Shun Sheng Pty Ltd v Lei

Application for discharge of Controlled Monies Order

1. Two main issues were debated at the hearing of the application. The first was whether the onus lay on the defendants to justify the discharge of the order, or on the plaintiffs to justify its continuation. The other was whether, in the circumstances, the continuation of the order was appropriate.

Onus

1. Counsel for the plaintiffs submitted that in accordance with the "rule of practice" referred to below, the orders should stand unless the defendants could identify a material change in circumstances which justified it being discharged.
2. It is convenient, in evaluating counsel's submission, to begin with the usual practice where an interlocutory injunction is sought in aid of a claim for proprietary relief or a final injunction.
3. If an injunction is obtained ex parte, it is made only on an interim basis. The onus remains on the plaintiff to justify the continuation of the injunction on the return date, when the defendant has been formally notified of the application and can appear to resist it. But once the defendant has had that opportunity, any continued injunction is usually granted on an interlocutory basis, that is, on the basis that it will apply until the court has given judgment following the trial. The "more usual" (Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [16]) form of order is to grant the injunction "until the hearing of the action or further order". But sometimes only the words "until further order" are used.
4. There is a "rule of practice" that once a court has dealt with a contested interlocutory application, it will not revisit its decision (on the application of the plaintiff or the defendant) unless there has been a material change in circumstances. The rule applies directly where the defendant contests the extension of an interim injunction on the return date and the injunction is granted. But it is also usually treated as applicable where the defendant has the opportunity to contest the extension of the injunction but does not do so.
5. Granting an injunction on an interlocutory basis once the defendant has had an opportunity to contest it, so that it then attracts the "rule of practice", is however not the invariable approach. It may be procedurally more convenient for the injunction to be extended on an interim basis, with the defendant being given an opportunity to require the plaintiff to justify the further continuation of the order at a later point. An order made "until further order", but reserving liberty to apply, will, it seems, usually have that effect: see Commonwealth Bank of Australia v Saleh [2005] NSWSC 843.
6. After final orders are made, any interlocutory orders come to an end. If the plaintiff obtains final relief, an interlocutory injunction will be displaced by, or subsumed within, that final relief. If final relief is refused, an interlocutory injunction necessarily falls away.
7. It is sometimes said that an injunction "until further order" is automatically discharged when the court makes final orders. It is of course possible to make an interlocutory order in terms which expressly provide for such automatic discharge, or are interpreted as doing so. But where that is not the case, there may be good reason for the interlocutory order to continue until the court has formally ruled on whether, and to what extent, it should be discharged. There may, as in the present case, be some uncertainty about the degree to which the final orders made by the court support the continuation of an interlocutory injunction. There may also be a question of appeal.
8. But in such a case, it seems to me that the extension of an interlocutory order once the judgment has been given should generally be seen, in effect, as interim. The onus, when the court comes to consider whether to continue the order despite the delivery of judgment, should be on the plaintiff.
9. Despite some apparent similarities, asset preservation orders are juridically distinct from interlocutory injunctions. An interlocutory injunction is granted to preserve the status quo until the plaintiff's claim can be determined at trial. It is typically used to protect the plaintiff's claimed proprietary interest in assets in the possession of the defendant. The rationale for an asset preservation order, on the other hand, is to prevent the defendant from disposing of assets so as to frustrate enforcement of a judgment in favour of the plaintiff (see the authorities discussed in Ip v Chiang [2019] NSWSC 1549). As already noted, an interlocutory injunction usually comes to an end when the proceedings have been decided. Given its rationale, an asset preservation order usually extends (if the plaintiff succeeds) beyond the delivery of final judgment and until the judgment has been fully satisfied.
10. There is also a procedural difference, which is most easily seen where an asset preservation order is sought from this Court in aid of a claim made by the plaintiff in some other court or tribunal (see Up In Smoke Assets Pty Ltd v Zervas Pty Ltd [2023] NSWSC 1227 at [17], and the citations there). In such a case, the substantive relief is being sought in the other court, and the only relief sought in this Court is the asset preservation order itself. Such an order resembles a permanent injunction (it only operates for a limited period of time, up until satisfaction of any judgment which may be obtained, but a permanent injunction may likewise have that feature, for instance where such an injunction gives effect to a contractual right which is limited in time). The order appears final in nature. And that immediately suggests that, like a permanent injunction, it may be made on an interim, or an interlocutory, basis, before the Court decides whether to make it "finally".
11. But where an asset preservation order is sought in aid of a claim made by a plaintiff in this Court, such procedural distinctions tend to become blurred. In my experience, where asset preservation orders are made in aid of substantive claims in this Court, the Court is usually only asked to make them on an interim basis or "until further order". Making such orders in their "final" form is only considered after judgment is obtained, and, often, not even then.
12. The nature of the relief, I think, also lends itself to a blurring of procedural distinctions. The conventional form of asset preservation order made by the Court specifies a sum of money, usually calculated by reference to the judgment amount sought by the plaintiff, and requires the defendant to maintain sufficient assets in the jurisdiction to exceed that figure. Usually, payments for reasonable legal expenses and living expenses, and transactions in the ordinary course of business, are exempted from the order. In my experience, it is commonplace for variations to be sought to the specified sum, or to the transactions exempted, or to the permitted quantum of legal costs or living expenses, without the Court being asked to consider whether there has been a relevant change in circumstances so far as those changes are concerned.
13. There is, in my view, nothing surprising about this. Often, a defendant's financial requirements vary from month to month or even week to week. The imposition of a "tight negative pledge" (Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [50]) on a fluid financial situation of this type could make a rigid application of the "rule of practice" unjust to the defendant and self-defeating for the Court.
14. These comments apply with even greater force when the Court, rather than making an asset preservation order of the conventional type, makes a "light touch" order. I use this term to refer to an order which merely requires the defendant to give the plaintiff a certain period of notice before entering into a specified type of transaction, leaving the plaintiff, if notice is given, to make an application, if so desired, to prevent the transaction going ahead. Such an order may be particularly useful in cases of defendants who are individuals, where the suggestion is that they might at some future time dispose of a major financial asset, such as a dwelling house, and dissipate the proceeds. This type of order has more in common with an interim order than with an interlocutory one.
15. Counsel for the plaintiffs referred me to the decision of M Osborne J, in the Supreme Court of Victoria, of Sportsbet Pty Ltd v ArcNames Ltd [2022] VSC 666. In that case, asset preservation orders were made on an interim basis. When the proceedings returned to court the order was extended "until further order" and the trial date was fixed in four months' time. Later, the hearing date was vacated and the defendant applied to have the order discharged. It was argued for the defendant that the onus lay on the plaintiff to justify the continuation of the order.
16. His Honour refused the application. He considered that it was not open to the defendant, "at a whim" to require the plaintiff to justify the order. Rather it was up to the defendant to demonstrate a material change of circumstances, and this had not been done (at [43], [51]).
17. I do not think this decision undermines what I have said above. The judgment treated asset preservation orders as a species of interlocutory injunction, but the distinctions to which I have referred evidently did not play any part in the argument. His Honour referred to the need to adhere to case management principles (at [44]) and to encourage a "pragmatic approach" to the continuation of interlocutory orders (at [46]). The orders in question were limited in scope and the delay resulting from the vacation of the hearing date (it had been re-fixed for the following year) was unlikely to result in prejudice.
18. Ultimately, the principles upon which the Court acts in deciding whether to re-visit interlocutory orders, and where the onus should lie where it does so, are at most "rules of practice". Such "rules" are not inflexible rules of law and allow for departure from them where the interests of justice demand it: see Nominal Defendant v Manning (2000) 50 NSWLR 139 at [46]. The ultimate question must be what procedure the Court should adopt to promote the just, quick and cheap disposal of the proceedings.
19. Applying that approach to the present case, I do not find it necessary to consider whether the Controlled Monies Order was made on an interim or on an interlocutory basis. Judgment has now been given in which the plaintiffs' direct monetary claims against Ms Lei and Mr Kitsos have failed. If it is necessary to say so, then I think this is a relevant change of circumstances. But I would prefer to say that, given the result of the judgment, the onus should now lie on the plaintiffs to justify the extension of the order.

Continuation of order

1. Counsel for the plaintiffs submitted that if (as I have found) the onus lay on the plaintiffs, there was still sufficient justification for continuation of the Controlled Monies Order, at least on an interim basis. Counsel pointed out that the judgment recognised that both Ms Lei and Mr Kitsos would have to account to the partnership firm for monies received by them. In Mr Kitsos' case, this included the regular weekly payments referred to above, which, according to counsel, totalled about $500,000.
2. Counsel acknowledged that I had made no specific finding of misappropriation of specified sums by Ms Lei, but nevertheless submitted that her liability was likely to be very substantial. Counsel referred in particular to J1 [99]-[100]. Counsel also observed that there had been evidence before me, which I had accepted, that for at least some of the relevant time, Ms Lei had a demonstrated gambling habit. In particular, counsel pointed out that during the period October 2013 to August 2014, the evidence indicated she had gambled a total of $656,000 (J1 [155]) (although her net loss was significantly less than this figure).
3. Counsel also raised the possibility that monies received by Mr Kitsos or Ms Lei might be traceable into their home, thus giving rise to a proprietary claim against at least some of the proceeds. There was also the Sunshine Island rent claim which remained outstanding. Counsel also indicated that an appeal against my judgment was being considered and that a decision would be made on whether to pursue that by 20 December. If an appeal was brought, it would involve a challenge to my dismissal of Ms Wei's claim for a payment on account by Ms Lei, guaranteed by Mr Kitsos, of $1.1 million, and judgment would be sought accordingly.
4. Counsel emphasised that, on the defendants' evidence, they did not intend to start looking for a new property until January next year. Counsel noted that the order could be made for a limited period, which would allow it to be reconsidered after a decision on the appeal had been made and the nature of the accounting claims against Mr Kitsos and Ms Lei had become clearer. Counsel submitted that, for practical purposes, all that was being sought was a "light touch" order which would cause little or no detriment to the defendants.
5. Counsel for the defendants submitted that none of these considerations justified the continuation of the orders. Counsel suggested that the correct figure for the amounts received by Mr Kitsos was closer to $400,000 than $500,000. Aside from that, the quantum of the accounting claims had never been articulated, and the possibility of a tracing claim had never before been mentioned. Counsel observed in particular that the accounts would be conducted by the Receiver, and the Receiver had not actively supported the application. The suggestion appeared to be that, if the Receiver was not bringing the application, the plaintiffs had no standing to do so.
6. I thought this submission went somewhat too far. It certainly could not apply to the rent claim by Sunshine Island, or the potential for the direct claim for a judgment of $1.1 million being maintained on appeal.
7. The submission was more understandable when it came to the accounting claims. But even there, I did not think that it necessarily prevailed. Although the partnership has been terminated, it continues until the winding up has been completed by the Receiver. So long as the partnership continues, Ms Wei as one of the partners has an entitlement to require assets of the partnership to be realised and collected so that they may be applied in discharge of partnership liabilities or otherwise distributed to the partners: Partnership Act 1892, s 39.
8. In my view, this interest subsists even after the appointment of a Receiver. No doubt the Receiver would have standing to apply for an asset preservation order in aid of any judgment to be obtained as a result of the accounting process, once accounts have been ordered. But in fact, no account has yet been formally ordered.
9. At the time the Controlled Monies Order was made, Ms Wei clearly had a sufficient basis for seeking it, not just in support of an individual claim for judgment which she made, but as a partner in the partnership. That remains the case and, in my view, will remain the case even once an accounting order is made.
10. The question thus came down to the amount, if any, which should continue to be quarantined. In this regard, the initial submissions by counsel for the plaintiffs tended to treat Mr Kitsos and Ms Lei together. But counsel ultimately acknowledged that accepted that it was necessary to consider their positions separately. In particular, by reason of his 90% ownership interest in the property, Mr Kitsos is entitled to $1.35 million of the $1.5 million in the controlled monies account, and Ms Lei is entitled to $150,000 (accrued interest was ignored by the parties as not being substantial enough to warrant separate consideration).
11. As already mentioned, counsel had roughly quantified the figure for which Mr Kitsos should account as $500,000. When I asked him about the remaining $850,000 in the controlled monies account belonging to Mr Kitsos, counsel referred to the possibility of obtaining a $1.1 million judgment in the event of a successful appeal. The suggestion was that Kitsos might be found liable for both the $1.1 million and the $500,000.
12. But the $1.1 million figure represented an alleged obligation of Ms Lei, guaranteed by Mr Kitsos, to pay $1.1 million on account of her liability to the partnership firm. I found that the payments to Mr Kitsos might have constituted, or included, payments on account of Ms Lei's partnership entitlement. It would therefore be double counting for Mr Kitsos to be liable for both. And on Ms Wei's primary case, which presumably is the case that the plaintiffs would be seeking to establish on appeal, the payments to Mr Kitsos were payments for services rendered which he had no obligation to refund at all (see J1 [222]).
13. On any view, it seemed to me very unlikely that Mr Kitsos could be made liable for more than $1.1 million, even on the best possible outcome from the plaintiffs' point of view. Any such contingency was in my view insufficiently substantial to justify retaining more than $1.1 million of Mr Kitsos' money in the Controlled Monies Account. I therefore considered that $250,000, at least, should be paid out to him.
14. There was less debate about Ms Lei's position, given that only $150,000 in the controlled monies account belongs to her and there are claims against her. Even so, it is true that the claims against her have not been quantified in any meaningful way. Furthermore, on my findings, she will be entitled, by way of credit, to a half share of the value of the partnership assets, including the goodwill of the partnership business, as well as to a half share of the monies to be accounted for by Ms Wei and other parties.
15. In the end, however, I decided to continue the retention of $1.25 million in the Controlled Monies Account ($1.1 million for Mr Kitsos and $150,000 in addition for Ms Lei). In making this decision I was heavily influenced by the seeming lack of prejudice to Mr Kitsos and Ms Lei, and the interim nature of the application.
16. I have relisted the proceedings before me early in the new Term and I make it clear now that it will be necessary for the plaintiffs to provide a fully argued justification on that occasion for the further continuation of the Controlled Monies Order. In particular, unless a plausible case can be put which properly quantifies Mr Kitsos' and Ms Lei's alleged liabilities, any application for the continuation of the Order beyond that point is likely to fail at the first hurdle.
17. Furthermore, I considered that the amount to be retained in the controlled monies account should be subject to deductions for reasonable legal costs and living expenses. Counsel for the defendants proposed living expenses of $2,500 each for Mr Kitsos and Ms Lei per month, and I did not understand counsel for the plaintiffs to demur.

Orders

1. The orders made on 7 December 2023 were: 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: 1. the sum of $250,000 be released forthwith to the second defendant; and 2. 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: 1. reasonable legal expenses of the first and second defendants; and 2. reasonable legal expenses of the first and second defendants; and 1. Costs of the motion reserved.

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