Firmtech Aluminium Pty Ltd v Xie (No 2)

[2022] NSWSC 1142

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Firmtech Aluminium Pty Ltd v Xie (No 2) [2022] NSWSC 1142

Hearing dates:

15, 17 August 2022

Decision date:

29 August 2022

Jurisdiction:

Equity - Duty List

Before:

Robb J

Decision:

See [104]-[116] below.

Catchwords:

CIVIL PROCEDURE — interim preservation — freezing orders — contested hearing to determine continuation of freezing orders — parties make open offers as to relief during interlocutory hearing — nature of relief sought shifts — no issue that plaintiffs have good arguable case — whether risk that defendants will dissipate assets to frustrate final judgment — no such risk — Court makes interlocutory orders preserving businesses operated by certain corporate defendants and orders for accounting

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 56

Corporations Act 2001 (Cth), ss 236, 237, 241

Uniform Civil Procedure Rules 2005 (NSW), rr 25.11, 25.12

Cases Cited:

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63

Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; [2006] HCA 46

Bax Global (Australia) Pty Ltd v Evans (1999) 47 NSWLR 538; [1999] NSWSC 815

Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18

Firmtech Aluminium Pty Ltd v Xie [2022] NSWSC 1031

Graincorp Operations Limited v Duncan Ross Munro [2015] NSWSC 227

H Biotechnology Pty Ltd v Shao; H Biotechnology Pty Ltd v Chen [2020] NSWSC 585

Ip v Chiang [2019] NSWSC 1549

Jackson v Sterling Industries Ltd (1987) 162 CLR 612

Jingalong Pty Ltd v Todd (No 2) [2014] NSWCA 347

Mercedes Benz AG v Leiduck [1996] AC 284

MWP Transport Pty Limited v Michael Thomas Kent [2018] NSWSC 1119

National Australia Bank Limited v Human Group Pty Ltd (No 2) [2020] NSWSC 1900

Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG “The Niedersachsen” [1983] 1 WLR 1412; [1984] 1 All ER 398

Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319

PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1; [2015] HCA 36

Samimi v Seyedabadi; Seyedabadi v Samimi [2013] NSWCA 279

Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156

YAJ1 v Opera Australia [2021] NSWSC 771

Texts Cited:

Practice Note SC Gen 14

Category:

Procedural rulings

Parties:

Firmtech Aluminium Pty Ltd (First Plaintiff)
Zhaohui Xu (Second Plaintiff)
Xiaoyan Xie (First Defendant)
Jiamin Zhang (Second Defendant)
Firmtech Aluminum Pty Ltd (Third Defendant)
Logikal Façade Solutions Pty Ltd (Fourth Defendant)
JKZ (Australia) Pty Ltd (Fifth Defendant)
Firmtech Group Pty Ltd (Sixth Defendant)
LGK Holdings Pty Ltd (Seventh Defendant)
Western Spring Projects Pty Ltd (Eighth Defendant)
Z & X Investment Holding Pty Ltd (Nineth Defendant)
Haj (Australia) Pty Ltd (Tenth Defendant)
JHN Projects Pty Ltd (Eleventh Defendant)

Representation:

Counsel:
A Ogborne & P Lin (Plaintiffs)
D Stack (Defendants)

Solicitors:
Pope & Spinks (Plaintiffs)
Piper Alderman (Defendants)

File Number(s):

2022/00221710

JUDGMENT

1. The plaintiffs, Firmtech Aluminium Pty Ltd (Firmtech) and Mr Zhaohui Xu, commenced these proceedings by leave of Meek J, sitting as Duty Judge, on 28 July 2022: see Firmtech Aluminium Pty Ltd v Xie [2022] NSWSC 1031.

2. The individual defendants are Ms Xiaoyan Xie and Mr Jiamin Zhang, who are a married couple and the first and second defendants.

3. The principal company defendants – principal in the sense that the evidence shows that they have taken an active part in the events that have given rise to these proceedings – are the third defendant, Firmtech Aluminum Pty Ltd, and the fourth defendant, Logikal Façade Solutions Pty Ltd. It will be noticed that the name of the third defendant is spelt the same way as the name of Firmtech except that the second "i" in "Aluminium" is missing. I will call the third defendant "Aluminum" to distinguish it from Firmtech and call the fourth defendant “Logikal”.

4. The fifth to eleventh defendants are companies controlled by Ms Xie as their sole director. The plaintiffs do not appear to have identified any specific evidence concerning their involvement in the events the subject of these proceedings, although the plaintiffs sought the continuation of freezing orders and other interlocutory relief against those defendants. I note that Meek J, at [57] of his reasons, referred to the eighth defendant as having undertaken a particular project, but the involvement of the additional company defendants has not yet been explained. There is no need for the purposes of these reasons to refer to these additional defendants by name or to distinguish between them.

5. In essence, these proceedings arise out of arrangements made between the individual parties in 2018 to establish a business of providing aluminium-framed glazing products to the building industry. For that purpose, they arranged for Firmtech to be incorporated on 18 May 2018. It was agreed that the shares in Firmtech would be issued equally to Mr Xu and Mr Zhang. Both men became directors of Firmtech. That arrangement has continued to the present day.

6. The plaintiffs complain that Mr Xu was increasingly excluded from control and participation in the business activities of Firmtech from no later than about January 2021. They say that Ms Xie and Mr Zhang have from no later than about late 2019 diverted the business of Firmtech to Aluminum and Logikal, and that in doing so they acted in secret from Mr Xu.

Relief sought in summons

7. Apart from the usual orders for short service, the plaintiffs' summons sought relief that may be summarised as follows:

• Freezing orders against all defendants in the terms contained in the precedent order in Practice Note SC Gen 14 (Freezing Orders) to preserve the defendants' assets to meet a judgment against them in the amount of $10 million.

• By prayer 10, an order that all the defendants inform the plaintiffs of their assets in Australia, giving their value, location and details (including any mortgages, charges or other encumbrances to which they are subject) and the extent of their interests in the assets and to serve within 7 working days an affidavit swearing as to the truth of the information.

• The draft freezing order contained the usual exceptions in relation to the defendants' ordinary living expenses, reasonable legal expenses, and dealing with or disposing of any of their assets in the ordinary and proper course of business.

• Interim relief was sought pursuant to ss 236, 237 and 241 of the Corporations Act 2001 (Cth) that leave be granted to Mr Xu to bring proceedings on behalf of Firmtech to seek the ex parte relief and then the inter partes relief claimed in the summons.

• Mr Xu sought the following final relief:

1. A declaration that the affairs of the first plaintiff were, at the institution of these proceedings, being conducted in a manner that was oppressive to the second plaintiff for the purposes of s.232 of the Corporations Act 2001 (Cth).

2. An order pursuant to s.233 of the Corporations Act 2001 (Cth) that the second plaintiff purchase all of the shares held by the second defendant in the first plaintiff at such purchase price and on such terms as determined by the Court.

3. Alternatively, an order that the defendants account in equity and/or under ss.1317H and/or 1317HA of the Corporations Act 2001 (Cth for the profits made as a result of the breaches by the second defendant of his director's duties and/or fiduciary duties owed to the first plaintiff and as a result of the knowing involvement of the other defendants in those breaches.

4.    Directions as to the taking of such accounts.

5.    An order that the defendants pay to the first plaintiff the amount found to be due to the first plaintiff on the taking of such accounts.

6.    Further or alternatively, an order that the defendants pay equitable compensation to the first plaintiff.

7. Further or alternatively, an order that the defendants compensate the first plaintiff pursuant to ss.1317H and/or 1317HA of the Corporations Act 2001 (Cth).

8. Such further or other orders that the Court considers appropriate in relation to the first plaintiff pursuant to s.233 of the Corporations Act 2001 (Cth).

9. Interest pursuant to ss 100 and 101 of the Civil Procedure Act 2005 (NSW).

10.    Costs.

• Firmtech sought the following final relief:

1. A declaration that the second defendant has breached the duties he owed as a director to the first plaintiff as a fiduciary in equity and/or pursuant to ss. 180, 181 and/or 182 of the Corporations Act 2001 (Cth).

12.    A declaration that the first and third to eleventh defendants were knowingly involved in the breaches of fiduciary duties and/or statutory director's duties owed by the second defendant to the first plaintiff.

13. A declaration of contravention pursuant to ss 1317B of the Corporations Act 2001 (Cth) that the second defendant has contravened ss 180, 181 and/or 182 of the Corporations Act 2001 (Cth).

14. A declaration that each of the first and third to eleventh defendants was involved in the contraventions by the second defendant of ss. 180, 181 and/or 182 of the Corporations Act 2001 (Cth) within the meaning of s.79 of the Corporations Act 2001 (Cth).

15. An order that the defendants account in equity and/or under ss.1317H and/or 1317HA of the Corporations Act 2001 (Cth) for the profits made as a result of the breaches by the second defendant of his director's duties and/or fiduciary duties owed to the first plaintiff and as result of the knowing involvement of the other defendants in those breaches.

16.    Directions as to the taking of such accounts.

17.    An order that the defendants pay to the first plaintiff the amount found to be due to the first plaintiff on the taking of such accounts.

18.    Further or alternatively, an order that the defendants pay equitable compensation to the first plaintiff.

19. Further or alternatively, an order that the defendants compensate the first plaintiff pursuant to ss. 1317H and/or 1317HA of the Corporations Act 2001 (Cth).

20.    Further or alternatively, a declaration that the first defendant holds the land identified in folio 60/849002 on constructive trust for the first plaintiff.

21.   Further or alternatively, a declaration that the third defendant holds the assets of its business carried on as at the filing of this summons at [Revesby address], on constructive trust for the first plaintiff.

22.    Further or alternatively, a declaration that the fourth defendant holds the assets of its business carried on as at the filing of this summons at [Revesby address] on constructive trust for the first plaintiff.

23. Interest pursuant to ss 100 and 101 of the Civil Procedure Act 2005 (NSW).

24.    Costs.

25.    Such further or other orders as the Court considers just.

8. It will be convenient at this point to note in relation to prayer 20 that the only evidence provided by the plaintiffs in relation to Ms Xie's ownership of the property is a title search: see Exhibit ZX1, page 808. Mr Xu did not refer to this issue in his principal affidavit affirmed on 26 July 2022, and indeed he skipped any reference to page 808 in the body of his affidavit.

9. Mr Xu sought leave to prosecute derivative proceedings on behalf of Firmtech, both for interlocutory and final relief, as Firmtech is equally controlled by Mr Xu and Mr Zhang as its directors, and the directors have not resolved that Firmtech should commence and prosecute these proceedings.

10. The Court was advised by counsel for Mr Xu that on the initial ex parte application, Meek J accepted that the evidence justified Mr Xu seeking the ex parte relief claimed on behalf of both plaintiffs.

11. At the hearing that took place before me, the proceedings were conducted on the basis that Mr Xu was the sole active plaintiff, as he submitted that his personal entitlement to seek the relief in prayers 1 to 10 of the final relief claimed in the summons was sufficient to support the Court making all the interlocutory orders sought by Mr Xu, and that those orders would protect Firmtech even if not specifically made on its application.

Interlocutory proceedings

12. After an ex parte hearing on 28 July 2022, Meek J made freezing orders substantially in the form sought by the plaintiffs. His Honour set out his reasons for judgment in Firmtech Aluminium Pty Ltd v Xie cited above.

13. Meek J made the freezing orders on a short-term basis returnable in the Duty List on 1 August 2022. On that date no appearance was noted for Firmtech. Mr Xu and the defendants were represented by counsel. By consent and without admissions, the freezing orders were extended until 15 August 2022.

14. The defendants were ordered to serve affidavits in response to the plaintiffs' evidence by 8 August 2022. The plaintiffs' evidence consisted of a 69-page affidavit affirmed by Mr Xu on 26 July 2022 and an exhibit of 881 pages. That reflected the factual complexity of the plaintiffs' case. Ms Xie and Mr Zhang affirmed affidavits on 8 August 2022. Mr Xu responded by an affidavit affirmed on 14 August 2022, with a further exhibit of 179 pages.

15. The defendants made the point at the hearing, not unreasonably, that they only had 8 days to prepare evidence in response to the substantial amount of evidence upon which the plaintiffs had relied, and that they had been required by circumstances to limit their response primarily to evidence directed at defending the claim for an extension of the freezing orders.

16. The interlocutory hearing took place before me as Duty Judge on 15 and 17 August 2022. Initially, the interlocutory relief sought by Mr Xu consisted of a continuation to final hearing of the freezing orders as made by Meek J. As will be seen below, the terms of the relief sought by Mr Xu changed during the course of the hearing.

17. Shortly before the hearing, the plaintiffs served notices to produce on most of the defendants. The notices to produce were marked for identification as MFI-1. Those notices to produce were undated, but the Court was told by counsel for the defendants that they were served at 4:53 PM on Thursday 11 August 2022, before the hearing commenced on Monday 15 August 2022. The Court was told that the defendants took issue with the lateness of service of the notices to produce and that they informed the plaintiffs by letter on the Friday that they objected to being required to produce some categories of documents. The Court does not know what the nature of the dispute was.

18. When counsel for the plaintiffs called upon the notices to produce at the commencement of the hearing, counsel for the defendants said that no documents were produced as a result of the time and circumstances in which the notices to produce were served. In these circumstances, counsel for the plaintiffs elected to proceed with the hearing of the plaintiffs' application for an extension of the freezing orders, without the benefit of any of the documents sought in the notices to produce.

19. One significant result of this course of action was that the interlocutory hearing was conducted on the basis that the plaintiffs did not have available to them any balance sheets, tax returns, business activity statements or evidence of payment of employees by Aluminum or Logikal. They also had no documentary evidence of the activities of the other company defendants.

Legal principles in respect of relief

Freezing orders

20. The power to make a freezing order is within the inherent jurisdiction of this Court “to make such orders as that Court may determine to be appropriate ‘to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction’”: PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1 at 18; [2015] HCA 36 at [43] (French CJ, Kiefel, Bell, Gageler and Gordon JJ), quoting Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 623.

21. Rule 25.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) is a further source of the Court’s jurisdiction to make freezing orders. That rule provides:

25.11 Freezing order (cf Federal Court Rules Order 25A, rule 2)

(1)   The court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the court’s process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied.

(2)   A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

22. Whether drawing on the Court’s inherent jurisdiction or statutory power, the primary objective of a freezing order is the same: that is, as was explained by a majority of the High Court in PT Bayan Resources TBK v BCBC Singapore Pte Ltd at 19 [46], to protect “a prospective enforcement process”. French CJ, Kiefel, Bell, Gageler and Gordon JJ quoted Lord Nicholls of Birkenhead in Mercedes Benz AG v Leiduck [1996] AC 284 at 306, where his Lordship said:

Although normally granted in the proceedings in which the judgment is being sought, [a freezing order] is not granted in aid of the cause of action asserted in the proceedings, at any rate in any ordinary sense. It is not so much relief appurtenant to a money claim as relief appurtenant to a prospective money judgment. It is relief granted to facilitate the process of execution or enforcement which will arise when, but only when, the judgment for payment of an amount of money has been obtained.

23. The matters that must be established by a party seeking a freezing order are as stated by Gleeson CJ in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321-2 (Meagher JA and Rogers AJA agreeing at 326 and 327 respectively) (Patterson):

The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant's absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.

24. Satisfaction of the first requirement that the plaintiff must establish a prima facie case does not require that the plaintiff show on the interlocutory evidence that the plaintiff’s case will more probably than not succeed at a final hearing. As McColl JA observed in Samimi v Seyedabadi; Seyedabadi v Samimi [2013] NSWCA 279 (Samimi):

[69] The expression “good arguable case” is used “in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success”: Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG ‘The Niedersachsen’ [1983] 1 WLR 1412; [1984] 1 All ER 398 (at 404) (“Ninemia Maritime”) per Mustill J. His Honour added (at 404) that “the court should not be drawn into a premature trial of the action, rather than a preliminary appraisal of the plaintiff’s case”.

25. Even though the threshold for establishing the first requirement is relatively low, as Mustill J said in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG “The Niedersachsen” [1983] 1 WLR 1412; [1984] 1 All ER 398 at 402-3:

… These cases are not easily reconciled, but to my mind they establish that the strength of the plaintiff's case is relevant in two distinct respects: (1) the plaintiff must have a case of a certain strength, before the question of granting Mareva relief can arise at all. I will call this the 'threshold'; (2) even where the plaintiff shows that he has a case which reaches the threshold, the strength of his case is to be weighed in the balance with other factors relevant to the exercise of the discretion. …

26. An important issue on the present application arose out of the following observation made by Gleeson CJ in Patterson at 325-6:

… In particular, I consider that Giles J was correct in taking the view that the evidence as to the nature of the scheme in which the appellant was allegedly involved, which established a prima facie case against him, was such as to justify the conclusion that there was a danger that the appellant would dispose of assets in order to defeat any judgment that might be obtained against him and that such danger was sufficiently substantial to warrant the injunction. There is no reason in principle why the evidence which is relevant to the first of the issues earlier referred to might not also have a bearing on the second, and this will especially be so where the prima facie case that is made out against a defendant is one of serious dishonesty involving diversion of money from its proper channels. The present is not a case in which a plaintiff who claims simply to be an unsecured creditor seeks to prevent a dissipation of assets which have no particular connection with the claim in question. This is a case in which the plaintiff claims that the defendant, making use of a corporation controlled by him, fraudulently misappropriated a large sum of money which, if it is still under the control of the appellant, would be quite likely to constitute, directly or indirectly, the bulk of his assets. As Giles J held, the nature of the scheme in which, on the evidence to date, the appellant appears to have engaged, is such that it is reasonable to infer that he is not the sort of person who would, unless restrained, preserve his assets intact so that they might be available to his judgment creditor.

27. The Court should not lightly grant a freezing order, given the serious impact that it might have on the affairs of the defendant. As was said in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 403-4; [1999] HCA 18 at [51] (Gaudron, McHugh, Gummow and Callinan JJ) (Cardile) (footnotes omitted):

[51] We agree with the tenor of what was said with particular respect to Mareva relief before judgment by the Court of Appeal of New South Wales (Mason P, Sheller JA, Sheppard A-JA) in Frigo v Culhaci:

“[A Mareva order] is a drastic remedy which should not be granted lightly. …

A [Mareva order] is an interlocutory order which, if granted, imposes a severe restriction upon a defendant's right to deal with his or her assets. It is granted at the suit of a plaintiff whose status as a creditor is in dispute and who need not be a secured creditor. Its purpose is to preserve the status quo, not to change it in favour of the plaintiff. The function of the order is not to ‘provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied; nor is it to improve the position of the plaintiff in the event of the defendant's insolvency’ … Many authorities attest to the care with which courts are required to scrutinise applications for [Mareva orders]. The leading decision in this State is Patterson v BTR Engineering (Aust) Ltd.”

28. Notwithstanding that evidence that tends to establish that the plaintiff has a sufficiently arguable case may also be relevant to a finding of likely dissipation of the defendant’s assets, the risk of dissipation must be established by “solid evidence”. As McColl J said in Samimi at [73]-[75]:

[73] In Ninemia Maritime (at 406), in a passage effectively approved in Frigo v Culhaci (at p 8), Mustill J discussed the nature of the evidence the applicant for a freezing order should adduce as follows:

“It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on. … Or … the plaintiff may be able to found his case on the fact that inquiries about the characteristics of the defendant have led to a blank wall. Precisely what form the evidence may take will depend on the particular circumstances of the case. But the evidence must always be there…” (Emphasis added)

[74] It is not necessary for an applicant to show that the respondent has a positive intention of evading a judgment, and it is sufficient to show that the course on which the respondent proposes to embark is, objectively speaking, calculated to have that effect: Finn v Carelli (at [4]). As Brereton J added:

“5 It is important to bear in mind that the jurisdiction to make orders of this type was never intended simply to enable a plaintiff or judgment debtor to obtain security for its judgment in advance of execution, but was firmly founded on the jurisdiction of the Court to prevent abuses of its process by preventing a defendant or judgment debtor from embarking on a course of conduct which would have the effect of defeating the Court’s jurisdiction. It also needs to be borne in mind that the mere fact that a judgment may not be satisfied for reasons of impecuniosity does not mean that there is an abuse of process. Indeed, it has been pointed out on several occasions that the prospect of impending insolvency is not a reason to grant a Mareva injunction [Hortico (Australia) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545 at 558].” (Emphasis added).

[75] Finally, in determining whether a freezing order should be made, the court must take into account any discretionary considerations, including the balance of convenience.

29. The plaintiff must pursue the application for a freezing order with due expedition. As was said in Cardile at 404 [53]:

[53] Discretionary considerations generally also should carefully be weighed before an order is made. Has the applicant proceeded diligently and expeditiously? …

Orders ancillary to freezing orders

30. Rule 25.12 of the UCPR provides the Court with the power to make orders ancillary to freezing orders. That rule provides:

25.12 Ancillary order (cf Federal Court Rules Order 25A, rule 3)

(1)   The court may make an order (an ancillary order) ancillary to a freezing order or prospective freezing order as the court considers appropriate.

(2)   Without limiting the generality of subrule (1), an ancillary order may be made for either or both of the following purposes—

(a)   eliciting information relating to assets relevant to the freezing order or prospective freezing order,

(b)   determining whether the freezing order should be made.

31. Paragraphs 8 and 9 of the precedent form of freezing orders annexed to the Court’s Practice Note SC Gen 14 serve as ancillary orders for the ‘provision of information’ as contemplated by r 25.12(2)(a).

32. Ancillary orders also comprise an aspect of the Court’s inherent jurisdiction to ensure that its orders are not frustrated: Bax Global (Australia) Pty Ltd v Evans (1999) 47 NSWLR 538 at 543-5; [1999] NSWSC 815 at [17]-[23] (Austin J) (Bax).

33. Bax was a case decided before the enactment of the Civil Procedure Act 2005 (NSW) and the UCPR, and the adoption of the Practice Note SC Gen 14, but it offers some jurisprudential context, particularly in respect of the relationship between disclosure orders that are ancillary to freezing orders and the Court’s general power to require disclosure. Austin J wrote at 543-5 [17]-[23]:

The jurisdictional basis for ancillary disclosure orders

[17] The practice of making ancillary disclosure orders in support of Mareva orders can be traced back in England to A v C [1981] QB 956. There Robert Goff J held that the power to make such ancillary orders derived from rules of court in relation to discovery of documents and interrogatories, which could be used at an early stage of proceedings, and also from a provision in the UK judicature legislation corresponding approximately with s 66(4) of the Supreme Court Act 1970. That the latter is not a source of jurisdiction for Mareva orders in Australia has been confirmed by the High Court in the Cardile case.

[18] Consistently with the High Court’s reasoning in Cardile, a court at first instance ought to consider whether it is more appropriate to invoke those procedures than to follow the newly developed special procedure which I shall describe. An advantage of ordering disclosure by the administration of verified interrogatories is that the questions to be answered are articulated with some precision and the procedure for objecting because of self-incrimination or on some other ground is clearly designated in the rules (see, in particular, Pt 24, r 5 and r 6).

[19] However, the procedures for interrogatories and discovery are not always available in cases where the plaintiff seeks disclosure ancillary to Mareva orders, as the English Court of Appeal pointed out in A J Bekhor & Co Ltd v Bilton [1981] QB 923. This is because on some occasions, the information to be disclosed about the defendant’s assets is relevant to the Mareva relief but does not relate to the facts in issue in the proceedings. For example, in the Bekhor case the proceedings related to recovery of moneys allegedly lent by the plaintiffs to the defendant, and did not therefore raise any issue as to the nature or location of any particular assets of the defendant, or of the defendant’s assets generally. One may contrast such a case with cases such as A v C, where the proceedings involved tracing of assets and so the nature and location of at least some assets were facts in issue in the proceedings. Thus, discovery and interrogatories will not always be alternatives to “Mareva disclosure orders”, especially where the subject matter of disclosure is a broad class of assets.

…

[23] Now that Cardile’s case has defined more precisely the source of the jurisdiction to make the Mareva orders themselves, some inferences can be drawn as to the Court’s jurisdiction to make ancillary disclosure orders. Since the source of the jurisdiction to make Mareva orders is the Court’s inherent power to prevent abuse of its processes and stultification of the administration of justice by the removal of assets from the plaintiff’s reach, the Court must also have the power to order disclosure of the nature and location of particular assets or assets of a class so that the Mareva relief is effective and not oppressive. As Robert Goff J pointed out in A v C (at 959), if the plaintiff does not know the number and location of (say) the defendant’s bank accounts, a Mareva order in respect of bank accounts generally could be oppressive both to the defendant and to the bankers who are required to act in accordance with it, especially where there is more than one account or several defendants. Without information about the nature and location of the defendant’s assets, the plaintiff may be unable to make the risk assessment which is necessary in order to give the undertaking as to damages, or if the undertaking is given, it may lead to an unexpected exposure. Robert Goff J concluded, as do I, that considerations such as these point to the conclusion that in the special cases where the court decides to make Mareva orders, it may make such disclosure orders as are necessary to ensure that the Mareva jurisdiction is properly and effectively exercised. While the power to do so does not depend upon the statutory discovery and interrogatory procedures, Cardile indicates (as I have mentioned) that these procedures should be considered as alternative methods of compelling disclosure, where they are available.

34. An ancillary order requiring disclosure by the respondent need not be limited to information relating to the assets and liabilities of the respondent but can rather include information in respect of payments of money and other transactional arrangements: Graincorp Operations Limited v Duncan Ross Munro [2015] NSWSC 227 at [9]-[17] (Bergin CJ in Eq).

35. There are competing views in the authorities as to whether the Court need first make a freezing order, or at least propose to make a freezing order, as a jurisdictional prerequisite to the making of an ancillary order: see MWP Transport Pty Limited v Michael Thomas Kent [2018] NSWSC 1119 at [3] (McDougall J) but cf YAJ1 v Opera Australia [2021] NSWSC 771 at [11] (Adamson J).

36. The power to make ancillary orders under r 25.12 is ultimately discretionary, and the Court will not make disclosure orders if it does not consider them “appropriate”. For instances in which this Court has declined to make the ‘provision of information’ orders annexed to Practice Note SC Gen 14, see Jingalong Pty Ltd v Todd (No 2) [2014] NSWCA 347 at [16] (Gleeson JA); H Biotechnology Pty Ltd v Shao; H Biotechnology Pty Ltd v Chen [2020] NSWSC 585 at [20]-[22] (Hamill J).

37. The Court’s consideration of whether ancillary orders such as disclosure orders are “appropriate” should be guided by the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings: Civil Procedure Act 2005 (NSW), s 56; MWP Transport Pty Limited v Michael Thomas Kent at [3] (McDougall J).

Freezing orders and injunction to preserve an asset contrasted

38. A freezing order can, in an inappropriate case, function as too blunt an instrument of relief. Its focus is on the liquidity of a defendant to meet a prospective judgment debt, rather than on the status of any particular article of property, or sum of money, the subject of a claim at law or in equity.

39. Where the object of a plaintiff’s final claim for relief is to get at property which the plaintiff alleges to be held on constructive trust by the defendant, a more subtle remedy available to the Court is an interlocutory injunction drafted to preserve the property in the hands of the defendant alleged to be held on constructive trust. As Gleeson CJ stated in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 217; [2001] HCA 63 at [10]:

… In order to preserve the subject matter of the dispute, and to prevent the practical destruction of the right claimed by the respondent before the action could be heard on a final basis, the Supreme Court had power to grant an interlocutory injunction. … Power of that nature has a long history, and is exercised according to principle, not unguided discretion. … For present purposes, what is most significant is that the justice and convenience of granting an interlocutory injunction, in a case such as the present, is to be found in the purpose for which the power exists.

40. The approach of the Court in determining whether to exercise its discretion to grant an interlocutory injunction was stated by Gleeson CJ and Crennan J in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at 68; [2006] HCA 46 at [19]:

[19] … in all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff’s entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances of the case, under which issues of justice and convenience are addressed. …

41. In the earlier judgment of Meek J in these proceedings at [18]-[19], his Honour referenced this distinction between an asset preservation order and an injunction to preserve an asset the subject of the proceedings. His Honour referred to the decision of Parker J in Ip v Chiang [2019] NSWSC 1549 at [126]-[129], where his Honour wrote:

[126] In dealing with the merits, it is important to distinguish between an asset preservation order on the one hand, and an injunction to preserve an asset which is the subject of the proceedings, on the other.

[127] An asset preservation order is made in cases where there is reason to think that otherwise the defendant will defeat the judgment by removing assets from the jurisdiction or dissipating them within the jurisdiction. Although the order may operate so as to provide security for the plaintiff’s claim, that is not its purpose. The purpose of the order is to protect the court’s processes and there is no justification for making an order which goes beyond the minimum necessary to do that.

[128] This explains why there will usually be an exception built into the order which permits the defendant to pay for reasonable living expenses and reasonable legal costs. Although such expenditure may result in the dissipation of assets, it is not a dissipation which can be regarded as an abuse of process: see Harrison Partners Constructions Pty Ltd v Jevena Pty Ltd [2006] NSWSC 317 at [10].

[129] On the other hand, an injunction against dealing with an asset is usually granted where there is an arguable case that the court will ultimately find that the plaintiff has proprietary interest in it. In such a case, to make an exception allowing for the use of the property to meet the defendant’s legal costs could result in property belonging to the plaintiff being appropriated to the defendant’s personal use. Although that does not deprive the court of power to make such an exception, it is often a good reason not to do so: Gap Constructions Pty Ltd v Vigar Pty Ltd [2011] NSWSC 1205 at [12].

42. In the context of determining whether certain freezing orders should be varied in National Australia Bank Limited v Human Group Pty Ltd (No 2) [2020] NSWSC 1900, Henry J made the following relevant observations of principle on this distinction at [106]-[112]:

[106] The Courts recognise juridical and practical distinctions between a freezing order where an applicant claims no proprietary interest and a claim made by an applicant who asserts a proprietary interest in assets possessed by another.

[107] In circumstances where no proprietary claim is made, the object of a freezing order is to restrain an owner from dissipating their own property to preserve the integrity of the Courts’ processes. Such an order operates in personam and not as an attachment on the property itself or as security for an anticipatory judgment. On the other hand, the object of a proprietary claim is to secure the property to which the plaintiff has at least a prima facie case of a proprietary interest and ensure that it is available to the plaintiff in the event it proves its claim to that property: Cardile v LED Builders Pty Limited (1999) 198 CLR 380; [1999] HCA 18 at 394-401; His Eminence Metropolitan Petar v The Macedonian Orthodox Community Church St Petka Inc [2006] NSWCA 277 (Petar) at [59] to [62]; Frigo v Culhaci [1998] NSWCA 88 at 16; Peter Biscoe, Freezing and Search Orders: Mareva and Anton Piller Orders (2nd ed, 2008, LexisNexis Butterworths) at [1.18].

[108] This distinction is also of practical importance and particularly relevant to NAB’s application for a variation to the Freezing Orders.

[109] When freezing orders are made in relation to non-proprietary claims, the usual position is that defendants generally have an entitlement to use their assets for legitimate purposes, such as to pay their ordinary living and business expenses and their reasonable legal expenses in defending the claims made against them: Goumas v McIntosh [2002] NSWSC 713 at [27].

[110] In contrast, there is no reason, in general, why defendants should be permitted to use property or money belonging to another in order to pay their legal costs or other expenses. There is an obvious risk of injustice if assets the subject of the proprietary claim are used to finance the defendants’ litigation as the money is not the defendants at all but represents money which is held on trust for the plaintiff. The Courts will be attentive to the protection of trust property and a defendant may not be allowed to access money to which they have no legal or moral right to enable them to spend it on their own living expenses or on private representation of their choice: Commonwealth of Australia v Jansenberger (Supreme Court (Vic), Southwell J, 3 October 1985, unrep) at 8; Petar at [85]; Birketu Pty Ltd v Westpac Banking Corporation (No 2) [2018] NSWSC 494 (Birketu) at [60], [63]; Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 at 784; Sundt Wrigley & Co Ltd v Wrigley (Court of Appeal (UK), 23 June 1993, unrep).

[111] In cases concerning proprietary claims, a “careful and anxious judgment” is required whereby the Court must assess whether any injustice to a plaintiff, such as NAB, would be outweighed by the potential injustice to the defendants, here Ms Rosamond and Human Group, if they were precluded from accessing funds and therefore perhaps denied the opportunity to advance an arguable defence: Birketu at [61] - [62]; Courtenay House at [49]; Cong v Shen [2020] NSWSC 945 at [163].

[112] The weighing of the interests of justice may involve a consideration of whether a defendant has shown that it is necessary for them to have access to funds over which a proprietary claim is made in order to defend the proceedings and other relevant discretionary factors that may be relevant, such as delay: Birketu at [64]-[68].

Defendants accept plaintiffs have a good arguable case

43. Although the defendants strenuously asserted that the plaintiffs' case would fail against them at a final hearing, they did not resist the Court reaching the conclusion on this interlocutory application that Mr Xu had established a good arguable case against the defendants, which is the first requirement of Mr Xu establishing a right to the continuation of the freezing orders.

44. In these circumstances, it will not be necessary for the Court to set out in detail the effect of the evidence relevant to the validity of the plaintiffs' case against the defendants. It will be sufficient to note that Mr Xu made the case that, by agreement between the individual parties, Firmtech was incorporated on 18 May 2018 in order, as I have noted above, to conduct the business of supplying aluminium-framed glazing products to the building industry. Ms Xie and Mr Zhang had been involved in that industry for some years. Mr Xu had not formerly been engaged in the industry, but had money to invest in the establishment of Firmtech's business. Mr Xu's case was that, in fact, Mr Xu advanced something over $1 million for the purpose of Firmtech's business. The shares in Firmtech were issued equally to Mr Xu and Mr Zhang, who were both made directors. Mr Xu claimed that the agreement was that Ms Xie and Mr Zhang would run the factory and the business and Mr Xu would be responsible for the accounting side of the business. Mr Xu's evidence was that he arranged Firmtech’s email address and webpage and designed Firmtech's logo. Mr Xu claimed that gradually, from no later than about January 2001, he was progressively shut out of the business of Firmtech, by being denied access to its accounts, email and computer systems. Mr Xu claimed that Ms Xie and Mr Zhang caused Aluminum and Logikal to conduct the same business as that which Firmtech had been incorporated to conduct, and that they operated out of the factory at Revesby under a lease entered into by Firmtech that had been substantially procured by Mr Xu. Mr Xu claimed that, until at least September 2021, the active defendants had used the services of Firmtech's employees, and that Aluminum and Logikal had diverted, to their own benefit, business that could have been undertaken by Firmtech by using the Firmtech business name and logo and taking advantage of the email address and webpage that had been established for Firmtech's use. Mr Xu complained that he did not learn that the active defendants had diverted business that could have been undertaken by Firmtech until mid-2021, as the defendants had acted in secrecy.

45. The active defendants' response to Mr Xu's claims was, in substance, that the arrangement between the individual parties required not only Ms Xie and Mr Zhang to devote their personal efforts on a full-time basis to the business of Firmtech, but that Mr Xu was also required to do so. They said that relatively shortly after the commencement of Firmtech's business, but in any event by the end of 2020, Mr Xu had ceased to play any significant role in the business activities of Firmtech, but instead had devoted himself to an abattoir and a property development business in which he had acquired interests. The defendants accepted that Mr Xu had invested more than $1 million in establishing and conducting the business of Firmtech, but they said that the amount of the investment had substantially been repaid. The defendants said that Firmtech's business suffered from the consequences of the COVID-19 pandemic which led to Firmtech suffering cash flow difficulties. Ms Xie and Mr Zhang gave evidence of discussions on or about 30 January 2021 in which, they claimed, Ms Xie and Mr Zhang on the one hand and Mr Xu on the other agreed to go their separate ways in business, and that Mr Xu said that he would devote himself to his other business interests. For that purpose, an informal accounting took place concerning the investments made by Mr Xu in Firmtech, and in due course Mr Xu was substantially repaid the amount of his investment. The defendants' case was that, as Mr Xu controlled the finances of Firmtech, he had caused Firmtech to make repayments of his investment from time to time that had caused Firmtech considerable cash flow problems. The defendants' case was that the real commercial purpose of Firmtech's business was to supply aluminium-framed windows and doors to the building industry. It was not directed at supplying aluminium-framed curtainwall systems. Consequently, Ms Xie and Mr Zhang had established Logikal in late 2019 to supply aluminium-framed glass façade systems to the building industry.

46. Mr Xu responded to this last claim by tendering some evidence that would support a finding that the supply of aluminium-framed façade systems was part of Firmtech's business from the outset.

47. As I have noted above, I was not taken to any evidence that showed that the company defendants other than Aluminum and Logikal had any involvement in the events that have led to the present proceedings, but Meek J observed in his judgment that the eighth defendant had undertaken business that I assume Mr Xu would say ought to have been done by Firmtech.

Change in the interlocutory relief sought by Mr Xu

48. Before I consider the issue of whether the evidence justifies a finding that there is a sufficient risk that the defendants will dissipate their assets to justify a continuation of the freezing orders, it will be appropriate to explain a development that occurred during the hearing that led to Mr Xu changing the nature of the interlocutory relief that he asked the Court to grant.

49. The genesis of the change was the fact that the amount of assets sought to be protected by the freezing orders was the relatively substantial value of $10 million.

50. Mr Xu's application for the continuation of freezing orders that required the defendants to maintain the value of their assets at least $10 million gave rise to a number of questions in my mind. The first was whether the evidence sufficiently established that the plaintiffs had reasonable prospects of obtaining final relief with a value of at least $10 million to justify inserting the sum of $10 million as the ‘Relevant Amount’ in the freezing orders. The second, which was related to the first, was whether there was sufficient evidence that the defendants had net assets of at least $10 million, and that the nature of those assets was such as to make it just to continue freezing orders that required the defendants to maintain the value of $10 million. The third was whether, in the circumstances, the continuation of freezing orders was not appropriate, and instead the Court should consider the making of orders that would preserve the businesses and the profit earned by Aluminum and Logikal, and that would also facilitate any accounting process that the Court might order at a final hearing.

Calculation of $10 million claim by Mr Xu

51. As to the first of these issues, it is to be noted that in his judgment on the ex parte application, Meek J dealt with the way that the plaintiffs had quantified their claim at [46]-[55]. At [55], Meek J stated the result of the plaintiffs' analysis of the evidence to show what profit Firmtech would have earned in the financial years ended 30 June 2020 and 2021 if it had continued to operate with the profit margin that it enjoyed in the financial year to 30 June 2019. His Honour observed:

[55] The analysis of the statements is said to show that if Firmtech had continued to operate with a profit margin at the 2019 level, it would have been expected to have had a net profit for 2020 of about $4.508 million rather than a net loss of $395,000 and a net profit for the 2021 financial year of $5.706 million instead of a net loss of $1.894 million.

52. The plaintiffs' evidence concerning the quantum of the relief to which they may be entitled at a final hearing is found primarily in pars 41 to 43 and 127 to 141 of Mr Xu's 26 July 2022 affidavit. At par 42, Mr Xu calculated that Firmtech had enjoyed a 40.73% profit margin for the year to 30 June 2019. That was on the basis that the profit and loss statement and the 2019 balance sheet showed that Firmtech had accrued income of $6,106,809.13 (being the total of actual income of $3,547,830.65 plus total accounts receivable of $2,558,978.48). Accrued expenses were $3,619,672.11 (being total cost of sales of $2,396,304.99 plus total expenses of $842,762.12 plus accounts payable of $380,600). The accrued net profit was $2,487,137.02.

53. Mr Xu then relied at par 128 on the BAS lodged for Firmtech that he had prepared for the period 1 July 2018 to 30 June 2021, as that was the only period for which he had access to Firmtech's accounting system or financial results. Mr Xu explained at pars 129 to 131 how he had received aged receivables and aged payables statements prepared by Firmtech's internal accountant at various dates.

54. Mr Xu then stated at par 132 that, based upon this evidence, he had calculated that, for the financial year ending 30 June 2020, Firmtech reported accrued income of about $5,590,826.36, reported accrued expenses of about $5,986,053.31 and reported a net loss of about $395,226.95. Mr Xu said at par 133 that this represented an approximate loss margin of 7.07%.

55. At pars 134 and 135, Mr Xu engaged in an equivalent process of reasoning in respect of the year ended 30 June 2021. Firmtech's reported accrued income was about $6,410,673.59, with accrued expenses of about $8,305,242.75, giving a net loss of $1,894,569.16. This represented a loss margin of about 29.55%.

56. Then, in pars 136 to 141, Mr Xu calculated for the 2020 and 2021 financial years what he claimed to be Firmtech's missing profits for the two years, which he claimed were respectively $4,508,343.92 and $5,706,670.68, instead of a net loss of $1,894,569.16. The difference between the expected profits and the actual losses was a total of $12,109,583.80. (Mr Xu's claim that the net profit for the 2021 year should have been $5,706,670.68 appears, from a consideration of the table set out in par 139, to be an error. If the missing profit in 2020 is said to be $4,508,343.92, then the missing profit in 2021 should be $7,601,239.84. However, this miscalculation is immaterial in the scheme of things).

57. It is significant that the exercise carried out by Mr Xu assumes that the claimed profit margin of 40.73% in the 2019 year would have been replicated in each of the following two years. Mr Xu could only rely upon his own assertions of what he believed to be the level of business undertaken by Firmtech to support that assumption.

58. Mr Xu also relied upon a projection that he explained in par 138 that he had done to determine what he claimed Firmtech's income should have been in 2020 and 2021 by starting from his calculation of the actual accrued expenses and assuming a profit margin of 40.73% to determine the projected income of $10,099,170.28 and $14,011,913.43 respectively.

59. Mr Xu did not make any allowance for the commercial effect of the COVID-19 pandemic.

60. In their submissions in response to the plaintiffs' claim, the defendants complained that Mr Xu's methodology was flawed and that, apart from ignoring the probable effect of the COVID-19 pandemic on Firmtech's business, he had not taken the financial figures in his analysis from the correct financial records of Firmtech. The defendants calculated that Firmtech's profit margin for the 2019 year using its tax return was 1.47%, and using its profit and loss statement was 8.07%.

61. The evidence and submissions on the interlocutory application would not have enabled the Court confidently to resolve this dispute. It is sufficient to say that it became apparent to me during the hearing that the way that the $10 million loss had been estimated appeared to be unreliable.

62. I suspect that the reason for the unreliability is that Mr Xu noted in par 41 of his 26 July 2022 affidavit that Firmtech's accounting system permitted reports to be made on a cash and an accruals basis. Mr Xu stated the figures for income and cost of sales on a cash basis (which was the basis upon which Firmtech prepared its tax returns), which gave a profit margin the same as the 8.07% calculated by the defendants in their submissions. However, Mr Xu calculated the profit margin of 40.73% in par 42 of his affidavit by combining the effect of the 2019 profit and loss statements and balance sheets in order to determine accrued income by adding total income received on a cash basis to accounts receivable as stated in the balance sheet. He performed a similar process in order to determine total costs of sales, by combining the effect of the reports on a cash and accruals basis. Whatever the logic of this financial analysis may be, it may not have reflected Firmtech's actual experience, particularly insofar as $2,558,978.48 of the supposed income in the 2019 year represented accounts receivable. There is no apparent evidence as to whether those debts payable to Firmtech were received.

Uncertainty in the value of the defendants’ net assets

63. The second difficulty that arose in determining whether it was appropriate for the Court to continue the freezing orders was the absence of reliable evidence concerning the net value of the defendants' assets.

64. When I enquired of counsel for Mr Xu what the values of the two items of real property identified in order 9(a)(iii)(1) and (2) of the freezing orders made by Meek J were, counsel was unable to be definite, but said that one of the properties was purchased for $628,000 in 2014 and the other was purchased in 2021 for $1,730,000, with the latter property being subject of a mortgage to secure a debt of unknown amount. Counsel acknowledged that the net value of the real property known to be owned by the defendants was "nowhere near $10 million".

65. This information led to a realisation on my part that an order that had the effect of requiring the defendants to sustain the net value of their assets in an amount of $10 million probably depended upon the value of the businesses being operated by Aluminum and Logikal, including their goodwill and assets, subject to their liabilities, approaching $10 million. Not only was there no evidence as to these values, but there was no evidence concerning the financial results of the two companies since they commenced business. Furthermore, the uncertainty concerning the calculation of the value of the business alleged to have been diverted away from Firmtech made it impossible for the Court to make any findings concerning the value of the defendant companies' businesses.

66. Order 8(a) as made by Meek J is materially in the form of the equivalent order 8(a) in Practice Note SC Gen 14 (Freezing Orders), in that it reads:

8(a)    You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia ("Australian assets") up to the unencumbered value of AUD $10,000,000.00 (the "Relevant Amount") …

67. I respectfully observe that the wording of this standard order may not be felicitous insofar as it is a prohibition against disposing of, dealing with or diminishing the value of the assets "up to the unencumbered value of" $X. It would be preferable for the wording to be more direct and require that the value be maintained at or above $X.

68. Be that as it may, I became concerned that the way in which the $10 million had been calculated, and the nature of the known assets held by the defendants, might make it unjust to the defendants to require that they maintain the net value of their assets at or above the sum of $10 million. To the extent that the value of the assets depended upon the unknown value of the businesses of the company defendants, the defendants could not be expected to know with confidence what the value of their assets was at any particular time. They could take steps in the course of business that caused the value of the businesses of the company defendants to diminish as a result of taking ordinary commercial risks. The exception in order 12(c) of the freezing orders permitting the defendants to deal with, or dispose of any of their assets in the ordinary and proper course of their business would not necessarily protect the defendants against inadvertently committing contempt of the freezing orders.

69. I raised these concerns with counsel for the parties. I also raised the issue of whether in the circumstances, the preferable course was for the Court to consider whether orders should be made preserving the businesses and the profits of the company defendants' businesses, and making orders that would facilitate the efficient preparation of accounts if the Court ordered the defendants at a final hearing to account to the plaintiffs. This is the distinction referred to by Parker J in Ip v Chiang at [126] between an asset preservation order on the one hand, and an injunction to preserve an asset which is the subject of proceedings, on the other, that I have set out above at [41].

Open offer by defendants to give undertakings

70. Counsel for the defendants responded to this observation on the first day of the hearing by informing the Court of an offer that the defendants would make to compromise the interlocutory application. The open offer which (as revised) was marked for identification as MFI-3 was to the following effect:

• Acceptance of the offer would require Mr Xu to give to the Court the usual undertaking as to damages.

• Ms Xie and Mr Zhang would not sell the real properties referred to in the freezing orders without giving Mr Xu at least 14 days' written notice of their intention to do so.

• Aluminum and Logikal would undertake to the Court that they would not sell their businesses or distribute or dispose of their end of financial year profits without giving Mr Xu 14 days' written notice of their intention to do so.

• The undertakings given by Aluminum and Logikal would not prevent them from operating their respective businesses, paying or otherwise incurring liabilities for ordinary operating expenses in the ordinary course of their respective businesses, or paying or otherwise incurring a liability for legal costs and expenses in respect of this proceeding.

• The costs of the interlocutory hearing would be reserved.

71. Mr Xu did not accept this offer, and instead made a counteroffer on the second day of the hearing. This open offer was marked for identification as MFI-4. The substance of Mr Xu's offer was as follows:

• Mr Xu would give to the Court the usual undertaking as to damages.

• Ms Xie, Mr Zhang, and the eleventh defendant would undertake to the Court that they would not dispose of, deal with or diminish the value of identified real properties owned by them without first giving to Mr Xu 14 days' written notice of their intention to do so.

• Ms Xie and Mr Zhang would give undertakings in the following terms to the Court:

4.    The first and second defendants each undertake to the Court that he or she will not participate in any business of designing, supplying, project managing and/or installing windows, doors, curtain walls, façade works, balustrades, metal works or cladding for building projects other than the businesses conducted by the third defendant (Aluminum) and/or the first defendant (Logikal) without first giving the second plaintiff 14 days' written notice to his solicitor of his or her intention to do so and particulars of the business he or she proposes to participate in.

• Each of Aluminum and Logikal would separately undertake to the Court in the following terms:

a)    It will, within 28 days, prepare a full and proper account of the profits of its business since 1 July 2018 to date, including the date, amount and payee of all expenses and the date, amount and payer of all income, and provide that account to the second plaintiff and to the Court following a direction from the Court to do so;

b)    It will, on and after the date of this undertaking, keep a full and proper account of the profits of its business, including the date, amount and payee of all expenses and the date, amount and payer of all income, and provide that account to the second plaintiff and to the Court following a direction from the Court to do so;

c)   It will not dispose, deal with or diminish the value of the business or its assets without first giving the second plaintiff 14 days' written notice to his solicitor of its intention to do so; and

d)    It will not distribute or dispose of its profits without first giving the second plaintiff 14 days' written notice to his solicitor of its intention to do so.

• Ms Xie would undertake to the Court that she would not dispose of, deal with or diminish the value of her shares in identified other company defendants without first giving the second plaintiff 14 days' written notice to his solicitor of her intention to do so.

• The other corporate defendants would give various undertakings not to dispose of, deal with, distribute or diminish their assets without first giving the second plaintiff 14 days' written notice to his solicitor of their intention to do so.

72. Although Mr Xu offered to accept the undertakings from the defendants contained in MFI-4 in lieu of the continuation of the freezing orders made by Meek J, it became apparent from the submissions of his counsel that, in addition, Mr Xu claimed an order requiring the defendants to serve an affidavit setting out the value, location and details of their assets as required by prayer 10 of the summons. Although an order in those terms had been included in the freezing orders made by Meek J on 28 July 2022, on 1 August 2022 on the return date of the summons, order 10 was vacated by Lindsay J by consent of the parties. The position thus adopted by Mr Xu was to revive his claim for an order in terms of prayer 10 of the summons.

73. By this process, as I understood it, the nature of the claim for interlocutory relief being made by Mr Xu changed. I understood that, although the offer in MFI-4 was made on the basis that, if accepted, it would state the terms of undertakings to the Court to be given by the parties, it also represented only part of the relief now sought by Mr Xu, and that Mr Xu sought the revival of order 10 even if the defendants declined to give the undertakings sought.

74. By this means, the continuing interlocutory relief sought by Mr Xu changed in its terms to be a number of interlocutory orders to preserve the subject matter of the plaintiffs' claim and to facilitate any accounting process that might ultimately be required to be to be undertaken by order of the Court, combined with an order that the various defendants serve affidavits verifying their assets in terms of the order commonly made ancillary to the making of a freezing order under UCPR r 25.12.

75. The defendants did not accept the open offer made by Mr Xu. Consequently, the complexion of the interlocutory hearing changed.

Inadequacy of evidence of plaintiffs’ loss

76. Against the possibility that I have misunderstood the stance taken by Mr Xu as a result of his offering to accept the undertakings contained in MFI-4, I should record that I do not accept that the evidence presented by Mr Xu at the contested hearing with the defendants was sufficient to justify the Court in accepting that there is a real possibility that Mr Xu will obtain relief at a final hearing that has a value to him of at least $10 million.

77. I do not demur from the acceptance by Meek J of this evidence at an ex parte hearing for the purpose of considering whether freezing orders should be made on a short-term basis. However, given that the quantification of any relief that Mr Xu may obtain on a final hearing is largely tied to the profits that have in fact been made by the defendants from business that has been diverted from Firmtech, or the profits that Firmtech may have earned in the absence of the diversion, Mr Xu ought to have been more active in obtaining records that may have enabled him to establish the likely quantum of his relief on a more objective basis than he has done. The quantification exercise carried out by Mr Xu involved in my opinion too great an element of speculation. He did not proceed upon the accounting basis actually adopted by Firmtech in the year to 30 June 2019, but combined cash and accrual accounting records without being able to demonstrate what the real profit margin of Firmtech's business was.

78. Moreover, Mr Xu entirely ignored the potential effect of the COVID-19 pandemic, even though there was evidence that Ms Xie complained to him of cash flow problems caused by the pandemic, and the evidence suggests that Mr Xu had an awareness of the problem.

Availability of order for disclosure by defendants

79. Before I consider whether interlocutory orders should be made substantially in the form of the undertakings sought in MFI-4, or whether Mr Xu's position should be protected by other relief directed at preserving the businesses established and profits earned by the defendants, I will address the question of whether the Court should now make the order that the defendants swear affidavits disclosing their assets as sought in prayer 10 of the freezing orders sought in the summons.

80. Mr Xu has not sought that order based upon the Court's power to order by discovery or interrogatories that a party disclose information to the other party that is material to the issues raised by that other party's claim for relief, as discussed by Austin J in Bax. For instance, Mr Xu has not claimed that any property acquired by a defendant has been purchased by profits earned from the diversion of Firmtech's business for which Mr Xu claims that the defendant must account to Firmtech. Even though, upon my understanding, Mr Xu no longer seeks the continuation of the freezing orders, he appears to claim that, as the circumstances exist that would justify the Court in continuing the freezing orders, the Court has power to and ought to make the order for disclosure sought by Mr Xu.

81. Insofar as UCPR r 25.12, which has been set out above, authorises the Court to make orders that are ancillary to a freezing order or prospective freezing order, in my opinion, the better view is that the ground for making an ancillary order is insufficient if the circumstances would only justify the making of a freezing order by the Court, but such order has not been made and the plaintiff has ceased to apply for the order to be made. The order for disclosure would not then be ancillary in the sense required by the rule. That conclusion is not affected by the statement in subrule (2) that the purposes for which the ancillary order may be made that are stated in subrule (2) do not limit the generality of subrule (1).

82. It is not, however, necessary for the Court on this application to express a final view on the question whether the Court's power to make an ancillary disclosure order is lost if the plaintiff abandons his claim for a freezing order, and instead seeks interlocutory relief to preserve the value of an asset claimed by the plaintiff in the proceedings. This is not a proper occasion for the Court to construe UCPR r 25.12 in a matter that would exhaust the field for its application.

Insufficiency of evidence of likely dissipation of assets

83. The reason why it is not necessary for the Court to attempt to define the outer limits of the application of UCPR r 25.12 is that I am not satisfied on the evidence that Mr Xu has satisfied the second requirement stated by Gleeson CJ in Patterson, that there be a danger, by reason of the defendants absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, that Mr Xu, if he succeeds, will not be able to have his judgment satisfied. Furthermore, as I will explain below, this is a case in which I consider that interlocutory orders to protect the specific assets claimed by Mr Xu in these proceedings would be a more appropriate form of interlocutory relief than the "drastic remedy" of freezing orders.

84. I should first deal with a point of principle raised by Mr Xu that I do not accept has the significance that Mr Xu suggested. Mr Xu submitted that the defendants' case had proceeded on the basis that the evidence relevant to establishing what Gleeson CJ in Patterson called a prima facie case would only be relevant to the satisfaction of the second requirement that there be a sufficient risk of dissipation to warrant the making of a freezing order if the conduct of the defendant involved fraud or a near equivalent. Gleeson CJ observed at 325 that: "[t]here is no reason in principle why the evidence which is relevant to the first of the issues earlier referred to might not also have a bearing on the second". The Chief Justice continued that "this will especially be so where the prima facie case that is made out against the defendant is one of serious dishonesty involving the version of money from its proper channels" (emphasis added). The example of "serious dishonesty" was only given as a special case where evidence going to the first requirement may be relevant to the second.

85. As I understand the defendants' submissions, they did not submit that it was necessary for the evidence to establish a prima facie case of fraud or serious dishonesty before that evidence might be sufficient to establish the required risk of dissipation. Rather, the defendants submitted that it was necessary for the Court to look at the facts of the case, and that in the present case, there was a serious contest between the parties as to whether the defendants had engaged in any wrongful conduct, and that, properly considered and even viewed negatively, the defendants' conduct did not involve a level of dishonesty that would justify an interlocutory conclusion that they were likely to dissipate their assets.

86. Given that applications for freezing orders are interlocutory in nature, and the evidence will necessarily be incomplete, the proper approach for the Court to take will be completely dependent on the circumstances of each case. However, experience shows that, in some cases, the evidence of the defendant's wrongdoing at the interlocutory hearing may be such as to furnish the Court with a high level of confidence that the plaintiff has a good claim against the defendant, arising out of conduct that involves substantial dishonesty. Cases of forgery or embezzlement are common examples. Usually, the defendant is not able to mount any serious evidentiary claim for justification at the interlocutory hearing. Other cases, such as the present, may have a different complexion.

87. If Mr Xu's claim is sound, then Ms Xie and Mr Zhang wrongfully excluded him from the enjoyment of his half interest and right to exercise control of Firmtech, and they then diverted Firmtech's business to company defendants that they controlled. According to Mr Xu, the latter course was done in secret, and by using Firmtech's intellectual property in an unauthorised manner. If Mr Xu's case is established at a final hearing, it will follow that Ms Xie and Mr Zhang have acted dishonestly, even if not fraudulently.

88. However, the defendants sought to meet this case on the interlocutory evidence, in that they sought to explain that Mr Xu, having initially agreed to participate fully in Firmtech's business, lost interest because of the economic circumstances and diverted his attention to his other business interests. They say the parties agreed to go their separate ways, in circumstances where Ms Xie and Mr Zhang would continue in the business of supplying aluminium-framed glazing products to the building industry. They say Mr Xu's financial investment was largely repaid. On the evidence in the present case, there is a real possibility, the strength of which cannot now be assessed, that the defendants will establish at a final hearing that their conduct was entirely lawful.

89. The defendants acknowledged that Logikal had engaged in business supplying aluminium-framed façade solutions to the building industry from late-2019 (which was earlier than 30 January 2021 when the defendants claimed that Mr Xu and they had agreed to go their separate ways) on the basis that Firmtech was not engaged in the business of providing façade solutions, and only provided aluminium-framed windows and doors. Mr Xu responded in his affidavit in reply by providing evidence that Firmtech had held itself out, in the company profile that it published, as being able to deliver façade solutions, and Mr Xu also pointed to a number of business records of Firmtech that appeared to suggest that part of the products supplied by Firmtech included the erection of building façades. On the other hand, in his first affidavit, Mr Xu invariably described Firmtech's business as involving the supply of aluminium doors and windows: see pars 40, 49, 50, 120, 121, 141 and 193.

90. The evidence concerning Aluminum's involvement in a project in the Australian Capital Territory called Campbell 5 is telling. Mr Xu claims that the business was diverted from Firmtech but accepted in his first affidavit that Aluminum had paid Firmtech $2,119,999.55 from its receipts from the Campbell 5 project. The defendants explained this payment on the basis that Aluminum treated Firmtech as a subcontractor for the supply of aluminium-framed doors and windows. That is at least superficially consistent with the belief expressed by Ms Xie and Mr Zhang that Firmtech's business was limited to the supply of aluminium-framed doors and windows and that the corporate defendants were entitled to supply aluminium glazed façade solutions.

91. There was some, albeit limited, evidence of WeChat communications between Ms Xie and Mr Zhou that are at least consistent with the defendants' version of events. In particular, the following exchange recorded in the exhibit to Ms Xie’s affidavit happened on 17 August 2020:

Ms Xie:    We have no cash flow/working capital to initiate the Modco project. I'll have to get payment from our clients no matter how difficult.

Ms Xie:   I reckon our client Shuning is about to close shop

Ms Xie:    Because Meriton has not given them any work, there must be something wrong with them.

Mr Xu:    All we have to do is to chase all outstanding payments from our clients, we need cash flow & working capital to continue operate.

Mr Xu:       Difficult times!!

Mr Xu:       Why not come and invest in agribusiness with me.

Mr Xu:       Oats, wheat etc.

Ms Xie:    I devoted all my time & effort in running the business that I haven't even been paid from Firmtech Aluminium yet, not a single dollar.

Ms Xie:    I know how to be a farmer!!

92. Some other notable exchanges occurring in WeChat messages between Mr Xu and Ms Xie included:

• On 18 August 2020, Ms Xie complained that Mr Xu had withdrawn $200,000 from Firmtech, which had had the effect of preventing Firmtech from paying suppliers. Mr Xu replied: "I need money here for meat business urgently as well.” Ms Xie then said: "due to no money paid to supplier, the workers will be on holiday till end of this month, office still open as usual.”

• In a WeChat message apparently dated 21 April 2021, Ms Xie said to Mr Xu: "we need cash flow as well". Mr Xu replied: "we have separated".

• A WeChat message in the exhibit to Mr Xu’s reply affidavit appears to record Mr Xu replying to a comment made by Ms Xie on about 21 April 2021. Ms Xie said: “I have no money with me to spend”. Mr Xu replied: “We are getting separated already”.

93. These exchanges are in no way conclusive, but they have persuaded me that there is a real contest about the circumstances in which Mr Xu ceased to participate in the business of Firmtech.

94. All that can be said in these circumstances is that I have not been able to accept that the interlocutory evidence produced by Mr Xu has been sufficient to satisfy me that I should conclude from the alleged conduct of the defendants that they are likely to dissipate their assets in a manner that will thwart the satisfaction of any judgment that Mr Xu may obtain against the defendants. This conclusion has been fortified by the following matters that I consider emerged from the evidence.

95. There is no evidence that any of the defendants have in fact taken any step to dissipate his, her or their assets, and there is definitely no "solid evidence" in this regard.

96. Mr Xie and Mr Zhang have been engaged in the building industry providing aluminium-framed glazing products for a number of years before the establishment of Firmtech, albeit mostly in the capacity of employees. They have attempted by means of the establishment of Firmtech to build their own business in the industry, and it seems likely that they see their future as continuing to operate in the industry, so that they have an interest in defending these proceedings and establishing their own right to continue to operate the business that they have built up over the years. There is in any case no evidence that Ms Xie and Mr Zhang could readily sell any of the company defendants' businesses.

97. Mr Xu sought to make much of the similarity between the names of Firmtech and Aluminum, given that the names are identical save for the absence of the second "i" in Aluminum's name. That fact may indeed have been evidence of dishonesty if it had appeared that Ms Xie and Mr Zhang had established Aluminum after Mr Xu was excluded from Firmtech in order to pass off Aluminum for Firmtech. However, the evidence establishes that Aluminum was incorporated some time before Firmtech, and had been used by Ms Xie and Mr Zhang in the same business as Firmtech. There was even evidence that Aluminum was intended to be incorporated with a name spelt exactly the same as Firmtech's, but the second "i" was left out by mistake. Ms Xie gave evidence that business that was in the pipeline for Aluminum at the time of incorporation of Firmtech was actually transferred to Firmtech to avoid any hiatus in that company's business as a result of the need to tender for contracts. Although there is still scope for criticising the way Aluminum carried out work that may have been available to Firmtech, the suggestion of dishonesty made by Mr Xu has largely been dispelled.

Delay in seeking interlocutory relief

98. It is not now necessary for the Court to determine whether any delay on Mr Xu's part would have impeded his entitlement to the making of freezing orders if he had continued to seek that interlocutory relief.

99. The plaintiffs' solicitors first wrote a letter of demand to Ms Xie and Mr Zhang on 2 July 2021. The demands made in that letter included that Mr Xu be restored to access to Firmtech's email account and web domain and that the username and passwords be provided to give access to certain computer services. However, it also required disclosure of all projects associated with Firmtech over the past two years, a list of and copies of project contracts for that period, and a list of tenders and quotations. Proceedings in this Court were threatened in the absence of a reply by 6 July 2021. After some correspondence between the parties' solicitors, the defendants' solicitors provided a substantive response on 15 July 2021, in which they suggested that the parties should confer to discuss a potential resolution of all matters in dispute. The last communication before the commencement of these proceedings was an email from the defendants' solicitors to the plaintiffs’ solicitors dated 13 December 2021, which included the statement: "We refer to our letter dated 15 July 2021 and note that we have not received a response to the matters contained in that letter."

98. Mr Xu sought to explain his subsequent delay in commencing the proceedings and applying for freezing orders by giving evidence that he did not positively discover that the defendants had diverted business away from Firmtech until dates in April and June 2021, when he became aware that Logikal had acquired its own manufacturing tools, had attempted to obtain an assignment of Firmtech's lease of the factory premises at Revesby, and that it had apparently engaged in business by providing aluminium glazed façade solutions.

99. The evidence was not sufficiently clear to enable the Court to determine with confidence whether Mr Xu only became aware that the defendants, or some of them, might have diverted Firmtech's business to themselves in about mid-2021. It appears at least that for most of the period upon which the dispute has been on foot, Mr Xu did not entertain a fear that any of the defendants would dissipate their assets in order to prevent the plaintiffs obtaining effective remedies against them.

100. The issue of whether or not any of the defendants have acted dishonestly in relation to the manner in which they have diverted Firmtech's business is clouded by the fact that, after Mr Xu was excluded from participating in the business of Firmtech, Mr Xu on his own admission established a business in the name of a company controlled by him called Firmtech Aluminium Windows and Doors Pty Ltd, which engaged in the same business as Mr Xu said Firmtech had been established to pursue. Mr Xu acknowledged that his company was obliged to account to Firmtech for the profits of this business: see par 184 of Mr Xu's 26 July 2022 affidavit. Mr Xu even gave evidence at pars 201 and 202 of this affidavit of a discussion that he had in June 2022 with an employee, Vince Taouk, of another company established by Mr Xu, Auscon Construction Global Pty Ltd, which had issued a quotation for windows and balustrading for a project in Wollongong. Mr Xu said in par 202:

On or about 23 June 2022, I received a telephone call from Vince Taouk and we had a conversation to the following effect:

Taouk:    "I am very angry. I have just had a call from Charlie Akkari, the Contract Administrator on the Wollongong Towers job, asking me why are there two Firmtech companies competing for the same job."

Me:       "What do you mean?"

Taouk:    "He said that he has got another quote for the windows from Logikal Façade Solutions claiming to be Firmtech."

103. On the present state of the evidence, the Court cannot know what to make of the fact that not only Ms Xie and Mr Zhang, but also Mr Xu, caused their own companies to continue in business providing aluminium-framed glazing products to the building industry, apparently using the name Firmtech and its logo after the time when they ceased to cooperate in the conduct of Firmtech's business.

Relief

104. As Mr Xu rejected the offer made by the defendants that is contained in MFI-3, he is no longer entitled to the benefit of the undertakings offered by the defendants. The defendants no longer offer to give Mr Xu 14 days’ prior notice of any intention to sell the real properties the subject of the offered undertakings.

105. As I have explained, on my understanding, Mr Xu now seeks interlocutory orders substantially in the form of the undertakings contained in the offer that is MFI-4. As I have also explained above, I am not satisfied that the Court should make the order sought by Mr Xu that the defendants swear affidavits to disclose their assets.

106. I am, however, satisfied that it will be appropriate for the Court to make interlocutory orders that effectively preserve the businesses operated by Aluminum and Logikal, insofar as those businesses may arguably have been developed by the diversion of the business opportunities that were available to Firmtech. Those activities should not be limited to the supply of aluminium-framed doors and windows, but, on an interlocutory basis, should extend to façade solutions, and indeed all products claimed by Firmtech in its company profile to be products offered by Firmtech: see Exhibit ZX2 pages 1-17.

107. Ms Xie, Mr Zhang, Aluminum and Logikal should be required to continue to operate those businesses in the ordinary course of business, and they should not be permitted to divert that business to other companies controlled by them, without the leave of the Court given on 14 days’ notice to Mr Xu.

108. It does not appear that the evidence justifies any further interlocutory relief being granted against the company defendants other than Aluminum and Logikal, although, as I have noted above, Meek J understood that the eighth defendant had undertaken a relevant project. It may be that Mr Xu is entitled on the evidence to extend the interlocutory relief to some other defendants in a way that I do not presently appreciate.

109. It will also be justified for the Court to make interlocutory orders that require the defendants against whom orders may be made not to deal with the profits of the businesses until the determination of these proceedings or further order. The profits should be calculated after allowing for reasonable salaries to be paid to Ms Xie and Mr Zhang for managing the businesses.

110. Pending the determination of these proceedings, the defendants who operate relevant businesses should be required to prepare proper accounts in accordance with applicable accounting standards and to retain all vouchers and contracts necessary to prove the validity of the accounts (cf the approach adopted by the Full Court of the Federal Court of Australia in Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156 at [205], where the Court accepted undertakings in lieu of an interlocutory order).

111. I would not make an order requiring any of the defendants to prepare any formal accounts that they have not already prepared in the ordinary course of their businesses (as Mr Xu sought in pars 5(a) and 6(a) of his open offer in MFI-4). I consider that the plaintiffs' delay in commencing these proceedings is sufficient to make it unjust for the Court now to make an order that any defendants retrospectively prepare accounts that they have not prepared in the ordinary course of business. I note that there is no actual evidence that any defendants have not kept proper accounts.

112. Even though I would not now order any of the defendants to prepare additional accounts retrospectively, the defendants should be ordered, pending the determination of these proceedings, to retain all the vouchers, contracts and other documents that would be necessary to facilitate an efficient accounting process between the defendants and the plaintiffs in the event that the Court orders that process to take place to enable a defendant to account to Firmtech.

113. I acknowledge that the orders that I have suggested should in principle be made would take effect until the determination of these proceedings or further order. The open offers made by both the defendants and Mr Xu generally only contemplated undertakings that steps would not be taken without the party giving the undertaking giving 14 days' notice to the other party or parties. If the parties would prefer orders to be made in that form, then they should advise my Associate of that fact. I would need to consider the position, but it is likely to be more efficient if the Court establishes an interlocutory regime by orders that will apply until the determination of these proceedings or further order.

114. The parties should confer and, to the extent that they are able to do so, they should agree draft short minutes of order to give effect to these reasons, and provide that draft to my Associate as soon as possible, and in any event within 10 days of the publication of these reasons. To the extent that the parties are unable to agree, they should provide to my Associate the versions of the draft short minutes of order that they contend should be made, together with brief written submissions supporting their positions. The parties should also consider the case management orders that should be made to ensure the efficient future conduct of these proceedings.

115. I will hear the parties on costs, but my present inclination is that the proper order is that the costs of the interlocutory applications to date should be the parties' costs in the cause.

116. I acknowledge that there are a number of issues in respect of which the parties led evidence and made submissions that I have not considered necessary to be dealt with in these reasons. The way the parties conducted this interlocutory application has approached the complexity of a final hearing, and it has not been feasible for the Court to deal with all issues in a manner consistent with the expeditious delivery of this interlocutory judgment.

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Amendments

02 September 2022 - Correction to spelling of Counsel's name

Decision last updated: 02 September 2022