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Asset preservation orders – is there a real risk of dissipation?

by

Dundas Lawyers

reviewed by

Malcolm Burrows

An asset preservation order is a class of freezing order made by a Court usually without notice to the respondent or defendant (Exparte) for the purpose of preventing the frustration or inhibition of the Courts processes.  The need for an asset preservation order arises when there is danger that a judgment (or prospective judgement) made in favour of the party initiating the proceedings would go wholly or partly unsatisfied because the respondent may dispose of, deal with or diminish the value of its assets.

This article considers the factors that the Federal Court of Australia, and to a lesser extent the (State based Courts) will consider in deciding whether or not to make an asset freezing order where there are proceedings in progress and the final determination by the Court has not been made.  The focus of this article is on the case law that interprets whether or not “there is a danger that the assets will be dissipated or diminished in value”.

The statutory requirements to be satisfied by the Federal Court

Freezing order

Rule 7.32 of the Federal Court Rules 2011 (Cth) (Rules) contains the enabling provisions that enable the Court to make a freezing order with or without notice (Exparte) to the respondent(s).  Rule 7.32 is as follows:

“(1) The Court may make an order (a freezing order), with or without notice to a respondent for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.

(2)  A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.“

Ancillary order

Rule 7.33 of the Rules enables the Court to make orders in relation to freezing order or prospective freezing order as follows:

“(1) The Court may make an order (an ancillary order) ancillary to a freezing order or prospective freezing order as the Court considers appropriate.

(2) Without limiting the generality of subrule (1), an ancillary order may be made for either or both of the following purposes:

(a) eliciting information relating to assets relevant to the freezing order or prospective freezing order.

(b) determining whether the freezing order should be made.”

Criteria for the Court to make a freezing order against a prospective judgement debtor

Rule 7.35 of the Rules contains the criteria that must be satisfied for the Court to make against a judgement debtor, or a prospective judgement debtor as follows:

“(1)(b) the applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the Federal Court of Australia;

(2) there is a sufficient prospect that the judgment will be registered in or enforced by the Court; and

(3) the Court is satisfied, having regard to all the circumstances, that there is a danger that a prospective judgment will be wholly or partly unsatisfied because any of the following might occur:

(c) the judgment debtor, prospective judgment debtor or another person absconds; or

(d) the assets of the judgment debtor, prospective judgment debtor or another person are:

(i) removed from Australia or from a place inside or outside Australia; or

(ii) disposed of, dealt with or diminished in value.”

From this, we can see that the elements to be satisfied are:

  • the applicant must have a good arguable case;
  • there is a sufficient prospect that the judgement will be registered in or enforced by the Court; and
  • there is a danger that a prospective judgement will be wholly or partly unsatisfied because an individual respondent absconds or the assets of the judgement debtor, prospective judgement debtor are removed from Australia or disposed of, dealt with or diminished in value.

Relevant cases

In Nevro Medical Pty Ltd v McKelvie [2020] FCA 1412 (Nevro Medical) it was alleged that the respondent an individual had misappropriated about $62,503.54 because he had doctored invoices, or they were fraudulent.  The applicant also identified further transactions amounting to at least a further $80,000.  The Applicant sued in contract, in equity and for breaches of duties imposed by section 182 of the Corporations Act 2001 (Cth).

In Nevro Medical, Snaden J at 13 refers to the decision in Basi v Namitha Nakul Pty Ltd [2019] FCA 743 per Wigney J where the principles governing the granting of freezing orders are summarised as:

What evidence must be adduced to show that there is a real risk of the dissipation of assets?

In Merryport Pty Ltd v Lawson [2023] FCA 838 (Merryport) one of the issues for consideration was whether there was a real risk of dissipation of assets in order to frustrate a prospective judgement.  Lee J at 8:

“It is not necessary for an applicant to prove on the balance of probabilities that steps will be taken to frustrate the Court’s processes. Rather, what must be shown is that on the balance of probabilities, there is a real risk of the dissipation of assets: see Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (at 327 per Meagher JA).”

In considering the ‘risk of dissipation’ the allegations in Merryport involved dishonesty and fraud.  Lee J was satisfied that there was a real risk of dissipation of assets:

“particularly in light of the allegation that the first respondent is the driving force behind what is alleged, on a proper basis, to be a calculated scheme of deception and dishonesty.”

Interestingly in this case the usual undertaking as to damages was not offered because the applicant was ‘restructuring’ however counsel for the applicant offered a $100,000 bank guarantee which they annexed to the proposed orders.

In the case of Insolvency Guardian Melbourne Pty Ltd v Carlei [2016] FCA 72 (9 February 2016)  (Insolvency Guardian) per Edelman J on the question of whether there was a danger that a prospective judgement will be wholly or partly unsatisfied it was said at 24 that:

“This is a matter that must be established by evidence and not merely by assertion. There must be a risk which is “palpable and demonstrated by evidence” rather than residing “only as a suspicion in the mind of an overly anxious plaintiff”: Bayley and Associates Pty Ltd v DBR Australia Pty Ltd [2012] FCA 746 at [34] (Foster J). However, in National Australia Bank Ltd v Bond Brewing Holdings Ltd [1990] HCA 10; (1990) 169 CLR 271, Mason CJ, Brennan and Deane JJ explained that a freezing order could be obtained even where there was not shown to be a positive intention by the party against whom the order was sought to frustrate any judgment.

In the circumstances I have described, particularly the serious concern raised in the affidavit of Mr Sierocki concerning what counsel described as the “scheme” to divert funds from Insolvency Guardian or Insolvency Guardian (Melbourne), I am satisfied that there is a danger that Mr Carlei or Zuppa Soup Kitchen would deal with his and its assets in a fashion which would leave Insolvency Guardian (Melbourne) unable to have a judgment satisfied.“

In this case there was an affidavit from Mr Sierocki that described a scheme to divert funds from Insolvency Guardian and as a result Edelman J concluded that the respondents would deal with their assets in a fashion that would leave them unable to satisfy any judgement against them.

In the case of Spotlight Pty Ltd v Mehta [2019] FCA 1796 the applicant’s prima facie case involved proof or allegations of serious dishonesty.  One of the issues to be determined was whether there was a danger that prospective judgement would be wholly or partly unsatisfied because of the dissipation of assets.  It was said by Anderson J at 19, on the question of whether there is a danger that a prospective judgement will be wholly or partly unsatisfied, that:

“Spotlight must secondly establish that there is a danger that a prospective judgment in its favour would be wholly or partly unsatisfied because, on the facts of the case before the Court, the respondents might dispose of, deal with or diminish in value their assets.“

Relevantly at 22 Anderson J said:

“I also take into account that Mr Mehta and Mr D’Lima, after initially cooperating with Spotlight and making admissions as to their conduct, have refused to cooperate any further with Spotlight after obtaining legal advice.“

In concluding on the issue of dissipation of assets it was said by Anderson J at 24 that:

“Based on the affidavit evidence, I am satisfied that the respondents are not the sort of persons who would, unless restrained, preserve their assets in tact so that they might be available to a judgment creditor.  It follows that I am satisfied that there is a danger that a prospective judgment that Spotlight may obtain against the respondents will be wholly or partially unsatisfied because the respondents may dispose of, deal with or diminish the value of their assets.“

In Victoria University of Technology v Wilson [2003] VSC 299 one of the issues to be determined was whether there was a risk that the assets would be dissipated and the sufficiency of evidence as to the risk of dissipation.  In considering this question where there were multiple incorporated defendants Redlich J discussed the following principles from the case law from 33:

  • a Court is permitted to consider the evidence adduced by the plaintiff to establish its claim to the substantive relief sought see Patterson v BTR Engineering (Aust) Ltd;
  • a prima facie cause of action is not sufficient to infer a risk of dissipation;
  • a Court may in some cases, having regard to the nature of the plaintiff’s claim, infer the existence of a risk of dissipation partly or wholly from the fact that the plaintiff has a good, arguable case – where a plaintiff’s case involves proof of allegations of serious dishonesty this approach may be appropriate;
  • the first and second named defendants demonstrated a lack of candour in providing information to the plaintiff and could be used to advance the plaintiffs argument that the defendants will dissipate their assets; and
  • a combination of factors can give rise to the feeling of unease, so that a Court could infer that there was sufficient danger of asset dissipation – see Mitchell v Saengjan [1994] NTSC 34; 117 FLR 273 at [45].

In contrast Redlich J cited the case of Aquasun Pty Ltd v Coverdale Ram Pty Ltd [2000] NSWSC 1146 where his honour said:

“The facts in evidence reveal no conduct on the part of the defendant which can reasonably be interpreted as potentially having the effect of frustrating the ordinary processes of the court and the enforcement of its judgments or of being intended to do so or of being in any way evasive, indicating dishonesty, or otherwise indicating actually or potentially that the assets of the company have been or will be dealt with in an irregular way.  I should not assume that the directors would behave irresponsibly or dishonestly unless some substantial ground for fearing that they may do so has been shown.“

From this, it can be inferred that it is better to adduce evidence of acts of the defendant that are dishonest, or the assets of a corporate respondent have been dealt with in an irregular way.  Without such evidence there is a risk that an application for an asset preservation order may fail regardless of the strength of the plaintiff case.

Cases where an application for a freezing order was unsuccessful

In the case Curtis v NID Pty Ltd [2010] FCA 1072 the Court was asked to make an asset preservation order where the only evidence of potential dissipation of assets was the potential sale of real property and payment of a dividend and the encumbrance of personal property.  The evidence adduced by the applicants in this case could be summarised as:

  • that there was real property assets for sale – a sale of assets for full value is not dissipation – per Edmonds J at paragraph 14; and
  • a concern that the respondents and its related companies were dissipating assets expressed in an affidavit.

The respondents raised four (4) points in reply that addressed the point raised by the applicant.  In short there was nothing in the evidence that the Court could reasonably infer that would lead to the inference that the assets would be dissipated.

Takeaways on Mareva orders

The unfortunate reality is that what’s required is strong admissible evidence to support the inference that assets will be dissipated.

Links and further references

Legislation

Federal Court of Australia Act 1976 (Cth) section 43

Federal Court Rules 2011 (Cth) rule 7.32

Federal Court Rules 2011 (Cth) rule 7.33

Federal Court Rules 2011 (Cth) rule 7.35

Cases

Aquasun Pty Ltd v Coverdale Ram Pty Ltd [2000] NSWSC 1146

ASIC v Burnard [2007] NSWSC 1217 (31 October 2007)

Basi v Namitha Nakul Pty Ltd [2019] FCA 743

Bayley and Associates Pty Ltd v DBR Australia Pty Ltd [2012] FCA 746

Cardile v LED Builders Pty Ltd (1999) 198 CLR 380

Curtis v NID Pty Ltd [2010] FCA 1072

Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd (2016) 103 ATR 327; [2016] FCA 653

Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194; [2010] FCA 1014

Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) (2012) 90 ATR 711; [2012] FCA 1064

Insolvency Guardian Melbourne Pty Ltd v Carlei [2016] FCA 72 (9 February 2016)

Jackson v Sterling Industries Ltd (1987) 162 CLR 612

Merryport Pty Ltd v Lawson [2023] FCA 838

Mitchell v Saengjan [1994] NTSC 34; 117 FLR 273

National Australia Bank Ltd v Bond Brewing Holdings Ltd [1990] HCA 10; (1990) 169 CLR 271

Nevro Medical Pty Ltd v McKelvie [2020] FCA 1412

Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319

Pankhurst v. Damata & Anor [2008] QSC 28 (19 February 2008)

Re RG Munro Futures Pty Ltd [2010] QSC 435

Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd [2007] VSC 165 – whether impecunious corporate applicants could be expected to support undertakings as to damages

Spotlight Pty Ltd v Mehta [2019] FCA 1796

Victoria University of Technology v Wilson [2003] VSC 299

Further information about asset preservation orders

If you need advice on obtaining an asset preservation order, contact us for a confidential and obligation-free discussion:


Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au

Doyles Recommended TMT Lawyer 2024

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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