Wender & Wender
[2017] FamCAFC 48
•29 March 2017
FAMILY COURT OF AUSTRALIA
| WENDER & WENDER | [2017] FamCAFC 48 |
| FAMILY LAW – APPEAL – PROPERTY – Where the wife argues that the trial judge erred in not applying the Federal Circuit Court Rules and instead applied the Family Law Rules to the question of whether an alternative valuation should be admitted – Where the wife further argues that in not allowing another expert report to be admitted into evidence the trial judge’s decision amounted to a denial of procedural fairness – Where there was no error in the trial judge’s decision in applying the Family Law Rules – Where the order for the appointment of a single expert witness was made by consent and the parties agreed upon the single expert – Where the wife made oral application to admit the report of a second expert after her case had been closed – Where admission of the second report would have necessitated the calling of further evidence and a further adjournment would have been required – Where it was plainly open to the trial judge to refuse the wife’s oral application – Where there was no lack of procedural fairness and the trial judge exercised her discretion appropriately – Where the wife disagreed with the value attributed to the husband’s business by the single expert and sought to rely on an alternative valuation report – Where the single expert accepted the methodology used in the alternative report and suggested it was “essentially” the same as his with a few “minor changes” – Where the two methodologies could not have been more different and the trial judge plainly failed to appreciate that – Where the expert valuer took into account the personal circumstances of the husband, namely his age, health and intention not to work longer than five years – Where these are not matters to be taken into account in valuing the business – Where a major flaw in applying the concept of “value to the owner” here is that the value arrived at is less than market value yet the husband could sell the business for its market value – Where the trial judge failed to address the inappropriate application of the “value to the owner” methodology – Where the trial judge erred in accepting the valuation of the single expert and the appeal must be allowed to that extent – Where plainly there needs to be further evidence presented – Where it is not appropriate to re-exercise the discretion – Appeal allowed in part and remitted for rehearing by a judge other than the trial judge. FAMILY LAW – CROSS-APPEAL – PROPERTY – Where Grounds 1, 2 and 3 have no merit – Where there is merit in Ground 4 as a result of the partial success of the appeal – Where it is appropriate to remit for rehearing the question of the costs of the valuations – Cross-Appeal allowed in part and remitted for rehearing by a judge other than the trial judge. FAMILY LAW – APPEAL – COSTS – Where if the appeal was successful the wife sought an order for costs as did the husband if the cross-appeal was successful – Where both the wife and the husband were partially successful as a result of the wife’s success on the appeal – Where the usual principle encapsulated in s 117(1) of the Family Law Act 1975 (Cth) should apply and each party should bear their own costs – Where the appeal has succeeded on a question of law – Costs certificates ordered for both parties pursuant to the Federal Proceedings (Costs) Act 1981 (Cth) for the appeal and for the rehearing. |
| Family Law Act 1975 (Cth) – s 117 |
Federal Proceedings (Costs) Act 1981 (Cth) – ss 6, 8 and 9
Family Law Rules 2004 (Cth) – rr 15.44, 15.45 and 15.49
Federal Circuit Court Rules 2001 (Cth) – rr 15.08, 15.09 and 15.10
| Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 |
| APPELLANT/RESPONDENT: | Ms Wender |
| RESPONDENT/APPELLANT: | Mr Wender |
| FILE NUMBER: | ADC | 3540 | of | 2009 |
| APPEAL NUMBER: | SOA | 80 | of | 2015 |
| DATE DELIVERED: | 29 March 2017 |
| PLACE DELIVERED: | Adelaide |
| PLACE HEARD: | Adelaide |
| JUDGMENT OF: | Strickland J |
| HEARING DATE: | 8 August 2016 |
| LOWER COURT JURISDICTION: | Federal Circuit Court of Australia |
| LOWER COURT JUDGMENT DATE: | 27 November 2014 |
| LOWER COURT MNC: | [2015] FCCA 3160 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Roder SC with Mr Tredrea |
| SOLICITOR FOR THE APPELLANT: | Jordan Fowler |
| COUNSEL FOR THE RESPONDENT: | Mr McQuade |
| SOLICITOR FOR THE RESPONDENT: | Norman Waterhouse Lawyers |
Orders
The appeal be allowed in part.
The cross-appeal be allowed in part.
Sub-paragraphs 7(b) and 7(c) of the Order made on 27 November 2015 be set aside.
The issue of the valuation of the husband’s professional practice as well as the question of the costs of all valuations be remitted for rehearing to the Federal Circuit Court of Australia by a judge other than Judge Kelly.
There be no order as to costs.
The Court grants to the appellant wife a costs certificate pursuant to the provisions of s 9 of the Federal Proceedings (Costs) Act1981 (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 appellant wife in respect of the costs incurred by her in relation to the appeal.
The Court grants to the respondent husband a costs certificate pursuant to the provisions of s 6 of the Federal Proceedings (Costs) Act1981 (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 respondent husband in respect of the costs incurred by him in relation to the appeal.
Each party be granted a certificate pursuant to the provisions of s 8 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 parties in respect of the costs incurred by each of them in relation to the rehearing.
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 Wender & Wender 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).
|
Appeal Number: SOA 80 of 2015
File Number: ADC 3540 of 2009
| Ms Wender |
Appellant
And
| Mr Wender |
Respondent
REASONS FOR JUDGMENT
Introduction
On 12 May 2016 Ms Wender (“the wife”) filed an Amended Notice of Appeal against paragraph 1 of the order made by Judge Kelly on 25 August 2014 and sub-paragraphs 7(b) and 7(c) of her Honour’s order made on 27 November 2015.
On 16 May 2016 Mr Wender (“the husband”) filed a Notice of Cross-Appeal against sub-paragraph 7(c) of the order made by her Honour on 27 November 2015.
The husband opposes the appeal of the wife and the wife opposes the cross-appeal of the husband.
The orders appealed against were made in the context of competing applications for property settlement by the parties and they provided as follows:
25 August 2014
1.The Court declines the wife’s oral Application for the further Expert [Report] from Mr [M] … to be received into evidence.
…
27 November 2015
…
(7)In the event the wife elects to retain the [I] St Property then within 28 days thereafter:
…
(b)the wife discharge the mortgages numbered … …. and …. … to the ANZ Banking Group registered over the said property; and
(c)the husband pays to the wife the sum of TWENTY TWO THOUSAND, NINE HUNDRED AND NINETY FOUR DOLLARS ($22,994).
…
The first order was made during the course of the trial before her Honour, and the other orders are part of the final property settlement orders made following that trial.
Relevant background
The husband was born in 1946 and at the time of the trial was 69 years of age.
The wife was born in 1954 and at the time of the trial was 61 years of age.
The parties commenced to live together in June 1993 and married in late 1993. They separated in July 2002 and divorced in October 2009.
The parties have one child who was 21 years of age at the time of the trial, and who was studying whilst living in the primary care of the wife.
At the commencement of the relationship the husband was working full-time as a professional and he has continued to operate his own professional practice ever since.
At the commencement of the relationship the wife was finalising her property settlement arising from her previous marriage, and as a result of that property settlement she retained ownership of a property at I Street. Subsequently that became the matrimonial home of the parties.
The wife has not been engaged in employment since the marriage, although she did provide occasional clerical assistance at the husband’s practice.
In 1998 the husband purchased the A Practice in the Victorian town of R, also purchasing the premises in which the practice operated, through an investment company. Thereafter the husband maintained his practice in Adelaide and commuted each week to R.
In July 2002 the husband sold his practice in Adelaide, just prior to the separation. He moved into rental accommodation in Adelaide and continued to work one day each week in the practice.
In 2006 the husband’s investment company sold the premises in R, but the husband continued to operate his practice from there.
In 2009 the husband purchased a unit at E Street, R which he rented out to other professionals working for the A practice.
The wife filed her Initiating Application seeking orders for property settlement on 27 November 2012, and the husband filed his Response on 1 February 2013.
The reasons of the trial judge
25 August 2014
Her Honour’s separate reasons for, in effect, dismissing the wife’s oral application for the report of her “shadow expert”, Mr M, to be received into evidence, can be summarised as follows:
a)The order made on 6 February 2013 for valuations to be obtained was a consent order that provided for single expert reports, and the power to make that order is to be found in r 15.45 of the Family Law Rules 2004 (Cth) (“the Rules”), given that the Federal Circuit Court Rules 2001 (Cth) do not “strictly apply in this case” ([3]).
b)The parties agreed to proceed on the basis of a single expert, and Mr C was appointed in that capacity to value the husband’s professional practice.
c)Rule 15.49 of the Rules contemplates the possibility of another expert report being admitted into evidence, but the court should “proceed cautiously” particularly at a late stage in the proceedings ([4]).
d)Mr C’s first report has been updated on numerous occasions during the proceedings.
e)The trial was adjourned part-heard for six months, and the wife had “plenty of opportunity to apply for leave to obtain a further expert’s report” ([7]).
f)The fact of the application being made on the day the trial was to resume is “fatal” to its success. It would be “unjust and inequitable to now allow that evidence to come before the court”; there would be a “blowout in the trial listing, with a further adjournment of the trial almost inevitable” ([8]).
g)The further expert report can still provide a basis for cross-examination of Mr C.
27 November 2015
The valuation of the A Practice is addressed at [41] – [61] of her Honour’s reasons for judgment.
Her Honour recorded that in December 2013 Mr C was instructed by the parties jointly to provide a formal valuation of the A Practice. Mr C prepared three reports as follows:
a)The first report dated 18 September 2013 was based on financial reports for the financial year ending 30 June 2013.
b)The second report dated 14 February 2014 responded to a business appraisal prepared by Dr P, and Mr C was also provided with financial reports for the period July to 31 December 2013.
c)The third report dated 14 August 2014 was based on financial reports for the financial year ending 30 June 2014. In this report Mr C also “addressed … at length” a shadow valuation report prepared by Mr M. The wife was not permitted by the court to call Mr M but Mr C “was cross-examined at length in relation to [his] report” (43]).
Her Honour noted that during cross-examination Mr C was given a copy of a valuation undertaken by a Victorian based valuation service, S Pty Ltd (“S”). Mr C agreed that S were “acknowledged experts in the valuation of [relevant professional] practices and similar businesses” ([44]), and that the husband had misrepresented their valuation when advising him that “[S] had concluded that the [A] practice was not worth very much and was not a particularly attractive purchase” ([45]). S had in fact valued the business at $1.3 million.
Her Honour then referred to the fact that in his first report Mr C set out his formal opinion based on three possible scenarios ([46]):
(Scenario 1) The net present value of the [A] Practice based on future maintainable earnings (FME), i.e. by considering the adjusted historical earnings over the prior five year period, then applying an appropriate discount rate;
(Scenario 2) The value of the Practice based on an alternative calculation of FME, taking into account the decrease in … staff and decreased practice earnings as at September 2013; and
(Scenario 3) The estimated market value of the Practice.
Her Honour then said that Mr C was of the view that Scenario 1 was unreliable “as the business was unlikely to maintain similar earnings in the future, given the staff losses during the 2013 financial year” ([47]), and in light of the husband intending to work for a further five years “market value assessment was irrelevant” ([47]). He concluded that “a valuation based on an alternative calculation of FME was the most appropriate approach (Scenario 2)” ([47]).
Mr C disagreed with the M and S reports insofar as they both included the husband’s income from his part-time professional work in Adelaide within the total income earnt by the practice. He was of the view that this income should not have been included as it was the husband’s personal income, and not income of the A Practice. Her Honour agreed with this position.
Her Honour then noted that under cross-examination Mr C stated that he would not have changed his opinion had he seen the 2011 S valuation.
Her Honour identified that S applied a capitalisation rate of 36 per cent in their 2011 valuation, whereas Mr C applied a capitalisation rate of 40 per cent. S applied a lower rate because they take the position “that practices located in urban centres justify a lower Capitalisation rate compared to suburban locations, which in turn are preferable to practices located in regional centres” ([51]). However, the A Practice is located in the large regional centre of R, and thus Mr C queried why a lower rate had been applied.
In her Honour’s view “Mr [C] was able to justify his decision to adopt the higher Capitalisation Rate of 40%”, however he had relied on the husband’s information provided to him, and her Honour found that the husband had been “less than frank when discussing the [S] valuation with Mr [C]” ([54]), and “equally coy when discussing other matters relating to the operation of the [A Practice]” ([54]).
Her Honour accepted Mr C’s valuation methodology as appropriate and on that basis also accepted his evidence regarding the value of the practice, but subject to a number of caveats.
As a result of those caveats her Honour concluded “that Mr [C’s] Alternative Valuation calculations are unduly pessimistic” ([58]). Her Honour said that although she accepted his methodology, “he has taken an excessively cautious approach in adopting Scenario 2 as his preferred option” ([58]). Thus, her Honour considered that Scenario 1 “based on the estimated Future Maintainable Earnings, provide[d] a more reliable assessment of the value of the [A Practice]”, finding the Practice to be valued at $467,249 ([59]).
Her Honour noted that the wife’s counsel argued that the lower capitalisation rate as contained in the S valuation should be applied, and provided an updated market valuation based on that valuation with the relevant figures updated to the 2014 financial year. Her Honour declined to rely upon those calculations finding that “Mr [C] was able to challenge a range of assumptions included within this document” ([60]).
At [61] her Honour recorded that the husband’s health remained “a matter of concern” and the “net profitability of the [A] practice may reduce over coming years”, but they were matters to be taken into account under s 75(2)(o) of the Family Law Act 1975 (Cth) (“the Act”).
The appeal
As referred to above the wife appeals against paragraph 1 of the order made on 25 August 2014 and sub-paragraphs 7(b) and 7(c) of the order made on 27 November 2015.
Order made 25 August 2014
The challenge to this order is to be found in Ground 1 of the Amended Notice of Appeal, and that reads as follows:
The learned trial Judge erred in refusing [see [43] of the Reasons] the application of the wife to adduce evidence of Mr [M], valuer, in relation to the value of the husband’s [professional] practice (“the proposed evidence”):
(a)when the proposed evidence was relevant evidence in terms of section 55 of the Evidence Act 1995 (Cth);
(b)when the adduction of the proposed evidence did not prejudice the husband given that the proposed evidence was in the form of a report which had been provided to the witness from whom the husband adduced evidence of the value of such practice, namely Mr [C] and [Mr C] had provided a report to the wife’s solicitors (dated 25 August 2014) responding to the proposed evidence;
(c)when the Court had not made an order that evidence as to the value of such practice be given by a single expert witness;
(d)when the wife through her solicitors had informed the husband through his solicitors that the opinion expressed in the first report of [Mr C] dated 18 September 2013 was not accepted by her;
(e)when the second and third [C] reports dated 14 February 2014 and 15 August 2014 were procured at the request of the husband and not the wife;
(f)when Rule 15.45 of the Family Law Rules did not apply (either pursuant to Court Rule 1.05(2) or Rule 1.05(3)(a) and Schedule 3);
(g)when the refusal of the application to adduce the proposed evidence had a significant prejudicial effect upon the wife’s opportunity to present her case which far outweighed any impact upon the orderly case management.
The wife argues that her Honour proceeded upon a “misapprehension” “as to the application of the relevant Rules of Court”, and in any event her decision amounted to a “denial of procedural fairness”.
As to the first issue, it is put that her Honour erred in finding that the Federal Circuit Court Rules did not apply and in then applying the Family Law Rules.
It is argued that r 15.08 of the Federal Circuit Court Rules applied, and that rule confers a discretion to give directions “in order to alleviate or moderate any consequent delay or prolongation of the trial”.
I do not accept that the trial judge misapprehended which rules apply here. It is beyond doubt that the Family Law Rules apply. Rule 15.08 of the Federal Circuit Court Rules is simply not applicable; that relates to matters where both parties “call expert witnesses to give opinion evidence about the same, or a similar, question” (r 15.08(1)). Here there was a consent order for a joint valuation to be obtained and the parties instructed a single expert, Mr C.
Nor do rr 15.09 and 15.10 of the Federal Circuit Court Rules apply. Mr C was not appointed as a “court expert” under those rules.
In these circumstances, the order was clearly made pursuant to rr 15.44 and 15.45 of the Rules.
Rule 15.49 of the Rules provides the court with a discretion to admit another expert report into evidence, but it has not been demonstrated that her Honour erred in the exercise of that discretion.
The order for the appointment of a single expert was made by consent on 6 February 2013, and by agreement between the parties Mr C was thereafter appointed as the single expert to value the husband’s professional practice; he was not the husband’s expert, but he was the expert appointed by both parties.
As referred to above, Mr C provided an initial report which was subsequently updated as and when more relevant information came to hand.
There was no objection to the reports of Mr C until 25 August 2014 upon the resumption of the adjourned trial. The report of Mr M was not provided to the husband’s solicitors until after the close of business on the Friday prior to the resumption of the trial on the Monday. The oral application to admit the report was made after the close of the wife’s case. Had the report been admitted the trial would have been extended not only by the need to call and cross-examine Mr M, but also by the prospect of the husband seeking to call expert evidence contrary to that of Mr M; a further adjournment would have been inevitable.
In these circumstances, it was plainly open to her Honour to refuse the application.
As to the claim of a lack of procedural fairness, that is a claim that must also fail. Plainly, procedural fairness or natural justice must be afforded to all litigants. As French CJ (as his Honour then was) said in International Finance Trust Company Limited v New South Wales Crime Commission (2009) 240 CLR 319 at [54]:
… It requires that a court be and appear to be impartial, and provide each party to proceedings before it with an opportunity to be heard, to advance its own case and to answer, by evidence and argument, the case put against it. According to the circumstances, the content of the requirements of procedural fairness may vary. …
The latter sentence from that quotation particularly echoes the comments of Mason J in Kioa v West (1985) 159 CLR 550 at 585, where his Honour said this:
… [t]he expression “procedural fairness” more aptly conveys the notion of a flexible obligation to adopt fair procedures which are appropriate and adapted to the circumstances of the particular case. The statutory power must be exercised fairly, i.e., in accordance with the procedures that are fair to the individual considered in light of the statutory requirements, the interests of the individual and the interests and purposes, whether public or private, which the statute seeks to advance or protect of permits to be taken into account as legitimate considerations …
(also see per Gibbs J at 563).
Significantly in Szbel v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 228 CLR 152 at [25], the High Court agreed with the statement of counsel for the respondent that:
… what is required by procedural fairness is a fair hearing, not a fair outcome.
Then of course there is the seminal decision of the High Court in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175, a decision which resonates with what occurred here. Heydon J cited (at [133]) with enthusiastic approval, the following colourful passage from the judgment of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 753 at [15]:
In view of the state of the law governing allowance of amendments, amendment applications brought forward before the trial began were treated with uncomplaining supine liberality, notwithstanding that they sometimes showed that problems had been addressed years after they should have been. I do not think that the law requires the discretion to allow amendments to be exercised in entire innocence of understanding the obvious impact of forbearance and liberality on the behaviour of litigants, who have diminished incentive to do their thinking in due time and to tell the court and their opponents their full and true positions. When forbearance and liberality are extended to a delinquent the burden of inconvenience and lost opportunities for preparation tends to fall heavily and without adequate repair on parties who have not been delinquent. A relative disadvantage is imposed on those who proceed methodically and in due time; their interest in procedural justice should claim at least as much consideration as the interests of the applicant for a late amendment who does not have to look far for the creator of his difficulty. It is even conceivable that a litigant might deliberately pursue a course which will impose disadvantage on an opponent who has to reconsider his ground and change course in the midst of a contest.
There is no lack of procedural fairness in this case. Her Honour exercised her discretion appropriately in considering r 15.49, and did not err in refusing the wife’s application. Further, her Honour correctly indicated that the report of Mr M could be used as a basis to cross-examine Mr C.
This ground of appeal has no merit.
Order made on 17 November 2015
The challenge to sub-paragraphs 7(b) and 7(c) of the order made on 27 November 2015 is to be found in Grounds 2 – 8 of the Amended Notice of Appeal, and they read as follows:
2.The learned trial Judge erred in finding [at [59] of Reasons] that in accordance with [Mr C’s] scenario one [see [49] and [56] of Reasons], the husband’s [professional] practice should be valued upon the basis of Future Maintainable Earnings (“FME”) when the evidence before the Court demonstrated that the value of the [professional] practice was substantially higher than the FME valuation, being that value set forth in the “[S] Valuation” (Exhibit W4) as modified by the importation of 2014 financial data in the manner set forth in the “Update of [S] Market Valuation, [A Practice]” (Exhibit W5), being evidence of value with which Mr [C] was in substantial agreement (see XXN of [C], T108-T121, passim).
3.The learned trial Judge erred in failing to find that the value of the husband’s [professional] practice was that set forth in the [S] Valuation updated in accordance with Exhibit W5.
4.Further, or in the alternative, the learned trial Judge erred in finding [at [47] of the Reasons] that:
“Mr [C] considered that the market value assessment was irrelevant, as the husband intended working for at least a further five years”.
when [Mr C] conceded in cross-examination [T121.10-T121.40] that, in accordance with the decision of the Full Court in Nettler v Nettler [2009] FamCAFC 185, that market value prevailed when it was higher than the value calculated on the basis of value-to-owner.
5.Further, or in the alternative, the learned trial Judge erred in finding (on the basis of an acceptance of the evidence of [Mr C]) that in valuing the [professional] practice (whether pursuant to [Mr C’s] scenario 1 or in accordance with the [S] Market Valuation):
(a)The husband’s income earned in Adelaide should be excluded [Reasons [49]];
(b)The capitalisation rate to be applied to the husband’s income should be 40% [the inference to be drawn from Reasons [51], [54], and [59].
6.Further, or in the alternative, the learned trial Judge erred in failing to give any or any sufficient reasons for finding [Reasons [60]]:
“Mr [C] was able to challenge a range of assumptions included within this document. In the circumstances I decline to rely upon the calculations set out in the wife’s “Updated [S] Market Valuation”.
7.Further, or in the alternative, the finding set forth in paragraph [5] hereof was inconsistent with the evidence constituted by the XXN of [C] on the [S] Valuation [T108-T121].
8.Further, or in the alternative, the learned trial Judge erred in finding [Reasons [16]]:
“I accept the valuation approach undertaken by Mr [C] is an appropriate methodology”
given her findings [Reasons [47]] that:
(a)“Mr [C] considered the market value assessment irrelevant as the husband intended working for at least a further five years”; and
(b)in the circumstances that, given the age of the husband, market value rather than value-to-owner was a valuation methodology more likely to give rise to the making of orders that are just and equitable in accordance with section 75(2) of the Family Law Act.
These grounds were argued together given they all go to her Honour’s finding as to the value of the husband’s professional practice. Further, Grounds 4 – 8 are all expressed to be in the alternative.
As referred to above, in his first report dated 18 September 2013, Mr C set out his formal opinion based on three possible scenarios, namely:
6.9.1The net present value of the adjusted earnings over a 5 year period based on earnings achieved for the three year period to June 2013 applying a discount rate of 40% together with the net present value of the estimated sale price to be achieved in 5 years – Scenario 1.
6.9.2The value of the capitalised projected earnings based on the practitioner staffing compliment as at September 2013 – Scenario 2.
6.9.3The estimated market value of the business – Scenario 3.
Mr C concluded that a valuation based on Scenario 2 was the most appropriate approach. He said this about Scenario 1:
6.13Given the material change in circumstances since 30 June 2013, and in particular the loss of a practitioner who now competes with this business, I would expect a return to the “status quo” to be unlikely, and certainly not in the short term …
In relation to Scenario 3 Mr C said this:
6.11Unless the husband finds himself in a position where he is no longer able to work and has to sell the practice, then I do not consider the market value assessment of $250,000.00 to be relevant.
Despite this evidence, as also identified above, her Honour found that Scenario 1 provided a more reliable assessment of the value of the practice. Her Honour concluded that the approach in Scenario 2 was “unduly pessimistic” ([58]).
The approach in Scenario 1 (and indeed Scenario 2)) is challenged by the wife in this appeal. Specifically the wife submits that the approach in Scenario 1 (and as will become apparent, in Scenario 2) was “demonstrably wrong, and contrary to the weight of the evidence”.
The wife sought to rely instead on the valuation report of S dated 21 September 2011, which was obtained by the husband but which was concealed from both the wife and Mr C until as late as 5 September 2014, namely well after the commencement of the trial.
Although that report was clearly out of date, the wife’s counsel provided her Honour with an aide-memoir marked “MFIW5” which purported to update the figures to 2014 as best as could be achieved.
This report, and the update, was put to Mr C in cross-examination. He accepted that this report used an appropriate methodology and suggested that it was “essentially” the same as his scenario but for a few “minor changes” (Transcript 10.10.2014, page 114, lines 23 – 24). However, Mr C disagreed with the capitalisation rate used, the fact that the calculation included the income of the husband earnt in Adelaide as opposed to in the practice in R, and the report applied a “notional cost of … wages for … staff when [he] went with the wages actually incurred and a notional wage for the husband” (Transcript 10.10.2014, page 129, lines 33 – 35).
There were also issues with liabilities such as annual leave and long service leave not being brought to account in the S report. Importantly though the major queries that Mr C raised about the updated S report were that it included the “bump in income in July (2013)” in the calculation (unlike in Mr C’s Scenario 2), and it did not address the sustainability of the income generated in 2014 “given issues around staffing” (Transcript 10.10.2014, page 130, lines 3 – 6).
Mr C explained in his evidence that it is for the court to decide whether the income is sustainable, and that is why he presented three scenarios. For example, Scenario 2 “tries to pick up what the outcome would be in the event … the nine month period from October (2013) to June 2014 is sustainable” (Transcript 10.10.2014, page 130, lines 32 – 34).
However, putting aside those differences for the moment, there is a real difficulty with Mr C’s approach which provides the basis of this appeal, and it is that he looked to value the business on the basis, as he called it, of “the value to the owner”, namely the husband. Accordingly, it is in fact not the case as suggested by her Honour in [56], that Mr C’s approach “mirrored” the S approach, and nor is it the case as suggested by Mr C that his report and the S report were essentially the same. Indeed, they could not be more different, and her Honour plainly failed to appreciate that.
The S approach was to value on the basis of the capitalisation of future maintainable earnings, that being the traditional method of ascertaining the market value of a business. Indeed, Mr C commenced his valuation by doing the same, but then determined that a more realistic approach was to “assess the value of the income stream assuming the practice has a limited life (or at least the husband will operate the practice for a limited period) and then perhaps attempt to sell the practice” (paragraph 5.40 of his first report). Having done that Mr C calculated the goodwill component of the resultant valuation. He then included that figure in the adjusted balance sheet of the business and arrived at “the adjusted net asset value” of the practice (Scenario 1).
Mr C applied the same approach in Scenario 2, but with obviously different figures to account for the impact on revenue from changed circumstances.
For completeness, I confirm that Scenario 3 applied an entirely different approach, and was Mr C’s estimate of “the market value of the practice”, based primarily on a comparable sale, but involving much guess work.
In Scenario 1, and Scenario 2 for that matter, Mr C proceeded on the basis of the husband’s evidence that because of his age and his health, he would only work for five years more. That resulted in a value substantially less than the market value based on a capitalisation of future maintainable earnings, namely the value arrived at by S, and tellingly the value arrived at by Mr C at the end of the first stage of his valuation.
I accept the submission of the wife that the approach of Mr C was “erroneous in principle”. “Value to the owner” is certainly a well-recognised approach in family law, but it is applied where the circumstances require the valuer to take into account the benefits that accrue to an owner which might not necessarily be available to any third party purchaser. Those circumstances commonly arise where there is no market for the business, or more particularly the interest of the owner in the business. The prime example of that is where the interest of the party being valued is a shareholding, and usually a minority shareholding in a company, and more often than not a family company. What is then taken into account in the valuation, are the benefits which accrue to the owner through that shareholding. For example, in Harrison and Harrison (1996) FLC 92-682 the Full Court approved the approach of the trial judge in adopting the concept of “value to owner” where the facts were as follows (at page 83,087):
The husband’s submission was that although the shares can be artificially valued they are valueless because unrealisable. This ignores the benefits which accrue to the husband through their ownership. Amongst those benefits are the rights to receive dividends, which in the past have been substantial, the buffer of a loan account, the provision of a motor car, yacht and trailer, the contribution toward certain household bills and the flexibility of being, if not self-employed, employed by a company in which he is a shareholder and director and whose ethos allows him a degree of autonomy. It also effectively ignores the assets of and business conducted by the companies and the reality of the husband’s interest in them.
It is sometimes said that what is being ascertained here is a “realistic value” based upon the worth of the shares to the owner. However, Warnick J in Ramsey & Ramsey (1997) FLC 92-742, at 83,997 challenged that description commenting that in fact the value to the owner often has a strong “notional” aspect, in contrast to the reality of the market.
There has been one case that I am aware of where the concept of “the value to the owner” has been applied to other than a share valuation. That case Scott & Scott [2006] FamCA 1379. The issue there was the valuation of the husband’s interest in a medical practice. However, the trial judge found sufficient similarities between the valuation of that interest as a result of there being a partnership agreement, and the valuation of shares to be able to apply the concept of “the value to the owner”, and the Full Court agreed. The trial judge said this:
In my view there are similarities between the valuation of shares referred to in these cases and the valuation of the husband’s interest in the medical partnership and medical trust. The Partnership Agreement fixes the value of the goodwill but also provides for that value to be altered by agreement …
However, here the business is being valued where there is a market, and plainly there is no shareholding or partnership agreement involved. Moreover, there are no benefits to the owner that may not be available to a third party purchaser that need to be taken into account. Instead, what is being taken into account by Mr C are the personal circumstances of the husband, namely his age, his health, and his intention not to work longer than five years. These are not matters that should be taken into account in valuing the business (Nettler & Nettler [2009] FamCAFC 185 at [28]).
The major flaw though in applying the concept of “value to the owner” in this case is that the value arrived at is less than market value (based on the traditional valuation method of the capitalisation of future maintainable earnings). The flaw is that the owner, namely the husband, could simply sell the business for its market value and thus achieve far more than Mr C’s “value to the owner”.
Unfortunately, her Honour failed to engage with these issues. Her Honour’s approach was to outline the three scenarios from Mr C’s report and evidence, but then erroneously proceed on the basis that Scenarios 1 and 2 were valuations arrived at by the capitalisation of future maintainable earnings, and as such “mirrored” the approach of the S valuation. Her Honour was misled in reaching that conclusion by Mr C’s evidence that the S approach was essentially the same as his, but for a few “minor changes”.
In any event, on that basis her Honour then focussed on the differences between the valuations (apart from the basic approaches) referred to above, such as the different capitalisation rates and the different adjustments. Her Honour then concluded that she preferred the evidence of Mr C, subject to several “caveats” (at [56]). Those caveats related primarily to the differences between Scenario 1 and Scenario 2, and her Honour said this:
58.Upon consideration of the 30 June 2014 Financial Statements in August 2014, Mr [C] concluded that Scenario 1, based on the estimated FME, led to a valuation of $467,249 and that his Alternative Valuation scenario led to a valuation of $107,397. I conclude that Mr [C’s] Alternative Valuation calculations are unduly pessimistic. While I accept Mr [C’s] methodology, he has taken an excessively cautious approach in adopting Scenario 2 as his preferred opinion.
59.Allowing for the cautious approach he has adopted in his nominated Capitalisation Rate, I conclude that Scenario 1, based on the estimated Future Maintainable Earnings, provides a more reliable assessment of the value of the [A Practice]. I find the [A Practice] is valued at 467,249 (sic).
As can be seen, and to repeat, in making this finding her Honour failed to address the real difficulty with Mr C’s valuation, namely the inappropriate application of the “value to the owner” methodology. As a result, her Honour erred and the appeal must be allowed to that extent.
That renders it unnecessary to consider the alternative grounds of appeal challenging her Honour’s apparent acceptance of the capitalisation rate applied by Mr C, and the adjustments made by him to the financial statements, such as excluding the husband’s income earnt in Adelaide. I indicate though that I am not persuaded that her Honour erred in this regard, and in particular I consider that her Honour did not err in failing to find that the value of the practice was that set forth in the S valuation updated in accordance with the document MFIW5. For a start, as was conceded by the wife’s senior counsel, MFIW5 was not evidence before her Honour; it had no status other than as an aide memoir. Further, many of the calculations were at odds with Mr C’s calculations, and it was plainly open to her Honour to accept his evidence. Further still, it is not apparent that the updated calculations in MFIW5 appropriately take into account all of the relevant considerations that a valuation undertaken in 2014 would have taken into account; MFIW5 was prepared by the wife’s solicitor and not a qualified valuer. And finally, there was in fact no specific figure that her Honour could safely accept as the value of the business arising from the exercise by the wife’s counsel.
The cross-appeal
There were five grounds of appeal in the Notice of Cross-Appeal, but prior to the hearing of the appeal Ground 5 was abandoned. The remaining grounds of appeal are as follows:
1.That the Learned Trial Judge erred in finding the value of [A Practice] to be $467,249.00, such finding being against the weight of the evidence.
2.That the Learned Trial Judge erred in failing to find the value of the [A Practice] to be $103,397.00.
3.That the Learned Trial Judge erred in the exercise of her discretion in failing to take into account properly or at all the negative value of the [E] Street [R] property.
4.That the Learned Trial Judge erred in failing to exercise her discretion in requiring the wife to contribute to the costs of valuations.
Grounds 1 and 2
In relation to these grounds the complaint is not that Mr C inappropriately assessed the value of the practice on the basis of the “value to the owner”, but that her Honour should have accepted the evidence of Mr C that as between Scenario 1 and Scenario 2, the latter should be adopted by her Honour.
As already identified, Mr C employed the same approach of the “value to the owner” in both Scenario 1 and Scenario 2, and the difference between them related to the different adjustments made by Mr C as a result of the spike in income in July 2013, and the changed staffing arrangements.
Thus, it can be seen that adopting Scenario 2 does not avoid the error made by her Honour in accepting the evidence of Mr C as to the valuation approach to be utilised. As a result, Grounds 1 and 2 cannot succeed.
In any event, as submitted by the wife, at trial the husband did not submit that Scenario 2 should be adopted by her Honour, and thus it is not open to the husband to now seek to complain that her Honour was in error in not so finding.
Ground 3
Given the lengthy period of separation before the proceedings were heard, and the extent of the assets bought and sold in that period by the husband as well as the wife receiving a significant inheritance, her Honour determined to adopt an asset by asset approach, “but only in relation to those assets that are in the category of ‘stand alone’ assets that were acquired post separation, without any intermingling with the pre-separation asset pool. This includes the [E Street] property and the wife’s inheritance. The remaining assets should be considered holistically” (at [37]).
It seems that the husband does not challenge the asset by asset approach adopted by her Honour, but rather says that the E Street property and the debt associated with it should be included in the assets and liabilities to be considered “holistically”, and in not so finding her Honour erred in the exercise of her discretion.
The husband argues:
a)That there is no evidence that he “acted recklessly or wantonly or that he had any intent to diminish the parties’ pool of assets”;
b)That “the property was purchased at a time when the financial affairs of the parties were still intertwined”; and
c)That “the subsequent drop in value could not have been foreseen by the [husband] at the time of purchase”.
However, the fact is that the property was purchased by the husband without any input from the wife; the husband borrowed the whole of the purchase price; and the loan was not secured against any other matrimonial asset. In these circumstances this asset has no relationship to the marriage or the matrimonial asset pool.
This complaint is essentially a weight challenge, and it is unnecessary to repeat the well-known principles applicable to such a challenge. Suffice to say that what needs to be established is that the trial judge was plainly wrong, her decision being no proper exercise of her discretion. Further, it is never enough that an appellate court would have reached a different conclusion when no error of law or mistake of fact is established (Gronow v Gronow (1979) 144 CLR 513). Here, it has not been established that her Honour’s conclusion was plainly wrong such that the decision was no proper exercise of her discretion.
This ground of appeal has no merit.
Ground 4
Given that the appeal against sub-paragraphs 7(b) and 7(c) of the orders for property settlement must succeed as a result of her Honour’s error in accepting the approach of Mr C to the valuation of the professional practice, and as I will explain shortly, that aspect of these proceedings will be remitted for rehearing, it will also be appropriate to remit for rehearing the question of the costs of the valuations. A significant factor in determining who should bear those costs, or in what proportions, will be what each party ultimately receives by way of property settlement, and the circumstances surrounding the obtaining of the valuations including the valuation[s] that I expect will be required for the purposes of a rehearing.
Accordingly, to achieve that outcome I will allow the appeal against her Honour declining to order that the wife make any payment to the husband on account of the valuations.
The outcome of the appeal and the cross-appeal
I have found merit in Grounds 2 – 8 of the appeal, and for reasons which flow from that finding, Ground 4 of the cross-appeal also succeeds.
The question then becomes whether I can re-exercise the discretion or whether I should remit the matter for rehearing by the Federal Circuit Court of Australia.
The wife’s senior counsel submitted that I could simply amend the relevant orders of the trial judge by in effect substituting the amounts that would apply if the S report was accepted utilising the updated figures. It was suggested that this would not entail a re-exercise of the discretion. However, even if I accepted that that would be the case, which frankly I do not, I have found that her Honour erred in accepting the approach of Mr C, but to repeat, I am not persuaded that her Honour erred in finding that the adjustments made and the capitalisation rate applied by Mr C should be preferred to those proposed by S, and specifically I do not consider that her Honour erred in declining to rely upon the calculations set out in the wife’s “updated [S] market valuation”. Further, counsel was not able to provide this court with a precise amount to be substituted as the value of the business.
Plainly there needs to be further evidence presented in relation to these matters, and given what has occurred in these proceedings to date, I would expect that evidence to be controversial and require cross-examination.
In these circumstances I do not consider that I am able to re-exercise the discretion, even with further evidence being presented. Thus, sub-paragraphs 7(b) and 7(c) of the order will be set aside, and the issue of the valuation of the husband’s professional practice, as well as the question of the costs of all valuations will be remitted for rehearing to the Federal Circuit Court of Australia by a judge other than Judge Kelly.
Costs
At the conclusion of the hearing, submissions were received from the parties as to the question of costs depending on the result of the appeal and the cross-appeal.
In the event that the appeal was successful the wife sought an order for costs, as did the husband if the cross-appeal was successful.
The wife was partially successful on the appeal, and the husband was partially successful on the cross-appeal, ironically though as a result of the wife‘s success on the appeal. Clearly though the work involved in the success of the appeal would have far exceeded the work involved in the success of the cross-appeal.
In the circumstances, and despite the latter disparity, the usual principle encapsulated in s 117(1) of the Act should apply, and each party should bear their own costs. However, because the appeal has succeeded on a question of law, and there will be no order as to costs, both parties are entitled to costs certificates pursuant to the Federal Proceedings (Costs) Act 1981 (Cth) for both the appeal and the rehearing.
I certify that the preceding ninety-eight (98) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Strickland delivered on 29 March 2017.
Associate:
Date: 29 March 2017
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