Solicitors:
Bingham Law - for the first and second plaintiffs
Sparke Helmore Lawyers - for the first and second defendants
File Number(s): 2018/347370
[2]
Judgment
This is an application brought by notice of motion filed on 2 July 2019 for various injunctions and Mareva orders, together with a declaration that if I make certain of the orders sought, the plaintiffs have a caveatable interest in certain properties. The application relates to properties owned by the defendants at Vaucluse, Castlereagh Street, Sydney and Mudgee. It also relates to properties in King Street, Sydney and Oberon owned by a company which is controlled by one or other of the defendants.
The application was originally brought ex parte on 2 July, on which date Slattery J made a number of orders in the nature of Mareva injunctions and freezing orders.
On 5 July the defendants returned to Court, having been served with notice of the orders, and agreed to the temporary maintenance of the status quo by giving certain undertakings in substitution for the orders that had been made. For reasons which will become clear, I have serious doubts as to whether the ex parte application was ever justified and I am concerned about its broad and heavy-handed nature.
There are two proceedings. The first proceeding was commenced on 24 January 2014. The plaintiffs claim restitution of certain fees they paid to a firm called Benjamin and Khoury for legal work done for the first plaintiff. The plaintiffs assert that they are entitled to recover $1.06 million on the ground that they paid that sum of money under a mistake of fact. The unusual fact relied upon in this case is that the first plaintiff was not aware of his right to have an assessment of the costs. He contends that if there had been an assessment, the amount payable by him to the legal firm would have been substantially less - in the amount of $1.06 million.
Those proceedings were commenced such a long time ago that the amount of interest which has accrued on that original claim is now substantial. I am not in a position to determine where the fault lies for the delay in the resolution of those proceedings but it does not reflect well on the parties or their legal advisors, excluding senior and junior counsel for the defendants who have only recently been retained.
The second proceeding was commenced on 12 November 2018. The statement of claim was served on the defendants on 12 December 2018. By this proceeding, the plaintiffs seek orders pursuant to section 37A of the Conveyancing Act 1990 (NSW) against Mrs Khoury, the second defendant. The claim arises as a result of the sale of a property at Strathfield by the first defendant and the purchase of a property at Vaucluse by the second defendant.
The plaintiffs allege that Mr Khoury sold the Strathfield property for $7.3 million and utilised approximately $4.55 million of the proceeds of sale to purchase the Vaucluse property in the name of Mrs Khoury. They contend that the transactions occurred with the intention of defrauding the plaintiffs as creditors of Mr Khoury. The plaintiffs' status as creditors is disputed. They are only creditors to the extent that they ultimately succeed in their claim for the recovery of moneys paid under mistake of fact in the circumstances which I have outlined.
The ex parte application on 2 July 2019 was, therefore, made five years after the commencement of the 2014 proceedings and eight months after commencement of the 2018 proceedings. The defendants complain bitterly about the inappropriateness of the ex parte application and the lack of full disclosure to Slattery J. The result of the orders made by him on 5 July discharging the ex parte orders and accepting the defendants' undertaking in substitution for them, means that the plaintiffs bear the onus today of demonstrating why the freezing orders should be made or reinstated.
Many applications come before me as duty judge for interlocutory freezing orders. It is not often that an application is made so many years after the commencement of proceedings. It is worthwhile recalling what was said by the Court of Appeal of New South Wales in Frigo v Culhaci [1998] NSWCA 88 and endorsed by the High Court of Australia in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 403 to 404.
The plurality, consisting of Gaudron, McHugh, Gummow and Callinan JJ said that they agreed with the tenor of what was said by the Court of Appeal (Mason P, Sheller JA and Sheppard A-JA) with particular respect to Mareva relief. They quoted and approved the following statements at [51].
A [Mareva order] is a drastic remedy which should not be granted lightly. ...
A [Mareva order] is an interlocutory order which, if granted, imposes a severe restriction upon a defendant's right to deal with his or her assets. It is granted at the suit of a plaintiff whose status as a creditor is in dispute and who need not be a secured creditor. Its purpose is to preserve the status quo not to change it in favour of the plaintiff. The function of the order is not to 'provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied; nor is it to improve the position of the plaintiff in the event of the defendant's insolvency'....
Many authorities attest to the care with which courts are required to scrutinise applications for [Mareva orders]. The leading decision in this State is Patterson v BTR Engineering (Aust) Ltd.
See also Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at [73]-[76].
Too often, applications for Mareva orders are made by plaintiffs whose sole purpose is to seek security for a judgment which they hope to obtain in the future. That is not the legitimate object of a Mareva order. As Wilson & Dawson JJ said in Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 619:
It exists not to create additional rights but to enable a court to protect its process from abuse in relation to the enforcement of its orders. It is neither a species of anticipatory execution nor does it give a form of security for any judgment which may ultimately be awarded.
In Cardile, the High Court went on to advert to several other matters of significance relating to the power to grant Mareva orders. They said at [52] and [53]: '...that there may be difficulties associated with the quantification and recovery of damages pursuant to the undertaking if it should turn out that the order should not have been granted.' They added that 'A further question to which a Mareva order gives rise is the identification of the events to trigger its dissolution or an entitlement to damages.' And they continued that: 'Discretionary considerations generally also should carefully be weighed before an order is made. Has the applicant proceeded diligently and expeditiously? Has a money judgment been recovered in the proceedings? Are proceedings (for example civil conspiracy proceedings) available against the third party? Why, if some proceedings are available, have they not been taken?'
When the ex parte application was made on 2 July, the judge asked the first question that any judge hearing such an application always asks and that is: 'Is there an imminent transaction and have you given notice to the other side?'. The answer given by senior counsel for the plaintiff was ambiguous to the point of being nonresponsive. There was no imminent transaction and no notice had been given.
Senior counsel did say, 'There is certainly a possibility of one and what we are concerned about in as much as the last time notice was given property was immediately encumbered'. He added that, in the light of what had occurred at a recent mediation, 'our concerns are 'heightened'. The last remark was apparently a reference to the unwillingness of the defendants during the mediation to reveal the amount of a loan secured by mortgage over the Vaucluse property. But for the reasons that follow, this hardly justified the application.
I am afraid the evidence does not support the basis for the relief that was sought and granted on 2 July. Nor does it support the basis for the making of fresh orders today or the reinstatement of the orders that were originally made. There was no imminent transaction and the concern based on 'the last time notice was given' was unfounded.
To some extent the plaintiffs now accept that the explanation given by the solicitor for the defendants satisfactorily answers part of their concerns. I should explain what those concerns are said to be. The first concern was said to be a trip by Mr and Mrs Khoury to Lebanon in early 2014. The plaintiffs' solicitor said that he had grave concerns that the purpose of the trip was to enable Mr Khoury to rearrange his financial affairs in Lebanon. This is sheer speculation. It is quite inappropriate as an evidential foundation, even if only a building block.
The evidence satisfies me that there was nothing whatsoever suspicious about the trip by Mr and Mrs Khoury to Lebanon in 2014. Mr and Mrs Khoury's daughter was working in Lebanon at the time. The 2014 proceedings were commenced on 24 January 2014. The trip had been planned as early as 3 December 2013. The only evidence of any prior notice of the claim embodied in the 2014 proceedings consisted of several letters sent on 8 December 2011 - over two years earlier. Those letters did not threaten proceedings. No theory has been advanced by the plaintiffs as to why Mr and Mrs Khoury might have waited for two years after the receipt of those letters to rearrange their financial affairs. More disturbing is the evidence from the first plaintiff that he actually knew that Mr Khoury was planning to go to Lebanon prior to the filing of the statement of claim. Slattery J was not informed of that knowledge.
The second ground relied upon is the sale of the Strathfield property and the purchase of the Vaucluse property. This involves the substantial questions of fact and law for determination in the 2018 proceedings, namely whether there was any intention to defeat creditors by that transaction. Nothing has changed in relation to the facts of that case. The facts are what they were at the time the cause of action arose. There was no imminent change in the circumstances and no imminent transaction which by itself justified any approach to the Court, let alone an ex parte application for injunctive orders.
The plaintiffs were aware of the sale and purchase transactions prior to the commencement of the 2018 proceedings in November 2018. That was eight months ago. They sought undertakings from the defendants and undertakings were provided on 8 February 2019. Those undertakings have been continued from time to time. They provide in substance that the second defendant will not deal with the Vaucluse property without providing 14 days written notice to the plaintiffs' solicitors of any intention so to deal. There has been no suggestion that the undertaking has been contravened. No further undertakings were sought by the plaintiffs prior to filing their notice of motion on 2 July 2019.
The third ground relied upon was a mortgage over the Vaucluse property. The plaintiffs' solicitor apparently did not become aware of that mortgage until 19 June 2019. The mortgage was provided to the Arab Bank in consideration for a loan. The evidence reveals that it was part of a refinance of the Khoury family and business arrangements. Its immediate effect was to extinguish a mortgage over Mr Khoury's business property in Castlereagh Street Sydney, which is one of the properties the subject of this application.
Although the plaintiffs' solicitor said that he became aware of the mortgage on 19 June there was no evidence from the previous solicitor for the plaintiffs who, one might surmise, was aware of the mortgage. After all, it was an encumbrance on the title to the Vaucluse property which was the subject of the undertakings sought and obtained in February 2019. I am quite confident that an experienced solicitor would have carried out a search of the Vaucluse property at the time of seeking and obtaining those undertakings.
The mortgage was signed by Mrs Khoury on 5 November 2018. The application proceeded on the basis of a mistaken belief that she signed it on 21 November 2018. Senior counsel for the plaintiffs now accepts that 21 November was not the operative date. 5 November 2018 is prior to the date on which the proceedings were commenced and five weeks before service of the statement of claim. It would appear that the plaintiffs' solicitors relied upon the fact of the mortgage having been executed on behalf of the Arab Bank by a legal practitioner on 21 November 2018. That of course says nothing about when the mortgage was arranged or executed by Mrs Khoury. There never was a proper factual basis for the concerns about the circumstances in which the Arab Bank mortgage was given. It did not justify the ex parte application to Slattery J.
In any event, the plaintiffs do not assert a money claim against Mrs Khoury. They only seek an order that she convey the Vaucluse property to Mr Khoury. And taken as a whole, the evidence suggests that the refinance had the effect of increasing Mr Khoury's net asset position and decreasing that of Mrs Khoury. On that view of the matter, the plaintiffs are better off. Unfortunately, it appears that relevant facts were not disclosed to Slattery J or were mischaracterised.
I should return to the applicable legal principles. The only basis upon which we make asset preservation orders or grant Mareva injunctions is to preserve the integrity of the process of the Court. Those orders are not a species of anticipatory execution. Nor are they an opportunity to obtain security for a judgment which a plaintiff may hope to obtain. Furthermore, the orders are discretionary.
As was so well-explained in Patterson v BTR Engineering (1989) 18 NSWLR 319 by Gleeson CJ (at 321) and Meagher J (at 327), the plaintiff must ordinarily demonstrate some indication of realistic danger that the process of the Court will be abused or frustrated together with some evidence from which the intention of the defendant to do so may be inferred. The usual way this is done is by demonstrating dishonesty but applications are not necessarily limited to dishonesty. And it must be clear that there is a 'real risk of dissipation of assets'. In this case, there is no evidence of dishonesty and no other satisfactory evidence which, properly characterised, gives rise to concern about a dissipation of assets designed to abuse or frustrate the process of the Court.
For those reasons, the appropriate orders are as follows:
1. I dismiss the notice of motion filed on 2 July 2019.
2. I order the plaintiffs to pay the defendants' costs of and incidental to the notice of motion, including the appearances on 5 July and 23 July.
3. The defendants are at liberty to make such application for indemnity costs as they may be advised.
4. The defendants are also at liberty to make such application for the payment of compensation arising out of the plaintiffs' undertakings as to damages given on 2 and 5 July as they may be advised.
5. The undertakings by the defendants given on 5 July will expire today and I need make no orders about them.
6. The proceedings are already listed for directions before the Chief Judge in Equity on 6 August. On that date the defendants should seek such directions as may be appropriate in relation to any application for indemnity costs or compensation which they wish to make.
[3]
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: 26 July 2019