Sterling and Sterling

[2008] FamCA 119

FAMILY COURT OF AUSTRALIA

STERLING & STERLING AND ORS [2008] FamCA 119

FAMILY LAW – PROPERTY – Injunctions – Interim

Family Law Act 1975 (Cth)

In the Marriage of Burridge (1980) 6 Fam LR 513;FLC 90–90
In the Marriage of Harris (1993) 16 Fam LR 579 at 586; FLC 92–378; 113 FLR 472 Valceski v Valceski (2007) 36 Fam LR 620
Hunt v Hunt and Others (2006) 36 Fam LR 64;

APPLICANT: Mrs Sterling

1^st RESPONDENT: Mr Sterling

2^nd RESPONDENT: Mr Watson

3^rd RESPONDENT: Ms Kelly

4^th RESPONDENT: Mr Border

5^th RESPONDENT: Mrs Border

FILE NUMBER: SYC 738 of 2007

DATE DELIVERED: 29 February 2008

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Judicial Registrar Loughnan

HEARING DATE: 26 February 2008

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Richardson, SC

SOLICITOR FOR THE APPLICANT: Anne Einfeld

COUNSEL FOR THE 1^ST RESPONDENT: Mr Connor

SOLICITOR FOR THE 1^ST RESPONDENT: The Argyle Partnership

COUNSEL FOR THE 2^{nd ,} 3^rd,

4^th AND 5^th RESPONDENTS:

Mr Richardson, SC

SOLICITOR FOR THE 2^{nd ,} 3^rd,

4^th AND 5^th RESPONDENTS:

Anne Einfeld

Orders

1. Within 48 hours of the wife having produced to the solicitors for the husband evidence of approval of an intended financier whereby, subject to the transfer by the husband of his interest in the B property to the wife, such financier will refinance the existing mortgage then the husband shall by way of partial property settlement, sign all documents necessary to transfer and assign all of his right, title and interest in the B property to the wife.

1. In the event that the husband refuses or neglects to sign (within 2 days of any time as specified in these orders) any documents necessary to effect the terms of these Orders, the Registrar or a Deputy Registrar of the Family Court of Australia is hereby appointed pursuant to s 106A of the Family Law Act 1975 to execute all deeds and documents on behalf of the husband.

1. That pending further order and except as provided for by these orders the husband is restrained from transferring, mortgaging, encumbering or in any way dealing with the B property.

1. The Court noted that these order are made on the undertaking of the wife contained in paragraph 5 of her affidavit sworn 13 February 2008.

1. The wife is to notify the husband through his solicitor forthwith upon the successful refinance of the B property and provide that solicitor with a copy of the signed finance agreement as soon as practicable thereafter.

1. Leave is granted to any party to restore the proceedings to the list on giving 48 hours notice to the other parties and the Court. 

IT IS NOTED that publication of this judgment under the pseudonym Sterling & Sterling is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYF 738 of 2007

MRS STERLING

Applicant

And

MR STERLING

Respondent

REASONS FOR JUDGMENT

Introduction

1. These are proceedings for interlocutory orders in relation to a property at B owned by a number of people, including the husband and wife. The property is being developed for use as an entertainment facility. The wife seeks that the husband join in further borrowings in order to complete the development or that the husband transfer his interest in the property to her. The husband opposes those orders and seeks the sale of the property. The wife opposes that order and says it is beyond jurisdiction. The other owners appear for the limited purpose of objecting to the Court’s jurisdiction to make the order sought by the husband.

2. I will grant the wife’s application by making orders that the husband transfer his interest in the property to the wife.

The Applications

1. In terms set out in the Case Outline document submitted on behalf of the wife, she seeks the following orders:

1. That within 48 hours of the appropriate documents being delivered to his solicitors the husband shall sign all documents and do all acts and things necessary to accept the loan approval as recorded in the letter of [B Finance] dated 16 October 2007 (annexure L to the applicant’s affidavit sworn 17 January 2008) and to do all acts and things necessary to comply with all borrowing obligations in accepting the loan including but not limited to executing a mortgage over his interest in the property situate at and known as [the B property] being the land comprised in folio identifier […] (“the [B] property”).

1. In the event that the relief sought in paragraph 1 is refused, then in the alternative, order that within 24 hours of the wife having produced to the solicitors for the husband evidence of approval of an intended financier that subject to the transfer by the husband of his interest in the B property to the wife, that such financier will refinance the existing mortgage then the husband shall by way of partial property settlement, sign all documents necessary to transfer and assign all of his right, title and interest in the B property to the wife.

1. In the event that the husband refuses or neglects to sign (within 2 days of any time as specified in these orders) any documents necessary to effect the terms of these Orders, the Registrar or a Deputy Registrar of the Family Court of Australia is hereby appointed pursuant to s 106A of the Family Law Act 1975 to execute all deeds and documents on behalf of the husband.

1. That pending further order and except as provided for by these orders the husband is restrained from transferring, mortgaging, encumbering or in any way dealing with the [B] property.

1. The husband to pay the wife’s costs of and incidental to these interim proceedings on an indemnity basis.

1. The orders sought by the husband are paraphrased in the Case Outline document of the husband’s counsel as follows:

2. The following paraphrase the Application in a Case of the husband:

   1.1.That leave be granted to serve this application at short notice on all parties including the wife, [Mr Watson], [Ms Kelly], [Mr Border] and [Mrs Border].

   1.2.That within 14 days from the date of these orders, the parties do all acts and things and sign all documents that may be necessary to list the [B] property for the best price reasonably obtainable on the following terms and conditions:

   1.2.1.[Machinery provisions follow]

   1.2.2.That upon the sale of the [B] property and on settlement, the net proceeds of sale shall be paid in the following manner and priority:

   1.2.2.1.In payment of all costs and expenses etc;

   1.2.2.2.In payment of such amounts required to discharge and pay all water rates and council rates in respect of the property;

   1.2.2.3.In payment of any outstanding mortgage loans secured against the property;

   1.2.2.4.In payment to [Mr Watson], [Ms Kelly], [Mr Border] and [Mrs Border] of their shares in the property;

   1.2.2.5.The net balance being the husband and wife’s interest in the property shall be held in a controlled monies account;

   1.2.2.5.1.[Machinery provisions]

The evidence

1. The following documents were relied on:

Wife’s affidavit sworn on 22.11.07. 
Wife’s affidavit sworn on 17.01.08. (bound version) 
Wife’s affidavit sworn on 13.02.08. 
Wife’s affidavit sworn on 27.02.08. 
Financial Statement of Wife sworn 17 January 2008

Affidavit of Mr Watson sworn on 29.01.08. 
Affidavit of Mr Watson filed 21.02.08
Affidavit of Mr D sworn on 30.01.08. 

Affidavit of Mr Z sworn on 30.01.08. 

Affidavit of Ms C filed 14.02.08
Affidavit of Ms Kelly filed 26.02.08
Affidavit of Mr Border filed 26.02.08
Affidavit of Mrs Border filed 26.02.08
Documents from B Finance

Proposed Loan Document to Mr Watson, the wife, Mrs Border and Mr Border.
Terms of Approval Document for Loan to Mr Watson, the wife, Mrs Border and Mr Border.

Husband’s affidavit of Financial Circumstances verified by affidavit sworn on 22.01.07 and filed on 05.02.07. 
Husband’s affidavit sworn on 29.01.08. 
Affidavit of Mr H sworn on 29.01.08.  

Reference was made in the list of documents relied on by the husband to a transcript of proceedings before Cohen J on 21.01.08 but it was not referred to in submissions and I have not seen it. 

The hearing

1. The matter was listed before me as a special fixture by Judicial Registrar Johnston on 30 January 2008. The following orders and notations were made:

   ‘1. That the Court notes that both parties consent to a Judicial Registrar exercising jurisdiction in what might become interim property proceedings.

   2.    That the injunction proceedings are listed for hearing by a Judicial Registrar at 10:00 a.m. on 27 February 2008.

   3. That the husband file and serve any interim property application together with all affidavits in support not later than 14 February 2008 and that such application also be returnable on 10:00 a.m. on 27 February 2008.

   4. That any third party be served not later than 8 February 2008 and that the husband provide such with an unsealed copy of all affidavits as soon as possible.

   5.    That all costs are reserved.’

1. There is no issue about the third parties being served as they appear, albeit for a limited purpose.

2. The hearing proceeded on the papers with submissions from the parties’ counsel. I first heard argument in relation to the jurisdiction to make orders sought by the husband. I told the parties I would hear all of the arguments and make orders and give reasons on all issues at the same time. I then took submissions on the merits of the competing claims. At the conclusion of the hearing I was told that a decision was needed as soon as practicable given the inherent urgency in the matter and the likelihood of a review. Judgment was reserved.

Short History

1. The husband is 42 years of age and the wife is 44 years of age. They started living together in 1993, were married in 1994 and separated in December 2004. They have two children.

10. I take it that the husband, the wife, the wife’s mother and perhaps other members of the wife’s family have been involved in running entertainment facilities.

11. The husband and wife and four others bought a two storey terrace in B in 2003 for $1.6M which was mostly borrowed. Development approval was granted on 29 July 2004 for a facility on the premises.

12. The parties separated in December 2004.

13. Work to fit out the premises is partially completed. On 9 May 2007 the husband refused to sign documents relating to further funding for the completion of the fit out. The Development Consent lapses on 28 July 2008.

Chronology Of Events 

14. The husband says that in September 2003 he and the wife were operating a business in partnership in the Eastern Suburbs.

15. In October 2003 the property at B was purchased for $1,600,000 and the husband and the wife acquired a 45% interest. The transfer was registered as follows:

The wife and the husband are registered proprietors as joint tenants in respect of 45/100 share;  

Ms Kelly and Mr Watson (the wife’s brother) are registered proprietors as joint tenants in respect of 45/100 share;

Mrs Border and Mr Border are registered proprietors as joint tenants in respect of 10/100 share.

16. The purchase was funded as follows:

$168,000            from the Borders;

$1,040,000borrowed from Permanent Trustees by each of the owners, secured on the B property;

$300,000line of credit with Homeloan Pty Ltd in the name of wife’s brother and mother.  The wife says $150,000 of that was a loan to her;

$250,000line of credit with Homeloan Pty Ltd in the name of wife’s mother. The wife says $125,000 of that was a loan to her.

17. It follows that the two lines of credit are not secured on the B property. As the Borders paid for their share outright, the other owners do not contend that their inclusion on the mortgage to Permanent Trustees was intended to reflect any further indebtedness by them.

18. An application for development consent for an entertainment facility was made through the wife’s mother. The husband asserts that the application was made in her name for privacy reasons.

19. On 29 July 2004 Development Consent was granted by the Council.

1. In December 2004 the parties separated with the wife and children remaining in the former matrimonial home. 

21. A business P Business rented the premises until 31 July 2005. They have been vacant since.

22. On 8 February 2006 a modification to the Development Consent was granted subject to conditions.

23. It is the wife’s evidence that on 1 July 2006 the owners of the property entered into a lease with the wife’s mother whereby she would operate an entertainment facility from the premises. The husband does not recall signing the lease and in any event may seek to have the lease set aside.

24. On 25 September 2006 building work commenced at the B property for the purpose of it being operated as an entertainment facility. This involved a special configuration including 8 purpose-built rooms.

25. On 20 February 2007 Terms of Approval were signed by all owners in relation to an offer from B Finance to extend mortgage on the B property.

26. A valuation was prepared in March 2007 for the purposes of refinance, referred among other things to the lease at $137,000 per annum excl of GST and to the intended use of the property.

27. On 28 March 2007 Terms of Approval were signed by all owners in relation to a 2^nd offer from B Finance to extend mortgage on the B property.

28. On 9 May 2007 the husband refused to sign the 3^rd revised refinance offer from B Finance.

29. On 22 October 2007 the term of the mortgage was extended. It is asserted that the extension was somehow authorised by all of the owners except the husband. 

1. It is an agreed fact that the Development Consent on the B property will lapse on 28 July 2008. 

The Law

31. The wife’s claims are based on section 114 and section 79. She seeks a mandatory injunction compelling the husband to join in a further borrowing. In the alternative she seeks an order for partial property settlement.

32. Section 114, among other things, provides:

….

1. [Injunctions in aid of jurisdiction]  A court exercising jurisdiction under this Act in proceedings other than proceedings to which subsection (1) applies may grant an injunction, by interlocutory order or otherwise (including an injunction in aid of the enforcement of a decree), in any case in which it appears to the court to be just or convenient to do so and either unconditionally or upon such terms and conditions as the court considers appropriate.

33. Section 79 empowers the court to alter the property interests of the parties to a marriage. There is power to make interim and partial property orders. There is the specific instance of Section 79(6) and also an acceptance of such a power through the case law -  In the Marriage of Burridge (1980) 6 Fam LR 513; FLC 90–90; In the Marriage of Harris (1993) 16 Fam LR 579 at 586; FLC 92–378; 113 FLR 472.

34. I raised with learned Senior Counsel for the wife the issue of whether the power of the Court under section 79 in respect of the B property would be exhausted by the partial order sought on behalf of his client. He said not and that in any event that such an argument would not be asserted on behalf of his client. It is not critical here in that the husband no longer seeks by way of final relief, to retain an interest in the property but rather seeks a cash adjustment. Such an order would not call for any further change in the legal title unless it was necessary to protect the husband from a secured creditor or for enforcement.

35. The source of power for the husband’s claim is less well identified and whether a power exists is in issue before me.

36. Learned counsel for the husband referred to a number of potential sources of power for an order compelling the third party owners of the B property to sell – Part VIIIAA of the Family Law Act; a cross-vested claim in equity such as for unjust enrichment or an application under section 66G of the NSW Conveyancing Act 1919. No equitable claim is pleaded but I accept that such claims can be made.

37. The operative provisions of Part VIIIAA are section 90AE and 90AF. The objects of Part VIIIAA of the Act are:

Section 90AA     The object of this Part is to allow the court, in relation to the property of a party to a marriage, to:

(a)make an order under section 79 or 114; or

(b)grant an injunction under section 114;

that is directed to, or alters the rights, liabilities or property interests of a third party.

38. The relevant sections are as follows:

[s 90AE]   s 90AE Court may make an order under section 79 binding a third party
90AE       (1)      In proceedings under section 79, the court may make any of the following orders:

(a)      an order directed to a creditor of the parties to the marriage to substitute one party for both parties in relation to the debt owed to the creditor;
(b)      an order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor;
(c)      an order directed to a creditor of the parties to the marriage that the parties be liable for a different proportion of the debt owed to the creditor than the proportion the parties are liable to before the order is made;
(d)      an order directed to a director of a company or to a company to register a transfer of shares from one party to the marriage to the other party.

(2) In proceedings under section 79, the court may make any other order that:

(a)      directs a third party to do a thing in relation to the property of a party to the marriage; or
(b)      alters the rights, liabilities or property interests of a third party in relation to the marriage.

(3) The court may only make an order under subsection (1) or (2) if:

(a)      the making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and
(b)      if the order concerns a debt of a party to the marriage—it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and
(c)      the third party has been accorded procedural fairness in relation to the making of the order; and
(d)      the court is satisfied that, in all the circumstances, it is just and equitable to make the order; and
(e)      the court is satisfied that the order takes into account the matters mentioned in subsection (4).

(4) The matters are as follows:

(a)      the taxation effect (if any) of the order on the parties to the marriage;
(b)      the taxation effect (if any) of the order on the third party;
(c)      the social security effect (if any) of the order on the parties to the marriage;
(d)      the third party's administrative costs in relation to the order;
(e)      if the order concerns a debt of a party to the marriage — the capacity of a party to the marriage to repay the debt after the order is made;

And

[s 90AF]        s 90AF Court may make an order or injunction under section 114 binding a third party
90AF   (1)      In proceedings under section 114, the court may:

(a)      make an order restraining a person from repossessing property of a party to a marriage; or
(b)      grant an injunction restraining a person from commencing legal proceedings against a party to a marriage.

(2)      In proceedings under section 114, the court may make any other order, or grant any other injunction that:

(a)      directs a third party to do a thing in relation to the property of a party to the marriage; or
(b)      alters the rights, liabilities or property interests of a third party in relation to the marriage.

(3)      The court may only make an order or grant an injunction under subsection (1) or (2) if:

(a)      the making of the order, or the granting of the injunction, is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and
(b)      if the order or injunction concerns a debt of a party to the marriage — it is not foreseeable at the time that the order is made, or the injunction granted, that to make the order or grant the injunction would result in the debt not being paid in full; and

(c)      the third party has been accorded procedural fairness in relation to the making of the order or injunction; and
(d)      for an injunction or order under subsection 114(1) — the court is satisfied that, in all the circumstances, it is proper to make the order or grant the injunction; and
(e)      for an injunction under subsection 114(3) — the court is satisfied that, in all the circumstances, it is just or convenient to grant the injunction; and
(f)       the court is satisfied that the order or injunction takes into account the matters mentioned in subsection (4).

(4)      The matters are as follows:

(a)      the taxation effect (if any) of the order or injunction on the parties to the marriage;
(b)      the taxation effect (if any) of the order or injunction on the third party;
(c)      the social security effect (if any) of the order or injunction on the parties to the marriage;
(d)      the third party's administrative costs in relation to the order or injunction;
(e)      if the order or injunction concerns a debt of a party to the marriage — the capacity of a party to the marriage to repay the debt after the order is made or the injunction is granted;

39. In support of the argument that the Family Court has power in relation to third parties I was referred to the comments of Brereton J in Valceski v Valceski (2007) 36 Fam LR 620. I was also referred to the decision of O’Ryan J in Hunt v Hunt and Others (2006) 36 Fam LR 64 dealing with the validity of section 90AE and 90AF. It is beyond doubt that orders can be made under the Family Law Act that bind third parties. There is a nice overview of that in Hunt where his Honour said

Third parties and Family law

[46]     In family law proceedings, issues relating to third parties are of considerable practical importance for a number of reasons. The financial affairs of parties to a marriage often include and involve companies and trusts, and are intertwined with the financial and property interests of other family members and others. Sometimes there are issues as to title to property made available to the parties to a marriage for example, in the context of family breakdown there can be a dispute about whether property acquired by one of the parties was intended to be a gift or a loan. There can be issues about whether the parties to a marriage have an interest in property held by a third party. There can be issues about what order to make in circumstances where a third party may have an interest in property in which a party to the marriage also has an interest. There can be issues about how to deal with the interest of a party to the marriage in a third party such as a company or a trust. There are often issues about the interface between the financial circumstances of the parties to a marriage and third parties which includes banks and other financial institutions and so on. The interests of third parties who have commercial or personal relationships with one or more of the spouses may often be liable to be affected by the resolution of the matrimonial dispute.

[47] Both as a matter of interpretation of the Family Law Act and as a matter of constitutional power it has sometimes proved difficult for courts which have jurisdiction under the Act to deal effectively with such matters. Issues that arise have been dealt with by a variety of approaches including concepts of alter ego and sham, the accrued jurisdiction and until Wakim, the cross-vesting of laws scheme.

[48] However, it has always been the case that courts having jurisdiction under the Family Law Act can make orders which have an effect on a third party and in some circumstances may make orders directly against third parties. The court has always, to some extent, had power to bind third parties, for example by injunction on an interlocutory basis: Sanders v Sanders (1967) 116 CLR 366; [1968] ALR 43; Antonarkis v Delly (1976) 10 ALR 251; 1 Fam LR 11,334 and R v Dovey; Ex parte Ross (1979) 141 CLR 526; 23 ALR 531; 5 Fam LR 1.

40. The question raised in relation to jurisdiction before me is not about the power to order third parties to sell their property but rather whether the Court has the power to make such an order in the interim. In short the submission on behalf of the wife and the other owners is that, unlike the provisions of Part VIII, there is no provision or scope for interim orders in Part VIIIAA. For example, it is said that  Section 80 is of no assistance here as it is limited in its application to proceedings under Part VIII.

41. There are a number of interesting questions here but it is not necessary for me to go into much detail. At the end of the day I would think that section 90AE and/or 90AF would support an interim order for the sale of property by a third party. Just briefly touching the relevant points:

• With respect to the submissions made to me, I do not know that the Court’s power to make an interim or partial order under section 79 is sourced in section 80. Section 79 itself contains a provision for such an order in certain circumstances. I am not sure that it is necessary for a Court, even a Court such as this which is of limited jurisdiction, to have express legislative power to make pending further order, an order of a type that it is unambiguously empowered to make on a ‘final’ basis. I accept that section 79 is a special case because of the need for finality. There is no such concept in relation to section 90AF. Indeed, section 114(3) deals entirely with injunctions in aid of jurisdiction. By definition these are likely to be interlocutory orders. The likelihood of a Court making granting an interim mandatory injunction for the transfer of real property is a different matter, but in my view the power is there;

• Section 90AE and 90AF set out types of orders can be made in proceedings under sections 79 and 114, respectively. The proceedings are not under Part VIIIAA they are under section 79 or section 114. I should read the legislation with a view to making sense of the Parliament’s intention and with a view to the scheme being practicable. Why would there be a restriction on the type of order that could be made in the section 79 proceedings just because the power to make that order against a third party in those proceedings is sourced in section 90AE? To take a silly example, is the Court without power to adjourn section 79 proceedings where a section 90AE order is sought because there in no mention of a power to adjourn in the latter section?

42. That is not to say that the Court would grant such an application except in very rare cases. To all of the caveats set out in Harris are added the additional requirements of the Part VIIIAA provisions. One would think that it would be rare that all of the following conditions would be met:

From Harris:

(1) The exercise of the power should be confined to cases where the circumstances presented at that time are compelling….(and later)

Examples include cases where it is necessary to do so to avoid an asset being eroded or lost in the intervening period, and cases (beyond the maintenance power) where an order in favour of one party is necessary to preserve or obtain a home for or is otherwise necessary for the welfare of the children.

…..

(2) It is an exercise of the s 79 power. Consequently it must be performed within those parameters. Since it is not the final hearing the judge is unlikely to have the final findings, but the exercise must fall within that general framework and the material available at that time.

(3) Of necessity it is likely to be a somewhat imprecise exercise. Consequently, it must be exercised conservatively and the judge must be satisfied that the remaining property will be adequate to meet the legitimate expectations of both parties at the final hearing, or that the order which is contemplated is capable of being reversed or adjusted if it is subsequently considered necessary to do so. …..

And that in terms of section 90AF (3):

….

(a)the making of the order, or the granting of the injunction, is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and

(b)if the order or injunction concerns a debt of a party to the marriage — it is not foreseeable at the time that the order is made, or the injunction granted, that to make the order or grant the injunction would result in the debt not being paid in full; and

(c)the third party has been accorded procedural fairness in relation to the making of the order or injunction; and

(d)for an injunction or order under subsection 114(1) — the court is satisfied that, in all the circumstances, it is proper to make the order or grant the injunction; and

(e)for an injunction under subsection 114(3) — the court is satisfied that, in all the circumstances, it is just or convenient to grant the injunction; and

(f)the court is satisfied that the order or injunction takes into account the matters mentioned in subsection (4).

(4) The matters are as follows:

(a)      the taxation effect (if any) of the order or injunction on the parties to the marriage;

(b)      the taxation effect (if any) of the order or injunction on the third party;

(c)      the social security effect (if any) of the order or injunction on the parties to the marriage;

(d)      the third party's administrative costs in relation to the order or injunction;

(e)      if the order or injunction concerns a debt of a party to the marriage — the capacity of a party to the marriage to repay the debt after the order is made or the injunction is granted;

Note: S 90AE(3) makes similar provision in relation to section 79 proceedings)

As to the merits of the claims

43. As I understand it the husband wants the property sold to limit his exposure to loss and in particular to stop what he sees as an erosion of matrimonial property. The husband is concerned that if the wife is permitted to refinance and continue with the project then matrimonial funds may be wasted or diverted to defeat his claim under section 79. He points to a number of concerns;

The wife’s lack of disclosure

44. There are a number of incidents raised but the husband complains that the wife sold out of W Pty Ltd without accounting to him and now W will guarantee the offered refinance from B Finance for the completion of the project. He is concerned about its capacity to provide such a guarantee.

The involvement of the wife’s mother

45. The husband is concerned that the value being protected by the wife’s application is likely to be for the benefit of the lessee (the wife’s mother) and not the owners of the B property. It is submitted that the purported lease is in effect not a commercial document. On its face the lease provides for rent of $137,000 per annum to commence on 1 July 2006. It is asserted on behalf of the husband and without complaint on behalf of the other parties, that no rent has been paid.

46. I take it that the rent is not being paid because on this issue, Senior Counsel for the wife referred me to terms of the lease dealing with the abatement of rent. With respect I am not sure that the provision for the abatement of rent in this lease could justify non payment of rent just because the renovations have not been completed. The operative provision of the abatement clause is

1. ABATEMENT OF RENT

   If the whole or any part of the building shall be destroyed or damaged by fire flood lightning storm or tempest or other disabling cause so as to render the demised premises during the term substantially unfit for the use and occupation of the Lessee or so as to deprive the Lessee of substantial use of the same or as to render the rebuilding or reconstruction of the building in its previous form impracticable or undesirable in the opinion of the Lessor then:-

   ..

47. The disabling cause here is the work required for a development approved at the application of the wife’s mother, which she and the owners knew at the time they signed the lease, was necessary for the property to be used as an entertainment facility. I doubt that work could fall within the description “or other disabling cause” where that would be read down by reference to the preceding words “destroyed or damaged by fire flood lightning storm or tempest”. Further, it appears to me that the lease makes the lessee responsible for the renovations. Included in the lessee’s responsibility for outgoings is:

1. RENT AND OUTGOINGS

…….

(b) …

viii.     repairs and maintenance including renovations (other than work of a structural nature except as is necessitated by the Lessee’s use of the demised premises …) – my emphasis added

48. On that basis, apart from some collateral agreement made between the owners and the wife’s mother, the lease would seem to make her responsible for the renovations and the payment of rent. Indeed, the fact that the rent is being paid is a representation referred to in a valuation of the property relied on by the project partners for refinance. It is the husband’s case that there is a collateral agreement between the wife’s mother and the other owners, for the waiver of rent.

49. The submission for the husband is that there should be some explanation as to why the wife’s mother is the lessee and yet a company, J Business, has commissioned the building work.

50. Thus questions are raised about the wife’s mother and yet she alone of the key individuals in the project is not on affidavit in the case. It is submitted that I should make an inference that her evidence would not assist the wife.

51. The problem with this argument from the husband’s point of view is that whether he signed the lease or not, he always knew that his mother in law was part of the development project. She could not have been involved without his agreement or acquiescence. He gives evidence about his involvement with the (her) development application. He knew of her involvement through various joint finance applications and right up until 9 May 2007 when he bailed out.

The validity of the lease

52. In very carefully worded evidence the husband does not say that he did not sign the lease but that seems to be his case. He does not recall signing the lease and he has a case to make about the credit worthiness of the person who says she witnessed his signature. In any event the husband may seek to have the lease set aside.

53. This is a matter that can be dealt with in the context of the final proceedings under section 79. As is submitted on behalf of the wife, the only real difficulty in addressing this issue will come if, as the husband seeks, the property is sold. Then the major benefit of repudiating the lease could only accrue to a new owner taking title subject to the lease.

The viability of refinancing

54. It is submitted that a properly informed financial institution may not advance money for the completion of the project. For example, it is submitted that if the wife made the same disclosure to the financier as she did to this court in her Financial Statements, showing a weekly deficiency of income over outgoings and of assets over liabilities, she would not secure the necessary finance. It is also noted as I have mentioned earlier, that the March 2007 valuation of the property, apparently prepared for an earlier refinance application, includes as a basis for the opinion of value, the incorrect representation that rent is being paid under the lease.

55. Subject to an issue I deal with later, this is not a real concern. The wife and other owners intend to refinance. They have formal offers of approval up to 22 February 2008 and then correspondence from a financier consistent with the offer being open to 29 February 2008 or to the resolution of the current interlocutory proceedings. Either they will be able to refinance or not. They are obliged to refinance within a timeframe that permits the renovations to be completed before the expiry of the development consent. The failure of that process will be known soon and should leave sufficient time for the orderly sale sought by the husband.

56. The real problem with the husband’s application is that an order for sale will preclude the final relief sought by the wife; conclude the development project involving a number of strangers to the marriage and there is no evidence to suggest that the sale will preserve assets. The wife seeks to retain an interest in the property by way of final orders. That could not occur if the property is sold now. The husband presents no evidence as to the existence of a market for a partially renovated entertainment facility in a two storey terrace encumbered by a lease for the operation of that facility and affected by a development time limit of 28 July 2008 – let alone what price might be achieved. What is there was a delay in selling the property, one could imagine that once there was insufficient time to complete the necessary renovations and again, once the Development Consent deadline was passed, the value of the property will fall. Although I am told that on an earlier date the husband represented that the enterprise at B has a value of the order of $4,000,000, before me he seeks to impugn a March 2007 valuation at $1.7M “as is” and $1.95M “if completed”. Much more than $2M has been injected into this enterprise already. In other words there are serious risks with the proposal of the husband.

57. Even if the order was only being sought against a spouse, the husband neither offers, nor discloses the wherewithal to support, an undertaking as to damages. That would not be fatal to his application but would be relevant to the exercise of discretion. Here it is not just a spouse affected. There are four other owners directly affected. They are strangers to the marriage and I have special obligations to them.

58. Next, there is nothing about the retention of the property that would prevent the husband seeking to challenge the lease or the various dealing and dispositions between the owners and between some of them and the wife’s mother. However, if the property is sold then it may be too late to address those matters in the final hearing – to trace and recover certain funds.

59. Assuming there is jurisdiction to make the orders sought on behalf of the husband, in the exercise of discretion they would not be made.

60. As to the wife’s claims – she seeks in the alternative that the husband join in further borrowings in order to complete the development of the property or that the husband transfer his interest in the property to the wife.

61. At the outset of the hearing I indicated to Senior Counsel for the wife that I was not inclined to the first alternative. Without suggesting that such an order should never be made, it seems to me that the Court should be very cautious about forcing a person to incur a significant liability. A person borrowing money is required to make disclosures and collateral agreements and to have that forced on a party really means that the Court should satisfy itself in relation to the disclosure and capacity to perform those obligations. I am not in a position to do that here. I should say that learned Senior Counsel did not thereafter press that order.

62. The alternate order sought by the wife is that the husband transfer his interest in the property to her by way of partial property settlement.

63. In terms of the counsel from the decision of Harris. The circumstances are compelling.

64. The project is at gridlock and if nothing is done then there it is likely to be financial loss. The only proposals are the two before me. I understand that if the renovations are not completed and the facility is not operating by 28 July 2008 then the Development Consent lapses. Presumably thereafter the building would be a white elephant - a building purpose fitted for use as an entertainment facility and the owners not being permitted to put it to that use. There may be options available for an extension of the deadline or for some creative use for the building for another purpose but none of that is in evidence. I suspect that either course will be very costly. Thus something must be done to preserve the asset and the orders the wife proposes are the only viable option.

65. I need to be conservative, given the inability to resolve disputed issues of fact in an interim hearing. There are no conservative options here. The critical question of whether or not there is a net matrimonial asset cannot be resolved by me. I think I was told by Senior Counsel for the wife that she thinks the pool is of the order of $2M. I may be wrong about that. I understand that the husband had asserted previously that there was value in the project of the order of $4M. In either event, there is likely to be a net matrimonial asset.

66. In terms of making orders within the parameters of section 79, that is a very theoretical exercise at this stage. I have referred to the parties views about the assets. The Financial Statements of the husband and wife suggest that beyond the B project there is little if anything by way of net assets. That remains to be tested. As to contributions, the parties’ cohabitation spanned 11 years and they have 2 children. The husband referred he and the wife running a business in 2003. I accept that contributions were made. As to the other matters in Section 79(4) there is little conclusive evidence at this stage.

67. There is something of a moving feast in relation to the quantum of the further funds needed but I understand the situation to be as follows. As at 29 January 2008 the builder, Mr Z was owed nearly $164,000 for work done. He estimated that a further $91,000 was required to take the project to completion. Over the period 31 January to 2 February 2008 the wife’s brother Mr Watson, paid the builder a total of $25,000. Thus the net amount owing to the builder to completion is about $230,000 ($164,000 + $91,000 - $25,000). In addition it is asserted that Mr Watson is owed $100,000 for $50,000 advanced in June 2007 and $50,000 advanced in December 2007, by way of loan, for payment to the builder. The deed of agreement with the wife called for repayment on 31 January 2008 together with interest at 9% pa. Finally, Mr D is owed $50,000 by the wife together with interest at 9% pa running from 15 January 2008, being the date of his written agreement with the wife. That adds up to $380,000 of which $230,000 is directly required by the builder.

68. The refinance proposal is that dated 13 February 2008 from B Finance[1]. It was conceded from the bar table that a letter exists extending that proposal to 29 February 2008 or to the conclusion of the interlocutory proceedings. The proposal involves an increase in the borrowing by $350,000 to $1,395,000. $350,000 is no more than the debts asserted to exist. The wife is accountable to the husband to the extent that the extended debt might later be found to be a matrimonial debt. Thus the onus will remain with her to substantiate a disputed debt and the payment of the debt would not lessen that obligation.

i)[1] Exhibit 2

69. Putting aside the borrowings not secured on the B property, in simple terms the proposed facility of $1,395,000 would seem to leave some margin of equity in a property that was bought in 2003 for $1,600,000 and on which over $600,000 has been spent to date by way of renovations.

70. If there was ever a net matrimonial asset then there remains scope for an adjustment of assets between the parties. Therefore the orders would not appear to prejudice the husband’s claim.

71. There is further protection of the husband offered by the wife. Insofar as the orders sought by the wife would enable the wife to further encumber the property she gives an undertaking[2] that upon entering into the mortgage of $1,395,000 she will not transfer, dispose of or otherwise encumber her interest in the property pending the completion of the property proceedings without first having given the husband 14 days notice through his solicitors of the full terms of any proposed transaction.

ii)[2] paragraph 5 of her affidavit sworn 13 February 2008.

72. It may be that there are a number of ready alternatives to the orders sought. It is the husband’s case (as opposed to evidence) that little remains to be done to complete the renovations. In any event, the husband submits that other sources of funds should and could be made available to meet the outstanding costs. He may be right although until May 2007 he was willing to join in borrowings for those purposes. There are no viable alternatives in evidence.

73. In my view, making no order is not an option and the orders proposed on behalf of the wife give the best chance of preserving matrimonial funds.

The form of orders

74. One of the issues raised by the husband, the misleading of a financial institution is important in another context. The Court has an obligation to a third party such as a creditor. That obligation has some expression in spousal maintenance and property proceedings in section 75(2)(ha). On the face of the evidence, the facts as asserted to be true before this court, albeit in relation to only one of the owner/borrowers, may be different in material ways to the facts represented by the principals in the redevelopment (including the husband) to past financiers. The likelihood of deliberate misleading of financial institutions, just as with potential fraud on the Revenue (such as social security or income tax) has resulted in referral of papers by Courts exercising power under the Family Law Act in order that the matters can be investigated. Here the wife is on notice about these matters and her obligations of full and frank disclosure to a lender are undiminished by these proceedings.

75. In the broadest terms looking at the matter from the point of view of the financial institution who might advance the funds, there appears to be sufficient equity in the property for the proposed facility.

76. The orders will be made on the undertaking of the wife contained in paragraph 5 of her affidavit sworn 13 February 2008 and will allow the husband to bring the matter back on short notice if the refinance fails.

I certify that the preceding seventy six (76) paragraphs are a true copy of the reasons for judgment of Judicial Registrar Loughnan.

Associate:

Date:  29 February 2008