Ryder v Frohlich

Supreme Court of NSW|1998-07-17|Before: Brereton J, Cripps AJ

CITATION : Ryder v Frohlich (No 2) [2006] NSWSC 1325

HEARING DATE(S) : 21/09/06 JURISDICTION : Equity

DECISION : Motion for freezing order dismissed with costs

LEGISLATION CITED : Partnership Act 1892 (NSW), s 42 Uniform Civil Procedure Rules 2005 (NSW), r 25.14

Frigo v Culhaci (unreported, NSWCA, 17 July 1998, BC9803225) Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545 CASES CITED : Ninemia Maritime Corp v Trave GmbH & Co KG (The Niedersachsen) [1984] 1 All ER 398 Patterson v BTR Engineering (Australia) Ltd (1989) 18 NSWLR 319 Third Chandris Shipping Corporation v Unimarine SA (The Pythia; The Angelic Wings; The Genie) [1979] QB 645; [1979] 2 All ER 972

Nicholas John Ryder (First Plaintiff/First Cross-Defendant) PARTIES : Protected Equity Investments Pty Ltd ACN 086 671 516 (Second Plaintiff/Second Cross-Defendant) Peter Frohlich (First Defendant/First Cross-Claimant) Coastal Capital Ltd ACN 061 336 445 (Second Defendant/Second Cross-Claimant)

Mr M Young COUNSEL : (First & Second Plaintiffs/First & Second Cross-Defendants) Mr R McHugh (First & Second Defendants/First & Second Cross-Claimants)

Grahame Jackson & Associates SOLICITORS : (First & Second Plaintiffs/First & Second Cross-Defendants) Speed and Stracey Lawyers (First & Second Defendants/First & Second Cross-Claimants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST

2314/03 Nicholas John Ryder & Anor v Peter Frolich & Anor JUDGMENT (Ex tempore) 1 HIS HONOUR: This is an application by a successful defendant, in whose favour there are likely to be substantial costs orders, for a freezing order against the unsuccessful plaintiff. The first plaintiff, Nicholas John Ryder, and the first defendant, Peter Frolich, who are the principals of the second plaintiff and second defendant respectively, are merchant or investment bankers. They were partners in an asset management business. Mr Ryder left the partnership business to work full time for Salomons in March 2001, up to which time the partnership had not proved to be profitable. On 11 April 2003, Mr Ryder commenced these proceedings, alleging that the partnership had remained on foot, notwithstanding his departure, and claiming a share of the profits up to the date of trial, although at the time of his departure from the business he had not asked for any payment. 2 At a very early stage shortly after proceedings were commenced, on 22 April 2003, Mr Frolich sent Mr Ryder a letter, which made a modest offer of about $36,000 payable to Mr Ryder immediately, and which was expressed to be without prejudice except as to costs.

3 In a judgment given on 19 May 2004, Cripps AJ held that the partnership was terminated when Mr Ryder left in March 2001, and remitted the matter to a Master for determination of whether any money was owing to Mr Ryder referable to the value of the business at that date, and also whether other moneys claimed by Mr Frolich in a cross-claim were owed by Mr Ryder to Mr Frolich. In explaining what order should be made, his Honour observed (at [59]): Bearing in mind the way this matter has been dealt with and the way I was asked to approach the question of liability, I would remit this matter to the Master to determine or to take accounts as at March 2001 as to the entitlements of Mr Frolich and Mr Ryder. Mr Frolich's case is at that time the Diversified Fund having only approximately $4 million worth of investment was not profitable and only became so after he obtained more subscribers much later in the year and, he says, of course, that the Equity Fund had no input from Mr Ryder at all. However, Mr Young, on behalf of Mr Ryder, disputes that the business was worthless in March 2001. His submission being, I think, that even although it was not then making a profit, the investments it had the potential to generate profits and hence have a value.

4 The costs of the four day hearing before Cripps AJ were reserved; those costs form part of the costs which Mr Frolich now claims. 5 In his Honour's judgment, Cripps AJ recorded adverse findings in respect of the credit of Mr Ryder, observing (at [34]): At all times Mr Ryder appeared to have a firm understanding of the direction he wished his evidence to go and that any facts or circumstances inconvenient to that course were denied or ignored by him.

6 Mr Ryder appealed, and on 21 December 2004 the Court of Appeal substantially dismissed his appeal, although it varied the terms of the reference to the Master, by adding to its subject matter the question of whether Mr Ryder had any entitlement under the Partnership Act 1892 (NSW), s 42, to profits after the date of dissolution. In the course of a judgment with which Hodgson JA expressed agreement, Ipp JA said (at [12]), "Common sense rebels against the notion that the appellants can now be permitted to assert that the partnership was not terminated as the judge found. In my opinion it is unnecessary to examine this issue any further".

7 The Court of Appeal made an order that Mr Ryder pay 80 percent of Mr Frolich's costs of the appeal. Those costs have since been assessed, and paid by the first and second plaintiffs.

8 In the course of the preparation for the hearing before the Associate Judge - as the Master had, of course, by then become - a dispute arose relating to whether the defendants were entitled to access to an expert report which Mr Ryder had obtained from John Banks of KPMG, but had not served. On 21 December 2005 Barrett J determined that dispute, and granted access to the defendants to Mr Bank's report. His Honour ordered that the plaintiffs pay the defendants' costs of that application; as an interlocutory costs order, those costs presumably became payable upon final determination of the matter. 9 Mr Banks had valued the partnership as at the date of dissolution at between $24,000 and $34,000. At the hearing before the Associate Judge, Mr Ryder relied on a report of a partner in Deloittes Touche Tomatsu which valued the partnership at $320,000. McLaughlin AsJ gave judgment on 18 August 2006. His Honour accepted submissions made on behalf of Mr Frolich that the Deloittes report was seriously flawed, in particular by reason of having relied on instructions and information, provided to the accountant by Mr Ryder, which were deliberately misleading.

10 In the course of his evidence before the McLaughlin AsJ, Mr Ryder contended that he was still a partner, notwithstanding his departure from the business, and that he let Mr Frolich do all the work, waited until the business had increased in value, and then asked for money on account of it. Mr Ryder gave the following evidence: Q. What I suggest to you is that your own conduct in leaving in those circumstances and in not asking for any money from Mr Frolich strongly indicates that the value you placed on the business as at 2 March 2001 was zero. Do you agree? A. No. Q. You say do you that at that time you thought it had a substantial value, but you didn't ask Mr Frolich for anything at that time? A. I still believed we were partners in the business at that time. Q. You understand that the Court is adamant that you made no contribution to the attraction of subscribers to the fund after that time. You are aware of that, aren't you? A. I guess so. Q. But it is your position that you say you still thought you were a partner and you let Mr Frolich do all the work, and you waited until the business had increased in value before asking for money on account of it. Is that your version of things? A. In essence, yes.

11 The Associate Judge concluded that as at the date of dissolution, the partnership was worthless; that no money was owing to Mr Ryder referable to the value of the partnership business as at the date of dissolution; and that, on the cross-claim, Mr Ryder owed Mr Frolich $29,650. He referred the matter back to the Court of Appeal to deal with the question of costs, indicating that before him the plaintiffs should be regarded as having been unsuccessful and the defendants successful, and that Mr Ryder should pay Mr Frolich's costs of the reference. Those costs, too, form part of the costs which Mr Frolich now claims.

12 On 8 September 2006 Mr Frolich's solicitors, Speed & Stracey, wrote to Mr Ryder's solicitors, Graham Jackson & Associates, assessing Mr Frolich's costs on an indemnity basis, but said to be conservatively, at more than $444,475, and seeking an undertaking that Mr Ryder would not, without first having given at least 14 days notice, alienate or further encumber property jointly held with his wife Mrs Jane Ryder at 14 Palmerston Place, Seaforth or otherwise alienate, encumber or remove from Australia any assets to the extent that they did not exceed $444,475, subject to the usual exceptions. The only response was a Without Prejudice letter of 13 September 2006. For reasons given yesterday, I upheld an objection to the tender of that letter.

13 On 12 September the Court of Appeal by consent remitted all proceedings to McLaughlin AsJ for the making of final orders, including all questions of costs.

14 The current position may be summarised as follows. Although there is no judgment for it, it has already been determined that Mr Ryder is indebted to Mr Frolich for $29,000 approximately. Mr Ryder has already been ordered to pay Mr Frolich's costs of the proceedings before Barrett J. In view of the outcome of the proceedings before Cripps AJ and before the Associate Judge, and the opinion already expressed by the Associate Judge in respect of the proceedings on the reference, it appears almost inevitable that there will be a substantial costs order against Mr Ryder, both in respect of the four day hearing before Cripps AJ and three day inquiry before the Associate Judge. In view of the early offer to which I have referred, and the strength of the findings made at all stages of the proceedings, there is a real likelihood that Mr Ryder will be ordered to pay Mr Frolich's costs on an indemnity basis. 15 The only evidence of assets held by Mr Ryder is a search which discloses that he and his wife are the proprietors as joint tenants of land in Folio Identifier C342818 at Manly, which is, I infer, their home at 14 Palmerston Place, Seaforth. It is subject to a mortgage to Homepath Pty Limited. There is no evidence of the value of the home - save whatever might be inferred from that fact that it is at Seaforth - and there is no evidence of the amount secured by the mortgage.

16 On the present application for an asset preservation order, no evidence has been tendered on behalf of Mr Ryder. 17 On an application for an asset preservation order, as a general rule an applicant has to establish, first, a prima facie cause of action against the respondent and, secondly, a danger that by reason of the respondents absconding, or of assets being removed out of the jurisdiction, or disposed of within the jurisdiction, or otherwise dealt with in some fashion, the applicant, if ultimately successful, will not be able to have a judgment in its favour satisfied.

18 Ordinarily, there must be evidence of at least a more than usual danger of assets being removed or dissipated [Frigo v Culhaci (unreported, Mason P, Sheller JA and Sheppard AJA, NSWCA, 17 July 1998, BC9803225)] although doubt as to the utility of that test was expressed by Gleeson CJ in Patterson v BTR Engineering (Australia) Ltd (1989) 18 NSWLR 319, 321 - 322.

19 The jurisdiction is now also contained in the Rules of Court: Uniform Civil Procedure Rules 2005 (NSW), r 25.14, relevantly provides that if an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the Court, the Court may make a freezing order against a prospective judgment debtor if the Court is satisfied, having regard to the circumstances, that there is a danger that a prospective judgment will be wholly or partly unsatisfied because of the prospective judgment debtor absconding, or the assets of the prospective judgment debtor being removed from Australia or disposed of, dealt with or diminished in value. I do not take the Rule to express any different test or to contain any different requirement from those which have been described at general law so far as asset preservation orders are concerned. 20 There is no doubt that Mr Ryder is a prospective judgment debtor in respect of the costs in these proceedings. So as far as the strength of the seriously arguable case is concerned, I would have to conclude that in this case the applicants have a very strong case for a substantial costs order. I come then to what in my mind is the crucial question, which is whether a sufficient risk of dissipation or danger that the judgment may be unsatisfied for any of the reasons referred to in the Rule has been established.

21 In Frigo v Culhaci the Court of Appeal said that a plaintiff must establish, by evidence and not mere assertion, that there is a real danger that by reason of the defendant absconding or removing assets out of the jurisdiction, or disposing of assets within the jurisdiction, the plaintiff will not be able to have the judgment satisfied if successful in the proceedings. While acknowledging there had been much debate as to the precise degree to which this had to be shown, the Court emphasised that mere assertion, that the defendant was likely to put assets beyond the plaintiff's reach, was not enough, for which proposition the Court cited Ninemia Maritime Corp v Trave GmbH & Co KG (The Niedersachsen) [1984] 1 All ER 398, as well as Patterson v BTR Engineering. Of the evidence called in Frigo v Culhaci, the Court of Appeal said: The evidence relied upon at the contested hearing fell far short. The admissions in the "without prejudice" correspondence should have been ignored. The sale of an unencumbered home unit at a figure above market value does not, standing alone, imply disposal of assets in order to defeat a prospective judgment, even where the purchaser is a close relative. Even if, which is doubtful, the appellant's suspension of work in the building contract could have been regarded as evidence of financial difficulties, it was not argued below that it had such effect. More importantly, that alone is not enough. A mareva injunction is not designed to stop a person from sliding into insolvency.

22 Put another way, the prospect of impending insolvency is not a reason to grant a Mareva injunction, for which proposition reference might also be made to the judgment of Young J, as his Honour the Chief Judge then was, in Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545, 558.

23 In a relatively early Mareva case, Third Chandris Shipping Corporation v Unimarine SA (The Pythia; The Angelic Wings; The Genie) [1979] QB 645, 672 Lawton LJ explained the requirement for a real risk of default in terms which show that what is required is a practical commercial judgment: There must be facts from which the Commercial Court, like a prudent, sensible commercial man, can properly infer a danger of default if assets are removed from the jurisdiction. For commercial men, when assessing risks, there is no commercial equivalent of the Criminal Records Office or Ruff's Guide to the Turf. What they have to do is to find out all they can about the party with whom they are dealing, including origins, business domicile, length of time in business, assets and the like; and they will probably be wary of the appearances of wealth which are not backed by known assets. In my judgment the Commercial Court should approve applications for Mareva injunctions in the same way. Its judges have special experience of commercial cases and they can be expected to identify likely debt dodgers as well as, probably better than, most businessmen. They should not expect to be given proof of previous defaults or specific incidents of commercial malpractice. Further they should remember that affidavits asserting belief in, or the fear of, likely default have no probative value unless the sources and grounds thereof are set out…

24 His Honour also endorsed the view that a distinction is to be drawn between assets which by their very nature are easily able to be removed from the jurisdiction with great speed and those which are not, saying: By a few words spoken into a radio telephone or tapped out on a telex machine bank balances can be transferred from one country to another and within seconds can come to rest in a bank which is untraceable or, even if known, such balances cannot be reached by any effective legal process.

25 In contradistinction, assets such as real estate are not so amenable to rapid disposition and removal.

26 The relevant factors in this case appear to be as follows. 27 First, at least with the benefit of hindsight, it might be said that the plaintiffs have engaged in the pursuit of what appears to be unmeritorious litigation, and with some considerable vigour, having pursued it as far as the Court of Appeal. It might be said that their claim was highly opportunistic, having regard to the circumstance that Mr Ryder left Mr Frolich to work in the business for several years and to build up its assets, before claiming a share. That said, there were some arguable points so far as valuation was concerned, and even though the earlier termination date - for which Mr Frolich contended - was resoundingly accepted by Cripps AJ and in the Court of Appeal, there remained an argument that there might have been some entitlement to a share in the partnership profits, or to interest after that date. What defeated that argument, of course, was the conclusion that the partnership had no value at the date of dissolution. The plaintiffs had a small measure of success in the Court of Appeal, reflected in the circumstance that they were ordered to pay only 80 percent of the defendants' costs of the appeal.

28 Secondly, and the matter on which Mr Frolich's counsel most strongly relies, is the "conduct" of Mr Ryder in the course of the litigation. I have already referred to the adverse credit finding made by Cripps AJ, a view which was shared by McLaughlin AsJ. Perhaps the most significant aspect of this conduct was that Mr Ryder, so it would seem, deliberately failed to provide information which would have been highly relevant to the analysis of a transaction on which he wished his valuer to rely as comparable, in the sense that he put forward as a share sale a transaction that was in fact a termination payment made to him in connection with which he was compelled to return shares in an employee share plan. This was plainly misleading and deceptive and calculated to produce a value which favoured him on a false premise. Nonetheless, I think it is a long leap from an adverse conclusion on credit, made in the course of contested proceedings, to a finding that there is a risk of an improper dissipation of assets to defeat a judgment.

29 This is not a case, as Patterson v BTR Engineering was, in which a Mareva order was sought in connection with funds which had been misappropriated, or allegedly misappropriated, by the respondent. While it is true that it might be said that Mr Ryder has engaged in the pursuit of unmeritorious and opportunistic litigation, he has done so as a plaintiff, invoking the processes of the Court, and not as a recalcitrant defendant resisting the processes of the Court. No evidence has been put before me of any default on the part of Mr Ryder in compliance with orders or directions of the Court to date, or of any disobedience of any order by him, and there must have been at least some opportunity, in litigation of this duration, for him to demonstrate recalcitrance or reluctance to comply with requirements of the Court.

30 It is of some considerable significance that the order for costs made against him in the Court of Appeal has been assessed and paid. That detracts from any basis for fearing that he will seek to evade his responsibilities as a judgment debtor. It is also significant that the only identified property is a residential home, as distinct from assets that might be readily liquidated and dissipated and removed from the jurisdiction. There is no evidence of any express threat of dissipation of assets before me.

31 I appreciate fully that an injunction - at least one which simply required notice to be given before dealing with assets - would seem to impose very little inconvenience on Mr Ryder, and I appreciate that there is an understandable desire on the part of a defendant who appears likely to obtain a substantial costs order in its favour in the near future to have some assurance that assets will not be dissipated, but as has repeatedly been stated, the Mareva jurisdiction is not to be used to give an applicant security before judgment, but only to prevent abuses of process.

32 Having regard to the accumulation of the factors to which I have referred, I am unable to infer any intent on the part of Mr Ryder to deal with his assets in a manner which would jeopardise such capacity as he otherwise might have to satisfy a judgment against him. I conclude that a sufficient risk of dissipation has not been made out to justify the grant of a freezing order. 33 My orders are:-

(1). Order that the Notice of Motion be dismissed with costs.

(2). Direct that the defendants by 28 September 2006 serve any further affidavit material and an outline of the submissions they propose to make on the question of costs of the proceedings generally. (3). Direct that by 12 October 2006 the plaintiffs serve any evidence upon which they intend to rely and an outline of their submissions on those questions. (4). Stand the proceedings over to 20 October 2006 at 9.30 before me. (5). Order that the exhibit may be returned on the expiration of 28 days from today if no application for leave to appeal has been filed within that time. **********

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