PHELPS & PHELPS
[2020] FamCA 285
•29 April 2020
FAMILY COURT OF AUSTRALIA
| PHELPS & PHELPS | [2020] FamCA 285 |
| FAMILY LAW – PROPERTY – INJUNCTION – where the wife seeks interim orders restraining the husband in his capacity as sole director and shareholder of the trustee company of the family trust, from executing any declaration, determination or resolution as to the distribution of income of the family trust without the prior written consent of the wife – application dismissed. FAMILY LAW – PRACTICE AND PROCEDURE – where the wife seeks her father be joined to the proceedings – where the wife seeks leave to amend her Response document to include property adjustment orders which extend to a range of commercial arrangements between her and her father as a third party – where the Court finds such proposed orders are beyond the jurisdiction of the Court – application for leave to amend refused. FAMILY LAW – PRACTICE AND PROCEDURE – where the wife seeks an adjournment of the final hearing listed in May 2020 – where the husband opposes the adjournment application – where the court is not persuaded a trial by electronic means would be unfair or unjust of itself – where the Court finds that uncertainties as to the valuation evidence arising from current trading conditions on businesses as a result of the COVID-19 virus imposed by government restrictions, necessitate some further evidence to be available before a trial – trial adjourned to a date not before 1 October 2020. |
| Family Law Act 1975 (Cth) ss. 79, 80(1) Family Law Rules 2004 rr 6.03, 11.10, 1.04 |
| Ellison & Sandini Pty Ltd [2018] FCAFC 44 Pelerman v Pelerman (2000) FLC 93-037 Tsiang & Wu and Ors [2019] FamCAFC 128 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 Mullen and De Bry (2006) FLC 93-293 Palmer v Parbery [2019] QCA 27 Nicholls v Louisville Investments Pty Ltd (1991) 10 ACSR 723 Capic v Ford Motor Company of Australia Limited (Adjournment) [2020] FCA 486 |
| APPLICANT: | Mr Phelps |
| RESPONDENT: | Ms Phelps |
| FILE NUMBER: | BRC | 4239 | of | 2017 |
| DATE DELIVERED: | 29 April 2020 |
| PLACE DELIVERED: | Brisbane |
| PLACE HEARD: | Brisbane |
| JUDGMENT OF: | Baumann J |
| HEARING DATE: | 14 April 2020, with further evidence received 23 April 2020 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr G Richardson SC |
| SOLICITOR FOR THE APPLICANT: | Phillips Family Law |
| COUNSEL FOR THE RESPONDENT: | Mr T Kirk SC |
| SOLICITOR FOR THE RESPONDENT: | Ryan Kruger Lawyers |
Orders
That the Final Hearing of these proceedings listed to commence on 26 May 2020 be adjourned to a date to be fixed after 1 October 2020.
That Orders 1, 2, 11, 12 and 13 of the Orders dated 6 November 2019 be discharged.
That the parties shall confer on a minute of order which is consistent with the Reasons for Judgment delivered 29 April 2020, and be in a position to provide by 4.00pm on 11 May 2020 a minute of an agreed order, or at least variations contended to an order.
That the parties be at liberty to provide to the Associate of Justice Baumann (...) dates of availability of their preferred Counsel for a Final Hearing for five (5) days after 1 October 2020.
That otherwise the proceedings be adjourned for Case Management Hearing at 12.00pm on 12 May 2020 in the Family Court of Australia at Brisbane.
That parties have leave to appear by telephone on 12 May 2020 by using the “AAPT GlobalMeet” telephone conferencing system as follows:
(a)They shall each telephone 1800 … (within Australia only) (toll free) by 11.55am on 12 May 2020;
(b)They shall each then enter the pass code … (followed by #); and
(c)Hold the line until the Court is ready to connect and proceed with the matter.
Note: The form of the order is subject to the entry of the order in the Court’s records.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Phelps & Phelps has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).
| FAMILY COURT OF AUSTRALIA AT BRISBANE |
FILE NUMBER: BRC 4239 of 2017
| Mr Phelps |
Applicant
And
| Ms Phelps |
Respondent
REASONS FOR JUDGMENT
Introduction
Subsequent to an initial interim hearing on 25 March 2020 when the parties, the wife Ms Phelps and the husband Mr Phelps, consented to two interim injunctions effectively:
a)restraining the husband from taking any steps to amend the Trust Deed of the R Trust without prior written notice to the wife; and
b)restraining the husband from removing C Pty Ltd as the Trustee of the Trust and appointing any substitute trustee in its stead without the prior written consent of the wife,
three remaining issues agitated by the wife were adjourned for further argument and submission until 14 April 2020, namely whether:
c)the wife’s father Mr D be added as a party to the substantive proceedings pursuant to Rule 6.03 of the Family Law Rules 2004 (“the Rules”); and
d)leave be granted pursuant to Rule 11.10 of the Rules to file an amended Initiating Application and amended Response;
e)the husband should be restrained in his capacity as the sole director and shareholder of C Pty as Trustee for the R Family Trust, from executing any declaration, determination or resolution as to the distribution of income of the R Family Trust for the period ending 30 June 2020 without the prior written consent of the wife, unless otherwise authorised by an order of this Court; and
f)that the final hearing of this matter be adjourned to a date to be fixed, not before 24 August 2020.
The wife’s amended Application in a Case filed 23 March 2020 also sought (at paragraph 7) further orders for “litigation funding”, however from submissions received orally it does not appear further litigation funding for the wife is opposed in principle, although the timing (and perhaps quantum) of such payments is shaped by if the hearing scheduled to commence on 26 May 2020 is adjourned or not.
One of the reasons why the Court elected to adjourn the remaining interim applications to 14 April 2020, was that the single expert forensic accountant Mr G had indicated that his updated valuation on relevant entities (as at 31 December 2019) would be available by 7 April 2020 and, as it transpired, an Affidavit of Mr G attaching valuation reports was completed and filed on 9 April 2020. The report, which included an earlier report dated 12 July 2018, comprises some 272 pages.
On 14 April 2020 further oral submissions were delivered by Mr Kirk SC for the wife and Mr Richardson SC for the husband. Mr D, the wife’s father who by Affidavit has confirmed that he consents to being joined as a party, was present during the hearing (as were all parties by telephone), but made no submission.
Subsequently, by email from the solicitors for the wife dated 23 April 2020 (and with the consent of the husband), further correspondence was tendered and relied upon, being:
a)an email from Mr G dated 14 April 2020; and
b)an email from Mr H of J Company dated 21 April 2020.
Before considering the submissions of the parties on the discrete issues identified, some contextual background is of assistance.
Background
The parties commenced cohabitation in October 2005; married in 2006 and separated in April 2015. There are two children of the marriage currently aged 10 years and six years who are cared for on a week about basis.
The wife’s father Mr D at the time of cohabitation was a person qualified to own and operate T businesses and the husband commenced working for him during 2006. Transactions post marriage that involved Mr D and/or his wife in a way and for a purpose which now appears to be controversial and raise serious issues for trial, resulted in the husband and wife through an entity C Pty Ltd, as Trustee for the R Family Trust (the “Family Trust”) which Trust was established on 21 April 2010 acquiring at least the following interests of substance:
a)On 1 July 2010 the T Business in Suburb K was acquired from the wife’s parents. The business is a full licence franchise and a dispute exists as to whether, as the wife asserts, the parties acquired the store at a significant reduction in the purchase price;
b)On 31 December 2012, C Pty Ltd as Trustee for the Family Trust acquired T businesses at B Town and W Centre, also from the wife’s parents; and
c)In 2013, C Pty Ltd as Trustee for the Family Trust acquired a T Business at Suburb S.
Although the W Centre store has recently closed, the single expert Mr G valued the R Family Trust under different scenarios, but for the purpose of the issues to be decided at this time, I record his opinion of the value of the Family Trust (which holds the four businesses) as:
a)at 31 March 2018 between $8,194,653 and $7,368,342 including goodwill but after allowance for external bank debts. The valuation also identifies “loans from the parties” of $1,265,219 each – a combined loan of $2,530,438 (see summary on pages 9 to 11 of “G-2”). These variations in the valuations rely on two different scenarios depending on the rate of salary payment to the husband; and
b)at 31 December 2019 between $8,268,012 and $8,087,701 including goodwill but after allowance for external bank debts. The valuation also identifies “loans from the parties” of $1,648,665 each – a combined loan of $3,297,330 (see summary on pages 132 to 134 of “G-3”).
“Loans from the parties” although they technically affect the “nett” value of the businesses, would be an “asset” in the parties’ personal assets and therefore Balance Sheet neutral.
The observation is made that at least on the comparison of the valuations between 31 March 2018 and 31 December 2019 no significant variations is identified - however I accept the evidence is untested and, as I explore shortly, events since at least February 2020 are yet to be formally assessed by the single expert. I further note that, on this summary at least, it appears that the parties’ contribution of funds (I infer probably from income) to the businesses over the period increased by approximately $767,000.
There are other interests of the parties which will need to be taken into account when the discretion under s 79 of the Family Law Act 1975 (“the Act”) is finally exercised, including at least:
a)a 50% share in the property at M Street, Suburb L previously valued (as a whole property interest at $3,900,000) which is subject to a mortgage in the region of $1,200,000;
b)interests in the Phelps Family Superannuation Fund of $624,968 at 31 December 2019 (see Mr G’s report at page 229 of “G-4”); and
c)the wife’s interests in the “N Pty Ltd” of $261,433 at 31 December 2019 (see page 229 of “G-4”), although the wife says that as this business is not currently operating its value may be less.
Whilst I acknowledge there are other items of property (furniture, cars etc) and other debts (e.g. credit cards) it is readily apparent that these parties’ “wealth” is significantly within the Family Trust that operates the businesses. At the very least, this explains the focus of both parties on the viability and operation of the businesses and their value. However, it is also clear that the history of ownership and operation is a matter of significant focus within a post separation relationship, where the parties are very adversarial and manifest little trust for each other at this time.
The husband commenced proceedings in this Court on 29 January 2018, over three years post separation. At the time of commencement of proceedings, the parties’ marriage had been dissolved by divorce made 27 June 2017.
From the wife’s initial Response it is clear that it has always been the wife’s case that she seeks as part of the alteration of property interests, that two businesses held by the entity C Pty Ltd as Trustee for the Family Trust be vested in her “or her nominee”. The husband has, it seems, consistently sought orders that he retain control of the entity, and thereby control of all the T businesses owned by it. This dispute, is central to the determination of the substantive proceedings.
It is not disputed, although the wife disagrees with the husband’s actions, that the husband has, as sole director of C Pty Ltd, caused decisions to be made by the Trustee of how profits from the business are to be distributed for taxation purposes. Such decisions must be made before 30 June in the year that the income has been generated, otherwise adverse tax implications could arise. Counsel for the wife asserts that for the last two years the decisions made by the husband have caused income to be taxed, ultimately at the highest marginal rate in the hands of the husband. I accept, as the husband concedes at paragraph 18 of his Affidavit, that from 28 July 2017 he ceased to be a “spouse” of the wife and as such he ceased to be a direct named beneficiary of the Family Trust. However, the Phelps Family Trust, created by Deed dated 25 November 2003 has been used by the husband as the vehicle through which profits from the Family Trust were distributed firstly to the Phelps Family Trust and then as the husband directs. The wife submits, and it is not contested by the husband, that the Phelps Family Trust (in which the parties’ children are beneficiaries) received a distribution of profits for the 2018 and 2019 years as follows:
a)30 June 2018 - $1,662,592
b)30 June 2019 - $2,418,875
The husband deposes that “I have not drawn a salary however the business meets expenses or Ms Phelps and my behalf and I draw funds from the business to meet my expenses and to provide support to Ms Phelps”.
Although proceedings have been on foot since January 2018 and although the wife had sought orders limiting the husband’s ability to withdraw more than $10,000 a month for his personal use, after an unsuccessful mediation in July 2018, interim orders were made by consent on 11 October 2018 (“the October 2018 Orders”) in the following form:
“1.That within 14 days of the date of this Order the husband pay or cause to be paid to the wife the sum of $400,000 by way of partial property settlement.
2.That the husband will pay or cause to be paid to the wife a sum of $165,000 by way of litigation funding to be categorised as partial property settlement, as follows: -
(a)The sum of $45,000 receipted into Ryan Kruger Lawyers Trust Account on 26 September 2018;
(b)$30,000 to Ryan Kruger Lawyers Trust Account on 1 February 2019;
(c)$30,000 to Ryan Kruger Lawyers Trust Account on 1 July 2019;
(d)$30,000 to Ryan Kruger Lawyers Trust Account on 1 October 2019; and
(e)$30,000 to Ryan Kruger Lawyers Trust Account on 1 January 2020, or 1 month from the first day of the final trial (whichever is earlier).
3.That within 14 days of the date of this Order the husband pay or cause to be paid to the wife the sum of $40,000 by way of partial property settlement be paid towards the wife’s credit card liability and that the wife will thereafter be responsible for any further debt incurred on the credit card moving forward.
4.That the husband in his capacity as the sole director and shareholder of C Pty Ltd as trustee for the Phelps Family Trust be restrained:
(a)from entering into bank finance arrangements secured over the property at M Street, Suburb L, unless he has the express written consent of the wife;
(b)from varying the financial arrangements between the parties where:
(i)the wife is paid $10,000 per calendar month;
(ii)the husband has paid or caused to be paid the mortgage, insurance, and rates of the house at M Street, Suburb L and the costs of the nanny in the amount of $600 per week (20 hours) and motor vehicle expenses being the motor vehicle repayments, insurance, maintenance, registration and fuel card;
without having given the wife 60 days written notice of his intention to do so.
5.That the husband meet payment of the wife’s telephone bill for one further month.
6.That within 14 days of the date of this Order the wife do all things necessary to transfer her mobile telephone and the telephone and internet at M Street, Suburb L into her sole name and from 26 October 2018 the wife shall be responsible for the payment of her mobile telephone bill and the telephone and internet bill for M Street, Suburb L;
6.That Orders 2(a) and 2(c) of the wife’s Amended Application in a Case are dismissed.
7.That each party bear their own costs of and incidental to the wife’s Application in a Case filed 6 September 2018.
8.That this Order concludes the wife’s Amended Application in a Case filed 6 September 2018 and the interim hearing date of 2 November 2018 be vacated.”
It is to be noted that when the October 2018 Orders were made, four years of distributions at the sole direction of the husband had been made.
It is noted that the wife received under the October 2018 Orders some payments for partial property settlement; litigation funding, payment of a credit card and periodic monthly payments ($10,000) plus the husband pays all expenses relating to the former matrimonial home at Suburb L, motor vehicle expenses and costs of a “nanny”. There is no evidence that the husband has not met these expenses under the October 2018 Orders save for a dispute as to payment for a nanny Ms P.
The wife, 2 March 2020, caused her solicitors to seek a number of undertakings form the husband in his capacity as the sole director and shareholder of C Pty Ltd.
As earlier recorded, two of the undertakings have been agreed to, and now are interim injunctions made by consent orders.
Although the hearing is set to commence for four days from 26 May 2020, the wife seeks the trial be adjourned. In my view, it is appropriate to deal with the other applications, before considering the adjournment application.
Application to join Mr D
The wife may “add another party after a case has started by amending the application or response to add the name of the party” (Rule 6.03). Accordingly, although the wife seeks an order that Mr D be added as a party, no such order is strictly necessary.
However, the wife asserts that once Mr D is added, there is a need for the wife to amend her Response “as set out in paragraphs 9 – 12” attached to Counsel’s submissions, namely:
“9That the Husband as the sole director/shareholder of C Pty Ltd as trustee of the R Family Trust:
(a)do all such things that are necessary to transfer to the Second Respondent, Mr D (or his nominee), the equity in the business known as T business Suburb K and T business B Town, including any and all licences provided by the franchisor T Limited;
(b)take such steps as shall be required to ensure that the borrowings secured over the Suburb K and B Town businesses immediately prior to transfer is no greater than a sum to be advised upon a determination of the value of the businesses, and on transfer the Respondent shall repay the said borrowings.
(i)pay to the Wife, a sum equivalent to the market value of the said businesses at that date and retain the said businesses; or, failing the Second Respondent’s ability to pay to the Wife a sum equivalent to the market value of the businesses;
(ii)cause the said store or businesses (as the case may be) to be sold and he shall pay the net proceeds of sale to the Wife.
10.That the Second Respondent shall hold the said businesses in his name solely subject to the following:
(a)that should the Wife become entitled by reason of the approval of T Limited for her to be a licensee of the Suburb K and/or B Town businesses within 3 years of the date of this order, then the Second Respondent shall transfer the said store or businesses to her for no consideration;
(b)that should the Wife fail to be so entitled to have the said businesses, or either of them, transferred to her within the said period, then the Second Respondent shall: -
11.That the Second Respondent:
(a)shall, in the period until sale or transfer, cause the Wife to be employed and paid a salary at the Suburb K and/or B Town businesses;
(b)shall, in respect of the profits after tax generated from the business conducted at the said businesses after payment to him of an appropriate salary, be held by him on trust for the Wife;
(c)shall, in respect of any losses sustained by the business conducted at the said businesses, be reimbursed from the net proceeds of sale or by the Wife on transfer.
12.The Husband shall take such steps as shall be necessary to obtain the consent of T Limited to the orders contained herein.”
The justification for this amendment is said to be that:
“The amendment proposes (as the wife, who is not yet qualified as a T Franchises licensee) that the T businesses be transferred to the wife’s father (who is a T licensee) ending her qualification. The terms of the order proposed require the wife’s father to hold the businesses totally for her benefit, both in terms of capital and income.”
In short, the husband submits on a number of bases that the proposed amendment to the wife’s Response should not be permitted (for which leave is required under Rule 11.10 as the case has been listed for final hearing). In short, it is the contention of the husband that adding Mr D as a party would be futile as the orders sought concerning Mr D cannot be made, as a matter of law. As this issue was not articulated until the husband’s written submissions were filed on 24 March 2020, I deal with the submissions in order of the husband’s objections and the wife’s response orally delivered by Mr Kirk SC on 14 April 2020.
A). The husband contends at paragraphs 5 to 23 that:
a)the proposed orders in relation to Mr D “are not supported by jurisdiction”;
b)the effect of the orders sought, in their expressed terms, articulate in effect an application to order property settlement for the benefit of a person other than the parties to the marriage;
c)if the construction of s 79(1) of the Act was to operate as contended for by the wife, then the question that would emerge is whether a law authorising the alteration of interest in such property, so as to adjust an interest in the wife’s father was a law, with respect to marriage within the meaning of s 51(xxi) of the Constitution. The answer to that is plainly “no”;
d)the orders sought which would purport to transfer property to Mr D will not attract the rollover relief which applies directly between the husband and the wife which could (if Capital Gains Tax is payable) “cause tax to be payable and forever lost by the R Family Trust” (see Ellison & Sandini Pty Ltd [2018] FCAFC 44). As the Family Trust will remain with the husband, it will be a burden he must then carry;
e)the orders so sought (to form the basis of the wife’s amended Response), if jurisdiction to make them existed, are shaped by the wife’s desire (as expressed at paragraphs 9 and 10 of her Affidavit) are required in order to comply with the requirements of T Limited. She proposes the two businesses be transferred into a new trust of which her father would be the appointer “until such time as the businesses could be transferred to me” and that “the final orders will necessarily be required to bind my father and direct him to take certain steps to implement the terms of the order”. The orders proposed by the wife:
(i)by order 9:
1.seek “the equity in the businesses to be transferred to Mr D (or his nominee). How the “equity” could either be determined or transferred is a mystery; and
2.seeks to quantify the borrowings “secured over the Suburb K and B Town businesses” which Mr D is obliged to discharge.
(ii)by order 10:
1.if the wife becomes entitled to be a licensee within three years then Mr D is to transfer the businesses to her; and
2.if the wife fails to be entitled to hold the businesses, then a process to determine the market value at that time is to be undertaken and the wife’s father shall either pay to her the market value and retain ownership or cause them to be sold.
It is contended there is no power under the Act to order Mr D to do any of these things which, by implication, makes the arrangements unenforceable as a Court order.
(iii)Similarly, by order 11:
1.requires Mr D to employ the wife and pay her a salary;
2.hold any profits (after payment to Mr D of an appropriate salary), on trust for the wife; and
3.Mr D shall be reimbursed in respect of losses sustained in the business.
It is submitted again, that such orders are beyond power; have likely adverse tax consequences and the issues between the wife and her father under such orders are so vague and uncertain that they create issues likely to “become a legal collision”.
f)At paragraphs 19 to 23 of his written submissions, Counsel for the husband asserts there is a “real issue for trial, should amendment permitting joinder of Mr D be permitted, as to the bona fides of both the Wife and Mr D” and whether the true intentions by seeking the amendments are “simply a device to secure the businesses for the Wife’s family as opposed to her”. Mr D becoming a party would potentially allow him to obtain (as a potential purchaser) all the financial records and discovery about the business in the possession of the husband (who controls the Trust) and “may operate to the Husband’s ultimate disadvantage”.
B). The wife contends in oral submissions in response that:
a)a power exists under both s 79 and s 80(1) of the Act, to make the orders sought which Mr Kirk SC had earlier categorised in his written submissions as “novel”;
b)referring to any “series of claims” made by the wife as “susceptible to summary dismissal” (husband’s submissions at paragraph 5) belies the reality, that if the Court was being asked to deal with a summary dismissal application (which it is not) then the authorities make it clear that any such claim must be demonstrated (amongst other considerations) as “doomed to fail” and if there is a “serious legal question to be determined, it should ordinarily be determined at a trial” (see Pelerman v Pelerman (2000) FLC 93-037);
c)if the effect of a transfer to Mr D was (subject to the valuation evidence) to create a capital gain taxable in the hands of the Family Trust then the Court could exercise a discretion as to how to treat the tax liability;
d)the husband has always known that the wife has sought to retain the Suburb K and Suburb S businesses;
e)the bona fides of the wife and Mr D can be properly tested at a final hearing;
f)acknowledging that if the wife, at this stage, was a person qualified under the requirements attached to operating/owning a T Business, that it would not be necessary to seek the orders concerning Mr D, the fact that she is not so qualified, the orders sought are the way in which the properties can be dealt with and which allows them to “come to her but in the event that they can’t come to me, my dad is to sell them at market value”; and
g)there is no question of jurisdiction because it is the property that the Court is dealing with and Mr D supports the orders.
Discussion
Mr D in his Affidavit filed 16 March 2020 confirms he is a “registered T Licensee” and whilst he makes some statements about his intentions at the time of the transfer of the Suburb K, B Town and W Centre businesses and claims he was not aware that the husband “had sole control of the R Family Trust” he supports orders which would enable him to be the registered licensee for the businesses the wife wishes to retain “until she becomes qualified as a licensee and the businesses could be transferred to her”.
However, in my view, before a Court is required to contemplate the orders sought, it is proper that any issue of jurisdiction is determined. Jurisdiction cannot be acquired by the Court BY CONSENT. Whilst I accept that applications for summary dismissal might need to be entertained (if filed) if the amendment sought is allowed, in my view dealing with the issue now on the basis of either allowing or not the amendment is a proper case management exercise considering the main purpose of the Rules (Rule 1.04) and the proximity to a final hearing (whether adjourned or not).
I have reached a conclusion that I would not permit the wife to amend her Response so as to include relief as articulated at proposed orders 9 to 12, for the following reasons:
a)I agree with the general thrust of the submissions as the proper construction of s 79(1) of the Act as contended for by Senior Counsel for the husband;
b)I accept that as originally pleaded by the wife, her claim that the two businesses in question be transferred to the wife “or an entity nominated by her” would permit a bare trustee or other corporate entity under the control of the wife to benefit from such an order. Such a device or form or order is not unusual in this jurisdiction, although careful consideration of tax implications is usually undertaken;
c)However it is clear at this stage (and the wife’s proposed orders contemplate that may be the position for up to three years), that the wife is unable to control or own a T Business as she does not yet qualify as a licensee. There is no evidence to suggest that the franchisor T Limited would give the wife an exemption. The husband, in his Affidavit filed 24 March 2020 (at paragraph 25) gives a summary of the steps the wife would need to undertake to be accepted as a “next generation candidate” and likely timetable. It is clear from the terms of the Deed of Variation of the Family Trust dated 5 May 2010, that T Limited would need to consent to any transfer or disposal of property. Accordingly, even if the wife has qualified there is no certainty a transfer, even to the wife or a bare trustee, would be consented to by T Limited;
d)Whilst the issue of “consent” by T Limited might be properly left to a matter for evidence at the hearing, I am satisfied that the intention of the orders sought by the wife is to actually transfer the interests she wants to her father or his nominee, which for example could involve her brother Mr F who jointly made an approach on or about 13 March 2020 to the wife to offer to purchase the T businesses.
As a result, notwithstanding the capacity to perhaps “tinker” with the orders, a number of conditions the wife seeks to impose if she cannot become a qualified person are likely to be unenforceable as a Court order if made.
e)Section 79(1) of the Act is the source of power and provides relevantly that:
“(1)In property settlement proceedings, the court may make such order as it considers appropriate:
(a)in the case of proceedings with respect to the property of the parties to the marriage or either of them--altering the interests of the parties to the marriage in the property; or
(b)…
Including:
(c)an order for a settlement of property in substitution for any interest in the property; and
(d)an order requiring:
(i)either or both of the parties to the marriage; or
(ii)…
to make, for the benefit of either or both of the parties to the marriage or a child of the marriage, such settlement or transfer of property as the court determines.”
f)Neither Senior Counsel who appeared before me were able to direct the Court to any authority where the Court has found jurisdiction under s 79(1) empowers the Court to make orders of the nature now contemplated by the wife – which I find are not orders for “the benefit” of the wife within the meaning of s 79(1) of the Act, although if she was ultimately able to qualify and fund the exercise she would, I accept, benefit from receiving a transfer at later date;
g)The lack of any authority is explained by Counsel for the wife by the proposition that this issue of jurisdiction has not been raised to his knowledge but that he is aware of cases where orders have been made transferring property to a third party at the direction of a party to the marriage. Counsel for the husband’s explanation for lack of any authority is because it is such a departure from the very core structure of how this section operates. I was directed to the decision of a majority of the Full Federal Court of Ellison & Sandini Pty Ltd (supra) where at paragraphs 102 to 103, they observed:
“102. There is no material difference between the terms of s 79 of the Family Law Act before its repeal by the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) and in its present form. Nor can it be said that the 21 September 2010 orders were made under s 79(1)(d) of that Act as opposed to s 79(1)(a). It is apparent that the power under s 79(1) is to make an order “altering the interests of the parties to the marriage in the property” (s 79(1)(a)) or “in relation to a bankrupt party to the marriage — altering the interests of the bankruptcy trustee in the vested bankruptcy property” (s 79(1)(b)). This power “includes” the power to order a “settlement of property in substitution for any interest in the property” (s 79(1)(c)) and to order “such settlement or transfer of property as the court determines” (s 79(1)(d)). In other words, an order under ss 79(1)(c) or (d) is a kind of order included within the scope of an order which alters interests in property under s 79(1)(a) or (b).
103. The position in respect of s 79(1) of the Family Law Act thus remains as described in Mullane v Mullane [1983] HCA 4; (1983) 158 CLR 436 at 445 in which the High Court said:
In our opinion, therefore, s 79 on its proper construction refers only to orders which work an alteration of the legal or equitable interests in the property of the parties or either of them. An interest in property is a right of a proprietary nature, not a mere — personal right… It does not exclude every interest which is not assignable or transferable… Thus an order under s 79 may give rise to an interest in property which is defeasible on assignment or transfer to a third party, or on the occurrence of some other event, or which the holder is enjoined from assigning or transferring.”
However those observations do not particularly assist me.
h)I am troubled by the submission that this Court exercising its jurisdiction under the Family Law Act 1975, and where it is required to consider whether the orders do justice and equity to the parties (s 79(2)), should consider orders that extend to a range of commercial arrangements between a party and a third party – even if they consent to their agreement being contained within a court order. Issues of enforceability could not be discounted and as a fundamental principle a court ought not make an order it is unable to enforce; and
i)I accept the submission that, in the exercise of the wide discretion to alter interests of the parties in a just and equitable manner, it is available for the Court to take into account, if required, taxation effects which might arise from the orders.
However, I find that the orders which the wife seeks the Court to make are, in the form proposed and for the reasons she and her father identify, beyond the jurisdiction of the Court. In those circumstances, even if Mr D is joined as a party, it would be inappropriate to permit the wife to amend her Response in the manner she suggests.
The wife shall not, in the exercise of my discretion, be granted leave under Rule 11.10(a)(ii).
When the matter reaches a final hearing, it may be that the evidence the wife is capable of producing (including from T Limited) and about the stage of her assessment as a qualified Next Generation Licensee, allows the Court to consider making the orders the wife seeks in her current Response – a transfer to her or her nominee.
These Reasons should not be understood to determine whether or not the current Family Trust controlled by the husband retains some or all of the businesses under final orders. In achieving orders that are just and equitable, the Court may be invited to consider orders for the sale on the open market (to any qualified person) of some or all of the businesses for example.
Injunction to restrain the husband from distributing income from the Family Trust
The wife, who has by consent achieved orders that restrain the husband from taking any steps to amend the Trustee Deed or removing the Trustee C Pty Ltd, and which preserves the current position of the husband as the sole director, shareholder and appointer under the Trust arrangements, seeks an order restraining the husband from making any declarations or decisions to distribute income for the period ending 30 June 2020 without her consent.
Although Mr D deposes that if he understood that his daughter “did not have any legal control within the Trust or control of the distribution of income through the Trust” he would never have transferred the three businesses to the Trust, the undisputed facts remain that:
a)the wife has never been a shareholder or director of the Trustee company C Pty Ltd since the Trust was established by Deed dated 21 April 2010;
b)the husband has at all times been and remains the appointor of the Trust;
c)the wife is a named beneficiary together with persons related to her as described at Item 2 of the Deed. The husband, as her spouse, was a specific named beneficiary (Item 2(a)(ii)), as are her children;
d)a separate Trust, the Phelps Family Trust (which the husband also controls), created on 25 November 2003 which was prior to cohabitation, names children of the husband as discretionary beneficiaries and as a result, by operation of Item 2(a)(c), the Phelps Family Trust is an eligible beneficiary of the Family Trust;
e)the report of the single expert Mr G reveals that income from the R Family Trust available for distribution since separation has been:
i)
Year ended 30 June 2015
$117,192
ii)
Year ended 30 June 2016
$1,682,679
iii)
Year ended 30 June 2017
$1,659,026
iv)
Year ended 30 June 2018
$,1877,505
v)
Year ended 30 June 2019
$2,483,453
f)The same reports record that these available distributions were allocated almost entirely to the Phelps Family Trust since the year ended 30 June 2016, and then in the following manner:
i)
Year ended 30 June 2016
Husband
$835,302
Wife
$835,303
ii)
Year ended 30 June 2017
Husband
$1,467,758
Wife
$210,000
iii)
Year ended 30 June 2018
Husband
$1,662,592
iv)
Year ended 30 June 2019
Husband
$2,418,875
g)Despite what appears to have been the husband making decisions about how the income from the Family Trust should be distributed for the years ended 30 June 2015, 2016, 2017, 2018 and 2019, no application to the Court had been made to restrain his capacity do so, until the current Application in a Case was filed on 16 March 2020.
Principles
The principles to be applied when the Court is asked to exercise its discretion and restrain otherwise lawful conduct by a party in circumstances like the present, are shaped by the need to preserve the status quo pending resolution of the controversy (Tsiang & Wu and Ors [2019] FamCAFC 128 relying on Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [9]-[12]).
Many of the cases, as did Tsiang & Wu and Ors (supra), seek injunctions to restrain a party from diminishing the assets (by either sale or further encumbering), pending a final determination.
In these proceedings, the wife seeks to restrain the husband from distributing income without her prior consent. Whilst the wife has provided no undertaking as to damages, the principles are settled that:
a)the wife must demonstrate there is a serious issue to be tried, which the Full Court in Tsiang & Wu and Ors (supra) summarised as “in essence it requires the demonstration of an arguable case or as was said in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65], the applicant must ‘show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo’”;
b)next the Applicant must demonstrate that the balance of convenience favours making the order (Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at [328]-[329]);
c)further, as Gleeson CJ observed in Patterson (supra) at [321]-[325]:
“…as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant's absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.”
d)relying on Mullen and De Bry (2006) FLC 93-293 at [49], the Full Court in Tsiang & Wu and Ors (supra) said at [25] that:
“It is unnecessary to demonstrate a positive intention but merely the possibility of the event occurring.”
e)however as stated by McMurdo JA (with whom Fraser and Gotterson JJA agreed), in Palmer v Parbery [2019] QCA 27 at [119]:
“The determination of whether there exists a sufficiently serious risk of the dissipation of assets involves the evaluation of future possibilities, rather than the ascertainment of historical facts.114 The risk of dissipation might justify an order although the probability of the risk eventuating is less than 50 per cent.115 But, as the risk of dissipation must be a real and not merely a theoretical one, it must have an evidentiary basis. Where a fact is alleged by the plaintiff in support of its case about the risk, but there is contrary evidence from the defendant, must the fact be proved to the court’s satisfaction as if the application for the freezing order was the trial of the case? In my view, a plaintiff need not do so. A freezing order is interlocutory in nature; it does not involve a final determination of the parties’ positions. Usually it is made in circumstances of urgency in which the court is unable to conduct an extensive and conclusive factual inquiry in a way which is fair to both parties. Where the factual basis for the plaintiff’s case about the risk of dissipation is disputed, the risk will commonly have to be evaluated with the recognition that the factual basis for it is in doubt. Nevertheless, the possibility of the plaintiff’s evidence being correct, considered with other facts and circumstances, might mean that there is a sufficiently serious risk of the frustration of the satisfaction of a judgment as to justify the making of a freezing order…”
Applying these principles to the evidence before me at this time, I have come to the conclusion that the wife’s application for this injunction should be refused for the following reasons:
a)Although the wife, in part relying upon what her father says was his intentions when he sold the Suburb K store to the Family Trust and her being named specifically as one of the beneficiaries, described through her Counsel that the Trust was her trust, or set up for her, the facts are that the husband has controlled the Trust since its inception in 2010 and, as Counsel for the husband fairly concedes, the Trust is the “alter ego” of the husband and as a consequence orders pursuant to s 79 of the Act “may be made in respect of the property of the trust as if it were property of his”;
b)By implication, the wife’s submission that it is her trust and as she is the named beneficiary (in her description the “primary beneficiary”), leads to her contention that when the husband ceased to be her spouse, he was no longer entitled to receive income from the Family Trust distributions. There is no evidence that the husband’s decision effectively as the Trustee of the Family Trust to distribute all income to the Phelps Family Trust is a breach of his fiduciary duties or contrary to the wide discretion prescribed by the terms of the Trust;
c)At paragraph 6.3 of the wife’s submissions, I was directed to a decision of Nicholls v Louisville Investments Pty Ltd (1991) 10 ACSR 723 at [728] where it seems the Court was seized of an application to remove a trustee because the Court found that the trustees who had “de facto” control of the trust had “continually made decisions favouring themselves as against other beneficiaries”. It was found that was “a clear breach of trust”.
d)In my view, the facts of this case, even at this time before all evidence is tested, does not establish that the husband as controller of the trust has made a decision to distribute in the past that is a “clear breach of the trust”. The Phelps Family Trust, on the interpretation of the description of the beneficiaries in favour of whom the discretion to distribute could be exercised, is a permitted beneficiary.
e)Even if the wife may not have been aware of the actions taken by the husband (and there is no claim by the wife that the husband had failed to meet his statutory obligations of disclosure), at least by the time Mr G delivered this first forensic report on 12 July 2018, an examination of annexures 8 and 9 would have identified that income distributions for the 2016 and 2017 financial years (even before the divorce) were being directed to the Phelps Family Trust, and at least at that time for the 2017 years differentially between the parties;
f)Yet the wife took no action after the release of the report to restrain the husband’s business actions save (by an Application in a Case filed 19 July 2018) to limit the husband withdrawing more than $10,000 per month for personal use. I can only assume she did not press such an Application as no such order was made by the Court;
g)In these circumstances, the wife’s delay in bringing her Application until 16 March 2020 remains unexplained to my satisfaction. She has, at all times, been competently represented;
h)Whilst I accept that the wife will be entitled to seek from the husband a full and complete accounting of how funds said to be distributed have been applied – particularly since the significant profits were generated from the 2016 year, the increase in the loans made by the parties to their entities at least partly confirms the husband’s evidence that available funds have been applied for business purposes as well. I accept, to the extent that the wife is entitled to track the funds, that she has a genuine interest in where the income has been used;
i)However accepting as I do that the husband has worked full-time in the businesses, he is of course entitled to receive some income for his personal efforts. As a result, the wife might be overly optimistic if she asserts all the income distributed (for the last two years exceeding, on the figures, $4 million) should be added back into a pool estimated to exceed many millions of dollars;
j)The husband says that he should not be restrained, in his capacity as Trustee, to be the subject of some prior consent by the wife. Again, I make the observation that the wife has not sought a similar injunction in previous years. The failure by the wife to do so, coupled with the prima facie lawfulness of the husband’s actions as prescribed by the Deed, do not in my view persuade me that the balance of convenience favours the wife. I am far from convinced, at this time, that the husband, as Trustee, has “wrongfully exercised his discretion”;
k)Perhaps most telling however, is the lack of any reliable evidence placed before the Court that the previous actions of the husband have, in some way, caused some decrease in the pool of assets. The report of Mr G based on the figures to 31 December 2019 reveal a maintenance of both income and profits. Subject to testing, the wife seems unable to demonstrate some business failings under the husband’s stewardship; and
l)Even though the wife seeks a 75% share of the pool of assets, I am not satisfied that the injunction is necessary because there is a sufficiently serious risk her entitlements might be frustrated.
All the major assets have been preserved. Even more than that, the husband who controls the Trust and wishes to retain all the businesses knows he can only do so if he has sufficient capacity to “pay” the wife her just and equitable entitlement. He has a strong interest therefore in manning the viability of the businesses –if not for the wife’s interest, at least to ensure his major secured creditor (the bank) and the requirements of T Limited are satisfied.
For all these reasons, I am not satisfied the injunction sought by the wife is appropriate and the Application will be dismissed.
Adjournment application
The wife seeks the trial be adjourned, whilst the husband says the trial can proceed and should proceed as listed for four days on 26 May 2020.
I have given consideration to the evidence and the submissions of Counsel and have considered whether a trial proceeding now in four weeks’ time is “unfair and unjust”. I use those terms, adopting the phraseology used by Perram J in his recently published decision (refusing an adjournment) of Capic v Ford Motor Company of Australia Limited (Adjournment) [2020] FCA 486. Although that decision related to an entirely different sort of case (a class action with multiple witnesses and trial listed for six weeks), nonetheless his Honour’s discussion of relevant principles was of assistance.
Before I identify the ultimate factor which persuades me to adjourn the final hearing until after 1 October 2020 (to be discussed with the parties – including the length of the trial and availability, if possible, of preferred Counsel in the case), I make these findings:
a)Now that the issue of whether the wife’s father will be a party to the proceedings has been resolved, this property dispute involves just two parties and not a significant number of witnesses. I am satisfied the case may take up to five days (one day longer than currently listed) but that is not an impediment to the current listing in itself;
b)The use of technology (the Court’s current preferred platform being Microsoft Teams), has developed so quickly over the last few weeks that many judges have been able to conduct both parenting and/or property hearings by virtual electronic means. It is now consistent with the published protocols of the Court that, subject of course to the discretion of the trial judge, every case should be carefully examined to determine if the case cannot be heard by technological means;
c)In this case, although there may be challenges such as and including the inability of Senior Counsel for the husband Mr Richardson SC entering the State of Queensland; not being able to see witnesses “in the flesh” in Court; the number of documents likely to be tendered or put to witnesses etc, I am not persuaded with proper planning and using all available technical support, that the trial proceeding electronically on 26 May 2020 would be unfair or unjust of itself. In this case, all parties are represented by Senior Counsel retained by experienced and highly competent firms of solicitors. Clearly there can be additional challenges to undertaking virtual trials, where parties are not legally represented or have no reliable access to technology. That is not an issue in this case; and
d)The court is also conscious that these proceedings have been set down for a final hearing, and even though the hearing date presently is less than two years since the wife filed her initial Response, nonetheless the parties have been separated for over five years and desire, understandably, some finality.
However, although these factors lean strongly towards the trial proceeding as listed, I have, after careful consideration, formed the view that uncertainties as to the valuation evidence arising from the current trading conditions imposed on the T businesses as a result of government restrictions on movement of people and business operations to protect the community from the transmission of the COVID-19 virus, necessitate some further evidence to be available before a trial.
In my assessment, for the reasons which follow, I find a trial no earlier than the first week in October 2020 (which the Court can accommodate or even thereafter before Christmas 2020) is appropriate and would better allow the Court to conduct a trial that is fair and enhances thereby, a more just result. Those reasons include:
a)The recent report of the single expert Mr G provides an opinion on the value of the parties’ interests in entities, in particular:
i)The R Family Trust;
ii)The Phelps Family Trust;
iii)The Phelps Family Super Fund; and
iv)N Pty Ltd.
based not only on the assessment made for the report dated 12 July 2018 but on updated financial information to 31 December 2019;
b)It is acknowledged that as a result of Government imposed restrictions within the current COVID-19 pandemic, the T businesses operated by the parties are not currently able to offer “sit in” services. They are able to offer, and are offering takeaway service. The assessment of Mr G, based on financial statements to 31 December 2019, could not have therefore anticipated how, if at all, the restrictions currently imposed could be factored into the current estimations;
c)Alert to this possible issue, the solicitors for the wife, by letter dated 19 March 2020, raised some questions to be answered by the single expert. At 25 March 2020, such answers (and of course the full report) were not available and as a result directions were made for such information to be available by 14 April 2020. The parties were also given leave to file any further Affidavits updating the circumstances from their perspective;
d)The further evidence from Mr G came in the following form, namely:
i)By email dated 9 April 2020, Mr G responded to the initial questions raised by the solicitor for the wife dated 19 March 2020;
ii)By a further email dated 9 April 2020, Mr G responded to further questions raised by the wife on 7 April 2020 (after the single expert’s report was released on 6 April 2020). These two letters dated 9 April 2020, together with a document describing the term “Limited Scope Valuation Engagement” were collectively marked Exhibit 4; and
iii)By agreement between the parties on 23 April 2020, the solicitors for the wife provided an additional email from Mr G reflecting on evidence given by the wife’s shadow expert Dr Q, specifically at paragraphs 8 to 11 of his Affidavit filed 9 April 2020. That response has been marked Exhibit 6.
e)The wife filed an Application in a Case on 9 April 2020 supported by an Affidavit of valuer Dr Q. The Application sought the appointment of Dr Q as an adversarial expert with respect to the valuation of the interests held by the R Family Trust. Objections were raised by Counsel for the husband to the wife relying on the Affidavit and in particular, paragraph 9(a). For reasons delivered orally, paragraph 9(a) was struck out, however the wife was given leave otherwise to rely upon the evidence of Dr Q, for the purpose of the application to adjourn the trial. Mr Kirk SC indicated, by the end of submissions, that he did not press for the orders appointing Dr Q as an adversarial expert at this time;
f)Furthermore, on 23 April 2020, an email dated 21 April 2020 from the single expert appointed to value the Suburb L family home, was tendered by agreement. This email was marked as Exhibit 7;
g)As the first step in any property case, the Court is required generally to make findings as to the value of the parties’ interests in property (widely defined) at the date of the hearing. Whilst the Court usually has valuation evidence some months earlier than a hearing, it is a matter for consideration by the trial judge (in the absence of agreement) whether the evidence of value at the time of assessment is still valid at the time of the hearing. Often “updates” from earlier assessments are necessary;
h)In this case, the Court accepts that the two primary assets (the T Franchises and the Suburb L home) could, because of the impact on operations and the market resulting from the COVID-19 pandemic, vary from the opinion expressed in Mr G’s report based on the 31 December 2019 figures. I am reluctant to engage any more fully with the competing diverse opinions expressed by Mr G and Dr Q recently as I will be the trial judge. Certainly it is clear that the two forensic valuers currently hold different opinions about both the utility and relevance of the report at 31 December 2019 and the impact (without either having, it seems to me, any data) of the changed trading conditions; and
i)There are also some uncertainties arising from the valuation of the Suburb L property as well as the wife’s interest in the N Pty Ltd.
I have reached a conclusion that, on balance, the hearing should not commence before 1 October 2020, by which time I anticipate that:
a)properly briefed with at least management reports for the operation of the Family Trust to 30 June 2020, Mr G as the single expert can more comprehensively opine as to the likely effect on the business valuation;
b)although the Court is not certain what might be the nature of any changes to movement freedoms and/or permitting customers to “dine in”, at least by 30 June 2020, there will be approximately four months of data (March, April, May and June 2020) of trading experience; and
c)some of the concerns raised, somewhat speculatively, by Dr Q at paragraph 9 of his Affidavit cannot be simply dismissed as relevant to the ultimate determination of the value of the businesses even though Mr G takes issue with them on their weight. Also, the concerns are not simply satisfied by the husband’s indication (through his Counsel) on 14 April 2020, that the husband is happy to accept the valuation evidence of Mr G whatever may be the effect (if any) of recent trading changes;
d)I would expect that Mr G, still the only appointed single expert, would be in a position by at least early August 2020, and with the benefit of more data as he has set out would be required, to express an opinion as to current value more likely to be accurate and reliable than the assessment currently before the Court. I do not ignore the chance that even with the additional data and reflection on events since 1 January 2020, Mr G might not alter significantly his opinion. I propose however, as the Court’s expert, to give him that opportunity;
e)If a report is available by early August 2020, and a trial does not commence until October 2020, this is sufficient time for the wife to take advice and instruct her solicitors whether at that time she wishes to press the application for the appointment of an adversarial expert. She may be content to rely on other evidence as “shadow expert” evidence. If an adversarial expert is permitted, I would expect the two experts to confer, as the Rules allow; and
f)Even if the restrictions on how courts manage and hear cases like this in October 2020 is not much different than the circumstances now, I am satisfied that the impediment to a fair trial arising from the state of valuation evidence – for not only the Family Trust, but also for the N Pty Ltd and the Suburb L home – will be significantly removed or at least more reliable.
Form of orders
After the parties have had an opportunity to consider these reasons, I expect the lawyers to seek to reach an agreement on the form of order including, in particular, the timetable for further evidence from Mr G and the new trial date.
As earlier indicated, I would like, in this case, to try and accommodate if possible the availability of retained Senior Counsel. The further orders or directions, if agreed, can be submitted to chambers, however if a dispute exists as to the orders that are consistent with these Reasons, then the matter will be listed for determination of the form of order at 12.00pm on 12 May 2020, by telephone.
I certify that the preceding forty-nine (49) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Baumann delivered on 29 April 2020.
Associate:
Date: 29 April 2020
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