Kassem (liquidator), in the matter of GKIII Hospitality Group Pty Ltd (in liq) v Khouzame

Federal Court of Australia|2024-04-05|Before: Mr J, Halley J

Prayer 1 to Prayer 8 of the originating process filed on 5 April 2024 (originating process) be returnable instanter.
Pursuant to r 1.39 and r 10.24 of the Federal Court Rules 2011 (Cth) (Rules), the time for service of the originating process and supporting affidavit of Ozem Kassem affirmed on 5 April 2024, be abridged and in lieu of personal service, service of those documents and a sealed copy of these orders (Documents) be effected by: (a) delivering the Documents to 66 Payten Avenue, Roselands NSW 2196, by 9.30 pm on Friday, 5 April 2024; (b) sending the Documents by way of email, by 7.30 pm on Friday, 5 April 2024 to: (i) chady.khouzame@gmail.com; (ii) afaf@khouzamelegal.com.au; (c) delivering the Documents, by 11.00 am on Monday, 8 April 2024 to: (i) c/- Khouzame Legal Pty Ltd, Suite 8, Level 2, 398 Chapel Road, Bankstown NSW 2200; and (ii) c/- SJS Advisory Group Pty Ltd, Suite 901, Level 9, 50 Clarence Street, Sydney NSW 2000.
Pursuant to s 1323 of the Corporations Act 2001 (Cth), orders be made against: (a) the first defendant in the form annexed to these orders and marked "Annexure A" and "Annexure B"; and (b) the second defendant in the form annexed to these orders and marked "Annexure C" and "Annexure D".
The proceeding be listed before the Commercial and Corporations Duty Judge at 10.15 am on Thursday, 11 April 2024.
These orders be entered forthwith. ANNEXURE A Freezing Order [The order entered is available on the Commonwealth Courts Portal, which attaches the freezing order] ANNEXURE B Information Eliciting Order [The order entered is available on the Commonwealth Courts Portal, which attaches the information eliciting order] ANNEXURE C Freezing Order [The order entered is available on the Commonwealth Courts Portal, which attaches the freezing order] ANNEXURE D Information Eliciting Order [The order entered is available on the Commonwealth Courts Portal, which attaches the information eliciting order] Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

A. Introduction 1 On 5 April 2024, I made ex parte orders as the Commercial and Corporations Duty Judge, under s 1323 of the Corporations Act 2001 (Cth) (Act), freezing the assets of the defendants up to the value of $670,000 (Freezing Orders). 2 The first plaintiff, Ozem Kassem, is the liquidator of the second plaintiff, GKIII Group Pty Ltd (in liq) (Company). 3 The first defendant, Chady Khouzame, is the sole director and secretary of the Company, and the second defendant, GKIII Holding Pty Ltd, is the holding company of the Company (GKIII Holding). 4 The plaintiffs seek to pursue in these proceedings insolvent trading claims under s 588M and s 588W of the Act against the defendants. 5 The plaintiffs' application for the Freezing Orders was urgent because according to PEXA records, Mr Khouzame was likely to complete the sale of the only remaining real property in his name on Monday, 8 April 2024. 6 The plaintiffs relied upon an affidavit of Mr Kassem affirmed on 5 April 2024. 7 These are my reasons for making the Freezing Orders.

B. Background 8 The Company was incorporated on 16 December 2015 and carried on the business of operating a nightclub in the CBD of Sydney, known as "The Carter". 9 Mr Khouzame was appointed as a director and secretary of the Company on 28 June 2021. He was the sole director and secretary of the Company at the time of Mr Kassem's appointment as liquidator. 10 GKIII Holding has owned all of the 100 ordinary shares on issue in the Company since 6 September 2021. Mr Khouzame has also been the sole director and secretary of GKIII Holding since 6 September 2021. 11 On or about 12 July 2023, the Company was served with a creditor's statutory demand by Jay Productions & Events Pty Ltd (Jay Productions). The Company did not comply with the statutory demand. 12 On 11 August 2023, the Company appointed Jessie Wang and Cliff Sanderson of Restructuring Works, as joint and several small business restructuring practitioners, under Pt 5.3B of the Act. 13 On the same day, Jay Productions commenced winding up proceedings against the Company in the Supreme Court of New South Wales. 14 On 13 October 2023, the Company entered into a restructuring plan which, among other things, provided for a distribution of funds to creditors by 13 January 2024 (Restructuring Plan). No distribution was made to creditors by that time or thereafter. 15 On 8 December 2023, Mr Khouzame sold a property he owned in Condell Park, NSW, for $1,900,000 (first Condell Park property). Mr Kassem is not aware of how the proceeds for that sale were applied. 16 On 5 February 2024, the Restructuring Plan was terminated, and the Company was wound up by orders of the Supreme Court of New South Wales. 17 On the same day, Mr Kassem caused a letter to be sent to Mr Khouzame, requiring, among other matters, that he deliver up the Company's books and records, and provide a completed report on company activities and property. Mr Kassem also gave notice under s 530A of the Act that Mr Khouzame was required to attend a meeting at Mr Kassem's offices to enable Mr Kassem to obtain information regarding the Company's affairs. 18 Mr Kassem caused property ownership searches of the records maintained by New South Wales Land Titles to be conducted in relation to Mr Khouzame. Those searches revealed that Mr Khouzame was the owner of the first Condell Park property, as well as another property in Condell Park (second Condell Park property). 19 On 8 February 2024, the second Condell Park property was listed for sale by auction. 20 On 26 February 2024, Mr Khouzame provided Mr Kassem with a report on company activities and property. Mr Khouzame, however, has not attended any meeting with Mr Kassem. 21 On 9 March 2024, the second Condell Park property was sold at auction for $1,520,000. Mr Kassem was not aware of the sale until 21 March 2024. 22 According to records available via PEXA, settlement of the sale was due to be completed on Monday, 8 April 2024.

C. Relevant principles 23 Section 1323 of the Act relevantly provides that where a civil proceeding has begun against a person under the Act and the Court considers it necessary or desirable in order to protect the interests of a person (aggrieved person) to whom another person (relevant person) is liable or may become liable to pay money, whether by way of a debt, by way of damages or compensation or otherwise, it may make orders including, if the relevant person is a body corporate, an order appointing a receiver and manager over all or part of the property of the relevant person: Re Richstar Enterprises Pty Ltd (No 3) (2006) 232 ALR 577; [2006] FCA 433 at [22] (French J, as his Honour then was). 24 The preconditions for the making of an order under s 1323 of the Act are satisfied when an investigation is being carried out under the Act in relation to an act or omission that constitutes, or may constitute, a contravention of the Act, or a civil proceeding has been commenced against a relevant person for a contravention of the Act and an application has been made by an aggrieved person for one or more of the orders that may be made under that section: Re Richstar at [21]. 25 It is now well established that while none of s 1323(1)(d)-(k) of the Act empowers the Court in explicit terms to make a freezing order, where grounds are established for the making of an order under s 1323(1)(h), it is open to the Court to make an alternative or lesser order, including a freezing order: Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360; [2007] NSWSC 1217 at [20]-[22] (Barrett J); Australian Securities and Investments Commission v Krecichwost (2007) 213 FLR 314; [2007] NSWSC 948 at [37] (McDougall J). 26 The purpose of the remedies provided in s 1323 of the Act is to protect the interest of persons who might have claims against corporations and others who are subject to the provisions of the Act (whether or not those claims flow from a breach of the Act). It achieves this by securing (a) the assets of the person or corporate, against whom the relevant claims may lie for the purpose of providing security for those claims or (b) assets for which that person may be liable to account in such a claim: Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 525 (Finn J). 27 Once the preconditions in s 1323(1)(a)-(c) are satisfied, a finding of necessity or desirability enlivens the discretion to make the orders sought pursuant to s 1323(1)(d)-(k): Krecichiwost at [22]-[39]. 28 As Barrett J explained in Australian Securities and Investments Commission v Sigalla [2010] NSWSC 1423 at [15]-[20]: [15] The next question, therefore, is whether I should conclude that it is either "necessary" or "desirable" to make an order "for the purpose of protecting the interests of' any such "person aggrieved". As posed by the legislation in the present case, this question relates to "an order appointing … a receiver" of property of Mr Falconer and Dunbar, given that the order actually sought is a freezing order which, in the particular context, is permitted as an "alternative or lesser order": see Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307; Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948; (2007) 64 ACSR 411; Australian Securities and Investments Commission v Banovec (No 2) [2007] NSWSC 961; (2007) 214 FLR 33; Australian Securities and Investments Commission v Burnard [2007] NSWSC 1217; (2007) 64 ACSR 360. [16] There was discussion in the course of submissions about the fact that a receivership order is characterised in some of the cases as more "drastic" with the result, perhaps, that, in order to characterise the "alternative or lesser" freezing order as "necessary" or "desirable", the court must first be satisfied that the "drastic" remedy of receivership be awarded. [17] While that may be, in theory, the correct approach, the central inquiry remains the same for both the "drastic" and the "alternative or lesser" orders: is it "necessary" or "desirable" that the court impinge upon the freedom of disposition that the person concerned enjoys in relation to his, her or its property and impose a regime that denies that freedom? The court's ordinary jurisdiction to appoint a receiver aims to protect assets that may turn out to belong to someone else. The purpose is protective. The same protective purpose is served, for the same reason, by a freezing order. [18] In addressing the "necessary or desirable" question in relation to the "alternative or lesser" freezing order, the court is dealing with an explicit statutory criterion. The approach is not the same as that adopted in relation to an application in equity for a freezing order of a Mareva kind. But factors typically taken into account in the exercise of equitable jurisdiction may well be relevant to questions of what is "necessary" or "desirable" in the interests of aggrieved persons. [19] The court may thus take into account all relevant discretionary factors, including those identified by Santow J in Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 at [4] to [7]. Santow J there observed that the public interest role of ASIC may warrant an order in circumstances where it might be denied to a private litigant. At the same time, however, any order the court makes must, as Santow J said "operate in a manner that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that such orders will intrude upon private rights". Santow J also pointed to the significance of the legislative exemption that ASIC enjoys from the requirement to give an undertaking as to damages. [20] In the end, the court's task is as described, in relation to an application under s 1323(1)0) and (k), by Nicholson J in Australian Securities and Investments Commission v Ivey (1998) 29 ACSR 391: "The Court is required to engage in a balancing exercise which includes a balancing of public and private rights."

D. Consideration 29 I was satisfied that the Freezing Orders sought by the plaintiffs should be made for the following reasons. 30 First, Mr Kassem has only been appointed as liquidator of the Company for two months, but in that time has carried out investigations into the finances and affairs of the Company and detected that, at all times throughout Mr Khouzame's appointment as a director of the Company, it had a significant taxation debt with the Australian Taxation Office (ATO). At the time of Mr Khouzame's appointment as director of the Company, the Company owed $221,674 to the ATO. The Company now has an outstanding tax debt of $686,324.36 to the ATO. 31 Second, Mr Kassem contends, and I accept, that many indicia which are often present in an insolvent company are present in this case. Mr Kassem's view, based on the documents he has obtained since his appointment and the information available to him, is that the Company was insolvent from at least 30 June 2021. Mr Kassem's view was based on (a) in the period of 30 June 2021 up until his appointment, the Company had increasing overdue statutory debts to the ATO, (b) the Company maintained a liquidity ratio below 1.0 from as early as 30 June 2019, (c) the Company held working capital deficiencies from as early as 30 June 2019, (d) the Company incurred trading losses during the financial years ended 30 June 2021, 2022 and 2023, (e) the Company entered into payment plans with the ATO as early as 9 November 2021, and defaulted on those from as early as 25 January 2022, (f) the Company received warnings and outstanding debt notices from the ATO as early as 8 August 2022, and (g) the Company's trade creditors remain unpaid outside of trading terms from at least 29 November 2022. 32 Third, I am satisfied that the preconditions for the making of an order under s 1323 are satisfied. The plaintiffs have commenced these proceedings for final orders declaring that the first and second defendants have contravened s 588G and s 588V of the Act respectively, and seek an award of damages pursuant to the concomitant s 588M and s 588W. 33 Fourth, the plaintiffs contended, and I accepted, that there was a considerable, or at least, an unacceptable, risk that Mr Khouzame might attempt to divest himself of the proceeds from the sale of the second Condell Park property following the completion of its sale on 8 April 2024 if orders were not made restraining him from doing so, for the following reasons: (a) an inference can be drawn from the timing of the appointment of the small business restructuring practitioners and the failure to make the financial contribution required by the Restructuring Plan despite being given 3 months to do so, and the fact that the real properties were promptly marketed for sale and sold, that Mr Khouzame intended to delay the impending winding up of the Company to arrange the sale of his real properties at Condell Park; (b) assets were removed from the Company's business premises on the day the Company entered liquidation, apparently by Mr Khouzame; and (c) Mr Khouzame has not complied with a statutory notice issued under s 530A of the Act which required him to attend the offices of Mr Kassem to answer questions and provide assistance in his inquiries into the Company. 34 I was therefore satisfied that the Freezing Orders should be made to prohibit Mr Khouzame from dissipating any proceeds of sale that might be forthcoming from the impending sale of the second Condell Park property. 35 The plaintiffs did not seek to inhibit the sale but rather to secure the proceeds of sale from dissipation by Mr Khouzame. It was therefore necessary to include a carve out in the Freezing Orders to permit the sale of the second Condell Park property to proceed. 36 The plaintiffs also sought orders requiring the defendants to produce documents and information to aid in the identification of what assets are captured by the Freezing Orders, together with ascertaining what proceeds from the sale of the first Condell Park property might already have been dissipated. I was satisfied that those orders should also be made. 37 For the foregoing reasons, I concluded that it was necessary or desirable to appoint a receiver over the assets of the defendants, and in circumstances where the plaintiffs sought a "less drastic" remedy, being the Freezing Orders, the Freezing Orders should be made to safeguard or preserve the property in respect of which a receiver could have been appointed.

E. Disposition 38 For these reasons, I made orders substantially in the form sought by the plaintiffs. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

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