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[2016] WASC 311
General information, not legal advice.
Supreme Court of WA
2016-09-28
Martino J
Original judgment source is linked above.
1 MARTINO J: On 18 January 2016, at an urgent ex parte hearing of an application made by the first, second and third plaintiffs Corboy J granted freezing orders against the first and second defendants. The orders were made until 4.00 pm on 22 January 2016. On 22 January 2016, at a hearing at which each of the defendants was represented, I amended the freezing orders and extended their operation until further order. I ordered that the action be added to the Commercial and Managed Cases List for case management by me.
2 The orders made by Corboy J on 18 January 2016 gave the defendants and others affected by the freezing orders liberty to apply to vary or discharge the orders. The orders made by me on 22 January 2016 preserved that liberty to apply. The first defendant applies to discharge the freezing order made against him and for a compensation order pursuant to the undertaking as to damages provided by the first, second and third plaintiffs. The application is made on the basis that on the hearing of the ex parte application the first, second and third plaintiffs did not:
3 The first defendant also contends that the balance of convenience warrants the discharge of the freezing order against him.
4 On 2 August 2016 I made orders programming the filing of affidavits and submissions by the first defendant and the plaintiffs on the first defendant's application to discharge the freezing orders and for compensation. On 10 August 2016 I amended the timetable contained in the orders I made on 2 August 2016 and listed the first defendant's application for hearing on 14 September 2016.
5 The fourth plaintiff was added as a party by the filing of an amended writ of summons on 20 April 2016, pursuant to leave granted by me on 19 April 2016. That amended writ of summons also added causes of action.
6 The first plaintiff is the sole shareholder of the second plaintiff and the fourth plaintiff. The fourth plaintiff is the sole shareholder of the third plaintiff.
7 The application made on 18 January 2016 was made by motion dated that day. Accompanying the motion was a writ of summons and an affidavit of Keith Joseph Muller made on 18 January 2016.
8 The writ of summons contained an indorsement of claim which provided:
...
1.4 the conduct of the first defendant ... as Chief Executive Officer of [the first plaintiff] together with the conduct of the second defendant ... as Chief Financial Officer of [the first plaintiff] by which they caused funds in the sum of $3,726,779.58 to be misapplied from the trust accounts maintained by [the second plaintiff] between 2014 and August 2015 and funds in the sum of $1,443,382.37 to be misapplied from the trust account maintaining by [the third plaintiff] between January 2015 and August 2015;
1.5 the conduct of [the first defendant and the second defendant] in misapplying such funds being in breach of their duties pursuant to the Corporations Act and as fiduciaries for each of the plaintiffs;
1.6 each of the plaintiffs thereby suffering loss and damage being not less than the sum of $5,170,161.95.
9 The plaintiffs claimed orders that the first defendant and the second defendant restore trust funds of $5,170,161.95, equitable compensation or damages for breach of duty, relief pursuant to s 1317H of the Corporations Act 2001 (Cth), interest and costs.
10 In his affidavit of 18 January 2016 Mr Muller deposed that he is a director of each of the first, second and third plaintiffs. He deposed that Fopar Nominees Pty Ltd is a secured lender to the first plaintiff pursuant to a general security deed dated 7 August 2015, that the first plaintiff 'comprises approximately 50 separate companies, a number of which are wholly owned subsidiaries' and that each of the second plaintiff and the third plaintiff 'is a 100% owned subsidiary of' the first plaintiff. The first plaintiff carries on a general insurance business. The second and third plaintiffs carry on business under an Australian Financial Services Licence.
11 Mr Muller deposed that the first defendant was the chief executive officer of the first plaintiff until 6 January 2016 when the Board of the first plaintiff resolved to suspend him. On Friday 15 January 2016 the Board resolved summarily to terminate the first defendant's employment.
12 At the date of Mr Muller's affidavit the second defendant was the chief financial officer of the first plaintiff.
13 Each of the second and third plaintiffs, pursuant to their Australian Financial Services Licence, maintained trust accounts.
14 On 15 January 2016 each of the second and third plaintiffs resolved to sell its business to PCS Insurance Group Ltd. Mr Muller deposed that in January 2016, in the course of due diligence in respect of the sale of the businesses to PCS Insurance Group, Mr Fogarty, Mr Asquith and Mr Muller, being the directors of the first plaintiff other than the first defendant, received information from the second defendant that there was some irregularity with the trust accounts of each of the second and third plaintiffs. They commissioned, as an advisor, Mr Dermott McVeigh, a registered company liquidator and principal at Ferrier Hodgson. On 8 January 2016 Mr McVeigh provided a discussion paper as a result of his firm's investigations. A copy of that discussion paper was attached to Mr Muller's affidavit.
16 The second paragraph of the Ferrier Hodgson discussion paper's executive summary was in the following terms:
The information contained in this report is provided for discussion purposes only and does not constitute an opinion provided by Ferrier Hodgson. Information is based upon preliminary discussions and has not been fully substantiated. No reliance should be placed on this discussion paper.
17 The discussion paper stated that the second defendant had advised that monies had been withdrawn from two trust accounts and used for business purposes. Ferrier Hodgson had held preliminary discussions with the second defendant on the background, treatment and use of these monies, which had been quantified at $3.7 million and $1.4 million. Ferrier Hodgson had been informed that the amount withdrawn from the second trust account had been $1.3 million, however on Ferrier Hodgson's reconciliation the total amount was $1.4 million at 8 January 2016.
18 Ferrier Hodgson stated that approximately $3.7 million was transferred from the client trust account of the second plaintiff into the operating account from 2014 onwards and that the majority of funds were allegedly used to service interest commitments on a convertible note provided by Mr J Fogarty, through a corporate vehicle controlled by him, Fopar Nominees. A lesser portion may have been used to service trade creditors. The accounting treatment was to transfer funds from the trust account to the operating account when it became apparent that the interest due on the convertible note or trade creditors were unable to be serviced. Ferrier Hodgson stated that the second defendant advised that both the second defendant and the first defendant were aware that funds were being drawn from the trust account to be used in this manner. The payments were not supported by any documentation and the transfer was initiated and approved by the second defendant.
19 Ferrier Hodgson stated that approximately $1.4 million was transferred from the client trust account of 'Australian Reliance Group' to the company operating account and used to service trade creditors. They stated that the second defendant and the first defendant were both aware that funds were being drawn from the trust account for this purpose. The basis of the statement that the second defendant and the first defendant had this knowledge was not expressly stated in the discussion paper, but it seems clear, from the context in which the statement appears, that the second defendant was the source of this statement, as he had told Ferrier Hodgson that both of the defendants knew about the withdrawals from the second plaintiff's trust account.
Our preliminary conclusion is that a breach has occurred as it appears that Trust account funds have been used for an improper purpose. However, it is not yet clear as to whether that breach would be criminal or civil in nature. Further investigations will need to be conducted to confirm or determine the extent of the unauthorised payments, and to determine how far the payments can be traced.
21 The authors recommended that further investigations be undertaken 'to fully understand the nature of the transactions and provide the Board with a more substantial response.'
The affidavit in support of the application to discharge the freezing order
22 In support of his application to discharge the freezing order the first defendant has filed an affidavit made on 24 August 2016 by Patrick John Tydde, a solicitor employed by the solicitors for the first defendant. Mr Tydde has attached to his affidavit transcripts of hearings in this action, correspondence between the solicitors for the plaintiffs and the solicitors for the first defendant in which the solicitors for the first defendant made complaint about the statement of claim and foreshadowed the application to discharge the freezing order and copies of historical company searches. Mr Tydde has deposed that he has been informed by the first defendant and believes that as a consequence of the freezing order:
(a) the first defendant has been unable to dispose of assets held in his personal capacity or by companies associated with him which fall within the scope of the freezing orders. He was unable to sell shares in February 2016 to take advantage of favourable market conditions. The shares have since fallen in value;
(b) discussions about potential employment that the first defendant had with an insurance broking company were terminated on 20 January 2016 as a consequence of the freezing order; and
(c) the first defendant is unable to make settlement offers in other court proceedings to which he is a party to the extent that any proposed settlement contemplates the payment by him of a global settlement sum.
23 The company search of the first plaintiff attached to Mr Tydde's affidavit contained data extracted from ASIC on 21 January 2016. It showed that the first defendant was a director and had been a director since 16 April 2014 and that Mr Muller was a director and company secretary and had occupied those positions since 27 July 2015.
24 The company search of the second plaintiff showed that at 21 January 2016 Mr Muller was a director and company secretary and had occupied those positions since 10 August 2015, that the first defendant was a director from 27 June 2011 to 11 January 2013, from 23 December 2013 to 21 November 2014 and from 10 August 2015 to 1 December 2015 and that the first defendant had been company secretary from 10 August 2015 to 1 December 2015.
25 The company search of the third plaintiff showed that at 21 January 2016 Mr Muller was a director and company secretary and had occupied those positions since 6 January 2016 and that the first defendant was a director from 10 January 2003 until 6 January 2016.
26 The company search of the fourth plaintiff showed that the first defendant was a director from 24 September 2007 until 6 January 2016.
27 In opposition to the first defendant's application the plaintiffs filed an affidavit made on 7 September 2016 by Jonathon Neil Asquith, who is a director and the company secretary of the first plaintiff and the sole director and company secretary of the second, third and fourth plaintiffs.
28 Mr Asquith has deposed that prior to August 2013 Steadfast Group Limited, an unlisted public company carrying on the business of providing support services to a network of insurance brokers, would issue ordinary shares to its members. The third plaintiff was a member of Steadfast on its own behalf and on behalf of its related companies and held five ordinary shares in the issued capital of Steadfast. In about August 2013 Steadfast undertook a capital restructure which involved the cancellation of the third plaintiff's shares and the issue of new shares which were listed for quotation on the Australian Securities Exchange. The third plaintiff was to be issued with 98,000 Steadfast shares free from conditions and 1,120,647 Steadfast shares to be held in escrow until 31 August 2014. The third plaintiff was not issued any shares, but the shares were issued to Hawkstone Group Pty Ltd.
29 Attachment JNA 6 to Mr Asquith's affidavit is a copy of an email dated 13 September 2014 from the second defendant to the first defendant with the subject heading 'Steadfast Shares & The Fund' and the first defendant's reply the same day. At the commencement of the email the second defendant wrote:
Further to our conversation yesterday regarding the sale of part of the Steadfast shares and our urgent need to access the Macquarie facility to pay some of our long overdue capital commitments I think the only option we have is to utilise some of the stock. Like you I am very concerned that given the current precarious state of the fund and Jon's ongoing threats that we can only do this in a manner that minimises our exposure.
30 The second defendant proposed the sale of $790,000 worth of shares in Steadfast and using the proceeds to refinance indebtedness of the second and third plaintiffs. In his email in reply the first defendant expressed his agreement to the second defendant's proposal, writing that it all seemed to make sense 'so long as we are protected given how volatile Jon is'.
31 Attachments JNA 8 to JNA 12 are copies of emails concerning the cessation of the employment of Mr David Sneddon by the fourth plaintiff in November 2014 and a copy of the settlement and release deed between the fourth plaintiff, Vantage Private Equity (Aust) Pty Ltd and Mr Sneddon.
32 Mr Asquith deposed that in January 2016 he, Mr Muller and Mr Jon Fogarty, who was and is a director of the first plaintiff, met with members of the plaintiffs' accounts staff. Ms Karen Campbell, the plaintiffs' group accountant, informed Mr Asquith and he believes that she knew about deficiencies in the trust accounts maintained by the second plaintiff and the third plaintiff and she informed the first defendant of them on about four or five occasions, the first occasion being in or about October 2014. Ms Rebecca Ferrier, the plaintiffs' administration manager, informed Mr Asquith and he believes that she knew about deficiencies in the trust accounts maintained by the second plaintiff and the third plaintiff and she informed the first defendant of them in or about February 2015.
33 Attachment JNA 17 to Mr Asquith's affidavit is a copy of an email from the first defendant to the second defendant dated 22 October 2014 and of the second defendant's reply the following day. In his email of 22 October 2014 the first defendant said:
And now I find out somewhere near $3m of trust funds monies have been used on top of the monies raised and then get informed by you that if we don't repay this ASAP we will both lose our houses. This is unacceptable, we need a plan on how we get this back in order, and never do it again.
34 In his reply to the first defendant's email the second defendant wrote:
Thanks for your email & yes you can now appreciate why I have too have been harping on for the last 12 months about our need to address our outgoings, income generation and need for cash. I completely agree we need to have a rigid plan to get the businesses on track as like you I am completely frustrated and gravely concerned at our perilous position. I spend every day trying to manage & manipulate our cash position whilst trying to shield this from staff & other interested parties.'
35 Mr Asquith has also attached to his affidavit a copy of a computer screen shot which the plaintiffs' solicitors provided to the first defendant's solicitors on 9 February 2016. That screen shot is a copy of an online report to ASIC made by the first defendant on 10 January 2016 in which the first defendant said:
I am the former CEO for Vantage Holding Group which is the holding company for a number of insurance distribution businesses including amongst other the Reliance Group. Mr Kim Hanson is the current CFO for the group. The group is currently in a process to sell the business and as part of the process have been informed by the acquirer that a likely deficiency in the trust account exists. The total quantum at this stage is unknown to me but is significantly less than the proposed purchase price. I met with Mr Kim Hanson yesterday and he admitted that there was in fact a trust deficiency that had been created due to recent cash flow issues in the business which has in turn led to the sale of the business, he advised that the proceeds of the sale would fix the issue. I have requested the company's auditor prepare a report of the issue and quantum of the deficiency. I have been informed by Kim Hanson that he has advised the Vantage Holding Group board that a deficiency exists.
36 Mr Asquith has deposed that the first defendant did not inform him of any deficiencies in the second or third plaintiffs' trust accounts.
37 Mr Asquith has deposed that between 30 October 2011 and 1 September 2012 the first plaintiff was the sole shareholder of the second plaintiff, between 2 September 2012 and 26 June 2013 the fourth plaintiff was the sole shareholder of the second plaintiff and since 27 June 2013 the first plaintiff has been the sole shareholder of the second plaintiff.
The plaintiff's allegations of the defendants' knowledge
38 The plaintiffs' claim in the indorsement of claim that the first defendant misapplied trust funds appears to be included in the pleading in par 17 of the statement of claim that as directors and officers of the second plaintiff and the third plaintiff the first defendant and the second defendant caused, alternatively were knowingly involved in the second and third plaintiff's breaches of their duties as trustee. They give particulars of that knowledge as:
(i) the emails between the first defendant and the second defendant of 22 and 23 October 2014;
(ii) the second defendant's admissions of his knowledge of the breaches of the duties as trustee at a meeting with Mr Fogarty, Mr Muller and Mr Asquith on 12 January 2016;
(iii) the termination of the employment of Mr Sneddon in November 2014, the inclusion in a deed of settlement and release of a confidentiality clause and the payment to Mr Sneddon of monies under the deed; and
(iv) that by reason of their offices in the plaintiffs and the related entities they ought to have known of the breaches.
39 The court may make a freezing order against a prospective judgment debtor if the applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the court and the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:
(a) the prospective judgment debtor or another person absconds; or
(b) the assets of the prospective judgment debtor or another person are:
40 The expression 'good arguable case' was used by Mustill J in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG [1984] 1 All ER 398, 404 where he considered that the right course was 'to adopt the test of a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success'. The plaintiffs must establish that they have a reasonably arguable case on legal as well as factual matters: Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 LR 380 [68]; BGC Contracting Pty Ltd v WA Construction Hire Pty Ltd [2010] WASC 25 [5] (Le Miere J); Perdaman Chemicals & Fertilisers Pty Ltd v Griffin Coal Mining Company Pty Ltd [2011] WASC 188 [143] [144] (Beech J); Festive Productions Ltd v Jones [2011] WASC 226 [34] [36] (Edelman J).
41 The onus of proving the risk of a judgment being rendered fruitless is on the plaintiffs. The standard of proof of the danger of nonsatisfaction of the judgment is that the risk must be real and not fanciful. The plaintiffs do not have to prove a positive intention to frustrate a judgment. While the inference of the risk of non-satisfaction of a judgment cannot usually be drawn from the fact that a plaintiff has a sufficiently arguable cause of action, evidence going to a plaintiff's cause of action can in some cases be relied upon in drawing the inference of danger, for example when the case made out against the defendant is one of serious dishonesty involving diversion of money: Cardile v LED Builders Pty Ltd [26]; Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319; BGC Contracting Pty Ltd v WA Construction Hire Pty Ltd [13] [15].
42 A freezing order is a drastic remedy which should not be granted lightly. The court is required carefully to scrutinise the application: Cardile v LED Builders Pty Ltd [51]. The remedy exists to prevent the frustration or abuse of the process of the court: Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612, 617, 621, 625. The plaintiff is not to be given a secured position against other creditors and the remedy is not to be used to circumvent the insolvency laws: Jackson v Sterling Industries Ltd (618, 625).
43 It is very difficult to give a general definition of the extent of the disclosure required on an ex parte application because each case depends so much on its own facts. The applicant must make a full and fair disclosure of all matters within its knowledge which are material to the proceedings and which tend to favour the other party: Bell Group NV (in liq) v Aspinall (1998) 19 WAR 561, 570. The applicant must make proper enquires, as the duty of disclosure extends not only to require disclosure of material facts known to the applicant but also to any additional facts which the applicant would have known if the applicant had made proper enquiries: Brink's Mat Ltd v Elcombe [1988] 1 WLR 1350; Commonwealth Bank of Australia v Oswal [2011] WASC 84 [7] (Le Miere J). The place to disclose the facts is in the affidavit and not in the exhibits, but each case must be looked according to its circumstances and the application of the principle of disclosure should not be taken to extreme lengths: Commonwealth Bank of Australia v Oswal [11].
Whether the plaintiffs failed to comply with the duty of disclosure
44 On this application counsel for the first defendant submitted in paragraph 48 of the first defendant's written submissions dated 24 August 2016 that on the hearing of the ex parte application by Corboy J the plaintiffs failed to comply with their duty of disclosure by failing to disclose the following facts:
(a) there was no evidence before the Court that supported the suggestion that [the first defendant] directed the impugned transactions;
(b) [the first defendant] was not a director of the second plaintiff at the time of the impugned transactions;
(c) Mr Muller was not a director of any of the plaintiff companies at the time of the impugned transactions, and had no basis to make the comments as to the manner in which those companies were operated by [the first defendant]; and
(d) the report prepared by Ferrier Hodgson was described by its authors as not fully substantiated, for discussion purposes only, and ought not be relied on.'
45 The submission that there was no evidence 'before the Court' that supported the suggestion that the first defendant had directed the payments from the trust accounts, it seems to me, is not a complaint of nondisclosure. It is a complaint that the evidence provided to the court did not provide a basis upon which the court could conclude that the first defendant directed the transactions.
46 At the hearing before Corboy J the plaintiffs made their claim on the basis that the first defendant was the chief executive officer of the first plaintiff when the allegedly improper dealings with funds in the second and third plaintiffs' trust accounts occurred. The first plaintiff owned all of the shares in the second plaintiff. The first defendant was a director of the first plaintiff. The fact that the first defendant may not have been a director of the second plaintiff at the time of the impugned transactions does not seem to me, on the facts of this case, to constitute a material nondisclosure.
47 Mr Muller did not purport to give evidence that he knew of the challenged transactions at the time that they occurred. He gave evidence of matters that had recently come to his attention. I do not regard the failure to disclose the fact that Mr Muller was not a director of any of the plaintiffs at the time of the impugned transactions constituted material nondisclosure.
48 In his affidavit Mr Muller deposed that after receiving information from the second defendant in January 2016 that there was some irregularity with the trust accounts maintained by the second plaintiff and the third plaintiff Mr Fogarty, Mr Asquith and he commissioned Mr McVeigh of Ferrier Hodgson as an advisor. On 8 January 2016 Mr McVeigh provided a discussion paper as a result of his firm's investigations. A copy of that discussion paper was attached to Mr Muller's affidavit.
49 The second paragraph of the discussion paper contained the disclaimer which I have quoted earlier in these reasons. At the commencement of the hearing of the ex parte application on 18 January 2016 Corboy J informed Mr Bennett of the papers that he had read. He said:
I have read the substantive part of the report of Ferrier Hodgson: that is pages 1 to 8 of the report, pages 51 to 60 of the affidavit. I have read page 61 of the affidavit annexure a to the Ferrier Hodgson report - it's a report of Mr McVeigh and Mr Powell.
...
CORBOY J: They're the materials I've read, Mr Bennett, which hopefully will assist you in relation to any disclosure obligations
BENNETT, MR: Yes.
CORBOY J: that may be outstanding given that it's an ex parte application (ts 2).
50 Although the fact that the Ferrier Hodgson discussion paper contained the disclaimer was not referred to in Mr Muller's affidavit and was not expressly drawn to Corboy J's attention by Mr Bennett, in the circumstances where the disclaimer appears clearly in the discussion paper and Corboy J informed Mr Bennett at the commencement of the hearing, for the purposes of Mr Bennett's disclosure obligations on the ex parte application, that he had read the discussion paper it is my view that there was no failure to comply with the disclosure obligation in not doing so.
51 I conclude that the plaintiffs did not fail to comply with their disclosure obligation on the hearing of the ex parte application for the freezing order.
The first defendant's objection to parts of Mr Asquith's affidavit on the basis that the evidence was available at the time of the ex parte hearing
52 At the hearing before me on 14 September 2016 the first defendant objected to the plaintiffs relying upon parts of the affidavit of Mr Asquith. I ruled that the evidence objected to was admissible, but that my ruling did not preclude the first defendant making submissions as to the weight to be attached to the evidence and to whether, in the exercise of my discretion, I should not base my decision on evidence in the affidavit.
53 One of the first defendant's objections to parts of the evidence contained in the affidavit was that the evidence was available at the time of the ex parte hearing before Corboy J. The first defendant relied upon the decision of Parker J in Todd v Novotny [2000] WASC 308 where the plaintiff made a fresh application for a freezing order after an earlier application had been dismissed. Parker J referred to a number of Victorian and New South Wales authorities on whether a second application should be heard after a first application has been fully argued. Following his review of those authorities Parker J said at [19]:
Given this state of authority I would not regard it as settled that a second application, of the type and in the circumstances which I am now considering, necessarily attracts the rule of practice that it should be treated as an abuse of process. I would regard it as open to me, however, as a matter of discretion to dismiss the second application. In exercising that discretion it is appropriate inter alia to take into account whether the failure to adduce the additional evidence now relied on when the first application was made is satisfactorily explained as well as the various matters which tell against the relitigation of an issue which has already been fully argued and judicially determined between the same parties, even if only in an interlocutory hearing. These include the risk of conflicting decisions, unnecessary vexing of respondents, judge-shopping, the diminution of certainty in the conduct by respondents of their affairs, the potential harm to public confidence in the integrity of judicial decisions, and the unnecessary expenditure of time and money which relitigation involves; cf Nominal Defendant v Manning [2000] NSWCA 80 at [72].
54 Counsel for the first defendant submitted that, by analogy, those observations may be relevant to the consideration on whether I should rely upon the plaintiff's evidence. I do not accept that the analogy is appropriate and I do not accept the submission that the plaintiffs should not be permitted to rely upon evidence available to the plaintiffs at the time of the application before Corboy J but not then relied upon by them.
55 The hearing before Corboy J was the hearing of an urgent ex parte application at which freezing orders were made for a short period. It was not a contested hearing intended to result in a determination that would operate until trial. In those circumstances it is my view that the rule of practice that where an application has been dismissed another interlocutory application which is substantially the same should be treated as an abuse of process has no application.
56 I rule that the plaintiffs can rely upon the evidence contained in Mr Asquith's affidavit, even if that evidence had been available at the time of the hearing of the application before Corboy J.
Whether the plaintiffs have established a strong arguable case on an accrued cause of action in relation to use of trust monies
57 As I have said the causes of action against the first defendant relied upon by the plaintiffs on the hearing before Corboy J as the basis for making the freezing order against him appear to include an allegation that the first defendant was knowingly involved in the second and third plaintiffs' breaches of their duties as trustee.
58 I have quoted pars 20 and 21 of the affidavit Mr Muller earlier in these reasons. Counsel for the plaintiffs submitted to me that I should read par 20, in the context of the affidavit as a whole, as meaning that the second defendant informed Mr Muller that the misapplication of the trust funds was made at the direction of the first plaintiff. Counsel for the plaintiffs drew my attention to the Ferrier Hodgson discussion paper and also to the notes by the second defendant in attachments KJM 3.1 and KJM 3.2.
59 I do not accept that submission. The discussion paper stated that the second defendant had advised that both the first defendant and the second defendant were aware of the drawing of trust funds for unauthorised purposes. It did not state that the second defendant has said that the first defendant had directed this to occur. I can find no statement in the discussion paper or KJM 3.1 or KJM 3.2 that the misapplication was at the direction of the first defendant.
60 Mr Muller did not depose that he was informed by the second defendant that the misapplication of the trust funds was at the direction of the first defendant. There is no evidence in the affidavit or the attachments that the misapplication of the trust monies was at the direction of the first defendant, other than the statement contained in par 20 which does not reveal its source. It is not something, as I read the affidavit, that Mr Muller purported to know of his own knowledge. I conclude that there is no evidence that can be relied upon in the affidavit of Mr Muller that the misapplication of the trust funds of the second and third plaintiffs was made at the direction of the first defendant.
61 As I have said the Ferrier Hodgson discussion paper states that the second defendant informed Ferrier Hodgson that both of the defendants were aware that trust funds were misused. Counsel for the first defendant submitted that what the second defendant told Ferrier Hodgson was inadmissible hearsay because the authors of the discussion paper had not made an affidavit. Counsel for the first defendant also pointed to the disclaimer in the discussion paper and submitted that the discussion paper did not provide a sound basis for making a conclusion as to the first defendant's knowledge of the misapplication of trust funds. On an interlocutory application an affidavit can contain statements of information or belief as long as it sets out the source or grounds of that information or belief: O 37 r 6 RSC. The second defendant is the source of the information of the first defendant's knowledge of the misuse of trust funds. The disclaimer in the Ferrier Hodgson discussion paper does not mean that the information cannot be referred to on the interlocutory application. I conclude that I should have regard to that information, even though it is hearsay which has not been tested.
62 I have referred earlier in these reasons to the evidence of Mr Asquith in his affidavit that he was informed by Ms Campbell and Ms Ferrier that they informed the first defendant of the deficiencies in the trust accounts. Counsel for the first defendant submitted that the evidence of Ms Campbell and Ms Ferrier having done so was hopelessly vague and lacking in detail that I should not rely upon it. I bear in mind that there is very little detail of the alleged conversations between Ms Campbell and the first defendant or of the conversation between Ms Ferrier and the first defendant provided in Mr Asquith's affidavit. The content of the conversations has also not been tested. However it is evidence that is admissible on this interlocutory application and it is evidence to which I have regard.
63 I also have regard to the evidence contained in attachments KJM 3.1 and KJM 3.2 to Mr Muller's affidavit along with emails written by the first defendant.
64 Those documents reveal the following chronology.
65 August 2014 - the note made by the second defendant as to the position of the second plaintiff at August 2014, at page 303 of Mr Muller's affidavit, was that with the Vantage Fund unable to contribute any further capital into the business at that stage and negotiations with the banks and lenders continuing to recover capital the drawn amount in excess of monies available grew to $1,879,030.42 less amounts due from insurers of $162,916.78, resulting in a net excess of $1,716,113.64. Accrued income from debtors was $1,120, 497. The net movement for the month was $612,404.12, which included growth of refunds due from insurers of $78,303, so that the net movement for the month was $534,101. The second defendant wrote in the note:
As mentioned above the business was facing contractual commitments which were due at this point and whilst we had indicative approval from Hunter we had to meet the short term trading and contractual commitments.
66 September 2014 - the note made by the second defendant as to the position of the third plaintiff, at page 165 of Mr Muller's affidavit, was that in September 2014 the available income was $171,768. While the balance remained positive it was less than would normally be expected at this time following the prior June and the release of income. Accrued income on debtors was $1,972,462.09. The reason expected funds were lower than would be expected at that time was primarily the ongoing losses relating to Sydney, which had accumulated losses at 30 September 2014 of $389,634, and Brisbane, which had accumulated losses of $106,884. The Sydney, Brisbane and Perth operations were essentially being funded from Australian Reliance.
67 The note made by the second defendant as to the position of the second plaintiff in this month, at page 294 of Mr Muller's affidavit, was that while the Vantage Fund continued to be unable to offer support to the business and its contractual commitments, management, recognising the problem, undertook to rectify the issue. In about the end of September a locked account was established in the Vantage Fund set up to cover the amounts due and contributions that were made from loans by the directors and refinance of existing assets such as partner loans and wholly owned assets. Management, through Hawkstone, contributed $456,943 and a further $250,000 to the Vantage Fund to be held in the locked account.
68 On 13 September 2014 there was the exchange of emails between the first defendant and the second defendant concerning the Steadfast Shares, copies of which are attachment JNA 6 to Mr Asquith's affidavit, to which I have referred.
69 October 2014 - the note made by the second defendant as to the position of the second plaintiff, at page 286 of Mr Muller's affidavit, was that a further $826,882 was paid into the Vantage Fund locked account which, if applied to the balance, would reduce the excess to a net excess of $679,523.70. Hawkstone contributed to group cash flow with additional payments to fund working capital. The note made by the second defendant as to the position of the third plaintiff, at page 158 of Mr Muller's affidavit, stated that to ensure that income available remained positive in the month management contributed a further $38,000 in loan funds, Hawkstone contributing $30,000 and the second defendant contributing $8,000.
70 On 22 and 23 October 2014 the exchange of emails between the first defendant and the second defendant concerning the shortfall of nearly $3 million occurred, copies of those emails are attachment JNA 17 to Mr Asquith's affidavit, to which I have referred.
71 November 2014 - the second defendant's note as to the position of the third plaintiff, at page 150 of Mr Muller's affidavit, was that it had received an income tax assessment of approximately $600,000. 'We entered into a payment arrangement which required monthly repayment of $72,796 commencing in November and continuing through to June 2015.
72 As management was aware that the business was due to receive a volume bonus in that month management funded the initial payment of $123,025.69 which included the initial income tax payment together with a further $50,000 due to the ATO. These monies were repaid to management following receipt of the volume business payment.'
73 December 2014 - the second defendant's note as to the third plaintiff, at page 144 of Mr Muller's affidavit, was that payments other than standard working capital for operating expenses for the month included a payment of a tax instalment of $72,796.50. Loans to associates were a loan to the second plaintiff of $225,000, a loan to Reliance Workplace Solutions for wages of $12,000 and a loan to the fourth plaintiff for legal expenses of $10,000.
74 June 2015 - the second defendant's note as to the position of the second plaintiff is at page 210 of Mr Muller's affidavit. It included that the 'PPS amount was $2,382,803.40'. This appears to be a reference to Prescribed Securities. In par 21 of his affidavit Mr Muller deposed that he was informed by the second defendant that the notation 'Prescribed Securities' used in the accounts for the trust accounts was created by the second defendant to disguise the fact that monies taken from the trust account were applied generally. In his note for June 2015 the second defendant also said that it was believed that there were sufficient funds returned to the Vantage Fund's locked account of in excess of $3 million from asset finances and management contributions. 'At this point we had prepared a number of finance application[s] on behalf of Partners for loans owing to RFP of up to $3.0 m from the Partners. The facility with Hunter Premium Finance was available and it was anticipated the business could recoup these funds and dramatically improve the position and reduce if not erase the PPS amount'.
75 The second defendant's note about the third plaintiff for this month, at page 103 of Mr Muller's affidavit was that major cash flow expenditure other than operational expenses included the final tax instalment of $72,796.62 and a loan repayment of $20,000.
76 July 2015 - the second defendant's note about the second plaintiff for this month, at page 200 of Mr Muller's affidavit, was that the business as a whole was faced with a demand for payment of interest by Fopar. The interest was paid by the second plaintiff as it was clear that if it was not paid Fopar would take action to threaten the business. The total amount paid to Fopar for interest and legal costs was $1,392,101.39. At the same time Fopar had a dispute with the trustee of the fund which meant access to any monies in the fund was not an option. Subsequently Fopar installed Mr Muller as trustee and he was appointed to the board of the first plaintiff. The new board repaid all debt from the locked account and resolved that no further borrowings could occur through any source. 'This effectively meant that we were unable to proceed with the refinancing of the Partner loans as these required a guarantee of Vantage or RFP as the owners of the other 50% of the respective franchises and the shareholding agreements included a preemptive right'. As a result the second plaintiff had effectively lost its short term ability to return funds and was further stretched as it was required to meet the payment to Fopar or face the threat of the business being closed down. As a result the amount of the PPS increased as at the end of July to $3,941,684.03.
77 It appears that the plaintiff companies had significant financial problems from at least August 2014. It also appears that both the first defendant and the second defendant were aware of these problems and that they used personal assets to assist the plaintiff companies to pay their debts.
78 There is a strong arguable case that the trust funds held by the second plaintiff and the third plaintiff were wrongly used to pay debts of the second plaintiff and the third plaintiff. There is also a strongly arguable case that at 22 October 2014, when he wrote the email to the second defendant, the first defendant was aware that almost $3 million of trust monies had been wrongly used.
79 I bear in mind that the information provided by the second defendant to Ferrier Hodgson has not been tested. Nevertheless, it is my view that the combination of the plaintiff companies' significant financial problems from August 2014, the information that both the first defendant and the second defendant were aware of these problems, that they used personal assets to assist the plaintiff companies to pay their debts, that at 22 October 2014 the first defendant was aware that almost $3 million of trust monies had been used, the information that Ms Campbell informed the first defendant of deficiencies in the trust accounts maintained by the second plaintiff and the third plaintiff on about four or five occasions, the first occasion being in or about October 2014 and the information that Ms Ferrier informed the first defendant of deficiencies in the trust accounts maintained by the second plaintiff and the third plaintiff in or about February 2015 there is, for the purposes of this interlocutory application, a strongly arguable case that the first defendant knowingly assisted the second defendant, the second plaintiff and the third plaintiff in the dishonest misuse of trust monies and so may be liable under the second limb of Barnes v Addy (1873) 28 LT (NS) 398; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 [111] [112].
80 In my view the fact that the first defendant was not a director of the second plaintiff from 22 November 2014 until 10 August 2015 is unlikely to weaken the strength of the plaintiffs' case. The first defendant was a director of the second plaintiff on 22 October 2014, when he wrote the email to the second defendant. He became a director of the second plaintiff again on 10 August 2015 until 1 December 2015. He was a director and chief executive officer of the first plaintiff at all relevant times.
The risk of a judgment being rendered fruitless
81 Counsel for the first defendant submits that the plaintiffs have not adduced any evidence that there is a risk of dissipation of assets by the first defendant. In this case the evidence to which I have just referred in dealing with the issue of whether the plaintiffs have demonstrated a strong arguable case is relevant. For reasons I have given it is my view that there is a strong arguable case that the first defendant knowingly aided the dishonest misuse of trust monies. If that case were to be made out at trial it would be a case of knowingly assisting a dishonest misuse of trust funds.
82 I bear in mind that the trust monies were not used for purposes external to the businesses of the second and third plaintiffs. They were used to make interest payments and to pay trade creditors. However, it is my view that if this case is made out at trial it would still amount to involvement in serious dishonesty. It would be the knowing misuse of trust assets to pay the debts of the second and third plaintiffs.
83 The plaintiffs also rely upon the termination of the employment of Mr David Sneddon in November 2014, the inclusion in a deed of settlement and release of a confidentiality clause and the payment to Mr Sneddon of monies under the deed. They submit that the payment was to ensure that Mr Sneddon did not disclose the trust account defalcations to others. I am not prepared to find, on the evidence and information produced on the hearing before me, that the dealings with Mr Sneddon demonstrate dishonesty on the part of the first defendant. Attachment JNA12 to Mr Asquith's affidavit is an exchange of emails between Mr Muller and Mr Sneddon in January 2016. It appears from those emails that Mr Sneddon does not agree that his employment ceased nor that the payments he received were made for the reasons for which the plaintiffs contend.
84 The plaintiffs also point to the transactions concerning the issue of the shares in Steadfast to Hawkstone Group and the sale of shares to refinance the indebtedness of the second and third plaintiffs demonstrate dishonest conduct by the first defendant. However I do not find, on this application, that the transactions demonstrate dishonest conduct by the first defendant. These transactions do appear to have occurred, but the evidence does not establish to my satisfaction at this stage that shares in Steadfast should have been issued to the third plaintiff, rather than Hawkstone Group.
85 The plaintiffs also rely upon the purchase of shares in Phil Doring Insurance Brokers. They submit that the purchase of that business in November 2015 by Reliance Online Pty Ltd with a guarantee by the first plaintiff was in breach of a circular resolution of the board of the first plaintiff made on 18 August 2015 concerning the entry into agreements. It may be that this matter warrants further investigation, but in my view the evidence presently available does not establish that the first defendant was dishonest.
86 The plaintiffs also point to the online report to ASIC made by the first defendant on 10 January 2016 which I have quoted earlier in these reasons. The plaintiffs submit that the report is self-serving and inadequate. The online report form allows for a brief description of the author's concerns of no more than 2,000 characters. I am not prepared, for the purposes of this application, to find that any lack of detail in that report justifies a conclusion that the first defendant may dispose of assets if not restrained from doing so.
87 I return therefore to the evidence and information concerning the plaintiff's case that the first defendant has knowingly assisted in the dishonest misuse of monies held on trust by the second and third plaintiffs. As I have said it is my view that if this case is made out at trial it would amount to involvement in serious dishonesty. It would be the knowing misuse of trust assets to pay the debts of the second and third plaintiffs.
88 I conclude from the strong arguable case that the first defendant has knowingly assisted that serious dishonesty that the plaintiffs have established that there is a real risk that if not restrained the first defendant will dispose of assets so as to make a judgment fruitless.
89 Counsel for the first defendant submits that the balance of convenience lies against the continuation of the freezing order and points to the evidence of Mr Tydde that he has been informed by the first defendant and believes that as a consequence of the freezing order:
(a) the first defendant has been unable to dispose of assets and so has lost the opportunity to sell shares at a high price;
(b) discussions about potential employment that the first defendant had with an insurance broking company have been terminated; and
(c) the first defendant is restricted in his ability to make settlement offers in other court proceedings to which he is a party.
90 In the circumstances where I have concluded that the plaintiffs have established a strong arguable case that the first defendant has knowingly assisted serious dishonesty and that the plaintiffs have established that there is a real risk that if not restrained the first defendant will dispose of assets so as to make a judgment fruitless I do not accept that the balance of convenience lies in favour of the discharge of the freezing order.
91 The freezing order prohibits the disposal of, dealing with or diminishing the value of assets up to the unencumbered value of $5.5 million. There is no evidence as to the value of the first defendant's assets. While I accept that discussions as to possible employment may have been damaged by the claims made by the plaintiffs in this litigation I cannot see that it is at all likely that whether or not a freezing order exists has any effect on those discussions.
92 I am satisfied that the balance of convenience lies in favour of the continuation of the freezing order. I dismiss the first defendant's application.
(1987) 162 CLR 612
(1998) 19 WAR 561
(1989) 18 NSWLR 319