Shun Sheng Pty Ltd v Lei

Application for discharge of remainder of Controlled Monies Order

1. One of the issues debated at the 7 December hearing was which party bore the onus on the application. Although the Controlled Monies Order had originally been made by consent, I considered that my September judgment had altered the position. To the extent that I continued the order after 7 December, I expressly did so on an interim basis, and indicated that the onus would lie on the plaintiffs to justify the Order's continuation at the present hearing.
2. Therefore, although the defendants are the applicants in the current application as a matter of form, in substance it is the plaintiffs who are the moving parties.
3. In my December judgment, I referred briefly to the possibility of the application to continue the Controlled Monies Order in aid of the claims which the plaintiffs wish to pursue on appeal. There was also some reference to this possibility in the submissions of the parties.
4. In Jesasu Pty Ltd v Minister for Mineral Resources (1987) 11 NSWLR 110 the plaintiff's claim for an injunction failed at first instance. The plaintiff appealed and, by majority, the Court of Appeal granted an injunction in substantially the same terms as the interlocutory injunction pending the hearing of the appeal. Kirby P stated (at 117E-F): … where, as here, there is an appeal as of right to this Court which the appellant has exercised, where no more relief is sought than to preserve the status quo pending the outcome of the appeal, where the appeal appears to raise an arguable point, where no special prejudice is alleged, where the Court could deal with the questions promptly and where the failure to give relief may involve serious (and arguably irreversible) damage to the appellant and loss of valuable rights, the balance of convenience favours the issue of an injunction upon appropriate conditions.
5. Counsel for the plaintiff referred me to a passage in the 4th edition of Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002, Butterworths LexisNexis), at [21-345], which referred to Jesasu. The learned authors stated that the decision had "enunciated the principle" that, where six conditions were satisfied, "an interlocutory injunction should be granted to preserve the utility of the appeal". The first five of the conditions were the same as those identified by Kirby P in the statement from Jesasu which I have quoted. The sixth was not. It was "failure to grant relief may involve serious damage to the applicant". This difference was pointed out by Santow JA, sitting as a single Judge of Appeal, in Network Ten Pty Ltd v Rowe [2006] NSWCA 4 at [10]-[12], where his Honour stated that the passage from Meagher, Gummow and Lehane "understates the hurdle to be passed before interlocutory relief based on balance of convenience should be granted". Instead, "serious and arguably irreversible damage" was required in accordance with Kirby P's statement. The passage from the 4th edition has been retained in the 5th edition of Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015 LexisNexis), albeit that the learned authors refer to other authority which is more restrictive.
6. It is unnecessary for the purposes of this judgment to go into this debate. Jesasu and Network Ten were both appellate cases. In fact, in Jesasu the trial judge declined to grant an injunction in aid of the appeal and left that question for determination by the Court of Appeal.
7. There are good reasons for such an approach. A Judge of Appeal is better placed to evaluate the relevant criteria, which include matters such as whether the Court of Appeal can deal with the appeal promptly, than the first instance judge is. And in some cases, notably where there is a real question about the balance of convenience, the strength of the appeal, as opposed to its arguability, may be relevant. Such an issue would be much better considered by a Judge of Appeal rather than the judge at first instance whose decision is under challenge.
8. For these reasons, it seemed to me that any application to continue the Controlled Monies Order in aid of claims which I have rejected should be dealt with by the Court of Appeal. I therefore suggested that the best course would be for me to stay any order for release of the funds which I may make for a sufficient period to allow an application to be made to a Judge of Appeal for continuation of the stay pending the determination of the appeal proceedings. I understood counsel for the plaintiffs to accept that this was the proper approach.
9. 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.

Evidence

1. The application was supported by an affidavit from the defendants' solicitor, Mr Patrick See, made on 4 December last year. Mr See gave some further oral evidence at the hearing on 31 January. There was no evidence on the application from the plaintiffs.
2. In his affidavit, Mr See stated that, on his instructions, Mr Kitsos and Ms Lei needed the money in the controlled monies accounts "for their ordinary living expenses, future legal expenses and for the purchase of a home for themselves". No further details were provided.
3. In his oral evidence, Mr See said that at the time he made his affidavit, Mr Kitsos and Ms Lei had not identified any particular property which they wished to purchase, but they had indicated that their intended price range was $1.5m to $1.7m. But Mr See said that the position had changed just before the 31 January hearing. There was now, on his instructions, a concrete proposal for Mr Kitsos and Ms Lei to buy a house belonging to Mr Kitsos' father. Mr Kitsos' father would then live with Mr Kitsos and Ms Lei at the house. The price apparently had not been agreed, and the terms of the contract had not been decided, but the price range remained between $1.5 million and $1.7 million.
4. So far as the need for money to pay legal expenses was concerned, Mr See's oral evidence made it clear that this was a reference to future legal costs in the accounting proceedings and in the appeal. Mr See said that the costs of the proceedings so far have been paid by Mr Kitsos and Ms Lei. Presumably the costs had been funded from other monies (perhaps including the surplus from the sale of the Bella Vista property referred to below) or from earnings. Mr See however did not know. Nor was there any evidence to quantify the potential legal costs which might be incurred in the future; clearly that would be hard to estimate at this point. It also emerged that the $250,000 which I ordered released to Mr Kitsos has not been drawn down and remains in the controlled monies account.
5. Mr See was asked about the sale of the property previously owned at Bella Vista by Mr Kitsos and Ms Lei (see J2 [9]). The sale price had been $3.5 million and about $1.3 million was applied in discharge of the mortgage. After deduction of the $1.5 million for the controlled monies account, this left $0.7 million which was paid to Mr Kitsos and Ms Lei.
6. Mr See was also asked about the possibility of monies being sent offshore by the defendants. He acknowledged that Mr Kitsos had family and "connections" in Greece, and likewise Ms Lei had family and "connections" in China. The nature of these "connections" was not specified and Mr See was not asked to provide any more detail.
7. Mr See was also asked about Mr Kitsos' response to the account ordered against him, and, in particular, whether he would be contending that some or all of the weekly payment he had received were for services rendered. Mr See said that he had discussed the issue with Mr Kitsos but acknowledged that Mr Kitsos had not notified any formal position to the Receiver or to the other parties of the proceedings on the question.

Submissions

1. At the beginning of their submissions, counsel for the plaintiffs conveyed an open offer to resolve the application on the basis of an undertaking by Mr Kitsos and Ms Lei, with a cross-undertaking as to damages from the plaintiffs. This resulted in an adjournment for the parties to consider their positions and some debate about the form of the undertaking to be provided. Ultimately, the undertaking sought by the plaintiffs from Mr Kitsos and Ms Lei was an undertaking to apply the whole of the $1.5 million to the purchase of a residential property, and thereafter not to encumber the property so as to reduce the equity in it below $1.5 million. This was not acceptable to Mr Kitsos and Ms Lei. I was informed by their counsel from the Bar Table that, on his instructions, they did not feel able to give the undertaking because of the possibility that some of the monies in the controlled monies account, or some future borrowings, might be needed to fund legal costs.
2. Counsel for the plaintiffs acknowledged that to retain the monies in the controlled monies account was in effect an asset preservation order. Counsel referred me to the decision of the Court of Appeal in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 as setting out the relevant principles.
3. The decision establishes that, generally speaking, the court must be satisfied that two requirements are met. The first is that the plaintiff has a prima facie cause of action against the defendant. The second is that there is a danger of the defendant's assets being removed from the jurisdiction, or dissipated within the jurisdiction, so as to defeat enforcement of the judgment the plaintiff may obtain. See Gleeson CJ at 321G-322A; Meagher JA at 326C-D.
4. The second requirement may sometimes be proved by direct evidence. But it may also be inferred, in a proper case, from the circumstances. Patterson was such a case. The first defendant was an employee of the plaintiff who had allegedly used his position to defraud the plaintiff of about $10 million by diverting purchase monies to a company controlled by him (the fourth defendant). There was evidence which established this allegation on a prima facie basis. The Court of Appeal held that it was legitimate to infer from that evidence that the first defendant was not the sort of person who would, if not restrained, preserve his assets intact for the benefit of a judgment creditor. See per Gleeson CJ at 322C-326A; Meagher JA at 327A-B; Rogers AJA at 330G-331C.
5. So far as the claim against Mr Kitsos was concerned, counsel estimated that the total amount paid to him was $481,000, on their calculations. On the face of it, Mr Kitsos could be liable for the entire amount.
6. Ms Lei was also obliged to account and counsel noted my finding that Ms Lei could have been guilty of cash misappropriations going back to 2019 or even earlier (see [8] above). Counsel relied also on the rent claim against Ms Lei. That claim was quantified in Sunshine Island's points of claim at more than $800,000, plus interest.
7. Counsel for the plaintiffs referred also to my findings concerning the credit of Ms Lei and Mr Kitsos at J1 [212]-[215]. In those paragraphs I expressed general reservations about the credibility of their evidence in the proceedings. Counsel also noted that Mr Kitsos had obtained advice on what his response to the accounting claim against him should be, but had not stated his position (see [32] above).
8. As to the balance of convenience, counsel for the plaintiffs submitted that, on the evidence, there would be no detriment to Mr Kitsos and Ms Lei from requiring the $1.5 million to be applied solely for the purpose of their proposed property purchase, and thereafter retained in the form of equity in that property. Counsel pointed out that the proposed vendor (Mr Kitsos' father) was apparently a "friendly" one. There was no evidence that contracts had been exchanged or that there was any risk of the proposed purchase going off.
9. In their submissions, counsel for the defendants emphasised that the onus lay on the plaintiffs for the purposes of the application, and that they had led no evidence in support of their claims. Counsel also pointed out that, so far as Ms Lei was concerned, the only relevant finding was of possible episodic appropriation of cash takings.
10. So far as the rent claim by Sunshine Island was concerned, counsel referred me to the points of defence filed on Ms Lei's behalf. In the first place, Ms Lei does not admit that any rent is outstanding. Counsel observed that in the tax returns, which were produced for the purposes of the hearing, the operating companies record the payment of rent as an expense of the business (see J1 [105]). According to the points of defence, more than $400,000 in payments are recorded in the returns produced. The returns for other years have not yet been produced so the Court simply does not know one way or another whether rent expenses were claimed in those years also.
11. To the extent that rent may be unpaid, there is a limitation covering the period before 20 November 2017. A defence of equitable set-off has also been pleaded, based on monies received from the takings of the business from Sunshine Island. These receipts are the subject of the account ordered against Sunshine Island to which I have referred to in [11] above and are said to total more than $200,000. Counsel also observed, to the extent the claim succeeded, that there would, on the face of it, be a claim for contribution from Ms Wei.
12. So far as the claim against Mr Kitsos is concerned, counsel pointed out that on Ms Wei's case the payments were all payments for services rendered and Mr Kitsos has no obligation to repay them. If Ms Wei is successful in her appeal then any obligation to account would presumably fall away. This was a point made at J2 [53].
13. So far as the balance of convenience is concerned, counsel for the defendants submitted that I should accept that the instructions, of which Mr See gave evidence, about the desire to use the monies to buy the property were genuine. The plaintiffs had led no evidence to cast any doubt on them. I should also accept the reasonableness of what counsel referred to as the potential need for "juggling" the financial resources which would be available to Mr Kitsos and Ms Lei if the monies were released, so as to cover other potential items of expenditure such as legal costs. In short, I should accept that it was reasonable for Mr Kitsos and Ms Lei not to want to undertake to use all of the monies for the purpose of purchasing the property, and never to encumber the property thereafter.

Conclusions

1. It is convenient to begin with the claim against Mr Kitsos based on his obligation to account for the payments received by him. For reasons which I have given, I do not think that the potential for the accounting order to be set aside as a result of the appeal is relevant. I have to approach this application on the basis of the orders which have been made, which oblige Mr Kitsos to account for those monies.
2. As I understand it, there is no dispute that these payments were made. Nor was the figure of $481,000 disputed by counsel for the defendants. The question is the characterisation of those payments. Given my rejection of Ms Wei's version of events, that is very much a matter for Mr Kitsos. I do not think that any affirmative inference can be drawn against Mr Kitsos based on his failure to state his position. To this point he has not been required to do so, although he soon will have to. But the simple fact is that he has received these monies and not given any explanation of them which would entitle him to retain them.
3. The claim against Ms Lei is not so clear, and the plaintiffs' failure to lead evidence is of more significance in her case. It is true that I have found, as a possibility, that she may have appropriated monies. But the Court has no basis for quantifying what the amount of such appropriations were, and none were suggested by counsel for the plaintiffs. Moreover, in determining any figure ultimately payable by Ms Lei it may be necessary to take account of amounts to be accounted for by third parties (including Mr Kitsos) and by Ms Wei herself. It is impossible on the material before me to make any estimate of where the balance will ultimately lie.
4. Sunshine Island's case on the rent claim is also unimpressive. Sunshine Island was Ms Wei's company. According to the evidence before me, Ms Wei was responsible for administrative matters including the lodgement of the operating companies' tax returns (see J1 [47]). There is every reason to assume that she would have been responsible for rent payments to Sunshine Island, and she would have had every incentive to make the payments. In that context, it is particularly significant that the plaintiffs have failed to lead evidence on the application from Ms Wei to provide prima facie support for Sunshine Island's allegations of non-payment.
5. It is also relevant that Ms Lei has a claim to contribution from Ms Wei. Sunshine Island is entitled to pursue Ms Lei alone, and obtain judgment against Ms Lei alone, for any rent shortfall. But an asset preservation order looks to satisfaction of a plaintiff's judgment, and if Ms Lei is entitled to contribution (as she appears on the face of it to be) then she will be entitled to require Ms Wei to pay her share before satisfying the judgment: Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, 2015 LexisNexis) at [10-035].
6. So far as the risk of dissipation of the monies in the controlled monies account is concerned, I think that the fact that the defendants are individuals who are residents in Australia is a significant matter. Where the defendant is a company, or an individual who is not resident here, there is often a clear incentive, and ready means, to remove assets from the jurisdiction. 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. Those assets must either be given away (in an effective and irrevocable way), or expended on consumption which leaves nothing behind. Defendants who face an overwhelming case of fraud may have an incentive to give away or consume any assets they have so as to spite the plaintiff. But that is not so obvious for defendants who face a claim which is contestable, or which, if successful, will not necessarily result in financial ruin.
7. In my view, the circumstances of the present case are far removed from those in Patterson. There is no suggestion that the payments to Mr Kitsos were fraudulent or underhand. Nor is the rent claim against Ms Lei based on concealment or fraud. Similarly it does not seem to be alleged that she concealed her appropriations of partnership cash.
8. Furthermore, although Mr Kitsos is facing a claim to account, Ms Lei will benefit to the extent of half the proceeds. The claims for account against other parties would, on the face of it, appear to give Mr Kitsos and Ms Lei some confidence that Ms Lei will recover a substantial sum for the goodwill of the partnership business which was allegedly appropriated by Ms Wei to Shun Sheng. 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. Mr Kitsos and Ms Lei also have a substantial prospect, given the outcome of my September judgment, of obtaining an order that Ms Wei pay at least some of their costs. I have been told from the Bar Table, and have no reason to doubt, that the amount involved is in the hundreds of thousands of dollars.
9. In these circumstances, why would Mr Kitsos and Ms Lei, who have already defeated the first part of Ms Wei's claim against them, give away the $1.5 million in the controlled monies account or dissipate it, thus leaving them in the position that if they succeed in the litigation, the money is gone? In this regard, I think it is notable that, although Mr Kitsos has been entitled since December to draw $250,000 from the controlled monies account, he has not done so.
10. The simple fact is that the plaintiffs have produced no evidence which demonstrates any substantial risk of deliberate dissipation. It is fair to say that there is little or no evidence of any immediate detriment to Mr Kitsos and Ms Lei. But it is no answer to a defendant's argument about lack of risk of dissipation to say that making the order will cause no great detriment. Unless the Court can be satisfied that there is some risk of the defendant frustrating the enforcement of the plaintiff's prospective judgment, there is no justification for making such an order in the first place. In my view that is the case with the present application.

Orders

1. For these reasons, the defendants' application succeeds, and I will order the release of the monies in the controlled monies account. I will, however, stay the operation of my order to allow the plaintiffs to make an application, if so advised, to a Judge of Appeal.
2. I see no reason why costs of the motion should not follow the event, on the ordinary basis. If any party seeks any different order, that party may make an application under the Rules.
3. The orders of the Court on the defendants' Notice of Motion filed 4 December 2023 are: 1. Order that the monies held in a controlled monies account pursuant to the Court's order of 30 August 2023, to the extent not ordered to be released on 7 December 2023, be released forthwith to the first and second applicants. 2. Order that the operation of order (1) be stayed up to and including 5pm on 22 February 2024. 3. Order that the second and third respondents pay the applicants' costs of the motion.

Amendments 21 February 2024 - Grammatical errors amended. 21 February 2024 - Grammatical Errors 01 March 2024 - [49] typographical error 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: 01 March 2024