Shirota v Liu

JACKMAN J 1 On 26 February 2024, the applicants filed an application seeking freezing orders against Pachira Investment Pty Ltd (Pachira), a company controlled by the second respondent, Mr Zhou, and owned by Mr Zhou and the first respondent, Mr Liu. The application seeks orders requiring the payment of the net proceeds of sale of a property registered in Pachira's name and located at 4 Drovers Way, Lindfield, New South Wales, 2070 into an interest-bearing account (the Lindfield Property). Pachira is the trustee of the Pachira Unit Trust, the units of which appear on the evidence available to me to be beneficially owned by the first and second respondents. 2 The Lindfield property is mortgaged to Prime Capital Securities Pty Ltd (Prime) and the sale of the Lindfield property is to be effected by Prime exercising a power of sale under its mortgage. An auction is scheduled for 23 March 2024. Accordingly, the applicants seek an order that the mortgagee, Prime, pay the net proceeds of sale after discharge of the mortgage into an interest-bearing account. The applicants also seek ancillary orders restricting the transfer or further encumbrance of the first and second respondents' respective interests in the Pachira Unit Trust, under which the Lindfield property is held. 3 The applicants commenced the proceedings on 21 August 2023 by way of an originating application and a concise statement seeking to recover an investment of $5 million plus interest from the respondents, Mr Liu and Mr Zhou. Mr and Mrs Shirota made the investment of $5 million on 23 December 2015. The applicants contend that the respondents personally guaranteed the repayment of their investment plus interest at a rate of 10% per annum. The applicants also seek damages for statutory misleading or deceptive conduct. Their claim, including interest, exceeds $9 million. 4 The present application is brought in circumstances where: (a) the first and second respondents have refused to undertake not to dissipate the proceeds of the sale of the Lindfield property, and have not provided any explanation of why they should not be required to do so; (b) the second respondent, who is the sole director and secretary of Pachira, currently resides in Shanghai; (c) the second respondent's former wife has given evidence in this proceeding that the second respondent's interest in the Lindfield property is his only significant asset in the jurisdiction; (d) the second respondent's former wife has also given evidence that the second respondent has not made mortgage payments as required by orders of the Federal Circuit and Family Court of Australia made on 12 January 2023; and (e) the second respondent is currently in default of orders for discovery made on 2 November 2023, and varied on 16 November 2023 and 14 February 2024. When queried about this default, the second respondent's solicitor said on 16 February 2024 that they had not been able to contact their client in the last two weeks. 5 The evidence as to the first and second respondents' interest in the Lindfield property is as follows: (a) Pachira is the registered proprietor of the Lindfield property; (b) according to ASIC records extracted on 26 February 2024 the first and second respondents each own 50% of the issued capital in Pachira, but in a letter dated 25 January 2024 Mr Liu's solicitor said that Mr Zhou sold 100% of the shares in Pachira to Mr Liu for $1 pursuant to a deed executed on or around 14 August 2020; (c) the Lindfield property is an asset of the Pachira Unit Trust; (d) the evidence given by the second respondent's former wife and the Federal Circuit and Family Court orders dated 12 January 2023, signed by her and Mr Zhou, describe Pachira as Mr Zhou's company, say that Pachira purchased the Lindfield property for $5 million on 17 August 2018 using money received from the former wife's mother, and say that the former wife relinquished any interest in Pachira and the Lindfield property to Mr Zhou; (e) during 2020, Mr Zhou and Mr Liu discussed compensating Mr and Mrs Shirota for their loss by a transaction involving the Pachira Unit Trust and the Lindfield property; (f) as a result of the transaction in 2020, Mr Liu acquired 50% of the units in the Pachira Unit Trust for $5 pursuant to a deed; (g) in addition, Mr Zhou agreed to cause 40% of the units in the Pachira Unit Trust to be acquired by Mr Liu for $4 and 10% of the units in the Pachira Unit Trust to be acquired by Mr Zhou for $1, but these transfers did not occur; (h) by letter dated 25 January 2024, Mr Lieu's solicitor advised that the units in the Pachira Trust were owned as set out in the two previous subparagraphs. 6 For a freezing order to be made, the applicants must establish that there is a good arguable case on an accrued or prospective cause of action that is justiciable in this Court, there are grounds for a freezing order against a third party pursuant to r 7.35(5) of the Federal Court Rules 2011 (Cth) (Rules), and the balance of convenience favours making such an order. 7 As to there being a good arguable case on an accrued or prospective cause of action that is justiciable in this Court, in Shirota v Liu [2023] FCA 1429 I found that there was a good arguable case against Mr Zhou based on the guarantee argument in circumstances where his former wife's counsel did not contest the issue. The threshold for establishing a good arguable case is a low one; the case must be more than barely capable of serious argument, but need not necessarily have a better than 50% chance of success. I am satisfied in this case that there is a good arguable case to the effect that: (a) on 23 December 2015, the applicants invested $5 million in the Red Oak Property Fund; (b) the investment was personally guaranteed by the first and second respondents, who guaranteed the return of the principal invested by the applicants in four years' time plus interest of 10% per annum, although I apprehend that there will be a serious contest as to that matter; (c) the applicants transferred the $5 million to an account as directed by the first respondent on 23 December 2015; and (d) the applicants have not been repaid the principal sum of $5 million, nor have they received any interest. 8 Where a freezing order or an ancillary order is sought against a third party pursuant to r 7.35(5) of the Rules, the court must be satisfied, having regard to all the circumstances, that: (a) there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because: (i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (b) a process in the Court is or 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. 9 In the present case, both of the alternatives in r 7.35(5) are satisfied. 10 In relation to paragraph (a), the applicants submit, and I accept, that there is a danger that a prospective judgment against Mr Liu or Mr Zhou will be wholly or partly unsatisfied because once the Lindfield property is sold and Prime is repaid, if the surplus proceeds are paid to Pachira without restriction, then Pachira (and Mr Zhou as its sole director) will be in a position to control Mr Liu's and Mr Zhou's entitlement to the proceeds of the sale of the Lindfield property. 11 In relation to paragraph (b), the applicants submit, and I accept, that a process in the Court may ultimately be available to the applicants as a result of a prospective judgment against Mr Liu or Mr Zhou, under which process Pachira may be obliged to disgorge assets or contribute towards satisfying the prospective judgments. That process may ultimately be available because once the Lindfield property is sold and Prime is repaid, the remaining proceeds of the sale of the Lindfield property may be held on trust for Mr Liu and/or Mr Zhou by reason of the matters noted above in relation to the evidence concerning the interests in the Lindfield property. 12 It is not necessary for the applicants to show that these events will necessarily come about. Rather, it is sufficient that the applicants have demonstrated that a legal process may be set in train by the applicants or a liquidator or a trustee in bankruptcy of the prospective judgment debtor, as a result of which the proceeds held by Pachira may not be available to satisfy the judgment which the applicants are seeking against Mr Zhou and Mr Liu. 13 As to the balance of convenience, I note that the applicants do not seek to prevent the sale of the Lindfield property, but merely seek an order that the net proceeds of sale are paid into an interest-bearing account. Accordingly, in granting the relief sought by the applicants, there is no risk of loss to Pachira due to a fall in property prices, nor do the applicants propose to restrict Prime from exercising its powers as mortgagee or from accessing the funds secured by its mortgage over the Lindfield property. I note also that the applicants proffer the undertakings set out in schedule A of the interlocutory application filed on 26 February 2024, which include an undertaking as to damages. 14 In contrast, if the relief is not granted, there is a danger that the first and/or second respondent will dissipate the proceeds of sale and, with respect to the second respondent, remove them from the jurisdiction. 15 Mr Hu, who appears for Pachira, seeks a variation to the proposed orders such that only 50% of the net proceeds would be held in the controlled moneys account and the other 50% would be available for Pachira to distribute to a company known as Eastern Investments (Australia) Pty Limited. Pachira submits that that company is a 50% unit holder of the Pachira Unit Trust and its interests as an innocent third party would otherwise be adversely affected by the orders made. Pachira relies on the register of unit holders of the Pachira Unit Trust dated 14 March 2016 and 14 August 2020 in support of its submission that that company is the unit holder of 50% of the units. Pachira submits that there is nothing to indicate a change of that unit holding. 16 I reject those submissions. In the first place, it appears from the evidence that on or about 20 June 2020 an agreement was entered into between EZ Consulting Group Pty Ltd and Mr Zhou as vendors and Mr Liu as purchaser, whereby Mr Zhou agreed to cause Mr Liu to acquire 40% of the issued units in the Pachira Unit Trust from Eastern Investments (Australia) Pty Limited for $4, and cause himself to acquire 10% of the issued units in the trust from that company. That evidence indicates that Eastern Investments (Australia) Pty Limited no longer holds any beneficial interest in the 50% of the units which had been registered in its name, as any such agreement would be specifically enforceable, thereby conferring on Mr Liu and Mr Zhou respectively the beneficial interest in any units which are legally held by Eastern Investments (Australia) Pty Limited. 17 Further, the letter of 25 January 2024 sent by the solicitors for Mr Liu to the solicitors for the applicants indicates that the units in the Pachira Unit Trust are held as to 50% by Mr Liu and 50% by Mr Zhou. It is true that the letter suggests that the agreement whereby Mr Zhou agreed to cause 40% of the units to be sold to Mr Liu for $4 and 10% of the units to be transferred to himself for $1 was never completed due to reasons unknown to Mr Zhou. However, as I have said, there appears to be no beneficial interest remaining in those units on the part of Eastern Investments (Australia) Pty Limited. 18 Mr Liu seeks that the proposed order 5(c) be varied to include his solicitor as a signatory to the controlled moneys account. I regard that as an unnecessary and potentially undesirable administrative complexity in circumstances where the applicants' solicitor is of unquestioned integrity and competence, and can be trusted to handle the moneys in the controlled moneys account responsibly. 19 In relation to Prime, the applicants seek the making of orders ancillary to a freezing order pursuant to r 7.33 of the Rules to the effect that Prime is not to dispose of the net proceeds of the sale of the Lindfield property after the mortgage is discharged, but are to pay those moneys to the applicants' solicitor to be deposited in the controlled moneys account. Prime does not oppose orders of that kind. 20 In addition, the applicants seek orders that Prime provide the applicants with a copy of any exchanged sale contract and notice of the settlement of the sale so that appropriate arrangements can be made for the payment of the money on settlement. Prime opposes such an order, referring to concerns about privacy, but such an order strikes me as appropriate to ensure that the applicants are adequately informed of the steps taken by Prime in relation to the sale. The obligation in the proposed order is not an onerous one. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.