Corporate Structures - they will not fool the Family Law Courts

1. Corporate Structures - they will not fool the Family Law Courts Michael Keogh, Partner Julie Hodge, Senior Associate 24 July 2014 Miller Harris in Business

2. The property division process The traditional four step process for determining property settlements (Hickey & Hickey [2003] FamCA 395) Step 1: Determine the identity and value of the property, liabilities and financial resources of the parties at the date of hearing. Step 2: Identify and assess the contributions of the parties and determine their contribution-based entitlements. Miller Harris in Business

3. The property division process Step 3: Identify and assess the relevant "future factors“ (e.g. age, health and earning capacity) and determine the adjustment (if any), that should be made to the contribution-based entitlements of the parties (established at Step 2). Step 4: Consider the effect of those findings and determinations, and resolve what order is just and equitable in the circumstances of the case. Miller Harris in Business

4. Preliminary considerations Consider the principles in Stanford & Stanford (2012) 293 ALR 70; [2012] HCA 52): • Identify the parties’ existing legal and equitable interests in property. • Is it just and equitable to make a section 79(1) (property adjustment) order, altering the existing legal and equitable interests of the parties’ in property? Answer: If "yes"- the court will consider the other steps to determine what property adjustment order to make. If "no" - no property adjustment order should be made by the Court. Miller Harris in Business

5. STEP 1Establish the current property pool at the time of trial or filing consent orders (or entering into a financial agreement) Includes all: • assets (property); • liabilities; • superannuation interests; and • financial resources. Miller Harris in Business

6. STEP 1Establish the current property pool at the time of trial or filing consent orders (or entering into a financial agreement) (cont.) Examples of financial resources include: • likely future gifts; • benefits likely to be received under the terms of a trust; • funds expected to be received through pending litigation; and • in certain circumstances, likely future inheritances. Miller Harris in Business

7. STEP 2Assess the parties’ respective contributions during the relationship Financial contributions made directly or indirectly by or on behalf of a party to the acquisition, conservation or improvement of any of the property of the parties. For example: • initial financial contributions; • contributions through earnings, windfalls of money, lotto, inheritances or gifts; and • through purchases and sales of property. Miller Harris in Business

8. STEP 2Assess the parties’ respective contributions during the relationship (cont.) Non-financial contributions made directly or indirectly by or on behalf of a party to the acquisition, conservation or improvement of any of the property of the parties. For example: • renovating and improving property; • share-trading; • sourcing investment or business opportunities; and • managing personal or business finances. Miller Harris in Business

9. STEP 2Assess the parties’ respective contributions during the relationship (cont.) The contribution made by a party to the marriage or de facto relationship to the welfare of the family, including: • homemaker contributions such as running the household, cooking and cleaning; and • parenting contributions (to children, including biological children, stepchildren and children treated as children of the relationship). Miller Harris in Business

10. STEP 3Identify and assess the relevant “future factors” The court considers relevant “future” matters, including: • the ages of the parties; • the health of the parties; • their capacity for employment; • their care or control of children; • their responsibility to support another person; and • the financial circumstances of their cohabitation with another person. Miller Harris in Business

11. STEP 3Identify and assess the relevant “future factors” (cont.) The court has power to make an adjustment to the proposed percentage division of the property pool to one or other party, on the basis of these future factors. Miller Harris in Business

12. STEP 4The court considers what order is just and equitable in the circumstances The court has the power to alter the proposed percentage division to make it just and equitable, or fairer. For example: • to enable a party to retain an asset; or • obviate the need for an asset to be sold. Miller Harris in Business

13. STEP 1Determining the current property pool This is determined at the date of trial, or the filing of consent orders, or the date the parties enter into a financial agreement. If relevant, the court will look at the difference in the current property pool compared to the property pool at separation. The court will not only look at the parties’ legal interests in property, but their equitable interests in property. Miller Harris in Business

14. The Family Law Courts will look behind corporate structures to determine the real value of the property pool • Trusts such as discretionary family trusts, are often established by business operators to: • protect their assets from potential court claims including claims of negligence; • for wealth distribution for tax purposes; and • as a means of attempting to protect a parties' assets from a family law property settlement claim, in the event of separation from their de facto partner or husband or wife.   Miller Harris in Business

15. The Family Law Courts will look behind corporate structures to determine the real value of the matrimonial or de facto property pool (cont.) Question: Your former partner cannot claim an asset you don’t legally own, right? Answer: Wrong! Miller Harris in Business

16. The Family Law Courts will look behind corporate structures to determine the real value of the matrimonial or de facto property pool (cont.) The Family Law Courts are increasingly looking behind corporate structures such as trusts and companies, to determine: Question: Does a party to a property settlement claim, have “de facto” or “effective” control of the assets of a particular trust or company? Answer: If the answer is “yes”, then the assets of that trust or company may be included in the “pool” of relationship assets for division between the parties to the relationship.  Miller Harris in Business

17. Separation and conduct Miller Harris in Business

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21. Reduction of assets by conduct of parties The obligation to be accountable commences from the commencement of the relationship. Financial losses incurred by the parties during the course of the marriage or de facto relationship, whether such loss is a result from a joint or several liability, are usually shared by the parties (although not necessarily equally).  Losses might not be shared equally at all in the following circumstances: • where one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of the assets; or • where one of the parties has acted recklessly, negligently or wantonly, with matrimonial assets, the overall effect of which has reduced or minimised their values. Miller Harris in Business

22. Reduction of assets by conduct of parties (cont.) The court does not apply a test of strict liability to the commercial success, or otherwise, of a person in business. It has to be affirmatively demonstrated the conduct was so commercially inept that it is appropriate for the liability to be accounted against the party responsible. In the matter of Kowaliw v Kowaliw (1981), the husband had lost money by permitting a prospective purchaser (who did not purchase) to reside in the home free of rent and outgoings for about a year. Miller Harris in Business

23. Reduction of assets by conduct of parties (cont.) Time is of the essence • The asset pool is determined at the date of the hearing or settlement. • The timeline from filing court proceedings to hearing, and judgement, is about two years. • The lotto ticket you purchase, and the contract you win, are all relevant to the assessment of the property division. Miller Harris in Business

24. Reduction of assets by conduct of parties (cont.) In the matter of Farmer v Bramley (2000), the husband won $5 million in a lottery six years after separation. There was no property of any value at the time of separation. The court gave the wife $750,000.00. Miller Harris in Business

25. Reduction of assets by conduct of parties (cont.) General duty of disclosure Each party to a case has a duty to the court and to each other party to give full and frank disclosure of all information relevant to the case, in a timely manner. Once it is established that there has been a deliberate non-disclosure, the court should not be unduly cautious about making findings in favour of the innocent party. Miller Harris in Business

26. Case study: Romano & June [2013] • The Family Court looked behind a discretionary trust and company structure, and determined a party, (the husband), had “real” control of the assets of these entities.  • The husband was: • not a shareholder of the corporate trustee of the trust; • only one of two directors of the corporate trustee; and • named as a beneficiary of the trust, but not an appointor (“controller”) of the trust with power to remove the corporate trustee. Miller Harris in Business

27. Case study: Romano & June [2013] (cont.) • Justice Forrest held “...it is, I am satisfied, absolutely clear that the husband actually controls the ... trust, as a matter of fact, as opposed to a matter of law.” • Justice Forrest went on to find that the husband’s mother and sister, who were the appointors (“controllers”) of the trust, would act according to the husband’s direction and they would not have been made appointors if the husband was not satisfied of that himself.  • The court held that the husband had “effective” control of the trust (and the companies which the court also considered), despite not having legal control.  Miller Harris in Business

28. Case Study: Kennon v Spry [2008] The High Court held that the assets of the family trust were property of the parties to the marriage, notwithstanding that neither the wife nor the husband were beneficiaries of the trust. • In 1968, Dr Spry was the trustee, appointor and controller of a family discretionary trust. • In 1998, when Dr Spry and his wife were having marriage difficulties, Dr Spry executed a deed of variation of the trust: • confirming his exclusion as beneficiary as “irrevocable”; • “irrevocably” excluding his wife as a capital beneficiary; and • appointing his two eldest daughters as joint trustees in the event of his death or resignation. Miller Harris in Business

29. Case Study: Kennon v Spry [2008] (cont.) • In October 2001, Dr Spry and his wife separated. • In January 2002, Dr Spry created four trusts, each in favour of a child of the marriage. Dr Spry divided the capital and income from the original trust, evenly into the four children’s trusts. • Dr Spry’s wife sought for the trust assets in Dr Spry’s trust and the children’s trusts, to be included in the matrimonial property pool available for division. Miller Harris in Business

30. Case Study: Kennon v Spry [2008] (cont.) The High Court held that Dr Spry was not capable of reinstating himself as a beneficiary but the High Court found that Dr Spry had ultimate and sole discretion to alter the trust deed, appoint trustees and to distribute trust assets, and that up until 1998, Dr Spry’s wife was a beneficiary of the trust. As such, Dr Spry could have exercised his discretion, during the course of the marriage, to distribute the whole of the trust fund to the wife. Effect of the decision: The assets of the trusts, totalling nearly $5.5 million, were added into the property pool, increasing the matrimonial property pool from $4.3 million to $9.8 million. Miller Harris in Business

31. Case Study: Kennon v Spry [2008] (cont.) The High Court also held: “Where property is held under such a trust by a party to a marriage and the property has been acquired by or through the efforts of that party or his or her spouse, whether before or during the marriage, it does not, in my opinion, necessarily lose its character as “property of the parties to the marriage” because the party has declared a trust, of which he or she is trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion.” Miller Harris in Business

32. Relevant factors in the court’s determination whether assets of corporate structures are property or financial resources to be included in the property pool The court will consider numerous factors, including: • the source of the trust or company funds and assets, and the date of their acquisition; • the purpose of the trust or company (& the range of beneficiaries); • distributions made by the trust; and • the control exerted by a party over the assets of the trust or company, whether legal control or “de facto” control. Miller Harris in Business

33. The court’s various powers when dealing with assets of corporate structures The Family Law Courts have a range of powers, including to: • set aside commercial transactions which would have the effect of diminishing claims under the Act & make necessary orders binding third parties, including sales of assets and establishments of trusts; • “add-back” assets disposed of, or funds expended; • consider assets of trusts or companies as a financial resource of the relevant party to be considered when determining the property division in their favour; and • set aside “sham” transactions. Miller Harris in Business