S & M & Ors - [2003] FamCA 1387

[2003] FamCA 1387

FAMILY LAW ACT 1975

IN THE FULL COURT OF

THE FAMILY COURT OF AUSTRALIA

AT BRISBANE

Appeal No. NA55 of 2002
File No. BRF6967 of 2002

IN THE MATTER OF:

MS S

Appellant/Wife

- and -

MR M and MR G

First Respondents/Liquidators

- and -

MR B

Second Respondent/Husband

REASONS FOR JUDGMENT

BEFORE:Ellis, Coleman and O’Ryan JJ
HEARD:27 February 2003
JUDGMENT: 24 December 2003

APPEARANCES: Mr North SC (instructed by Hirst & Co, Family Lawyers, Level 1, 293 Queen Street, Brisbane, Queensland, 4000) appeared on behalf of Appellant Wife.

Mr Kent and Mr Schulte of Counsel (instructed by McCullough Robertson, Lawyers, Level 12, Central Plaza 2, 66 Eagle Street, Brisbane, Queensland, 4000) appeared on behalf of the First Respondents.
Mr Eleftheriou, Solicitor (Hawthorn Cuppaidge & Badgery, Solicitors, Level 7, 160 Edward Street, Brisbane, Queensland, 4000) appeared on behalf of the Second Respondent.

S & M and Ors - Appeal No. NA55 of 2002

Coram:  Ellis, Coleman and O’Ryan JJ.
Date of Hearing:  27 February 2003
Date of Judgment:  24 December 2003

Catchwords: Family law – Property – Whether jurisdictional error – Notice to third party creditors – Whether miscarriage of justice under s 79A(1)

Family law – Costs – Conduct

Introduction

This is an appeal by Ms S (“the wife”) against the following order made by May J on 5 December 2002, namely:

“1. Pursuant to s.79A the orders made on 8 May 2002 in paragraph 4 as they refer to [A] Pty Ltd are set aside.
2.        Within seven days the husband’s shares in [A] Pty Ltd be transferred to the wife.
3.        Should the husband refuse or neglect to execute a document necessary to implement this order within seven days after the document has been tendered to him, the Registrar of this Court is appointed to execute on his behalf all documents necessary to implement the order on proof by affidavit of such refusal or neglect and such Registrar is also appointed to do all acts and things necessary to give validity and operation to any such documents.
4.        Until such transfer the husband is restrained from dealing in any manner with the shares in [A] Pty Limited.
5.        Any debt due to the husband from the company, [A]Pty Limited, be assigned to the wife.
6.        The injunction made on 22 November 2002 be extended to 4.00 pm 13 December 2002 and if no appeal is filed on or before 4.00 pm on 12 December 2002 then the injunction expires and the monies be paid from the trust account to the liquidators.
7.        The husband and the wife each pay half of the applicant’s costs, to be taxed.
8.        That pursuant to Order 38 Rule 26 of the Family Law Rules this matter reasonably required the attendance of Senior Counsel.”

The First Respondent to the appeal, Mr M and Mr G (“the liquidator”), are the liquidators of [A] Pty Limited ACN …. (in liquidation) (“[A Pty Ltd}”). The Second Respondent to the appeal, Mr B (“the husband”), is the husband of Ms S.

Background

Following their separation in 1990, the husband and the wife resolved their outstanding financial issues. As a consequence, on 8 September 1992, maintenance agreements dated 24 June and 8 September 1992, were approved pursuant to the provisions of s 87 of the Family Law Act 1975 (Cth) (“the Act”). On 7 August 1998, the wife filed an application seeking, inter alia, that the approval of the agreements be revoked. On 8 May 2002, May J ordered, inter alia, that the approval be revoked and that the husband pay to the wife by way of property settlement the sum of $950,000. Paragraph 4 of her Honour’s order provided:

“The husband forthwith do all things and sign all documents necessary to secure the amount to be paid by him pursuant to paragraph 2 of these orders by mortgage over all real estate registered in his name or in the name of [F] Pty Limited or [A] Pty Limited. Further within 14 days the husband do all things and sign all documents necessary to secure the amount to be paid by him pursuant to paragraph 2 of these orders by debenture charge over the assets of [F] Pty Limited and [A] Pty Limited.”

By an amended application filed on 21 November 2002 the liquidator sought the following order:

“1. The order of this Honourable Court dated 8 May 2002 be varied or set aside pursuant to s.79A of the Family Law Act 1975 (as amended) so as to remove, exclude or otherwise vary order encumbering the assets of [A] Pty Limited (ACN …) (in liquidation) therein; alternatively.
2. Pursuant to s.588FF(1)(e) of the Corporations Act 2001 the securities given over the assets of [A] Pty Limited (in liquidation) by the order of her Honour Justice May dated 8 May 2002 be released or discharged.
3. Such other order or orders as this Court deems necessary.”

That application was heard by May J on 28 November 2002. On 5 December 2002 her Honour made the orders set out in paragraph 1 hereof, against which the wife has now appealed.

During the 1990s F Pty Limited and A Pty Ltd engaged in transactions that attracted the attention of the Deputy Commissioner of Taxation. On 10 September 1998 the Deputy Commissioner issued a Notice of Assessment of income tax payable for the 1993 financial year to A Pty Ltd. Proceedings to recover the amount due were commenced in the District Court of Queensland resulting in judgment being entered against A Pty Ltd on 12 September 2000 in the sum of $92,743.35.

In the s 79A proceedings commenced by the liquidator, the only oral evidence given before her Honour was by Ms S, an employee of the Deputy Commissioner of Taxation. Mr Z, accountant, gave affidavit evidence on behalf of the wife, but was not cross-examined. Mr Z deposed that he accompanied the wife to a meeting held at the office of the Deputy Commissioner on 4 July 2000, at which a number of officers were present, including Ms S. He deposed that on that occasion he recalled discussing the tax debts of A Pty Ltd, and F Pty Limited, and the action which the wife was taking in the Family Court regarding revocation of the existing maintenance agreements and also property settlement. Mr Z also deposed that the wife and he had a meeting with officers of the Australian Taxation Office in 1998 relating to a particular scheme and, at that meeting, the officers had in their possession affidavit material relating to the proceedings instituted by the wife to revoke the then existing maintenance agreements.

The trial Judge found that Ms S did recall a meeting on 3 July 2000 involving the wife, Mr Z and others but that she did not recollect being advised on that occasion of property proceedings but was aware of “divorce proceedings”. Her Honour further found that Ms S had conceded during the course of cross-examination that the filenoting of meetings of that nature was, and continues to be, a practice within the office of the Deputy Commissioner and that a narrative or filenote of the meeting would have been made.

Her Honour found that the wife had a recollection of having been involved in two meetings with representatives of the Deputy Commissioner of Taxation prior to the commencement of the trial in October 2000. Her Honour recorded that the wife deposed that officers of the Australian Taxation Office advised her that they were aware of the proceedings in the Family Court of Australia and had possession of affidavits and documents filed in those proceedings. She further held that the wife recalled speaking at length to officers from the Australian Taxation Office about the proceedings in the Family Court and the nature of her application before the Court. Her Honour further recorded that the wife deposed that she had advised the officers that the proceedings in the Family Court had been set down for trial on a particular date and that she was advised that they were already aware of that date. In addition, her Honour recorded that the wife deposed that she had been advised that a representative of the Australian Taxation Office would be present at the hearing of the proceedings in the Family Court.

As we have previously recorded, on 12 September 2000 the Deputy Commissioner of Taxation obtained judgement in the sum of $92,743.35 representing unpaid income tax owed by A Pty Ltd. On that day A Pty Ltd paid $36,400 towards the judgment debt whereupon the Deputy Commissioner agreed not to enforce the judgment pending discontinuance or determination of Federal Court proceedings by A Pty Ltd against the assessed tax on which the judgment was based. The Deputy Commissioner had also issued an assessment for the year ended 30 June 1997, which was due for payment on 22 June 2000, in the amount of $146,100 concerning deductions claimed by A Pty Ltd as trustee of the B Family Trust trading as KQ. Ms S deposed in her affidavit filed on 27 November 2002, that this amount remained outstanding.

On 31 October 2000 the hearing of the application to revoke approval of the maintenance agreements commenced before May J and continued on 7 and 21 November 2000, 4, 5, 6 and 8 June 2001 and 28 February 2002. On that last day judgment was reserved.

An Outline of Case Document was filed on behalf of the wife on or about 4 June 2001. Her Honour found that in that document the wife “specifically sought from the court that she be granted a mortgage and debenture charge over [A Pty Ltd’s] assets to secure any amounts to be paid by the husband to her.” Her Honour recorded this to be the first occasion the wife made known her intention to ask the Court to use the assets of A Pty Ltd as security. No such order formed part of the wife’s application filed on 7 August 1998.

On 17 August 2001 F Pty Limited filed an application in the Supreme Court seeking that enforcement of the judgment in favour of the Deputy Commissioner against F Pty Limited dated 20 February 2001 be stayed. In those proceedings, an affidavit dated 17 August 2001 by Mr J was filed on the wife’s behalf. Ms S deposed that this was the first notice that the Deputy Commissioner received that the assets of A Pty Ltd were being considered as part of the available assets in the Family Court property proceedings. Ms S further deposed that in the light of the agreement between A Pty Ltd and the Deputy Commissioner; an undetermined objection against the assessments for the year ended 30 June 1997; and a valuation exhibited to the affidavit of Mr J, the Deputy Commissioner did not consider it necessary to fully investigate at that time the financial position and solvency of A Pty Ltd.

Ms S deposed that on 13 March 2002 the husband advised the Deputy Commissioner that he was having difficulty obtaining finance as a result of the judgment against A Pty Ltd and F Pty Limited but at no time did either the husband or A Pty Ltd advise the Deputy Commissioner that A Pty Ltd was insolvent.

In her reasons delivered on 8 May 2002, her Honour recorded:

“402 Justice and equity demand that the Deeds be no longer enforceable and be revoked in view of the circumstances at the time of the approval of the Deed, the incorrect facts placed before the Court, the omissions and the subsequent conduct of the parties.”

In relation to the proceedings for settlement of property her Honour said:

“406 The first, and in this case, extremely difficult task is to identify the property and liabilities of the parties at the date of the hearing.
407 The evidence as to the assets and liabilities position of the husband and the various companies under his control is extremely unsatisfactory. The submission on behalf of the wife that this state of affairs is solely because the husband has failed to make full and proper disclosure of his financial circumstances is accepted. Certainly, there are some matters which are uncertain, including his tax position but even in that important respect very little proper attention was paid by the husband or those people that might have given evidence about that subject. In contrast, it is accepted that the wife has done all that is required of her in relation to disclosure. Further, she has through her diligent solicitors done everything to ascertain the husband’s true position, no doubt, at considerable cost. The Court is left in the difficult position then of there being large gaps of knowledge of the husband’s current financial position and his various dealings since separation.
…

415 The effect of the husband’s failure to disclose has had a serious financial effect on the wife….
416 …[I]t is accepted that because of the husband’s attitude to disclosure and his failure to provide those documents which were necessary when clearly they would have been available to him, the Court should not accept any of his evidence in relation to his assessment of his financial position when there is no other acceptable evidence.”

Her Honour thereafter went on to record:

“432 It is accepted that there is evidence which supports the conclusion that the available assets were in the vicinity of $7,715,415…”.

In relation to liabilities her Honour noted:

“434 Just as the question of the assets is highly problematical, so is the question of liabilities. Again, correctly, counsel submitted that the major reason for this is the husband’s failure to provide the Court with satisfactory evidence. The question in relation to income tax is the most difficult one. The evidence reveals that the husband has received amended assessments which total $1.28 million. These assessments relate to arrangements when the parties were together and without the protection of the Deed approved by the Court, the wife may well have been liable. All that can be said is that the outcome is unknown. It would be wrong to ignore such a substantial liability. It can only be brought in at the current amount owing with a consideration of the possibility that the husband may not be required to pay it.
435 It is important to appreciate that this liability arises from joint decisions made by the parties, albeit on the advice of Mr Hart. [A] Pty Limited in its capacity as trustee, has been assessed to pay tax in relation to a distribution of $78,928 purported to be made to [H] Unit Trust in 1993 and also a distribution of $200,000 to [N] Unit Trust in 1997. The position of the taxation commissioner is that these disbursements are part of an offensive tax minimisation arrangement and therefore penalties have been imposed, including for the late lodgement in 1993 and incorrect return penalties in 1997.”

Her Honour then referred to assessments for income tax issued to F Pty Limited and recorded that if the sum owing to the Commissioner was deducted then the net asset worth of the parties was $6,435,415.

After consideration of the evidence relating to the respective contributions of the parties, and other relevant matters, her Honour went on to note:

“456 In general terms, then, the wife will receive assets valued at approximately $472,000 so that the husband should pay to the wife $943,790 to be rounded to $950,000. While recognising that it appears impossible for the husband to provide this sum without the sale of property his position is so uncertain that the Court will order that the sum be paid within 90 days, or such other period as agreed between the parties, with some provision as asked for, in relation to information about his financial affairs. The receipt by the wife of the sale proceeds of [D] Street should reduce the sum payable by the husband.”

Despite the terms of the order of 8 May 2002 the husband did not execute the relevant documents. Pursuant to paragraph 13 a charge on the assets of A Pty Ltd was executed by a Deputy Registrar and lodged with the Australian Securities and Investments Commission on 28 June 2002. However, the full amount of $950,000 remained owing to the wife on 8 August 2002.

On 25 June 2002 the Deputy Commissioner obtained a copy of the order of 8 May 2002. Ms S deposed that at no time prior to 8 May 2002 was the Deputy Commissioner notified by either the husband or the wife that the assets of A Pty Ltd were to be the subject of a charge in favour of the wife in the Family Court proceedings. Ms S also deposed that the Deputy Commissioner only became aware that a dividend would not be paid to unsecured creditors after having been referred to the report to creditors prepared by Mr M.

On 1 August 2002 A Pty Ltd appointed Mr M and Mr G to be administrators of the company pursuant to s 436A of the Corporations Act 2001. On 28 August 2002, at a second meeting of creditors of A Pty Ltd, Ms S was appointed as the representative of the Deputy Commissioner of Taxation to the Committee of Inspection of the company. On that occasion Ms S was advised by Mr M that A Pty Ltd was not currently solvent. At a reconvened second meeting of creditors on 18 October 2002 Mr M advised Ms S that A Pty Ltd was insolvent. On 18 October 2002 Mr M and Mr G were appointed as liquidator by a resolution of creditors pursuant to s 446A of the Corporations Act.

On 28 October 2002 Mr G and Mr M executed a Business Sale Agreement providing for the sale of a substantial portion of the assets of A Pty Ltd to W Investments Pty Limited.

On 7 November 2002 Mr M applied to the Deputy Commissioner of Taxation for funding in respect of an application to set aside the wife’s securities. That request was successful and an application to the Court was filed on 21 November 2002.

On 14 November 2002, an application made to the Court by the Deputy Commissioner of Taxation was dismissed. On 22 November 2002, on the application of the liquidator, the following order was made:

“UPON THE UNDERTAKING of the applicant to pay as directed by the Court to any person restrained or affected by the injunction granted today, or of any continuation thereof, such compensation as the Court may in its discretion determine.
IT IS FURTHER ORDERED.
(2)     Until 4.00 pm on 28 November 2002, the wife cause all monies payable to her as a consequence of the sale of the assets of [A] Pty Limited (In Liquidation) to be paid into the trust account of McCullough Robertson Lawyers.
(3)     The monies referred to in paragraph 2 be invested in an interest bearing deposit in the joint names of Mr [M] as liquidator of [A] Pty Limited ACN … and the wife until further order.
(4)     The question of costs is reserved.”

Settlement of the sale of the assets of A Pty Ltd to W Investments Pty Limited occurred on 22 November 2002, following which the sum of $295,001 was paid to the wife and the liquidator and the sum of $53,241.36 to A Pty Ltd. The sum of $295,001 was placed in the trust account of McCullough Robertson Lawyers pursuant to the order of 22 November 2002.

Her Honour recorded that in his affidavit filed on 21 November 2002 Mr M provided a schedule of the creditors of A Pty Ltd, the amount owing to each creditor and the period in which the debt originated. The schedule was prepared after his appointment and following his initial investigation. Mr M identified four secured creditors who were owed a total of $2,408,177. This included the amount owing to the wife, namely of $1,350,000. In later documents the amount due to the wife was reduced to $1.2 million representing the judgment debt together with interest and costs. Mr M identified an amount of $473,896.01 owing to unsecured creditors, which included an amount of $254,852 owing to the Australian Taxation Office in respect of the financial years ending 30 June 1993 and 30 June 1997.

Her Honour recorded that Mr M had been unable to detect any significant change in the asset position in the six months prior to his appointment and that he had deposed that no assets were disposed of at any time after 8 May 2002.

An annexure to Mr M’s affidavit comprised an extract listing aged accounts contained in Management Accounts of A Pty Ltd and amounts owing to unsecured creditors totalling $20,206.61. In the list of unsecured creditors an amount of $19,552.92 was shown as owing to TMC. Her Honour referred to an affidavit filed on 27 November 2002 by Mr P, a director of TRC Pty Limited, who had deposed that A Pty Ltd was indebted to his company in the sum of $30,000 as at 8 May 2002 and in the sum of $19,552.92 as at 1 August 2002. Mr P had the day to day conduct of TRC Pty Limited trading as TMC and he had no record of ever having received notice of proceedings between the husband and the wife in this Court.

Her Honour also referred to the evidence of Mr X, the manager of V Pty Limited trading as BP … Fuels. He deposed, that as at 8 May 2002, A Pty Ltd was indebted to V Pty Limited in the sum of $3,292.40 and that by 1 August 2002 the debt had increased to $4,133.98. He further deposed that he had also no record of ever having received notice of proceedings between the husband and the wife in the Family Court.

Mr M’s analysis of the proposed distribution in the event that the wife’s securities were not void as against the liquidator indicated that $394,770.76 would be left after the realisation of secured creditors. In accordance with the wife’s security she would receive the whole of that balance and the unsecured creditors would receive nothing. Mr M however also did a distribution analysis of what would happen in the event that the wife’s charges were void against the liquidator. In that event the unsecured creditors would receive $324,421.33 in full settlement of all outstanding debts and there would be $70,349.43 surplus to the shareholder.

Submissions to Trial Judge and Relevant Findings

In her reasons the trial Judge identified two claims advanced in the alternative on behalf of the liquidator. Counsel submitted on behalf of the liquidator that a miscarriage of justice as envisaged by s 79A(1)(a) of the Act had occurred and that the Court should remove, exclude or vary paragraph 4 of the orders encumbering the assets of A Pty Ltd. In the alternative the liquidator made an application pursuant to s 588FF(1)(e) of the Corporations Act for an order for the release or discharge of the securities over the assets of A Pty Ltd created pursuant to the orders of 8 May 2002.

Her Honour recorded the provisions of s 79A(1) of the Act and recorded that the liquidator claimed to be a person affected by an order on the basis that the practical effect of the order of 8 May 2002 would give the wife a priority in advance of unsecured creditors. Neither the husband nor the wife took issue with the claim that the liquidator was entitled to make the application.

Her Honour identified and addressed two distinct issues raised in the application pursuant to the provisions of s 79A of the Act. Firstly, that company funds may only be used to discharge company liabilities; and secondly, that the husband and wife provided materially false evidence. Her Honour proceeded to identify the submissions made as to the first aspect of the application, summarising the contents of the written submissions filed on behalf of the liquidator as follows:

“For the purposes of s.79A the ‘other circumstance’ relied on is simply the fact that the court was unaware that the creation of the securities would have the effect of placing [A Pty Ltd] into insolvency and that the unsecured creditors of [A Pty Ltd] would not be paid; and that, thereby, as a matter of law, the security could not validly be created because it depleted the company’s funds which, as a fundamental principle of common law “shall remain available for the discharge of its liabilities.” The purported creation of the securities could not create a “new liability” of [A Pty Ltd], relevantly, because that offended the further fundamental principle of company law that the fund of a company may be used only for the purposes of the company. It is not a valid purpose for a company to use its funds for other than its own corporate purposes.”

Her Honour referred to the decision of the Queensland Court of Appeal in ANZ Executors & Trustee Company Pty Ltd v Qintex Australia Ltd (Receivers and Managers Appointed) [1991] 2 Qd R 360 at 371.

On behalf of the liquidator it was submitted that the husband was seeking to have A Pty Ltd meet obligations with respect to his debt to the wife and that this Court was unaware, when it made the orders of 8 May 2002, that the creation of the charges over A Pty Ltd’s assets would have the effect of placing A Pty Ltd into insolvency, thereby jeopardising the payment of unsecured creditors.

Her Honour then referred to Semmens v Commonwealth of Australia and Collector of Customs (S.A.) (1990) FLC 92-116 and noted that counsel for the liquidator had submitted that the appropriate asset for valuation at trial was the husband’s share in A Pty Ltd, not the value of the assets owned by the company. Counsel further submitted that any transfer of the husband’s share in the company to the wife would have been in accordance with the fundamental principles discussed in Qintex and would not have defeated the interests of the unsecured creditors of A Pty Ltd.

Her Honour then identified the submissions in relation to the second aspect of the application, namely the alleged suppression of evidence by the husband and the wife in earlier proceedings. It is not necessary to record her Honour’s observations in relation to that aspect of the application.

Her Honour then identified what she described as the “other significant and perhaps third argument” of the liquidator, namely that the husband and/or the wife should have given notice to the Deputy Commissioner of Taxation of the orders sought in relation to A Pty Ltd. Her Honour recorded that notice given to the unsecured creditors was also material to any determination of whether justice had been denied to third parties with legitimate interest in property the subject of the proceedings. In addition, her Honour noted the submission that the actual granting of security to the wife by the Court would constitute a miscarriage of justice in that the Court cannot do that which the director himself could not have lawfully done.

Her Honour recorded that she agreed with the submission that the company could not legally have granted a mortgage over company property in favour of a bank to secure a borrowing by the husband intended to pay the amount awarded to the wife, and that such a mortgage may well have been voidable under the Corporations Act.

Her Honour observed that this Court has traditionally treated the expression ‘miscarriage of justice’ as meaning simply that an order has been unjustly obtained, referring to Holland and Holland (1982) FLC 91-243 and Suiker and Suiker (1993) FLC 92-436.Her Honour then referred to Official Trustee in Bankruptcy v Donovan and Donovan and Stevens (1996) FLC 92-703, Biltoft and Biltoft (1995) FLC 92-614 and Semmens (supra).

Counsel for the liquidator further submitted that the absence of notice to A Pty Ltd and its unsecured creditors as to the relief sought by the wife and the fact that such relief, if granted, may have placed A Pty Ltd into insolvency and had the effect that A Pty Ltd’s unsecured creditors would not be paid, gave rise to a miscarriage of justice.

Her Honour referred to the concession by the wife that she first sought orders involving the assets of A Pty Ltd in her Outline of Argument filed on 4 June 2001, and that A Pty Ltd had not been given notice that such relief was sought. However, it was submitted on behalf of the wife that for all intents and purposes A Pty Ltd through its sole director and shareholder, namely the husband, received practical notice of the proceedings. On behalf of the liquidator, it was submitted that this did not interfere with the general principle that ordinarily the making of orders against a company without its joinder or at least notice to it amounts to a denial of natural justice and jurisdictional error. Her Honour referred to submissions on behalf of both the liquidator and the wife in relation to what notice, if any, creditors, and in particular the Deputy Commissioner of Taxation, had and went on to record:

“77.   In the light of the decision in Qintex and the well settled corporate principles there described, the prospect of an order granting security over the assets of a company to secure an ‘in personam’ debt, could not be considered a natural inference to be drawn from knowledge of the institution of the proceeding in this Court.
78.    …[I]n particular, it seems that it is not yet entirely clear when notice should have been given to third parties and when the assets of companys or trusts are treated in effect as assets of the parties what orders may be made consequently.
79.    What is clear in this case is that [A] Pty Ltd has been deprived, by the terms of the orders of 8 May 2002, of the ability to conduct its own affairs including the payment of its creditors in accordance with the principle that the “integrity of a company’s assets, except to the extent allowed by its constitution, must be preserved for the benefit of all those who are interested in them, most pertinently its creditors” per Nourse LJ in Brady v Brady (1988) BCLC 20 at 38.
80.    I am also of the opinion that it would have been reasonable in the circumstances for the parties to have advised the DCT of the nature of the orders sought at trial. This is particularly so given the detriment that was incurred by the orders of 8 May 2002 to the DCT’s potential for recovery from [A] Pty Ltd. By notifying the DCT, this Court may well have been placed in a position to make orders which were in keeping with the principles espoused in Qintex.
81.     The term ‘miscarriage of justice’ can be construed simply as a failure by a Court to attain justice: In the Marriage of Simpson (1982) 8 Fam LR 467. I am of the view that a miscarriage has in fact transpired.”

Her Honour thereafter noted that even if a ground for setting aside the orders was established, the Court retained a discretion as to whether the original orders should be varied or set aside and that the liquidator bore the onus of satisfying the Court that it was appropriate to intervene. Her Honour referred to the evidence of the wife and in particular her dire financial position, the looming prospect of bankruptcy and that the wife has been able to maintain her position by referring creditors to her entitlement under the orders of 8 May 2002 and the proximity of payment. The wife gave evidence about the risk of bankruptcy if distribution of the funds was subject to any further delay.

Her Honour identified the submission of counsel for the liquidator that there could be no suggestion of prejudice to the wife if the orders were set aside because if it was accepted that the order for security ought never have been made then there could be no prejudice to the wife in having the order now set aside. The wife should never have had the benefit of the security of her judgment against the assets of A Pty Ltd and thus would be in no worse a position now by not having had that security.

Her Honour recorded:

“85. Counsel for the applicant also urges the Court to consider its own jurisdictional error in the exercise of its discretion pursuant to s.79A. It is submitted that the Court erred in ordering the security against a person or entity not a party to the proceedings, not represented and in the absence of notice to creditors.”
86. Having regard to the detriment incurred to the legitimate third party creditors, the miscarriage of justice articulated by the applicant, and the jurisdictional error identified above, the only proper exercise of the discretion is to set aside the order for the securities as they affect [A] Pty Ltd.
87. There remains a consideration of what order, if any, should be made in substitution for the order so set aside.”

Her Honour then considered the application of the wife pursuant to the provisions of s 588FF(1)(e) of the Corporations Act, in relation to which she concluded:
“111. Even if it is accepted that the transaction was an uncommercial transaction although an involuntary one, it is not so clear that it was an insolvent transaction.
112. Apart from the question of whether the wife has the protection of s.588FG, the application pursuant to s.588FF should fail because the applicant is unable to prove that it was an insolvent transaction at the relevant time.”

On 5 December 2002, after her Honour delivered her reasons for judgment, an application was made by the liquidator for costs. After hearing submissions, her Honour ordered that the husband and the wife each pay one-half of the liquidator’s costs. The wife now appeals against the order of 5 December 2002. She seeks that that order be set aside and in lieu thereof that the application by the liquidator be dismissed with costs.

Grounds of Appeal

The Notice of Appeal contains five grounds of appeal, namely:

“1.     The learned Judge erred in concluding that the order of 8 May 2002 deprived [A] Pty Ltd of the ability to conduct its own affairs.
2.     The learned Judge erred in concluding that it could have been reasonable for the parties to have advised the Deputy Commissioner of Taxation of the nature of the orders sought at trial.
3. In considering whether there had been a miscarriage of justice for the purposes of s.79A of the Family law Act 1975 the learned trial Judge considered that issue by reference to the present position rather than the position at trial and thereby erred.
4.       The learned trial Judge erred in concluding that the order requiring the first respondent to execute a charge in favour of the appellant over the assets of [A] Pty Limited involved jurisdictional error.
5.       The learned trial Judge erred in ordering the appellant to pay one half of the costs of the application in circumstances where the application as amended did not seek costs against her.”

Submissions

In his written Outline of Submissions Senior Counsel for the wife dealt with the issues under the following headings:
1.       Jurisdictional Error
2.       Miscarriage of Justice
3.       Detriment to Third Party Creditors
4.       Summary Conclusions on the Issue of Her Honour’s Discretion
5.       Costs

The Outline of Submissions on behalf of the first respondent also dealt with the issues raised under each of the headings identified. No separate submissions were made before us on behalf of the husband, although he was represented at the hearing of the appeal.

The submissions on behalf of both the wife and the liquidator overlap in relation to a number of the grounds of appeal.

Jurisdictional Error

Introduction

The jurisdictional error her Honour identified arose in substance because firstly, A Pty Ltd was not a party; secondly, the company was not represented; and thirdly there was no notice to the unsecured creditors of the company.

Service of the application on the company and its representation

On behalf of the wife it was submitted that while it is a matter of record that A Pty Ltd was not a party to the proceedings, as a matter of fact and law, it knew of the proceedings and participated in them by reason of the husband’s involvement. Further, it was submitted that the husband was the sole director and shareholder of A Pty Ltd and there was no other natural person who could act or give instructions on behalf of the company or to whom notice of the proceedings might be given because he was also the company secretary. The husband was the directing mind and will of A Pty Ltd; he was the “embodiment of the company…he hears and speaks through the persona of the company…and his mind is the mind of the company”: Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170-1 per Lord Reid.

The wife further submitted that it is well established that an individual who is the decision-maker on behalf of the company, as its “directing mind and will”, can be viewed for all intents and purposes as the company. In support of this submission we were referred to Hamilton v Whitehead (1988) 166 CLR 121 at 127 per Mason CJ, Wilson and Toohey JJ in which the relevant passage from the speech of Lord Reid in Tesco Supermarkets (supra) was cited with approval and applied. We were also referred to Bernard Elsey Pty Limited v Federal Commissioner of Taxation (1969) 121 CLR 119, where Windeyer J, when referring to the company, made the following observations (at 121):
“It was, however, still in existence; and when the present story begins it was there, a legal person ready and waiting to be used by Elsey for his purposes. He and a Mr J. F. McConachie of Toowoomba, an accountant who was his taxation agent, were at all relevant times directors of the company. They were the only shareholders, Elsey having nine hundred and ninety-five shares and McConachie five shares. Elsey was in complete control of the company’s business. The company existed simply to do his bidding and to alleviate his liabilities. Indeed it was for him really only a name of convenience: he personally carried out the undertakings of the company with which this case is concerned.
…
His mind was the company’s mind. Indeed when speaking of the affairs and transactions of the company he did so in the first person, regarding all its affairs and transactions as his.”

Additionally, it was submitted on behalf of the wife that her Honour erred in concluding that A Pty Ltd was not on notice. Rather, it was submitted that A Pty Ltd was “patently” on notice of the proceedings and of the order sought. It was further submitted that there was simply no one else to whom notice could be given on behalf of the company, and that it would be fanciful in the circumstances to conclude otherwise than that the company well knew that the wife was seeking an order affecting it. From at least 4 June 2001, when the wife sought an order against the company, through its directing mind and will, the company knew the order being sought against it. In conclusion, it was submitted that her Honour’s finding that a jurisdictional error arose from the non-joinder or non-service of A Pty Ltd is erroneous, and to the extent that her Honour’s discretion was exercised upon this basis, it miscarried.

It was not disputed by the liquidator that the husband was the sole director and sole shareholder of A Pty Ltd. As was submitted on their behalf, the Corporations Law now provides that a proprietary company may have a single person as sole director and shareholder (see s 114 and s 201A of the Corporations Act ). Whilst notice to a person who is the sole director and sole shareholder of a company may in some circumstances be construed as notice to that company, Counsel for the liquidator submitted that it is incorrect to suggest that notice of the property proceedings to the husband, and his participation in those proceedings, is the equivalent of the company participating in the proceedings.

Counsel for the liquidator submitted that had A Pty Ltd been a party to the proceedings, the creditors of that company may have drawn an inference that the assets of the company may, as a consequence, be at risk. However, in our view, this submission overlooks the circumstances where a party to a marriage is in complete control of such a third party. In that case, and it was submitted this is such a case, if the third party had been separately served with notice of the order sought against the company, it does not follow that the party in complete control, in the present case the husband, would have ensured that the unsecured creditors were given appropriate notice.

It was further submitted on behalf of the liquidator that the natural result flowing from the submissions made on behalf of the wife is that where an individual, who is a sole director and sole shareholder of a proprietary company, is a party to proceedings, the company is also for practical purposes participating in those proceedings. In effect the company conducts the proceedings by proxy. For all intents and purposes the Court record is silent as to the company’s involvement and no one other than the parties to the action, and the sole director and sole shareholder, would know of the company’s involvement and the hidden activity. It was submitted on behalf of the liquidator that there is a need for transparency in these circumstances, given that it is legitimate for sole director/sole shareholder companies to exist, and that one way to achieve that transparency is by insisting that the company be made a party if its interest will be effected.

It was further submitted on behalf of the liquidator that the submissions on behalf of the wife, directed at highlighting that the husband was the directing mind and will of the company, did not address the issue that A Pty Ltd was never joined as a party and the husband was not served with any application in his capacity as a director. It was submitted that the submission on behalf of the wife failed to address the fact that in relation to the order for security the husband’s personal interest was in direct conflict with his duty as the directing mind and will of the company. The practical effect of the order granting security over the property of the company was to give the husband an advantage, to the detriment of the unsecured creditors of the company, in respect of his obligation to pay $950,000 to the wife. Resort could be had to the property of the company before any execution against the husband personally. This would be in priority to payment of the company’s creditors and in a way the husband could not otherwise lawfully achieve. The wife, who was never a creditor of the company, thus achieved priority over all unsecured creditors of the company via the security.

In certain circumstances, the Court may attribute ownership of the property of a third party to a party to the marriage in circumstances where the third party is completely controlled by a party to the marriage, or is the ‘alter ego’ of that party. The ‘completely controlled’ or ‘alter ego’ exception was recognised by Gibbs J in Ascot InvestmentsPty Limited v Harper (1981) 148 CLR 337 who said at 354-355:
“The position is, I think, different if…a company is completely controlled by one party to a marriage, so that in reality an order against the company is an order against the party, the fact that in form the order appears to affect the rights of the company may not necessarily invalidate it.”

As a result of the ‘completely controlled’ exception to the limit on the third party jurisdiction, in circumstances where a party to the marriage has such control over the third party, and the ability to vest property of the third party in himself or herself, this has been treated as the equivalent of ownership of the property of the third party: Bowman and Bowman (1984) FLC 91-574; Ashton and Ashton (1986) FLC 91-777; Stein and Stein (1986) FLC 91-779; Aysom and Aysom (1988) FLC 91-925; Goodwin and Goodwin Alpe (1991) FLC 92-192; In the Marriage of Davidson (1991) FLC 92-197; Harris and Harris (1991) FLC 92-254 and Gould and Gould; Swire Investments Ltd (1993) FLC 92-434 at 80,423-80,433. Examples of such situations include where a party is in a position as trustee or appointor of a discretionary trust, and also a corpus object, or in the case of a proprietary company where one party has the power to realise for him or herself the value of the assets of the company.

The husband and the wife were the directors and shareholders of A Pty Ltd. It was the trustee of the B Family Trust. Pursuant to the provisions of the Maintenance Agreements, the wife was to resign as a director, and transfer her share to the husband, who thereby would ultimately become the sole shareholder in and director of A Pty Ltd.

It was common ground that A Pty Ltd was not served with the wife’s application as amended; that A Pty Ltd had not been joined as a party to the proceedings or named as a respondent (see Gould and Gould (supra) at 80,449-80,451); and that the wife had not sought an order directly against A Pty Ltd in her original application. The first indication given by the wife that she intended to seek an order encumbering the assets of A Pty Ltd so as to secure moneys owing to her by the husband was contained in her Outline of Case Document filed on or about 4 June 2001.

In our view, in the instant case, it is clear that the husband was the directing mind and will of A Pty Ltd. Consequently, although it would have been the preferable course, in the circumstances of this case it was not necessary for the wife to separately serve A Pty Ltd with notice of the order she sought in relation to the assets of the company. It was also not necessary, in the circumstances of this case, that A Pty Ltd be separately represented in the proceedings, given the husband’s participation. Service of the application and the wife’s Outline of Case Document upon A Pty Ltd and/or the joinder of A Pty Ltd as a party to the proceedings would not have served any useful or practical purpose in the particular circumstances of this case, as the husband was in complete control of A Pty Ltd. The husband, by some action on his part, was the only person who could have notified other interested parties, including the unsecured creditors of A Pty Ltd, of the proceedings, the order sought by the wife and that such proceedings were likely to affect the assets of the company. We are therefore satisfied that her Honour was in error in concluding that there was jurisdictional error because A Pty Ltd was not separately served with the relevant documentation and/or was not joined as a party. In our view, in so concluding, her Honour failed to consider the relationship between the husband and A Pty Ltd and that service of the relevant documentation on A Pty Ltd or the joinder of A Pty Ltd in the proceedings would not have served any useful or practical purpose.

Third party creditors

It was submitted on behalf of the liquidator that in circumstances where there was scathing criticism of the husband’s conduct of the proceedings at first instance, the Court must be alive to the interests of A Pty Ltd, and whether the husband, as a sole director and sole shareholder, considered the interests of the creditors.

In Ascot Investments Gibbs J (at 354) said:
“There is nothing in the words of the sections that suggests that the Family Court is intended to have power to defeat or prejudice the rights, or nullify the powers, of third parties, or to require them to perform duties which they were not previously liable to perform.”

It is clear from this statement that the legitimate interests of third parties should not be subordinated to the interests of a party to a marriage, and the Court therefor cannot make an order that operates to the detriment of third parties. Thus, even if the complete control test is satisfied it does not follow that the interests of other third parties can be ignored. However, the necessary qualification is that the Family Court can disregard sham transactions or in certain circumstances set aside an instrument or disposition pursuant to s 106B of the Act.

In proceedings under s 79 of the Act the Court is required to firstly make a finding as to the extent and value of the property of the parties which in this case included the shareholding of the husband in A Pty Ltd: Hickey and Hickey and Attorney-General for the Commonwealth (2003) FLC 93-143.

In determining the net value of the property of the parties in proceedings brought pursuant to the provisions of s 79 of the Act, the Court considers secured and unsecured liabilities of the parties. In Biltoft, (supra) at 82,124 the Full Court said:

“A general practice has developed over the years that, in relation to applications pursuant to the provisions of s. 79, the Court ascertains the value of the property of the parties to a marriage by deducting from the value of their assets the value of their total liabilities. In the case of encumbered assets, the value thereof is ascertained by deducting the amount of the secured liability from the gross value of the asset. See, Ascot Investments Pty Ltd v. Harper & Anor (1981) 148 CLR 337 where Gibbs J. (as he then was) pointed out at p 355 that the Court “must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.” Where the assets are not encumbered and moneys are owed by the parties or one of them to unsecured creditors, the court ascertains the value of their property by deducting from the value of their assets the value of their total liabilities, including the unsecured liabilities.”

Ordinarily there is no issue in relation to the interests of secured creditors as the secured creditor has an interest in that part of the property of the debtor over which the security is taken. The Court cannot make an order altering the interests in property to the extent that a secured creditor’s rights in property are affected because the property, to the extent of the security, is not the property of the parties. This is consistent with Ascot Investments (supra) namely that the Court cannot make an order that operates to the detriment of the rights and interests of a third party.

Unsecured creditors however have no right to a particular part of the debtor’s property. The unsecured creditor has a right to sue the debtor, recover judgment and prove in bankruptcy. However, the usual practice described in Biltoft (supra), also applies to unsecured creditors. The Court will deduct the known amounts owed to unsecured creditors in order to arrive at the net value of the property of the parties. In Re Bailey, M.J. and Bailey M.J. (executrix of the estate of Bailey H.R.) (1990) FLC 92-117 at 77,772 the Full Court noted that it “matters not whether the liabilities are actual, contingent, arising out of contract or tort”. In Rowell and Rowell; Deputy Federal Commissioner of Taxation (Intervener) (1989) FLC 92-026 at 77,392 McCall J observed that the Court has always taken into account liabilities including those which are contingent and have to be established.

As to the rights of unsecured creditors of a company they have no proprietary interest in the assets of the company and cannot interfere with the conduct of the business of the company apart from, for example, taking proceedings for liquidation of the company. However, in certain circumstances, the interests of unsecured creditors cannot be ignored. In Walker v Wimborne (1976) 137 CLR 1 at 6-7 Mason J (with whom Barwick CJ agreed) said:

“…the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a “group” of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent.”

In Kinsela and Another v Russell Kinsela Pty Limited (in liq) (1986) 4 NSWLR 722 Street CJ dealt at some length with relevant authorities and said (at 730):

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholder’s assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency or the imposition of some alternative administration.”

Directors of a company thus have a duty to take account of the interests of creditors in circumstances where the company is insolvent.

In Spies v The Queen (2000) 173 ALR 529 at 555 a majority of the High Court (Gaudron, McHugh, Gummow and Hayne JJ) approved of the observations of Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 at 444 that the duty to take into account the interests of creditors also arises when the company is nearing insolvency.

On behalf of the liquidators it was submitted that the duty to avoid prejudicing the interests of creditors extends not only to existing creditors but also future creditors. In Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114 at 118 Lord Templeman suggested that directors of companies which are solvent are under a duty to present and future creditors. His Lordship concluded that a company owes a duty to its creditors to keep its property inviolate and available for repayment of its debts. Similarly, we were referred to Jeffree v National Companies & Securities Commission [1990] WAR 183 where the Full Court of the Supreme Court of Western Australia followed Winkworth in holding that a director owed a duty to the company’s present and future creditors to ensure that the assets of the company were not dissipated so as to defeat the claims of creditors: see also Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242 per Cooke J at 247-250.

In Biltoft (supra), the Full Court approved at 82,127 the following observation of Nygh J in Af Petersens and Af Petersens (1981) FLC 91-095 at 76,660:
“Nor, as has been pointed out earlier, is there anything in the decision of the High Court in Ascot Investments Pty. Ltd. v Harper and Harper to suggest that this Court cannot make an order dividing the assets of the parties because such a division might hamper a third party in his or her chances of recovery of a debt.”

In Biltoft the Full Court went on to comment (at 82,128):
“Thus, although there is a general rule as set out in Prince and Prince (…[(1984) FLC 91-501]) and Rowell and Rowell (supra), the rule is not absolute, is not prescribed by the statute and there are a number of well recognised exceptions to some of which we have already referred. There is no requirement that the rights of an unsecured creditor or a claim by a third party must be considered and dealt with prior to the Court making an order under s. 79, nor is there a rule of priority as between a creditor claimant and a spouse. Those rights, however, cannot be ignored. They must be recognised, taken into account and balanced against the rights of the spouse.”

However, the Full Court also noted (at 82,128-82,129):
“There is an obligation on both parties to disclose any significant creditors or any significant claim against either of them by a third party. If, as a result of the order of the Court in the property proceedings, the ability of a creditor or claimant to recover his or her debt or claim is likely to be affected, notice of the Family Court proceedings must be given to that creditor or claimant. He/she may then intervene in the Family Court proceedings and either seek a stay of those proceedings or some appropriate order which recognises his/her rights.”

In Re Bailey (supra) the Full Court recorded (at 77,774):
“The combination of the statement by the High Court in Ascot Investments and Harper and sec. 79A clearly indicates to us that it is not proper for the Court to proceed in a property application without due regard to liabilities of a party which are either established or in the process of being determined where the liabilities are of such magnitude as to be defeated by the order being sought in the Family Court.”

In Rowell (supra) McCall J at 77,392 observed that family law does not operate in a vacuum and that the legitimate rights of third parties are not to be ignored when determining the rights to property between husband and wife. We note that this principle was cited with approval in Semmens (supra) where the Full Court observed at 77,767:
“Neither the Family Law Act nor the Rules of Court require notices to be given to third parties in proceedings under sec. 79, 86 or 87. Nevertheless there are cases where the orders sought by one or both of the parties may impinge upon the legitimate rights of third parties. Whilst it would not be appropriate to require parties to such proceedings to give notice in every case to all third parties who are or may be creditors of one or both of the parties, nevertheless in particular cases the failure by the parties to do so (or the Court to direct such a course) may prejudice the rights of third parties.
As Gibbs C.J. said in the quotation from Ascot Investments referred to above:
“... it does not follow that Parliament intended that the legitimate interests of third parties should be subordinated to the interests of a party to a marriage, or that the Family Court should be able to make orders that would operate to the detriment of third parties.”
Whilst we think it inappropriate, in the absence of Rules of Court to this effect, to require notices to be given to third parties in all such circumstances, it must be recognised that the failure to do so in particular cases can severely impinge upon the “legitimate interests of third parties” and may almost inevitably in many cases constitute a “miscarriage of justice” within sec. 79A. Consequently, in our view, where in a proceeding under sec. 79, 86 or 87 it appears to either of the parties that there are interests of third parties which might be adversely affected by the orders which are being sought or the terms of the agreement, justice and common sense dictate that those third parties be given notice.
Similarly, where the Court becomes apprised of that circumstance in the course of hearing such a proceeding, that procedure would also commend itself.
Failure to do so in a particular case may adversely affect the interests of a third party and, in the long run, may open up the orders which have been made or the agreement which has been approved or registered to challenge sec. 79A and 87(8) or otherwise.”

This passage in Semmens (supra) was cited with approval by the Full Court in Biltoft (supra) at 82,127. In Biltoft (supra) the Full Court, referring to the rights of an unsecured creditor or a claim by a third party, noted at 82,128:
“Those rights, however, cannot be ignored. They must be recognised, taken into account and balanced against the rights of the spouse.”

In Official Trustee in Bankruptcy v Donovan (supra) the Full Court recorded at 83,421:

“This court has, on numerous occasions, emphasised the obligation of full disclosure of third party interests to the Court and the responsibility of notification to third parties. See Chemaisse and Chemaisse; Federal Commissioner of Taxation (…[(1998) FLC 91-915]), Re Chemaisse; Federal Commissioner of Taxation (Intervener) (…[(1990) FLC 92-133]), Deputy Commissioner of Taxation (WA) v Spanjich (…[(1988) FLC 19-974]); Rowell and Rowell; Deputy Federal Commissioner of Taxation (Intervener) (…[(1989) FLC 92-026]); Re Bailey and Bailey (…[(1990) FLC 92-117]), Semmens v Commonwealth of Australia and Collector of Customs (SA) (…[(1990) FLC 92-116]) and Biltoft and Biltoft (…[(1995) FLC 92-614]). The only finding open to the trial Judge on the evidence was that neither the Law Society, the Receiver of the husband’s practice, nor the persons whose funds were misappropriated by the husband were notified of the return date of the relevant proceedings or that the parties intended, if possible, to seek that the duty Judge make final orders in relation to the wife’s claim under s 79 on that return date, namely, 7 February 1986. Clearly, on the evidence, the ability of a claimant to recover a debt arising out of the husband’s misappropriation was likely to be affected by the making of the final orders which were in fact made.

In our judgment, in the circumstances of this case, there was an obligation to notify, and given the relevant statutory scheme, to notify the Law Society of the proceedings, the return date of those proceedings and that, if possible, final orders would be sought on that return day to enable the Law Society, if it so desired, to seek to intervene in the proceedings, or a stay of the proceedings or some other appropriate order. That obligation was not discharged by placing the relevant material before the Court.
In the circumstances of this case, the failure to so notify amounts to a miscarriage of justice within the meaning of s 79A(1)(a).”

In certain circumstances there may be an obligation upon a party to property settlement proceedings and/or the Court to notify a person or entity whose interests may be adversely affected by an order being sought, such as a third party creditor, who may have a right to intervene or to be heard in the proceedings. Failure to do so will generally preclude the making of an order adversely affecting such a third party. The importance of notice to a third party whose interests may be adversely affected by a decision was made clear by Kirby J in Allesch v Maunz (2000) FLC 93-033 at 87,517:

“It is a principle of justice that a decision-maker, at least one exercising public power, must ordinarily afford a person whose interests maybe adversely affected by a decision an opportunity to present material information and submissions relevant to such a decision before it is made. The principle lies deep in the common law. It has long been expressed as one of the maxims which the common law observes as “an indispensable requirement of justice”. It is a rule of natural justice or “procedural fairness”. It will usually be imputed into statutes creating courts and adjudicative tribunals.” [footnotes omitted]

In the circumstances of this case, there was a clear obligation on the husband to notify A Pty Ltd’s unsecured creditors once he was aware of the final order sought by the wife. The wife had no similar obligation.

The situation may however be different if it was known to the party seeking relief that an order against the assets of the controlled third party may adversely affect the interests of other third parties such as unsecured creditors. So also if there was evidence before the Court that the relief sought by a party may prejudice the interests of other third parties the Court would be obliged to ensure that steps were taken to give notice to the relevant third parties.

In this case, her Honour made findings as to the extent and value of the financial circumstances of the parties. As was submitted on behalf of the wife, her conduct, and that of her solicitor, is to be contrasted with the conduct of the husband. His conduct was correctly the subject of significant criticism by her Honour. He failed to make a full and proper disclosure, and provide proper evidence and details to the wife and to the Court, of his financial position and the details of his businesses. The evidence so far as known to the wife however, was placed before the Court and her Honour made findings based upon this evidence. Her Honour ultimately accepted that the assets of A Pty Ltd were to be valued at $1,221,961. Her Honour was also informed of a debt by A Pty Ltd to the Australian Taxation Office that appeared to be in the order of between $200,000 and $300,000. It was submitted on behalf of the wife that with respect to A Pty Ltd, the evidence before her Honour, and this was the only evidence that the wife had in the circumstances of the husband’s behaviour, was that the company was likely to have a net asset position close to $1,000,000.

We accept the submission on behalf of the wife that her Honour made findings in accordance with the best evidence available to her namely that the total asset pool was to be valued at $7,715,415. She was aware of income tax assessments totalling approximately $1.28 million for which the husband was apparently liable but nevertheless, that meant that there was a net asset position in excess of $5,000,000.

The wife and her advisers had been assiduous to obtain discovery and disclosure and to obtain information so as to present the best evidence possible for the Court. On the evidence available to the Court, and to the wife and her legal advisers, there was, in the circumstances, no occasion to have concern that the Australian Taxation Office should be given any more notice by the wife and/or her advisers than was given. On the evidence available to the wife, her solicitor and to the Court there was little likelihood that the Australian Taxation Office would be affected by an order because of the apparent substantial asset position of the company and the significant net asset position of the parties. It is understandable therefor why it would not occur to the wife or the Court that any third party would be prejudiced by what she sought.
It was submitted on behalf of the wife that any criticism of her or her legal advisers in failing to give notice in the circumstances is unfair because it can only be infected by circumstances that have come to light in hindsight subsequent to the judgment originally pronounced by the trial Judge. We accept the submission, in the circumstances pertaining at the time of the trial, that it is unfair to suggest that the wife’s conduct contributed to a miscarriage of justice.

In the circumstances, we do not accept that the wife had any obligation or duty to take steps to give notice to the unsecured creditors of A Pty Ltd.

The husband however, had an obligation to give notice to the unsecured creditors of the relief sought by the wife once it was known to him. He had this duty because as a director of A Pty Ltd he had a duty to the unsecured creditors of the company, in circumstances where the company was nearing insolvency or there was a risk of insolvency if the order sought by the wife was made. Next, and importantly, irrespective of his duties as a director, he had a duty to give such notice because he knew or ought to have known that the relief sought by the wife may impinge upon the legitimate interests of the unsecured creditors. In our view, in the instant case, such failure on the part of the husband was not a jurisdictional error and her Honour erred in so finding.

Miscarriage Of Justice

On behalf of the wife, Mr K, Chartered Accountant, prepared a valuation report of corporate structures. He arrived at a net asset value for A Pty Ltd of $960,790. Mr K included in reaching his net value of A Pty Ltd a goodwill value of $935,000 which he stated in his report he was unable to verify. It was submitted on behalf of the liquidator, that as Mr M’s investigations disclosed, some of the assets adopted by Mr K were not in truth the assets of A Pty Ltd but were assets owned by third parties. At the trial her Honour did not have Mr M’s evidence but she had Mr K’s qualified report and observations as to the goodwill component. Mr K’s report is dated 15 November 2000 and the relevant order for security was not made until 8 May 2002. It was submitted on behalf of the liquidators that the report was therefor inherently unreliable.

In his affidavit filed on 21 November 2002, Mr M identified an amount of $473,896.01 as owing to unsecured creditors, which included an amount of $254,852 owing to the Australian Taxation Office in respect of the financial years ending 30 June 1993 and 30 June 1997. Mr M had been unable to detect any significant change in the asset position of the company in the six months prior to his appointment and deposed to no assets being disposed of at any time after 8 May 2002. Thus it is clear that as at 8 May 2002 the interests of the unsecured creditors of A Pty Ltd may be adversely affected by the order. As it transpired, after the subsequent sale of assets of the company, the unsecured creditors will receive nothing if the order of 8 May 2002 is not set aside.

Pursuant to the provisions of s 79A(1)(a), the Court may vary or set aside an order made under s 79 only if it is satisfied that there has been a miscarriage of justice. Section 79A(1)(a) applies only to circumstances existing at or before the time of the making of the original property order and not to circumstances that occur after the order was made: see Molier and Van Wyk (1980) FLC 90-911 at 75,767-75,768; Public Trustee v Gilbert (1991) FLC 92-211 and Sommerville and Sommerville (2000) FLC 93-042 at 87,666-86,667. Further, the expression “miscarriage of justice” has been interpreted to mean that an order has been unjustly obtained: see Holland (supra) at 77,339. In Clifton and Stuart (1991) FLC 92-194 at 78,337-78,338 the Full Court made it clear that the phrase should not be interpreted too widely and that it concerns the integrity of the judicial process. The phrase “or any other circumstance” is limited by the phrase “miscarriage of justice” and cannot be read as if it were unlimited in scope: Gebert and Gebert (1990) FLC 92-137 at 77,935 and Clifton and Stuart (supra) at 78,337. The phrase in s 79A(1)(a) should also not be read ejusdem generis with the preceding words “fraud, duress, suppression of evidence, the giving of false evidence”: Elliot and Willcox (1996) FLC 92-687 at 83,134. In the context of this case it is also important that it is not necessary to demonstrate that the order was wrong but simply that there had been a miscarriage of justice on account of one of the reasons stated in the section.

In Semmens (supra) the Full Court indicated that there may be a miscarriage of justice by reason of any other circumstance if a party to proceedings fails to give a third party notice that a property order that he or she is seeking may impinge upon the interests of the third party. In Biltoft (supra) the Full Court made it very clear that the rights of unsecured creditors cannot be ignored and must be recognised and balanced against the rights of the parties to the marriage. A miscarriage of justice may therefore occur where an unsecured creditor, whose interests may be adversely affected by a proposed order for property settlement, is neither given notice of the proceedings and the order sought nor an opportunity to be heard: see also Official Trustee in Bankruptcy v Donovan (supra).

A basic premise of company law is that a company is a legal entity separate from its shareholders and directors: Salomon v Salomon & Co Ltd (1987) AC 22. Thus, even where a company has only one shareholder and director, the company nevertheless retains its rights, privileges, duties and liabilities separate from those of its constituent director(s) and shareholder(s), as the case may be. A necessary consequence of this principle is that company property remains separate from that of its director(s) and shareholder(s).

However, the alter ego concept for the purposes of proceedings under s 79 of the Act, recognised in Ascot Investments (supra), does not mean in the case of a company that the separate entity doctrine is abandoned. The company remains a separate legal entity and its rights, privileges, duties and liabilities are separate from those of its sole member. It does not mean that a party to the marriage can deal with the interests of the company in a way that is contrary to the general law or the Corporations Act.In the instant case, the husband was under a duty to ensure that the interests of the unsecured creditors of A Pty Ltd were not adversely affected by an order of the Court without the creditors first being given notice of the proceedings, the order sought and ensuring that they were afforded an opportunity to be heard in the proceedings. On or after 4 June 2001, the husband knew or ought to have known that the effect of the order then sought by the wife may render A Pty Ltd insolvent. There was then triggered an obligation to ensure that the interests of the unsecured creditors of A Pty Ltd were not adversely affected and an obligation on the husband to give notice. This he failed to do. We accept that detriment was thus caused to the unsecured creditors by reason of the making of the security order.

The critical date is 8 May 2002 and an analysis of the true state of affairs of A Pty Ltd at that date was undertaken by counsel for the liquidator in his submissions. Counsel was endeavouring to demonstrate that if her Honour had undertaken a similar analysis it would have been obvious that it was necessary to give notice to unsecured creditors because they may be effected if the order sought by the wife was made. He was critical of the trial Judge for her failure to undertake this analysis. As was submitted on behalf of the wife there were unsatisfactory aspects of the evidence and scope for debate. We do not accept this criticism of her Honour given the difficulties she had in ascertaining the financial circumstances of the husband. However, irrespective of this analysis there remains the evidence that established that as at 8 May 2002 the effect of the security order was to put the company at risk of insolvency and thus effect the legitimate interests of the unsecured creditors.

In our view, it follows that the failure by the husband to disclose the relevant debts or to disclose his financial position to the Court, and the possible adverse effect on third parties of the order sought by the wife, if made, was sufficient to trigger the “any other circumstance” element in s 79A. We are therefore of the opinion, that the trial Judge was correct in finding that s 79A applied, irrespective of the wife’s conduct.

It was submitted on behalf of the wife that in the circumstances there was no miscarriage of justice because the liquidation of the company after the order was made cannot be taken into account. However, this submission fails to address the evidence of Mr M that establishes that at the time the order had been made, if the security order was enforced, the company was at risk of insolvency and thus the interests of unsecured creditors would be prejudiced. The unsecured creditors should have been afforded the opportunity to be heard as to whether or not the order was made.

Her Honour concluded:

“80. I am also of the opinion that it would have been reasonable in the circumstances for the parties to have advised the DCT of the nature of the orders sought at trial. This is particularly so given the detriment that was incurred by the orders of 8 May 2002 to the DCT's potential for recovery from [A] Pty Ltd. By notifying the DCT, this Court may well have been placed in a position to make orders which were in keeping with the principles espoused in Qintex.
81. The term "miscarriage of justice" can be construed simply as a failure by a court to attain justice: In the Marriage of Simpson (1982) 8 FamLR 467. I am of the view that a miscarriage has in fact transpired.”

In our view, her Honour’s conclusion that a miscarriage had in the circumstances occurred was open to her. It has not been demonstrated to our satisfaction that, in so finding and in exercising her discretion to set aside paragraph 4 of the order of 8 May 2002, she erred in the appellate sense.

Costs

On behalf of the wife it was submitted that the trial Judge erred in ordering her to pay one half of the liquidator’s costs of the proceedings before her. It was submitted that a costs order against the wife was inappropriate and not a proper exercise of discretion. It was further submitted that if the matter before the trial Judge did miscarry the fault lay with the husband’s failure to make disclosure and the failure by the Australian Taxation Office to protect its own interests when it had been made aware of proceedings and had informed the wife that it would be attending the trial.

It was further submitted on behalf of the wife that the Australian Taxation Office had been informed of the proceedings and was aware that the assets of A Pty Ltd were asserted to be the assets of the husband. Moreover, it was submitted that the Australian Taxation Office had made a decision not to investigate in detail. It was submitted that the wife had not concealed evidence at the hearing before her Honour and that in the whole of the circumstances, whatever costs order might be made as between the liquidator and the husband, no order in favour of the liquidator should have been made against the wife. In addition, senior counsel for the wife referred to the evidence before her Honour as to the wife’s financial circumstances.

On behalf of the liquidator it was submitted that there is no utility in the ground of appeal that the application below did not seek a specific costs order. Costs it was submitted were always likely to be an issue.Emphasis was placed upon the discretionary nature of the order for costs and the width of the discretion of the trial Judge. It was finally submitted that the trial Judge had properly considered all relevant factors and no appealable error was demonstrated.

In considering whether the circumstances justified the making of an order for costs, her Honour took into account that the liquidator had been wholly successful in the proceedings and the dire financial circumstances of the wife. We note, however, the provisions of s 117(2A)(e) of the Act. On a reading of her Honour’s reasons as a whole, we are not satisfied that, in reaching her conclusion, her Honour properly took into account the conduct of the parties to the proceedings and, in particular, the conduct of the husband. Her Honour noted that much of the cost and expense incurred by the wife was occasioned by the husband’s failure to properly participate in the proceedings. Accordingly, we are satisfied that in failing to properly take that conduct into account, her Honour erred in the appellate sense.

Having concluded that the trial Judge erred in making the order for costs which she did, we are of the view that it is appropriate for us to re-exercise the discretion. Having regard to the respective submissions of the parties and the matters referred to in s 117(2A) of the Act, we are of the view that the circumstances do not justify the making of an order for costs against the wife.

Conclusion

We are therefore of the view that the appeal should be allowed in part in that we would set aside so much of paragraph (7) of the order of the trial Judge which provides that the wife pay one-half of the liquidator’s costs.

Costs of the Appeal

On behalf of the liquidator, it was submitted that in the event that the appeal was dismissed, the wife should pay the liquidator’s costs. On behalf of the wife, it was submitted that the liquidator should pay the wife’s costs of the appeal, whatever the outcome, in particular because the liquidator is indemnified in relation to costs by the Australian Taxation Office and because the Deputy Commissioner could have intervened in the proceedings before the trial Judge.

Having regard to the submissions made on behalf of the parties and the matters referred to in s 117(2A) of the Act, we are of the view that the circumstances do not justify the making of an order for costs in relation to this appeal.

Order

We order:
1.That the appeal be allowed in part.
2.That paragraph 7 of the order of 5 December 2002 be varied by deleting the words “and the wife each”.
3.That there be no order as to costs of and incidental to the appeal.

I certify that the preceding 111 paragraphs
are a true copy of the reasons
for judgment delivered by
this Honourable Full Court.

Associate

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Citations

S & M & Ors [2003] FamCA 1387

Most Recent Citation

C.S.R.& F and M Pty Ltd [2007] FMCAfam 477

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