McCloy v ITI & Syddall Enterprises Ltd
[2013] NZHC 2001
•7 May 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-404-002616 [2013] NZHC 2001
UNDER the Property (Relationships) Act 1976
BETWEEN CHRISTINE HAMILTON THOMPSON Appellant
ANDMICHAEL LEITH THOMPSON First Respondent
MICHAEL LEITH THOMPSON, DEAN ALAN ELLWOOD AND BRUCE KENNETH DELL
Second Respondents
Hearing: 1 and 2 August 2013
Appearances: A Hinton QC and S Ambler for Appellant Lady D Chambers QC for First Respondent V Bruton for Second Respondents
Judgment: 30 August 2013 at 2:30PM
(RESERVED) JUDGMENT OF ANDREWS J
This judgment is delivered by me on 30 August 2013 at 2:30pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors/Counsel:
Simpson Grierson, Auckland – R M Gapes / S Ambler (Appellant) A Hinton QC, Auckland (Appellant)
B Hopkins, Auckland (First Respondent)
Lady D Chambers QC, Auckland (First Respondent)
T G T Legal, Auckland – V Bruton (Second Respondents)
THOMPSON v THOMPSON [2013] NZHC 2001 [30 August 2013]
Table of Contents
Introduction ..........................................................................................................[1] Background...........................................................................................................[4] Agreement as to division of assets of the MLT Trust ......................................[13] The Family Court judgment .............................................................................[14] Approach on appeal ...........................................................................................[21] Appeal issues.......................................................................................................[24] Relevant documents ...........................................................................................[27] The sale to Next ..............................................................................................[28]
The RoT covenant ...........................................................................................[36] Relevant authorities ...........................................................................................[37] Z v Z (No 1).....................................................................................................[38] Briggs v Briggs ...............................................................................................[40]
Z v Z (No 2).....................................................................................................[43] Brownie v Brownie (HC) ................................................................................[47] Brownie v Brownie (leave application) ...........................................................[50]
Is the payment for the RoT covenant “property” under the Act? .................[51]
What sort of property is the payment for the RoT covenant? .............................
Introduction ....................................................................................................[53]
Submissions on appeal....................................................................................[57]
Discussion.......................................................................................................[64] Should the payment for the RoT covenant be treated as relationship property pursuant to s 9(4) of the Act? ..................................................................................
Introduction ....................................................................................................[83]
Submissions on appeal....................................................................................[86]
Discussion.......................................................................................................[88] Has there been a disposition of property to a trust which has defeated Mrs Thompson’s claim, and if so, should an order for compensation be made
under s 44C of the Act?............................................................................................
Introduction ..................................................................................................[100]
Submissions on appeal..................................................................................[102] Discussion.....................................................................................................[104] Result ................................................................................................................. [112]
Introduction
[1] Following the dissolution of their marriage, the appellant (Mrs Thompson) and the first respondent (Mr Thompson) agreed on the division of assets such as the family home, their holiday home, and various chattels, and the proceeds of a business that was established and built up during their marriage. However, they were not able to agree as to entitlement to a payment made to Mr Thompson for a Restraint of Trade covenant (“the RoT covenant”) given by him to the purchaser of the business.
[2] In a judgment delivered on 24 April 2013, Judge M L Rogers gave judgment in favour of Mr Thompson on Mrs Thompson’s claim that the payment for the RoT covenant is relationship property and should be divided equally (“the Family Court judgment”).1
[3] Mrs Thompson has appealed against the Family Court judgment. In essence, the appeal turns on whether the Family Court Judge was wrong to hold that the payment for the RoT covenant is not relationship property.
Background
[4] While counsel for both Mr and Mrs Thompson made submissions as to factual matters, the essential facts were not in dispute. What follows is a brief summary of relevant events. Where necessary, these will be expanded on later in this judgment.
[5] Mr and Mrs Thompson were married in 1971 and had been married for nearly
31 years when they separated in August 2002. They had five children, all of whom are now adults. During the marriage Mr Thompson worked full time in the business they established, which expanded considerably both in New Zealand and overseas. Mrs Thompson initially worked outside the home, but after the birth of their first
child she was responsible for running the household and raising their five children.
1 CHT v MLT [2013] NZFC 306.
[6] Mr Thompson has had many years experience working in the health foods/dietary supplements industry. In about 1972 he was employed by Healtheries of New Zealand Ltd (“Healtheries”), later becoming a director of the company, managing its operation, finances, and export sales. In 1984 Mr Thompson resigned from Healtheries and he and Mrs Thompson established Nutra-Life Health and Fitness Ltd (“Nutra-Life”).
[7] In 1989 Mr and Mrs Thompson established Health Foods International Limited (“HFI”), which became the holding company for Nutra-Life and a number of associated companies. Mr Thompson held 55 per cent of the shares in HFI, and Mrs Thompson held 45 per cent.
[8] On 1 July 1994 Mr and Mrs Thompson sold their respective shareholdings in HFI to the ML Thompson Family Trust (“the MLT Trust”), one of a number of trusts established by them to hold assets acquired during the marriage. The sale price for the shares was $1.11 million dollars, which was their assessed fair market value at the time.
[9] On 10 August 2002, Mr and Mrs Thompson separated. Their marriage was dissolved on 25 July 2005. Mr Thompson continued to work in the business. An “indicative assessment” of the fair market value of the shares in the HFI group, undertaken on Mrs Thompson’s instructions in May 2005, was between $37.9 million and $43.6 million, with an approximate midpoint being $40.7 million.
[10] By an agreement dated 1 December 2006 (“the sale agreement”), companies associated with Next Capital Health Group Limited (“Next”) purchased the business and assets of HFI and Nutra-Life (“the HFI/Nutra-Life business”). The purchase price was $72.3 million, allocated as to approximately $22.3 million for the business assets and $50 million for goodwill. It is relevant to record that Next also acquired Healtheries in November/December 2006.
[11] The sale agreement was conditional upon (amongst other things) Mr Thompson entering into the RoT covenant, and on his subscribing for 19.95 per cent of the shares in Next, for $12 million. Mr Thompson entered into the RoT covenant
on 21 December 2006. He received a payment of $8 million from Next after having entered into the RoT covenant. Mr Thompson also became a director of Next. It was common ground between Mr and Mrs Thompson that the sale of the business to Next was at a very good price, and that a significant factor in achieving that price was Mr Thompson’s agreement to enter into the RoT covenant.
[12] Mr Thompson also received a cash bonus of $1.392 million from the trustees of the MLT Trust (as shareholders of the HFI group of companies) following the sale to Next. Mrs Thompson made no claim in respect of the bonus.
Agreement as to division of assets of the MLT Trust
[13] Mr and Mrs Thompson, and the trustees, agreed that distributions out of the MLT Trust would be made to Mr and Mrs Thompson in equal proportions and that, ultimately, the assets of the trust would be divided equally between separate trusts established by each of them. As one of the trustees, Mr Elwood, put it in an affidavit filed in the proceeding:
The trustees were acting in accordance with the agreement... that the trust property would be divided 50/50 for [Mrs Thompson’s] and [Mr Thompson’s] benefit.
The Family Court judgment
[14] The first issue addressed by the Judge was whether the payment to Mr Thompson of $8 million for the RoT covenant was relationship property under s 8 of the Property (Relationships) Act 1976 (“the Act”). The Judge considered that the starting point for deciding that issue was the proper classification of the proceeds of sale of the HFI/Nutra-Life business.
[15] The Judge noted that the vendors of the business were HFI and Nutra-Life, and that the covenantors to the sale agreement were the trustees on behalf of the MLT Trust. She also noted that there was no suggestion that either of Mr or Mrs Thompson were the vendors. That led the Judge to conclude that the business when sold was neither relationship nor separate property; rather, it was trust property. The
Judge was not persuaded that the payment for the RoT covenant became relationship property by virtue of its association with the sale of the business.2
[16] The Judge then considered whether the payment for the RoT covenant was relationship property under s 8(e) of the Act, as property acquired by Mr Thompson after the marriage began. The Judge concluded that a claim under s 8(e) was bound to fail, as the payment was made to Mr Thompson four years after he and Mrs Thompson had separated.3
[17] The Judge next considered whether the payment for the RoT covenant was Mr Thompson’s separate property which, pursuant to s 9(4) of the Act, it was just in the circumstances to be treated (in whole or in part) as relationship property. The Judge held that even if it were arguable that the payment for the RoT covenant was Mr Thompson’s separate property derived from the HFI/Nutra-Life business, it had not been established that the interests of justice required that it be treated as
relationship property.4
[18] Finally, the Judge considered Mrs Thompson’s argument under s 44C of the Act, that the effect of the sale of the HFI shares to the MLT Trust in 1984 had been to defeat her claim to the payment for the RoT covenant as being relationship property; that is, it was submitted that but for the transfer of the shares to the trust, the business would have remained relationship property and, by application of the principles set
out in the Court of Appeal’s judgment in Z v Z (No 1),5 and the High Court in
Brownie v Brownie,6 the payment for the RoT covenant would also have been relationship property, to be divided equally between Mr and Mrs Thompson.
[19] The Judge accepted that, if it were the case that the business was still relationship property (that is, if the shares in HFI were still held by Mr and Mrs Thompson), the payment for the RoT covenant would have to be considered as relationship property, pursuant to Z v Z (No 1). Therefore, the sale to the MLT Trust
had the effect of defeating Mrs Thompson’s claim to the payment for the RoT
2 Family Court judgment at [33]–[36].
3 At [37].
4 At [38]–[41].
5 Z v Z (No 1) [1989] 3 NZLR 413 (CA).
6 Brownie v Brownie HC Christchurch AP217/97, 4 April 1998 (Brownie v Brownie (HC)).
covenant.7 However, Her Honour declined to make any order for compensation under s 44C of the Act.8
[20] In reaching that conclusion, the Judge noted that in the 12 years between the transfer of shares to the trustees of the MLT Trust and the sale to Next, the value of the HFI/Nutra-Life business had increased dramatically, and that as a result of the trustees’ decision that the trust assets were to be shared equally, Mr and Mrs Thompson were sharing equally in the increased value of the former relationship
property.9 The Judge also took into account that the relationship property had been
sold to the MLT Trust 12 years before the payment for the RoT covenant was made to Mr Thompson, and that the sale of shares to the trust was for market value, and agreed to by both Mr and Mrs Thompson. Her Honour also noted that the RoT covenant affected Mr Thompson, solely, by imposing restrictions and obligations on him, but had benefitted both spouses by achieving a sale price which was almost
double the original estimated value of the business.10
Approach on appeal
[21] Section 39 of the Act (which provides the right of appeal to this Court), provides (at s 39(3)), that an appeal to the High Court is to be treated as if it were an appeal under s 72 of the District Courts Act 1947, and that ss 74 – 78 of that Act apply. Section 75 of the District Courts Act provides that the appeal is to be by way of re-hearing, and s 76 provides that, having heard the appeal, this Court may make any decision it thinks should have been made, or may direct that the application be re-heard in the Family Court.
[22] The approach to general appeals under s 72 of the District Courts Act is as set out in the judgments of the Supreme Court in Austin, Nichols & Co Inc v Stichting
Lodestar,11 and Kacem v Bashir.12
7 Family Court judgment, at [46].
8 At [49].
9 At [47].
10 At [48]. The “original estimated value” is a reference to the indicative assessment prepared in
May 2005: See [9] above.
11 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 (SC).
12 Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1 (SC).
[23] The appellate court has the responsibility of considering the merits of the case afresh, and must substitute its own decision if it reaches a different decision from that reached in the judgment under appeal. As the Supreme Court said in Austin, Nichols, where the lower court had a particular advantage such as technical expertise and the opportunity to assess the credibility of witnesses, the appellate
court might hesitate to find that findings of fact and degree are wrong.13 However,
the weight given to the lower court’s reasoning is a matter for the appellate court’s
assessment.14
Appeal issues
[24] Mrs Thompson’s primary ground of appeal was that the Judge erred in finding that the payment for the RoT covenant was not relationship property under s 8 of the Act. Secondly, it was contended that, in the event that the payment was Mr Thompson’s separate property, the Judge erred in finding that justice did not require it to be treated as relationship property pursuant to s 9(4) of the Act. The third ground of the appeal was that, having found that the sale of the shares to the MLT Trust had defeated Mrs Thompson’s claim to the payment for the RoT covenant, the Judge erred in failing to make a compensatory order under s 44C of the Act.
[25] Mr Thompson cross-appealed against the Judge’s finding that the sale of the HFI shares to the MLT Trust defeated Mrs Thompson’s claim to the RoT covenant. In essence, the grounds of the cross-appeal were that under no circumstances could Mrs Thompson have any claim to the payment.
[26] Determination of the proper treatment of the payment for the RoT covenant (for the purposes of this relationship property proceeding) is central to this appeal. This requires, first, a decision as to whether the payment is “property” as defined in the Act, secondly (if it is “property”), a decision as to whether it is relationship property, and thirdly (if it is not relationship property), a decision as to whether it
should nonetheless be treated as relationship property.
13 Austin, Nichols, above n 11, at [5].
14 See also Kacem v Bashir, above n 12, at [32].
Relevant documents
[27] Before turning to the issues on appeal, it is helpful to refer to the relevant provisions of the agreement for the sale of the business to Next, and the RoT covenant.
The sale to Next
[28] The parties to the sale agreement were HFI, Nutra-Life, and an Australian Nutra-Life company as vendors, the trustees as covenantors, three “Next”-related companies as purchasers, and Next as guarantor.
[29] Clause 2 of the agreement is headed “Sales and Purchases of Assets”. Clause
2.1(a) provided:
2.1 Sales and Purchases
(a) HFI and [Nutra-Life] agree to sell, transfer and assign, and [Next] agrees to purchase and take a transfer and assignment of the Business of HFI and [Nutra-Life] in New Zealand and the New Zealand Assets, on the Completion Date on the terms and conditions set out in this Agreement.
Subclauses 2.1(b) and (c) provided, in similar terms, for the sale of the Nutra-Life
Australian business and assets, and for the sale of intellectual property.
[30] Clause 3 is headed “Calculation and Payment of Purchase Price”. Clause 3.1 set out the purchase price for the assets, as follows:
3.1 Purchase Price for Assets
The Purchase Price for the purchase of the Assets and the assumption of the Assumed Liabilities shall be the sum of
$72,300,000, adjusted in accordance with clause 3.2, allocated as
follows:
(a) for the Assets (other than the Goodwill and the IP Assets), for the IP Assets and for the Assumed Liabilities, the amounts agreed by the Vendors and the Purchaser prior to Completion and formally recorded in the Completion Statement being comprised of the elements set out in clause five of the First Schedule); and
(b) for Goodwill, the balance of the Purchase Price.
[31] In her submissions in this Court, Lady Chambers referred to a breakdown of the purchase price for the business, which indicates that $25,886,236 was allocated to assets, $41,300,000 was allocated to trademark licences and trademarks, and
$8,114,000 was allocated to “goodwill”.
[32] “Assets” was defined in the sale agreement as meaning “prepayments (to the extent specified in the Completion Statement), the Fixed Assets, the Inventories, the Book Debts, the IP Assets and the Goodwill (but excluding, for the avoidance of doubt, the Excluded Assets).” The “Excluded Assets” are not relevant for this appeal.
[33] “Goodwill” was defined in the agreement as follows:
“Goodwill” means the goodwill and trading reputation of the Business and includes (but without limitation) the benefit of and all the Vendors’ rights and interest in:
(a) the Business Contracts (other than the [HFI – Nutra-Life] License); (b) the Business Names and all logos used in the Business;
(c) the business licences and permits of the Business, including the
Material Business Licences;
(d) the Business Records; (e) the Properties;
(f) all formulae, techniques, know-how, trade secrets, specifications, designs, copyright and patents owned or held by the Vendors for use in the Business (including all other intellectual property rights in each of the foregoing);
(g) all customer and supplier relationships with the Business, including any operating lease but excluding any finance lease; and
(h) all software programmes, domain names and websites (including copyright and the material within those websites) owned or held by the Vendors relating to the Business,
but excluding, for the avoidance of doubt, the IP Assets.
[34] Clause 6 is headed “Conditions to Completion”. Subclauses 6.1(a) and (b)
provided:
6.1 Conditions
Completion, and the parties obligations at Completion, are conditional upon the following:
(a) Michael Leith Thompson (or nominee) agreeing to contribute the lesser of $12,000,000 and the sum necessary to subscribe for 19.95% of the ordinary share capital in Next Capital Health Group Limited at Completion (on an as- converted, fully diluted, basis) in cleared and immediately available funds to subscribe for stapled units in Next Capital Health Group Limited immediately after Completion occurring under this Agreement on the terms agreed between the Michael Leith Thompson and Next Capital Heath Group Limited on the Execution Date (as may be subsequently varied in writing by those persons);
(b) Michael Leith Thompson agreeing to a personal restraint of trade for the longer of five years from Completion and two years from the date on which he ceases to be a director of Next Capital Health Group Limited and its subsidiaries that is substantially similar to the restraint included in clause 11 and agreeing to provide services to allow the smooth transition of the sale of the Business, that are incidental to the Transaction and that will be for a temporary period commencing on Completion on the terms agreed between the Michael Leith Thompson and the Purchasers on the Execution Date (as may be subsequently varied in writing by those persons);
[35] Clause 11 is headed “Non-compete” and provided that the vendors and the covenantors undertook that neither they nor any company related to any of them would directly or indirectly carry on any activity or business which is the same as or similar to the Nutra-Life business, or hold any interest in any company or other business entity which either directly or indirectly carries on such business.
The RoT covenant
[36] The RoT covenant was a separate agreement between Mr Thompson and
Next. The relevant provisions were as follows:
(a) The Introduction provided, as relevant
...
C. [Mr Thompson] has knowledge, skill and experience that, if utilised by a competitor of Next, would be detrimental to the business to be acquired by Next under the Sale and Purchase Agreement.
D. Accordingly, Next has required [Mr Thompson] to enter into a restraint of trade for a period equal to the longer of five years after completion and two years after he ceases to be a director of Next Capital Health Group Limited and its subsidiaries, and to provide certain incidental temporary, transition, services to Next.
(b) Clause 1 Non-Compete provided, as relevant:
1.1 Definitions
For the purposes of this Section 1, “Restricted Activity” means any activity or business which is the same as or similar to the businesses of [HFI and Nutra-Life] as of the Completion Date, including in respect of the research, development, manufacture, production, marketing, distribution or worldwide sale of nutritional products, supplements, herbal and sports nutrition products, and the licensing of certain trademarks.
1.2 No competition
Subject to clause 1.5, [Mr Thompson] agrees that he will not, during the Restraint Period ... and in the Restraint Area
...:
(a) directly or indirectly carry on or be engaged in, whether solely or with another person and whether for himself or as manager, employee, director or agent for any other person, or any other capacity whatsoever, any Restricted Activity; or
(b) hold any interest in any company, corporation, partnership, joint venture, association or other business entity which directly or indirectly carries on or is in engaged in, whether solely or with another person and whether as manager, employee, director or agent for another person, or in any other capacity whatsoever, any Restricted Activity.
[Subclause 1.3 Restraint Period provided for the restraint period to be the greater of five years from the completion date under the sale agreement, or two years after the date Mr Thompson ceases to be a director of Next.]
...
1.8 Reasonableness of restraint
[Mr Thompson] acknowledges that each of the restrictions imposed by this clause 1:
(a) is reasonable in its extent (as to duration, geographical area and restrained conduct) having
regard to the interests of each party to this
Agreement; and
(b) extends no further, in any respect, than is reasonably necessary and is solely for the protection of [Next] in respect of the goodwill of the Business.
...
1.10 Consideration
(a) In consideration of [Mr Thompson] agreeing to provide the restraints set out in this section 2, Next agrees to pay to [Mr Thompson] at Completion on the Completion Date the amount of $8,000,000 (plus Goods and Services Tax (“GST”) (if any) in cleared and immediately available funds.
(b) The parties are proceeding on the basis that the restraints are not subject to GST because they are not a supply made in the course or furtherance of a taxable activity. ...
(c) Clause 2 Provision of transition services provided:
2.1Agreement by [Mr Thompson] to provide transition services
[Mr Thompson] agrees to provide Next with transition services to allow the smooth transition of the sale of the businesses of [HFI and Nutra-Life] to Next under the Sale and Purchase Agreement (the “Transition Services”.
The Transition Services will be incidental to the sale of such businesses and will be for a temporary period commencing on completion.
2.2 Scope of services
[Mr Thompson] and Next will agree on the scope of the Transition Services from time to time (each acting reasonably).
2.3 Compensation
Next shall not be obliged to pay [Mr Thompson] any salary or other form of remuneration or compensation for the provision of the Transition Services.
Relevant authorities
[37] It is also helpful, before turning to the issues, to refer to five judgments which were focused on in counsel’s submissions. In this summary, the parties will be
referred to as “the wife” and “the husband”, rather than as “appellant” or “respondent”, to avoid confusion. Also, I will refer to “relationship property”, rather than to “matrimonial property”, in accordance with the changes effected in the Property (Relationships) Amendment Act 2001.
Z v Z (No 1)15
[38] This was an appeal to the Court of Appeal where the sole issue was the proper valuation of the goodwill of the husband’s legal practice. It was common ground that the practice was relationship property. The parties also agreed that if on a notional sale the husband were to give a restraint of trade covenant, the goodwill would be worth $80,000, but the goodwill would be worth only $35,000 in the absence of such a covenant. In the Family Court, it was held that the goodwill should be valued so as to include the value of the restraint, and was relationship
property.16 On appeal, the High Court reached a different conclusion, on the basis
that the restraint would require the husband to give up a right to practise his profession in the future, and the right to practise in the future could not be relationship property.17
[39] The Court of Appeal unanimously held that the goodwill was to be valued with the restraint. The Court’s reasoning was that, under the Act, relationship assets are to be valued at market value (with a “willing but not anxious seller” and a “willing but not anxious buyer”), and on the basis that the seller is seeking the maximum price obtainable. A restraint of trade covenant increases the price a buyer would be prepared to pay, and the existence of a restraint covenant is an important
element in estimating the value of the goodwill.18 Richardson J said:19
In the hypothetical market the willing but not anxious seller must be taken to seek the maximum price obtainable from what is available for sale. Protection against the hypothetical seller’s competition through a covenant in restraint of trade is an element of goodwill increasing the price a hypothetical buyer would otherwise be prepared to pay. As an element in the goodwill the covenant attaches to the business and cannot properly be characterised as a purely personal attribute.
15 Z v Z (No 1), above n 5.
16 Z v Z (1987) 3 FRNZ 48 (FC), at 56–57.
17 Z v Z (1988) 3 FRNZ 64 (HC), at 69.
18 Z v Z (No 1), above n 5, at 415 (per Richardson J), 417 (per Somers J) and 418 (per Bisson J).
...
[Goodwill] is independent of the current owner. The value of goodwill is the additional value attaching to the business as a going concern over and beyond the value of the assets employed in the business. It is concerned with the earning capacity of the business, here a professional practice, ... As the agreed valuation figures vividly demonstrate, the existence of a covenant restraining the hypothetical seller of this business from competing with the business following sale is an important element in estimating the value of the goodwill. It is in that sense an attribute of existing property.
Briggs v Briggs20
[40] This case concerned the wife’s share of a company, which provided personal investment advice, brokerage services, and sub-underwriting, owned by the parties in equal shares. The Family Court had valued the company at $1.4 million and ordered that the wife’s shares be vested in the husband, subject to his paying her $700,000. The issue on appeal to the High Court was whether the business was properly valued at $1.4 million.
[41] It was accepted by both parties that the company owed much to the drive and acumen of Mr Briggs, and that its success had been built on his personal efforts, contacts, and reputation. Thorp J accepted the husband’s submission that a distinction must be made between “personal goodwill” (described as the business skills of an entrepreneur, personal contacts built up by individuals in a certain environment and reputations of those engaged in business or in professional undertakings) and “company goodwill” (the benefit and advantage of the good name, reputation, and connections of a business).
[42] His Honour referred to Z v Z (No 1) but observed that:21
... the giving of a restraint of trade covenant would not ensure the retention by a purchaser of the whole of the clientele of a business in which trade is closely attached to the personal qualifications of the vendor of the business. The effect of Z v Z would be very slight in the case, for example, of a public relations business “depending for its viability almost exclusively on the ability and business connection” of its proprietor: ...
20 Briggs v Briggs (1996) 14 FRNZ 404 (HC).
21 Briggs v Briggs, above n 20, at 411(reference omitted).
Thorp J accepted that a discount should be applied to the valuation of the company
to take into account the “personal goodwill” factor.
Z v Z (No 2)22
[43] In this case the Family Court had held that the wife was entitled to a half share of the relationship property at separation, including a share of the husband’s expected future earnings as a member of an accountancy firm. This was on the grounds that it was just, pursuant to s 9(4) of the Act. The husband appealed, and his appeal was heard before a full Bench of the Court of Appeal. The issues on appeal included whether the husband’s earning capacity, together with any enhancement of that capacity during the marriage, were relationship property under the Act.
[44] It was submitted for the wife that the husband’s enhanced earning capacity was “property” under the Act, and that it was relationship property because it had been developed and enhanced during, and as a result of, the marriage. The Court of Appeal concluded that:23
As forceful as these considerations are, however, expanding the definition of property to include a husband’s enhanced earning capacity would be a radical departure from the conventional concept which Parliament chose to endorse. It is true that the definition in s 2 is not exclusive, but the classification of a spouse’s enhanced earning capacity as property would extend the breadth of the definition to the point where the reference to real and personal property and rights and interests in such property would appear incongruous. The word “asset” is given the same meaning as “property” and the definition of “owner” is similarly restricted to the more conventional meaning of property. ... Further, if Parliament had been intended to include a spouse’s enhanced earning capacity, it could be expected to have made express reference to it as well as provide the machinery for its implementation.
[45] However, the Court rejected a submission for the husband that in order to be
“property” under the Act, property must be transferable or have an exchange value. The Court said:24
22 Z v Z (No 2) [1997] 2 NZLR 258 (CA).
23 At 281. (Ms Hinton submitted that the judgment of the Court of Appeal in Z v Z (No 2) had been influential in leading to the insertion of s 15A of the Act in the Property (Relationships) Amendment Act 2001).
It is to be acknowledged that construing the definition in s 2 to include a right or interest of this kind [a right or interest in a professional partnership] is, in effect, to recognise the husband’s enhanced earning capacity once that capacity is harnessed through an external mechanism such as the partnership deed; all agree that the husband’s interest in that partnership is property. His career advanced to the point where he became a partner in his accounting firm and to the income to which he is now entitled reflects his earning capacity. The key point, however, is that this earning capacity is manifested in a right or interest which falls within the definition and on which a money value can be placed. It is the right or interest which is property and not the underlying economic concept of earning capacity which gives rise to or is the product of that right or interest.
[46] The Court left open the question whether specific interests (for example, an interest in a sole practice, or employment contracts) came within the definition of “property” in the Act, noting that the issue will be whether the interest can be brought within the definition and given a monetary value, but held that a spouse’s enhanced earning capacity, of itself, was not relationship property under the Act.25
Brownie v Brownie (HC)26
[47] Both Mr and Mrs Brownie had given restraint of trade covenants on the sale of their business, shortly after their separation. As part of the sale, Mr Brownie was to be paid a “retainer” of $60,000 a year, for five years. Mrs Brownie claimed that the retainer was relationship property. The Family Court held that $50,000 of the retainer was a genuine remuneration for services, and the balance was relationship property, pursuant to s 9(4) of the Act.27 Mr Brownie appealed to the High Court and his appeal was heard before a full Court.
[48] The High Court considered the judgments in Z v Z (No 1), Briggs v Briggs, and Z v Z (No 2), and held that they were bound by the judgment in Z v Z (No 1). The Court concluded that the benefits derived by Mr and Mrs Brownie under the sale agreement, including the retainer arrangement, had to be treated broadly as being part of the proceeds of sale. The Court found no basis in principle upon which Z v Z
(No 1) could be distinguished.28
25 At 283.
26 Brownie v Brownie (HC), above n 6.
27 Brownie v Brownie (1997) 16 FRNZ 54 (FC) (Brownie v Brownie (FC)).
28 Brownie v Brownie (HC), above n 6, at 8.
[49] The Court further said that the judgment of Thorp J in Briggs v Briggs was not inconsistent with Z v Z (No 1), and that Z v Z (No 2) did not cast any doubt on the authority of Z v Z (No 1), and was not inconsistent with Z v Z (No 1). The Court noted that the Court of Appeal in Z v Z (No 2), rejected the argument that “enhanced earning capacity” could be treated as “property”, but did not suggest that the goodwill of a practice, capable of being sold, did not fall within the concept of
property under the Act.29 The Court accepted that the effect of the restraint of trade
was to “sterilise” Mr Brownie’s future earning capacity, and thus diminish what would otherwise be his separate property, but concluded that there was “a fundamental policy issue involved”, and that the issue of policy had already been resolved against him, by Z v Z (No 1).30
Brownie v Brownie (leave application)31
[50] Finally, it is appropriate to note the comments of Young J in respect of Mr Brownie’s application for leave to appeal to the Court of Appeal from the High Court judgment. His Honour noted:32
However, the issue is, in truth, one of policy and on this issue the Court of Appeal has spoken and that was very much the basis upon which this Court dismissed the appeal.
Is the payment for the RoT covenant “property” under the Act?
[51] “Property” is defined in the Act as including:
(a) real property:
(b) personal property:
(c) any estate or interest in any real property or personal property: (d) any debt or anything in action:
(e) any other right or interest:
[52] It was not disputed that Mr Thompson’s particular skills and attributes, and his “enhanced earning capacity” derived from those skills and attributes, are not “property” under the Act.33 However, the RoT covenant, and the payment Mr
Thompson received for the covenant which restrained him from employing those
29 At 11.
30 At 12.
31 Brownie v Brownie (1998) 17 FRNZ 190 (HC) (Brownie v Brownie (leave application)).
32 At 192.
attributes and skills in competition with Next, were “property” as defined in the Act. In terms of Z v Z (No 2), the payment can be seen as having “harnessed” Mr Thompson’s “enhanced earning capacity” through the “external mechanism” of the RoT covenant and the monetary value of the payment to him.34 Accordingly, the RoT covenant, and the payment Mr Thompson received from Next, are both “property” under the Act.
What sort of property is the payment for the RoT covenant?
Introduction
[53] In the Family Court, it was submitted for Mrs Thompson that the payment for the RoT covenant was relationship property pursuant to s 8(1)(e) and (l) of the Act, which provide, as relevant:
8 Relationship property defined
(1) Relationship property shall consist of—
...
(e) subject to sections 9(2) to (6) ... all property acquired by either spouse ...after their marriage ... began; and
...
(l) any income or gains derived from, the proceeds of any disposition of, and any increase in the value of, any property described in paragraphs (a) to (k).
[54] It was submitted that the RoT covenant protecting the goodwill of the HFI/Nutra-Life business was relationship property, and that the payment was the proceeds of the disposition of that property. Z v Z (No 1) and Brownie v Brownie (HC) were cited as authority.
[55] The Judge considered that Z v Z (No 1) and Brownie v Brownie (HC) had no applicability. This was because in both of those cases the asset intended to be protected by the restraint of trade provision (respectively, the legal practice and the company) was accepted as being relationship property. The Judge considered that the position was quite different in the present case, as the shares in HFI/Nutra-Life
were held by the trustees. Thus, the Judge held, the HFI/Nutra-Life business was neither relationship property nor separate property; it was trust property.35
[56] That analysis, however, begs the question as to the nature of the RoT covenant and the payment to Mr Thompson. The purpose of considering Z v Z (No 1) is to decide whether the payment for the RoT covenant is relationship property. The analysis cannot begin from an assumption that it is not relationship property.
Submissions on appeal
[57] Ms Hinton’s reasoning for the payment for the RoT covenant being relationship property started with the statement by Richardson J in Z v Z (No 1) that the goodwill of a business is “property” and that, as an element of the goodwill, a restraint covenant attaches to the business.36 Ms Hinton submitted that the goodwill of the HFI/Nutra-Life business (including both the “business goodwill” and any goodwill which resided in Mr Thompson, personally, (the “personal goodwill”)) was acquired and built up during the marriage, and was in existence at the time Mr and Mrs Thompson separated. It was, therefore, relationship property under s 8(1)(e) of
the Act.
[58] Ms Hinton further submitted that when Mr and Mrs Thompson sold their shares to the MLT Trust, the business goodwill was transferred with the shares, but Mr Thompson retained the personal goodwill element of the business goodwill. Then, she submitted, when the HFI/Nutra-Life business was sold to Next, the payment of $8 million to Mr Thompson was property derived from the personal goodwill element of the business goodwill, and was, therefore, relationship property under s 8(1)(l).
[59] Ms Hinton also submitted that the submissions by Lady Chambers for Mr Thompson that the payment to Mr Thompson was for his personal skills and attributes, and “forward-looking”, and therefore his separate property, were wrong.
She submitted that the RoT covenant was assignable, and clearly property and, as
35 Family Court judgment, at [34].
36 Z v Z (No 1), above n 5, at 415.
made clear in Z v Z (No 1), an element of the business goodwill rather than attributable to a “purely personal attribute”. The purpose of the payment was not “forward-looking”, but aimed at protecting the business goodwill, which had been acquired during the marriage. Ms Hinton submitted that, in accordance with the strong policy considerations expressed in Z v Z (No 1), and recognised in Brownie v Brownie (HC), the RoT covenant, and the payment for it, are properly classified as relationship property.
[60] As indicated above, Lady Chambers submitted that a clear distinction must be made between business goodwill and personal goodwill, and that the payment to Mr Thompson was solely for his personal skills and attributes, and was his separate property. She submitted that, as a payment for personal goodwill, it was outside of the policy considerations of Z v Z (No 1).
[61] Lady Chambers submitted that the distinction between personal goodwill and business goodwill was carefully made in the agreements entered into on the sale of the business to Next; the sale agreement, in which the trustees sold the assets of the business to Next, and the RoT covenant, in which Mr Thompson agreed to an extensive restraint on the use of his skills and attributes in competition to Next.
[62] Lady Chambers further submitted that the payment to Mr Thompson was a “classic” personal goodwill payment, in that it was to compensate him for the restraint on his using his personal earning capacity in the future. She also submitted that the payment was intended to compensate Mr Thompson for services he was to provide in the future (the “transitional services” referred to in the RoT covenant, and as a director of Next) for which he was to receive no payment.
[63] Finally, Lady Chambers submitted that the payment did not exist at the time Mr and Mrs Thompson separated, so could not be relationship property under s 8(1)(e).
Discussion
[64] The RoT covenant, and the payment to Mr Thompson, raise two considerations, with different focuses. The first is that the RoT covenant was given
in order to protect the value of the HFI/Nutra-Life business, so it is necessary to focus on the value of restraining Mr Thompson from certain activities for a specified period. This may be described as an element of business goodwill. As Richardson J said in Z v Z (No 1), in this respect “the restraint attaches to the business and cannot properly be characterised as a purely personal attribute”.37
[65] The second consideration is that the RoT covenant restrains Mr Thompson from using his personal skills and attributes (except in accordance with the terms of the covenant) and it is necessary to focus on the benefits and burdens of his not using those skills and abilities. This is the personal goodwill element, described by
Thorp J in Briggs v Briggs.38
[66] While both counsel in their submissions took an “all or nothing” approach (the RoT payment was entirely for business goodwill or entirely for personal goodwill) it is clear from Briggs v Briggs that both can co-exist in a business. In that case, while recognising the significance of Mr Briggs to the success of the company, Thorp J did not accept the submission on behalf of Mr Briggs as to the value to be put on the personal goodwill element. The expert opinion evidence for Mr Briggs was that, in the absence of Mr Briggs’ personal skills, the company should be valued at $569,000, a discount of approximately $830,000 from the valuation given in the expert evidence for Mrs Briggs (indicating that Mr Briggs’ personal goodwill should
be valued at $830,000). However, his Honour allowed a discount of $300,000.39
This indicates that a considerable portion of Mr Briggs’ personal attributes attached
to the business goodwill of the company, rather than to his personal goodwill.
[67] When deciding whether the payment to Mr Thompson for the RoT covenant was relationship property, it is necessary to consider the effect of the covenant in protecting the business goodwill of the HFI/Nutra-Life business. At the same time, as noted in Briggs v Briggs, only business goodwill attaches to the business so as to become potentially, relationship property. In this case, it was not disputed that the value of the HFI/Nutra-Life business was increased by virtue of the RoT covenant.
The question is, did it increase the value of the business to $72.3 million (the
37 Z v Z (No 1), above n 5, at 415.
38 Briggs v Briggs, above n 20, at 411.
39 Briggs v Briggs, above n 20, at 414.
purchase price) or to $80.3 million (the purchase price plus the payment to Mr
Thompson).
[68] Put another way, I am required to decide whether the payment to Mr
Thompson for the RoT covenant diverted value from the “total” purchase price of
$80.3 million by paying to him the amount by which the value of the HFI/Nutra-Life business was increased by virtue of the covenant, or whether the purchase price of
$72.3 million took into account the value of the RoT covenant.
[69] Unfortunately, the valuations in evidence do not give a clear view as to the value of the HFI/Nutra-Life business with and without the RoT covenant. The valuation prepared in May 2003 by Hussey & Co (“the Hussey valuation”),40 suffered from the fact that its author had access to limited information. For that reason, the assessment was described as “indicative”. The Hussey valuation of between $37.9 million and $43.6 million, with a mid-point of $40.7 million does not
appear to take into account the effect on business goodwill of a restraint of trade covenant.
[70] In November 2006, the trustees asked Deloitte to comment on the reasonableness and price and offer structure proposed by Next for its purchase of the HFI/Nutra-Life business (“the Deloitte comment”). Deloitte recorded that Next had offered to purchase the assets and undertaking for $72.3 million, and to make a separate payment to Mr Thompson of $8 million “as consideration for a Restraint of Trade agreement and for committing to undertake transition services to allow the smooth transition of the sale of the Nutra-Life business to Next.”
[71] It is evident that the Deloitte comment is not a “valuation” as such: as Deloitte says, it is a comment on the reasonableness of Next’s offer rather than an analysis and valuation of the HFI/Nutra-Life business. Nevertheless, the Deloitte comment in particular as to the effect of the RoT covenant, is helpful.
[72] Regarding the RoT covenant, Deloitte commented that:
Given Next’s stated position that [Mr Thompson’s] ongoing transition role, given his close knowledge of both businesses, is critical to bringing the two companies together and maximising the synergies between them, we believe that the value Next would ascribe to the transaction without [Mr Thompson’s] contractual and equity commitment would be materially reduced. In fact, it is possible (and indeed likely) that Next (or any other prospective buyer) would not be interested in Nutra-Life at all without these commitments.
[73] Deloitte further commented that:
... the restraint of trade component is likely to be a requirement for any purchaser. The value to Nutra-Life to a prospective purchaser without (Mr Thompson] being restrained is therefore likely to be significantly reduced (or arguably making the business unsaleable), particularly given his long standing role in the industry.
[74] Working back from the sum of $72.3 million (that is, the purchase price exclusive of the payment to Mr Thompson) Deloitte calculated that EBITDA41 multiples of 7.2x (forecast EBITDA) or 8.0x (historical EBITDA) had been applied. Deloitte’s opinion was that these multiples compared “very favourably” to the multiple applied for the purpose of Next’s earlier purchase of Healtheries42 (where a multiple of 7.6x forecast EBITDA was applied for a “more strategic acquisition”) and the multiple of 8.0x forecast EBITDA applied for another recent purchase of a nutritional supplements business, involving unrelated parties. Deloitte observed that it was “a widely held view” that the latter purchase had been at a “very high price”. Deloitte considered that both of these purchases “would have had commercial restraints on the vendors and hence these multiples have not been adjusted downward to compare to the 7.2x [multiple for the HFI/Nutra-Life purchase price of
$72.3 million] which has this element carved out”.
[75] The trustees also obtained a valuation of the RoT covenant from Simmons Corporate Finance (“the Simmons valuation”). Simmons applied a “comparative income differential” method (assessing the difference between the value of the business with the RoT covenant and without it), by using the “discounted cash flows” and “capitalisation of earnings” valuation methods. Simmons valued the RoT covenant at between $6.2 million and $9.6 million. However, as the Simmons
valuation works from the Next purchase price and payment to Mr Thompson, it does not assist in assessing the value of the HFI/Nutra-Life business.
[76] There are other factors which point either towards $72.3 million having properly accounted for the business goodwill of the HFI/Nutra-Life business, or towards $80.3 million being the “total price”.
[77] Under the sale agreement, the vendors were the HFI/Nutra-Life companies, with the trustees as covenantors. The sale agreement provided at clause 3.1(a) and (b) that the purchase price of $72.3 million was for the assets and for goodwill.43
Further, at clause 6.1(b), the agreement included a condition requiring Mr Thompson to enter into the RoT covenant and, at clause 11, a non-competition provision binding the vendors and covenantors.44 While the distinction made in respect of the purchase price may suggest that the business goodwill (only) was transferred under the sale agreement, the interconnection made in clauses 6.1 and 11 between restraint covenants by Mr Thompson and the companies/trustees may suggest that the business derived value and protection from restraining Mr Thompson. That would be business goodwill, in terms of Z v Z (No 1).
[78] The RoT covenant provided, at clause 1.10(a) and (b),45 that the payment was to Mr Thompson, as consideration for providing the restraints, and that the parties considered that GST was not payable because the payment was a personal payment, rather than for a supply made in the course of, or furtherance of a taxable activity. This may suggest that the payment was for Mr Thompson’s personal goodwill.
[79] The two independent trustees, Mr Dell and Mr Ellwood, stated in affidavits filed in the proceeding that Mr Thompson had asked to be paid between $12 million and $15 million for entering into the RoT covenant, and that they negotiated with him to reduce the payment down to $8 million. The trustees do not say why they considered it necessary to negotiate with Mr Thompson as to the amount he was to receive for the RoT covenant. It may suggest that the trustees saw the sale to Next as
a package at $80.3 million, and that the more that was diverted to Mr Thompson, the
43 Referred to at [30] above.
44 Referred to at [34] and [35] above.
less would come to the trustees as shareholders. It may also suggest that the trustees were concerned to ensure a proper balance between the allocation of payments for the business goodwill and Mr Thompson’s personal goodwill.
[80] Finally, I refer to an affidavit sworn by Mr Lockhart, of Next. Mr Lockhart was one of two people in Next responsible for the purchase of the HFI/Nutra-Life business. Mr Lockhart makes it clear that Next was concerned to ensure that Mr Thompson’s industry experience, entrepreneurial flair, and personal abilities and knowledge of the industry were not employed in competition to Next.
[81] In this appeal, it is for the appellant to establish that the Judge was wrong to conclude that the payment to Mr Thompson was not relationship property under s 8(1)(e) and/or (l) of the Act. To do this, the appellant must establish that the payment was for business goodwill, not for personal goodwill. It is a matter of re- considering the evidence presented to the Family Court, and bearing in mind the authorities referred to, in particular the strong policy statements made in Z v Z (No 1), and noted in Brownie v Brownie (HC).
[82] Having considered those matters, and applying a balance of probabilities standard, I am not satisfied that the appellant has established that the payment to Mr Thompson for the RoT covenant was for business goodwill. Rather, on the same standard, I accept that payment for the business goodwill of the HFI/Nutra-Life business was incorporated in the purchase price of $72.3 million. The payment to Mr Thompson was for his personal goodwill and is not, therefore, relationship property under s 8(1)(e) or (l).
Should the payment for the RoT covenant be treated as relationship property pursuant to s 9(4) of the Act?
Introduction
[83] It is necessary to go on to consider whether the Judge erred in concluding that the payment for the RoT covenant should not be treated as relationship property, under s 9(4) of the Act. Section 9 of the Act defines “separate property”.
Section 9(1) provides that “All property of either spouse or partner that is not relationship property is separate property”. Section 9(4) provides (as relevant):
(4) The following property is separate property, unless the Court considers that it is just in the circumstances to treat the property or any part of the property as relationship property:
(a) all property acquired by either spouse or partner while they are not living together as husband and wife ...
[84] In the Family Court it was submitted for Mrs Thompson that if the Judge found that the payment for the RoT covenant was “property acquired by” Mr Thompson after separation (rather than the proceeds of sale of relationship property), then it would be just to treat the payment as relationship property.
[85] The Judge rejected this submission on the basis that the HFI/Nutra-Life business had not been relationship property since 1994, when Mr and Mrs Thompson sold their shares to the trustees of the MLT Trust. Her Honour concluded that while the payment could arguably be trust property (as being the payment for a covenant Mr Thompson was able to give, and for which he could obtain a substantial price, only by virtue of the existence of the HFI/Nutra-Life business) it had not been established that the interests of justice required the payment to be treated as separate
property.46
Submissions on appeal
[86] Ms Hinton submitted that the Judge was wrong to conclude that the transfer of shares to the MLT Trust ruled out the payment for the RoT covenant being treated as relationship property and that, as a result, the Judge failed to deal with the s 9(4) argument. She submitted that the Judge failed to exercise the broad unfettered discretion conferred by s 9(4). In particular, Ms Hinton submitted that Mr Thompson had developed and built up the particular skills and attributes (personal goodwill), for which he later received payment pursuant to the RoT covenant, during the marriage. In the circumstances, she submitted, it would be just to treat the
payment as relationship property.
46 Family Court judgment at [38]–[31].
[87] Lady Chambers submitted that justice did not require the payment to be treated as relationship property, for the reasons that it was made to Mr Thompson four years after the marriage ended, and that it was not traceable to the efforts of the marriage; rather, it was a purely forward-looking payment, aimed at compensating Mr Thompson for depriving him of the ability to work in the future in competition to Next, and for providing transition services together with a significant investment in Next.
Discussion
[88] In deciding whether it is “just in the circumstances” to treat property as relationship property under s 9(4) the Court is granted wide latitude in exercising this discretion. In M v B, William Young P stated that:47
... a broad brush assessment is necessary to produce an outcome which is
‘just’ for the purposes of ss 1N(c) and 9(4) and conforms to the principle expressed in s 1N(c) that a ‘just division’ requires the Court to have ‘regard
to the economic advantages’ to the husband ‘arising from’ the marriage and its ending. What is ‘just’ for the wife, must, of course, not be at the expense
of what is unjust for the husband. But I see no injustice to the husband in taking a plain words approach to the language of the statute and in particular to ss 8(1)(l) and 9(4). I do not see an actual (as opposed to an apparent)
doubling up in the award to the wife.
[89] This is not to say that what is “just” is arbitrary; rather what is “just” needs to be considered from an overall perspective. As the Court of Appeal in Morris v Morris stated, the discretion in s 9(4) to treat separate property as relationship property is “conferred in the broadest terms and is not expressly fettered in any way” although it “must, of course, be exercised having regard to the purposes of the legislation.”48
[90] The purposes and principles of the Act are set out in ss 1M and 1N which provide, as relevant:
1M Purpose of this Act
The purpose of this Act is—
...
(b) to recognise the equal contribution of husband and wife to the marriage partnership, ...
47 M v B [2006] 3 NZLR 660 (CA), at [179].
(c) to provide a just division of the relationship property between the spouses ... when their relationship ends ...
1N Principles
The following principles are to guide the achievement of the purpose of this
Act:
(a) the principle that men and women have equal status, and their equality should be maintained and enhanced:
(b) the principle that all forms of contribution to the marriage partnership, ... are treated as equal:
(c) the principle that a just division of relationship property has regard to the economic advantages or disadvantages to the spouses or partners arising from their marriage, ... or from the ending of their
marriage, ...
[91] These purposes and principles provide the lens through which to view the PRA; in particular, the lens through which to view whether it is “just” in the circumstances to treat, under s 9(4), the separate property as relationship property.
[92] I accept that Mr Thompson’s skills and abilities are not property under s 2 of the PRA. However, it is also true, factually, that the division of roles in the relationship substantially helped Mr Thompson to develop these skills to such an extent that Next was prepared to pay Mr Thompson $8 million for a RoT covenant. This division of roles and the effort that both Mr and Mrs Thompson put into their
relationship, including the company, must be treated as equal.49 In Cossey v Bach,
Fisher J held that:50
Treatment of matrimonial property under the discretion in s 9(4) is normally found upon evidence that the property in question is directly or indirectly traceable to assets which had constituted matrimonial property during the marriage, or at least on broader grounds establishing some connection between the existence of the separate property and the earlier marriage partnership.
[93] In my view such a connection between the existence of the RoT payment and the efforts during the marriage exists in this case. By Mrs Thompson looking after the children and the home, this enabled Mr Thompson to develop his skills and abilities to an extent he could not otherwise have done. He was able to build up HFI/Nutra-Life into an extremely valuable company due to this division in roles. It
is for these developed skills and abilities, or for them not to be used, as well as
49 PRA, s 1N(b).
Mr Thompson’s demonstrated performance, that Mr Thompson was paid the
$8 million RoT payment. These skills, abilities, and performance are causally linked to the efforts in the relationship. Therefore there is some connection between the RoT payment and the relationship.
[94] The mere presence of a connection between the RoT payment and the relationship does not, however, automatically mean that it is just to treat the whole
$8 million RoT payment as relationship property under s 9(4). In addition to determining whether there is a connection between the RoT payment and the relationship, it is also necessary to determine the character of the RoT payment. In Roberts v Roberts, Williamson J stated:51
... the philosophical basis for some compensation payments is important to a resolution of this case because if the sole and proper basis for such payments is a property right acquired during the course of employment ... then that right may have been acquired during the course of a marriage, rather than being a payment made for events occurring after the marriage had finished.
[95] If the RoT payment was purely forward looking, as in Roberts v Roberts where the redundancy payment was paid to compensate future disruption to Mr Roberts’ employment, then I find that it would not be just to treat the payments as relationship property under s 9(4). However, if some of the RoT payment was not solely to compensate future disruption to Mr Thompson’s employment, and instead was based on rewarding Mr Thompson for his performance as director of HFI/Nutra- Life during the relationship, then in relation to this portion of the payment, I find that it would be just to treat this portion as relationship property. This is the same distinction as was made in Brownie v Brownie (HC), between compensation for future earnings or services rendered, and the payment in respect of skills and
attributes acquired during the marriage.52
[96] It was expressly recognised by Next that Mr Thompson was very able, had good contacts and employees would follow him. This assessment was not mere conjecture, but was based on past experience when Mr Thompson left Healtheries. Part of the value ascribed to the RoT payment was based on Mr Thompson’s past performance. This portion is not forward-looking and is not compensation for future
disruption. Instead, this payment is for business performance that is firmly connected, even made possible, by the relationship.
[97] In Brownie v Brownie (FC), the Family Court described this exercise of discretion in s 9(4) as being, in practice,53
... used to overcome any perceived unfairness. This is particularly in the case where in some concrete or contributory sense, property acquired post- separation reflected the input of matrimonial property itself, or effort during the marriage resulting in post-separation property such as redundancy payments
[98] I find that it would be unjust not to treat the portion attributable to Mr Thompson’s business performance during the relationship as relationship property. This is in line with the obiter comment in Brownie v Brownie (HC), where the High Court considered that even if it the portion of the retainer attributable to the restraint of trade was separate property, it would be just to treat it as relationship property.54
I find that it is just to treat this portion of the RoT payment attributable to the past
performance – the portion not acting as compensation for future disruption – as relationship property.
[99] On the evidence before the Court, I do not consider that it is possible to fix the amount of the payment for the RoT covenant which is attributable solely to compensating Mr Thompson for loss of future earnings. That is an exercise which will require further evidence, and a further hearing, should the parties not be able to reach agreement.
Has there been a disposition of property to a trust which has defeated Mrs Thompson’s claim, and if so, should an order for compensation be made under s 44C of the Act?
Introduction
[100] In the Family Court, the Judge held that the HFI/Nutra-Life business was relationship property at the time Mr and Mrs Thompson transferred their shares to
the trustees of the MLT Trust.55 However, the Judge held that an order for compensation was not required, as the transfer had been 12 years before the payment was made to Mr Thompson for the RoT covenant, the transfer to the trustees was at the market value assessed at the time, and the decision of the trustees to divide the trust assets equally between Mr and Mrs Thompson meant that they are each sharing equally in the increase in the value of the former relationship property.56
[101] Section 44C of the Act provides, as relevant:
44C Compensation for property disposed of to trusts
(1) This section applies if the Court is satisfied —
(a) that, since the marriage ... began, either or both spouses ... had disposed of relationship property to a trust; and
(b) that the disposition has the effect of defeating the claim or
rights of 1 of the spouses ...
(2) If this section applies, the Court may make 1 or more of the following orders for the purpose of compensating the spouse ... whose claim or rights under this Act being defeated by the disposition:
(a) an order requiring 1 spouse ... to pay to the other spouse ... a sum of money, whether out of relationship property or
separate property:
(b) an order requiring 1 spouse ... to transfer to the other spouse
... any property, whether the property is relationship property or separate property:
(c) an order requiring the trustees of the trust to pay to 1 spouse
... whole or part of the income of the trust, either for a specified period or until a specified amount has been paid.
...
(4) The Court may make 1 or more orders under subsection (2) if it considers it is just to do so, having regard to—
(a) the value of the relationship property disposed of to the trust:
(b) the value of the relationship property available for division: (c) the date or dates on which the relationship property was
disposed of to the trust:
(d) whether the trust gave consideration for the property, and if so, the amount of the consideration:
(e) whether the spouses ..., or either of them, or any child of the marriage, ... is or has been a beneficiary of the trust:
(f) any other relevant matter.
Submissions on appeal
[102] Ms Hinton submitted that the Judge was correct to hold that Mrs Thompson’s rights had been defeated by the transfer of the shares to the trustees of the MLT Trust, but wrong to refuse to exercise her discretion to award compensation under s 44C. In particular, she submitted that the Judge was wrong to consider as a relevant consideration that Mr and Mrs Thompson were already sharing in a substantial property pool, and to consider as relevant the fact that the disposition to the trust had been 12 years before the RoT covenant was entered into.
[103] Lady Chambers submitted that the Judge was wrong to find that the transfer to the trust had defeated Mrs Thompson’s rights and that, in any event, none of Mrs Thompson’s rights had been defeated, as the payment to Mr Thompson for the RoT covenant would never have been relationship property.
Discussion
[104] Section 44C is aimed at compensating someone for their rights to what would otherwise have been relationship property being defeated by a disposition of that property into a trust. Under the Act prior to the introduction of s 44C in 2001, a party could only claim compensation if the disposition was done with the intent to defeat a party’s interest. However, it was difficult to prove that there was such an intent. Sections 44C and 44F were introduced to provide compensatory relief for situations falling outside of s 44.
[105] The leading case on the requirements for a claim under s 44C is the judgment of the Court of Appeal in Nation v Nation.57 The Court stated that there must be a disposition:58
(a) to a trust;
(b) of relationship property;
(c) made since the relationship began; (d) made by either or both of the parties; (e) one to which s 44 does not apply; and
(f) one that has the effect of defeating the claim or rights of one of the partners.
57 Nation v Nation [2005] 3 NZLR 46 (CA).
58 At [144]. The Court of Appeal has recently affirmed this in Rabson v Gallagher [2011] NZCA
459, [2011] NZFLR 1040 (CA) at [57].
[106] In this case, (a) to (e) are clearly satisfied: there was a disposition of the shares to the MLT Trust, this was of relationship property, it was made after the relationship began, by both of the parties, and s 44 does not apply. The contentious question is whether the disposition had the effect of defeating the claim or rights of one of the parties. In relation to this, the main question is whether Mrs Thompson had rights in the $8 million RoT payment at all.
[107] I have already found that the amount of the RoT attributable to business goodwill was part of the $72.3 million purchase price of the company. The additional $8 million RoT payment was not for the business goodwill; it was for personal goodwill. The payment was acquired after the end of the relationship. Under s 9(4), it is by default Mr Thompson’s separate property and Mrs Thompson had no rights in this property. While I have held that it is just to treat part of this separate property as relationship property under s 9(4), this is an exercise of my discretion. It does not found a “right” to the RoT payment. Therefore there was no right to the RoT payment that was defeated by the disposition so s 44C does not apply.
[108] On this basis, I find that the Judge was wrong to hold that the disposition of shares to the MLT Trust defeated rights that Mrs Thompson had to the $8 million RoT payment, because there were no such rights.
[109] In the light of my conclusion that the Judge erred in finding that the disposition of shares to the MLT Trust defeated Mrs Thompson’s rights, it is not necessary to consider Mr Thompson’s appeal against the Judge’s finding that a compensatory order should not be made pursuant to s 44C(2) of the Act. However, for completeness, I turn to consider, briefly, Mrs Thompson’s submission that the Judge erred in the exercise of her discretion under s 44C(4).
[110] I am not persuaded that the Judge took into account irrelevant considerations, failed to take into account relevant considerations, made an error of law, or was plainly wrong. Under subs(4) the value of the property disposed of to the trust, the value of the relationship property available for division, the date on which the relationship property was disposed of to the trust , the consideration given by the
trust, are all relevant factors to which the Court may have regard in deciding whether an order should be made to compensate one of the spouses. The Judge took into account such matters, and was entitled to do so.
[111] Accordingly, I would dismiss Mrs Thompson’s appeal against the Judge’s
refusal to make a compensatory order under s 44C(2) of the Act.
Result
[112] Mrs Thompson’s appeal is dismissed, except insofar as it relates to that portion of the payment for the RoT covenant which does not represent compensation for Mr Thompson’s loss of future earnings. In that respect, the appeal is allowed and further evidence may be submitted, and a further hearing allocated, should the parties not be able to agree on the amount.
[113] Mr Thompson’s cross-appeal is allowed.
[114] As to costs, counsel agreed at the hearing that if agreement cannot be reached, memoranda may be filed.
Andrews J
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