2009 |
| PLACE DELIVERED: | Perth |
| PLACE HEARD: | Sydney |
| JUDGMENT OF: | Faulks DCJ, Thackray & Ryan JJ |
| HEARING DATE: | 4 February 2009 |
| LOWER COURT JURISDICTION: | Family Court of Australia |
| LOWER COURT JUDGMENT DATE: | 23 November 2007 |
| LOWER COURT MNC: | [2007] FamCA |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Gould |
| SOLICITOR FOR THE APPELLANT: | Aitken Lawyers |
| COUNSEL FOR THE RESPONDENT: | Ms Judge |
| SOLICITOR FOR THE RESPONDENT: | Goldrick Farrell Mullan Solicitors |
Orders
That the appeal be dismissed.
That the respondent be at liberty to make an application by way of written submissions in respect of costs incurred by him in relation to the appeal by filing such submissions at the Eastern Region Appeal Registry of the Family Court of Australia and serving them on the appellant within 21 days of the date hereof.
That the appellant have a further 14 days in which to make written submissions in answer thereto by filing such submissions at the Eastern Region Appeal Registry of the Family Court of Australia and serving them on the respondent.
That the respondent be at liberty to reply to an answer by way of written submissions by filing such reply at the Eastern Region Appeal Registry of the Family Court of Australia and serving it on the other party within a further 7 days.
That each party endorse on the cover sheet the date on which a copy of that submission was served on the other party.
IT IS NOTED that publication of this judgment under the pseudonym Nettler & Nettler is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT SYDNEY |
Appeal Number: EA 151 of 2007
File Number: PAF 1206 of 2005
| Ms Nettler |
Appellant
And
| Mr Nettler |
Respondent
REASONS FOR JUDGMENT
The wife has appealed against property settlement orders made by Coleman J in November 2007.
The husband and wife had agreed that the wife should receive most of their assets, including a mortgage broking business. There was a significant dispute about the amount the wife should pay the husband. He sought $700,000, whereas the wife proposed a settlement of $31,600.
The trial Judge ordered the wife to pay $166,000. However, his Honour also ordered that the husband receive some of the assets which the parties had agreed the wife would receive. The net value of these assets (after allowing for contingent capital gains tax) was $209,634.
Background
The husband was 47 years of age and the wife 44 years of age at the time of judgment.
The husband and wife commenced cohabitation in April 1992 and were married in September that year. At the time, the wife had assets worth about $80,000 and the husband had assets worth about $12,000.
The husband and wife purchased the matrimonial home in the year they were married at a cost of $168,000. The wife contributed about 45% of the cost from the funds she had at the commencement of cohabitation. The parties borrowed between $80,000 and $100,000 to complete the purchase. The home was worth $530,000 at the time of trial.
The parties established the mortgage broking business in August 1998. The wife has always worked in the business but the husband did not commence salaried employment in the business until January 2000.
The parties separated some time between September 2004 and March 2005. The husband left the former matrimonial home in April 2005. The wife dismissed the husband from his employment in the business in July 2005.
There are two children of the marriage, aged 9 and 14 years at the time of judgment. The youngest child lives with the wife in the former matrimonial home. The other child moved to live with the husband in early 2007.
The wife has two children from a previous relationship. They were aged 20 and 21 years at the time of judgment. They lived with the husband and wife during the marriage.
The wife had another child after the relationship with the husband ended. This boy was just one year old at the time of trial and has significant health problems. The wife receives appropriate child support from the boy’s father.
The business
The mortgage broking business is conducted by a corporation. The corporation will be referred to in these reasons as “the business”. The wife is the sole director and company secretary. The husband and wife hold all of what his Honour described as “the equity shares”.
The most valuable asset of the business is its loan book. The loan book is, in effect, a catalogue of the mortgages already settled by the business. The business continues to receive “trailing commissions” in relation to each of these mortgages until they are discharged.
The business leases its premises from a Unit Trust. The business itself is the trustee of the Trust, but pays commercial rent for the premises. The units in the Trust are held by the two (infant) children of the marriage and the two children of the wife’s previous relationship. The real estate owned by the Trust was agreed to be worth $400,000 with external borrowings of $145,000. His Honour found that the Trust owed the parties an amount of $23,664 and owed the business $97,341. The monies the Trust owed the business formed part of its net tangible assets which had an agreed value of $313,000 (excluding the loan book).
The trial Judge’s reasons
We will refer in detail to relevant portions of the trial Judge’s reasons when addressing each of the grounds of appeal.
It is sufficient at this point to note that his Honour determined that it was not appropriate to adopt a global approach to the assessment of contributions. He considered contributions to the business should be assessed independently of contributions to the other assets.
His Honour found that the contributions to the non-business assets had been made in proportions 60:40 in favour of the wife, whereas contributions to the business had been made equally. Overall, this resulted in an assessment of contributions 53.6% by the wife and 46.4% by the husband.
His Honour also found there should be an adjustment of 1% in favour of the wife on account of the s 75(2) factors.
In coming to his decision the trial Judge determined that the parties had no greater entitlement in the Unit Trust than the monies owed by the Trust to them personally and to the business. He also excluded from the asset pool an account held by the wife as trustee for the child born after the end of the relationship. There was between $4,000 and $7,000 held in that account.
Ground 1 - asserted errors in valuation of the business
There were nine grounds of appeal asserting errors in the trial Judge’s valuation of the business.
The wife’s expert had valued the business on the basis of its future maintainable earnings. For this purpose, the loan book was not valued separately as the significant income derived from the book was included in the anticipated future earnings of the business. On the other hand, the husband’s expert valued the business on the basis of the amount that would be received upon disposal of its assets, including its loan book.
The trial Judge correctly concluded that there was no dispute between the experts that the loan book could be sold for somewhere in the region of $335,000 to $345,000. He also found there was no dispute that the business had other tangible assets with a value of $313,000. His Honour recorded that this figure took into account the amount owed to the business by the Unit Trust.
Coleman J generally accepted the valuation matrix adopted by the husband’s expert, notwithstanding that the valuer had conceded he had made a number of errors, which necessitated a sizeable adjustment to his original valuation. His Honour concluded that the value of the business was the sum of the value of the loan book and the other tangible assets. He acknowledged this figure was greater than the valuation arrived at by calculation of the future maintainable earnings.
Rounded out, his Honour found the total assets were worth $1.99 million subject to total liabilities of $1.13 million. Of these the non-business assets were worth $1.33 million, with non-business liabilities of $1.02 million. The value of the business, as determined by his Honour, resulted in it being the parties’ most valuable asset.
We turn now to consider the various grounds relating to the valuation of the business. It will be convenient to discuss some together.
Grounds 1(a) and 1(c)
Ground 1(a) asserts that is was “unrealistic” for his Honour to find that the loan book was valued in the vicinity of $340,000 in circumstances where the wife did not propose to sell the book and was reliant upon “the inclusion of the Loan Book in the business to derive income for herself and the children”.
Ground 1(c) is based on a similar foundation. In effect, it asserts that the trial Judge erred in preferring the methodology of the husband’s valuer rather than accepting the future maintainable earnings approach. The error was said to arise because it was the wife’s intention to continue running the business. As a subsidiary complaint it was asserted that the trial Judge gave inappropriate weight to the “concept of the value of the Loan Book as a ‘stand‑alone’ asset given the wife’s evidence of intention to continue to run the business”.
There is no substance in these grounds. As his Honour said, the guiding principle for determining land value is found in Spencer v Commonwealth (1907) 5 CLR 418. Summarised this involves determination of the fair price which a hypothetical prudent purchaser would pay a not over anxious vendor who “desired to purchase it for the most advantageous purpose for which it was adapted”. His Honour correctly stated that the Spencer test has been applied to a wide range of assets other than land. The appropriate method of valuation of a business therefore cannot depend upon the subjective intentions of one of the parties to the proceedings. A party may wish (or say they wish) to retain and operate a business that has substantial tangible assets, but little or no income. It cannot be right in principle that a party wishing to hold onto a business can then insist on the business being valued on its future maintainable earnings in circumstances where the business, or its underlying assets, could be sold immediately for a substantially greater sum. To conclude otherwise would be inconsistent with Spencer.
In circumstances where it was common ground that there existed a market into which the loan book could be sold and that it was worth in the region of $335,000 to $345,000, we consider his Honour was entitled to proceed on the basis he did.
Grounds 1(b), (f) and (g)
These grounds relate to the competence of the two valuers.
· Ground 1(b) asserts that the husband’s valuer had been “demonstrated to be incompetent” in that he acknowledged he had made three errors which had resulted in him having to reduce his estimate of the value of the business by approximately $307,000 (or 30%).
· Ground 1(f) asserts that the trial Judge erred in accepting the evidence of the husband’s valuer in circumstances where the wife’s valuer was found not to have made any errors of fact or methodology.
· Ground 1(g) asserts that the trial Judge gave inadequate reasons for preferring the valuation of the husband’s valuer, given that the methodology employed by the wife’s valuer was not rejected.
His Honour was well aware that the husband’s valuer had made the errors referred to in Ground 1(b) and that these had resulted in him adjusting his valuation significantly. He discussed the errors and acknowledged that the wife’s valuer had not been shown to have made any errors. However, his Honour noted that the husband’s valuer had readily acknowledged the errors and had not attempted to rationalise them or shift responsibility to anyone else. His Honour considered the valuer should be commended for this. He rejected the proposition that the errors were indicative of incompetence. In doing so, his Honour said it should be recognised:
that the exercise which each of the amply qualified experts undertook in this case was not without complexity and one which permitted quite different but reasonably held opinions on the part of each of the experts. Valuation remains an inexact science.
His Honour nevertheless said that in the absence of demonstrated error by the wife’s valuer, the weight to be given to the opinion of the husband’s valuer “must be seen as potentially reduced by reason of the magnitude of the errors” he had made. However, his Honour also observed that portion of the evidence given by the wife’s valuer provided support for the opinion of the husband’s valuer, which would otherwise have been absent (i.e. the existence of a market for the sale of loan books).
It will be apparent from the portions of the judgment to which we have referred that his Honour accepted that the errors made by the husband’s valuer cast doubt on his opinion. Nevertheless, his Honour rejected the proposition that the errors were an indicator of incompetence. In our view, that course was open to him. There is accordingly no substance in Ground 1(b).
There is also no substance in Ground 1(f). The fact that a valuer is found not to have made any errors of fact or methodology does not mean their opinion must be accepted. In Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1980) 146 CLR 336 Mason J (as he then was) said at 381:
As with the assessment of damages, especially in personal injury cases, the valuation of property by a court has many of the characteristics of a discretionary judgment. Valuation is a matter of estimation, not of precise mathematical calculation. It certainly involves the making of a value judgment in the metaphorical as well as the literal sense.
These observations are apt to the issues under discussion. Commonly, there are a number of methodologies that can be employed in seeking to ascertain the value of an asset. Ultimately a choice needs to be made by the Court as to the methodology to be preferred and the opinion to be accepted. The valuation methodology employed by the wife’s valuer focussed on future maintainable earnings. His Honour considered that an alternative methodology was preferable. He was entitled to do so.
There is also no merit in Ground 1(g). The trial Judge went to considerable lengths to explain why he preferred the opinion of the husband’s valuer. We consider his reasons were more than adequate.
Grounds 1(d), 1(e) and 1(h)
These grounds relate to the wife’s intention to retain the business and the likely impact on her income of a sale of the business assets.
· Ground 1(d) asserts that the trial Judge gave inappropriate weight to the “theoretical value” for which the loan book could be sold. In support of this ground, counsel for the wife drew attention to the evidence of both valuers which pointed to the wife being required to enter into a restraint of trade covenant in the event she sold the loan book. It was therefore submitted that there was an “air of unreality” in finding a “theoretical value” for the book.
· Ground 1(e) asserts that the trial Judge gave inadequate weight to the consequences of a sale of the loan book, namely that the wife’s income would be “virtually extinguished” in light of the evidence relating to the likely restraint of trade covenant.
· Ground 1(h) asserts that his Honour erred in finding (in paragraph 44) that the wife’s future earning capacity “may” be impeded as a consequence of the restraint of trade covenant in the event of a sale of the loan book. The ground asserts that the evidence was that such a covenant would “almost certainly be required”.
It was submitted in response to these grounds that the trial Judge had been “cautious” in the findings he had made in relation to the loan book and had canvassed at some length the possible detriment to the wife in the event the book was sold. It was also submitted his Honour had not given inappropriate weight to the “theoretical value” of the book. Finally, it was submitted that in paragraph 44 his Honour was merely summarising the evidence of the husband’s valuer, rather than making a finding.
In dealing with these three grounds, it is instructive to set out what his Honour said at paragraphs 42 to 49 and paragraph 62 of his reasons. We have emphasised some portions which we consider to be of particular importance. It should be noted that Mr Gwynne was the wife’s valuer and Mr Smith was the husband’s valuer.
42.Closely analysed, the valuation dispute can be seen as more one of emphasis or focus than of essential disagreement. It does not seem to be disputed that the loan book could be sold. Albeit the conclusions are arrived at by quite different means, there is substantial agreement as to the theoretical value for which the loan book could be sold ($335 000 – 345 000).
43.It seems to be common ground, but is accepted if it is not, that sale of the loan book would have revenue implications for [the business]. Mr Gwynne in his original report … quantified those likely implications. Mr Gwynne was of the opinion that “should the loan book value be unlocked by sale” there would likely be “an immediate impact on the level of remuneration derived by [the wife]”. Mr Gwynne suggested the further implications of [the business] being liquidated. The evidence does not establish that the sale of the loan book would necessitate the liquidation of [the business], although [the business] could clearly have to “start from scratch” if the loan book were to be sold.
44.Although Mr Smith, correctly, suggested that the loan book could be sold, and the price for which that might be ultimately does not seem to be seriously disputed, Mr Smith also identified adverse implications for [the business] and/or the wife in the event of the loan book being sold. At least two particular factors were identified by Mr Smith in that regard, the first being that the wife’s future income earning capacity may be impeded as a consequence of restraint of trade covenants being required of her as a condition of any sale of the loan book, the second being that, without the loan book, the wife would have to, in effect, start business again as a mortgage broker in the absence of an existing portfolio of clients which the wife identified to Mr Smith as “one of the most important factors in the conduct of the business”. In support of his contention, Mr Smith pointed to the fact that [the business] commenced business without a loan book, albeit the evidence of the parties’ income from [the business] suggests that the level of that income at that time was far less then that of recent times.
45.From the evidence of the experts a number of matters appear, although not necessarily conceded to be so, to emerge as common ground. They are:
a)that [the business] could sell its loan book for something in the order of $335 000 - $345 000;
b)that such a sale would have taxation implications for [the business];
c)that, consequent upon any sale of the loan book, although [the business] would have the net proceeds of sale available to it to generate investment income, [the business’] income from mortgage broking would be significantly curtailed, initially by the loss of commissions flowing from its ownership of the loan book. [The business] would also have to “start again” as a mortgage broker without an existing portfolio of clients, and in the probable face of restraints on the ability of [the business] and/or the wife to compete with the purchaser of the loan book for a defined period within a defined but unspecified geographical location (the extent of neither of which was suggested in evidence).
46.Whilst an oversimplification, conceptually, the difference is essentially between [the business] being “cashed-up” (as a consequence of the sale of the loan book) with reduced revenue, or retaining the loan book and being substantially less “cashed-up”, but with its earnings base maintained.
47.It is relevant for a variety of purposes to refer to the evidence of the experts in relation to the level of remuneration which [the business] provides to the wife. The experts disagreed in that regard. Mr Smith suggested that a level of remuneration of approximately $175 000 per annum can be seen as available to the wife. Mr Gwynne suggested the lesser but still substantial figure of $135 000 per annum. The difference between the two experts appears largely referable to different understandings of whether or not there is another employee of [the business], or should be, on a salary of approximately $45 000 per annum.
48.In addition to the salary which the wife can derive from [the business], and appears to derive from the corporation having regard to her most recent Financial Statement of 5 November 2007, Mr Smith said in oral evidence that the provision of a car (worth about $10 000 per annum), phone (worth about $1000 per annum) and superannuation contributions (worth about $12 000 - $15 000 per annum) were further emoluments which the wife receives from her employment by [the business].
49.The evidence does not permit the Court to find what, on balance, the wife’s income would be likely to be were the loan book to be sold, although it is a clear inference from the evidence of both experts that there would be a substantial reduction in the income which the wife would thus receive. Mr Gwynne considered that “there is likely to be an immediate impact on the level of remuneration derived by [the wife]” (Joint Statement of Expert Witnesses of 7 November 2007, par 13). Mr Smith said that sale of the loan book “may adversely affect [the wife’s] future income earning capacity because it is possible that the sale agreement may place restrictions on her future conduct of a mortgage broking business” (Joint Statement of Expert Witnesses of 7 November 2007, par 17(a)). By how much the wife’s earnings would thus be likely to be reduced is not clear. The issue is complicated by the reality that, even after payment of tax, investment of the proceeds of sale of the loan book would offset to some extent the loss of income of the wife resulting from its realisation.
…
62.Given that the value of the loan book could only be “unlocked” by a sale, it is necessary to consider whether the revenue implications of such sale as quantified by Mr Gwynne, require consideration. Although there may be no actual sale, it is to the Court’s mind illogical to have regard to a figure which can only be realised by a sale without having regard to what are not disputed to be the revenue implications of such a sale (see Brett-Hall & Brett-Hall (2006) FLC 93-276). This is particularly so as, having preferred the higher valuation contended for [the business], the Court should have regard to the realities which flow from so doing, which have been identified earlier. Conversely, if the Court’s orders do not render a sale of [the business’] loan book probable, the justification for taking revenue implications of a sale into account dissolves. This is an issue which assumes significance pursuant to s 75(2)(o) or, potentially, s 79(2) of the Act…
Turning first to Ground 1(d), it is true that in paragraph 42 his Honour referred to the “theoretical value” for which the loan book could be sold. However, as his Honour found at paragraph 45, it was common ground that the loan book could be sold for something in the order of $335,000 to $345,000. The value was therefore not “theoretical”. We presume that in referring to the value of the loan book as being “theoretical”, his Honour simply had in mind that the wife wanted to keep the business and the loan book and hence there was no certainty the book would be sold. There is therefore no merit in Ground 1(d).
We also consider there is no merit in Ground 1(e). Having found that the business should be valued on the basis of the amount that could be received on disposal of its assets, his Honour then said it was appropriate to have regard to the “revenue implications” of such a sale. These included the impact on the wife’s earning capacity of a sale of the loan book. The passages we have emphasised in citing his Honour’s reasons indicate that he was fully aware of the negative revenue impact arising from the sale of the loan book. He was also clearly cognisant of the fact that a restraint of trade covenant might be required.
Although we were not taken to the relevant passages, we should also note that his Honour on two different occasions during the trial expressed the firm view that he regarded it as a “matter of common sense” that a restraint of trade covenant would be required. [AB 3:735 at line 15 and AB 3:740 at line 49]
Whilst his Honour was well aware that the wife might be required to enter into a “restraint of trade” covenant, we do not consider this could have any impact on the valuation of the loan book. It is, of course, a very significant issue in determining how the wife might have to earn an income in the future. This issue, however, will be more appropriately addressed when we come to the complaint concerning his Honour’s treatment of the s 75(2) factors.
We turn next to Ground 1(h). We accept the submission that in paragraph 44 his Honour was doing no more than summarising the evidence of the husband’s valuer. His Honour went on, in paragraph 45, to accept that if the loan book was sold the business would have to “start again” without existing clients “and in the probable face of restraints on the ability of [the business] and/or the wife to compete with the purchaser of the loan book for a defined period within a defined but unspecified geographical location”.
His Honour could not find as a certainty that a restraint of trade covenant would be required – this is implicitly acknowledged even in the ground of appeal which asserts that the evidence was that such a covenant “would almost certainly be required” (emphasis added).
Before moving from the present grounds, we should record that we were not directed to any evidence which would support the proposition that the wife’s income would be “virtually extinguished” if the loan book was sold. As will be seen from the citation above, his Honour found that the evidence did not permit him to determine the level of the wife’s income in the event that the loan book was sold, although he accepted it could be clearly inferred from the evidence that there would be a substantial reduction. There was no challenge to these findings.
Ground 1(i)
This ground asserts that his Honour erred in finding that the principle of “highest and best use” was relevant to the valuation of the business.
No argument was advanced in support of this ground. In any event, his Honour did not apply the principle of “highest and best use”. Rather, he said that principle was consistent with the approach he adopted of accepting the higher valuation of the business. All his Honour was saying was that, when faced with evidence indicating the net assets of the business were worth more than the figure suggested by the future maintainable earnings methodology, it was appropriate to adopt the higher net asset based figure. This is the same approach as would be adopted when land has two or more possible uses – the valuation would ordinarily proceed on the basis of the highest and best use. We consider this analogy was apt.
Having determined the valuation issues, in his discussion of s 75(2) considerations the trial Judge did refer to the business in terms of its “highest and best use”. His Honour was not there purporting to revisit his earlier valuation findings and we interpret his later references to “highest and best use” as merely a shorthand reference to his earlier discussion.
Ground 2 – misunderstanding the relief sought
This ground asserts that the trial Judge erred in “misunderstanding” the relief sought by the wife.
The ground relates to a statement made in paragraph 2 of his Honour’s reasons in which he was drawing attention to the “widely divergent” claims he was asked to consider. In doing so, he noted that the husband had sought a payment of $700,000 from the wife, whereas in her Amended Response the wife had proposed a payment of $31,600.
The asserted “misunderstanding” was that his Honour did not mention a handwritten “aide memoire” provided by counsel for the wife during the hearing, which made reference to a proposed distribution of assets by which the wife would pay the husband $173,430 – i.e. considerably more than had been set out in her Amended Response.
Our attention was not drawn to any request by the wife to amend the relief sought in her Amended Response. Indeed, in his closing address at trial, counsel for the wife noted that even the figure of $173,340 was subject to “recalculation” because certain assets included in the aide memoire were to be taken out. [AB 3:767] His Honour therefore correctly stated the relief formally sought by the wife.
Furthermore, we accept the submission made on behalf of the husband that the parties’ entitlements and the structure of his Honour’s orders were not in any way influenced by any “misunderstanding” of what the wife had proposed.
Ground 3 – contributions generally
The wife asserts that the trial Judge erred in finding that her contributions should be assessed at 53.6% in circumstances where her initial capital contribution was in the region of $80,000 whilst the husband’s initial capital contribution was only about $12,000.
We have recorded that the trial Judge determined that it would not be appropriate to adopt a global approach to the assessment of contributions. He found that contributions to non‑business assets had been made in proportions 60:40 in favour of the wife, but that contributions to the business had been made equally. As a consequence, his Honour’s overall assessment was that the wife had contributed to the extent of 53.6%.
It was submitted on behalf of the wife that the wife’s superior initial financial contribution was not matched by any equivalent contribution by the husband during the course of the relationship or after separation. Both parties were engaged in employment throughout the relationship, save for leave taken by the wife around the time of the birth of the children. It was submitted that the appropriate overall contribution finding would have been 60:40 in favour of the wife up to the time of separation.
It was submitted in response that his Honour had clearly taken into account the discrepancy in initial contributions. It was further submitted that authorities such as Pierce v Pierce (1999) FLC 92‑844 and Spiteri and Spiteri (2005) FLC 93‑214 establish that the exercise to be undertaken does not involve an assessment of whether an initial contribution is “matched” by an equivalent later contribution, but rather that the overall contributions, including initial contributions, should be weighed up in the circumstances of each case.
The submissions made on behalf of the husband drew attention to the fact that in assessing contributions his Honour took into account not only the disparity in initial contributions but also the husband’s contribution to the welfare of the two children of the wife’s previous relationship. Given his Honour’s finding that the other contributions were of equal value, it was submitted that his Honour’s overall assessment was a reasonable and appropriate exercise of discretion. It was noted that his Honour had given detailed reasons for determining that the post‑separation contributions did not overall favour either party.
We do not find any merit in this ground. There is no challenge to any of his Honour’s findings of fact in relation to contributions. In dealing with the non-business assets, his Honour found that:
86.... the evidence reveals that both parties applied themselves diligently during their years together. The picture which emerges is of two people giving of their best in all relevant financial and non-financial respects. It is not productive, and not possible in any event, to meaningfully descend into the detail of the relativities of who did what at any particular time.
87.As the agreed schedule of their earnings reveals, the parties contributed approximately equal amounts from employment during their cohabitation. It is clear beyond doubt that both parties made relevant non-financial contributions, including contributions as homemaker and parent.
His Honour found that were it not for two matters, he would have been “comfortably satisfied” that the parties had contributed equally to the non-business assets. His Honour then turned to discuss those two matters which he considered could potentially impact upon his view that the contributions were equal.
His Honour first considered the disparity in the initial capital contributions. He found that the use the wife had made of her initial contribution was more significant than its magnitude relative to the husband’s initial contribution. He noted that the wife’s funds constituted “a very substantial proportion” of the cost of the former matrimonial home (he quantified this at approximately 45% of the purchase price). He also said he could safely infer that the parties’ financial position had been “materially assisted” by that contribution and that the contribution could be seen as ongoing in nature.
The second matter, which his Honour found counteracted the wife’s initial contribution to some extent, was the contribution the husband had made to the welfare of the wife’s children from her previous relationship. He observed that these children had been under the roof of the parties for 10 and 12 years respectively prior to attaining the age of 18 years. His Honour acknowledged that appropriate child support had been paid for them and that there was no clear evidence as to the financial burden on the husband of the children being members of his household.
His Honour then expressed his assessment of these “counteracting” contributions in this way:
91.To regard the wife as having contributed 60 per cent and the husband 40 per cent to the acquisition, conservation and improvement of the non-[business] assets would in the circumstances be reasonable. The disparity of entitlements resulting from such decision, approximating $60 000, broadly accommodates the net effect of the two countervailing aspects of contributions to which reference has been made.
The monetary effect of his Honour’s contribution based assessment was that the wife was entitled to $185,503 from the non‑business assets and the husband was entitled to $123,668. In our view it was open to his Honour to conclude that this represented an appropriate balancing of the wife’s significantly greater initial contribution against the significant contribution the husband made for the benefit of the wife’s children. It is the nature of the exercise of discretion that another judicial officer might reasonably have considered the wife’s initial contribution was of greater significance than his Honour considered it was. That, however, is not the test: House v The King (1936) 55 CLR 499.
There is therefore no merit in this ground.
Before leaving this topic, we should note that the authorities suggest that contributions to the welfare of children who are the children of only one of the parties to the marriage should not be considered in the context of assessment of contributions under s 79(4) but rather as a factor under s 75(2): Robb and Robb (1995) FLC 92-555; Mehmet and Mehmet (No 2) (1987) FLC 91-801. Counsel for the husband made persuasive submissions about some of the practical difficulties involved in complying with this requirement. More importantly, it was not asserted by the wife that his Honour erred in adopting the approach he did and in this regard it is noteworthy that before his Honour both counsel pursued the approach ultimately adopted by his Honour. Even if his Honour’s approach to this matter is arguably inconsistent with authority it was not established that the overall outcome would have been any different if he had dealt with this matter under s 75(2)(o).
Ground 4 – contributions to the business
The wife asserts by this ground that the trial Judge erred in finding that the parties made equal contributions to the business:
in circumstances where the wife was the principle [sic] and developer of that business during cohabitation, and made significant post‑separation contributions to that business at a time when the husband made none.
In support of this ground, counsel for the wife referred to the fact that the wife had been the sole director and secretary of the company; had commenced the business two years before the husband started working in it; and had continued to operate the business after the separation. It was also noted the husband had been remunerated for his efforts in the business. In these circumstances it was submitted that the finding of equality of contributions to the business was not open.
In response it was submitted that his Honour had considered the contributions to the business in detail and that his finding of equality of contributions was within the reasonable range of discretion. Particular attention was drawn to what was said by the husband (and not challenged in cross-examination) concerning:
· the role he had played in the business;
· the support he had provided to the wife so as to allow her time to devote to the business;
· the fact that the husband was unable to be a director of the business by virtue of his employment with a bank at the time the business was set up (although he had been a shareholder); and
· his employment in the business over a period of five years, although at times he also had other employment.
Attention was also drawn by counsel for the husband to the wife’s evidence that the parties had commenced “income splitting” when the husband started work in the business.
Counsel for the husband also made reference to the findings concerning the level of income the wife had derived from the business after separation, which greatly exceeded the income the husband had earned in the same period. It was submitted that in light of this it was open to the trial Judge to find that contributions after separation remained equal, notwithstanding the wife had continued to operate the business alone.
Consideration of his Honour’s reasons provides substantial support for the propositions advanced on behalf of the husband.
The trial Judge commenced his consideration of this topic by recording his view that contributions to the business should “be considered broadly”. His Honour said that “failure to do so is likely to distort, unfairly to the husband, the true nature and quality of the contributions of the parties”.
His Honour accepted that “superficially” the wife had made the greater direct contributions to the business. However, he found that any conclusion that the wife’s contributions to the date of separation were “cumulatively” greater than those of the husband would ignore the indirect contributions the husband had made “as detailed in his evidence and substantially accepted by the Court”. His Honour found that those indirect contributions counterbalanced the wife’s greater direct contributions to the business up to the date of separation.
Although his Honour considered the issue was not strictly related to the business, he dealt in this context also with the submission of the husband that his contribution entitlement should be enhanced by virtue of his contributions to the Unit Trust. We need say no more on this issue than that his Honour rejected the husband’s submission.
His Honour then turned to consider whether or not contributions made after separation had any impact on the contribution entitlements of the parties as at the time of separation. He noted that the wife, having dismissed the husband from his employment in the business in July 2005, had undertaken the “great bulk” of the work of the business. He accepted she had carried out that work diligently.
On the other hand, his Honour noted that the wife had been “very substantially remunerated for her efforts” and that the evidence did not establish whether she had been “over or under‑remunerated”. The husband’s income in this period was less than half of what the wife had received. His Honour concluded that the wife had received “ample compensation for her undoubtedly greater efforts in the conservation and improvement” in value of the business after separation. His Honour therefore determined that in the exercise of his “undoubtedly broad discretion” there should be no departure from his finding that the parties had contributed equally to the business.
There was no challenge to his Honour’s generally positive finding in relation to the credibility of the husband, nor to his criticisms of the wife for failing to give the husband credit for the contributions he had made, and in particular his contributions to the welfare of the family.
Although the trial Judge did not make specific mention of the details, it can be safely assumed from what he said in paragraphs 3 to 7 and paragraph 92 of his reasons that the evidence his Honour “substantially accepted” was that given by the husband in his affidavit concerning his contributions during the relationship (paragraphs 27 to 38) and his contributions after the date of separation (paragraphs 47 to 54).
In the absence of any attack on his Honour’s findings of fact we consider that it was well open to him to find that the parties’ contributions to the business were equal.
Grounds 6 and 6A – s 75(2) adjustment and the orders made
Although it may not be immediately apparent, these two grounds are inextricably linked.
Ground 6 asserts that his Honour erred in making an adjustment of only 1% in favour of the wife on account of s 75(2) factors “in circumstances where the wife has the care and control of a very young child who is severely developmentally delayed”.
Following comments from the Bench in the course of the hearing, the wife sought and was granted leave to rely upon an additional ground. After one unsuccessful attempt to encapsulate the point we understood was being agitated, counsel ultimately relied upon the following ground (which for convenience we will refer to as Ground 6A):
That the Trial Judge erred in not appropriately taking into account the prospect of the wife being required to sell the Loan Book of [the business] to meet the payments required to be made to the husband.
Counsel for the wife submitted in support of Ground 6A that there was no evidence to show the wife could afford to make the payment ordered to the husband other than by disposal of the loan book, which in turn would lead to the negative impact on her earning capacity already discussed.
In support of Ground 6 counsel for the wife drew attention to evidence concerning the nature of the medical problems of the wife’s youngest child; the difficulty the wife had experienced in finding a childcare centre which will accept the child; and the amount of time the wife is required to expend in the daily care of the child. It was submitted that the thrust of the evidence was that the wife had been able to manage the care of the boy whilst she was self‑employed, but her capacity to earn income in any occupation other than her own business would be reduced as a result of having to care for a child with special needs.
In response it was submitted on behalf of the husband that his Honour had specifically declined to take into account in the husband’s favour any “financial and emotional support” that the wife might receive from her youngest child’s father and that, in doing so, his Honour had commented that the husband’s propositions about that issue “conveniently overlook the unchallenged medical evidence” about the serious health problems of the child.
It was further submitted that a number of the s 75(2) factors may have favoured one or other of the parties and that his Honour had properly weighed up all of them when arriving at the 1% adjustment.
Finally, it was submitted that the medical evidence had not addressed in detail the future needs of the child that might have to be met by the wife and that, in any event, the child was not a child of the marriage.
Before turning to consider his Honour’s discussion of the s 75(2) adjustment, it is important we mention a number of highly relevant findings and observations his Honour made in his judgment before he came to address that issue directly. We have already referred to a number of these in addressing other grounds of appeal.
The first, very significant, set of findings relate to the likely future income of the wife. These were contained in paragraphs 47 to 49 of the reasons. It will be recalled that his Honour said in paragraph 47 that the valuers disagreed about “the level of remuneration which [the business] provides to the wife”. He went on to note that the husband’s valuer had suggested an amount of approximately $175,000, whereas the wife’s valuer had suggested a figure of $135,000.
It is clear from the evidence of the experts that these figures were not, in fact, the full extent of the funds available to the wife from the business. Instead, they were the amounts the experts had assumed (when calculating the future maintainable earnings) that a person in the position of the wife would be entitled to receive for the work she performed in the business. This figure was based upon industry information which suggested that a person (or persons) performing her role in a mortgage broking business would expect to receive a remuneration package equivalent to 63% of the commission income derived by the business, plus superannuation and motor vehicle benefits. [AB 3:580]
In dealing with the additional benefits that were available to the wife from the business, it will be recalled that his Honour (at paragraph 48) found that she was entitled to a car (about $10,000 per annum), telephone (about $1000 per annum) and superannuation contributions (about $12,000 - $15,000 per annum).
Having made these references to what the valuers had said about the wife’s income, his Honour then considered what the wife’s income would be if the business was sold. For ease of reference, we will recite again what he said:
49.The evidence does not permit the Court to find what, on balance, the wife’s income would be likely to be were the loan book to be sold, although it is a clear inference from the evidence of both experts that there would be a substantial reduction in the income which the wife would thus receive. Mr Gwynne considered that “there is likely to be an immediate impact on the level of remuneration derived by Mrs [Nettler]”… Mr Smith said that sale of the loan book “may adversely affect Ms [Nettler’s] future income earning capacity because it is possible that the sale agreement may place restrictions on her future conduct of a mortgage broking business”… By how much the wife’s earnings would thus be likely to be reduced is not clear. The issue is complicated by the reality that, even after payment of tax, investment of the proceeds of sale of the loan book would offset to some extent the loss of income of the wife resulting from its realisation.
After discussing other evidence concerning the valuation of the business, his Honour again returned to discuss issues associated with the wife’s likely future income. He said this:
56.As suggested to Counsel for the parties during the trial, although important, determining a theoretical value for [the business] should not be all consuming. If the Court, albeit perhaps not for the reasons advanced by Mr Smith for so doing, prefers the figure suggested by Mr Smith for the value of [the business] to that advanced by Mr Gwynne, it must be remembered that, although there is no evidence that the wife intends to do so, realising all or a substantial part of the value of [the business’] assets and generating a substantial capital sum can only be achieved by incurring significant ongoing financial and other practical detriments. Whether pursuant to s 75 or s 79(2) of the Act, regard would have to be had to those consequences.
57.Conversely, if, notwithstanding the reality that the loan book could be sold, and for a very substantial sum relative to the other assets revealed by the evidence in this case, Mr Gwynne’s valuation of [the business] were preferred, the implications of the wife having, through [the business], an asset which she could liquidate for a substantial sum which she could then utilise in the form of the loan book, and the ability to derive very substantial remuneration and other benefits while she refrained from doing so would also have to be taken into account, particularly pursuant to s 75(2)(b) of the Act.
The trial Judge returned to this issue again a little later in his judgment. Although we have set it out above, paragraph 62 of his Honour’s reasons bears repeating:
62.Given that the value of the loan book could only be “unlocked” by a sale, it is necessary to consider whether the revenue implications of such sale as quantified by Mr Gwynne, require consideration. Although there may be no actual sale, it is to the Court’s mind illogical to have regard to a figure which can only be realised by a sale without having regard to what are not disputed to be the revenue implications of such a sale (see Brett-Hall & Brett-Hall (2006) FLC 93-276). This is particularly so as, having preferred the higher valuation contended for [the business], the Court should have regard to the realities which flow from so doing, which have been identified earlier. Conversely, if the Court’s orders do not render a sale of [the business’] loan book probable, the justification for taking revenue implications of a sale into account dissolves. This is an issue which assumes significance pursuant to s 75(2)(o) or, potentially, s 79(2) of the Act…
The next reference in his Honour’s judgment to matters relevant to the s 75(2) adjustment concerned the parties’ superannuation. The husband’s interests approximated $64,000 and the wife’s approximately $52,000. His Honour said this about these entitlements:
81.It is unclear how those sums were calculated, but as neither party seeks a splitting order pursuant to the legislation, it is unnecessary to inquire further about them. Whether the superannuation interests are treated as property of the parties or financial resources will have little impact on the determination of this case given that the interests of each party are not significantly divergent in value. The vesting of both interests is comparatively remote. On balance, the Court prefers to have regard to superannuation interests of the parties at Stage 3, when s 75(2) factors are considered. So doing will not materially impact upon the parties’ entitlements.
It is in the context of all of these findings and observations that his Honour then turned to his assessment of the s 75(2) factors. We consider it necessary to set out a good deal of his Honour’s discussion in order to appreciate the path he followed in reaching his decision concerning s 75(2). It will be seen that this was by no means a straightforward matter. Consideration of the entirety of the findings will also demonstrate that it is unhelpful to focus, as Ground 6 does, on just one facet of the matters with which his Honour was grappling.
His Honour said this under the heading “Section 75(2)”:
102.Section 75(2) was relied upon to some extent by each party, albeit, unsurprisingly, with different emphases.
103.On behalf of the husband it was submitted that the wife would “continue to have the benefit of the business built up by the parties during the marriage and its ongoing trailer income”… It was also submitted that the wife would have the benefit of motor vehicles owned by the business… The difficulty with this submission, as was foreshadowed earlier in these Reasons, is that the wife’s ability to derive the benefits to which Counsel for the husband refers, involve the wife not “unlocking” any part of [the business]. More significantly, the wife retaining these benefits involves her not “unlocking” [the business’] loan book which represents more than one third of the total net assets of the parties. That significance is not lessened by reality that another one third of the net assets of the parties are represented by the net tangible assets of [the business], the realisation of which is not suggested to be likely or commercially prudent.
104.Although it is hopefully conceptually justifiable, there is a degree of unreality in having, as the Court has, included [the business] on a highest and best use basis at the figure it has. To adjust under s 75(2) by way of disparity of earnings in favour of the husband by reason of the wife’s retention of that asset would be potentially compound that unreality and be unfair to the wife as her greater earning ability is dependent upon her not realising any of the assets of [the business].
105.Had the Court opted for the lower valuation, which for reasons it has given the Court has considered inappropriate, there would undoubtedly need to be a significant adjustment under s 75(2) by virtue of the disparity of earning capacity of the parties, the wife’s current earnings being more than double those of the husband, and potentially continuing to be so into the future.
106.Ultimately the Court prefers to address this dilemma pursuant to s 75(2)(o). It could, in the alternative, perhaps be addressed by s 79(2), but the Court struggles to understand what residual power s 79(2) might repose in the Court after the provisions of s 75(2) have been exhausted. Whatever the reality, the Court prefers to approach this issue via s 75(2)(o).
107.The husband relies upon the fact that he has in his care a child of the marriage. The wife also has a child of the marriage in her care. Significantly, the child in the wife’s care has potentially five more years of dependency than does the child in the husband’s care. An adjustment of modest proportions in the wife’s favour by virtue of that reality would seem appropriate.
108.The Court has earlier referred to the superannuation interests of the parties. Having regard to the relative sums, and the remoteness of their probable vesting, no s 75(2) adjustment would in the circumstances be appropriate.
109.Counsel for the husband complained that the wife had “not paid regular child support as assessed and the evidence [would] reveal that the wife is not likely to prioritise the payment of child support” in the future… Whilst, whatever her reasons, the wife’s failure to promptly pay child support until virtually the eve of the trial of these proceedings does not reflect well on her, there is insufficient evidence to found a conclusion that the wife will in the future fail to meet her child support obligations. It seems common ground that the wife’s income (for so long as she retains [the business]) will exceed that of the husband. No adjustment for child support, either past, present or future, would, in the Court’s view, be appropriate. To the extent that incomes may vary, or the children might cease to reside where they currently do, those are matters well able to be accommodated by the appropriate tribunal pursuant to the provisions of the child support legislation.
110.As noted earlier, the Court does not accept that any “financial and emotional support” provided to the wife by [the youngest child’s father] should in the circumstances of this case advance the husband’s cause. With respect to Counsel for the husband, the submissions made on his behalf … conveniently overlook the unchallenged medical evidence which makes clear the serious and ongoing health problems which, regrettably, the wife’s youngest child […] suffers and will continue to suffer in the future.
111.That leads into the question of the significance within s 75(2) of the wife’s [youngest child]. Whilst the Court has considerable sympathy for the wife, and [the child’s father], by reason of [this child’s] state of health and likely future state of health, those are not matters which should result in any positive adjustment to the wife’s entitlement as against the husband in these proceedings. The Court does not understand that any adjustment was thereby sought, but rather that the Court temper its assessment of the wife’s future earning capacity by reason of the demands which may be placed upon her, and restrictions on her ability to work arising from them, by reason of [the youngest child’s] state of health.
112.The issue that this submission raises is not without complexity. In a reductionist sense, any diminution in the wife’s earning capacity cannot be said to be referable to, or the fault of, the husband in these proceedings. On the other hand, a wide array of the vicissitudes of life can, and often are, taken into account when the Court seeks to assess the likely course of a party’s future earning capacity. Commonsense suggests that the [youngest child’s] health may well in future impact upon the wife’s capacity to work to the extent that she has in the past and appears to at present. When that might occur, and the quantum of its impact cannot be suggested. In those circumstances, any adjustment must be purely arbitrary. That is not a sound or sufficient basis for an adjustment. That, for reasons which follow, is not ultimately a difficulty.
113.As hopefully is apparent from the Court’s Reasons, the valuation which the Court has determined for [the business] has significance beyond what is often called Stage 1 or Step 1 in the proceedings: the identification and quantification of the property of the parties. Without wishing to restate what, hopefully, has been adequately articulated earlier, to fail to in any way differentiate between tangible, available assets, or money as it will be when received by the husband, and assets which are inextricably linked to and “tied up” in a business venture which is ongoing is to ignore reality. This is particularly so when the latter are worth so much more than the former and provide the basis for a party’s income. In the circumstances of this case, and particularly having regard to the realities of [the business], and the implications of accepting the higher valuation of [the business], a s 75(2) adjustment, very largely in reliance upon those factors, could possibly be made in the wife’s favour.
His Honour then turned to consider the way in which the settlement might be structured, depending on various scenarios. A clear understanding of this portion of the judgment is necessary not only for the purposes of Ground 6A but also to put in context his Honour’s assessment of the s 75(2) factors. His Honour continued:
114.If no s 75(2) adjustment were made to the contribution based entitlements of the parties, to satisfy his entitlement ($396 025.85), the husband would receive the totality of the net proceeds of sale of the interest in the [R] property {$725 000 - $531 420 - $16 964 = $176 616} and the proceeds of sale of the [M] property {$33 018} and, assuming that the wife were able to do so, the remaining equity in [the former matrimonial home] of $59 676.94 together with the sum of $114 766.08 {$396 025.85 - $176 616 - $33 018 - $59 676.94 - $7713.83 – $200 - $3062 - $1000 = $114 766.08}. The wife’s ability to borrow 100 per cent of the value of [the former matrimonial home] from St George must be problematic, but even if she could, the wife would still have to raise an additional $114 766.08. How, without the benefit of equity in real estate, the wife could expect to borrow such moneys is unclear.
115.Whilst, on the evidence before this Court, [the business’] loan book could be sold, and a gross pre-CGT sum of $335 000 - $345 000 realised, the evidence suggests that [the business’] income, and in turn that of the wife would thereby be significantly reduced. The wife’s ability to service the already substantial borrowings over [the former matrimonial home] would thus be adversely impacted.
116.There is an essential unfairness in equating $396 025.85 of tangible risk-free assets in the hands of the husband with $457 860.27 in the hands of the wife when the totality of those assets are tied up in the entity through which she derives her income, less a further sum of over $100 000 to be borrowed to enable the wife to pay the husband his entitlement.
117.Conversely, the Court having concluded as it has in relation to the value of [the business] and determined the contribution based entitlements of the parties, the husband is entitled to oppose his entitlement being determined by what the wife can afford to pay to him without materially altering her position.
118.Complicating the wife’s position is the improbability of her being able to borrow almost $60 000 to pay to the husband in partial satisfaction of his entitlement on the security of [the former matrimonial home] given that so doing, if St George were agreeable, and there is no evidence that St George is agreeable, would represent a borrowing of 100 per cent of the value of [the former matrimonial home]. It is tempting to think that St George would be very unlikely to do that, but in the absence of evidence the Court refrains from speculation.
119.Although the husband may not see it so, it is potentially as much in the husband’s interest that the wife and [the business] remain intact and commercially viable as it is in the wife’s interest that this occur. If the husband’s entitlement can only be met by the wife causing [the business] to sell its loan book then a not insignificant s 75(2) adjustment in favour of the wife would be appropriate having regard to the evidence of both Mr Smith and Mr Gwynne in relation to the implications for [the business], and hence the wife, in terms of income consequent upon the “unlocking” of [the business’] loan book. Just how that would be calculated is difficult to know, notwithstanding the assistance gained from the evidence of both experts, and particularly from the evidence of Mr Gwynne.
120.On balance, the Court concludes that the appropriate approach is to make a minimal adjustment by virtue of s 75(2) in favour of the wife. To adjust, pursuant to s 75(2), only by reason of the wife having the future obligation to provide and care for the younger of the two children of the marriage, that being for potentially five years longer than may be the case of the husband, would be appropriate. An adjustment of one per cent would in the circumstances be appropriate. The Court does not otherwise propose making a s 75(2) adjustment.
121.To the extent that the husband might seek such an adjustment on the basis that the wife earns approximately twice what he does, the inclusion of the asset which generates that income in the asset pool at its highest and best use valuation, reflecting as it does 63.8 per cent {$554 714 / $853 886.12} of the total assets militates against so doing. In broad terms, to ignore the reality that, only by being unable to realise [the business], or its loan book, can the wife continue to earn as she does, an adjustment in favour of the husband is unjustified.
In our view this lengthy recital demonstrates that the trial Judge undertook a careful and principled analysis of the s 75(2) factors. It might appear at first glance that having earlier accepted the higher valuation on the basis the business assets would be sold, it would follow that his Honour would deal with the s 75(2) factors on the same basis. The wife’s income on that scenario would decrease significantly and his Honour considered this would lead to her receiving a “not insignificant s 75(2) adjustment”. It might appear insufficient justification to depart from such an approach to say, as his Honour did at paragraph 121, that the husband will not receive an adjustment in his favour on the basis that the wife will have an income approximately twice his income.
Prima facie, the husband could not expect to “have his cake and eat it too”. He secured an advantage in having the business valued at an amount significantly higher than the future maintainable earnings approach would have indicated and did so on the basis of a valuation assumption that the business would be sold. He could not, in our view, also anticipate receiving a s 75(2) adjustment on account of the wife then being able to earn a substantial income from operating that business.
His Honour seems to have been making this very point at various stages in his judgment; for example, in paragraph 62, where he said:
Although there may be no actual sale, it is to the Court’s mind illogical to have regard to a figure which can only be realised by a sale without having regard to what are not disputed to be the revenue implications of such a sale.
Could it be that he overlooked this when he came to make his decision? In our view, the answer can be found in the final part of his Honour’s judgment where he dealt with s 79(2) – although clues to his Honour’s thinking can also be found in some of the paragraphs recited above; for example, quoting again from paragraph 62, where he said:
…[I]f the Court’s orders do not render a sale of [the business’] loan book probable, the justification for taking revenue implications of a sale into account dissolves.
Once again it will be necessary to set out much of what his Honour had to say under the heading “Section 79(2)”:
122.By virtue of s 79(2) of the Act the Court must not make an order unless it is just and equitable to do so. The justice and equity of the proposed division of the assets of the parties being 54.6 per cent to the wife and 45.4 per cent to the husband must therefore be considered. The Court has previously endeavoured to address the difficult issues which arise from the nature and value of the parties’ assets.
123.As noted earlier, on the evidence before the Court, it is improbable that the wife could satisfy the husband’s entitlement of $387 664.30 {45.4% of $853 886.12 = $387 664.30} within the near future. Were she obliged to do so, the probabilities are that the wife would have to sell [the former matrimonial home] and the [business] loan book, thereby leaving her to find alternate accommodation, albeit not necessarily accommodation which she owns, at a time when her income is likely to be substantially reduced. The husband on the other hand would then have substantial liquid funds with which to rebuild his future and a secure and not insubstantial income. Such an outcome would not in this Court’s view constitute justice or equity. The husband’s entitlement would need to be reduced if it were to be realised by the sale of [the business] loan book to the extent that the proceeds of its sale would incur a taxation liability.
124.As noted earlier, the difficulty in this Court is striking an appropriate balance between the husband receiving his just entitlement as determined by the Court, and the wife satisfying that entitlement without being potentially gravely disadvantaged, both financially and otherwise.
125.In Elsey v Elsey (1997) FLC 92-727 the Full Court (Ellis, Baker and Coleman JJ) said, per Baker JJ (at 83,799):-
In my opinion, trial judges must consider the economic consequences which flow from their orders before making them. Otherwise, the result achieved may not be just and equitable, as s 79 requires. Indeed, the provisions of s 79 clearly require trial judges to consider the effect of any proposed order upon the earning capacity of the parties before consideration is given to the s 75(2) factors.
126.If the husband is to receive the proceeds of sale of [the M property] ($33 018, subject to each party paying 50 per cent of the capital gains taxation relating to that realisation as and when that is determined), the joint St George account ($3062), his Commonwealth Bank account ($200), his AMP shares ($7713.83), the horse gear ($1000) and the entitlement to receive the equity in or net proceeds of sale of [the R property], after capital gains taxation, (approximately $176 616), the husband would be entitled to receive a further $166 054.47 {$387 664.30 - $33 018 – $3062 - $200 - $7713.83 - $1000 - $176 616 = $166 054.47}.
127.The wife should, within 90 days of this date, pay to the husband $100 000 of such sum. The balance of $66 000, together with interest calculated at a rate one per cent in excess of the rate from time to time determined by the Reserve Bank of Australia as the prime rate should be paid on or before 1 February 2009.
128.To the extent that the husband is “kept out of his capital” by such a scheme of orders, the Court does not accept that he could complain. The husband’s entitlement will have not been discounted, notwithstanding the nature of the assets which the wife will retain, and he will be paid interest at a rate equal to or potentially better than that he might obtain were he to invest $66 000 of his entitlement. Having not reduced the gross value of [the business] loan book by reason of a potential capital gains taxation liability, there is a fairness to both parties in making orders which reduce the likelihood of its sale.
129.On the other hand, the wife will thereby have the opportunity to retain or realise the former matrimonial home in which she and the younger child of the marriage live and [the business], or at least its loan book, and, should she choose or be forced to realise either or both of those assets, have a reasonable time within which to do so.
130.Although less than a perfect solution, for the Court does not perceive there to be one which is fair to both parties, the Court considers the proposed orders the least unjust or inequitable which could in the unusual circumstances of this case be applied. The effect of the Court’s conclusions is shown graphically below. [table omitted]
His Honour was faced with a considerable dilemma which he sought to expose in those parts of the reasons to which we have referred. He knew that the wife, for good reason, was very anxious to retain the business and the former matrimonial home. It seemed improbable she could afford to do so and pay the husband the amount to which his Honour considered he was entitled. The husband, on the other hand, was “entitled to oppose his entitlement being determined by what the wife can afford to pay to him without materially altering her position”.
The solution found by his Honour was to structure his orders in such a way as would “reduce the likelihood” of the sale of the business because it “is potentially as much in the husband’s interest that the wife and [the business] remain intact and commercially viable as it is in the wife’s interest that this occur”.
First, his Honour gave the husband the equity in the R property so as to reduce the total amount the wife had to find in order to satisfy the husband’s entitlements.
Secondly, he gave the wife 90 days in which to find $100,000 to pay to the husband. This was done in the context that it was agreed there was $131,272 in the business bank account.
Thirdly, he gave the wife until February 2009 to find the balance of the settlement – i.e. a period of about 15 months from the date of judgment.
The wife had given no evidence concerning her capacity to borrow funds to make a payment to the husband, nor the point at which she would be constrained to dispose of assets so as to pay his s 79 entitlement. She was aware that the husband sought a payment significantly greater than what she was proposing. We accept the submission made by counsel for the husband that the onus was on the wife to provide evidence concerning the extent of her capacity to borrow funds. It was not for the husband to provide what would have been speculative evidence about the wife’s likely financial position.
The wife was insisting she would keep the business. If there was a limit beyond which she could not go in obtaining the husband’s entitlements without disposing of assets then, as is routinely the case, she should have advised the Court of that limit. His Honour could then have proceeded to make an order for sale of the business in the event that the assessment of the husband’s entitlements surpassed that limit. He could also at the same time have factored into his judgment all of the consequences that might have flowed from an order for sale – including capital gains tax ramifications and the impact on the wife’s income earning capacity. The wife was firmly opposed to such an outcome.
What his Honour did instead was to give the wife the opportunity she desired to keep the business and in the meantime to earn the substantial income that flowed from the business. If it transpired that the business had to be sold in order to meet the husband’s entitlements then the wife would have, at least, had the benefit of the income of the business in the interim and would still have the asset to sell. In the meantime the husband would have been required to wait for the money to which he was entitled, albeit he would ultimately have the benefit of interest on his capital.
Although not mentioned in the reasons, we note that counsel for the husband put to the wife’s valuer in cross examination [AB 3:729] that the draft accounts for 2007 showed the trailing commissions earned that year alone amounted to $265,000 – and this was accepted. The wife’s valuer, in fact, made his calculations on the basis that the level of commissions would increase to about $301,000 in the following year.
In our view, the way his Honour structured his orders provides the explanation for why he did not give the wife a significant s 75(2) adjustment based on an assumed sale of the business, notwithstanding the business had been valued on such an assumption.
As his Honour said, the outcome was “less than a perfect solution”; however, he acknowledged that he could not perceive a solution which was “fair to both parties”. He was of the view that his orders were “the least unjust or inequitable which could in the unusual circumstances of this case be applied”.
If the wife is ultimately unable to afford to acquire the husband’s interest in the business and it has to be sold then, at least to some extent, she may be seen to be the author of her own misfortune since she did not provide the Court with the means of knowing the limit of her capacity to attain her objective. Conversely, if she is able to keep the business she will earn a substantial income and retain (and perhaps be able to build up) the asset which provides that income.
For the sake of completeness, we should observe that his Honour did discuss with counsel for the wife in closing addresses the issue of how the wife would fund a settlement greater than the amount she was proposing to pay (at that stage $173,430). He indicated to counsel for the husband that although both parties agreed that the wife should receive all of the property “in specie” there had to be a default provision in the event the wife could not afford to acquire the husband’s interests. [AB 3:778]
Counsel for the wife agreed and the following exchange then took place between his Honour and counsel for the wife. (We have highlighted passages in which counsel for the wife hinted that the wife may have means of securing funds in order to meet a settlement beyond what might have been thought to be her capacity.)
MR GOULD: … If your Honour would grant the wife the usual two to three month opportunity to find the money to pay the husband, should that not be possible, or she desires not to within the usual period, then something must happen. The first point of call she would invite your Honour to consider would be the sale of the parties’ interest in the [R property] and such of the proceeds as would need to satisfy the verdict, whether that be the whole. If it’s less than a certain amount it won’t be problematic. If it’s more than a certain amount it might be.
HIS HONOUR: I thought you mentioned a figure in the two hundred thousands.
MR GOULD: No, your Honour. Could I take your Honour to the aide-memoire, and number 8 of that document.
HIS HONOUR: A hundred and seventy three forty two.
MR GOULD: That’s it, your Honour.
HIS HONOUR: You say then that [the R property] would be enough?
MR GOULD: [The R property] would be enough. If your Honour is against me then your Honour might be looking to some secondary form of security. Could I invite your Honour, and perhaps it’s a slightly unusual request, to at that time, if the wife were unable to comply with the order, both parties have liberty to approach in relation to further machinery provisions. The wife would be loathe to have the [former matrimonial home] sold. It’s clearly her home. She’ll be making the best attempt she can to get the money. She is a mortgage broker, your Honour, and your Honour might think that she has some avenues open to her that are perhaps not available to other people. But beyond that, your Honour, yes, she would obviously have to come up with the money or something else would have to be sold. But, first point of call, [R property], and then secondly, perhaps, liberty to apply in the event that that eventuated. It may not have to. [AB 3:778]
This proposal for a “liberty to apply” provision, somewhat tentatively advanced, came very late in the hearing. Counsel for the husband in response drew attention to the funds that the wife had at her disposal in the bank account of the business. She also drew attention to the fact both parties had agreed the R property should be kept by the wife and expressed the husband’s concerns about difficulties associated with securing a sale of the R property (in which the parties had only a half interest). She went on to submit that there was equity in the home in which the wife was living and this could be accessed in order to satisfy any order.
The following exchange then occurred between counsel for the husband and his Honour concerning the proposition that the wife should keep the R property:
HIS HONOUR: The wife wears all the risk. The parties jointly go into an investment with a third party, presumably knowing or being told the downsides of that, and when the relationship ends one party bears the sole downside of it. Is that what you are saying?
MS JUDGE: No. Well first of all it’s the wife’s case that she wants that property. But secondly, I’m only addressing your Honour in relation to --
HIS HONOUR: What property? [R property]?
MS JUDGE: That she’s happy to pay out the husband in relation to his interest in that property.
HIS HONOUR: Not as I understand what Mr Gould said. Mr Gould, can you put it beyond doubt. Does your client want [R property] or not?
MR GOULD: Yes, both parties seek the transfer to the wife of the [R property]. On that point, could I invite your Honour to keep in mind the affidavit of the wife of 05/11/2007 where she deposes to a conversation with the other co-owner who seems, if not keen then certainly prepared, to sell and they even discussed when would be a good time to do that. In February.
HIS HONOUR: I think the short answer, Ms Judge, is that Mr Gould’s client wants [the R property] and your client, I’m not going to put in him in the position where how swiftly he does or doesn’t get his money is in the hands of people over whom he has no control.
MS JUDGE: Thank you, your Honour.
HIS HONOUR: Contrary to what I understood it was common ground that [R property] would be sold, the parties would be inviting that to happen and of course that’s different. Because if they are both involved then it would be unfair to the wife to have to come up with that portion of your client’s entitlement within three months. If she wants it, though, you can proceed on the basis that whatever I conclude he ought to receive, she will have three months interest free to raise it. If she hasn’t raised it then sales are liable to follow to generate that sum. Do you want to say any more about that?
MS JUDGE: No…
It will be seen that the final desired position of the wife was to be given liberty to come back to make submissions about the way in which the husband would receive his entitlements in the event the husband received a greater settlement than she was proposing. On the other hand, the husband’s desired position was that he receive almost his entire settlement in cash and not be obliged to take the R property, given the difficulties he feared might be associated with liquidating his interest. Ultimately, neither party secured their preferred outcome.
His Honour did not give the wife the opportunity to make submissions after delivery of judgment about how she would meet the husband’s entitlement. In our view the wife cannot complain about not being given relief she sought only in the dying minutes of the hearing. The time to address the relief she would seek in the event the husband was successful in obtaining a larger award was much earlier in the proceedings when she could have given evidence of her borrowing capacity. This would have included any avenues that may have been open to her from her position as a mortgage broker in a business that had sourced over 100 million dollars of loans from financial institutions.
Furthermore, the issues that would have to be considered in the event of the wife exercising the proposed “liberty to apply” would not be restricted to the means by which the husband would receive his settlement. In our view, his Honour would not only have had to reconsider the way the settlement would be structured, but also the very foundations of the settlement. This would not be consistent with the imperative contained in s 81 that further proceedings be avoided.
The Court has a wide discretion when determining the extent of any adjustment pursuant to s 75(2) and we are not persuaded that his Honour’s determination fell outside the reasonable range of discretion. Similarly, subject to procedural justice being afforded, the Court has a wide discretion in determining the way in which a settlement is structured to ensure that it is just and equitable. Again, we consider the way his Honour structured the orders was open to him.
Accordingly we consider there is no merit in Grounds 6 and 6A.
The outcome – appeal dismissed – costs submissions required
We have found no merit in any of the grounds relied upon by the wife. (Grounds 5, 7 and 8 were not pursued.) The appeal will therefore be dismissed.
Counsel for the husband submitted that if the appeal was dismissed costs should be awarded against the wife on an indemnity basis. She asked us to delay receiving all of her submissions in support of this application pending delivery of our judgment. In these circumstances, we intend to give the parties an opportunity to make written submissions in relation to the application for costs foreshadowed.
It may be of assistance to counsel in preparing their submissions to know that we have formed the view that some of the grounds of appeal, particularly those relating to s 75(2), were arguable. We have already received some oral submissions on costs and we can say that on the basis of the matters put to us to date, we have a preliminary view that each party should bear their own costs. However, we acknowledge that there is additional material the husband wishes to place before us which may cause us to adopt a contrary view.
I certify that the preceding one hundred and twenty nine (129) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court
Associate:
Date: 13 October 2009
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