Carnegie v Nelson-Carnegie

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:

There are three relevant companies:

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:

The Proposed Transaction has three parts:

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 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:

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:

Dawson J said, at 511-512:

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:

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:

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: