Recovery of costs by solicitors acting on their own behalf – another nail in the coffin
In the recent decision of Manzo v CSM Lawyers Pty Ltd [2024] FCAFC 96, the Full Court of the Federal Court of Australia determined that an incorporated legal practice which had represented itself in litigation was not entitled to recover its professional costs from its unsuccessful opponent.
In doing so, the Court considered conflicting authority from the Courts of Appeal in both Victoria and New South Wales and also seemingly closed-off a possible loophole which had been left ajar by the decision of the plurality in the High Court in Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333 (Bell Lawyers Decision).
Background
The Chorley Exception (so named after the decision London Scottish Benefit Society v Chorley (1884) 13 QBD 872) is (or was, in Australia) an exception to the well-established rule that because an order for costs is intended to provide an indemnity for costs actually incurred (as opposed to providing compensation for productive time expended), a self-represented litigant is not entitled to professional costs for acting for him or herself in legal proceedings. The Chorley Exception provided that self-represented litigants who are solicitors are entitled to recover professional costs for work they have undertaken in legal proceedings.
In Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150, the New South Wales Court of Appeal held that the Chorley Exception applied to work undertaken by self-represented litigants who were barristers, in addition to those who were solicitors.
On appeal, in September 2019 the High Court of Australia overturned the decision of the NSW Court of Appeal, finding that the Chorley Exception did not form a part of the common law of Australia ([2019] HCA 29). In so doing, the High Court effectively abolished the Chorley Exception in Australia.
The plurality in the High Court left the door slightly ajar in respect of whether a self-represented incorporated legal practice (ILP) may recover costs of acting on its own behalf (Bell Lawyers Decision at [51]).
Since the Bell Lawyers Decision, conflicting authorities have arisen in the Courts of Appeal in Victoria and New South Wales regarding whether a self-represented ILP may recover costs of acting on its own behalf.
In United Petroleum Australia Pty Ltd v Freehills [2020] VSCA 15 (United Petroleum) the Victorian Court of Appeal denied an ILP its costs in respect of work done on its behalf by its employed solicitors.
In Atanaskovic v Birketu Pty Ltd [2023] NSWSC 312 (Atanaskovic), although at first instance the partners of an unincorporated practice had been denied costs in respect of work undertaken by their employed solicitors, on appeal the NSW Court of Appeal determined that the inclusion of “remuneration” within the definition of “costs” in the relevant NSW legislation entitled an ILP to recover costs incurred by its employed solicitors in representing the firm. That decision, however, turns upon the specific terms of the NSW legislation.
The present proceeding
The firm, CSM Lawyers Pty Ltd (CSM) is an ILP.
An issue arose as to whether CSM ought to be entitled to recover its costs in respect of work undertaken by its employed solicitors on its behalf against Mr Manzo relating to an appeal proceeding instituted by Mr Manzo.
In support of its application for its costs CSM submitted, in effect, that because it was an ILP with more than one director and shareholder (i.e. it was not a sole-director and sole-shareholder ILP), there was sufficient independence (or detachment) between the firm as party and the employed solicitors undertaking the work on its behalf so as not to infringe the indemnity principle if it were to be awarded its costs of the proceeding. That position was consistent with the observations of the plurality in the Bell Lawyers Decision.
After considering the Bell Lawyers Decision and those decisions that have followed in Victoria and NSW, the Full Court preferred the approach taken by the Victorian Court of Appeal in United Petroleum and stating that if CSM’s submissions were accepted, “[i]n effect, it would create an artificial distinction based on the size of an incorporated legal practice.”
The Full Court did, however, permit CSM to recover their outlays in the proceeding, including counsel’s fees.
The effect of the decision
The decision closes the door, at least in courts in the Federal jurisdiction, on the potential loophole left in the decision of the plurality in the Bell Lawyers Decision in respect of the costs of self-represented ILPs acting on their own behalf in proceedings.
Although not strictly binding upon courts in the state jurisdictions, the decision is likely to be persuasive in the state courts (perhaps other than in NSW, where it is inconsistent with the Atanaskovic Decision).
Furthermore, the decision will likely serve as an effective block upon the pursuit of bankruptcy proceedings founded upon costs orders awarded in favour of self-represented ILPs.
Where to now?
The Atanaskovic Decision is the subject of an appeal to the High Court, special leave having been granted in April 2024.
The determination of that decision may resolve, once and for all, whether the last limited element of the Chorley Exception remains in Australian Law.
James Conomos Lawyers Becomes JCL Law Partners
As of 10 June 2024, the firm has rebranded from James Conomos Lawyers to JCL Law Partners.
We have operated as James Conomos Lawyers since 1 July 1992, when the firm was first established by James Conomos. Since that time, we have built a reputable brand name in JCL - something we have sought to retain as part of the rebrand.
The words “Law Partners” signify a move forward and a new structure in the form of James Conomos and Adrian Robins as directors and will enable further growth, including the introduction of further directors and lawyers.
We are also excited to announce that the rebrand coincides with our move to a new office on Level 4 of Turbot Place.
Whilst our visual identity has changed, our dedication to exceptional client service has and will not. We would like to take this opportunity to thank you for your ongoing support. We look forward to welcoming you to our new office in the near future!
James Conomos Lawyers Sponsors IR Global 'On the Road' Conference in Dubai
Last week, James Conomos (Managing Director) & Justine Fletcher (Practice Manager) attended IR Global’s latest ‘On the Road’ Conference in Dubai. James Conomos Lawyers had the pleasure of being a headline sponsor of the event.
Jim and Justine were pleased to have met with 130+ members from a variety of jurisdictions, offering an invaluable opportunity to connect with like-minded individuals from across the globe.
After landing, we hosted a pre-event private dinner at the incredible Prime 68 restaurant, alongside Dubai-native Paoletti Law Group, membership sponsors of the event.
Throughout the event, there were numerous opportunities to learn from and connect with members from a variety of jurisdictions - from presentations and breakout sessions to opening and closing drinks receptions and a luxury networking dinner. We enjoyed strengthening our relationships with fellow IR Global members while learning so much about the region.
In the modern world, having international connections is more important than ever. We look forward to future events with IR Global where we can continue to expand our international presence and capabilities.
Federal Court outlines when a liquidator may recover general liquidation remuneration and costs from trust assets
In the recent decision Lawrence, Ozifin Tech Pty Ltd (in liq) v AGM Markets Pty Ltd (in liq) [2022] FCA 1478, the Federal Court of Australia has provided useful guidance on when a liquidator may recover general liquidation remuneration and costs from trust assets.
Background
In this judgment, liquidators of multiple companies were successful in obtaining directions and declarations they sought regarding the distribution of statutory trust funds, and obtaining payment of their fees from trust assets.
AGM Markets Pty Ltd (in liquidation) (AGM), OT Markets Pty Ltd (in liquidation) (OT) and Ozifin Tech Pty Ltd (in liquidation) (Ozfin) were service providers offering web-based trading platforms to retail clients for opening and closing margin foreign exchange contracts and ‘contracts for differences’ positions.
AGM was the only entity to hold an Australian Financial Services Licence (AFSL). OT and Ozifin were authorised to provide certain financial services on behalf of AGM through separate agreements. AGM’s role was mainly as an issuer of financial products, and the custodian of the client funds of OT and Ozifin.
Between February 2018 and October 2020, ASIC led Federal Court proceedings against the Companies for various breaches of the Corporations Act 2001 (Cth) (Act), including unconscionability and profiting from conflicts of interest. As a result of those proceedings, AGM’s AFSL was cancelled and pecuniary penalties of $75 million ordered. The Federal Court also held that the Companies be wound up, with separate liquidators appointed to each entity. The Companies liquidators (Liquidators) sought directions and declarations regarding the distribution of trust funds held by the Companies.
Intervention by ASIC
ASIC intervened in each application and took an opposing view to the liquidators in terms of the characterisation of the constructive trust funds and whether the liquidators could take out their general liquidation costs and expenses in priority to the investors who are the beneficiaries of such non-statutory trusts. ASIC asserted that each of the relevant trusts involved an institutional constructive trust rather than a remedial constructive trust. Accordingly, the Liquidators sought to use constructive trust funds to pay general liquidation costs and expenses.
His Honour Beach J rejected ASIC’s submissions that the constructive trusts should be characterised as institutional for the following reasons:
- the application of a remedial constructive trust is preferred where funds are held by the constructive trustee as a result of their own misconduct;
- the client accounts were not static after the Companies’ wrongdoing occurred, making the determination of funds payable very intricate;
- the element of judicial discretion was absent from ASIC’s submissions, which is required in institutional and remedial constructive trusts;
- an institutional constructive trust is unpreferable where it has the effect of preventing a liquidator from recouping their general liquidation costs and expenses.
Beach J further determined that even if an institutional constructive trust were to be imposed, the Liquidators would still be entitled to deduct from it their general liquidation costs and expenses.
His Honour lastly considered the Court’s “expansive jurisdiction to allow a liquidator’s remuneration to be paid out of assets of a trust” and held that the liquidators’ general liquidation work had the effect of indirectly benefitting the trust and its beneficiaries.
Key takeaways
Beach J relevantly provides that:
- neither Staatz or Park are authority for any principle that liquidators cannot recover general liquidation costs from trust funds in an appropriate case. Both are an application of the broad discretionary power to the circumstances of the relevant case. The question is one of discretion with each case turning on its own facts (at [210]);
- generally, whether general liquidation costs can be recovered from trust assets is a matter for the Court to determine, and relevant factors include the extent to which the relevant company acted in its capacity as trustee of a trust and whether there are separately identifiable company assets from which the remuneration of the liquidators might be paid (at [220]).
This decision resolves the history of uncertainty in cases recovering general liquidation expenses from trust assets and considers the appropriate characterisation of funds subject to constructive trusts. The outcome reinforces the notion that courts will ensure to prevent a liquidator from being exposed for their costs and expenses. It also highlights that courts will generally support arrangements that result in cost-effective distributions to beneficiaries.
NSW Court of Appeal upholds rejection of proof of debt claim
The recent decision of Alora Property Group Pty Ltd as trustee for Alora Property Group Trust v Henry McKenna (as Liquidator of Alora Davies Development 104 Pty Ltd) [2022] NSWCA 197 has upheld a primary judge’s finding that a proof of debt claim should be rejected. This decision dealt with some interesting considerations for insolvency practitioners and creditors when seeking to challenge a liquidator’s proof of debt.
Background
The company, Alora Davies Development 104 Pty Ltd, was wound up in insolvency on 6 May 2020. It had been a joint venture between its two shareholders “Alora” and “Davies” to develop real property. The arrangements were contained in a shareholder’s agreement, which relevantly provided by clause 16:
The parties agree that Alora (or its nominee) shall be entitled to be paid fees for project managing the Company’s property development(s) including but not limited to managing the development application process. The fees payable shall be calculated at $8,000 plus GST per lot, to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders.
After the company was wound up in insolvency, APG (Alora’s nominee and related entity) on 5 June 2020 lodged a formal proof of debt with the liquidator, in the sum of $1,084,983.82. On 22 February 2021, the Liquidator admitted APG’s proof to the extent of $166,599.62. The liquidator rejected any claims for project management fees essentially on the basis that as the development had not been completed and there were no proceeds available for distribution, no entitlement to any fees had accrued. The primary judge found in the liquidator’s favour and APG appealed this decision.
In arriving at its decision at first instance, the Court noted that a person appealing against the liquidator’s decision to reject the proof of debt has the onus of showing that decision was wrong, and that question is determined by reference to the evidence before the Court when it considers whether or not to affirm the liquidator’s decision. Further, the decision in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 remains good law in respect of an appeal against a liquidator’s decision in relation to a proof of debt under s90-15 of the Insolvency Practice Schedule in Schedule 2 to the Corporations Act 2001. These principles were not disturbed on appeal.
On appeal, APG submitted that the terms of clause 16 were clear and unambiguous, to the effect that APG (as Alora’s nominee) was entitled to fees for its project management services and that it did not stipulate that those fees were contingent on any event such as completion of all of the services.
However, the Court of Appeal (Ward P, Macfarlan JA & Brereton JA) disagreed with APG’s interpretation. They held that the proper construction of clause 16 was that the project management fees became payable only upon completion of the project by realisation of the development.
It was concluded that project management was expressly not limited to the managing of the development application process, and so contrary to the appellant’s contention, that alone could not be enough to earn the fee. All of the project management work required to bring the project to completion needed to be performed. The purpose of the provision that the fees would be paid “prior to the disbursement of funds via dividends or profit share” was to ensure the fees would be paid in priority to distribution of any surplus, once funds were available – a situation which would only arise upon completion of the project by realisation.
The presumption of advancement survives a High Court challenge, but its influence has been weakened
The High Court decision of Bosanac v Commissioner of Taxation [2022] HCA 34 has confirmed that the presumption of advancement is an entrenched part of Australian law despite the Commissioner of Taxation’s (Commissioner) submission to abolish the principle on the basis of that it has no acceptable rationale, and is anomalous, anachronistic and discriminatory.
Background facts
Mr and Mrs Bosanac had purchased a house for use as their matrimonial home in Dalkeith, WA. The deposit funds came from their joint bank account, the mortgage was in both their names, however the property was registered solely in the wife’s name.
Following an audit by the ATO, it was determined that Mr Bosanac had a substantial tax debt. As a result, the Commissioner sought a declaration that Mr Bosanac had a 50% beneficial interest in the Dalkeith property, despite it being registered only in his wife’s name.
The issue was - what did Mr and Ms Bosanac intend as to the beneficial ownership of the property at the time of purchase? This is generally determined by reference to the following presumptions in equity:
- Resulting trust – this presumption arises when two parties contribute to the purchase price, but legal title is only recorded in the name of one. In those circumstances, equity presumes that the person holding legal title does so for both contributors; and
- Presumption of advancement – this presumption operates to prevent a resulting trust from arising where the relationship between the parties provides a reason for concluding that a gift was intended.
A presumption of trust is a useful tool for creditors and bankruptcy trustees to attack assets not held in the name of the debtor, especially in circumstances where evidence of the actual intention of the parties may be difficult to ascertain.
In the first instance decision in the Federal Court of Australia, the trial judge found that the presumption of advancement arose and had not been rebutted, and therefore the property was not held beneficially for the husband. This was despite Mr Bosanac contributing to the deposit and assuming a considerable personal liability under the mortgage. Weight was placed on the fact that Mr Bosanac and Mrs Bosanac had owned other assets separately, and that Mr Bosanac was a sophisticated person of business so would have understood the consequences of not having an asset in his name.
This decision was reversed on appeal before the Full Federal Court, which held that it was the intention of the parties that 50% of the property was held beneficially for Mr Bosanac. The Court emphasised the fact that the deposit was taken from a joint loan account, and Mr Bosanac had accepted substantial personal liability for the mortgage and effectively each contributed half of the purchase price.
This was a significant decision as it reversed the presumption of advancement and showed that where a husband contributed to the purchase of an asset, it may not be sufficient to protect that asset from creditors merely by the asset being held in the wife’s name.
High Court appeal
The Commissioner’s key submissions on appeal called for abolishing the presumption of advancement altogether. The Commissioner submitted that the doctrine was outdated and had not kept pace with societal values where the presumption of advancement applies from husband to wife, but not from wife to husband. Ms Bosanac’s submissions in reply rejected the abolition of the doctrine noting that the underlying rationale for a number of equitable doctrines have evolved over time and remain unsettled, which should not mean that they should be abolished because they sit uneasily with modern principles.
The High Court delivered three separate judgments (Kiefel CJ and Gleeson J, Gageler J & Gordon J and Edelman J). All were in agreement that the appeal should be allowed, and the decision of the Full Federal Court set aside, with the result that the original judgment of the Federal Court stood, namely that the property was not held beneficially for the husband. In the end, the Commissioner’s claims failed. It was held that the presumption of advancement remains an entrenched part of Australian law, and although the criticisms about the presumption not reflecting contemporary standards of relationships were recognised, they were too enshrined in Australian law to be simply abolished.
However, all three judgments clearly emphasised that the presumptions played a more limited role in the ultimate determinations and that while the presumption remains intact, it will not overcome the objective intention of the parties.
Gageler J described the presumption of resulting trust and the presumption of advancement as being of practical significance only in rare cases where the totality of the evidence is incapable of supporting the drawing of an inference about what the parties intended when purchasing the property (at [67]). The question of intention as to whether a trust arises is entirely one of fact.
When applying this reasoning to the Bosanac’s, it was held that the clear inference was that the parties' objective intention was that Mr Bosanac was doing no more than facilitating Ms Bosanac's acquisition of the Dalkeith property. He did so by assisting in paying the deposit and entering into the joint loans for the purpose of funding the purchase, as his wife did not have the personal finances to do it on her own. Therefore, the appeal was allowed.
The key takeaway from this case is clear: the influence of the presumption of advancement is arguably weakening in Australia and cannot be simply relied upon without considering the surrounding circumstances. Instead, the Court will look to the objective intention of the parties at the time of the acquisition to determine whether any presumption applies.
Federal Court confirms liquidators are entitled to be remunerated from company trust accounts
Earlier this year, the decision of Re Jahani (as joint and several liquidators of Ralan Property Services Qld Pty Ltd (in liq) and Another [2022] FCA 107 determined that liquidators of a company were entitled to be paid their remuneration from funds held in the company’s trust account.
Factual Background
The Ralan Group was a property developing giant on the Gold Coast. It was characterised by the administrators as a Ponzi scheme and as a result of poor management, the business model became unsustainable and administrators were appointed on 30 July 2019.
At the time of the administrators’ appointment, Ralan Group held over two million dollars in a trust account connected to Ralan Group’s real estate services, which was regulated by the Agents Financial Administration Act 2014 (Qld) (Administration Act). Section 20 of the Administration Act provides that an amount paid to a trust account cannot be used for payment of a debt of a creditor of an agent.
The administrators were appointed as liquidators on 17 December 2019 and as part of the winding up process they made an application under section 90-15 of the Insolvency Practice Schedule for their remuneration to be paid out of the trust account. This application was opposed by creditors who had deposited money into the account, on the basis that this would contravene the Administration Act, because it represented a payment of debt to a creditor of an agent.
Decision
The Court applied the salvage principle from Re Universal Distributing Company Pty Ltd (in liquidation) [1933] HCA 2 that the remuneration, costs and expenses incurred by a person such as a liquidator in preserving, recovering and realising a fund on behalf of others should be borne by the fund and that entitlement is secured by an equitable lien over the fund. Finding otherwise would result in insolvency practitioners being unwilling to undertake the role of liquidator
Farrell J rejected the creditor’s argument that section 20 of the Administration Act precluded the liquidators’ equitable lien over the statutory fund. Her Honour held that the work undertaken by a liquidator was for the benefit of the depositors in the trust account, and not as an agent of the company, which would otherwise be an excluded payment under section 20 of the Administration Act. It was held that there would be an unfair result if the liquidators were prevented from recovering their remuneration from that statutory fund. The Court observed (at [123]):
While it may be distasteful to creditors that they get little return where orders are made for payment of an external administrator’s remuneration and expenses from a fund, there is nonetheless a benefit to creditors and beneficiaries in having their position resolved and to the community in not permitting assets to remain unproductively in the hands of a defunct company.
This decision provides clarity around the operation of a liquidator’s lien over statutory trust account funds and how the Court will be inclined to remunerate liquidators who perform work for the benefit of creditors and beneficiaries.
Corporate insolvency reforms to come under review
Parliament’s Joint Committee on Corporations and Financial Services announced on 28 September 2022 it would review Australia’s Corporate Insolvency laws as the end of pandemic-era support prompts the collapse of financially stretched businesses, most notably in the construction industry.
The terms of reference for the inquiry include current industry trends, operation of existing legislation such as unlawful phoenixing reforms, the operation of the PPSR and the simplified liquidation reforms. The inquiry will look at other areas of reform, such as unfair preference claims and insolvent trading safe harbours.
Other potential areas for reform include small business restructuring laws, which allow firms with up to $1 million in liabilities to seek advice from an insolvency practitioner on developing a restructuring plan, will also be reviewed, as will new laws penalising directors who avoid paying workers’ entitlements during insolvency.
The full details can be found here.
First test of anti-phoenixing laws exposes difficulties in recovering assets
The Supreme Court of Victoria was the first Australian court to test the new creditor defeating disposition laws that came into effect in early 2020 (read our summary of the laws here). The decision of Re Intellicomms Pty Ltd (in liq) [2022] VSC 228 has shown that proving a transaction was intended to defeat creditors may be easier, but recovering assets outside of the transaction will remain a challenge.
Factual background
On 8 September 2021, Intellicomms Pty Ltd (Intellicomms) entered into a sale share agreement with Technologie Fluenti Pty Ltd (TF) and sold a number of assets, including their intellectual property. The court expressed the opinion that this sale agreement had “all the hallmarks of a classic phoenix transaction”. This was based on the following factors:
- TF was controlled by the sister of IntelliComms' sole director and shareholder;
- TF was incorporated two weeks prior to the sale agreement;
- The assets were sold for significantly less than what they were valued at by a different potential purchaser;
- Intellicomms was placed into creditors’ voluntary liquidation immediately after the share sale;
- one of Intellicomms’ major creditors, who was also a shareholder, was not notified of the shareholders’ meeting proposing to appoint the liquidators; and
- there was no evidence that Intellicomms had taken steps to sell the business to any third party.
The Court found that the sale agreement was a creditor-defeating disposition under section 588FD(1) and 588FE(6B) of the Corporations Act 2001 (Cth), as the consideration payable under the sale was less than market value and best price reasonably obtainable having regard to the circumstances existing at the time of the sale agreement. As a result, it was void at and after the time it was made.
The liquidators applied to the court to have an order that TF deliver up all property of IntelliComms under section 588FF(1)(b), which was uncontroversial. However, what was unique was the request under either section 588FF(1)(c) or section 588FF(1)(d) was to have all property which was “derived by” TF as a result of the sale agreement.
Can a liquidator recover property that was “derived” from a voidable sale?
Under section 588FF(1)(c), the court may make an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction.
The Court can also make an order under section 588(1)(d) requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both money that the company has paid under the transaction and proceeds of property that the company has transferred under the transaction.
The liquidators claimed that any new software licences that had entered into was as a result of the intellectual property, know-how and confidential information of IntelliComms. The court declined to make orders because:
- there was no evidence to calculate ‘an amount’ of benefit which TF received; and
- could not determine what ‘fairly represents’ the proceeds of the property transferred to TF and there was no evidentiary basis to make such a determination.
Gardiner AsJ confirmed that the clawback powers in section 588FF(1) are limited to property transferred in the impeached transaction. This is due to the nature of the relief under this provision being restitution rather than compensation for loss or damage.
This decision was the first to test out the parameters of the anti-phoenixing legislation and provides a useful example of the considerations the court will take into account when determining what is a “creditor defeating disposition”. However, this decision also demonstrates how difficult it may be to claim relief under section 588FF for assets that are not specifically part of the relevant transaction and whether relief sought is restitution or compensatory.
ATO obtains $220 million dollar freezing order for potential capital gains tax liability
An important decision was handed down in the Federal Court recently in Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139 (Perry J). It was held that a taxpayer’s assets may be frozen despite no notice of assessment being issued by the ATO at the time freezing orders were applied for.
Background
On 28 January 2022, AusNet shareholders voted in favour of a scheme for a consortium led by Brookfield, a global asset manager, to purchase all the shares in AusNet from existing shareholders. The date of implementation was set as 16 February 2022. State Grid was incorporated in Hong Kong and a majority shareholder who owned 19.9 per cent of the company.
State Grid stood to make $736.5 million from the takeover and, according to the Australian Taxation Office (ATO), would subsequently owe $220 million in capital gains tax (CGT) from the deal. However, the ATO could not action an assessment until the date of implementation.
The ATO was aware of the transaction and had a phone conversation with State Grid’s lawyers where they requested that State Grid hold an amount on account of the anticipated CGT liability. This request was refused as State Grid had disputed that any CGT liability would arise.
Due to concerns that State Grid would remove the proceeds of sale from Australia and deprive the ATO of the opportunity to recover the CGT from State Grid, the Deputy Commissioner applied to the Federal Court for a freezing order on 15 February 2022, one day before the date of the takeover.
Should a freezing order be granted?
A freezing order is an order restraining a respondent from removing any assets located in or outside Australia. Under Rule 7.32 of the Federal Court Rules, the Federal Court has power to make a freezing order to prevent its processes from being frustrated by a prospective judgment being unsatisfied. An important note in this case was that there was no judgment, just a prospective judgment – in that the transaction had not yet occurred so there was no tax assessment.
The Court will grant an order when the following three elements are satisfied:
(a) A good arguable case
The Court held that the Deputy Commissioner had a good arguable case on the basis that the Commissioner would be issuing the Special Assessment as soon as the transaction completed on 16 February 2022.
(b) Danger that a prospective judgment will be wholly or partially unsatisfied
There were ten different reasons why the Court held that there was a danger that the proceeds of sale would be removed from Australia. The most significant ones were that it was a substantial sum of money, State Grid had no assets in Australia and State Grid has never lodged an income tax return or Business Activity statement with the ATO.
(c) Balance of convenience
The Court then undertook a weighing of factors to determine whether the balance of convenience favoured the making of the order. State Grid submitted that there was no evidence that they had proposed to do anything unlawful, the fact that no special assessment had been made and the effect that the order could have on the takeover.
The Deputy Commissioner submitted that fact that this was a substantial sum, that after the takeover by Brookfield, State Grid would not have any residual business in Australia and that there would be difficulties in enforcing a prospective judgment obtained against State Grid in respect of assets held in China or in Hong Kong.
The Court held that the balance of convenience favoured the order being made.
Conclusion
The Court made the freezing orders against both State Grid and AusNet on the basis that:
• State Grid could not diminish the value of two specific bank accounts below approximately AUD$220 million; and
• AusNet must continue to hold $220 million of the amount payable to State Grid.
Applications for freezing orders are common but rarely granted where a debt is yet to be owing. This case has tested the Court’s willingness to issue a freezing order, despite no judgment and no notice of assessment.
