Shun Sheng Pty Ltd v Jun Lei

Background

1. The statement of claim alleged various aspects of misconduct on the part of Ms Lei, including the misappropriation of cash totalling more than $1 million, partly to feed a gambling addiction. Ms Wei alleged that the partnership was terminated on 30 June 2019 when she entered into an agreement with Ms Lei and her partner, Mr Kitsos. Part of the agreement provided for Ms Wei to pay Ms Lei and Mr Kitsos $4,000 per week, in return for a promise that they would sell a property they owned in Castle Hill and repay the amount of Ms Lei's debt to the company. Some two weeks later, Ms Wei alleged that she agreed to pay a further $1,000 per week, making a total of $5,000 per week in return for a guarantee by Mr Kitsos of the outstanding debt. Curiously, the amount of the debt was not agreed until 9 October 2020, on Ms Wei's pleading, at which stage it was said that Mr Kitsos acknowledged that the amount was "at least $1.1 million". (Although the evidence indicated that Ms Lei may well have gambled such an amount over a period of years, her net losses were a small proportion of the amount spent on gambling.) The pleadings sought a judgment against Ms Lei and Mr Kitsos in an amount of $1.1 million and a referral for accounts to be taken with respect to Ms Lei's dealings with the assets of the partnership.
2. At a trial conducted in mid-August 2023, a key issue was whether the partnership terminated on or about 30 June 2019 (as Ms Wei alleged) or on 18 October 2021, as alleged by Ms Lei and accepted by Ms Wei in the event that the earlier date was not the correct date.
3. In Shun Sheng (No 1), the judge made procedural orders, joining Shuang Pty Ltd (the operating company from 2019, owned by Mr Kitsos) as a third defendant (order 1), winding up the partnership and appointing a receiver and manager (orders 5, 6 and 7), and reserving certain matters for further consideration (order 8). He also made three declarations (orders 2, 3 and 4), and an order otherwise dismissing the plaintiffs' claims against Ms Lei and Mr Kitsos (order 9), although the judgment recognised that Ms Lei might be ordered to repay moneys found on the accounting to have been misappropriated by her. Critical to the plaintiffs' case was a declaration that the partnership was dissolved on 18 October 2021 (order 4), effectively rejecting Ms Wei's primary case that the partnership had been repudiated by Ms Lei's misappropriation of funds, discovered in June 2019.
4. On 2 January 2024, Ms Wei and her two companies sought leave to appeal in respect of (a) the finding as to the date of dissolution of the partnership, (b) her monetary claim against Ms Lei in the sum of $1.1 million and (c) her monetary claim against Mr Kitsos as guarantor of the payment of $1.1 million by Ms Lei. No order was sought in favour of either of the corporate applicants. However, on 22 February an amended summons and draft notice of appeal sought to expand the appeal to cover procedural orders 5, 6 and 7 made in Shun Sheng (No 1) and orders permitting further steps to be taken by Ms Lei in pursuing one aspect of her claims.
5. The application for leave to appeal was based on the assumption that the judgment was interlocutory, for the purposes of s 101(2)(e) of the Supreme Court Act 1970 (NSW). Order 8 made by the trial judge reserved three matters for further consideration, namely: 1. A claim by Sunshine Island (the registered owner of the premises) against Ms Lei for unpaid rent; 2. A cross-claim by Ms Lei against Shun Sheng for an account of partnership assets appropriated to it by Ms Wei; and 3. An account by "any of" Sunshine Island, Mr Kitsos or Shun Sheng for assets or income of the partnership received by them.
6. Without exploring the nature of those outstanding claims, it was accepted by the parties that the finding of fact as to the date on which the partnership was dissolved was of importance to those claims. The fact that the date was in the form of a declaration was no doubt to guide the receiver in determining the debts and liabilities of the partnership. The receivership will not be completed whilst that date remains uncertain. However, the trial judge has fixed only two further days for completion of the proceedings (as compared with four days of hearing in August 2023). One of the matters to be resolved now is whether that hearing should proceed or whether the hearing date should be vacated. In considering that question the attempt to expand the scope of the proposed appeal should be disregarded. It is possible that leave will be refused in relation to interlocutory challenges to procedural rulings.
7. The first and second orders sought in the notice of motion sought to maintain a freezing order with respect to a sum of $1.25 million held in a controlled moneys account established by the respondents' solicitors (order 1). In the alternative, injunctions were sought restraining Ms Lei from disposing of, dealing with, diminishing or otherwise removing the sum of $150,000 from the controlled moneys account and Mr Kitsos from taking similar steps with respect to the balance of $1.1 million. To explain the form of the alternative order, it is necessary to outline the steps by which the moneys were deposited in the account.
8. In April 2023, Ms Wei became aware of a proposed sale by Ms Lei and Mr Kitsos of the family home in Bella Vista. On 24 April 2023, Ms Wei obtained an undertaking not to proceed to settlement without the consent of the applicants or leave of the Court. On 30 August 2023, the Court released the respondents from that undertaking on the basis that $1.5 million of the settlement sum would be retained by their solicitors in a controlled moneys account. On 7 December 2023, after delivering judgment in Shun Sheng (No 1), the trial judge ordered that $250,000 be released to Mr Kitsos. The explanation for the alternative form of the freezing order sought by the applicants is that the Bella Vista property was owned by Ms Lei and Mr Kitsos as tenants in common with Ms Lei's share being 10% and Mr Kitsos' share being 90%. However, if the moneys are not to be released, the form of the alternative orders seems unnecessary. Only if the money is to be released in part, may the initial ownership be relevant.
9. One factor affecting the continuation of the freezing order is the period for which it is likely to operate, if not discharged. That may depend in part on the fate of the stay application and it is convenient to address that issue first, as did the parties in their submissions.

Application for stay

1. Although the notice of motion sought a stay of proceedings in the Court below, the application was, in substance, for an order vacating the hearing dates which had been fixed by the trial judge. It is not a stay of steps designed to give effect to the orders made, although the finding as to the date of the termination of the partnership (which finds form in declaration) will no doubt be the basis for resolving the outstanding issues.
2. There are two curious aspects of the present application. The first is that the parties were unable to identify a specific direction or order listing the matter for hearing on 4 and 5 March 2024, although it was certainly a period identified by the judge in the course of argument, but at a stage when senior counsel for the applicants was given an opportunity to consult his diary. That no doubt happened, but the matter was not addressed again. As a result, there is no direction or order which can be set aside.
3. The other curiosity is that it is generally appropriate that an application to stay proceedings pending an appeal should be dealt with by the court from which the appeal is brought. That principle was recorded by Brennan J in Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd [No 1] [1] and has been applied by this Court in relation to appeals to it. On that basis, it was appropriate to ask whether the present application had been made to the trial judge. It does not appear to have been made in express terms (perhaps because the issue was not revisited after dates were fixed for the further hearing) but it is clear from the discussions referred to in the transcript of 30 January 2024, that the judge was proposing those dates after the application for leave to appeal had been filed, although before the date for a concurrent hearing in this Court was fixed for 29 April 2024, that direction being made by the President on 12 February 2024.
4. There is much to be said for attempts to achieve an early resolution to litigation: so much is mandated by Pt 6 of the Civil Procedure Act 2005 (NSW). Further, by the end of 2023 the proceedings in the Equity Division had already been on foot for two years. The trial judge was conscious that both sides had outstanding claims which were not ready to proceed and was faced with a dilemma. As he noted with respect to a rent claim brought by Sunshine Island against Ms Lei, the evidence before the Court in September 2023 had been insufficient to determine the claim and, rather than dismiss it, he gave Sunshine Island a further opportunity to identify the amount owing. [2] He anticipated a cross-claim by Ms Lei against Ms Wei in relation to the claim for rent. Further, there was an issue as to whether Ms Lei could prosecute a Keech v Sandford claim against Ms Wei, presumably on the basis that as a fiduciary, she had arranged the transfer of the lease from the company operating the business at the time that the partnership was on foot to a new company controlled by her, at least to the extent of 75% of the shareholding (her new partner having the remaining 25%). However, that claim may also have depended upon the date on which the partnership was terminated. In any event, the judge considered it appropriate for that matter to stand over for future consideration.
5. These circumstances will also give rise to a dilemma for this Court. Should the application for leave to appeal be granted in order to resolve the dispute as to the termination date, or should leave be refused on the basis that it would be preferable to resolve any outstanding issues once all claims have been resolved at trial in an appeal from a final judgment?
6. Given the common position of the parties that there remain outstanding issues (though precisely how many is uncertain) which will require a further hearing, and given the agreement that the resolution of at least some of those issues will turn upon the correct date of termination of the contract, there is an immediate attraction in adjourning those issues until the application and appeal in this Court, if leave be granted, have been resolved. There might have been reason to doubt the appropriateness of that course if the application for leave had been listed for separate consideration; the fact that there is to be a concurrent hearing renders it more likely that leave will be granted and the issue addressed on its merits.
7. At a hearing on 30 January 2024, the trial judge dealt with an application to vacate a hearing date which had been fixed for the following day. That application was in effect granted and later dates were sought, namely from 4 March 2024. [3] At that stage the parties were aware that the application for leave to appeal had been returnable before the Registrar of this Court on 12 February 2024. It is clear from the transcript that, as at 30 January, the trial judge was confident that, if the matter were heard in the week of 4 March, he would be able to deliver a judgment "by the time the Court of Appeal is ready". [4]
8. Three observations should be made in regard to that position. First, it is clear that the trial judge was anxious to avoid the fragmentation of the process and saw the merit in the whole matter being dealt with by this Court at one time. Secondly, he may have underestimated the expedition with which this Court might seek to list an interlocutory appeal. Thirdly, even with great efficiency in delivering the judgment (and assuming that the hearing were to be completed in the two days allocated) there would be some further lapse of time before the losing party took steps to appeal, a timetable for submissions was fixed and complied with, and the appeal was ready to be heard.
9. Expedition is one thing, excessive haste another. In my view, if the matter were to proceed in the Equity Division in the first week of March (which is next week) and judgment were delivered by late March or early April, there would be an inevitable application to vacate the hearing date in this Court. At this stage, there is no proposal to seek to vacate that hearing date, perhaps because it might affect the application for leave. On the assumption that the hearing of the interlocutory appeal will proceed, the appropriate course is to vacate the hearing in the Equity Division next week. Neither party claimed prejudice should that occur; the trial judge is listed to be the duty judge throughout that week (and the next) and accordingly there is unlikely to be delay to the administration of justice.
10. There remains a question as to whether a judge of this Court should make an order vacating hearing dates in the Division, or whether, having expressed that view, it should leave the matter to the trial judge to determine how to proceed. As the evidence does not reveal that he has been asked to reconsider the matter since the hearing date was fixed in this Court, in my view he should be given the opportunity to take such steps as may appear appropriate to him, before this Court resorts to orders. That aspect of the motion will be stood over to allow that step to be taken.

Freezing orders

1. The history of the freezing orders during 2023 has been set out above. That must be updated by noting the order of the trial judge on 8 February 2024. The primary order was that the moneys held in the controlled moneys account pursuant to the Court's order of 30 August 2023, and not released on 7 December 2023, were to be released "forthwith" to Ms Lei and Mr Kitsos. However, the operation of the order was stayed up to and including 5pm on 22 February 2024. The purpose of the stay was to allow the plaintiffs (Ms Wei, Sunshine Island and Shun Sheng), to seek to have the freezing order maintained. Although the trial judge approached the matter on the basis that an application to continue the freezing order in aid of claims which he had rejected should be dealt with this Court, it did not follow from that conclusion that the order should have been discharged. However, the judge approached it on the following basis: [5] "25 It follows that the debate on the present application is confined to whether the Controlled Monies Order should be extended against Mr Kitsos on account of the accounting claim against him, and against Ms Lei on account of the rent and accounting claims against her." He concluded that those matters did not justify a continuation of the orders.
2. Most interlocutory injunctions seek to maintain the status quo between the parties, pending resolution of the dispute. This is not such a case: the circumstances are closer to that of a Mareva injunction discussed in Patterson v BTR Engineering (Aust) Ltd. [6] The jurisdiction permits the court to make an order "preventing a defendant from disposing of his assets so as to create a situation in which any judgment obtained against him would not be satisfied" and so as to "prevent the abuse or frustration of its process". [7] That such an order was properly made in the present case, indeed by consent, is not now in dispute. The question is whether the order should be discharged.
3. The trial judge dealt with Mr Kitsos first and then with Ms Lei. He considered whether the orders should be maintained with respect to Mr Kitsos on the basis that he was to be required to account for the sum of $481,000 which had been paid to him from the business. He had not given evidence justifying his retention of the moneys, but that was because he had not been called upon to provide an explanation. The judge concluded that so far as he was concerned, the order should be discharged. [8]
4. With respect to Ms Lei, the judge acknowledged that his findings included at least a possibility that she may have misappropriated moneys from the business. [9] Indeed, so much was reflected in the orders for the appointment of a receiver. The judge then considered whether, given the lack of detail in his findings in that regard and the other outstanding issues, the inability to quantify any amount she might eventually have to meet warranted a continuation of the order.
5. Turning to the risk of dissipation, he noted that both defendants were individuals and were residents in Australia. He stated: [10] "I accept that the risk of dissipation within the jurisdiction will found the making of an asset preservation order, but for an individual living and working in Australia, dissipating assets is not necessarily easy."
6. He further noted that when the claims were all resolved, "Mr Kitsos and Ms Lei may well feel that the likelihood is that Ms Wei will end up owing Ms Lei money rather than the other way around". [11]
7. It is convenient to deal with the approach adopted by the trial judge in three parts. The first concerns the possible outcome of the appeal. The judge's reasoning may be viewed as based on an assumption that the question should be judged according to the present stage of the proceedings, or on an assessment that the appeal by Ms Wei is not reasonably arguable. The submissions in this Court, however, accepted that some assessment should be made of the merit of the appeal. For reasons explained below, I accept that the appeal is neither frivolous nor vexatious (and indeed no submission was made in support of such a conclusion) and that it is at least reasonably arguable.
8. The second matter concerns the assessment of the risk of dissipation. The factors which persuade me that the risk of dissipation is real are substantially as follows: 1. There was undisputed evidence that Ms Lei gambled amounts in excess of $900,000 over a period of some six years. Her losses were far less than her expenditure, but there was a clear case of addictive behaviour. 2. There was evidence of her removing cash from a safe on the premises, and seeking to do so covertly. 3. There appears to have been a degree of agreement between Ms Wei and Mr Kitsos that Ms Lei should be denied access to the cash retained at the premises. However, it appears that Mr Kitsos was not able to maintain that degree of control over his wife to prevent misappropriation occurring. 4. Ms Lei, though resident in Australia, has family and connections in China and has travelled overseas on a number of occasions, including to China. 5. Mr Kitsos has family and connections in Greece. 6. The trial judge made damning findings as to the credibility of Ms Wei and Ms Lei with respect to evidence given on oath. The judge also made adverse findings with respect to Mr Kitsos in relation to critical aspects of his evidence relating to Ms Lei's behaviour. 7. Given the circumstances, there is no reason to accept assurances, not given by Mr Kitsos or Ms Lei personally, but by their solicitor on instructions, that Mr Kitsos "has no intention of disposing of [an amount of $308,000 in a Westpac bank account] or the monies in the controlled moneys account other than to pay for living expenses, legal expenses and to purchase a property in New South Wales to live in". [12]
9. The most significant factor in favour of the view taken by the trial judge is that Mr Kitsos retains a significant sum in a Westpac account and that, until recently, he had not sought to draw down the $250,000 which had been released pursuant to the order of 7 December 2023. These circumstances suggest that the risk of dissipation on the part of Mr Kitsos is relatively low, but the same cannot be said on the findings of the trial judge with respect to Ms Lei.
10. Three further considerations should be addressed in weighing up the risk of dissipation. The first, and perhaps critical consideration, is that, accepting Mr McDonald's assurance in his affidavit as to his instructions, Mr Kitsos at least has no need of money. That is because the order of 7 December, as entered (although not in the same terms as that in the published judgment) read as follows: "1 Order that the $1.5 million held in a controlled monies account pursuant to the Court's order of 30 August 2023 be dealt with in the following manner: a. The sum of $250,000 be released forthwith to [Mr Kitsos]; and b. The remaining sum be retained in the controlled monies account until 31 January 2024 or such other date which may be fixed by the Court, but subject to payment out of the following: i. reasonable legal expenses of the First and Second Defendants [Ms Lei and Mr Kitsos]; and ii. living expenses of the First and Second Defendants in the sum of $2,500 each per month."
11. The only identified expense which is not covered by the orders is the purchase of a home. Ms Lei and Mr Kitsos have expressed an interest in purchasing a home in a range of $1.7-$1.8 million. The amount recently released from the account ($250,000) would suffice for the payment of a deposit on a house in that range. No doubt there are also demands for legal fees arising from the continued proceedings in the Equity Division and preparation for the appeal. However, those are separately available for release under the terms of the 7 December order, as are reasonable living expenses.
12. In the circumstances, I am satisfied that there is a risk of dissipation, against which the balance of convenience is all one way: Ms Lei and Mr Kitsos have not presented evidence of any need which is not met or able to be met under the present order.
13. A further consideration is that any order will continue until the determination of the application for leave to appeal (and the appeal if leave be granted), the hearing of which is fixed for 29 April 2024, namely in two calendar months. It is unlikely that circumstances will change in that time, but if, for example, contracts were exchanged on a residential property which required settlement within that period (or within the period during which judgment may be reserved following the hearing) the orders may be varied on short notice to allow for settlement to occur. Purchase of a residential property in NSW is free from the risk of dissipation; although enforcement of a judgment may face additional obstacles that would not justify retention of the moneys.

Orders:

1. Before making orders it is convenient to note that the order made by the trial judge for release of moneys from the controlled moneys account was stayed and the stay extended by agreement, until 5pm on the day that this judgment is delivered. There will be no need to extend that interlocutory stay.
2. There remains an issue as to the costs of the proceedings. Although the applicants on the motion have been largely successful, my present view is that the costs of the motion should be costs in the summons in this Court. If some variation of that order is sought, it can be made before the Court hearing the application for leave to appeal.
3. The Court makes the following orders: 1. Set aside the release order made by the trial judge in the Equity Division on 9 February 2024, so that the sum in the controlled moneys account remains subject to the orders made on 7 December 2023 until further order; 2. Grant leave to Ms Lei and Mr Kitsos, prior to the disposal of the proceedings in this Court, to apply on three days' notice for a variation of order (1) based on changed circumstances; 3. Direct that a copy of these reasons be given to Parker J forthwith to allow his Honour to consider the appropriate course to be taken in relation to the matters listed before him pending hearing of the appeal on 29 April 2024; 4. Order that the costs of the motion be costs in the summons seeking leave to appeal; 5. Subject to any application for other orders to give effect to these reasons, otherwise dismiss the notice of motion.

Endnotes

1. (1986) 161 CLR 681, 684; [1986] HCA 84.
2. Shun Sheng Pty Ltd v Lei (No 2) [2023] NSWSC 1623 at [17].
3. Tcpt, 30/01/24, p 30(22).
4. Tcpt, p 31(8).
5. Shun Sheng Pty Ltd v Lei (No 3) [2024] NSWSC 72.
6. (1989) 18 NSWLR 319 (Gleeson CJ, Meagher JA and Rogers AJA).
7. Patterson at 321F (Gleeson CJ), in the latter passage quoting Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 623 (Deane J).
8. Shun Sheng (No 3), [47].
9. Shun Sheng (No 3), [48].
10. Shun Sheng (No 3), [51].
11. Shun Sheng (No 3), [53].
12. Affidavit, HJH McDonald, 22 February 2024, par 32. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 February 2024