HIS HONOUR: On 9 August 2016 I gave reasons for judgment in which I answered a separate question that had been posed pursuant to UCPR r 28.2 ([2016] NSWSC 1084). The circumstances giving rise to that question are set out at [1] to [3] of those reasons. For convenience, I set out those three paragraphs.
[1] HIS HONOUR: On about 15 October 2014, the plaintiffs (as "Sellers") and the defendant (as "Buyer") made a written contract described as a Share Sale and Purchase Agreement (the sale contract). Under that contract, the plaintiffs agreed to sell to the defendant all shares held by them in the capital of a "Target Company" known as Shore Solutions Inc. The consideration for the sale was US$22 million, subject to adjustment in accordance with the relevant provisions of the sale contract.
[2] The "Completion Amount" of US$22 million was payable on completion of the sale contract, in exchange for transfer of the shares. Of that Completion Amount, 20% (US$4.4 million) was to be held as an "Escrow Amount" by an "Escrow Agent" in a "Escrow Account" for a period of 12 months. The balance was payable on completion, to or for the benefit of the plaintiffs as specified in the sale contract.
[3] Completion occurred on 15 November 2014, and the Completion Amount was paid in accordance with the provisions of the sale contract that I have summarised. Once 12 months had elapsed after completion, the plaintiffs required the defendant to join with them in directing the Escrow Agent to pay to the plaintiffs the Escrow Amount. The defendant has refused to do so. It says that it has claims for breach of warranty against the plaintiff; that the amount of those claims (once justified and quantified) is to be taken in abatement of the "Purchase Price" under the sale contract (I shall return to what is meant by "Purchase Price"); that it is entitled to be paid or refunded the proved amount of those claims out of the Escrow Amount; and that until all this happens, it is not required to join in a direction to the Escrow Agent to pay the Escrow Amount to the plaintiffs.
Also, for convenience, I set out the separate question that my reasons dealt with:
Whether, on the proper construction of the contract entitled "Share Sale and Purchase Agreement" entered into between the parties on or about 15 October 2014, and in circumstances where the defendant has made Warranty Claims as defined in that contract, which Claims have not been finally agreed or adjudicated, the defendant is now obliged to direct the Escrow Agent to release the Escrow Amount to the plaintiffs.
I concluded that the question should be answered "yes", and stood the matter over for the making of orders to give effect to that conclusion.
The complicating factor is that the defendant has a cross-claim against the plaintiffs, seeking substantial damages (of the order of $US2.4 million) for breach of warranty. That cross-claim has not been dealt with. The defendant submits that any order that the Court makes should be fashioned so as in effect to freeze part of the Escrow Amount, so as to leave in escrow an amount sufficient to cover its claim, together with costs. It seeks that the freezing order extend to the amount claimed for costs because, under the share sale agreement in question, "loss" was defined to include legal costs payable in consequence of breach.
The plaintiffs oppose the order sought by the defendant. They say that the Court should order the defendant to do what, on my conclusion, it is contractually bound to do.
The evidence of the defendant's solicitor, Mr Mattock, satisfies me that the defendant has a good arguable case on its cross-claim. Mr Elliott of Counsel, who appeared for the plaintiffs, did not submit otherwise.
There was some evidence as to the law of the Republic of the Philippines. As I understand it, that evidence was intended to show that the equivalent of a freezing order could not be made by the courts of that country, in aid of a judgment that might be recovered in the courts of this country. To the extent the point is relevant, I accept that the affidavit in question makes it good.
The real question is whether, in terms of UCPR r 25.11(1), there is "a danger that a judgment or prospective judgment of [this Court] will be wholly or partly unsatisfied".
Mr Pike of Senior Counsel, who appeared with Mr Lim of Counsel for the defendant, submitted that there was such a danger. He said that the asset in question was, either actually or notionally, within the State, because of the Court's control over the plaintiffs. Whether or not that is so is a question that was not analysed in any detail. In terms of the power to make a freezing order, it may not be relevant, because r 25.11(2) extends to assets located outside Australia.
As I understand it, that submission put by Mr Pike was intended to deal with the issue of the danger that a prospective judgment might be unsatisfied. He submitted, in essence, that if the orders sought by the plaintiffs were made, the Escrow Amount would be paid out to them and there would be nothing within the control of this Court in this State.
I am prepared to accept that this is correct, at the level of fact. It is common ground, by reason of an earlier application for security for costs, that the plaintiffs have no assets in New South Wales. Thus, I accept, if the deposit in question were paid out to the plaintiffs (which of necessity would happen either in the Philippines or elsewhere, as jointly directed by the parties), the fund, to the extent that the Court has any control over it, would pass out of the control of the Court.
However, the core question is whether there is, on the evidence, a danger that a judgment or prospective judgment of this Court will be wholly or partly unsatisfied. To my mind, something more is needed than that the order, if made, will result in the funds being paid out to the plaintiffs, and leaving the control of this Court (to the extent that this Court has control over them).
It is trite to observe, and has often been said, that a freezing order is an exceptional remedy and one that should not be granted lightly. That point was repeated by Bathurst CJ (with whom Beazley P and Barrett JA agreed) in Severstal Export GmbH v Bhushan Steel Ltd (2013) 84 NSWLR 141 at [57]. At [59], Bathurst CJ referred with evident approval to a decision of Kenny J in Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 80 ATR 449. Her Honour said at [12] that it was not enough to show that assets within the jurisdiction were moveable, and that the respondent, being incorporated outside the jurisdiction, might remove them. Her Honour said that there needs to be evidence to support an inferential finding of danger of dissipation; evidence from which a prudent sensible commercial person could properly infer a danger of default if assets were removed from the jurisdiction.
It seems to me that her Honour's observations govern the approach that I should take in this case.
There is no evidence that the plaintiffs have any assets other than the fund in question. Of course, they did hold the shares in the company that were sold to the defendant. Of course, they received a substantial sum of money - in excess of $US17 million - for those shares when settlement occurred a little under two years ago. While I would not put it beyond the capacity of anyone to spend that amount of money in two years, the likelihood that it has all gone missing in action could be thought to be a little bit fanciful.
Regardless, the question is not just one of the assets available to the plaintiffs to satisfy any judgment that may be removed against them. It is whether, by risk of dissipation of such assets as are known to exist, there is a danger of default; a danger that any judgment that the defendant may recover on its cross-claim would not be enforced.
One of the problems that the defendant faces is that it chose to bring its claim for damages for breach of warranty by way of cross-claim in this Court. Thus, as events have turned out, it chose to sue, in this Court, cross-defendants who have no assets within the territorial jurisdiction of this Court. In those circumstances, it seems to me, the defendant assumed the risk that any plaintiff or cross-claimant takes, that a judgment that it obtains may remain unsatisfied.
Another matter to take into account is that there is no evidence that the plaintiffs would dissipate the fund if it were paid out to them. Obviously, they want to get the money into their hands. It may be assumed that they wish to do so, so that they can make use of it. One would think that it is not unnatural that persons owed such a substantial sum of money would rather have it sitting in their respective bank accounts, or transmuted into tangible assets, rather than have it sitting in an account held by an escrow agent. But the fact that they want to have it demonstrates no more than that (on my view of the contract) they are seeking to enforce and enjoy their contractual rights.
In many cases where a freezing order is sought, the risk of dissipation, and the consequent danger of non-satisfaction of a prospective judgment, are clear. In other cases (Severstal itself was one) the question may be finely balanced. In many cases, minds could not reasonably differ as to the outcome. In others, they can.
In my view, this case is, at best, from the perspective of the defendant, one that is finely balanced. I do accept that if the orders sought by the plaintiffs are made, there will be nothing left, by way of an asset, over which this Court has any control. But on the other hand, I accept, as Mr Elliott submitted, that there is no evidence of risk of dissipation if the order that his clients seek is made. Nor is there evidence that the plaintiffs have no assets anywhere other than their interest in the Escrow Amount.
In those circumstances, and bearing in mind the exceptional nature of the order that is sought (and bearing in mind also the express terms of the parties' bargain, to which I referred in my earlier reasons), I have come to the conclusion that the orders sought by the defendant should not be made.
In those circumstances, it appears to me, the orders sought by the plaintiffs are appropriate, perhaps with some adjustment to deal with the progress of the cross-claim. I will however give the defendant an opportunity to be heard on the detail of those orders.
The defendant's notice of motion filed on 24 June 2016 is dismissed with no order as to costs.
I direct that these orders be entered forthwith.
I direct that the exhibits be handed out.
[4]
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Decision last updated: 14 September 2016