REASONS FOR JUDGMENT

1                     This was a motion on notice filed 2 August 2010 wherein the applicant moved the Court for orders that:

(1)               The first and second respondents, NID Pty Limited (‘NID’) and H & R Holdings Pty Limited (‘H & R’), respectively, be restrained from ‘selling, disposing of, encumbering or otherwise dealing with in any way any of its money, property or other assets up to the value of $1,500,000’, other than for certain limited purposes, including the payment of reasonable legal expenses of defending proceedings, to comply with any statutory requirements to which they are subject, and to pay ordinary and proper business expenses bona fide incurred by them; and

(2)               the third, fourth, fifth, and sixth respondents, Esther, Ruth, Hans, and David Faerber, respectively, give to the applicant’s solicitors 14 days’ notice of any intention to sell, dispose of, encumber, or otherwise deal with, any of their own money or other assets to the extent that it will exceed $10,000, other than for certain limited purposes, including those outlined in sub-paragraph (1) above.

2                     The applicant’s motion would seem to be an application for a so-called ‘freezing order’ under O 25A of the Federal Court Rules (‘the Rules’).  If the applicant is not moving the Court for the abovementioned orders under the Rules, presumably the application is made pursuant to s 23 of the Federal Court of Australia Act 1976 (Cth) (‘the Act’) from which the Court derives its power to make freezing orders: see Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 393 – 394.  In this regard, O 25A r 6 provides:

‘Nothing in this Order diminishes the inherent, implied or statutory jurisdiction of the Court to make a freezing order or ancillary order.’

3                     At the outset, I should say that the terms of the order sought against NID and H & R seem to me to be deficient in that they do not restrain those companies from dealing with property they own which has a value in excess of $1,500,000.  When I pointed this out to counsel for the applicant, he informed me that he, as the draftsman, intended the terms of the order to restrain each company from dealing with its property in any way, other than for the permissible purposes, if it resulted in the value of the net assets of the company being reduced to less than $1,500,000.  I have great difficulty with this construction, but in the scheme of things it does not matter.

4                     When deciding whether to grant a freezing order, the Court is to enquire:

(1)               Whether the present case is one in which a freezing order ‘could as a matter of law possibly be granted’: Davis v Turning Properties Pty Ltd (2005) 222 ALR 676 at 687 per Campbell J; and

(2)               as a matter of discretion, whether the present case is such that it is appropriate to do so.

5                     Enquiry (1) consists of two sub-enquiries, namely, whether:

(a)                The applicant ‘has a good arguable case on an accrued ... cause of action’ (O 25A r 5(1)); and

(b)               having regard to all the circumstances, ‘there is a danger that a ... prospective judgment will be wholly or partly unsatisfied’ due to the prospective judgment debtors absconding or the assets of such prospective debtors being ‘removed from Australia’ or ‘disposed of, dealt with or diminished in value’ (O 25A r 5(4)(a) and (b)).

Strength of the case

6                     Though the respondents have filed a defence in opposition to the applicant’s statement of claim in the substantive proceedings, they do not dispute that he has a ‘good arguable case’.  The threshold is a very low one: in Ninemia Maritime Corp v Trave Schiffahrtsgesselschaft mbH und Co KG (The Niedersachsen) [1983] Com LR 234 at 235 (affirmed on appeal: [1983] 1 WLR 1412), Mustill J (as his Lordship then was) said that a good arguable case is one ‘which is more than barely capable of serious argument, and yet not necessarily one the judge considers would have better than a fifty per cent chance of success’.  This test has since been applied in numerous domestic cases: Errigal Ltd v Equatorial Mining Ltd [2006] NSWSC 953 (White J); Pure Logistics Pty Ltd v Scott [2007] NSWSC 595 (McDougall J); Westpac Banking Corporation v McArthur [2007] NSWSC 1347 (Barrett J).

Danger of disposal of assets

7                     However, the respondents did submit that the applicant’s evidence is not sufficient to establish that there exists a danger that the respondents’ assets will be disposed of or dissipated.  The sufficiency of the evidence is dealt with from [11] below.

8                     The test in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 is in similar terms to O 25A r 5(4).  In that case, Gleeson CJ, with whom Meagher JA broadly agreed, said, at 321 – 322, as follows:

‘[A] plaintiff will need to establish … a danger that, by reason of the defendant absconding, or of assets being removed from the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.’

9                     ‘Danger’, however, is not defined.  In some cases, judges have employed the phrase ‘real risk’ to identify the degree to which a plaintiff must demonstrate that a prospective judgment will go unsatisfied: see, for example, Cardile at [122] per Kirby J; Ninemia [1983] 1 WLR 1412 at 1422 per Kerr LJ.  In others, it has been said that an applicant must establish ‘a sufficient likelihood of risk which in the circumstances of a particular case justifies an asset preservation order’: Lifetime Investments Ltd v Commercial (Worldwide) Financial Services Pty Ltd [2005] FCA 226 at [14] per Kiefel J, approving Victoria University of Technology v Wilson [2003] VSC 299 at [36] per Redlich J.  There is even a third view, namely, that the plaintiff establishes ‘a sufficient apprehension of dissipation of the … assets’: Vaughan v Duncan [2007] NSWSC 811 at [5] per Hamilton J.

10                  What is settled, however, is that solid evidence of a danger of dissipation or disposal of assets be produced.  The relevant test was enunciated by Brereton J in Finn v Carelli [2007] NSWSC 261 at [4], where his Honour referred to the NSW Court of Appeal’s decision in Frigo v Culhaci [1998] NSWCA 88:

‘It is not necessary for an applicant to show that the respondent has a positive intention of evading a judgment, and it is sufficient to show that the course on which the respondent proposes to embark is, objectively speaking, calculated to have that effect.  But as the Court of Appeal made clear in Frigo v Culhaci, an applicant must establish, by evidence and not mere assertion, that there is a real danger that by reason of the respondent absconding or otherwise dealing with assets, the applicant will not be able to have its judgment satisfied.  While acknowledging that there has been much debate as to the precise degree to which that has to be shown, the Court emphasised that mere assertion that the defendant was likely to put assets beyond the plaintiff’s reach was inadequate, for which the Court cited Ninemia Maritime Corp v Trave GmbH & Co Kg (The Niedersachsen) [1984] 1 All ER 298 as well as Patterson v BTR Engineering.’

Sufficiency of the applicant’s evidence

11                  The applicant’s evidence consisted of two affidavits sworn by him; one on 2 August 2010 together with exhibits MC-70 to MC-83 (Ex 1) and the other on 20 September 2010 together with exhibits MC-84 to MC-93 (Ex 2).  Some parts of Ex 1 were not read or rejected and some parts of Ex 2 were objected to and not pressed.  The applicant also tendered (Ex 3) a bundle of 19 pages of correspondence between his solicitors and the respondents’ solicitors between 16 August and 21 September 2010.

12                  The applicant, at para 2 of Ex 1, asserted his concern that ‘the [r]espondents and related companies are dissipating their assets and that this may frustrate the Court’s process in the event that my claim is successful’.

13                  In response, the respondents made four points.

14                  First, the applicant makes this assertion merely on the basis that such assets ‘[are] being offered for sale’ (Ex 1, Ex MC-70).  Even although the 10 Stokes Avenue, Alexandria and Flat 173, Latymer Court, Hammersmith, London properties either have been or will be placed on the market for sale, and the property at 52-54 McCauley Street, Alexandria has been placed on the market for sale or lease, it is trite that ‘[s]ale of an asset for full value is not dissipation’: P M Biscoe, Freezing and Search Orders: Mareva and Anton Piller Orders (2^nd ed, LexisNexis Butterworths, 2008) at 6.30.

15                  Second, there is not an iota of evidence to suggest that the proceeds from the sale of the abovementioned properties might be disposed of or diminished in value.  The evidence provided by the applicant goes no further than ‘[b]are assertions that the [respondents] are likely to put any asset beyond the [applicant’s] grasp’: Ninemia at 1419 per Kerr LJ.  Freezing orders are only granted on the basis of objective facts from which a danger of dissipation or disposal of assets may be inferred.  With respect, it is patently clear that the applicant has pointed to no such objective facts.

16                  Third, courts will only freeze a respondent’s assets in the most exceptional of cases, as they ‘restrict the right to deal with assets even before judgment’ (Practice Note CM 9 at [6]).  As Slattery J said in Khalifeh v Rahme [2009] NSWSC 1332 at [20(f)], referring to Frigo:

‘Freezing orders are an exceptional interlocutory remedy the function of which is to minimise the possibility of an unscrupulous defendant seeking to render himself or herself judgment proof by taking steps to ensure that no assets within the jurisdiction can be found in the day of judgment but it is a drastic remedy and should not be granted lightly.’

17                  Finally, the respondents made the point that by no stretch of the imagination could they, on the evidence, be said to be ‘unscrupulous’ in their dealings.  As is clear from the correspondence between the parties’ solicitors, the respondents have taken appropriate steps to inform the applicant as to the state of each of the properties the subject of this application, and the reason for proposing to sell or lease them (namely, to put the proceeds into the business to enable it to keep operating).

18                  I totally agree with these responses of the respondents.

19                  The applicant, at para 39 of Ex 1, refers to the fact that on 27 July 2010 he discovered that H & R had taken out a margin loan facility to a maximum of $3 million secured by BHP shares it owned, but there is no evidence that H & R, assuming it has drawn down against this facility, has dissipated the loan proceeds.  Indeed, there was no evidence before the Court which would enable the Court to make any finding as to the net worth of H & R either now or at any time in the past.

20                  The paragraphs of Ex 2 contain either references to Exs MC-84 to MC-93, being documents provided to the applicant by the respondents, or references to material in an affidavit sworn by Peter Ross Hunt on 20 August 2010, but which counsel for the respondents did not read.  None of these documents or material contain any evidence that any assets are currently being sent out of the jurisdiction or are being dissipated, dealt with, or disposed of within the jurisdiction.

21                  In respect of figures appearing in the material showing retained earnings of NID as at 30 June 2009 of $8,516,001 and retained earnings of NID as at 30 April 2010 of $445,499, the highest the evidence got was what appears at paras 19 and 20 of Ex 2:

‘19       I am unable to understand the difference in the retained earnings balances and why the balance would reduce by $8,070,502, when the operating loss reported is $4,200,000.

20        I am concerned that the assets of [NID] and [H & R] are being dissipated.  I am also concerned that the Respondents’ assets are being dissipated.’

With respect, the applicant’s lack of understanding and concern, are not evidence upon which any objective conclusion could be drawn.  It does not appear that the applicant sought any ancillary relief pursuant to O 25A r 3 to assist his evidentiary task, but the fact that he did not does not ‘lower the bar’ on the issue of sufficiency of evidence.

22                  Clearly, the documents and material relied on by the applicant show that the major contributing cause in the reduction of the retained earnings balance over the ten month period from 30 June 2009 to 30 April 2010 was the fact that NID was trading at a loss; at least $4.2 million, but maybe more.  There is no evidence that the reduction was due to any conduct which would lead one to objectively conclude that NID was disposing of assets outside the ordinary course of its business, or otherwise dealing with them with a view to diminishing their value.

23                  The applicant made much of the payment of a dividend by NID to its shareholders in the order of $1.162 million out of the profits for the year ended 30 June 2009.  The evidence is uncertain as to when the dividend was paid but suggests that it was paid sometime after 30 March 2010 and before 30 April 2010; the point being made that it was paid at a time when NID had been incurring significant trading losses.  It undoubtedly contributed, to the extent of the amount of the dividend, to the reduction in the balance of retained earnings as at 30 April 2010, but no illegality was alleged and at most it represented only 25% of the trading loss impact to that latter date on the same retained earnings.  Moreover, all but a nominal amount of the dividend was paid to NID Holdings Pty Limited, which holds all but two shares in NID, and according to the same materials upon which the applicant relied, NID Holdings Pty Limited had, by 30 April 2010, increased its lending to NID by a further $1.05 million over the 30 June 2009 balance date figure (p 22 of Ex MC-89).

24                  Moreover, according to the same materials (Ex MC-86), by a resolution of directors of NID on 2 July 2010, NID had agreed to borrow a further $1.7 million from NID Holdings Pty Limited to enable it to keep operating in the July to December 2010 period.

25                  None of this represents conduct on the part of NID which would in any way enable a reasonable person to objectively concluded that NID was engaged in conduct which was designed to dissipate its assets or diminish their value.

26                  It follows, in my view, that the applicant’s motion fails on the sufficiency of evidence threshold.  Nevertheless, in the event I am wrong on this score, I consider below the discretionary considerations raised in the submissions of the respondents; they too lead me to the conclusion that the motion must fail.

Discretionary Considerations

27                  First, the applicant has not proceeded with his application with any vigour or urgency.  The applicant’s solicitors first wrote to the respondents’ solicitors expressing concern in respect of the sale of the assets in question on 15 June 2010 (Ex 1, Ex MC-70).  The applicant’s notice of motion was filed on 2 August 2010.  A delay of seven weeks could hardly be said to indicate that the applicant has ‘proceeded … expeditiously’: Cardile at [53].

28                  Second, no ex parte or truly interim relief was sought by the applicant, even though this course was available to him.

29                  Third, the granting of a freezing order will have a damaging effect on NID’s business (see, for example, Pearce v Waterhouse [1986] VR 603 at 607 – 608).  As the correspondence from the respondents’ solicitors indicates, the purpose of the sale of the assets in question is ‘to return both NID and H & R … to good corporate health’ (Ex 1, Ex MC‑72, p 2).  If an order were made, there is a real risk that the business will be adversely affected, even though the proposed orders are framed in such a way as not to do so.  Ironically, this would be to the applicant’s detriment were he ultimately to succeed in the substantive proceedings.

30                  Fourth, the proposed orders amount to an invasion of the liberty of the third to sixth respondents.  For example, if one of these parties needed to purchase a car with their own funds they would be required to apply to the Court to vary the orders, as not to do so would expose them to a charge of contempt.  As stated above, freezing orders are granted in the most exceptional of cases.  They are granted in circumstances where the respondents fit Slattery J’s characterisation of the ‘unscrupulous defendant’ in Khalifeh.  This is not such a case, and to impose this regime on each of the third to sixth respondents would make life unduly burdensome.

31                  Fifth, it is noteworthy that, on 25 June 2009, in a letter addressed to the board of directors of NID (Ex 1, Ex MC-83 p 92), the applicant, amongst other things, describes the McCauley Street and Latymer Court properties as ‘non-performing assets’ which he recommends ought to be ‘discard[ed]’.  The applicant’s position on 25 June 2009 and his position today are irreconcilable, and this ought to be taken into account.

32                  Finally, and without ‘undertaking a preliminary trial’ (Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622 per Kitto, Taylor, Menzies and Owen JJ), the respondents’ defence to the applicant’s claim in the substantive proceedings (a relevant factor) is strong: see, in the context of interlocutory injunctions, Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [248] per Heydon J, citing Hubbard v Vosper [1972] 2 QB 84 at 96 per Lord Denning MR.

33                  The substance of the applicant’s case is that the shareholders of NID represented to the applicant that they would not interfere with the day-to-day management of NID, and that he relied on such representations in accepting his position as Chief Executive Officer of NID.  It is stretching the credulity of the Court to ask it to accept that an experienced accountant such as the applicant understood such representations, even if made, to be a guarantee that the shareholders would never exercise their rights as shareholders to intervene in the affairs of the company in the event that they formed a view that the company was being mismanaged, or that they somehow relinquished the rights of the company under an employment contract to terminate the employment of the applicant.

Conclusion

34                  For all these reasons, the applicant’s motion must be dismissed with costs.

Associate:

Dated:         5 October 2010