Rankine and Addison
[2008] FamCAFC 148
•14 October 2008
FAMILY COURT OF AUSTRALIA
| RANKINE & ADDISON | [2008] FamCAFC 148 |
| FAMILY LAW - APPEAL – From decision of Family Court Judge – PROPERTY SETTLEMENT – Major issue before the trial Judge was the value of shareholding in a private corporation, held by a family trust – The parties had initially agreed on a single expert witness to value the shareholding – Wife appealed against property orders – Two main contentions on appeal – That the evidence of the expert witness was so flawed it ought have been rejected and, either other expert evidence obtained, or the shares divided between husband and wife, or sold –That a debt of $3,030,300.00 owed by the corporation to the trust had not been included as a trust asset and should have been – A consideration on appeal of the extent to which, and manner in which, these issues were put before the trial Judge – The way the parties’ cases were conducted at trial – Whether the trial Judge’s failures to reject the expert’s evidence or require or permit other evidence and to include as a trust asset the debt from the corporation were open conclusions – Held on appeal that trial Judge’s conclusions were open – No merit in contentions on appeal – Appeal dismissed – Costs against appellant |
| Family Law Act 1975 (Cth), s 75(2), s 79, s 117(2A) |
| Coulton v Holcombe (1986-1987) 162 CLR 1 Sharman v Evans (1977-1978) 138 CLR 563 |
| APPELLANT: | MS RANKINE |
| RESPONDENT: | MR ADDISON |
| APPEAL NUMBER: | WA | 14 | of | 2007 |
| FILE NUMBER: | PTW | 5225 | of | 2002 |
| DATE DELIVERED: | 14 October 2008 |
| PLACE DELIVERED: | Brisbane |
| PLACE HEARD: | Perth |
| JUDGMENT OF: | BRYANT CJ, WARNICK & BOLAND JJ |
| HEARING DATE: | 14 July 2008 |
| LOWER COURT JURISDICTION: | Family Court of Western Australia |
| LOWER COURT JUDGMENT DATE: | 14 August 2007 |
| LOWER COURT MNC: | [2007] FCWA 50 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr McCusker QC with Mr Galic |
| SOLICITOR FOR THE APPELLANT: | Galic & Co |
| COUNSEL FOR THE RESPONDENT: | Mr Dowding SC with Ms Farmer |
| SOLICITOR FOR THE RESPONDENT: | DCH Legal Group |
Orders
That the appeal be dismissed.
That the appellant wife pay the respondent husband’s costs of and incidental to the appeal as agreed and in default of agreement, as assessed.
IT IS NOTED that publication of this judgment under the pseudonym Rankine & Addison is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT PERTH |
Appeal Number: WA 14 of 2007
File Number: PTW 5225 of 2002
| MS RANKINE |
Appellant
And
| MR ADDISON |
Respondent
REASONS FOR JUDGMENT
In the trial before her Honour, Justice Martin, of property settlement issues between Ms Rankine and Mr Addison, a major issue was the value of a 70 per cent shareholding in a private corporation, held by a family trust. The parties had initially agreed on a single expert witness, Mr X, to value that shareholding.
In this, the wife’s appeal against the orders made by Martin J, after abandonment of three grounds, two contentions remained. The first was that the evidence of Mr X was so flawed it ought have been rejected and, either other expert evidence obtained, or the shares divided between husband and wife, or sold.
As to the second argument, that primarily pursued before us, as Mr McCusker of Queen’s Counsel argued the appeal for the wife, the focus moved away from the valuation of the shares and the contention became that a debt of $3,030,300.00 owed by the corporation to the trust had not been included as a trust asset, but should have been. To address these arguments involves a consideration in some depth of the extent to which, and manner in which, these issues were put before the trial Judge and whether the trial Judge’s failures to reject Mr X’s evidence or require or permit other evidence and to include as a trust asset the debt from the corporation, were conclusions open to her.
We will consider these contentions after an outline of the context in which they arose.
Two of the grounds abandoned went to a costs order made by Martin J against the wife, in respect of the costs of trial. As to ancillary matters, the wife filed an application for leave to adduce fresh evidence and in relation to certain other aspects of the appeal, but the application was not pursued. The husband filed an application for leave to rely on evidence in the event that we found merit in any of the grounds of appeal.
Context
The parties married in June 1979. They had two children, who were adults by the time of the trial.
In 1988 the husband, who had obtained a degree in science, left employment as a senior scientific officer and coordinator of a management unit of a Department of Western Australia, to set up his own private consultancy. In 1990, A Pty Ltd (“APL”) was incorporated. That company became the trustee of the Addison Family Trust (“AFT”). The business developed software for a chemical management system.
Over the years, the parties also regularly bought and sold real estate. Nonetheless, at separation in mid-2000 the parties had virtually no net assets.
After separation, in about November 2000, the husband reached agreement with “B” to establish an entity to house the intellectual property comprised of the software applications. That entity was R Pty Ltd (“RPL”) in which B held 25 per cent of the shares, APL as trustee for AFT 70 per cent, and the husband’s brother 5 per cent.
The genesis of the debt from RPL to AFT, which was the focus of the second argument before us, arose from the following circumstances, as described by Martin J in her reasons for judgment:
31.…All sales, chemical and administrative support staff, are employed by [RPL]. All design, development and information technology support staff are employed by [APL] who invoice their services monthly to [RPL]. …
Precise particulars of the debt appear from a passage of Mr X’s evidence quoted in her reasons by Martin J (at paragraph 130):
[RPL] has accrued expenses of $3,030,000 for past fees due to [APL] for the period from April 2002 to June 2003. I understand from Ms [C] that these have not yet been invoiced to [RPL] as the directors of [RPL] and [APL] are concerned as to the effect this would have on the solvency of [RPL]. [RPL] does not have sufficient cash flows to meet the liability to [APL] should it become payable. However, it is acknowledged that the liability for this amount to [APL] does exist.
Mr McCusker’s argument is that if the debt exists for the purposes of valuing RPL shares, it ought be included as an asset of the trust.
Martin J ultimately calculated net assets for division between the parties at $6,444,098. As seen, this did not include as an asset the debt from RPL to AFT. Her Honour assessed contributions to the time of separation as equal but because of post-separation matters, concluded that, by trial, contribution favoured the husband 65 per cent to the wife’s 35 per cent. She readjusted 10 per cent to the wife for s 75(2) factors, thus dividing the net assets 55 per cent to the husband; 45 per cent to the wife.
We return to the question of the way in which, relevantly to the valuation of RPL and to the assets of AFT, the cases of the parties were conducted. We will then consider the manner in which Martin J dealt with the issues put before her and then the arguments pursued before us. The information that follows about matters prior to and during the trial is derived from Martin J’s reasons.
CASES OF THE PARTIES
(a) Prior to trial
The husband commenced the s 79 proceedings in March 2004. In about January 2005, the wife, having changed solicitors, filed an application for the appointment of Mr L as the single expert “…to report on the value of the business operations of [RPL], and in consequence of that valuation, to value [APL’s] interest in the company as a whole.” In the alternative, the wife sought leave to file a report of Mr L as “her single expert” at trial. The husband proposed other arrangements and, by consent, orders were made in early February 2005 that Mr X “…be appointed as the single expert to prepare a report and give evidence in relation to the value of the business operations of [RPL] and, in consequence of that valuation, to value [APL’s] interests in the company as a whole…”
Significantly in this appeal, Mr X’s task (as described in the above quotes from the trial Judge’s reasons) did not include valuing AFT itself.
Mr X’s first report issued in April 2005. He said:
6.3.2[RPL] has not returned a profit since incorporation and the level of losses has been increasing …
And (as already seen in part):
6.3.4The losses have been funded by the Company's share capital of $3,000,000 and more recently by [APL]. [RPL] has accrued expenses of $3,030,000 for past fees due to [APL] for the period from April 2002 to June 2003. I understand from Ms [C] that these have not yet been invoiced to [RPL] as the directors of [RPL] and [APL] are concerned as to the effect this would have on the solvency of [RPL]. [RPL] does not have sufficient cash flows to meet the liability to [APL] should it become payable. However, it is acknowledged that the liability for this amount to [APL] does exist.
His report continued:
6.3.6I have valued the shares in [RPL] being the company which owns the Business. The difference between valuing a business and the company that operates the business is that one must value the business and then add the value of non-business assets and deduct the value of non-business liabilities to arrive at the value of the company.
6.3.7Accordingly in determining the fair value of the Company I have used the ‘Net Assets on a Going Concern’ method of valuation. In using this method I have assumed that the Business is a going concern and accordingly the valuation does not contemplate a forced sale of the Company and its assets.
…
8.1…
Under the Software Development and Support Agreement with [APL], [RPL] must pay [APL] for their support and development costs at a mark up on the actual costs incurred by [APL]. Salaries and wages are charged to [RPL] at the rate of 285% of the actual cost incurred by [APL]. I have assumed that a purchaser of the intellectual property would employ support and development staff directly and therefore would not incur this mark up on costs.
Martin J summarised the effect of Mr X’s first report, as follows:
143.Mr [X]’s conclusion overall in his initial report of 8 April 2005, was that the fair value of shares held by [APL] in [RPL] was nil, concluding at para 9 of his report:
“I have concluded that [RPL] is a loss making business that is currently being funded by amounts due to [APL] that have not yet been invoiced. I have doubts in relation to its medium term financial viability.
I have valued the shares in [RPL], the company which owns [RPL] business. My valuation model results in a valuation of [RPL] between ($94,239) and ($786,496). Therefore in my opinion [RPL] has no value on a net asset valuation basis.”
Of some of what followed Mr X’s first report, Martin J said:
67.Some questions were posed to the expert by the wife’s solicitors. [Who] also instructed a forensic accountant … to assist in the matter… .
68.…The wife was obviously unhappy with Mr [X]’s conclusion that [RPL] had very modest value. …
…
77.… The wife had commissioned a preliminary valuation report from [an accountancy firm] dated 3 August 2005, which said further investigation of the value of [RPL] was required. …
In November 2005 various applications were filed, including one by the wife to vacate the trial listed for 6 February 2006. Of these applications, Martin J said:
86.All the interim applications were listed before Justice Thackray, eventually, on 15 and 16 December 2005. …
87.At that time, Justice Thackray was prepared to vacate the trial date for 6 February 2006. …
88.… It was also ordered that, in the event the wife seeks to rely on any business valuation evidence other than that of [Mr X], she make an application on or before 28 February 2006, or within seven days of her expert report becoming available, whichever was the sooner.
…
90.No application was made by the wife to rely on further business valuation evidence.
91.On 29 March 2006, the wife filed an application seeking vacation of the trial which was due to commence before me a few days later. …
92.On behalf of the wife, it was submitted that affidavits … raised serious questions about the true value of [RPL], for example, as to whether the information technology and software belonging to the business have been valued properly or at all. Alleged errors in Mr [X]’s report were referred to and the report was said to be obsolete. The explanation for the non-filing of the application for leave to introduce any expert valuation evidence by 27 February 2006, “was because inquiries and investigations were still continuing”. …
…
99.… I dismissed the wife’s application. …
(b) During the trial
As to these matters, Martin J said:
101.The matter then proceeded over five days from 3 April 2006.
102.By the conclusion of that hearing, it was apparent that the case would have to be adjourned …
…
146.Mr [X] prepared an updated report as a result of a request made by me during the initial part of the trial on 4 April 2006. Clearly, much more up-to-date information was required for the purposes of my decision, particularly having regard to the then negotiations between the company and [B]. For the purpose of the updated report, Mr [X] had the benefit of considerable additional information, including the audited financial statements of [RPL] for the years ended June 2004 and 2005, and management accounts of [RPL] for the eight months ended 28 February 2006. He had been asked to ascertain, or have ascertained, from the documents and information made available to him that:
•under scenario 1, the existing arrangement with [B] will continue unchanged;
•under scenario 2, the existing arrangement with [B] will be discontinued from 20 April 2006.
…
144.Using the net assets on a going concern method of valuation, Mr [X], after adjustments for some errors made in his initial report, after questions had been put to him, concluded his amended valuation was as in appendix 1 of his report of 27 May 2005, a copy of which is attached (annexure 3), which valued [RPL] at between ($586,486) and $105,761. Therefore, in his opinion, [RPL] had a value on a net asset valuation of between zero and $105,761.
145.In relation to amounts due to [APL] by [RPL], Mr [X] said:
“The following amounts are due to [APL] by [RPL] as at 31 December 2004.
$ Payable to [APL] 179,711 Accrued expenses 3,030,300 Total: 3,210,011 The accrued expenses of $3,030,300 relate to work carried out between April 2002 and June 2003 by [APL] on behalf of [RPL]. This has not yet been invoiced to [RPL] as it would generate taxable income in [AFT] and hence a large tax liability. It is however a genuine liability of [RPL].
Since June 2003 all work done by [APL] has been invoiced and paid by [RPL] through the loan account with [APL].”
…
157.In his opinion, the value of [RPL] if the [B] contract continued was between $140,000 and $400,000, and the value of [RPL] if the [B] contract does not continue was between zero and $55,000.
158.On 24 July 2006, Mr [X] provided a further brief updated report by letter regarding his view of the impact of the developments in [B] after the hearing in April 2006, to which I have previously referred. He said:
“On the basis of the new facts it is reasonable to believe that the value of the shares in [RPL] now lies between the values I assess for scenarios 1 and 2 and that this will be at the lower end of the range given the reduced commitment by [B]. Based on the impact of these new facts only, in my opinion this would lead to a value range of between $55,000 and $140,000. I have been provided with an updated cashflow projection for [RPL] for the year ending 30 June 2000. This shows that [RPL] will continue to make significant losses under the new arrangement with [B].”
…
109.The hearing date … was … relisted for 25 July 2006, on which day further evidence was given by Mr [X] and the husband. On 19 July 2006, the wife filed a further application seeking leave to reopen the case and that the wife be permitted to adduce expert valuation evidence on the part of [Mr D] of [the accountancy firm], and further, or alternatively, the court order a fresh and/or further valuation be undertaken by a court appointed expert to the [sic] value [AFT] and the business known as [RPL].
110.The wife’s position remained that Mr [X]’s valuation does not take into account the valuation of the [AFT].
…
113.There was a further afternoon’s evidence and further submissions on 2 August, and Mr [X] again gave further evidence.
The transcript of the trial discloses that, when the matter resumed on 25 July 2006, Mr Galic, for the wife, raised the issue of the extent to which he might be permitted to cross-examine Mr X, particularly in the light of his application to adduce further evidence from another expert. In addressing the Court Mr Galic said:
… - - there is very significant issue, your Honour, as to the treatment of the amount of $3,000,000 thereabouts said to be owed to - - to the family trust by the company. Mr [Addison] gave evidence on the last occasion that he - - that this amount was to all intents and purposes irrecoverable. That raises the question of whether in fact it’s a true debt at all and bearing in mind, of course, that we’re dealing with not arms’ length payment arrangements here.
…
… - - why in fact that sum of money continues to be recorded as a sundry creditor in the books of the company and and in fact an asset in the books of the trust and indeed in the indicative valuation by Mr [D] he comments to the extent that he thinks there are significant bona fide issues in relation to the $3,000,000 and he does include that he considers that Mr [X] is about $3,000,000 out.
… - - the main difference in the valuation approaches by the two experts as I see it is that Mr [D] has in fact valued the family trust and the business and the company as one of the business.
He has in fact torn down the corporate veil between the trust and the company so that the - - the $3,000,000 might be an amount receivable by the trust but if we’re looking at it as one business then it all comes out in the wash. You can’t have a liability to yourself, Mr [D] would say, …
Martin J observed:
… The matter was adjourned for a lengthy period with an ample time to consider all these issues. Therefore, I certainly permit cross-examination on matters that could possibly have been addressed earlier that haven’t been but it’s very different to bringing in an expert after the main hearing and the case is complete.
…
… All this is far, far too late and we’ve dealt with it previously and nothing new has occurred to justify a change in the determination I previously made so I’m not going to permit reopening as far as Mr [D]’s evidence is concerned. As I say, of course his report and his assistance can be used in cross-examining Mr [X] and the husband. …
Mr X was then cross-examined by Mr Galic who went immediately to the question of the $3,030,300.00 owed by RPL to AFT. Mr X said:
… - - I’ve treated that as a surplus liability of the company, being a valid liability of [RPL].
Later exchanges of relevance included:
How would you have treated the $3 million that’s been expensed in the accounts of the company?---Well, the $3 million - - presently in my valuation of [RPL] it shows it as a liability of [RPL]. Now, on the other side it would be an asset, presumably, of the family trust so the two would nett [sic] out with one another if we were valuing both at the same time. So I’d come up with the value of [RPL] which has it as a liability and the valuation of the trust, which I would assume if it’s in there would show it as an asset, and the two would then be equal and opposite.
So they would cancel each other out?---In effect.
Is that what you’re saying?---In effect that’s what I was doing, yeah.
…
Let’s just assume for one moment that Mr [Addison] is correct when he says the amounts - - it’s not collectable and if that’s the case why should it - - why should the amount continue to be recorded as a liability in the amounts of [RPL]? ---In [RPL] it’s still a valid liability and if [RPL] - - if some creditors were to appoint an administrator or a liquidator to [RPL] there would still be a valid debt of [RPL] which would have to be met by the administrator and therefore - -
…
Well, it’s - - what I’m saying to you is if you put [RPL] into liquidation the director has declared it’s not going to result in any dividend distribution to the family trust whatsoever, so why wouldn’t you ignore that in formulating your opinion? - - -If there was - - you would have an argument there I think if the director of the company had some sort of agreement to waive that, to say, “Look, we’re not going to pay that”, something in writing, but as a liquidator if I - - if I were - - I’m not a liquidator but if I was appointed a liquidator of this company and I saw a liability there for $3 million, that’s a liability. Now, if, on the other side, the person who is owed the $3 million thinks he’s not going to get it back that’s - - I don’t see how that’s relevant to the liquidator.
…
And what does that - - what does that - - does that not tell you that the directors recognised it as being irrecoverable for a long time?---The directors of [RPL]?
MR GALIC: Yes?---No. No, not - - no, because the directors of [RPL] have included it in their financial statements for the last period. That would implicate - - not by implication, definitely says that they think it is payable and they’ve signed off on financial statements saying that it’s a liability.
Mr Dowding SC, counsel for the husband at trial and on appeal, then asked questions of Mr X during which the following exchange of relevance occurred:
Now, if the business were wound up today, and let’s assume for a minute that no one was prepared to resource the software, what are the assets available to meet the $3 million liability?---The assets are what’s on the balance sheet of the company as at the day’s date.
As to matters following the close of evidence on 2 August 2006, Martin J said:
114.On that date, I made orders permitting further written questions to be asked of the expert witness and for filing of written submissions which were to include “an updated final statement of assets, liabilities and resources, setting out the effect of their proposed orders”. …
(c) Submissions
During the trial, the following written submissions of relevance to the cases of the parties about the debt from RPL to AFT were made:
On behalf of the wife (filed 12 May 2006):
4.The husband admits in para. 68 of his affidavit sworn 30.06.05, and he confirmed in cross-examination, that the $3,030,300 that is shown as an asset of [APL] a.t.f. the [Addison] Family Trust is irrecoverable. It therefore cannot be an asset of the company a.t.f. the trust. Or if it is to be regarded as an asset, it is an asset of no value.
5.If the $3,030,300 is irrecoverable, it cannot be a liability of [RPL] (It is noteworthy that this $3,030,000.00 has been included unchanged in the financial statements for over 3 years and so has apparently been recognized as irrecoverable for a long time.) The result of this is that Mr [X] has undervalued [RPL] by $3,030,000.
On behalf of the husband (filed 25 July 2006):
7.3… She and her team had in their possession a “critique” of the report in May 2005. Notwithstanding that, the wife did not file any applications between February 2005 and trial in April 2006 other than applications to postpone the hearing. In particular, she did not at any stage apply for leave to adduce other expert evidence. (original emphasis)
…
14.We say that the assets of [APL] are best established by identifying the assets of the company and not by some other method. In any event the wife has lost the opportunity of establishing another method of valuation through her delay. It would be most unjust and irregular that she should now be permitted to have any further allowance in relation to the adducing of evidence.
Further, after trial on behalf of the wife (filed 1 September 2006):
1.In proceedings which are intended to effect an alteration or a division of matrimonial property interests, it is beyond farcical that the most significant matrimonial asset of all, namely [APL], which acts as Trustee for the [Addison] Family Trust (“Family Trust”), has still not been valued; see [X], evidence, 25 July 2006 and 1 August 2006.
2.Whilst this has much to do with the instructions which were initially given to the single expert in April 2005, it is clear that the matter cannot proceed to final determination on the evidence as it presently stands, until such time as the entire Family Trust asset has been valued. The business known as [RPL] ([…] and/or “the business”) constitutes only part of that asset. It is not the only asset of which the Family Trust consists of. [sic] There are other balance sheet items, which have not yet been valued, namely the important income or profit stream flowing from the Family Trust, that has never been the subject of any formal independent valuation assessment in these proceedings. …
…
Revised Report of 6 April 2006
This report revealed serious flaws in Mr [X]’s treatment for valuation purposes of the $3,030,300.00 owed by the business [RPL] to the Family Trust as at 28 February 2006. Under cross-examination, Mr [X] explained that he had, for valuation purposes, deducted the foundry creditor amount of $3,030,300.00 from his valuation of the business in determining the value of [RPL]. That amount has been expensed in the operations of [RPL]’s business and is clearly a business related liability, and is included as part of the pool of assets and liabilities which comprise the value of the business. Deducting the liability from the business value, as Mr [X] has done, results in “double counting” of the liability, i.e. it has been deducted twice in determining the value of [RPL], resulting in an undervaluation of [RPL] by approximately $3 million (see Annexure “A” – [accountancy firm] Commentary).
REASONS FOR JUDGMENT OF MARTIN J
We have already set out many passages from the judgment in describing events up to and including the delivery of final submissions. Other relevant parts of the trial Judge’s reasons are:
115.Although the wife’s statement of assets and liabilities for trial had been inadequate, to my knowledge she did not, with her closing submissions or otherwise, file an updated final statement of assets, liabilities and resources and apart from the business valuation issue, the submissions on her behalf did not refer to the other assets and liabilities.
In respect of Mr X’s updated report, Martin J quoted:
5.2.4$3,030,300 is shown as a sundry creditor amount due to [APL]. The origins of this liability are discussed in my report of 8 April 2005. I understand from Mr [O] that as of 5 April 2006 this amount has yet to be invoiced by [APL]. However, a tax deduction has been claimed for this amount by [RPL] on the basis of the amount being a genuine expense of the Company arising under the Software Development and Support Agreement with [APL].
And her Honour later said in relation to Mr X’s evidence at the close of trial:
160.[Mr X’s] position had then changed very markedly and in his oral evidence he said the value of [RPL] was possibly more than $1,000,000 and the revised spreadsheet later produced referred, with [B], to a low value of $2,031,425 to a high of $2,291,425.
161.In his evidence in response to questions on 1 August 2006, Mr [X] conceded that in preparing the spreadsheet which he presented on 25 July 2006, he neglected to consider the working capital requirements of the business:
…
The way that I have valued the business of [RPL] is on the assumption that it will be acquired by a third party, as such I should have considered how a third party would be required to reconstruct the business assets of the company under its ownership. I did not do that.
In my opinion it is correct to say that the plant and equipment, employee provisions, debtors, bank overdraft and creditors of [AFT]’s business would need to be replicated in [RPL] by a third party. However the business of [AFT] is tainted by the existing arrangement between [RPL] and [AFT].
…
Based on the above I estimate the value of [AFT]’s interest in [RPL] of between $960,000 and $1.05 million. This is summarised below:
Low Value
$’mHigh Value
$’mEntire share capital 1.28 1.40 75% shareholding 0.96 1.05
162.Counsel for the husband correctly summarised the position in his closing submissions (annexure 5), which takes into account [A Addison]’s 5% interest.
163.Further questions were then formally put to Mr [X] by the wife’s solicitors, to which Mr [X] provided a written response on 18 August 2006. The further considerations raised do not vary his final conclusion, nor do they vary mine.
164.In his written submissions, counsel for the wife was scathing of the single expert, saying:
“…
The single expert has been demonstrated to be void of any credibility whatsoever. The court cannot seriously be expected nor should it, nor can it, safely rely upon any part of his evidence given, the entirety of which should be struck from the court record and in its place another single expert’s opinion obtained to value to [sic] the Family Trust which, of necessity, will entail a revaluation of the business.
The single expert’s admission alone that the Family Trust asset was not the subject of any valuation produced by him in these proceedings is telling enough in itself for the court to discount his entire testimony and to direct that a revaluation take place.”
…
166.The final submissions on behalf of the husband somewhat surprisingly, having regard to the very large increase in the value attributed to the company by Mr [X] (which presumably would have come as somewhat of a bombshell to the husband) sought to support Mr [X]’s final valuations. For him it was submitted, that Mr [X] had been subjected to extraordinarily detailed cross-examination. The terms of both the appointment of Mr [X] and his terms of reference to value the company was done upon terms sought by the wife and not otherwise… .
…
…
173.The assets of the Trust mainly included the real property in West Perth and [Z], which was revalued late in the proceedings, and about which there was no dispute as to value. The operating assets at 30 June 2006, were included at $22,632 and the shares in [RPL] at $1,000,000.
…
175.The wife’s position was that the conclusions of the single expert, Mr [X], are seriously flawed and also do not, because of limitations in the original terms of reference, address all relevant issues to a valuation of the husband’s business interests overall. In particular, “it is beyond farcical” that the most significant matrimonial asset of all, [APL], which acts as trustee for [AFT], has still not been valued. As previously mentioned, the order appointing Mr [X] only referred to a valuation of the business of [RPL] which constitutes only part of the asset. There are other balance sheet items, which have not yet been valued, namely the important income or profit stream flowing from the family trust, that has never been the subject of any formal independent valuation assessment in these proceedings. Mr [X] conceded (under cross-examination, on 25 July 2006 and again on 2 August 2006) that:
•he has never been asked to value the ongoing profit stream from the Trust that was being distributed back to the business; and
•that had he been instructed to value [the same], then he would have placed a value thereon of about $11,000,000 assuming an after tax discount rate of between 10% to 15% which is about the equivalent of the [E] Multiple used by Mr [X].
…
177.For the husband, it was submitted that the wife’s main assertion in her submissions that the income of or profit stream of [AFT] has not been valued is incorrect and that Mr [X] has brought the [AFT] income streams to account in his valuation.
“59The only income generating a profit stream into [AFT] is the income generated by its provision of services to [RPL], with a 285% mark up applied (see 8.2 of Mr [X]'s 6 April 2006 report). In valuing [RPL], Mr [X] has normalised this expense in the [RPL] calculations by utilising an indirect salary cost multiplier of 0.78, thereby valuing [RPL] on a profit basis greater than that shown in its accounts (refer again to 8.2 and 8.3 of his report of 6 April 2006).
60.This takes into account, in the valuation of [RPL], the profit that would otherwise be generated in [AFT]. All other assets in [AFT] were valued and included in the husband's asset and liability statements (and the wife's). Mr [X] has detailed in his reports and written responses, and in his evidence in cross examination, that he has included and normalised all incomes and costs into and out of [RPL]/[AFT] (and see [X]'s letter 1 August 2006 – copy attached, setting out answers to DCH Question 1).
…
178.I have therefore concluded that, as proposed by the husband, and for the reasons set out in the husband’s submissions, the value of [AFT]’s shares in [RPL] should be included at $1,000,000. While the position in relation to the valuation evidence was unsatisfactory, Mr [X] had to deal with reasonably complex and varying information at short notice, and I am satisfied that, eventually, his valuation was a fair conclusion as to the position.
…
199.Unfortunately, the wife did not provide a full statement of assets and liabilities as required, so in the absence of challenge, I have included most of the items as included by the husband.
Martin J then set out an asset/liability table. It included “operating assets” of AFT at $22,632.00, various real property at updated values, plant and equipment at $567,798.00 and the shares in RPL at $1,000,000.00. Liabilities, including significant liabilities of AFT, were deducted.
THE ARGUMENTS ON APPEAL
There were three grounds of appeal against the substantive orders. The third related to an aspect of the judgment unrelated to the matters discussed so far and, as indicated, was not pursued. The other two grounds very much focused on asserted deficiencies in Mr X’s valuation of RPL. Even the ground that mentioned the $3,030,300.00 debt from RPL to AFT did not complain that the essential error was that it had not been included as an asset of AFT, but rather, that it should not have been included as an asset of AFT or as a liability of RPL.
That ground was:
2.In light of the fact that the husband:
(a)admitted in para. 68 of his affidavit sworn 30 June 2005, and
(b)confirmed in cross-examination,
that the amount of $3,030,300 (amount) that is shown in financial statements as an asset of [APL] as trustee for the Trust is irrecoverable, the learned Trial Judge erred in not concluding (as submitted by counsel for the wife) that:
(c)the amount cannot be an asset of the company as trustee for the Trust (or in the alternative is an asset of no value), and therefore
(d)the amount cannot be a liability of [RPL] and therefore
(e)[RPL] has been undervalued by Mr. [X] by $3,030,300.
Nonetheless, as we indicated at the outset, Mr McCusker argued that the debt from RPL to AFT should have been included in the “asset pool” as an asset of AFT.
We think it tolerably clear that the wife’s case put before the trial Judge was that account should be taken of the $3,030,300.00 from RPL to AFT, in some way or other. What was less clear was whether she argued that the debt should be taken into account as an asset of AFT or, what seems to have predominantly been her position, that it should not be deducted as a liability of RPL. In relation to the latter proposition, the evidence of Mr X was squarely against her. The debt was in the financial statements of RPL, tax deductions had been claimed in respect of it and Mr X’s opinion was that a liquidator would regard it as payable.
By way of an aide memoire to us, Mr McCusker sought to and did, particularly in view of the concession made by Mr Dowding, demonstrate that in Mr X’s valuation of RPL, account had been taken of the debt to AFT, but, in the circumstances, this adds nothing to the position as it presented before Martin J.
However, the argument that, if the debt to AFT could be deducted in the valuation of RPL, it should be, or at least should be able to be, taken into account as an asset of AFT, has a superficial attraction. But the proposition is beset by a number of problems.
Firstly, while Mr X, as seen, made some concessions in relation to hypotheses put to him, at no stage did he say that an asset of AFT’s that should be taken into account was the debt from RPL.
Secondly, it is also clear enough that the evidence of the husband (with no evidence to the contrary) was that the debt was irrecoverable. It could not be met from cash flow of RPL.
Thirdly, whether or not it could be met from a winding up of RPL was not the subject of evidence, because Mr X made it clear that he had not valued it on a winding up basis.
Fourthly, even if the debt was to be regarded as an asset of AFT, notwithstanding all of the above, the evidence suggested that its value would not be $3,030,300.00. Evidence was that AFT might well incur a tax liability in respect of it.
Moreover, had the argument now put been more clearly put at trial, other issues in respect of the debt might have arisen. If, for example, it was paid off from cash flow over a long period of time, then a discount might have been appropriate. If the debt was recoverable only on liquidation of RPL, then RPL might have had to be revalued downwards and the debt discounted in the books of AFT. If the debt was excluded as a liability of RPL, some liability to pay tax previously deferred or deemed not payable, might have arisen.
The point of these observations is that, if the wife was to be allowed by this Court, on the basis that the trial Judge should have so acted to (on the face of it) include the $3,030,300.00 as an asset of AFT, the husband would be disadvantaged unless allowed to respond in full. Further litigation would seem almost inevitable. Had the wife at trial brought evidence directly in relation to the debt as an asset of AFT, these issues might have been explored.
In Sharman v Evans (1977-1978) 138 CLR 563, Barwick CJ said at 565-566:
I think it is relevant to the decision of this appeal to remember that our system by which differences between citizens and, for that matter, between the state and the citizen are resolved is one of trial. It is not a system of resolution by appeal. Further, the trial itself is an adversary process where each side of the record is free to choose the ground and manner upon and in which it will fight the case and contest its issues. By that choice each is bound, unless for special reasons a court of appeal allows a deviation to be made from that course. Adherence to these basic principles places great responsibility on the trial judge in deciding the case; and also upon advocates who decide for their clients exactly how and upon what grounds the issues will be fought. [emphasis added]
In Coulton v Holcombe (1986-1987) 162 CLR 1, Gibbs CJ, Wilson, Brennan and Dawson JJ said (at 7-8):
… In a case where, had the issue been raised in the court below, evidence could have been given which by any possibility could have prevented the point from succeeding, this Court has firmly maintained the principle that the point cannot be taken afterwards: see Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438 Bloemen v The Commonwealth (1975) 49 ALJR 219. In O'Brien v Komesaroff (1982) 150 CLR 310 at 319 Mason J, in a judgment in which the other members of the court concurred, said:—
“In some cases when a question of law is raised for the first time in an ultimate court of appeal, as for example upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is expedient in the interests of justice that the question should be argued and decided (Connecticut Fire Insurance Co v Kavanagh; Suttor v Gundowda Pty Ltd; Green v Sommerville (1979) 141 CLR 594 at 607–8). However, this is not such a case. The facts are not admitted nor are they beyond controversy.”
…
…
Finally, in a recent decision of six justices of this Court — University of Wollongong v Metwally [No 2] (1985) 59 ALJR 481 at 483 — the Court said:
“It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.”
The Court of Appeal recognized the great importance, in the public interest, of these principles. Their Honours summarized them in the following terms:
“the finality of litigation; the difficulty of inducing an appeal court to consider new facts; the undesirability of encouraging tactical decisions not to present an issue at first instance: keeping it in reserve for appeal; and the need for vigilance to avoid injustice to a party having to meet new facts and new issues of law for the first time at the appeal court.” [footnotes omitted] [emphasis added]
In our view, although in submissions to the trial Judge the wife complained about Mr X’s evidence relevant to the debt from RPL to AFT and about the absence of a valuation of AFT, she must now be restricted to the case that she put before the trial Judge on the point.
We think the wife cannot complain before us about this. She had the most ample of opportunities to put evidence about it before the court, whether by way of amendment of the terms of reference to Mr X or by the timely presentation of expert evidence in relation to AFT’s assets. None of the rulings of Martin J or any other judge relating to attempts by the wife to make some other arrangement for expert evidence were appealed except insofar as the present appeal argues that Martin J ought have rejected Mr X’s evidence and permitted or required other expert evidence.
Further, the trial Judge had before her evidence upon which she could, as she did, find the value of RPL (after deduction of the debt to AFT) and the value of AFT, not including the debt, because it was deemed by the husband as unrecoverable.
We reject the argument that Mr X’s evidence was so flawed that it ought have been rejected. As seen, Martin J addressed the submissions for the wife in this regard and concluded:
178.… While the position in relation to the valuation evidence was unsatisfactory, Mr [X] had to deal with reasonably complex and varying information at short notice, and I am satisfied that, eventually, his valuation was a fair conclusion as to the position.
Her Honour’s conclusion was reached in the context that (as seen):
199.Unfortunately, the wife did not provide a full statement of assets and liabilities as required, so in the absence of challenge, I have included most of the items as included by the husband.
We consider that the trial judge’s approach was well open to her.
We find no merit in the contentions for the wife on appeal.
Costs
The husband seeks costs and Mr McCusker took the position that costs should follow the event. We have had regard to the factors set out in s 117(2A) of the Family Law Act 1975 (Cth). We consider that the nature of the proceedings, namely on appeal and the result, justify an order that the wife pay the husband’s costs of the appeal.
I certify that the preceding fifty-seven (57) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court.
Associate:
Date: 14 October 2008
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