RHG MORTGAGE CORPORATION LTD -v- MORGAN KELLY [2016] WASC 169 (19 May 2016)

3 The Application was renewed yesterday morning and heard urgently on an ex parte basis yesterday afternoon. I adjourned the matter overnight to take the opportunity to consider the basis for the Application. For the reasons outlined below, I have concluded that a freezing order should be made on an interim basis. Following service on the defendant, the matter is to come back before me for an inter partes hearing.

4 In support of the Application, the plaintiff relied upon an affidavit sworn by Lisa Nicole Giles on 6 May 2016, an affidavit sworn by Tamara Elise Strack on 18 May 2016, and a further affidavit sworn by Ms Strack on 18 May 2016, together with the attachments to those affidavits. The plaintiff has also filed an undertaking as to damages and in relation to service of documentation on the defendant.

5 Before turning to the alleged facts, on the basis of which I have concluded that this is an appropriate case for the grant of a freezing order on an interim basis, it is appropriate to make an observation in relation to the affidavit material. The affidavit sworn by Ms Strack on 18 May 2016 refers to a significant amount of factual material that appears to have been known to the plaintiff before the Application was made on 9 May 2016, and yet which did not appear in the affidavit filed in support of the Application.

6 Parties who make an ex parte application for an order in the very serious nature of a freezing order should be in no doubt about the imperative of ensuring that all of the relevant factual information is placed before the court for the purposes of the ex parte application. Failure to do so may, at the very least, result in the discharge of any orders made and an award of costs.

7 I should add that in making this observation, I do not intend to suggest any fault or impropriety on the part of the plaintiff's solicitors. Counsel for the plaintiff advised the Court that the material in Ms Strack's affidavit was not known to the plaintiff's solicitors when the chamber summons was filed. For present purposes, I accept that assurance although, of course, solicitors need to ensure that they have drawn to their client's attention the particular importance in an ex parte application of placing all relevant factual information before the court, regardless of whether it assists their client's case. I have asked counsel for the plaintiff to draw my concerns about these matters to the attention of his client.

8 Turning to the factual material filed in support of the Application, in order to explain why I propose to make the orders today, it is only necessary to refer briefly to that material by reference to three matters:

(i) the alleged default by the defendant on the loan repayments;

(ii) the insurance claim made by the defendant which is alleged to have resulted in a payment by the RAC to the defendant; and

(iii) the defendant's alleged failure to pay the insurance payment to the plaintiff.

(i) The alleged default by the defendant on the loan repayments

9 The defendant is the registered proprietor of land in Port Kennedy (the Land). In 2007, he borrowed a little over $360,000 from the plaintiff pursuant to a written loan agreement. The repayment of the loan was secured by a mortgage granted by the defendant in favour of the plaintiff over the Land. There was a house on the Land. The plaintiff says that the defendant defaulted on the loan in January 2016 by failing to pay the sum of $3,867 when it fell due.

10 A notice of default was issued by the plaintiff's solicitors. The plaintiff says that the defendant did not remedy the default. On 25 February 2016, the plaintiff entered into possession of the Land in the exercise of the rights it claimed as mortgagee. (It appears that the defendant had previously vacated the property in view of fire damage to it.)

11 In her affidavit, Ms Strack deposes that between January and May of 2016, attempts were made by the plaintiff's staff to contact the defendant in respect of the default. Some of those attempts were successful and some were unsuccessful. On occasion, the defendant himself called the plaintiff's staff and discussed the repayment of the default amount and how he could regain possession of the Land.

12 Between 7 April and 5 May 2016, there were various communications between the plaintiff's staff and the defendant. By late April 2016, the arrears had reached just under $11,400, and there was a discussion about the repayment of that outstanding amount. The defendant made arrangements authorising the direct debit of the arrears from a bank account with another financial institution. Although there was no evidence as to this, the plaintiff's counsel advises me that the plaintiff has not yet effected that direct debit.

(ii) The insurance claim made by the defendant which is alleged to have resulted in a payment to the defendant

13 It appears that, in or about 2014, the house on the Land was very badly damaged by fire. The defendant subsequently advised the plaintiff that he had made a claim on the insurance policy that he had maintained with the RAC in respect of the house and its contents. The plaintiff was noted on that policy as the mortgagee in respect of the Land. By early April 2016, as a result of communications with the RAC, it appears that the plaintiff had come to expect that it would receive a payment under the insurance policy direct from the RAC.

14 On or about 6 May 2016, the RAC advised the plaintiff that it had resolved the defendant's insurance claim on confidential terms as between it and the defendant and that a payment would be made to the defendant. (It appears that settlement of the claim had occurred following a complaint made by the defendant to the Financial Ombudsman in relation to the claim.) Information the plaintiff has been able to glean from communications with the RAC suggests that a payout of the claim was made to the defendant on or about 9 May 2016 into a bank account in the defendant's name with another financial institution (the Insurance Payment). The precise amount of the Insurance Payment is not known to the plaintiff but information available to the plaintiff suggests that the Payment may have been in the vicinity of $330,000.

(iii) The defendant's alleged failure to pay the Insurance Payment to the plaintiff

15 The third factual matter to which reference needs to be made is the plaintiff's allegation that the defendant has failed to pay the Insurance Payment to the plaintiff as he is required to do pursuant to the loan agreement.

16 On 9 May 2016, the plaintiff sent a letter to the defendant by email directing him to pay the Insurance Payment into his loan account with the defendant (the Direction). Ms Strack's first affidavit set out a number of attempts she made to communicate with the defendant by email and phone between 9 May and 17 May 2016, in the course of which she advised the defendant that he was required to pay the Insurance Payment to the plaintiff. Ms Strack deposed to three indicia which suggest that the defendant received these communications.

17 Two emails sent by the defendant on 11 May 2016 suggest that he had received Ms Strack's previous communications, although it is not entirely clear whether or not the defendant fully understood the implications of the correspondence that he appears to have received. In addition, Ms Strack had a telephone conversation with the defendant on 17 May 2016. Ms Strack deposed that during that conversation, the defendant acknowledged receipt of her emails. Ms Strack deposed that the substance of that conversation was as follows. Ms Strack explained to the defendant that she had been attempting to contact him in relation to the Direction and informed him that he must pay the Insurance Payment into the loan account. Ms Strack asked the defendant whether he would be transferring funds to the loan account in accordance with the Direction and he answered 'Yes.' Ms Strack asked the defendant when he proposed to make that payment, but he refused to discuss that matter and he then terminated the call. Ms Strack deposed that she was not left with the impression that the defendant intended to cooperate with the plaintiff or transfer the funds in accordance with the Direction.

Developments since the first hearing of the chamber summons

18 At the first hearing of this matter on 9 May 2016, the plaintiff sought to restrain the defendant from dealing with property equal in value to the full amount of the Insurance Payment. Since then, the plaintiff has obtained a valuation of the Land. In its present condition, with the fire damage to which I have referred, the Land is said to be valued at $190,000, although any proceeds from a sale would need to be subject to a deduction of the agent's commission and other expenses associated with sale.

19 In view of that further information, the plaintiff has amended the orders it seeks on the Application. It no longer seeks to restrain the defendant from dealing with the full amount of the Insurance Payment, but rather seeks to restrain the defendant from disposing of his assets in the sum of $160,000, which is said to reflect the approximate amount that would be owing to the plaintiff following the recovery of proceeds from any sale of the Land and in view of the outstanding balance of the loan.

The principles applicable to the grant of freezing orders

20 I turn to the requirements for a freezing order to explain why I am content to make the interim order sought in this case.

21 Order 52A r 2(1) RSC makes clear that the purpose of the Court's jurisdiction to make a freezing order is to prevent the frustration of the Court's processes. Like a Mareva order, the purpose of a freezing order under O 52A is to ensure the efficacy of the execution which would lie against an actual or prospective judgment debtor by preserving funds to meet the judgment or prospective judgment. Thus the object is to protect the integrity of the Court's processes, and to prevent the abuse or frustration of the Court's processes. That does not necessarily require that the defendant have any intention to frustrate those processes.[1]

22 The High Court in Cardile v LED Builders Pty Ltd has made clear that the grant of a Mareva order should be approached with a high degree of caution.[2] The reason for that position is that, as a matter of practical reality, a freezing order operates as a tight 'negative pledge' species of security over property and a contempt sanction is attached to it.[3] As Beech J noted in Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd, 'a Mareva order is a drastic remedy which should not be granted lightly'.[4] A further reason for exercising caution is that, in many cases, there may be difficulties associated with the quantification and recovery of damages pursuant to a plaintiff's undertaking as to damages if it were to turn out that the order should not have been made.[5]

23 In the circumstances of this case, the freezing order is sought pursuant to O 52A r 5 RSC. The requirements for the freezing order are, first, that the plaintiff must have a good arguable case on an accrued or prospective cause of action that is justiciable in this Court. (As I have mentioned, an action has been commenced in this Court by the plaintiff in the terms to which I have referred.) Secondly, the Court must be satisfied, having regard to all of the circumstances, that there is a danger that the prospective judgment will be wholly or partly unsatisfied because, amongst other things, the prospective judgment debtor's assets may be disposed of, dealt with or diminished in value. Thirdly, given that a freezing order is a discretionary remedy, the Court is required to consider whether the balance of convenience favours the grant of the freezing order.

24 Although it is convenient to refer to each of those factors separately, they are all necessarily interconnected and a freezing order should only be granted by reference to all of the factors, considered as a whole. The strength of the plaintiff's case, the danger of frustration of a prospective judgment, the balance of convenience and any other relevant discretionary factors are all considered together in the exercise of the discretion.[6]

25 For the purpose of making interim orders, I accept that the evidence to which I have referred at [9] - [17] above demonstrates that the plaintiff has a good arguable case in respect of the claim set out in the indorsement to the Writ, in that that evidence suggests that the defendant has failed to pay the Insurance Payment to the defendant, as required under the loan agreement.

26 In support of that claim, the plaintiff points to cl 5.2 of the terms said to form part of the mortgage. That clause requires the defendant to do his best to ensure that proceeds from an insurance claim are used to reinstate the property or are paid to the plaintiff and in the event that the plaintiff directs the defendant to use or hold proceeds from an insurance claim in a particular way, requires the defendant to use them as directed.

27 Based on the facts outlined in the affidavits before the Court, I am satisfied that the plaintiff has made out a good arguable case.

28 The more difficult part of this case, as counsel was made well aware in the course of yesterday's hearing, is satisfaction of the second requirement for a freezing order.

The danger of frustration of a prospective judgment

29 The basis for the Application is not that there is a risk of flight on the part of the defendant, nor is there any evidence to support such an allegation given that the evidence presently before the Court suggests that the defendant has family and employment in Western Australia. Rather, the basis for the Application is that the plaintiff says there is a danger that the assets of the defendant, as the prospective judgment debtor, may be disposed of, dealt with or diminished in value.

30 What has been of concern to me in this case is that there is relatively little evidence before the Court to permit any inference as to why the Insurance Payment made to the defendant has not, in turn, been paid to the plaintiff. A variety of possibilities exist as to why no payment has been made, not the least of which might simply be that the defendant disputes any liability to pay the money. The evidence simply does not disclose any reason for the nonpayment at this stage.

31 Turning to the matters of which the Court needs to be satisfied under this requirement, I start by noting that the authorities make clear that the Court's jurisdiction to grant a freezing order is not to be invoked for the purpose of providing a plaintiff with security for its claim, even if it appears that a claim is likely to succeed and even if there is no reason to suppose that the restraint would cause any real hardship to a defendant. In this respect, it is sufficient to refer to observations made by Kerr LJ in the Ninemia case, where his Honour observed that:[7]

[A]s the law stands, this jurisdiction cannot be invoked for the purpose of providing plaintiffs with security for claims, even when these appear likely to succeed we are speaking generally and not with reference to this case and even when there is no reason to suppose that an order for an injunction, or the provision of some substitute security by the defendants, would cause any real hardship to the defendants.

32 The High Court also made the same point very clearly in Jackson v Sterling Industries Ltd, where Deane J said that the purpose of a freezing order:[8]

is not to create security for the plaintiff or to require a defendant to provide security as a condition of being allowed to defend the action against him. Nor is it to introduce, in effect, a new vulnerability to imprisonment for debt, or rather for alleged indebtedness, by requiring a defendant, under the duress of the threat of imprisonment for contempt of court, to find money, which he may or may not have (whether or not at some point of time it may have been available to him), to guarantee to a plaintiff that any judgment obtained will be satisfied. It is to prevent a defendant from disposing of his actual assets (including claims and expectancies) so as to frustrate the process of the court by depriving the plaintiff of the fruits of any judgment obtained in the action.

33 Accordingly, the Court cannot make a freezing order simply on the basis that a defendant might not meet a judgment debt. More is required to demonstrate that, having regard to all of the circumstances, there is a danger that the prospective judgment will be wholly or partly unsatisfied because the judgment debtor's assets may be disposed of, dealt with or diminished in value.

34 In the present case, counsel for the plaintiff relied on a number of aspects of the circumstances deposed to in the affidavits, to support the claim that such a danger exists. It is not necessary or appropriate to refer to all of those alleged circumstances. I do not rely upon those that I have not mentioned for the purpose of making a freezing order in this case. I make note of this because some of the circumstances referred to were, with respect to counsel, wholly speculative. In respect of some of the other circumstances on which counsel relied, there was simply too little information available to permit any inference to be drawn, based on those circumstances, that there is a danger that the defendant may dispose of, or deal with, or diminish in value, his assets so that he might not be able to meet any judgment debt.

35 However, what can be relied upon, and what I am satisfied is sufficient to warrant the grant of interim relief in this case, is that it appears from the evidence that the defendant has received the Insurance Payment in circumstances where the relevant insurance policy was a requirement of the loan and where that insurance appears to have been intended to be been for the benefit of the plaintiff as mortgagee, at least to the extent that the building on the Land formed part of the security for the loan. Furthermore, the evidence before the Court suggests that there has been notice to the defendant that the terms of the mortgage require that any Insurance Payment be paid to the plaintiff and that the defendant has not made payment. I note that it appears that the default in this respect has only occurred over the past week. However, evidence given by Ms Strack in her affidavit as to her communications with the defendant leads me to the conclusion that there is a basis, having regard to that evidence, for an inference that the defendant does not intend to pay the Insurance Payment to the plaintiff and perhaps intends to dispose of or diminish the value of those funds, which may have the result that he would not be in a position to meet a judgment debt, and in that way the Court's processes may be frustrated.

36 This conclusion is, I acknowledge, in effect, largely based on the same evidence as is relied upon to support the first limb of the requirements for the freezing order, that is, the good arguable case that the defendant is in breach of the terms of the mortgage in that he has not paid the Insurance Payment to the plaintiff as directed. However, as Gleeson CJ pointed out in Patterson v BTR Engineering (Aust) Ltd:[9]

There is no reason in principle why the evidence which is relevant to the first of [those] issues ... might not also have a bearing on the second.

37 Meagher JA made the same point.[10] His Honour, however, noted that:[11]

Normally proof of the first ingredient alone will not suffice; normally one cannot infer a risk of the dissipation of assets from the fact that the plaintiff has a prima facie cause of action.

38 Both of their Honours acknowledge that there may be circumstances where it is possible to rely on the evidence which establishes first limb in order to establish the second limb. In Patterson, it was possible to do so because the first limb involved allegations of serious dishonesty on the part of the defendant. However, neither the Chief Justice nor Meagher JA confined the circumstances in which evidence as to the first limb could be relied on to establish the second limb, to circumstances of dishonesty. Accordingly, it is not necessary in this case to frame the circumstances relating to non-payment of the Insurance Payment by reference to any allegation of dishonesty as counsel for the plaintiff sought to do at one point in his submissions. The question in every case comes down to the totality of the circumstances and what inferences the court considers can be drawn from those circumstances.

39 As I have already observed, the plaintiff now seeks to restrain not the entire amount of the Insurance Payment it believes the defendant has received but only that part which would represent the likely balance of any judgment debt that it would not otherwise recover from the sale of the Land. Confining a freezing order to that amount will permit the defendant to make use of the balance of any of the funds he has received. Nothing in the material before me at present suggests any prejudice or hardship would arise from that outcome so as to tip the balance of convenience against the making of an interim freezing order.

40 In summary, I consider that the plaintiff has made out a good arguable case on the cause of action it seeks to pursue in this Court, sufficient to satisfy the first limb of the requirements for a freezing order. I am also satisfied on the evidence before me at this stage that there is a danger that the defendant's assets will be diminished or dissipated so that any judgment debt might not be able to be met, and that there is a danger that the Court's processes may be frustrated in that sense. The balance of convenience does not weigh against the making of an interim freezing order at this stage. I emphasise that all of these matters will fall to be redetermined once the defendant has been served and the application is brought back for an inter partes hearing.

41 Accordingly, I will make a freezing order restricted to the amount of $160,000.

42 Finally, I should observe that at this stage I am not minded to make an ancillary order requiring the defendant to provide information in respect of his assets. It seems to me that the preferable course is for the defendant to be served and for the restraint of his assets to be put in place pending the inter partes hearing. Having regard to the rather modest sum in dispute between the parties (when compared with the cost of the Application) the parties should explore whether it is possible to resolve their dispute without the need to expend more time, and possibly more money in legal expenses, on the pursuit of further orders as against the defendant. Of course, I will hear from the plaintiff further in respect of any application for ancillary orders upon the return of the application at the inter partes hearing.

43 I will discuss with counsel the precise terms of the freezing order which should be made.

[1] See the discussion by Beech J of those principles in Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd [2011] WASC 188 [134] [135].

[2] Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380.

[3] Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 [50].

[4] Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd [2011] WASC 188 [139].

[5] See Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 [52].

[6] Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Co Pty Ltd [2011] WASC 188 [142] citing Perth Mint v Mickelberg (No 2) [1985] WAR 117, 119 and Glenwood Management Group Pty Ltd v Mayo [1991] VicRp 45; [1991] 2 VR 49, 54 55.

[7] Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG; The Nidersachsen [1983] 1 WLR 1412, 1422.

[8] Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612, 625 (Deane J).

[9] Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 325 (Gleeson CJ).

[10] Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 326 (Meagher JA).

[11] Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 326 (Meagher JA).