A v C
[2019] NZHC 2814
•31 October 2019
NOTE: PURSUANT TO S 35A OF THE PROPERTY (RELATIONSHIPS) ACT 1976, ANY REPORT OF THIS PROCEEDING MUST COMPLY WITH SS 11B,
11C AND 11D OF THE FAMILY COURT ACT 1980. FOR FURTHER INFORMATION, PLEASE SEE
https://www.justice.govt.nz/family/about/restriction-on-publishing-judgments/
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-000344
[2019] NZHC 2814
BETWEEN A
Appellant
AND
C
Respondent
Hearing: 29 October 2019 Counsel:
N Levy for the Appellant
M Freeman for the Respondent
Judgment:
31 October 2019
JUDGMENT OF DOOGUE J
Introduction
[1] The appellant, Ms A, appeals the reserved judgment of Judge T M Black dated 30 May 2019, dismissing her applications to set aside two contracting out agreements, one dated 9 July 2004 (the First Agreement) and the second undated1 (the Second Agreement) on the grounds that giving effect to both agreements would cause her serious injustice.2
1 Agreed by the parties to have been signed sometime during March 2010.
2 Property (Relationships) Act 1976, s 21J.
A v C [2019] NZHC 2814 [31 October 2019]
The Family Court decision
[2] The Family Court Judge found the parties had lived together between 2000 and 2015.3 They have three children.4 At the time the parties met, Mr C’s separate property included his shares in Virtual Plumbing Limited (VPL).5 The parties entered into a contracting out agreement on 9 July 2004.6 On the same day a deed was executed establishing the C Family Trust (the Trust).7 In 2010, a further contracting out agreement was signed by the parties.8
[3] The Judge then turned to s 21J(4)(a) of the Property (Relationships) Act 1976 (the Act) and found that the substantive effect of the first agreement was that:9
(a)The parties’ family home at Kiln Avenue is declared to be relationship property (which is simply a statement of the legal position which existed at the date of the first agreement).
(b)Mr C’s commercial interests are recorded as his separate property (which again, is nothing more than a statement of the legal position which existed at the time of the agreement).
(c)The Act (and in particular, various compensatory provisions) is contracted out of.
[4] The Second Agreement affirmed the provisions of the First Agreement and also provided for the Trust to guarantee the obligations of VPL for the purposes of refinancing. The guarantee included a mortgage over the Trust’s property. Further, Mr C agreed to indemnify Ms A from any liability arising under the guarantee if a call was ever made on the guarantee.10
3 A v C [2019] NZFC 3735 at [1] [Family Court Decision].
4 At [1].
5 At [32] of the Family Court Decision, the Judge addresses the nomenclature of Mr C’s businesses and no issue is taken with this on appeal.
6 At [8].
7 At [9].
8 At [10] of the Family Court Decision, the Judge described the Second Agreement as being signed in March 2010.
9 At [33].
10 At [34].
[5] The Judge concluded that the provisions of both agreements were “straight forward and unremarkable”.11 Further, he found that they did provide for a joint pool of relationship property.12
[6] Turning to the length of time since the agreements were made, the Judge noted that the First Agreement was confirmed within the Second Agreement some six years after it had been entered into.13 In relation to the Second Agreement, it was significant to the Judge that it was entered into at a time when VPL was facing liquidation.14
[7] The Judge found that the First Agreement was not unfair or unreasonable in light of all the circumstances at the time it was made.15 His reason was that the agreement classified assets in the same way they would have been classified had the parties separated at that point.
[8] In considering whether the Second Agreement was unfair or unreasonable in light of all the circumstances at the time it was made, the Judge rejected Ms A’s submission that it exposed the trust property and herself to risk for no benefit. He concluded that the detriment “was potential only”.16
[9] The Judge also rejected Ms A’s submission that she was naïve and did not in each instance fully understand what she was being asked to sign. He did so for two reasons. First, that in each case the agreements have certificates signed by independent lawyers and such certificates are prima facie evidence that each agreement was adequately explained to Ms A.17 Secondly, there was nothing in the evidence “approaching duress which might give pause for thought”.18
[10] The Judge then outlined his findings on whether the agreements had become unfair or unreasonable in light of any change in circumstances since they were made.19
11 At [35].
12 At [36].
13 At [38].
14 At [38].
15 Property (Relationships) Act 1976, s 21J(4)(c).
16 Family Court Decision, above n 3, at [41].
17 At [42].
18 At [44].
19 Property (Relationships) Act 1976, s 21J(4)(d).
He found that at the time the First Agreement was made VPL was of “little value”.20 Further, at the time the Second Agreement was made VPL was of “modest value” and was facing liquidation.21 Finally, he found that by the time the parties separated, VPL was worth “something in the region of $1.2 million”,22 and that increase in value was because of retained earnings.23
[11] But for the contracting out provisions, the Judge found that Ms A had three possible remedies: s 9A(1), s 9A(2) and s 17 of the Act.24
[12] The Judge considered s 9A(1) and found Ms A’s assertion that the increase in the value of VPL was attributable to the application of relationship property to be ill- conceived.25 Mr C had undrawn salary which Ms A argued constituted gains or income that were the application of relationship property. The Judge said:26
Underpaying himself is not an application of any property, far less relationship property.
[13]Further:27
Even if I accepted the [sic] Mr C’s effective control of the company by virtue of his being sole shareholder and direction [sic] amounts to ‘property’, it was his separate property regardless of the agreements.
[14] The Judge then turned to a consideration of s 9A(2) and whether the increase in the value of VPL was attributable (wholly or in part, and whether directly or indirectly) to Ms A’s actions.28 Ms A relied on her unpaid work for VPL between 2004 and 2010, other contributions to the relationship and the refinancing/guarantee transaction in 2010.
[15] The Judge did not accept these arguments. Firstly, he said that even on the most generous interpretation of the available evidence, the unpaid work Ms A
20 Family Court Decision, above n 3, at [46].
21 At [47].
22 At [48].
23 At [48].
24 At [53].
25 At [59].
26 At [56].
27 At [57].
28 At [60].
performed for VPL would amount to $60,000 over three years and therefore the relationship property Ms A would be entitled to would be $30,000.29 He did not consider that the loss of that amount would cause Ms A serious injustice in light of the other property available to her as a result of the re-settlement of the Trust’s assets.30
[16] Further, he dismissed Ms A’s other contributions to the relationship finding there was no nexus between them and any increase in the value of VPL.31
[17] He dismissed the guarantee transaction in 2010 as being a significant contribution, finding:32
The bank would have placed no reliance on her personal covenant whatsoever. It is an accident of banking law and practice.
[18] The Judge then turned to Ms A’s final argument that Mr C’s separate property, VPL, had been sustained by the application of relationship property based on the financial arrangements in 2010. He found Ms A had not discharged the onus on her to establish that her actions sustained VPL.33
[19]In summary, the Judge found:34
There being no arguable claim under any of the compensatory provisions relied upon, giving effect to agreements which preclude such arguments being mounted cannot amount to serious injustice.
[20]Further, he said:35
The test of serious injustice must be looked at from the point of view of both parties and the discretion to set aside an agreement should not be exercised if to set aside the agreement on the basis of serious injustice to one party created a similar or greater injustice to the other.
29 At [65].
30 At [66].
31 At [69].
32 At [70].
33 At [75]–[80].
34 At [81].
35 At [83].
[21] Finally, the Judge found that the certainty factor weighed heavily against a finding of serious injustice.36 He therefore dismissed Ms A’s applications to set aside both agreements.
Approach on appeal
[22]This is an appeal pursuant to s 39 of the Act. Section 39 provides:
39 Right of appeal to High Court
(1)This subsection applies to a decision of the Family Court or the District Court, in proceedings under this Act, to—
(a)make or refuse to make an order; or
(b)dismiss the proceedings; or
(c)otherwise finally determine the proceedings.
(2)A party to proceedings in which there is made a decision to which subsection (1) applies, or any other person prejudicially affected by the decision, may appeal to the High Court against the decision.
(3)The High Court Rules 2016 and sections 126 to 130 of the District Court Act 2016, with all necessary modifications, apply to an appeal under subsection (2) as if it were an appeal under section 124 of that Act.
(4)On the ex parte application of the appellant, the Family Court or District Court (as the case requires) may order that the appellant must not be required under section 126(1) of the District Court Act 2016 to give the Registrar of the High Court security for costs.
(5)Subsection (4) overrides subsection (3).
(6)If the appeal relates to proceedings commenced after the death of one of the spouses or partners, this section is modified by section 93.
[23] Section 127 of the District Court Act 2016 provides that all civil appeals to the High Court must be by way of rehearing.
[24] The Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar held that the proper approach to be taken in appeals of this kind is as follows:37
Those exercising general rights of appeal are entitled to judgment in accordance with the opinion of the appellate court, even whether that opinion is an assessment of fact and degree and entails a value judgment If the appellate Court’s opinion is different from the conclusion of the tribunal appealed from, then the decision under appeal is wrong in the only sense that matters, even if it was a conclusion on which minds might easily differ. In
36 At [84].
37 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].
such circumstances it is an error for the High Court to defer to the lower court’s assessment of the acceptability and weight to be accorded to the evidence, rather than forming its own opinion.
[25]However, Heath J said in B v F:38
[7] Application of the Austin, Nichols principles is not altogether easy, in the context of appeals from the Family Court. Many first instance decisions represent a mix of findings of fact (after seeing and hearing witnesses), the formation of an evaluative judgment and the exercise of statutory discretions. Sometimes it is difficult to characterise a particular decision as evaluative, factual or discretionary in nature.
[26]Heath J said further:
[8]I approach this appeal on the following basis:
(a)First, I must take account of the advantage that Judge Twaddle had of hearing and seeing the witnesses give evidence before him:
(b)Second, to the extent that the Judge exercised any discretion in reaching his decision, I must determine whether those discretionary decisions were or were not open to him, based on May v May (1982) 1 NZFLR 165 (CA) and Blackstone v Blackstone (2008) NZCA 312 at [8].
(c)Otherwise, I am free to reconsider the Family Court’s decision and to substitute my own view on questions of fact and evaluation, if I were convinced that the first instance decision was wrong.
[27] If the appeal is against the exercise of a discretion, the approach in May v May39 continues to apply. May was a case under the Matrimonial Property Act 1976 in which the Court of Appeal held that it would not interfere unless the Judge had acted on a wrong principle, failed to take into account some relevant matter, or had taken account of some irrelevant matter, or was otherwise plainly wrong.
[28] In Williams v Scott, Faire J noted that the appellant bears the onus of satisfying the appellate Court that the decision under appeal was wrong and that those aspects of the Family Court judgment which are alleged to be wrong should be identified in the notice of appeal and points on appeal.40 His Honour also noted that the principles of
38 B v F [2010] NZFLR 67 (HC).
39 May v May [1982] 1 NZFLR 165 (CA).
40 Williams v Scott [2014] NZHC 2547, [2015] NZFLR 355 at [42].
an appeal by way of rehearing did not apply where the decision appealed from was the exercise of a discretion.
[29]These principles were recently confirmed and summarised by Nation J in
Bethell v Bethell:41
However, the Court of Appeal has confirmed that, where an appeal lies against the exercise of a discretion, an appellant court will not interfere unless the judge has acted on a wrong principle, failed to take account of some relevant matter, took account of some irrelevant matter, or was otherwise plainly wrong.
The grounds of appeal:
[30]The grounds of appeal are best expressed as follows:
(a)Did the Family Court Judge err in finding the parties had contracted out of s 9A(1) of the Act in the agreements?
(b)Did the Family Court Judge err in classifying Mr C’s earnings for his services to VPL as his separate property?
(c)Did the Family Court Judge err in fact and in law concluding that giving effect to the contracting out agreements would not cause serious injustice?
Discussion
[31] The starting point must be an examination of the two agreements, their provisions and their effects.
The First Agreement – 9 July 2004
[32] The First Agreement recorded the parties’ agreement that a property at 29A Kiln Street, Silverstream in which the parties resided was to be treated as relationship property in the same meaning as the Act.42
41 Bethell v Bethell [2018] NZHC 3171 at [19].
42 At [2.1] of the First Agreement.
[33] Further it recorded that a one-third share in a commercial property situated at 75-77 Sydney Street, Petone and 100 shares in Virtual Plumbing Limited were to be treated as the separate property of the respondent in the same meaning as the Act.43
[34] The agreement recorded that the commercial property situated at 75-77 Sydney Street, Petone and the 100 shares in VPL were owned by Mr C prior to their relationship commencing or had been acquired by Mr C separately during the relationship and that Ms A had made no contribution to such property, whether directly or indirectly.44
[35] The critical provisions of the First Agreement are clauses 2.3 and 2.4 which are set out at [38] and discussed below at [39]-[45].
The Second Agreement – March 2010
[36] Although not itself dated, it is clear the parties entered into this supplementary agreement sometime around 16–18 March 2010.
[37] The Second Agreement was entered into for the purpose of refinancing a loan to VPL against the family home and, significantly, in the recital the agreement says:45
Mr C and Ms A wish to record their agreement in relation to the refinancing and this Agreement shall be supplementary to the Relationship Property Agreement and comprise a variation of that Agreement, and Mr C and Ms A wish to contract out of the Property (Relationship) Act 1976 to the extent necessary to do this.
[38] This meant Ms A was potentially putting at risk her half of the family home at 29A Kiln Street, Silverstream which was agreed to be relationship property in the First Agreement and reaffirming the forgoing of the potential benefits identified in clauses
2.3 and 2.4 of the First Agreement.
43 At [2.2].
44 At [2.3].
45 At [G] of the Second Agreement.
Did the Family Court Judge err in finding the parties had contracted out of s 9A(1) of the Act in the agreements?
[39] The operative provisions are clauses 2.3 and 2.4 of the First Agreement, which state:
2.3Ms A acknowledges the property listed in Schedule “B” was owned by Mr C prior to their relationship commencing or has been acquired by Mr C separately during their relationship and Ms A has made no contribution to such property, whether directly or indirectly. Ms A therefore acknowledges that the property listed in Schedule “B” and any property bought in substitution thereof, or any increase in value of such property, shall be Mr C’s absolute and separate property and Ms A shall have no claim whatsoever in respect of such property.
2.4Mr C and Ms A agree and accept that any work carried out by one of them on the property of the other or any contribution (whether direct or indirect) by one of them to the property of the other, shall not in any circumstances create for the person carrying out the work or making the contribution, any legal, beneficial or other interest in that property.
[40] Regrettably, clause 2.3 is poorly drafted and on first blush the two clauses together could likely cause confusion because they overlap. However, in my view on examination, the constituent elements of clause 2.3 are, first, an acknowledgement that Ms A had not contributed to the creation of Mr C’s one-third share in the commercial property at 75-77 Sydney Street, Petone and the shareholding in VPL. Secondly, she is contracting out of sharing in any property that is bought in substitution of the aforementioned property. Thirdly, she is contracting out of “any increase in the value of such property”. Finally, she is accepting she “shall have no claim whatsoever in respect of such property”.
[41] The clear meaning of clause 2.4 is to prevent any claim by Ms A that any work carried out by her or any contribution by her (whether direct or indirect) to Mr C’s separate property shall not create any legal or beneficial interest in that property. In other words, any actions taken by her in this respect do not create a claim.
[42] Read together, it is clear that clauses 2.3 and 2.4 are addressing the scheme of s 9A of the Act. There are two ways in which a claim may be made for any increase in the value of separate property. The first is by the application of relationship
property46 and the second by actions or contributions of the partner or spouse to the separate property.47
[43] Ms A argues that the word “therefore” in the second part of clause 2.3 is confined to the acknowledgement that the separate property in existence at that time was to be Mr C’s separate property. I do not agree. The first part of the clause is backward looking to the creation of the property that existed at that time. The second part of the clause is future looking acknowledging that the form of the property may change (any property bought in substitution) and may increase (any increase in value of such property), and that in either fresh scenario Ms A could have no claim. “Any increase” is expressed broadly in this context and must be able to be read so as to include any increase attributable to the application of relationship property.
[44] Thus, the effect of clause 2.3 is to preclude any s 9A(1) claim by Ms A in respect of Mr C’s separate property.
[45] Clause 2.4 is drafted clearly and is on foot with s 9A(2). It clearly precludes any s 9A(2) claim by Ms A in respect of Mr C’s separate property.
[46] Another way of reading the two clauses together is to find clause 2.3 was all encompassing and 2.4 completely tautologous. But both interpretations reach the same conclusion. The parties did contract out of s 9A(1).
[47] As a result of my analysis the answer to the first question on appeal is no — the Judge did not err in finding the parties had contracted out of s 9A(1).
[48] In order to answer the third question on appeal it is necessary to see whether the significant increase in the value of VPL since the Second Agreement was entered into is a change of circumstances which has made the agreement unfair or unreasonable.
46 Property (Relationships) Act 1976, s 9A(1).
47 Section 9A(2).
[49] To address this issue, it is necessary to consider what remedies Ms A might have had but for the contracting out provisions of the agreements and to canvas her claims under ss 9A(1), 9A(2) and 17.
[50] The first remedy to consider is the claim that relationship property in the form of Mr C’s appropriate earnings for personal services rendered to VPL has been applied to his separate property VPL and has caused the dramatic increase in the value of VPL.48
Did the Family Court Judge err in classifying Mr C’s appropriate earnings for his services to VPL as his separate property?
[51] Mr C is an employee of Virtual Admin Limited and his salary is $52,000 per year. Mr C’s role is, broadly, administration and management of VPL. He does not undertake any of the plumbing work himself.
[52] Mr C has at all relevant times taken a salary of between $50,000 – $60,000 which is an amount he describes as comfortable to live on.49
[53] In addition, Mr C receives “fringe benefits” associated with his employment and/or position as director of the companies. He has a company car, company telephone, and is able to expense travel to the company. His fringe benefits are worth around $30,000 per year.50 That was the case throughout the relationship.
[54] Mr C acknowledges that he has only ever taken conservative earnings for his personal services to VPL because he considers it important that there were funds available to VPL so it could continue to trade as a solvent entity and grow.51
[55] However, Mr C also took significant drawings from the company during the relationship and applied them for the benefit of the relationship by the creation of relationship property. Significantly, he utilised resources and drawings from VPL to
48 Section 9A(1).
49 Mr C affidavit dated 3 October 2017, at [10]–[11].
50 Child Support Decision [23] and [32]. Ms A also received fringe benefits from the company during the relationship (travel, a company car, and a company computer for home use).
51 Mr C affidavit, above n 49, at [12].
build himself and Ms A a new home at 29A Kiln Street which was sold following separation for $1,150,000. Mr C’s evidence is that he took drawings of around
$700,000 from VPL to build the house and around $400,000 – $500,000 was borrowed from the bank and secured as a mortgage over the title of the property.52
[56] The Family Court Judge dealt with this issue in a pithy five paragraphs. He rejected the notion that undrawn salary (for Mr C’s personal services to VPL) constituted income.
[57] Further, he rejected the notion that the retention of earnings in the company amounted to the application of relationship property to Mr C’s separate property VPL.53
Authorities referred to by the parties
[58] There are few authorities that directly assist with this particular point of appeal. Counsel for Ms A has referred me to three cases in support of the proposition that Mr C’s retained earnings for his services provided to VPL are relationship property, while counsel for Mr C refers to one other case which, he says, more closely resembles the parties’ circumstances.
[59] The earliest of those cases is Watson v Watson.54 In that case, the husband owned all but one of the 20,000 shares in a company at the time he and his wife married, which were accepted to be the husband’s separate property. By the time the couple separated, the husband owned all by one of the 100,000 shares, 80,000 of which were “bonus shares” received or acquired by the husband during the marriage. The husband also earned varying salaries over the course of the marriage, ranging from
$25,000 to $100,000. At issue was whether the bonus shares were relationship property.
[60] The Court of Appeal found that the bonus shares were in part derived from the husband’s separate property and in part from the husband’s services to the company
52 At [16].
53 Family Court decision, above n 3, at [57] and [58].
54 Watson v Watson (1996) 14 FRNZ 571 (CA).
and were therefore relationship property. In respect of the husband’s earnings for his services to the company, the Court stated they were relationship property under s 8(e) of the Act as they were attributable to his personal efforts and not his separate property.55 In particular, the Court found that some part of the value of the bonus shares was attributable to funds “which would otherwise have been distributed to him for his services to the company”.56
[61] Commenting specifically on the apportionment of the value of the bonus shares between separate and relationship property, the Court stated (emphasis added):57
The problem in this case is the absence of evidence enabling a rational division of the assets in question proportionate to a reasonable return on the husband's separate property at marriage and a reasonable assessment of the appropriate rewards for his services to the company. The former would be the separate property component and the latter the matrimonial property component.
The assessment of what could be said to represent the husband's separate property has to be arbitrary given the unsatisfactory state of the evidence in the peculiar circumstances of this case.
[62] Because of the lack of adequate evidence, the Court of Appeal could not go on to determine what these “appropriate awards” should have been on any principled basis.
[63] Gallichan v Gallichan concerned a dispute over the classification, division and valuation of shares in a company which had been formed after the parties had married, but the shares of which were held by a company formed prior to the marriage and wholly owned by the husband.58 The issues in that proceeding were whether the increase in value of either or both of the companies could be attributed to the wife’s contributions to the marriage or to retained earnings (by way of an issue of bonus shares) which, in the normal course, would have been distributed over the years as income to the husband, thereby causing them to acquire the classification of relationship property. This latter issue resembles Ms A’s submission in the present appeal.
55 At 576.
56 At 578
57 At 577.
58 Gallichan v Gallichan [2000] NZFLR 26 (HC).
[64] Laurenson J framed the wife’s submission in respect of the husband’s remuneration as follows:59
The appellant's basic submission was that the respondent's efforts on behalf of HHL were such that he was clearly entitled to more by way of remuneration than he actually received. Thus, to the extent that the retained earnings represented remuneration which should have been paid to the respondent, then that portion was matrimonial property, ie because if it had been paid out to the respondent as remuneration it would have been matrimonial property. Hence, if, instead, it was retained and then distributed as (part of) the bonus shares, the bonus shares representing, as they did, the increase in value of the original shareholding, then that increase in turn became matrimonial property. This, in turn, remained the case with the increase which later flowed through to the Brocall shares and debt.
[65] It appears that Laurenson J proceeded on the basis that “adequate remuneration” ought to be received by someone in the husband’s position, that is, someone who is both an employee of a company and is able to set his or her own salary. This is for two reasons. First, Laurenson J determined, on his reading of the evidence, that the District Court Judge “was entitled to reach the conclusion that the remuneration received by the respondent was appropriate.”60 Second, Laurenson J stated (emphasis added):61
The question in the present case is, therefore, if one accepts that the respondent was adequately remunerated, is there some part of the increase in value represented by the bonus shares attributable to funds “which would otherwise have been distributed to him for his services to the company”. The amount of the earnings which were retained was such that the respondent could have received a higher level of remuneration. The fact is that he did not.
[66] Ultimately, however, Laurenson J distinguished the case from Watson on the basis that the:62
...payment of a higher remuneration was not within the control of the respondent. He was the minority shareholder in a private company where the policies of the company were entirely dictated by the father. This is to be contrasted with the position which applied in both Hight and Watson where the shareholding partner was in control. Thus the question as to whether or not a greater remuneration might have been paid is not an issue.
59 At 35.
60 At 36.
61 At 36.
62 At 36.
[67] Therefore, the principle arising from Gallichan is that while retained earnings which would normally be distributed as remuneration will be classified as relationship property, it is contingent on the ability of the spouse who ultimately receives those retained earnings to set their quantum. In the context of a company, this will therefore depend on the spouse’s shareholding and factors such as the company’s ability to remunerate the spouse to any greater extent.
[68] Hale v Hale also concerned a relationship property dispute involving bonus shares.63 In that case, the wife claimed that the bonus shares in a company, formed before the parties met and which owned the family farm and the farms which subsequently replaced it, were relationship property. In particular and in a similar vein to Watson and Gallichan, the wife submitted that the accumulated shareholders’ funds which were capitalised to create the bonus shares issue were derived from unpaid salary and were in the nature of relationship property.64 The Family Court Judge in Hale applied Watson and held that it was the character and origin of the company funds converted into bonus shares which is determinative of their classification, stating:65
If the funds to be converted are in reality unpaid earnings from the efforts of a shareholder spouse they will be classified as relationship property because the fruits of the spouse’s efforts within the relationship are properly so classified within the scheme of the Act. If, on the other hand, the company funds are not the result of the personal efforts of the spouse and are a capital return from a separate property investment, they are not classifiable as relationship property. If the company funds represent both personal efforts of the shareholder spouse and a return on capital it will be necessary for the Court to apportion them accordingly (as was the case in Watson).
[69] On appeal, Toogood J found that “this was not the usual case of one partner working on a farm and under-drawing salary which is then accumulated and capitalised into shares.”66 Had that been the case — that is, remuneration in return for effort applied — Toogood J concluded the bonus shares would have been treated as relationship property.67 That conclusion was not possible however given that the profits remaining in the company which were then credited to the shareholders’ current
63 Hale v Hale HC Hamilton CIV-2011-419-34, 16 September 2011.
64 At [44].
65 CJH v DKH FC Hamilton FAM-2008-075-119, 21 December 2010 at [28].
66 Hale v Hale, above n 63, at [47].
67 At [48].
accounts as salaries were “in substance dividends and represented a partial return on the investment.”68
[70] Counsel for Mr C submits that Watson, Gallichan and Hale can be distinguished on the basis they involved property (bonus shares) created during the respective relationships which needed to be categorised. He therefore submits that Shepard v Spencer is the most analogous case to the present appeal, at least from a factual perspective.69 That case concerned an application for leave to appeal against a decision of this Court involving a relationship property dispute. The issue relevant to the present appeal was whether the increase in the value of shares in a company, which was formed by the husband, had entered into a partnership with him and held the family farm on trust for the partnership, was relationship property. White J found that it was.
[71] Chisolm J declined to grant leave in respect of this issue. This is because at first instance, counsel for the appellant acknowledged that substantial earnings from the farm were retained in the company, contributing to the increase in its value over the years. Chisolm J went on to say (footnotes omitted):
[35] Given the appellant's concessions, White J's approach to s 9A(l) was an entirely orthodox application of the Supreme Court's observation in Rose that:
[30] ...Once a causative link is established between the application of relationship property and some such increase in value, the whole of the increase, howsoever the balance of the increase arose, is required by subsection (1) to be treated as relationship property...
As White J found, in terms of s 9A(l) the increase in value of Mr Shepherd's separate property shareholding in BSL was in part directly attributable to the application of relationship property, namely the undistributed partnership income in which Mr Shepherd had a beneficial interest.
[72] While counsel for Mr C says Shepherd is most analogous to the present appeal, he submits that it is nonetheless distinguishable on the basis that the appellant in Shepherd “had an existing ‘right’ to partnership profits which had not been paid and
68 At [48].
69 Shepherd v Spencer [2012] NZHC 1458.
had been left in the company.” He submits that in contrast, Mr C did not have an entitlement to a “market salary”.
Discussion
[73] Given that Watson, Gallichan, Hale and Shepherd support the proposition that “underpaying” oneself could constitute an application of relationship property contrary to the Judge’s conclusion, I conclude that the Judge erred in his interpretation of s 9A(1) of the Act.
[74] It is not appropriate for me to comment on the question of whether Mr C received adequate remuneration for his personal services to VPL and whether any such earnings have been retained by VPL given that there is insufficient evidence before me and that submissions could not usefully be made on that point. However, that issue is immaterial to the question of whether this appeal should be allowed. The fact of the matter is that Shepherd, though differing from Watson, Gallichan and Hale insofar as it did not concern bonus shares, confirmed the principle established by those cases: an increase in the value of separate property which is attributable to retained earnings (which would otherwise be distributed and be classified as relationship property) will likely also be relationship property subject to the factors mentioned at [67] above.
[75] It will be necessary for the Family Court Judge to undertake a full assessment as to whether or not Ms A can establish to the relevant evidential threshold that Mr C was not paid “appropriate earnings” by VPL and that earnings were retained by the company that should have been distributed to Mr C for his personal services to the company (subject to the company’s ability to pay additional earnings and other material considerations as to the viability of the business of VPL). For that purpose, it is necessary to remit this matter back to the Family Court.
[76] Depending on the outcome of that assessment, it may be necessary for the Family Court Judge to reconsider whether or not giving effect to the contracting out agreements would cause serious injustice.
Result
[77]The appeal on the first ground is dismissed.
[78]The appeal on the second ground is allowed.
[79] It is not appropriate, in light of [75] and [76] above, to consider the third ground of appeal.
[80] The matter is remitted to the Family Court for reconsideration in light of this decision.
[81] I consider costs on a 2B basis should apply but give counsel 14 days to confer and advise as to whether they propose some other basis for costs.
Doogue J
Solicitors:
Paino & Robinson, Upper Hutt
Thomas Dewar Sziranyi Letts, Lower Hutt
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