The Owners - Strata Plan No 98970 v Capitol Property Services Pty Ltd

Nature of the proceedings and role of the parties and Mr Qiu

1. The plaintiff is a body corporate constituted under s 8 of the Strata Schemes Management Act 2015 (NSW) and is the registered proprietor of the common property in Strata Plan 98970 (the Owners Corp).
2. The second defendant (Lotus) was the developer of the strata building and retained lot 2 in the strata plan on completion of the development. The first defendant was the builder.
3. These proceedings were commenced in NCAT on 29 January 2021 and subsequently transferred to this Court in April 2021.
4. The Owners Corp claims damages for alleged building defects, relying on statutory warranties under Part 2C of the Home Building Act 1989 (NSW).
5. The evidence adduced at the hearing of the present application establishes that the alleged defects and the costs of rectifying them are the subject of five expert reports that the Owners Corp has served on the defendants to date. The alleged defects include serious waterproofing issues affecting at least one of the units in the strata building. One of the five expert reports served by the Owners Corp attributes some of the waterproofing issues to failures within the waterproofing membrane detailing of the rooftop area, causing water penetration through the concrete slab and into the roof of the unit below. That expert report recommended further investigation and water testing.
6. The Owners Corp has not yet prepared all of the evidence that is necessary to identify the extent of the alleged defects and the costs of rectifying them. The preparation of that evidence requires investigations that involve destructive work in the common areas and within individual units in the strata building, including the removal of facades to expose the existence or extent of water penetration in the concrete.
7. The Owners Corp has been liaising with the builder and Lotus to facilitate these investigative works being undertaken in the presence of all parties' representatives and experts. The current public health orders precluded those works being undertaken in recent weeks. The Court was informed that the public health orders that will apply from 31 July 2021 will continue to preclude those works for as long as those orders remain in force, given the number of people required to participate in and observe the works.
8. The Owners Corp adduced evidence of its current estimate of the cost of rectifying the alleged defects based on the limited investigations it has been able to carry out to date. That estimate is approximately $1.056 million. The Owners Corp emphasises that this is likely to increase once the further investigative work is undertaken.
9. Lotus and Mr Qiu accept that the Owners Corp has a good arguable case - indeed, a strong case - for damages for the alleged breaches of statutory warranties. Whilst they criticised the Owners Corp's evidence of estimated quantum on this application as lacking supporting explanation or analysis by the relevant experts, Lotus and Mr Qiu accepted that Owners Corp's application to continue the freezing order should be determined on the basis that the current estimate of the quantum of the claims is approximately $1 million. They emphasise that the investigative works yet to be undertaken may result in that estimate increasing or decreasing.
10. As I have already mentioned, Mr Qiu is not presently a party to these proceedings. The Owners Corp intends to commence proceedings against him under s 37A of the Conveyancing Act in relation to the transaction that gave rise to the freezing order application.
11. Mr Qiu is not a shareholder or director of Lotus. He is one of two directors of Q&D Investments Pty Ltd, which owns 85 per cent of the shares in Great Tang Brothers Pty Ltd, which in turn owns 50 per cent of the shares in Lotus. The other director of Q&D Investments Pty Ltd - Jun Qiu - owns all of the shares in Q&D Investments Pty Ltd.
12. Mr Qiu has given evidence that he has had "substantial involvement in the control of" Great Tang Brothers Pty Ltd since it was registered in May 2010. He was the sole director of that company from 8 February 2021 to 20 May 2021, but has not been a director at any other time.
13. As I have already mentioned, Lotus retained Lot 2 in the strata plan on completion of the development. Its sole director, Mr David Milton, owns Lot 5. Mr Qiu owns Lot 6.

Transfer of Lot 2 from Lotus to Mr Qiu

1. Bannermans Lawyers are the solicitors on the record for the Owners Corp in these proceedings. Project Lawyers are the solicitors on the record for Lotus and are also representing Mr Qiu in relation to the freezing order.
2. On or about 11 May 2021, Ms Vivian Evans (the owner of Lot 7 in the strata plan) was informed by the strata managing agent that Lotus was intending to sell Lot 2. Ms Evans conducted a title search for Lot 2 on 13 May 2021, which showed that Lotus was still the registered proprietor of Lot 2 as at that date. There were no mortgages or other encumbrances on the title.
3. On 18 May 2021, Bannermans Lawyers wrote to Project Lawyers referring to these proceedings and stating that it had come to their attention that Lotus wishes to sell Lot 2. The letter requested an undertaking by Lotus that it would not sell or transfer Lot 2 prior to the finalisation of the proceedings or, alternatively, that Lotus agree to set aside an amount of the net sale proceeds to be agreed in Project Lawyers' trust account on the basis that it would not be released until the conclusion of the proceedings. The letter reserved the Owners Corp's rights to seek a freezing order if Lotus did not either give the undertaking or agree to set aside part of the net sale proceeds.
4. Bannermans Lawyers contacted Project Lawyers again on the morning of 24 May 2021 seeking a response to their letter dated 18 May 2021.
5. Later that same day, Mr Qiu emailed the strata managing agent asking whether there was any budget breakdown for rectifying the building defects. As the owner of Lot 6 in the strata plan, Mr Qiu was entitled to that information. The strata managing agent replied that the defect consultants "put it in the area of $1.2m but this is without further investigation. The consultants need to look behind the facades and pull the membranes up where they are failing to see what the issues are. It could grow or shrink."
6. On 27 May 2021, while Bannermans Lawyers were still waiting on a response to their 18 May letter, Lotus and Mr Qiu entered into a contract for the sale of Lot 2 to Mr Qiu for a stated price of $3.78 million. The contract states that the sale was entered into by the vendor directly without the intervention of an agent.
7. The transfer of Lot 2 to Mr Qui was registered on 28 May 2021.
8. Consistently with the contract, the consideration stated on the face of the transfer is $3.78 million. However, it is clear from documents produced by Lotus and Mr Qiu in these proceedings that no funds were transferred by Mr Qiu to Lotus in consideration for the transfer of Lot 2.
9. The contract was entered into and the transfer was registered in the midst of: 1. without prejudice discussions between Ms Evans on behalf of the Owners Corp and Mr Milton on behalf of Lotus in an effort to resolve these proceedings; and 2. a marketing campaign for Lot 2 for sale by public auction on 12 June 2021 with an asking price of in excess of $4 million.
10. On 28 May 2021, Project Lawyers responded to Bannerman Lawyers' letter of 18 May 2021. Project Lawyers (who had not acted for Lotus or Mr Qiu in relation to the transfer of Lot 2) did not refer to the transaction that had already occurred. Rather, the letter asserted that it was premature for the Owners Corp to seek any undertaking in circumstances where the defendants were yet to file their Technology and Commercial List Responses and to prepare their evidence. The letter stated that the Owners Corporation had not provided any evidence to suggest that Lotus was attempting to frustrate the processes of the Court or that any judgment obtained by the plaintiff would be wholly or partly unsatisfied. The letter stated: "We are instructed that our client currently has the means to satisfy any such judgment."
11. The last mentioned statement was incorrect by close of business on 28 May 2021 because the registration of the transfer of Lot 2 to Mr Qiu left Lotus with assets of cash at bank of approximately $900,000 from which to pay any judgment (and costs order) in favour of the plaintiff. That is less than the Owners Corp's present estimate of the quantum of its claims, even before allowing for Lotus to pay its own legal costs and any other expenses as it is entitled to do from its own funds. (I note that a subsequent payment of approximately $265,000 reduced Lotus' cash at bank to approximately $635,000 on 31 May 2021.)
12. Bannermans Lawyers wrote to Project Lawyers again on 28 May 2021 stating that they were now aware that Lotus had transferred Lot 2 to an individual. The letter sought an explanation of the transaction.
13. No explanation was forthcoming at that time.
14. The explanation offered by Mr Qiu in his affidavit affirmed on 28 July 2021 is that Lotus undertook the development of the strata building pursuant to a joint venture agreement between Lotus (as the developer), Great Tang Brothers Pty Ltd (GTB) and two other companies (as investors), a development manager and a project manager. On 18 March 2019, the project manager produced a profit share calculation for the development recording that GTB was entitled to approximately $13.139 million. The project manager's spreadsheet stated that $11.410 million of that profit share was to be paid to GTB in the form of apartments 102, 106 and 303 (Lots 2, 6 and 12) with the remaining $1,729,400 to be paid or transferred to GTB. The members of Lotus resolved to pay the $1,729,400 to GTB on 3 April 2019. There is no evidence of any resolution concerning a transfer of Lots 2, 6 and 12 to GTB.
15. According to Mr Qiu, he has had "substantial involvement in the control of" GTB since its incorporation in 2010. I note, however, that Mr Qiu is not a shareholder of GTB and there is no evidence that he owns shares in that company through other entities. He was a director of GTB only during the period from 8 February 2021 to 20 May 2021.
16. Mr Qiu gave evidence that he decided that the transfer of Lot 2 from Lotus to GTB would not proceed in about May 2019 because he no longer needed that apartment. He says that he informed Mr Milton, and that they had a conversation in which they agreed that Lotus would hold that apartment on trust for GTB and that GTB would receive the net proceeds of sale of the apartment when it was sold. According to Mr Qiu's evidence, the object of this arrangement was to avoid GTB taking a transfer of Lot 2 on which it would have to pay stamp duty. Lot 2 was marketed for sale from mid-2019, but withdrawn from the market in October 2019. Mr Qiu refers to correspondence between himself, the strata managing agents and other unit owners in which he refers to himself as the owner of Lot 2 (or apartment 102). A fresh marketing campaign for Lot 2 was commenced in April 2021. Mr Qiu received feedback during May 2021 that potential purchasers were put off by the present proceedings relating to alleged defects. He deposed that: "I decided that, rather than selling apartment 102 for a reduced amount as a result of these legal proceedings, I would purchase apartment 102 myself."
17. The marketing campaign for Lot 2 continued after 28 May 2021, despite the registration of the transfer to Mr Qiu. The unit was open for inspection on 29 May 2021. Ms Evans attended the inspection, spoke to the selling agents and requested a copy of the contract for sale which was subsequently emailed to her on 31 May 2021. She was told that the unit had an asking price of $4 million but was expected to sell for about $4.3 or $4.4 million. As at 31 May 2021, Lot 2 was still advertised for auction on 12 June 2021.
18. The Owners Corp filed made its application for a freezing order on 1 June 2021. The order was made ex parte on that date.
19. The Owners Corp acknowledges that the marketing campaign for Lot 2 appears to have ceased since the freezing order was made on 1 June 2021. I note that the terms of the freezing order permitted a sale of Lot 2 to an arm's length purchaser at public auction for a price of not less than $3.78 million provided that the deposit and any net proceeds of sale were paid into an account to be held on terms agreed in writing between Mr Qiu and the Owners Corp.
20. At the time the freezing order was made, Lotus had approximately $635,000 cash at bank as referred to above. This increased to approximately $684,000 on 11 June 2021 as a result of a payment received from the Australian Taxation Office, but has been reduced to $618,607 as at 28 July 2021. I note that the freezing order permits Lotus to incur legal expenses and other expenses in the ordinary course of business. There has been a reasonably significant level of activity in these proceedings in connection with applications for the continuation of the freezing order since 1 June 2021 and there is no basis for inferring that Lotus' cash at bank has been depleted in breach of the freezing order. In addition to the $618,607 cash at bank, Lotus has retained $182,165 in a separate account respect of the building contract with the first defendant. Lotus does not own any other assets in Australia.
21. Mr Qiu travelled to Singapore at about the time that the transfer of Lot 2 was registered. There is evidence that he informed other residents of the strata building that he was travelling to see family. His cars parked in the garage of the building have been wrapped in plastic, suggesting that he may intend to be away for some time. Mr Qiu himself gave no evidence about his travel arrangements or whether or when he plans to return to Australia.
22. Lotus and Mr Qiu contend that Lotus held Lot 2 on trust for GTB. However, for the purpose of the Owners Corp's application to continue the freezing orders, they accept that there is an arguable case that Lot 2 was not held on trust for GTB and that there is also an arguable case that the transfer is voidable under s 37A of the Conveyancing Act as an alienation of property with intent to defraud creditors of Lotus.
23. In my view, that concession was correctly made for the purpose of the present application and the arguable case rises to the level of a good arguable case for the following reasons: 1. there is no evidence to substantiate Mr Qiu's assertion that he has "substantial involvement in the control of" GTB (whatever that may mean); 2. the profit distribution estimates relied on by Mr Qiu as evidencing GTB's entitlement to Lot 2 were prepared before the commencement of these proceedings, Lotus' potential liability to the Owners Corp would ordinarily be expected to affect its assessment of the profitability of the development and there is no evidence of any resolution of Lotus to transfer Lot 2 to GTB as part of any profit distribution; 3. apart from Mr Qiu's assertion referred to above about his involvement in the control of GTB, there is no evidence of his authority to decide for GTB in May 2019 not to take the transfer of Lot 2 that he says GTB was entitled to as part of its share of Lotus' profits from the development; 4. although Mr Milton gave evidence on behalf of Lotus, he did not give any evidence of the May 2019 conversation relied on by Mr Qiu as establishing that Lotus held Lot 2 on trust for GTB; 5. Mr Qiu's evidence that he decided to "purchase" Lot 2 for himself is not supported by any evidence that he paid the $3.78 million price stated on the contract dated 27 May 2021. Indeed, the evidence establishes that this "price" was not paid to Lotus, and there is no evidence that it was paid to GTB; 6. Mr Qiu's evidence that he decided to "purchase" Lot 2 rather than persist with the campaign to sell it at the public auction advertised on 12 June 2021 is inconsistent with the evidence that marketing campaign continued after the property was transferred to Mr Qiu on 28 May 2021; 7. by entering into the contract on 27 May 2021 and taking the transfer of Lot 2 on 28 May 2021, Mr Qiu became liable for stamp duty, which was the very thing that he says he sought to avoid by having Lotus hold the property from May 2019 allegedly on trust for GTB; and 8. there is no evidence explaining the haste with which the transfer was registered one day after the contract was signed, save that it coincides with the time at which Mr Qiu became aware that the Owners Corp's claims in these proceedings may exceed $1.2 million and Lotus (through Project Lawyers) became aware that the Owners Corp may seek a freezing order.
24. As I have already mentioned, the Owners Corp has undertaken to commence proceedings under s 37A of the Conveyancing Act in relation to the transfer of Lot 2 to Mr Qiu.

Consideration and determination

1. The freezing order presently: 1. restrains Lotus from removing from Australia, disposing of, dealing with or diminishing the value of its assets in Australia up the unencumbered value of $3.78 million; and 2. restrains Mr Qiu from disposing of, dealing with or diminishing his interest in Lot 2, except that he is not restrained from selling Lot 2 to an arm's length purchaser for not less than $3.78 million provided that the deposit and net proceeds of sale are paid into a bank account and held on terms agreed in writing between Mr Qiu and the Owners Corp (or, in the absence of such agreement, paid into Court).
2. The order is subject to the usual exceptions for payment of reasonable legal expenses, transactions in the ordinary and proper course of business and payment of bona fide business expenses.
3. The Owners Corp submits that the freezing order should be extended until further order, on the basis that the parties have liberty to apply which may be exercised after it has had the opportunity to carry out the investigative works referred to above and has served further evidence of the quantum of its claim for breach of statutory warranties.
4. Alternatively, the Owners Corp Submits that the freezing order should be extended for a period of four months, on the basis that it presently expects to have been able to serve its further evidence by that time (subject to any additional delays that may occur as a result of ongoing constraints on the necessary investigative works imposed by public health orders).
5. The Owners Corp gives the usual undertaking as to damages.
6. As I have already mentioned, Lotus and Mr Qiu do not oppose the continuation of the freezing order, but contend that the value of Lotus's assets to which the order applies should be reduced to $800,000 and that the order should be discharged insofar as it relates to Mr Qiu provided that Lotus pays into a solicitor's trust account a further sum of $200,000 and on Mr Qiu's undertaking to the Court that he will give the Owners Corp seven days' prior notice of any dealing with Lot 2.
7. Lotus and Mr Qiu accept that the Owners Corp may wish to apply for a further variation to the freezing order to increase the value of the assets to which it applies after the investigative work has been undertaken and the Owners Corp has served its further evidence. They submit that the Owners Corp should have liberty to apply for that purpose. They submit that a freezing order is a drastic remedy, and they should not be subject to such an order affecting the value of their assets up to an amount that bears no relationship at all to the quantum or potential quantum of the Owners Corp's claim for breach of statutory warranties.
8. I accept, of course, that a freezing order is a drastic remedy not to be granted lightly. Its purpose is to preserve the status quo, and not to provide the plaintiff with security for judgment in circumstances where the plaintiff's status as a creditor is disputed: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [51]-[54] (Gaudron, McHugh, Gummow and Callinan JJ). For that reason, where a plaintiff has demonstrated a good arguable case, there is a danger that any judgment obtained will be wholly or partly unsatisfied by reason of dissipation of the defendant's assets, and discretionary factors favour the making of a freezing order, the order should not restrict the defendant dealing with their assets to the extent that the value of those assets exceeds the quantum or likely quantum of the plaintiff's claim. Contrary to the Owners Corp's submissions, I do not regard the value of the assets affected by a freezing order as a matter that is relevant only to "the balance of convenience".
9. If the Owners Corp's claims for damages for breach of statutory warranties were the only claims relevant to the application to continue the freezing order, I would not have been prepared to continue the order in terms that restrict dealings with assets up to the value of $3.78 million, being a sum which bears no relationship to the value of those claims at all. Although the Owners Corp's inability to quantify its claims at this stage is not due to any delay or delinquency on its part, I would have required some evidence of an estimated range of quantum based on best and worst case scenarios, even if those estimates were necessarily imprecise. I would have been prepared to continue the order in relation to assets above a value at the upper end of that range for a period of time pending completion of the necessary investigative works and service of the further evidence in relation to quantum.
10. However, the Owners Corp's cause of action under s 37A of the Conveyancing Act is also relevant, in circumstances where the Owners Corp has given an undertaking to commence those proceedings and it has a good arguable case that Lot 2 was transferred from Lotus to Mr Qiu with the intent to defraud creditors of Lotus. Those claims, if successful, would restore Lot 2 to Lotus for the benefit of any creditors of Lotus, which will include the Owners Corp if its claims for breach of statutory warranties succeed.
11. On the basis of the matters acknowledged by Lotus and Mr Qiu and the evidence presently before the Court, the Owners Corp has a strong arguable case for breach of statutory warranties and a good arguable case of fraud relating to the transfer of Lot 2 (which points to a risk of further dissipation of assets that would frustrate the enforcement of any judgment). In those circumstances, and on the basis of the Owners Corp's undertaking to commence proceedings against Lotus and Mr Qiu under s 37A of the Conveyancing Act, I am satisfied that it is appropriate that the discretion under rules 25.11 to 25.14 of the Uniform Civil Procedure Rules 2005 (NSW) be exercised to continue the freezing order in its current terms for a period of four months. It will be for the Owners Corp to apply for any further continuation of the order beyond that period. Any such application will fall to be determined having regard to the quantum evidence that is presently expected to have been served in these proceedings by then, an assessment of the strength (or otherwise) of the Owners Corp's cause of action under s 37A of the Conveyancing Act on the basis of the pleadings and any evidence served in those proceedings (which will have been commenced by then) and the diligence with which the Owners Corp has prosecuted those proceedings. Given that the evidence presently before the Court reveals a good arguable case that Mr Qiu took the transfer of Lot 2 from Lotus under a transaction intended to defraud its creditors, I am not persuaded to accept his undertaking to give prior to notice to the Owners Corp of any dealing with Lot 2, in lieu of continuing the freezing order against him.

Conclusion and orders

1. For the reasons above, I make the following orders and notation: 1. Upon the plaintiff, through its counsel: 1. giving the usual undertaking as to damages; and 2. undertaking to commence as soon as reasonably practicable proceedings under s 37A of the Conveyancing Act 1919 (NSW) in relation to the transfer registered on 28 May 2021 from the second defendant Lotus Fund (No. 9) Pty Limited to Mr Kunyi Qiu of the property identified in Folio Identifier 2/SP98970 (known as Unit 102 at 1 Premier Street, Neutral Bay, New South Wales), order that the freezing order made on 1 June 2021, as varied by orders made on 3 June 2021 and 23 June 2021, be extended until 5pm on 1 December 2021. 1. Note that the matter is listed for further directions on 13 August 2021.

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: 02 August 2021