Plaintiff v Defendants

2 The plaintiff initiated proceedings in this court against her former partner, Min Zhi Mo, the first defendant, his son the fourth defendant, Jia Ren Mo and two companies associated with the first defendant, MS International Trading Pty Ltd ("Trading") and MS International Group Pty Ltd ("Group"), the second and third defendants respectively.

3 The plaintiff and the first defendant had, since approximately 1993, been in a de facto relationship. They also engaged in a number of business ventures which appear to have been extremely profitable.

4 In 2007, the relationship between the plaintiff and the first defendant deteriorated and they separated. They then entered into a settlement agreement ("the agreement") in September 2007 which the plaintiff now contends was procured by duress.

5 The plaintiff issued proceedings in this court on 15 July 2008 under Part IX of the Property Law Act ("the Act"), as well as seeking orders that the agreement be set aside. The plaintiff also sought orders on the basis that a "business partnership" existed between the plaintiff and the first defendant.

6 On 15 July 2008, Hansen J of this court made freezing orders ex parte pursuant to r.37A.02 against the first to fourth defendants restraining them from dealing with assets up to the amount of $3,500,000.

7 Having established a de facto relationship in or about 1993, the plaintiff and the first defendant purchased a property at Vermont. In 1996, they purchased a milk bar business at Frankston which they operated until approximately April 1998. From about 1998 they operated a number of "$2 shops" in the suburbs of Melbourne.

8 In recent years, the shops were operated by Trading; that company was also involved in importing goods from China. The first defendant was the prime mover in relation to the import side of the business, whilst the plaintiff played a significant role in relation to the retail operations.

9 Both the plaintiff and the first defendant were directors of Trading and held shares in that company, although the precise structure of the shareholding is not entirely clear.

10 At the end of 2003, Trading purchased a warehouse at 3-5 Rings Road, Moorabbin for $820,000 for use with the importing business as well as for housing stock for the shops. It is the subject of a mortgage of $715,000 approximately. The defendants' valuer estimates its current worth at $1.1 million.[1]

11 In January 2005, the plaintiff's daughter, Sue, became the registered proprietor of an apartment; 203 at 79 Whiteman Street, Southbank. The property was purchased for $356,000, with the funds provided by the plaintiff and the first defendant, with a mortgage, apparently, of $240,000.

12 In March 2005, the fourth defendant, Jia, son of the first defendant, became the registered proprietor of a penthouse at 79 Whiteman Street, Southbank. The plaintiff and the first defendant resided at that property with Jia until September 2006 when the plaintiff left. The property was purchased for $830,000, with a mortgage of either $500,000 or $600,000 (depending on which party's version is accepted). There is a dispute as to the source of the funds provided for the balance of the purchase price. It has recently been valued at between $1,100,000 to $1,200,000 and, according to the fourth defendant, there is currently a mortgage of approximately $326,000.[2]

13 On 26 July 2006, the first defendant established a second company, Group. He was the sole shareholder and director of this company. This company operated actively as demonstrated by its bank statements.

14 At the time that their relationship dissolved in mid 2007, the plaintiff and first defendant (via one or other of the corporate entities) operated three shops (at Norlane, Corio and South Melbourne). In addition, the importing business was operated by Trading from the warehouse.

15 After the end of the relationship there were discussions between the plaintiff and the first defendant as to the resolution of their differences and settlement of their property interests. There is disagreement between the parties as to the circumstances surrounding the signing of the agreement by the plaintiff. Two matters, however, are clear. On 15 August 2007, there was a meeting at the penthouse attended by a number of people in relation to the distribution of assets. Then, on 6 September 2007, the plaintiff signed the agreement which involved the distribution of certain assets and a cash payment by the first defendant to the plaintiff. It suffices to say that the agreement provided for the plaintiff to be paid $400,000 by the first defendant and the business at Corio valued at $95,000 was transferred to her. She also was to be provided with two motor vehicles formerly owned by Trading which had little value above the relevant motor vehicle loans. The agreement also provided that she transfer her interest in Trading to the first defendant.

16 On its face, the agreement only deals with distribution of the assets of Trading. There is no mention of Group, or the real estate, within the agreement.

17 Subsequently, the Corio business was transferred to the plaintiff, who has managed and operated that business. She has been paid $400,000 and provided with the two motor vehicles by the first defendant.

18 Some ten months after the agreement was signed, the plaintiff commenced the current proceedings.

19 The ex parte orders made by Hansen J froze the assets of the first to fourth defendants up to an amount of $3,500,000. This figure was based upon the estimate by the plaintiff of combined assets of about $7 million, with the plaintiff having a putative entitlement to half that amount.

20 Since those orders were made, a number of affidavits have been filed by each of the parties dealing not only with the question of the plaintiff's cause of action but also with the value of any assets held by the parties.

21 In determining this application I have applied the following principles.

22 First, that a freezing order, by its very nature, is a drastic remedy and a court must exercise a high degree of caution before taking a step which will interfere with a party's capacity to deal with his or her assets.[3]

23 Second, the order is not designed to provide security for the applicant's claim.[4] It is solely directed to preserving assets from being dissipated, thereby frustrating the court process.[5]

24 Third, the applicant bears the onus both in satisfying the Court that the order should be continued and in satisfying the Court as to the amount which is to be the subject of the order.

25 Fourth, that an order can only be made on the basis of admissible evidence which supports the contentions made by the party seeking the order. Speculation and guesswork is no substitute for either the facts or inferences properly drawn from proved facts.[6]

26 Fifth, that before such an order can be made it is necessary that the applicant establish -

(a) an arguable case against the defendant[7]; and

(b) that there is a danger that the prospective judgment will be wholly or partly unsatisfied as a result of the defendant's actions in either removing the assets or disposing or dealing with them so as to diminish their value.[8]

27 Sixth, the balance of convenience must favour the granting of the freezing order.[9]

28 Seventh, that there is no set process determining the exact nature of an order. The order will be framed according to the circumstances of the case.[10]

29 Eighth, the applicant must establish with some precision the value of prospective judgment. The order should not unnecessarily tie up a party's assets and property.[11]

30 Finally, there may be discretionary considerations which militate against the granting of a freezing order, such as delay in bringing the application on before the court or a lack of candour in the materials placed before the court.[12]

31 A separate issue arose in this case in respect of a specific discretionary consideration; namely what weight, if any, should be given to the existence of caveats lodged by the plaintiff over the properties. The caveats lodged by the plaintiff are said to be based upon the plaintiff's equitable interest which arises by reason of a constructive trust[13].

32 A caveat's purpose is to protect the estate or interest claimed by the party lodging it. It provides a statutory injunction against the registration of subsequent dealings and provides notice of the existence of the estate or interest to those who consult the register.[14] However, establishing a relationship and an entitlement under the Property Law Act (Vic) 1958, of course, does not give rise to a constructive trust.[15]. The existence of a constructive trust depends upon the circumstances relevant to the asserted creation of an interest in the subject property, not the mere existence of a de facto relationship between the parties.[16] To put it simply, the caveat is only as good as the evidence supporting the existence of an estate or interest in the subject property. Very different considerations arise in determining an adjustment of property, real or personal, under s 285 of the Act.

33 I now consider these issues in the context of this case.

34 I am satisfied that the plaintiff has a good arguable case. She has satisfied me that, prima facie, she has a claim against the first defendant under the Act which will require an analysis, difficult as it might be, of the respective contributions, both financial and non-financial, made by the plaintiff and the first defendant, the extent of their asset pool and ultimately adjustment of those interests, if necessary.

35 Much of the affidavit material filed by both parties was devoted to matters that can only be resolved at trial. There is a vigorous dispute as to the circumstances surrounding the meeting in August 2007 and the subsequent signing of the agreement in September. The plaintiff asserts that she was coerced into the agreement and that the independent legal advice provided to her was no such thing. The first defendant contends that the plaintiff rationally entered into the agreement and had sought legal advice from a number of solicitors; furthermore, through her solicitor she placed caveats on at least two of the properties. Moreover, it is clear, it is submitted, that she was given "independent" legal advice concerning the effects of the settlement agreement.

36 One of the difficulties in an interlocutory application such as this is the inability of the court to resolve these hotly contested factual issues, such as that of the circumstances surrounding the agreement.

37 I need say no more about this issue (and perhaps should not, given that there will be a trial of these issues) as it was conceded by counsel for the first to fourth defendants that, even if the agreement is established as being entered into voluntarily, it does not resolve the plaintiff's claim. Section 285(1)(c) of the Act makes this clear; the agreement simply forms part of the material to be considered by the court in reaching a conclusion as to the appropriate disposition of the assets and consequential orders adjusting the parties' interests in property.[17]

38 In those circumstances, it is clear that the plaintiff has a good arguable case.

39 The plaintiff has made a number of assertions in her affidavit concerning the prospect of the defendants removing or dissipating any assets under their control. In the main, these assertions are speculative and can be put to one side.[18]

40 The first defendant has sworn that he has not and has no intention of dissipating any assets or removing assets from the jurisdiction.

41 I am not persuaded by the first defendant's protestations. In particular, the following matters satisfy me that it is proper to draw the inference that there is a danger that the assets will be dissipated.

42 First, the first defendant's admitted forgery of the plaintiff's signature on a loan and guarantee document in respect of additional funds borrowed by Trading from Westpac, purportedly for staff superannuation.[19] The loan agreement and guarantee was signed in June 2007 with the first defendant forging the plaintiff's signature. The fact that he did so at a time very close to the separation seems to me to be relevant and I am not comforted by the disputed assertion of the first defendant that the plaintiff was aware that he had done so and in effect endorsed this course of conduct.

43 Second, the setting up of Group, in my view, is a matter of real significance. The plaintiff was the secretary of Trading and held shares in it. In 2006, the first defendant set up a one person company, namely Group, in his own name and it is clear that he commenced to carry out business operations through that company.[20] The first defendant asserts that the plaintiff was aware of its incorporation, a fact denied by the plaintiff. I also think it is significant that notwithstanding that the plaintiff may have known of Group's existence, there is no mention of Group and its assets and liabilities in the agreement. I do not accept the argument on behalf of the first defendant that the incorporation of Group was simply a standard business arrangement. One might ask why, if this was a business arrangement to further the joint interests of the first defendant and the plaintiff, was the plaintiff not included as a shareholder and officer as she had been in Trading.

44 For these reasons I am persuaded that the conduct of the first defendant in the immediate past gives rise to an inference that there is a danger of dissipation or diminution of assets which may satisfy any putative judgment obtained by the plaintiff.

45 I am reinforced in that conclusion by the first defendant's ready access through his business contacts in China to the means by which funds could be easily transferred out of the jurisdiction.

BALANCE OF CONVENIENCE/DISCRETIONARY CONSIDERATIONS

46 As I have said, I believe that there is a clear potential for any judgment obtained by the plaintiff to be frustrated by the removal and/or dissipation of assets by the first, second and third defendants.

47 I have, in determining whether to continue the freezing order, taken into account the fact that the plaintiff has had solicitors acting on her behalf since August 2007 and no steps were taken other than the lodging of caveats to protect her interests for nearly nine months after the agreement was entered into. Notwithstanding these matters it is, in my view, appropriate to make an order freezing the assets of the first, second and third defendants to a certain value and of the fourth defendant in respect of dealings with the penthouse - of which I will say more in a moment.

48 I am also conscious that the first defendant, via his corporate vehicles, operates both the Norlane shop and the import/export business from the warehouse; whilst this order should not affect the proper bona fide conduct of this business, it is, in my view, necessary to make a freezing order given my conclusions as to the danger of the assets being dissipated.

49 Finally, I should add for the reasons I set out in paragraphs 31 and 32, that in the context of this case, I do not think that the caveats lodged by the plaintiff should inhibit the exercise of my discretion to grant the order.

THE VALUE OF ANY POTENTIAL JUDGMENT - WHAT AMOUNT SHOULD BE FROZEN

50 I should state at the outset that I have limited confidence in the evidence of either the plaintiff or the first defendant as to the value of the various assets identified by each of them. The plaintiff's estimates as to the values, at least, of the properties are no more than speculation.[21] The plaintiff, however, continues to assert that the asset pool amounts to around $7 million and she is entitled to half.

51 On the other hand, the first defendant swears as to his belief that his shareholdings in each of Trading and Group have no positive value, nor do his shares in another related company.[22] In my view, the first defendant paints an entirely unrealistic picture of the operations of these businesses. It has to be remembered that these businesses appear to have operated on a cash basis; moreover, it emerged during the course of the hearing that the Norlane shop operated through Trading by the first defendant, and valued by the first defendant at $300,000 is in fact on the market through an agent at an asking price of $750,000. Significantly, it is asserted in the advertisement placed by the agent that the business returns an income of around $26,000 per week - or over $1 million per year.

52 I accept the valuation of the penthouse at a figure of $1.1 million by the fourth defendant's valuer. I also accept the valuation of the warehouse at $1.1 million by the first defendant's valuer as this seems consistent with the purchase price and any subsequent rise in property values.

53 The task of a court in making a freezing order is particularly difficult where there are wildly differing estimates of the value of the applicant's claim, tinged with either speculation or self-interest. However, I think that the interests of justice require me to try to place a value, interim and necessarily imprecise, on the asset pool which will determine the limits of any putative judgment.

54 I have had considerable difficulties determining the likely value of any joint equity in the real estate. The assertions made by each of the parties are irreconcilable. As best as I can tell (rounding the figures), the equity in the real estate is $1,275,000 made up as follows:

55 Given the asserted turnover and the asking price of the business at Norlane, it can be valued in the region of $400,000. Corio can be valued at $100,000 - roughly in accord with the agreement. On the evidence I cannot place any estimate on any other businesses or proposed businesses.

56 The question then arises as to the valuation of stock held by either Trading or Group or by the first defendant in his own name. This forms a substantial part of the asset pool as nominated by the plaintiff. As I have said, I have little confidence in any of the documentary material or accounts provided by the first defendant as to the assets of either Trading or Group. However, whilst many of the plaintiff's estimates as to real estate values are based on sheer guesswork, she clearly has a familiarity with retail stock and the operation of the businesses. On that basis I propose to accept the plaintiff's valuation of $2 million in terms of stock which, I think, is consistent with the scope of the enterprises and the necessity for the use of a sizeable warehouse.

57 A rounded up figure of $500,000 (being $400,000 cash and $95,000 for the Corio business) must be brought into account by the plaintiff.

APPROPRIATE ORDERS IN RESPECT OF FIRST , SECOND, AND THIRD DEFENDANTS

58 My estimate, as set out above, and I emphasise, based upon the less than perfect material placed before me, is that the asset pool may be valued in the region of $3,775,000. If the plaintiff is successful and is entitled to half the asset pool, then she may obtain a judgment in the region of $1,887,500 from which $500,000 is to be deducted as already having been received by her. This leaves $1,387,500 to be the subject of freezing orders. $775,000 of that is secured by the orders I propose to make in respect of the penthouse owned by the fourth defendant.

59 It seems to me, therefore, appropriate that the orders relevant to the first, second and third defendants be varied to freezing the dealing with or disposition of assets of up to $612,500.

APPROPRIATE ORDERS IN RESPECT OF THE FOURTH DEFENDANT

60 Finally, I need to say something about the application in respect of the fourth defendant, the registered proprietor of the penthouse.

61 The fourth defendant is a party to the proceeding. However, the allegations contained in the statement of claim and the affidavits filed by the plaintiff relate to the first defendant and his associated companies; I assume that the fourth defendant has been joined to enable his participation in the hearings by reason of his ownership of the penthouse.

62 The plaintiff claims to have a half interest in the equity in the penthouse. It is appropriate to make that property the subject of a freezing order.

63 Apart from making an order relating to disposition of or dealing with the penthouse (of which the fourth defendant is the registered proprietor), it is not appropriate to make any further order concerning the fourth defendant.

64 I propose to make a freezing orders in respect of the first, second and third defendants in similar terms to paragraphs 6 and 7(a)(i), (ii) and (iii) (A) and (B) and (b) of Hansen J's orders, such orders to operate until further order. I will also make an order in similar terms to paragraphs 10 and 11 of that order with a variation for legal expenses to a figure of $70,000. Paragraph 6 will be amended to read $612,500.

65 In relation to the fourth defendant, I will order that Jia Ren Mo does not deal with, dispose of or diminish the value of the property situate at 211/79 Whiteman Street, Southbank (vol 10902, folio 068) until further order of the Court.

66 I will require the plaintiff to renew the undertakings number (1), (6) and (7) previously given by her in Schedule A of the orders made by Hansen J.

[1] First defendant's affidavit 28 July 2008 [11] and [12]

[2] Affidavit of Jia Ren Mo 28 July 2008 [5] and [8]

[3] Cardile v LED Builders Pty Limited (1998) 198 CLR 380, [51]; Practice Note 3 of 2006

[4] Jackson v Sterling Industries [1987] HCA 23; (1987) 162 CLR 612, 621, 625

[5] Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) [1998] HCA 30; (1998) 195 CLR 1, [73]

[6] Hartwell Trent (Aust) Pty Ltd v Tefal Societe Anonyme [1968] VicRp 1; [1968] VR 3, 13

[7] Glenwood Management Group Pty Ltd v Mayo [1991] VicRp 45; [1991] 2 VR 49, 49

[8] R. 37A.02(1) Under the general law the plaintiff must establish that there is a real risk of assets being disposed of: Cardile [122]

[9] Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513

[10] Jackson v Sterling Industries [1987] HCA 23; (1987) 162 CLR 612, 621

[13] See McMahon v McMahon [1979] VicRp 23; [1979] VR 239

[14] Goldstraw v Goldstraw and the Registrar of Titles [2002] VSC 491 [38]

[15] Bell v Graham [2000] VSC 142 in relation to a claim under the Family Law Act

[16] For instance, a constructive trust may arise out of indirect contributions by a party to the purchase price of the subject property_. Goldstraw v Goldstraw and the Registrar of Titles_ [2002] VSC 491

[17] Steinbarth v Peters [2005] VSC 87 [10]

[18] For example see [101] - [104] of the plaintiff's affidavit sworn 15 July 2008

[19] [47] of the first defendant's affidavit 29 July 2008

[20] I also note that on 17 August 2007 a company was registered as MS International Imports Pty Ltd with the first defendant as a director

[21] See [82 - [86] of the plaintiff's affidavit of 15 July 2008

[22] [18] of the first defendant's affidavit of 28 July 2008

[24] See [12] of the reasons. I have accepted the valuer's lower figure of the range.