Karim (Overseas) Pty Limited v Francis

Supreme Court of NSW|2020-09-15|Before: Henry J, Karim P

Judgment

On 10 September 2020, the plaintiff (Karim Overseas) obtained an ex parte injunction restraining the first defendant (Mr Francis) from dealing with funds received from the liquidators of Karim Pty Limited (in liq) (Karim P/L) until 15 September 2020.
On 15 September 2020, the matter came before me when sitting as Duty Judge. On that occasion, Karim Overseas sought an order extending the injunction pending determination of the proceedings or further order. Karim Overseas claims to be entitled to the relief on the basis that Mr Francis holds the funds as constructive trustee in favour of Karim Overseas.
Mr Francis opposed the making of the order. He contended that the injunction should be discharged due to a lack of candour when ex parte relief was being sought and that, in any event, the injunction should be refused on balance of convenience grounds.
At the end of the hearing, I ordered the injunction be continued until 5pm on 6 October 2020 and directed Karim Overseas to file evidence in support of its claims by 29 September 2020. I gave summary reasons at the time and indicated that I would provide more detailed reasons later. These are those reasons.
In support of its application for an extension of the injunction, Karim Overseas read three affidavits of its solicitor, David Balog, sworn 9 September 2020, 10 September 2020 and 15 September 2020. Mr Francis read an affidavit of his solicitor, Felicity Healy, sworn 15 September 2020.

Background

Karim Overseas is an exporter of meat products and livestock from Australia.
Mr Francis is the former General Manager of Karim Overseas. He left its employ in April 2018.
The second defendant, Kevin Nol, is the sole director and company secretary of Karim Overseas and holds 80% of its shares.
On 8 December 2010, Mr Francis and Mr Nol incorporated Karim P/L. They each were a director and held 50% of the shares.
On 1 February 2012, Karim P/L purchased a property at Penshurst Street, Willoughby for $1.36 million (Willoughby property).
The funds used to pay for the Willoughby property came from a Westpac bank account in the name of Karim Overseas and a term deposit account in the joint names of Mr Francis and Mr Nol (joint account). The money in the joint account also came from funds held by or payable to Karim Overseas. The funds used to purchase the Willoughby property were recorded in Karim P/L's books and accounts as loans to Karim P/L from Mr Francis and Mr Nol personally.
On 18 March 2019, Karim P/L was wound up on just and equitable grounds on application by Mr Nol and liquidators were appointed.
On 9 May 2019, Karim Overseas submitted a proof of debt to the liquidators for $2,067,688.12, which included the funds used to purchase the Willoughby property. In its proof of debt, Karim Overseas asserted that the funds used to purchase the Willoughby property were advanced as a loan to Karim P/L. In submissions in support of the proof of debt, Mr Nol and Karim Overseas also asserted that Mr Francis had manipulated the funds used to purchase the Willoughby property and that Mr Nol was not privy to the transactions.
On 14 May 2019, Mr Francis submitted a proof of debt to the liquidators for $696,021.63. He asserted that the funds used to purchase the Willoughby Property were advanced by way of two loans to Karim P/L from Mr Francis and Mr Nol in equal parts and that the amount claimed in the proof of debt remained owing to him.
On 2 June 2020, the liquidators issued a report for Karim P/L's shareholders that stated that the liquidators intended to accept Mr Francis' proof of debt and reject that of Karim Overseas. It also noted that a company related to Mr Nol's superannuation fund had offered to acquire the Willoughby property for $1,825,000.
On 9 July 2020, the liquidators issued a report to creditors. On the same day, the liquidators' solicitor sent an email to the solicitors for Mr Francis and Mr Nol advising that the liquidators intended to adjudicate on the proofs of debt lodged by Mr Francis, Karim Overseas and any other creditors on 16 August 2020 by admitting Mr Francis' proof of debt and rejecting the proof of debt from Karim Overseas. The email also stated that, on or around 13 September 2020, the liquidators would make distributions to Mr Francis and to any other creditor with an admitted proof of debt consequent upon the adjudications.
On 31 July 2020, Mr Nol submitted a proof of debt to the liquidator in the amount of $696,021.63.
On 2 August 2019, the liquidators completed the sale of the Willoughby property to a third party, receiving net proceeds of $1,463,273.
On 17 August 2020, the liquidators formally rejected the proof of debt lodged by Karim Overseas.
Karim Overseas did not challenge the liquidators' decision to reject its proof of debt. Rather, on 9 September 2020, it commenced these proceedings claiming that Karim P/L, by its liquidators, holds the proceeds of sale of the Willoughby property on constructive trust for Karim Overseas and that any funds disbursed to Mr Francis and Mr Nol are also held on constructive trust in favour of Karim Overseas. Karim Overseas' claims are based on allegations that: 1. Mr Francis and Mr Nol breached their fiduciary duties by using Karim Overseas' funds to purchase the Willoughby property and improperly recording the receipt of those funds in Karim P/L's books and accounts as loans from Mr Francis and Mr Nol; 2. Karim P/L knew about the breaches of fiduciary duties, received the funds and now holds them as constructive trustee; and 3. Mr Francis unconscionably denies any obligation to account for his share of the funds and intends to receive and disburse his share of them for his own purposes.
Karim Overseas seeks declaratory relief, orders restraining Mr Francis and Mr Nol from dealing with their intended distributions from the liquidators in the amount of $696,021.63 and orders that they both pay those amounts to Karim Overseas.
Also on 9 September 2020, Mr Nol directed the liquidators to pay any monies to be distributed to him to Karim Overseas. In the proceedings, Karim Overseas contends that Mr Nol has acknowledged his obligation to account for those funds.
In the morning of 10 September 2020, the solicitors for the liquidators sent an email to the solicitors for Karim Overseas and Mr Francis advising that the liquidators had admitted the proofs of debt submitted by Mr Francis and Mr Nol and that they intended to distribute the amounts of $696,021.63 to each of them on 11 September 2020.
At 3.00pm on 10 September 2020, Karim Overseas' application for injunctive relief was heard on an ex parte basis by Rein J sitting as the Equity duty judge. His Honour granted the injunction on the basis of the usual undertaking as to damages in the following terms: 5. ORDER that up to 5pm on Tuesday, 15 September 2020 the First Defendant be restrained by himself, his servants and agent from disbursing, transferring, paying, charging, encumbering or dealing with any payment received by him from the Liquidators of Karim Pty Limited (In Liquidation) (Company) by way of distribution to the First Defendant as a creditor of the Company otherwise than by paying the said moneys to the Plaintiff or alternatively dealing with the said moneys in accordance with the directions of the Court.
On 11 September 2020, the liquidators paid Mr Nol's distribution in the amount of $696,021.63 to Karim Overseas in accordance with Mr Nol's direction dated 9 September 2020. They also paid Mr Francis' distribution into his solicitor's trust account, pending the outcome of the further hearing on 15 September 2020.
According to Ms Healy's evidence, Mr Francis intends to use the funds received from the liquidators to pay down amounts on a loan relating to his home in Kyle Bay that is owned by Mr Francis and his wife jointly. Ms Healy also gives evidence that Mr Francis' business has been significantly impacted at the moment and that he is living on credit cards.

Should the injunction be discharged?

The first issue raised by the submissions was whether the injunction should be discharged because Karim Overseas had failed to disclose material matters to Rein J.
Mr Francis submitted that Karim Overseas had not been frank and lacked candour when making its application for ex parte relief for three reasons. First, Karim Overseas had created a false sense of urgency to the application by failing to disclose that it had known about the liquidators proposed date of distribution since 9 July 2020. Second, Karim Overseas failed to inform the Court that its proof of debt to the liquidators referred to the funds being advanced by way of loan, rather than the funds having been taken by Mr Francis and Mr Nol in breach of their fiduciary duties. The third matter raised was that there was no evidence of any risk of dissipation by Mr Francis.
I was not persuaded that there had been a lack of candour or disclosure such that the injunction should be discharged.
The evidence before Rein J comprised two affidavits from Mr Balog, of 9 and 10 September 2020, both of which were also read on this application. Mr Balog's 9 September 2020 affidavit exhibited four liquidators reports dated 2 June, 5 June, 18 June and 9 July 2020. The reports refer to Karim Overseas' proof of debt and its assertion that the funds used to purchase the Willoughby property were advanced as a loan to Karim P/L by Karim Overseas. They also make clear that Karim Overseas contended that Mr Francis, but not Mr Nol, had failed to carry out his duties along the lines advanced in this case: see for example, page 6 and 7 of the 2 June 2020 Report.
At the hearing, Rein J indicated that he had looked at the papers, which included Mr Balog's affidavit of 9 September 2020. He was also taken to parts of the liquidators reports during the course of oral submissions. While his Honour's attention was not specifically drawn to those parts of the reports that refer to Karim Overseas' proof of debt, during oral submissions reference was made to the liquidators view that the money had been loaned and the nature of this case. In these circumstances, I was satisfied that the relevant material concerning Karim Overseas' proof of debt had been placed before Rein J and the nature of the case before the liquidators compared to that now advanced before this Court was brought to his attention: cf Harrem Pty Ltd v Tebb [2006] NSWSC 1415.
Similarly, the liquidators report dated 9 July 2020 exhibited to Mr Balog's 9 September 2020 affidavit includes a timeline for the proposed dividend distribution process. That timeline refers to 13 September 2020 as the last day for the notice of declaration of a first and final dividend to be provided to creditors: at page 5. While accepting that the 9 July report and the liquidators email of the same date referring to a distribution to Mr Francis on 13 September were not specifically drawn to His Honour's attention on the ex parte application, it seemed to me that there was material placed before the Court that indicated that Karim Overseas was on notice, from as early as 9 July, that the funds were to be distributed on 13 September 2020. At the hearing, Karim Overseas also informed Rein J that it became aware, on 9 September 2020, that the liquidators intended to bring forward the distribution by two days, which was accurate, and that prior to 9 September it had anticipated that the distribution would be made on 13 September 2020, which was consistent with the information contained in the 5 June 2020 report. Having regard to the above, I did not consider there had been a failure to disclose matters which were material to the making of the ex parte order: Nutek Constructions Pty Ltd v Slotwinski [2017] NSWSC 1795 at [25] and [26].
The material before Rein J also included evidence from Mr Balog that Karim Overseas was concerned that the moneys which it claims are subject to trust in its favour will be disbursed by Mr Francis: Affidavit, David Balog, 9 September 2020 at [34]. While that evidence was in very general terms, it was evidence which was open to the Court to accept or reject. Accordingly, I was not satisfied that there had been any failure to disclose material evidence regarding any risk of dissipation of funds.

Should the injunction be extended?

At the hearing, Counsel for Mr Francis did not contest that there was a serious question to be tried. As he put it, Mr Francis was prepared to proceed on the basis that the pleadings disclosed a prima facie case that Mr Francis breached his fiduciary duty. He did, however, note that there would be a contest between the parties as to the circumstances in which the funds came out of Karim Overseas and reserved Mr Francis' right to argue that there were deficiencies with the pleading and a lack of particularisation.
On that basis, and because the pleaded case of breach of fiduciary duty by Mr Francis, if established, would arguably give rise to a remedial constructive trust over the funds in favour of Karim Overseas, I accepted that a serious question to be tried had been established that Karim Overseas would be entitled to final relief as sought in these proceedings: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 at 68 (Gleeson CJ and Crennan J) and 81-84 (Gummow and Hayne JJ).
The contest at the hearing was on balance of convenience grounds. The factors relevant to the balance of convenience include whether, if the injunction is not granted, Karim Overseas will suffer harm for which damages will not be an adequate remedy. The Court will consider the risks of doing injustice according to whether the injunction is granted or refused. It considers what would be the loss and inconvenience to Karim Overseas if the injunction is not granted, compared to the loss to Mr Francis if it is granted: Castlemaine Toohey Limited v South Australia (1986) 161 CLR 148; [1986] HCA 58 at 153; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1 at 622-623.
The essence of Karim Overseas' submission on balance of convenience was that refusing to grant the injunction would lead to the trust funds being paid away onto Mr Francis' mortgage, with a significant risk that the funds would not be recoverable in the future. Karim Overseas also submitted that Mr Francis would be adequately protected by its undertaking as to damages and that Mr Francis was unlikely to be prejudiced by the injunction as he had given no good reason why the funds were needed now.
At the hearing, Mr Francis took issue with the adequacy of the undertaking as to damages, arguing that there was no evidence as to its value. I did not accept that submission. The evidence disclosed that Karim Overseas had cash on hand of around $7.990 million: Affidavit, David Balog, 15 September 2020, Ex DCB-2 at 12. I was satisfied that the evidence demonstrated the adequacy and value of Karim Overseas' undertaking as to damages.
Mr Francis also argued that there was no risk of dissipation of the funds as the money was intended to be used to pay down his mortgage and there was no clear evidence of dishonest conduct which would support the inference that the funds would not be preserved by Mr Francis. Mr Francis relied on the observations of Giles J, as referred to by the Court of Appeal in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (Patterson v BTR) at 322, that a Court would very likely require strong evidence of an intention to dispose of a matrimonial home, if that was a defendant's only asset, when considering whether or not there has been shown to be a risk that assets will be lost in the absence of a Mareva injunction.
Counsel for Mr Francis submitted that using the funds to increase the equity value in Mr Francis' home, which was an asset within the Court's jurisdiction, meant there was no increased risk that Mr Francis would be unable to satisfy any judgment. In any event, he submitted that the Court could fashion an order to protect Karim Overseas by making it conditional on the property not being further encumbered.
I was not persuaded by Mr Francis' submission on this issue. I was not satisfied that the Court could fashion an order of the type suggested by Mr Francis' counsel that would adequately protect Karim Overseas in circumstances where the property in question is jointly owned by Mr and Mrs Francis and Mrs Francis was not a party to these proceedings. While an order may have been able to be crafted to impose a restriction on Mr Francis, I did not consider it open to the Court to make an order restricting Mrs Francis' dealings with the property. Mr Francis' counsel was asked whether an undertaking would be proffered by Mr and Mrs Francis not to further encumber or reduce the equity in the property so as to enable access to the funds at a later time if needed. None was forthcoming despite Karim Overseas having indicated that such an undertaking might have resolved the need for an injunction.
Unlike the position in Patterson v BTR, Karim Overseas was not seeking a freezing order over Mr and Mrs Francis' home or Mr Francis' other assets. Rather, it was seeking to restrain Mr Francis from using funds which are subject to a claim of a constructive trust in favour of Karim Overseas. There was also no evidence of the amount of available equity in the property. The absence of that evidence, the evidence that Mr Francis is in a weak financial position and the other matters referred to above, led me to conclude that there was a risk to Karim Overseas that the funds the subject of its claim might not be recovered in the future in the absence of injunctive relief.
Mr Francis also contended that Karim Overseas' decision to bring these proceedings rather than appealing the liquidator's decision to reject its proof of debt and its delay in bringing the application were factors that weighed against the grant of extending the injunction. I did not consider Karim Overseas' decision to forego an appeal as significant in this case. As Karim Overseas submitted, doing so may have led to further delay and cost and an outcome which would have required litigation of this nature in any event.
The issue of delay was, to my mind, of more consequence. Even accepting Karim Overseas' submission that it would have been premature to bring the proceedings until the liquidators had formally ruled on its proof of debt on 17 August 2020, in my view, no adequate explanation was given as to why the proceedings were not brought during the period between 18 August and 9 September 2020. That said, I was not persuaded that this delay was, by itself, a sufficient basis to warrant refusing the grant of interlocutory relief.
While finely balanced, I would have been inclined to extend the injunction until final determination of the proceedings or until further order. The factor that persuaded me not to do so at this stage and to only extend the injunction for three weeks was the doubt raised during submissions and by the liquidators' reports about the strength of the case advanced by Karim Overseas.
As Mr Francis submitted, the liquidators rejected Karim Overseas' claim that it loaned funds to Karim P/L to purchase the Willoughby property and that Mr Nol was not privy to the impugned transactions. He also contended that the liquidator accepted his submissions (which would also be his defence in these proceedings) that Mr Nol and Mr Francis agreed to use the profits from Karim Overseas' business to acquire properties, in which they would each hold a 50% interest, and there had been no breach of duty on his part. Mr Francis contended that the liquidators' findings on these matters were indicative of the relative strength of the parties' positions in these proceedings and a factor that weighed heavily against the grant of interlocutory relief.
Karim Overseas submitted that the Court could not, based on the liquidators' reasoning, pre-judge the claim now being advanced that Mr Francis and Mr Nol sourced the funds from Karim Overseas in breach of their fiduciary duties.
While accepting that the Court must form its own views of the merits of the claims made by Karim Overseas in this case, in my view, there was force to Mr Francis' submissions on this issue. Leaving to one side the liquidators' conclusions, the position adopted by Mr Nol and Karim Overseas during the liquidators investigations, to the effect that Mr Francis was the only relevant person involved in the transactions and in breach of duty, is seemingly inconsistent with the case being advanced in these proceedings, to the effect that both Mr Francis and Mr Nol were involved and breached their fiduciary duties to Karim Overseas. Mr Nol has filed a submitting appearance in these proceedings. He has seemingly accepted the allegations made against him by acknowledging his obligation to account for the funds to Karim Overseas. In my view, this change of position raised a doubt about the strength of Karim Overseas' case and whether an extension of the injunction until final determination was warranted at this stage of the proceedings.
For this reason, I concluded that the interests of justice dictated that the injunction should be extended for a short period of time only and to order Karim Overseas to serve its evidence in support of its claim. This was primarily for the reason that I did not consider there was sufficient material before the Court to properly assess the strength of Karim Overseas' case, particularly as the evidence at the hearing did not deal with Mr Nol's involvement in the transactions, whether he had knowledge of Mr Francis' alleged conduct or whether there was some agreement of the nature alleged by Mr Francis before the liquidators. Requiring Karim Overseas to serve its evidence in support of its claims should enable the Court to be in a position to better assess the merits of Karim Overseas' claims and determine whether a further extension of the injunction is justified on the next occasion.
I also considered that extending the injunction for a short period would best preserve the status quo by maintaining the fund rather than allowing it to be used to pay down Mr Francis' home loan and would not cause substantial prejudice to Mr Francis.

Orders

For these reasons, I made the following orders and directions: 1. On the usual undertaking as to damages given by the plaintiff, order 5 of the orders made by Rein J on 10 September 2020 be continued up until 5pm on 6 October 2020 2. Direct the plaintiff to file and serve its affidavit evidence in support of the claims set out in the statement of claim filed on 9 September 2020 and any evidence in support of its claim for interlocutory relief by 29 September 2020. 3. Direct the defendant to file and serve any evidence in relation to the plaintiff's claim for interlocutory relief by 2 October 2020. 4. List the matter before the duty judge in Equity at 10am on 6 October 2020. 5. Direct that these orders be taken out forthwith.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 October 2020

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