Judgment - EX TEMPORE
Revised from transcript; issued 1 July 2021
Before the Court is an application for a freezing order in a mortgage case. The mortgagee has exercised its power of sale. The mortgagors seek to restrain the mortgagee from paying out a sum of $11 million, which forms part of the proceeds of sale of the mortgaged properties.
The defendant mortgagee, GEMI 160 Pty Limited ("GEMI 160"), is a subsidiary in a group of companies involved in lending for property projects. The holding company of the group is GEMI Holdings Pty Limited. I will refer to the group as "the GEMI Group".
The plaintiff mortgagors are four companies which were originally controlled by Rebecca Bich Nghi Huynh and her brother Wing Cheung. Following their default under the loan agreement, GEMI 160 has appointed receivers and managers to the companies. These proceedings have been brought in the name of the companies on the instructions of Ms Huynh and Mr Cheung, who are the directors. They claim to have standing to exercise the companies' rights when the receivers and managers will not do so. It is not necessary for the purposes of this judgment to make any ruling on the standing question.
[2]
Background and procedural history
The loan in question involved a borrowing of $23.4 million by the plaintiff companies from GEMI 160. The loan agreement was dated 1 July 2020, and the loan moneys were drawn down on 3 July.
Security for the loan included first ranking mortgages on commercial properties in the City of Sydney owned by the plaintiff companies. Those properties are at Dixon Street and Goulburn Street.
The loan was repayable in January 2021. The principal amount was not repaid and, as I have mentioned, GEMI 160, in the exercise of its powers under the security documentation, appointed receivers and managers to the plaintiff companies.
GEMI 160 later proceeded to exercise its power of sale over the Dixon Street and Goulburn Street properties. The properties appear to have been sold in May 2021. The sale of the Dixon Street property settled on 27 May. The amount received appears to have been approximately $10.5 million.
The settlement of the Goulburn Street sale has been rescheduled on several occasions. Earlier it was scheduled for 11 June 2021. Later it was rescheduled to the date of the hearing, last Friday, 25 June. But it has been deferred at least until today to allow me to deliver this judgment. The sale amount is slightly more than $20 million.
There is a second security-holder who holds an unregistered second ranking mortgage over the Goulburn Street property, Hasting Capital Pty Limited ("Hasting"). The amount owed to Hasting appears to be approximately $800,000.
In these proceedings the plaintiff companies make two main allegations against GEMI 160. The first is that both the Dixon Street and Goulburn Street properties were sold for less than they were truly worth. The second claim is that some of the fees which have been charged to the plaintiffs' loan account by GEMI 160 since the loan went into default are penalties and are therefore unrecoverable.
GEMI 160 is a single venture company which was established for the purpose of the loan transaction which is the subject of these proceedings. The moneys to fund the loan came from third party investors. GEMI 160 had no assets of substance of its own.
The third party investment took the form of a standard form agreement styled "Limited Recourse Loan Agreement" ("LRLA") between each investor and GEMI 160. This provided for the investor to lend to GEMI 160 a share of the monies to be lent by GEMI 160 to the plaintiff companies.
Under cl 4.6 of the LRLA, GEMI 160 was obliged to repay to the investors the amounts lent by them within four business days of the due date for repayment of the loan by GEMI 160 to the plaintiff companies. Similarly, the rate of interest payable to the investors under the LRLA corresponded with the rate of interest payable to GEMI 160 by the plaintiff companies, except for a margin representing profit to GEMI 160.
Under cl 6 of the LRLA, the arrangement was expressly made a limited recourse one. GEMI 160's liability to its investor lenders was limited to what was defined as the "Aggregate Amount Available". This was essentially to be the moneys which GEMI 160 collected from the plaintiff companies less any expenses associated with recovering the loans and, of course, the interest margin.
Such were the arrangements when the funds were raised from the initial investors and lent to the plaintiff companies in July 2020. Thereafter, the GEMI Group permitted "shares" in the loan to the plaintiff companies to be traded among investors. An existing investor might "sell" that investor's "share", in whole or part, to an incoming (or existing) investor. This was documented by the investors involved executing fresh LRLAs which reflected their new "shares" of the loan.
The overall effect is not unlike corporate debt being parcelled up into debentures which can be acquired and traded by investors, except that in such structures the debt is held by the lender on trust for the debenture holders. Under the structure in the present case GEMI 160 is not a trustee. The investor lenders have no interest in the loan from GEMI 160 to the plaintiff companies, but only rights as limited recourse unsecured creditors against GEMI 160.
The limited recourse nature of the scheme has the effect that any shortfall, or costs, associated with attempting to recover the loan to the plaintiff companies are ultimately borne pro rata by the investors. In addition, clause 7.3 of the LRLA provides:
The Lender [investor] must at all times release, discharge, indemnify and keep indemnified the Borrower [GEMI 160], and its directors, executives, managers, other officers and Associates from and against all claims, demands, obligations, losses, damages, costs and expenses of any kind which may be imposed on, incurred by or asserted against the Borrower or its directors, executives, managers, other officers and Associates in any way relating to or arising out of the enforcements of its rights under the Loan Agreement and Securities. Where the Lender has funded only part of the Sponsor [the ultimate borrower, in this case the plaintiff companies] Facility Amount that indemnity is limited to the Lender's Proportion of all such claims, demands, obligations, losses, damages, costs and expenses.
As I have mentioned, GEMI 160 was obliged to repay to the investors the amounts lent by them within four business days of the due date for repayment of the loan to the plaintiff companies. GEMI 160 has thus been in default of its repayment obligation under the LRLAs since shortly after the plaintiff companies defaulted in January. In the absence of payment from the plaintiff companies, GEMI 160's interest obligations to the investors have been funded by another entity or entities in the GEMI Group.
I interpolate that while some of the investors appear to be external parties, others are associates of the GEMI Group. Substantial shares of the debt owed to the investor lenders are now held by another GEMI subsidiary, called GEMI Investments Pty Limited, and by two trusts which are managed by another GEMI subsidiary.
The LRLAs do not apparently contain any express provision which would give GEMI 160 the right to withhold moneys due to the investor lenders against the possibility that claims are made against GEMI 160 which might reduce the Aggregate Amount Available. And even if, as a matter of practicality, it would be open to GEMI 160 to retain sufficient funds to meet the plaintiff companies' claims if those claims are successful, it has no obligation to do so.
In these circumstances the concern of Ms Huynh on behalf of the plaintiff companies is that once the moneys are available from the sale of the Goulburn Street property, it can be expected that those moneys will be paid out to the investor lenders, leaving nothing to cover the plaintiffs' claims (and that is indeed GEMI 160's intention). Hence this application.
The proceedings were commenced urgently in the Duty List and an ex parte freezing order was obtained on 11 June. Since then the order has been continued without objection on the part of GEMI 160, but on an interim basis only.
The application to have the freezing order continue until the hearing, or until further order, came before me last Friday, 25 June, for determination. Counsel for the plaintiff companies acknowledged that the onus lay on his clients to justify the continuation of the order.
[3]
Application for freezing order
The order sought by the plaintiff companies is modelled on the standard form of order attached to Practice Note No. SC Gen 14. As with the standard form of order (paragraph 6(a)), the order sought provides that GEMI 160 "must not remove from Australia or in any way dispose of, deal with, or diminish the value of any of your assets in Australia up to the unencumbered value of $11 million".
Also consistently with the standard form of order, this obligation is then made the subject of various exceptions. One of them, which is not controversial except as to the amount, is for payment of GEMI 160's reasonable legal expenses. The other two, which reflect exceptions in paragraphs 10(c) and (d) of the standard form of order, would, broadly speaking, permit GEMI 160 (subject to giving notice) to deal with or dispose of any of its assets: (1) in the ordinary and proper course of its business; and (2) to discharge obligations bona fide and properly incurred under a contract entered into before the order was made.
But engrafted onto the orders sought are two carve-outs which reduce the scope of the exceptions. The first would prevent GEMI 160 from making any payments to investor lenders who are associates of the GEMI Group. The second would prevent any payments to investor lenders to the extent that their investments were made after 3 July 2020, when the loan was originally drawn down.
Counsel for GEMI 160 opposed the making of any freezing order of this type. Counsel advanced various arguments.
[4]
Payment to pre-existing creditors
As I understood it, counsel argued that in the circumstances of this case the Court simply lacked power to make the freezing order sought. It is convenient to deal with this argument first.
In support of this argument counsel pointed out that, while the structure adopted for the external investors to put their money into the loan will leave GEMI 160 with no or minimal assets, this was a feature of the investment structure which had been adopted long before there was any dispute. It cannot be seen as a step taken as part of a conscious attempt to defeat the exercise of the Court's jurisdiction.
Counsel also submitted that the purpose of a freezing order is to protect the plaintiff from the possibility of any dissipation of assets. Counsel submitted that no dissipation was present in this case, because GEMI 160's net assets were always zero or insubstantial. The value of the asset represented by the loan was matched by equivalent liabilities to the investor lenders.
It is clear from authority at the highest level in Australia that the court can only make a freezing order for a legitimate purpose. In Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 617, two members of the majority, Wilson and Dawson JJ, said that the remedy "must be necessary to prevent the abuse of the process of the court". Their Honours added (at 618) that the court "cannot prevent the defendant from disposing of his assets merely because he fears there will be nothing against which to enforce its judgment".
Brennan J (at 621) similarly indicated that it was impermissible to make an order "which goes beyond what is reasonable protection of a legal or equitable right which the court may enforce by judgment". In his Honour's view, orders of that type were properly directed to a "scheme which a debtor may devise for divesting himself of assets" (my emphasis). Deane J (at 622) spoke similarly, describing the remedy's proper field of operation as being to prevent a defendant from "disposing of his assets so as to create a situation in which any judgment obtained against him would not be satisfied" (my emphasis).
These passages, and especially the parts I have emphasised, provide some support for counsel's submissions. They suggest that a freezing order is only justified to restrain a defendant from taking voluntary steps to remove assets from the reach of legal action in the knowledge or expectation of such action being brought.
But there are statements in the authorities which put the jurisdiction on a wider basis, focussing simply on the effect of the steps taken by the defendant. One comes from Deane J himself in Jackson at 623 where he cited with approval the statement of principle by Lord Denning MR in Rahman (Prince Abdul) v Abu-Taha [1980] 1 WLR 1268 at 1273 that an order is available where "the circumstances are such that there is a danger that the plaintiff, if he gets judgment, will not be able to get it satisfied". And in National Australia Bank Ltd v Bond Brewing Holdings Pty Ltd (1990) 169 CLR 271 at 277, a three-member Bench of the High Court (Mason CJ, Brennan and Deane JJ) stated that the view that a freezing order cannot be obtained "in the absence of a positive intention to frustrate any judgment" is mistaken. Their Honours cited Deane J in Jackson at 623 for this proposition.
The doctrinal basis of freezing orders was considered again by the High Court in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. In that case, echoing Wilson and Dawson JJ in Sterling, the Court (Gaudron, McHugh, Gummow and Callinan JJ) discussed the foundation for such orders in terms which drew a parallel with abuse of process. The Court quoted from CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345 at 391 (emphasis in the original):
The counterpart of a court's power to prevent its processes being abused is its power to protect the integrity of those processes once set in motion.
The reference to abuse of process is arguably significant. That is because, in deciding whether the bringing of proceedings constitutes an abuse of process, the focus of the court is not on the effect which the proceeding would have on the defendant, but on the purpose of the plaintiff. It is only if that purpose is in some way illegitimate that the plaintiff will be prevented from doing what he is lawfully permitted to do: see, for example, Williams v Spautz (1992) 174 CLR 509, especially at 521-522.
On its own this suggests that the remedy may be confined to actions taken for a purpose which can somehow be characterised as illegitimate. But in the same paragraph of the judgment the Court went on to describe a freezing order as appropriate for "preserving the efficacy of the execution which would lie against the actual prospective judgment debtor". They also adopted (at 393-394 [26]) what had been said in National Australia Bank about there being no need for any positive intention to frustrate enforcement of the court's judgment.
These further observations are consistent with the broader view that all that is required is that the defendant take action which in fact will or may lead to assets not being available by way of execution. Having said that, however, the Court pointed to the need for guidelines and rules to govern the exercise of the discretion for the making of a freezing order so as to prevent the remedy being abused.
Turning to the specific powers of this Court, the application is for an order under Part 25, Division 2 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). Such an order is defined in r 25.11(1) as one which is made:
for the purpose of preventing the frustration or inhibition of the court's process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied.
That rule thus contains no express limitation referring to the purpose of the defendant.
Practice Note No. SC Gen 14 provides in cl 5:
The purpose of a freezing order is to prevent frustration or abuse of the process of the Court, not to provide security in respect of a judgment or order.
Clause 12 further provides:
The order should, where appropriate, exclude dealings by the respondent with its assets for legitimate purposes, in particular:
(a) payment of ordinary living expenses;
(b) payment of reasonable legal expenses;
(c) dealings and dispositions in the ordinary and proper course of the respondent's business, including paying business expenses bona fide and properly incurred; and
(d) dealings and dispositions in the discharge of obligations bona fide and properly incurred under a contract entered into before the order was made.
However, as the Practice Note itself points out at cl 2, the Note is intended to express the Court's usual practice. It does not limit the Court's power under the Rules.
I am sitting at first instance and have not heard full argument on the question of the Court's power. At the very least, there is some support for the view that the power is not limited to preventing the defendant from voluntarily taking steps in response to legal proceedings, or the possibility of legal proceedings. On the material I have cited that may be the better view. At all events I am not prepared to say that the Court has no power to grant the order sought.
Having said that, the points raised in argument are clearly relevant to the way in which the Court should exercise its powers. In this regard, counsel for the plaintiff companies relied on the decision of the English Court of Appeal in Atlas Maritime Co SA v Avalon Maritime Ltd; The Coral Rose (No 1) [1991] 4 All ER 769.
The defendant in that case was a wholly owned subsidiary of a Swiss company involved in commodity trading. The defendant purchased a damaged ship and made repairs to it with funds advanced by the parent company. The ship represented the company's only significant asset.
Later, the defendant entered into negotiations with the plaintiff to sell the ship to it. The deal fell through and the plaintiff commenced proceedings for breach of contract. The defendant then sold the ship to a third party. An order was obtained freezing the defendant's assets to the extent of US$3 million. The defendant transferred the proceeds of sale less the US$3 million to the parent company by way of repayment of the funds advanced.
The plaintiff's claim that there was a contract which had been wrongfully repudiated was upheld, but the determination of the damages claim was referred to arbitration. The defendant then applied to discharge the injunction to enable it to transfer the US$3 million to its parent company. The defendant contended that it had a bona fide liability to its parent company which predated the dispute with the plaintiff: see Iraqi Ministry of Defence v Arcepey Shipping Co SA; The Angel Bell [1981] QB 65.
All three members of the Court of Appeal accepted that the defendant was indebted to its parent company. Nevertheless, the Court declined to permit the moneys to be paid over.
One of the critical factors for Neill LJ, who gave the leading judgment, was the close link between the defendant and its parent company. He rejected the suggestion that the corporate veil could be pierced so that the defendant company could be regarded as the alter ego of its parent, but continued (at 776):
Nevertheless in the exercise of a discretion in relation to injunctive relief 'the eye of equity' (see Jones v Lipman [1962] 1 All ER 442 at 445, [1962] 1 WLR 832 at 836 per Russell J) can, I think, look behind the corporate veil in order to do justice. This approach was recognised by Danckwerts LJ in Merchandise Transport Ltd v British Transport Commission [1961] 3 All ER 495 at 518, [1962] 2 QB 173 at 206, where he said:
[W]here the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.
Counsel for the plaintiff companies submitted that the present circumstances are relevantly the same insofar as the freezing order is sought to prevent payments being made by GEMI 160 to related entities of the GEMI Group. But I think there are significant differences.
In the Coral Rose case, the arrangements between the defendant and its Swiss parent were highly informal. Although the Court of Appeal judges rejected the view which the trial judge had formed that the defendant was an agent of the parent, nonetheless the loan was hardly an arm's length one. The judges characterised the repayment as one of loan capital. In particular, Staughton LJ pointed out (at 780G-H) that in the ordinary course the debt would not have been repaid until "the prosperity of [the defendant] permitted it".
The present case is quite different. Some of the lender investors are related parties, but others are at arm's length. The terms of the LRLAs are the same in each case. Moreover, the LRLAs contain specific provisions requiring repayment. Although the arrangement is a limited recourse one, it is clear that the desire on the part of GEMI 160 to repay the investor lenders is based on real and enforceable obligations which were entered into long before there was any thought of the dispute which now exists.
The other observation that I would make about the decision in the Coral Rose case is that in Cardile the High Court criticised the English authorities on freezing orders as "lacking any firm doctrinal foundation". By contrast the decision confirms in Australia that the basis for a freezing order is, and is only, the court's inherent power (or implied power in the case of a statutory court) to protect its own processes. The High Court was at pains to point out (at 394-399 [27]-[40]) that a freezing order does not derive from the jurisdiction to grant an interlocutory injunction. Consistently with this, the power is not confined to courts having an equitable jurisdiction and may be exercised in aid of common law claims. This makes the reference in Neill LJ's judgment to the "eye of equity" particularly questionable in an Australian context.
A further feature of the present case, which in my view is of great importance, is the indemnity created by cl 7.3. Counsel for the plaintiff companies suggested that the clause did not cover claims by third parties; it simply prevented investor lenders from themselves making any claim against GEMI 160 for any default or breach of duty in conducting the sale of the properties. I do not read the clause that way. In particular, that construction seems to me to be difficult to reconcile with the fact that the clause itself confers an indemnity. That indemnity is worded in general terms and, in its natural meaning, would extend to claims made by third parties, including in the present case where the plaintiff companies are borrowers, as well as claims made by the investor lenders themselves. Counsel for GEMI 160 propounded the same reading of the clause.
In these circumstances, it would seem that if the plaintiff companies' claims succeed against GEMI 160 then GEMI 160 will have a right of indemnity back against the investor lenders. It is true, as counsel for the plaintiff companies pointed out, that they cannot themselves litigate that claim for indemnity and are dependent on that being done by GEMI 160. However, I do not see why I should assume that the directors of GEMI 160, or the receivers (if they are in control of its affairs at the time), would not pursue an apparently good cause of action for indemnity so as to protect its interests. Even if they were not prepared to do so, a liquidator would certainly be entitled to pursue the claim.
Accordingly, I question whether the payment of moneys out to the investor lenders involves any unreasonable interference with the process of the Court. No doubt it would be more convenient for the plaintiff companies if the money was frozen in GEMI 160's hands, but a freezing order is an extraordinary remedy which is not granted merely to make it easier for plaintiffs to recover amounts which they claim.
[5]
Prima facie case and balance of convenience
I should say something briefly about the other points which were debated.
First, counsel for GEMI 160 contended that the plaintiffs' claim was a weak one. In the case of the Dixon Street property, the plaintiff makes four complaints about the sale: first, it is said that the agent who was retained by GEMI 160 was inexperienced in the sale of properties of this kind; second, it was said that the property was left in disarray, which would have reduced its selling value; third, there was no advertising on the site; and fourth, the sale took place by way of expression of interest rather than by auction.
In the case of Goulburn Street, there was an auction, but the property was sold beforehand. The plaintiff companies complain about this and also allege that at least one of the interested parties had been told the amount owed under the loan. The suggestion was that this would have led offerors to tailor their bids to the amount owed rather than offering the full value of the property.
The evidence before me in support of these allegations was unimpressive. There was no evidence of an expert nature commenting on the sales. Instead, the evidence took the form of reported views expressed by real estate agent acquaintances of Ms Huynh and by Ms Huynh herself.
The evidence on quantum was also unimpressive. Valuation reports were in evidence which had been obtained from a professional valuation firm in March in connection with a possible refinancing of the properties with another lender. These valued the Goulburn Street property at $21.5 million and the Dixon Street property at $13 million. Ms Huynh, however, stated that in her experience as a property investor, such valuations were always conservative. She advanced her own figures of $23 to $24 million for Goulburn Street and $15 million for Dixon Street.
It is true that the independent valuations are somewhat above the price paid, but there is little support for the additional values attributed to the properties by Ms Huynh, at least at this stage. Her evidence really does not rise beyond assertion.
A second area of debate concerned the value of Ms Huynh's undertaking as to damages. In her affidavit in support of the application she referred to her home which she half-owns with her husband or partner. It is a substantial house at Strathfield.
There was some debate as to the house's value. For GEMI 160, desk-top or kerb-side valuations were produced, which ranged between $2.2 and $2.5 million. Ms Huynh relied on market appraisals which were significantly higher.
In her initial affidavit, which was presented to the Court when ex parte relief was obtained on 11 June, Ms Huynh stated expressly that the Strathfield property was unencumbered. This was incorrect. In fact, the property was the subject of a mortgage with Westpac Banking Corporation ("Westpac"), with the amount secured being approximately $500,000.
In addition, Hasting, the second mortgagee on the Goulburn Street property, holds a second equitable security over Ms Huynh's share of the Strathfield property for the amount owed to it. In fact, following the default by the plaintiff companies, Hasting commenced proceedings in this Court in March in which it sought an order for sale of the property under s 66G of the Conveyancing Act 1919 (NSW) in order to enforce its equitable security over Ms Huynh's half-share. And as well, under the loan documentation with the plaintiff companies, GEMI 160 is entitled to security over Ms Huynh's share of the Strathfield property for any amounts owing to it.
Affidavits were subsequently filed to explain why the incorrect statement had been made that the property was unencumbered. Those affidavits came from Ms Huynh herself and from her solicitor. According to the affidavits, Ms Huynh had made the solicitor aware of the loan from Westpac, and the solicitor was also aware of the proceedings by Hasting. The explanation offered was that the matter had been overlooked in the rush and Ms Huynh had not checked her affidavit before swearing it. I must say that it seems strange that such an obvious mistake could have been made. However, there was no cross-examination and it was not possible for the Court on this application to reach any concluded view.
Based on the figures which have been presented to the Court, the sale of the Goulburn Street property will result, after payment of all amounts claimed by GEMI 160 and the payment of the $800,000 to Hasting, in a surplus. Ms Huynh made assumptions about the amounts to be paid out by way of costs of sale and to the receivers, and she estimated a surplus of $500,000. It is also clear on any view that Ms Huynh's half-share of the Strathfield property, assuming that the Hasting loan is discharged on the proceeds and nothing is owing to GEMI 160, will have a substantial equity value of at least $1 million.
According to counsel for GEMI 160, interest on the moneys that will be restrained, if the orders sought by the plaintiff companies were granted, amounts to approximately $900,000 per annum. Given the potential for expedition, I think it is clear that the undertaking as to damages would have sufficient value at least to obtain a freezing order lasting for several months.
[6]
Conclusion
In conclusion, I return to whether it is appropriate to make an order in the circumstances which I have described, namely an order preventing GEMI 160 from making payment to the investor lenders who are associates of the GEMI Group, or who made their investments after the loan was drawn down on 3 July.
I have already referred to the difficulties in distinguishing between third party investors and related party investors. As I have pointed out, there is no relevant difference in the legal documentation. The fact that the plaintiff companies accept that ordinary third party investors should be able to be paid out is, in my view, an acknowledgement that the Court should not make a freezing order which would prevent the discharge of obligations which were entered into bona fide before the orders were made. Once this concession is accepted, it is hard to see why, where the related parties have invested on the same arm's length terms, they should not also be able to be paid out.
The attempt to have the order exclude the payment of investors who invested in the structure after the initial loan gives rise to somewhat different considerations. Counsel for the plaintiff companies took me to the terms of the LRLAs. As counsel pointed out, the terms of the LRLAs are, in certain respects, ill-suited for the position of investors who came in after the loan was initially made to the plaintiff companies. Counsel suggested that such investors had no contractual right of repayment and that, accordingly, no exception should be made in their favour.
I do not accept this submission. In the first place, it is far from clear that post-loan investors would have no contractual right of repayment. The question is ultimately one of the interpretation of the LRLAs. Despite the sloppiness in using the original form of the LRLA for subsequent investments, the instrument must be read in its actual context and given a sensible construction consistent with the operation which the parties must have intended that it would have had. It would be an extreme result to conclude that the whole process of subsequent investors signing a LRLA was contractually ineffective, and that clearly could not have been intended, either by the investors or by GEMI 160 as borrower.
Furthermore, counsel did not suggest that even if there were no contractual rights of repayment, GEMI 160 would receive a windfall. Counsel accepted, as I understood it, that at least there would be some restitutionary obligation to repay the moneys.
In these circumstances, it seems to me that the fact that the liability may not be a contractual liability, but instead may be a liability in restitution arising out of an ineffective contract, makes no difference. It is still a liability arising out of events and transactions which relevantly took place before the order was made or contemplated.
In my view this is simply a case where the circumstances do not justify the making of the freezing order sought. If it is necessary to balance the interests of the plaintiffs against those of the defendant and the investors who stand behind it, then the result is the same. Taking into account the circumstances of the case, including in particular the weakness of the plaintiffs' claims on the present evidence and the existence of a mechanism under cl 7.3 for those claims, if successful, to be brought home to the investors in due course, then I would conclude, in the exercise of my judgment, that the balance is against the plaintiffs.
Before parting with the case, I should say that the application was presented entirely as one based on the Court's freezing order jurisdiction under the Rules. That was appropriate so far as the major part of the claim, namely the allegation of sale at an under-value, was concerned. That is an unsecured claim which, if successful, will require GEMI 160 to bring the value allegedly foregone to account.
The penalty claim, so far as the fees are concerned, gives rise to slightly different considerations. If successful, it will result in GEMI 160 having to disgorge that part of the proceeds of sale which were applied to those fees. In the language of account, it is a claim for a falsification, not a surcharge.
It may be that an application for an order restraining GEMI 160 from appropriating those moneys to itself under the terms of its mortgage could have been mounted under the Court's ordinary jurisdiction to grant an interlocutory injunction so as to preserve the subject matter of the proceedings, or possibly under the Court's powers with respect to property under UCPR Part 28, Division 1. These possibilities were not debated before me and I say nothing about them.
[7]
Conclusions and orders
For the reasons which I have given, the application for freezing order relief should be refused.
(Counsel addressed on the form of order and costs, and were directed to bring in a minute of order reflecting the decision)
On 29 June the following orders were made in accordance with the terms of the minute of order agreed by counsel:
1. The notice of motion filed in the proceeding on 11 June 2021, as amended on 25 June 2021, is dismissed.
2. The plaintiffs to pay the defendant's costs of, and associated with, the notice of motion (including the costs of the hearings on 15, 17 and 25 June 2021), as agreed or assessed.
3. The proceeding to proceed by way of pleading.
4. The matter to be listed before the Registrar on 12 July 2021.
The Court notes:
1. The defendant undertakes not to distribute, or otherwise deal with, the sum of $1,903,198.71, identified at page 8 of Exhibit JE-4, without giving 14 days written notice to the Plaintiffs.
[8]
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Decision last updated: 01 July 2021