Brunswick Zhang v Australia Dayu
[2015] VSC 782
•16 December 2015
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL COURT
S CI 2015 6044
| BRUNSWICK ZHANG PTY LTD (ACN 608 071 996) | Plaintiff |
| v | |
| AUSTRALIA DAYU TRADING PTY LTD (ACN 150 772 419) | Defendant |
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JUDGE: | DIGBY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 December 2015 |
DATE OF RULING: | 16 December 2015 |
CASE MAY BE CITED AS: | Brunswick Zhang v Australia Dayu |
MEDIUM NEUTRAL CITATION: | [2015] VSC 782 |
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PRACTICE AND PROCEDURE – Freezing Order – exercise of discretion – high degree of caution required – degree of risk that judgment or prospective judgment will not be wholly satisfied – effect of defendant’s conduct rather than purpose may be relevant – other elements required under Order 37A Supreme Court (General Civil Procedure) Rules 2015.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Mullen | Rigby Cooke Lawyers |
| For the Defendant | Mr J Evans | Madgwicks |
HIS HONOUR:
Nature of the plaintiff’s application
The plaintiff/applicant, by Summons dated 10 December 2015, seeks a freezing order under Rule 37A of the Supreme Court (General Civil Procedure) Rules 2015. That Rule provides that with or without, notice to the affected party the court may make an order freezing a respondent party's assets for the purpose of preventing the frustration or inhibition of the court processes. Such orders are usually directed to seeking to meet the risk that a judgment or prospective judgment of the court will, or may, be wholly or partially unsatisfied.
To accede to such an application I need to be satisfied, approaching the application with caution as the cases indicate a court should in the exercise of such a discretion, that:
(a)
the plaintiff has a judgment in its favour, or a good arguable case establishing a reasonable prospect of success at trial.
The latter being relevant in this application;
(b)
the defendant has assets in the jurisdiction.
This is not in issue in this application;
(c) there is a danger that a judgment, or prospective judgment, will be unsatisfied due to dissipation or disposition, or the like, of the defendant's assets;
(d) the balance of convenience favours the granting of the remedy sought including on a balance of the relative risks to the parties; and
(e) that the plaintiff will provide the usual undertaking as to damages, in the event that the injunction sought is granted.
In applications of this type it is usually necessary to be satisfied that there is a reasonable possibility, not a fanciful one, that the defendant might abscond or remove or dispose of relevant assets, or in some other way render such assets inaccessible. Further, in these sorts of applications the court may look at the effect rather than the purpose of the defendant's conduct in determining whether the court's process is likely to be abused or frustrated.
Background
These proceedings were commenced by Writ and Statement of Claim dated 26 November 2015. The plaintiff seeks damages for breaches and/or repudiation of Heads of Agreement and Contract of Sale also referred to as an Agreement to Purchase) in relation to a development site at 2–8 Barry Street, Brunswick (“Barry Street”).
The proceedings follow a related proceeding in this Court (S CI 2015 5043) (“the caveat proceeding”), which was commenced by the current defendant against the plaintiff to remove a caveat that the plaintiff had lodged in respect of Barry Street.
The defendant brought those earlier proceedings because it had entered into a subsequent Contract of Sale of Barry Street for a higher price (“the second Contract of Sale”), and wished to settle on that contract of sale on 30 November 2015.
Shortly after the earlier caveat proceeding was commenced, the parties agreed to settle that process on the basis that:
(a) the proceeding be immediately discontinued (orders made on 9 November 2015);
(b) the plaintiff agreed not to enforce its Contract of Sale and to provide a withdrawal of its caveat over Barry Street at the settlement of the second Contract of Sale, upon repayment of the $500,000 deposit which the plaintiff had previously paid (this settlement of sale of land and repayment occurred on 2 December 2015); and
(c) the settlement was without prejudice to the plaintiff’s right to bring a claim for damages against the defendant.
It is not clear why the plaintiff’s previous solicitor did not simply bring this claim for damages as a counterclaim in the caveat proceeding, although one possible reason appears to have been that the second purchaser (who had no knowledge of the plaintiff’s agreement to purchase) had also lodged a caveat over Barry Street, and done so prior to the plaintiff.
The defendant opposes the application by the plaintiff for the freezing and ancillary orders sought in the Summons to which I have referred.
The defendant does not oppose the order that is sought by the plaintiff in relation to the affidavit of Mr Jixin Xu (Xu) sworn 14 October 2015, namely, that the plaintiff be released from any implied undertaking which may exist. I shall order the plaintiff’s release (for the purposes of this proceeding) from any undertaking that it would not use the affidavit of Xu sworn 14 October 2015 which was filed in proceeding S CI 2015 5043.
I also note that the application, insofar as it related to the provision of information sought in [10], of the Summons is not pressed.
Both counsel appearing in this application have provided written submissions. Those submissions identify the following affidavit evidence which is relied upon by each party:
(a) affidavit of Mr Renhai (Ryan) Ouyang (Ryan) sworn 9 December 2015; and
(b) the affidavits of Xu sworn 14 October 2015 and 15 December 2015.
As I have mentioned in this application, it is necessary to identify a good arguable case or, put another way, a serious issue to be tried. Relevantly, in this matter the defendant does not dispute that the plaintiff has an arguable case in respect of the breach of contract in the underlying proceedings.
The defendant however opposes the application for a freezing order for the following reasons:
(a) the defendant has undertaken not to deal with $300,000 of its assets which are held in its lawyer's trust account until this proceeding is resolved, without giving seven days’ notice of its intention to do so;
(b) the evidence in respect of the quantum of the plaintiff's claim, the defendant submits, is highly unlikely to result in damages in this case in excess of about $250,000 in relation to the relevant breaches and therefore the $300,000 secured by way of the defendant's undertaking is adequate;
(c) the defendant contends that the evidence before the Court does not establish, to the required standard of satisfaction that there is a relevant danger that a prospective judgment of the court might not be satisfied because the defendant’s assets are at risk of being removed from Australia, disposed of, or in some other manner dealt with or diminished in value; and
(d) that even if the matters to which I have referred were not accepted, as a matter of discretion, I should not make a freezing order in this case because:
(i) taking into account that the grant of such an injunction imports a considerable degree of caution, and;
(ii) taking into account the earlier mentioned undertakings proffered by the defendant, including on behalf of its Director, Xu, and;
(iii) the lack of strength of the plaintiff's claim for damages in excess of a quarter of a million dollars, and the difficulties in quantifying the damages that the plaintiff is asserting in respect of compensation above the normal contractual measure, and;
(iv)the capacity of the freezing orders not to limit the defendant's legitimate commercial activities while proceedings are on foot, and;
(v) the insufficiency the defendant asserts in relation to the plaintiff’s undertaking as to damages proffered by the plaintiff,
such an order should not be made.
The defendant however accepts that there is evidence identified by the plaintiff in this application which is sufficient to support the plaintiff’s arguable claim, under the first and the second limbs of Hadley v Baxendale,[1] in relation to the value of the potential development and the profit associated with it, given the existence of the permit which was part of the Contract of Sale in respect of the Barry Street property.
[1](1854) 9 Exch 341; 156 ER 145.
As I have already mentioned, the defendant harshly criticises the assumptions and the assertions which are needed to support the likely profits which the plaintiff’s witness Ryan endeavours to establish in his affidavit by reference to the calculations in the Court Book at pages 478 to 480.
The defendant also submits that the assumptions, assertions and the profit calculation put forward by the plaintiff are highly unlikely to succeed at trial because the defendant submits the subject land was always offered for sale to any potential purchaser with the benefit of the 39 unit Planning Permit issued on 9 June 2015. The defendant submits that it is reasonable to infer that the market value of the land, at the present time, incorporates the additional value which the existence of a permit relating to the land carried with it.
Next, the defendant submits that there is nothing in the evidence which discloses any specific or special matter being communicated to the defendant, or its agents, in respect of the land the plaintiff was intending to develop which would differentiate the land, or the transaction in issue, from the normal situation where damages would be recoverable on the basis of the difference between the purchase price and the true value of the land.
However Mr Evans, Counsel for the defendant, conceded, as I understood it, that there was evidence sufficient to mount an arguable case that here special circumstances existed so as to permit the plaintiff to recover under the first and second limb of Hadley v Baxendale.
Further, the defendant submits that whether or not any redevelopment of the land in accordance with the Planning Permit proves ultimately to be profitable is entirely speculative, including because there is no timeframe ascribed to the calculation of the profits which are claimed by the plaintiff.
Centrally, the defendant also submits that there is insufficient evidence before the court for me to be satisfied that there is a real danger or real risk that the judgment against the defendant which may ultimately be obtained by the plaintiff will be wholly or partially unsatisfied because of a disposal or a dealing of the assets or a diminution of the assets hereafter by the defendant.
The defendant says that the plaintiff's case in this regard rises no higher than a general assertion made by Ryan in his affidavit of 9 December 2015, at [71] and [72], and that the evidence relied on by the plaintiff is not sufficient to satisfy the relevant requirements which the defendant submits need to be in the nature of solid evidence of a danger of dissipation or disposal of assets rather than a mere assertion to that effect.
The defendant also submits that this case has factual similarities to Architecture HQ Pty Ltd v Propertyline Pty Ltd,[2] where the principal basis for the alleged “real risk” was there that the defendant was a special purpose vehicle principal the assets of which had been turned into cash.
[2][2015] FCA 686.
The defendant also points to the affidavit material, in particular Xu's affidavit sworn 15 December 2015, and contends that there is no evidence of a present intention to distribute to unitholders and the defendant also submits that all that is said by Xu is that there will be no distribution, however if an appropriate investment offers itself sometime in the future, Xu and the defendant will look to investing the approximate $1.6m available to the defendant in such an investment.
On the issue of discretion, the defendant submits that bearing in mind:
(a) the high degree of caution to be exercised in relation to this type of injunction, and;
(b) the undertakings proffered by the defendant and by its Director Xu, and
(c) taking into account the lack of strength of the plaintiff's case for damages in excess of $250,000 and the plaintiff’s difficulties quantifying damages; and
(d) the capacity of the proposed freezing order to emasculate the commercial activity of the defendant while proceedings are on foot, and;
(e) finally also taking into account what the defendant says is the insufficiency of the plaintiff's undertakings as to damages,
there should be no freezing order made on this application.
The plaintiff/applicant's submissions recognise the principles of approach also submitted as appropriate by the defendant, including those elaborated by J Forrest J in Zhen v Mo & Ors.[3] The plaintiff submits that there is a legal basis for the plaintiff's claims including pursuant to the Heads of Agreement and the Contract of Sale, both as specified in its Statement of Claim at [18] and [19] and supported by Ryan's said affidavit and the various documents annexed as part of exhibit “RO-1”.
[3][2008] VSC 300.
In [30] of its written submission dated 14 December 2015, the plaintiff details the communications and relationship issues between Ryan and Xu, and thereby the plaintiff and the defendant, which it says gives rise to the special features of this case entitling the plaintiff to contend for damages beyond the normal measure for breaches of the Contract of Sale. These matters are set out at [38] to [43] of the plaintiff's written submissions in paragraphs which also spell out the alternative ways the plaintiff puts its claim; as follows:
34.Two alternative claims for damages are made:
(a)The primary claim is for the loss of the development profit that the plaintiff reasonably expected to make when it developed Barry Street in accordance with the planning permit that had been obtained and the plans that the plaintiff and defendant then knew (the Likely Development Profits Claim). At the time of the filing of the Statement of Claim, the plaintiff estimated those profits at $4,000,000, with a view to revising and further particularising that loss and damage following expert evidence. However, on 8 December 2015, when this application was required, Ryan, an experienced property developer who had considered the Barry Street Development for 22 to 23 months, prepared a detailed estimate of the likely profits from the planned development. The resulting estimation was $3,217,459, and that is all that is now sought for the purposes of the freezing order application.
(b)The alternative claim is for the difference between the value of the property and the price in the Contract of Sale (the Valuation Claim). In the Statement of Claim, this was estimated at $250,000, as the value was estimated at $4,000,000, based on the price paid by the subsequent purchaser and a valuation, and the price was calculated at $3,750,00035. However, that value was pleaded without having seen the valuation itself or the precise circumstances of the sale to the subsequent purchaser. Now having better knowledge, it appears that the appropriate value may be higher than the $4,000,000 previously alleged. This is because:
(i)the valuation by Charter Check Kramer on 22 September 2015 was undertaken on a Direct Sales Comparison to be used for First Mortgage Security Purposes, rather than a cash flow analysis on the basis of the particular development proposal that had been the subject of considerable work by Ryan over 22 months, and planning approval; and
(ii)the price in the Second Contract of Sale was not reached after an open process involving a fully informed market, and was likely limited by both the short settlement period required by the defendant and the failure to notify other potential buyers (including the plaintiff) of the offer or the fact that it was still on the market.
As to the availability of a quantum of damage beyond the normal measure argued for by the plaintiff, as I have mentioned, the defendant concedes such a claim is arguable on the present material filed by the defendant.
The plaintiff asserts a potential entitlement to $3,217,459 in relation to the Barry Street development, and the plaintiff supports that potential recovery by citing Hadley v Baxendale, the learned authors of the text, The Sale of Land, Wickrama in particular, and Cottrill v Steyning & Littlehampton Building Society.[4]
[4][1966] 1 WLR 753.
The plaintiff submits that the plan to develop Barry Street which had been the subject of some considerable discussion and planning between the plaintiff and the defendant, in particular Xu and Ryan, was to be undertaken in accordance with the Planning Permit obtained by Ryan's company in June 2015. The plaintiff contends that the planned Barry Street development was not merely one of a range of foreseeable options. The plaintiff submits that the Barry Street development was clearly the most likely and probable one, and a realistic option.
The plaintiff submits that as in Cottrill, the defendant's knowledge of the plaintiff's intention to develop Barry Street in accordance with specific plans and make a profit like those now sought in the likely development profits claim, is clearly identifiable. In this regard the plaintiff relies on the relationship between Ryan and his companies and the defendant, under the Project Management Agreement referenced in paragraph [43(a)] of the plaintiff's written submissions, under which some 22 to 23 months were spent by those parties considering and working towards the potential development of Barry Street.
Mr Mullen, Counsel for the plaintiff, also calls in aid of this special arrangement and the special relationship alleged in Xu’s evidence in [11], [12], [15], [17] and [18] of his affidavit of 14 October 2015. Further, he relies upon the various discussions between Ryan and Xu and/or Mr Vincent including those specified in [42(b)] of the plaintiff's written submissions of 14 December 2015 and the detail concerning their relationships and the dealings in relation to the proposed development of Barry Street at [42(c)- (g)] of those submissions.
As to the plaintiff’s case for recovery of damages beyond the normal contractual measure for a breach of a contract for the sale of land, as identified by the plaintiff in its submissions, I am satisfied that there is a relatively strong good arguable case on the legal basis identified by the plaintiff. I will come to the quantification of that claim shortly.
The plaintiff also submits in relation to the defendant’s financial position that there is both an uncertainty and a paucity of assets. Xu has however by affidavit of 15 December 2015 confirmed at [12] the limit of the defendant's assets. Xu confirms that the defendant does not presently have any business interests in its own right. He confirms that the only assets of the defendant of any value are the proceeds of sale of the land and that those proceeds are held as an asset of the Barry Street Development Trust.
It is also clear on the material filed that the defendant is not presently active although, as is mentioned in [14] of the same affidavit, Xu contemplates that the $1.6m in funds being held by the defendant may be deployed to invest in other businesses within Australia if an attractive opportunity presents itself. There is however no present or specific prospective deployment of the $1.6m on the present affidavit material.
The approximate sum of $1.6m which is conceded in argument as the approximate sum in the possession of the defendant also accords with the plaintiff’s expectations, as referred to in [45] of the plaintiff's written submissions. The plaintiff submits that there is a danger of diminution, dissipation or removal of the $1.6m of the defendant’s assets from jurisdiction, in some way or other.
I am satisfied that there is a reasonable possibility, and not just a fanciful one, that the defendant might dispose of relevant assets in effect by deploying them in a manner which one way or the other results in those assets being unavailable to meet a judgment in favour of the plaintiff, including perhaps by relationship related loans, or by way of some risky investment, either offshore or within Australia.
By its most recent sworn affidavit, the defendant through Xu at [14] makes it clear that although the defendant has no immediate investment in mind, the money held by it in the sum it appears of approximately $1.6m will probably be invested by the defendant, if at any time in the future an alternative investment attractive to it can be identified. This position is consistent with the defendant's notice to Madgwicks on 8 December 2015 that it intended to withdraw $300,000 of the proceeds of sale of Barry Street.
Further, although Mr Evans sought to paint the defendant's past conduct in acceptable tones, in my view the defendant's conduct in relation to:
(a) postdating of the Contract of Sale and the defendant’s disquieting similar conduct in respect of that document and the Heads of Agreement, including entering into the second Barry Street sale without reference back to the plaintiff when the first Contract of Sale had been entered into with the plaintiff, and;
(b) retaining the $500,000 deposit, and;
(c) the defendant initial failure to be forthcoming in respect of the $400,000 held by Savills rather than Madgwicks. That is the defendant did not initially disclose that Savills held $400,000 of relevant funds,
all lead me to have reservations, on present materials, about the commercial adroitness of the defendant.
I consider that such reservations justify my concluding that there is a sufficient risk that the defendant may cause the proceeds of the sale of the Barry Street land to be unavailable or inaccessible to satisfy a prospective judgment obtained by the plaintiff.
Further, in my view the defendant's conduct has in the past been opportunistic and commercially ruthless, particularly given Xu's long commercial relationship with Ryan and the plaintiff, in particular in relation to the subject property at Barry Street itself. There is also evidence that the defendant has been the subject of recent financial stress, including its failure to immediately repay the $500,000 deposit upon resale of the Barry Street property to another purchaser.
Such financial stress is probably, in my view, also reflected by the defendant's resale of the property rather than deciding to undertake its further development and, also reflected by the recent loan and settlement arrangements which the defendant has entered into.
For all of these reasons, I consider that there is an unacceptable risk and danger that unless an appropriate freezing order is made in this matter, and made now, the plaintiff's prospective judgment will, or at least may, be partially or wholly unsatisfied.
I return to the calculation of the plaintiff's asserted potential profit on its alternative damages claim. During the course of argument Mr Evans, counsel for the defendant, appropriately conceded that on this application I was in no better position than being able or interlocutory and necessarily superficial material, to do the best I can to evaluate the strength and the quantum of this component of the plaintiff's claim and upon such evaluation, fix an appropriate amount of security in the context of the plaintiff's estimate of $3.2m profit from the Barry Street development.
Doing the best I can in the circumstances, and taking into account both the acknowledged extent of the relevant current assets held by the defendant, namely, approximately $1.6 million, and also taking into account the bold estimates made by Ryan on the basis of the costings in the Court Book at pages 478 to 480, which include construction costs, consulting costs and an unexplained timeframe, I am not satisfied that the plaintiff's profit projections for the development in issue are reliable beyond being some evidence from an experienced developer of an optimistic commercial outcome for the development. What is assumed to be a problem free development.
Accordingly, I consider that it is appropriate on the one hand to attempt to address the risk that the ultimate judgment in favour of the plaintiff in this matter may be unsatisfied with a conservative level of acceptance of Ryan's profit projections for the planned development at Barry Street. I do so by discounting the assessment made by Ryan, noting for example, that his approximately $9m for construction costs are quite undetailed, and that the approximately $650,000 of consulting costs are similarly undetailed. Furthermore, there is no timeframe which has been identified for the completion of the project.
Taking these matters into account, I consider that it is appropriate to discount by 50 per cent Ryan's profit estimate to arrive at a sum of $1.6m as the amount which I should take into account as relevant in respect of the potentially successful alternative cause of action in damages pursued by the plaintiff in this proceeding. It is that amount of the defendant's assets I shall order to be frozen until the outcome of the trial of this matter, or further order, namely $1.6m.
Finally, although I have touched upon a number of matters relevant to the balance of convenience, I conclude by summarising my view that here the balance of convenience is to be weighed less heavily in the overall balance, given the relatively strong cause of action for recovery of a substantial sum in connection with the alternative damages claim pursued by the plaintiff.
That balance of convenience also favours the making of the freezing order that I have foreshadowed, including because on the material available, that freezing order is not likely to impact the defendant's ongoing business, at least at this point, in any specific or immediate way. That conclusion is supported by the fact that the defendant appears to have no current ongoing commercial activity.
Further, there is as the plaintiff submits on the material, no negative implication for any third party as a result of the proposed freezing order which is sought. In my view, in the context of the sum of the plaintiff’s claims, the financial state of the defendant, to which I have referred, as established by Xu's affidavit, there is ample justification, on the balance of convenience, for the order I propose to make.
I also take into account the further undertaking which has been offered by the plaintiff in respect of damages, namely, a personal undertaking in addition to the undertakings outlined in the draft Penal Notice which the plaintiff initially offered to secure the defendant's. That further undertaking is by way of a personal undertaking from Ryan to the extent of $200,000 to meet any damages that might arise on the part of the defendant.
In the circumstances that undertaking appears to me to be adequate. In particular, taking into account the sum of approximately $1.6m which would be affected by this order and the likely return on investment of any business undertaking which might be undertaken by the defendant over the probable period between now and the determination of the underlying proceedings.
I also bear in mind that I shall order that there be liberty to apply and therefore were the defendant to identify some specific proposed investment, there will be an opportunity for the parties to consider whether the orders made today should be modified.
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