Injunctions and businesses in family law matters: Chea & Sok [2022] FedCFamC1F 628

Injunctions restraining a business from dealing with its property may have detrimental impacts on the operation of the business.  In family law matters, injunctions are sought for good reason to prevent a party from dealing with property in a manner that might deplete what is ultimately available for division, so the purpose is to preserve the property pool as much as possible until either the parties agree or the court determines the outcome.  However, quite often an injunction restraining an entity from dealing with property might be sought, or the order made, without adequate attention given to the payment of upcoming business liabilities (such as tax payable) and the source of payment, and the impact of the restraint on cash flow.  In those circumstances insolvency becomes an unintended and undesirable consequence despite the objective was the preserve the property pool.

By way of example, the recent decision Chea & Sok [2022] FedCFamC1F considered an application to discharge injunctions that restrained the husband, in personam or in his personal capacity, from dealing with property held within the group of entities owned by him, referred to broadly in the decision as C Pty Ltd.

By way of brief background of the facts in Chea:

1. The parties married in 2003 and separated in 2018. Proceedings were commenced on 27 November 2020;

2. The parties’ wealth and the majority of husband’s income derive from his property development activities, held in a group of entities included incorporated business and trusts, but mainly structured around three main trusts;

3. On 9 December 2020, when the matter came before His Honour Judge Kemp in the Federal Circuit Court (as it was then), His Honour made the injunctive orders. These Orders, which were the focus of the most recent decision, included:

6. That without admission, and pending the determination of the parties interim applications, the Respondent Husband be restrained, including in his capacity as director or officeholder of any entity, by injunction from encumbering, disposing of or otherwise dealing with the following real estate in which the husband has an interest in his name or pursuant to a company or trust in which he has an interest, including by way of increasing the indebtedness of the entity in which the real property is owned, pending further order of the court or agreement in writing between the parties, namely: 

6.1  [City P] property;

6.2  [Q Town property];

6.3  [R Street, City S]

6.4  [T Street Suburb U];

6.5  [V Street, Suburb W]

6.6  [AA Street, City K];

6.7  [BB Street, Suburb CC]

6.8  [DD Street, M Town];

6.9  [EE Street, Suburb FF];

6.10 [GG Centre]; and

6.11  other real estate in the Respondent’s name or in which he has an interest pursuant to any trust or company owned by or controlled by him or in which he has an interest; other than in respect of the sale of the property at [O Street, City J].

1. 7. That pending further order the Husband be restrained from injunction from disposing of or applying the proceeds of sale of the property at [O Street, City J] in any way other than for the payment of agents fees and commissions and to discharge the mortgage secured against the [O Street, City J] property which is in the sum of approximately $1,500,000 without the written consent of the Wife.

                     …….

1. 9. That pending the determination of the parties interim application that in relation to any company or trust in which the Husband has an interest, the husband and his agents are restrained by way of injunction in his capacity as a director or as trustee of a Trust from selling, transferring, assigning, encumbering or alienating the assets of the company or Trust without an Order of the Court or the prior written consent of the Wife.

4. On 24 July 2022, the wife filed an application that sought – among a raft of other orders – a continuation of orders 6 and 9 of the Orders made on 9 December 2020 pending further Order or agreement being reached by the parties in writing.

5. On 28 July 2022, the husband sought in response that orders 6 and 9 of the 9 December 2020 orders be discharged, and that Order 7 of the 9 December 2020 orders be discharged and that he apply the funds to discharge his ATO tax debt in the sum of $2,362,209.86.

To continue or discharge the restraints?

6. The central question before the court was whether there was any evidence as to whether the husband had any intention of disposing of any assets that would defeat the wife’s case. As a comment, in order to make this assessment, it is necessary to understand the nature of the business activities that the husband’s businesses engaged in.  For example, at paragraph 9 of the judgment the court referred to an extract from the husband’s affidavit in relation to the usual course of such business activities:

During the marriage, so that I could meet the running costs associated with each entity within the [C Pty Ltd], I regularly sold assets (mainly properties) held by one entity and used profits generated to meet the expenses and capital associated with another. This resulted in multiple inter-company loans. This is my usual course of business to grow the companies, build their property portfolios, and increase income and available cash within the Group.

7. Given the nature of husband’s business activities which involved the regular selling of assets held by one entity to pay another entity, the injunctions, which had been in place for about 18 months by this point, were ‘severely constraining the (husband’s) ordinary business activities and that insolvency may become a real risk [at 26], arguing by reason of:

a) As a result of order 7 and not being able to access funds from the sale of O Street, the husband’s group of entities had insufficient cash. The sale proceeds of O Street was the only major source of cash;

b) C Pty Ltd had a tax debt of $2,402,158.37 with interest accruing. C Pty Ltd needed the cash from the sale of O Street to pay the tax liability. The wife doubted the legitimacy of the tax debts, despite supporting documents produced in relation to the tax debts;

c) The husband’s income had been restricted by the injunctions, and a release of the injunctions may have the impact of increasing his income by the time of the final hearing.

8. The wife sought the status quo remain in relation to the injunctions. The wife relied upon allegations of the husband’s gambling and an assertion that he would “simply will not obey orders” as key reasoning to for the injunctions to continue. In relation to the continuation of the injunctive relief, the court said at 21 that:

“The applicant must establish both an arguable case with sufficient likelihood of success to justify the preservation of the status quo, and that the balance of convenience favours the grant of the injunction, in that there is a danger or risk of dissipation of, or dealings with assets which will frustrate any judgment in favour of the applicant”

9. The court was unable to conclude the husband would not comply with the orders. The court was also unable to conclude that the balance of convenience favoured the continuation of the injunctions or that he would engage in conduct to reduce the property pool.  Rather, the court was concerned that the injunctions had likely had a negative impact on the value of the business due to the contains on the husband’s business activities.  At paragraph 43 the court also remarked that, which is usually a central line of enquiry in family law matters (looking at past conduct as an indicator of present conduct):

“There was no dispute that the husband’s business activities through the C Pty Ltd has substantially produced the wealth of the parties.”

10. As noted above, the wife resisted the payment of the tax debts, however the court, when enabling the discharge of order 6 noted that the failure to pay outstanding tax risks the husband’s business activities and that it was in the parties’ interests for the tax debts to be paid.

Conclusion

Parties should carefully consider the advantages and disadvantages of restraining a business from performing certain activities.  There may be alternative steps that can be undertaken to best ensure that the value of property is preserved in family law matters.

If you have a business or trust that is being impacted upon by a family law matter or proceeding, please contact our Family & Relationship Law team, for a 30 minute no cost consultation to provide you with tailored advice in relation to you and your individual circumstances.