Solicitors:
Hunt Partners (Plaintiff)
Websters (Defendant in 2016/184465)
Minter Ellison (Second and Third Defendants in 2017/377290)
File Number(s): 2016/184465 & 2017/377290
Publication restriction: None
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Judgment
On 24 November 2017 in proceeding 2016/00184465 (the 2016 Proceeding), Hammerschlag J delivered judgment in favour of the plaintiff, Bindaree Beef Pty Ltd, against the defendant, Chinatex (Australia) Pty Ltd (Chinatex Australia), in the sum of $31,350,364 subject to certain adjustments (see Bindaree Beef Pty Ltd v Chinatex (Australia) Pty Ltd [2017] NSWSC 1615).
Chinatex Australia's principal asset until 14 November 2017 was all of the shares in a company known as Unibale Pty Ltd. In August 2017, the business of Unibale was valued by Crowe Howarth at approximately $36,000,000.
Shortly before 1 December 2017, Bindaree became aware that Chinatex Australia had transferred all of its shares in Unibale to Chinatex Fortune Company Ltd, a company based in Hong Kong (Chinatex Hong Kong). On 1 December 2017, the court, on an ex parte application by Bindaree, granted freezing orders against Chinatex Australia and Unibale. On 14 December 2017, those freezing orders were extended by consent and without admission until 5.00pm on 2 February 2018.
On 12 December 2017, Chinatex Australia lodged an appeal against Hammerschlag J's judgment and by notice of motion filed on 14 December 2017, Chinatex Australia sought an order staying that judgment until the determination of the appeal. On 14 December 2017, an order granting a stay was made by consent and without admission until 5.00pm on 2 February 2018.
On 13 December 2017, Bindaree commenced proceedings (the 2017 Proceeding) seeking a declaration pursuant to s 37A of the Conveyancing Act 1919 (NSW) that the transfer by Chinatex Australia to Chinatex Hong Kong of the shares in Unibale is void. That section provides:
(1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930 , with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
By consent, freezing orders were made in those proceedings against Chinatex Australia and Unibale in similar terms to the freezing orders that were made in the 2016 Proceeding.
On 2 February 2018, I extended the order granting a stay in the 2016 Proceeding and the freezing orders in the 2017 Proceeding until further order of the court and pending this judgment.
The issues currently before the court are whether the stay granted in the 2016 Proceeding should continue and whether the freezing orders granted in the 2017 Proceeding should continue and be extended to cover Chinatex Hong Kong.
It is convenient first to deal with the freezing orders.
The power to make a freezing order is granted by UCPR r 25.14, which provides:
(1) This rule applies if:
(a) judgment has been given in favour of an applicant by:
(i) the court, or
(ii) in the case of a judgment to which subrule (2) applies--another court, or
(b) an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in:
(i) the court, or
(ii) in the case of a cause of action to which subrule (3) applies--another court.
(2) This subrule applies to a judgment if there is a sufficient prospect that the judgment will be registered in or enforced by the court.
(3) This subrule applies to a cause of action if:
(a) there is a sufficient prospect that the other court will give judgment in favour of the applicant, and
(b) there is a sufficient prospect that the judgment will be registered in or enforced by the court.
(4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:
(a) the judgment debtor, prospective judgment debtor or another person absconds,
(b) the assets of the judgment debtor, prospective judgment debtor or another person are:
(i) removed from Australia or from a place inside or outside Australia, or
(ii) disposed of, dealt with or diminished in value.
(5) The court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a "third party") if the court is satisfied, having regard to all the circumstances, that:
(a) there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because:
(i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor, or
(ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor, or
(b) a process in the court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.
(6) Nothing in this rule affects the power of the court to make a freezing order or ancillary order if the court considers it is in the interests of justice to do so.
In the present context the rule raises four issues. The first is whether Bindaree has a good arguable case in the 2017 Proceeding. If it has, it does not appear to be disputed that the court has power to grant a freezing order restraining Bindaree from disposing of the shares in Unibale on the basis that those shares will have to be returned to Chinatex Australia if Bindaree succeeds in the proceedings. The second is whether there is a danger that any judgment Bindaree obtains in the 2017 Proceeding will be wholly or partially unsatisfied because the assets of Chinatex Hong Kong (the shares in Unibale) will be disposed of or dealt with or diminished in value. The third is whether the court has power to make an order against Unibale. The fourth is whether the court, in the exercise of its discretion, ought to make the orders sought.
Chinatex Australia does not object to a continuation of the freezing orders made against it.
In my opinion, Bindaree has a good arguable case in the 2017 Proceeding.
The question under s 37A of the Conveyancing Act is whether the transfer of the shares in Unibale to Chinatex Hong Kong was made with the intention to defraud creditors and whether Chinatex Hong Kong acquired the shares in good faith not having, at the time of the alienation, notice of the intent to defraud creditors. Bindaree appears to have a good arguable case against Chinatex Australia and Chinatex Hong Kong. The evidence is that Chinatex Australia sold the shares to Chinatex Hong Kong and was paid $38,035,217 for those shares. There is no evidence of what happened to the $38,035,217 except that all or most of it is no longer held by Chinatex. Without more, that evidence strongly suggests that the sale of the shares was made to defraud creditors and Bindaree, in particular. Chinatex Australia and Chinatex Hong Kong are owned by the same ultimate parent, Chinatex Corporation, a company incorporated in the People's Republic of China. In the absence of any other evidence, it might well be concluded that having regard to the relationship between Chinatex Australia and Chinatex Hong Kong that Chinatex Hong Kong will not be able to make out the defence in subs (3). Consequently, there is a good arguable case that Bindaree will succeed against both Chinatex Australia and Chinatex Hong Kong.
Chinatex Hong Kong submits that there is no evidence that Chinatex Hong Kong might dispose of the shares in Unibale or, for that matter, that Unibale might issue further shares or dispose of its assets. There is no evidence that they have taken steps to do so to date. Both have given undertakings to the court (on a without prejudice basis). Chinatex Hong Kong has undertaken not to dispose of, or to encumber its shares in Unibale or to cause Unibale to issue new shares without first giving 14 days' written notice to Bindaree. Unibale has undertaken not to dispose of or to encumber its assets without first giving 14 days' written notice to Bindaree, subject to certain exceptions that are consistent with the standard form freezing order set out in Practice Note SC Gen 14 Supreme Court Freezing Orders. It has not given an undertaking not to issue further shares.
I do not accept Chinatex Hong Kong's submission. Chinatex Australia and Chinatex Hong Kong are part of the same group of companies. It is apparent from what I have said that there are good reasons for thinking that members of the group have taken steps to frustrate the court's processes by taking steps to ensure that Hammerschlag J's judgment will go unsatisfied. In my opinion, that risk continues to exist in relation to the proceedings under s 37A of the Conveyancing Act since it would be open to Chinatex Hong Kong to dispose of its shares in Unibale to another company in the group.
In my opinion, the court has power to make orders in respect of Unibale. No freezing order is sought against Unibale. Rather, what is sought is an injunction restraining Unibale from issuing shares the effect of which would be to dilute Chinatex Hong Kong's current interest in Unibale. Under UCPR r 25.12(1), the court has power to make "an order … ancillary to a freezing order or prospective freezing order as the court consider appropriate". The order sought by Bindaree is such an order. UCPR r 25.14(6) makes it clear that the court is not limited in the circumstances in which it can make an ancillary order except by the requirement that the order must be in the interests of justice.
No discretionary reason is advanced for why the freezing orders and ancillary order should not be made. In my opinion, the undertakings proffered by Chinatex Hong Kong and Unibale are not sufficient. The real issue is whether Bindaree should be put to proving it is entitled to a freezing order or ancillary order if and when Chinatex Hong Kong or Unibale gives notice, or whether Chinatex Hong Kong and Unibale should be put to proving that circumstances have changed in a way that makes it appropriate to relieve them of the obligations imposed by a freezing order or ancillary if and when they want to take steps that are inconsistent with those orders. In circumstances where I am satisfied that the freezing order and ancillary order should be granted, I can see no reason why the onus of proof should remain with Bindaree in the event notice is given.
Chinatex Hong Kong and Unibale take issue with the form of the orders proposed by Bindaree. However, those orders are consistent with the standard form orders set out in the Practice Note. In my opinion, there is no reason not to make orders in those terms in this case.
Bindaree has not sought an order restraining Unibale from disposing of its assets. However, Unibale has given an undertaking to the court to that effect. In circumstances where the order is not sought and the undertaking has been given, it is not necessary to address this issue further.
As to the question of a stay, Chinatex Australia submits that a stay ought to be granted because its financial position is such that it cannot meet the judgment debt with the result that if a stay is not granted, it is likely to be placed into liquidation rendering the appeal nugatory. In support of that submission, it relies on evidence given by Mr Zhe Xu, who is a director of Chinatex Australia and an internal accountant with Chinatex Corporation. According to Mr Xu, the net value of Chinatex Australia's assets is approximately $1,800,000. Mr Xu also gives evidence that he has been informed by Chinatex Corporation's general counsel that Chinatex Corporation will not provide funds to Chinatex Australia from which it might satisfy the judgment or any order as to costs.
I accept that the fact that Chinatex Australia cannot meet the judgment debt and an order for its winding up is likely to render its appeal nugatory provides a strong ground for granting a stay: see Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383.
However, as I have said, the evidence in this case is that Chinatex Australia received approximately $38,000,000 in exchange for its shares in Unibale. No explanation is given of what happened to that money, although that information is peculiarly within the knowledge of Chinatex Australia. In the absence of any explanation, it is reasonable to infer that the money was dissipated in order to defeat enforcement of Bindaree's judgment debt. Consequently, if the appeal is rendered nugatory, it is rendered nugatory because of steps taken by Chinatex Australia to avoid satisfying the judgment if its appeal fails. In my opinion, it cannot rely on the consequence of its own decisions that were taken to avoid enforcement of the judgment as grounds for why the judgment should be stayed.
In addition, I am not satisfied that if a stay is not granted the appeal is likely to be rendered nugatory. Little weight can be placed on the evidence given by Mr Xu concerning Chinatex Corporation's willingness to provide funds to Chinatex Australia to satisfy the judgment debt. The evidence is that Chinatex Corporation has provided letters of support to Chinatex Australia in the past. It is not at all clear that Chinatex Corporation will not continue to support Chinatex Australia if there is no other alternative.
Chinatex Australia does not advance any other basis for why the court should grant a stay.
It follows that the application for a stay should be dismissed.
[3]
Orders
The order of the court in the 2016 Proceeding is that the notice of motion filed on 14 December 2017 be dismissed with costs.
The orders of the court in the 2017 Proceeding are:
1. Without admission by the first and second defendants, order 1 made by his Honour Justice Ball on 14 December 2017 be continued until further order;
2. Without admission and upon the plaintiff, by its counsel, giving the usual undertaking as to damages, the second defendant be restrained, until further order, from issuing any shares of any class to any person or to issue any other form of security to any person that is the equivalent of shares in the second defendant or that may be convertible to shares in the second defendant;
3. Without admission and upon the plaintiff, by its counsel, giving the usual undertaking as to damages, the third defendant be restrained, until further order, from:
1. selling, transferring, gifting, disposing of, encumbering, diminishing the value of or otherwise dealing in any way with any shares issued by the second defendant which are legally and/or beneficially owned or held by the third defendant including, without limitation, the 11,000,000 ordinary shares issued by the second defendant which were transferred to the third defendant on 14 November 2017; and
2. causing the second defendant to issue any shares of any class to any person or to issue any other form of security to any person that is the equivalent of shares in the second defendant or that may be convertible to shares in the second defendant.
I will hear the parties in relation to the costs of the plaintiff's motion filed on 1 December 2017 in the 2016 Proceeding.
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Decision last updated: 07 February 2018