First Plaintiff v First Defendant

2 The plaintiffs' case against the defendants arises out of failed investments made by the defendants on the plaintiffs' behalf. The claims are based on misleading and deceptive conduct and breaches of directors' duties and fiduciary duties. It is alleged, amongst other things, that the defendants made unauthorised investments and use of the plaintiffs' funds and that the first defendant ("Mischel") improperly used his position as a director of the second plaintiff to gain a benefit for himself and companies that he controls. The plaintiffs seek common law, equitable and statutory remedies against the defendants.

3 The defendants do not contend that the plaintiffs have not shown a "good arguable case" against them within the meaning of r 37A.05(1)(b) of the Supreme Court (General Civil Procedure) Rules 2005. However they have contended that there is no risk that they will dissipate their assets so that a judgment against them may go unsatisfied. They have also submitted that the balance of convenience overwhelmingly favours the discharge of the orders.[1]

4 The authorities make it clear that the plaintiffs must establish a "real risk" of dissipation of assets. In other words, they must establish that there is a danger that assets will be dissipated if the freezing order is refused.[2] The existence of a real risk or danger may be a matter of inference and there does not have to be evidence of a positive intention to frustrate a judgment.[3] However there must be "solid evidence" of the risk of dissipation.[4]

5 The plaintiffs rely in part on the nature of their claims against the defendants in support of their submission that the defendants will dissipate their assets, absent the freezing orders. It was argued that the claims involve allegations of "serious dishonesty", which are matters that may be considered by the Court in determining whether there is the danger of dissipation of assets.[5] The plaintiffs have put evidence before the Court supporting the facts alleged against the defendants in the pleadings. That evidence is principally from their sole director ("Malone"). It was argued that his evidence showed numerous occasions on which Mischel both lied to the plaintiffs about his use of their funds and that he dishonestly attempted to exonerate himself of all blame for the loss of their funds.

6 Although a risk of dissipation generally is not shown merely from the fact that a plaintiff is able to show a good arguable case a court, may in some cases, having regard to the plaintiff's claim, infer the existence of a risk of dissipation partly or wholly from the nature of the claims made.[6] In this case, in my view, some weight can be attached to the nature of the claims alleged against the defendants as constituting matters that are relevant in considering whether there is a real risk of dissipation as the conduct complained of involves allegations of misuse of the plaintiffs' funds.

7 The plaintiffs also contend that other conduct on the part of Mischel indicates a propensity to dishonest behaviour. First, the plaintiffs have put evidence before the Court that Mischel has recently set up a new company to operate the accounting and business advisory business that was previously operated by the second defendant. It was submitted that the inference to be drawn was that Mischel has diverted the business and income stream into a new entity so that the second defendant will no longer receive that income. That inference was said to be supported by other evidence from Malone about conversations that Mischel had with him in late 2008 when Mischel suggested that Malone should set up a "phoenix structure" to divert the business and income of the first plaintiff's business and choose names for entities in the phoenix structure which closely resembled the name of the first plaintiff in order to conceal the fact that the business and income was being diverted. Secondly, the plaintiffs have put evidence before the Court that Mischel was apparently able to travel overseas although Malone had his passport (which was valid until 2016). Malone's evidence was that Mischel had given it to him as a sign of good faith when he told Malone in early July 2008 about the extent of the investment losses. It was submitted that Mischel must have obtained a new passport for which he would have had to make a declaration to the passport office that his passport had been lost or stolen. It was submitted that the inference should be drawn that Mischel was issued a new passport on a false declaration about his old passport. It was further submitted that the fact that he is now travelling overseas despite his gesture of "good faith" is another indication of his dishonesty towards the plaintiffs. Thirdly, the plaintiffs relied on the fact that Mischel was convicted in 1993 for obtaining property by deception in relation to trust funds of his clients in the course of his work as an accountant and that he had been arrested in the United States having left Australia shortly before a warrant for his arrest was issued.

8 Mischel swore two affidavits in response to the plaintiffs' affidavits. He disputed many of the factual matters deposed to in the plaintiffs' affidavits, but did not provide his version of events. He also deposed that he did have a new passport but gave an explanation about how he came to apply for it, although he said that he cannot now recall whether he noted in his application that his passport was lost or stolen. He also deposed to and gave an explanation for establishing a new entity to conduct his accountancy practice previously conducted through the second defendant.

9 I did not regard his explanations about the passport or the setting up of the new company satisfactory or persuasive but rather, in my view, his evidence begged for consideration more questions than were answered. I am not satisfied on the strength of his evidence that there is no putative conduct to support the plaintiffs' concern that he may dissipate his assets, absent an order or from which the Court may infer a risk of dissipation. I am satisfied on the totality of the evidence that the risk of dissipation of assets is not fanciful and that an inference is capable of being drawn that there is a risk of dissipation of assets.

10 However, the defendants have also put on evidence to demonstrate that there is no risk of dissipation of assets that would otherwise be available to meet a judgment as their assets, apart from the goodwill of the accountancy practice and some household and personal effects, are secured in favour of the Commonwealth Bank of Australia ("CBA") and Zigmo Australia Pty Ltd ("Zigmo") for loans made to Mischel and companies that he controls and that the present indebtedness of the Mischel group in respect of those loans exceeds the value of the assets. Mischel has estimated that the net deficiency of assets is around $664,092.33. This financial position is supported by valuations of the assets, which have not been challenged and documents from each of the lenders showing the current balances outstanding.

11 The plaintiffs have not challenged the CBA liability. However they have challenged the Zigmo liability. It was submitted that the Court should not be satisfied on the evidence that any liability to Zigmo is secured by the assets. That evidence included financial statements of Mischel group companies as at June 2009, which did not disclose any indebtedness to Zigmo and the apparent non-disclosure of the liability to a consultant that Mischel had engaged to assist in procuring the refinance of the CBA debt. The plaintiffs also contended that such evidence as there was of any actual loans tended to show that the loans came from funds sourced from third parties "facilitated" by Zigmo and not from Zigmo's own funds.

12 Whilst the evidence was not entirely satisfactory, the records and file of Zigmo which were produced under subpoena do provide support for the defendants' claim and, in my view, sufficiently demonstrate for present purposes the existence and enforceability of the secured liability in favour of Zigmo.

13 Accordingly I am satisfied that there is little or no real risk of dissipation of assets as I am satisfied that there is minimal or no net equity in the defendants' assets available for unsecured creditors. As it is well established law that a freezing order should not be used as a form of security for a judgment debt,[7] the freezing orders should therefore be discharged. I will hear the parties on the question of costs.

[1] Zen v Mo [2008] VSC 300.

[2] Pearce v Waterhouse [1986] VicRp 5; [1986] VR 60; Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH und Co KG [1983] 1 WLR 1412, 1422_; Construction Engineering (Aust) Pty Ltd v Tambel (Australasia) Pty ltd_ [1984] 1 NSWLR 274, 279; Victoria University of Technology v Wilson [2003] VSC 299, 8.

[3] Victoria University of Technology v Wilson [2003] VSC 299, 36; Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 326.

[4] Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH (The Niedersachsen) [1984] 1 All ER 398, 406 H Mustill J.

[5] Patterson v BTR Engineering (Aust) Ltd (1989)18 NSWLR 319.

[6] Ibid; Victoria University of Technology v Wilson [2003] VSC 299.

[7] Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612, 621, 625; A J Bekhor & Co Ltd v Bilton [1981] EWCA Civ 8; (1981) 1 QB 923, 941-942.