The Alter Ego Principle

Can the Court make orders that affect third parties?

s90AE of the Family Law Act 1975 (Cth) (hereinafter “the Act”) empowers the court to make orders affecting parties other than parties to the marriage – but to do so those parties should be joined as respondents and/or accorded procedural fairness.

This section is most commonly used to set aside dispositions to third parties which defeat claims under the Act pursuant to s106B.

An example would be, where a party transfers an asset to their parent, in order to attempt to remove it from the equation in a property settlement with their former spouse.

But what about where a party is using a company and a trust to do their dirty work in order to argue that the assets in the name of the company/trust do not form part of the property pool to be divided with their former spouse?

Where a company is a mere puppet or alter ego of a party, the Court in appropriate circumstances will treat a party and the company as one and the same and the assets will be included in the pool for division between the two separated parties.

In Atkins & Hunt [2020] FamCAFC 252, the Court held that a company substantially controlled by the Husband was not his mere puppet.

In making this decision, the court went through the elements a party must establish in order for the court to determine that a company is a mere puppet or alter ego of a party.

In this case, property settlement orders were made in 2014.

The Wife successfully appealed those orders and the matter was remitted for rehearing.

The issue in dispute at the rehearing was the value of husband’s interest in the companies.

The Wife alleged companies N Pty Ltd were the mere puppet and the alter ego of the husband and the whole value of N Pty Ltd should be treated as that of the husband. In the alternative, the Wife sought to set aside the disposition the husband made transferring 90% of his controlling shares of N Pty Ltd without sufficient consideration on the basis that it defeated her claim in property settlement proceedings (this was incidentally done whilst the appeal was pending).

The recipients of the company shares were the Husband’s 3 sons who were joined to proceedings as well as the associated entities of the group of companies.

It was agreed at the rehearing that had the Husband not disposed of those shares they would have been worth $5.9M.

The Trial Judges held that while the Husband had transferred his shares in an attempt to defeat an anticipated claim by the Wife, the evidence fell short of establishing the companies were the Husband’s ‘mere puppet’. The Judges recognised that the company was a separate legal entity, meaning that it could not be a mere puppet or alter ego of the Husband.

The Court subsequently made orders for a 80%/20% in the Husband’s favour. There was a cash payment required to the Wife of $964,000 and if he failed to make payment, s106B orders would facilitate the reversal of the transfer of shares back to the Husband’s name in order to facilitate payment.

The Wife appealed to the Full Court of the Family Court.

The Wife argued on appeal that the Trial Judge erred in not finding that the companies were the ‘alter ego’ of the Husband & erred in that he did not make an adverse inference from the husband’s failure to lead evidence.

At paragraph 33, the Full Court stated “The wife… focused on the capacity of the husband to control N Pty Ltd as demonstrating that the company and the controller should be treated as one and the same.” This argument was, however, rejected, with the Court concluding that “something more than mere control is required.”

In considering the Wife’s contention, the Full Court referred to the original trial judgment of Bryan CJ and Murphy J, stating that establishing an ‘alter ego’ “does not devolve from the indicia of control by a shareholder; corporations where considerable control is vested in a particular shareholder do not per se forego their separate personality. Rather, the concept refers to the company having no existence and direction separate from that of the relevant shareholder”.

At appeal, the onus was on the Wife to prove that the company was a ‘mere puppet’. It was therefore incumbent upon the wife to call evidence in support of her claim that the directors did everything the husband told them to do. The Wife contended that an adverse inference could be drawn from the husband’s failure to produce evidence to the contrary. This was rejected. The appeal was dismissed and the Wife was ordered to pay the Husband’s costs of the appeal.

The matter of Atkins & Hunt and Ors provides a clear example of the difficulties and arguments that can arise in matters involving corporate entities, particularly where family members are involved.

The important take away lessons in the line of cases dealing with the treatment of discretionary trusts, such as this one, are that in establishing that a company is an ‘alter ego’ for a party:

More that more than mere control is required;
One cannot rely on the court to consider the history of trust distributions alone;
In order to prove indirect control of a trust, supporting evidence must be brought before a Court to properly support a ‘puppet’ scenario, that is, that the director of the company is the spouse’s puppet and does everything the spouse tells them to do.

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The Alter Ego Principle – When a Spouse uses a trust to hide assets

Can the Court make orders that affect third parties?