Federal Court of Australia

Nova Supply Chain Finance Pty Limited v Active Capital Reinsurance Limited (a company incorporated in Barbados) [2024] FCA 1398

ORDERS

THE COURT ORDERS THAT:

1.    Upon the second and third respondents, via their counsel, undertaking to the applicant and to the Court that they will not dispose of or deal with any assets except for the purposes of paying their ordinary living expenses, legal expenses and business expenses (or otherwise with the consent of the plaintiff in writing), the freezing order made against the second and third respondents on 22 November 2024 be discharged.

2.    Costs reserved.

3.    The matter be listed on 10 February 2024 at 9.30 am in relation to any application to vary or discharge the undertaking referred to above and for case management generally.

4.    The applicants serve a copy of these orders by 4 pm today on all persons and entities on whom it has served the orders of 22 November 2024.

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

REASONS FOR JUDGMENT

Delivered ex tempore, revised from transcript

JACKMAN J:

1    On 22 November 2024, I made freezing orders in the standard form against the second respondent (Mr McNally) and the third respondent (Insured Creativity). The matter was stood over until today. Mr Ribbands has appeared on behalf of the second and third respondents and seeks to have the freezing orders discharged on the basis that the second and third respondents undertake to the applicant and to the Court that they will not dispose of or deal with any assets except for the purposes of paying their ordinary living expenses, legal expenses and business expenses, or otherwise with the consent of the plaintiff in writing.

2    Mr Ribbands relies on an affidavit by Mr McNally of 28 November 2024, which has been prepared in somewhat difficult and hurried circumstances, given that Mr McNally is presently in Tahiti and will not return to Australia until 10 December 2024. Mr McNally's affidavit proves that since the orders were made on 22 November 2024, all of his personal bank accounts with the ANZ Bank have been frozen, all the business bank accounts for Insured Creativity, Wanchai Investments Pty Ltd and Wanchai Hospitality Pty Ltd with Westpac Banking Corporation have been frozen, none of his businesses can trade at all as a result, he cannot buy anything using his ANZ credit cards, and he has no access to his bank accounts with the ANZ.

3    Mr McNally’s evidence also establishes that if the orders made on 22 November 2024 are permitted to remain, then the following will occur:

(a)    Insured Creativity in conducting its insurance broking business will be unable to pass on client premiums to insurers, pay stamp duty or pay GST. It will then be in breach of its AFSL, and it will be wound up. Mr McNally estimates that the value of its business as a going concern is approximately $2 million, and the applicant has provided security for its undertaking as to damages of only $30,000;

(b)    Wanchai Investments Pty Ltd will be unable to pay the expenses of Insured Creativity (contrary to its current practice), including bank accounts, car finance, premium funding, rent and the ATO, and will be wound up. Mr McNally will be liable on the guarantee of the lease that it has entered into;

(c)    Wanchai Hospitality Pty Ltd will be unable to pay staff, suppliers and rent, and Mr McNally will be liable on the guarantee of the lease of the premises from which it trades. Mr McNally says that as the businesses will be unable to trade, he will also be liable to the vendors of the shares in Wanchai Hospitality Pty Ltd for the $50,000 that he owes them on 1 December 2024; and

(d)    Mr McNally proves that, if all three of his businesses fail, as will occur if the orders are permitted to remain, then he will personally be bankrupted and will lose his businesses and his houses.

4    This appears to me to be a consequence of the fact that the bank accounts for those entities have been frozen and, as often occurs, the banks do not wish to risk breaching the freezing orders by permitting the ordinary processes for electronic banking to operate without being able to monitor whether transfers fall within the exceptions to the freezing orders, or by making an inadequate assessment as to whether transfers of funds from those bank accounts fall within the particular exceptions to the freezing orders, such as those pertaining to ordinary living expenses and ordinary business expenses.

5    In those circumstances, I do not think the balance of convenience favours the continuation of the freezing orders of 22 November 2024 and the proposed discharge of those orders upon the undertaking referred to above by Mr McNally and Insured Creativity is appropriate.

Further Observations

6    Applications to vary freezing orders because of difficulties in operating bank accounts are made relatively frequently, reflecting the increasingly common practice for freezing orders to be served on, or notified to, the bank of the person who (or the company which) is subject to the order. Order 15 of this Court’s standard form of freezing order set out in the Freezing Orders Practice Note (GPN-FRZG) (in common with the standard orders used by other Australian courts and in the United Kingdom) was presumably intended to deal with that circumstance by providing that:

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.

7    The condition expressed in the concluding phrase in that order arguably imposes a positive obligation on a bank which has been notified of the freezing order to be satisfied that withdrawals appear to be permitted by the exceptions to the freezing order. Westpac took the view that it did so in Rambaldi (Trustee) v Meletsis, in the matter of the bankrupt estate of Karas (No 3) [2022] FCA 807 at [41], and although O’Callaghan J was generally critical of Westpac’s conduct in that case I do not think that his Honour found that Westpac had adopted an erroneous construction of Order 15. Indeed, his Honour referred at [95] to Westpac’s proposal that it would remove the block on the accounts if the parties agreed that Westpac had no monitoring obligations, saying (perhaps controversially) that Westpac’s obligations were not a matter for agreement between the parties but were for Westpac to identify and comply with. In the absence of argument on the point in the present matter, I do not express any view as to the proper construction of Order 15.

8    The issue which arises is that, in the modern world of automated and electronic banking transactions with minimal (or no) human involvement on the part of the bank, it is not easy for banks to ascertain whether a withdrawal is permitted by a freezing order. As a result, many banks which are served with a freezing order simply block their customer’s account, perhaps subject to a protocol such as that adopted in Rambaldi v Meletsis requiring the customer to attend personally at a branch of the bank after having sent an email 1–2 business days beforehand enclosing sufficient supporting documents to establish to the satisfaction of the bank’s staff that a proposed withdrawal falls within one of the exceptions to the freezing order.

9    I can well understand why banks take this approach. While the risk to a bank of being liable for contempt of court in relation to a freezing order against its customer may typically be a remote one, any risk that the bank’s employees may be imprisoned, the bank fined and its assets sequestrated is not a risk to which anyone would wish to be exposed, as Lord Bingham said in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28; [2007] 1 AC 181 at [13].

10    The practice of serving banks with freezing orders has thus often had the unfortunate consequence of making it practically very difficult for those who are subject to freezing orders to engage in transactions within the exceptions to those orders, those exceptions being vitally important safeguards in the striking of a fair balance between the parties. As Laddie J observed in The Bank v A Ltd [2000] EWHC J0517-13; (2000) LLR 271 at [31]:

Mareva orders have rightly been described as the nuclear weapons in the court’s armoury and as being at the very extremity of the court's powers. To reduce the risk of abuse, stringent safeguards have been put in place to protect, as far as possible, the interests of the absent respondent.

11    The difficulties are starkly illustrated by the circumstances in Rambaldi v Meletsis. On one day, it took Mr Meletsis over two hours in his local branch to process 34 payments, and in the following weeks he spent about 25 hours ensuring that the payments had been received by the intended recipients: see [30]. Mr Meletsis was unable to use his credit cards and other forms of payment for living expenses (including ordering food online when members of his family were in isolation after contracting COVID-19, paying for nearby parking at an emergency department when his child fell ill, and booking school holiday activities for his children online: see [93]). I do not suggest in any way that parties who serve freezing orders on banks might intend to undermine the practical operation of the exceptions to the freezing order. However, experience teaches that the law of unintended consequences is not subject to desuetude or repeal.

12    What then is the solution? At present, the answer usually given is to wait for the problem to arise in the few days after making the freezing order, and then to deal with the problem on an ad hoc basis. That is time-consuming, expensive and frustrating, as the circumstances in Rambaldi v Meletsis amply demonstrate. In that case, the parties initially appeared before O’Callaghan J on three occasions in the space of two and a half weeks. The parties and Westpac then appeared four weeks later on just one day’s notice, and over the course of the following month filed written submissions addressed to the question whether Westpac should pay the plaintiffs’ and the first and second defendants’ costs of the first and second defendants’ applications to vary the freezing orders. That would have to be the only available solution for it to be consistent with the overarching purpose of the civil practice and procedure provisions of facilitating the just resolution of disputes according to law, and as quickly, inexpensively and efficiently as possible: s 37M of the Federal Court of Australia Act 1976 (Cth).

13    In my view, bearing in mind that the making and serving of the freezing order against a specified person (or company) should itself provide sufficient protection to a prospective judgment creditor, and that the service of the order on that person’s (or company’s) bank is typically supererogatory, the onus should be on the party seeking a freezing order to justify any proposal to give notice of the order to a bank or financial institution which is not itself a party to the order. Accordingly, in my view, consideration should be given in future cases to making an order to the effect that the freezing order is not to be served on, or notified to, any bank or financial institution which is not a party to the order without the leave of the Court. The applicant for leave would then have to justify the proposed course of action in the particular circumstances of the case, and demonstrate how the full scope of the order (particularly the exceptions pertaining to ordinary living and business expenses and reasonable legal expenses) would be likely to operate in practical terms. On reflection, that is the course which I should have taken when this matter first came before me on an urgent ex parte hearing.

Associate:

Dated:    5 December 2024