Shirota v Liu

JACKMAN J: 1 This is an application for an order ancillary to a freezing order pursuant to r 7.33 of the Federal Court Rules 2011 (Cth) (Rules) against Ms Chunni Shui, the former wife of the second respondent, Mr Zhou. In its original form, the interlocutory application sought an order to freeze the disposal of 50% of the net sale proceeds from the property at 21 Marian Street, Killara (the Killara Property), but in its modified form as handed to me today and as communicated to Ms Shui's legal representatives last night, the ancillary order which is sought seeks to impose a regime of notification as to the sale of the Killara property and the purchase of a new residence for Ms Shui. Ms Shui is not a party to the proceedings and, as I have indicated, is the former wife of the second respondent, Mr Zhou. The respondents are alleged to have engaged in misleading or deceptive conduct and unconscionable conduct and are also alleged to have breached a guarantee provided to the applicants in 2015. 2 In relation to the guarantee, I am satisfied that there is a good arguable case against Mr Zhou based on the way in which that guarantee was said to have been executed, which gives rise to a question of construction as to whether the respondents were bound personally to honour that guarantee or whether it only binds the entity referred to as "Red Oak Property Fund." As I understand it, Mr Raftery who appeared for Ms Shui did not contest that there was a good arguable case against Mr Zhou on that basis. 3 Rule 7.35(1) of the Rules requires as a condition of the application of the rule that an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the Court, and I am satisfied that that element is met in the present case. Rule 7.35(5) then confers power on the Court to make a freezing order or an ancillary order against a person other than a judgment debtor or prospective judgment debtor if the Court is satisfied that, having regard to all the circumstances, there is a danger that a judgment or prospective judgment would be wholly or partly satisfied because of various matters, or a process in the Court may ultimately be available to the applicant as a result of a judgment or prospective judgment under which process the third party may be obliged to disgorge assets or contribute towards satisfying the judgment or prospective judgment. 4 On 23 June 2017, Ms Shui became the sole registered proprietor of the Killara Property having purchased it for $4.9 million. Mr Zhou is the sole director and shareholder of EZ Consulting Group Pty Ltd which recorded the Killara Property address as the company's registered office and principal place of business. Mr Zhou is also the sole director and shareholder of EZ Consulting Group Pty Ltd, which recorded the Killara Property address as the company's registered office and principal place of business. Mr Zhou is also the sole director and 50% shareholder of Pachira Investment Pty Ltd and gives the Killara Property as his residential address, shown on a company search of that company. On 3 November 2023, signage for the sale of the Killara Property was observed on the Killara Property, and an employee of the applicants' solicitors was told by the listing agent that the Killara Property was for sale with a price guide of $8.8 million to $9.4 million, and he subsequently received a copy of the draft contract of sale. 5 Ms Shui has affirmed an affidavit on 13 November 2023, which gives evidence to the following effect. She and Mr Zhou were married in China on 11 July 2001, she came to Australia on or around 30 March 2002 and has lived in Australia since then, and she is now an Australian citizen. They have a son, who was born in Australia in 2004 and is attending university in Australia. She has no plans to leave Australia in the foreseeable future or to live in any country other than Australia. Her son also does not have any plans to live in any country other than Australia. While Mr Zhou and Ms Shui were living together, they jointly repaid the mortgage of the Killara Property with their income. The current loan balance is around $3,388,684.50. On 17 August 2018, Mr Zhou's company, Pachira Investment Pty Ltd, purchased a property in Lindfield for $5 million. Ms Shui has had her own businesses and has never been involved in Mr Zhou's businesses. 6 Ms Shui gives evidence that her relationship with Mr Zhou started to break down in around 2017. They attended marriage counselling in around October 2018. Mr Zhou resided in China since the outbreak of the pandemic in 2020 until around December 2021, during which time Ms Shui resided in Australia with their child. She seldom spoke to Mr Zhou during that time. In March 2022, the marriage broke down irretrievably. Ms Shui found the breakdown of the marriage very embarrassing and gives evidence that in Ms Shui's and Mr Zhou's culture, divorce, especially due to extramarital affairs, is still stigmatised, and she would avoid talking about it where she can. On 26 March 2022, Ms Shui filed a divorce application in China, as they were married in China and the Chinese court did not require the waiting period of a year for divorce. A divorce order was made by the Chinese court on 27 December 2022. 7 From August 2022, Ms Shui and Mr Zhou started to negotiate about the financial settlement of their matrimonial assets. On 12 January 2023, consent orders were made by the Federal Circuit and Family Court of Australia in which, among other things: (a) the Killara Property is to remain Ms Shui's property, free from any future claim by Mr Zhou; (b) Mr Zhou is to pay the mortgage and other costs of the property until the property is sold within 24 months; and (c) Mr Zhou is to be entitled to the shares of Pachira Investment Pty Ltd, and the property which it owns was encumbered at the time of the consent orders for $2.4 million. 8 Ms Shui gives evidence that Mr Zhou has not been paying all the mortgage instalments of the Killara Property as required by the consent orders, which has placed Ms Shui under significant financial burden. Since the divorce, Ms Shui has had limited contact with Mr Zhou, and the only conversations they have had are limited to the divorce proceedings, his failure to pay the costs as required by the consent orders, and their son. In view of the financial position which Ms Shui is now in, she decided to sell the Killara Property and purchase another property with the sale proceeds as her place of residence. She expects the Killara Property to be sold for at least $8.5 million, and after paying off the mortgage, she expects to receive around $5 million which, on her evidence, should be sufficient to purchase another property, either without finance or with limited bank finance. 9 Ms Shui listed the Killara Property for sale in April 2023 and engaged two real estate agents for that purpose. However, the property did not achieve a satisfactory price in three months, and Ms Shui removed the online listing. In September 2023, Ms Shui engaged another real estate agent to again list the Killara Property for sale, and it remains advertised for sale. While attempting to sell the Killara Property, Ms Shui has also been actively looking for property to purchase and has made enquiries or inspected a number of different properties. 10 Ms Shui also gives evidence as to a process server coming to the Killara Property on 23 August 2023, and on that occasion, Ms Shui said that she was not involved in Mr Zhou's business. Ms Shui does agree that she said that she was Mr Zhou's wife, but gives evidence that she did so out of embarrassment that they were divorced and because she did not want to disclose her private affairs to a stranger. When the process server attempted to hand Ms Shui a bundle of documents for her to pass on to Mr Zhou, she refused to accept them on the basis that this was Mr Zhou's matter and none of her concern. Rather, she gave the process server Mr Zhou's email address. Ms Shui did recall Mr Zhou mentioning to her that a Japanese investor had invested around $5 million in Red Oak Fund, but that was the extent of her knowledge about the matter. She did not know the name of the investor and did not know of the proceedings against Mr Zhou until she was approached by the process server. 11 Mr Hewitt SC for the applicants submits that there is a good arguable case against Mr Zhou based on the obligations under the guarantee, which as I have indicated is not contested by Ms Shui. Mr Hewitt submits that there is an arguable case that while Mr Zhou and Ms Shui were married and until the Court orders of 12 January 2023, the Killara Property was held on trust for both of them, relying on the judgment of Gordon J in Deputy Commissioner of Taxation v Vasiliades [2014] FCA 1250; (2014) 323 ALR 59 at [62]-[67], and the cases referred to in those paragraphs. I accept that up to that point in time there is a good arguable case as to such a trust, with the result that 50% of the beneficial interest in the Killara Property was at that time arguably held by Mr Zhao. As to the orders made by the Federal Circuit and Family Court of Australia on 12 January 2023, Mr Hewitt submits that there is a reasonable and arguable case that those orders are liable to be set aside on the basis that they constituted an alienation of property with the intent to defraud creditors within the meaning of s 37A of the Conveyancing Act 1919 (NSW) or s 79A of the Family Law Act 1975 (Cth) on the basis that the orders prejudiced creditors without notice to them. 12 In relation to the argument concerning s 79A, Mr Hewitt relies on the judgment of Parker J in Nguyen v Corbett [2017] NSWSC 1689; (2017) 19 BPR 38,191, especially at [101] and [102]. The effect of s 79A of the Family Law Act is that a person affected by an order made by a court under s 79 in property settlement proceedings may apply to have the order set aside or varied by satisfying the court that, relevantly, there has been a miscarriage of justice by reason of fraud, duress, suppression of evidence, the giving of false evidence "or any other circumstance". Mr Hewitt submits that the expression "any other circumstance" is wide enough to include circumstances where the making of the property settlement orders with the consent of both Ms Shui and Mr Zhao brought about a transfer of Mr Zhao's interest in the Killara without notice to the applicants and, thereby, prejudiced their interests as creditors. That argument does go beyond the circumstances which were considered in Nguyen v Corbett, which dealt with the making of incomplete or misleading statements in the obtaining of the property settlement orders. However, I do not regard anything in the reasoning of Parker J as limiting the expression "any other circumstance" to those particular circumstances. As to the application of s 37A of the Conveyancing Act, Mr Hewitt submits that it is only Mr Zhao who had an intent of defrauding creditors. 13 Mr Raftery submits that the application of s 79A of the Family Law Act to the present circumstances would depend on whether misleading statements were made to the Court in obtaining the orders. However, as I have indicated, I do not regard the expression "any other circumstance" as being confined to that particular set of circumstances, and I do regard the expression as sufficiently wide to encompass the argument which Mr Hewitt has advanced. In my view, the element of r 7.35 requiring there to be a good arguable case in relation to s 79A of the Family Law Act and s 37A of the Conveyancing Act on the present evidence is at the weaker end of the spectrum, however the threshold is a low one and I regard it as having been satisfied in the present case. 14 As to the balance of convenience, the present application for what is, in substance, a regime of notification is not particularly burdensome and would enable the applicants to satisfy themselves as to the bona fides of Ms Shui's transactions with the Killara Property and any property purchased with the proceeds of that sale. 15 There are two exceptions, however, to that proposition. One concerns the order sought in paragraph 1(a) whereby Ms Shui is to provide the applicants with written notice five business days prior to exchanging any contract for the sale of the Killara Property, attaching a copy of the contract to be exchanged, unless the property is to be sold at auction (in which case, 10 days' notice is to be provided of the date and place of the auction). I do not see that there is any particular need or desirability for that information to be provided and I can see a situation where a likely sale at an attractive price might fall through because contracts are unable to be exchanged for a period of five days after the terms have been agreed orally. 16 Likewise, paragraph 1(e) of the proposed orders would require Ms Shui to provide the applicants with written notice five business days prior to entering into any contract for the purchase of any real property, including particulars as to the price to be paid using the sale proceeds received or to be received from the Killara property and providing a copy of the contract for the purchase. Again, I do not see any need or desirability for that information to be provided. And again, I can see a circumstance in which Ms Shui may be unable to achieve an exchange of contracts because of the delay of five days between reaching an oral agreement and the formal exchange of contracts. Accordingly, I am not prepared to make an order which includes those two elements. 17 Mr Raftery submits that the applicants have sufficient protection in order to satisfy a prospective judgment by reason of the assets held by Zhou himself, by way of shares in Pachira Investment Pty Ltd which, in turn, owns valuable real property, and also by the property which is owned by the first respondent, Mr Liu. It does not appear to me that Mr Zhou's personal assets in Pachira Investment Pty Ltd would be sufficient to meet a successful judgment in favour of the applicants in these proceedings, and it is difficult to know what the actual value is of assets held by Mr Liu in circumstances where there is no evidence as to the extent to which the real property assets which he holds are encumbered. In those circumstances, I think it is realistic for the applicants to fear that a successful judgment may not be able to be met by the assets standing in the names of the first and second respondents personally. In view of the minimal burden imposed by the notification regime propounded by the applicants, I regard the balance of convenience as favouring those limited orders. 18 As to the question of costs, the interlocutory application as originally framed, which sought a freezing order in relation to 50% of the net proceeds of sale of the Killara Property, would have been dismissed with costs on the evidence, as it has turned out. I recognise that much of that evidence was served this week, but having seen that evidence, I would not have made the order as originally formulated, and I commend the applicants for having modified their application in the way in which they have. The modified form of the application was served last night after 7 pm. By that time, counsel had been briefed, an affidavit of Ms Shui had been made, and counsel had prepared written submissions, which were handed up today. 19 The applicants submit that they only became aware of Ms Shui's evidence when her affidavit was served two days ago at around 1 pm, and I am not critical of the applicants who have responded promptly and appropriately to that evidence. Ms Shui's counsel, in my view, acted reasonably in opposing the amended relief, and has been partly successful in doing so, and, as I have indicated, he would have been successful if the interlocutory application, as originally framed, had been pursued. 20 In terms of the costs incurred during the course of today, the applicants have explained the rationale for the amended application as being that they want to have an assurance, or the ability to verify, that matters proceed consistently with Ms Shui's evidence. I accept that that is a genuine and legitimate objective for the applicants to hold, and justifies their conduct in proceeding with the matter today. 21 However, in all the circumstances, I think that a fair price to pay for that assurance and verification is to ensure that Ms Shui is not materially prejudiced by conduct which, as far as the Court is able to ascertain, will proceed in accordance with the intentions that she has affirmed in her affidavit. Avoiding such material prejudice, in my view, includes the applicants having to pay her costs. Accordingly, I order that the applicants pay Ms Shui's costs of the application. I also order that Mr Zhou pay his own costs of today. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.