Chen v Insight Investment Management Pty Ltd

Applicants' claims in the proceeding 5 In December 2021 Ms Chen and her partner, Mr Sheng (applicants), invested $400,000 with the first respondent, Insight Investment Management Pty Ltd, to participate in an investment in the initial public offering (IPO) of Huon Valley Seafoods Pty Ltd after reading an investment brochure and guide that, among other things, is claimed to have represented repayment of the investment in 12 months with a return of 17.6%. The applicants allege that the investment brochure and guide falsely represented that Andrew Forrest was associated with Huon Valley. I observe that Mr Forrest's image appears on those documents, which are in Mandarin and are exhibited to Ms Chen's affidavit. 6 The applicants say the investment was marketed to them by the second respondent, Mr Xu. Huon Valley did not undertake the IPO and has been in liquidation since July 2023. The applicants have been unable to recover the funds they invested. 7 The applicants' claims in the proceeding are for repayment of their $400,000 investment by Insight under s 925D of the Corporations Act 2001 (Cth) and damages for defective product disclosure statements and misleading and deceptive conduct under ss 1022B(1) and/or 1041I of the Corporations Act or s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Further or alternatively, the applicants seek relief against Mr Xu individually and jointly with Insight under s 197(1) of the Corporations Act. They estimate the value of their claim to be $470,400 as at December 2022. 8 The respondents are yet to file a response to the applicants' concise statement filed on 20 May 2024. However, they submitted in response to the application that while Insight, as trustee of the Insight Investment Unit Trust, was used as a vehicle to raise funds from investors to invest in Huon Valley, Mr Xu did not have a role in preparing the content of the investment brochure or guide provided to the applicants. 9 Mr Xu claims to have received the investment brochure and guide via a Dropbox link from Ms Kim Xie, director of Rec Capital Pty Ltd, which he then distributed to potential investors, including the applicants, upon the request of Mr Xie and Ms Ling Pu, director of Fin Capital Pty Ltd. 10 Mr Xu deposed that the funds invested in Insight, totalling $1,520,000, including $100,000 of Mr Xu's personal funds, were passed on to Fin Capital via Insight's solicitors, Grillo Higgins Lawyers. The respondents claim not to be in possession of the funds and say that they have not recovered any of the funds.

Freezing order application 11 By their interlocutory application, the applicants seek a freezing order under rr 7.32 and 7.35 of the Federal Court Rules 2011 (Cth) that the respondents must not remove from Australia or in any way dispose of, deal with or diminish the value of any of their assets in Australia up to the amount of $470,000 until the hearing and determination of the proceeding or further order. 12 The applicants also seek an ancillary order under r 7.33 of the Rules requiring the respondents to file and serve an affidavit disclosing the value, location, details (including any mortgages, charges or other encumbrances to which they are subject), and extent of interests in their Australian assets. 13 The applicants gave the usual undertaking as to damages. The applicants provided a form of order which was annexed to the application. The order contains a number of exceptions or 'carve outs' in respect of Mr Xu's ordinary living expenses of up to $1,000 per week, reasonable legal expenses and dealings in the ordinary and proper course of business.

Applicable principles 14 The Court has the power to make a freezing order under s 23 of the Federal Court of Australia Act 1976 (Cth) and Div 7.4 of the Rules. Under r 7.33, the Court may make an ancillary order to a freezing order or a prospective freezing order, including an order made for the purpose of eliciting information relating to assets relevant to the freezing order or prospective freezing order. 15 The principles to be applied are well established: see the summaries provided by Wigney J in Basi v Namitha Nakul Pty Ltd [2019] FCA 743 at [7]-[9]; O'Bryan J in Royal Express Pty Ltd (Recs and Mgrs Apptd) (Admins Apptd) v Huang [2021] FCA 585 at [3]-[4]; Moshinsky J in Gecko Australia Pty Ltd v Montagnese [2022] FCA 488 at [16]-[19] and Lee J in Merryport Pty Ltd v Lawson [2023] FCA 838 at [6]-[9]. 16 The issues to be considered on such an application are: (a) whether the applicants have a good arguable case on legal as well as factual matters; (b) whether there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because the assets of the prospective judgment debtor are removed from Australia or from a place inside or outside of Australia or are disposed of, dealt with or diminished in value: r 7.35(4)(b) of the Rules; and (c) the exercise of discretion. 17 One of the key issues in this application is whether the applicants have established that there is a danger of dissipation of assets. In Gecko at [19], Justice Moshinsky summarised the relevant principles as follows: (a) it is not necessary for the Court to be satisfied that the risk of dissipation is more probable than not; (b) the risk of dissipation must be demonstrated by evidence: see Bayley & Associates Pty Ltd v DBR Australia Pty Ltd [2012] FCA 746 at [34] per Foster J, citing Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 323-324 per Gleeson CJ; and (c) in some cases, the risk of dissipation of assets to avoid a judgment will be evident from the applicant's or plaintiff's strong prima facie case of the defendant's having fraudulently misappropriated assets or of serious dishonesty: see KTC v Singh [2018] NSWSC 1510 at [8] per White J, citing Patterson at 325-326. 18 A further issue that arose at the hearing of the application was whether the Court may grant an ancillary order for disclosure of information relating to the assets of the respondents if the Court does not make a freezing order.

Consideration 19 I am satisfied on the basis of the affidavit evidence filed by the applicants that they have demonstrated a good arguable case in relation to the alleged breaches of and relief sought under the Corporations Act and the ASIC Act. 20 In their written submissions, the applicants submitted that there is a real risk of dissipation of assets because of: (a) the complete lack of repayment or response by the respondents to requests for an explanation about the investment; (b) Mr Xu's family connections in mainland China; and (c) Mr Xu's involvement in "divorce proceedings". 21 At the hearing of the application, the applicants' submission on the real risk of dissipation of assets was refined. Counsel for the applicants submitted that Mr Xu, who is a mortgage broker, is a person familiar with financial instruments. Mr Xu is also the sole director and company secretary of Insight, the trustee of the Insight Investment Trust. The applicants invested in the Insight Investment Trust in order to provide the funds which Insight then invested in the Huon Valley IPO. 22 The applicants submit that the risk of dissipation may be inferred from the nature of the alleged wrongdoing, which involved financial misconduct, and the respondents' failure to provide any update or explanation regarding the applicants' investment or return of the funds invested. Furthermore, I was told that the applicants as unit holders in the Insight Investment Trust have requested details of the assets of the Trust, which has been refused. In addition, the applicants request for a copy of the Trust Deed was only met shortly before the hearing. 23 A freezing order may be made where - having regard to all the circumstances - there is a "danger" that a judgment or prospective judgment will be wholly or partly unsatisfied "because" any of the events described in r 7.35(4) "might" occur. The danger that a judgment or prospective judgment will be wholly or partly unsatisfied because of the risk of dissipation of assets must be of sufficient substance to justify a freezing order in the particular circumstances: Deputy Commissioner of Taxation v Huang [2021] HCA 43; 273 CLR 429 at [18]. 24 On the basis of the applicants' evidence and submissions, I am satisfied that the applicants have established a danger that a judgment will be wholly or partly unsatisfied because one of the events described in r 7.35(4)(b) might occur. I am satisfied of this having regard to the nature of the alleged wrongdoing, which involved a significant investment of funds routed through the first respondent, Insight, and subsequent failure to account for or provide any explanation regarding the investment. Ms Chen's initial enquiries regarding an update on the applicants' investment and potential refund were met with opaque responses. The respondents' explanation that the funds invested in the Insight Investment Trust were provided to Fin Capital was only given in Mr Xu's affidavit, however, it was not corroborated by any documents. 25 I am therefore satisfied that the preconditions for the making of a freezing order are satisfied and that the Court should in the exercise of its discretion make a freezing order, subject to what follows in relation to one of the proposed 'carve outs'. 26 Mr Xu has two children. Mr Xu is the primary carer of his 12 year old son, who lives with Mr Xu. Mr Xu also provides financial support for his daughter, who lives with his ex-wife. The carve out for Mr Xu's ordinary living expenses should not be limited to any weekly or other amount and should ensure that it enables Mr Xu to meet the living and education expenses of his dependents. 27 I am also satisfied that an ancillary order requiring the respondents to file and serve an affidavit disclosing their assets should be made. Although it is unnecessary to decide the issue given that I am satisfied the freezing order should be made, the applicants submitted that the Court could make an ancillary order for disclosure of information even if the Court did not make a freezing order. In my view, the Court's power to make an ancillary order under r 7.33 of the Rules arises if the Court makes a freezing order or prospective freezing order: Merryport at [9] (Lee J) and Grecko at [38] (Moshinsky J). I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Neskovcin.