This case is an important reminder about the potential for the Court to ignore liabilities, even where they are secured.
This was an unsuccessful appeal where:
- It was argued that the primary judge erred in excluding a loan that the husband alleged he owed to his parents.
- The loan alleged to be owed was excluded from the balance sheet.
The loan
The appellant husband sought the inclusion of a debt of $4.66 million as a liability in the property pool.
The primary judge disregarded the debt of $4.66 million the husband owed to his parents. The appellant argued that it was an error for the debt to be excluded.
It was contended that the husband purchased property in 2003, including a loan from his parents and about five corporations that they control borrowing about $1.179 million. The husband borrowed an additional $634,072 to assist with the construction of the property.
A loan agreement was entered into in 2004, replaced with a further agreement in 2007. The capital advances were about $1.8 million and the remainder of the debt of around $2.8 million was said to be interest. A caveat was registered against the title of the property said to be pursuant to a charge granted by the 2007 loan agreement.
The primary judge accepted the husband borrowed the money on the terms set out in the loan agreement but found that the husband failed to establish either the quantum of the debt, or the likelihood it would be enforced against him.
The husband, contended (and failed) on appeal that the approach of the primary judge was flawed because once the debt was proven to be an existing liability, the judge was then obliged to take it into account by commensurately reducing the net equity in the parties’ assets available for division between them.
The Court
The Court on appeal supported the position of the primary judge, that given the findings made about how the quantum of this debt was uncertain and it was unlikely to be enforced against the husband, that it should not feature on the balance sheet.
In the appeal hearing the husband contended that a trial judge has no discretion to put aside a secured debt, so long as it is not a sham. The Appeal Court rejected that contention in absolute terms.
The Appeal Court restated the long-standing practices within the Court to:
- Identify and ascertain the gross value of the parties’ assets and to deduct their secured and unsecured liabilities from the assets to then establish the net value of the divisible property.
- Be discerning about the treatment of debts owed by spouses to creditors, as circumstances may require some liabilities to be disregarded or allocated exclusively to one spouse for payment from his or her individual share of the divided property.
The Appeal Court in this case identified that a secured debt will usually be enforced, but not always. The Court indicated that the significant factual issue is always the likelihood of debt’s enforcement, regardless of whether it is secured. This warranted examination of debt to an unrelated commercial creditor (like a bank) to a close connection (like a family member).
The Appeal Court further found that the charge granted by the husband was incapable of supporting a caveat and referred to the findings of the primary judge about the husband failing to prove the quantum of the debt and it also being unlikely that the debt would be enforced against him. The existence of the charge did not compel the judge to take the debt into account.
This case is a helpful reminder to litigants and practitioners about the Court’s discretionary ability to exclude liabilities, even where there is a form of documentation. Parties should ensure that they receive appropriate advice about any potential loan and the impacts of that loan in family law proceedings.
