Payne and Payne

[2013] FCCA 794

FEDERAL CIRCUIT COURT OF AUSTRALIA

PAYNE & PAYNE [2013] FCCA 794

Catchwords:
FAMILY LAW – Property – company in liquidation – allocation of debts – contribution and s.75(2) factors favour wife – Part VIIIAA order directed to husband’s father as a third party creditor.

Legislation:  
Family Law Act 1975, ss.75(2), 79, 79(1), 79(2), 79(4), 90AE

Stanford & Stanford [2012] HCA 52
Lee Steere v Lee Steere (1998) FLC 91-626
Hickey v Hickey & Attorney General of the Commonwealth of Australia (Intervenor) (2003) FLC 93-143
In the Marriage of Omacini (2005) 33 Fam LR 134
D & D [2003] FamCA 473
Ibbott & Ibbott [2008] FMCAfam 38

Applicant: MS PAYNE

Respondent: MR PAYNE

File Number: ADC 4245 of 2011

Judgment of: Judge Kelly

Hearing dates: 5 and 6 March 2013

Date of Last Submission: 6 March 2013

Delivered at: Adelaide

Delivered on: 17 July 2013

REPRESENTATION

The Applicant: In Person

Counsel for the Respondent: Ms J Cocks

Solicitors for the Respondent: Websters Lawyers

ORDERS

1. The parties do all things and execute all documents necessary to cause the former matrimonial home situate at Property C in the State of South Australia to be placed on the market for sale within 35 days.

2. The property shall be listed for sale by private treaty in the first instance with a real estate agent to be agreed between the parties within 14 days and in default of agreement as nominated by the President of the Real Estate Institute of South Australia.

3. The property shall be listed for sale at a price to be agreed between the parties taking into account the advice of their real estate agent.

4. Upon settlement of sale of the property, the proceeds of sale shall be applied as follows:

   (a)in discharge of the mortgage secured thereon;

   (b)to pay all rates, taxes and other adjustments as required;

   (c)to pay all fees, commissions and disbursements arising from the sale;

   (d)to pay the sum of NINETY THREE THOUSAND FIVE HUNDRED AND TWELVE DOLLARS AND THREE CENTS ($93,512.03) to (omitted) Accountants in discharge of the Directors’ loan outstanding to (omitted) Pty Ltd (In Liquidation);

   (e)to pay the sum of THREE THOUSAND ONE HUNDRED DOLLARS ($3,100) to (omitted) Primary School towards the children’s outstanding school fees;

   (f)to pay any balance then remaining to Mr Payne in partial repayment of the debt owed to him by the parties in their personal capacity as joint guarantors.

5. Thereafter the husband retain responsibility for any debt still owing by the parties to Mr Payne, whether such debt is owed personally, in their capacity as joint guarantors or in their capacity as directors of (omitted) Pty Ltd (In Liquidation) and do indemnify the wife in relation to that debt.

6. Thereafter each party retain all assets presently in their possession free from any claim by the other party, including any superannuation entitlements.

7. The wife pay the mortgage repayments and all other outgoings associated with the former matrimonial home while she remains living in the premises.

8. The wife provide the husband with 14 days written notice in the event that she vacates the former matrimonial home prior to the date of settlement.

9. Save as otherwise provided for in these Orders, the husband shall retain responsibility for all debts in his sole name.

10. Save as otherwise provided for in these Orders, the wife shall retain responsibility for all debts in her sole name.

11. Paragraph 1 of the Orders of 16 December 2011 is discharged.

12. Pursuant to section 90AE(1)(a) of the Family Law Act 1975 (as amended) Mr Payne substitute the husband in lieu of the wife with respect to any debt owed to him by the parties personally, in their capacity as joint guarantors or in their capacity as directors of (omitted) Pty Ltd (In Liquidation).

13. All proceedings are otherwise dismissed as finalised.

14. Both parties’ costs are reserved provided that any Application for costs is filed within 28 days.

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

FEDERAL CIRCUIT COURT OF AUSTRALIA

AT ADELAIDE

ADC 4245 of 2011

MS PAYNE

Applicant

And

MR PAYNE

Respondent

REASONS FOR JUDGMENT

Introduction

1. Ms Payne and Mr Payne married in (omitted) 2000.  In 2003 they established a company known as (omitted) Pty Ltd, through which they ran a (omitted) business.  The parties separated in 2010. (omitted) Pty Ltd went into liquidation in September 2011.

2. The only tangible asset of any significant value is the former matrimonial home.  The wife wishes to remain in the former matrimonial home, to ensure ongoing stable accommodation for her and the two children.  She acknowledges some responsibility for the matrimonial debts and proposes that she retain her existing credit card debts and pays the sum of approximately $40,000 towards the parties’ liabilities.  This sum represents the maximum amount she can raise through re-financing the former matrimonial home.  She says the husband should retain responsibility for all remaining debt, including any debt still owing to (omitted) Pty Ltd (In Liquidation) and to Mr Payne, the husband’s father.

3. The husband argues such an approach is untenable.  He says that the former matrimonial home should be placed on the market for sale and the balance outstanding, whatever that might be, should be directed to the parties’ liabilities arising out of their failed business.  Any net proceed still remaining should be paid to his father.

4. Both parties blame each other for the financial difficulties surrounding (omitted) Pty Ltd but the end result is that their personal liabilities now exceed their assets.  Faced with this difficult reality, the parties have been unable to resolve their competing applications for property settlement and it now falls to the Court to determine this issue.

Background

1. In these Reasons, statements of fact should be considered as findings of fact. 

2. The husband was born in 1972 and is 40 years old.  The wife was born in 1977 and is 36 years old.  The parties began living together in approximately 1997 and were married on 7 October 2000.  There are two children of their marriage:  X born (omitted) 2002 (now aged 11), and Y born (omitted) 2004 (now aged 9).  Both children live with the wife.

3. Prior to their relationship the husband established his own (omitted) business, (omitted).  The wife worked in the (omitted) industry.  The parties decided to move interstate and lived in Western Australia for approximately two years before returning to South Australia in 2000. 

4. The husband recommenced trading as (omitted) while the wife resumed employment in (omitted).  They also revived a (omitted) business that had previously been operated by the husband’s family.

5. In 2001 the parties began trading as (omitted) Payne Partnership and operated (omitted) through the partnership structure.  In 2003 they registered their company, (omitted) Pty Ltd and negotiated with the husband’s father to purchase his business, (omitted).  The parties paid Mr Payne $150,000, which included a significant goodwill component.  The parties took out a bank loan to purchase the business and Mr Payne provided a guarantee for that loan.

6. The wife now argues that the purchase price for (omitted) was over inflated.  She says the nature of the business did not lend itself to any goodwill component, particularly as there were no ongoing contracts with existing customers. She says that the figure of $150,000 reflected the amount Mr Payne needed to pay out a property settlement with his former wife, rather than the value of (omitted).  The husband denies this. 

7. It is impossible for the Court to determine this issue, on the evidence before me.  However, even if the wife could establish that the parties paid more for the business than it was worth, this would not lead to an adjustment between them with respect to this property settlement now.  The parties obtained financial advice at the time, some of which was cautionary.  Whether or not the wife had concerns about the transaction, or felt some pressure from the husband at that time, she nonetheless entered into the purchase ‘with her eyes wide open’ and proceeded to run the business jointly with her co‑director, the husband. 

8. At the time the parties purchased (omitted) the business appeared to be trading comfortably.  The (omitted) Pty Ltd financial reports[1] would indicate the business continued to trade profitably over the subsequent years.  (omitted) Pty Ltd operated from premises owned by Mr Payne.  The business had an informal agreement to pay rent of $100 per week, which eventually increased to $150 per week.  The parties also continued to operate the (omitted) business.

   [1] Annexure 41 to the wife’s Affidavit filed 13 August 2012, (omitted) Pty Ltd Financial Reports for years ending 30 June 2007, 30 June 2008 and 30 June 2009 

9. In January 2009 (omitted) Pty Ltd purchased a new Toyota (omitted) vehicle using approximately $20,000 from savings together with a loan of approximately $26,000 obtained through Toyota Finance.  In November 2009 (omitted) Pty Ltd purchased a Toyota (omitted) vehicle relying on company funds together with a further loan of approximately $16,800.

10. The parties separated on 31 May 2010.  The husband says he became concerned at that time that the wife had not been managing the business finances properly and that personal drawings were being made against the business far in excess of what could be properly attributable as salary or directors’ fees.

11. The wife denies that she mismanaged the business finances. The wife says she has confidence that their accountants properly prepared the financial records for the company each year.  She further denies that the company was in financial difficulties prior to the husband re‑directing income into his separate bank account.

12. It would seem the husband’s concerns commenced before the separation as he set up his own personal bank account in 2009 and payments such as his 2009 tax refund was deposited into that account.  The wife says that other earnings were also deposited into that account, funds that should properly have been directed into (omitted) Pty Ltd.  The husband denies this and there is insufficient evidence before the Court to support such a finding.

13. By October 2010 it became clear that the company’s financial circumstances were precarious.  The parties met with their company accountant, Mr J, in an attempt to negotiate a property settlement as well as manage their financial situation.  Mr J advised the parties to cease all payments from (omitted) Pty Ltd, including repayments to the home mortgage, the (bank omitted) Business loan and the two car loans.  The wife subsequently negotiated to maintain the mortgage repayments on her own behalf.

14. In late October 2010 the husband engaged (omitted) Accountants to undertake an informal audit of the (omitted) Pty Ltd books of account.  The husband says that he ceased trading through (omitted) Pty Ltd and established his new company structure (omitted) Payne Pty Ltd, trading as (omitted), acting on the advice of (omitted) Accountants.  

15. The husband did not inform the wife that he had instructed new accountants, or that he had set up a new business structure until April 2011.  Mr Payne conceded that his new business undertook work for a number of existing (omitted) customers.

16. In October 2010 (omitted) Pty Ltd ceased making rental payments to Mr Payne for the premises rented by (omitted).  In June 2011 the informal rental agreement was terminated by Mr Payne.  All of the plant, machinery and stock belonging to (omitted) Pty Ltd was apparently placed in a shipping container.  Mr Payne issued a Demand for Payment for the unpaid rent from October 2010 to July 2011.  He then issued proceedings in the Supreme Court of South Australia to wind up (omitted) Pty Ltd on account of unpaid debts in the sum of $7,829.  This debt consisted of approximately 37 weeks of unpaid rent totalling $5,550 and a further loan he had previously made to the company to assist with an overdue BAS payment, in the sum of $2,279.

17. Following further discussions, the parties decided to voluntarily liquidate all (omitted) Pty Ltd assets.  Nonetheless in September 2011 the Debtors Petition in the Supreme Court of South Australia proceeded and (omitted) Pty Ltd was placed into liquidation. 

18. (omitted) Accountants were appointed as liquidators.  All the company assets have been called in and sold by the liquidators.  Various meetings have taken place between (omitted) and the parties.  (omitted) advised the parties that they were each liable to repay to (omitted) Pty Ltd the monies advanced to them via the Directors’ loan account.[2]  Initially the parties were advised that they owed approximately $85,000.  At the time of trial that debt had been further clarified and now stands in the sum of $93,500.

    [2] Annexure 15A to the husband’s Affidavit filed 26 February 2013

19. (omitted) Pty Ltd’s liabilities included the (omitted) Bank business loan which was secured by way of personal guarantee from the parties and Mr Payne.  Once the loan fell into arrears, the (omitted) Bank called in the personal guarantees.  In circumstances where neither party was in a position to discharge the loan, Mr Payne paid out the balance owing to the (omitted) Bank (approximately $123,000) rather than face enforcement proceedings.

20. The (omitted) Bank was an unsecured creditor in the liquidation.  (omitted) have informed the parties that Mr Payne has now been substituted for the (omitted) Bank in the list of creditors.  While he has no greater status than any other creditor in the liquidation process, Mr Payne has filed an Affidavit[3] informing the Court that he intends seeking repayment from the parties in their personal capacity as joint guarantors.

    [3] Affidavit of Mr Payne filed 9 January 2013

The husband’s further business dealings

1. I appreciate there was a legitimate concern that (omitted) Pty Ltd may have been trading insolvent in October 2010.  Whether that was the case or not, it is clear that the husband’s actions in setting up a new business in direct competition with (omitted) removed any possibility that (omitted) Pty Ltd could trade its way out of its difficulties.

2. In the course of cross examination, the husband conceded that while trading as (omitted) in 2010/2011, he continued to use (omitted) Pty Ltd plant and equipment.  He also agreed that he was operating through the premises on his father’s property.  This evidence raises the question whether (omitted) should have been paying rent to Mr Payne for the period October 2010 to July 2011, rather than (omitted) Pty Ltd. 

3. The husband cannot recall telling his father about setting up his new business, but I reject this evidence. The husband was living with his father at this time. Mr Payne was in the process of suing (omitted) Pty Ltd for unpaid rent. I do not accept that the husband would not have mentioned he was now trading – and using the premises – through a different corporate structure.  

4. The husband confirmed that he has continued to work from his father’s property.  He does not presently pay rent to Mr Payne and has not been asked for any rental payment since 30 June 2011, the time at which Mr Payne sought to enforce payment from (omitted) Pty Ltd. 

5. The husband then gave evidence about his current business dealings.  The husband says that he is no longer trading as (omitted) Payne Pty Ltd and is in the process of winding up that company. He has established another company, (omitted) Pty Ltd.  The husband is a director of this company and the shareholders are himself, his father and his partner Ms B. 

6. (omitted) Pty Ltd has never traded but the husband is associated with another business which trades under the name of (omitted).  His partner Ms B operates the business as a sole trader and has done so since 1 July 2012.  (omitted), not surprisingly, undertakes (omitted).  It does not employ any staff.  The husband and Mr Payne subcontract to (omitted) and their payments are invoiced through, and paid to (omitted).  (omitted) major client is (omitted).  (business omitted) were also a major, if not the major, client for (omitted), and (omitted) before that.

7. According to the husband, Ms B is responsible for all management of (omitted) Holdings and currently any profits earned through (omitted) Holdings are paid back into the business.  The husband gave evidence that he has no involvement in the management of (omitted) and is not receiving any income at present. 

8. The husband gave evidence that he suffered anxiety and depression across 2012 which has limited his capacity to work.  He gave evidence that he is presently working about 15-20 hours per week and that, between them, he and his father may earn approximately $1,500 per week on behalf of (omitted) Holdings, although this figure varies depending upon the number of jobs on offer at the time.

9. Whatever past difficulties there might have been in the interpersonal relationship between the husband and his father, they are now working together and directing all payment for their services to (omitted).  In addition, his father has provided the truck that they use to undertake their various contracts.  Yet again, it appears the husband has no interest in this asset.  Be that as it may, it is clear the husband and Mr Payne are engaged in a joint enterprise, together with Ms B.

10. The husband reiterated that he does not receive any payment for his services and that the income is all paid direct to (omitted), which is controlled by Ms B.  He said that he and Ms B have had an “on again, off again” relationship but that he trusts Ms B to run the business properly. 

11. The husband’s present business structure seems designed to ensure that there are no assets and virtually no income that can be traced personally to the husband at present.  He is asking the Court to accept that his whole livelihood and financial support is in the hands of his partner Ms B. 

12. In light of all of these matters it is surprising that the husband did not call his father or Ms B to give evidence.

Legal principles

1. The relevant legal principles governing any application for property settlement are set out in Part VIII of the Family Law Act. Section 79(1) states the Court may make such orders between the parties as it considers appropriate. Section 79(2) says that a court shall not make an order unless it is just and equitable to do so. The recent High Court decision of Stanford & Stanford[4] clarifies that s.79(2) directs that the Court not make an order adjusting the property interests of the parties unless it is just and equitable to do so.  Obviously, in most circumstances where parties have separated, that condition is easily met.[5]

   [4] Stanford & Stanford [2012] HCA 52, paras 37-40

   [5] Stanford & Stanford, ibid, para 42

2. In considering the terms of any such order, s.79(4) directs the Court to take into account the parties’ contribution to the maintenance and acquisition of the asset pool during the marriage, including direct and indirect financial contributions, direct or indirect non financial contributions and any contribution to the overall welfare of the family, including in the capacity of homemaker or parent.

3. Section 79(4)(d) directs the Court to consider the impact of any proposed order upon the earning capacity of either party. Section 79(4)(e) directs the Court to refer to the matters set out in section 75(2), factors that generally direct the Court’s attention to each party’s future needs.

4. In summary, the Court must be satisfied that it is just and equitable under all the circumstances to make an order adjusting the property interests of the parties.  In order to then determine the appropriate order to be made, there is a clear process that has been identified by various authorities.[6] First the Court must identify the assets and liabilities arising from the parties’ marriage. Once the asset pool has been identified, the Court then considers the relevant factors identified in s.79(4)(a)-(c) in assessing each party’s contribution during the marriage. The third step requires the Court to consider the range of factors set out in s.79(4)(d)-(g) including the future needs factors identified in s.75(2).

   [6] Lee Steere v Lee Steere (1998) FLC 91-626; Hickey v Hickey & Attorney General of the Commonwealth of Australia (Intervenor) 2003 FLC 93-143; In the Marriage of Omacini (2005) 33 Fam LR 134

1. The Court should then consider its findings and make appropriate orders regarding the property interests of the parties, ensuring that it is just and equitable to make the proposed orders, in accordance with s.79(2).

2. As was commented by the Full Court in D & D[7]:

   “The task is to examine the facts of each case carefully to decide what is appropriate and just and equitable in the circumstances. There cannot be expected to be a universal answer to that question on any given set of facts.  It is of the essence of judicial discretion that different minds may comfortably arrive at different conclusions.”

   [7] D & D [2003] FamCA 473 at 49

3. Considerations of justice and equity also apply in any situation where the Court is considering making an order affecting a third party, pursuant to Part VIIIAA. While s.90AE and s.90AF empower the Court to make an order under s.79 that binds a third party, the Court may only make such an order if the conditions set out in s.90AE(3) or s.90AF(3) are met as follows:

   (a)that making the order is reasonably necessary to effect a proper division of the assets between the parties;

   (a)that it is not foreseeable at the time the order is made that making the order would result in the debt not being paid in full;

   (b)the third party has been accorded procedural fairness;

   (c)the Court is satisfied that, in all the circumstances, it is just and equitable to make the order or grant the injunction;  and

   (d)the Court is satisfied that various matters specified in s.90AE(4) have been taken into account.

4. These conditions are cumulative and the powers contained in Part VIIIAA of the Family Law Act are closely circumscribed.  The Court must be careful to ensure that a third party’s rights are not undermined as a result of the orders made by the Court adjusting the property interests between the parties.

5. The liquidators are aware of the family law proceedings between the parties.  Mr Narayan attended various hearings on behalf of (omitted) and endeavoured to provide some assistance to the Court, at least to the extent of clarifying the debt owing to the liquidators.  (omitted) were invited to participate as a party to the proceedings but declined to do so.

6. The husband’s father, Mr Payne, has also been invited to participate in the proceedings.  He has been present during numerous interlocutory hearings.  On at least one occasion he was represented by solicitors, Scammell & Co and his legal representatives were granted leave to participate in the directions hearing.  Again he was invited to intervene in the proceedings, but declined to do so.  The Court has made it clear to Mr Payne that orders may be made that affect his position as a third party creditor.

7. In those circumstances, the Court is satisfied to proceed to rule on the alteration of property interests as between the parties, pursuant to s.79, and to consider making orders that may affect the third party creditors, pursuant to Part VIIIAA of the Family Law Act 1975.  The Court is satisfied that the relevant third parties, being the liquidators and Mr Payne, have been accorded procedural fairness in relation to the making of these orders.  As to whether any appropriate order can or should be made pursuant to Part VIIIAA, this issue will be addressed further in these Reasons.

These proceedings

1. The wife filed her Application for property settlement on 10 November 2011.  The husband filed his Response on 13 December 2011.  The parties had engaged in extensive negotiations over the preceding 15 months and it is clear that their understanding of their financial circumstances changed substantially across that period.  By the time these proceedings commenced, (omitted) Pty Ltd had been placed into liquidation.

2. The first directions hearing took place on 16 December 2011 and the parties were directed to participate in a Conciliation Conference on 2 April 2012.  Various other orders were made by consent, including an order that the husband pay one half of the children’s school fees.  Clearly that order could not be made without an appropriate child support departure application and accordingly the order is unenforceable.

3. No agreement was reached at the Conciliation Conference and given the parties’ difficult financial circumstances, both parties ceased legal representation shortly thereafter.  Both parties attended in person at the next directions hearing on 11 April 2012.  The matter was listed for a two day trial on 3 and 4 September 2012 and the usual trial directions were made.  In addition, each party was directed to file and serve any Amended Application or Amended Response upon which they intended to rely setting out any orders that may affect any third party or third party creditors, with such documents to be filed by 18 May and served upon any relevant third party by 31 May 2012. 

4. As the parties were self represented, the Court considered it appropriate to bring the matter back for further directions on 3 August 2012.   Unusually, the husband did not appear on this occasion. The following orders and notations were made:

   “UPON NOTING the following:

   (i)following the liquidation of the parties’ company (omitted) Pty Ltd the parties still owe an outstanding business loan to the (omitted) Bank for the sum of approximately $120,000, which loan is secured against property owned by the husband’s father;

   (ii)the wife’s proposal is that she assume responsibility for approximately one-third of that outstanding debt with the husband to assume responsibility for the remaining sum outstanding

   THE COURT ORDERS THAT:

   1.The wife forward a copy of her Amended Initiating Application filed 19 July 2012 to the husband’s father, Mr Payne.

   2.Each party file such documentation as may be available to them relating to the liquidation of (omitted) Pty Ltd, such documentation to be included within their trial Affidavit or under cover of an Affidavit to be filed by the liquidator.”

5. The husband acknowledges that the wife notified the liquidators of the Court hearing, albeit late.  The wife also sent a copy of her Amended Application to Mr Payne on 8 August 2012. 

6. The hearing commenced on 3 September 2012.  Both parties were self represented. Neither (omitted) nor Mr Payne had sought leave to intervene in the proceedings but Mr Payne was again present at Court during the hearing. The Court considered the parties’ affidavits, together with the Financial Statements and a Balance Sheet prepared by each of them.  The Court also heard brief evidence from each party.

7. Both parties conceded that they could not afford to undertake a full audit of (omitted) Pty Ltd’s books or to present the accounting evidence necessary to clarify whether one party or the other was more responsible for the drawings now encompassed within the directors’ loan account.  Accordingly they both conceded that the debt owed by them to the liquidators should come into the asset pool as a joint matrimonial debt.

8. In the course of this hearing, it became clear that various issues were still unresolved, including the status of the loan repaid by Mr Payne, whether he now came in simply as an unsecured creditor in the liquidation (or not) and whether the liquidators would accept partial discharge of the Directors’ loan account, such that the wife and children may be able to remain in the former matrimonial home.  Accordingly, a set of proposed draft summary Orders was prepared by the Court on the basis that a copy of the proposed Orders would be served upon the liquidators. 

9. The proceedings were then adjourned to 26 September 2012.  On that occasion, the liquidators, (omitted), were represented by Mr Narayan.  Mr Payne was also present in Court during this hearing. The wife had filed a copy of further correspondence from (omitted) to the parties dated 24 September 2012.[8]  Mr Narayan expressed the view that Mr Payne had been substituted for the (omitted) Bank and that his status was now as an unsecured debtor in the liquidation.  Mr Narayan offered to enter into negotiations between the parties and Mr Payne to see whether there could be any resolution of the parties’ overall debt position vis-à-vis the liquidation and Mr Payne.  No resolution was reached.

   [8] Court document 21

10. I note with some concern that Mr Narayan appeared in these proceedings on behalf of the liquidators, having previously represented Mr Payne in the Supreme Court proceedings that led to (omitted) Pty Ltd being placed into liquidation.  This raises a clear perception of potential conflict, in my view.

11. The wife filed a formal Application seeking to join Mr Payne as a party to the proceedings.  Mr Payne was given liberty to file a Response and Affidavit by 18 January 2013.  In the event he declined to file any such documents, the husband was given leave to file an Affidavit on behalf of his father.  Alternatively the wife was given liberty to issue a subpoena for Mr Payne’s attendance as a witness.

12. Mr Payne filed an Affidavit on 9 January 2013, prepared by his solicitors, Scammell & Co.  It does not appear to form part of either party’s case, nonetheless I take it into account as an indication of his attitude to the ultimate determination of these proceedings.

13. The final hearing proceeded on 5 and 6 March 2013.  The wife represented herself.  The husband instructed solicitors and was represented by Counsel.  On this occasion the wife relied upon the following documents:

    a)Amended Application filed 19 July 2012;

    b)Affidavits filed 13 August 2012 and 29 November 2012;

    c)Financial Statement filed 29 November 2012;

    d)The document regarding liquidation filed 26 September 2012;

    e)Case Outline filed 1 March 2013.

14. The husband relied upon the following documents as set out in his Case Outline:

    a)Amended Response filed 8 May 2012;

    b)Affidavits filed 3 September 2012, 11 December 2012, 26 February 2013;  and

    c)Financial Statement filed 11 December 2012.

The Asset Pool

1. The asset pool has been identified by the parties and is set out below.  They have not agreed the value of the major asset, the former matrimonial home at Property C and there is no reliable valuation evidence regarding this property.  The wife relies on an (omitted) Bank valuation in the sum of $245,000.  The husband argues that the property may be worth $270,000. The absence of any valuation evidence does not affect my capacity to determine this matter, in the circumstances.

2. The parties agree that the mortgage secured over the property stands in the sum of $146,690.  The further debt to the liquidator of (omitted) Pty Ltd stands in the sum of $93,512.50.

3. The other assets are of modest value and the parties agree that they will each retain the assets, superannuation and liabilities in their own name and do not seek any specific adjustment in relation to these items.  The wife argued that the credit card debts in her name arose during the parties’ relationship and included a mixture of family and business related expenses.  The wife’s credit card liabilities have remained virtually unchanged since separation whereas the husband’s borrowings have increased substantially.  I conclude that the wife’s credit card debts should be included as a matrimonial debt but that the husband’s credit card debt should not.

4. At the conclusion of the hearing, both parties conceded that there should be no adjustments in relation to the motor vehicles (including the husband’s motorcycle and the tractor in the wife’s possession) and their superannuation.  Having considered all of the evidence, I am satisfied that this agreed position can be properly reflected in a just and equitable outcome.  

5. While Mr Payne has been substituted for the (omitted) Bank within the liquidation, he is unlikely to receive full repayment. (omitted) have indicated that unsecured creditors may receive repayment in the region of 30 cents in the dollar, but this remains uncertain.

6. Mr Payne may receive from that process, any balance outstanding should be included as a matrimonial debt, as it arises in the parties’ personal capacity as co-guarantors, even though the loan was taken out by (omitted) Pty Ltd.  Mr Payne argues the parties also owe him the further sum of $12,000.00 which he loaned to (omitted) Pty Ltd but I consider that debt is clearly subsumed within the liquidation and I do not include it as a further liability.

7. The husband also acknowledges a debt in relation to the children’s outstanding school fees.  While the earlier Court order is unenforceable, the husband’s recorded consent clearly indicates that he saw himself as equally responsible for this expense and I include the unpaid school fees as a relevant matrimonial debt. 

8. Therefore the asset pool is as follows:

   ASSETS

   Former matrimonial home at 1 Property C            $245,000 - $270,000
   The husband’s motor cycle  E$7,000
   The husband’s furniture  E$3,000
   The husband’s bank account  negligible
   The husband’s interest in (omitted) Pty Ltd  nil
   (no longer trading under that name)
   Wife’s tractor  E$4,000
   Wife’s furniture and effects  E$7,500
   Wife’s bank account  negligible

   TOTAL ASSETS  (estimate) $266,500-$291,500

   LIABILITIES

   Mortgage secured against former matrimonial home              $146,690
   Debt due to (omitted) Pty Ltd (in liquidation)  $93,512
   Wife’s credit cards  E$13,100
   School fees owed by the husband  $3,100

   SUB-TOTAL  (E) $256,402

   Monies owed to Mr Payne   
   less any distribution from (omitted) Pty Ltd
         (in liquidation)  (E) $123,571

   TOTAL  LIABILITIES  (E) $379,973

   SUPERANNUATION

   Husband's (omitted) Superannuation  $11,052
   Wife's (omitted) Superannuation  $11,356
   Wife's (omitted) Superannuation       $683

   $23,091

9. Clearly the parties’ debts greatly exceed their available assets.

10. For the reasons set out in this judgment, I conclude that the former matrimonial home will need to be sold to discharge the parties’ debts.  If the property achieves a sale price in the range of $270,000, there may be a modest equity remaining.  If that were to be the case, those funds (if any) should also be directed to discharge the parties’ debts.

Contributions

1. Both parties worked hard during their marriage and contributed to the financial security of their family.  They each criticise the other for poor or reckless financial management, but I am unable to conclude that either party was more or less responsible for their financial difficulties.

2. There are many unanswered questions in relation to the demise of (omitted) Pty Ltd.  The husband says the wife was largely responsible for maintaining the accounts for their business (omitted) and for managing the family finances.  He argues the wife routinely and improperly listed private expenditure within the company accounts, a situation that was only made clear to him after separation when he instructed (omitted) to undertake an audit of the business.[9]  I note that (omitted) were not instructed to undertake a formal audit process. 

   [9] Annexure DP3, husband’s Affidavit sworn 31 August 2012 and filed 26 February 2013

3. The wife challenges (omitted)’s analysis of the company records but cannot afford to undertake a formal audit herself. The wife argues that both parties were equally involved in managing the business and were equally responsible for meeting family expenditure from the business bank account, on the understanding that such expenses would eventually be adjusted for and allocated as salary or dividends. 

4. Many small businesses operate on a similar basis.  Sometimes, as with Mr and Ms Payne, the directors may withdraw more than can be properly accounted for as salary or dividends (or that the directors choose to account for as salary or dividends, for taxation purposes). This gives rise to a director’s loan, ie funds that the directors have ‘borrowed’ from the business.  Again, this is not unusual or improper, provided that the directors remain able to meet any demand for repayment of such loans, if the company should require it.  This is the situation that eventually confronted (omitted) Pty Ltd.

5. The wife maintains that (omitted) Pty Ltd was trading successfully until the husband withdrew his labour and began undertaking work for the company’s clients through his new business structure, (omitted). In circumstances where neither party has been able to present detailed accounting evidence to substantiate their respective claims of impropriety by the other party, the Court is unable to determine these matters.

6. I conclude that the parties’ direct and indirect financial contributions during their marriage should be assessed as equal.

7. Both parents were involved in their children’s care during the marriage, but the wife took on the primary responsibility as homemaker and parent.  She has continued in this role since separation.  Presently the children spend very little time with their father.  Clearly the wife’s post separation parenting contribution is significant. The wife has maintained the mortgage repayments on the former matrimonial home, but has negotiated a reduced repayment regime on an interest only basis.  The balance owing on the mortgage has not changed substantially since separation.

8. Mr Payne pays very modest child support and the wife is primarily responsible for the children’s financial support as well.  Given the husband’s evidence about his current employment arrangements and health issues, this situation is unlikely to change any time soon.  In the circumstances I am satisfied that the wife has made a significantly greater contribution in the role of homemaker and parent.

Section 75(2) factors and future needs

1. Both parties are still relatively young.  The wife presently holds three part time jobs working as a (omitted) and in the (omitted) industry.  She earns approximately $950 per week and also receives limited government support through the Family Tax Benefit scheme. 

2. Given the husband’s situation she effectively bears the sole financial responsibility for supporting their two children.  She has not re‑partnered.

3. The husband has suffered ill health which apparently limits his capacity for full time work, but he has nonetheless been able to return to the workforce as a (omitted) in the same field as previously.  He is hopeful that his health will continue to improve.

4. The husband’s evidence about his present working life was less than impressive. The husband concedes that he was using (omitted) Pty Ltd plant and equipment while trading as (business omitted). His taxable income for the year ending 30 June 2011 was approximately $60,000.

5. The husband says his taxable income for the year ending 30 June 2012 was approximately $18,000. He tells the Court that he and his father currently work 15 to 25 hour per week on average but he does not receive any income at present.  I repeat my earlier concerns that the husband has chosen to structure his business/work arrangements in order to minimise any formal income or assets received or held by him. 

6. The husband has re-partnered.  He did not call Ms B to give evidence, which is surprising, given the extent of her involvement with his financial arrangements now.  I find it difficult to accept his characterisation of their relationship as “on and off”, in the circumstances. 

7. The husband appears to earn less than the wife, however I am not satisfied that he has given the Court a full and complete account of his true financial circumstances.  He appears to be operating the same business as previously, albeit through a different financial structure.  I consider it likely that he does receive an income at present and that he will be able to earn a substantially higher income in the future. 

8. I am satisfied the husband’s conduct in the period since separation is a relevant factor.  Neither party has been able to produce any forensic accounting analysis, but I repeat my earlier concern that the husband’s decision to set up a new business structure which then provided services to (omitted) Pty Ltd clients had an impact on the parties’ overall financial situation, albeit the extent of that impact is unquantifiable.  He has also tailored his present financial arrangements so as to avoid scrutiny by the Court.

1. In the circumstances I conclude that the s.75(2) factors, particularly the wife’s ongoing parenting responsibilities, lead to a significant adjustment in favour of the wife.

Conclusion

1. I have not allocated a precise percentage adjustment in relation to my discussion regarding the parties’ contributions or the s.75(2) factors. There is too great an air of artificiality in doing so, given that what remains to be determined is the allocation of responsibility for debt. Nonetheless, I repeat my findings that the wife’s post separation parenting contributions and the s.75(2) factors warrant a significant adjustment in the wife’s favour.

2. At the end of the day, the Court is faced with the reality that the parties’ liabilities exceed their assets.  The wife’s proposal – that she retain the former matrimonial home and pay approximately $40,000 in discharge of the outstanding debts – is not an outcome that the Court can contemplate.  This would result in the wife retaining net assets valued somewhere between $50,000 and $75,000 and the husband retaining matrimonial debts in excess of $160,000, including the balance due to the liquidators.  Such an outcome could not possibly be viewed as just and equitable as between the parties.  It also ignores the legitimate claims of the creditors within the liquidation process.

3. There is no option other than to sell the former matrimonial home, so as to enable the net proceeds of sale to be directed to the outstanding debts. As to the question of priority between debtors, neither the liquidators nor Mr Payne chose to take formal part in the proceedings.  Both parties acknowledge their liability to the liquidators and I conclude that this debt should take priority.  If there are any net proceeds still remaining, those funds should be paid towards the parties’ remaining debts owing to the school and to Mr Payne.

4. Mr Payne will presumably receive a distribution from the liquidation process, once the directors’ liability has been paid in and the company finally wound up.     

5. The parties agree that they will retain those debts for which they are presently responsible.  Hopefully there will be sufficient funds from the sale of the former matrimonial home to bring the children’s school fees up to date. 

6. The only debt then remaining will be the balance still owing to Mr Payne.  The amount of this debt is unclear, as it depends upon what amount he ultimately receives through the liquidation process. Notwithstanding this uncertainty, I conclude that the husband should retain responsibility for the debt owing to Mr Payne and should indemnify the wife in relation to the balance of the debt still remaining to Mr Payne.  

7. As already discussed, the wife has made a greater post separation contribution than has the husband, by virtue of providing primary care to the children and she will continue in that role for the foreseeable future.  The wife’s modest income will be directed to supporting the children and discharging the credit card debts in her name.  She will incur the inevitable disruption and expense associated with finding alternative accommodation for her and the children.  She will also be subject to the vagaries of the rental market, with the ongoing uncertainty that can bring, both for her and the children.

8. Given her financial responsibilities, she has no capacity to make any further contribution to the parties’ outstanding debts.

9. The husband is clearly able to work and earn an income.  His precise income cannot be quantified by the Court, but that arises by virtue of the husband’s own actions in setting up his present work/business structure.  That situation, together with the fact that he is actually working together with his father, leads me to conclude that he will be well placed to negotiate a reasonable repayment arrangement with Mr Payne in the future.  Indeed, he has a strong incentive to do so.

10. The wife will continue to provide for the parties’ two young children.  She will continue to discharge the credit card debts owing since separation.  The husband will be left with a greater debt burden, but he has structured his finances in such a way that he will not be making any meaningful financial contribution to the children’s support in the foreseeable future.  In those circumstances I conclude it is appropriate that he retain that greater debt burden.

11. Taking into account all of the above, I am satisfied this outcome represents a just and equitable settlement between the parties. 

Should a Part VIIIAA order be made?

1. Having ordered that the husband indemnify the wife in relation to the debt remaining to Mr Payne, I now consider whether it is appropriate to make an order directing him to substitute the husband for the wife in relation to this debt, pursuant to s.90AE(1)(a). As discussed, Part VIIIAA allows the Court to make an order affecting a third party, including a third party creditor, but only if the conditions set out in s.90AE(3) and (4) are met.

2. The conditions set out are quite stringent, as discussed by Brown FM (as he then was) in Ibbott & Ibbott[10]. However, in that case, His Honour was dealing with a situation where there was an asset pool from which the third party liquidator’s outstanding debts could be paid. It was very clear that any Part VIIIAA order made by the Court in that case may have resulted in the relevant debt not being paid in full. But it would be wrong to interpret s.90AE(3) so as never allow an order to be made against a third party creditor.

   [10] Ibbott & Ibbott[10][2007] FMCAfam 38

3. Section 90AE(3)(b) requires the Court to consider whether it is foreseeable that making the order would result in the debt not being repaid in full.  That is not the situation here in relation to Mr Payne, who already faces the possibility that the debt owing will not be repaid in full, whether or not an order is made. 

4. The reality is that once the former matrimonial home has been sold and the net proceeds distributed, there are no assets remaining in the possession of either party against which Mr Payne can claim. On any view of present situation, it is unlikely that Mr Payne’s remaining debt will be repaid in full, irrespective of any order made pursuant to ss.90AE.

5. While Mr Payne could pursue the debt against the wife in her capacity as co-guarantor, this is unlikely to achieve any significantly better outcome for him, in terms of the debt being repaid.  The wife has no capacity to make any further repayment to Mr Payne, given her limited financial circumstances.     

6. The husband asks the Court to accept that he is equally impecunious, but the weight I can place upon his evidence in this regard is limited, given that he appears to have deliberately constructed his financial arrangements to achieve this outcome.

7. We know the husband is working.  Indeed, he is working together with his father.  Mr Payne will be well placed to monitor the husband’s financial circumstances and negotiate or enforce some repayment regime.  The husband has acknowledged his indebtedness to his father.  It appears he is reliant upon his father’s goodwill, to the extent that Mr Payne owns the truck that he and the husband use in their working endeavours.  The husband has every incentive to repay his father, in order to maintain their ongoing working relationship. 

8. Turning to the remaining requirements of s.90AE(3), I have already ruled that it is just and equitable as between the parties that the husband retain responsibility for the balance of any debt owing to his father. I am satisfied that such an order is necessary to effect a property settlement between the parties. Having determined that the husband should indemnify the wife in relation to this debt, it is proper that he now be substituted for the wife in relation to this debt, in terms of implementing the property settlement.

9. I am satisfied that Mr Payne is on notice that this Court has the capacity to make orders that may affect his rights as a third party creditor and that he has been afforded procedural fairness in this regard. 

10. With respect to the matters set out in s.90AE(4), I am confident that this order is unlikely to have any taxation effect upon the parties or Mr Payne. It will not impact either party’s entitlement to social security benefits. I do not anticipate the order will require Mr Payne to incur any specific administrative costs or experience any difficulty in complying with the order.

11. I have already commented on the parties’ future capacity to repay the debt.  Taking into account all of the above, I am satisfied it is appropriate to make an order directing Mr Payne to substitute the husband in place of the wife with respect to the balance of the debt still owing to him.  Indeed, this order operates to further clarify the husband’s obligations, should Mr Payne choose to pursue further litigation in relation to this debt.

Child Support

1. A final issue relates to what was, in effect, the wife’s oral application for a Child Support Departure order, in that she sought an order that the husband continue to pay one half of the children’s past and future school fees.  Counsel for the husband argued that the wife’s application was made after her client had closed his case and it would be improper to now rule on that issue.

2. I have already ruled that the husband should contribute towards the children’s outstanding school fees.  Future child support issues should be dealt with through the usual processes available to the parties, rather than an oral application raised late in the trial.  Accordingly, I decline to make an order as sought by the wife. 

3. Even had the wife’s application been properly before the Court, I consider Ms Payne would have had difficulty meeting the requirements of s.117 of the Child Support (Assessment) Act 1989, on the evidence before me.  While both parties originally supported the children’s attendance at a private school, their financial circumstances are very different now.

4. I now make orders as set out at the commencement of these Reasons.

I certify that the preceding one hundred and fourteen (114) paragraphs are a true copy of the reasons for judgment of Judge Kelly

Date:  17 July 2013