HIS HONOUR: The application before the Court is a summons seeking a raft of orders, the most urgent of which are freezing orders. The first plaintiff, (Firmtech), is a company which is involved in manufacture and distribution of aluminium products. The second plaintiff (Mr Xu) is a director of Firmtech and a fifty percent shareholder. The first defendant (Ms Xie) is the sole director of all of the defendant companies. The second defendant (Mr Zhang) is the other director and fifty percent shareholder of Firmtech.
Slightly confusingly, but explained on the evidence, is the fact that one of the defendant companies is another company with a name very similar to Firmtech, the only difference being that Firmtech has two i's in the word "Aluminium" and the third defendant's name omits the second "i" in "Aluminum". I will refer to this other company simply as the third defendant (D3).
Firmtech seeks a declaration that Mr Zhang breached duties that he owed as a director to Firmtech as a fiduciary in Equity and pursuant to ss 180 to 182 of the Corporations Act 2001 (Cth). It also seeks a declaration that Ms Xie and the third to eleventh defendants were knowingly involved in the breaches. Other declaratory relief and relief for accounts and compensation are sought. The final relief sought by Mr Xu are declarations and orders that the affairs of Firmtech were being conducted in a manner oppressive to him for the purposes of s 232 of the Corporations Act. Other orders are sought that he purchase the shares held by Mr Zhang in Firmtech and that the defendants give an account in equity and/or under s 1317H Corporations Act for profits made as a result of alleged breaches by Mr Zhang of his director's duties and/or fiduciary duties owed to Firmtech and as a result of allegedly knowing involvement of the other defendants in those breaches. Other consequential relief including orders for payment of compensation are sought.
Apart from the freezing orders, which I will come to, there is interim relief sought being orders pursuant to ss 236, 237, 241 Corporations Act that leave be granted to Mr Xu to bring proceedings on behalf of Firmtech for the purposes of seeking the freezing order relief but otherwise to take no further step in the proceedings on behalf of Firmtech without leave of the Court. Mr Xu seeks, as I understand it, on the return of the summons after the freezing orders have been obtained to seek an order that leave be granted to him to bring the proceedings on behalf of Firmtech and to seek the final relief sought on behalf of Firmtech.
The purpose of freezing orders is addressed in various authorities including authorities of the High Court such as Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 and recently Goulburn International PL v GEMI 160 Pty Ltd [2021] NSWSC 796 per Parker J at [31] to [53].
Without in any way intending to define the circumstances in which freezing orders may be obtained the principal purpose of a freezing order is to prevent frustration or abuse of the processes of the Court as distinct from providing security in respect of a judgment or an order: see Cardile v LED Builders. The Supreme Court has specific provisions which address the making of freezing orders. There are rules of Court under Pt 25 Div 2 Uniform Civil Procedure Rules 2005 (NSW) specifically dealing with freezing orders and Practice Note SC Gen 14 also addresses the making of freezing orders. The evidence in support of the application for freezing orders is addressed in the Practice Note at para 20 and should generally include information addressing the following matters:
1. Details of the judgment or litigated cause of action which the application is based on.
2. The amount of the claim.
3. The nature of the respondent's assets so far as they are known.
4. The circumstances giving rise to a good arguable case as referred to in r 25.14.
5. The identity of any person other than respondents who the applicants believe may be affected by the order.
6. How that person may be affected by it.
7. Where the application is made ex parte, any possible defence that the respondents may have.
The applicant seeking a freezing order bears the onus of establishing the relevant material risk of asset dissipation: see Drama Unit Pty Ltd v Timothy James Cook as Administrator of Fearndale Holdings Pty Ltd [2019] NSWCA 276 at [29] per Leeming JA.
In relation to risk of asset dissipation, Mr Ogborne, who appears on the application for the second plaintiff, has drawn my attention to several decisions of this Court.
The first decision is Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, being a decision of the Court of Appeal. The Court of Appeal was comprised by Gleeson CJ, Meagher JA and Rogers AJA. Gleeson CJ, in referring to the jurisdiction, made reference to one aspect which is, for want of a better description, a prima facie case, and a second aspect which is a risk of dissipation.
Gleeson CJ, at 325E, indicated that the primary judge in that case, Giles J, was correct in taking the view that evidence as to the nature of a scheme in which the appellant was allegedly involved, which established a prima facie case against him, was such as to justify the conclusion that there was a danger that the appellant would dispose of assets in order to defeat any judgment that might be obtained against him and that such danger was sufficiently substantial to warrant the injunction. His Honour went on to indicate that there is no reason in principle why the evidence which is relevant to the first of the issues might not also have a bearing on the second, and that this will be especially so where the prima facie case that is made out against the defendant is one of serious dishonesty involving diversion of money from its proper channels.
The judgment makes clear that the case was one in which the plaintiff claims that the defendant, making use of a corporation controlled by him, fraudulently misappropriated a large sum of money which, if it was still under the control of the appellant, would quite likely be or constitute, directly or indirectly, the bulk of its assets. Giles J had held, and Gleeson CJ appears to have accepted, that the nature of the scheme in which, on the evidence, the appellant appears to have engaged was such that it is reasonable to infer that he is not the sort of person who would, unless restrained, preserve his assets intact so that they might be available to his judgment creditor.
Meagher JA, at 326D, indicated that in exceptional cases (of which his Honour said the present was unfortunately one) one can infer the existence of the latter ingredient (dissipation) partly or wholly from the proof of the former (i.e. the prima facie case).
His Honour went on to say that this may well be the situation in all cases where the plaintiff's prima facie case against the defendant involves proof of gross dishonesty.
Mr Ogborne also drew my attention to a recent decision of Slattery J in Allsop Investments Pty Ltd v Jerkovic (No 2) [2022] NSWSC 7, setting out the legal principles, noting that evidence in relation to the establishment of a serious question to be tried can also support the inference of a risk of dissipation of assets, citing Patterson v BTR Engineering and other judgments of this Court that have applied those principles: see [6] and [7].
As a condition of the making of a freezing order, an applicant for the freezing order ought to provide an undertaking as to damages in the usual form; see Cardile v LED Builders at [42] and the Practice Note at [16].
The duration of an ex parte freezing order should be limited to a period terminating on the return date of the notice of motion or document for relief, in this case the summons, which would be as early as practical and usually no more than a day or two after the order is made, when the respondent would have an opportunity to be heard: see Practice Note at [9]. A freezing order should reserve liberty for a respondent to apply on short notice to discharge or vary the freezing order: see Practice Note at [10]. The value of the assets covered by the freezing order should not likely exceed a likely maximum amount of the applicant's claim, including interest and costs: see Practice Note at [11].
An applicant for an ex parte freezing order is under a duty to make full and frank disclosure of all material facts to the Court, including, as noted above, possible defences known to the applicant and information which may cast doubt on the applicant's ability to meet the usual undertakings as to damages and assets within Australia: see Practice Note [19].
There is a distinction between an asset preservation order, on the one hand, and an injunction to preserve an asset, the subject of the proceedings, on the other.
The distinction is discussed by Parker J in Ip v Chiang [2019] NSWSC 1549 at [126]-[129].
On the application in this case the property sought to be restrained is in the sum of $10 million.
The orders seek to restrain Ms Xie of dealing with property at Chipping Norton, and Mr Zhang of dealing with property at Revesby and also dealing with a business at Revesby.
The application was supported by an affidavit of Mr Xu and an exhibit in two volumes.
Also tendered on the application is a copy of a property search, a National Property Ownership report in relation to Mr Zhang identifying ownership apparently of the property at Revesby and a form of transfer in respect of that property. That has become Ex 1. Another tender is of a National Property Ownership report in relation to Ms Xie of property apparently owned by her at Chipping Norton and also a transfer in respect of that property. That material has become Ex 2.
Handed up on the application is a flow chart diagram which is said to show the relationship between Ms Xie, Mr Zhang and a number of entities, including, relevantly, all the defendants. That chart has been marked as MFI 1.
It suffices to note that the chart and its description shows Ms Xie as being the sole director of each of the (third-eleventh) defendants.
Further, it purports to show that Ms Xie and Mr Zhang are beneficiaries of a trust known as the JKZ Investment Trust, of which the fifth defendant JKZ (Australia) Pty Ltd is the trustee, and that JKZ (Australia) as trustee has full ownership of the sixth defendant (Firmtech Group).
I have also been informed that Ms Xie is an appointor of the trust and that she and Mr Zhang are beneficiaries of the trust.
Firmtech was incorporated on 18 May 2018.
In 2018, Mr Xu became one of two directors of Firmtech and a 50% shareholder.
His affidavit addresses the formation of Firmtech and his dealings with Mr Zhang and Ms Xie and the establishment of Firmtech's businesses and funding of Firmtech by Mr Xu.
It is asserted that Firmtech was initially successful.
Mr Xu, in addition to incorporating Firmtech and establishing its businesses, which includes supplying and installing aluminium framed windows and doors, had other dealings with Mr Zhang and Ms Xie.
This included dealings involving land at Panania and personal loans.
Mr Xu says that between 18 December 2019 and 21 February 2022, Mr Zhang and Ms Xie, unbeknownst to him, incorporated eight companies. Further, he says they said nothing to him about the incorporation of those companies.
In 2019, Firmtech tendered for contracts to supply metalwork and aluminium framed windows and doors for a project in the ACT known as Campbell 5 or C5.
Mr Xu had discussions with Ms Xie about this some time later and he reviewed bank accounts and noticed that moneys totalling approximately $2.12 million had been received from the third defendant, described as being by reference to the C5 project.
He subsequently found drawings in the Revesby factory prepared for the C5 project showing the contract with D3 and not Firmtech.
Mr Xu sought to investigate the assertions of Ms Xie that Firmtech needed more funding to pay for supplies for the C5 project. There were discussions in early January 2021 in which he indicated to her that he did not understand why she was always asking or saying that the company was short of cash flow.
He says later in January 2021, Ms Xie provided spreadsheets asserting money said to be owed to him by Firmtech in connection with another loan described as the Luna loan.
In early February 2021 discussions centred around selling land at Panania for about $1.185 million and land at Lansvale for $6.05 million in order to pay back a sum said to be owed to Mr Xu of $1.22 million.
Mr Xu asserts that in about May 2020, steps were taken by Mr Zhang and Ms Xie which had the practical effect of excluding him from the operations of Firmtech and removing his access to accounts, the website, the accounting system and shared drive of Firmtech.
Further, he asserts that they failed to keep him informed of projects secured by Firmtech.
The affidavit provides some detail in respect of these matters.
The information includes details about various projects and clients, including projects at Waterloo, Westfield Sports High School, and in respect of a builder client named Parkview Constructions Pty Ltd.
It is asserted that there has been a diversion of income from Firmtech.
It is said that for the year ended 30 June 2019, Firmtech had a net profit of $2.487 million.
I have been taken to accounts of Firmtech for the year ended 30 June 2019, at p 386 of the exhibit, showing cost of sales in the order of $2.364 million and expenses of $842,000.
I was further taken to a cash flow forecasting sheet, p 408 of the exhibit, which shows forecasting for the year 1 July 2019 to 30 June 2020 based on a profit margin of 38%.
Mr Xu claims that Firmtech spent increasing amounts on supplies in the 2020 and 2021 financial years.
He says that from observation of activities at the Revesby factory, Firmtech employed more workers in the 2020 and 2021 financial years.
Based on conversations with a number of people, including Ms Xie and employees at Firmtech, Mr Xu asserts there had been no significant change in prices being charged by suppliers in the 2020 and 2021 financial years and no significant change in pricing structures being offered or paid by builders for Firmtech to manufacture, supply and install aluminium framed windows and doors in those years.
Mr Xu asserts that he expected the profit margin for Firmtech to continue at about 40%, which bears close similarity to the 38% profit margin.
He expected that to happen after the 2019 financial year, yet, despite that, Firmtech suffered dramatic declines in profitability in the 2020 and 2021 financial years.
Mr Xu has had access to BAS statements of Firmtech and analysed the statements.
The analysis of the statements is said to show that if Firmtech had continued to operate with a profit margin at the 2019 level, it would have been expected to have had a net profit for 2020 of about $4.508 million rather than a net loss of $395,000 and a net profit for the 2021 financial year of $5.706 million instead of a net loss of $1.894 million.
It is further asserted that there has been a particular diversion of business from Firmtech in relation to a number of projects, including in particular the Campbell 5 project as mentioned, a project in Wollongong, projects with D3 named as contractor on the drawings, projects at Ingleburn and Epping and Bankstown, and 32 projects identified on folders in Firmtech's offices.
The Bankstown project is one it appears has been undertaken by Western Spring Projects Pty Ltd, the eighth defendant.
The seventh defendant, LGK Holdings, is said to own one of the trucks at the factory: p 881 of the exhibit.
The affidavit goes on to provide details regarding the projects.
Mr Xu says there is also a passing off claim by Logikal in respect of Firmtech's business, and details are provided in respect of that.
The affidavit continues to set out what are described as recent developments.
One of these includes the purchase of land, being the Chipping Norton property, on 6 December 2021 by Ms Xie.
Other developments include apparent claims being made against Firmtech and Mr Xu by a creditor.
Mr Xu says that Firmtech is still earning income from a standing arrangement to provide scrap metal left over at the end of projects to another company.
Another recent development is said to be information received on or about 29 April 2022 that an employee had been called by Ms Xie regarding removing Firmtech's leased punching tools from the Revesby factory.
Mr Xu says he went there on that day and saw that four punching tools had been dismantled, packed up and placed on a pallet to be shipped.
Another recent development is that on 22 June 2022, Mr Xu received a call from a solicitor who acts for the landlord of the Revesby factory regarding an attempt to assign the lease of the factory to Logikal.
Mr Xu says that neither Mr Zhang nor Ms Xie informed him of any of these matters.
On 23 June 2022, Mr Xu received a phone call from another person enquiring as to why there were two Firmtech companies competing for the same job.
In relation to the relief sought, from what I have described in the affidavit, there is information that has been provided about the basis for the claim for substantive relief.
As to the amount of the claim or $10 million, that has been explained at least by reference to the expected profit as I have referred to in the 2020 and 2021 financial years.
Mr Ogborne properly accepts that there is some difficulty in quantification and that there is some uncertainty regarding figures based on these aged receivables. Nonetheless, that is the material as it exists at this stage before the Court.
The application is made ex parte, and as part of the application my attention has been drawn to correspondence on behalf of the solicitor for the plaintiff dated 2 July 2021 to Mr Zhang and Ms Xie, at pp 745 and 746 of the exhibit, and response from Piper Alderman Solicitors on 15 July 2021, at pp 747 to 750 of the exhibit. The letter from Piper Alderman sets out some background, which Mr Ogborne during the course of the application disputed, at least to some extent, and the letter from Piper Alderman also sets out assertions in relation to the allegations.
It will be appreciated that these letters are dated.
There has been more recent activity, in particular that which I have referred to in the affidavit.
As to the requirement regarding detail in respect of the nature and value of the respondent's assets as far as they are known to the applicant, Mr Ogborne tendered and referred to the searches in relation to the properties that have become exhibits 1 and 2 in the proceedings.
In relation to the question regarding risk of dissipation, Mr Ogborne relies upon the matters that I have referred to in the judgments of Patterson v BTR Engineering and the cases that have applied it, and submits that this case is a quintessential example of that.
Whether that is the case is not for me to ultimately decide.
Nonetheless, I accept that in relation to the matters that are ordinarily required to be satisfied on such an application, there is sufficient material before me to underpin the freezing orders and interim order that is sought.
I am mindful of the seriousness of such relief being granted.
It is proposed that if the summons, the affidavit and material that supports the application is served by 6.30pm this evening, that the matter will come back before the Duty Judge on Monday at 10am and the defendants will have an opportunity to respond at least then.
Further, the orders reserve leave or liberty to the defendants to apply urgently to discharge or vary the orders.
In those circumstances, I propose, with some slight modification, to make the orders that have been set out in the draft form of orders.
The slight modification is in relation to the material in para 11, so that where the words "may tend to incriminate you" have been included, to substitute the words from the Practice Note, being "may tend to prove that you have committed an offence against or arising under an Australian law or a law of a foreign country".
Subject to that modification, I make the orders set out in the proposed short minutes of order, being orders 1 through to 18, noting that the orders contain schedule A, being undertakings given to the Court by Mr Xu, and a schedule B, a listing of the affidavits relied upon, being the affidavit of Mr Xu dated 26 July 2022.
[3]
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Decision last updated: 02 August 2022