D & H Investments Pty Ltd v Thomas Paul Wagner - [2008] SASC 233

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
D & H INVESTMENTS PTY LTD & ANOR v WAGNER & ANOR
[2008] SASC 233
Judgment of Judge Lunn a Master of the Supreme Court
22 August 2008
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - PRACTICE AND PROCEDURE
Application by 1st defendant to vary a Mareva order over part of his assets to raise legal expenses - history of breaches of the undertaking which preceded the order - held onus on 1st defendant to show he could not raise the necessary money without resort to the land covered by the Mareva order - held onus not discharged - application dismissed.

D & H INVESTMENTS PTY LTD & ANOR v WAGNER & ANOR
[2008] SASC 233
Reasons on 1^st defendant’s application to vary the Mareva Order and for an adjournment of the trial

In this action the plaintiffs sue the defendants for damages in excess of $1 million in relation to the first defendant’s construction of a boat for the plaintiffs. The action has a long history, having been originally commenced in the District Court in 1999. As a result of delays caused by the first defendant I directed on 14 January 2008 that a trial date be fixed even though the action had not been referred for trial. That trial date is now fixed for 27 October 2008 for four to five weeks. As yet the action has not been referred for trial.
By a Notice for Directions issued on 15 July 2008 the first defendant sought orders for the variation of a Mareva Order and that the trial of the action be adjourned. The variation sought was that he be permitted to borrow $200,000 for his legal expenses of the trial. It was not disputed that such an amount would be properly payable for such legal expenses. The second defendant has elected to take no part in the argument on this application which has been strenuously opposed by the plaintiffs.
History of the Mareva Order
Prior to 2000 the first defendant owned a number of blocks of land on Kangaroo Island which are on separate titles (“ the Kangaroo Island land”). On 29 February 2000 he gave a mortgage to secure a loan from his father-in-law of $200,000 over part of that land being CT5661/473. On the documents in evidence it is unclear what happened to this $200,000, but the first defendant claims it was put into his business as working capital. If that is so it is not apparent on the financial records of the business which have been put before me.
On 9 May 2000 the plaintiff applied in the District Court for a Mareva Order against the first defendant restraining him from dealing with the Kangaroo Island land pending the outcome of this action. On 5 June 2000 the first defendant by his then counsel gave an undertaking to Judge David that he would not deal with the Kangaroo Island land until judgment in the action. On the recording of that undertaking no orders were sought by the plaintiffs on their application for the Mareva Order. The undertaking did not extend to any assets of the first defendant other than the Kangaroo Island land.
In late 2004 and early 2005 the first defendant mortgaged all of the Kangaroo Island land, except the title which had been previously mortgaged to his father-in-law, to the National Bank to secure a loan of $150,000. No documentation was presented by the first defendant in evidence to account satisfactorily for what happened to that $150,000. He says that it was used at least in part to pay out the mortgage to his father-in-law, but that is inconsistent with some other documentary evidence which suggests that the loan to his father‑in-law was still outstanding in mid 2005.
A matrimonial property dispute between the first defendant and his ex‑wife was resolved by a consent order made in the Family Court on 25 July 2005. Under the terms of that order the first defendant was required to transfer to his two infant sons as tenants in common his interest in the land CT5661/473, being the Kangaroo Island land which had been mortgaged to his father-in-law. That mortgage was discharged and on 16 August 2005 the first defendant transferred the land in that title to his two infant sons who have held it ever since.
The mortgage to the National Bank and the transfer to his sons were breaches of the undertaking which the first defendant had given to the District Court on 5 June 2000. He says that he had overlooked that undertaking when entering into those transactions. They have significantly diminished the benefit which the plaintiffs would have obtained from the undertaking if they are successful in this action. The plaintiffs elected not to take contempt proceedings against the first defendant for the breaches of the undertaking upon the plaintiff consenting on 14 February 2007 to a Mareva Order being made in this Court over his interest, subject to the mortgage to the National Bank, in the Kangaroo Island land other than that transferred to his sons. This order did not extend to assets of the first defendant other than the Kangaroo Island land. No provision was made in this order for the first defendant to have resort to the Kangaroo Island land to pay his future legal expenses of this action, although, on what he now puts before this Court, it should have been obvious that he needed to do so.
At the time of his dealings with the plaintiffs about the building of the boat the first defendant was trading in his own right under the business name of Wagner Boatworks. In September 1999 a company, Wagner Boatworks Pty Ltd, was incorporated with the first defendant and his then wife as its directors. The Wagner Family Trust was established of which that company became the trustee and the business formerly conducted by the first defendant in his own right was put into that trust. In October 2002 another company, Boatworks Power & Sail Pty Ltd, was incorporated with the first defendant as its sole director and his elderly mother as its only shareholder. The Wagner Family Trust No 2 (“Trust No 2”) was established with that new company as its trustee and the business previously carried on by the Wagner Family Trust was put into that new trust. In August 2004 another company, Wagner Marine Pty Ltd (“Wagner Marine”), was incorporated with the first defendant as its sole director and his mother as its shareholder. The Wagner Family Trust No 3 (“Trust No 3”) was then established with Wagner Marine as its trustee and the first defendant as its principal beneficiary. The business previously conducted by the Trust No 2 was then carried on by the Trust No 3.
Until about November 2007 the first defendant was employed by the trustees of the various trusts which were conducting the business and paid some wages. However, he says in about November 2007 he ceased to be an employee and thereafter merely took drawings as a director of Wagner Marine. The financial accounts for the three companies and the three trusts which were supplied by the first defendant to the plaintiffs for the purposes of this application do not give a clear picture of how the assets and entitlements moved between the first defendant and the various companies and trusts.
The Law
The onus is upon the first defendant to show that he has no other assets from which he could pay his legal fees. The relevant law was summarised by Phillips J in Commissioner of Taxation v Manners (1985) 81 FLR 131 at 134 where he said:
‘I turn now to the principles to be applied in deciding this application. In A v C (No 2), reported at [1981] 1 QB 961, an application by two defendants for variation of a Mareva injunction, Robert Goff J held that, since the defendants had failed to adduce evidence to show they had no other assets, that is, assets not caught by the Mareva, out of which they could pay legal fees, the application would be dismissed. His Lordship expressly stated at 963 that “The defendants have not discharged the burden of proof which rests upon them.” Rogers J, an experienced judge of the Common Law Division of the Supreme Court of New South Wales, appears to take the same view in Australian Iron & Steel Pty Ltd v Buck [1982] 2 NSWLR 889:
“It has been submitted on behalf of the defendants that Lloyd J made no reference to such an onus of proof in deciding P C W (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158. This was an application by a defendant for variation of a Mareva order so as to allow payment of reasonable living expenses and legal costs. But it was unnecessary in the circumstances of that case, for His Lordship to make any such reference. In that case, in contradistinction to the present one, the defendant did make an affidavit about his assets. Not only that, his evidence went unchallenged and as His Lordship remarked at 162, ‘There was no application to cross-examine the first defendant on his affidavit, although he was known by the plaintiffs to have been sitting in court throughout the hearing.’”
(The passage quoted there from Australian Iron & Steel Pty Ltd v Buck does not appear in the report of that case at [1982] 2 NSWLR 889, but it summarises other statements on the topic in the judgment and the headnote). The leading case in this State is Mane Market Pty Ltd v Temple, Debelle J, 27 November 1998, Jud No [1998] SASC 6986, where it was held in similar circumstances to this case that it was appropriate to require the defendant to satisfy this Court that he had no other assets with which he could pay his legal costs of the action.
There was no issue here that the first defendant sufficiently controlled Wagner Marine and the Trust No 3 so that the assets and the resources of that company and that Trust could be bought into account in assessing what other means the first defendant had to fund his defence of this action: Atlas Maritime Co SA v Avalon Maritime Ltd (No 3) [1991] 4 All ER 783.
The evidence of the first defendant
The first defendant was cross examined on his affidavits and the financial statements of the companies and trusts concerned with his business which he had supplied to the plaintiffs’ solicitors. He was not an impressive witness. He avoided answering a number of questions by saying they were matters which he had left to his accountants and which he did not understand. He was unable to explain a number of apparent inconsistencies, anomalies and omissions which were pointed out to him in cross-examination. I adjourned his re-examination to a subsequent day for this counsel to obtain any further instructions he needed for re‑examination, but there was no further re-examination.
Discharging the onus of proof
This is a case similar to Mayne Market Pty Ltd v Temple (above) where the history of the matter requires that the first defendant should satisfy this Court that he has no other assets from which he can pay his legal costs other than by raising a substantial loan against the security of the remaining Kangaroo Island land. The purpose of a Mareva Order is to prevent a defendant from dissipating his assets before final judgment so that the plaintiff is not prejudiced in the recovery of its judgment if it is successful. If there had been a Mareva Order over the whole of the first defendant’s assets, the Court would exercise a discretion on an application for a variation of the order to meet legal expenses on how much should be properly allowed for such expenses and out of which assets they should be met. Where, as here, there is only a Mareva Order over part of the defendant’s assets it is implicit in the authorities cited above that, if possible, the legal costs should be met out of the defendant’s resources which are not subject to the Mareva Order. Hence the Court has the discretion to refuse the first defendant recourse to the assets subject to the Mareva Order unless he has shown that he has no other way of obtaining the necessary monies to pay his proper costs of defending the action. In exercising the Court’s discretion it is necessary to balance on the one hand the risk of the successful plaintiff being deprived of the benefit of assets against which its judgment can be satisfied against the defendant being able to diminish the effectiveness of the Mareva Order by using those assets for costs while dissipating other available assets which are not subject to the Mareva Order so that they will not be available to satisfy any ultimate judgment in the action. In determining this issue I bear in mind that it is the first defendant who has the best means of knowledge of his available resources, and not the plaintiffs.
On the evidence before me, and on the balance of probabilities, I am not satisfied that the first defendant has shown that he has no other assets from which he can pay his legal costs for the following reasons:
·The first defendant has given no evidence about the current financial position of the Trust No 3 or Wagner Marine, or even as at 30 June 2008. The documents he produced show that as at 30 June 2007 Wagner Marine had $120,528 in the bank and it had a turnover in that financial year of over $900,000. The balance sheet as at 30 June 2007 for the Trust No 3 showed under the heading of current liabilities trade creditors of $80,579 and a taxation office liability of a nett $46,868, but there was no evidence of their terms of payment. How much of that $120,528 in the bank at 30 June 2007 could have been available for payment of future legal costs is unclear. That balance sheet also showed work in progress at nil, but the first defendant admitted having ongoing jobs and could not explain why there was not some figure shown for work in progress. He was unable to say how much money had been in the bank at anytime since 1 July 2007, except that it fluctuated. There is at least a reasonable possibility on the evidence that some significant amount is currently available, or has been available since the making of the injunction on 14 February 2007, to be applied towards future legal costs to prepare for, and run, the trial.
·The first defendant has declared his income for income tax purposes for the 2005, 2006 and 2007 financial years respectively at $54,376, $57,754 and $28,800. The turnover of the Trust No 2 in the 2005 financial year was $97,065, but its trustee went under administration on 22 November 2004 and into liquidation on 17 December 2004. The turnover of Trust No 3 in the 2006 and 2007 financial years was $373,504 and $967,062. The first defendant was unable to explain satisfactorily why in those three financial years his personal income was diminishing whereas the turnover of the business was rapidly escalating. He was unable to give any details of his personal income since 1 July 2007. There is an inference that he has been minimising his income so as not to have resources with which to pay legal costs.
·The first defendant said in his affidavit of 15 July 2008 at paragraph 25 that he had been advised by the National Bank that he could borrow monies on the security of the remaining Kangaroo Island land to fund his further legal expenses. No documentation was produced to support this assertion and he did not say how much of the $200,000 which he says that he needs the Bank was prepared to lend to him. If he was to be able to borrow $200,000, it is uncertain on the figures he has put forward how he would be able to service that loan. If he cannot borrow that amount because he cannot afford the servicing costs, it is unclear where he would obtain the balance of the monies to fund the defence of the action. He did not suggest that there was any utility in the Court allowing him significantly less than what he said is needed to fund the whole of the defence to the action.
·The Kangaroo Island land is still registered in the first defendant’s name and has current Government valuations of a total of about $300,000 but subject to about $157,000 still owing to the National Bank. In paragraph 21 of his affidavit of 15 July 2008 the first defendant said that he believed that land had a much greater value, although his opinion is not admissible evidence of its value. He said he was prepared to obtain a formal appraisal of the properties. On 23 July the plaintiffs’ solicitors wrote to his solicitors requesting that he obtain a formal appraisal or valuation of that land. He has not put forward any such appraisal or valuation and has offered no explanation as to why he has not done so. That means that the only admissible evidence that I have of its value is the Government valuations which are that he has at present a net equity of about $133,000 in that land. On that basis it is unlikely that he could raise the money he says that is necessary for his defence either from mortgaging or selling that land.
·The first defendant’s evidence and documents do not give a full and frank disclosure about his financial history and his current financial position. It is not necessary for me to go as far as considering any finding that the first defendant has other significant assets which he has not disclosed. I need only find, as I do, that he has not discharged the onus upon him to show that he cannot raise the necessary monies for his defence from his resources other than the Kangaroo Island land.
One possible result of this application was that part of the $200,000 could have been found to be available from resources other than the Kangaroo Island land and the balance could have been made available from that land. However, there is no sufficient evidence on which to reach any such conclusion.
Accordingly, the application in paragraph 2 of the application of 15 July 2008 is dismissed.
Adjournment of the trial
The first defendant has been placed in a difficult position because the counsel whom he had retained some years ago for the trial, Mr Di Fazio, unfortunately died in June 2008. This has meant that he now needs to retain new counsel for the trial. It is not necessary for me to deal with the arguments about whether he could, or should, have been in a position to have briefed new counsel who would be ready for a trial on 27 October. In the course of argument his counsel, who was briefed only for this application, conceded that it was inevitable that if any variation of the Mareva Order was refused the first defendant would have to appear for himself at the trial. It is likely that would also have been the position if the late Mr Di Fazio was still his counsel. The case for the adjournment has not been put forward on the basis of the first defendant appearing in person at the trial. There is nothing in the material before me to suggest that he personally could not do what he needs to do to defend the action for a trial commencing on 27 October. However, he is at liberty to make a further application for an adjournment of the trial if he contends that he cannot be ready to defend himself properly at such a trial.
The application for the adjournment of the trial is refused.
I have today made the following orders:
1.Paragraphs 1, 2 and 3 of the Notice of Specific Directions of 15 July 2008 are refused.
2.      Costs of the application to be paid by the first defendant to all other parties.
3.     Fit for counsel.
4.     Further directions hearing to be held on 8 September 2008 at 9.30am.