Cardile & Ors v LED Builders Pty Limited

[1998] HCATrans 131

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S107 of 1997

B e t w e e n -

PAUL CARDILE, LUCY CARDILE and ULTRA MODERN DEVELOPMENTS PTY LIMITED

Applicants

and

L.E.D. BUILDERS PTY LIMITED

Respondent

Application for special leave to appeal

BRENNAN CJ
GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 1 MAY 1998, AT 11.27 AM

Copyright in the High Court of Australia

MR T.M. JUCOVIC, QC:   May it please your Honours, I appear with my learned friends, MR D.J. HAMMERSCHLAG and MR R. ALKADAMANI, for the applicants.  (instructed by Castrission & Co)

MR T.E.F. HUGHES, QC:  May it please your Honours, I appear with my learned friends, MR I.M. JACKMAN and MR A.J. GRANT, for the respondents.  (instructed by Speed and Stracey.

MR JUCOVIC:   Your Honours, the application raises a question about the extent to which there must be an interest in property where a Mareva injunction is granted against a third party to proceedings.  These were copyright proceedings in which an election was ultimately made for an account of profits against the defendant.  The applicants in the case were associated with the defendants but there was no allegation that they held any property of the defendants.

GUMMOW J:   No.  But Justice Kiefel’s proposition would allow for that, would it not?

MR JUCOVIC:   That is so, your Honour. 

GUMMOW J:   Do you dispute her proposition?

MR JUCOVIC:   Yes, your Honour.  We say it is wrong. 

GUMMOW J:   But even if it were wrong, would there be some lesser proposition which would still encompass you?

MR JUCOVIC:   No, your Honour.  Where there is a debate that the third party holds the property of the defendant, the court can, within the copyright proceedings, in aid of execution of a judgment against the defendant in the copyright proceedings, determine the issue of whether there is any property to which the successful plaintiff in the copyright proceedings would have access to in execution of its judgment.

GUMMOW J:   What about damages, the construction of assets?

MR JUCOVIC:   I am sorry, your Honour?

GUMMOW J:   That has nothing to do with it?

MR JUCOVIC:   No, your Honour.  The proposed causes of action against the applicants in this case would be causes of action in the hands of a liquidator of the defendant in the copyright proceedings.

GUMMOW J:   Yes, but they were Mareva injunctions against banks, for example, which are not malefactors in any way.

MR JUCOVIC:   No.  And in those cases, your Honour, it is usually ‑ ‑ ‑

GUMMOW J:   But who are third parties.

MR JUCOVIC:   Certainly, your Honour, but who had - your Honour, this was not a quia timet injunction.  The acts complained of that gave rise to a Mareva injunction against the defendant had occurred; the acts had occurred before the application.  In cases where banks are involved, there is usually no dispute that the bank holds property of the defendant in the proceedings to which a Mareva injunction is granted.

Your Honour, perhaps the point can be illustrated in this way.  The Full Federal Court did not address in terms why the applicants to these proceedings should have been joined as respondents in the Federal Court proceedings.  If there was an allegation or a triable issue that the applicants in this case held assets of the defendant in the Federal Court proceedings, there would have been a basis upon which they could have been joined to determine that issue.  They have, in fact, never formally been joined, although the actual notice of motion sought their joinder. 

Your Honour, our point is that the Full Federal Court said that it was not a necessary element of a Mareva injunction that the third party have some proprietary interest in the assets sought to be enjoined.  Where the defendant to the Mareva proceedings has no interest in the assets which are enjoined in the hands of a third party, there is no issue that can be tried at the end of the day as to whether execution in relation to the judgment will go against the assets of the third party.

GUMMOW J:   It is put against you that section 23 of the Federal Court Act is very broad and ample enough to deal with this as a statutory matter.

MR JUCOVIC:   Yes.  May I address that in this way, your Honours.  Section 23 ‑ ‑ ‑

GUMMOW J:   And implicitly in that that Justice Deane’s judgment, perhaps, in Jackson would give it an interpretation which is ample enough to be used against you here.

MR JUCOVIC:   Section 23 depends upon the proposition that the court has power in relation to matters in which it has jurisdiction.  The court is given jurisdiction by section 19, your Honours.  It has such original jurisdiction as is vested in it by the laws made by Parliament.

GUMMOW J:   Here it is the Copyright Act.

MR JUCOVIC:   Yes.  Your Honour, the Copyright Act gave no right of action against the applicants in this case.  The right of action against the applicants in this case was a prospective one given to a liquidator.  The applicants in this case could not be joined in proceedings for relief by the respondent in this case.  No jurisdiction of the Federal Court has been invoked, your Honours.  When your Honours go to - if I can take your Honours to what Justice Deane said in Jackson v Sterling Industries, there are two passages which I would like to draw your Honours’ attention to.  Firstly, your Honours, at page 622.

GUMMOW J:   Suppose in this case there had been an allegation that your clients were co-conspirators with the infringers to bring about - facilitate the act of infringement, these orders would then have properly been made against you.

MR JUCOVIC:   Properly made, but there is no such allegation.  Your Honours, my clients were joined after a declaration was made that there had been a breach of copyright.  There was no allegation of co‑conspiracy.  They are still not formal parties to these proceedings.  What Justice Deane says at 622 about section 23 is found in the first paragraph of his judgment, your Honours:

Wide though this power is, it is subject to both jurisdictional and other limits.  It exists only “in relation to matters” in respect of which jurisdiction has been conferred upon the Federal Court.  Even in relation to such matters, the power is restricted to the making of the “kinds” of order, whether final or interlocutory, which are capable of properly being seen as “appropriate” to be made by the Federal Court in the exercise of its jurisdiction.

Where you have a question about whether property in the hands of the third party can be the subject matter of the courts execution in the case, we do not dispute, your Honour.

GUMMOW J:   The case is not finished yet because there has been no assessment on account of profits.

MR JUCOVIC:   It has been heard and reserved, your Honour. 

BRENNAN CJ:   Is this your proposition, that when the account is taken and the judgment is finally entered then there is still nothing to be done so far as these parties are concerned?

MR JUCOVIC:   That is so, your Honour.  There is nothing to be resolved.  They are left in limbo until, if at all, some action is taken by a liquidator of Eagle Homes, the copyright infringer, against my clients.  Your Honours, Jackson v Sterling Industries has to be understood in its context.

BRENNAN CJ:   Why then is it not appropriate to extend the remedy of the Mareva injunction to parties against whom a liquidator or trustee might have a right of recourse, maintaining the injunction until such time as it appears unnecessary to have a liquidator or trustee appointed?

MR JUCOVIC:   Because the jurisdiction of the court is not properly invoked.  There is no issue between the respondent and the applicants that can be tried and resolved.  It may never have to be resolved.  The judgment may be paid.  We could never ‑ ‑ ‑

BRENNAN CJ:   Why could not the Mareva injunction endure until that situation is clear?

MR JUCOVIC:   Because it is aid of someone else’s cause of action, your Honour.  It is not appropriate to the copyright holder’s cause of action in this case.

BRENNAN CJ:   The assumption is, is it not, that the respondent to the Mareva application is somebody who has acquired property with notice of the plaintiff’s cause of action and in circumstances which would require the property that is frozen to be available to answer that cause of action in the hands of the defendant or the defendant’s successor in title?

MR JUCOVIC:   Because the Full Federal Court said that it is not necessary to look to see whether the asset is the asset of the copyright infringer, your Honour, there was no investigation of that.  The injunction is against the whole of the assets but there is no allegation here that any particular asset is the asset of the copyright infringer.  The particular assets we are concerned with, your Honours, are dividends properly paid by Eagle Homes to the personal applicants in this case.  The dividends were declared, credited to a loan account, and over time the loan account was paid.  There was never any attempt to identify any particular asset in the hands of the applicants ‑ ‑ ‑

GUMMOW J:   Two questions arise, I suppose.  You spoke about a liquidator going in of the defendant.

MR JUCOVIC:   Yes, your Honour.

GUMMOW J:   The first question is, perhaps, would these transactions be liable to attack by a liquidator?  Secondly, if the answer to that is yes, would it necessarily matter, because would not the Mareva injunction being used here somehow to anticipate the insolvency laws, is that permissible or impermissible?  Several members of the Court in Jackson suggested it would not be permissible to supplement the insolvency laws.

MR JUCOVIC:   That is so, your Honour.  The basic proposition we put as to why it is impermissible is that no jurisdiction under section 19 of the Federal Court Act is invoked to which a Mareva injunction under section 23 is appropriate, your Honour.  I should also refer your Honours to section 22 which should not be neglected.  Section 22 requires the court to resolve all matters in dispute - the court has a duty to resolve between the parties to litigation all matters in dispute between those parties.  There is no dispute between the respondent in these proceedings and the applicants that can be resolved in relation to any particular causes of action which vest in the liquidator upon the liquidation of Eagle Homes.  No jurisdiction under section 19 is properly invoked to which sections 22 and 23 can attach to resolve this issue, your Honours.

Your Honours, there have been a series of cases which are referred to in the judgments where injunctions have gone against third parties.  Either there is a cause of action by the applicant for the Mareva injunction against the third party or there is an issue to be tried in the proceedings as to whether property in the hands of third parties is in truth an asset of the defendant in the proceedings.  When you have that situation, your Honours, you have, at the end of the day in some appropriate manner, even before the end of the day, an issue to be tried in the court as to whether or not the court’s processes of execution against the defendant in the proceedings can go to the assets in the hands of the third party.  At the end of the day in this case there is no issue to be tried between the applicants and the respondent to this case as to whether or not any causes of action are in the hands of Eagle Homes against the applicants in this case.

Justice Kiefel, who gave judgment three days before Justice Emmett in this case, took a different view from Justice  Emmett.

GUMMOW J:   Which is the particular passage to which you - principle in Justice Kiefel’s ‑ ‑ ‑

MR JUCOVIC:   Your Honours, it is actually more easily identified in an extract in the judgment of Justices Beaumont and Kiefel at page 48 of the application book

BRENNAN CJ:   I think we will call on Mr Hughes at this stage, Mr Jucovic.

MR HUGHES:   Your Honours, the factual starting point for any consideration of this application is that as found by the primary judge:  one, in August 1996 LED, the respondent, established a good cause of action for infringement of copyright against Eagle Homes.  As has been stated, LED elected to take an account of profits.  The second finding, in substance, is that the present applicants have participated in the depletion of the assets of Eagle Homes by instigating payment or transfer of its money and assets to themselves in order to render the company judgment proof.  Third, as a result of what I venture to describe as the machinations of the present applicants, LED will not recover in full, in the absence of Mareva relief, the amount of any judgment it will obtain.  At the date of the hearing of the Mareva proceedings, LED, according to the primary judge, had a prima facie entitlement to $200,000 on the taking of any account.  Fourth, any cause of action prospectively available to a liquidator of Eagle Homes, for example, based on 37A of the Conveyancing Act New South Wales, but that is not the only prospective cause of action, any such cause of action against the present applicants would be rendered ‑ ‑ ‑

GUMMOW J:   That is the Statute of Elizabeth.

MR HUGHES:   The Statute of Elizabeth.  But, of course, there are other potentialities against the directors who instigated the dissipation of these assets for breach of their fiduciary duty to Eagle Homes.  Another prospect is a proceeding based upon the preference provisions of the Corporations Law which is set out somewhere in the application book.  So what the primary judge found, amongst other findings, is that the judgment would be defeated if these assets, which are the dividend and the business, formerly that of Eagle Homes, now that of Ultra Modern, are not available.  An inference is clearly open, and each of the judgment in the Full Court adopt this, as to the existence of a risk that the applicants, unless restrained, may engage in further movement of the relevant assets to frustrate the effectiveness of any judgment.

What has happened, your Honours, in this case is that the controllers of Eagle Homes, the Cardiles, have retained effective dominion over the relevant assets, that is the moneys paid as dividends and the business of Eagle Homes, while changing the legal ownership.  The substantial commercial effect of this stratagem is the same as if the assets had been transferred to a trustee for Eagle Homes in which latter event, your Honours, Mareva injunction would clearly have been appropriate, even on a narrow view of the authorities.  On that view, Eagle Homes would have had an equitable interest in the assets transferred as cestui que trust. 

Now, we go on to say this:  the very broad power - and we submit it is such - conferred upon the Federal Court by section 23 of its constitutive Act, is limited only to the extent that its exercise, first, must have a relationship to a matter within the court’s jurisdiction and, second, must conform to the well‑known general principles which govern the exercise of discretionary judicial powers.  Each of those conditions, we venture to submit, is satisfied in the present case.  The first condition, that is the necessary relationship, is satisfied because the orders are designed to underpin the enforceability of the judgment which the Federal Court, in due course, will deliver.

BRENNAN CJ:   Can I just ask you to pause there for a moment, Mr Hughes.  Let it be assumed that the account is taken, judgment is entered for the balance found to be due.  What remedy, if any, then is available to your client as against the parties who are the applicants here?

MR HUGHES:   The remedy that is available is that my client would move to wind up the company, Eagle Homes, and would then sustain the liquidator to commence proceedings to recover back these fraudulent payments; fraudulent if one adopts the language of the Statute of Elizabeth.

BRENNAN CJ:   So the question really is, is a Mareva injunction available in aid of intended execution when the party, defendant, to the proceedings is not then in liquidation?

MR HUGHES:   Yes, that is the question.

BRENNAN CJ:   Is that not an important question?

MR HUGHES:   It is important, but there are discretionary reasons why this is not a suitable vehicle, your Honours, for testing it. 

BRENNAN CJ:   It seems to be, on what you have outlined, a very clear case of a dissipation of assets by a defendant in order to avoid the consequences of the judgment.  Does it not make it, therefore, an ideal case for raising the question?

MR HUGHES:   Except this:  I can put it, I hope, not too picturesquely, if I say that these applicants are coming to the Court with somewhat soiled hands.  There can be no doubt, on the authorities, that Mareva relief is not available against an innocent third party, except the sort of case that your Honour Justice Gummow postulated, the bank that owes a debt to the defendant, the bank then being a third party. 

CALLINAN J:   You rely on the fiduciary relationship too, do you not?

MR HUGHES:   Indeed we do, because that would be a very available cause of action at the suit of the liquidator when, as is inevitable, your Honours, a liquidator will have to be appointed because it seems that, as things stand, the assets of Eagle Homes are just insufficient to pay even the moderate amount to which, as the primary judge found, my client is prima facie entitled. 

BRENNAN CJ:   Are you entitled now to seek the appointment of a provisional liquidator?

MR HUGHES:   It could well be envisaged, I suppose, that in truth my client has stayed its hands until the judgment is delivered, but that is certainly a course well worth considering.  What we would wish to say is that Mareva relief, in principle, this being a developing field of the law, should be available to prevent a third party conspiring with a defendant to undermine the effectiveness of the Court’s jurisdiction to the detriment of a plaintiff, in this case LED.  A guiding principle in the Mareva field of discourse - and your Honours had reference to the authorities, including a judgment of Justice Kiefel - is that the remedial jurisdiction of the Federal Court under section 23 should be allowed to develop so as to meet new situations as they emerge in the course of commercial experience.  The judgment sought to be appealed from conforms to that principle because it was meeting a new situation.  It would be anomalous, we venture to submit, if by careful and tricky contrivance, which is what has happened in this case, assets could be placed beyond the reach for judgment while the controllers of the prospective judgment debtor, Eagle Homes, still have their foot on them.

The controllers of Eagle Homes have simply arranged matters so as to divest the assets from that company and vest them in an alter ego.  There would be an anomaly if a remedy is not available in such a case and the authorities, including statements in Jackson, support that broad approach to the exercise of an incidental or ancillary jurisdiction under section 23 of the Federal Court Act.  Stripped of its cladding, your Honours, the applicants’ case is that if a third party against whom Mareva relief is sought holds the relevant assets on trust for the defendant, there can be an entitlement, other conditions being satisfied, to Mareva relief.  But that there is no such entitlement where, in order to defeat such relief, the defendant has wholly divested itself of assets to a third party who is its alter ego.  To make such a distinction would be unprincipled.  The stratagem devised by these parties, the applicants, could be regarded as too clever by half and it is an appeal to form over substance and such an appeal, in a case such as the present, is, we venture to suggest, out of date and out of touch with current notions of justice.

I do not wish to go through the authorities, it would be tedious and unnecessary to do so because your Honours had a conspectus of them in the judgments under review.  But such an approach would be, in our submission, incongruent with modern notions of administering justice.  So there is a strong discretionary ground, we venture to suggest, why this application should be refused because it is made by people who do not deserve the time of the Court.  If your Honours please.

BRENNAN CJ:   Thank you, Mr Hughes. 

GUMMOW J:   What is the current interlocutory regime, Mr Hughes, the orders presently in force?

MR JUCOVIC:   The orders presently in force are at page 51.  They were continued until further on 26 August.  Your Honour will see that at page 54.

GUMMOW J:   They are unaffected by anything in the Full Court?

MR HUGHES:   No, the Full Court having given its judgment allowing the appeal, remitted the matter of formulating the orders to the primary judge, Justice Emmett.  His Honour did so and the orders are set out at the pages of the application book to which my learned friend ‑ ‑ ‑

GUMMOW J:   Page 51?

MR HUGHES:   Yes.

GUMMOW J:   So that is presently in force?

MR HUGHES:   Yes, your Honour.

GUMMOW J:   It seemed to expire on 26 August.  But then that was extended, was it?

MR HUGHES:   That was extended.

GUMMOW J:   At page 54, until further order.

MR HUGHES:   Yes.

BRENNAN CJ:   Special leave will be granted in this case.

AT 12 NOON THE MATTER WAS CONCLUDED