Atkins & Hunt and Ors 2017 FamCAFC 79

This is a case that involves a discussion of corporate structures.

In this case, the structure involves the husband and his adult children, but not this wife.

This corporate structure had its beginnings in 1973, 30 years before the husband and wife married.

The particular structure here is that there are two proprietary companies called N Pty Ltd and T Pty Ltd. T is an investment company and the only investments are its shares in N Pty Ltd. The value of the shares in N Pty Ltd determine the value of the shares in T Pty Ltd.  The shareholdings in each company are divided into classes. The eight shareholders, other than the husband, were gifted their shares by the husband. The husband and his adult son are the sole directors of each corporation.

This was a case where the husband was described as, for all practical purposes, controlling all of the voting shares in N Pty Ltd.  What was unusual about N Pty Ltd was that it didn’t treat all members of a class of shareholders in the same way. For example, the holders of C class shares had received different dividends to other holders of C class shares.

The husband’s shareholdings either in his own right or through T Pty Ltd could cause N Pty Ltd to pay all of the dividends to one shareholder which may or may not be the husband or T Pty Ltd or otherwise divide them as they see fit.

The husband could appoint the directors as he chose. The husband had sufficient votes to wind up the companies if he chooses. He’s got the complete discretion to determine the payment of dividends from N Pty Ltd. He has determined the amount of dividend that has been paid and to whom they’ve been paid.

The husband also would move large amounts of cash from time to time to minimise the interest payable on the line of credit by depositing them into the line of credit account secured over the former matrimonial home.

These are perfect examples of the types of issues that are relevant in the Family Court jurisdiction when considering a corporate structure.

The amount of money moved to the line of credit was in excess of $8M.

The case involved a valuer engaged by the wife and a single expert. The Judge preferred the single expert.

Obviously, the wife’s contention was that the corporations were the husband’s alter ego, and, on another ground of appeal, the wife sought that if the corporations were not his alter ego, the value had not been properly ascribed.

The court summarised the wife’s case as being simply that the company was incorporated to meet tax implications and death duties and that the shares have always been in his ultimate control and that he was in a position to receive all benefit at his whim.

The court referred to Mallet v Mallet [1984] HCA 21, Ramsay v Ramsay (1997) FLC 92-742, Warnick J., Harrison v Harrison (1996) FLC 92-682.

In this case, the wife raised arguments on appeal that she had not run at trial and the majority decision determined that those grounds had to fail.  The majority considered the alter ego argument. The court said:

“By reason of their individual memoranda, articles and shareholdings, corporations can embrace widely differing measures of control by an individual shareholder.”

The concept of alter ego can have ambiguity.

Another way of expressing it is synonymous with the concept of lifting the corporate veil. That is, ignoring the separate legal personality of the corporation.

In Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy [1988] FCA 179, it was said:

“It does not follow from the use or even abuse of control of the company’s affairs that their controller acquired any of the company’s property by some informal process.”

The court, in this case, said:

“Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company’s separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded as acts in the law done by that other person.”

The court said:

“More fundamental to the instant context however, each of the statements of Gibb J., Beaumont J., in the Federal forecourt just referred to point to the need for evidence beyond that evident from a company structure including its articles, the nature and extent of its shareholders and the manner in which dividends have in the past been paid in order to found a submission that the corporate veil should be pierced.”

In this case, there were arguments addressing section 254T of the Corporations Act and section 232 of the Corporations Act. These provide:

“CORPORATIONS ACT 2001 – SECT 254T

Circumstances in which a dividend may be paid

• A company must not pay a dividend unless:

• the company’s assetsexceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
• the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
• the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Note 1:    As an example, the payment of a dividend would materially prejudice the company’s ability to pay its creditors if the company would become insolvent as a result of the payment.

Note 2:    For a director“˜s duty to prevent insolvent trading on payment of dividends, see section 588G.

• Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).”

“CORPORATIONS ACT 2001 – SECT 232

Grounds for Court order

The Court may make an order under section 233 if:

• the conduct of a company’s affairs; or
• an actual or proposed act or omission by or on behalf of a company; or
• a resolution, or a proposed resolution, of members or a classof members of a company;

is either:

• contrary to the interestsof the members as a whole; or
• oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.

Note: For affairs , see section 53.”

These loan accounts were referenced to section 90AE(1)(a) which provides….

Section 90AE reminds us that N Pty Ltd is a third party.

The court pointed out that the treatment of loan accounts for the purposes of Division 7A of the Income Tax Act “is by no means conclusive of how they should be treated in achieving justice and equity pursuant to section 79 of the Act”.

The dissenting judgement in this was written by May J. She considered the merits of the new grounds rather than simply ignoring them. The majority did not.

A single expert had valued the company based on the capital rights of the shares in a winding up and depended on the allowance for control by the husband. The wife’s expert valued the company based on the history of payments of dividends. May J. referred to Ashton v Ashton [1986] FamCA 20.  She referred to the decision of Strauss J. with whom Ellis and Emery JJ. agreed.

A trust and a company are not the same.  A company is a separate legal person, a trust is not a separate legal person. The legal owner of the trust property is the trustee and the beneficiaries are the equitable owners of the trust property.

Ascot Investments Pty. Ltd v Harper and Harper (1981) FLC, at page 354, was also considered.

May J. determined that it would be better to consider whether the grounds had any merit rather than dismissing them on the basis that the case was not argued before the Trial Judge. Grounds 1 and 2.1 dealt with the alter ego argument.

Her Honour referred to S & M and Ors [2003] FamCA 1387 as being indicative of the type of argument now being run.

Part VIIIAA of the Act has been enacted post the Ascot Investments Pty. Ltd v Harper and Harper decision.

Eventually, Her Honour found:

“An analysis of the company structure and shareholdings together with the memorandum and articles of association could not be interpreted as matter of fact that the company is the alter ego of the husband.”

May J. wrote the decision in relation to legal fees which was accepted by the majority.

Chorn and Hopkins was accepted as the appropriate authority.

The case of Trevi and Trevi [2019] FamCAFC 51 considered the issue of legal fees as an addback. Murphy J. expressed it in this way:

“I consider respectfully that Her Honour confused two well established approaches to dealing with the wife’s paid legal fees as a claimed addback. More specifically, while purporting to treat the same as a matter relevant to section 75(2)(o), Her Honour in fact applied considerations relevant to the adding back of the sum. The discretions relevant to each are illuminated by differing considerations and Her Honour failed to consider matters relevant to the exercise of the discretion inherent within section 75(2) and the place of subparagraph (o) within that section. It follows that I also consider that Her Honour erred in the assessment of the relevant section 75(2) factors and that Her Honour’s reasons were inadequate to explain her refusal to add back the wife’s paid legal fees.”

This case is an example of a re-exercise of the discretion. The court discusses that at paragraphs 12 to 28.  They make clear that the re-exercise is a different task. It is relevantly what this court considers to be the proper assessment of section 79(4)(e).