Solicitors:
W&H Lawyers Australia (plaintiff)
Marsdens Law Group (defendants)
File Number(s): 2016/ 254904
[2]
Judgment (ex tempore)
HIS HONOUR: On 13 September 2016 for reasons given that day (see in the matter of Gondon Five Pty Ltd [2016] NSWSC 1401), I made orders including the following:
(1) Until further order the second defendant Gondon Five be restrained from by itself, its servants and agents, alienating, encumbering or otherwise adversely dealing with the units at 1-9 Allengrove Crescent, North Ryde or the proceeds of their sale, otherwise than in selling and/or completing the sale of the units, paying proper adjustments on completion of any sale, paying legal expenses agents' commission and selling costs in respect of any such sale, paying to the relevant taxation authority any taxation liability properly payable, repaying to any lender the outstanding amount of its loan (where such repayment is made with the prior written agreement of the plaintiff), repaying to the first defendant CFAM the amount outstanding in respect of its loan, and remitting the balance to CFAM by way of dividend or return of capital.
(2) Until further order the first defendant CFAM be restrained from by itself, its servants and agents, alienating, encumbering or otherwise adversely dealing with any amount received by it henceforth from Gondon Five, whether by way of loan repayment, dividend or return of capital, up to the total of $2,704,005 plus one-third of the amount so received ("the preserved sum"), provided that it is not a contravention of this order for CFAM to make repayments and/or distributions to the plaintiff, including from the proceeds of sale of any of the reserved units referred to in the letter agreement dated 5 September and executed 16 October 2015, and in the event that any such repayment or distribution is made to her, the preserved sum shall be reduced by the amount so paid or distributed to her.
Those orders contained no express carve-out for reasonable legal expenses of the second defendant or the first defendant respectively. By interlocutory process filed on 8 October 2016, the defendants seek an order varying the orders of 13 September by inserting in order (1), before the words "and remitting the balance", the matter:
the payment of expenses incurred in the ordinary course of business, including reasonably incurred legal fees and disbursements
and by inserting in order (2), after the words, "it is not a contravention of this order for CFAM to make", the words:
payment of expenses incurred in the ordinary course of business, including reasonably incurred legal fees and disbursements.
At the interlocutory hearing which culminated in the judgment of 13 September 2016, there was some affidavit evidence, given by a solicitor, that the estimated costs of the defence of the proceedings by all the defendants up to and including the final hearing would be in excess of $500,000. On the present application, evidence has been adduced that the defendants have to date incurred costs and disbursements of $217,000, at what is really only an early stage of the litigation. In addition, there are now additional proceedings against each defendant; in the District Court, by the plaintiff's ex-husband against CFAM; and in the Common Law Division, by Wang against Gondon Five. Both of these appear to be claims for repayments of loans.
It is not in doubt, and I do not doubt, that as a general proposition a freezing order should not prevent the payment of legal costs and expenses reasonably incurred by a defendant in the defence of proceedings. But that is a general proposition, and subject to the following qualifications. First, it does not mean that there must be an express carve-out for legal costs if the practical effect of the order as framed is not to prevent the payment of reasonably incurred legal costs. An express carve-out will more typically be required when the freezing order applies to all assets, and not only to some of the assets of the defendant. Secondly, the proposition is at its strongest where a freezing order is granted in aid of a claim for an unsecured debt or damages. That situation is to be distinguished from a case where the plaintiff has a proprietary claim; in such a case there is no principle that entitles a defendant to expend the plaintiff's property on its own defence. Likewise, where the plaintiff is a secured creditor, there is no principle that a defendant is entitled to erode the plaintiff's security for the purposes of its own defence. Thus, while as a matter of ordinary practice, where a freezing order is granted in respect of all assets of a defendant in connection with an unsecured claim for debt or damages, a carve-out will normally be expressly reserved in the order, that will not necessarily be the case where the order extends only to some of the defendants' assets, or is in aid of a proprietary claim or a secured claim.
In the judgment of 13 September 2016, I said (at [52]) that I thought that the draft orders which had been formulated and provided to counsel for consideration made clear that a carve-out would not be required, as the "unpreserved" two-thirds of whatever may be received by CFAM is available for distribution. To expand upon the reasoning that underpinned that observation, it is necessary to make some observations about the structure of the entities involved.
The second defendant Gondon Five is wholly owned by CFAM in its capacity as trustee of the Ciu Family Trust. That is to say, all the shares in Gondon Five are trust assets, and the beneficial owner of Gondon Five is the trust. Gondon Five is involved in the present proceedings because it is a potential respondent to a derivative claim which the plaintiff seeks leave to bring in the name and on behalf of CFAM against it and because it is the repository of trust property. Leave to bring the claim against it under (CTH) Corporations Act 2001, s 237, has not yet been considered or granted. Gondon Five is now also a defendant to the Wang claim in the Common Law Division which, as I have said, appears to be a debt claim. Because Gondon Five is wholly owned by the trust, and because all the shares in it are trust assets, its decisions in respect of litigation against it, including whether, to what extent and at what expense to defend it, should be informed by the interests of the trust as the beneficial owner of Gondon Five.
CFAM is, of course, the trustee of the trust. It is engaged in the present proceedings as defendant to the plaintiff's personal claim of debt against it in its capacity as trustee of the trust for funds allegedly advanced by the plaintiff to the trust, and also because it is the respondent to a claim for its removal and replacement as trustee. Finally, it is involved because it is the corporation in respect of which the plaintiff seeks leave under s 237 to bring proceedings against Gondon Five. CFAM is now also the defendant to the additional claim in the District Court by the plaintiff's ex-husband. There is no suggestion that CFAM has any capacity other than that of trustee of the trust. Accordingly, its decisions in respect of any litigation brought against it, including whether, to what extent and at what expense to defend it, should be informed by the interests of the trust as a whole. It may well be entitled, if not now then retrospectively, to indemnity in respect of the claim for its removal and replacement, at least if it is successful in resisting that claim and even possibly if it is not; but ultimately the question of the expenditure of any of the trust assets on litigation is a question of propriety for the trustee.
Accordingly, as it seems to me, ultimately the interests of the trust as a whole are the touchstones for decisions in respect of Gondon Five's defence of this litigation and any other litigation against it, and in respect of CFAM's defence of this litigation and any other litigation against it. While the orders of 13 September have the effect of prohibiting Gondon Five from expending the proceeds of sale of the North Ryde development on its own litigation costs, it does not prohibit CFAM from doing so, except to the extent that doing so would impinge on the preserved sum. If CFAM forms the opinion that it is in the interests of the trust that Gondon Five should be funded to defend the proceedings against it, then there is nothing prohibiting CFAM from resorting to its assets to do so, save to the extent that doing so would erode the preserved sum referred to in order (2) of 13 September.
As explained in the judgment of 13 September, CFAM appears to have net assets which are not subject to the freezing order of $3,551,742 (see [27] of the judgment). In addition, it has anticipated receipts from Gondon Five of a total of about $28 million after tax, being in excess of $12 million in repayment of the loan, and in excess of $15 million by way of dividend or return of capital after tax. The order requires that something in the vicinity of $9 or $10 million of that be preserved, assuming that it is all received; but the order operates so that only $2,700,000 is required to be preserved at the outset, and in addition one-third of the funds to be received from Gondon Five from time to time, as and when they are received. Accordingly, it would seem that there should be in the order of at least $16 million available from the receipts from Gondon Five, plus $3,500,000 of net assets not subject to the injunction, out of which CFAM can - if so minded and if it decides that it is proper to do so - fund its own defence of these and any other proceedings; fund Gondon Five's defence of these and any other proceedings to the extent that it is in the interests of the trust that those proceedings be defended; make distributions to Jinsong, and make distributions to Yolanda.
No evidence has been adduced to suggest that the calculations which were tentatively made in the previous judgment are misconceived or incorrect. No evidence has been adduced to show that funds in the order that I then contemplated will not be readily available to CFAM. The objection was made that the funds could be expended on Gondon Five's litigation only if CFAM first determined that it would be in the interests of the trust to do so, but I do not see why that is an objection, given that Gondon Five is essentially a trust asset.
Accordingly, the defendants have wholly failed to show that the orders have the effect of preventing them from paying their reasonable legal expenses of these or other proceedings in so far as doing so is a proper trust expense. Nothing I have said should be taken as judicial advice to the effect that they would be justified in incurring those expenses. If such advice is sought, and it may be that as a matter of prudence it should be, it should be sought in a separate application and probably from another Judge.
By consent, the Court orders that:
1. The interlocutory process filed 8 October 2016 be amended as follows:
1. In para 2, the words "originating process" are deleted and replaced by the words "statement of claim".
The Court further orders that:
1. Paragraph 4 of the interlocutory process filed on 8 October 2016 be dismissed with costs assessed in sum of $5,500, payable forthwith.
2. Upon the undertaking of Grant Butterfield to pay the appropriate filing fees, the defendants have leave to file in court the notice of motion in the form initialled by me, dated this day and placed with the papers, such motion to be returnable for hearing on 10 November 2016 at 10am before me.
The Court directs that:
1. Common Law Division proceedings 2016/302763 be listed before me at that time.
2. The defendants lodge with my Associate and serve any submissions and further evidence in relation to the application in para 2 of the interlocutory process of 8 October 2016, and the notice of motion of 18 October 2016, by 24 October 2016.
3. The plaintiff lodge with my Associate and serve any submissions in respect of those applications by 7 November 2016, together with any proposed amended statement of claim.
4. Any submissions in reply by the defendants should be served by close of business on 9 November 2016.
5. Paragraph 2 of the interlocutory process of 8 October 2016 and the notice of motion of 18 October 2016 be fixed for hearing before me on 10 November 2016.
[3]
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Decision last updated: 09 November 2016