Stenson and Osmund (No.3)

[2016] FCCA 1533

FEDERAL CIRCUIT COURT OF AUSTRALIA

STENSON & OSMUND (No.3) [2016] FCCA 1533

Catchwords:
FAMILY LAW − Whether any property of either party has a value.

Legislation:

Family Law Act 1975 (Cth),ss.90SM, 90SF(3)

Personal Property Security Act 2009 (Cth)

Stanford v Stanford [2012] HCA 52

Applicant: MS STENSON

Respondent: MR OSMUND

File Number: DGC 1706 of 2012

Judgment of: Judge Phipps

Hearing dates: 3 December 2015 and 7 & 8 March 2016

Date of Last Submission: 8 March 2016

Delivered at: Dandenong

Delivered on: 24 June 2016

REPRESENTATION

Counsel for the Applicant: Ms Mapp

Solicitors for the Applicant: Rothwell Lawyers

Counsel for the Respondent: Mr Busby

Solicitors for the Respondent: Mackellars Lawyers

ORDERS

1. That each party be solely entitled to the exclusion of the other to all superannuation and other property (including choses-in-action) owned or in the possession of such party as at the date of these orders.

2. That each party be solely liable for and indemnify the other against any liability encumbering any item of property to which that party is entitled pursuant to these orders.

3. That otherwise all extant applications are dismissed.

IT IS NOTED that publication of this judgment under the pseudonym Stenson & Osmund (No.3) is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT DANDENONG

DGC 1706 of 2012

MS STENSON

Applicant

And

MR OSMUND

Respondent

REASONS FOR JUDGMENT

Introduction

1. The applicant and the respondent were in a defacto relationship from 2007 until 2011. The applicant applies pursuant to s.90SM of the Family Law Act 1975 (Cth) for an order in respect to the property of the parties. The initial issue is whether there is any value in property of the parties.

2. The applicant owns an apartment in Property S Victoria but no claim is made in respect of that apartment.  While the property has not been valued it is heavily mortgaged and neither party asserts that it has any net equity value.

3. The husband, through companies and a trust owns and operates a (omitted) business trading as (business omitted) Pty Ltd.  The applicant accepts that it has no net value because its liabilities exceed its value.  The business, excluding the plant and equipment, has been valued at a midpoint of $120,000 and the plant and equipment given a realisable value of $644,000.  This value is contested by the respondent.  The liabilities exceed $1 million.  They include a liability for taxation of about $400,000.  Much of this is not current and is being paid under an arrangement with the Australian Taxation Office.

4. The applicant’s case is that there is sufficient evidence to show that the respondent has wrongfully withdrawn money from the company to require further investigation.  Her case is that that can only be done if she is made a controlling shareholder so that she would then have access to the records of the company and could determine whether that is so or not.

5. The applicant has an estimated $74,000 in superannuation as at 17 2012.  The respondent has $155,914.04 in superannuation as at 30 November 2015 with (omitted) Superannuation.

6. Apart from the question of valuation, the applicant’s proposal has a number of problems.  The (omitted) Bank has a floating charge over the assets of (omitted) Pty Ltd.  A change of shareholding without the bank’s permission may be a default under the provisions of that floating charge.  Another issue is that if the applicant became a shareholder and a director, the business would have directors and shareholders hostile to each other.  The applicant’s submission is that this problem could be solved by her having a majority shareholding.  The applicant’s submission does not attempt to explain how the business could operate under these conditions.  Paralysis and failure would seem likely.

7. As a separate issue the applicant claimed she holds an equitable charge over three machines, a (omitted), an (omitted) and a (omitted) purchased from (omitted) Pty Ltd in circumstances described later.  The applicant lent money to (business omitted) Pty Ltd and it was used to purchase these machines.  These machines are now owned by (omitted) Pty Ltd and are encumbered to the (omitted) Bank.  Quite apart from any other issue, in the absence of the (omitted) Bank being a party I cannot make a finding.

8. These issues will not have to be considered if there is not sufficient evidence that the respondent has an undisclosed asset of money taken from the business.

History

1. While the parties were in the defacto relationship the respondent was a director and shareholder of (business omitted) Pty Ltd which carried on a (omitted) business.  The applicant was employed by this company throughout the relationship.

2. At the commencement of the relationship the company directors were the respondent and Mr R.  The company had six fully paid shares.  Mr A, Mr R’s son-in-law, held three shares the respondent held two and his son, Mr W held one.  When the relationship came to an end the respondent was the sole director.  Mr A had signed a transfer of his three shares to the applicant and the respondent but the transfer had not taken place because of a dispute between the applicant and the respondent.

3. The applicant claimed an agreement with the respondent that all Mr A’s shares would be transferred to her so that she owned half the shares in (business omitted) Pty Ltd.  The respondent says that the agreement was that Mr A’s shares be transferred to the applicant and the respondent jointly so that the applicant would own one quarter of the company and he, with his son, would own three quarters.

4. (business omitted) Pty Ltd was placed into administration on 30 April 2012.  On 5 July 2012 it entered into a Deed of Company Arrangement.  The Deed provided for an agreement between (business omitted) Pty Ltd and (omitted) Pty Ltd under which the assets and employees of (business omitted) Pty Ltd transferred to (omitted) Pty Ltd and it assumed the liability in respect of money owed to (omitted) Bank and advances made by the respondent.  It now trades as (business omitted) and continues the business previously carried on by (business omitted) Pty Ltd.

5. The structure for ownership of the business is this.  The respondent is the sole director and shareholder of (omitted) Pty Ltd which is trustee of the (omitted) Trust Deed.  (omitted) Pty Ltd is the sole shareholder in (omitted) Pty Ltd and (omitted) Pty Ltd trading as (business omitted).  (omitted) Pty Ltd owns plant and equipment secured to the (omitted) Bank and leased to (omitted) Pty Ltd for cost of debt service.  (omitted) Pty Ltd is the trading company carrying on the business.  The respondent is the sole director of each company.

6. The signing of the share transfers by Mr A happened after the settlement on 18 March 2011 of court proceedings between Mr R, (omitted) Pty Ltd and (omitted) Pty Ltd on the one hand and the respondent and (business omitted) Pty Ltd on the other hand.  These court proceedings arose out of an earlier agreement for the respondent to purchase Mr R’s interest in the business.  This included the purchase of three machines, a (omitted), an (omitted) and a (omitted) from (omitted) Pty Ltd which were leased to (business omitted) Pty Ltd and used in the business.

7. The respondent obtained bank finance but that was withdrawn when the bank found that the three pieces of machinery were encumbered.  Mr R then commenced proceedings and they were settled by agreement on 18 March 2011.  This provided for (business omitted) Pty Ltd to pay Mr R and his three companies $447,639.26 and upon payment, amongst other things, the provision of a duly executed share transfer by Mr A to transfer his shares to the applicant and the respondent.  Those shares have not been transferred as has already been explained.

8. To help pay the amount the applicant lent (business omitted) Pty Ltd $184,000 which she obtained by increasing the mortgage over her Property S property.  The applicant paid this directly to (omitted) Pty Ltd to secure the release of the encumbrances over the three pieces of machinery.

9. The relationship between the parties broke down at the end of 2011 largely because of the dispute about the share transfer.  The applicant says she was excluded from the business premises.  The respondent says that the applicant took sick leave and did not return.  There is no need to resolve this issue.  The applicant subsequently took unfair dismissal proceedings against (business omitted) Pty Ltd.

10. The respondent says that he placed (business omitted) Pty Ltd into administration because of its financial difficulties.  In the early part of 2012 the business was in considerable financial difficulty.  The respondent says he could not raise further funds because of the impasse over the shareholding.  The bank would not lend more money.  The company received at the least one Notice to Pay.  The respondent took advice and he was advised to place the company into voluntary administration.  This led to the Deed of Company Arrangement and the transfer of the assets.

The applicant’s claim

1. The applicant’s claims, that the respondent has undisclosed assets and money taken from the business, or at least there is enough evidence to warrant further investigation, relies on two things.  First that a loan account in the respondents name shows a substantial reduction for the year ending 30 June 2015.  Second the respondent’s personal bank account, so far as available, shows amounts totalling over $300,000 paid to the respondent from the business account, this being well in excess of his salary.

2. Another matter requires brief mention.  Towards the end of the hearing the applicant tendered grantor search certificates of the Personal Property Securities Register for (omitted) Pty Ltd and (omitted) Pty Ltd.  These showed no securities registered.  The applicant argued that this meant that the provisions of the Personal Property Security Act 2009 (Cth) made any securities unenforceable.

3. Subsequently the respondent’s solicitor produced grantor certificates for both companies.  The search for (omitted) Pty Ltd showed a security interest registered by (omitted) Bank and the search for (omitted) Pty Ltd showed several security interests registered including by (omitted) Pty Ltd which factors the company’s invoices.  The others are by suppliers to the company.

4. I conducted a hearing by telephone.  The reason for the discrepancy is explained by the method of operation of the Personal Property Securities Register.  The search certificates initially tendered by the applicant were the result of a search using the company names only.  This type of search searches the business name register.  A search of a corporation requires use of the companies Australian Company Number.  Consequently, the applicant’s searches did not show the registrations.  The respondent certificates showed each companies Australian Company Number.  I reopened the hearing and permitted the respondent to tender the search certificates showing the registered securities.

5. The Balance Sheet of (business omitted) Pty Ltd as of 31 March 2012, immediately prior to the administration, shows a non-current liability to the respondent of $572,499.  The Deed of Company Arrangement after the administration which resulted in the assets of the business being transferred to (omitted) Pty Ltd and (omitted) Pty Ltd provided that the respondent was a non-participating creditor not entitled to participate in any distribution.

6. The Balance Sheet of (omitted) Pty Ltd for the period 1 July 2012 to 31 January 2013 shows a non-current liability to the respondent of $607,680.01.  It shows a total equity of $262,101.94.  The balance sheet as of 30 June 2014 shows a non-current liability to the respondent of $607,362 and total equity of negative $139,966.  The balance sheet as of 30 June 2015 shows a non-current liability to the respondent of $108,806 and negative equity $149,700.  The same balance sheet, 30 June 2015, for Last Year to Date shows the non-current liability, loan Mr Osmund $69,232.

7. The applicant argues that the accounts of (omitted) Pty Ltd show that the respondent’s loan account was transferred into the accounts of (business omitted) Pty Ltd.  The applicant argues that the reduction in the loan shown in the year 2015 means that the respondent must have been paid some $400,000 by (omitted) Pty Ltd.

8. The applicant then argues that an examination of the respondent’s personal bank accounts, to the extent that they are available, shows some $300,000 being paid to the respondent, an amount far in excess of his entitlement to wages.  The applicant’s bank statements show this to be correct.

9. The respondent points to the entry in the balance sheet for 30 June 2015, Provision for Doubtful Debts negative $417,362.  Under the column Last Year to Date the same entry appears but it is not on the balance sheet as of 30 June 2014.  The respondent says that his understanding is that the transfer of his loan account from (business omitted) Pty Ltd to (omitted) Pty Ltd was a mistake and it was rectified in 2015 by a book entry which reduced his loan account and balanced it as an entry provision for doubtful debts.  This may not have been the correct way to make the adjustment but it was done.

10. The company accountant, who may have been able to explain in more detail, was not called.  This is understandable.  The application commenced on 7 June 2012.  Over the years the applicant put her claim in a number of ways.  She claimed an amount of money, then transfer of all the shares to her and then she abandoned that claim and again claimed an amount of money but then at the commencement of this hearing put her claim again as a claim for transfer of shares.  The issue about the loan account would not have been apparent to the respondent.

11. The respondent says he did not receive the money.  He lives in rented premises.  His form of transport is a motorbike on loan.  Apart from personal possessions he has nothing.  He denies receiving any repayment of his loan account as it existed when (business omitted) Pty Ltd went into administration.

12. So far as his personal account is concerned he said that he paid many business expenses from his personal account.  He borrowed money from his ex-father-in-law and a friend in various amounts and paid them back as he could.  Money went back and forth.  This was done through his personal account and the business then reimbursed him.

13. The applicant’s argument depends upon making a finding that the respondent has wrongly removed some $400,000 from (omitted) Pty Ltd and has undisclosed assets.  The respondent provides a plausible explanation for the alteration in his loan account.  He has no personal assets.  He uses a motorbike borrowed from a friend.  The question then is should I find on the balance of probabilities, that the respondent has done so or at least there is sufficient doubt to warrant further investigation.  I do not do so.  The husband’s explanation is logical and plausible.

14. The changes in the Year to Date entries from the entries in the previous year’s balance sheet add some weight to the respondent’s explanation.  If the changes are to correct an error made in 2012 backdating is logical.

15. The husband says that his aim is to keep the business working and keep its 30 employees in their employment.  The tax debt is about $400,000 and the business pays interest on that debt.  The factoring arrangement has a similar amount outstanding, again with interest and fees.  Money is owed to the (omitted) Bank.  The respondent is personally liable for all these amounts.  It makes no sense for him to take money out of the business and hide it rather than reduce these debts.  For instance, for the respondent to not pay the tax debt when he had the means is illogical.  The respondent does not impress as a person who is illogical to this extent.

16. The final point is that the applicant has lodged a proof of debt with the administrator of (business omitted) Pty Ltd for the amount she lent and received a payment.

17. The only asset, apart from superannuation, of the defacto relationship has no value.  There is nothing about which an order can be made.  In Stanford v Stanford [2012] HCA 52 the High Court of Australia said that when considering a property application under the Family Law Act 1975 (Cth) the Court must first determine what interests in property the parties had and then next determine whether it is just and equitable to make an order. It is then that considerations of contributions and adjustments are looked at.

18. In this case the respondent’s property is his interest in the various entities making up the business of (business omitted) Pty Ltd and the applicant’s property, her interest in her Property S apartment.  Neither has any value.  In the circumstances it is not just and equitable to make an order.

Superannuation

1. Superannuation is a separate consideration.  The husband has $155,000 in superannuation.  There is no evidence of its value at the commencement of the parties’ relationship.  In her financial statement filed on 7 June 2012 the applicant gives an estimated value of $74,000 for her superannuation.  There is no evidence of its current value or its value at the commencement of the relationship.

2. The parties were in a defacto relationship from mid-2007 until the end of 2011, about 4½ years. The applicant worked in the respondent’s business throughout that time. She claims she was very successful in obtaining new customers and improving the efficiency of the business. The respondent, while acknowledging the applicant worked full time in the business as a business development officer, denies the extent to which she claims she contributed. This issue was not explored at the hearing. Notwithstanding a reasonable inference is that when the considerations in s.90SM(4)(a)-(d) are applied, the parties contributions to each other’s superannuation were equal. Given that the parties will be unable to access their superannuation for many years there is no adjustment for matters in s.90SF(3).

3. A reasonable inference from the evidence is that each party’s superannuation increased by about the same during the relationship and to the extent one increased more than the other it is because it had higher value at the start.  From this it follows that each party contributed equally to the increased superannuation during the relationship.  This means that there should be no adjustment of superannuation interests.

4. The only appropriate order is that each party retain the property and superannuation now in that party’s possession and remain solely liable for debts.

I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Judge Phipps.

Date: 24 June 2016