L v S HC Wellington CIV 2010-485-1207
[2010] NZHC 2280
•16 December 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2010-485-1207
UNDER the Property (Relationships) Act 1976
BETWEEN L Appellant
ANDS Respondent
Hearing: 11 November 2010
Counsel: M Freeman for Appellant
R J Buchanan for Respondent
Judgment: 16 December 2010 at 4pm
I direct the Registrar to endorse this judgment with a delivery time of 4pm on the
16th day of December 2010.
RESERVED JUDGMENT OF MACKENZIE J
[1] This is an appeal against judgment of Judge Ullrich QC in the Family Court at Porirua on 18 June 2010 relating to certain relationship property issues.
[2] The parties had lived in a de facto relationship from 1986 until their separation in 2008. They initially lived in Hamilton where they purchased a family home. They then moved to Australia for about seven years and purchased another home which was sold before they returned to New Zealand in 2004. While they were living in Australia they also purchased a property at Whangamata in 2002. Some time after their return to New Zealand the appellant was made redundant and
the parties decided to set up their own business. They purchased a franchise and set
L V S HC WN CIV-2010-485-1207 16 December 2010
up a company, FDL, to operate this business. At the same time they set up another company, FPL, to hold the Whangamata property.
[3] There are five aspects of the judgment under appeal which are the subject of challenge by the appellant. Counsel for the appellant submits:
a) The Judge was wrong in fact and in law in determining that the value of the shares in FDL was $63,185;
b)The Judge was wrong in fact and in law in determining that a proportion of the debt incurred on the appellant’s Australian Westpac Visa credit card was not relationship debt;
c) The Judge was wrong in fact and in law in determining that a proportion of the debt incurred on the appellant’s New Zealand Westpac Visa credit card was not relationship debt;
d)The Judge erred in determining that a loan advanced to the appellant from a family trust did not require payment as at the separation date and accordingly should not be taken into account in the division of relationship property; and
e) The Judge erred in determining that interest was not owing in respect of the trust debt.
Shares in FDL
[4] The shares in FDL were owned 60 by the appellant, 39 by the respondent and one by their daughter. The business was purchased at a cost of $193,000 in May 2005. The Judge describes the purchase price as being paid by borrowings from Westpac of nearly $150,000, and $43,000 from savings. Of the money borrowed from Westpac, $115,000 was borrowed by FDL. Subsequently, the former family home in Hamilton was sold and the proceeds were used to repay that loan. The payment into FDL of the sale proceeds to enable that repayment was recorded as
a loan from FPL to FDL of $115,000. It appears that a further $10,000 was borrowed on a credit card from Westpac (to which I later refer). The respondent called evidence from an accountant, Mr Woods, as to the value in the shares of FDL. He described his instructions as being “to determine the potential relationship property value if any of the company and as to whether there was any evidence of mismanagement or worse on the part of the appellant who was the sole director of both FDL and FPL”. His evidence was extremely critical of the appellant’s stewardship of FDL. He expressed the opinion that the respondent had failed to comply with a number of statutory provisions and that FDL was clearly trading insolvently. He noted that the company had never made any profit. He said that under the appellant’s management and direction the company had consumed approximately $355,000 of capital which would almost certainly never be recovered. He considered that on a liquidation it would be clear to a liquidator that there had been voidable preferences. His opinion was that “the shares in FDL have no current value and the company should cease to trade immediately before its situation deteriorates still further”.
[5] It was accepted by the parties that the shares in FDL were relationship property. The Judge directed that all the shares in FDL were to be transferred to the husband. An issue for the Judge to determine was the value, if any, of those shares. She valued “his interest in that company” at $63,185. It is clear that the Judge was referring to the value of all of the shares.
[6] Although the shares in FDL were owned by the appellant and the respondent, the business of the company was not conducted by them both. The Judge considered whether the business of FDL was a “common enterprise” in terms of para (b) of the definition of relationship debt in s 20(1) of the Property (Relationships) Act 1976. She concluded that it was not. The Judge held:
[73]The only evidence of common enterprise in this case is the wife’s shareholding in FDL and a very limited preparation of some invoices in the earlier stages of the business. Otherwise, she was completely excluded from the operation of the business and especially from any decision making about the business by the husband. Neither was she party to any proper financial information about the business.
[7] In fixing the value of $63,185, the Judge clearly had regard to the accounts of the company for the year ended 31 March 2008. That was the last available set of accounts produced in evidence and was the nearest date to the separation date in
November 2008. A simplified balance sheet appears below:
Assets
Current assets 51,265
Fixed assets 54,026
Intangible assets – franchise 58,963
164,254
Liabilities
Westpac (term and current) 69,940 FPL 115,000 Sundry creditors 31,915 Credit card 4,900 Customer deposits 677 37,492 222,432 Shareholders current accounts 119,369 Total liabilities 341,801 Net deficit on shareholders’ funds 177,547
[8] The state of the company’s accounts, and the lack of evidence as to up to date values, made it necessary for the Judge to adopt a robust and broad brush approach to the value of the company. The Judge determined that the franchise was saleable at a value of $140,000 of which $40,000 would have to be paid to the franchisors. She based that finding on evidence from the appellant that he had received an offer of that amount for the franchise. She concluded that that would leave $100,000 available to the company. From that amount she deducted creditors of $31,915, and a credit card debt of $4,900, leaving the deemed value of $63,185.
[9] That calculation indicates that the Judge assumed that the current assets and fixed assets shown in the balance sheet were worthless. There was no evidence relevant to the value of the assets, apart from Mr Wood’s evidence. He did not carry out a formal valuation of either the business of the company, or of the assets of the company, in coming to his view that the shares have no value. On the liabilities side, the Judge excluded the debt to FPL of $115,000. That was appropriate because the Judge transferred to the respondent all shares in FPL, subject to the condition that the loan of $115,000 was not demanded from FDL. The Judge also excluded the
Westpac debt. That too was appropriate because a condition of the transfer of the shares in FPL to the wife was that FPL would be responsible for payment of the Westpac indebtedness. That left sundry creditors of $31,915, a credit card debt of
$4,900, and a minor item of deposits of $677. In taking the creditors into account at the figure shown in the March 2008 accounts, the Judge necessarily assumed that the financial position had not deteriorated between 31 March 2008 and the date of separation, which was in November 2008. In the light of Mr Wood’s evidence, that seems highly questionable.
[10] A valuation of the shares in the company would have required an assessment of the true value (as opposed to book value) of the company’s assets, and an assessment of the extent of its liability, at the relevant date. The difficulty which the Judge faced is that there was no evidence directed to the issue of valuation. The only available evidence was from the company accounts, the latest of which was at
31 March 2008, and Mr Wood’s evidence. Mr Wood in his report described one of the purposes of his visit to the company as being to determine the potential relationship property value of FDL. He referred to a December 2008 unaudited balance sheet, which was not produced in evidence, and noted that the shareholders current account of about $119,000 “appears to be at risk on the basis that the company will almost certainly not realise the fixed assets shown and on a liquidation basis it is likely that the shareholders will receive nothing back”.
[11] The Judge found, on the basis of the appellant’s evidence, that $43,000 was contributed from the parties’ savings to purchase the business in May 2005. That amount would clearly have been relationship property. It is accordingly inherent in the Judge’s findings that, if the shares in the company had no value, the appellant’s conduct of FDL’s business, from which the respondent was excluded, has caused a loss of at least $43,000 of relationship property. It is understandable that the Judge might have thought it appropriate that the respondent should receive some recompense for the value of the one saleable asset which the company owned, namely the franchise. However, it was necessary that there be an evidential foundation for the value which she attributed to the company’s shares, after excluding the intercompany debt and the Westpac debt. I do not consider that there was a proper evidential foundation for the proposition that, if these debts were
excluded from the calculations, the remaining assets and liabilities of the company would be such that a value of $63,000 could properly be attributed to the shares in the company.
[12] If the shares in the company were, as Mr Wood thought, worthless, that might raise other considerations in the appropriate division of relationship property. On the Judge’s finding that the respondent was excluded from the running of the business, it would appear that any loss in value in the company from the date of purchase of the business might have been attributable to the actions of the appellant. Mr Wood’s evidence as to the poor standard of management of the company is relevant in this regard. That might raise a question whether there are extraordinary circumstances which might make equal sharing repugnant to justice under s 13 of the Act. I express no view on that. But that is an issue which would need to be addressed separately from the value of the shares in the company. Considerations of that sort cannot justify fixing a value for the shares which does not have a proper evidential foundation.
Australian Westpac Visa
[13] The second ground of appeal relates to the Judge’s finding concerning the amount owing on an Australian Westpac Visa credit card. As the Judge recorded, it was agreed that at separation there was NZ$14,210 owing on an Australian Westpac Visa credit card in the name of the appellant. The appellant asserted that this was a relationship debt and the respondent asserted that it was a personal debt of the appellant. The card had been cleared in February 2004. After that the major transaction was a debit of NZ$10,000 for a cash advance on 2 June 2005. The appellant said that that was probably an advance to FDL, as the advance was made around the time the business was set up. The Judge considered the evidence concerning that payment. She found as a fact that the $10,000 was not used to pay part of the purchase price for the business, but was used as working capital for running the day to day business of the company. She held that on that basis the only way the debt could be regarded as a relationship debt is if it was incurred in the course of a common enterprise. She found as a fact that the business was not a
common enterprise in terms of paragraph (b) of the definition of ‘relationship debt’ in s 20(1) of the Act. In the course of that she made the findings at [73] set out above.
[14] Counsel for the appellant submits that the Judge failed to have proper regard to paragraph (c) of the definition. He refers to the Judge’s finding that that advance was used as working capital for the company. He submits that, on that basis, the debt was clearly incurred for the purpose of improving or maintaining relationship property, in that the purpose of working capital is to maintain the operation of FDL’s business and therefore maintain the company (which is relationship property).
[15] I do not consider that any error of law on the part of the Judge has been demonstrated. She has found as a fact that the business of the company was not a common enterprise. There was a proper evidential basis for that finding. While the provision of working capital to the company might assist in maintaining the value of the shares, that will not necessarily be the case. On the findings of fact made by the Judge here, the provision of working capital for the company has not had the effect of maintaining the value of the shares which, on Mr Wood’s assessment, were worthless. The question of whether the debt was incurred for the purpose of maintaining relationship property, namely the shares in the company, was essentially a question of fact. Put colloquially, the question was whether putting in a further
$10,000 was throwing good money after bad. The Judge was best placed to resolve that question of fact. There was evidence before her to justify that finding. Mr Wood’s opinion that the capital consumed would never be recovered and that the company was trading insolvently supports her conclusion. This Court should not interfere.
New Zealand Westpac Visa
[16] The third ground of appeal relates to the New Zealand Westpac credit card debt. The Judge recorded that both parties had a card for this account and that counsel had reached agreement prior to the commencement of the hearing that the amount outstanding of $13,572 would be shared equally. The respondent’s agreement to this was based on the appellant’s claim that all of this debt was
relationship debt incurred jointly or in the course of common enterprise or for the benefit of both parties in the course of managing the affairs of the household and for the purpose of bringing up their children. Having heard the appellant’s oral evidence given under cross-examination, the respondent sought to resile from that agreement on the basis that the appellant had misrepresented the position. The appellant had stated in evidence that the credit card would have been used for things like hireage of equipment, purchasing software, or anything else that had to be done over the Internet to keep the business running.
[17] The Judge referred to her earlier finding that the business of FDL was not a common enterprise. The Judge then examined the evidence and said:
[90]Without more specific evidence I find that the amount of $4,900 as listed in the accounts is the business debt component of the New Zealand Westpac Visa debt and is therefore the personal debt of the husband.
[91]I find that the balance of $8,672 is a relationship debt to be shared equally.
[18] Counsel for the appellant submits that the Judge took an unduly narrow approach to the concept of relationship debt and that she appeared to have relied on the oral evidence of the appellant in a vacuum in determining that $4,900 of the debt related to business expenditure. Counsel submits that the Judge had available to her in evidence accounts for FDL for the years ending 31 March 2006, 2007 and 2008 and draws attention to the differences in current credit card liability recorded in those accounts. He submits that the changes in figures do not support the conclusion that
$4,900 had been spent on credit card by the company over the period. Assuming that the accounts are accurate, they provide no more than a snapshot of the amount of credit card indebtedness at balance date. It would not be possible to determine, from the evidence of the amount outstanding at any balance date, what transactions had been incurred during the course of the year. There was nothing to contradict the appellant’s own evidence that the expenditure had been for company items. On that basis, the appellant has failed to demonstrate that the Judge erred in taking into account the appellant’s evidence of the purpose of that payment. There was a proper evidential basis for the Judge’s factual findings, and this Court should not interfere.
Loan from family trust, and interest
[19] The fourth and fifth grounds of appeal relate to a loan of $25,000 which the appellant said was advanced from his mother’s trust to assist in the purchase of the parties’ home in Australia. The evidence of the respondent was that she did not know that this sum had been advanced and used for the purchase of the parties’ house in Australia in 2003. The Judge noted that the appellant had provided an acknowledgement of debt between the trustees of the trust and the appellant for an amount of $24,000 lent to the appellant in 2003. The appellant’s evidence was that he repaid the loan with interest on or about 28 November 2008, shortly after the parties had separated. He claimed to have paid both the principal and interest, giving a total of over $31,000.
[20] The Judge found that the sum of $25,000 was advanced from the trust to the appellant to assist with the purchase of the Australian house. The Judge discussed the repayment of the principal and said:
[129]I am left with the impression that there has been sufficient obfuscation around the “repayment” of this loan such that I am not prepared to find that it was still outstanding at separation and repaid after separation.
[130]I find although the sum of $25,000 borrowed in 2003 was a relationship debt, it was not a debt still requiring repayment as at the separation date.
[21] The Judge was not satisfied that there is any evidence that interest was demanded on the debt, and that although the deed provided for interest on demand she found that interest was not demanded by the lender and therefore interest is not owing. I consider that these factual findings were available to the Judge and that no sufficient basis for appellate interference with those findings has been demonstrated.
Result
[22] The outcome is that the appeal must be allowed in respect of the first ground, but dismissed on all other grounds. The appropriate course is to remit the matter to the Family Court so that that Court can determine the value of the shares in FDL.
That Court should also determine whether, if a different value is attributed to those shares on the reconsideration, any consequential alteration to the division of relationship property is appropriate.
“A D MacKenzie J”
Solicitors: Buchanan Gray, Wellington for Appellant
Thomas Dewar Sziranyi Letts, Lower Hutt for Respondent
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