BALANCE OF CONVENIENCE
171 As already noted, given my finding that Mr Costagliola has not demonstrated that the Trustee would have a good cause of action against Nerotua under the Bankruptcy Act, I am not strictly required to consider the balance of convenience. I have, nevertheless, decided, for more abundant caution, to address that issue on the hypothesis that my finding that the Trustee does not have, or would not have, a good arguable case against Nerotua under s 139D or s 139E of the Bankruptcy Act might be wrong.
172 In my view, even if Mr Costagliola had demonstrated that the Trustee would have a good cause of action, the balance of convenience does not, or would not, support the making of the freezing orders sought by Mr Costagliola. That is so for a number of reasons.
173 First, even if I am wrong in concluding that the Trustee would not have a good arguable case against Nerotua under either or both of s 139D and s 139E of the Bankruptcy Act, I am nevertheless of the view that any case that the Trustee might have against Nerotua under either of those provisions would, at least on the current state of the evidence, be very weak and would face significant hurdles. The weaknesses and hurdles are apparent from my earlier analysis of the relevant causes of action and the evidence adduced and submissions advanced in relation to the elements of those proposed actions. It is unnecessary to rehearse that analysis in this context.
174 When considering whether to make a freezing order, which is a species of injunctive relief, the issue of whether the applicant has made out a good arguable case and whether the balance of convenience favours the grant of relief are related inquires because "the apparent strength of the parties' substantive cases will often be an important consideration to be weighed in the balance": Samsung Electronics Co. Ltd v Apple Inc. [2011] FCAFC 156; (2011) 286 ALR 257 at [67]; GlaxoSmithKline Australia Pty Ltd v Reckitt Benckiser Healthcare (UK) Limited [2013] FCAFC 102; (2013) 305 ALR 363 at [81(j)]. It will "often be necessary to give close attention to the strength of a party's case when assessing the risk of doing an injustice to either party by the granting or withholding of interlocutory relief": Warner-Lambert at [70]. As will be seen, the freezing orders sought by Mr Costagliola would, if made, result in prejudice or disadvantage to Nerotua. In those circumstances, it is necessary to weigh in the balance my assessment that, even if Mr Costagliola had demonstrated that the Trustee would have a good arguable case, that case in my view is at best weak and problematic, at least on the current state of the evidence.
175 Second, the freezing orders sought by Mr Costagliola are sought in circumstances which are out of the ordinary. Ordinarily it is the judgment debtor, or prospective judgment debtor, who seeks freezing orders. As explained earlier, judgment has not been given in Mr Costagliola's favour in this Court, and he does not contend that he has a good arguable case on a cause of action or prospective cause of action that is justiciable in this Court. Rather, he contended that the Trustee has a good arguable case on a cause of action or prospective cause of action. While, for the reasons given earlier, in my view that does not preclude him from applying for freezing orders, it gives rise to a number of considerations that bear on the balance of convenience.
176 In particular, I am somewhat sceptical that there is any real prospect that the Trustee will commence the proceedings envisaged by Mr Costagliola. The Trustee was appointed over a month ago. He was no doubt aware of this proceeding. Mr Costagliola did not adduce any evidence from him. The only indication of the Trustee's attitude concerning the postulated proceeding against Nerotua is his statement in his report to creditors that, having met with the solicitors for each of the parties, it was likely that, following the hearing in this matter, he would seek advice and that his investigations were ongoing. That is hardly a ringing endorsement of the proceeding proposed by Mr Costagliola. I accept that the evidence indicates that Mr Costagliola only became aware of Mr Autore's bankruptcy in recent times and that his, or his legal advisers', discussions with the Trustee must also have occurred in recent times. That said, the absence of any real indication from the Trustee that he is likely to commence the proceedings envisaged by Mr Costagliola is a relevant consideration.
177 Perhaps more significantly, the Trustee's report to creditors reveals that Mr Autore's bankrupt estate has no assets and significant liabilities. I would readily infer in those circumstances that the Trustee would be unlikely to commence the proceedings proposed by Mr Costagliola unless Mr Costagliola agreed to indemnify the Trustee and fund the action. Mr Costagliola did not himself give any evidence in support of this application. There is no evidence that he would be prepared to indemnify the Trustee and fund the proposed proceeding against Nerotua. There is also no evidence that he has the financial capacity to fund the proposed proceeding. I am also somewhat sceptical that he would ultimately be prepared to fund the litigation, particularly given that the commercial reality is that, even if the Trustee's case against Nerotua succeeded, it would not necessarily follow that Mr Costagliola would receive anything from Mr Autore's bankrupt estate. Nor is there any evidence capable of supporting an inference that a litigation funder or other third party would be prepared to fund the proposed action.
178 This case is distinguishable from HPack Investments in that regard. In that case, Black J's reasoning included the following (at [49]):
It does not seem to me that that jurisdiction is excluded because the relevant judgment requires a two step process, involving first the winding up of HPack and then the liquidator's claim. In determining whether to make such an order, the Court would, of course, have to assess the likelihood that a winding up order will be made and that a liquidator would obtain such a judgment, and I do so below. Absent a resolution of the issues with the Respondents, there is here no reason to think that a liquidator would choose not to bring the proceedings if funded to do so, given the apparent prospects of the claims (which I address below) and the amount of the potential recoveries. If he or she could not fund those proceedings from CSF's existing resources, relying on any right of indemnity or exoneration against trust assets (as to which I note a dispute below), and if the DCT did not fund them, then there is no reason to think that he or she could not readily obtain any necessary third party funding to bring the relevant claims, given their apparent prospects and the potential recoveries. The Court may of course need to reconsider that position and potentially discharge a freezing order made on that basis, if a winding up order was not promptly made or a liquidator did not promptly commence and expeditiously carry on the contemplated proceedings.
(Emphasis added)
179 I would not draw the same inferences in this case. Unlike in HPack Investments, given what I have said about the prospects and likelihood of recovery, and in the absence of any evidence from Mr Costagliola or the Trustee, I can see no basis for inferring that the Trustee would, or would be likely to, commence the proposed proceedings against Nerotua unless he was funded to do so, or any basis for inferring that Mr Costagliola could or would fund the proceeding, or that any third party would be likely to fund the proceedings.
180 I should also emphasise that if I had been persuaded to make any freezing orders against Nerotua, the orders that I would have made would only have operated for a relatively short period (perhaps as short as 30 days) to allow the Trustee to consider whether he proposed to commence proceedings against Nerotua. Before continuing the orders, I would most likely have required evidence or even an undertaking from the Trustee that he would, within a short period, commence the proposed proceeding and prosecute that proceeding expeditiously. The orders proposed by Mr Costagliola envisaged that the Trustee would have up to two years in which to commence the proposed proceeding against Nerotua. That, in my view, would be entirely inappropriate in the circumstances, particularly given the likely impact that the proposed orders would have on Nerotua and the secured creditor.
181 Third, the freezing orders proposed by Mr Costagliola included an order (order 2 b) restraining Nerotua from:
completing or agreeing to complete any sale of the [Potts Point] Properties, unless Nerotua has first undertaken that it will, on the application of the trustee in bankruptcy of [Mr Autore's] estate, pay such portion of the net proceeds of sale as the Court determines it would be liable for had it retained an estate in the Properties.
182 There are in my view a number of significant problems with that order.
183 If the proposed undertaking is not given by Nerotua, the effect of the order would be that Nerotua would be restrained from selling the Potts Point Properties. The effect of Alessio's unchallenged evidence was that he and Floriana, the current directors of Nerotua, wanted to sell the Potts Point for entirely legitimate commercial reasons. The proposed development of the properties was not considered to be commercially viable, Nerotua owes a large debt to J & A Potts Point arising from the purchase of the properties and the proposed development, and Nerotua was projected to incur substantial losses once the properties are sold. The difficultly is that if the sale of the properties is prevented from proceeding, Nerotua's debt will no doubt continue to grow and its projected losses will increase. That is likely to be to the detriment of not only Nerotua, but also J & A Potts Point as secured creditor. I will say something further in respect of Mr Costagliola's undertaking as to damages shortly.
184 While it is true that Nerotua could proceed to sell the Potts Point Properties if it gave the undertaking referred to in the proposed order, there are in my view a number of problems with the requirement that Nerotua give that undertaking. It is unclear to whom the undertaking is to be given. It is equally unclear who Nerotua must undertake to pay. It may, however, perhaps be assumed that the undertaking is to be given to the Court, and that Nerotua must undertake to pay the Trustee. A more significant issue is that the undertaking that Nerotua would be required to give is to pay the Trustee an unspecified sum of money. Moreover, given the complexities of the matter, Nerotua has no real way of ascertaining or even guessing what that sum might be. Freezing orders typically prevent the respondent from removing or disposing of assets up to a specified amount that generally reflects the amount that the respondent is or may be liable to pay as a result of the judgment debt or prospective judgment debt. No such amount is specified in the proposed undertaking.
185 Another difficulty is that, if Nerotua gives the undertaking, it may, as events transpire, have no capacity to make that payment once the properties are sold given the size of the secured debt. That is because the evidence tends to indicate that it is possible, if not likely, that the properties will be sold for less than the amount of the secured debt owed to J & A Potts Point. If Nerotua is unable to pay any money to the Trustee in accordance with the undertaking in those circumstances, it would breach of the undertaking. Mr Costagliola submitted that in those circumstances he would be unlikely to commence proceedings to enforce the undertaking. That, however, is not a complete answer to the problem created by the fact that Nerotua may not be able to pay the amount that is required to pay to comply with the undertaking. Even if Mr Costagliola did not commence proceedings to enforce the undertaking, Nerotua would nonetheless be in breach of the undertaking. It would, in my view, be oppressive to expect Nerotua to give an undertaking that it might not be able to comply with, let alone one which it is unlikely to be able to comply with.
186 The difficulties do not end there. Even if Nerotua gives the undertaking and is able to sell the Potts Point Properties, the effect of the other order sought by Mr Costagliola is that Nerotua is restrained from "disbursing, dealing with, disposing of, or otherwise dissipating the net proceeds of the sale of the [Potts Point Properties], after payment of sale costs, secured creditors of Nerotua, and the usual fees and adjustments". That restraint is proposed to continue until either the elapse of two years during which time the Trustee has not applied for relief under the Bankruptcy Act, or the Trustee obtains an order under the Bankruptcy Act in respect of the proceeds, or the parties agree, or the Court makes a further order, whichever occurs first.
187 There are in my view several difficulties with that order. One difficulty is that the restraint operates in respect of the entirety of the sale proceeds (less the deductions specifically identified). As noted earlier, freezing orders typically prevent the respondent from removing or disposing of assets up to a specified amount that generally reflects the amount that the respondent is or may be liable to pay as a result of the judgment debt or prospective judgment debt. That is not the case with the proposed order. Another difficulty is that the restraint is not subject to any exceptions. Freezing orders are typically subject to exceptions which permit the respondent to pay, for example, reasonable legal expenses, or to deal with or dispose of their assets in the ordinary and proper course of business, including paying business expenses. That is not the case with the orders proposed by Mr Costagliola. While the proposed orders would permit Nerotua to pay secured creditors from the sale proceeds, it would not be permitted to pay any unsecured creditors. That would undoubtedly cause prejudice to not only Nerotua, but also the unsecured creditors.
188 A related difficulty is that, if the Trustee does obtain an order under either s 139D or s 139E of the Bankruptcy Act against Nerotua, and Nerotua is required to pay the amount specified in the order to the Trustee in accordance with the undertaking, that payment might be seen as preferring the interests of the Trustee to the detriment of other unsecured creditors. If, as is possible, Nerotua turns out to be insolvent at the time it pays the Trustee, the payment to the Trustee might, in those circumstances, be considered to be a preferential payment and therefore voidable pursuant to ss 588FA and 588FE of the Corporations Act and as a result liable to be disgorged to the liquidator of Nerotua pursuant to s 588FF of the Corporations Act: see the discussion, in relevantly analogous circumstances, in Skyworks v 32 Drummoyne Road [2017] NSWSC 343 at [52].
189 Fourth, the apparent reason for Mr Costagliola seeking to restrain Nerotua from selling the Potts Point Properties is that he perceives that, due to the element in s 139D(1)(e) of the Bankruptcy Act that the entity still has an estate in the relevant property, the Trustee will no longer have a cause of action under s 139D against Nerotua if the properties are sold. Mr Costagliola also apparently believes that if the properties are sold, but the undertaking is given by Nerotua, the Court would consider and determine any action taken by the Trustee against Nerotua pursuant to s 139D on the hypothetical basis that Nerotua still held an estate in the properties as required by s 139D(1)(e).
190 It is, however, by no means clear to me that the Court would, or would be able to, proceed in that manner. It is also difficult to see how the Court could grant relief under s 139D(2) if Nerotua no longer has an estate in the Potts Point Properties, unless the Court proceeded on the basis that the sale proceeds constituted the relevant property for the purposes of s 139D(2). It is not entirely clear to me that the Court could proceed on that basis. I do not propose to express any concluded views in respect of this issue, other than to note that the basis upon which the Court could proceed under s 139D if the Potts Point Properties are sold raises complex issues the resolution of which is by no mean easy or clear.
191 Fifth, for the reasons that have been given, the orders sought by Mr Costagliola would, if made, potentially prejudice Nerotua and cause it to suffer damage. That is particularly the case if the sale of the Potts Point Premises is prevented or impeded by the orders. Mr Costagliola has given an undertaking as to damages. There is, however, no evidence that Mr Costagliola can give a valuable undertaking in that regard because there is no evidence concerning his financial position. The "inability of a plaintiff to give a valuable undertaking as to damages is a factor which can be taken into account in assessing the balance of convenience and may even by decisive": Epp v Levy [2001] NSWSC 482 at [31] quoting Hodgson J in Wentworth v Wentworth (unreported, Supreme Court of New South Wales 12 June 1997). I do not go so far as to say that Mr Costagliola is unable to give a valuable undertaking as to damages. There is, however, no evidence that he can.