Monday, 27 March 2017

Australian Divorce Blog named in the top 50 Australian blogs

I am delighted that the Australian Divorce Blog has been named in the top 50 blogs in Australia by Feedspot.

In the words of Feedspot founder Anuj Agarwhal:

I personally give you a high-five and want to thank you for your contribution to this world. This is the most comprehensive list of Top 50 Australia Blogs on the internet and I’m honored to have you as part of this!

Wednesday, 22 March 2017

The danger of relying on your valuation expert in the Family Court

Going to court to argue the value of the family company can be a risky affair, as a recent Family Court case illustrates. In the case, called Riley and Riley, all property settlement issues between the husband and wife were settled save one: how much was the husband's interest in the family company worth?

There was $1.7 million difference between the parties as to the value of the shares. Not surprisingly, the expert engaged by the husband, Mr A, said that the shares were worth a lot less; but the expert engaged for the wife said that the shares were worth a lot more.

And for this argument about the value, the parties engaged in a trial in the Family Court that lasted eight days.

Why ever did the parties not engage a joint expert, consistent with usual practice, and save themselves an enormous amount in legal and accounting fees?

The husband's expert Mr A, who was ultimately favoured by the court,  was of the view that there was no goodwill attached to the business, and that the appropriate valuation was net value of the physical assets. The wife's expert, Mr K, formed the view that the usual approach of capitalisation of future maintainable earnings was the right approach to valuation. Mr A was ultimately favoured because the husband was seen as acting prudently and efficiently, and the husband had provided more detailed information to Mr A than he had to Mr K. Mr A was therefore better informed, and therefore in a better position to offer an opinion than Mr K.

The wife's submissions

The case sets out a good summary of the law concerning valuations, as provided for in the submissions of the wife's counsel (but also their limits, as set out by Justice Thornton);

  • There is no fixed rule in the Family Court for the methodology for determining the value of shares or other property or commodities.
  • The standard for the determination of a fair price for a business is generally that which a hypothetical prudent purchaser would pay a not over anxious vendor who desired to purchase it for the most advantageous purpose for which it was adapted. In this regard counsel referred to Nettler & Nettler [2009] FamCAFC 185 at [28], which identified this as the guiding standard in relation to the valuation of land, as articulated in Spencer v Commonwealth (1907) 5 CLR 418.
  • The fact that a business does not sell need not be taken as indicative of the value of shares of a business; the test laid down in Spencer v Commonwealth can only be applied where there is a ready market, and is “of no application” in a case where a market is lacking.The fact that a business may be unsellable – that the value of its shares may be unrealisable through sale – does not necessarily render it valueless.
  • The value to a hypothetical prospective purchaser is not necessarily the relevant figure when evaluating the value of shares in private companies in a family law context, and in fact this is an entirely inappropriate approach in a family law context. The value to the owner, and the reality of that value, is the relevant figure,and commercial valuation methods are not necessarily appropriate in a family law context, as the commercial valuation of shares in a proprietary company will not necessarily be reflective of the value to the spouse (or other family member). In a family law property valuation context, shares in a company are valued differently depending on the value of the shares to each shareholder; the value is determined by considering, among other things, the shareholder’s relationship with the company and thus the different forms of benefit the shareholder can derive from the shares. The value must be a realistic value, the reality of the worth to the shareholder party.
  • Where a business is a long running business and there is no reasonable or realistic evidence to show it is to cease operations, it makes sense to look to the future maintainable earnings to determine the value of the business unless it is found that the net tangible assets are greater. Counsel relied on the decision of Scott & Scott [2006] FamCA 1379 at [55]. Counsel also relied on Georgeson & Georgeson where capitalisation of future maintainable earnings was considered the most appropriate methodology for valuing certain shares in a business, because the business was an active trading entity.
  • It is necessary to look to the best value to which the business would be put. If a better value for a business is to be found by taking certain actions or viewing the business a certain way, then that is the valuation to be preferred. Counsel referred to the case of Nettler & Nettler, suggesting that the judge at first instance in that case, in preferring the valuation derived by selling a business’ loan book rather than a valuation based on future maintainable earnings, was preferring the valuation methodology arrived at by considering the best value that could be derived from the business in the circumstances of that case. At first instance, the judge referred to the principle that it is most appropriate to refer to the “highest and best use” of an asset when its value is being determined, and the endorsement of this principle in numerous cases.
  • The role of a judge is more nuanced than accepting one expert’s wholesale view or another’s. A judge can accept part of an expert’s view without accepting the entirety of the expert’s view, and, in considering the evidence and coming to their own conclusions, is not necessarily under any obligation to accept the evidence of one expert witness about a matter relevant to a valuation merely because they have rejected the evidence of the other.A judge can (and must) come to their own conclusions about valuation evidence,including about whether a method of valuation is an appropriate one in the circumstances of a case, and is to do so “by the application of established principles of valuation”.
  • Referring to obiter comments by Mason J in Mallet v Mallet, counsel for the wife stated that there can be a risk, in examining methods of valuation, of losing sight of the true object of the exercise of valuation, which is to ascertain the real value of the shares, and focusing instead on the means of achieving that object.
  • Counsel for the wife referred to the Court’s comments in Lenehan & Lenehan that “in ordinary circumstances the vendor’s borrowings are irrelevant” and are not a matter that a hypothetical purchaser would take into account, and “the question of the value of that business ... is to be calculated independently of those factors, otherwise it would mean the value of the business would vary depending upon the particular circumstances of the individual vendor”.

The approach by Justice Thornton

Her Honour found:

  1. There are competing valuations of the business of the Company made by the experts whose expertise was not seriously challenged. On the state of the evidence as it stands, it is not open to me to adopt a different valuation or approach from that of either of the experts. I do not accept Mr K’s midpoint valuation of $2,686,467 because of the deficiencies outlined above and prefer Mr A’s valuation.
  2. I reject the submissions of counsel for the wife, so far as they were asserted, regarding the application of principles of “value to the owner” as being relevant for present purposes where I cannot accept Mr K’s valuation.
  3. I also reject the submissions of counsel for the wife that the “highest and best use” of an asset principle should be adapted and applied in favour of Mr K’s valuation of the Company. The “highest and best use” analogy is not appropriate here and in circumstances where there are flaws identified in the valuation of Mr K because of the lack of information about the financing arrangements of the Company.
  4. The conclusion reached by the Full Court on the facts of the case of Lenehan & Lenehan (“Lenehan’s case”) that “the vendor’s borrowings are irrelevant to the question of the value of that business which is to be calculated independently of those factors” and that it is not a matter which the hypothetical purchaser would take into account is distinguishable on the facts in this case. Lenehan’s case involved the valuation of a pharmacy business where there were competing expert valuations based on capitalisation of future maintainable earnings. An importation business operating in international markets is very different from a pharmacy business because it is a business where borrowing and foreign exchange fluctuations are integral to the operation of the business. A hypothetical prudent purchaser of such a business would not enter into a purchase without factoring the costs of any trade finance arrangement into the equation. Any prudent purchaser must factor in the costs of borrowings in order to determine the value of the business.
  5. The foreign exchange fluctuations into the future remain within the realm of speculation but I am satisfied that the three year period of earnings considered by Mr A is reasonable having regard to the fluctuations in the value of the Australian dollar and the economic factors he outlined.

Sunday, 19 March 2017

Preparing for a family report in the Family Law Courts

When parents continue to disagree about what happens with their children, the road too often leads to the Family Law Courts. When the dispute gets there, the parties will either organise or a judge will order that they see a family report writer so that a family report is written.

What is a family report?

Quite simply, it is a report about the needs and best interests of the children, and deals with the surrounding dynamics, which often include:

  • the parenting capacity of each of the child's parents, and significant others
  • domestic violence
  • drug and alcohol abuse 
  • mental health
  • the child's views and maturity
  • any special needs of the child
  • extended family, such as grandparents, and siblings or half-siblings
  • cultural issues, including if the child is Aboriginal or Torres Strait Islander.

A family report writer will typically interview both parents and, depending on their age and maturity, interview or at least observe the kids alone and with each parent. The report writer will typically have read the affidavit material (either before or after seeing the parties) and any subpoenaed material supplied to them. The interviews typically take most of the day. Most interviews will occur at an office, but occasionally, the family report writer may want to conduct a home visit.

The family report writer will then write a report, setting out the issues, then a narrative of each of the interviews, then commonly in conclusion sets out some recommendations.

When is a family report prepared?

The timing varies. Often it is ordered at the beginning of a matter. Sometimes, it isn't ordered then but is ordered before there is a trial or final hearing. It would be a rare parenting matter that didn't have the benefit of a family report. When the court orders the preparation of a report- it either appoints a family consultant who is employed or contracted by the court- and pays for it, or another expert- and orders the parties to pay.

Sometimes they are organised by the parties before there is any court, to hopefully give the parties guidance and possibly prevent court proceedings, as the parties attempted in Packer and Irwin, for example.

Other times they are organised by an independent children's lawyer.

Who writes family reports?

Typically they are written by expert social workers or psychologists, and occasionally by child psychiatrists.


The power of a family report

A family report writer is the second most powerful person that a parent will deal with in their court case, after the judge. They are more powerful typically than an independent children's lawyer. Their power comes from three sources:

  1. They, and they alone, are typically the only professional in the case to have met both the parents and the children other than in a court room, and interacted with them for a long period. Usually the judge does not have the ability to meet the children. When the judge or independent children's lawyer meets the parties, it is normally in the even more artificial environment of the court room. Family report writers have told me that while they listen to the parents, they are often guided by listening to and observing the children.
  2. They are independent.
  3. They are experts qualified int he field of social science, who are able to assist the parents and the court with recommendations.
Family report writers are not Gods. In the words of one judge: "This court is not run by social workers. It is run by judges. Family reports will be assessed along with other evidence."

The court is not required to follow the recommendations of a family report writer- but often will. If a report is prepared early in the proceedings, but the parties have to wait a long time for a trial, they may find themselves stuck with the (often unwelcome) recommendations for many months and in some cases years, by which time what is in the family report may have become a self-fulfilling prophecy.

Preparing for the family report

When going along to an interview for a report, several things are important to remember:

  1. It will be assumed that you are going to be on your best behaviour- because you know what is being said will be channelled straight back to the judge.
  2. Therefore, dress the part, and don't engage in bad behaviour. A woman who punched the family report writer, for example, did not do so well in the recommendations!
  3. Remember the old American TV saying: "Anything you can and say will be used against you in a court of law." Whether it is in the room with the interviewer, or outside where your child is, be careful about how you act and what you say.
  4. Don't engage in bad mouthing your ex. While your ex might have engaged in bad behaviour- such as domestic violence, and it may be necessary to talk about that, your focus should not be about throwing mud for the sake of it. I continue to be amazed by parents who cannot say one positive thing about their ex as a parent- and continue in that vein in the interview. Occasionally there will be a parent who is so bad that nothing positive can be said about them- but in the scheme of things they are a rarity. Most parents try and be good parents, despite their limitations.
  5. It's all about your kids! Despite the pain between you and your ex, the focus is on what the impact of the breakup and other conduct has had on your kids, and what is needed to protect them and foster their welfare.  
  6. Be honest and be yourself! Family report writers can usually pick a fake a mile off.
  7. Do not overload the family report writer with wads of paper. They may refuse to read any of it. In any event, social workers are much more inclined to observe you, rather than documents. Lawyers are much more interested in documents, as a general rule, than are social workers. Social workers are interested in people.
  8. Above all, make appropriate arrangements for your children. Don't announce with drama that you have to leave early- to get the children somewhere, which with a bit of organisation could have been avoided.  Make sure that your kids have adequate toys, games, food and drink to while away the hours. 
  9. Don't coach your children. Usually the least bit said about the interviews the better. The Family Court of Western Australia has a useful brochure about this- here. Of course, talking to your children in advance must be age appropriate.
  10. Consult your solicitor. Going in unprepared, without the benefit of advice from your lawyer, is foolhardy.

Wednesday, 15 March 2017

High Court gives special leave in duress prenup case

Recently I blogged about how the Full Court of the Family Court said that a wife to be who had signed a pre-nup just before they married, and a financial agreement just after, which were amongst the worst her lawyer had ever seen, was not under duress because she had legal representation. The Full Court had overturned the decision of a Federal Circuit Court judge who found that there had been duress.

The wife sought to appeal that decision to the High Court. Appeals to the High Court are not as of right. What is needed before the appeal is heard is for one or several judges to grant special leave to appeal. Only when that special leave is granted can the appeal proceed.

Special leave was granted last week in that case. Let's see what the High Court does with it now. The High Court rarely decides family law cases, but when they do, they are often highly significant, such as MRR and GR- which redefined practical outcomes concerning parenting decisions, or Kennon v Spry, which redefined how trusts are treated in family law, or Stanford, the effect of which needs to be considered in every property settlement case.

I will watch this one with great interest.

Was it a loan or was it a gift?

A common feature about Australian families is that parents often support their children financially. They either make gifts or lend money to their children. This is often an issue if the adult child splits up from their spouse or partner: was it a loan or a gift?

In my view, anyone who is in this situation and approaching a relationship bustup (or if their son or daughter is about to have one) should get legal advice- quickly.

Too often, the parents and their child will scream out: "It was a loan!" Not surprisingly, too often, the former spouse, who benefited from the money, will say: "No, no it was a gift!" The difference in approach can be significant:

  • If it's a loan, it might be able to be sued upon, meaning that the parents might start separate court proceedings to get their money back (which then pressures the former spouse). Their child typically will say that it was a loan and the money needs to be paid back. These proceedings might end up with the parents being joined to the property settlement proceedings between husband and wife.
  • If it's a loan, there might have been substantial interest owing on it. The capitalised interest might wipe out everything else that the husband and wife might own, meaning that the expartner gets nothing.
  • If it's a gift, then it won't be a deduction from the balance sheet.  It will be taken into account in assessing the financial contributions of the parties on property settlement. Depending on the amount, when it was made and what was made of the money (for example if it were frittered away or was used as a springboard that resulted in all the wealth of the parties being accumulated after that), it might make a significant change in the percentage division to each of the parties, or it might not.
  • Sometimes, in the right types of case, it will make little difference either way.
And even if it is found to be a loan, then is it still owing? For example- many years ago I was acting for the husband. The wife's parents lent the parties a lot of money. With interest it equalled half the value of everything that they owned. If that was removed from the property pool, then there was little left.

What was surprising was that there was loan documentation. It wasn't a recent invention as I have sometimes seen. It was the real deal, prepared by lawyers, and clearly documenting a loan from the wife's parents to her and the husband.

However, there was a problem for them. The loan documentation had not been prepared thoroughly- and it meant that the loan was not repayable because it was outside the time limit for a civil claim in contract. Whoops!

My client was keen to take advantage of the slip up. He would be better off financially, but when taking the course of relying on the Statute of Limitations, there is the real risk of blowback. It is often seen as a low act to rely upon the time limit. He relied on the time limit. He did a very good deal, because the loan was treated as a gift, but subsequently his kids did not talk to him because of their perception that he had ripped off their grandparents.

Be careful what you wish for.

This whole issue of loans was highlighted in a recent Queensland case, decided in the District Court between parents and their son. It did not involve the usual marital bustup, but a falling out between parents and son. The parents claimed that their son owed them almost $300,000 because of loans they had made to him. They failed, despite their son being called a "sponge" by the judge, because despite his promises to pay back, and despite the payments to their son wiping out any savings that they might have for retirement, an essential contractual element- the intention to create legal relations- was missing:

"The plaintiffs were deeply religious people who had a simplistic view of a person’s moral obligations. They were generous in their charity and not merely motivated by financial gain. On the other hand, the defendant cynically abused their generosity and shamelessly sponged on them when he found himself in dire financial circumstances. I found the defendant’s evidence to be self-serving and I did not find him to be a credible witness. I prefer the testimony of the plaintiffs to that of the defendant although it was notably lacking in detail concerning the transactions in question and both plaintiffs were evasive at times. As noted above they were only able to calculate what they alleged they were owed by trawling through bank statements years later. I accept the evidence of the plaintiffs that it was the intention of the parties that the monies advanced by them to the defendant were to be repaid by him. This is supported by what he says in the email correspondence quoted above. I am also satisfied that alleged loans 4, 5 and 6 were made. However, I do not accept that the plaintiffs have discharged the onus of proving that there was an intention to create legally binding loan contracts with the defendant. Even if, extraordinarily, the defendant used the same mantra of “I’ll pay you back in full and more and look after you in old age” practically every time the plaintiffs provided him with money, this is a general statement consistent with him being morally obliged to repay his parents rather than one which bears the indicia of entering into a binding loan agreement. In circumstances where no ledgers were kept and no demand was made until 2015, the transfers of money did not indicate an intention to create legal relations. Rather, in circumstances where the defendant’s business... was struggling and this business employed his sister, the plaintiffs’ daughter, it is understandable that they extended their charity to this organisation. The giving of the credit cards to the defendant for his use whilst he was injured and impecunious also does not indicate an intention to create a binding loan agreement enforceable at law."