Audio Products Group Pty Ltd v Mamone

[2005] NSWSC 982

CITATION:	Audio Products Group Pty Ltd v Mamone & Ors [2005] NSWSC 982
HEARING DATE(S):	20 September 2005
JUDGMENT DATE :	20 September 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Application to dissolve injunction refused.

CATCHWORDS:	ASSET FREEZING ORDER - THIRD PARTY - First Defendant misappropriates Plaintiff's funds - First Defendant a director and shareholder of Second Defendant - Plaintiff obtains asset freezing order against Second Defendant - whether Court has jurisdiction to make order - whether order should be dissolved.
CASES CITED:	Cardile v LED Builders Pty Ltd (1999) 198 CLR 380
PARTIES:	Audio Products Group Pty Ltd - Plaintiff Antonio Mamone - First Defendant ADM Developments Pty Ltd - Second Defendant
FILE NUMBER(S):	SC 6301/04
COUNSEL:	Ms K. Dixon (Sol) - Plaintiff V.R Gray - Defendants
SOLICITORS:	Clayton Utz - Plaintiff Cumberland Frank - Defendants

LOWER COURT JURISDICTION:

Ex tempore

1    On 24 November last year I made orders by consent in this matter, one of which was to impose an asset freezing order on the Second Defendant. The Defendants now seek to have that injunction dissolved. The circumstances may be briefly described as follows.

2    The First Defendant (“Mr Mamone”) was an employee of the Plaintiff, Audio Products Group Pty Ltd. Last year it was discovered that Mr Mamone had been defrauding the Plaintiff on a systematic basis for some time. When his frauds were detected and Mr Mamone confessed to some wrongdoing, the Plaintiff commenced detailed investigations to ascertain the extent of the frauds and where the proceeds of the frauds had gone. There is evidence to the effect that Mr Mamone placed some of the proceeds of the fraud in the names of his wife and of his parents. Mr and Mrs Mamone are each 50% shareholders of the Second Defendant (“ADM Development”). They are also the two directors of the company. The Plaintiff has not uncovered any evidence so far to suggest that any of the proceeds of the fraud have been passed by Mr Mamone to ADM Developments.

3    ADM Developments is carrying out a real estate development at Nelson Bay. It says that the terms of the asset freezing order are severely impairing its ability to proceed with that development. In particular, it says that it is not able to borrow on its assets to fund that development because its ability to borrow on its assets is rendered unclear by the terms of the asset preservation order.

4    Mr Gray, who appears for the Defendants, says that the injunction restraining ADM Developments should be dissolved for two reasons. The first is that this Court has no jurisdiction to make an asset freezing order against ADM Developments in the circumstances which I have narrated. A second basis is that the terms of the order are so wide and unfair as to be impractical and unworkable.

5    In support of his submission that this Court has no jurisdiction to make an asset freezing order against ADM Developments, Mr Gray relies heavily upon the decision of the High Court in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. That case deals extensively with the jurisdiction of the Court to make orders of a Mareva type against third parties, that is, parties not directly involved in particular litigation against whom no relief is directly sought by a plaintiff. That is this case.

6    Mr Gray draws attention to the fact that the proceedings so far instituted by the Plaintiff, which are embodied in a Summons which the Plaintiff seeks leave to file in the Commercial List of this Court, contain claims only against Mr Mamone and not against ADM Developments. Mr Gray says that the asset freezing order against ADM Developments does not fall within any of the categories envisaged by the High Court in Cardile in which such an order may be made against third parties.

7    The High Court enunciated in broad terms the situations in which an asset freezing order may be made against third parties in paragraph 57 of the judgment of Gaudron, McHugh, Gummow and Callinan JJ. That paragraph is as follows:

“What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

(i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies” , of the judgment debtor or potential judgment debtor; or

(ii) some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.”

8    I am unable to accept Mr Gray’s submission that this case does not fall within the parameters envisaged by the High Court as supporting the jurisdiction of a court to make an asset freezing order against a third party. In my opinion, the circumstances of this case fall within that category which is subparagraph (ii) in the passage which I have quoted.

9    In the present case the circumstances are that a bankruptcy petition has been filed against Mr Mamone by the Plaintiff for non-compliance with a bankruptcy notice. That bankruptcy petition is due to be heard next month. It is possible that a bankruptcy trustee will be appointed upon a sequestration order being made and that that bankruptcy trustee will endeavour to satisfy any judgment which may be obtained by the Plaintiff against Mr Mamone in these proceedings in a variety of ways.

10    The Summons which is proposed to be filed by the Plaintiff against Mr Mamone claims a total amount of somewhat in excess of $1.4M by way of damages against Mr Mamone. That sum is in addition to the amounts which are the subject of consent judgments against Mr Mamone obtained by the Plaintiff arising out of the frauds which he has perpetrated.

11    If those proceedings result in a substantial judgment against Mr Mamone, it would be open to Mr Mamone's bankruptcy trustee, who upon sequestration will have become entitled to Mr Mamone's 50% shareholding in the ADM Development, to seek a winding up of ADM Development on just and equitable grounds, in addition to any others that may be available. If the bankruptcy trustee succeeds in that application, ADM Development will be obliged in the administration of its liquidation to distribute to the bankruptcy trustee as a 50% shareholder in the company, such of the surplus of the company's assets after paying its debts and liabilities as the trustee as such shareholder is entitled to receive.

12    It is, of course, only a matter of possibility that these events can come about but, as I read the judgment of the High Court in Cardile , it is not necessary in order to support an asset freezing order that the applicant must show that these events necessarily will come about. What has to be shown is that the third party, such as ADM Development, is in a position where by legal process set in train by the Plaintiff or a liquidator or bankruptcy trustee of the putative judgment debtor, assets of the third party may become available to satisfy the judgment which the Plaintiff seeks to obtain against the judgment debtor.

13    In my opinion, the possibility that a bankruptcy trustee of Mr Mamone may ultimately obtain contribution from a surplus of assets in ADM Development, brings this case into that category envisaged in subparagraph (ii) in the judgment of the High Court in the passage which I have quoted. Accordingly, I am of the view that the Court does have jurisdiction to make an asset freezing order against ADM Development. To hold otherwise would be unrealistic in the circumstances.

14    This is a case in which Mr Mamone is, by his own admission, guilty of a serious fraud. It is a case in which proceeds of the fraud have, according to the evidence so far, been passed to Mr Mamone's wife and parents. The circumstances in which those persons became possessed of proceeds of the fraud are not known but that circumstance alone demonstrates that Mr Mamone is prepared to use others to further his own fraudulent purposes. This is one of those cases, of which there are many precedents in the Court, where dishonest activity on the part of a defendant affords good ground for the making of asset preservation orders in order to prevent dissipation of assets to defeat the execution of judgment.

15    It is unrealistic to suppose that Mr Mamone, as a 50% shareholder of ADM Development and as a co-director of the company with his wife, cannot have any influence in the fraudulent disposition of that company's assets if he were minded to engage in such a course of action to prevent the Plaintiff from recovering any fruits of a judgment against him.

16    In those circumstances, I think that not only is there jurisdiction for the Court to make the orders against the Second Defendant, but it is a proper case in which the Court should exercise that jurisdiction.

17    Mr Gray's second submission is that the terms of the asset freezing order are so wide and restrictive as to unjustly impair ADM Development in the proper conduct of the business. The basic complaint is that the asset freezing order prevents ADM Development from dealing with its assets, except to the extent that they exceed a certain minimum amount, that amount being a sum estimated as reasonably necessary to satisfy a judgment debt which Mr Mamone may incur.

18    Mr Gray says that it would be impossible for a lender to ADM Development to know whether or not the terms of the freezing order were breached by any particular proposed transaction because it is very difficult to know the value of any particular assets which are proffered by ADM Development as security for borrowing.

19    There is some substance in this proposition. However, I do not think that the difficulty in which ADM Development is placed is insuperable. After all, when ADM Development is engaged in any financing transaction, it is a matter of course that it will have to disclose its assets and liabilities position to a proposed lender. That assets and liabilities position no doubt will be supported by valuations, or some informed estimate, of values of property which should indicate what proportion of the property of ADM Development is subject to the asset freezing order and what proportion of the property is available as security. If there is any doubt about that matter, ADM Development can always approach the Plaintiff to explain the transaction and to obtain the Plaintiff's consent to a relaxation of the asset freezing order to permit the transaction to take place on the ground that it cannot, on any reasonable view, prejudice the security of the asset freezing order.

20    If ADM Development makes such an approach in relation to a particular proposed transaction, and the Plaintiff unreasonably refuses its consent to a relaxation of the asset freezing order, ADM Development may always approach the Court for an order relaxing the operation of the freezing order to permit that specific transaction. I emphasise that the application would be made in relation to a particular transaction because the Court should be able to see by reference to the detail of that transaction that it is of such character and of such extent that the security provided to the Plaintiff by the asset freezing order will not be in jeopardy.

21    For those reasons, it seems to me, that the operation of the freezing order as it presently stands does not constitute an unwarranted interference with the Second Defendant's operations, bearing in mind the circumstances which I have earlier recounted. If the Second Defendant wishes to obtain a relaxation of the order to permit a particular transaction to take place, then a mechanism for obtaining that specific permission is open to it in the way I have suggested.

22    For those reasons I decline to dissolve the orders presently restraining the Second Defendant.

23    I think that the Summons which the Plaintiff seeks leave to file should be filed in the Commercial List of this Division. I do not think it of particular consequence as to whether the matter is dealt with in the General List of the Equity Division or in the Commercial List but it does appear that there will be considerable accounting evidence as to the damages which the Plaintiff alleges it has suffered by reason of the frauds and it may be that there is some benefit to be derived if it proceeds in the Commercial List in that regard. Accordingly, I will grant leave to file the Summons, which is Annexure A to the affidavit of Katherine Dixon filed on 24 August 2005, and that the proceedings be entered into the Commercial List.

24    The debate today has focused almost exclusively on the question whether the Court had jurisdiction to make any asset freezing order against the Second Defendant. In that contest the Second Defendant has been unsuccessful. I think that the costs of today ought to be paid by the Defendants. I so order.

25    There has been really no contest about the transfer of the matter into the Commercial List. Although minimal costs may have been incurred in that application, the substantive costs would have been incurred in the debate about jurisdiction to make an asset freezing order.

26    There being no opposition by the Plaintiff to the variation of the terms of the present injunction so as to restrain the Second Defendant from dealing with or disposing of its assets other than in the ordinary course of business, I will vary the order in accordance with the terms of Short Minutes of Order which the parties will bring in. I will stand the matter down in the list to enable those Short Minutes to be brought in.

27    In accordance with the reasons which I have previously given, I now make orders and directions in accordance with the Short Minutes of Order initialled by me, dated today and placed with the papers.

28    The proceedings will be stood over for directions on 9 December 2005 in the Registrar's List.

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