Shareholder accounts don’t stack up
Warford & Warford  FamCA 55 (9 February 2016)
Shareholder accounts don’t stack up:
The following is annotated. For full case: http://www.austlii.edu.au/au/cases/cth/FamCA/2016/55.html
- During cohabitation, Warford paid various living expenses of the husband and the wife such as rent for their own accommodation, energy and water, childcare and other expenses. The husband said that these have been included in a shareholder loan account, the total of which is now $116 502. I shall refer to this again below.
- Warford is in fact owned by the husband’s brother and his parents. I propose to treat the business as such for the purpose of these proceedings. I am satisfied that it has a Nil value as valued by the single expert valuer, Q Accountants.
- Exhibit 3 was a letter dated 6 November 2015 by Carroll and O’Dea, the solicitors for the business Warford which was prepared to explain the legal position concerning the ownership of the shares in Warford.
- The solicitors indicate that the shareholding as represented in the ASIC register is incorrect. The shareholding in the ASIC register is as follows:
- <li “=””>- Mr Warford 5000 Class A shares
<li “=””>- Mr T Warford and Ms U Warford<li “=””>- (the husband’s
parents) (jointly) 2500 Class B shares
– Ms Warford 2500 Class C shares
- Apparently the ASIC register reflects what all relevant parties intended. But the solicitors say that the legal ownership of the shares of the company remains as follows:
- <li “=””>- Mr V Warford (the husband’s brother) 75 Class A shares
<li “=””>- Mr T Warford and
Ms U Warford (jointly) 25 Class B shares
- I accept this evidence and find that neither the husband nor the wife hold any legal interest in Warford.
- In any event, as I have said, this company has no value.
- In relation to the husband’s assertion that the husband and wife owe the company money through the shareholders’ account, as the wife submitted, how could this be the case if they are not shareholders. I am inclined to agree with the wife.
- But even if I am wrong about this I would not propose to bring into the balance sheet the amount of $116 502 which the husband asserts he and the wife owe the company.
- His case is that the sum of $116 502 should be brought into the balance sheet. Yet in my view, to do so would be quite unfair to the wife, as she has submitted.
- It is clear that since separation the husband has continued to have the business pay some of his personal expenditure including substantial sums for his legal costs of these proceedings.
- Mr Q, the expert who valued the business at Nil also referred to the then $116 708 in what was referred to as a shareholder loan account which he described as representing “moneys owed by the parties to (Warford Pty Limited)”. He reported that although some transactions were able to be identified as connected with the husband or the wife, the “overwhelming majority” of transactions could not be.
- Mr Q raised this with the parties through their solicitors. The response was that the wife did not know the details of the loan account or which shareholders were represented in relation to the account. But she did acknowledge that some of the payments therein were made for the benefit of the husband, the wife and the children.
- The response on behalf of the husband was that he asserted that the shareholders’ loan was for the benefit of both the husband and the wife on an equally shared basis.
- Yet it became clear during the wife’s cross-examination of the husband about these matters that this was not the case. Mr Q’s report was dated 19 August 2014. The husband conceded that “a bit less” than $16 000 of his costs of these proceedings was added to the shareholders’ loan account during the 2013/2014 financial year and that it also included some of his personal expenditure. He also conceded that in the 2014/2015 financial year, drawings for his personal expenditure were made including $2500 for a mortgage payment and approximately $14 000 was for his legal costs of these proceedings.
- These latter drawings would not appear to me to affect the amount of $116 708 because they appear to have been drawn after Mr Q reported. But the significance of this material just adds to what I regard as the unsatisfactory nature of this whole issue about this so called shareholders’ loan account.
- It is the husband who submits that the Court should include the $116 502 as a liability to be taken into account against the pool of property and superannuation of the parties. He is the person who would have been able to obtain the appropriate detail about the relevant drawings. Mr Q gave him an opportunity to do so and from what I see from Mr Q’s report, this was not done. And the husband could have placed the detail before this Court.
- In the absence of such detail, I am far from persuaded that it would be fair to the wife to include $116 502 as a liability which should be borne by both parties. As I said, the wife has conceded that some of the debt would flow from expenditure on the family. But this is impossible to quantify in the absence of detail.
- In all these circumstances, I shall not include the $116 502 in the balance sheet. But given the wife’s concession, doing the best I can in difficult circumstances I shall take this into account when considering s 75(2) matters.