China Insurance Group Finance Company Ltd v Kingston

Supreme Court of NSW|2020-09-16|Before: Stevenson J, Hammerschlag J, Williams J

Solicitors: Ashurst Australia (Plaintiff) HWL Ebsworth (Defendant) File Number(s): 2020/246363

Judgment

The plaintiff, China Insurance Group Finance Ltd ("China Insurance"), is a Chinese State-owned corporation based in Hong Kong.
China Insurance claims that by loan agreement dated 6 December 2017 it agreed to lend the defendant, Mr Phillip Kingston, some HKD653 million (equivalent to approximately AUD122 million), that Mr Kingston has defaulted and that the loan is now due.
China Insurance commenced these proceedings on 24 August 2020.
Service of the Summons and Commercial List Statement was effected on Mr Kingston pursuant to orders for substituted service made by Hammerschlag J on 4 and 9 September 2020.
By notice of motion filed in court on 11 September 2020 before me as Commercial List Duty Judge, China Insurance sought a freezing order against Mr Kingston and an order requiring him to give an affidavit of assets. I refused to deal with the matter ex parte. A final hearing occurred on 16 September 2020.

Decision

I am not persuaded to make a freezing order.

Background

Mr Kingston was a director of Sargon Capital Pty Ltd ("Sargon Capital"), Trimantium Investment Management Pty Ltd ("TTIM") and Trimantium Capital Funds Management Pty Ltd ("TCFM") (together, "the Sargon Companies").
On 29 January 2020 receivers ("the Receivers") were appointed to each of the Sargon Companies by a company related to China Insurance, Taiping Trustees Ltd ("Taiping").
On 8 April 2020 each of the Sargon Companies was wound up.
China Insurance's application for a freezing order is based on the results of the Receivers' investigations to date of the Sargon Companies.
Mr Kingston is one of a number of people summonsed by the Receivers [1] to appear in this Court to be publicly examined in relation to the affairs of the Sargon Companies for seven days commencing 19 October 2020.
In his written submission for China Insurance, Mr Hartford Davis submitted that a freezing order should be made because: 1. China Insurance has a strong prima facie case against Mr Kingston; 2. the Receivers have, following investigation, expressed "concern that funds may have been misappropriated or misdirected" by Mr Kingston from one or other of the Sargon Companies; 3. Mr Kingston has "not acceded fully" to requests by the Receivers to deliver books and records of the Sargon Companies and has caused one of them to remove the trustee of a trust that the Receivers are investigating; 4. Mr Kingston does not own real estate in Australia and "may" have structured his affairs so as to avoid ready identification of his assets; and 5. Mr Kingston "appears" to have evaded service of these proceedings.

The test

The matters that must be demonstrated to justify a freezing order are well known and recently and conveniently summarised by Williams J in Axis Medical & Rehabilitation Pty Ltd (as trustee for Axis Trust t/a Astir Australia) v Tuantab. [2]
The making of a freezing order is a drastic remedy and should not be granted lightly. [3]
An applicant for a freezing order must show a good arguable case being a case more than barely capable of serious argument although not necessarily one which has a better than even chance of success. [4]
The applicant must also show a danger that any judgment obtained by it against the defendant will be wholly or partly unsatisfied because the defendant's assets might be disposed of or dealt with or diminished in value.
Demonstration of an imminent threat of dissipation of assets is often sufficient. However, it may also be sufficient to show that the defendant has previously acted in a way which shows that his probity is not to be relied upon [5] or that, unless restrained, the defendant would take steps to make himself proof against an order to pay any judgment obtained. [6]

Good arguable case?

The evidence before me establishes, at least on a prima facie basis, that China Insurance lent Mr Kingston $HKD653 million, that Mr Kingston has defaulted, and has failed to respond to demands made on him on 20 January 2020 to repay the amount then due.
I accept, for the purpose of these proceedings, that China Insurance has a good arguable case to recover the loan.

Threat of dissipation?

Mr Hartford Davis accepted that China Insurance could not point to any imminent threat of dissipation by Mr Kingston of his assets or of any "other special feature of the case beyond the Receivers' expressions of concern".
In final argument before me, Mr Hartford Davis' submissions were directed to the proposition that, by reason of his involvement in the following transactions, I should conclude that Mr Kingston was a person who has previously acted in a way that shows his probity is not to be relied upon such as to warrant the making of a freezing order against him.

$50 million advance by Taiping to TTIM

On 20 February 2018, TTIM drew down $50 million under a Secured Promissory Note made between Taiping as lender and TTIM and others as borrowers.
The stated purpose of the loan was to enable TTIM to purchase shares in Sargon from TCFM.
The drawdown notice required that the $50 million be paid into a specified account.
Under the relevant Share Sale Agreement, the funds, once paid into that account, could only be released from the account with Taiping's consent.
There is no evidence before me that the $50 million was not paid into that account. Indeed, as I understand it, it is common ground that it was so paid on 21 February 2018.
The Receivers' investigations reveal that thereafter, between 13 March 2018 and 10 April 2018, some $40.3 million of the $50 million was paid from TCFM to recipients that the Receivers have not been able to identify.
This has led to the Receivers to reach the tentative conclusion that "funds may have been misappropriated or misdirected". Mr Hartford Davis accepted that the Receivers do not currently know what happened to this money.
Although Mr Kingston was the sole director of TCFM, I do not see the Receivers' tentative conclusions to be a sound basis upon which to draw any conclusion about Mr Kingston's probity. At this stage, it is not known what has happened to the $40.3 million. This may well be a matter explored at the forthcoming examinations. At the moment, I could not draw any conclusion, relevant to Mr Kingston's probity, about the matter.

Transfer of $28.4 million from Sargon

On 4 July 2018 Mr Kingston sent a letter to Taiping stating that TTIM proposed to borrow some $31 million from Sargon.
In that letter, Mr Kingston said: "…we write to confirm you [sic] that TTIM's intention to accept [some $31 million] from [Sargon] for an intended period of two months…while Sargon prepares for its next acquisition… Upon expiry of [the two months] TTIM will return the [$31 million] in full to Sargon… TTIM will purchase 36 [units] in the Trimantium Sargon Investment Trust…[at] a total purchase price of [some $28.5 million]… We confirm that (i) [the $31 million]; (ii) [the $28 million]; and (iii) the funds that are unused from the [$31 million] less the [$28 million] must not be used for any purpose by TTIM other than expressed [sic] permitted in writing by Taiping, and these funds will only be kept in TTIM's bank account which fall [sic] in the definition of 'collateral' under the General Security Deed dated 9 February 2018 in favour of Taiping, thereby ensuring that Taiping has security over these amount [sic]."
It is not clear to me what use Mr Kingston in this letter was stating that TTIM would make of the funds referred to.
First, Mr Kingston said that TTIM would return the $31 million to Sargon after two months.
Then, Mr Kingston recorded that TTIM would purchase units in the named trust for $28.5 million, evidently using part of the $31 million.
Finally, Mr Kingston gave the confirmation set out in the final paragraph which appears to mean, although it is not at all clear, that that part of the $31 million as was "unused" would be retained in TTIM's bank account and remain secure to Taiping under the General Security Deed there referred to.
On the other hand, the drawdown request executed by Mr Kingston on behalf of Sargon and TTIM stated that the "purpose and use" of the $31 million drawdown was to "reduce interest costs for Sargon while the next acquisitions are being prepared" and that after two months the "drawdown amount will be returned in full to Sargon". The drawdown notice also confirmed that Sargon and TTIM confirmed that the $31 million would not be used for any other purpose without Taiping's consent.
Mr Moller, who appeared for Mr Kingston, accepted that there is a tension between the terms of the Drawdown Request and Mr Kingston's letter of 4 July 2018.
The $31 million was paid into TTIM's bank account of 13 July 2018. On 16 July 2018, $28.5 million of that $31 million was paid out of TTIM's bank account and, pursuant to a Unit Sale Agreement dated 13 July 2018, used to purchase in the name of a wholly-owned subsidiary of TTIM, Dragon Shield Holdings Pty Ltd, units in the trust referred to in the 4 July 2018 letter ("the Trust"). TCFM was trustee of the Trust.
Mr Hartford Davis submitted that the use of these funds to purchase the units in the Trust was inconsistent with, and in breach of, the undertaking given by Mr Kingston to Taiping in the 4 July 2018 letter; and that this bespoke Mr Kingston acting in a manner showing that his probity could not be relied upon.
I am unable to reach that conclusion on this evidence.
As I said, I find Mr Kingston's letter to Taiping of 4 July 2018 to be unclear. On my reading of it, Mr Kingston was doing no more than informing Taiping that that part of the advance of $31 million as was "unused" for the purpose of enabling TTIM to purchase units in the Trust would be retained in TTIM's account.
Whether that is the correct construction of the letter is not a matter I should decide on this application. There may be matters of context [7] or other matters that would need to be considered before forming a final view about this.

Retirement of TCFM as trustee of the Trust

On 19 November 2018, by a Deed of Retirement and Appointment, TCFM retired as trustee of the Trust and another company, Fintech Investments Australia Pty Ltd was appointed trustee.
Mr Kingston was the sole director of each of these companies and hence appears to have effected this result.
When the matter was first before me, and at the stage where China Insurance sought to proceed ex parte for a freezing order, the evidence of the Receivers was that this had occurred after the Receivers were appointed.
In fact, as Mr Moller has pointed out in his submissions, these events occurred several months before the Receivers were appointed. Mr Kingston, through his solicitors, had last April provided the Receivers with a copy of the Deed of Retirement.
In final submissions, Mr Hartford Davis accepted that the Receivers had been mistaken in their assertion that Mr Kingston had effected the change of trustees after their appointment but pointed to the fact that the change of trustees occurred around the time when China Insurance served notices of default on Mr Kingston. Mr Hartford Davis also submitted that Mr Kingston's replacement of TCFM as trustee of the Trust should be seen as an example of him "obstructing" the Receivers (although they had not then been appointed). Why else, Mr Hartford Davis asked rhetorically, would Mr Kingston decide to cause TCFM to retire as trustee?
In my opinion, it is drawing a long bow to conclude from these matters that Mr Kingston has acted in a way that suggests that his probity cannot be relied on.
There may well be reasons Mr Kingston acted this way which did not necessarily bespeak a desire to "obstruct" the Receivers or China Insurance. There is certainly not enough evidence to reach any conclusion about this.
Mr Hartford Davis also submitted that Mr Kingston's decision to cause TCFM to retire as trustee of the Trust caused TCFM to be in breach of its obligations to Taiping under cl 3.1 of the General Security Deed.
By cl 2.1 of the General Security Deed, TCFM granted a security interest to Taiping over its "Collateral". By cl 3.1 of that Deed, TCFM agreed to not dispose of or part with possession of any "Collateral" without Taiping's consent.
"Collateral" was defined to mean TCFM's "present and after acquired property".
Clause 1.7(b) of the Deed provided that: "Regardless of whether [TCFM] has expressly entered into this Deed as trustee of any trust, the assets the subject of the charge created by it under cl 2.1 include [TCFM's] right of indemnity out of and lien over the assets of any trust of which it is trustee."
Thus, Mr Hartford Davis submitted, by retiring as trustee of the Trust, TCFM parted with any lien it had over the assets of the Trust, and thus disposed of part of its "collateral" in breach of its obligations under the deed.
A trustee has a right to resort to and apply the trust fund for the discharge of liabilities incurred by the trustee in the authorised conduct of the trust. That right is given effect to by an equitable lien in favour of the trustee over the property in question. [8]
There is, however, no evidence before me as to whether TCFM, as trustee of the Trust, had an entitlement against the assets of the Trust such as would be given effect to by an equitable lien.
Thus, while it may be that TCFM has, in a technical sense, acted in breach of its obligations under the General Security Deed by retiring as trustee of the Trust, the significance of that breach is not apparent.
In those circumstances, assuming it was Mr Kingston who caused TCFM to retire as Trustee, I am unable thereby to draw any conclusion as to his overall probity.

Investment by Mr Kingston of proceeds from China Insurance in companies with which he has no known legal relationship

The final matter addressed by Mr Hartford Davis was that there is evidence showing that Mr Kingston used money borrowed from China Insurance to invest "through companies of which he has no known legal or beneficial interest, and with whom he has no documented legal relationship". Those companies include Pattani Private Capital Pty Ltd and its wholly-owned subsidiary Grand Circle Opportunities Pty Ltd.
Mr Hartford Davis submitted that this shows that Mr Kingston "is not a person who can be expected to keep his assets intact". However, as Mr Hartford Davis accepted, such use by Mr Kingston of the proceeds of his loan from China Insurance was not a breach of any term of the relevant loan agreement.
And, as Mr Moller pointed out, the effect of a "Supplementary Agreement IV to the Loan Agreement" made between China Insurance, Mr Kingston and Pattani Private Capital and others, is that shares of Pattani Private Capital are mortgaged to China Insurance and thus part of China Insurance's overall security.
I do not feel able to draw any inference about Mr Kingston's probity from these matters.

Mr Kingston's alleged failure to "accede fully" to the Receivers' requests

Mr Hartford Davis did not develop this submission with great enthusiasm.
There are few particulars of Mr Kingston's alleged failure to cooperate with the Receivers although the evidence does reveal that his solicitors have, since April this year, been communicating with the Receivers concerning the production of documents.
Further, as I have said, Mr Kingston is to be publicly examined next month by the Receivers. I am not persuaded these factors warrant the making of a freezing order.

Mr Kingston's "structure" of his affairs

The "structure" of which complaint is made is not identified, nor does China Insurance point to any relevant change in the structure brought about by Mr Kingston which might be said to have been effected to frustrate China Insurance's enforcement of any judgment it obtains.
As Mr Moller submitted, whatever structure there may be to Mr Kingston's financial affairs, it has existed prior to the events the subject of these proceedings.

Apparent evasion of service

As I have said, Mr Kingston was ultimately served pursuant to orders for substitute service made by Hammerschlag J on 4 and 9 September 2020.
The contention that, hitherto, Mr Kingston "apparently evaded" service is based upon the fact that no response was received at the intercom of his Melbourne residence on a number of occasions and from the fact that his solicitors, HLW Ebsworth, who were acting for him in relation to dealings with the Receivers, did not receive instructions from Mr Kingston to accept service that was a process in these proceedings.
I do not see these matters as warranting a conclusion, nor even a suggestion, that Mr Kingston was "evading" service.

Conclusion

For these reasons, I am not satisfied that China Insurance has made out a case for a freezing order.
I order that the plaintiff's notice of motion of 11 September 2020 be dismissed with costs.

Endnotes

Who have made the appropriate applications under Part 5.9 of the Corporation Act 2001 (Cth).
[2020] NSWSC 486 at [10]-[12].
Frigo v Culhaci [1998] NSWCA 88 at 6 (Mason P, Shellar JA and Sheppard AJA); approved in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 at [51] (Gaudron, McHugh, Gummow and Carlin JJ).
Eg Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321 (Gleeson CJ) and 326 (Meagher JA).
Eg Samimi v Seyedabadi; Seyedabadi v Samimi [2013] NSWCA 279 at [72]-[74] (McColl JA).
Ross v Internet Wines Pty Ltd (2004) 60 NSWLR 436; [2004] NSWCA 195 at [75] (Giles JA, Spigelman CJ and McColl JA agreeing).
No contractual provisions being "acontextual" per Edelman J in Rinehart v Hancock Prospecting Pty Ltd (2019) 366 ALR 635; [2019] HCA 13 at [83]; and see Bell P in Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155 at [82]
J D Heydon, M J Leeming, Jacobs Law of Trusts, (8th Ed, 2016, LexisNexis Butterworths) at [21-04]. 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: 17 September 2020

Corporation Act 2001(Cth)

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