Solicitors:
Clayton Utz (Plaintiff)
McGrath Dicembre & Co (2nd & 3rd Defendants)
Nelson McKinnon Lawyers (4th Defendant)
File Number(s): 2016/256494
[2]
Judgment
HIS HONOUR: This is an application by the third defendant, Sfakia Pty Ltd ("Sfakia"), to discharge a freezing order made against it on 25 August 2016. The order was subsequently varied by consent on three occasions between 30 August and 9 September 2016.
The first plaintiff, Mr Lakis and the second plaintiff, Amazon Pest Control Pty Ltd (in liquidation), commenced proceedings on 25 August 2016 seeking a declaration under s 37A of the Conveyancing Act 1919 (NSW) that a transfer dated 24 January 2013 from the first defendant, Mr Michael Lardis to the second defendant, Mrs Athena Lardis of a 49 per cent interest in a property in Dolls Point for an expressed consideration of $1, and the transfer of assets from the fourth defendant, FLT Holdings Pty Ltd, formerly called Pesthelp Holdings Pty Ltd ("Pesthelp"), were void and should be set aside. In fact, the summons referred to a transfer of assets from Sfakia to Pesthelp, but I think that was a typographical mistake.
On 25 August Pembroke J, when sitting as Duty Judge, on the ex parte application of the plaintiffs made freezing orders that, amongst other things, restrained Mr and Mrs Lardis, pending final determination of the proceedings or further order of the Court, from dealing with any interest in the Dolls Point property and restrained Sfakia from disposing of or dealing with the business and assets acquired by it from Pesthelp on or about 20 June 2016. His Honour also made a freezing order that restrained each of Mr and Mrs Lardis and Sfakia from disposing of or dealing with or diminishing the value of their assets in Australia up to the unencumbered value of $1,579,784.65. The proceeding was made returnable on 30 August and on that day orders were made by consent that the freezing order be varied by substituting a lesser figure of $861,076.55 in paragraph 5(a) of the freezing order. It was ordered that the orders otherwise continue until final determination or further order of the Court.
The matter was stood over to 1 September when further adjustments to the orders were made and the matter was stood over to 9 September. The matter, however, came back before the Court on 7 September when, again by consent, but without admissions, there were additional adjustments to the terms of the orders. One of the amendments was to limit the assets of the second defendant to which the order should apply.
Initially on the application before me today the second defendant also sought an order to further vary or discharge the orders so far as they affected her, but, by reason of certain undertakings that have been given, that part of the application has been resolved.
The position of Sfakia was that the amendments made to the terms of the injunctions that were granted put it in the position in which it was able to continue to carry on its business, without undue interference by the terms of the injunctions. The position of the second defendant, Mrs Lardis, was that from the income to be derived from Sfakia she and Mr Lardis would able to meet their ordinary living expenses and pay their liabilities without undue constraints from the terms of the injunctions.
That position changed as a result of their receiving an email sent by Mr Lakis to a supplier of Sfakia that referred to the obtaining of freezing orders and made certain other assertions which the defendants say were calculated and likely to have the effect of damaging, perhaps severely, Sfakia's business. Sfakia wants the orders to be discharged so that it can seek to preserve the reputation of its business by being able to advise that supplier that the freezing order has been discharged thereby, to use the words of the defendants' solicitor, "mitigating the falsity of the allegation made by your client and the destructive slander he has propagated".
Some background is necessary.
Mr Lakis and Mr Lardis were at one time the shareholders and directors of Amazon Pest Control Pty Ltd.
On the application of Mr Lakis and against the opposition of Mr Lardis, Black J made an order on 14 December 2012 that Amazon Pest Control Pty Ltd be wound up. The order was stayed up to 24 January 2013.
In May 2014 the liquidator of that company assigned to Mr Lakis claims that the company had against Mr Lardis, and he assigned to Mr Lardis claims that the company had against Mr Lakis. Those claims were heard this year in proceedings before Young AJA. The upshot, relevantly for present purposes, is that judgment has been given in favour of Amazon against Mr Lardis for $1,090,076.24.
After relations broke down between Mr Lardis and Mr Lakis it appears that both men established similar pest control businesses through other companies. Mr Lardis acquired a pest control business in the northern beaches that was conducted through the fourth defendant, Pesthelp.
On 20 June 2016 an agreement was made between Pesthelp and Sfakia for Pesthelp to sell to Sfakia all its interest in its business, including work in progress, book debts, client base, intellectual property and all other assets, in consideration for which Sfakia agreed to "adopt" certain liabilities of Pesthelp, described as employee entitlements, liability in respect of three motor vehicles, and creditors totalling $37,793. According to the terms of the sale agreement, the assets Sfakia acquired had a value of $131,317 (not including goodwill), and the liabilities for which it assumed responsibility had a value of $183,501. The agreement provided for its being completed on 30 June 2016 and that on completion Sfakia would pay $10,000 representative of any potential goodwill.
On 23 June and 27 June 2016 there were apparently discussions between the Lardis' accountant and a Mr Dragan Ljubic from Tribeca Advisory Pty Ltd and between Mr and Mrs Lardis and Mr Ljubic that led in due course to Pesthelp's entering into a voluntary winding-up which became a creditor's voluntary winding-up. In a report to creditors of 14 July 2016 Mr Ljubic advised that a bank cheque of $11,000 was received from Sfakia on 27 June 2016 and that these moneys related to moneys outstanding to Pesthelp in relation to Sfakia's purchase of its business and assets on 20 June.
A report provided to creditors, being the summary of affairs that was signed by Mr Lardis as the director of Pesthelp, recorded that the company had assets of $11,000 and creditors of $180,625. These consisted of a debt of $167,327 owed to the Deputy Commissioner of Taxation and the balance of the debts were owed to a firm of chartered accountants and a company called W Advisory Pty Ltd.
At all times from the delivery of judgment by Young AJA on 12 May 2016, if not earlier, it would have been apparent to Mr Lardis and to Mrs Lardis that judgment in a very substantial sum would in due course be entered against Mr Lardis.
The shares in Pesthelp were owned by a company called Melidoni Pty Ltd ("Melidoni"). Mr Lardis and Mrs Lardis owned the shares in Melidoni equally.
Mr Lakis contends that the transfer of Pesthelp's business to Sfakia was taken with the intention of putting assets of Mr Lardis outside his reach. That is because Mr Lardis does not own any of the shares in Sfakia. They appear to be held by Mrs Lardis and it appears that Sfakia is in any event the trustee of a trust, the terms of which are not before me. Mr Lakis contends that Mr Lardis' interest in the property at Dolls Point was also alienated with the intent to defraud creditors.
Mr and Mrs Lardis had formerly owned the Dolls Point property jointly. By a transfer (apparently relodged on 24 January 2013) they transferred the property to themselves as tenants in common as to Mr Lardis as to a one per cent share and as to Mrs Lardis as to a 99 per cent share. The consideration expressed for that transfer in the form of transfer was the sum of $1. Mr Lakis says that that transfer was in fraud of creditors.
What precipitated the present application was an email sent by Mr Lakis to a company called Agserve which was a supplier to Pesthelp and is a supplier to Sfakia. Mrs Lardis deposes that when Sfakia purchased the business she entered into a payment arrangement with Agserve for the debt then owed to Agserve by Pesthelp to be paid by monthly instalments. She says that she had been meeting the payment of those instalments in accordance with that agreement.
On 21 September Mr Lakis sent an email to Agserve in which he said:
"I am writing to inform you that Mr Michael Lardis, former director of Pesthelp [H]oldings has declared himself bankrupt as of the 8th September 2016. Mr Lardis sold his company to his wife Mrs Athena Lardis prior to him putting the old [P]esthelp company into voluntary liquidation on the 4.07.2016.
I have successfully obtained a freezing order over all his assets including a stay of the transfer of the Pesthelp business to his wife Athena.
Whilst the outcome of the freezing Orders have yet to be finalized Mr Lardis has been found liable to return to Amazon Pest Control Pty Ltd over $1,558,000.00 by virtue of supreme court proceedings concluded in May this year.
I am not aware if there are any monies outstanding to your company and I don't propose to advise you in any action you may wish to undertake, suffice to say that you may wish to re evaluate any further credit given to Pesthelp during this period.
Please find attached documents for your records."
The attached documents included the notice sent by the liquidator of Pesthelp (now called FLT Holdings Pty Ltd) to creditors, including the summary as to affairs, and documents recording the appointment of a Trustee in Bankruptcy to Mr Lardis on 8 September 2016 on his own petition. Mrs Lardis complains that the email contains false statements. It is not true to say that Mr Lakis has obtained a stay of the transfer of the Pesthelp business to Mrs Lardis. There is no restraint on Sfakia's conducting its business in the proper and ordinary course.
Mrs Lardis complains that if Agserve terminates the payment arrangements she has made with it and requires payment of its debt in full, Sfakia will not be in a position to pay that amount and it would have to be placed in administration or liquidation. She also says that given its limited trading history, Sfakia would not be able to acquire chemicals for its business that are purchased in bulk on credit, or at least would not be able to do so on credit terms.
The issue is whether on what is the first contested inter partes application, the injunctive relief against Sfakia should be discharged. That in turn raises three principal issues, namely, whether on the materials now before the Court, Mr Lakis has demonstrated a prima facie cause of action, or perhaps a serious question to be tried, or perhaps a good arguable case for his claim against Sfakia. Secondly, whether there is a danger of assets being dealt with so as to put them beyond the reach of Mr Lakis as a judgment creditor, and, thirdly, whether the sending of the email on 21 September shows either that the proceedings or the application for a freezing order have been brought for a collateral and improper purpose of causing damage to Sfakia's business and to Mr and Mrs Lardis, or in any event, whether the freezing order should be discharged because it has given rise to conduct by the plaintiff that was calculated to cause damage in a way which was not intended and should not be permitted.
It is perhaps unfortunate that the injunction granted on an ex parte application was granted until further order rather than until a fixed date. In Ross v Internet Wines Pty Ltd (2004) 60 NSWLR 436; [2004] NSWCA 195 Giles JA (with whom Spigelman CJ and McColl JA agreed) said (at [109]) that:
"It is generally undesirable that ex parte relief be granted until further order …The party subject to ex parte relief should not have to apply to discharge it."
However, notwithstanding that Sfakia has had to apply for the discharge of the order, the approach of the Court, in general at least, is that it remains up to the plaintiff to establish a case for the continuation of the injunction, just as if the injunction had originally been given up to a fixed date (Resort Hotels Management Pty Ltd v Resort Hotels of Australia Pty Ltd [1991] 22 NSWLR 730 per McLelland J at 731).
In Commonwealth Bank of Australia v Saleh [2005] NSWSC 843, Palmer J said (at [10] and [11]) that even where an order has been continued until further order of the Court by consent, the burden remains on the plaintiff who obtained the injunction to satisfy the Court that the injunction should be continued, and that the mere fact that the defendant has previously consented to the injunction being given until further order, does not reverse the burden.
In Re Black Eagle Media Pty Ltd [2014] NSWSC 1778, Black J observed that that would not be so if the terms of the consent orders showed that the parties had a different intention. The terms of consent orders made in this case do not show such a different intention. I think the burden is on the plaintiff now to establish that this is a proper case for the granting of a freezing order against the assets of Sfakia in the same way as if a contested application had been heard earlier, but now with the additional factor arising from the email of 21 September.
In Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, Gleeson CJ said that as general rule a plaintiff seeking a freezing order will need to establish first a prima facie cause of action against the defendant. Sometimes that test has been described as a requirement to show a good arguable case, although it may in some circumstances be sufficient to establish a serious question to be tried. As in other cases concerning interlocutory injunctions generally, the prima facie strength of the plaintiffs' cause of action is a material consideration.
So far as the claim against Sfakia is concerned, the plaintiff pleads that on about 20 June, Sfakia and Pesthelp agreed that the business and assets of Pesthelp were to be purchased by Sfakia for a consideration of $11,000. That allegation is said to be based upon terms of the notice provided by the liquidator of Pesthelp.
It is pleaded that the sale of Pesthelp's business and assets to Sfakia for $11,000 occurred at a substantial undervalue. As particulars of that allegation, Mr Lakis refers to an affidavit made by Mrs Lardis on 31 August 2016. She had been required to give an affidavit of discovery of her assets and in that affidavit she sets the value of Sfakia's assets at $62,000. It is then pleaded that Mr and Mrs Lardis caused Sfakia and Pesthelp to effect a sale of Sfakia's business and assets to FLT (scil. FLT's (Pesthelp's) business and assets to Sfakia) with the intention of reducing the value of Mr Lardis' share in Melidoni and increasing the value of Mrs Lardis' share in Sfakia by a commensurate amount, due to an apprehension that the creditors of Mr Lardis, including Amazon, would enforce its debt against his assets and defeat, hinder or delay Amazon's ability to enforce its judgment debt against Mr Lardis.
Section 37A of the Conveyancing Act provides in substance that every alienation of property made with the intention to defraud creditors shall be voidable at the instance of any person thereby prejudiced. Mr Lakis' claims that he is a person prejudiced because the effect of the sale transaction has prejudiced Amazon's ability to enforce its judgment debt against Mr Lakis' asset being his share in Melidoni, which in turn held the shares in Pesthelp. Mr Lakis pleads that on 1 September 2016 Young AJA made final orders that Mr Lardis pay Amazon $1,090,076.24 plus interest to be calculated.
To show that there is serious question to be tried or a prima facie case that Mr Larkis was a person prejudiced by the transaction on the ground alleged in the statement of claim, it will be necessary for him to be able to show that Melidoni's share or shares in Pesthelp had any value. Mr Lakis submits that the value of Pesthelp's business and assets is something peculiarly within the Lardis' knowledge or perhaps within the knowledge of the liquidator of Pesthelp, but not within his knowledge except insofar as he has been able to glean information from materials provided to him including the documents sent by the liquidator and evidence given by Mrs Lardis. The present question has to be determined, I think, not on the basis that some further evidence might become available to Mr Lakis that would demonstrate at least a serious question to be tried that he was prejudiced by the relevant transaction, but rather whether the evidence, on the basis of which he seeks a continuation of a freezing order, demonstrates that there is such a serious question to be tried.
The evidence appearing from the summary of affairs is that as at least from July 2016 Pesthelp was insolvent. It had assets only of $11,000 being moneys paid to the liquidator and debts of over $180,000.
The sale agreement indicates that Pesthelp's liabilities for which Sfakia assumed responsibility totalled $183,501 and its assets excluding goodwill totalled $131,317. The liabilities for which Sfakia assumed responsibility did not include the liability to the Deputy Commissioner of Taxation, or to the other creditors referred to in the summary of affairs.
Mr Bender who appeared for Mr Lakis points to the affidavit made by Mrs Lardis on 31 August 2016. She deposed that she owned one ordinary share in Sfakia and that it had an estimated value of approximately $62,000. In a later affidavit she said that she arrived at this figure on the basis that she valued the business at the purchase price she paid for it plus the obligation Sfakia assumed to pay outstanding employee entitlements and car leases of $52,184. It is not easy to follow that as $52,184 was the amount of the net liabilities which were assumed by Sfakia. I infer that what Mrs Lardis intended to convey was that she reached the $62,000 figure by the sum of what she called $11,000 (rather than $10,000) and the net amount of the liabilities assumed.
Assuming that Mrs Lardis' affidavit provides some evidence that the business acquired by Sfakia was valued at $62,000 (which is the allegation in the statement of claim), that does not demonstrate that the shares Melidoni holds in Pesthelp have that value because that would be to ignore the $180,000 of liabilities of Pesthelp. It seems to me that on the materials before the Court on this application, that there is not a serious question to be tried, that Mr Lakis or Amazon was a person prejudiced by the transaction of which he complains, at least on the ground upon which he asserts prejudice in the existing pleading.
The statement of claim alleges that the consideration for the purchase of Pesthelp's business and assets was the price of $11,000. But it appears from the sale agreement that the consideration was rather a promise to pay $10,000 plus the assumption of the obligation to pay certain of Pesthelp's liabilities, or to meet certain of Pesthelp's liabilities.
That does not mean, however, that the plaintiff, if he has standing, would necessarily have a weak case in establishing that the sale transaction was made with the intent to defraud creditors.
The assertion made by Mr Lakis in correspondence to the liquidator was that the liquidator should investigate whether the sale to Sfakia was carried out to avoid Mr and Mrs Lardis' having to account to the ATO to the tune of approximately $170,000, and he suggested that the sale was made with intent to defraud the Deputy Commissioner. That is not how the matter is presently pleaded, but nonetheless, I would not discount the strength of the plaintiff's claim for that reason. However, the question of his standing does seem to me to create a very substantial problem in the litigation and it certainly cannot be said that his claim appears to be a strong one.
On the question of the risk of dissipation of assets, Mr Lakis points to the timing of the two transfers as showing a risk of dissipation of assets.
Mrs Lardis does give evidence as to what she would say was a proper justification for her acquisition of most of Mr Lardis' interest in the Dolls Point property. That explanation has not been tested and suggests a consideration which is not expressed in the transfer. I think that the evidence as to the risk of dissipation of assets is reasonably strong and, subject to the effect of the email and to what I have already said about the prima facie strength of the plaintiff's case, could justify the making, or the continuation, of the freezing order.
The email however is troubling. Counsel for Mr Lakis accepts that it should not have been sent. Mr Lakis for his part has said that he is prepared to correct the error in the email; the error, as I understand it, being the wrong statement that the transfer of Pesthelp's business to the company owned by Mrs Lardis has been stayed.
Mr Bender submits that the email is evidence that Mr Lakis has been acting under emotional distress. He has given evidence of the distress that he has suffered as a result of the years of litigation in which it seems he has been the substantially successful party. I can understand that he sees the transactions about which he now complains as designed to thwart his attempts to recover moneys that have been misappropriated from the company of which he and Mr Lardis were shareholders.
I do not infer from the sending of the email that Mr Lakis' motive in obtaining the freezing orders was to cause damage to Sfakia's business, rather than to avoid the risk of dissipation of assets which could prevent the enforcement of judgment. Nonetheless, it does appear from the email that the email itself was sent with the purpose of harming Sfakia's business. It seems to have been calculated to cause Agserve to stop providing supplies of chemicals to Sfakia.
It appears to me that Mr Lakis has sought to use the fact of the making of the freezing orders as a lever to cause damage to Sfakia's business. This, coupled with the misrepresentation in relation to the orders that were made (even though I do not infer that was his intent when the orders were made), I think is a sufficient reason for the Court to protect its own processes by discharging the orders.
Accordingly, because of what I regard as the prima facie weakness of the plaintiffs' case against Sfakia on the grounds of standing, and having regard to the terms of the email, I think the orders made on 25 August 2016 as subsequently varied, so far as they are made against Sfakia, should be discharged.
I order that the Freezing Order made on 25 August 2016 so far as it is directed to the third defendant and order 1(c) made on 25 August 2016, and as those orders made have been varied on 30 August 2016, 1 September 2016 and 9 September 2016, be discharged.
I discharge orders 3 and 4 made by the Registrar on 27 September 2016 and in place of those orders, make the following orders:
Order that the defendant file and serve defences to the statement of claim by 4pm on 12 October 2016.
Order the defendants to serve any affidavits by 4pm on 18 October 2016.
Order the plaintiffs to serve any affidavits in reply by 4pm on 24 October 2016.
Order that the plaintiff pay the 3rd defendant's costs of its application and otherwise order that the costs of today be costs in the proceedings.
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: 13 October 2016