APPLICATION TO VARY THE FREEZING ORDER
5 The freezing order made against Mr Tesoriero has been varied on a number of occasions on the application of Mr Tesoriero. It is sufficient for present purposes to refer to the most recent. By an interlocutory application filed on 17 June 2022, Mr Tesoriero sought an amendment to allow for payment of up to $1,866,000 for his reasonable legal expenses, and an order that funds paid into Court or a controlled monies account be released to Mr Tesoriero for the payment of his legal expenses. On 20 July 2022, Lee J varied the Freezing Order to allow for payment by Mr Tesoriero of up to $1,250,000 on his reasonable legal expenses.
6 On the evidence given by Mr Tesoriero, and the submissions put forward by his then Senior Counsel presumably with the assistance of the assessment of likely costs made by Mr Tesoriero's then solicitors, Lee J determined that the Tesoriero Parties would have a fair trial if the freezing orders were varied to allow Mr Tesoriero to have access to $1,250,000. His Honour noted that Mr Tesoriero could apply for a further variation "if the case were to develop in some extraordinary way such that this assessment is wrong": [2022] FCA 910 at [38].
7 Shortly after those orders were made, namely on 5 August 2022, Mr Tesoriero executed a new retainer with Aptum Legal for an amount of legal costs in excess of those which Lee J had identified as sufficient.
8 By this application, which was filed just over two months after the variation made on 20 July 2022, Mr Tesoriero has applied for a further variation which, if granted, would allow him to expend $3,831,937.40 on his reasonable legal expenses. As Westpac submitted, this is more than double the amount sought by Mr Tesoriero in June this year. It is more than three times the amount which Lee J had determined was appropriate. Further, it is an amount which can only be paid from funds over which Lee J has concluded that Westpac has prima facie proprietary claims: [2022] FCA 910 at [34].
9 The freezing order covers assets to the unencumbered value of AUD$253,766,555.76 and NZD$44,097,969. Accordingly, as Lee J noted at [9], its "practical effect" is that of an "all assets" freezing order.
10 By reason of the variation made by Lee J the freezing order now allows for payment of up to $1,250,000 on reasonable legal expenses. Only the amount of $271,219.57 remains in trust. An amount of $215,928.94 remains owing to Fortis Law. There is also an amount owing to Mr Tesoriero's present legal advisors, Aptum Legal.
11 The Tesoriero Parties referred to the decision of Henry J in National Australia Bank Ltd v Human Group Pty Ltd (No 2) [2020] NSWSC 1900 at [111]. It is useful also to refer to [109] and [110] of her Honour's reasons:
When freezing orders are made in relation to non-proprietary claims, the usual position is that defendants generally have an entitlement to use their assets for legitimate purposes, such as to pay their ordinary living and business expenses and their reasonable legal expenses in defending the claims made against them: Goumas v McIntosh [2002] NSWSC 713 at [27].
In contrast, there is no reason, in general, why defendants should be permitted to use property or money belonging to another in order to pay their legal costs or other expenses. There is an obvious risk of injustice if assets the subject of the proprietary claim are used to finance the defendants' litigation as the money is not the defendants at all but represents money which is held on trust for the plaintiff. The Courts will be attentive to the protection of trust property and a defendant may not be allowed to access money to which they have no legal or moral right to enable them to spend it on their own living expenses or on private representation of their choice: Commonwealth of Australia v Jansenberger (Supreme Court (Vic), Southwell J, 3 October 1985, unrep) at 8; Petar at [85]; Birketu Pty Ltd v Westpac Banking Corporation (No 2) [2018] NSWSC 494 (Birketu) at [60], [63]; Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 at 784; Sundt Wrigley & Co Ltd v Wrigley (Court of Appeal (UK), 23 June 1993, unrep).
In cases concerning proprietary claims, a "careful and anxious judgment" is required whereby the Court must assess whether any injustice to a plaintiff, such as NAB, would be outweighed by the potential injustice to the defendants, here Ms Rosamond and Human Group, if they were precluded from accessing funds and therefore perhaps denied the opportunity to advance an arguable defence: Birketu at [61] - [62]; Courtenay House at [49] [In the matter of Courtenay House Capital Trading Group Pty Ltd (In Liq) [2018] NSWSC 1918]; Cong v Shen [2020] NSWSC 945 at [163].
12 At [154], her Honour stated:
[T]he cases to which I have referred make clear that there is no predisposition to allow a defendant access to frozen funds that are subject to a proprietary claim to pay their living and legal expenses. To the contrary, it seems to me that the starting position is that a defendant will not be entitled to such access unless they can demonstrate that the interests of justice weigh in their favour.
13 This articulation of the relevant legal principles by Henry J in Human Group was not in dispute.
14 The Tesoriero Parties put forward five submissions as to why the variation should be made. They are set out in full in the written submission and supplemented by oral submissions. I will not repeat each of them in full. In summary:
(1) First, it was submitted that the sum of $271,219.57 which remains in trust is inadequate to meet Mr Tesoriero's reasonable legal costs to the end of the trial. The Tesoriero Parties pointed to work which remained outstanding, including the filing of an amended defence, and submitted that the amount remaining in trust is unlikely to cover the legal costs for the hearing which is listed for three weeks starting on 6 February 2023. I should note in this regard that three weeks has been allowed for the hearing but the estimate of some parties is that only two weeks will be required. Three weeks has been allowed to seek to ensure the matter does not become part heard.
(2) Secondly, it was submitted that access to additional funds for reasonable legal expenses is necessary to ensure a fair trial. The submission was that there should be "equality of arms" and that the applicants were well resourced with the consequence that the Tesoriero Parties should also be well resourced. It was submitted that a freezing order should not operate as a form of de facto security for an applicants' claim and that the sole purpose is to prevent "illegitimate" dissipation of assets that would otherwise be available to meet any judgment. The Tesoriero Parties referred to Goumas v McIntosh [2002] NSWSC 713 at [27] (Barrett J).
(3) Thirdly, it was submitted that Mr Tesoriero does not have any other assets above and beyond the unencumbered value of AUD$253,766,555.76 and NZD$44,097,969. The Tesoriero Parties referred in this regard to the conclusion of Lee J that, despite delays and deficiencies in Mr Tesoriero's disclosure of his financial position, it is "likely that the substance of Mr Tesoriero's asset and liability position has finally been revealed, despite the deficiencies to which Westpac rightly points": [2022] FCA 910 at [32]. I interpolate that his Honour also observed that he was "unconvinced that the true position concerning Mr Tesoriero's financial affairs has been completely disclosed with any precision": at [32].
(4) Fourthly, it was submitted that the evidence explains why the amount now sought is needed. It was said that the estimate of Mr Tesoriero's previous representatives was "simply unrealistic for commercial litigation of this size and complexity".
(5) Fifthly, it was submitted that the making of a proprietary claim does not of itself preclude the making of an order permitting Mr Tesoriero to use funds to meet reasonable legal expenses.
15 The starting point is to observe that, in order to engage the Court's discretion to vary the freezing order, the Tesoriero Parties must establish that there has been a material change of circumstances since the application before Lee J, or that new material has been discovered that was not reasonably available at the time his Honour's orders were made: Human Group at [104], [119]; Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 at [46]; Short v Crawley (No 42) [2009] NSWSC 1110 at [75].
16 The Tesoriero Parties did not clearly articulate what changes in circumstance were relied upon apart from the fact that Mr Tesoriero had again changed solicitors. Mr Tesoriero had first engaged Fortis Law, then Madgwicks and finally, shortly after the judgment of Lee J, Aptum Legal. I will proceed on the basis that a change in legal representation is in certain circumstances capable of being a relevant change in circumstance. The reasons for the change, however, are relevant to the exercise of the discretion. No explanation was given as to why there was a change in representation. It was not put that the previous representation fell below a standard that would enable a fair trial or that there was a reason for a change in representation which should be taken into account in favour of the Tesoriero Parties.
17 For the reasons which follow the Tesoriero Parties have not established that the discretion to vary the freezing order should be exercised in their favour.
18 First, it is relevant to have regard to the source of any funding of the Tesoriero Parties' legal costs if a variation of the freezing order were ordered. Any further funding necessarily must come out of assets in respect of which the applicants have a prima facie proprietary claim, and in relation to one asset, in relation to which another person that I will come to, has a proprietary claim in the nature of a security interest.
19 The Tesoriero Parties have identified four potential sources of funds to pay legal expenses, being the proceeds of sale of:
(1) "XOXO" Motor Yacht Cayman Islands Official Number 734587 (XOXO Yacht) - acquired by Intrashield Pty Ltd (Intrashield PL) as trustee of the Mangusta Trust and transferred (for, at best, nominal consideration) to Mangusta (VIC) Pty Ltd (Mangusta PL) as trustee of the Mangusta Trust;
(2) 23 Margaret Street, Rozelle NSW (Margaret Property) - the former registered proprietor of which was 23 Margaret Street Pty Ltd (Margaret PL);
(3) 8-12 Natalia Avenue, Oakleigh (Natalia Property) - a property associated with 8-12 Natalia Avenue Oakleigh Pty Ltd (Natalia PL); and
(4) 1160 Glen Huntly Road, Glen Huntly (Glen Huntly Property) - the former registered proprietor of which was 1160 Glen Huntly Pty Ltd (Glen Huntly PL).
20 As to the XOXO Yacht, on the evidence on this application (which was not disputed), the relevant facts are:
the XOXO Yacht is an asset of the Mangusta Trust, of which Intrashield PL was trustee at the time of acquisition;
the purchase price of the XOXO Yacht was funded (in part) by Forum Group Financial Services Pty Ltd (FGFS) (in the amount of $116,500) and 26 Edmonstone Pty Ltd (Edmonstone PL) (in the amount of $1,006,675);
in February 2019, Mangusta PL replaced Intrashield PL as the trustee of the Mangusta Trust, and title to the XOXO Yacht was transferred from Intrashield PL to Mangusta PL for nominal consideration;
the liquidators (who are also the liquidators of FGFS and Edmonstone PL) were appointed as liquidators of Intrashield PL on 28 July 2021, by order of this Court;
the moneys advanced by Edmonstone PL and FGFS to fund the purchase of the XOXO Yacht have not apparently been repaid and Intrashield PL continues to have undischarged liabilities that it incurred as trustee of the Mangusta Trust, including loan liabilities to FGFS;
in these circumstances, it would seem that Intrashield PL has a right of indemnity out of the trust assets (being the XOXO Yacht) for the liabilities it incurred as trustee. The right of indemnity would appear to be secured by an equitable lien over the trust assets, which arises by operation of law and confers a proprietary interest in the nature of a security interest in the trust assets. The proprietary interest of the trustee would ordinarily take priority over claims of beneficiaries and subsists in the trust assets after transfer to a new trustee: Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, 74 NSWLR 550 at [13]-[22], [50]; Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 per Gordon J at [14], [22]-[23]; Hughes in the matter of Substar Holdings Pty Ltd (in liquidation) [2020] FCA 1863 at [26]-[29].
on 3 September 2021, having regard to the security interest of Intrashield PL in the XOXO Yacht, this Court (with the consent of Mangusta PL) appointed the liquidators as receivers and managers of the XOXO Yacht with powers to sell the yacht;
pursuant to that appointment, the XOXO Yacht was sold by the liquidators acting as Court appointed receivers; and
the net sale proceeds of $616,282.78 are held by the liquidators' solicitors and the costs of the receivership are yet to be paid from the sale proceeds.
21 The liquidators submitted, and I accept, that the proceeds of the sale of the XOXO Yacht should not in these circumstances be made available to the Tesoriero Parties. Those proceeds are subject to an equitable lien in the nature of a security interest in favour of Intrashield PL as the former trustee of the Mangusta Trust. If those funds are made available to Mangusta PL, or to the other Tesoriero Parties, to pay legal costs, that would destroy or diminish that interest.
22 As to the proceeds of sale of the Margaret Property, Natalia Property and Glen Huntley Property, the liquidators submitted, and I accept, that:
(1) According to the books and records of FGFS and each of Margaret PL, Natalia PL and Glen Huntly PL, FGFS is a substantial creditor of each of those companies. The records of FGFS show outstanding intercompany loans payable to FGFS by Margaret PL (in the sum of $691,212.26), Natalia PL (in the sum of $2,145,305.36) and Glen Huntly PL (in the sum of $1,020,015.30).
(2) Those debts exceed the frozen funds held in relation to those entities, as referred to in [12] of Mr Evans' fifth affidavit. On the evidence before the Court on this application, there is no suggestion that the entities have any other assets of substance. It follows that according to the evidence on this application, even apart from the claims made against them by Westpac and the other financiers, each of the entities appears to be insolvent.
23 I should also observe that, viewed from the position of Westpac, the amounts of money, irrespective of whether they constitute loans, are constituted by funds that Westpac asserts are stolen funds and in respect of which it asserts it has a proprietary interest.
24 The Tesoriero Parties seek to use all of the remaining funds of these three entities to pay the legal costs of all of the Tesoriero Parties, numbering 21.
25 I should also observe that two of the three entities, Margaret PL and Natalia PL, are currently subject to winding up applications brought against them by FGFS, relying on their failure to comply with statutory demands. Those winding up applications are listed for hearing on 2 November 2022. The presumption of insolvency referred to in s 459C of the Corporations Act 2001 (Cth) will apply in those proceedings. If Margaret PL and Natalia PL are ordered to be wound up on 2 November 2022, the proceedings against them will be stayed by operation of s 471B of the Corporations Act. In that event, those entities will not need to spend their remaining funds defending the proceedings.
26 Whilst SMBC is not a party to these proceedings, SMBC was heard in opposition of variation to the freezing order. SMBC also contends that it has proprietary claims against Margaret PL and Natalia PL. SMBC made submissions broadly similar to those made by the liquidators, except that its interest lay in the fact that the monies were, it contends, stolen monies.
27 In my view, in the circumstances of this case, including those referred to below, it is not appropriate to use the funds of three apparently insolvent entities to pay the legal costs of each of the Tesoriero Parties. The use of the funds in this way would have the practical effect of defeating the claims of the creditors of the three apparently insolvent entities including the claims of FGFS, by leaving the three entities without any assets. I should make clear that this is not a reason of itself for refusing the variation, but that it is an additional discretionary matter.
28 Secondly, on the evidence adduced before Lee J, it was concluded that a fair trial could be achieved with total funding of $1,250,000, about $787,000 of which was to be funded out of assets in respect of which there was a prima facie proprietary claim.
29 As I have mentioned, after Lee J so concluded, the decision was made by the Tesoriero Parties to engage new legal representatives. This is likely to have substantially increased total costs because the new representatives necessarily do not have the knowledge of what has previously occurred and have been and will be required to duplicate what other solicitors and barristers have already done. By way of example only, the new representatives have been and will be required to review evidence and discovery already reviewed, provide advice on what has occurred to date and give advice in respect of topics in respect of which advice has presumably already been given. No attempt was made by the Tesoriero Parties to quantify in any way what the duplication of costs would likely be.
30 At paragraph 53 of his third affidavit, Mr Evans gave evidence that on the basis of his review of the file received from Madgwicks, he considered that duplication of work would be minimal. It seems to me, however, that the duplication is necessarily quite extensive for the reasons I have just given.
31 It is relevant to determining where the balance lies that the funding of the respondents' legal costs is now necessarily only out of property in respect of which an applicant has a prima facie proprietary claim, in circumstances where the level of those legal costs has been substantially increased by changing forensic decisions and changing decisions as to legal representation without specific reasons being advanced for the change in legal representation.
32 Thirdly, I am not satisfied that the estimate of $3,831,937.40 is one which reflects an appropriate amount having regard to the competing interests of the parties.
33 As to general approach, the estimate appears to have been formulated on the basis that it is appropriate in the circumstances of this case for the Tesoriero Parties at this point in time to have "equality of arms" rather than focussing on what is sufficient and reasonable to permit a fair trial. This inference arises from aspects of the submissions and, to the extent it can be understood, the manner of quantification of the future legal fees. Whatever might be the situation in another case, it is the circumstances of this case which must govern the appropriate orders to make. The costs of the Tesoriero Parties in this litigation have been increased by changes in representation and by changing forensic decisions. These increases in costs have, in substantial degree, been funded by assets over which there are prima facie proprietary claims. I do not consider an appropriate balance would be struck by further depleting assets over which there are prima facie proprietary claims, in the circumstances I have identified.
34 Aptum Legal's estimate of future costs in this and the SMBC proceeding is $2,246,123. Mr Tesoriero is not a respondent to the SMBC proceeding, but some of his entities are. The material which has been adduced only partly assists in working out how the amount has been determined. The evidence as to how the amount was calculated was not sufficient to reach a confident conclusion in that respect. Hourly rates were provided and a total claimed. However, there was no estimate of the number of hours necessary or the number and seniority of lawyers anticipated to be engaged on the various tasks.
35 Mr Evans' evidence in his second affidavit (affirmed on 15 September 2022) was that, from 5 to 31 August 2022, Aptum Legal incurred $209,480.96, including a "substantial amount of work in preparation for trial". The trial in this matter was originally listed for hearing commencing on 10 October 2022. As Westpac observes, significant work must have been undertaken in order for that quantum of costs to be incurred on trial preparation.
36 Noting the absence of sufficient material to determine exactly how the estimate of future legal costs was calculated, some amounts appear excessive. Westpac gave the following examples of what it considered to be excessive solicitor expenditure excluding disbursements and counsel fees:
$73,600 in respect of "case management", described as "general care and conduct" and "document and file management", without further explanation;
$76,020 in respect of discovery, which includes "completing further discovery for Respondents" in circumstances where the respondents have previously denied an obligation to give further discovery and not sought an extension of time to provide further discovery in the orders made on 28 September 2022;
$132,300 in respect of lay evidence, in circumstances where the forensic decision previously made by Mr Tesoriero was to file no lay evidence;
$14,550 in respect of a pre-trial case management hearing, with an estimate of half a day, in circumstances where no case management hearing has been listed and, if one were, half a day is likely excessive;
$126,700 for pre-trial preparation which includes preparing opening submissions, objections to evidence (tasks usually undertaken by counsel), general trial preparation and co-ordination of trial logistics;
$218,620 for attendance at trial based on 15 sitting days (together with a further sum for post-trial work), in circumstances where: (a) there is no breakdown of the calculation of an amount which translates to $14,574.66 per day for instructors; and (b) both senior and junior counsel have been briefed; and
$33,770 for a mediation which Westpac opposes and which has not been ordered.
37 I agree that some of these amounts appear excessive, although it is difficult to tell without fully understanding how the amounts were calculated.
38 As to past legal costs, the amount expended to date is $1,515,898.40. Westpac submitted this amount was the product of various forensic choices made by Mr Tesoriero. Westpac points to a history of Mr Tesoriero taking various procedural courses and then abandoning them. Westpac referred in this respect to Mr Tesoriero's changing stance with respect to whether to make a strike-out application and with respect to the service of lay evidence. I accept that Mr Tesoriero's changing forensic decisions have increased past costs.
39 Whilst perhaps a minor matter, I note that, on this application, Mr Tesoriero has not deposed to an inability to fund the litigation by other means if the variation is not made. I note, in this regard, that his father (Mr Tesoriero Senior, who is also a respondent) has provided funding in the past and is represented by the same solicitors as represents the Tesoriero Parties. As Lee J noted in [2022] FCA 910 at [33], there is no legal obligation on the part of Mr Tesoriero Senior to provide funding. Notwithstanding, it is of at least some relevance that funding from that source might be forthcoming.
40 In summary, the Tesoriero Parties have already been permitted to access legal costs in an amount which has been held to have been sufficient to permit a fair trial. In the circumstances described above, it would not strike an appropriate balance between the competing interests of the parties (and others), to order a further variation on the basis of the events which have transpired since the last variation ordered on 20 July 2022.