Australian Securities and Investments Commission v Adler

Nature of the application

1. By Interlocutory Process filed on 20 September 2024, by leave, the Plaintiff, WAM Active Ltd ("WAM"), seeks an order in the nature of a freezing order against the Second Defendant, Mr Bolton. That order is sought in circumstances that the Court had previously made orders for the service of relevant documents upon Keybridge Capital Ltd ("Keybridge"), the First Defendant, and upon Mr Bolton, and made orders that each of Keybridge and Mr Bolton inform WAM of certain matters, and provide WAM by no later than 5pm on 18 September 2024 any document recording the loan agreement pursuant to which loan funds were advanced to an "asset rich" entity (in Keybridge's description) associated with Mr Bolton, which it has now emerged is an Italian company.
2. I pause to note that no such loan agreement has been produced by Keybridge. Where there is no suggestion that the order made by the Court has not been complied with in fact, or that there was some practical reason that it could not be complied with, the Court can properly infer that the absence of production of that loan agreement in response to a mandatory order for its production establishes that it does not exist in any written form.

Evidence on the application

1. I should first address the relevant evidence before turning to the applicable authorities, the parties' submissions and the reasons that I am satisfied that a freezing order should be made in this case.
2. WAM read the affidavit dated 15 September 2024 of Mr Hamilton, who is its chief financial officer, who refers to the significant shareholding of WAM in Keybridge, and to the fact that WAM has brought winding up proceedings against Keybridge, in which it relies on a presumption of insolvency arising from an unsatisfied creditor's statutory demand. Mr Hamilton there refers to several announcements made by Keybridge to Australian Stock Exchange ("ASX"), including an announcement made in late February 2024 in respect of a standstill agreement between Keybridge and Mr Bolton and a third party, and Keybridge's agreement to pay Mr Bolton $4.3 million to enter into a separate restraint agreement with Keybridge, with the payment to be made at the end of a two year period. That is, apparently, at some time in late 2025. That announcement also recorded that, once the terms of the standstill were satisfied, Mr Bolton would become entitled to a fee of $4.72 million, but plainly recognised the possibility that that fee would not be payable, if the terms of the standstill were not satisfied, and expressly refers to the possibility as distinct from the certainty that that fee would become payable to Mr Bolton.
3. Mr Hamilton also refers to a further announcement made by Keybridge to ASX on 19 August 2024, which there referred to an "undocumented" agreement by Keybridge to pay Mr Bolton $4.75 million (a different amount) to enter into the relevant restraint agreement and refers to the fact that the back to back agreement with Mr Bolton, "once finalised", which apparently had not then occurred, would make payment conditional upon the standstill agreement with the third party being satisfied, with payment to occur at the end of the two year period.
4. That announcement added that, and it is apparent that, WAM then became aware that: "In July 2024, Keybridge advanced an unsecured loan to an asset rich entity owned by Mr Bolton, equal to the unpaid standstill fee and bonus. The loan is on commercial terms and must be repaid either by the proceeds of the restraint fee or by the asset rich borrower. Further details will be provided in the company's annual accounts."
5. I pause there to note that there was a suggestion made by Mr Broadfoot, with whom Ms Doyle-Markwick appears for Mr Bolton, that WAM there knew all that was needed to be known about the relevant transaction and that its delay in seeking relief tends against the relief that it now seeks. That is, with respect, a quite extraordinary submission, where it has first emerged in evidence produced today that the "asset rich entity" is an Italian incorporated company so that any judgment of an Australian Court against it would have to be enforced in Italy, possibly by invoking Italian corporate insolvency proceedings, a matter to which no reference was made in the announcement made by Keybridge to ASX at that time.
6. Mr Hamilton also there refers to the fact that a number of creditors, including but not limited to WAM, appear to have claims against Keybridge. That is a relevant matter, so far as the transactions which are in issue appear to have occurred at a point that a presumption of insolvency had arisen in respect of Keybridge, and a question whether a duty of Keybridge's directors to take into account the interests of creditors may have arisen.
7. Keybridge also reads the affidavit dated 16 September 2024 of its solicitor, Ms Mouyat, which dealt with service. No question as to service arises in circumstances that both Keybridge and Mr Bolton are today represented by counsel.
8. WAM also reads a further affidavit dated 20 September 2024 of Ms Mouyat which confirms that, although there had been reference to steps being taken by a third party to seek to have bankruptcy orders made in respect of Mr Bolton, he is not presently bankrupt, so no question of any requirement for leave to bring these proceedings against him arises. Ms Mouyat also there refers to evidence which has emerged, in respect of the information provided by Keybridge and Mr Bolton pursuant to the Court's orders, that the entity to which the relevant loan was made, an Italian company under the name Crotto del Nino S.r.l. ("Crotto"), appears to own buildings and land in Como, Italy. That affidavit also annexes a consent of liquidator, which is relevant to a foreshadowed application by WAM for the appointment of a provisional liquidator to Keybridge, which is not in issue today.
9. Mr Bolton reads an affidavit dated 18 September 2024 of Mr Patton, a director of Keybridge, which Keybridge provided to comply with the Court's order for the disclosure of information in respect of the relevant transaction. Mr Gandar, who appears for Keybridge, submits and I accept that I should approach that affidavit on that basis, and not on the basis that it was filed in order to affirmatively advance any case of Keybridge in respect of the application. I do not draw any inference from matters that are not included in the affidavit, but have regard only to the evidence that emerges from the affidavit, so far as it indicates the steps taken by Mr Patton and Keybridge in respect of the relevant transactions.
10. Mr Patton there identifies the "asset rich entity" to which the relevant funds were transferred in about July 2024, namely Crotto, and notes that those funds were paid in early July 2024. He refers to the fact that the loan funds have been fully disbursed by Crotto and observes that: "I do not know the details of how [Crotto] disbursed the Loan Funds, and it is not a matter for Keybridge as to how the Loan Funds were disbursed by [Crotto] in circumstances where Keybridge was not a party to those transactions."
11. With all respect to Mr Patton, it seems to me that that is an odd observation. Ordinarily one might expect Keybridge to have a real interest in the fact that an Italian entity to which it had lent substantial amounts, subject to a possibility but not a certainly that a future transaction would avoid the need for that entity to repay them, had disbursed those funds so that they were no longer available to it to fund a repayment.
12. Mr Patton also refers to the circumstances of the entry into the restraint by Keybridge with a third party and the restraint with Mr Bolton, and indicates that the Keybridge board of directors approved a loan of $4.75 million to Crotto in June 2024. He indicates the terms of the loan, which include that it is unsecured; it is for $4.75 million; it is, in his view, on commercial terms and must be repaid either by the proceeds of the amount to be paid to Mr Bolton in respect of the restraint (I interpolate, if such an amount is ultimately payable) or by Crotto; and interest is payable at a rate of 10% per annum, capitalising annually, and the loan maturity date is December 2025.
13. An immediate difficulty arises in that respect, however, namely that the case law, including the often cited judgment of Santow J in Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 ("ASIC v Adler"), has recognised that, ordinarily, a transaction between a company, and its director, would need to be documented in order to satisfy a requirement that it is on "arm's length" or commercial terms. However, Mr Patton fairly makes clear that there is no executed written loan agreement between Keybridge and Crotto.
14. Mr Patton also refers to an exchange of emails between Mr Bolton and himself on or about 2 July 2024, and there is also evidence of an exchange of emails between Mr Patton and Mr Catalano, another director of Keybridge. Those emails appear to contemplate that the funds would be held in trust by Crotto until the transaction was documented, but that was not done. An email dated 2 July 2024 referred to Keybridge having taken legal advice from a solicitor's firm in respect of the transaction. The summary of that advice is redacted, but then refers to the proposed terms and the need to ensure that the transaction is on "commercial arm's length" terms, expressly including: "...documentation, an appropriate loan agreement needs to be prepared and executed."
15. It is apparent, of course, that some two and a half months later, that has not occurred, given Mr Patton's evidence that there is currently no written loan agreement between Keybridge and Crotto.
16. There are also exchanges between Mr Patton, Mr Catalano and Mr Bolton as to the terms of the loan, and Mr Bolton there points out that the loan is to a "property backed entity with considerable net equity". It is, however, perhaps surprising that neither Mr Bolton, nor Mr Patton nor Mr Catalano, there address that that property backed entity is incorporated in Italy, not in Australia, raising questions as to enforcement of any Australian judgment and the scope of the Italian insolvency regime which even an undocumented loan to a property backed entity in Australia would not involve. Mr Patton also there advances the proposition that Keybridge's assets go up and down from time to time, but it is notable that he does not there deny Mr Hamilton's evidence, to which he responds, that they have presently gone down, as a result of the payment to Crotto, to the point that Keybridge only has cash of $6,000.
17. Mr Bolton in turn reads his affidavit dated 18 September 2024, again provided in response to the Court's order for disclosure, which confirms that the "asset rich entity" is Crotto, and indicates that he had engaged an Italian notary public to pay the entirety of the funds paid to Crotto by way of Keybridge's loan to creditors of Crotto, and to vendors of a "quota", which he indicates is similar to shares in Crotto. He refers to the disbursal of the loan funds on 8 July 2024, indicating that those funds are no longer available to Crotto in order to meet a repayment to Keybridge, although I recognise that Crotto may itself have assets (or at least a property at Lake Como) which could potentially be released to fund such a repayment.

Submissions and determination

1. Turning now to the parties' submissions, before I address the applicable principles, WAM points to the evidence of the transactions to which I have referred above, and submits that there is at least a reasonably arguable and apparently strong case available to Keybridge (which WAM seeks to bring as a derivative action) that Mr Bolton acted in breach of his duties as a director to Keybridge in causing it or permitting it to pay away most of its remaining liquid assets to Crotto, a company associated with him, by an undocumented loan, giving rise to the risk that that loan would not be recoverable, at least if the contingency in which the restraint fee was payable to Mr Bolton was not satisfied and no amount was due to Mr Bolton to be set off against Crotto's obligation to Keybridge.
2. WAM also contends that Keybridge has a strong arguable case that Mr Bolton was involved in a contravention of s 208 of the Corporations Act 2001 (Cth) ("Act"), for which compensation would be payable pursuant to s 209(2) and s 1317H of the Act. I bear in mind, in that respect, the reasoning in ASIC v Adler, to which I referred above, which held in a very similar circumstance, that the arm's length exception to Ch 2E of the Act was not available in respect of an undocumented transaction by which a significant amount of money was paid by a company to its director, Mr Adler.
3. WAM also refers to a reasonably arguable, and apparently strong, case available to a liquidator appointed to Keybridge that the transaction may be voided as an uncommercial or unreasonable director related transaction. It seems to me that it is plainly arguable that an undocumented loan to a company in Italy, of a substantial amount, by a company that is subject to a presumption of insolvency, reducing its cash assets to $6,000, could be characterised as an uncommercial or unreasonable directed related transaction. However, I give little weight to that matter because it here turns upon the question whether a liquidator will be appointed to Keybridge. I should not reach any view as to the prospect that that will occur, where that matter is shortly before the Court and the parties have not yet completed their evidence as to the question whether Keybridge will be able to establish its solvency and displace the presumption of insolvency which presently exists.
4. WAM in turn submits that there is a danger or real risk that a prospective judgment in favour of Keybridge, implicitly in an action brought by a provisional liquidator or liquidator, or in the derivative action which WAM has foreshadowed that it would seek to bring on Keybridge's behalf, as a statutory derivative action, if a provisional liquidator were not appointed, would be wholly or partly unsatisfied because assets of Mr Bolton would be disposed of. I bear in mind, and will return to, the submissions put by Mr Broadfoot in response to that proposition.
5. I note, however, that the structure of a transaction, such that a significant amount of a loan is made available to Crotto, an Italian incorporated entity associated with Mr Bolton, in circumstances which involve seriously arguable contraventions of the directors' duties provisions and the related party transactions provisions, seem to me to raise at least a real risk that, within the language of the case law, Mr Bolton would not be inclined to retain any remaining assets in Australia to meet any judgment of an Australian Court against him rather than to transfer them overseas. WAM also refers to the nature of the conduct to which I have referred above, in submitting that that conduct is demonstrative of commercial immorality or, at least, a lack of inclination of Keybridge's directors (including Mr Bolton) to retain assets within Keybridge, in order to meet the claims of creditors against that company.
6. Mr Gandar, properly, did not seek to be heard for Keybridge in respect of this application, where the relief sought is not directed against Keybridge, but to preserving the efficacy of any claim that may be brought on its behalf against Mr Bolton.
7. Mr Broadfoot, for Mr Bolton, referred to the applicable case law, to which I will refer below. He points out that the purpose of a freezing order is not to improve the position of a claimant in an insolvency, and that it will be a minority of cases where a freezing order will be made, and I accept both propositions. He submits that the powers conferred by, relevantly, Uniform Civil Procedure Rules 2005 (NSW), rr 25.11 and 25.14 are conditioned on the satisfaction that the plaintiff, relevantly WAM in bringing a derivative action for Keybridge, or a provisional liquidator of Keybridge, has a good arguable case on a justiciable cause of action. He also points to the fact that a party seeking a freezing order must establish, by evidence and not assertion, that there is a real danger that the defendant would, for example, remove assets out of the jurisdiction or otherwise from the reach of creditors, or otherwise from the reach of the Court at the time a judgment was ordered, so as to support a freezing order, and I bear those matters in mind and will return to the authorities below. Mr Broadfoot also points to the relevance of discretionary considerations and submits that there has here been delay by WAM in seeking the relief, where it had notice of some aspects of the transaction at an earlier point in time. I give limited weight to that submission where, as I noted above, it seems to me that an essential aspect of this transaction is the involvement of Crotto, an Italian entity, and that matter only emerged, not having previously been disclosed by Keybridge, when the Court made compulsory orders for disclosure.
8. Mr Broadfoot also submits that there is no evidence as to what assets Mr Bolton holds within the jurisdiction, and it "could be" that Mr Bolton has other assets in the jurisdiction that are not readily able to be dissipated. I bear these matters in mind, but I note, first, that I understand WAM's application is brought to seek to ensure that such Australian assets as Mr Bolton has are not dissipated, and that Mr Bolton himself leads no evidence of the availability of other assets in Australia to meet a judgment. I do not draw any inference that is adverse to him, or any inference that that evidence would not have assisted him, in these circumstances, where his affidavit was made pursuant to a disclosure order. I simply note that there is no such evidence, and the position may, as Mr Broadfoot rightly points out, be affected if at some point in the future it emerges that Mr Bolton has assets in Australia which are readily available to meet a judgment in respect of a claim of the kind foreshadowed by WAM.
9. Second, Mr Bolton points to the suggested delay in seeking a freezing order against Mr Bolton, but that proposition depends upon earlier, and incomplete, disclosures of aspects of the relevant transaction and I have pointed to the significance of the non-disclosure of the fact that the payment was to an Italian entity above.
10. Third, Mr Broadfoot submits that this is not a case where a transaction occurred and thereafter the recipient of the funds sought to move them offshore for an unrelated purpose and that the impugned transaction was, of its nature, one in which the funds were paid offshore. I accept that proposition, but it does not provide any answer to the case for a freezing order. To the contrary, the fact that a transaction involves a transfer of funds offshore is a common situation in which the Court will make a freezing order, to ensure that any remaining funds do not follow the funds that have already been transferred offshore. To put that proposition differently, it is not apparent to me that there is any difference of substance between Mr Bolton procuring a payment by Keybridge to an Italian company, and Mr Bolton receiving a payment directly from Keybridge and then transferring that money himself to an Italian company.
11. Turning now to the applicable authorities, Mr Pesman, with whom Mr Krochmalik appeared for WAM, referred to the decision of the High Court in PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1; [2015] HCA 36 at [47], where the Court referred to Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 as authority for the Court's role in making a freezing order, as a process contingent on factors additional to the outcome of a substantive proceeding in the Court, and recognised that such an order can be made against a third party where no present cause of action exists and where no present proceeding has been commenced. I took the same approach in Re HPAC Investments Pty Ltd [2020] NSWSC 1638 at [36]ff, where I undertook an extensive review of the applicable authorities and found that, in that case, a freezing order could be made on the application of the Australian Tax Office ("ATO"), in order to protect the prospects of recovery in a claim which might in future be brought by a liquidator appointed on the ATO's application. Plainly, that result has much in common with the position here, so far as WAM seeks either to protect Keybridge's recovery in proceedings which may be brought as a derivative action on Keybridge's behalf, or by a provisional liquidator or liquidator appointed to Keybridge. I do not otherwise repeat the review of the authorities to which I have there referred, and to which I have had regard in determining whether to make the orders sought.
12. I am satisfied that, here, WAM has established a seriously arguable case, and potentially a strong case, available to Keybridge for breach of directors' duties or Ch 2E of the Corporations Act or both in respect of Mr Bolton's involvement in the relevant transaction; the nature of this transaction is such that I should find that there is a real risk that Mr Bolton would remove any remaining Australian assets outside the jurisdiction, if not restrained from doing so; and that the discretionary considerations, and particularly any question of delay, do not prevent the order sought, where significant aspects of the transaction have only emerged in response to a compulsory order for disclosure by the Court.
13. Mr Broadfoot rightly emphasises the significance of the making of a freezing order and the intrusive character of the remedy and I bear those matters in mind. However, I also recognise that that order is ultimately directed to protecting the interests of justice so that orders made by the Court are not rendered fruitless by the dissipation of assets held by a defendant, and they have a significant role in the public interest in that respect.
14. For these reasons, I will make the order sought, although I accept Mr Broadfoot's submission that it should only be made for a short period, reserving the possibility that, for example, Mr Bolton may in due course lead evidence of the availability of other assets in Australia and offer undertakings to the Court and the parties as to the retention of those assets which may prevent the need for a continuance of a freezing order.

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