Time 2000 Systems (Australia) Pty Ltd ACN 127 853 614 v Rafferty

REASONS FOR JUDGMENT 1 This is an application for leave to appeal from orders made by Besanko J on 19 December 2008, which orders were made pursuant to O 25A of the Federal Court Rules (the Rules). The orders are in the nature of freezing orders. Order 25A rule 2 sets out the purpose of orders of that kind. It relevantly states: 2(1) The Court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. 2 The purposes identified in the rules are consistent with the purposes for such orders identified by the High Court in Jackson v Sterling Industries Limited (1987) 162 CLR 612and in Cardile v LED Builders Pty Limited (1999) 198 CLR 380. The application is brought by the respondents to the proceeding and I shall continue to refer to them as the respondents. 3 The applicants to the proceeding claim that they entered into three agreements with the respondents for the purpose of exploiting certain intellectual property interests and with a view to marketing, selling and installing modular accommodation units in Western Australia and the Northern Territory. 4 There was a joint venture and a shareholders agreement which were entered into on 23 November 2007, and a rights agreement which was entered into on 19 December 2007. The applicants claim that they paid a sum of $1.7 million to the respondents in accordance with their obligations under those agreements. It is the applicants' case that the three agreements together constituted a "franchise agreement", which gave rise to a "franchise system" within the meaning of the Trade Practices Act 1974 (Cth) (the Trade Practices Act) and the Franchising Code of Conduct which is a schedule to the Trade Practices Industry Code's Franchising Regulations 1998. 5 It is claimed by the applicants that Time 2000 Systems (Australia) Pty Limited was a franchisor and Time 2000 West Pty Limited was a franchisee. The applicants claim that the applicants became franchisees within the meaning of the Code. They claim that Embleton Limited and Mr Donovan, the fourth and fifth respondents to the proceeding, were associates of Time 2000 Systems (Australia) Pty Limited, within the meaning of the Code. 6 It is the applicants' claim that the respondents breached the Code in not providing documents to the applicants as required by the Code. The applicants claim that there was a breach of s 51AD of the Trade Practices Act. The applicants seek various declarations in the proceeding but they also seek an order that the money paid by the applicants by the respondents be repaid to them. The respondents deny that the three agreements constituted a franchise agreement or gave rise to a franchise system. 7 Alternatively, the respondents allege that at no time did the applicants request the relevant documents. They say the applicants were provided with such information as was necessary to make an informed decision. The respondents plead by way of further alternative an estoppel alleging that the applicants were not entitled to rely on any breaches of the Code or, in the alternative, they have waived any rights in relation to the Code. 8 The applicants applied by way of notice of motion, for orders that Gemhall Holdings Pty Ltd (Gemhall Holdings) and Time 2000 Pty Ltd (Time 2000) pay the proceeds of the sale of property of those companies into an interest bearing account and that they be further restrained from disposing of the moneys in those accounts to the extent of $1.7 million which is the claim for damages brought by the applicants in the proceeding. The applicants also sought an order that the second to fifth respondents file affidavits disclosing assets owned by each of them to meet a judgment in favour of the applicants. 9 Gemhall Holdings is the trustee of the Stephen Donovan Family Trust which is a discretionary trust, the beneficiaries of which include the respondent, Mr Donovan, his parents, any future spouse and child or children of Mr Donovan, any charity and any school body, institution corporation or foundation established for education purposes. Mr Donovan is named in the trust deed as the appointor. On or before 10 or 11 December 2008, Mr Donovan was the sole director and sole shareholder of Gemhall Holdings. Gemhall Holdings, at the relevant time, owned property at Level 1, 529 Chapel Street, South Yarra in the State of Victoria. 10 Time 2000 is the trustee of a unit trust, the Diamante Trust, of which all units are owned by Gemhall Holdings. On or before 10 or 11 December 2008, Mr Donovan was the sole director of Time 2000. Time 2000 owns property at 291 Beaconsfield Parade, Middle Park in the State of Victoria. 11 On or about 10 or 11 December 2008 Mr Donovan's then fiancé and now wife, was appointed a director of each of Gemhall Holdings and Time 2000. She was also appointed to replace Mr Donovan as the appointor under the Stephen Donovan Family Trust. Evidence was adduced before Besanko J that the property owned by Gemhall Holdings was advertised for sale by auction, the date of which was to be 11 December 2008. There was also evidence before Besanko J that the property owned by Time 2000 was advertised for sale seeking expressions of interest which were to close on 10 December 2008. 12 It was undisputed before Besanko J that Gemhall Holdings and Time 2000 had each been paid $250,000 by the respondents' solicitors on or about 31 December 2007. The respondents adduced evidence that in October 2007 Gemhall Holdings had lent $310,000 to the respondent, Time 2000 Systems (Australia) Pty Limited (Time 2000 Systems) in a number of separate loans and that the payment of $250,000 on 31 December 2007 was a partial repayment of those loans. Evidence was led that in October 2007 Time 2000 also lent, in a series of loans, the sum of $310,000 to Time 2000 Systems and that, like in the case of Gemhall Holdings, the payment of $250,000 on 31 December 2007 was a partial repayment of those loans. 13 It would seem to be undisputed that, as at the date of the hearing before Besanko J, if those loans had been made by Gemhall Holdings and Time 2000 the sum of $120,000 remained outstanding to those two entities. 14 The respondents led evidence that Gemhall Holdings was required to sell its property in order to raise money to repay its mortgage, which was then paid until December 2008, but for which, it was said, Gemhall Holdings would be unable to pay beyond 2008 if the property were not sold. 15 Gemhall Holdings and Time 2000 are not respondents to the proceeding and were not respondents at the time the matter came before Besanko J. Notwithstanding they were not respondents, the orders sought by the applicants included orders against those entities. 16 On 19 December 2008 Besanko J made the following orders: Upon the Applicants, by their Counsel, giving to the Court the usual undertaking as to damages, 1. Gemhall Holdings Pty Limited ACN 065 106 381 pay the proceeds of any sale or settlement of the property described in Victorian Certificate of Title Volume 10362 Folio 393, being the property situate at Level 1, 529 Chapel Street, South Yarra in the State of Victoria, into an interest bearing account, net of the amount used to discharge or reduce the sum secured under any existing mortgage on that property or the property referred to in Order 3, and net of usual costs incurred in the course of sale, the details of which account are to be notified by an affidavit filed and served within seven days of settlement. 2. Gemhall Holdings Pty Limited ACN 065 106 381 by itself, its directors, officers, employees, agents or otherwise be restrained until further order from disposing of or otherwise dealing with $1.7 million of the monies in the accounts referred to in order 1 and 3. 3. Time 2000 Pty Limited ACN 079 316 224 is to pay the net proceeds of any sale or settlement of the property described in Victorian Certificate of Title Volume 8193 Folio 672, being the property situate at 291 Beaconsfield Parade, Middle Park in the State of Victoria into an interest bearing account, net of the amount used to discharge or reduce the sum secured under any existing mortgage on that property or the property referred to in Order 1, and net of the usual costs incurred in the course of sale, the details of which account are to be notified by an affidavit filed and served within seven days of settlement. 4. Time 2000 Pty Limited ACN 079 316 224 by itself, its directors, officers, employees, agents or otherwise be restrained until further order from disposing of or otherwise dealing with $1.7 million of the monies in the accounts referred to in orders 1 and 3. 5. Until further order, the Fifth Respondent is to notify the solicitors for the Applicants in writing of any proposed change in the shareholding or directorships of Gemhall Holdings Pty Limited or Time 2000 Pty Limited or any proposed change to the Appointors, trustees or beneficiaries of the Stephen Donovan Family Trust or the Diamanti Trust ten business days prior to the making of any such change. 6. The Second to Fifth Respondents file affidavits within twenty-one days disclosing the assets available to each of them available to meet a judgment in favour of the Applicants. 7. Until further order, the Fifth Respondent is to notify the solicitors for the Applicants in writing of any proposed mortgage or encumbrance, or proposed variation of an existing mortgage or encumbrance, of the assets available to Gemhall Holdings Pty Limited or Time 2000 Pty Limited ten business days prior to the making of any such change. 8. The Second to Fifth Respondents pay the Applicants' costs of and incidental to the hearings on 12 and 19 December 2008, certified fit for Counsel. 9. Except as provided in order 8, the costs of and incidental to the Applicants' Notice of Motion dated 5 December 2008 are reserved. 10. This order does not prohibit Gemhall Holdings Pty Limited ACN 065 106 381 and Time 2000 Pty Limited ACN 079 316 224 from: (a) paying their reasonable legal expenses; (b) dealing with or disposing of their assets in the ordinary course of their business, including paying business expenses bona fide and properly incurred up to $3,000 for any single expense; (c) in relation to matters not falling within (a) or (b), dealing with or disposing of any of the assets of Gemhall Holdings Pty Limited and Time 2000 Pty Limited in discharging obligations bona fide and properly incurred under a contract entered into before this order was made, provided that before doing so the Second to Fifth Respondents give the Applicants, if possible, at least two working days' written notice of the particulars of the obligations, unless they arise from a contract with a related entity, in which case there be at least 14 days' written notice of the particulars of the obligation. 11. The Second to Fifth Respondents, Gemhall Holdings Pty Limited and Time 2000 Pty Limited and the Applicants may agree in writing that orders 10 (a), (b) or (c) are to be varied. In that case the Second to Fifth Respondents must as soon as practicable file with the Court and serve on the Applicants a minute of a proposed consent order recording the variation signed by or on behalf of the Applicants and the Second to Fifth Respondents, Gemhall Holdings Pty Ltd and Time 2000 Pty Ltd, and the Court may order the variation of the order accordingly. 12. Liberty to apply on short notice to vary or discharge this order. THE COURT FURTHER ORDERS THAT: 13. The second, third, fourth and fifth respondents are to make discovery of the agreed categories of documents on or before Friday, 30 January 2009. 14. There be a directions hearing on Friday, 13 February 2009 at 9:30am. 17 The respondents, with the exception of the first respondent (Time 2000 West Pty Limited), have applied for leave to appeal against those orders. As it happens it is only paragraphs 5 and 6 of those orders which affect the respondents. Paragraph 5 requires Mr Donovan to give the notice mentioned in the order. Paragraph 6 requires the second to fifth respondents to file affidavits disclosing the assets available to each of them to meet a judgment in favour of the applicants. 18 On a directions hearing, prior to this hearing, on the application of counsel for the respondents and for Gemhall Holdings and Time 2000, I made an order joining Gemhall Holdings and Time 2000 as applicants to the application for leave to appeal. It seemed to me that they needed to be applicants to the application so that they could advance their contentions that those paragraphs of the order which affected them ought to be the subject of leave. No objection was taken to the joinder of the non-parties to the proceeding as parties to the application for leave to appeal. To avoid any doubt, I did not make any order joining them as parties to the proceeding as no order of that kind was sought by the respondents, Gemhall Holdings, Time 2000 or the applicants. 19 Although paragraphs 5 and 6 of the orders are the only orders which affect the respondents, it was accepted on all parties' part that if paragraphs 1 to 5 and paragraph 7 were set aside on appeal, that paragraphs 5 and 6 would also have to go because there would be no reason for those orders to stand. 20 The primary judge gave reasons for his decision. He identified the evidence which had been adduced by the applicants and the evidence adduced by the respondents. No complaint is made by the respondents and Gemhall Holdings and Time 2000 in relation to the facts which his Honour identified. In particular, no complaint is made that his Honour failed to have regard to any relevant fact or had regard to any irrelevant fact. 21 Next, his Honour considered the law. He noticed that the Court had power under s 23 of the Federal Court of Australia Act 1976 (Cth) to make Mareva orders or, as they are referred to in the Rules, freezing orders, and he had regard to the decisions of the High Court in Jackson v Sterling Industries Limited (1987) 162 CLR 612 and Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. 22 He observed that the joint reasons of the majority in Cardile 198 CLR 380 raised a number of propositions. First, that an order should not be made against a non-party to a proceeding "where judgment has not been obtained or execution recovered or not holding, controlling or capable of disposing of the property of a party in that proceeding". 23 Secondly, he observed the general proposition that the grant of freezing orders against a third party "is not limited to cases in which the third party holds, or is about to hold, or dissipate, or further dissipate property beneficially owned by the defendant in the substantive proceedings". 24 Thirdly, he observed that the guiding principle in considering whether to grant Mareva orders against third parties is as set out in [57] of the majority's reasons: What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word "may", be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which: (i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including "claims and expectancies", of the judgment debtor or potential judgment debtor; or (ii) some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor. 25 Lastly, he observed that there are a number of discretionary factors to which the majority in Cardile 198 CLR 380 referred at [53] which needed to be taken into account in determining whether an order should be made: 1. Whether the applicant has acted in a timely fashion; 2. Whether the applicant has obtained a money judgment in the proceeding; and 3. Whether the applicant has a cause of action against the third party. 26 There is no complaint that his Honour has misunderstood the law. 27 His Honour turned his attention to the resolution of the issues. He said that although neither party made detailed submissions on the question as to whether the applicants had a good arguable case, he was of the opinion that such a case existed. Issue was taken in relation to that holding by the respondents and Gemhall Holdings and Time 2000 on this application. They said that his Honour ought not to have found that there was a serious question to be tried. However, it is clear that the case which is raised by the applicants against the respondents will be determined upon a construction of the various agreements which, undoubtedly, were entered into by the parties. Although the respondents deny that those agreements amount to franchise agreements or give rise to a franchise regime, it cannot be doubted, I think, that as between the parties there is a serious question to be tried. 28 His Honour addressed the question as to whether there was a danger that a prospective judgment in favour of the applicants against the respondents would remain unsatisfied or partly unsatisfied if recovery is restricted to the assets of those respondents. 29 That proposition was criticised by Mr White, counsel for the respondents on this application. But I think that his Honour was merely considering whether there was any need for a freezing judgment at all because if there was not any risk that a prospective judgment against the respondents would remain unsatisfied, or partly unsatisfied, there would be no reason to make a freezing order against any non-party. I think there is nothing, with respect, in that criticism. His Honour then said: It seems to me that the most contentious issue in this case relates to the third question, namely whether some process, ultimately enforceable by the parties, is or may be available to the applicants as a consequence of a judgment against the respondents, pursuant to which whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, a third party may be obliged to disgorge property or otherwise contribute to the funds or property of the respondents to help satisfy the judgment against the respondents. 30 His Honour addressed the facts and said: The respondents submission that Mr Donovan, as a member of a class of possible objects of appointment, has no proprietary interest in the trust assets is correct. 31 His Honour is undoubtedly correct about that and no criticism is made about that statement. His Honour concluded, however, that that submission was not fatal to the applicants' application. 32 In my opinion, his Honour was right to approach the matter in the manner in which he did. First, to remind himself, as he did, that the respondent, Mr Donovan, has no proprietary interest in the trust assets of Gemhall Holdings or Time 2000. He was also right, in my opinion, to conclude that that was not fatal to the applicants' application. That follows, it seems to me, from the judgment of the majority in Cardile 198 CLR 380 and, in particular, at 401-402, and at [45]. 33 His Honour also said it followed from the provisions of O 25A r 5(5) itself and, I think, in that respect, he was also right. That rule provides: (5) The Court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a third party) if the Court is satisfied, having regard to all the circumstances, that: (a) there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because: (i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (b) a process in the Court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment. 34 In my opinion, that subrule supports the contention that it is not fatal to the applicants' application that Mr Donovan has no proprietary interest in the trust assets. His Honour concluded: It is possible that Mr Donovan will receive an interest under the Stephen Donovan Family Trust which is recoverable by a trustee in bankruptcy in the event that the applicants obtain a judgment against Mr Donovan and he's placed into bankruptcy upon being unable to satisfy that judgment. 35 The gravamen of the respondents' argument on this application is that his Honour posed for himself the wrong test. It was said that his Honour posed for himself a test which was merely speculative and whether it was possible or not the event might occur was an irrelevancy. I think, with respect, that argument ignores the sentence before the one to which I have referred in which he said, after referring to Cardile 198 CLR 380 and to O 25A r 5(5): Both refer to a process which is or may ultimately be available and the fact that the third party may be obliged to disgorge assets or contribute towards satisfying the judgment or prospective judgment. 36 It also overlooks, with respect, the cases to which his Honour referred which were all, as his Honour noticed, directed to the question as to whether it may be that an interest of the kind to which his Honour referred will arise. I think, without doubt, that the test which his Honour was addressing was the test which was referred to in Cardile 198 CLR 380 and in the Rules, and also in the cases to which his Honour referred. 37 He concluded that there was a possibility that Mr Donovan may receive an interest under the Stephen Donovan Family Trust and, in those circumstances, he was entitled, notwithstanding the criticism made by Mr White, to conclude that orders ought to be made of the kind which were made. 38 On an application of this kind an applicant must address the test laid down by the Full Court of this Court in Décor Corporation Pty Limited v Dart Industries (1991) 31 FCR 397. In that case, and in many cases subsequent to it, the Full Court of this Court and members of this Court have said that leave to appeal will only be granted if the decision from which leave is sought to appeal is attended with sufficient doubt to warrant the same being reconsidered and substantial injustice will result if leave were to be refused, supposing the decision to have been wrong. 39 The two tests are cumulative in the sense that both must be established before leave ought to be given. In my opinion, the applicant has failed to satisfy the test that the decision from which leave is sought to appeal is attended with sufficient doubt. Moreover, in my opinion, the applicant has failed to satisfy the second limb of Décor 31 FCR 397. The second limb assumes that the decision is attended by doubt and the inquiry is whether substantial injustice would result if leave were to be refused. As I pointed out during argument, the orders which were made by his Honour require Gemhall Holdings and Time 2000 to pay the moneys which they receive on the sale of their property into an interest bearing account and to hold $1.7 million in that account until further order. The sum of $1.7 million, as I have said, is the sum of the claim by the applicants against the respondents. I was told on this application by both parties that, in fact, the properties which were advertised for sale and for expression of interest in December 2008 did not sell. In those circumstances, the orders in paragraphs 1 to 5 made by his Honour do not presently operate to inhibit Gemhall Holdings or Time 2000 at all. In those circumstances, they would suffer no substantial injustice, even assuming his Honour's decision to be wrong. 40 Moreover, no prejudice to Gemhall Holdings and Time 2000 accompanies the making of the orders. There is no obligation on the part of Gemhall Holdings or Time 2000 to tell anyone of the existence of the orders. The only notification provision in the orders is that contained in paragraph 5 and that relates not to the assets of Gemhall Holdings or Time 2000 but to the constitution of the shareholding or directorships of those companies. There is a notification order in paragraph 7 that requires that Mr Donovan to notify the applicants' solicitors of any proposed mortgage or encumbrance or variation of any existing mortgage or encumbrance. There is, however, no injunction restraining Gemhall Holdings or Time 2000 from varying their existing borrowings or taking any further mortgages or encumbrances. In my opinion, because the orders presently do not in any way affect Gemhall Holdings or Time 2000, it cannot be said that those companies, which are applicants on this application, would suffer any substantial injustice by reason if leave were refused, even assuming the decision to be in error. 41 Moreover, I do not think the respondents would suffer any substantial injustice by being required to file affidavits which would disclose the assets available to them to meet a judgment in favour, again, upon the assumption that the decision complained of was wrong. I do not think that would give rise to any substantial injustice on those parties' part. 42 For all of those reasons, in my opinion, the application for leave to appeal should be dismissed. 43 There will be an order that the respondents to the proceeding, except the first respondent, and the two additional applicants, Gemhall Holdings Pty Limited and Time 2000 Pty Limited on the application for leave to appeal pay the applicants' to the proceedings costs. 44 I will discharge paragraph 6 of the order I made on 2 February 2009 and I will make an order extending the time within which the second to fifth respondents have to comply with the orders made by Besanko J on 19 December 2008 to Friday, 13 March 2009. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.