OWEN & OWEN
[2016] FCCA 2130
•18 August 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| OWEN & OWEN | [2016] FCCA 2130 |
| Catchwords: FAMILY LAW – Property – sham transactions by husband – complex web of private companies and loans to and from those companies – transactions unravelled. |
| Legislation: Bankruptcy Act 1966 (Cth) Companies Act 2008 (South Africa), Ch.2, Pt.C Corporations Act 2001 (Cth), s.588FB Family Law Act 1975, ss.75(2), 79(4) Superannuation Industry (Supervision) Act 1993 (Cth) |
| Cases cited: Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 Beckler v Beckler [2013] FamCA 327 Bevan v Bevan [2013] FamCAFC 116 Demondrille Nominees Pty Ltd v Shirlaw & Anor (1997) 25 ACSR 535 In the Marriage of Kowaliw (1981) FLC 91-092 Jones v Dunkel (1959) 101 CLR 298 |
Wayne Lonegren, The Valuation of Businesses, Shares and Other Equities
(4th ed, 2003)
| Applicant: | MS OWEN |
| Respondent: | MR OWEN |
| File Number: | MLC 8582 of 2014 |
| Judgment of: | Judge Wilson |
| Hearing dates: | 22 – 23 March 2016 |
| Date of Last Submission: | 6 April 2016 |
| Delivered at: | Melbourne |
| Delivered on: | 18 August 2016 |
REPRESENTATION
| Counsel for the Applicant: | Ms S. Mariole |
| Solicitors for the Applicant: | Lakey Family Law and Mediation |
| Respondent in person |
THE COURT ORDERS THAT –
Within 14 days of the date of this judgment the parties are to provide a Minute to Chambers to give effect to these reasons.
IT IS NOTED that publication of this judgment under the pseudonym Owen & Owen is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLC 8582 of 2014
| MS OWEN |
Applicant
And
| MR OWEN |
Respondent
REASONS FOR JUDGMENT
Introduction
On the first day of the trial of this proceeding, the parties announced that parenting issues had been resolved, that many of the property issues had been resolved and that a discrete number of property-related issues fell for determination.
The remaining matters were –
a)the characterisation of the (omitted) Group loan (“the (omitted) loan”) described below;
b)the characterisation of the (business omitted) (“(omitted)”) loan described below; and
c)whether the sum of $230,000.00 must be returned.
Synopsis
For the reasons that follow, in my judgment –
a)the so-called share sale transaction involving (omitted) Group was a sham;
b)the so-called share sale transaction involving (business omitted) was a sham; and
c)the sum of $230,000.00 must be returned.
Relevant factual background
By application filed 24 September 2014, Ms Owen (“the wife”) sought parenting and property orders following the collapse of her marriage to Mr Owen (“the husband”). That marriage lasted for almost 22 years.
The wife was born on (omitted) 1966 and the husband was born (omitted) 1966. They have two children, X born (omitted) 1999 and Y born (omitted) 2005. At the date of the trial of this proceeding, each parent was 49 years of age, their son was 17 and their daughter was 10.
The husband and wife finally separated on 20 July 2014. After separation, the wife and their two children remained in the former matrimonial home.
The husband and wife met in South Africa. At the time, the husband worked in his father’s (business omitted) enterprise while the wife studied (omitted). She later qualified. The parties married in 1994. They settled in Australia in 2008 after the end of the apartheid era.
Prior to the partial resolution of property matters, the affidavit material in this case showed that the husband and wife owned real property in South Africa, as well is in (omitted) South Africa.
In her affidavit sworn 1 March 2016, the wife deposed to the gross asset position of the marriage to have been $3,176,363.00 on which liabilities were owed in the sum of $634,082.00 resulting in a net asset position of $2,542,281.00.[1]
[1] Affidavit of Ms Owen sworn 1 March 2016 at p.17.
The wife stated that in October 2015 or thereabouts the husband relocated to Perth where he has rented premises and that he regularly travels between South Africa, Perth and Melbourne.
The wife swore in her affidavit of 1 March 2016 that the husband had interests in various companies mainly as a shareholder. In evidence, the husband gave his occupation as a company director.
A large amount of the affidavit material in this proceeding was addressed to parenting issues and issues relating to property that did not concern the three issues that I was required to consider as announced to me on the first day of the trial of this proceeding. As a result, the most expeditious course in these reasons is to move immediately to the facts surrounding the three issues in dispute.
Instead of reciting a lengthy narration of the commercial history of this litigation, it will be more meaningful to record the relevant facts against the three specific issues that remained for determination in this proceeding.
The (business omitted) loan
In his affidavit sworn 16 March 2016, the husband stated that he registered a private company in South Africa called (omitted) (“(omitted)”) in which he was the sole director and shareholder. The husband swore that his own father had been a successful businessman, having owned (omitted) (Pty) Ltd (“(omitted)”), a company involved in the (business omitted). The husband swore to the sensibility of merging (business omitted) with (business omitted) because of the husband’s father’s heart attack and difficulties the father encountered after that heart attack.
The husband swore at paragraph 33 of his affidavit of 16 March 2016 that in the 1994 financial year, his merged business more than doubled its gross revenue. He deposed to wishing to sell the division of the business previously involved in (business omitted) and using the proceeds to fund an attempt to enter South Africa’s (business omitted) market. The husband stated that with the benefit of an inheritance and the sale of certain land in Western Australia, the husband registered a new company, (omitted) (Pty) Ltd (“(omitted)”). That company manufactured (omitted) while (business omitted) continued to work in (business omitted). At the end of 1996, the husband consolidated the operations of (business omitted) with (business omitted). The husband said he effected that by transferring his shares in (omitted) to (omitted). I suspect that was a crude description of what actually happened in the context of the share transfers among shareholders because the husband was the sole shareholder in (business omitted) so he must have sold the shares in (business omitted) to either (business omitted) or others with interests in (business omitted). He did not say. But as the husband later invested in (business omitted), a distribution made after the sale of two properties in South Africa, it is likely that the husband was the owner or controller of the majority of the shares in the issued capital of (business omitted). Otherwise any such investment or such a distribution would have been speculative.
In due course, (business omitted) established the following wholly owned subsidiaries –
a)(omitted) (Pty) Ltd ((omitted)”); and
b)(omitted) (Pty) Ltd (“(omitted)”).
The husband described (omitted), (omitted), (omitted) and (omitted) as the “(omitted) Group”.
The husband swore that in 2003 or thereabouts, he transferred a 3% interest in the (omitted) Group to Ms E, a further 3% interest in the (omitted) Group to Mr L and a further 3% interest in (omitted) Group to Ms B while the husband retained 91% of the issued shares in the capital of (omitted) Group. No separate company known as (omitted) Group existed so when the husband swore that he transferred a 3% interest in the group to each of those named persons, I took him to mean that he transferred to 3% interest in each of (omitted), (omitted), (omitted) and (omitted), while he retained the 91% interest in each of (omitted), (omitted), (omitted) and (omitted).
The husband swore that he established (business omitted) so as to market the (product omitted) manufactured by members of the (omitted) Group. He said he owned half of the shares in (omitted) while his business partner, Ms J, owned the other half. The husband said (omitted) purchased “the operational business” from (omitted) Group for AUD$150,000.00.[2] He did not say what he meant by “the operational business”.[3]
[2] Affidavit of Mr Owen sworn 16 March 2016, p.10 at [48].
[3] Ibid.
The husband swore that his business partner Ms J ran (business omitted).
The husband said he provided vendor finance. In ordinary parlance the phrase vendor finance is usually used in connection with a terms contract under which the vendor permits the purchaser to pay instalments for the purchase of something on terms by which the selling price accrues interest during such time as the full price remains unpaid. The husband swore in paragraph 49 of his affidavit made
16 March 2016 that (omitted) Group repaid the loan of $150,000.00 and that he used that same amount to purchase (business omitted). Curiously, in the earlier paragraph he swore to establishing (omitted) in which he owned half of the shares. His version of the loan to (omitted) was very confusing.
The husband swore in paragraph 56 of his affidavit of 16 March 2016 that his business sustained serious problems in 2006. He said that in that year strong affirmative-action policies were introduced in South Africa in relation to government and municipal contracts. He said that the sophisticated system previously enjoyed in the southern area for (business omitted) was replaced by (product omitted) pursuant to which a large number of (products omitted). While this ameliorated employment issues in the region, the husband said it was an economic calamity for (business omitted) (he did not say on to which entity the calamity befell). The husband swore “[i]n one fell swoop, I lost approximately 40% of my business revenue”.[4]
[4] Affidavit of Mr Owen sworn 16 March 2016, p.12 at [61].
After conducting research into the viability of establishing his concept in Australia, the husband swore in paragraph 65 of his affidavit made 16 March 2016 that he submitted a business plan that resulted in his sponsorship in Australia.
The husband swore that he could not sell (business omitted) (which I took him to mean (omitted) Group or any member of it) on the open market. He said in paragraph 69 of his 16 March 2016 affidavit that he sold his 50% shareholding in (business omitted) to Ms J and her partner Mr M in 2007. The husband said he had no alternative but to do that because no buyer was available for (business omitted). He said the sale price was nominal, expressed as the repayment of his shareholder loan over 10 years with interest at prime plus 5% or 18% whichever was higher. The husband said no written contract came into existence as he trusted Ms J and Mr M.
In paragraph 234 of his 16 March 2016 affidavit, the husband put forward in considerable detail a schedule of his assets, liabilities and financial resources in annexure “O-44”. Under the heading “Net Assets – Collectable Financial Resources Over Ten Years”, the husband listed the loan to (business omitted) in the sum of AUD$391,291.00.[5]
[5] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-44”.
That seemed at first blush to be an ambiguous concession that (omitted) owed the husband the sum of $391,291.00.
In his evidence before me, the husband said that the loan to (omitted) fluctuated. He said that if he was entitled to drawings (a phrase known in the context of partnerships, it being an unusual reference in the context of a distribution of dividends of a company) he may have not taken the payment and instead transformed that to a loan or to an increase in his existing loan. The husband said the (omitted) loan was at 2011, 306,000 rand. It grew because, so the husband said, he provided trade finance and the company agreed to pay him interest. He said the (omitted) loan was “a historical loan” in respect of which there were “no terms around the loan” and “interest needs to be paid, and capital gets paid as and when the company can afford to pay the capital”.[6]
[6] Transcript of Proceedings, 22 March 2016, p.24 at lines 36-39.
Pausing at that point in the narrative, a few issues must be made before going further. First, both the wife and husband gave evidence of a complex corporate arrangement created by the husband in South Africa and elsewhere. Among the remarkable volume of financial evidence in this case, nowhere was there any document in the nature of company records from an entity equivalent to the Australian Securities and Investments Commission (“ASIC”) showing changes in the shareholding of (businesses omitted).
Equally, nowhere was there any evidence beyond the husband’s statements in his affidavits and transcript before me recording advances by shareholders to that shareholder’s company, interest payments or receipts, reduction in capital sums due from time to time, nor even minutes of board meetings at which those matters would be expected to have been discussed and approved. Perhaps that is to be expected in corporate structures where a single person is, for all intents and purposes, the alter ego of the company. Equally, South African company law may not require it, although that strikes me as being unlikely as South Africa’s Companies Act 2008 has provisions comparable to other Commonwealth countries, one part of which relates to transparency, accountability and integrity of companies.[7]
[7] Companies Act 2008 (South Africa), Ch.2, Part C.
Even management accounts were likely to have told of the existence of the loans and the terms of repayment to which the husband deposed. It struck me as curious that the husband failed to put into evidence information as important as that, especially as he put into evidence an array of meticulously carefully arranged documents ranging from bank documentation in (omitted) accounts to an agreement for the letting of a safe at (omitted).[8]
[8] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-7”.
The second point of relevance is that the husband’s activities concerning his acquisition in and disposal of the various shares mentioned in this case occurred at times when the relationship between the husband and the wife was not strained. At no stage did the wife suggest in evidence that the husband’s acts in converting what would otherwise have been a dividend payable to him into an addition to the loan account was contrary to her wishes or that she expressly forbade it. For that matter, the wife gave very little evidence about the factual circumstances of the various companies until she focused on the husband’s alleged sale of (businesses omitted) in March 2011, the details of which I have addressed below. The wife contended that:
a)the so-called sale was not at arm’s length;
b)the husband sold his interest in those companies to his sister in order to control repayments; and
c)the sale was effected in that manner to leave money in South Africa and to ensure that repayments could be easily made when measured against the husband’s capacity to pay.
The husband maintained that it was a proper sale.
In order to set in context the controversy about the (business omitted) loan and the correct characterisation of that transaction, it is necessary to understand the contentions advanced by the wife about the consequences of her successfully impugning the transaction.
In essence, relying on the observations of a line of authority said to have originated in the decision of Baker J in In the Marriage of Kowaliw[9] (“Kowaliw”), the wife contended that the husband’s sale of his shares in (businesses omitted) was reckless and its overall effect was the reduction of matrimonial assets. Ms Sophie Mariole, counsel for the wife, contended that the economic consequence of such conduct was relevant to s.75(2) considerations, themselves relevant to s.79(4) considerations of the Family Law Act 1975 (Cth) (“the Act”).
[9] (1981) FLC 91-092.
Before descending into the detail of Ms Mariole’s submissions, it is necessary to go to the share sale agreement dated 1 March 2011[10] (“the share sale agreement”). It was made between the husband as vendor and Ms S as purchaser. Ms S was at all relevant times the husband’s sister, as that much was common ground.
[10] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-24”.
In the share sale agreement, the date of settlement was expressed as
1 March 2011, being the date of the share sale agreement. On that date, the purchaser agreed to take ownership of the husband’s 91% shareholding in “the (omitted) group of companies” (that phrase was not defined) for 6.55 million South African rand.[11] The clause in which that obligation appeared, clause 2, then described the price “being fair market value for the company”.[12] One of the issues in this case was the accuracy of the stated agreed position between vendor and purchaser that the fair market value of the company was 6.55 million South African rand.
[11] Ibid.
[12] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-24”.
Clause 3 of the agreement provided that the fair market value of the transaction was based on ATO’s 2011 financial year’s retained income plus a price earnings ratio of four times four years the estimated after-tax earnings of the 2011 financial year.[13] That formula was complicated. However, expressed arithmetically, the total value of 100% of the business was South African rand 7,201,315 and 91% of that was 6,553,197 South African rand leading to the agreed purchase price of 6.55 million South African rand.[14]
[13] Ibid.
[14] Ibid.
Clause 4 of the agreement provided that the purchase price for the husband’s share was to “be funded by a vendor loan from the vendor to the purchaser”, five years of the life of which was to be interest-free and thereafter the parties were to negotiate an interest-rate and financial repayment terms for the outstanding balance of the vendor’s loan.[15]
[15] Ibid.
Other provisions of the agreement addressed a moratorium on capital repayments for a period of time and that the husband would continue “as a director of (omitted)” (yet that expression was not defined nor was the (omitted) company specified).[16] A restraint of trade was imposed on the husband pursuant to clause 9. The agreement was signed on 18 August 2011, that is to say over four months after the date of the transaction on 1 March 2011.
[16] Ibid.
The wife swore at paragraph 54 of her affidavit of 1 March 2016 that the husband had full control of all of their finances. She stated that from 2007 the husband established bank accounts with (omitted) Bank in (country omitted), (omitted) Bank in South Africa and with (omitted) Bank in Australia (“(omitted)”). The wife also swore that since 2007 the husband had sold or otherwise dealt in gold and cash holdings in amounts of $800,000.00 or thereabouts.
On the husband’s version of events, in 2011 he finally decided to sell the business and that the catalyst for that was his impending loss of tax status in 2012 when he and the wife became permanent residents in Australia. The husband explained that by stating that from 2008 to 2012 he was in Australia on a temporary visa. He said that when he and the wife became permanent residents in 2012 they lost their tax status. The husband said the previous situation applicable to his company evaporated. Under the previous situation his company created a profit, did not pay him any dividends and he did not pay tax in Australia on the basis that he was exempt by reason of being a temporary resident.
The husband explained the exemption by reference to the controlled foreign companies provisions of the tax laws. He said if a person was an Australian resident (temporary or permanent) and if that person owned a business overseas that made a profit, that person had to disclose that profit for tax purposes even if the person had not received a dividend. The husband said that tax law prevented the accumulation of profits offshore because it required Australian residents to bring their profits onshore upon which they paid tax.
The wife contended that she was dubious of the validity of the share sale agreement. In support of her doubts (none of which were, strictly speaking, admissible in evidence) the wife relied on the expert report of Ms A dated 4 September 2015 which Ms A annexed to her affidavit sworn 4 September 2015. In paragraph 7 of her report, Ms A addressed the agreement between the husband and Ms S for the transfer of 91% of the issued shares in the capital of (businesses omitted).[17] Ms A recorded how Ms S paid the purchase price by applying funds derived from an unsecured loan, funds having been provided by the husband as vendors. Ms A recorded that she had not been provided with documentation relating to the unsecured loan agreement between the husband and Ms S.
[17] Affidavit of Ms A sworn 4 September 2015 at annexure “A-1”.
Ms A stated in paragraph 7.12 of her report that the assessment of the commerciality of the share transfer transaction between the husband and Ms S would require details in order to confirm that the overall value of the company (I interpolate, “the companies”, as several were under consideration) was 7,201,315 South African rand.[18]
[18] Affidavit of Ms A sworn 4 September 2015 at annexure “A-1”.
Ms A went on to say that even if the agreed sale price was considered commercial, in her opinion the terms of the sales were not commercial mainly on account of the undocumented or undisclosed terms of the vendor finance and the fact that the vendor finance was unsecured. She expressed the opinion that a party selling a 91% shareholding on vendor finance terms would –
a)document the transaction;
b)require security; and
c)not permit five years of the loan to be interest-free with no repayments at all during the first 12 months.[19]
[19] Affidavit of Ms A sworn 4 September 2015, annexure “A-1” at [7.15].
Ms A said a transaction of the sort into which the husband and Ms S entered would come under scrutiny in connection with rules relating to uncommercial transactions under the Bankruptcy Act 1966 (Cth), the Corporations Act2001 (Cth) (“Corporations Act”) and the Superannuation Industry (Supervision) Act 1993.[20]
[20] Ibid.
Ms A did not state, in terms, that the transaction for Ms S’s acquisition of the husband’s 91% shareholding in those companies was uncommercial, properly so called. However, in paragraph 11.2 of her report Ms A stated that based on her preliminary findings, it appeared that the husband had entered into various non-commercial transactions that caused him to claim assets that but for the transaction would have been part of the matrimonial asset pool but which were classified as financial resources.
Ms A’s opinion formed the basis of a recommendation for further investigations into aspects of the husband’s financial affairs.
Ms A was not called to give evidence and her report went into evidence unchallenged. Aspects of Ms A’s report were put to the husband for his response. Unsurprisingly, the husband was not specifically challenged on Ms A’s preliminary findings that the sale of the 91% shareholding in (businesses omitted) were uncommercial transactions. There was no need. In view of the exquisite lengths to which the husband went to explain how the sale to his sister was set up, I would have expected the husband to deny that the transaction was uncommercial.
In considering the husband’s evidence about the transfer of his 91% shareholding, especially whether the transaction was uncommercial and therefore was a wasteful reduction in matrimonial asset, I must examine not only the terms of the transfer but also the effect of it. Ms A used the phrase “uncommercial” and incorporated by way of analogy the learning applicable to that phrase in the context of bankruptcy law and corporations law. She appears to have used the expression as an illustration of the way in which the share transfer agreement of March 2011 was not at arm’s length. No provision of the Act nor cases decided under that legislation have expressly embraced the notion of an uncommercial transaction as has, by contrast, s.588FB of the Corporations Act. Having said that, I see no basis for rejecting the notion of “uncommercial transaction” as a measuring stick by which a transaction will be assessed as leading to the conclusion that one party has embarked upon a course of conduct designed to reduce or minimise the effective value of the matrimonial asset.
The decision of the Full Court of the Federal Court of Australia in Demondrille Nominees Pty Ltd v Shirlaw & Anor[21] (“Demondrille Nominees”) (Foster, Lindgren and Madgwick JJ) is the leading authority on an “uncommercial transaction”. There, the Full Court held that a court must examine whether there was a bargain of such magnitude that it could not be explained by normal commercial practice. However, according to Hodgson JA as a member of the Court of Appeal of the Supreme Court of New South Wales in Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd(in liq)[22] the test is not so stringent that no person would have entered into the transaction. Normal practice, while not decisive, is relevant.
[21] (1997) 25 ACSR 535.
[22] [2007] NSWCA 167 at [54].
Aside from the terms of the share transfer itself, none of the husband’s evidence in relation to the establishment of (businesses omitted) was challenged. In cross-examination, Ms Mariole put to the husband that he did not put in evidence any financial statements, especially concerning (business omitted) and that the husband did not intend to lead evidence from any representative of (business omitted) about the value of the loan account. The husband said he was not in possession of (business omitted)’s 2015 financial statements and no representative of the company was present to give evidence as to the value of the loan.
As mentioned above, no independent evidence was given about the value of each of the companies. In the share sale agreement, the parties purported to attribute a value to 100% of (omitted)’s business. The value of the business and the value of the shares were two different things. Assets and liabilities beyond the “business” ordinarily make up the value of the shares. Not only that but shares are valued on a variety of bases, only one component of which is the business conducted by the company, the value of the shares of which are in issue. For a detailed consideration of the issue, see Wayne Lonegren, The Valuation of Businesses, Shares and Other Equities.[23]
[23] (4th ed, 2003).
It must also be remembered that after the husband and wife migrated to Australia, companies owned and controlled by the husband were adversely affected by the 2006 decision taken by the (omitted) to move away from the (omitted) system that had existed prior to that date and to use instead a (product omitted) system involving a large number of (omitted). The husband said that move “was a disaster for (omitted)”.[24] He said that in “one fell swoop” he lost 40% of his business revenue.[25] The husband swore in paragraph 62 of his affidavit sworn 16 March 2016 that the blow was more than a personal and commercial setback as he realised how vulnerable he was, a matter compounded by the rapidly changing political landscape and sharp increase in crime.
[24] Affidavit of Mr Owen sworn 16 March 2016, p.11 at [60].
[25] Affidavit of Mr Owen sworn 16 March 2016, p.12 at [61].
In 2008 the husband, wife and their children settled in Australia, as has been observed above.
The husband left in South Africa a number of business interests. He stated in paragraph 113 of his affidavit sworn 16 March 2016 that he was required to work from 4.00 p.m. until past midnight most days by reason of the fact that South Africa was between nine and 11 hours behind Melbourne. He said those were lonely and difficult times as well it being “an incredibly stressful period” and “a critical period in the breakdown of the marriage”.[26]
[26] Affidavit of Mr Owen sworn 16 March 2016, p.24 at [113].
Despite the 40% reduction in (omitted)’s revenue, objective evidence told of the fact that between 2008 when the husband and the wife and their children settled in Australia and 2011 when the share transfer agreement was entered into, the husband successfully ran (omitted) and its subsidiaries. He traded in gold in that period, successfully it seems, and he retained a substantial shareholding in (omitted).
The husband swore at paragraph 123 of his affidavit of 16 March 2016 that in the period from March 2008 when he settled in Australia until March 2012 when he became a permanent resident of Australia, interest that (omitted) did not pay on its loan account was added to the loan account without incurring a tax liability.
The husband repeatedly gave evidence that his tax position in relation to his liability to pay tax in Australia changed in 2012 when he became a permanent resident. His status as a temporary resident in the period from 2008 until 2012 conferred upon him an exemption from the operation of the controlled foreign companies provisions of the taxation legislation. Once the husband became a permanent resident he had to pay tax in Australia if (omitted) earned a profit and paid him a dividend. However that would not be the case if his 91% interest in (omitted) and its subsidiaries was transferred to a person he trusted and who could hold a shareholding for him. The husband was aware of the wife’s accusations in that regard as he swore in paragraph 66 of his affidavit –
Ms Owen accuses me of having re-structured my business operations in such a manner so as to retain control and as an alternative option to selling my businesses outright.[27]
[27] Affidavit of Mr Owen sworn 16 March 2016, p.12 at [66].
Pausing at that point, it seems to me that a fair interpretation of the evidence was that in 2011 the husband wanted to avoid the tax ramifications of the change of status in Australia from being a temporary resident to being a permanent resident. So when the contract to manage (omitted) was let, a contract very important for the business as a whole, the husband would have been exposed to significant tax liability unless he altered the ownership of the (omitted) Group. Yet in the process it was necessary for him to maintain control of the affairs of the (omitted) Group. He had previously loaned a very large sum of money to his sister, that she repaid in accordance with the husband’s request and he trusted her.
That factual setting formed the genesis of the share sale agreement. Importantly, there was no evidence that the agreement was drafted by the legal representatives of the vendor or the purchaser and there was no evidence that any due diligence investigations were made prior to the entry into that agreement. There was no evidence that the transaction was even the subject of negotiations. Not a single email was put into evidence, as one might have expected to demonstrate that the terms of the agreement had been the upshot of a true consensus or even a meeting of minds. To say, as the husband said, that the agreement was approved by the South African Revenue Service, wholly missed the point.
In company law, an uncommercial transaction of the sort to which Ms A referred was a bargain that could not be explained by normal commercial practice. The Full Court of the Federal Court of Australia made that observation in Demondrille, as has been pointed out above. In my view, the agreement into which the husband and his sister entered was not an agreement that could be explained by normal commercial practice. I say that for three main reasons –
a)the agreement provided the purchaser with five years of interest-free vendor finance;
b)the agreement provided the purchaser with no obligation to repay any amount for 12 months; and
c)under the agreement, the vendor put the purchaser in funds to pay her own obligations under the agreement.
In no way could those terms be said to reflect normal commercial practice. There is force in Ms A’s observations that the agreement was not an arm’s length transaction. In and of itself, that phenomenon, howsoever true, will not render the transaction amenable to unravelling nor the transaction being called into question. However in circumstances where the transaction was not supported by considerations ordinarily evident in proper commercially supportable arrangements, I became more and more persuaded that the agreement share sale in fact bore the complexion the wife put on it. Paragraph 42 of her affidavit sworn 1 March 2016 seemed apposite where she said –
I am very concerned as this transaction is not an at (sic) arm’s length transaction and I believe that the (omitted) Group of Companies has been deliberately sold to the Respondent Husband’s sister in order to control repayments and leave such payments and monies received in South Africa and to further control the repayments in accordance to (sic) his needs.
In Kowaliw Mr Justice Baker held that marriage for most couples is an economic partnership and both parties should share in the economic fruits of the marriage, although not necessarily equally. His Honour further held that no distinction can usefully be drawn between marital assets on the one hand and business assets on the other.
His Honour further held that financial losses incurred by the parties or either of them in the course of the marriage, whether such losses result from joint or several liability, should be shared by them, although not necessarily equally.
That rather broad statement was subject to exceptions. The first was where one of the parties had embarked on a course of conduct designed to reduce or minimise the effective value or worth of the asset. The second was where one of the parties had acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which reduced or minimised the value of the asset.
Mr Justice Baker held that responsibility for conduct that was commercially inept and economically reckless should be borne solely by the party who engaged in that conduct.
Since the decision of the High Court of Australia in Stanford v Stanford,[28] the import of the observations of Baker J in Kowaliw have been applied either in assessing whether there has been an intentional dissipation of matrimonial assets or as matters to be addressed when considerations relevant to s.75(2)(o) of the Act are engaged. Authority for those propositions include Watson v Ling,[29] Bevan v Bevan[30] and Beckler v Beckler.[31]
[28] (2012) 247 CLR 108.
[29] [2013] FamCA 57.
[30] [2013] FamCAFC 116.
[31] [2013] FamCA 327.
In the circumstances of this case, I am satisfied that it is just and equitable that the assets of the husband and wife ought to be subject to orders altering their respective interests under s.79(4) of the Act and for those purposes, s.75(2)(o) of the Act becomes relevant. As a matter bearing upon the latter section, I have taken into account that in March 2011 the husband purported to enter into an agreement that was, in reality, a sham. That so-called share sale agreement purported to bear the hallmarks of legitimacy. In reality it was a contrivance designed to give the appearance of a commercially proper disposition of matrimonial assets for a fair value when the arrangement did no more than confer some form of interest in favour of the husband’s sister yet the arrangement permitted the husband to retain actual and effective control of the (omitted) Group, in the process enabling the husband to take advantage of not being required to pay the tax consequences that fell to him as result of his becoming a permanent resident.
This was a sham transaction
For the purposes of Australian law, a sham is something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true but something made in imitation of something else or made to appear to be something it is not. It is something false or deceptive. The classic definition of sham and most frequently cited came from the decision of the Diplock LJ in Snook v London and West Riding Investments Ltd.[32] Yet the decision of the High Court delivered a year earlier in 1966 used the following question as the formulation of the test for the existence of a sham –
… did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front – all these words have been metaphorically used – concealing their real transaction.[33]
[32] [1967] 2 QB 786.
[33] Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 40 ALJR 265 at 279.
More recent authority of the High Court in relation to a finding of sham in the context of a tax avoidance scheme is Raftland Pty Ltd as Trustee of Raftland Trust v Commissioner of Taxation.[34] In the specific context of family law disputes, in WGOC & GH & Anor,[35] the Full Court of the Family Court of Australia upheld a finding of the existence of a sham in respect of a purported transaction for the sale and purchase of real estate allegedly settled on trust by the brother of the husband. The trial judge held that the trust itself was a sham, a finding not disturbed on appeal. Similarly in Pierce v D’Cruz,[36] the Full Court of the Family Court held that the trial judge’s finding that agreements purporting to transfer shares as part of the joint-business arrangement was not genuine and were a sham should not be disturbed.
[34] (2008) 238 CLR 516.
[35] [2006] FamCA 539.
[36] [2010] FamCAFC 99.
Under the Act, sham transactions may always be disregarded as the High Court of Australia said in Ascot Investments Pty Ltd v Harper.[37]
[37] (1981) 148 CLR 337.
In my judgment, the March 2011 transaction in which the husband allegedly transferred 91% of his interests in (businesses omitted) was a sham. I have disregarded it.
That then leads to the upshot urged by the wife about the proper treatment of the (omitted) loan, not just the characterisation of the transaction itself.
Ms Mariole submitted that the so-called loan of $391,291.00 should be disregarded and that the sum of $391,291.00 should be treated as a matrimonial asset.
I agree.
That disposes of the husband’s contentions in respect of the (omitted) loan.
Let me now turn to the second factual issue in dispute in this case.
(omitted) loan
The amount in issue in relation to this matter was $614,154.00.
In the “Statement of our assets, liabilities and financial resources as at the end of February 2016” document (the same as the one in which the husband recorded the (omitted) loan of $391,291.00) the husband recorded that a loan to (omitted) of $614,154.00 was uncollectible.[38] A reading of that statement gave no indication about why the (omitted) loan was said to be uncollectible.
[38] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-44”.
Some insight into the loan as between (omitted) and (omitted) was given in notes to the financial statements of (omitted).[39] The statements were dated 21 October 2008 and were for the financial year ended
29 February 2008. The statements were prepared by auditors practising in South Africa.
[39] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-23”.
The following must be said about the financial statements –
a)first, in the opinion of the auditor, (omitted) had an accumulated loss of 1,406,424 South African rand for the financial year ended 29 February 2008 and as at that date, the company’s liabilities exceeded its assets by 1,406,224 South African rand;
b)second, in the director’s report the board reported that the ability of the company to continue as a going concern depended on a number of factors, the most significant being that the directors continued to procure funding for the ongoing operations for (omitted) and that the subordination agreement referred to in Note 7 of the Notes to the Financial Statements remained in force for as long as it took to restore the solvency of the company; and
c)third, Note 7 was important. It appeared against balance sheet item “Other financial liabilities”. The note referred to a loan of 290,397 South African rand in the year 2008. That was to be contrasted with the same item in the 2007 year where the loan was 1,112,199 South African rand. The narration to Note 7 was as follows opened –
This long term loan was granted by (omitted) (Pty) Ltd at an interest rate of 18%. Capital repayments have been suspended by agreement until the company is in a better position to resume repayments
This long term loan was granted by Ms Owen at an interest rate of prime plus 5%. Capital repayments have been suspended by agreement until the company is in a better position to resume repayments. A subordination agreement for R1.45 million has been signed by the lender.[40]
[40] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-23”.
Some of the more important matters to be taken from Note 7 included –
a)(omitted) allegedly granted the loan to (omitted);
b)interest was 18%;
c)the wife granted the loan at an interest rate of prime plus 5%; and
d)a subordination agreement for 1.45 million South African rand had been signed by Ms Owen as lender.
Nowhere in the evidence before me was any subordination agreement.
Nowhere in the evidence before me was a loan agreement signed by the wife in favour of (omitted). The husband did not adduce any record, even in the form of the minutes of the board of (omitted) by which (omitted) agreed to borrow 1.45 million South African rand (or any amount for that matter) or the terms of such alone, its interest rate or the duration of the loan. Nor did the wife adduce any such evidence.
It was common ground that the husband sold his shareholding in (omitted) to a former employee, Ms J in 2007. The wife asserted that the purchase price was funded by an unsecured loan of a sum in South Africa equivalent to AUD$870,000.00.
The husband’s account of the sale of his 50% shareholding in (omitted) was different to the version given by the wife. He swore that in 2007 he sold his 50% share in (omitted) to Ms J and her partner Mr M. The husband said the purchase price was nominal on the basis that the balance of his then extant shareholder’s loan (AUD$200,000.00) would be repaid over 10 years with interest at prime plus 5% or a total interest rate of 18%. He said no written agreement was entered into as he trusted Ms J and Mr M.
The husband’s version of the sale of the shareholding in (omitted) was made all the more difficult to follow because his narration did not follow a chronological (or for that matter, logical) sequence of events. The husband stated that by selling his share in (omitted) he was able to secure the repayment of his shareholder loan in AUD$200,000.00. He said that on 1 March 2007 his shares in (omitted) were transferred to Ms J and that, on behalf of (omitted), a loan certificate was signed confirming the outstanding sum due to him. He said as he was no longer an owner of (omitted), the tax laws relating to controlled foreign companies did not apply to him.
The husband did not exhibit or otherwise adduce in evidence the so-called loan certificate. Such evidence as there was of a loan identified Ms Owen, the wife. It did not identify the husband and the amount mentioned was different. The subordinated loan agreement referred to in Note 7 did not emerge in the evidence.
I formed the view in this case that the husband was very loose in his language about documents that supported his version of events. In many instances, no documents supported his contentions.
The “Statement of our assets, liabilities and financial resources as at the end of February 2016” was a document prepared by the husband.[41] He ascribed to the entries on it various conclusions, especially item 21, being a loan involving (omitted) that he said was collectable and item 24, being the loan to (omitted) that he said was uncollectible. Without further detailed investigation into each entry on that statement, I was not willing to proceed with the attributions given by the husband to the entries on it, especially whether the transaction was in fact a loan and not a sham or whether a loan was in fact owed to the person stated or in the amount stated. I took the view that the husband was an intelligent yet cunning businessman whose word was not to be accepted without substantial verification by independent sources.
[41] Affidavit of Mr Owen sworn 16 March 2016 at annexure “O-44”.
Returning to the (omitted) transaction, the husband did not lead evidence from Ms J or Mr M, her partner. Knowing that the (omitted) loan was in controversy, it was surprising to me that the husband did not seek evidence from the purchasers of his shares in (omitted) to tell of the transaction, that it was valid, to produce the share register, to explain the financial arrangements that the husband said were true or other matters. Those witnesses could have given relevant and highly probative evidence. Their absence was not explained. Ms Mariole asked me to draw an adverse inference against the husband by reason of their absence. In reliance upon the decision of the High Court of Australia in Jones v Dunkel[42] I am willing to so draw that adverse inference by concluding that Ms J and Mr M were not called to give evidence in support of the husband because their evidence would not have assisted his case.
[42] (1959) 101 CLR 298.
Ms A’s evidence in relation to the (omitted) loan was along similar lines to her evidence about the (omitted) loan. In essence, she said she had not seen any documentation in support of the so-called share sale agreement or documentation in relation to the alleged unsecured loan. Ms A said she was unable to assess whether the agreed sale price was or was not a proper commercial price. However, she expressed the opinion that a party selling a 100% shareholding on vendor’s terms would ordinarily document the transaction and importantly, would require security until the vendor finance was paid.[43]
[43] Affidavit of Ms A sworn 4 September 2015 at annexure “A-1”.
To my mind, Ms A’s last mentioned observations reflected prudent and expected commercial practice. The absence of any share sale documentation and of any verification that the agreed price was a proper commercial price together with the absence of any security documentation all point to the alleged transaction being a sham. I do not accept that it had the commercial effect that the husband said it did. There is real force in the opinion expressed by Ms A.
Precisely why and on what factual basis the husband said the (omitted) loan – if indeed it was a loan properly so called – was uncollectible was not adequately explained. The husband said that if there was any more discrediting of (omitted) beyond what the union had already done, the city would cancel the contract. I found that explanation bordering on ridiculous. It made no sense for a large creditor said to be owed a very considerable sum, to walk away from the debt (if indeed the debt was legitimate), not having attempted to collect the debt, upon giving no more than that explanation. The husband went on to say that in his experience in South Africa, nothing went to the creditors in a liquidation unless “hard assets”[44] were involved and he said (omitted) did not have any hard assets. He made that statement about (omitted) having no hard assets in the absence of having seen (omitted)’s financial statements in which its assets should have been detailed.
[44] Transcript of Proceedings, 22 March 2016 at p.33.
That evidence from the husband was not credible. I do not accept that a creditor owed (so it was said) as much as was owed by (omitted) would do nothing to endeavour to collect the debt. I am not willing to accept the husband’s assertion that the debt was uncollectible based on no more than his comments recorded above. In difficult economic times, creditors ordinarily push harder than usual to collect debts and rarely do they proclaim so easily that a debt is uncollectible.
That exchange from the husband caused me to seriously question most of his evidence. To that point I was willing to accept that, based on his experience in business, he was a sophisticated businessman who had enjoyed considerable commercial success over many years. His explanations about the alleged (omitted) loan and the alleged (omitted) loan convinced me that while he may have been an intelligent businessman, he was also cunning in financial matters and not necessarily always straightforward or honest. As mentioned above, I do not believe that on the two occasions of the (omitted) loan and the (omitted) loan, an intelligent businessman, as was the husband, actually advanced large sums to borrowers, unsecured, with no documentation and on terms that were so generous as to be borderline charitable. Those were not proper commercial transactions. The husband gave me unreliable evidence about them. The “transactions” were in truth shams. The fact that the husband persevered with the legitimacy of the transactions indicated to me that I needed to be extremely cautious about accepting his evidence. I have chosen to reject what he said in his characterisation of the so-called (omitted) loan and the so-called (omitted) loan.
Ms Mariole urged me to treat the sum of $614,154.00 as a matrimonial asset. In my judgment she is correct. I will treat that sum as a matrimonial asset.
The sum of $230,000.00
The husband gave evidence that he loaned a company called (omitted) (Pty) Ltd (“(omitted)”) the sum of $230,000.00 to enable (omitted) to meet its expenses. He said he sold a quantity of gold in the (country omitted) in April or September 2013 and deposited the proceeds in an (omitted) Bank offset account. He said he intended to pay that amount to purchase a business but that transaction was cancelled and so he felt it would be much easier to have the balance of the money in his account as he administered that sum from his account rather than from the offset account.
That rather confusing version of events did not enable any proper understanding to be given to the controversy over the amount of $230,000.00.
The husband stated in paragraph 130 of his affidavit sworn
16 March 2016 that (omitted) was incorporated and that he was the sole director and shareholder of it. As with the other companies relevant to this proceeding, the husband did not provide any evidence of the sort that ASIC provides in relation to Australian companies. Be that as it may, the wife did not challenge the fact that the husband was the sole director and secretary of (omitted). The husband gave evidence that (omitted) manufactured (omitted) equipment from the husband’s garage. He said that “[o]n accounting advice, I arranged for [the wife] to lend the AUD$ 100 000 to the company (sic)”.[45] He did not say when that was but I am willing to proceed on the basis that such an arrangement was made after 2009 but before he acquired permanent residency in 2012.
[45] Affidavit of Mr Owen sworn 16 March 2016, p.27 at [131].
The husband’s version of events in respect of the $100,000.00 loan involving (omitted) differed to the wife’s. The wife said that the husband “convinced me to enter into a loan agreement with his company (omitted) Pty Ltd (sic) for the amount of approximately $100,000 and these monies have, to the best of my belief, never been repaid”.[46]
[46] Affidavit of Ms Owen sworn 1 March 2016, p.23 at [81].
As an addendum, the wife volunteered “[t]he Respondent Husband further removed $230,000 from our joint offset account”.[47] On the wife’s version of events, the loan to (omitted) stood apart from the amount of $230,000.00 withdrawn from the offset account. In other words, she took issue with the fact that (omitted) had not repaid the sum of $100,000.00 and she took issue with the fact that the husband made an unauthorised withdrawal from the joint account in the sum of $230,000.00.
[47] Ibid.
The payment of $230,000.00 was made by cheque payable to the husband and it had the effect of increasing the joint indebtedness of the husband and the wife. He admitted he did not tell the wife about the payment of $230,000.00 to himself.
In her report dated 9 March 2016, specifically between paragraphs 8.6 and 8.26, Ms A addressed, among other amounts, the sum of $230,000.00.[48] She traced the dilution of that amount after it was transferred into the husband’s control. She reported that –
a)on 28 February 2014 the sum of $230,000.00 was withdrawn from the joint (omitted) Bank account of the husband and wife;
b)on the same day the sum of $230,000.00 was deposited into an account with (omitted) Bank account number (omitted) called by Ms A “(omitted) account”;
c)the (omitted) account was opened in (omitted);
d)after the sum of $230,000.00 was deposited into the (omitted) account, amounts in varying sizes were transferred out of the (omitted) account and into accounts controlled by the husband in the name of the husband himself, or (omitted), or (omitted) (Pty) Ltd or (omitted) (Pty) Ltd or (omitted) (“(omitted)”);
e)the sum of $230,000.00 was part of the larger sum of $349,480.00 transferred in 52 separate transactions out of the (omitted) account and into the husband’s (omitted) Bank account, account number (omitted) (“(omitted) account”);
f)the transfers between (omitted) and (omitted) were circular in nature; and
g)several large sum transfers were made to (omitted) the domicile of which was in the (country omitted).[49]
[48] Affidavit of Ms A sworn 9 March 2016 at annexure “A-2”.
[49] Affidavit of Ms A sworn 9 March 2016 at annexure “A-2”.
Ms A observed in paragraph 8.22 of the report dated 9 March 2016 that the circular transfer of funds involving (omitted) seemed to serve no purpose other than to make it appear that the husband had expended funds withdrawn from the joint (omitted) Bank account.
I accept that opinion. It showed that the husband’s disposition of the sum of $230,000.00 was or was likely to have been a sham in the way I have found that the so-called (omitted) loan was a sham and in the way I have found that the so-called (omitted) loan was a sham.
The husband elected not to challenge Ms A’s evidence.
I prefer the careful and detailed explanation given by Ms A about the application of the sum of $230,000.00 over the version given by the husband on the same matter. The husband’s version was imprecise, difficult to follow and unsupported in large measure by objectively maintainable documentation. Conversely, Ms A’s version was neither imprecise nor difficult to follow and in almost all respects carefully followed the flow of funds into and out of accounts.
Ms Mariole invited me to conclude that the sum of $230,000.00 was dealt with recklessly by the husband. I do not consider that the 52 transactions addressed by Ms A that resulted in the depletion then subsequent exhaustion of the $230,000.00 was properly characterised in the second exception adumbrated in Kowaliw. In my view, the husband’s conduct fitted within the first exception mentioned in that case, namely conduct designed to reduce or minimise the effective value or worth of the matrimonial asset. It is not seriously open to debate that the husband’s dealings with the sum of $230,000.00 was anything but deliberate. He transferred funds out of the joint account into the (omitted) account, then to the (omitted) account. Then the husband paid various sums into other accounts, mainly in relation to companies owned or controlled by him. It must be remembered that the transfer of $230,000.00 out of the joint account was made without the wife’s knowledge or consent.
It was readily apparent from Ms A’s explanation of the application of funds out of the (omitted) account that the husband regarded himself as being unrestrained in any way in his use of his position as a director of the very many companies he owned and controlled. The husband neither sought nor obtained the wife’s consent to the use of joint funds. The husband then applied those funds in any way he chose. In Kowaliw, marriage was described for most couples as an economic partnership in which both should share in the economic fruits of the marriage. The husband’s conduct in this case in relation to the sum of $230,000.00 was a very long way from conduct even approximating how a partner in an economic partnership should have behaved. His conduct was unilateral, non-consensual and by reason of his non-disclosures, he concealed events, all wholly antithetical to the proper operation of any economic partnership of which I am aware.
The husband must account for the sum of $230,000.00.
Conclusions
The findings expressed above support the conclusions mentioned in paragraph 3 above.
I direct the parties bring in minutes within 14 days of this day to give effect to these reasons.
I certify that the preceding one hundred and thirteen (113) paragraphs are a true copy of the reasons for judgment of Judge Wilson
Date: 18 August 2016
Key Legal Topics
Areas of Law
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Civil Procedure
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Administrative Law
Legal Concepts
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Judicial Review
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Standing
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Procedural Fairness
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Natural Justice
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Jurisdiction
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