Plaintiff v First defendant

Supreme Court of Victoria|2011-12-23|Before: BELL J

PRACTICE AND PROCEDURE - freezing orders - application for variation - defendants want to mortgage and sell properties for sound commercial reasons and provide funds for legal and ordinary business purposes - such use of funds within usual exceptions to orders - bank nonetheless requires approval of plaintiff or court - plaintiff refused to give approval, alleging defendants had access to other sources of funds - defendants seek approval from court by way of variation - whether possible availability of other sources of funds is relevant - purpose of freezing orders - scope of legitimate inquiry into the question - Supreme Court (General Civil Procedure) Rules , O 37A.

2 It is well established that the purpose of such orders is to protect the processes of the court, [1] in this case the taxation and penalty recovery proceeding to be brought by the deputy commissioner against Mr Karas and the companies. That is the purpose expressly specified in r 37A.02(1).[2]

3 Consistently with that limited purpose and the standard order specified in form 37AA, the freezing orders made by Davis J have an express exception allowing Mr Karas to use his assets for ordinary living expenses and allowing him and the companies to use their assets for reasonable legal expenses and in the ordinary and proper course of business. The orders made provision for other exceptions to be agreed between the deputy commissioner and the defendants. The orders were served on Mr Karas and his companies and froze their assets accordingly.

4 By a summons dated 13 December 2011, the defendants have applied to the court for a variation of the orders in two respects. The first variation sought is to permit Mr Karas to enter into a specified loan agreement and mortgage in relation to the property he owns at 164 Napier Street, Fitzroy. He wants to borrow $250,000 against the property to meet his past and continuing legal expenses.

5 The second variation sought would allow the second defendant, Capital One Securities Pty Ltd, to sell the property it owns at 59 Gore Street, Fitzroy so as to eliminate the mortgage on that property. The balance of the proceeds, expected to be about $180,000, would be paid into its bank account.

6 On behalf of Mr Karas and the companies, it is submitted that technically the court's permission is not needed for these transactions to take place. The first variation is solely for the purpose of paying Mr Karas's reasonable legal expenses and the second variation is a sensible commercial step in the ordinary course of the money lending business of Capital One. The need for the court's express permission by way of variation of the freezing orders has arisen only because the bank of the defendants has refused to allow them to operate their financial facilities in the usual way. The bank fears the proposed transactions might breach the freezing order and is adopting the conservative approach of not allowing the transactions to take place without the express variation of the orders.

7 As is appropriate and implicitly contemplated by the orders, the defendants have first sought the consent of the deputy commissioner to the transactions. In determining whether to give that consent, the deputy commissioner has required Mr Karas and the companies to provide a great deal of information about various transactions which have taken place, both before and after the orders were made. The deputy commissioner has been particularly concerned that the defendants might have access to assets and money which should be utilised before selling or encumbering the property which is the subject of the orders. Some but not all of that information has been provided. The matter came to court because the parties were at loggerheads about what should be done.

8 Mr Karas and the companies submitted the deputy commissioner's requests for further information were unreasonable. It was submitted that all property belonging to the defendants, whether it was land or cash, is the subject of the orders and therefore is the subject of the exceptions. The exceptions allow the property to be used for reasonable legal expenses and in the ordinary course of business and the variations sought were for those purposes. As the defendants were legally entitled to use their assets for those purposes in any event, it was irrelevant whether the defendants had access to other sources of money for those purposes.

9 The deputy commissioner submitted the defendants should not be allowed to defeat the orders (even in part) by drawing on the frozen assets when there might be other sources of funds on which they could draw. That would subvert the purpose of the orders, which was to protect the processes of the court in the deputy commissioner's taxation recovery proceedings against the defendants. It was for this reason that the deputy commissioner was asking for the further information.

10 Of course, the exceptions specified in the freezing orders permit the defendants to use the assets frozen for permitted purposes, including ordinary living expenses, reasonable legal expenses and in the ordinary and proper course of business. However, when defendants seek the variation of a freezing order in terms allowing a specific dealing, encumbrance or disposal with respect to the subject property, even for intended permitted purposes, it is in my view relevant to take into account whether they have access to other sources of funds for those purposes.

11 I think that conclusion follows from the purpose of a freezing order, which is to protect the processes of the court. Because that is the purpose of a freezing order, the court is always concerned with the scope and the preservation of the assets of the defendant. As to the scope of the defendant's assets, freezing orders usually require them to swear an affidavit disclosing all of their worldwide assets. On evidence establishing there are reasonable grounds for thinking a defendant might take steps to dissipate their assets and thus defeat the processes of the court, this disclosure requirement is imposed to ensure plaintiffs and the court will have full knowledge of what assets might be available for execution of judgment in actual or proposed proceedings. The orders dated 26 June 2011 contain that requirement in this case. As to the preservation of the defendant's assets, the terms of a freezing order prevent dissipation of the assets, except for permitted purposes.

12 The two issues of scope and preservation are inter-connected. Freezing orders are made, administered and enforced as a whole. The scope of the defendant's assets as proved and disclosed may impact on the orders which are made for their preservation and the terms of the order, including the terms of the exceptions.

13 When the court is being asked to make a specific variation of a freezing order, even for a permitted purpose, it is consistent with the court's concern with the scope and preservation of the assets of the defendant to take into account that the defendants might have other sources of funds on which they can draw. That being so, it is legitimate for the deputy commissioner as the plaintiff in the present case to seek information about such other sources of funds and to bring evidence about those sources to the attention of the court. I have taken into account that this approach is has been adopted in relation to orders of a similar type.[3] However, I base my conclusion on the purpose of freezing orders, which create personal and not proprietary rights,[4] and operate to protect the processes of the court by preventing the dissipation of assets and not to confer any pre-judgment security on the actual or proposed defendant.[5]

14 A freezing order puts a plaintiff, in this case the deputy commissioner, in a certain position of power with respect to the defendants, in this case Mr Karas and his companies. The experience of the court is that banks and other financial institutions often require the approval of the court or the plaintiff before they will allow particular transactions to take place, even for apparently permitted purposes. As in this case, disputes can arise as to whether that approval should be given. Often questions of the adequacy of the disclosure of information by defendants are raised by plaintiffs. Defendants often complain that plaintiffs require too much and more than they legitimately need.

15 It is important that plaintiffs do not abuse their position of power by unreasonably refusing to provide approval for particular transactions for permitted purposes. The purpose of a freezing order is not to place the plaintiff in the de facto position of supervising the conduct of the defendant's personal or family life or business. A freezing order is not an order for the appointment of the plaintiff as the de facto administrator of the defendant's business. It does not of itself place the plaintiff in the position of a mortgagee, chargee or secured creditor. It has a wholly different asset-protective function. Resolution of practical issues which arise from the operation of exceptions to freezing orders must be resolved with that limited function in mind.

16 Where there is a reasonable basis for thinking a defendant might have access to other sources of funds which are within their direct or indirect control, it is perfectly reasonable for a plaintiff to seek information about that subject before deciding whether to grant approval or consent to a particular transaction or variation. But this cannot justify seeking what is, in effect, legal discovery of documents or requesting answers to what are, in effect, legal interrogatories. If it is necessary to seek invasive orders of that kind or to seek full or better enforcement of the disclosure requirements of a freezing order, the processes of the court are independently available for that purpose, including the processes for punishing contempt of court.[6]

17 In the present case, the deputy commissioner's position in relation to the defendants' request was set out in affidavits, in correspondence and in written submissions of counsel. The level of detail of the information sought was very great and it seems no stone was left unturned. I think the level of detail in the information sought was disproportionate to the nature of the approvals and variations which were at issue and not justified having regard to the purpose of a freezing order. In the end, that was effectively conceded by the deputy commissioner and the court was invited to focus on two particular issues of significance.

18 The first issue was the destination of the amounts of $525,000 and $1,388,000 which (before the freezing orders were made) were deposited in the ANZ bank account of Capital One on 15 March 2011 and 1 April 2011 respectively and later withdrawn. The second was the destination of the income of that company from its money lending business (after the freezing orders were made), given the evidence that it has $3-4 million out on loan. The company is a short-term money lender and the interest payable on amounts of that magnitude, whether singly or making up that total, would be expected to be large.

19 In my view, inquiry by the deputy commissioner in respect of those matters is reasonable and legitimate. I reject the submission of Mr Karas and the companies that it is neither legally relevant nor relevant on a discretionary basis for the court to have information in relation to those matters before determining the issues raised at least in respect of one part of the summons. The unexplained withdrawal or payment of money in the amount of $525,000 or $1,388,000 from Mr Karas's company shortly before the freezing orders were made is, in my view, relevant to whether the court should (by variation of the orders) specifically permit him to encumber or deal with the frozen assets for the proposed purposes. Likewise the unexplained absence of any income from Capital One's continued money lending business is relevant to the exercise of that power. In the absence of an explanation as to these matters, it is reasonable to think that the defendants might have access to funds on which they could draw without having to utilise the assets which have been frozen. I will not grant the first variation sought until at least those matters are addressed.

20 Turning to the second variation sought, Mr Karas and his company have established on the evidence there are sound commercial reasons for selling the property. As submitted by the deputy commissioner, the property should not be sold until an independent valuation has been obtained. I would grant the variation in the terms sought by the defendants on the condition that that be done.

21 There will be orders for a variation of the freezing order dated 28 July 2011 in terms of paragraph 2 of the summons dated 13 December 2011 of the defendants, subject to the provision of an independent valuation to the reasonable satisfaction of the deputy commissioner. The property cannot be sold until that valuation has been supplied.

22 The further hearing of the application for the variation sought in paragraph 1 of the summons will be adjourned to the judge in the Practice Court on

20 February 2012. The defendants are to file any further affidavits on which they wish to rely by 6 February 2012. I ask the parties to try to resolve the issues by discussion if possible.

[1] Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, 391 (Gaudron, McHugh, Gummow and Callinan JJ); Deputy Commission of Taxation v Gashi (2010) 27 VR 127, [10]-[11] (Bell J).

[2] Rule 37A.02(1) provides the freezing orders may be made '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.'

[3] See Szentessy v Woo Ran (Australia) Pty Ltd (No 2) (1985) 82 FLR 306 (Kelly J); Australian Iron & Steel Pty Ltd v Buck [1982] 2 NSWLR 889, 890 (Rogers J); Commissioner of Taxation v Manners and Terrule Pty Ltd (1985) 81 FLR 131 (Phillips J); Clout (Trustee) v Anscor Pty Ltd [2001] FCA 174, [10] (Drummond J)(cited with approval in Allomak Ltd v Robert Allen [2010] VSC 197, [24] (Davies J)).

[4] Deputy Commissioner of Taxation v Ousley (1992) 92 ATC 4168, 4173 (Hedigan J).

[5] Anglo Eastern Trust Ltd v Kermanshahchi [2002] EWHC 3152, [9] (Neuberger J).

[6] Cf Deputy Commissioner of Taxation v Gashi (No 3) [2011] VSC 448 (Dixon J)).

Court (General Civil Procedure) Rules 2005

At a glance

Court

Decision date

Before

Source

Judgment (31 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (4)