Sanders & Sanders & Ors
[2012] FamCAFC 136
•26 July 2012
FAMILY COURT OF AUSTRALIA
| SANDERS & SANDERS AND ORS | [2012] FamCAFC 136 |
| FAMILY LAW – APPEAL – Adequacy of reasons – Appealable error established. |
| Family Law Act 1975 (Cth) |
| Bennett and Bennett (1991) FLC 92-191 Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 |
| APPELLANT: | Ms Sanders |
| FIRST RESPONDENT: | Mr Sanders |
| SECOND RESPONDENT: | U Pty Ltd |
| THIRD RESPONDENT: | CG Pty Ltd |
| FOURTH RESPONDENT: | S Pty Ltd |
| FIFTH RESPONDENT: | K Pty Ltd |
| SIXTH RESPONDENT: | Y Pty Ltd |
| SEVENTH RESPONDENT: | N Pty Ltd |
| EIGHTH RESPONDENT: | Mr EB |
| NINTH RESPONDENT: | AS Pty Ltd |
| TENTH RESPONDENT: | Mr YY |
| FILE NUMBER: | SYC | 8576 | of | 2007 |
| APPEAL NUMBER: | EA | 142 | of | 2011 |
| DATE ORDERS MADE: | 26 July 2012 |
| DATE REASONS PUBLISHED: | 29 August 2012 |
| PLACE DELIVERED: | Sydney |
| PLACE HEARD: | Sydney |
| JUDGMENT OF: | Bryant CJ, Ainslie-Wallace & Rees JJ |
| HEARING DATE: | 26 July 2012 |
| LOWER COURT JURISDICTION: | Family Court of Australia |
| LOWER COURT JUDGMENT DATE: | 18 November 2011 |
| LOWER COURT MNC: | [2011] FamCA 881 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Paul |
| SOLICITOR FOR THE APPELLANT: | Paul & Paul Lawyers |
| FOR THE FIRST RESPONDENT: | Mr Sanders in person |
| FOR THE SECOND RESPONDENT: | Mr YY in person |
| FOR THE THIRD RESPONDENT: | W Sanders in person |
| FOR THE FOURTH RESPONDENT: | Mr YY in person |
| FOR THE FIFTH RESPONDENT: | G Sanders in person |
| FOR THE SIXTH RESPONDENT: | No appearance |
| FOR THE SEVENTH RESPONDENT: | No appearance |
| FOR THE EIGHTH RESPONDENT: | No appearance |
| FOR THE NINTH RESPONDENT: | No appearance |
| FOR THE TENTH RESPONDENT: | Mr YY in person |
Orders made on 26 July 2012
That the appeal be allowed, with reasons to be published later.
That, by consent, further expert evidence in the proceedings be given by a single expert, Mr E, chartered account (“the single expert”).
That the single expert report on the interests of the husband and wife as at 31 August 2010 and 30 June 2012 in:
(a) NPA (“the partnership”);
(b) Sanders-A Family Trust;
(c) Sanders Family Trust; and
(d) Sanders Family Trust (I).
That in carrying out the exercise in Order (3), the single expert consider and, if appropriate, take account of:
(a)the effect of the discharge by the husband and wife of the NAB loans secured over the former matrimonial home in the sum of $1,457,000; and
(b)in particular whether that discharge gives rise to a debt owed by the partnership to the husband and wife, and, if so, in what proportions.
That, if the single expert concludes that the value of the partnership and other entities is a net deficit, he report on the capacity of the partners, jointly and severally, to meet the liabilities of the partnership, including any monies owed to the husband and wife.
That the fees of the single expert be paid in the following proportions:
(a) 20 per cent by the wife;
(b) 20 per cent by the husband; and
(c)20 per cent each by Mr YY, Mr W Sanders and Mr G Sanders, or the corporate entities that they represent (or in such other proportions as they agree).
That each of the parties file and serve upon each other party and the single expert an affidavit on or before 26 August 2012 setting out their assets and liabilities, whether held personally, or by any corporate entity or trust, or by any other person or entity on their behalf.
That, upon filing of the single expert report, the matter be listed before one of the members of the Bench for any further necessary directions as to re-exercise or other orders.
That each of the 1st, 3rd, 5th and 10th respondents be granted a costs certificate pursuant to the provisions of s 6 of the Federal Proceedings (Costs) Act 1981 (Cth), being a certificate that, in the opinion of the Court, it would be appropriate for the Attorney-General to authorise a payment under that Act to each of the named respondents in respect of the costs incurred by them in relation to the appeal, including expenditure on the single expert’s report for the purpose of the Full Court’s re-exercise of discretion as part of the appeal.
That the wife be granted a costs certificate pursuant to the provisions of s 9 of the Federal Proceedings (Costs) Act 1981 (Cth), being a certificate that, in the opinion of the Court, it would be appropriate for the Attorney-General to authorise a payment under that Act to the wife in respect of the costs incurred by her in relation to the appeal, including expenditure on the single expert’s report for the purpose of the Full Court’s re-exercise of discretion as part of the appeal.
That the application to adduce further evidence filed 6 July 2012 by the 10th respondent be dismissed.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Sanders & Sanders and Ors has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT SYDNEY |
Appeal Number: EA 142 of 2011
File Number: SYC 8576 of 2007
| Ms Sanders |
Appellant
And
| Mr Sanders |
Respondent
And
| U Pty Ltd |
Respondent
And
| CG Pty Ltd |
Respondent
And
| S Pty Ltd |
Respondent
And
| K Pty Ltd |
Respondent
And
| Y Pty Ltd |
Respondent
And
| N Pty Ltd |
Respondent
And
| Mr EB |
Respondent
And
| AS Pty Ltd |
Respondent
And
| Mr YY |
Respondent
REASONS FOR JUDGMENT
On 26 July 2012, at the conclusion of the hearing of this appeal, we indicated that we would allow the appeal and for practical reasons deliver our reasons at a later date. These are our reasons.
As both the appellant and the respondents wished to avoid the matter being remitted for re-hearing if possible, we made a number of orders directed to obtaining evidence that might enable this Court to re-exercise discretion without a remitter. Until that evidence and its status (whether it is contested) is before the Court, a decision about remittance remains to be determined.
Ms Sanders (“the wife”) appeals against orders of Cleary J made on 18 November 2011 after a trial of eight days. Mr Sanders (“the husband”) and ten other respondents were parties to the suit. Of those respondents eight appeared in person; two made no appearance.
The original proceedings that gave rise to the appeal commenced when the husband started proceedings on 13 December 2007. The hearing of that application took place in May 2009 before Judicial Registrar Loughnan (as he then was). The wife applied for a review of the decision and, ultimately, in November 2010, the matter came before Cleary J for hearing. Her Honour determined the matter on 18 November 2011. The wife appeals against her Honour’s determination.
Before the Judicial Registrar the husband sought orders in respect of the properties of the parties. In short, his Honour made various orders, including an order that the former matrimonial home be sold. He provided for various costs and liabilities to be paid from the proceeds and after that had occurred, the wife was to receive 77 per cent of the remaining balance and the husband was to receive the remainder. The Judicial Registrar also made an order for spousal maintenance to be paid by the husband, which varied a previous order by reducing the amount payable to the wife to $357 per week, but to cease on 29 November 2009. Further orders were made by the Judicial Registrar, including an order providing for each of the parties to retain assets then in their possession.
When the former matrimonial home was sold, a debt of $1.475 million owed by the partnership and secured over that property was discharged.
Again in summary, the Judicial Registrar made orders requiring the wife to transfer her shareholding in various corporate entities and trusts to the husband, to disclaim any interest in three trusts, and to assign any interest in loan accounts in the trusts to the husband. Although the orders in relation to the sale of the house and payment of the net proceeds were put into effect to the wife’s benefit, by the time the matter came before Cleary J, the wife had not complied with the orders in relation to the corporate entities and the trusts.
In her application to review the orders of the Judicial Registrar before Cleary J, the wife asserted various errors, including errors of fact in findings about the value of an insurance policy and, more particularly, in findings about the value of a trust which she asserted was worth significantly more than the Judicial Registrar had found. She also asserted the Judicial Registrar erred in failing to have regard to the fact that a liability to be repaid would have a benefit to the husband.
She asserted that these failures resulted in her receiving, by way of s 75(2) factors, an insufficient amount, and that, if she was right about the value of assets, then the asset pool as well would need to be adjusted. The husband for his part sought an order that the wife refund an extra $30,000 that she had received on sale of the parties’ house, and also sought an adjustment in the percentage entitlements found by the Judicial Registrar.
By the time the matter had come before Cleary J, however, a number of intervening events had occurred in relation to the business, and, accordingly, the wife significantly amended her application.
At all material times the husband had operated a business trading as NE Group (“NPA”) in partnership, first with Mr A and later with other partners.
On 1 September 2010 new arrangements for NE Group took effect in which the husband transferred his interest in the partnership to his two sons. The wife sought to set aside this transaction pursuant to s 106B of the Family Law Act 1975 (Cth) (“the Act”) and she sought consequential orders relating to the transfers. She joined ten further respondents, being related entities and individuals. Her claim was that she should be paid a sum of $2.5 million by the Sanders Family Trust and take control of the business. She sought a raft of other orders which are not necessary to consider here. She also sought spousal maintenance from 5 November 2009 of $1,340 per week, less other payments she was receiving.
Although the wife was dissatisfied with the orders of the Judicial Registrar, through a series of defaults and delays, a valid application for a review of his decision was not filed until April 2010. As a result, the orders of the Judicial Registrar remained undisturbed.
Justice Cleary heard the matter over a period of eight days. Her Honour identified at [97] of her reasons the issues for hearing as follows:
1. Should the disposition of the husband’s interests in the business be set aside? [s 106B]
2. Was there a failure by the husband to make full and frank disclosure?
3. How should the net asset pool as determined be divided [s 79; s 75(2)]. [This includes the issue of valuation of the business and The [Sanders] Family Trust].
4. Should the husband continue to pay spouse maintenance and if so, how much and for what period.
5. How should the payment of $30,000 by the husband in July 2010 be categorised?
Her Honour dismissed the wife’s application, finding against her on all the relevant issues. Issues of credit played a part, her Honour finding that the husband’s evidence and that of his witnesses was more reliable than that of the wife. She also dismissed the husband’s application.
In order to give context to the matters argued on appeal it is necessary to give some brief outline of the evidence and the issues before her Honour touching on the issue of valuation of the partnership business.
None of her Honour’s findings of fact in relation to the background to the dispute was challenged and we adopt them from her reasons.
The Business
In 1990 the husband and Mr A started in partnership trading as NE Group (“NPA”). In 1996 it seems that the husband and Mr A bought office premises in Sydney from which the business of NPA was conducted.
In 1998 a trust was established for the Sanders and A families, the Sanders-A Family Trust. The trustee of that trust is N Holdings Pty Ltd (“N Holdings”). The husband and Mr A are directors and shareholders of N Holdings. N Holdings acquired the real estate in Sydney and NPA leases the premises from N Holdings.
A further trust was established in 1998, the Sanders Family Trust No 1. Y Pty Ltd is the trustee. According to her Honour’s reasons at [10], Y Pty Ltd purchased properties using borrowings from the National Australia Bank (“NAB”).
In July 2002 Mr A and the husband decided to increase the partnership of NPA and four new partners were introduced. Each paid in $500,000 and received 10.5 per cent interest in the partnership. Two of those four new partners were Mr YY and Mr EB.
The $2 million paid by the incoming partners was paid to Mr A and the husband personally through their family trusts. None was paid into the partnership accounts. In the time that the partnership stood at six, each partner was paid an agreed salary from operating capital and it seems from funds borrowed from the NAB.
In 2006 Mr A and two of the other partners left the partnership. Each was paid out in the sum of $215,000 and their holdings transferred to the remaining partners – the husband (70 per cent), Mr YY (15 per cent) and Mr EB (15 per cent).
In 2010 Mr EB suddenly left the partnership. It appears that he had borrowed the money to buy into the partnership from the NAB and somehow persuaded the NAB to enter into an arrangement for repayment that was disadvantageous to the other partners. In any event he left the partners with a debt of $460,000 secured over the real estate in Sydney. After this date the husband held a 70 per cent interest in the partnership and Mr YY held 30 per cent.
In June 2010 the husband decided to withdraw from the partnership in NPA and on 1 September 2010 he transferred his interest in the partnership to his sons, W and G Sanders. At the date of the hearing, the sons (or their associated entities) between them held a 70 per cent shareholding and Mr YY 30 per cent.
On learning of the transfer of that interest the wife amended her review application to include an application under s 106B of the Act to set aside the transaction.
At that point, further respondents were joined to the proceedings being Mr YY, U Pty Ltd (a company incorporated after 1 September 2010 of which Mr YY and W and G Sanders are directors), Mrs YY, S Pty Ltd (the trustee for the YY Family Trust), CG Pty Ltd (the trustee for G Sanders), K Pty Ltd (the trustee for W Sanders), Y Pty Ltd (the trustee for the Sanders Family Trust No 1 and the Sanders Family Trust), N Holdings Pty Ltd (the trustee for the Sanders-A Family Trust), Mr EB and AS Pty Ltd (the trustee for Mr EB). Neither Mr EB nor AS Pty Ltd appeared.
U Pty Ltd was established on or about 31 August 2010 when the husband transferred his interest in the partnership to his sons and that company became the trustee for the trust trading as NE Group.
Her Honour found at [49] that the husband’s decision to transfer his interest and effectively remove himself from the operations of NE Group was made at a time when he believed that he was exclusively entitled to a 70 per cent interest in NPA pursuant to Judicial Registrar Loughnan’s orders and that it was done because he was in poor health and the business was floundering. Her Honour further found at [65] that the sons of the parties made independent decisions to take over the husband’s interest in the partnership and that they did not collude in any way to defeat their mother’s interests. There was no challenge to these findings.
Almost the whole of the evidence in the case was directed to the question of the value of NPA both at the date of trial and at 31 August 2010.
The Valuation Evidence
Mr E
When the matter was before Judicial Registrar Loughnan, a single expert, Mr E was appointed to conduct a valuation of the parties’ assets.
In his report of November 2008, Mr E considered NPA and three associated entities, gave valuations of each and apportioned the value to the husband and/or wife as follows:
The Sanders-A Family Trust $41,422 (the husband)
The Sanders Family Trust No 1 $16,066 (the husband and
wife each)
NPAnil
The Sanders Family Trust nil
Mr E’s valuation was based on the Future Maintainable Earnings of the partnership. Her Honour found, and it was undisputed, that the parties accepted Mr E’s valuation for the purposes of the hearing before the Judicial Registrar. Although Mr E was called to give evidence in the trial before her Honour, he had not prepared an updated report and said that he could not give an opinion about the then value of the business without updating his report.
Mr M
In October 2010 the accountant for the business, Mr M prepared a report in which he commented on Mr E’s valuation and considered the effect of the restructure of the business following the husband relinquishing his interest in the business from September 2010.
He agreed with Mr E’s valuation of NPA at nil and observed that Mr E had included in his valuation a Gross Profit Margin of the business for a period of six years up to the date of the valuation. He said that comparing Mr E’s figure with that of 2010 showed no overall improvement in the trading results for the business since Mr E’s valuation.
He indicated that when considering the CGT and Stamp Duty ramifications of the proposed transfer of the husband’s interest in the partnership to his sons he had come to the conclusion that NPA had a nil value.
He said:
18. The Balance Sheet dated 31 August, 2010 (Annexure 6), shows Trade Creditors were $832,598 and Trade Debtors were $228,033. At the same date, total Current Assets were $247,675 and total Current Liabilities were $883,551.
19. As there is currently a significant deficiency in Current Assets and the business has no assets available to be used a (sic) security for borrowings, it is my opinion [NPA] is wholly reliant on the support of the Trade Creditors for working capital requirements. Reduction of the deficiency in Current Assets will be dependent on the financial performance of the business.
In February 2011 Mr M prepared a further report on the valuation of the business, turning his mind to the financial position of the partnership at 31 August 2010. Mr M said that, on this date, the partnership had a net deficiency of assets of $539,080 and, after adjustments, concluded that the net deficiency was $572,426.
He considered the likely amount to be received by the partnership had it been sold. In assessing that value he adopted the method of capitalising future maintainable profits in which he assessed the earnings of the business - EBIT (earnings before interest and taxation) multiplied by a capitalisation rate which he said would be in the range of 2.5 to 3 but concluded that 2.5 was the preferred rate.
Using that method, he found the value of the business was $360,000. He further said that as he had earlier concluded there was a deficiency in assets of approximately $572,000 and, assuming costs of sale at about $36,000 (10 per cent), the net profits to the partners from the sale would be $340,000 leaving a shortfall of $230,000 to be paid by the partners in accordance with their percentage shareholding.
Relevantly for these proceedings, Mr M noted that the partnership owed no money to the NAB as at 31 August 2010.
As to the restructure of 1 September 2010 he said:
…Whilst it no longer has any bank debt there were at 31 August monies shown as owing to the trusts representing the three partners totalling approximately $370,000. At that date Current Liabilities exceeded Current Assets by a factor of 3.5. This imbalance is indicative of a business under severe stress in the management of cash flow and the servicing of debts. The fact that Trade Creditors are approximately $832,000 and Trade Debtors are only $228,000 indicates the business has used Trade Creditors to fund short term working capital requirements. In the absence of equity injection, the imbalance between Creditors and Debtors of $604,000 can only be serviced from future post tax profits.
In relation to the partnership loans to the NAB, Mr M said:
…In July 2010 when the bank debt and overdraft was paid out in full, the term loan balances had been paid down to approximately $458,000. This represented a debt reduction of $585,000. The [Sanders] Trust had a 70% interest in the business. Therefore of the three partners, the [Sanders] Trust derived the greatest benefit in terms of bank debt reduction. The percentage interest of the reduction in amount owing by the [Sanders] Trust was approximately $409,500. The proportionate share of debt reduction for the Trusts representing the other two partnership interests was approximately $87,750 each.
He further observed that all the partners had derived a benefit from the loan funds as they were used for working capital and to fund the shortfall between available cash and money drawn by the partners from the business and to acquire the interests of departing partners in 2006. He also noted that all partners derived a benefit from the extinguishing of that debt in 2010, the benefit being proportional to their interests.
Mr M was cross-examined twice in the proceedings, the first time on 2 March 2011.
He was asked about the process of withholding invoices (also referred to as “suppressed sales”) and said that this had been the practice adopted by the business.
He said that “historically” the practice had been to withhold sales invoices in the order of “2-300,000”.
In the context of the transfer of the husband’s interest in the business to his sons which took place from 1 September 2010, Mr M did not agree that to “suppress sales” from the financial year before was artificial. He said:
…if you’re talking about the… deferment or raising of sales invoices until the subsequent financial year, my expectation is that the bulk of those invoices would have been raised in the month of July and, therefore, be reflected in the debtors as at the end of August.
Asked if the business was insolvent, Mr M said:
…clearly from the get-go, certainly for the past period of time, the balance sheet has been deficiency of assets, so one of the definitions of insolvency is deficiency of assets – having said that the business is still operating.
Mr M agreed that the liability to the NAB in the order of $1.4 million was a liability of the partnership and that the apparent corresponding debt to the parties in relation to the loan was not shown in the books of the business. He said that he had been instructed by the husband not to show it. He said that the $1.4 million debt:
…basically, the debt represented working capital of the business, so in essence, it was 1.4 million of borrowings from the bank to support the working cover of the partnership.
Asked about the conclusions in his report, it was suggested to him that, in effect, it meant that the business had no value. He said:
…I didn’t actually say it [the business] had no value at the date I swore this affidavit. I said that the business was dependent on – wholly reliant on the support of trade creditors, so that the reduction of deficiency in current assets will be dependent on the financial performance of the business. In essence I was saying that in order to pay down the deficiency obviously the inference is that that business would have to be making significant income going forward.
He was further cross-examined on 3 March 2011 in relation to a report prepared by a valuer engaged for the wife, Mr B and in particular in relation to the practice in the business of holding back invoices from a particular financial year. Mr M reiterated his view that, if invoices are withheld from the end of June 2010, they would be reflected in July of 2010 and in the 31 August 2010 closing balance.
Mr B
The wife obtained two reports from a valuer, Mr B. The first report dated 31 August 2010 was attached to an affidavit sworn on 17 November 2010. It was admitted into evidence over objections. In the report Mr B indicates that he had not had access to all financial material relating to the associated entities.
In his first report Mr B valued the interest of the husband and wife in the business at $1,457,693. He further valued the husband’s interest in N Holdings Pty Ltd (the trustee for the Sanders-A Family Trust) at $167,204 and in Y Pty Ltd (the trustee for the Sanders Family Trust No 1) at $68,979. He found no value in the Sanders Family Trust.
The value of the husband’s interest in N Holdings was based on N Holdings receiving repayment of the unsecured loans made by it to both the Sanders-A Family Trust and the Sanders Family Trust. Similarly, the value he ascribed to the husband’s interest in Y Pty Ltd was also based on it receiving repayment of the unsecured loan made to the Sanders Family Trust.
Mr B noted that the books of the business showed during the year ended 30 June 2010 the “elimination of bank debt” being the payment of the business’ debt of $1.457 million from the sale of the marital home of the parties. In considering the valuation, Mr B treated that payment as a loan from the husband and wife to the business.
Mr B’s methodology was to take the EBIT (found by him to be $433,373) and adopt a capitalisation rate of 3 to reflect the respective partnership holdings. On that basis, he valued the business at $1.3 million which would be the likely amount to be expected on a sale of the business by the partners. Taking into account the debt to the parties owed by the partnership of $1.457 million, he said that there was a net deficiency of assets in the order of $157,693. While he found the joint interest of the husband and wife in the partnership business to be $1.457 million referable to the loan by them to the partnership, he found the husband’s interest in the partnership to be negative $110,385, being 70 per cent of the net deficiency $157,693. He thus concluded that the value of the business was nil.
On 3 March 2011 it was indicated to her Honour that Mr M and Mr B had not had an opportunity to confer about their valuations to reach points of agreement between them. As part of the discussion, counsel for the wife indicated to her Honour that Mr B was waiting on information from Mr M and the husband. Nonetheless it was agreed that the valuers could confer.
On 4 March 2011 some discussion occurred about three volumes of documents that had apparently been made available to the wife’s solicitors by the husband but which had not been provided to Mr B. This was particularly contentious in the context of Mr B’s earlier comments that he had not had all of the financial documents available to him that may have been relevant to his consideration of valuation.
Counsel for the husband asked her Honour to reject Mr B’s report tendered earlier in the proceedings and moved to summarily dismiss the wife’s case. In responding, counsel for the wife argued that the documents, many of which related to the buying out of previous partners of the partnership, were not relevant to the question of the valuation of the partnership and further observed that Mr M regarded them as being of little help in determining the question of valuation.
Counsel for the wife said:
…But, with great respect, given that neither party and their experts have used any of the data contained within these termination agreements or deeds to come to the conclusion they have about valuation, it… doesn’t serve any purpose.
…
…But at the end of the day, your Honour, the determination of the value of the interest, the consideration of the section 106B application does not hinge upon those documents, and might we submit that the utilisation of them now, in the cross-examination of my client, is used for a purpose which is not consistent with the analysis in either of the reports by Mr [B] or Mr [M].
Counsel for the wife submitted that Mr B was contending that he had not received financial information about the associated entities that hold assets and in which the husband has interests.
Her Honour ruled that no reliance would be placed on the report of Mr B.
Immediately after making that ruling, her Honour was informed that Mr M and Mr B had reached “significant agreement”.
Evidence of Agreement between the Valuers
A handwritten document was tendered (Exhibit W12) which reflected that agreement between the experts. It read:
Agreed Issue
1. The (business) average net profit for the three years end 30 June 2010 after adjusting for interest, (indecipherable) interest, profit on sale of non-current assets, drawing in lieu of salaries and suppressed sales approximates $416,667 per year. Mr [B] has stated that he believes the suppression of sales from 1st July 2007 to 30th June 2010 is $700,000. Mr [M], having reviewed the GST Activity Statements, believes it is not unreasonable to adopt such a figure for the purpose of the valuation.
Disagreed Issue
2. Mr [B] believes 3 is the appropriate multiplier to be used in the valuation. Mr [M] states his view is that it should be 2.5
Her Honour permitted Mr B to give oral evidence limited to the point of disagreement with Mr M, the appropriate capitalisation rate.
Mr M was recalled at the request of counsel for the wife. Counsel said:
MR LLOYD: …Now, dealing with point 1, the position is, having a regard to your view about the multiple, the simplistic approach to this and the correct approach would be the 416,667 that you’ve agreed is the appropriate figure with Mr [B] would simply be multiplied by 2.5 in your instance, wouldn’t it?---Yes.
And that would be, for your Honour’s benefit $1,041,667 and some cents. Now, in addition to that, one would have on the balance sheet, wouldn’t one, the suppression of sales of $700,000?---Yes.
Total: $1,741,667. Now, that figure would then be representative of the entire partnership as it currently exists. Do you agree?---Yes.
Counsel for the wife then moved to ask Mr M further questions about the loan account of N Holdings. After objection from counsel for the husband, her Honour asked counsel for the wife how his present line of questions related to the “.5 percent difference in the rate”, being, we understand, a reference to the difference between the two experts on the capitalisation rates referred to in part 1 of the agreement document.
Counsel in his answer to her Honour’s question said:
…So far, the evidence means that, as I understand it from Mr [M], that we have a value of 1.74 million. And that’s made up on his argument of 416,667 times 2.5, and then one would need to add to the balance sheet, which he agreed with me, the $700,000 of suppressed sales totalling 1.74…
Mr M then said: “No. I didn’t say it was worth 1.7 million”.
Her Honour then said:
…Look, Mr Lloyd, the basis of this approach was that we had an agreed fact and that there was going to be brief, confined evidence on whether or not the rate should be 2.5 or three… I don’t recall any discussion about cross-examination about the meaning of the agreed fact.
As to the capitalisation rate, Mr M maintained that the appropriate rate was 2.5.
Counsel for the wife then suggested to him that he had compromised in the sense that the average net profit “…now is something totally different to what you had contended for before…” to which Mr M agreed saying that “…[t]he profit figures is brought to account the suppressed sales that we discussed...”
Mr M agreed that in his report he had found the maintainable net average annual income for the business to be $142,000 but after discussion with Mr B he had revised that to $416,667. He said: “The agreement, as you’re aware, was because we’ve brought into account, fundamentally, the dividends and the debtors”.
In answer to questions asked of him by counsel for the husband, Mr M said that while the annual net income for the business was $416,000, if the $700,000 from suppressed sales were brought in, then the creditors should also be considered to determine the net figure.
While being cross-examined by Mr YY, Mr M was asked:
How did you derive the figure for the average net profit over the three years?--- …Step 1 was, there was discussions regarding what was the actual results – adjusted results – after taking into account agreed adjustments, which basically are adjustments to interest and a couple of other items. There was agreement on the adjusted result, so what we then did was we looked at those adjustment results for three years, not for four years, and added to those adjusted results was $700,000. So in essence, if you aggregate the three years worth of adjusted results with fiscals ’08, ’09 and ’10, and then you add $700,000 if there’s a view that that represents suppressed sales, then you get up a new figure and you divide that by three, and that gives you $416,000. All right...
The hearing was adjourned part heard and resumed on 17 November 2011. In the adjournment the wife’s solicitor had apparently received further financial information. Counsel for the wife indicated that it might be necessary to recall Mr B on the question of value of the associated entities and sought an adjournment.
After her Honour declined to grant the adjournment, counsel for the wife applied to reopen the wife’s case. He submitted to her Honour:
…on the basis that there’s now no evidence educed (sic) in these proceedings by the husband with respect to the [Sanders] family trust, and there’s no evidence up to date of the [Sanders-A] family trust, in the event that Mr [B’s] report is out. And we couldn’t proceed without that evidence being educed (sic) and that evidence being before your Honour, and to that end, we would need to recall Mr [B]…
Her Honour indicated that Mr B’s evidence would be limited to that he gave viva voce on 4 March 2011.
She said:
…otherwise his report annexed to his affidavit was not to be relied on, there being no foundation for it or no sufficient foundation through failure of supply of relevant documents. So that’s what happened on 4 March.
The matter was then stood over until 28 March 2011. In the adjourned period Mr B provided a second report dated 24 March 2011.
When the matter returned to court, counsel for the wife renewed his application that her Honour allow reliance on Mr B’s evidence. He said that having had access to the documents which Mr B said had not earlier been considered by him, counsel argued that the perceived defect which caused her Honour to reject the report had been remedied. To that end, he sought to rely on the report dated 24 March 2011. Counsel for the husband objected to the tender and reliance on that report. Her Honour adjourned to read the affidavit and further report but declined to allow them into evidence.
In his closing argument, counsel for the wife submitted to her Honour:
…the following facts, which are not the subject, and nor can they be the subject, of dispute. Mr [M] and Mr [B] both concluded and told the court as experts this is a business which has this very day a future maintainable earning capacity of 416-odd thousand dollars per annum. That is just not capable of challenge. It follows as night follows day that this is a business which has a value. It follows as night follows day that what was given away by the husband had a value…
Her Honour’s Findings as to Valuation
At [123] and following, her Honour considered the history of the partnership from 2002 when four new partners were introduced to the business. She continued:
133. In 2006 a decision was taken to remove two of the new partners. Also [Mr A] agreed to finally dispose of his interest at this time. Three out of six partners therefore left. Each was paid $215,000, a total of $645,000. Together they had a 50 per cent content interest…
Her Honour noted that, as a result, the husband had then a 70 per cent interest. She continued:
136. By this time the business was laden and struggling with debt. The valuation of the business [NPA] was put at Nil by the joint valuer in the May 2009 proceedings. That value was accepted. Since then the business has experienced further adverse events.
She found:
143. Even without the valuation evidence of Mr [M] and Mr [E], there was sufficient evidence of the precarious state of the business. However I have accepted the valuation evidence of both valuers.
…
146. Further, objectively, the value in the business had probably diminished since 2009 so that the transfer was unlikely to represent a disadvantage to the wife.
Her Honour’s finding as to the value of the business appears as follows:
108. The position in relation to the business was little changed since the May 2009 hearing, when the valuation of $Nil was accepted.
Her Honour compiled a balance sheet of the parties’ assets and liabilities at [162]. In relation to the business she noted that the wife asserted a value of $1,365,494 and the husband’s value was said to be “NIL”.
Clearly, from [108], her Honour determined that the value of the partnership to the parties was nil. She gave no reasons for coming to that conclusion. Her Honour made no reference there or in any other part of the judgment to the agreement between the experts as to the value of the business.
The Appeal
The appellant asserts eight grounds of challenge to her Honour’s decision. Seven of them concern the evidence of the value of the partnership. Mr Paul, who argued the appeal on behalf of the wife, argued the grounds in a global way and, given the way in which the appeal was argued and our conclusion as to the disposition of the appeal, we can deal with the issue of the valuation of the partnership globally.
As the evidence to which we have earlier referred makes clear, in Mr M’s report and in his evidence, he had ascribed a figure to the future maintainable earnings of the business conducted by the partnership. The eventual agreement with Mr B as to a figure was consistent with his evidence albeit at a different rate. Whether her Honour was wrong to exclude Mr B’s report after admitting it and/or in failing to accept into evidence his second report is in our view beside the point.
Nowhere in her reasons does her Honour refer either directly or by implication to the agreement as to future maintainable earnings or to the dispute about an appropriate capitalisation rate.
True it is that the valuers’ agreement as to future maintainable earnings did not conclude the question of the value of the partnership. It did however provide her Honour with the first step in the process of determining whether the partnership had a value and, if so, what. Regrettably, her Honour appears to not have considered this evidence at all.
The requirement of a judge to provide reasons for his or her decision is well known. In this matter, because the respondents represent themselves, we feel it is appropriate to set out the relevant principles to assist them to understand our conclusion and determination of the appeal.
In Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247, McHugh J said at page 279:
…without the articulation of reasons, a judicial decision cannot be distinguished from an arbitrary decision. In my opinion the giving of reasons is correctly perceived as “a necessary incident of the judicial process” because it enables the basis of the decision to be seen and understood both for the instant case and for the future direction of the law.
This Court applied Soulemezis in 1991 in the case of Bennett and Bennett (1991) FLC 92-191 where the Full Court said at paragraph 78,266 with respect to the adequacy of reasons:
In Sun Alliance Insurance Ltd v Massoud (1989) VR 8, the Full Court of the Supreme Court of Victoria, consisting of Fullagar, Gray and Tadgell JJ, followed the principles established by the New South Wales Court of Appeal. Gray J, who delivered the principal judgment, said, at 18:
“The adequacy of the reasons will depend upon the circumstances of the case. But the reasons will, in my opinion, be inadequate if: --
(a) the appeal court is unable to ascertain the reasoning upon which the decision is based; or
(b) justice is not seen to have been done.
The two above stated criteria of inadequacy will frequently overlap. If the primary Judge does not sufficiently disclose his or her reasoning, the appeal court is denied the opportunity to detect error and the losing party is denied knowledge of why his or her case was rejected.”
The crux of the decisions to which we have referred is that the process of reasoning emerging from the judgment under review must be discernable.
Her Honour had before her an agreement between the experts that clearly gave a figure for future maintainable earnings of the business and, while there was disagreement between them as to the appropriate rate at which the net maintainable earnings were to be multiplied, they had agreed on a means by which she could have considered the value to the parties of the partnership.
Her Honour did not mention this agreement or the evidence of Mr M and Mr B on this issue in her reasons or in support of her conclusion that the value of the business was nil. It is difficult to understand how her Honour reached her conclusion that the business had no value in the light of this agreement and her judgment does not reveal her reasoning process.
Her Honour had a number of issues before her for determination. An issue for her determination was whether she ought exercise the discretion under s 106B of the Act and set aside the disposition by the husband of his interest in the partnership to his sons. The issue of the valuation of the partnership was central to the determination of that issue and, ancillary to that finding, her determination of whether she would find proved the matters precedent to an exercise of her discretion under s 106B. That determination squarely required her Honour to consider whether the interest in the partnership given to the sons had a value. Her Honour determined that it had no value. She did not say why. She did not refer to the evidence before her on the issue other than to note that Mr E had ascribed no value to the business and that “…position in relation to the business was little changed…”
The evidence before her Honour indicated that the position had indeed changed. For one, the parties had, through the sale of their marital home, discharged a debt of the partnership in the order of $1.457 million. It seems to us that the discharge had an impact on the business conducted by the partnership in two ways, first as her Honour observed:
56. Mr [YY] conceded that with the repayment of $1.4 million worth of debt, overheads for the business had reduced by the extent of the loan repayments and there were no more drawings by Mr [Sanders].
Secondly it created a liability in the partnership to the husband and wife. Her Honour reproduced at [162] the joint balance sheet prepared by counsel for the husband and wife during the hearing. The second item on that balance sheet is the debt owed to the parties by the partnership. At this point, it seems to us that her Honour ought to have recognised that the husband and wife became creditors of the partnership. Further, the repayment of the debt created a benefit to the partnership and partners. Of course, whether the partners would be able to pay that debt to the parties would require an examination of, at least, their personal financial circumstances. Nowhere in her Honour’s reasons does she indicate a consideration of these matters. In fact, although her Honour sets out the contentions of both parties as to the values of the business conducted by the partnership and the associated entities, she makes no determination of the issues joined in the balance sheet other than as to the finding that the business had no value.
Her Honour’s failure to either consider the evidence of the value of the business or to give reasons why her consideration of that evidence led her to conclude that the value of the business was nil went to the heart of the determinations required of her.
In so doing her Honour fell into appealable error.
At the conclusion of the hearing of this matter, we concluded that her Honour’s error in this regard so cut across the issues for determination before her that we considered that, for this reason alone, the wife’s appeal must succeed.
It is important to observe that we do not say that her Honour’s finding that the value of the business of the partnership was nil is incorrect but that she gave no reasons for so finding in the light of the evidence of Mr M and the agreement between Mr M and Mr B.
Ground 8 relates to the wife’s application for spousal maintenance.
It was asserted that, in dismissing the wife’s application for spousal maintenance, her Honour failed to have proper regard to the value of the husband’s business interests, failed to take into account that the wife was in receipt of a disability pension and failed to take into account the husband’s capacity to meet the wife’s claim to spousal maintenance.
As we have indicated, Judicial Registrar Loughnan ordered the husband to pay maintenance for the wife until 29 November 2009. The husband made the ordered payments until 29 August 2009.
Her Honour had before her two aspects in relation to spousal maintenance, payment of arrears in relation to the order of the Judicial Registrar and an application by the wife for ongoing spousal maintenance of $1,340 per week.
As to the arrears in relation to the order made by the Judicial Registrar, her Honour found at [170] that, although the husband failed to comply with that order, in light of the fact that, in addition to the funds ordered to be received by her from the sale of the parties’ property, the wife received a further $30,000 on signing the documents necessary to effect the sale of that property, the order should be discharged from the date to which it had been paid.
Her Honour then turned to the wife’s application for future spousal maintenance at [173] and following. Her Honour noted that the wife was in receipt of a disability pension and received interest on a term deposit of $100,000, a sum that her Honour said would most likely be spent on legal costs. Her Honour observed that, although the wife had qualifications for employment, the wife does not propose to seek employment.
Her Honour said that the husband’s taxable income was about $55,000 and found that his mental and physical health was “in doubt”.
After observing that, while the wife received the “lion’s share” of the proceeds of sale from the marital home, her Honour noted at [177] that “…the majority if not all of her capital, have been expended on legal costs…”
Her Honour said:
178. Part of the reason why the wife remains unemployed is her resistance towards the very idea of entering the paid workforce. Part of the reason is because of the physical disability which gives rise to the disability pension she receives. However, just as there was no medical evidence in the May 2009 hearing, there was no medical evidence in this hearing.
179. I do not consider that an ongoing order for spouse maintenance in the sum sought or at all is required, especially in circumstances where an additional sum of $30,000 was received in July 2010.
Her Honour therefore dismissed the wife’s application.
No written argument was directed to this ground of appeal. During oral argument it was said that the wife’s receipt of a disability pension meant that she had demonstrated the requisite “need” and thus, her Honour ought to have considered the reasonableness of her claimed financial needs and the husband’s capacity to meet those needs. Although not entirely clear, it seems that the wife’s counsel argued that she was not obliged to produce evidence of the reason for the grant of the disability pension, the decision to grant her the pension being proof sufficient.
Even if this argument is accepted (and it is not necessary for the disposition of the appeal at this point to consider the correctness of the argument), the determination of the wife’s entitlement to spousal maintenance is inextricably linked to the issue of the value of the partnership and the s 106B argument. The determination of that issue will rest on whether the Full Court is able to re-exercise her Honour’s discretion.
On that basis, we will allow the appeal in relation to the spousal maintenance.
It became clear from the submissions of the respondents that our determination to allow the appeal was a matter of great distress especially to the sons of the parties, who in their submissions said that they were struggling to keep the business going and were obviously distressed at the prospect of further, protracted litigation. We expect too that the husband, the wife and Mr YY are of the same view.
Although not customary, in this matter we were of the view that we should indicate to the parties that the appeal would be allowed but then canvass with them whether circumstances would allow us to re-exercise the discretion.
This Court having found error by a trial Judge may, in certain circumstances, determine the issue that was before the trial Judge. It is not necessary to outline all of the considerations that might lead this Court to exercise its discretion to determine the issue before the trial Judge. However, before doing so, the parties must be given an opportunity to put before the Full Court evidence of relevant matters as at the date of the determination of the appeal.
It was clear to us that, if the Full Court was to exercise the discretion and determine the issue between the parties, the first step would be to obtain a thorough valuation of the partnership and the parties’ interests in it.
The parties agreed to an order being made for the appointment of Mr E to conduct an updated valuation.
We stress however that this Court can only proceed to determine the issue if the evidence on which that decision is made is uncontroversial. Where the evidence requires cross examination or is otherwise controversial, the matter must be remitted for further hearing by a trial judge.
However, in the circumstances of this case, and with the agreement of the parties, orders were made to set in train the provision of evidence of value of the business of the partnership and then the matter will be further mentioned to determine its future course.
Again, somewhat unusually, we determined the issue of costs of the appeal. Each of the parties requested a certificate and we considered that it was appropriate to make the order for a certificate in respect of the appeal at least in the first instance. We should indicate that, if it becomes necessary for the matter to be reheard, we would order a certificate in relation to any rehearing.
Application for Further Evidence
Mr YY filed an application in the appeal that further evidence from Mr M be admitted and considered on the appeal.
The affidavit in support of the application contained a statement by Mr M in which he disputes the circumstances and the substance of the agreement reached with Mr B and which was recorded in writing and tendered in evidence in the trial.
Given our determination about the appeal, we do not propose to consider this application further and we will dismiss it.
I certify that the preceding one hundred and thirty (130) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court (Bryant CJ, Ainslie-Wallace & Rees JJ) delivered on 29 August 2012.
Associate:
Date: 29 August 2012
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