Wynter & Colling
[2022] FedCFamC2F 212
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Wynter & Colling [2022] FedCFamC2F 212
File number(s): NCC 2085 of 2015 Judgment of: JUDGE BETTS Date of judgment: 3 March 2022 Catchwords: FAMILY LAW – PROPERTY – where the husband defaulted in his obligations causing the wife to receive less than her proper entitlement under final consent orders – where the wife initially brought enforcement proceedings and the husband then became bankrupt – whether the bankruptcy releases the husband from the debt – where the wife additionally seeks relief pursuant to s79A – effect of Bankruptcy Act – just and equitable outcome. Legislation: Bankruptcy Act 1966 (Cth)
Family Law Act 1975 (Cth), Pt VIII
Cases cited: Black & Kellner (1992) FLC 92-287
Clyne v Deputy Commissioner Of Taxation (1984) 154 CLR 589
Cummings v Claremont Petroleum NL (1996) 185 CLR 124
Harris & Caladine (1992) FLC 92-217
Jones v Dunkel (1959) 101 CLR 298
McMaster [1991] 15 FLR 215
Valder & Saklani [2021] FamCAFC 142
Division: Division 2 Family Law Number of paragraphs: 130 Date of last submission/s: 20 August 2021 Date of hearing: 19 and 20 August 2021 Place: Newcastle Solicitors for the Applicant Byrnes Lawyers Solicitors for the Respondent Lindeman Lawyers ORDERS
NCC 2085 of 2015 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: MS WYNTER
Applicant
AND: MR COLLING
Respondent
ORDER MADE BY:
JUDGE BETTS
DATE OF ORDER:
3 MARCH 2022
THE COURT ORDERS THAT:
1.If it is necessary, the wife has leave to bring these proceedings against the husband nunc pro tunc pursuant to s 58 of the Bankruptcy Act.
2.That pursuant to s 79A(1)(c) of the Family Law Act, orders 14 and 15 of the consent order of 4 December 2015 are varied so that, in lieu of the payments to the wife set out therein, it is ordered that:
“The husband is to forthwith pay the wife the sum of $105,355.16 together with interest thereon, calculated in accordance with the relevant rules of court from 14 December 2016 to the date of payment.”
3.Pending the husband’s discharge of his obligations in accordance with order 2 herein, the husband is restrained by injunction from:
(a)Selling, disposing of, alienating or encumbering his interest in the business known as B Company other than in compliance with order 2;
(b)Obtaining unsecured personal debt in his sole name or that of the said business other than in compliance with order 2;
(c)Obtaining any chattel mortgage, secured finance against plant, equipment or motor vehicles, or any further credit in his sole name or that of the said business other than in the course of compliance with order 2.
4.The proceedings are adjourned to 9.30am on 17 March 2022 for consideration of the wife’s costs application.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under a pseudonym Wynter & Colling has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
JUDGE BETTS
INTRODUCTION
On 4 December 2015 a Judge of the (then) Federal Circuit Court made a final order by consent adjusting the respective matrimonial property interests of the applicant wife, Ms Wynter, and the respondent husband, Mr Colling, following the breakdown of their twenty-five (25) year relationship.
Amongst other things, the order provided for the husband to retain the parties’ business known as “B Company”, which the husband had established and conducted as a sole trader since 2000. The order required the husband to indemnify the wife in respect of any debts of B Company, as well as requiring him to be solely liable for various loan and mortgage repayments.
The husband defaulted in those obligations, ultimately causing the wife to receive $105,366.16 less than her proper entitlement under the order.
In May 2017 the wife brought enforcement proceedings against the husband pursuant to s 105 of the Family Law Act 1975 (Cth) (“the Act”). Therein she sought declaratory relief that this was the sum owed to her as a result of the husband’s breaches/defaults, and an order that he pay her this sum, together with interest and costs.
When the husband belatedly filed his response material on 21 September 2017, he disclosed for the first time that he no longer owned and operated B Company, but that the business was now conducted by a proprietary company C Pty Ltd (“C Pty Ltd”) of which he and his partner Ms D were directors and equal shareholders (the name “C Pty Ltd” being an amalgam of their respective Christian names.) The company had been established over a year prior.
On 5 December 2017, the husband successfully petitioned for bankruptcy; the bankruptcy took effect on 9 December 2017.
The wife was highly suspicious of the husband’s motivations. She considered that C Pty Ltd was nothing more than a puppet or alter ego of the husband, created to enable him to retain the business during his bankruptcy and evade his payment obligations to her. She considered that the bankruptcy was also a ruse and that Ms D would only be “babysitting” the business during his bankruptcy.
The wife required leave of the court to continue the proceedings against the husband: s 58(3) of the Bankruptcy Act. She continued to press her case but without formally seeking such leave. She informed the Bankruptcy Trustee about the proceedings but the Trustee did not participate. Effectively the proceedings languished for a time.
Eventually the wife joined both C Pty Ltd and Ms D to the proceedings in order to seek relief against them if necessary, including under s 106B of the Family Law Act. C Pty Ltd never participated in the proceedings, nor did it file any material. Ms D belatedly filed her own material in May 2020.
On 10 December 2020 the husband was discharged from bankruptcy, his estate having made no payments to the wife in the intervening period. The husband promptly resumed control of B Company as a sole trader and has since continued operating the business ever since; C Pty Ltd was de-registered.
Concerned that the bankruptcy may have released him from the debt and thereby defeated her enforcement application, the wife changed tack. In August 2021 she filed an Amended Initiating Application seeking relief against the husband pursuant to s 79A of the Family Law Act.
She specifically sought to discharge various clauses of the consent order and in lieu thereof she sought an order that the husband be ordered to pay her $105,366.16 together with interest and costs. Though the husband was no longer a bankrupt, the wife served a copy of her application upon the husband’s Bankruptcy Trustee who acknowledged receipt and advised that he did not intend to participate in the proceedings.
In her written submissions after judgment was reserved, the wife pressed her original enforcement application as an alternative position in the event that the court considered that the bankruptcy had not discharged the husband’s debt pursuant to the consent order.
The husband opposed the making of any order requiring him to pay money to the wife. While he broadly accepts the wife’s calculations as to the debt he owes her pursuant to the consent order, he contends that any enforcement application must fail because the bankruptcy released him from such debt.
As for the wife’s s 79A application, the husband contends that it would be unjust and inequitable to require him to make any further payment to the wife as she is in a much stronger financial position than he is. He says that his bankruptcy was genuine and that it resulted from the order itself, which he says contained substantial errors or omissions which unfairly operated to the wife’s financial advantage and his disadvantage. To be clear, the husband does not himself seek any relief under s 79A. He merely seeks that the wife’s s 79A application be dismissed as a matter of discretion.
By the time the proceedings came on for trial on 19 and 20 August 2021, the husband and the wife were the only remaining parties, the wife having discontinued her claims against C Pty Ltd and Ms D.
THE TRIAL
At trial the wife was represented by Mr Byrnes solicitor. He relied upon the wife’s Outline of Case Document filed 16 August 2021, her Amended Initiating Application of 4 August 2021, her Financial Statement of 6 August 2021 and her Trial Affidavit of 6 August 2021. Mr Byrnes also tendered into evidence the financial records of C Pty Ltd for the 2016, 2017, 2018 and 2019 financial years. [1]
The husband was represented by Mr Lindeman solicitor, who had only very recently received instructions to act on his behalf. The husband had not filed any recent material. Mr Lindeman relied upon the husband’s Response filed 22 January 2021, the husband’s Financial Statement of 20 May 2020 and the husband’s Trial Affidavit filed 22 January 2021. As will become apparent from the history of the matter, the husband’s failure to file updated material – particularly a Financial Statement – only underscores the court’s concerns about the husband’s lack of financial disclosure and his credibility generally.
I also had the benefit of written submissions from the parties.
The wife was the first witness at trial. She consistently came across as defensive, if not somewhat resistant to the cross-examination process. I attribute this to her strong sense of grievance at the husband’s actions rather than to any desire on her part to be evasive or difficult with the court. In fact she made concessions in the witness box (including as to the value of her own real property interests) and overall I consider her evidence to be broadly reliable.
The husband’s demeanour was very different; he came across as fairly calm and collected throughout. However, much of his evidence was inconsistent or otherwise unreliable.
As observed earlier, the husband had not provided financial disclosure to the wife – even so much as simple bank statements of B Company since he resumed control of it December 2020. His evidence as to his relationship with Ms D was confusing at best, if not positively evasive. Despite admitting that his relationship with her was still on foot, he had clearly chosen not to call her as a witness notwithstanding her intimate knowledge as to relevant events concerning C Pty Ltd and its operations. In my view Ms D was a material witness. I infer that the husband did not call her because her evidence would not have assisted his case: Jones v Dunkel (1959) 101 CLR 298.
After reserving judgment, the court of its own motion re-listed the proceedings on 2 February 2022 to clarify the wife’s affidavit calculations. I invited further written submissions from the wife and these were filed on 14 February 2022. The husband did not wish to file anything in response.
THE FIRST ROUND OF PROCEEDINGS CULMINATING IN THE CONSENT ORDER
The proceedings themselves were very brief; both parties were represented throughout. The husband filed on 5 August 2015 and on the first return date in September the matter was set down for mediation on 19 November. The matter settled at mediation, and the consent order was duly made a few weeks later.
Brevity in these types of proceedings is usually beneficial for all concerned. But in hindsight the litigation process perhaps moved a little too quickly in this case. In particular, the wife was concerned about the husband’s lack of full and frank financial disclosure leading up to the mediation. The wife’s concern was reasonable because, although she had assisted with some bookkeeping work and helped prepare PAYG and tax documents during the marriage, the husband was responsible for managing the parties’ financial arrangements. Moreover, he had been solely managing “B Company” since separation. The wife was therefore dependent upon the husband to provide her with full and frank disclosure as to the financial aspects of the business operations.
The wife’s concerns about the husband’s lack of full and frank disclosure were amplified by the late flurry of disclosure documents he provided in the shadow of the mediation, including on the day prior.
In the limited time available before the mediation, the wife’s solicitor identified some unexplained and significant cash withdrawals by the husband apparently totalling some $178,000. Each party in fact complained about the other’s post-separation withdrawals from the business bank account. Various items of property items had not been formally valued, although B Company’ had some $86,701 in its bank account. Neither party knew the precise tax liabilities arising out of the past operation of B Company, although the wife’s evidence is that in May 2014 the business accountant had told her that the liabilities were around $40,000 – a figure that would have been outdated by the time of the mediation
In short, going into the mediation there were some potentially significant financial “unknowns”. Such matters would be relevant to the question of what would constitute a just and equitable property division between the parties. It was therefore incumbent on the parties to either seek to adjourn the mediation so as to further explore such unknowns, or to proceed with the mediation in the absence of definitive evidence and answers and try to negotiate a mutually acceptable settlement on a commercial basis.
The parties in this case, each with the benefit of legal advice, chose the latter course. They were entitled to do so. The settlement they reached was embodied in the terms of the consent order submitted to the court for its approval.
The court’s decision to make the order involved a substantive exercise of discretion, not mere “rubber stamping”: Harris & Caladine (1992) FLC 92-217. Put shortly, the court determined that, on the evidence before it, the consent order did affect a “just and equitable” property division as required by s 79 of the Act. Upon the making of the order, the court’s jurisdiction was exhausted, subject only to any application to enforce the order or to seek to re-open it under s 79A.
THE TERMS OF THE CONSENT ORDER
By way of overview, the consent order provided for each of the parties to retain various assets and to assume responsibility for various liabilities. Their two (2) real properties were to be sold, namely the former matrimonial home at Suburb E and a commercial unit at F Town.
Upon settlement of the sale of both real properties, the net sale proceeds of each were to be divided between the parties in accordance with a formula whose stated effect was to create an overall 65% - 35% division of the net property in the wife’s favour taking into account the agreed values of various other matrimonial assets and liabilities. Upon these cash adjustments being made, the property settlement would be complete.
To the extent they are relevant, the orders were in the following terms:
2.That upon completion of the sale of the former matrimonial home…the parties shall distribute the proceeds of sale in the following order and priority:
(a)In discharge of the mortgage secured over the former matrimonial home to [G Bank];
(b)…
(c)…
(d)…
(e)In payment to the wife of an amount calculated in accordance with order 14;
(f)In payment of the balance to the husband.
4.That upon completion of the sale of the commercial unit…the parties shall distribute the proceeds of sale in the following order and priority:
(a)In discharge of the mortgage secured over the commercial unit to [G Bank];
(b)…
(c)…
(d)…
(e)In payment to the wife of an amount calculated in accordance with order 15;
(f)In payment of the balance to the husband.
5.It is noted the net value of the matrimonial pool of assets is calculated as the total of the following:
(a)The business known as [B Company], plus $ 201,361
(b)[Motor Vehicle 1], plus $ 60,000
(c)[Motor Vehicle 2], plus $ 15,000
(d)[Motor Vehicle 3 and equipment], plus $ 20,000
(e)Proceeds of sale of the former matrimonial home after payment of the liabilities referred to in order 2(a), (b), (c) and (d), plus
(f)Proceeds of sale of the commercial unit after payment of the liabilities referred to in order 4(a), (b), (c), and (d), plus
(g)The husband’s superannuation entitlements, plus $ 60,000
(h)The wife’s superannuation entitlements, less $ 12,000
(i)Amount paid by husband to [H Finance] as noted in Notation 10, less $ 47,831.72
(j)[B Company] business overdraft $ 46,000
6.It is noted that the net value of the matrimonial pool of assets referred to in Notation 5 is to be divided between the parties as to 65% to the wife and 35% to the husband.
7.That from the date of these Orders the husband shall solely pay and bear as and when they fall due all repayments of principal and interest…in relation to the mortgages secured over the former matrimonial home and the commercial unit…and shall indemnify the wife in relation thereto.
11.That the husband be declared to be the sole legal and beneficial owner of all right, title and interest in and to:
(a)all cash at bank and other moneys invested by him in his sole name and the name of “[B Company]”;
(b)all furniture and personal effects in his possession;
(c)the motor vehicles in his possession;
(d)all and any superannuation entitlements he may have;
(e)the business known as “[B Company]”;
(f)all tools and equipment in his possession.
12.That the wife be declared to be the sole legal and beneficial owner of all her right, title and interest in and to:
(a)all cash at bank and other moneys invested by her in her sole name;
(b)all furniture and personal effects in her possession;
(c)the [Motor Vehicle 1] and [Motor Vehicle 3] in her possession;
(d)all and any superannuation entitlements she may have;
(e)all [equipment] in her possession.
13.That each party be solely liable for all and any debts in their sole name and each party shall indemnify the other in relation thereto, save and except the husband shall indemnify the wife with respect of any liability she may have in relation to “[B Company]”.
14.The amount to be paid to the wife in accordance with Order 2(e) is calculated in dollar terms as follows:-
65% of the net value of the matrimonial pool of assets referred to in Notation 5, less
(a)[Motor Vehicle 1] $ 60,000
(b)[Motor Vehicle 3 and equipment] $ 20,000
(c)The wife’s superannuation entitlements $ 12,000
(d)And the amount paid to the wife pursuant to order 4(e).
15.The amount to be paid to the wife in accordance with order 4(e) is calculated in dollar terms as follows:-
65% of the new value of the matrimonial pool of assets referred to in Notation 5, less
(a)[Motor Vehicle 1] $ 60,000
(b)[Motor Vehicle 3 and equipment] $ 20,000
(c)The wife’s superannuation entitlements $ 12,000
(d)And the amount paid to the wife pursuant to Order 2(e).
THE WIFE’S SECTION 79A APPLICATION
The wife’s application is based upon s 79A(1)(a), s 79A(1)(b) and s 79A(1)(c) of the Act.
79A Setting aside of orders altering property interests
(1) Where, on application by a person affected by an order made by a court under section 79 in property settlement proceedings, the court is satisfied that:
(a) there has been a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information), the giving of false evidence or any other circumstance; or
(b) in the circumstances that have arisen since the order was made it is impracticable for the order to be carried out or impracticable for a part of the order to be carried out; or
(c) a person has defaulted in carrying out an obligation imposed on the person by the order and, in the circumstances that have arisen as a result of that default, it is just and equitable to vary the order or to set the order aside and make another order in substitution for the order...
(d)…
(e)…
the court may, in its discretion, vary the order or set the order aside and, if it considers appropriate, make another order under section 79 in substitution for the order so set aside.
For the wife to succeed under s 79A(1), a two-step process is involved. She must first establish that a relevant ground for relief exists and if so she must then satisfy the court that, in the exercise of discretion, it is appropriate to vary or set aside the original order and/or make another order pursuant to s 79. The wife carries the onus of proof throughout.
HAS THE WIFE MADE OUT A GROUND FOR RELIEF UNDER SECTION 79A?
THE “DEFAULT” GROUND: SECTION 79A(1)(C)
I am satisfied that the husband “defaulted” in carrying out his obligations pursuant to the consent order: s 79A(1)(c).
By way of background, the order was implemented smoothly up until the commercial unit was sold in March 2016. At settlement, clause 4(a) of the order provided for the mortgage to be discharged, resulting in a leftover balance of $93,488.16 to be divided between the parties in accordance with clauses 14 and 15 of the consent order.
The husband was unhappy about this. He requested that those leftover proceeds be applied to reduce his own loan for the commercial unit in the amount of $100,000 which was secured by mortgage over the Suburb E property only. The wife would not agree to apply the net sale proceeds in that way and insisted on the terms of the order being followed. Accordingly, only the mortgage over the commercial unit was discharged at settlement; the leftover $93,488.16 was banked to the wife’s solicitor’s trust account.
I am satisfied that the husband was aggrieved by this. But for now he continued paying the Suburb E mortgage and loans as required by the order.
The husband’s evidence is that around June 2016 he became aware that the tax liabilities in respect of the operations of B Company in FY 2014 and FY 2015 amounted to $198,000. Clause 13 of the consent order required that he indemnifying the wife for same. His case is that this amount came as a crushing blow.
Given events which follow, I accept that the husband became aware of the tax debt around mid-2016 although I am unable to make a finding as to the specific amount owed. In short, this is because the evidence as to the tax debt is rather unsatisfactory. Remarkably, even at the final hearing the husband had not produced a single document from the ATO. The “best” evidence as to the quantum of the tax debt is the husband’s Bankruptcy Trustee’s Report to Creditors of 22 December 2017, some eighteen (18) months later, in which the ATO is nominated as a creditor at that time in the amount of $104,587.
I am satisfied that from July 2016 the husband actively set out to evade his financial responsibilities to both the wife and the ATO as creditors.He reneged on his obligations to the wife pursuant to the consent order and at the same time he surreptitiously took active steps to retain “B Company” and put it out of the reach of the wife or the ATO.
The husband’s defaults pursuant to the order began after 4 July 2016 when he unilaterally ceased making any further mortgage repayments for Suburb E, squarely contrary to clause 7. As a result, additional mortgage interest accrued and the wife soon received default notices.
On 18 July 2016, the husband and his partner Ms D incorporated C Pty Ltd. The husband and Ms D were each appointed directors, with each holding a $1 share.
C Pty Ltd then “acquired” the business of B Company from the husband in opaque circumstances. There was no written contract of sale. Although the business had been valued at $201,361 in the consent order, there is no evidence that C Pty Ltd paid any money to the husband to acquire the business from him, or that Ms D paid the husband any money for her half shareholding.
The full extent of the loss to the wife only crystallised later when the parties sold the Suburb E home for $710,000. Unknown to the wife, the B Company business overdraft was secured by the Suburb E mortgage. Clause 2(a) of the order required discharge of the Suburb E mortgage at settlement but clause 13 also required the husband to indemnify the wife for all liabilities in relation to B Company, which included the overdraft.
Those two clauses need to be read together somehow. If clause 13 takes precedence over clause 2(a), then the husband is required to indemnify the wife for the full amount of the business overdraft to the extent that it formed part of the Suburb E mortgage. But if clause 2(a) is given precedence over clause 13, then the mortgage has to be discharged regardless of whether or not the business overdraft forms part of it.
I much prefer the first interpretation to the second: generalia specialibus non derogant.
But perhaps for pragmatic reasons the wife took a “middle road” approach – namely that the overdraft sum of $46,000 specified in the order could legitimately be treated as part of the “Suburb E mortgage” and discharged at settlement. Any amounts in excess of this were the husband’s sole responsibility.
Given the nature of these proceedings, I will also adopt the wife’s interpretation which I consider generous to the husband. In my view the $46,000 overdraft figure in the order was purely there as a notional figure for the purposes of calculating the final cash adjustments between the parties inter se.
But even on the wife’s approach, the overdraft presented an insoluble problem. The overdraft balance was not $46,000 but $143,000 and, as a secured creditor, the mortgagee required repayment in full in order to release the mortgage at settlement.
The husband was content for that to occur; it would cause the wife to suffer a substantial loss of her entitlements under the order. She demanded that he instead refinance the “excess” overdraft (ie. the extra $97,000) prior to settlement.
The husband claims that he tried to do so but was unable to. In my view he was at best half-hearted about refinancing and I simply do not accept that he made a genuine effort to do so. He was clearly unhappy with being lumbered with the tax debt and he even went so far as to suggest that the $46,000 overdraft balance in the order was no more than a “typo” and that the correct figure should always have been $146,000. He claimed to have had discussions with his then solicitor and that she had assured him that it the “typo” would be “sorted out” in due course.
The husband did not call his former solicitor as a witness at trial, nor did he attempt to tender any documents exchanged between them in this respect. But whatever discussions he may have had with her, I reject his evidence that the $46,000 figure was a “typo”. The parties both knew at the mediation that the overdraft balance had increased to $145,255 albeit that the wife says she only found out the true balance at the mediation itself. She attributed most of this overdraft increase to the husband having withdrawn $80,000 from the overdraft the day after separation and so the topic of the overdraft was clearly a topic of negotiation. I consider that the $46,000 figure in the order was a deliberate and informed compromise figure arrived at by the parties. They both signed the order, as (presumably) did their solicitors. To suggest that it was a “typo” that everyone missed is simply not credible.
The incoming purchasers began threatening legal proceedings to enforce settlement. Time was running out.
Ultimately, on 14 December 2016 settlement took place and the mortgage (including the full amount of the overdraft of $143,158.34) were discharged in full.
The husband chose not to make any (or any substantial) payments to reduce the overdraft prior to settlement. This is so notwithstanding that it is now known that B Company (C Pty Ltd) had some $68,210 in its bank accounts when settlement occurred.
This was a substantial default by the husband of his obligations pursuant to clause 13 of the consent order.
I accept the wife’s affidavit evidence that:
(a)had the husband kept up the repayments for the Suburb E (home) mortgage after 4 July 2016, its balance at settlement would have been $232,767 instead of $239,316.69. The difference between the two figures is $6,549.69;
(b)had the husband kept up the repayments for the Suburb E (commercial unit) mortgage after 4 July 2016, its balance at settlement would have been $100,000 instead of $104,951.22. The difference between the two figures is $4,951.22;
(c)the overdraft payout was $143,158.34 instead of $46,000. The difference between the two figures is $97,158.34.
In summary, the husband’s defaults resulted in the net sale proceeds for the Suburb E property being depleted by $108,659.25.
I accept the wife’s affidavit evidence quantifying her personal loss arising from the defaults:
105.In summary, the amounts required to discharge the loans to the [G Bank] were $108,659.25 greater than what they should have been.
106.The net proceeds of sale amounted to $195,749.24.
107.With the additional $108,659.25 referred to above the total net proceeds of sale should have been $304,408.49.
108.As noted above, the Orders made on 4 December 2015 provide a formula to calculate the amount I was to receive.
109.Adopting that formula the amount I should have received should have been calculated as follows:
[B Company] $201,361
[Motor Vehicle 1] $60,000
[Motor Vehicle 2] $15,000
[Motor Vehicle 3 and equipment] $20,000
Proceeds of sale of former matrimonial home $304,408.49
Proceeds of sale of commercial unit $93,488.81
Husband’s superannuation entitlements $60,000
Wife’s superannuation entitlements $12,000
Sub Total $766,258.30
Less amount paid Husband to [H Finance] $47,831.72
Net matrimonial pool $718,426.58
(The amount referred to in Order 5(j) is included when calculating the net proceeds of sale of the home as set out above).
110.65% of the net pool totals $466,977.27.
111.Pursuant to the Orders I retained the following:
[Motor Vehicle 1] $60,000
[Motor Vehicle 3 and equipment] $20,000
My superannuation entitlements $12,000
Total $92,000
112.To receive my 65% share I was required to receive $374,977.27 from the net proceeds of sale.
113.Instead, I received $269,611 (as noted above).
114.The shortfall was, therefore, $105,366.16.
THE “IMPRACTICABILITY” GROUND: SECTION 79A(1)(B)
The wife contended that the husband’s bankruptcy rendered it impracticable to carry out the order.
As the Full Court recently observed in Valder & Saklani [2021] FamCAFC 142:
18. …It is well established that once a person becomes a bankrupt, his or her creditors lose “the remedies against the person and property formerly available” for which there is “substituted a right to prove against the estate” (Clyne v Deputy Commissioner Of Taxation (1984) 154 CLR 589 at 594). Further, “the bankrupt is divested of both his interest in his property and liability for his provable debts” (Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 138).
19. A discharge from bankruptcy operates to release the bankrupt “from all debts (including secured debts) provable in the bankruptcy” as per s 153(1) of the Bankruptcy Act.
The question is whether the debt owed by the husband to the wife arising as a result of his defaults pursuant to the consent order constituted a “provable debt” under the Bankruptcy Act. Section 82 of the Bankruptcy Act provides the relevant definition:
(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
…
(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.
…
(4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value.
The wife contended that, as the court had not determined her enforcement application or made findings quantifying the wife’s losses at the date of the bankruptcy, the debt remained in the nature of unliquidated damages within s 82(2).
I respectfully reject that argument. The wife’s enforcement application had been able to quantify the debt down to the very cent owed ($105,366.16) to which her enforcement application had merely added some legal costs, thereby bringing the total claim to $110,046.16. Moreover, the husband’s debtor’s petition acknowledged the debt in the rounded amount of $110,000. The difference in quantum is de minimis and in my view the debt clearly fell within the ambit of s 82(4) of the Bankruptcy Act.
In my view, the debt owed by the husband to the wife was a provable debt. It follows that the husband’s bankruptcy rendered the proper implementation of the orders “impracticable” thereafter: s 79A(1)(b).
STEP 2 – EXERCISING THE DISCRETION WITHIN SECTION 79A
It is the wife’s case that C Pty Ltd was no more than a puppet or an alter ego to enable him to avoid his financial responsibilities to her. She also contends that the bankruptcy itself was a ruse
I accept that to be so. I have already made various findings about the husband’s conduct but some further observations and explanations are needed.
The husband was less than frank with the Bankruptcy Trustee. He initially told the Trustee that B Company had ceased to trade in June 2016 and that, upon its closure, no assets had remained.
Yet the Balance Sheet for C Pty Ltd as at 30 June 2017 specifically included business goodwill as an asset with a value of $100,000 “at cost”. In his investigations the Bankruptcy Trustee confirmed that C Pty Ltd had in fact acquired the business goodwill from the husband for the $100,000 stated but that no money had changed hands. The husband had instead provided C Pty Ltd with interest-free vendor finance of $100,000, contemporaneously opening a shareholder capital account in his own name with an initial credit in that amount.
The husband had been drawing down on his $100,000 shareholder capital account. In particular, he had C Pty Ltd pay for his own personal expenditure including (amongst other things) overseas and interstate trips, food, accommodation, drinks, clothing, legal fees and tax bills as set out in the wife’s affidavit. He effectively had access to a personal “line of credit” arising out of the vendor-free finance arrangement.
The husband’s vendor-free finance was an artifice. If the husband was genuine about paying the wife and the ATO then he needed “cash” – perhaps raised by a sale of the business (or a share in it) or by some other refinancing arrangement. A vendor finance arrangement only benefitted him, not the wife or the ATO.
The husband told the Bankruptcy Trustee that he had resigned as an office holder of C Pty Ltd. This was untrue; he only resigned later on.
The husband told the Bankruptcy Trustee that his wages were $37,650 whereas Ms D’s wages were $56,392. This was incongruous given that B Company had always been the husband’s business prior to it being acquired by C Pty Ltd and given that it was the husband’s goodwill that C Pty Ltd had acquired. There seems no logical basis for Ms D to have been paid the higher stated income of the two, particularly noting that the husband’s taxable income in FY 2013 and FY 2014 had been $126,078 and $182,494 respectively.
It is also noteworthy that the husband only disclosed the existence of C Pty Ltd to the wife a year after it had taken over the B Company business, and only then after she had commenced enforcement proceedings. Even so, his September 2017 Financial Statement did not disclose his shareholder capital account which had a ledger balance at the time of $68,452. Instead he valued his interest in C Pty Ltd at a mere $1.
It is not as though the B Company business was struggling financially after the husband’s bankruptcy; it remained profitable. In FY 2017, the Financial Statements of C Pty Ltd disclose gross sales of $731,000 and a gross trading profit of $388,763. Even after payment of wages, C Pty Ltd still made a net profit after tax of $131,759 which formed retained earnings for the company. In FY 2018, C Pty Ltd made a net profit after tax of $42,625 raising its retained earnings to $174,383.77. In FY 2019, its net profit before tax was $123,076.
On 6 December 2020, just days prior to the husband being discharged from bankruptcy, C Pty Ltd was de-registered – either by the husband or by Ms D. Ms D claimed she did not de-register the company and that she only found out it had been de-registered in February 2021. The husband claims he did not de-register it himself, although he accepts that it was de-registered at ASIC’s request. This is plausible given that ASIC had apparently commenced strike-off proceedings against C Pty Ltd arising out of an $11,000-odd default judgment relating to a workers’ compensation matter.
If it was the husband who de-registered C Pty Ltd, he ought not to have done so given he was not a director at the time and given that he was also an undischarged bankrupt. If it was Ms D who did so, then why deny it?
In any event the husband promptly resumed operating B Company as a sole trader in December 2020. There was no formal contract between he and C Pty Ltd; there is no evidence that any money changed hands or that there was any proper winding-up or accounting to the husband or Ms D in respect of the company’s operations. The company simply ceased to exist, although once again the wife did not find out until much later (6 months in fact).
As with many of the husband’s financial dealings, unanswered questions abound.
The husband admitted in the witness box that he had never wanted to set up a company and that he (and Ms D) had always planned to revert back to conducting B Company as a sole trader.
I am satisfied that once his bankruptcy was ended C Pty Ltd had outlived its usefulness.
THE DISCRETIONARY EXERCISE
I have earlier observed that both s 79A(1)(b) and s 79A(1)(c) are engaged in this case.
Though the wife’s s 79A claim is something of a “scattergun”, she is not seeking a fresh re-exercise of the court’s discretion under s 79 as such. The orders the wife seeks are more in the nature of a variation aimed at restoring herself to the financial position she would have been in had the husband not defaulted.
Her application is best and most appropriately dealt with pursuant to s 79A(1)(c). Prima facie, given my factual findings in this case her proposed variation appears to be the very manifestation of “justice and equity”.
This view is only fortified by the husband’s blatant and ongoing failure to make full and frank disclosure to the wife in respect of B Company since he resumed running the business as a sole trader, in the witness box that he was aware of that obligation. Citing well-known authorities such as Black & Kellner (1992) FLC 92-287, Mr Byrnes contended that the husband ought not be given the benefit of his own lack of disclosure in terms of the potential value of B Company. I accept the general tenor of that submission. The husband’s non-disclosure makes it quite artificial, if not impossible, to undertake an entirely “fresh” exercise of discretion under s 79.
I turn now to those matters which the husband says weigh against the exercise of discretion in the wife’s favour.
The husband has raised various concerns about the conduct of the mediation, asserting that the wife was belligerent, unreasonable and unwilling to negotiate in good faith. In effect this is a complaint that he was under “duress” at the time.
I reject that argument. The husband was legally represented and was free to agree, or not agree, to the terms of the order. If he wanted to clarify values or debts etc, he could have sought to adjourn the mediation or otherwise delayed signing the order until these matters were clarified. He did none of those things. Nor for that matter did the wife.
As for the figures set out in the order, these represented an agreed compromise of each party’s legal position; it is too late now to complain about alleged undervalues or overvalues of assets in the order. The order deliberately omitted values for certain specific assets (such as the bank account balance of B Company and various chattel items) and liabilities (such as the tax debts).
The parties were free to enter into an order in the terms they did; each presumably had good reasons for doing so. The court cannot and should not look behind such matters; to do so now would be akin to “unscrambling an omelette”.
As for the husband’s various allegations about the wife “wasting” money during the marriage or otherwise making limited contributions, these are matters that must be seen as having found expression in (or been merged in) the terms of the consent order. In the circumstances of this case, it would not be just and equitable for the husband to be able to re-agitate the 65% - 35% division based on these historical matters which are in any event disputed.
I should also observe that since separation the wife has had the ongoing care of the parties’ daughter X (born …2006) on essentially a full-time basis from 2017 onwards; X has not spent any time with the husband. So the wife’s ongoing parenting contributions have continued and will continue for a few more years. Moreover, the husband does not pay any regular child support for X. The wife’s unchallenged evidence is that he owes her arrears of $115,524 based on administrative assessments of his child support income.
In short, since the making of the consent order the wife’s entitlement has likely increased rather than decreased.
I turn then to the husband’s strongest arguments, namely:
(a)that his bankruptcy ought to be given its full effect at law, with the result that the debt should remain permanently extinguished;
(b)his allegedly depleted financial circumstances, particularly as a result of bearing responsibility for the tax debt.
The bankruptcy argument:
Mr Lindeman referred me to the Federal Court decision in McMaster [1991] 15 FLR 215. In that case the husband had declared bankruptcy and the wife sought leave of the Federal Court to press a section 79A application in the bankruptcy proceedings. The Federal Court declined to grant leave to the wife, noting that one of the purposes of the Bankruptcy Act was to extinguish the debts of bankrupts, including debts arising from unpaid moneys pursuant to a family law order.
I take it as a given that this is the general effect of the Bankruptcy Act. There is a clear and obvious public purpose and benefit in releasing a bankrupt from his/her unsecured debts and instead providing for creditors to prove against the bankrupt estate and share rateably in whatever moneys can be realised.
As for releasing a bankrupt from his/her debts, my factual findings in this case demonstrate the husband’s mala fides towards his financial obligations to the wife pursuant to the consent order. Section 79A of the Family Law Act permits the wife to bring the within application and to that extent the two pieces of legislation are drawn into potential conflict I consider that s 79A ought to prevail on the facts of this case.
What of the inequitable division as between the creditors if the wife’s application is granted?
The Bankruptcy Trustee was aware of these proceedings at all material times and chose not to participate in them. During the husband’s bankruptcy the Trustee did not make any claim against the husband in respect of his “divested” interest in C Pty Ltd. I am in no way critical of the Trustee for this. After all, the Trustee was obliged to consider the commerciality of litigation having regard to the interests of the creditors – primarily the ATO and the wife.
The debt to the ATO has now been released by the husband’s bankruptcy; there is no suggestion that the ATO is interested in pursuing any fruits of this litigation. Although making the wife’s proposed order would now result in her receiving “preferential” treatment as a creditor, she is the creditor who chose to take all the risks (and associated costs) of litigating.
Again I see no impediment to the relief sought by the wife.
If it was considered necessary, I would for the reasons herein formally grant the wife leave to proceed nunc pro tunc with her enforcement application and her s 79A application pursuant to s 58 of the Bankruptcy Act.
The financial circumstances argument:
I turn then to the respective financial circumstances of the parties as best I can discern them.
The wife’s financial circumstances are modest. She earns $625 per week as an educator; she receives means-tested benefits of $137 per week; her weekly expenses are $610. She has re-partnered and her partner (aged 57) earns a healthy income. The wife holds a thirty percent (30%) interest in a 2.5 acre real property at J Town in common with her partner. In her Financial Statement she had estimated the value of her 30% share as $84,000 (the overall value of the property being $280,000).
The wife also owns an 11 acre property at K Town. In her Financial Statement she had estimated its value at $240,000.
In the witness box, the wife accepted that she had no formal valuation evidence for either property. She said each property had various flaws which negatively impacted their value. For instance the J Town property has an incomplete, partly-renovated house on it with 2 x 50-year old bathrooms, no kitchen and termite damage. The K Town property only has a small shed and two (2) shipping containers on it. There are no services connected.
In cross-examination the wife did concede that, as a general statement, property values in Region L had increased significantly in recent times. When pressed, she conceded that K Town in particular was “possibly” worth more than her $240,000 value.
Ultimately the wife’s estimates of value are the best evidence before the court and I adopt them.[2]
The wife’s mortgage is $160,000 so that her total net equity in real estate is $164,000. Additionally she has about $3,000 in the bank, a $65,000 Motor Vehicle 1, some $3,000 worth of house contents and $10,000 in equipment bringing her net assets to $245,000. Additionally she has superannuation of $22,000 which brings her total net assets up to $267,000.
The husband says that his own financial circumstances are much worse. As at the date of his Financial Statement of 6 May 2020, he was a “labourer” for B Company (at that stage via C Pty Ltd) earning $768 per week. But this was not accurate as C Pty Ltd was a mere puppet of his, and its financial statements when operating B Company disclose profits and retained earnings not allowed for in his Financial Statement. Based on its long history as a successful business, and in the absence of financial disclosure by the husband, I am satisfied that the husband’s true income and earning capacity are substantially greater than his stated figure although the evidence does not permit me to arrive at a precise number.
The husband’s Financial Statement asserts that he spends $130 per week supporting Ms D and her children but it also lists his total expenditure as $105 per week, which is obviously inconsistent. The most benevolent interpretation is that the $130 is additional expenditure over and above the $105 and, given that he filled the document out himself, I will read it in that way. That is, he spends $235 per week in total.
The husband’s Financial Statement asserts that Ms D’s income is $850 per week.
The husband’s Financial Statement values his non-superannuation assets at $2,301 including his (then) half shareholding in B Company valued at $1 - an entirely arbitrary figure which is glaringly improbable given the past success of the business.
It needs to be remembered that the consent order valued B Company at $201,361 in December 2015; its goodwill was still said to be $100,000 in June 2016 when C Pty Ltd “acquired” the business from the husband. B Company has always had a real, and in my view significant, value as evidenced by the deliberate steps the husband took to preserve it as an asset during his bankruptcy via C Pty Ltd.
The husband’s Financial Statement also asserts that his preserved superannuation is $69,000 although that figure would now be at least somewhat out of date. The husband gave no evidence of any debts.
But although the husband’s financial circumstances are opaque, would it be just and equitable to order him to pay the wife the full cash sum she seeks? How can he raise the money?
Borrowing from a lending institution seems a remote prospect given the husband’s past bankruptcy. In that sense his bankruptcy was very much “real” and it will have enduring real world consequences.
The husband likely has access to some cash resources known only to him. I infer this because while the husband’s current bank balances are unknown, he does have control of B Company which has clearly been a successful business.
I could potentially order payment by instalments or otherwise give the husband a lengthy timeframe to pay. But this is an unattractive option as it must carry with it a high risk of default potentially leading to further enforcement proceedings or perhaps another bankruptcy application.
The only other option is for the husband to sell his interest in B Company. The business is a valuable one but its potential sale proceeds cannot be stated with precision.
In closing submissions I specifically raised with Mr Byrnes the prospect of a super splitting order whereby the husband’s superannuation is paid to the wife. True, this is not the same as her receiving “cash” but it is still a significant and tangible asset and would limit or avoid the risk of further enforcement proceedings. After taking instructions, Mr Byrnes advised that the wife opposed a super splitting order.
These parties need to finalise their financial relationship if possible: s 81 Family Law Act.
In the end I do not consider that the husband ought to receive the benefit of his own non-disclosure. That his finances are opaque is an inevitable consequence of his failure to meaningfully engage with his disclosure obligations.
I have therefore come to the view that the wife has made out her case for relief, save that I respectfully consider that the variation sought by her in respect of the consent order was cast in unnecessarily broad terms. To avoid unduly complicating things, I have limited the extent of the variation and preserved the consent order as much as possible.
I will also make the interim injunctive orders she seeks in respect of B Company which I consider to be “proper” as that term is understood in the context of s 114 of the Act. Given my factual findings in this case, such restraints should require no further explanation.
If any enforcement issues do arise, these can be addressed later if necessary.
CONCLUSION & ORDERS
For these reasons, I make the orders set out at the commencement hereof.
The proceedings are adjourned to 9.30am on 17 March 2022 for consideration of the wife’s costs application.
I certify that the preceding one hundred and thirty (130) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Betts. Associate:
Dated: 3 March 2022
[1] Exhibit 1, which appears at pages 224 – 244 of the exhibit bundle prepared by Mr Byrne.
[2] The wife’s estimates of value are admissible: see the Full Court decision of Frederick & Frederick [2019] FamCAFC 87 particularly paragraphs 38 and 39.
0
5
0