Zhen v Mo & Ors [2008] VSC 300 (29 August 2008) – interesting case on freezing orders

September 2, 2008 |

One of the most frustrating aspects of litigation is winning a case and not being able to recover under a judgment. Hiding assets pre, during or post litigation is stock in trade of wily defendants. Forrest J’s decision in last Friday’s Zhen v Mo & Ors is a useful analysis of the principles involved with the grant of a Mareva Injunction. The action is more on the prosaic side. It is a de facto property dispute between a couple over the assets of their $2 shops. There is no good reason why these cases should still be heard in the state courts of Australia rather than the Family Court. The only, and it is a bad one, reason is that the conservative federal government just passed wouldn’t consent to the transfer of jurisdiction.

Relevant extracts of the decision:

22 First, that a freezing order, by its very nature, is a drastic remedy and a court must exercise a high degree of caution before taking a step which will interfere with a party’s capacity to deal with his or her assets.[3]

23 Second, the order is not designed to provide security for the applicant’s claim.[4] It is solely directed to preserving assets from being dissipated, thereby frustrating the court process.[5]

24 Third, the applicant bears the onus both in satisfying the Court that the order should be continued and in satisfying the Court as to the amount which is to be the subject of the order.

25 Fourth, that an order can only be made on the basis of admissible evidence which supports the contentions made by the party seeking the order. Speculation and guesswork is no substitute for either the facts or inferences properly drawn from proved facts.[6]

26 Fifth, that before such an order can be made it is necessary that the applicant establish –

(a) an arguable case against the defendant[7]; and

(b) that there is a danger that the prospective judgment will be wholly or partly unsatisfied as a result of the defendant’s actions in either removing the assets or disposing or dealing with them so as to diminish their value.[8]

27 Sixth, the balance of convenience must favour the granting of the freezing order.[9]

28 Seventh, that there is no set process determining the exact nature of an order. The order will be framed according to the circumstances of the case.[10]

29 Eighth, the applicant must establish with some precision the value of prospective judgment. The order should not unnecessarily tie up a party’s assets and property.[11]

30 Finally, there may be discretionary considerations which militate against the granting of a freezing order, such as delay in bringing the application on before the court or a lack of candour in the materials placed before the court.[12]

31 A separate issue arose in this case in respect of a specific discretionary consideration; namely what weight, if any, should be given to the existence of caveats lodged by the plaintiff over the properties. The caveats lodged by the plaintiff are said to be based upon the plaintiff’s equitable interest which arises by reason of a constructive trust[13].

32 A caveat’s purpose is to protect the estate or interest claimed by the party lodging it. It provides a statutory injunction against the registration of subsequent dealings and provides notice of the existence of the estate or interest to those who consult the register.[14][15]. The existence of a constructive trust depends upon the circumstances relevant to the asserted creation of an interest in the subject property, not the mere existence of a de facto relationship between the parties.[16] To put it simply, the caveat is only as good as the evidence supporting the existence of an estate or interest in the subject property. Very different considerations arise in determining an adjustment of property, real or personal, under s 285 of the Act. However, establishing a relationship and an entitlement under the Property Law Act (Vic) 1958, of course, does not give rise to a constructive trust.

His Honour found there was a good arguable case. The interesting part of the judgment was looking at whether there was a danger of an unsatisfied judgment. Even though he used Judgespeak, the restrained anodyne prose style that our judiciary so love, its clear that Forrest didn’t think much of two of the defendant’s antics. And why would you. I mean:

  • He admitted to forging the plaintiff’s signature. A big cross on credibility there for starters. No doubt that will take up a few hours in cross examination. And the forgery immediately pre dated the separation. A typical amateur hour play. His Honour said:

42 First, the first defendant’s admitted forgery of the plaintiff’s signature on a loan and guarantee document in respect of additional funds borrowed by Trading from Westpac, purportedly for staff superannuation.[19] The loan agreement and guarantee was signed in June 2007 with the first defendant forging the plaintiff’s signature. The fact that he did so at a time very close to the separation seems to me to be relevant and I am not comforted by the disputed assertion of the first defendant that the plaintiff was aware that he had done so and in effect endorsed this course of conduct.

Can you feel the love.

  • The defendant sets up another trading company immediately before the split for no good reason. Except that it allows for the easy transfer of assets to another company. Again the restrained language belies a real sense of gotcha! Caught in the act.

43 Second, the setting up of Group, in my view, is a matter of real significance. The plaintiff was the secretary of Trading and held shares in it. In 2006, the first defendant set up a one person company, namely Group, in his own name and it is clear that he commenced to carry out business operations through that company.[20] The first defendant asserts that the plaintiff was aware of its incorporation, a fact denied by the plaintiff. I also think it is significant that notwithstanding that the plaintiff may have known of Group’s existence, there is no mention of Group and its assets and liabilities in the agreement. I do not accept the argument on behalf of the first defendant that the incorporation of Group was simply a standard business arrangement. One might ask why, if this was a business arrangement to further the joint interests of the first defendant and the plaintiff, was the plaintiff not included as a shareholder and officer as she had been in Trading.

Once the court is minded to grant a Mareva Injunction (Freezing Order) then it will turn to how much should be frozen. That necessarily involves some form of assessment of what the case is worth. It is quite common that practitioners will want the whole of the asset pool to be frozen. That may be the case in certain situations, like if the sole assets are a couple of properties. But because the courts tread lightly when dealing with this (and Anton Pillar) form of order they will not cast the net wider than necessary. This case is also interesting in showing that the court was aware that there were caveats on the properties in dispute but that did not dissuade the court from making an order. A good judgment.

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