FEDERAL COURT OF AUSTRALIA

Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (No 5) [2024] FCA 1034

ORDERS

THE COURT ORDERS THAT:

Orders in relation to the first to fourth respondents

1.    Upon the plaintiffs by their counsel giving the usual undertaking as to damages, the proceeds of sale of the second defendant’s property at 16 Orange Street, Eastwood NSW 2122 (Folio Identifier 19/245273) (Eastwood Property), net of the usual adjustments and the payment of legal costs pursuant to order 1 made on 31 July 2024 (Net Proceeds), be paid into an interest-bearing controlled monies account to be established by the plaintiffs’ solicitors, and held in such account subject to written agreement between the applicants and the first, second and fourth respondents to this interlocutory process or further order of the Court.

2.    To facilitate the completion of the sale of the Eastwood Property, by 4 pm on 30 August 2024:

(a)    the first respondent remove from the title of the Eastwood Property the caveat with document identification number AU203696;

(b)    the second respondent remove from the title of the Eastwood Property the caveat with document identification number AU266327.

3.    In default of compliance by the first or second respondent with order 2, the Registrar of this Court be empowered to do all things and execute all documents necessary or appropriate to give effect to that order.

4.    The third respondent be restrained from lodging a further caveat on the title of the Eastwood Property until 4 pm on 2 September 2024, or such other time as agreed between each of the plaintiffs, the third respondent and the fourth respondent.

5.    Each respondent claiming an entitlement to be paid an amount of the Net Proceeds pursuant to an obligation of the second defendant bona fide and properly incurred under a contract entered into before the orders made by this Court on 15 July 2024, or without notice of those orders, is to file and serve the following documents in support of that claim by 13 September 2024, or such other date as set by the Court:

(a)    any documents on which it relies to establish its claim; and

(b)    any additional evidence on which it relies to establish its claim.

6.    The second defendant to provide monthly bank statements of all accounts held either solely or jointly in his name to the plaintiffs to the extent that he has access to them, such bank statements to be provided on the 15th day of each month or the next business day.

7.    The Court notes that the third respondent does not claim any entitlement to be paid any amount by the second defendant, including from the Net Proceeds, and it has waived any such entitlement for payment from the second defendant that it otherwise has.

8.    Costs reserved.

9.    Adjourn to 27 September at 9.30 am before Jackman J.

10.    The interlocutory injunction made earlier today restraining completion of the Eastwood Property is dissolved.

Orders in relation to the fifth and sixth respondents

11.    Notes the undertaking of the Fifth and Six Respondents, Chu Li and Silver Altum Pty Ltd (through their counsel) to the Interlocutory Process dated 27 August 2024 not to deal with their title to the property known as 33A Kings Road, Vaucluse, NSW (Folio Identifier 1/230111) until the completion of the hearing on 27 September 2024 without the agreement in writing of the plaintiffs.

12.    Notes the usual undertaking as to damages is given by the plaintiffs (through their counsel).

13.    Adjourns the Interlocutory Process, so far as it concerns the Fifth and Sixth Respondents, with leave to the parties to relist on three business days’ notice, to 27 September 2024 at 9.30 am.

14.    Reserves the costs to date of the Interlocutory Process, as between the plaintiffs and the Fifth and Sixth Respondents.

Orders in relation to the third defendant and seventh respondent, David Darmali

15.    The application for this order is made returnable immediately.

16.    Subject to the next paragraph, this order has effect until further order.

17.    Anyone served with or notified of this order, including you, may apply to the Court at any time to vary or discharge this order or so much of it as affects the person served or notified.

18.    In this order:

(a)    ‘plaintiff’, if there is more than one plaintiff, includes all the plaintiffs;

(b)    ‘you’, where there is more than one of you, includes all of you and includes you if you are a corporation;

(c)    ‘third party’ means a person other than you and the plaintiff;

(d)    ‘unencumbered value’ means value free of mortgages, charges, liens or other encumbrances.

19.    (a)     If you are ordered to do something, you must do it by yourself or through directors, officers, partners, employees, agents or others acting on your behalf or on your instructions.

  (b)    If you are ordered not to do something, you must not do it yourself or through directors, officers, partners, employees, agents or others acting on your behalf or on your instructions or with your encouragement or in any other way.

Freezing of assets

20.    (a)    You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia (‘Australian assets’) up to the unencumbered value of AUD$9,861,905.22 (‘the Relevant Amount’).

  (b)    If the unencumbered value of your Australian assets exceeds the Relevant Amount, you may remove any of those assets from Australia or dispose of or deal with them or diminish their value, so long as the total unencumbered value of your Australian assets still exceeds the Relevant Amount.

21.    For the purposes of this order:

(a)    your assets include:

(i)    all your assets, whether or not they are in your name and whether they are solely or co-owned;

(ii)    any asset which you have the power, directly or indirectly, to dispose of or deal with as if it were your own (you are to be regarded as having such power if a third party holds or controls the asset in accordance with your direct or indirect instructions); and

(iii)    the following assets in particular:

A.    33A Kings Road, Vaucluse NSW (Folio Identifier 1/230111) or, if it has been sold, the net proceeds of the sale;

B.    Your shareholding or other interest in Darmali Investments Pty Ltd, carried on at 8 Candlebush Crescent Castle Hill NSW 2154 or, if it has been sold, the net proceeds of the sale;

C.    Your shareholding or other interest in Trinity Zone Pty Ltd, carried on at 8 Candlebush Crescent Castle Hill NSW 2154 or, if it has been sold, the net proceeds of the sale,

(b)    the value of your assets is the value of the interest you have individually in your assets.

Provision of information

22.    Subject to paragraph 23, you must:

(a)    at or before the further hearing on the Return Date (or within such further time as the Court may allow):

(i)    to the best of your ability inform the plaintiffs in writing of all your assets in Australia, giving their value, location and details (including the value of any mortgages, charges or other encumbrances to which they are subject) and the extent of your interest in the assets; and

(ii)    swear and serve on the plaintiff an affidavit setting out the above information.

23.    (a)     This paragraph (23) applies if you are not a corporation and you wish to object to complying with paragraph 22 on the grounds that some or all of the information required to be disclosed may tend to prove that you:

(i)    have committed an offence against or arising under an Australian law or a law of a foreign country; or

(ii)    are liable to a civil penalty.

(b)     This paragraph (23) also applies if you are a corporation and all of the persons who are able to comply with paragraph 22 on your behalf and with whom you have been able to communicate, wish to object to your complying with paragraph 22 on the grounds that some or all of the information required to be disclosed may tend to prove that they respectively:

(i)    have committed an offence against or arising under an Australian law or a law of a foreign country; or

(ii)    are liable to a civil penalty.

(c)     You must:

(i)    disclose so much of the information required to be disclosed to which no objection is taken; and

(ii)    prepare an affidavit containing so much of the information required to be disclosed to which objection is taken, and deliver it to the Court in a sealed envelope; and

(iii)    file and serve on each other party a separate affidavit setting out the basis of the objection.

Exceptions to this order

24.    This order does not prohibit you from:

(a)    paying up to $1,500 a week on account of your ordinary living expenses;

(b)    paying an amount not exceeding $100,000 on account of your reasonable legal expenses;

(c)    dealing with or disposing of any of your assets in the ordinary and proper course of your business, including paying business expenses bona fide and properly incurred; and

(d)    in relation to matters not falling within (a), (b) or (c), dealing with or disposing of any of your assets in discharging obligations bona fide and properly incurred under a contract entered into before this order was made, provided that before doing so you give the plaintiff, if possible, at least two working days written notice of the particulars of the obligation.

25.    You and the plaintiffs may agree in writing that the exceptions in the preceding paragraph are to be varied. In that case the plaintiffs or you must as soon as practicable file with the Court and serve on the other a minute of a proposed consent order recording the variation signed by or on behalf of the plaintiffs and you, and the Court may order that the exceptions are varied accordingly.

26.    (a)     This order will cease to have effect if you:

(i)    pay the sum of $9,861,905.22 into Court; or

(ii)    pay that sum into a joint bank account in the name of your lawyer and the lawyer for the plaintiff as agreed in writing between them; or

(iii)    provide security in that sum by a method agreed in writing with the plaintiffs to be held subject to the order of the Court.

(b)    Any such payment and any such security will not provide the plaintiffs with any priority over your other creditors in the event of your insolvency.

(c)    If this order ceases to have effect pursuant to 26(a) above, you must as soon as practicable file with the Court and serve on the plaintiffs notice of that fact.

Costs

27.    The costs of this application are reserved to the Court hearing the application on the Return Date.

Persons other than the plaintiffs and Third Defendant

28.    Set off by banks

This order does not prevent any bank from exercising any right of set off it has in respect of any facility which it gave you before it was notified of this order.

29.    Bank withdrawals

No bank need inquire as to the application or proposed application of any money withdrawn by you if the withdrawal appears to be permitted by this order.

Orders in relation to the Second Defendant’s Application to Vary the Freezing Order made by Jackman J on 15 July 2024

30.    Order 10(b) of the freezing order made by Jackman J on 15 July 2024 be amended by varying $50,000 to $87,000 plus GST.

31.    In the event the second defendant files a Notice of Appeal in respect of the orders made by Jackman J on 23 August 2024 in Chu v Lin, in the matter of Gold Stone Capital Pty Ltd [2024] FCA 766, Order 10(b) of the freezing order made by Jackman J on 15 July 2024 be varied to stipulate that the second defendant may, subject to further application, pay an amount not exceeding $294,300 plus GST on account of his reasonable legal expenses.

32.    Order that notations be added to the freezing order made by Jackman J on 15 July 2024 in the following terms:

Nothing in these orders shall operate to prevent the withdrawal of any monies from any bank account in the name of Australian Sydney Realty Pty Ltd, including the following bank accounts of the Westpac Banking Corporation:

(a)    Account ending 7029 – Australian Sydney Realty Pty Ltd;

(b)    Account ending 2266 – Australian Sydney Realty Pty Ltd;

(c)    Account ending 2816 – Australian Sydney Realty Pty Ltd; and

(d)    Account ending 7156 – Australian Sydney Realty Pty Ltd.

33.    Each party pay its own costs of this application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

SCHEDULE A

Undertakings Given to the Court by the Plaintiffs

1.    The plaintiffs undertake to submit to such order (if any) as the Court may consider to be just for the payment of compensation (to be assessed by the Court or as it may direct) to any person (whether or not a party) affected by the operation of the order.

2.    As soon as practicable, the plaintiffs will file and serve upon the respondent copies of:

(a)    this order;

(b)    the application for this order for hearing on the return date;

(c)    the following material in so far as it was relied on by the plaintiffs at the hearing when the order was made:

(i)    affidavits (or draft affidavits);

(ii)    exhibits capable of being copied;

(iii)    any written submission; and

(iv)    any other document that was provided to the Court.

(d)    a transcript, or, if none is available, a note, of any exclusively oral allegation of fact that was made and of any exclusively oral submission that was put, to the Court;

(e)    the originating process, or, if none was filed, any draft originating process produced to the Court.

3.    As soon as practicable, the plaintiffs will cause anyone notified of this order to be given a copy of it.

4.    The plaintiffs will pay the reasonable costs of anyone other than the respondent which have been incurred as a result of this order, including the costs of finding out whether that person holds any of the respondent’ assets.

5.    If this order ceases to have effect the plaintiffs will promptly take all reasonable steps to inform in writing anyone to who has been notified of this order, or who he has reasonable grounds for supposing may act upon this order, that it has ceased to have effect.

6.    The plaintiffs will not, without leave of the Court, use any information obtained as a result of this order for the purpose of any civil or criminal proceedings, either in or outside Australia, other than this proceeding.

7.    The plaintiffs will not, without leave of the Court, seek to enforce this order in any country outside Australia or seek in any country outside Australia an order of a similar nature or an order conferring a charge or other security against the respondent’ or the respondent’ assets.

SCHEDULE B

Affidavit Relied On

Name of deponent            Date affidavit made

1.    Andrew Lacey            27 August 2024

2.    Andrew Lacey            29 August 2024

Name and address of plaintiff lawyers

REASONS FOR JUDGMENT

Delivered ex tempore, revised from transcript

JACKMAN J:

The Plaintiffs’ First Application — Mr Cai

1    The plaintiffs have filed an interlocutory process seeking, among other things, that the proceeds of sale of Mr Cai’s property in Eastwood be paid into Court pending a determination of whether Mr Cai is permitted to pay the proceeds to persons who claim to hold security over the property. Mr Cai owns the property at Eastwood which he has sold for $3,102,000 and that sale is said to be due to be completed on 2 September 2024, although more recent information suggested that it was proposed to be completed today at 9.30 am. I have restrained the completion of that sale until further order.

2    The plaintiffs seek an order that the proceeds of sale be held in a controlled monies account in view of the fact that there are three persons claiming to be creditors of Mr Cai who have lodged caveats on the title of the property and their total claims exceed the value of the property. The freezing orders against Mr Cai made on 15 July 2024 include the usual exception in order 10(d) permitting Mr Cai to discharge “obligations bona fide and properly incurred under a contract entered into before this order was made”. The plaintiffs contend that the Court cannot be satisfied at this stage that the debts allegedly owing to the three caveators were bona fide and properly incurred by Mr Cai and thus there is a real risk that the freezing orders would not permit the sale proceeds to be applied to those debts. The plaintiffs accordingly propose that each claimed creditor should be given an opportunity to substantiate his, her or its claim and the proceeds of sale should be held in a controlled monies account in the meantime (unless any of the claimed creditors provides alternative security to the plaintiff’s satisfaction).

3    The first reason for the plaintiffs saying that the caveats are contestable is the timing of the lodgement of the caveats. When the hearing of this matter took place between 3 and 21 June 2024, the Eastwood property had an apparently clear title, and this had been the position since 19 December 2016 (except for a short-lived caveat lodged by Mr Cai on 20 June 2020). A week after the hearing concluded Haiming Cai lodged his caveat. I delivered judgment on 15 July 2024. Shortly after that (on 19 and 22 July 2024 respectively), Sunshine Cladding Pty Ltd (Sunshine Cladding) and Jia Liu lodged their caveats. Accordingly, after about eight years of no encumbrances on the title, within a month of the hearing concluding there were three encumbrances securing debts that were claimed to exceed $4.5 million in total. Further, each of the caveats is said to relate to a debt that had been outstanding for some time before the caveat was lodged.

4    The plaintiffs refer to other circumstances which give rise to further causes for concern in relation to the caveats. Haiming Cai is Mr Cai’s brother, and apparently resides in China. He is represented by a firm of solicitors who appear to have been acting for both Cai brothers in June and July 2024. The caveat Haiming Cai lodged on 28 June 2024 claims to relate to a debt that has been owing since 28 January 2014. That is more than a decade ago. Haiming Cai claims to be owed a total of $3.15 million comprising a loan advance of $900,000 plus $2,250,546.48 in accrued interest on the basis that no interest payments have ever been made under the claimed January 2014 loan agreement, notwithstanding that the agreement supposedly required quarterly interest payments (such that the loan has been in default for many years). It has also been noted that the loan was supposed to have been repaid in full on 28 January 2024. The alleged debt to Haiming Cai was not disclosed as a liability of Mr Cai in his marriage settlement in 2019. The plaintiffs submit that that is a reason also to doubt its veracity. The plaintiffs also draw attention to the fact that although the loan has been in default for many years, Haiming Cai did not see fit to lodge a caveat or take any enforcement action until a week after the hearing in this matter concluded. The plaintiffs further draw attention to the fact that when asked by the plaintiffs’ solicitors to provide evidence in support of his claim, Haiming Cai declined to do so.

5    In relation to Sunshine Cladding, Mr Cai claims to be in a poor financial position but says that:

(a)    in February this year, with a hearing in this matter a few months away, Mr Cai commissioned Sunshine Cladding to conduct a full scale renovation of his home at a cost of $512,710 (and in circumstances where Sunshine Cladding appears not to hold the appropriate licence to conduct home renovations);

(b)    the renovation was then completed in about three months;

(c)    Sunshine Cladding was not paid for its work, and appears to have done the work on credit, despite needing to incur liabilities to subcontractors; and

(d)    Sunshine Cladding did not lodge a caveat to protect its position until after the Court had delivered judgment against Mr Cai, by which time the alleged debt had been owing for about two months. It appears that Sunshine Cladding withdrew its caveat after it became clear that the veracity of its interest, or claimed interest, was questioned by the plaintiffs.

6    As to Jia Liu, she claims an equitable charge over the Eastwood property pursuant to a loan agreement dated 21 April 2023, securing a principal advance of $800,096.20, together with accrued interest of $92,197.56 and legal costs of $1,790 (being a total of $892,293.77). She has not yet provided documents to substantiate her claim that the advance was made. Ms Liu claims that interest was payable monthly under her loan agreement, but no payments were made. Her solicitors have said that she lodged the caveat when she did because she had learned that Mr Cai had sold the property, although they did not say how she learned that. It is not clear why, if the loan is genuine, she took no action before July 2024 despite the loan having been in default for more than a year. The plaintiffs submit that viewed in isolation, Ms Liu’s claim may not be quite as concerning as those of the other two caveators. However, the plaintiffs submit that when all three are viewed together, there is an available inference that Mr Cai was seeking to load the Eastwood property with false encumbrances in order to frustrate the impending enforcement of the plaintiffs’ judgment against him.

7    In all the circumstances, it seems to me appropriate that the proceeds of the sale of the Eastwood property should be paid into a controlled moneys account held by the plaintiffs’ solicitors pending determination of whether the caveators have any entitlement to those moneys.

8    The plaintiffs also seek orders requiring the caveators to remove their caveats to permit the completion of the sale of the Eastwood property. As judgment creditors, the plaintiffs have no standing to apply for an order that the caveats be removed under s 74MA of the Real Property Act 1900 (NSW), because they have no estate or interest in the property. However, the Court has power in its inherent jurisdiction to order a caveat to be removed in order to protect its own processes, including the enforcement of a judgment debt.

9    In the plaintiffs’ submission, the Haiming Cai and Ms Liu caveat should be removed, because if they remain on the title and the settlement does not proceed, then Mr Cai will be in default of the sale contract, and that would likely erode the assets against which the plaintiffs can enforce their judgment. For similar reasons, the plaintiffs seek an order restraining Sunshine Cladding from lodging further caveats until the sale is complete. The plaintiffs have also sought an order that in default of compliance by Haiming Cai or Ms Liu with the order that they remove their caveats, the Registrar of this Court be empowered to do all things and execute all documents necessary or appropriate to withdraw the caveats. The Court has power to make that order pursuant to s 53(1) of the Federal Court of Australia Act 1971 (Cth), r 41.10 of the Federal Court Rules 2011 (Cth) and s 94 of the Civil Procedure Act 2005 (NSW): Weston (Trustee) v Sanna [2020] FCA 830, [72]–[78] (Markovic J).

10    In my view, it is appropriate that such an order be made in order to avoid the risk of prejudice to the plaintiffs (and Mr Cai) if the sale is not completed on schedule.

The Plaintiffs’ Second Application — Mr Darmali

11    The plaintiffs seek freezing orders against Mr Darmali, who is the third defendant in the principal proceedings, pursuant to rr 7.32 and 7.35 of the Federal Court Rules 2011 (Cth). The plaintiffs draw attention to the findings of dishonest conduct by Mr Darmali, which I made in the trial judgment at [29]–[54], [224]–[226] and [235]–[236]. That in itself is suggestive of the risk of dissipation of assets. The present application is brought because, on 16 August 2024, Mr Darmali transferred ownership of his sole real property asset to his wife, Ms Li, and Silver Altum Pty Limited, which is wholly owned and controlled by Ms Li.

12    The transfer was said to be for consideration of $3,750,000, although the plaintiffs do not know whether such consideration was in fact paid. If the consideration was paid, then Mr Darmali has liquidated his assets in circumstances where a large judgment against him was looming. It can be inferred that there is a real risk that he is seeking to dissipate the moneys. If the consideration was not paid, or if the price of $3.75 million was less than the market value of the property, then Mr Darmali will have disposed of his sole real property asset in circumstances which may provide a basis for an inference that he was attempting to defraud creditors such that the plaintiffs would be entitled to set the disposition aside pursuant to s 37A of the Conveyancing Act 1919 (NSW).

13    In those circumstances, the plaintiffs submit, and I accept, that they have established a substantial risk that Mr Darmali may dissipate his assets, and that it is appropriate to make a freezing order. Ms Li and Silver Altum have provided undertakings which are satisfactory to the plaintiffs not to deal with the property known as 33A Kings Road, Vaucluse. Mr Darmali has proffered undertakings which the plaintiffs have not accepted, and the plaintiffs submit that it is preferable to make a freezing order in the conventional form, which will also give Mr Darmali the benefit of the undertakings which are contained in the usual form of freezing order.

14    I accept that, in the circumstances of the case, it is appropriate to make a freezing order as sought by the plaintiffs for the time being. The matter will come back before me on 27 September 2024 at 9.30 am, on which occasion I will consider any proposed variation to the present orders which I will make against Mr Darmali. The one exception to the orders sought by the plaintiffs is that the amount of legal expenses permitted to be paid by Mr Darmali under order 10(b) is proposed to be increased to $100,000. That amount appears to me reasonable, given that Mr Darmali faces likely, if not inevitable, legal expenses in dealing with the lump sum costs regime which I have ordered in these proceedings, the Supreme Court proceedings brought against him, and obtaining advice on prospects of appeal. I emphasise that the amount which I have inserted in order 10(b) is a cap on “reasonable legal expenses”, such that Mr Darmali is not entitled to pay unreasonable legal expenses even if they amount to a total of less than $100,000.

The Second Defendant’s Application

15    Mr Cai applies for variations to the freezing orders made on 15 July 2024. In that regard, he refers to three changes of circumstances since the hearing that day. First, on 23 August 2024, the Court made orders for the assessment of the party’s costs on a lump-sum basis, which will clearly involve additional legal expenses on the part of Mr Cai. Second, on 27 August 2024, the plaintiffs filed an interlocutory process seeking orders in respect of the Eastwood property, which is owned by Mr Cai, and costs will necessarily be incurred by Mr Cai in dealing with that application by the plaintiffs. Third, Mr Cai now has new legal representatives and some additional costs will be incurred, as they must familiarise themselves with the proceedings. Accordingly, Mr Cai seeks two orders in relation to monetary caps imposed on the reasonable legal expenses which he is permitted to pay pursuant to order 10(b) of the freezing order against him. First, Mr Cai seeks that the monetary cap in order 10(b) be amended by varying $50,000 to $87,000 plus GST. Second, Mr Cai seeks an order that, in the event that he files a notice of appeal in respect of the orders which I made on 23 August 2024, order 10(b) of the freezing order made on 15 July 2024 be varied to stipulate that Mr Cai may, subject to further application, pay an amount not exceeding $294,300 plus GST on account of his reasonable legal expenses.

16    In relation to those matters, the plaintiffs submit that the estimates of costs are excessively high and should be capped in lower amounts. In my view, the application by Mr Cai is reasonable. It may well be that the estimates that are given to justify those figures for the cap on reasonable legal costs will turn out to be excessively high, but it is difficult to say at this stage whether that will be the case. Further, the efficient conduct of these proceedings does require the minimisation of applications to the Court to vary costs, and it strikes me as desirable to make an order now which will provide for the likely costs to be incurred in any appeal, if a notice of appeal is actually filed.

17    I emphasise that the legal expenses permitted under order 10(b) are capped, in the first instance, by the concept of “reasonable legal expenses” such that it would be a breach of the orders for legal expenses in unreasonable amounts to be paid by Mr Cai. In the circumstances of this case I also regard it as desirable that there be an additional monetary cap on the costs to be incurred which, of course, may be the subject of an application for a variation in the event that the monetary cap proves to be too low. In the circumstances, it is appropriate that I make the orders now sought by Mr Cai to vary order 10(b).

18    Mr Cai also seeks orders that notations be added to the freezing order made on 15 July 2024 to the effect that nothing in those orders shall operate to prevent the withdrawal of any monies from the four bank accounts in the name of Australian Sydney Realty Pty Limited with the Westpac Banking Corporation. In relation to one of those accounts, being a statutory trust account, that account is essential for the operation of the business of Australian Sydney Realty Pty Limited and the other accounts are all held for the purpose of conducting that business.

19    There is no freezing order against Australian Sydney Realty Pty Limited, and it appears to me desirable that the orders be clarified so that Westpac need not fear any breach of the orders by permitting Mr Cai or others to operate those four bank accounts. Accordingly, the order sought by Mr Cai in that respect seems to me appropriate.

Associate:

Dated:    5 September 2024

SCHEDULE OF PARTIES