Aho v HBU LEFTA 2101 Pty Ltd

Relevant principles

1. The relevant principles were not in dispute. The Court has a broad power to make an asset preservation (or freezing) order under both its inherent jurisdiction and Part 25 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). Rule 25.11 confers power to make an order 'for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied'. Rule 25.11 does not prescribe the form of the order; rather, the power to make the order is defined by reference to its purpose, consistently with its juridical basis which is the Court's inherent and statutory jurisdiction to make such orders as it considers appropriate to prevent the abuse or frustration of its processes in relation to matters coming within its jurisdiction: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 at [41]-[42].
2. Three requirements must be satisfied for the grant of an asset preservation order under r 25.11 (Peter Biscoe, Freezing and Search Orders (3rd ed, 2023, LexisNexis) at [2.52]): first, the applicant must have a good arguable case on an accrued or prospective cause of action that is justiciable in the Court, or a judgment of the Court; second, the Court must be satisfied having regard to all the circumstances that there is a danger that the actual or prospective judgment debt will be wholly or partly unsatisfied because any of the events set out in r 25.14(4) or (5), as applicable, might occur; and third, if those two requirements are met, the Court must be satisfied that as a matter of discretion, it is in the interest of justice to grant an order bearing in mind, among other things, the balance of convenience and that the jurisdiction is to be exercised with a high degree of caution (reflecting the fact that the remedy is drastic and not to be granted lightly).
3. As HBU submitted, it is necessary to bear in mind that the purpose of a freezing order is to prevent the abuse or frustration of the Court's processes and not to provide security for the plaintiffs' claim. As Barrett J put it in Goumas v McIntosh [2002] NSWSC 713 at [23]: The aim [of a freezing order] is not to stop people spending their money. It is to stop them spending it in ways which are not legitimate, having regard to the interest of the claimant in ensuring that there is no untoward removal of assets from the ownership of the person against whom a judgment may in due course be entered. Hence, the mere fact that a judgment against the defendant may not be satisfied for reasons of its impecuniosity does not mean that a freezing order should be granted: Finn v Carelli [2007] NSWSC 261 at [5].
4. For these reasons, where a party seeking a freezing order does not bring a proprietary claim against assets of the defendant, the usual position is that the defendant will generally have an entitlement to use its assets for legitimate purposes, including the payment of reasonable legal expenses of the litigation: Goumas at [27]; National Australia Bank Ltd v Human Group Pty Ltd (No 2) [2020] NSWSC 1900 at [106]-[112]; Biscoe, Freezing and Search Orders at [2.95].

Consideration

1. It is not in dispute that the plaintiffs have a good arguable case. Rather, HBU contends that the freezing order should be discharged because the purpose of a freezing order is not to prevent a defendant from dealing with its own assets for regular and legitimate purposes, which includes the payment of its reasonable legal expenses, as such dealings would not frustrate the Court's processes. HBU says that it should be entitled to use the funds in the Bank Account to meet its reasonable legal expenses of the present proceedings and the related proceedings (which are estimated to be approximately $213,000) and other business expenses bona fide and properly incurred in the conduct of its business (which are expected to be minimal). HBU relies on the authorities referred to earlier that freezing orders should not preclude the person subject to it from paying such costs because they are legitimate exceptions which do not conflict with the policy underlining the jurisdiction to make freezing orders.
2. The plaintiffs submit that no variation should be made to the freezing orders because, in effect, HBU is seeking to use the Bank Account to fund its defence of the claims brought by the plaintiffs in these proceedings in breach of cl 10.3 of the JVA. The plaintiffs press for the continuance of the freezing order or, alternatively, a more limited form of order, being that set out in prayer 6 of the summons which is that the Bank Account be frozen until further order of the Court.
3. For the following reasons, in my view, the plaintiffs are entitled to a freezing order to restrain HBU from using the funds in the Bank Account for purposes other than paying its reasonable legal expenses up to $30,000 and its other business expenses bona fide and properly incurred in the conduct of its business.
4. First, the plaintiffs have a good arguable case that the use by HBU of the funds in the Bank Account to pay legal expenses or indeed any other expense is a breach by it by cl 10.3 of the JVA. In my opinion, the plaintiffs would be entitled to an interlocutory injunction to restrain HBU from breaching cl 10.3. The essential requirements for such relief are that (a) there is a serious question to be tried; (b) the plaintiff is likely to suffer injury for which damages is not an adequate remedy; (c) the balance of convenience favours the grant of the injunction; and (d) granting the injunction would not be refused on discretionary grounds.
5. As to the first requirement, on HBU's case, the JVA has not been terminated and if that is so, the proposed use of the funds in the Bank Account is clearly a breach of cl 10.3 of the JVA. The plaintiffs contend that the JVA has been terminated. If that is so, the question would arise as to whether cl 10.3 survives the termination. There is a good arguable case that it does.
6. When a party to a contract, upon the breach by the other of a condition of a contract, elects to treat the contract as no longer binding on it, the contract is not rescinded as from the beginning; rather, while both parties are discharged from the further performance of the contract, rights which have already been unconditionally acquired and rights and obligations which arise from the partial execution of the contract, and causes of action which have accrued from its breach, continue unaffected: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477 per Dixon J. This is reflected in cl 11.2 of the JVA which provides that the termination of the JVA will not prejudice any accrued rights or obligations of a party before the date of termination.
7. In my view, cl 10.3 would survive termination of the JVA because, on the proper construction of the JVA, that clause confers a right (together with a correlative obligation) which was unconditionally acquired prior to the termination. That construction of cl 10.3 gives it a sensible business operation in circumstances where the funds in the Bank Account reflect amounts borrowed from the lender in respect of which the parties to the JVA (in particular the plaintiffs) have given security by way of guarantees and registered mortgages.
8. As to the remaining requirements for an interlocutory injunction, damages would not be an adequate remedy because the only significant asset of HBU is the Bank Account. The balance of convenience would favour the grant of injunctive relief because HBU has admitted in its defence in the related proceedings that the loan of $1.5 million (of which the amount standing to the credit of the Bank Account is part) was made to it and the use of that amount for any purpose other than to repay the lender would only serve to increase the liability of the plaintiffs under their guarantees (which are secured by the mortgages they have given) both as to principal and a liability to interest during the period of any delay in repayment. There are no discretionary factors which would weigh against the grant of the injunction.
9. Second, HBU is controlled by the second and third defendants. The real dispute in the present case is between the plaintiffs and the second and third defendants, each of whom has given a guarantee to the lender. There is nothing in the evidence to suggest that the second and third defendants are not able to fund the litigation (both in the present case and the related proceedings) without recourse to the funds in the Bank Account. Indeed, they or entities associated with them have received the benefit of significant payments from the Bank Account to date, including 'procurement fees'/'management fees' of $316,352 and legal costs of $110,382 (which appear to relate at least in part to the costs incurred by the second and third defendants in the related proceedings).
10. Third, I am satisfied that each of the requirements for the making of a freezing order in respect of the Bank Account set out at [8] above is met (noting that the first requirement is not in dispute).
11. Fourth, the power under r 25.14 of the UCPR is broad and flexible and can be moulded to meet the circumstances of the case: Cardile at [41]. In the present case, in my view the appropriate order is one which freezes the Bank Account only, rather than all the assets of HBU. This will allow HBU to raise funds from its shareholder (which appears to be related to the second and third defendants) in order to fund payment of its legal expenses of the present case or the related proceedings.
12. The plaintiffs did not oppose the inclusion of an exception to the freezing order to be made against the Bank Account to allow it to be used to pay legal expenses up to $30,000 or business expenses bona fide and properly incurred (which are expected to be limited to the costs of maintaining the company's registration with ASIC and accountancy expenses which are in substance the same as the existing exclusions to the freezing orders made on 28 August 2024). In effect this preserves the exclusions under the freezing order made on 28 August 2024.
13. There was no dispute that each party's costs of the application should be costs in the cause.
14. For these reasons the Court made the following orders on 18 September 2024: 1. Upon the Plaintiffs by their Counsel giving the usual undertaking as to damages, an order that the bank account 082-201 75 620 2905 held by the First Defendant with National Australia Bank Ltd at Chatswood (Bank Account) be frozen until further order of the Court, subject to the exceptions that this order does not prohibit the First Defendant from: 1. paying from the Bank Account no more than $30,000 in respect of its reasonable legal expenses; 2. in relation to matters not falling within (a), paying from the Bank Account amounts to discharge obligations bona fide and properly incurred in the ordinary and proper course of its business. 1. List the matter for directions before the Equity Registrar on Thursday, 26 September 2024. 2. An order that each party's costs of the First Defendant's application to lift the freezing orders previously made by the Court be costs in the cause. 3. Order that these orders be entered forthwith.

Amendments 23 September 2024 - [6] - typographical error corrected. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 October 2024