Insolvency Guardian Melbourne Pty Ltd v Carlei

NAME AND ADDRESS OF APPLICANT'S LAWYERS The applicant's lawyers are: Rostron Carlyle Lawyers, Level 15, 270 Adelaide Street, Brisbane QLD 4000, Attention: Mr. Billy Fitzgerald, Tel: 07 3009 8444, Fax: 07 3009 8499 E: b.fitzgerald@rclaw.com.au Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

EDELMAN J: 1 This urgent application was brought last night for an ex parte freezing order. It involves an application by Insolvency Guardian Melbourne Pty Ltd (Insolvency Guardian (Melbourne)) pursuant to r 7.32 of the Federal Court Rules 2011 (Cth). It is for freezing orders including over the bank accounts of the first and second respondents. These are my oral reasons which summarise the basis for the application and explain, for the benefit of the respondents to whom I will direct that these reasons be provided, why I have made the freezing order, which is returnable for hearing in the Brisbane Registry of the Federal Court of Australia on 17 February 2016 at not before 9.30 am. 2 The reasons which follow are based only upon the affidavit evidence of the applicant. That evidence has not yet been tested. It has not been contradicted. The respondents have not had the opportunity to make any submissions about this evidence. For that reason, any assessment in these reasons of whether the "applicant has a good arguable case on a prospective cause of action" is necessarily a provisional and highly tentative assessment. 3 In Frigo v Culhaci (unreported; 17 July 1998), in a passage quoted with approval in Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380, the New South Wales Court of Appeal said at 10-11 that a freezing order is "is a drastic remedy which should not be granted lightly". It is an order which: imposes a severe restriction upon a defendant's right to deal with his or her assets. It is granted at the suit of a plaintiff whose status as a creditor is in dispute and who need not be a secured creditor. Its purpose is to preserve the status quo, not to change it in favour of the plaintiff. The function of the order is not to 'provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied; nor is it to improve the position of the plaintiff in the event of the defendant's insolvency'. ... 4 Nevertheless, I am satisfied that the freezing order should be granted as sought by Insolvency Guardian (Melbourne) with liberty to apply on one day's notice.

The facts asserted on this application 5 The facts giving rise to this application are described in the affidavit of Mr Jarrod Sierocki which is sworn on behalf of Insolvency Guardian. Mr Sierocki is the sole director of Insolvency Guardian. 6 The applicant company (Insolvency Guardian (Melbourne) was established in 2014 in Melbourne, closely associated with Insolvency Guardian. The two companies worked closely together to assist clients who were insolvent, nearing insolvency, or in financial distress. Mr Sierocki describes the two companies as "offices" in his affidavit. 7 The first respondent, Mr Philip Carlei, was a contractor for Insolvency Guardian (Melbourne). From around February 2014, Mr Carlei was the sole person engaged in the Melbourne office. His position entailed following up leads generated by Insolvency Guardian, either himself or through Mr Sierocki's referral network. Mr Carlei had a great deal of autonomy and worked largely unsupervised. However, all of the administrative work and advertising was performed by employees of Insolvency Guardian, and paid for at its Brisbane office. 8 On 21 January 2015, Mr Carlei was appointed as a director of Insolvency Guardian (Melbourne). His remuneration was the equivalent of 50 per cent of the fees charged to the clients he introduced. The fees would be charged and received by Insolvency Guardian, who would then pay 50 per cent of that amount to Mr Carlei. 9 The Melbourne office did not reap the same financial rewards as the Brisbane office. On 9 December 2015, Mr Sierocki decided that Insolvency Guardian (Melbourne) would cease trading. 10 Around mid-December 2015, Mr Carlei informed Mr Sierocki that he intended to resign as a director of Insolvency Guardian (Melbourne). Mr Carlei lodged a Form 370 with the Australian Securities and Investments Commission giving notice of his resignation as director on 6 January 2016. The form said that Mr Carlei had resigned as a director on 30 June 2015. However, Mr Sierocki says that neither he nor anyone else at Insolvency Guardian received this resignation until mid-December. 11 Following Mr Carlei's resignation, Mr Sierocki arranged for all emails sent to Mr Carlei to be diverted to Mr Sierocki's email address. In late January, Mr Sierocki received three emails that revealed that Mr Carlei may have continued to conduct business in the name of Insolvency Guardian (Melbourne) despite having resigned as a director. Mr Sierocki became aware that Mr Carlei had received money as payment for that work into bank accounts that were not controlled by Insolvency Guardian or Insolvency Guardian (Melbourne). 12 Those emails, as well as two more emails sent to Mr Carlei after his oral intention to resign in December, suggest that payments of $22,000 and $385 were made into accounts not owned by Insolvency Guardian. The sum of $385 was paid into an account operated by the second defendant, Zuppa Soup Kitchen Pty Ltd. Mr Carlei is the sole director and company secretary of Zuppa Soup Kitchen. 13 Mr Sierocki has not yet fully inspected the emails that were received by Mr Carlei following his resignation. But Mr Sierocki says that he suspects that Mr Carlei may have received up to $400,000 in profits that should have been paid to Insolvency Guardian (Melbourne). This suspicion is due to (i) the poor performance of Insolvency Guardian (Melbourne), (ii) the number of matters referred to Insolvency Guardian (Melbourne), (iii) the rates at which Insolvency Guardian converted such referrals into clients, and (iv) the fees charged by Insolvency Guardian. 14 Counsel for Insolvency Guardian (Melbourne) properly acknowledged that a possible argument that Mr Carlei might make is that he was acting on his own account in working for, and receiving funds from, the clients described in the affidavit evidence. As counsel said, there are a number of serious questions that would be raised by such an explanation. One of those questions is why Mr Carlei was receiving emails from those clients at his Insolvency Guardian email account. Another is why Mr Carlei was engaged in work for, or opportunities related to, matters which appear to be within the business opportunities of Insolvency Guardian (Melbourne) while he was (as counsel asserted) a director of Insolvency Guardian (Melbourne).

Rule 7.32 of the Federal Court Rules 2011 (Cth) 15 Rule 7.32(1) of the Federal Court Rules 2011 (Cth) empowers the Court to make an ex parte freezing order "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." By r 7.32(2) the freezing order may restrain a respondent from dealing with or removing any assets located in or outside Australia. The purpose of the provision is not to enable an applicant to obtain security for its judgment in advance of execution. Rather, it is founded on the jurisdiction of the court to prevent abuses of its processes. A freezing order may be made before a cause of action has accrued, and before judgment. The High Court of Australia upheld the validity of the Western Australian Supreme Court equivalent of r 7.32 in PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36; (2015) 89 ALJR 975. 16 The criteria that must be satisfied for the court to grant a freezing order are set out in r 7.35 of the Federal Court Rules 2011 (Cth). In substance, the criteria relevant to this application are that: (1) the applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the Federal Court of Australia; (2) there is a sufficient prospect that the judgment will be registered in or enforced by the Federal Court of Australia; and (3) the Court is satisfied, having regard to all the circumstances, that there is a danger that a prospective judgment will be wholly or partly unsatisfied because any of the following might occur: (a) the judgment debtor, prospective judgment debtor or another person absconds; or (b) the assets of the judgment debtor, prospective judgment debtor or another person are: (i) removed from Australia or from a place inside or outside Australia; or (ii) disposed of, dealt with or diminished in value.

Is it appropriate to grant a freezing order? 17 Each of the three criteria discussed above are considered separately below before I turn to the exercise of overall discretion and the manner in which the freezing order should be fashioned to protect, as far as possible, the interests of the respondents who are not present before the court and have not had the opportunity to make submissions or provide evidence.

1. Good arguable case on a prospective cause of action 18 The applicant must establish a good arguable case on a prospective cause of action. The phrase 'a good arguable case' has a long history. Its provenance may have been in the judgment of Mustill J, as his Lordship was then, in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG [1984] 1 All ER 398, 404. The phrase has been treated as the equivalent of the general law requirement explained by Gaudron, McHugh, Gummow and Callinan JJ in Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 at [68] that the applicant must establish that it has a reasonably arguable case on legal and factual matters (see also BGC Contracting Pty Ltd v Western Australian Construction Hire Pty Ltd [2010] WASC 25 [5] (Le Miere J); Perdaman Chemicals & Fertilisers Pty Ltd v The Griffin Coal Mining Company Pty Ltd [2011] WASC 188 [144] (Beech J)). Further, it is not sufficient merely to assert a claim in an affidavit or pleading in order to establish a good arguable case. 19 In oral submissions, counsel for Insolvency Guardian (Melbourne) explained that his client undertook to bring proceedings in the Federal Court of Australia (Queensland Registry) within 14 days. Consistently with his obligations to put all issues before the Court, counsel indicated that Mr Carlei was based in Melbourne and may seek to have the proceedings transferred to Melbourne. That is a matter that can be addressed if, and when, it arises. It suffices to note that with videolink technology, directions and any interlocutory matters can be dealt with via videolink in the immediate future. 20 The prospective causes of action upon which Insolvency Australia relies were described in broad terms by counsel. He characterised the prospective actions against Mr Carlei as actions for breach of director's duties and corresponding common law and equitable duties. This appears to be a reference to causes of action which include: (1) a breach of s 180 of the Corporations Act 2011 (Cth) and an associated claim in equity insofar as Mr Carlei breached any duty of care and diligence as a director of the applicant; (2) a breach of s 182 of the Corporations Act 2011 (Cth) and an associated claim in equity insofar as Mr Carlei improperly used his position to gain an advantage for himself or someone else and cause detriment to the company; or (3) a breach of s 183 of the Corporations Act 2011 (Cth) and an associated claim in equity insofar as Mr Carlei improperly used information obtained from his position to gain an advantage for himself or someone else and cause detriment to the company. 21 As for the prospective cause of action against Zuppa Soup Kitchen Pty Ltd, counsel initially described this action as based on its involvement in what was described as a "scheme" by Mr Carlei. Although reference was made by counsel to the receipt of funds by Zuppa Soup Kitchen, his characterisation appeared to be a reference to a cause of action based on the second limb of Barnes v Addy (1874) LR 9 Ch App 244, 251-252 or Eaves v Hickson (1861) 30 Beav 136, 141; (1861) 54 ER 840, 842. These actions are not limited by the amount received but can extend to the sums lost by an applicant. 22 Based upon the facts that I have described, I consider that there is a good arguable case, within the meaning of that phrase that I have described, against each respondent for up to $400,000.

2. Sufficient prospect that the judgment will be registered in or enforced by the Federal Court of Australia 23 There is sufficient prospect that a judgment obtained as a consequence of a good arguable case described above would have sufficient prospects of being enforced by the Federal Court of Australia.

3. Danger that a prospective judgment will be wholly or partly unsatisfied 24 The next question is whether "there is a danger that a prospective judgment will be wholly or partly unsatisfied" because (relevantly, in the circumstances of this case) the respondents might "dispose of, deal with or diminish in value" their assets. This is a matter that must be established by evidence and not merely by assertion. There must be a risk which is "palpable and demonstrated by evidence" rather than residing "only as a suspicion in the mind of an overly anxious plaintiff": Bayley and Associates Pty Ltd v DBR Australia Pty Ltd [2012] FCA 746 at [34] (Foster J). However, in National Australia Bank Ltd v Bond Brewing Holdings Ltd [1990] HCA 10; (1990) 169 CLR 271, Mason CJ, Brennan and Deane JJ explained that a freezing order could be obtained even where there was not shown to be a positive intention by the party against whom the order was sought to frustrate any judgment. 25 In the circumstances I have described, particularly the serious concern raised in the affidavit of Mr Sierocki concerning what counsel described as the "scheme" to divert funds from Insolvency Guardian or Insolvency Guardian (Melbourne), I am satisfied that there is a danger that Mr Carlei or Zuppa Soup Kitchen would deal with his and its assets in a fashion which would leave Insolvency Guardian (Melbourne) unable to have a judgment satisfied.

Conclusion 26 I am satisfied that the freezing order should be made. 27 The applicant has made this application ex parte. As I have explained, and as the New South Wales Court of Appeal said in Frigo v Culhaci (unreported; Court of Appeal of NSW, 17 July 1998, 10-11), in a passage quoted with approval in Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380, a freezing order "is a drastic remedy which should not be granted lightly". 28 The serious nature of the freezing order and the ex parte application have the effect that the freezing order must be fashioned to ensure that the order is not abused. As Gaudron, McHugh, Gummow and Callinan JJ said in Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 at [50], the granting of a Mareva order is bound to have a significant impact on the property of the person against whom it is made: in a practical sense it operates as a very tight "negative pledge" species of security over property, to which the contempt sanction is attached. It requires a high degree of caution on the part of a court invited to make an order of that kind. An order lightly or wrongly granted may have a capacity to impair or restrict commerce just as much as one appropriately granted may facilitate and ensure its due conduct. 29 One way in which the order can, and should, be narrowed to protect the interests of the respondents is for them to have liberty to apply with one day's notice and for the matter to be returnable within a week. 30 The form of the freezing order sought is also appropriate. It is in the order set out in the current Federal Court of Australia Practice Direction. There are appropriate carve-outs from the order in respect of living expenses, legal fees and ordinary existing obligations. I am also satisfied that the undertakings given by Insolvency Guardian (Melbourne) and Mr Sierocki are of substance. Mr Sierocki deposes to having substantial net assets and will provide an irrevocable bank undertaking in the amount of $5,000 on or before 12 February 2016. 31 Finally, any concern that the freezing order might affect any trading activities of Zuppa Soup Kitchen is mitigated by the following matters: (1) Zuppa Soup Kitchen is a $12 company; (2) shareholders of Zuppa Soup Kitchen are companies associated with Mr Carlei; (3) Mr Carlei is the sole director of, and only shareholder of the companies that hold shares in, Zuppa Soup Kitchen; (4) Zuppa Soup Kitchen was established 7 months ago while Mr Carlei was working full time for Insolvency Guardian (Melbourne). 32 For the above reasons, I order that a freezing order is to be made returnable on Wednesday 17 February 2016 at 9.30 am. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.