RILEY & RILEY

[2014] FamCA 292

FAMILY COURT OF AUSTRALIA

RILEY & RILEY [2014] FamCA 292

FAMILY LAW – PRACTICE AND PROCEDURE – Adjournments – whether the trial should be adjourned upon oral application of the respondent wife.

Income Tax Assessment Act 1936 (Cth)

APPLICANT: Mr Riley

RESPONDENT: Ms Riley

FILE NUMBER: MLC 9926 of 2011

DATE DELIVERED: 29 April 2014

PLACE DELIVERED: Melbourne

PLACE HEARD: Melbourne

JUDGMENT OF: Thornton J

HEARING DATE: 29 April 2014

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr St John QC with Mr Hutchings

SOLICITOR FOR THE APPLICANT: M A Legal

COUNSEL FOR THE RESPONDENT: Ms Vohra

SOLICITOR FOR THE RESPONDENT: Mills Oakley Lawyers Pty Ltd

IT IS NOTED that publication of this judgment by this Court under the pseudonym Riley & Riley has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLC 9926 of 2011

Mr Riley

Applicant

And

Ms Riley

Respondent

EX TEMPORE REASONS FOR JUDGMENT

1. This matter was listed for trial for six days before me commencing on 28 April 2014.  On the first day of trial, counsel for the wife made an oral application for an adjournment.  The wife’s application to adjourn the trial was essentially for the following four reasons.

2. Firstly, counsel for the wife submitted that the husband has engaged in trial by ambush by filing a Second Further Amended Initiating Application at 5.36 pm on 23 April 2014, being one business day before the trial.  This changes his case as the husband seeks that the business conducted by Riley Pty Ltd (as trustee of the Riley Trading Trust) be valued at 60 per cent of its net tangible assets and that he pay the wife half of this amount. 

3. The husband’s outline of case, filed on 23 April 2014, proposed that there is no goodwill in the business and that it is worth only its net tangible assets because the sale process has been unsuccessful.  This is the first time that the wife had any notice that the husband’s case was that there was no purchaser for the business.

4. It was also submitted by the wife’s counsel that the husband has engaged in trial by ambush by filing an affidavit of the accountant, Mr A, and annexing a report at 4.29 pm on 23 April 2014, one business day before the trial, which did not comply with the orders previously made for the filing of documents in the trial.  This report purported to alter the previous methodology for valuing the business and did not provide a copy of his instructions.  The report relied upon draft financials from F Accountants provided at the same time to the wife without any analysis of the figures. 

5. Secondly, counsel for the wife submitted that the trial should be adjourned as the business was in the process of being sold and therefore a valuation would be available.

6. Thirdly, counsel for the wife submitted that there has been an understanding that the business was to be sold and therefore the wife’s expert accountant has not had the opportunity to value the business on the assumption that it cannot be sold.

7. Fourthly, counsel for the wife submitted that the husband’s outline of case referred to the husband becoming aware for the first time on 11 April 2014 that the tax planning and structure of the business does not comply with the requirements of Division 7A of the Income Tax Assessment Act 1936 (Cth) as there are no formal loan agreements. The consequence of this is that there is an unknown tax liability of the parties estimated at between $440,000 and $1.8 million. No evidence in respect of this liability has been filed with the Court and the tax liability of the parties remains unknown.

8. It is the wife’s case that, given the process in place for the sale of the business, the value of the business cannot be determined and that an offer for purchase of the business is imminent.  It is also the wife’s case that the tax liability of the parties cannot be determined at this stage, having regard to what has just been discovered by the husband. 

9. The wife’s application was opposed by the husband who sought leave to rely upon the affidavit of his accountant, Mr A, which was filed out of time.  The husband opposed the application on the basis that the business cannot be sold and to avoid further costs by continuing to operate an unprofitable business, the Court should accept the valuation provided by Mr A on a net tangible assets basis.  It was submitted that, unless an offer is received by the end of this week, there would be no marketable goodwill in the business.  It was also submitted that because an offer had not been made by now, it was unlikely that any offer would be forthcoming.

10. It was submitted by counsel for the husband that there is nothing to prevent the parties’ accountants conferring if no other offer is received.  Counsel for the husband submitted that the taxation liability was a recent development for both parties and that the Australian Tax Office will have to determine what amount is payable by the parties.  It was submitted that this will be a long process and may require the resubmitting of accounts, but that a determination could be made and an order could be accommodated by a percentage requirement which would not be an improper basis for an order as between the parties.

11. On 25 October 2013, I made orders by consent providing for the appointment of an agent to sell the business and Mr S, accountant, was subsequently appointed.  After hearing evidence today from Mr S, I am satisfied that there are at least two prospective purchasers for the business who may respond this week.  Any offer from a prospective purchaser would only be the beginning of the sale process, because further negotiations would need to be entered into with the husband as to his commitment to any transition period, the terms of his employment and salary, and other matters.  I accept the evidence of Mr S that the process might not be concluded until the end of June 2014 if an offer was received this week.

12. Exhibit A was a letter dated 24 April 2014 from Mr S of F Proprietary Limited, the selling agent, to the parties indicating that an expression of interest and signed confidentiality agreement had been received from five parties interested in the purchase of the business.  One of those parties indicated that there was no real incentive to purchase the business given the importance of the husband to the business.  There was no response from one other party and two other parties indicated that they would respond shortly or next week.

13. The correspondence pointed out that the husband is a critical element in the value of the business.  The basis of the offer was that the husband be paid a commercial salary and “be prepared to a transition period of two years”.  The evidence of Mr S was that he had approached all potential purchasers and that he could only give an estimate as to a timeframe for an offer, however his evidence was that after sending out investment teasers to 12 parties, he had three prospective purchasers who were Company G, Company H and Company L.

14. He agreed that by mid-April he had no offers but that he had followed up all emails and was told that that two interested parties had indicated that they would respond this week.  Mr S also agreed with the general proposition that the warehousing costs of the business are high and that it would be prudent to sell stock if it was unprofitable.  He was not in a position to assess the profitability of the Type J food products arm of the business because he was not provided with enough information to do so.

15. On 6 March 2014, I ordered that the husband file an Amended Application by 4.00 pm on 3 April 2014.  The husband did not file his Amended Application until 23 April 2014.  In that Application, the husband sought an order providing for the business to be wound up in the alternative.  In his outline of case, also filed 23 April 2014, the husband’s position was that he sought to purchase the business from the wife at a value calculated on a discounted net tangible assets basis and his intention was to continue working in the business.  This was a significant change of position from his previous application and from the consent orders made on 25 October 2013 providing for the sale of the business.

1. I accept the submissions on behalf of the wife that the manner in which the husband has conducted his case with the late filing of a Second Further Amended Initiating Application at 5.36 pm one business day before the first day of the trial places the wife at a disadvantage.  The late filing of this application and the affidavit of Mr A alone is a sufficient justification for an adjournment, having regard to the procedural orders previously made.  However, there is the fact that the sale of the business may be achieved on the evidence of Mr S with the prospect of an offer being made this week.

2. This offer will not, of course, conclude the sale process but ultimately may provide a valuation for the business which would be greater than a net tangible asset valuation.  If the business cannot be sold, the wife should have the opportunity of her accountant, Mr K, conferring with the husband’s accountant, Mr A, about the appropriate valuation of the trading company.  The problem of identifying the existing assets and liabilities of the parties is compounded by the assertion of the husband that there may be a tax liability of between $440,000 and $1.8 million.

3. There is no expert evidence before the Court at all about this liability but that the extent of the liability is being investigated by M Accountants on the evidence of the husband.  Any assessment of liability to pay tax might well be the subject of further analysis by the wife’s accountant, Mr K, and she is entitled to that opportunity. 

4. As a matter of fairness, it is appropriate to adjourn the trial so that the business can be sold or to allow the wife an opportunity to assess the value of the business if it cannot be sold, which should be fairly clear if no offers are made within the next two weeks on the evidence of Mr S, and to determine the potential taxation liability of the parties having regard to the non-compliance with Division 7A of the Income Tax Assessment Act 1936 (Cth).

5. I am not satisfied that it would be just and equitable at present to make orders in a trial altering the property interests of the parties until:

   (a)the business is sold; or

   (b)there is a reasonable opportunity to realise the marketing and the response from the potential purchasers identified by Mr S; or

   (c)there is a reasonable opportunity to ascertain the tax liability having regard to the lack of compliance with Division 7A of the Income Tax Assessment Act 1936 (Cth) for the personal loan accounts and the loan account between Riley Trading Trust and N Proprietary Limited.

1. As counsel for the wife pointed out by way of example, the husband has paid his legal costs from the business and this is a factor that may require an adjustment.  That is just one example.  But for all of these reasons outlined previously, I propose to adjourn the trial.  The adjourned date and the timetabling for the filing of further material will be discussed at tomorrow’s hearing after submissions in relation to the interim issues are heard.

I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Thornton delivered on 29 April 2014.

Associate: 

Date:  1 May 2014