Gecko Australia Pty Ltd v Montagnese

Introduction 1 The plaintiffs have applied for a freezing order against the first, second, fourth and fifth defendants. For the purposes of these reasons, I will refer to these defendants as "the Montagnese defendants". The plaintiffs also apply for an ancillary order for the provision of information by these defendants about their assets. 2 The plaintiffs' application is made by interlocutory application dated 25 March 2022. The interlocutory application was initially listed for hearing on 8 April 2022. However, the hearing of the application on that date was adjourned to enable the parties to file further evidence. The parties subsequently filed further evidence and the hearing of the application took place on Friday, 22 April 2022. 3 The plaintiffs rely on four affidavits of Evan Stents, a partner of HWL Ebsworth, the solicitors acting for the plaintiffs, dated 25 March, 7 April, 13 April and 20 April 2022. 4 The Montagnese defendants rely on the following affidavits: (a) an affidavit of Domenic Gatto, a partner of King & Wood Mallesons, the solicitors acting for the defendants, dated 5 April 2022; and (b) two affidavits of James Russell, a solicitor employed by King & Wood Mallesons, dated 20 April and 22 April 2022. 5 There was no cross-examination of the deponents. 6 A good deal of the affidavit evidence was evidence given on an "information and belief" basis. The source of this information was, in many cases, people who are likely to be witnesses in the trial of this proceeding. It was not possible, within the framework of this interlocutory application, for this type of evidence to be tested in cross-examination. It follows that, while I proceed for present purposes on the basis of the affidavit evidence filed by the parties, the evidence before the Court at the trial of the proceeding is likely to be more expansive and may well be very different.

Overview of the proceeding 7 In broad outline, the proceeding concerns the conduct of the first defendant (Ms Montagnese), who was the director, chief executive officer and managing director of a caravan business known as New Age Caravans. The business was operated by the third plaintiff (NAC), which was a wholly-owned subsidiary of the second plaintiff (New Age Holdings). Ms Montagnese and her company, the second defendant (Montagnese Holdings), sold the shares in New Age Holdings to the first plaintiff (Gecko) for over $54 million. Gecko is a special purpose vehicle for the Walkinshaw Group. 8 The purchase price was payable in three tranches pursuant to three share sale agreements. The share sale agreements were entered into in October 2016, July 2017 and July 2018. The payments of the tranches were made in November 2016, August 2017 and August 2018. 9 The plaintiffs allege that Ms Montagnese engaged in misleading or deceptive conduct that induced Gecko into buying the shares for the price that it did. Ms Montagnese remained in charge of the companies after she received full payment. She departed in mid-2019. 10 The plaintiffs allege that during her tenure as director and officer, Ms Montagnese committed breaches of her statutory and general law duties, and also of her employment agreement and a shareholders' agreement. 11 The plaintiffs allege that those breaches caused loss to New Age Holdings and NAC, and also inflated the price payable under the tranches of the share sale. 12 The plaintiffs seek relief including a declaration of a constructive trust over real property owned by the fourth defendant (Northpoint) and the fifth defendant (Highpoint), of which Ms Montagnese was a director, on the basis of 'knowing receipt'.

The present application 13 By their interlocutory application, the plaintiffs seek a freezing order under rr 7.32 and 7.35 of the Federal Court Rules 2011, until the hearing and determination of the proceeding or further order, requiring the Montagnese defendants to give the plaintiffs notice in advance before removing from Australia or in any way disposing of, dealing with or diminishing the value of any of their assets, where the value of the removal, disposal, dealing with or diminishing of value exceeds $10,000. 14 The plaintiffs also seek an ancillary order under r 7.33 requiring the defendants to file and serve an affidavit deposing to: the value and location of their assets in Australia and overseas; the location of the proceeds of the sale of shares in New Age Holdings that are directly or indirectly held by them; and any material transfers of assets or restructuring, following the commencement of this proceeding, that would affect the ability to enforce a judgment against them. 15 At the hearing on 8 April 2022, senior counsel for the plaintiffs handed up the form of order sought by the plaintiffs. This form of order contains a number of exceptions or 'carve outs', which address some of the complaints raised by the defendants in their outline of submissions. Also, the form of order relating to the provision of information provides for the affidavits to be seen only by the plaintiffs' counsel and solicitors, and not by the plaintiffs themselves.

Applicable principles 16 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 Federal Court 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. 17 The parties referred to a number of recent judgments of this Court that contain summaries of the applicable principles. In particular, reference was made to Spotlight Pty Ltd v Mehta [2019] FCA 1796 (Spotlight v Mehta) at [9]-[12] per Anderson J; Royal Express Pty Ltd (Receivers and Managers Appointed) (Administrator Appointed) v Huang, in the matter of Royal Express Pty Ltd [2021] FCA 585 at [3]-[4] per O'Bryan J; and Hurst, in the matter of Lloyds Curry Shop Pty Ltd (in liq) v Prasad [2021] FCA 1562 at [22]-[28] per Cheeseman J. The cases indicate that the issues to be considered on such an application are: (a) whether the plaintiff or applicant has a good arguable case; (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 disposed of, dealt with or diminished in value (assuming the relevant aspect of r 7.35(4)(b) is sub-paragraph (ii)); and (c) the exercise of discretion. 18 In Spotlight v Mehta, Anderson J quoted the following passage from the judgment of Wigney J in Basi v Namitha Nakul Pty Ltd [2019] FCA 743 at [7]-[9]: 7 The purpose of a freezing order is to prevent an abuse or a frustration of the Court's process by depriving an applicant of the fruits of any judgment obtained in the action: Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 625. It is "no light matter" to freeze a party's assets and there is, accordingly, a need for the Court to exercise caution: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 324F. A freezing order is a "drastic remedy" which should not be lightly granted: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [51] citing Frigo v Culhari (unreported, NSW Court of Appeal 17 July 1998 at 10-11). 8 An applicant has a good arguable case if they have "a reasonably arguable case on legal as well as factual matters": Cardile at [68]; Insolvency Guardian Melbourne Pty Ltd v Carlei (2016) 111 ACSR 236; [2016] FCA 72 at [18]. It has also been said that a "good arguable case" is one "which is more than barely capable of serious argument, and yet not necessarily one the judge considers would have better than a fifty per cent chance of success": Curtis v NID Pty Ltd [2010] FCA 1072 at [6] citing Ninemia Maritime Corp v Trave Schiffahrtsgesselschaft mbH & Co KG (The Niedersachsen) [1983] Com LR 234 at 235 (affirmed on appeal: [1983] 1 WLR 1412); Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd (2016) 103 ATR 327; [2016] FCA 653 at [7]. 9 Where a freezing order is sought on the basis of a danger of the dissipation of assets, it is not necessary for the Court to be satisfied that the risk of dissipation is more probable than not. Nor is it necessary for the applicant to adduce evidence of an intention on the part of the respondent to dissipate assets: Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194; [2010] FCA 1014 at [8]-[10]; Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) (2012) 90 ATR 711; [2012] FCA 1064 at [23]. The making of a freezing order involves a discretionary exercise of power. The Court retains a discretion to refuse relief even if the requirements in r 7.35 of the Rules are satisfied: Patterson at 321-322. 19 One of the key issues in relation to the present interlocutory application is whether the plaintiffs have established that there is a danger of the dissipation of assets. In relation to this issue, the following principles are relevant: (a) as set out in the above extract, 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 (Patterson) 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.

Consideration 20 The plaintiffs contend that it has recently come to their attention that Northpoint (of which Ms Montagnese is a director) sold its property at 8 Northpoint Drive, Epping, Victoria (the Northpoint Drive Property) on 28 November 2021, which was soon after the proceeding was commenced. (The originating process in this proceeding was served on Ms Montagnese on 19 October 2021.) The plaintiffs note that the Northpoint Drive Property is the subject of a claim for a constructive trust by NAC and New Age Holdings in this proceeding. 21 The Montagnese defendants have filed evidence to the effect that consideration of selling the Northpoint Drive Property commenced before Ms Montagnese was aware of the proceeding. In particular, the Montagnese defendants have filed evidence that: on or around 20 September 2021, Bruce Cugnetto (of Cooper Street Properties Pty Ltd) initiated contact with Ms Montagnese and asked her whether she was interested in selling the Northpoint Drive Property; between 20 and 30 September 2021, Robert Griffiths (the third defendant) approached CBRE and asked them whether they were interested in putting a proposal to Northpoint for CBRE to arrange the sale of the Northpoint Drive Property on behalf of Northpoint; on 30 September 2021, CBRE sent a proposal to Mr Griffiths; on 1 October 2021, Northpoint entered into an exclusive commercial agency agreement with CBRE for the sale of the Northpoint Drive Property; Ms Montagnese was first notified of the proceeding on 19 October 2021; following the conclusion of the expression of interest campaign, on 11 November 2021, Northpoint entered into a contract for the sale of the property for $5,012,800; and the settlement is due to take place on 9 May 2022. 22 The plaintiffs submit that it is relevant that Northpoint's substantial asset, and its only real property, was sold after the proceeding was commenced, and that the proceeding includes a claim for a constructive trust over the property. 23 In support of the application for a freezing order, the plaintiffs also rely on the nature of the claims that they make against the Montagnese defendants, and the strength of the prima facie case in relation to those claims. In particular, the plaintiffs highlight the following claims: (a) The plaintiffs allege that, in breach of her duties, both before and after the sale of shares to Gecko, Ms Montagnese engaged in "channel stuffing", which was an unsustainable, artificial and highly damaging practice whereby Ms Montagnese arranged wholesale sales of high-end, high-priced stock caravans to a dealer that she controlled and to other NAC dealerships. The plaintiffs allege that there was no actual retail demand for these caravans, and that the practice created an oversupply of "stock caravans" in NAC's distribution channels. (b) The plaintiffs allege that, in breach of her duties, Ms Montagnese made loans amounting to hundreds of thousands of dollars to NAC dealers located in Sydney, South Australia, Gold Coast and Sunshine Coast. The plaintiffs contend that, in making these loans, Ms Montagnese breached her duties as a director and officer of NAC and New Age Holdings, by placing herself in a position of undisclosed conflict between her own self-interest as a creditor and her duties as a director, fiduciary and officer. (c) The plaintiffs allege that Ms Montagnese committed the tort of conversion in relation to two caravans, each worth over $100,000. The plaintiffs allege that, in doing so, Ms Montagnese asked an NAC employee to create false invoices and to delete them. (d) The plaintiffs allege that Northpoint and Highpoint knowingly received part of the share sale proceeds, which included gains made by Ms Montagnese as a result of her breaches of duties. 24 The plaintiffs contend that the Montagnese defendants' capacity for misconduct is further demonstrated by the shredding of documents that occurred in late 2018 or early 2019, when Ms Montagnese and her son were seen to be shredding a significant volume of documents in her office and removing garbage bags full of shredded documents. In response, the Montagnese defendants have filed affidavit evidence to the effect that the shredding was done openly and consistently with usual practice. Further, they contend that there are electronic copies of the key company documents. 25 The plaintiffs contend that Ms Montagnese's capacity for misconduct is also demonstrated by the wiping of her laptop computer before it was returned to the company upon her departure. There is conflicting evidence about whether Ms Montagnese's computer was wiped before it was returned. 26 In addition to the above facts and matters, the plaintiffs rely on: (a) the Montagnese defendants' solicitors' responses to questions raised by the plaintiffs; (b) the Montagnese defendants' refusal to provide an undertaking not to dispose of assets without first giving notice to the plaintiffs, in response to the plaintiffs' request for such an undertaking; and (c) the large quantum (approximately $22 million) of the plaintiffs' claims against the Montagnese defendants. 27 In addition to the evidence referred to above, the Montagnese defendants rely on the evidence concerning the "balance of convenience" set out in paragraphs 54-58 of Mr Gatto's affidavit. This includes evidence to the effect that: Ms Montagnese has investments in funds managed by Mutual Trust and Macquarie Private Bank in the tens of millions of dollars; and Ms Montagnese has not (in the five months since this proceeding was commenced) sought to, and does not intend to, abscond, dissipate her assets or remove them from Australia in order to stultify any adverse judgment ordered against her or her corporate entities in the proceeding. 28 In my view, on the basis of the affidavit material filed by the plaintiffs, the plaintiffs have established a good arguable case in relation to the allegations of misleading or deceptive conduct and breaches of director's duties. I refer, in particular, to the evidence set out in Mr Stents' affidavit dated 13 April 2022 at paragraphs 7 to 10 (as corrected by his affidavit dated 20 April 2022). This includes the allegations of "channel stuffing" and the allegations relating to loans to dealers. 29 I am also satisfied that the plaintiffs have established a good arguable case in relation to the conversion of the two caravans: see Mr Stents' affidavit dated 7 April 2022 at paragraphs 17 to 26; and Mr Stents' affidavit dated 13 April 2022 at paragraphs 14 to 15. 30 I am also satisfied that the plaintiffs have established a good arguable case that Northpoint and Highpoint knowingly received part of the share sale proceeds. 31 However, in my view, the plaintiffs have not established that there is a danger that a prospective judgment in their favour would be wholly or partly unsatisfied because the Montagnese defendants might dispose of, deal with or diminish in value their assets (being the relevant aspect of r 7.35(4)(b)). 32 Insofar as the plaintiffs rely on the sale of the Northpoint Drive Property, the evidence filed by the Montagnese defendants shows that this was in train before Ms Montagnese had notice of the proceeding. I do not consider the fact that Northpoint has sold the property to demonstrate that there is a risk of the Montagnese defendants dissipating their assets. It is true that Northpoint proceeded to enter into a contract to sell the property after it had notice of the claims made in this proceeding (including the claim that the property is held on a constructive trust for the plaintiffs). However, I do not consider this fact to demonstrate a risk of dissipation, in circumstances where there are significant legal and factual issues in relation to the constructive trust claim, as outlined in the oral submissions made by the Montagnese defendants. In particular, the constructive trust claim, as currently pleaded in paragraph 69 of the statement of claim, is dependent on the alleged "channel stuffing" in FY 2016 (see paragraphs 58 and 59 of the statement of claim). Although paragraph 19(a) of the statement of claim suggests that the alleged channel stuffing relates to both a dealer controlled by Ms Montagnese (Caravans on Cooper) and other NAC dealerships, the further and better particulars provided by the plaintiffs (see page 14 of the annexures to Mr Gatto's affidavit) indicate that the allegation for FY 2016 relates only to Caravans on Cooper. The factual material relating to the number of "stock caravans" in the yard of Caravans on Cooper during FY 2016 (see paragraph 48 of Mr Gatto's affidavit) shows only a slight increase in the number of stock caravans in the period from September 2015. On the basis of this material, the allegation of channel stuffing in FY 2016 does not appear to be strong. Further, if made out, the financial impact would appear to be modest. 33 Insofar as the plaintiffs rely on the nature of the allegations in the proceeding, and the strength of those allegations, I am not persuaded that these matters demonstrate a risk of the Montagnese defendants dissipating their assets. The allegations of misleading and deceptive conduct are not of the same character as the allegations discussed in some of the cases (eg, fraudulent misrepresentation) where the allegations themselves have indicated a risk of dissipation. Although the statement of claim does contain an allegation relating to knowledge (paragraph 37), the misleading or deceptive conduct case is not presented as a case of fraudulent misrepresentation. In relation to the alleged breaches of director's duties, while these are undoubtedly serious allegations, I am not persuaded on the basis of the present material that these allegations are sufficiently strong to ground an inference that there is a risk of dissipation of assets. I refer to the discussion above of the channel stuffing allegation in relation to FY 2016. I am also not persuaded that the allegations of channel stuffing in relation to later years, and the allegations regarding loans to dealers, are sufficiently strong to ground such an inference. As for the allegations relating to conversion of the two caravans, there are contested factual issues in relation to these allegations, and I am not persuaded that these allegations are sufficient to ground an inference of a risk of dissipation of assets. 34 Insofar as the plaintiffs rely on the shredding of documents, there are contested factual issues relating to the circumstances in which this occurred. I do not consider that these events provide a basis to infer that there is a risk of dissipation of assets. 35 Similarly, in relation to the alleged wiping of the laptop, there are contested factual issues, and I am not persuaded that the allegation provides a basis to infer that there is a risk of dissipation of assets. 36 Further, I do not consider the other facts and matters relied on by the plaintiffs to provide a basis to infer that there is a risk of dissipation of assets. 37 In light of the above, I do not consider there to be a proper basis to make a freezing order in the circumstances of this case. 38 The plaintiffs have applied for an order requiring the Montagnese defendants to provide information about their assets. The plaintiffs apply for such an order on two alternative bases. First, they apply for such an order as an ancillary order to the making of a freezing order. In the alternative, they apply for such an order as an ancillary order in relation to a prospective freezing order, noting that r 7.33 refers to both a "freezing order" and a "prospective freezing order". In my view, in the circumstances of this case, and having regard to the matters discussed above, no freezing order is in prospect. Accordingly, I do not consider the reference in the rule to a "prospective freezing order" to provide a basis to make an order for the provision of information of the kind sought by the plaintiffs. 39 It follows that the interlocutory application is to be dismissed. I will hear from the parties in relation to costs. [Discussion with counsel took place in relation to costs.] I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky.

SCHEDULE OF PARTIES VID 597 of 2021 Defendants Fourth Defendant: NORTHPOINT DRIVE HOLDINGS PTY LTD (ACN 609 630 668) Fifth Defendant: HIGHPOINT DRIVE HOLDINGS PTY LTD (ACN 607 370 141) Cross-Claimants Second Cross-Claimant: G MONTAGNESE NOMINEES PTY LTD (ACN 601 854 488) (IN ITS OWN CAPACITY AND AS BARE TRUSTEE FOR GABRIELLE MONTAGNESE) Third Cross-Claimant: A.C.N. 147 489 889 PTY LTD