31 Senior counsel for ZMS and Sigalla made the incredible submission that an exchange of contracts for sale does not constitute a breach of order 1(a)(ii) because an exchange of contracts is not a 'sale' for the purposes of the order. 'Sale' is defined in Butterworths' Australian Legal Dictionary (1997) as including an agreement to transfer property, and there is no basis for concluding that this ordinary meaning was intended to be departed from in favour of a narrower concept; on the contrary, the scope of the order is expanded in various ways in order 1(b). Additionally, upon the exchange of contracts for the sale of land the purchaser acquires an immediate equitable interest in the property and an enforceable right to possession on completion, and so there is a dealing and disposal of property at that time, contrary to the order."
30 Austin J also said:
"42 As I have explained, I regard the evidence as showing that Sigalla knowingly and intentionally caused to ZMS to exchange contracts on Unit 6 in breach of the court's orders, and that his false evidence in cross-examination, to the effect that he was not thinking of the court's orders when he gave the instruction to exchange, made the breach all the more serious. …"
31 The factory unit concerned was one of eighteen developed by ZMS. Upon the hearing before me on 15 March 2010, it was explained that fifteen of these had been sold before any freezing orders were made. After the sale made by ZMS in contravention of the orders, as found by Austin J, a mortgagee exercised its power of sale in respect of the remaining two.
32 ZMS, speaking through counsel no doubt instructed by Sigalla, submitted upon the present application that the contempt constituted by the exchange of contracts on 10 November 2009 was motivated by a desire to preserve the net assets of ZMS. A picture was painted of circumstances in which a mortgage debt was due but unpaid, ZMS was prevented by the freezing orders from refinancing and the mortgagee was waiting in the wings for an opportunity to enter the arena and effect a fire sale, only to be held at bay by ZMS which, for the benefit of its own constituency, triumphed by selling the particular unit at a better price (reference was made to a finding by Austin J that Sigalla believed he had "no practical alternative" but to proceed with the exchange of contacts, even though he knew that the orders would thereby be breached).
33 It does neither ZMS nor its controller, Sigalla, credit to seek to invest with some form of nobility of purpose an intentional and knowing contravention of an order of the court. The true position is as submitted by counsel for TZL, that is, that the conduct of ZMS through Sigalla demonstrated disdain for the orders of the court and a serious lack of probity on the part of Sigalla and ZMS. They could have come back to court seeking variation of the orders to allow the sale. They obviously preferred deliberate defiance of the orders.
34 It is necessary to refer, in this connection, to Sigalla's evidence that refinancing of the mortgage loan had been rendered commercially impossible by the making of freezing orders. He refers in an affidavit to receipt of an "in principle" offer of new finance from the Commonwealth Bank some time shortly before freezing orders were made against ZMS on 26 August 2009. He was living in the United States at the time and had retained an intermediary, CDS Financial Services (Mr Shaun Smith), to seek out sources of finance. Sigalla says that "about mid-September", the Commonwealth Bank withdrew its offer of finance and he had a conversation with Mr Smith in which Mr Smith said words to the effect:
"Andrew, the CBA has been made aware of your freezing orders by ASIC and as a result have decided to withdraw the offer of finance."
35 Sigalla then refers in his affidavit to email correspondence between Mr Smith and himself. That correspondence does not appear to bear out the version of events concerning the Commonwealth Bank given by Sigalla and repeated above. The central email is from Mr Smith to Sigalla and is dated 28 September 2009. It followed receipt by Mr Smith of an email from ASIC enclosing a notice under s 33 of the Australian Securities and Investments Commission Act 2001 (Cth). Having regard to the content of Mr Smith's email, it may be inferred that the notice under s 33 required him or his company or both to produce loan documents, including but not limited to loan applications, bank contacts and file notes concerning ZMS. After referring to the s 33 notice and a telephone call he had received from an ASIC officer on 24 September 2009, Mr Smith said:
"They [ie, ASIC] advised that they would also be contacting Chris Tracey of CBA in relation to the matter.
Given the above occurrence I can confirm CBA shall be unable to assist you until the matter is suitably resolved. I am unable to seek alternate funding until this occurs."
36 Having regard to this email, there is a distinct possibility that ASIC did not contact the Commonwealth Bank until 24 September 2009 or later and that the assessment that CBA would not proceed with its offer of finance was an assessment made by Mr Smith and conveyed by him to Sigalla. Mr Smith's email does not refer to freezing orders or their effect on the Commonwealth Bank's thinking. It is also relevant to note that, on 19 June 2009 (some two months before any freezing order was in place), National Australia Bank, with which Sigalla, ZMS, BZI and other Sigalla companies maintained accounts, unilaterally terminated the banker customer-relationship by a letter addressed to Sigalla reading in part as follows:
"The continued conduct of drawing cheques on your accounts prior to arranging for sufficient clear funds to be available has left us with no other choice. Further the outstanding lease residual for ZMS Investments Pty Ltd, having not cleared as contracted, is of ongoing concern.
It is also apparently clear that the banking relationship has become untenable and we recommend you seek an alternate financial institution for any future relationship."
37 There is thus room for an inference that the inability of ZMS to refinance the Ingleburn mortgage was not a direct result of the freezing orders made against ZMS in these proceedings. If that matter were somehow to become an issue in the future, it is quite possible that the cause and effect asserted by Sigalla would be found to be lacking.
38 ASIC has instituted contempt proceedings against Sigalla. The charges are detailed in an amended statement of charge filed on 1 March 2010 alleging no fewer than forty-one contraventions of freezing orders made by the court against Sigalla in the ASIC proceedings. The application under s 1323 of the Corporations Act on which those orders were made no doubt sought the appointment of a receiver of Sigalla's assets and thereby became the vehicle for the making of freezing orders as a "less drastic remedy": Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307. The forty-one contraventions of orders alleged by ASIC have yet to come before the court. I therefore do no more than note the ASIC allegations.
39 Returning to the finding of contempt by Austin J and my observation that ZMS and Sigalla demonstrated a serious lack of probity, I note the submission made by counsel for TZL that that of itself is sufficient to demonstrate a risk of dissipation of assets. Counsel referred to part of the judgment in the Ninemia Maritime case (above) in which Mustill J said (at 406), in relation to proof of risk of dissipation:
"It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way that shows that his probity is not to be relied on."
40 TZL has, on this application, led direct evidence that ZMS, at the instigation of Sigalla, has previously acted in a way that shows that the probity of ZMS and Sigalla is not to be relied on. That, to my mind, is alone sufficient to warrant the continuation of the freezing order.
41 I nevertheless move to another aspect of the evidence relevant to the dissipation question. Sigalla refers in an affidavit to activities that he would like to have ZMS undertake but will not be able to pursue if freezing orders are in place. I quote from the affidavit:
"79. From time to time ZMS has engaged in consulting work, for example work in the nature of that of an investment bank facilitating finance or capital raising or investment projects. Often, this work can be speculative in that it depends upon the success of the outcome, in other words, if capital is unable to be raised by a client, ZMS may not be paid anything or might get a relatively small fee. However, if for example a capital raising was successful, ZMS could earn very substantial profits.
80. Where ZMS has taken on such engagements in the past, it has engaged other consultants or analysts to assist in carrying out subordinate yet necessary tasks. ZMS would have to carry those costs until it is paid, if it does get paid at all under the engagement.
81. The operation of the freezing orders deny the opportunity to tender for and carry out that work and earn profits because ZMS is not able to disperse funds for costs it would have to carry until or if and when it gets paid for the engagements it might undertake.
82. I have not sought out such opportunities since the freezing order was made because it would be fruitless to do so. Thus, ZMS is, in practical terms is being denied the opportunity to undertake such profitable work. ZMS has undertaken no income generating activity since the freezing orders were entered."
42 The distinct possibility disclosed here is that ZMS, if free to do so, will undertake assignments and pay sub-contractors from its own pocket in circumstances where it receives nothing or a small fee. There is thus a clear foreshadowing of outlay of assets for no return - in other words, dissipation.
43 Later in the same affidavit, Sigalla refers to a desire for ZMS to be able to undertake share trading. TZL makes the point, which has substance, that share trading is an inherently speculative activity which, while capable of making profits, also often results in losses.
44 The conclusion stated at paragraph [40] above is consolidated and strengthened by the matters stated in paragraphs [40] to [43]. I am therefore satisfied, having regard to all the circumstances, that there is a danger that any judgment TZL obtains against ZMS will be wholly or partly unsatisfied because assets of ZMS are disposed of in such a way as to effect a reduction in the totality of ZMS's assets.
45 It follows that TZL has made out a case for the continuation of freezing orders against ZMS, subject to two related matters to which I now turn. The first concerns various aspects of the balance of convenience put forward by ZMS. The second goes to a particular aspect of the balance of convenience, that is, the capacity of TZL to meet the undertaking as to damages that it will be expected to give to the court as the price of the continuation of the restraints. Balance of convenience questions are obviously material to the exercise of the court's discretion.
46 ZMS points to various activities it would like to undertake but will be unable to pursue if freezing orders are in place. I have already referred to a desire to undertake potentially speculative consulting assignments and potentially speculative share trading. Another matter concerns undeveloped land at Ingleburn. Sigalla says in his affidavit that this land can be developed so as to produce a profit of the order of $2.5 to $3 million. Development consent is said to be in hand. Sigalla says that, but for the freezing orders, development would have started in October 2009. If the orders are continued, he says, there will be a severely diminished likelihood of obtaining bank finance to carry out the development.
47 The thesis here propounded by Sigalla is that, if the freezing orders expire and are not continued, ZMS's prospects of obtaining bank finance will no longer be severely diminished. That simply cannot be so. No bank is so naïve as to say to itself, "Oh well, now that those freezing orders have gone we can prudently go ahead and make a large development loan to this private company that not only has pending against it litigation in which claims of the order of $7.7 million are made but also is controlled by a person who is being pursued in both that litigation and in separate ASIC litigation, is himself bound by freezing orders, has already been punished for contempt of court because of his role in one breach of freezing orders and is the subject of ASIC allegations of forty-one more breaches of such orders."
48 The hypothetical banker just quoted would also take into account in his or her cautious assessment - and give significant weight to - the next matter to be mentioned, that is, that there is pending in the Federal Court of Australia an application by the Commissioner of Taxation for an order that ZMS be wound up in insolvency and an order that a liquidator be appointed.
49 The Commissioner's application is advanced with the benefit of a presumption of insolvency arising from non-compliance by ZMS with a statutory demand for the payment of approximately $3.3 million (being about $1.5 million for goods and services tax and the balance for interest and penalties). There was apparently no application by ZMS for an order setting aside the statutory demand (even though Sigalla, in an affidavit, refers to "a disputed liability for goods and services tax") with the result that, absent leave on the special and restricted ground in s 459S(2) of the Corporations Act, ZMS will be unable, on the hearing of the winding up application, to rely on the ground that there is a genuine dispute as to the existence or amount of the Commissioner's debt.
50 The winding up application has already been before the Federal Court and was adjourned. It appears that ZMS is taking steps towards defending the proceedings. There is reference in the evidence to a proposal to commission an appropriate expert to prepare a solvency report. From this it may be inferred that there may be an attempt by ZMS to prove itself solvent despite the debt of $3.3 million to the Commissioner. In submissions, however, greater emphasis was placed on prospects of being able to reach some accommodation or settlement with the Commissioner - something apparently not previously attempted despite winding up proceedings having been commenced and having actually come before the court. Sigalla deposes in relation to this:
"However, ZMS has no ability to come to any settlement with the ATO because the freezing order denies the ability of ZMS to disburse funds by way of settlement."
51 There is a certain disingenuousness here. The thesis is that freezing orders will prevent negotiation of a settlement because any settlement agreed will not be able to be implemented. The obvious answer is that, if a settlement were agreed and the Commissioner were willing to accept a given amount in discharge of the liability, there would be very good prospects indeed that ZMS would, with ease, obtain from the court dispensation enabling it to pay that amount to the Commissioner. Freezing orders do not have the purpose of preventing payment of legitimate debts; nor do they represent some form of security or priority for the party at whose suit they have been made. The sole purpose is to prevent dissipation in the form of an unwarranted diminution of the net asset base. The proposition that the existence of freezing orders will make it impossible to reach a settlement with the Commissioner must be rejected; and as to implementation of any settlement that might be reached subject to a proviso regarding the court's granting dispensation from the freezing order, it need only be said that the prospects of that proviso being satisfied must be rated as excellent.
52 The various matters going to the balance of convenience already canvassed do not militate against the making of freezing orders.
53 I turn now to a separate issue that also goes to the balance of convenience, that is, the capacity of TZL to honour the undertaking as to damages (when I say that this goes to the balance of convenience, I mean to indicate that doubt about an applicant's ability to honour an undertaking as to damages may militate against the making of orders unless security for the undertaking is forthcoming).
54 ZMS and Sigalla maintain that TZL is insolvent. Sigalla was a director of TZL until June 2009 and may therefore be taken to have intimate knowledge of its financial position, at least as it existed at that and earlier times during his tenure. He makes the point that, as TZL's sole asset, in commercial terms, is technology which has yet to be turned to profitable account, the company remains reliant on the ability to access capital while the commercialisation program continues. He points to very substantial excess of current liabilities over current assets at 31 December 2009 - of the order of $30 million. This, coupled with a loss of more than $5.3 million for the half year to 31 December 2009 and net cash outflows from operating activities of more than $2.4 million, caused the auditors to say in their report:
"The ability of the consolidated entity to continue as a going concern is dependent on the continued support of the group's lenders and shareholders and the ability to generate future profits and positive cash flows."
55 There is also evidence, however, that TZL has been able to raise capital and has exercised this ability in recent times. At the annual general meeting held on 26 February 2010, shareholders passed resolutions approving a substantial conversion of debt to equity and the issue of further shares.
56 There can be no doubt that TZL has financial problems, but the evidence before the court does not bear out Sigalla's assertion that it is insolvent. TZL, in any event, puts forward reasons why the court should not afford weight to TZL's financial position when considering the balance of convenience. It is to those that I now turn.
57 The first point TZL makes is that the orders already in force were made by consent and make no provision for security for TZL's undertaking. ZMS's response is that the financial position has deteriorated since then. The riposte is that the position has improved in that the debt to equity conversion and capital raising approved by the annual general meeting have occurred. The correct time for expressing the present concerns about TZL's financial state, according to TZL, was when the orders were first made; and ZMS should not be heard to make that complaint now.
58 Second, TZL points to a matter referred to as follows at paragraph 9 of my judgment of 10 November 2009 in Australian Securities and Investments Commission v Sigalla (above):
"Certain asset preservation orders were made in the TZL proceedings, culminating in orders of 16 September 2009. But no such order was made in those proceedings against Mr Sigalla or BZI. Rather, in item 7(a) of short minutes of orders made on that day, the court noted a consent of Mr Sigalla and BZI to the making against them in the TZL proceedings of freezing orders in the same terms as those that had been made in these present proceedings, if TZL served a statement of claim on them in the TZL proceedings by 23 October 2009 and if the asset preservation orders sought by ASIC were not continued. The condition concerning filing of a statement of claim by TZL was satisfied, with the result that, although no asset preservation orders are extant against Mr Sigalla and BZI in the TZL proceedings, those defendants to those proceedings have consented to the imposition there of asset preservation orders the same as those made in these proceedings, if the last-mentioned orders are not continued."
59 The point TZL makes is that the consent given by Sigalla and BZI in these proceedings, as referred to in the judgment in the ASIC proceedings, was not predicated on TZL's giving any undertaking as to damages. Thus, Sigalla showed himself willing to accept the imposition of freezing orders against himself and BZI in these proceedings without any undertaking as to damages by TZL (much less security for any such undertaking) but now seeks to say that the worth of such an undertaking as regards orders affecting ZMS - another Sigalla emanation - is an important factor bearing on the question whether such last-mentioned orders should be made.
60 In the same vein, Sigalla and BZI submitted in the ASIC proceedings that the ability of TZL to obtain freezing orders against them in these was a reason why those orders were not "necessary or desirable" (in s 1323 terms) in the ASIC proceedings.
61 These submissions about past attitudes and stances of Sigalla and his companies are persuasive. When it suited him to do so, Sigalla adopted the position that absence of an undertaking as to damages by TZL or doubt about the worth of that undertaking was not a matter of concern to him. He took that attitude in order to achieve some result desired at the time. Now, when it suits him to take the opposite stance, he simply abandons the attitude that was previously convenient. This seriously calls into question the genuineness of his fear (and therefore that of ZMS) that TZL will be unable to honour the undertaking as to damages.
62 The relevance to be attached to doubt about a plaintiff's financial capacity should now be brought into focus. A conclusion that such doubt exists does not lead inexorably to the result that interlocutory restraint will be refused. In Wentworth v Wentworth (unreported, NSWSC, 12 June 1997), Hodgson J said:
"As regards the undertaking as to damages question, it is clear in my opinion that the inability of a plaintiff to give a valuable undertaking as to damages does not necessarily preclude the granting of relief. However, where one is balancing monetary disadvantages as between a plaintiff and a defendant, the inability of a plaintiff to give a valuable undertaking as to damages is a factor which can be taken into account in assessing the balance of convenience and may even be decisive."
63 In the present case, the fact that Sigalla has shown himself to be, in essence, unconcerned about the existence and worth of an undertaking as to damages from TZL causes me to attach no real weight to the possibility that TZL may in the future not have the funds to honour its undertaking in full. I say this in a context where, on the case TZL makes against ZMS (which, as I have found, is a "good arguable case"), any shortage of funds to TZL has been contributed to, to the extent of about $7.7 million, by payments wrongfully made to ZMS.
64 The outcome on the question of the continuation of freezing orders against ZMS is accordingly that the orders made on 16 September 2009 will be continued up to 5pm on 15 August 2010, if TZL by its counsel or solicitor again gives to the court the undertakings contained in Schedule 1 of Appendix A of the orders entered on 26 August 2009.
65 There is, however, one possible qualification to this to which I must now turn. ZMS seeks an exception allowing the expenditure of funds by ZMS on the defence of the winding up proceedings to which I have referred. TZL does not oppose an order creating a suitable exception. There is some dispute between the parties as to the appropriate form of a "carve-out", including as to amount (ZMS says that $200,000 should be allowed; TZL proposes $150,000). The appropriate course, in my view, is to create an exception in the form proposed by TZL. ZMS can always seek to have it expanded if the need arises. There will therefore be an order that the orders made on 16 September 2009, as continued by orders made today, be amended in the manner set out on the final page of the annexure B to the affidavit of Leslie Michael Steven Pozniak sworn on 15 March 2009.
66 Finally, I turn to the question of security for costs, as sought by all three defendants, that is, ZMS, BZI and Sigalla. TZL does not contend that it should not be ordered to provide security for the defendants' costs of the proceedings. The contest is as to the amount.
67 ZMS seeks security in the sum of $497,975. TZL says that an appropriate sum is $250,000; indeed, it has offered that sum but the offer has not been accepted.
68 The defendants' estimate of costs is detailed in an affidavit of their former solicitor, Mr Ward. Several aspects became the subject of submissions by TZL.
69 TZL noted that the defendants' estimate includes $128,000 for counsel and solicitors for the full ten days of estimated hearing time. TZL refers, in that connection, to an observation of Smith J in Felsink Pty Ltd v City of Maribyrnong [2007] VSC 49 at [33]:
"I consider that the first defendant is entitled to have security for costs in respect of costs incurred in preparation for trial and for the first two days of the trial. It is appropriate to limit any security to the first two days of the trial because it places an unfair burden on the plaintiff to be required to provide security for costs which may never be incurred. Further, the issue can be revisited if the trial is continuing at the end of the second day and appropriate orders made if necessary."
70 The clear message here is that any estimate should take account of the possibility of settlement either before trial or in the early stages - a possibility that may be more pronounced where, as here, the hearing is expected to be long. On this basis, I am of the opinion that the $128,000 should be reduced by $102,400 (representing eight hearing days) so that the total is reduced to $395,575.
71 TZL next says that this balance should be discounted by a factor recognising that assessed costs should be expected to be lower than costs actually charged. There were competing submissions on this but they went to quantum rather than the principle. A discount of 30% should be applied to produce a figure of $276,902.50.
72 TZL refers to the fact that proceedings brought by Sigalla against TZL will be heard at the same time as these proceedings, so that some part of the court time actually occupied will be devoted to that other matter. Reference is also made to delay on the defendants' delay in seeking security and Sigalla's breach of orders.
73 Having regard to all these factors, security should, at this stage, be ordered in the sum for which TZL contends, that is, $250,000.
74 Subject to the contemplated undertakings being given by TZL, the orders will be as follows: