Solicitors:
Carter Newell (Plaintiff)
File Number(s): 2023/117439
[2]
JUDGMENT
The plaintiff married the defendant in 1990. They separated in 2008. During their marriage they created a number of corporate entities in which they have held positions such as director or secretary.
The defendant did not appear, either in person, or by audio-visual link or by a legal representative. This was envisaged by the plaintiff. A chronology of service was accordingly prepared. I am satisfied the defendant is aware of the hearing date and has chosen to take no part in the proceedings. This is emphasised by her solicitors filing a notice of ceasing to act on 18 August 2023.
The defendant has not, at any stage of the proceedings, filed any evidence as to any matter.
The plaintiff requested the court to proceed in accordance with r 29.7(2)(a) of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). I agreed for these reasons:
1. the defendant is aware of the proceedings and of the hearing date. The chronology sets out the numerous occasions on which the defendant has been told of the hearing and when it would occur (Exhibit A);
2. the defendant, either by herself or through her solicitors (while she retained them), has not filed any document indicating an interest in or opposition to the proceedings;
3. the defendant has not sought an adjournment; and
4. the proceedings have an urgency, which will be explained below, which require them to be completed in a timely fashion.
There are three relevant companies:
1. M&T Carnegie Pty Ltd;
2. Overby Stallings Holdings Pty Ltd (Overby); and
3. C.F. Group Investments Pty Ltd (CFG).
The plaintiff and the defendant each own 50% of the shares in M&T Carnegie Pty Ltd.
M&T Carnegie Pty Ltd is the trustee for the Mark and Tanya Carnegie Family Trust (M&T Family Trust).
M&T Carnegie Pty Ltd owns all of the shares in Overby. Overby owns all of the shares in CFG.
On 14 May 2010, the parties executed a financial agreement under Part VIIIA of the Family Law Act 1975 (Cth). The intent of the agreement was to split the parties' assets (including the assets of the companies) equally between them.
In January 2020, the plaintiff moved to New Zealand. At the same time, he wanted to wind up the above three companies, a measure contemplated by the financial agreement.
Each of the parties has appointed an alternative director for each of the three companies. The plaintiff's alternative director is Ms Carolyn Sutton. The defendant's alternative director is Ms Jacqueline Clarke.
On 30 June 2021, the plaintiff and the defendant executed a term sheet. The term sheet was prepared by a Mr Glen Frost of PricewaterhouseCoopers (PwC). Mr Frost had been retained by the defendant.
Classically, a term sheet is a document outlining, usually in brief, the terms of a forthcoming agreement. A term sheet is usually not binding on its parties, but can, by its terms, be expressed to be binding.
The term sheet is entitled: "Binding Term Sheet" and includes these clauses:
"7. This Term Sheet summarises the principal terms of the Proposed Transaction and is intended to be binding on the parties.
Under the heading, GENERAL:
"Binding Nature: The parties agree that the provisions of this Term Sheet are intended to be legally binding."
The Proposed Transaction has three parts:
1. Overby is to declare an "unfranked dividend in favour of M&T Family Trust as its sole shareholder. The amount of the Overby Dividend will be $1,000,000." The dividend is to "be sourced from, and constitute, conduit foreign income";
2. M&T Carnegie Pty Ltd is to then declare a trust distribution in favour of the plaintiff "in an amount equal to, and funded from, the Overby Dividend received by M&T Family Trust" as set out in (1) above; and
3. the plaintiff then has the option to request "future distributions from M&T Family Trust to himself or entities nominated by him, at a time and for an amount at his discretion, that are indirectly to be funded from CFI [conduit foreign income] of Overby, and to the extent amounts requested do not exceed MC's 50% share of Group Retained Earnings …"
This case concerns the third part.
In the simplest of terms, conduit foreign income refers to income earned outside of Australia by an Australian company. If the entitlement to that income is in turn held by a person who is not a resident of Australia (in this case the plaintiff who lives in New Zealand) then the taxation laws allow for a conduit of the funds from the foreign source, through Australia and on to the entitled person. If funds are treated in this way, an exemption from holding tax in Australia will arise.
The ATO website explains the position in this way:
"The other type of dividend a resident company may pay or credit to you is an unfranked dividend. There is no franking credit attached to these dividends.
The whole or a portion of an unfranked dividend may be declared to be conduit foreign income on your dividend statement. To the extent that the unfranked dividend is declared to be conduit foreign income, it is not assessable income and is exempt from withholding tax."
The issue of conduit foreign income was of concern to me because the court should not be in a position where it is sanctioning any form of tax avoidance. I am satisfied that is not the case, but no doubt the ATO will take such measures as it thinks appropriate should it have a different view. I note from the confidential affidavit of Carolyn Sutton, dated 14 July 2023, (Exhibit C) that discussions have been held with the ATO in relation to, at least, the income received by Overby from a foreign source.
On 30 June 2021, in accordance with the first part of the proposed transaction, Overby declared an unfranked dividend in favour of M&T Family Trust, sourced from conduit foreign income.
On the same date, and in accordance with the second part of the proposed transaction, M&T Family Trust declared a $1 million trust distribution in favour of the plaintiff, funded from the above dividend.
In January 2022, the plaintiff endeavoured to initiate the third part of the Proposed Transaction. The defendant has failed to cooperate, leading to the current proceedings.
The further amended summons requests that the orders of the court be made prior to 1 December 2023. The reason for this request is taxation advice received by the plaintiff to the effect that he "qualified for a transitional residency exemption in New Zealand on any foreign income received by him for a period of up to 4 years from his arrival". The four years will be completed in January 2024.
I think the first matter to be resolved is the question of jurisdiction. My initial reaction to the summons was that it concerned a "matrimonial cause" as defined in s 4 of the Family Law Act. This in turn would mean that this court did not have jurisdiction to hear the matter, that jurisdiction having been extinguished by a proclamation dated 27 May 1976, effective from 1 June 1976.
The most apparently applicable definition of a matrimonial cause is that found in paragraph (ca)(i) of the definition:
proceedings between the parties to a marriage with respect to the property of the parties to the marriage or either of them, being proceedings:
(i) arising out of the marital relationship
In this case the proceedings are between parties to a marriage, and they concern property of the parties. The question then arises as to whether the proceedings arise out of the marital relationship. The High Court considered the matter in Perlman v Perlman (1984) 155 CLR 474; [1984] HCA 4. Wilson J said of the agreement in Perlman, at 500:
"It is sufficient for me to express the opinion that on no reasonable construction of the paragraph could it be said that the wife's claims focus on circumstances arising out of the marital relationship. The marriage was dissolved in 1978 and the financial relationships of the parties were finally determined by the approved agreement. The husband's failure to respect his obligations under the agreement has nothing whatever to do with the marital relationship."
Dawson J said, at 511-512:
"It was also submitted that the proceedings in the Supreme Court were proceedings for an order in circumstances arising out of the marital relationship within the meaning of par. (c) of the definition of matrimonial cause and for that reason excluded by the proclamation from the jurisdiction of that Court. Clearly, that submission cannot be sustained. The proceedings arose out of a contractual relationship entered into after the marital relationship had been concluded by the dissolution of the marriage. The dissolution of the marriage was the occasion for the contract but the circumstances in which relief was sought arose out of the contract and its breach and not the marital relationship."
A similar issue was considered in the New South Wales Court of Appeal in Bate v Priestley (1989) 13 Fam LR 376. At 393-394, Hope AJA (as his Honour then was) said:
"It has been submitted for the defendant that there is a much closer relationship in the present case between the deed upon which the plaintiff sued and the orders of the Family Court, and hence it can the properly said that the proceedings arose out of the marital relationship……. Nonetheless the proceedings arose out of the deed and not otherwise. They did not arise out of the marital relationship which led to proceedings in the Family Court and to the execution of the deed.
At 396, his Honour emphasised that the proceedings had been brought to enforce a deed, not to enforce any orders of the Family Court.
The circumstances are the same here, the proceedings have been brought to enforce the term sheet, they have not been brought to enforce any order made in the Family Court.
Colefax SC DCJ, in Patel v Patel [2015] NSWDC 2 at [74], made this concise observation:
"In my opinion Bate v Priestley, until overruled in the High Court, continues in this State to stand for the proposition that parties to a marriage can, between themselves, and in respect of property adjustment issues, agree to provide remedies at common law outside those available under the (Family Law) Act."
Finally, on jurisdiction, I think it relevant that the term sheet was executed on 30 June 2021, 11 years after the financial agreement was registered in the Family Court. For purposes of these proceedings, I am satisfied that the proceedings arise out of the term sheet and not out of the marital relationship.
Returning to the chronology, the defendant has refused to comply with the obligation she undertook in respect of future distributions from the M&T Family Trust to the plaintiff (or his nominee).
This then raises the appropriateness of the remedy sought by the plaintiff. It is essentially one of specific performance of the defendant's undertakings under the term sheet. As already noted, Overby, on 30 June 2021, and consistent with Step 1 in the term sheet, declared an unfranked dividend in favour of M&T Family Trust. Then, on the same date, and pursuant to Step 2, the M&T Family Trust declared a trust distribution in favour of the plaintiff in the sum of $1 million.
The taking of these two steps amounts to a partial performance of the term sheet. On 14 February 2023, in order to achieve the third part of the term sheet, Ms Sutton sent the defendant's representative (Mr Glen Frost of PwC) the documents necessary for the defendant to authorise the additional distribution. The distribution was said to be in the sum of $35,444,615. The figure has never been challenged.
On 28 February 2023, the plaintiff's solicitors sent the defendant a letter requesting her performance of her obligations under the term sheet. The defendant was asked to sign the draft distribution documents. She did not respond.
The defendant's lack of response amounts in my view to a failure to perform the contract (the term sheet) according to its components. The silence of the defendant excludes any argument that performance is not possible.
I have considered whether the proper approach should be a claim for damages. Theoretically, the plaintiff could sue the defendant for breach of contract and seek damages accordingly. The difficulty with this approach is that the time necessary to bring such an action to fruition would necessarily involve the plaintiff being denied the tax exemption available under New Zealand law.
It might be said that such a denial would simply increase the amount of damages. I would prefer to approach the matter on the basis that damages would not be an appropriate remedy, and in fact would be punitive of the defendant by imposing upon her an obligation to pay extra damages, apparently assessed at $13 million.
The specific orders sought by the plaintiff include an order that should the defendant fail to comply with orders made by the court, that the Registrar of the court be directed to execute the documents on behalf of the defendant. Having regard to the apparent disinterest of the defendant in the proceedings, and in performing her part of the term sheet, I think this is an appropriate order and is one sanctioned by r 40.8 of the UCPR.
In relation to costs, the defendant has, by ignoring all requests to perform her part of the term sheet, led the plaintiff to institute the proceedings and to continue them in the absence of any participation by the defendant. I think it inevitable that the defendant must pay the costs of the proceedings.
I make the following orders:
1. Pursuant to rule 29.7(2)(a) of the Uniform Civil Procedure Rules 2005 (NSW), the matter could proceed to final hearing on 13 November 2023 in the absence of the defendant.
2. The plaintiff has leave to file the Further Amended Summons that is initialled by me today and placed with the papers.
3. The Affidavit of Carolyn Michelle Sutton affirmed 14 July 2023, and which is titled "Confidential Affidavit of Carolyn Michelle Sutton affirmed 14 July 2023" be kept in the Court file in an envelope marked, "Confidential - Not to be opened without the leave of a Judge".
4. The Court declares that the term sheet dated 30 June 2021, a copy of which is annexed at pages 17 to 26 of the exhibit to affidavit of Mark Carnegie affirmed on 31 March 2023 (Term Sheet) is binding on the parties.
5. The defendant specifically perform the Term Sheet, in particular, the second paragraph on p 4 of the Term Sheet, by executing (or causing to be executed by her alternate director) documents in the form of the documents annexed at pages 9 to16 of the exhibit to the affidavit of Carolyn Michelle Sutton affirmed on 22 September 2023, within 7 days of this order being made by the Court.
6. Pursuant to s 94 of the Civil Procedure Act 2005 (NSW) and r 40.8 of the Uniform Civil Procedure Rules, upon the solicitors for the plaintiff filing an affidavit proving service of this order on the defendant and that the defendant has failed to comply with order 5 above, documents in the form of the documents annexed at pages 9 to 16 of the exhibit to the affidavit of Carolyn Michelle Sutton affirmed on 22 September 2023 be executed by the Registrar of this Court in the name of and on behalf of the defendant.
7. The defendant pay the plaintiff's costs.
[3]
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Decision last updated: 15 November 2023