SCOTT & SCOTT
[2019] FamCAFC 9
•24 January 2019
FAMILY COURT OF AUSTRALIA
| SCOTT & SCOTT | [2019] FamCAFC 9 |
| FAMILY LAW – APPEAL – INTERIM PROPERTY – Appeal by the wife against interim property orders providing for the sale of a business owned by various entities of the parties – Where previous orders had allowed for the appointment of an independent manager – Where the wife had sought an injunction for the manager to no longer involve the husband in the business – Where the wife seeks to preserve the business for final hearing – Where the husband sought an order that the manager be discharged and a receiver and manger be appointment to the business – Where the husband claimed that the business was insolvent and sought appointment of receivers for sale of the business – Where the manager suggested that the court make further directions as to the management off the business – Adequacy of reasons – Where her Honour’s finding as to the high risk of the business becoming insolvent business was unsupported by and contrary to the evidence – Appeal allowed – Orders appointing receivers to sell the business set aside – Matter remitted for rehearing. |
| Family Law Act 1975 (Cth) ss 79, 81, 117 Family Law Rules 2004 (Cth) r 20.47(5) |
| Bennett and Bennett (1991) FLC 92-191; [1990] FamCA 14 Medlow & Medlow (2016) FLC 93-692; [2016] FamCAFC 34 Strahan & Strahan (Interim Property Orders) (2011) FLC 93-446; [2009] FamCAFC 166 |
| APPELLANT: | Ms Scott |
| RESPONDENT: | Mr Scott |
| FILE NUMBER: | CRC | 105 | of | 2016 |
| APPEAL NUMBER: | EA | 65 | of | 2018 |
| DATE DELIVERED: | 24 January 2019 |
| PLACE DELIVERED: | Sydney |
| PLACE HEARD: | Sydney |
| JUDGMENT OF: | Ainslie-Wallace, Ryan & Watts JJ |
| HEARING DATE: | 30 October 2018 |
| LOWER COURT JURISDICTION: | Family Court of Australia |
| LOWER COURT JUDGMENT DATE: | 11 May 2018 |
| LOWER COURT MNC: | [2018] FamCA 317 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Jonathon Priestley SC |
| SOLICITOR FOR THE APPELLANT: | Fishburn Watson & O'Brien |
| COUNSEL FOR THE RESPONDENT: | Grant Carolan |
| SOLICITOR FOR THE RESPONDENT: | Green & McKay |
Orders made 30 October 2018
That by 4pm Tuesday 6 November 2018 both the appellant and respondent agree on a minute to be sent to the Eastern Appeals Registry as to Mr L’s willingness to be reinstated as Manager of the business in terms of the orders of Judge Middleton made on 14 July 2016.
That by 4pm Tuesday 6 November 2018 the Receivers appoint pursuant to the orders of Justice Cleary made on 11 May 2018 be notified of the appeal and file any submissions that they wish about the orders proposed by the appellant.
Orders
The appellant have leave to appeal the orders made on 11 May 2018.
The appeal against the orders made on 11 May 2018 is allowed and the primary judge’s orders of that date are set aside.
The matter is remitted for rehearing to a judge of the Family Court of Australia other than the primary judge.
Note: The form of the order is subject to the entry of the order in the Court’s records.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Scott & Scott has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT SYDNEY |
Appeal Number: EA 65 of 2018
File Number: CRC 105 of 2016
| Ms Scott |
Appellant
and
| Mr Scott |
Respondent
REASONS FOR JUDGMENT
Ms Scott (“the wife”) appeals interim property orders made on 11 May 2018 in property settlement proceedings between her and Mr Scott (“the husband”). The primary judge ordered that a receiver and manager be appointed to the parties’ business enterprise and that the receiver may sell assets and call in debts.
Because these are interim orders leave to appeal is necessary. The wife opposed leave being granted. For the reasons that follow, we are of the view that leave should be granted; the test for granting leave being satisfied.[1]
[1]Medlow & Medlow (2016) FLC 93-692 at [57].
The husband is a professional who together with other professionals conducted his practice from the K Centre (“KC”). Other related services were also located in that centre. G Pty Ltd is a company that generated income through fees paid by the professionals and other services occupying the KC. The commercial building from which the practice was conducted is held by E Pty Ltd as trustee for the F Trust. E Pty Ltd is also the trustee for the Scott Family Trust which received the income from G Pty Ltd. It is convenient to refer to the KC and the associated entities as “the business”.
The wife was employed as the practice manager during the marriage and remains in that role.
The parties separated in mid-2015. In August 2016 the husband left the business and commenced practice first in rented premises and then from a building purchased by him. The circumstances in which he left the KC are contentious as are assertions by the wife that the husband induced professionals and other services to leave the KC.
The business continues to operate. However, the management and financial health of the business is hotly contested.
On 14 July 2016 interim orders were made appointing an independent interim manager, Mr L (“the manager”) to the business. The orders provided that the parties remain involved in the conduct of the business subject to the manager’s direction and to receive the same remuneration as they did prior to their separation. These were the orders in place at the time of the hearing before the primary judge.
In February 2018 the wife filed an Amended Application in a Case seeking interlocutory orders and injunctions. She also sought an amendment to the orders of 14 July 2016 to the effect that the manager would no longer be required to involve the husband in the conduct of the business, pay him any remuneration and be allowed to refuse to give the husband information of a confidential commercial nature. The wife further sought orders requiring the husband to sign documents necessary to effect a rollover of a bank facility and to make other payments in relation to the business.
There had been for some time a financial facility provided to the business by the Z Bank (“ZB”). At about the time of the hearing before the primary judge that facility needed to be rolled over or the capital sum would fall due and the husband and wife would become jointly responsible for that debt. Up to the time of the hearing the business had been making the monthly payments in respect of the facility and proposed to continue to make the payments if the facility was rolled over. The husband who was guarantor for the financing refused to agree to the rollover which would involve an extension of his guarantee of the facility.
The wife’s position before her Honour was that she wished to preserve the parties’ assets including the business for the final trial and it was said that, depending on the property settlement order ultimately made, she hoped to be able to purchase the business from the husband. It was further argued to the primary judge that if the business was sold then the wife’s employment there would come to an end.
In response, the husband sought that the order of 14 July 2016 appointing the manager be discharged and instead a receiver and manager to the business be appointed to effect a sale of the assets, with an entitlement to each party to purchase the KC in the event they wished to do so.
The husband advanced two bases for seeking that order. First, and in broad terms, the husband complained about the exercise of the manager’s functions, and, in particular, that the manager had not provided him with up to date financial information, had sought to prevent him from coming onto the premises and wished the husband to facilitate the rollover of the financial facility from ZB and to take over the lease payments of vehicles leased by the business and in the husband’s possession. The husband argued that it was unfair to seek his financial support for the business when he was not in possession of up to date financial information about it.
Secondly, the husband asserted that the business was insolvent. That position was supported by a report of the husband’s accountant Mr P.[2] Mr P conceded that as the husband had not been provided with updated financial information about the business since July 2017 his opinion as to the financial circumstances of the business was based on earlier financial reports and modelling based on them and on current bank statements and correspondence from the Australian Tax Office.
[2] Report of Mr P dated 20 November 2017, marked Annexure A to the affidavit of Mr P affirmed on 20
November 2017.
The manager also prepared a report on the health of the business and contended that it was solvent.[3] His report addressed the matters of which the husband complained and set out his reasons for taking the course he did.
[3] Management report prepared by Mr L dated 9 March 2018, marked Annexure A to the affidavit of Mr L sworn
on 9 March 2018.
As part of his report, the manager suggested that the court make further directions about the management of the business. The suggested directions in some ways mirrored the orders sought in the wife’s application, for example about the provision to the husband of commercial in confidence documents and requests that the husband be ordered to make certain financial arrangements and pay certain costs. The manager suggested a direction be made as to whether, in his consideration of the solvency of the business, he ought to include as income the husband’s service fee to the business which the manager said was owed but not paid.
As we have said, her Honour concluded that the manager should be removed and receivers appointed, with each party given the option to purchase, including bidding at auction, the KC.
Her Honour’s reasons for judgment are brief. She said:
·The parties are in conflict, each asserting aggressive conduct against the other. Conflict has heightened and has also involved the practice staff and on two occasions the police have been called (at [15]).
·The manager has “continued to try to manage constantly changing practice arrangements” (at [15]).
·After setting out the directions sought from the Court by the manager, that “[i]t is apparent from consideration of these orders just how dysfunctional the operation of the parties’ entities has become” (at [25]).
·In reference to the wife’s applications that the husband be excluded from the business and that he be ordered to sign the rollover documents and pay other outstanding accounts, that “the orders proposed would make the manager’s role one of protecting the interests of the entities from the husband” (at [26]).
·After noting that the wife wished to preserve the assets of the parties pending hearing (at [27]) and accepting the wife’s submission that she would find it difficult to purchase the business if the receivers listed it for sale, that that was not a sufficient basis for allowing the current arrangement to continue (at [50]).
·That the appointment of an independent manager has “proved to be problematic”, referring to the length of time in which the interim orders appointing the manager had then been in place (at [33]).
·That to make orders restraining the husband from attending the business premises while ordering him to sign the rollover document to enable the practice to continue resulted in an obvious injustice (at [44]).
·The manager has been placed in an increasingly untenable position and, after referring to the directions that the manager sought from the court, that:
47. Those questions starkly reveal the dilemma of the manager. He needs the income that was anticipated by [the husband]’s ongoing involvement in the practice, but recognising the level of dispute which affects not only the parties but staff and patients of the practice, wishes to exclude him from the operation.
48. In my view the position of the manager should not continue.
·That she accepted the husband’s submissions (at [51]) that “it would be just and convenient proceeding under the power in s 81(1)(k) of the Act to appoint receivers to crystallise the assets and thus preserve them in the circumstances.”
·That she further accepted that the evidence supported a conclusion that “the fabric of the management has been shredded and is unworkable” (at [51]).
·As to the issue of solvency:
56. The report of Mr P, together with his letter of 15 February 2018, expresses his professional opinion that the business of K Centre is currently insolvent and represents a significant risk to creditors should it be permitted to continue. This is of course a serious matter with implications for both parties if found to be the case.
57. The wife disputes insolvency. It is not necessary in this proceeding to come to a finding on whether or not the business is insolvent. Given the history of events, the risk of it becoming insolvent, if not already so, is high.
Turning then to the grounds of appeal. Although a number of grounds were asserted, the thrust of the appeal was that the bases on which her Honour decided to order the appointment of a receiver were flawed and unsupported by the evidence. Further it was asserted that her Honour failed to give adequate reasons for her conclusions.
Management of the business
It was argued that her Honour’s conclusion at [25] that the business was “dysfunctional” was unsupported by the evidence.
Although her Honour referred to the request for further directions sought by the manager and concluded that the nature of orders sought, of themselves, indicated the dysfunctional nature of the operation of the business, she gave no reasons why that spoke of dysfunction when, it seems to us to be a rather orthodox procedure for the appointed manager to suggest the making of further directions from the Court as to matters of management.
There can be no doubt that as between the husband and wife there is acrimony and conflict. Nor could there be doubt that the husband did not agree with some of the manager’s decisions nor can it be doubted that the manager likewise did not agree with the husband’s actions.
At its highest it seems that the husband’s complaints are that the manager acted inconsistently with his appointment in not providing the husband with financial information and, the husband said that he would not sign the documents to rollover the financial facility in circumstances where he was unaware of the financial state of the business. Further the husband complained at the suggestion that he be prevented from attending the business.
While, as we say, these issues were contentious, it was not submitted to her Honour that the manager was acting improperly or against the interests of the business.
These matters of contention between the husband and the manager were the subject of the manager’s request to the Court for directions, and, we imagine that her Honour could have made orders in the short term which would have satisfied both the manager and the husband. Notably though the husband’s solution to his complaints about the manager and the suggestion that the business was insolvent was that a receiver be appointed to sell the business.
Her Honour’s reasons do not indicate the basis on which she concluded that the business was “dysfunctional” and that management has been “shredded” such that the manager’s position was untenable to the extent that her Honour’s only option was to appoint a receiver to the business to effect its sale.
In making an order such as this, which is in the nature of an interim property order, her Honour was enjoined to proceed cautiously and to be satisfied that the order is capable of alteration at any time up to the final exercise of the power under s 79 of the Family Law Act 1975 (Cth) (“the Act”).[4] Her Honour’s order, if the receivers exercised their power of sale, would be incapable of being reversed at a final hearing and equally so it would mean that the wife’s hope of purchasing the business as a going concern would be lost. To sell the business would also bring the wife’s employment to an end.
[4]Strahan & Strahan (Interim Property Orders) (2011) FLC 93-446.
While her Honour at [27] referred to the wife’s submission that to allow the present management to continue would preserve the assets for the final hearing, her Honour said at [28], without saying why, that that was an insufficient basis to prevent the appointment of a receiver.
Solvency
Turning then to the issue of solvency, the husband, based on the opinion of Mr P submitted that the business was insolvent. The manager disputed Mr P’s opinion and said that he “expect[ed] for the time being … [to] continue to meet debts as and when they fall due”.[5] The manager’s report, while noting that it had not been easy to ensure the business remained solvent, set out a number of steps taken by him to make it financially viable. Nowhere in his report did he indicate that the financial viability of the business rested on receipt of the husband’s service fees, nor could it have since the husband left the practice in August 2016 and the business had continued since that time. Her Honour’s conclusion that the manager needed the husband’s income for the business to continue (at [47]) was unsupported by the evidence and was wrong.
[5]Management Report by Mr L, dated 9 March 2018, page 11 [6].
Her Honour did not decide the issue of solvency, saying that it was unnecessary to make that determination, however, she continued and said that if the business was not then insolvent, the risk of it becoming so was “high” (at [57]). If this conclusion was based on her Honour’s finding at [47] and discussed above at [28], then neither the finding nor the resultant conclusion is able to be sustained. On the other hand, if her Honour’s conclusion is not based upon that finding, she gave no reasons for the conclusion and we see no support for it in the evidence before her.
Thus, in our view, the basis for her Honour’s order that a receiver be appointed was flawed in that it was unsupported by the evidence and she gave insufficient reasons to support it.[6] The appeal will be allowed and the orders set aside.
[6]Bennett and Bennett (1991) FLC 92-191
Disposition of the Appeal
Although submissions were made that the Full Court could re-exercise the discretion of the primary judge, it was ultimately agreed that the application should be remitted to be heard by another judge.
Notice to the Receivers
At the conclusion of the appeal hearing it became apparent that the receivers appointed by her Honour’s order had not been notified of the appeal. Orders were made that they be notified and given the opportunity to provide submissions as to their position.
The receivers filed written submissions on 9 November 2018 to the effect that if the orders of the primary judge were set aside, they wished their position as to costs to be preserved. It was not argued that the Full Court would make any such orders but that if the appeal succeeded and the matter remitted to be re-heard, the receiver’s costs should be determined at that time.
That the receivers should be paid for their work was undisputed although the quantum of their claimed costs was contentious and at some time that dispute will have to be resolved.
Reappointment of the manager
In the event that the appeal was successful, the wife sought that the primary judge’s order appointing the receiver be set aside and that the manager be re-appointed and resume management of the business. Regrettably, the manager’s consent had not then been sought and this information was not available on the hearing of the appeal. The Full Court made orders that the manager’s consent to being re-appointed be sought.
The issue is somewhat fraught. The manager has indicated a willingness to be reappointed conditional on being paid a sum which he said represented his unpaid fees together with 12 per cent interest on that sum. In any event, there was no agreement between the parties as to the terms of the manager’s reappointment. If agreement can be reached, it is obviously appropriate that he continue his management of the business until the issue is reconsidered or the final property settlement proceedings are determined.
We will set aside her Honour’s orders of 11 May 2018. By Order 4 of that date, her Honour discharged Orders 1 – 4 of the orders made on 14 July 2016 which appointed the manager. Obviously the effect of our order will revive the appointment of the manager. It will be a matter for the parties to resolve the question of the manager’s outstanding fees and the interest he claims payable in respect of them.
Costs
In the event that the appeal succeeded the wife sought an order for costs against the husband. It was argued that the wife was in an inferior financial position to the husband who, it was said, was earning considerably more than her.
The question of costs following a successful appeal are governed by the provisions of s 117 of the Act which provides that in general, parties to proceedings should pay his or her own costs.
Although the appeal was successful, we are not persuaded that in this matter we should depart from the usual principle and we will not make an order for costs against the husband.
I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court (Ainslie-Wallace, Ryan & Watts JJ) delivered on 24 January 2019.
Associate:
Date: 24 January 2019
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