A Musumeci Pty Limited t/as Better Choice Fisheries v Cosimo Marzano & ors

Judgment 1HIS HONOUR: The plaintiff A Musumeci Pty Ltd alleges that the first defendant Cosimo Marzano, who was employed as its financial controller from about 2002 until August 2009, engaged between 2004 and 2009 in a course of misappropriating moneys of the plaintiff that were under his control, and applying them to the benefit of himself and the second defendant, which is a corporation related to him. After the institution of proceedings, the defendants, on 14 December 2009, the plaintiff having given the usual undertaking as to damages, through their counsel gave to the Court an undertaking that they would not by themselves, their officers, servants, agents or employees: (a) remove, or cause or permit to be removed from the State of New South Wales and from Australia all or any of their assets; and (b) sell, charge, mortgage, or otherwise deal with or dispose of or cause or permit to be sold, charged, mortgaged, or otherwise dealt with or disposed of, all or any of the assets whether located within Australia or outside of Australia, PROVIDED that this Order: (c) shall not prevent the Defendants from paying their reasonable ordinary living, business and operating expenses up to an amount of $20,928 per month plus any reasonable taxation and GST liabilities that may arise from time to time; (d) shall not prevent the Defendants from paying reasonable legal expenses; and (e) shall not prevent any bank, building society or financial institution from exercising any right of set-off which it may have in respect of a facility afforded by it to any of the Defendants prior to the date of this Order. 2By Notice of Motion filed on 21 April 2011, the defendants seek to have their above undertaking varied, so as to permit the second defendant to sell a property located at Deer Park in Victoria, on condition that the net proceeds after selling expenses and discharging the mortgage be held and applied in accordance with the undertakings previously given, and that the property be sold for not less than $330,000. 3The precise form of the proposed varied undertaking has been further refined in a Draft Order proffered by the defendants today, but for the purposes of the present decision the fine detail of that revision does not much matter. 4The plaintiff does not oppose the application insofar as the second defendant seeks to be permitted to sell the Deer Park property, but proposes a reserve price of $350,000 as distinct from the $330,000 proposed by the defendants. It further seeks that the proceeds of sale, after discharge of relevant encumbrances, land tax, rates and costs of sale, be paid into Court or into the defendants' solicitor's trust account, pending further order. The essential dispute, therefore, is whether any surplus remaining from the proceeds of sale should effectively be frozen absolutely, or should be held upon terms of the existing undertaking - which would, inter alia , permit them to be applied to the reasonable costs of the defendants' defence. As it would seem, that is the prime if not sole purpose to which it is desired to apply them. 5There is some valuation evidence that suggests that the property may be worth between $360,000 and $380,000 as at April of this year. The defendants' solicitor explain, in an affidavit, that assuming proceeds of sale of $340,000, the defendants' intention is to apply $14,500 to agent's and solicitor's costs of sale, a total of about $251,500 to discharge encumbrances primarily secured upon Deer Park, and a further $34,000 to reduce other loans (which are apparently collaterally secured on the property pursuant to all money mortgages) - leaving a balance of, say, $40,000 to be applied to the defendants' outstanding legal fees, which amount to approximately $42,000. 6Accordingly, the present dispute is in respect of prospective net proceeds from sale in the order of some $40,000, which may amount to very little in the context of the case - given that the defendants disclose assets of some $3.2 million, and liabilities of some $2.3 million, and the plaintiff claims a sum in the order of $3 million in respect of the alleged defalcations. 7Each counsel has ably advanced principles which assist their respective cases. For the defendants, who are the applicants on the Notice of Motion, Mr McGrath has emphasised that it is a cardinal principle of Mareva relief that a plaintiff is not entitled to, as it were, improve its position by gaining security over a defendant's assets, but only to prevent a defendant from frustrating a potential judgment by dissipating assets or removing them from the jurisdiction. Further, he submitted that no prima facie case was established by the evidence, as distinct from mere allegations in the pleadings, that the plaintiff's claim is so large that it would be defeated by the application of say $40,000 to legal expenses. 8Against that, Mr Vincent, for the plaintiff who is the respondent to the Notice of Motion, points out that this is not merely a case of a creditor suing a debtor and seeking an injunction to prevent frustration of any judgment ultimately recovered. Because what is alleged is a dishonest misappropriation by a trusted employee, this is a case of alleged breach of fiduciary duty, in which the plaintiff asserts that it has proprietary remedies and rights against the defendant in respect of property taken from the plaintiff, and property into which such misappropriated property can be traced. In that respect, Mr Vincent points to the circumstance that the subject Deer Park property was in fact acquired in 2007, during the period of the alleged fraudulent scheme. 9Both these competing submissions are correct. As I have said elsewhere, it is a fundamental principle of Mareva relief that it should not be allowed to stultify the proper defence of the proceedings, and generally speaking the proper legal costs of the defence should be exempted from the scope of an asset preservation order [ Harrison Partners Construction Pty Ltd v Jevena Pty Ltd [2006] NSWSC 317, [10]]. 10On the other hand, there is a fundamental distinction between, on the one hand, preservation of assets under a freezing order or Mareva injunction, pending the resolution of a creditor's claim against a debtor, so as to prevent dissipation of assets of the defendant(s) generally in order to prevent frustration of the plaintiff's ability to satisfy a potential money judgment for debt or damages; and, on the other, a claim for a conventional interlocutory injunction to preserve the subject matter of a proprietary claim in order to preserve the very fund or asset to which the plaintiff claims to be beneficially entitled [ Australian Receivables Ltd v Tekitu Pty Ltd & 2 ors [2008] NSWSC 433, at [12]]. 11I have not found it easy to resolve just where this case fits, for the additional reason that, unlike in Tekitu - where the injunction sought extended only to an identifiable part of the defendant's assets and not to all of them - here the undertaking extends to all of the defendants' assets. Against that, if the $40,000 were preserved absolutely, that would still leave the defendants at liberty to use their other assets for legal expenses, in accordance with the terms of the existing injunction. 12For the plaintiff it is also put that there is no apparent case - or at least evidence - that their legal costs could not be funded from other sources, for example, the second defendant's business income, or perhaps the Horsley property that was acquired in 1997 or 1998, before the alleged fraud. 13It will be apparent that there are significant competing considerations on both sides. But one matter to which ultimately I have found I should give considerable weight is the existing regime established by the original undertakings 18 months ago in December 2009 which, by the proviso, plainly contemplated that the defendants would not be prevented by the freezing undertaking from paying their reasonable legal expenses. Much time has passed, and it is not surprising that they would have substantial legal expenses to pay. In the light of the contemplation that existed then, and in the absence of evidence that the plaintiffs have not just a strongly arguable case - which is sufficiently established for present purposes pursuant to the Notice to Admit Facts - also but that the quantum of that case is such that it would be defeated by expenditure of $40,000 (as to which there is at this stage merely allegation in the pleadings and not evidence), I do not see sufficient cause to depart from the regime established by the original undertakings of 14 December 2009. 14On that basis I would accede, in substance, to the defendants' application. 15So far as the reserve price, for want of a better word, is concerned, in light of the valuation evidence, the plaintiff's proposal of $350,000 is not an unreasonable one. On the other hand, it is greatly undesirable that the parties should be put to the additional cost of coming back to Court to obtain a reduced reserve price if that appears to be too much, and I am inclined to accept a figure of $340,000. 16My orders are: