Groeneveld Australia Pty Ltd v Nolten Vastgoed BV

[2011] VSC 18

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

PRACTICE COURT

No. 6596 of 2010

GROENEVELD AUSTRALIA PTY LTD (ACN 070 025 795)	First Applicant
and GROENEVELD TRANSPORT EFFICIENCY BV	Second Applicant
v
NOLTEN VASTGOED BV and CHRIS NOLTEN	First Respondent Second Respondent

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JUDGE:	VICKERY J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	1 FEBRUARY 2011
DATE OF JUDGMENT:	2 FEBRUARY 2011
CASE MAY BE CITED AS:	GROENEVELD AUSTRALIA PTY LTD v NOLTEN VASTGOED BV
MEDIUM NEUTRAL CITATION:	[2011] VSC 18

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INJUNCTIONS – Application for freezing orders against non-parties – Continuation of freezing order – Standard of proof - Application refused - Supreme Court (General Civil Procedure) Rules 2005 (Vic), Order 37A.05(5)(b) – Property Law Act 1958 (Vic.) s.172 – Onus of proof may shift – Standard of proof – Inferences of fact in a civil matter.

PRACTICE AND PROCEDURE – Application for freezing orders against non-parties – Continuation of freezing order – Standard of proof - Application refused - Supreme Court (General Civil Procedure) Rules 2005 (Vic), Order 37A.05(5)(b) – Property Law Act 1958 (Vic.) s.172 – Onus of proof may shift – Standard of proof – Inferences of fact in a civil matter.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr A. T. Strahan	DLA Phillips Fox
For the Respondents	Mr D.J. Christie	MAE Lawyers

TABLE OF CONTENTS

The Facts.............................................................................................................................................. 2

The Applicants’ Case......................................................................................................................... 2

The Respondents’ Case..................................................................................................................... 6

Freezing Orders – Legal Principles............................................................................................... 11

Section 172 Property Law Act 1958 (Vic) – Transactions to defraud creditors...................... 21

Inferences of Fact Circumstantial Evidence in Civil Cases...................................................... 28

Whether a ‘Good Arguable Case’.................................................................................................. 30

Whether the Loan Moneys Advanced Were Secured by the Mortgages  30

The Claim Under s.172 of the Property Law Act........................................................................ 32

Balance of Convenience.................................................................................................................. 34

Conclusion......................................................................................................................................... 35

HIS HONOUR:

1. On 9 December 2009 Davies J made interim orders by consent in the Practice Court, but on a without prejudice basis, freezing the proceeds (the “Proceeds”) of the settlement of a sale of a property known as 53 Stanton Court, Gisborne, Victoria (the “Gisborne Property”).  At that time the respondents had not put forward affidavit material and did not make any submissions in opposition to the application made.  The matter was brought on before the Practice Court on 17 December 2009 and then adjourned to 1 February 2010.  By this time the respondents had filed and served the affidavits upon which they relied. 

1. The applicants claim that they have a right to the Proceeds and that the respondents have no claim to them.  By originating motion, filed 8 December 2010, the applicants, who are the plaintiffs on the motion, seek the following orders against the respondents, who are the defendants to the motion:

1.Freezing orders in respect of specified assets in accordance with the annexed form of order.

2.        Such further orders as this Honourable Court deems appropriate.

1. The grounds upon which the relief is sought are as follows:

1.        The plaintiffs obtained a judgment in this Court on 22 November 2010.

2.The plaintiffs may have a claim under the processes of this Court yielding a means of satisfaction of the judgment from the assets of the defendants. 

3.The plaintiffs seek relief pursuant to order 37A of the Supreme Court General Civil Procedure Rules freezing specified assets of the defendants as identified in the annexure to the opposed orders.

The Facts

1. Walter Nolten was the former Managing Director of the first applicant, Groeneveld Australia Pty Ltd (“Groeneveld”).  In July 2009 Groeneveld commenced proceedings against Walter Nolten in respect of alleged breach of duty which he owed to the company. 

1. On 1 December 2010 Davies J made orders against Walter Nolten and the companies related to him following the trial.  Damages and compensation are yet to be determined.  It is estimated, however, that Walter Nolten and his defendant companies are each liable for amounts of between $900,000 and $1.6 million. 

1. Following the trial, Walter Nolten breached inter partes undertakings not to dispose of his family home in Gisborne.  The applicants became aware of the sale and sought freezing orders relating to the assets of Walter Nolten.  Mr Nolten consented to those orders freezing the assets including his family home in Gisborne on 9 December 2010.

1. In the present application the first respondent, Nolten Vastgoed BV (“Vastgoed”), is a Dutch company owned and controlled by Walter Nolten's brother, Diederick Nolten.  The second respondent, Chris Nolten, is Walter Nolten's father.

1. By this application the applicants seek to continue the orders made by Davies J on 9 December 2010 preserving the proceeds of the sale of the Gisborne property as against the third parties, Vastgoed and Chris Nolten.

The Applicants’ Case

1. In a draft statement of claim presented by the applicants’ counsel, Mr Strahan, in the course of submissions, allegations are made, or proposed to be made, against the first respondent Vastgoed and the second respondent, Chris Nolten.  Proceedings are yet to be issued against the respondents which incorporate these allegations.

1. In relation to Vastgoed, what is pleaded is that in or about December 2009, Walter Nolten entered into a transaction with Vastgoed that purported to have the following elements:  Vastgoed agreed to loan Walter Nolten 100,000 euros;  the moneys loaned by Vastgoed to Walter Nolten would be dissipated on living expenses and used to service borrowings in relation to a property known as “the Brendale property” and another property known as “the Barry Road property”;  and Walter Nolten agreed to procure the Vastgoed mortgage over the Gisborne property.  This is all described in the draft pleading as the “Vastgoed transaction”. 

1. It is then pleaded that the Vastgoed transaction had the following effect:  Nolten Investments, a company associated with Walter Nolten, was able to service borrowings and hence retain its interest in the Brendale property;  TTM Australia Pty Ltd (“TTM”), another company associated with Walter Nolten, was able to service borrowings and hence retain its interest in the Barry Road property;  Walter Nolten's sole personal asset against which judgment against him could be enforced, namely his interest in the Gisborne property, became subject to the Vastgoed mortgage which was part of the Vastgoed transaction.

1. In the premises it is alleged that Walter Nolten entered into the Vastgoed transaction with the intent to defraud his creditors within the meaning of s.172 of the Property Law Act 1958.

1. In relation to a second loan from Chris Nolten, it is pleaded in the draft statement of claim that in or about December 2009, Walter Nolten entered into a transaction with Chris Nolten that purported to have the following elements:  Chris Nolten agreed to loan Walter Nolten 228,000 euros;  the loan would be interest free;  the moneys loaned by Chris Nolten to Walter Nolten would be dissipated on living expenses and used to service borrowings in relation to the Brendale property and the Barry Road property;  and Walter Nolten agreed to procure a mortgage over the Gisborne property to secure the loan.

1. It is pleaded that the transaction entered into with Chris Nolten had the following effect:  Nolten Investments was able to service its borrowings and hence retain its interest in the Brendale property;  TTM was able to service its borrowings and hence retain its interest in the Barry Road property;  and Walter Nolten’s sole personal asset which judgment against him could be enforced, namely his interest in the Gisborne property, became subject to a mortgage to support the loan made by Chris Nolten.

1. It is on this basis that it is alleged that Walter Nolten entered into the transaction in an attempt to defraud his creditors and is caught by s.172 of the Property Law Act 1958.

1. The applicants seek to draw these conclusions from the following facts:

First, a company controlled by Walter Nolten was able to service borrowings and hence retain its interest in the Brendale property.

Second, a company controlled by Walter Nolten was able to service borrowings and hence retain its interest in the Barry Road property. 

Third, Walter Nolten's sole asset, against which a judgment against him could be enforced, namely his interest in the Gisborne property, became subject to mortgages in favour of the related party lenders.

1. They say that the effect of these transactions was, therefore, to preserve wealth within the Nolten family.  They say further that Walter Nolten's intention may be inferred from the following additional facts. 

1.In or about July 2009 the plaintiffs commenced proceeding No.7564 of 2009 against Walter and others, which they call the principal proceeding.

2.In or about September 2009, the plaintiffs amended the statement of claim in a the principal proceeding to include allegations that Walter Nolten breached his duties to his company. 

3.The companies related to Walter Nolten, including TTM and Nolten Investments, had knowingly assisted Nolten in his breach of duty.

4.The Vastgoed loan and the loan from Chris Nolten were entered into in or about December 2009.

1. The plaintiffs assert that on 5 July 2010 the solicitors for Walter Nolten wrote an open letter admitting liability in respect of a number of the breaches of duty claims.

1. On 22 November 2010 this Court gave judgment in favour of the plaintiffs in respect of the breach of duty claims which were not admitted, and on 1 December 2010 made orders in favour of the plaintiffs in respect of the claims in the principal proceedings. 

1. It was contended by the applicants that, at least from October 2009, Walter Nolten knew he was, or was likely to be, liable to the plaintiffs in respect of a significant claim for damages. 

1. The applicants say further, which I accept, that they are not, in this application or in any trial of their cause of action, required to prove Walter Nolten's intent from direct evidence. They are permitted to rely on proper inferences drawn from the circumstances. Nevertheless, they contend that the compelling inference from the facts is that Walter Nolten had the relevant intention required under s.172 of the Property Law Act such as to enliven its operation against him.

1. However, this application is not made against Walter Nolten.  It is made against third parties, namely against his brother and father.  Accordingly, the test that applies to a third party in these circumstances must be considered. 

1. I was referred to the evidence of Mr Leggatt filed in this proceeding by his affidavit of 31 January 2011.  Mr Leggatt is a lawyer and partner of the firm DLA Phillips Fox.  He has the care and conduct of this matter on behalf of the applicants.  He has sworn and filed a number of affidavits on their behalf in support of their present application.

1. In his affidavit of 31 January 2011, Mr Leggatt gave detailed evidence about the corporate structure of entities associated with Walter Nolten from which he ultimately drew the following conclusions: 

Given the ownership structure [which Mr Leggatt described in some detail in the preceding paragraphs] it is clear that as at December 2009/February 2010, Mr Nolten was a defendant in litigation with Groeneveld Australia Pty Ltd and that the only asset he beneficially owned was the Gisborne property.  It is also clear [so Mr Leggatt says] from the budget of Mr Nolten provided to his brother Diederick [which was exhibited in this matter] that money advanced to him by Diederick and his father was used to service the loans on the Brendale and Barry Road properties as well as meet subdivision costs of the Brendale property.

1. He then said: 

The equitable mortgage is taken by Nolten Vastgoed BV and Chris Nolten have the convenient effect of diverting the only money beneficially owned by Walter Nolten as at February 2010 away from Mr Nolten and at least partly investing in assets which Mr Nolten does not beneficially own.  The evidence also appears to disclose that Mr Nolten was keeping his family members closely up to date with [d1] information about his financial affairs and his litigation with my clients [as he says] including by the provision of copies of advice from counsel.

1. Mr Leggatt then said: 

that he had instructions to plead a claim against the respondents, Vastgoed and Chris Nolten in which he would seek to set aside the equitable mortgages granted in their favour on the basis that they are contrary to s.172 of the Property Law Act.

1. Further, the applicants also propose to plead, as reflected in their draft statement of claim, that the mortgages over the Gisborne property do not support the loans actually advanced by either Vastgoed or Chris Nolten, but in fact support “other loans”.

The Respondents’ Case

1. By his sworn affidavit dated 8 December 2010, Barry Joseph Woods, who was the solicitor engaged by the Nolten family to give effect to the transactions which I have described, swears to the following matters:

(a)He is a solicitor who acts for both Nolten Vastgoed BV and Chris Nolten, the respondents to this proceeding.  He swears that he was, in about December 2009, instructed by Chris Nolten and Diederick Nolten, who were Walter Nolten's father and brother respectively. 

(b)He swears that the Noltens, who engaged him as their clients, informed him that they were aware that Walter Nolten had been terminated from his job and that he was involved in litigation with his former employer.

Second, that Walter Nolten had asked them to lend him money to enable him to meet his day‑to‑day living expenses, including private school fees for his three children, and servicing his loan with NAB and to fund his legal expenses in the proceeding. 

Third, that they had agreed to lend the money, and further advances if necessary, to Walter Nolten provided adequate security was given.

Fourth, that Walter Nolten and his wife, Serita, had agreed to provide security in the form of a mortgage over their property in Gisborne.

1. Mr Woods swears that the Noltens instructed him to prepare, two loan agreements, one with the lender Vastgoed, lending an amount of 174,000 euros and another with the lender, Chris Nolten, lending the sum of 53,000 euros.  Mr Woods was instructed to prepare two registrable mortgages over the Gisborne property to secure the loans together with caveats which were to be lodged on the title to the Gisborne property.  He swears that he was not asked to register the mortgages, rather to lodge caveats instead.  The loan agreements and the mortgages were exhibited in another affidavit filed in these proceedings, that of Mr Nguyen, sworn 7 December 2010. 

1. Mr Woods also swears that while he had been instructed to register the caveats upon the loan agreements being signed, there was a delay in registering the caveats due to administrative problems in his office.  He swears that the delay had nothing to do with the Noltens.

1. The affidavit of Mr Woods was not challenged directly by the material advanced by the applicants and Mr Woods was not cross‑examined.  I accept the statements of fact as stated by Mr Woods in his affidavit to which I have referred. 

1. In another affidavit filed on behalf of the defendants, sworn in the Netherlands on 8 December 2010, Mr Diederick Nolten swears as follows:

(a)       He is the brother of Walter Nolten.  He resides in the Netherlands.  He describes Nolten Vastgoed BV as a Dutch company which he owns and controls.  He makes his affidavit in this proceeding from his own knowledge save where indicated to the contrary.  Again he refers to the affidavit of Mr Nguyen which was affirmed on 7 December 2010.

(b)      He describes the following scenario in his affidavit.  He says that in mid July, or about then, 2009, Walter Nolten informed him that he had been terminated from his job and was being sued by his former employer.  In about September 2009 he says that Walter Nolten asked him to loan him 60,000 euros to cover his costs of living and to pay his legal fees.  He says that he told Walter Nolten that he would lend him the money through his company, Nolten Vastgoed BV, provided adequate security would be provided for the loan.

(c)       He says that he caused 60,000 euros from his company to be directly deposited into Walter Nolten's Commonwealth Bank account on 17 September 2009.  He says that he had a loan agreement prepared to document the loan.  Walter and he signed it when Walter came to the Netherlands in mid October 2009.  The document, then signed, was written in the Dutch language. 

(d)      He says further that on 1 February 2010 he came with his father to Australia to visit Walter Nolten as he knew he was going through a difficult time and he wanted to offer him his support, including financial support.  While he was in Australia he says that Walter Nolten, together with his father, Chris Nolten, discussed Walter Nolten's expected financial needs for the next four months.  Walter Nolten had prepared a cash flow spreadsheet in which he had set out his expected financial commitments for February and March, April and May 2010.  Walter Nolten took his father and Diederick Nolten through the spreadsheet explaining the repayments and other expenses listed.  That spreadsheet was produced in evidence and submissions were made upon it.

(e)       Walter Nolten informed Diederick Nolten that he was doing a property subdivision project in Brendale, Queensland in relation to which he was required to pay stamp duty of $32,000 in February and against which he had a loan which required monthly payments of $2,000.  Diederick Nolten swears that the spreadsheet formed the basis for a new loan agreement.  It appears that the subdivision in Queensland was commenced before the litigation that was commenced by the plaintiffs against Walter Nolten and his companies.

(f)       Diederick Nolten says that he brought to Australia on his computer a loan agreement which he had prepared in draft before he left the Netherlands.  It was based, he says, on the agreement which Walter Nolten and he had signed in November 2009.  He says that at the meeting he revised the agreement to reflect the amount of the loan and the stages in which the loan moneys were to be drawn down and the security position, namely that his company would have a mortgage over Walter's property in Gisborne behind the mortgage to the National Australia Bank, and his father's mortgage securing the sum of $55,000.  At clause 2 of the loan agreement, Mr Diederick Nolten refers to part of the purpose of the loan being to assist, among other things, the sale of the four blocks in the project in Queensland.  He says that this was a reference to the property subdivision project at Brendale, Queensland.

(g)      Walter Nolten and Diederick Nolten signed the agreement once he had revised it.

(h)      Once the agreement had been signed, Diederick Nolten then says he telephoned Barry Woods, a solicitor who Walter Nolten and his father knew, on a conference call to explain what had been agreed and ask him to prepare the necessary documents in English to effect the loan and the mortgage.  He then returned to Holland.

(i)       He swears that shortly thereafter the loan agreements arrived in Holland and after he was satisfied they reflected the agreement that Walter Nolten and he had made, he signed them and sent a copy back to Walter Nolten.  Once he had signed the loan agreements, he caused 50,000 euros from his company to be directly deposited to Walter Nolten's Commonwealth Bank account on 16 February 2010.  His company made further loan advances by way of direct deposit to Walter Nolten's Commonwealth Bank account as follows:  12 March 2010, 18,000 euros;  14 April 2010, 42,500 euros;  16 April 2010, 28,000 euros;  17 May 2010, 18,000 euros.

1. Diederick Nolten says further in his affidavit that he was aware that Groeneveld's lawyers had asserted that the loan agreement and mortgage were executed with the intention of avoiding Groeneveld's judgment.  He denies that the loan agreement and the mortgage were entered into by him with that intention.  He says that if that was Walter Nolten's intention as asserted, then he was unaware of that intention.  He says that he entered into the loan agreement and the mortgage to secure the loans referred to in good conscience and to support his brother.

1. Finally, he says, that the loan was to be repaid on 31 May 2010, that the Brisbane property had been sold and he expected the loan to be repaid upon settlement of the sale.  He says that he needed to use the money for further expansion and day‑to‑day running of his business.

1. Walter Nolten’s father, Chris Nolten, swore an affidavit in The Hague, Netherlands dated 14 December 2010 which is factually similar to the affidavits of Mr Woods and Diederick Nolten.  He too denied that the loan agreement and the mortgage were entered into by him with an intention of avoiding Groeneveld's judgment.  He says that if that was Walter Nolten's intention as asserted, then he was unaware of that intention.  He says that he entered into the loan agreement and the mortgage to secure the loans referred to in good conscience and to support his son.

1. These affidavits were not before Davies J on 9 December 2010 when she made her orders initially freezing the assets as I have described.  The affidavits of Diederick Nolten and Chris Nolten were not directly challenged by the material advanced by the applicants and they were not cross‑examined.

Freezing Orders – Legal Principles

1. As Hargrave J observed in Robmatjus Pty Ltd v Violet Home Loans:[1]

The circumstances in which the Court may exercise its inherent power to make a freezing order, also known as a "Mareva order" or an "asset preservation order", is now the subject of harmonised court rules, which apply in all superior courts in Australia. The harmonised rules reflect, and are informed by, the numerous reported cases dealing with the extraordinary power of the Court to freeze the assets of a judgment debtor, prospective judgment debtor or a third party in circumstances where there is a risk that they may act to frustrate or inhibit the Court’s process, by taking steps which will or may result in a judgment or prospective judgment of the Court being wholly or partly unsatisfied.

[1][2007] VSC 165 at [47].

1. In Victoria, Order 37A of the Supreme Court (General Procedure) Rules 2005 applies to applications for a freezing order.  Rule 37A.02(1) provides:

37A.02 Freezing order

(1)The Court may make an order (a "freezing order"), upon or without notice to the 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.

1. Rule 37A.03 provides for the making of ancillary orders:

37A.03 Ancillary order

(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 paragraph (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.

1. Rule 37A.05(4) specifies circumstances in which the Court may make a freezing order or an ancillary order against a defendant or judgment debtor.  Rule 37A.05(4) provides:

37A.05  Order against judgment debtor or prospective judgment debtor or third party

...

(4)The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied because any of the following might occur -

(a)the judgment debtor, prospective judgment debtor or another person absconds;  or

(b)the assets of the judgment debtor, prospective judgment debtor or another person are -

(i)removed from Australia or from a place inside or outside Australia;  or

(ii)       disposed of, dealt with or diminished in value.

1. Rule 37A.05(5) specifies circumstances in which the Court may make a freezing order or an ancillary order against a person other than the judgment debtor or prospective judgment debtor, referred to in the rule as a "third party".  The rule provides:

37A.05  Order against judgment debtor or prospective judgment debtor or third party

...

(5)The Court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a "third party") if the Court is satisfied, having regard to all the circumstances, that -

(a)there is a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied because -

(i)the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor;  or

(ii)the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor;  or

(b)a process in the Court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment of the Court, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.

1. In this application, it is Rule 37A.05(5)(b) which is specifically relied upon by the applicants.

1. Returning to the discussion of Hargrave J of the legal principles governing freezing orders in Robmatjus, his Honour noted: [2]

The Court’s powers to make a freezing order or an ancillary order are not limited to the circumstances stated in Rule 37A.05. However, the power to make orders in this case can be determined by reference to the circumstances specified in Order 37A. Of course, an order will not follow as a matter of course if the elements for the existence of the Court’s power are established. The Court retains a discretion and must consider the balance of convenience.

[2]Supra at [52].

1. In Robmatjus, like the present case, the applicants relied upon sub-rule (b) of Rule 37A.05(5).  In this regard, Hargrave J said:[3]

   [3]Supra at [57].

The plaintiffs rely upon the second limb of Rule 37A.05(5). Rule 37A.05(5) is based upon the decision of the High Court in Cardile v LED Builders Pty Ltd. The facts in that case bear a number of similarities to the facts in this case. The joint judgment of Gaudron, McHugh, Gummow and Callinan JJ contains the following statement of principle as to the circumstances in which freezing orders may be made against persons who are not parties to the proceeding:

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

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

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

[Citations omitted]

1. Hargrave J in Robmatjus also considered the standard of proof required to determine whether the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor for the purposes of sub-rule (b) of Rule 37A.05(5).  His Honour was asked to consider whether the standard of proof required an applicant to establish "a compelling cause of action" for relief as a result of such process being instigated or some lesser standard.  His Honour determined that it will be enough if an applicant for relief under sub-rule (b) of Rule 37A.05(5) can satisfy the Court that, in all the circumstances of the case, there is a real case to be investigated under the process or processes relied upon as potentially yielding a means of satisfaction of the judgment from the assets of the non-parties.  The issue was analysed by his Honour in the following passage:[4]

A threshold issue was raised in argument. It was submitted on behalf of the defendant and the non-parties that, in order to establish that a relevant process "may" ultimately be available, the plaintiffs must establish "a compelling cause of action" for relief as a result of such process being instigated. It was submitted that a mere possibility that some process may ultimately lead to relief of the relevant kind is not sufficient for the purposes of the rule. I do not accept this submission. Although I accept that a merely theoretical possibility will not fall within the rule, I do not think that a plaintiff need establish a "compelling cause of action". It will be enough if a plaintiff can satisfy the Court that, in all the circumstances of the case, there is a real case to be investigated under the process or processes relied upon as potentially yielding a means of satisfaction of the judgment from the assets of the non-parties.

[4]Supra at [59].

1. Later, in Deputy Commissioner of Taxation v AES Services (Aust) Pty Ltd,[5] Forrest J considered the principles applicable to freezing orders generally.  In so doing, his Honour restated the principles which he had earlier distilled in Zhen and Mo v Ors.[6]  The principles restated in AES Services are:[7]

   [5][2009] VSC 418.

   [6][2008] VSC 300.

   [7][2009] VSC 418 at [20].

First, that a freezing order, by its very nature, is a drastic remedy and a court must exercise a high degree of caution before taking a step which will interfere with a party’s capacity to deal with his or her assets.[8]

[8]           Cardile v LED Builders Pty Limited[1999] HCA 18; (1998) 198 CLR 380.

Second, the order is not designed to provide security for the applicant’s claim.[9] It is solely directed to preserving assets from being dissipated, thereby frustrating the court process.[10]

[9]           Jackson v Sterling Industries[1987] HCA 23; (1987) 162 CLR 612, 621, 625.

[10]Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3)(1998) 195 CLR 1, [73].

Third, the applicant bears the onus both in satisfying the Court that the order should be continued and in satisfying the Court as to the amount which is to be the subject of the order.

Fourth, that an order can only be made on the basis of admissible evidence which supports the contentions made by the party seeking the order. Speculation and guesswork is no substitute for either the facts or inferences properly drawn from proved facts.[11]

[11]         Hartwell Trent (Aust) Pty Ltd v Tefal Societe Anonyme[1968] VR 3, 13.

Fifth, that before such an order can be made it is necessary that the applicant establish –

(a)       an arguable case against the defendant;[12]  and

(b)that there is a danger that the prospective judgment will be wholly or partly unsatisfied as a result of the defendant’s actions in either removing the assets or disposing or dealing with them so as to diminish their value.[13]

Sixth, the balance of convenience must favour the granting of the freezing order.[14]

Seventh, that there is no set process determining the exact nature of an order. The order will be framed according to the circumstances of the case.[15]

Eighth, the applicant must establish with some precision the value of prospective judgment. The order should not unnecessarily tie up a party’s assets and property.[16]

Finally, there may be discretionary considerations which militate against the granting of a freezing order, such as delay in bringing the application on before the court or a lack of candour in the materials placed before the court.[17]

[12]Glenwood Management Group Pty Ltd v Mayo[1991] 2 VR 49, 49.

[13]R.37A.02(1).  Under the general law the plaintiff must establish that there is a real risk of assets being disposed of: Cardile [122].

[14]         Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513.

[15]Jackson v Sterling Industries [1987] HCA 23; (1987) 162 CLR 612, 621.

[16]         Cardile [124].

[17]         Cardile [58].

1. Effective on 3 May 2010, the Chief Justice authorised the issue of Practice Note No. 5 of 2010 which deals with freezing orders.  The Practice Note receives recognition in Order 37A where in Rule 37A.02(4) it is provided that:  “In making a freezing order or an ancillary order, the Court shall have regard to the practice note concerning freezing orders”.  Of relevance to the present application are paragraphs 5-7 and 12 of the Practice Note, which find their origins in the case law cited by Forrest J in Zhen and Mo v Ors and AES Services to which I have referred.  These paragraphs provide:

5.The purpose of a freezing order is to prevent frustration or abuse of the process of the Court, not to provide security in respect of a judgment or order.

6.A freezing order should be viewed as an extraordinary interim remedy because it can restrict the right to deal with assets, even before judgment, and is commonly granted without notice.

7.The respondent is often the person said to be liable on a substantive cause of action of the applicant. However, the respondent may also be a third party, in the sense of a person who has possession, custody or control, or even ownership, of assets which he or she may be obliged ultimately to disgorge to help satisfy a judgment against another person. Rule 37A.05 addresses the minimum requirements that must ordinarily be satisfied on an application for a freezing order against such a third party before the discretion is enlivened. The third party will not necessarily be a party to the substantive proceeding, (see Cardile v LED Builders Pty Ltd (1999) 198 CLR 380) but will be a respondent to the application for the freezing order or ancillary order. Where a freezing order against a third party seeks only to freeze the assets of another person in the third party's possession, custody or control (but not ownership), Form 37AA will require adaptation. In particular, the references to “your assets” and “in your name” should be changed to refer to the other person's assets or name (e.g. “John Smith's assets”, “in John Smith's name”).

12.The order should exclude dealings by the respondent with assets for legitimate purposes, in particular:

(a)       payment of ordinary living expenses;

(b)       payment of reasonable legal expenses;

(c)dealings and dispositions in the ordinary and proper course of the respondent's business, including paying business expenses bona fide and properly incurred; and

(d)dealings and dispositions in the discharge of obligations bona fide and properly incurred under a contract entered into before the order was made.

1. Further, of particular relevance to the present application, are the observations of the High Court in Cardile v LED Builders Pty Ltd.[18] An important passage dealing with this issue in the judgment of Gaudron, McHugh, Gummow and Callinan JJ[19] was cited by Hargrave J in Robmatjus, as noted above.  Rule 37A.05(5) of this Court reflects the principles set out in Cardile.

   [18](1999) 198 CLR 380.

   [19]Supra at 405–406 [57].

1. However, both Cardile and Rule 37A.05(5)(b), which evolved from it, do not specify the degree of satisfaction which will be required by a court before it may proceed to grant Mareva relief against third parties.

1. In the present case, Mr Strahan of counsel submitted on behalf of the applicants that the approach of Hargrave J in Robmatjus was correct, where his Honour held that for the purposes of sub-rule (b) of Rule 37A.05(5), it is enough if the applicant for the relief can establish a real case to be investigated as to whether the third party may be obliged to disgorge assets or contribute toward satisfying a judgment or prospective judgment.  This approach was applied by Hargrave J in Robmatjus in the following passages:[20]

   [20]Ibid at [59–66].

A threshold issue was raised in argument. It was submitted on behalf of the defendant and the non-parties that, in order to establish that a relevant process "may" ultimately be available, the plaintiffs must establish "a compelling cause of action" for relief as a result of such process being instigated. It was submitted that a mere possibility that some process may ultimately lead to relief of the relevant kind is not sufficient for the purposes of the rule. I do not accept this submission. Although I accept that a merely theoretical possibility will not fall within the rule, I do not think that a plaintiff need establish a "compelling cause of action". It will be enough if a plaintiff can satisfy the Court that, in all the circumstances of the case, there is a real case to be investigated under the process or processes relied upon as potentially yielding a means of satisfaction of the judgment from the assets of the non-parties.[21]

The plaintiff relies upon a number of processes which are or may ultimately be available to them. First, it was submitted that s.172(1) of the PropertyLaw Act 1958 (Vic) may be a foundation for a proceeding in the Court to set aside the sale of business agreement between the defendant and Violet Home Loans. Section 172(1) of the Property Law Act provides: ... [Here His Honour set out the sub-section].[22]

It was submitted on behalf of the defendant that there was no case for possible relief under s.172(1) because the sale of business agreement was entered into for full consideration. Reliance was placed upon s.172(3) which provides: … [Here His Honour set out the sub-section].[23]

I do not accept the submission of the defendant in this regard. I accept that the evidence does not enable any conclusion to be drawn as to whether the sale of business agreement was entered into for valuable consideration, or upon good consideration. However, there is a real case to be investigated as to whether the sale of business agreement was entered into in good faith. Further, if the sale of business agreement was entered into with intent to defraud creditors, in particular the plaintiffs, there can be no doubt that Violet Home Loans, through Mr Mingos, had notice of that intent. Accordingly, s.172(3) is not a complete answer to the plaintiffs’ reliance upon s.172(1) as a process which is or may be available to them to recover any judgment from the non-parties.[24]

I say the non-parties, and not just Violet Home Loans, because it seems to me that there is a real case to be investigated as to whether the direction by the defendant to Violet Home Loans, that Violet Home Loans should pay the purchase consideration under the sale of business agreement to Franklin Dell in satisfaction of its dividend entitlement, also constituted an alienation of property made with intent to defraud creditors. Accordingly, there is a real case to be investigated as to whether that direction should be set aside under s.172(1)..[25]

Further, there is a real case to be investigated as to whether the distribution or distributions by Franklin Dell to the beneficiary or beneficiaries of the Mingos Family Trust, which I was informed amounts to the whole of the $850,000 paid by Iden in respect of the sale by Violet Home Loans of the Adelaide Bank loan portfolio, is an alienation of property which may be set aside under s.172(1). At present, the evidence justifies the inference that Mr Mingos was the recipient of the $850,000 or, if not him personally, a person or entity associated with him.[26]

Accordingly, the plaintiff has satisfied me that s.172(1) is a process which is or may ultimately be available to it in order to set aside the sale of business agreement, the direction that the purchase consideration payable by Violet Home Loans …[27]

[Emphasis added]

[21]Ibid at 59.

[22]Ibid at 60.

[23]Ibid at 61.

[24]Ibid at 62.

[25]Ibid at 63.

[26]Ibid at 64.

[27]Ibid at 65.

1. In contrast,  Mr Christie of counsel who appeared for the respondents, submitted that this test was inconsistent with the approach of Forrest J in Zhen and Mo v Ors and AES Services.  It was submitted that Forrest J determined that an arguable case against a respondent must first be established before Rule 37A.05(5)(b) can be engaged, and that the sub-rule merely provides for the factual elements to be proven by an applicant before relief against a third party may be granted.

1. In order to determine this question, assistance is derived from the analysis of the High Court in Cardile where the doctrinal basis of the Mareva order, including such orders made against third parties, was considered.  The Court cited[28] the observations made in the joint judgment of Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia[29] as a correct statement of principle where the issue before a court is the granting of a Mareva order against parties from whom final relief is sought.  In this type of case it was observed that:

   [28]Ibid at 399–401 [41].

   [29](1998) 195 CLR 1 at 32.

The Mareva injunction is the paradigm example of an order to prevent the frustration of a court's process … and The general principle which informs the exercise of the power to grant interlocutory relief is that the court may make such orders, at least against the parties to the proceeding against whom final relief might be granted, as are needed to ensure the effective exercise of the jurisdiction invoked.

[Citations omitted]

However, the High Court in Cardile observed that where the relief is sought against non-parties, “the focus must be on the administration of justice”.[30]

[30]Ibid at 401 [42].

1. The High Court in Cardile sets out some of the basic elements in the administration of justice to be considered in applications for Mareva orders against non-parties, where it is stated:[31]

There is a temptation to use the term "flexible" to cloak a lack of analytical rigour and to escape the need to find a doctrinal and principled basis for orders that are made. There are significant differences between an order protective of the court's process set in train against a party to an action, including the efficacy of execution available to a judgment creditor, and an order extending to the property of persons who are not parties and who cannot be shown to have frustrated, actually or prospectively, the administration of justice. It has been truly said that a Mareva order does not deprive the party subject to its restraint either of title to or possession of the assets to which the order extends. Nor does the order improve the position of claimants in an insolvency of the judgment debtor. It operates in personam and not as an attachment. Nevertheless, those statements should not obscure the reality that the granting of a Mareva order is bound to have a significant impact on the property of the person against whom it is made: in a practical sense it operates as a very tight "negative pledge" species of security over property, to which the contempt sanction is attached. It requires a high degree of caution on the part of a court invited to make an order of that kind. An order lightly or wrongly granted may have a capacity to impair or restrict commerce just as much as one appropriately granted may facilitate and ensure its due conduct.

[Emphasis added]  [Citations omitted]

[31]Ibid at 403 [50].

1. The applicants in this case seek to demonstrate that recourse may be had to the respondents to satisfy in part their prospective money judgment against the primary debtor.  In the light of the observations of the High Court in Cardile, by what standard should the evidence relied upon by the applicants in this case be evaluated?

1. In Glenwood Management Group Pty Ltd v Mayo[32] Young CJ stated the accepted test to be met by for relief in the form of a Mareva order.  The Chief Justice said:

This application for a Mareva injunction has been hastily put together and as hastily answered but the principal difficulty which it raises is whether the plaintiffs have shown an arguable case. This requirement has been variously expressed in the authorities but “a good  arguable case” is the minimum which a plaintiff must show to invoke the jurisdiction of the court to grant a Mareva type injunction: see Ninemia Maritime Corporation v. Trave S.G m.b.H und Co. K.G (The Niedersachsen) [1983] 1 WLR 1412, at p.1417.

[32][1991] 2 VR 49, 49.

1. In my opinion nothing in Rule 37A, introduced by Statutory Rule 102/2006, qualifies the entrenched common law requirement in Victoria that in order for Mareva relief to flow, a good arguable case against the respondent must be demonstrated.

1. If the threshold was reduced to reflect a real case to be investigated, to determine whether the third party may be obliged to disgorge assets or contribute toward satisfying a judgment or prospective judgment, this, in my opinion would not advance the requirement for a high degree of caution to be exercised on the part of a court invited to make an order of this kind, rather, it would diminish the capacity of a court to give effect to the requirement and would be inconsistent with it.

1. Finally, in my opinion, no distinction is warranted or should be made as to the test to be applied in the evaluation of the evidence in cases where the Mareva order is sought, whether against a party to the principal proceeding or a non-party.

1. With the greatest respect to the observations and approach of Hargrave J in Robmatjus, to the extent that his Honour applied the real case to be investigated test for the purposes of granting a freezing order against third parties, I decline to follow and apply such a test.

1. Accordingly, and in addition to discretionary considerations to be taken into account, as a minimum in my view, a good arguable case against a respondent must be demonstrated before relief may be granted for a freezing order under Rule 37A, whether that relief is sought against a party to the principal proceeding or a third party.

Section 172 Property Law Act 1958 (Vic) – Transactions to defraud creditors

1. The applicants rely upon s.172(1) Property Law Act 1958 (Vic) to establish a cause of action against the respondents to found their claim to a freezing order against them. Section 172 provides:

(1)       Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2)This section shall not affect the operation of a disentailing assurance, or the  law of bankruptcy or insolvency for the time being in force.

(3)This section shall not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors.

1. In Chen v Marcolongo, Chen v International Pty Ltd[33] Young JA considered an equivalent section to s.172 Property Law Act 1958 (Vic) found in the New South Wales legislation.[34]  His Honour stated:  

   [33][2009] NSWCA 326.

   [34]Section. 37A Conveyancing Act (NSW).

Before dealing with the authorities, I should set out a series of propositions which appear to be non-controversial, but are useful to bear in mind when looking at the more precise question posed about the element of dishonesty. [35]

[35]Supra at [210].

First, Mr Pritchard put that where property is exchanged for other property, there is a mere conversion or exchange of one asset for another and not an alienation that comes within s 37A.[36]

I accept that this proposition is mainly correct, but it is not completely correct. So if a person sells all his property to a company in consideration of the issue of fully paid shares in the company, that transaction may well be an alienation in fraud of creditors; see eg In re Carl Hirth; Exparte The Trustee[1899] 1 QB 612 (CA); In re Fasey; Ex parte Trustees[1923] 2 Ch1.[37]

Indeed, even transactions designed to defeat execution are vitiated by s 37A, certainly if made voluntarily and in some circumstances even if made for valuable consideration. This proposition is supported by old authorities when only certain types of property could be taken in execution: see Kerr on the Law of Fraud and Mistake 7^th ed (Sweet and Maxwell, London, 1952) at 354.[38]

[38]Ibid at 213.

Accordingly, all the leading cases under s 37A or its equivalent suggest that the focus is on intention. The intention must be to deprive the creditors of something to which they would otherwise be entitled.[39]

[39]Ibid at 214.

To find such intention one looks at all the facts including evidence of subjective intention and in particular looks at the nine "badges of fraud" as they were called by Lord Hatherley LC in Allen v Bonnett(1870) LR 5 Ch App 577 at 579. These derive from Twyne's case [1601] EngR 4; (1601) 3 Co Rep 80b; 76 ER 809, a decision of the Star Chamber and provide a check list for when a court is looking to see whether a conveyance for value was fraudulent.[40]

[40]Ibid at 215.

The nine badges are (see Kerr on Fraud and Mistake at 350 and following) in summary as follows:

(1)A conveyance of the whole of a person's property is a badge of fraud.

(2)The second badge of fraud is the donor's continuance in possession of the property.

(3)Secrecy of transfer.

(4)Conveyance made pendente lite.

(5)       A trust or reservation for the grantor's benefit.

(6)Unusual statements of fact in the deed (so a statement that the deed is made without any fraudulent intent is a suspicious circumstance).

(7)       Power of revocation.

(8)       False statements in the deeds.

(9)       Inadequacy of consideration.

All of these flow from Twyne’s case.[41]

[41]Ibid at 216.

Accordingly, if one has a transaction like one used to have when one was barring an entail, an estate in fee simple was given up in exchange for a debt owed by a man of straw, the mere fact that there is an exchange of property would be insufficient to take the case out of a statute.[42]

[42]Ibid at 217.

In May on Fraudulent and Voluntary Dispositions of Property, 3^rd ed (Stevens and Haynes, London, 1908), the learned editor said at 68:

"It is material to investigate the amount of property withdrawn from the reach of creditors in proportion to their demands, and the value and tangibility of that substituted in its place; for the consideration may be given in such a form as to defeat creditors; as where it consists in an agreement to maintain the grantor during his life, or to indemnify him against debts which he owes …”.[43]

[43]Ibid at 218.

May's basal proposition comes from Dewey v Bayntun (1805) 6 East 257; 102 ER 1285.[44]

[44]Ibid at 219.

The next proposition I should consider is what was put by Mr Pritchard in reply that potential debtors are not obliged to retain property for the benefit of potential creditors. I believe this proposition is correct and flows from the authorities, though one can't quote a simple chapter and verse for it.[45]

[45]Ibid at 220.

Next, in the words of Kerr at 342 (exactly the same words are in May at 62):

"The fraudulent intent … is not established by evidence merely that the result of the conveyance has been to delay or exclude creditors. So, the fact of a bona fide creditor being defeated is not in itself a sufficient ground for setting aside a deed founded on valuable consideration."[46]

[46]Ibid at 221.

The principal authority given is Freeman v Pope(1870) LR 5 Ch App 538. It is not the mere fact that the creditors have been impeded by the conveyance or even that that consequence is the probable result of what happens. One must be a little careful here because one is really dealing with a question of fact and there may be situations where a jury or other finder of fact will be justified in taking the view that a person must intend the natural and inevitable consequences of his or her acts.[47]

As Pennycuick VC said in Lloyds Bank Ltd v Marcan[1973] 1 WLR 339 at 344:

''The word 'intent' denotes a state of mind. A man's intention is question of fact. Actual intent may unquestionably be proved by direct evidence or may be inferred from surrounding circumstances. Intent may also be imputed on the basis that a man must be presumed to intend the natural consequences of his own act …".[48]

Pennycuick VC's judgment was criticised in part on appeal (though the appeal was dismissed), in Lloyds Bank Ltd v Marcan[1973] 1 WLR 1387, a case which will have to be discussed subsequently. However, in my view, his Lordship's statements which I have quoted remain correct.[49]

The authorities also make it clear that intention to defraud need not be the only intention that a person has when making the alienation: Barton v Deputy Commissioner of Taxation of the Commonwealth of Australia[1974] HCA 43; 131 CLR 370 at 375. However, the intention to defraud creditors must be a prominent part of the intention of the debtor; see Williams v Lloyd[1934] HCA 1; 50 CLR 341.[50]

[47]Ibid at 222.

[48]Ibid at 223.

[49]Ibid at 224.

1. I accept the thorough analysis of Young JA in Chen, including the passages cited from the judgment of Pennycuick VC in Lloyds Bank Ltd v Marcan, as correct.

1. Reference was made to the decision in PT Garuda Indonesia Ltd v Grellman[51] which was a decision made by the Full Court of the Federal Court, comprising Wilcox, Gummow and von Doussa JJ. The Court in Garuda considered the application of s.121(1) Bankruptcy Act 1966 (Cth), which provided protection to creditors in a manner not dissimilar to s.172(1) of the Property Law Act 1958 (Vic). Section 121(1) of the Federal Act which was in then in the following terms, provided:

Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

[51](1992) 35 FCR 515.

1. The Court in Garuda traced the historical roots of s.121(1) Bankruptcy Act 1966 in the following passages:[52]

   [52]Supra at [20–21].

... The enactment of the Act followed the Report in 1962 of a committee appointed by the Commonwealth Attorney-General to review the bankruptcy law ("the Clyne Committee"). Paragraph 173 of the Clyne Committee's Report was as follows:

"FraudulentDispositions:

173.Under the Statute 13 Eliz.c.5, enacted in 1570 but now to be found in various Property Law Acts passed in England and in the several States, fraudulent dispositions were liable to be set aside at the instance of any person thereby prejudiced. The Committee  considers that, where a fraudulent dispositions has been made by a debtor who subsequently becomes bankrupt, the trustee of the estate should have the power, at any time, subject to exceptions in favour of persons who have dealt with the bankrupt in good faith, to have it set aside for the benefit of the estate of the bankrupt."

21.The statute of 13 Elizabeth I, c.5 (the Elizabethan statute) provided that transfers of property for the purpose of delaying, hindering or defrauding creditors or others of their lawful debts were "to be clearly and utterly void, frustrate, and of none Effect ..." provided that the statute did not extend to transfers of property "upon good Consideration and bona fide lawfully conveyed or assured to any Person or Persons ... not having at the Time of such Conveyance or Assurance to them made, any Manner of Notice or Knowledge of such Covin, Fraud, or Collusion as is aforesaid".

1. The Court noted that in Victoria, the Elizabethan statute has been adopted in s.172 Property Law Act 1958, and has been adopted in other States and Territories of Australia.[53]

   [53]Supra at [25].

1. At the trial in Garuda, it was not disputed that transactions in question were dispositions made by Mr Simpson with the intent to defraud creditors.  The central issue concerned whether Garuda, as a party to a transaction being the transfer to it of a property by Mr Simpson, had acted in good faith.

1. The first submission in Garuda was that "fraudulent intent on the part of the bankrupt must be expressly proved".  However, the Court was of the view that direct evidence of this element is not a requirement, and the relevant intention may also be inferred from the circumstances, a proposition which I readily accept.[54]

   [54]Supra at [32], citing Freeman v Pope(1870) LR 5 Ch App 538 at 541 (a case upon the Elizabethan statute); Mackay v Douglas(1872) LR 14 Eq 106 at 120 (another such case); In re Simms(1930) 2 Ch 22 at 31-34 (an act of bankruptcy case under the 1914 British Act). Further, the matter was discussed in detail in Noakes v Harvy Holmes and Son[1979] FCA 40. See too: Official Trustee v Marchiori(1983) 69 FLR 290 at 296.

1. In Garuda, counsel for that party also contended that it was for the applicant to prove that the respondent (Garuda) knew of the fraudulent intent of the prime perpetrator (Mr Simpson) of matters which amounted to a breach of s.121(1) Bankruptcy Act 1966 (Cth).[55]  That is, for the applicant to succeed, it had to show that Garuda accepted the alleged fraudulent transaction entered into by Mr Simpson with full knowledge of his intent to defeat or delay his creditors.  It was submitted that the evidence did not support such a finding.  It was in this context that the Court considered the notion of good faith which was contained in what was described as the “protective provisions” of both ss.120 and 121 of the Bankruptcy Act 1960.

   [55]Supra at [45].

1. As to this contention the Court said in Garuda:

The notion of good faith is common to the protective provisions of both ss.120 and 121. In each section it is the good faith of the settlee or disponee respectively that must be considered. This is clear from the language of s.121, and well established by authority in the case of s.120: Mackintosh v Pogose(1895) 1 Ch 505 at 509-510; Re Hyams; Official Receiver v Hyams(1970) 19 FLR 232 at 256.[56]

[56]Supra at [46].

1. The Court also proceeded to analyse good faith, as the concept is used in ss.120 and 121, by reference to the authorities. The Court said:[57]

   [57]Supra at [48–50].

48.In Butcher v Stead(1875) LR 7 HL 839 the Lord Chancellor (Lord Cairns) said at p.847 in relation to s.92 of the Bankruptcy Act 1869 (UK):

"I think there can be no doubt that the words 'in good faith' mean without notice that any fraud or fraudulent preference is intended." In Re Hyams; Official Receiver v Hyams (supra) at p.256 Gibbs J, in relation to the meaning accorded to good faith by the Lord Chancellor in Butcher v Stead (supra) said:

“... In the context of the Australian statute this exposition may be modified to read without notice that any fraud or preference contrary to the statute is intended”.

This formulation of the meaning of "in good faith" in sub-s.120(1) was applied by the Full Court of the Supreme Court of Queensland in Re Pacific Projects Pty Ltd(1990) 2 QdR. 541 at 545. Gibbs J, when sitting as a judge of the Supreme Court of Queensland, had earlier posed the relevant question in a case under s.46 of the Mercantile Acts 1867-1896 (Q) as whether the disponee of a disposition made by the disponer with intention to defraud creditors was "privy to the fraud":  Re Barnes, ex parte Stapleton (supra) at 240.

In Mogridge v Clapp(1892) 3 Ch 382 at 401 Kay LJ in considering a provision under the Settled Land Act 1882 which required a dealing with a tenant for life to be one in good faith said that good faith "must mean or involve a belief that all is being regularly and properly done".[58]

[58]Supra at [49].

1. The Court in Garuda also made observations on the burden of proof, in the following passage:[59]

47.The appellant's submission that the burden of proof is on the party seeking to avoid the transaction was not disputed by the respondent, and in our opinion is correct. In Michael v Thompson(1894) 20 VLR 548 the Full Court of the Supreme Court of Victoria placed the ultimate burden of proof on the creditors seeking to set aside a settlement under the Elizabethan Statute, although the Court held that where the settlement is fraudulent and all the facts concerning the settlement are within the knowledge of the settlor and the settlee, and not within the knowledge of the creditors, "a very slight degree of proof should be sufficient to shift that burden" (at 553). In Re Trautwein; Richardson v Trautwein (supra) (at 75) and in Re Hyams; Official Receiver v Hyams (supra) (at 256) on applications under s.94 of the Bankruptcy Act 1924 (the precursor to s.120) it was said that the onus of proof was on the party seeking to impeach the settlement to establish a want of good faith in the settlee. In The Official Trustee v Marchiori (supra) at p.297, Fisher J accepted that the onus of proof on an application based on both ss.120 and 121 by the Official Trustee to have a transaction declared void was on the applicant, and his Honour followed Michael v Thompson (supra). A similar position prevails under the United Kingdom legislation: Re T (A bankrupt) (1966) 110 Sol Jo 387; and see also Official Assignee of the Estate of Cheah Soo Tuan Khoo Saw Cheow (1931) AC 67. This position stands in contrast to that under s.122 of the Act where the burden of proving that a payment having the effect of giving a preference was received by the creditor in good faith and for valuable consideration and in the ordinary course of business is expressly placed on the person who claims that the transaction ought not be upset: sub-s.122(3).

[59]Supra at [47]

1. In Michael v Thompson[60] the Full Court said as to the burden of proof in cases brought under the Elizabethan statute: 

Then it is said that there is no evidence fit to be left to a jury that the settlee was connected with the fraud at all. In relation to a matter of this kind, where all the facts concerning the settlement are within the knowledge of the settlor and the settlee and are not within the knowledge of the creditors impugning the settlement, although the burden of proof is on those impugning the settlement, a very slight degree of proof should be sufficient to shift that burden. That is simply on the principle that, if it were not so, the most egregious frauds on creditors could never be investigated. If sufficient though slight evidence is given to impugn the deed, those who know all about the deed have only to go into the box and explain it. We think the question, therefore, is, whether there is evidence here which would bring that rule into play.

Further the Full Court observed in relation to the facts of the case before it:[61]

All these facts, in our opinion, warrant the learned judge in demanding that the other side should say what they have to say against it, or else bear the consequences.

[60](1894) 20 VLR 548 at 552.

[61]Supra at 553.

1. Accordingly the observation by the Full Court in Garuda, that only a slight degree of proof is necessary in cases of this kind, merely relates to the shifting of the evidentiary burden of proof in cases where relief is sought under s.172(1) Property Law Act 1958 and where the settlement is fraudulent and all the facts concerning the settlement are within the knowledge of the settlor and the settlee, and not within the knowledge of the creditors.  It does not relate to the standard of proof.  I fear in this case that the applicants have taken the requirement as to the “slight degree of proof” as applying, not to the possible shifting of the evidentiary burden of proof, but to the standard of proof which must be achieved.  This is borne out by the written submissions advanced by the applicants where it was said: 

In the circumstances the “slight degree of proof” required to impugn the bona fides of the lenders will clearly be available.

1. For completeness, it should be noted that, for the purposes of s.172(3) of the Act, from the outset, the evidentiary burden is placed on the party seeking to take advantage of the exculpatory protection granted by the sub-section.

Inferences of Fact and Circumstantial Evidence in Civil Cases

1. This approach to s.172 of The Property Law Act 1958 is consistent with authority.  Reference is made to the observations of the High Court where it considered the assessment of circumstantial evidence in Luxton v Vines.[62]  Here damages for personal injuries were sought where the plaintiff was struck by an unidentified car.  On the question of proving negligence arising from circumstantial evidence, Dixon, Fullagar and Kitto JJ said:

But this is a civil and not a criminal case. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as mere conjecture or surmise.[63]

[Citations omitted]

[62](1952) 85 CLR 352.

[63]Supra at 358.

1. Luxton v Vines was followed in Chamberlain v R (No 2).[64]  In the joint judgment of Gibbs CJ and Mason J, of the approach to the assessment of circumstantial evidence, the following was said:

It follows from what we have said that the jury should decide whether they accept the evidence of a particular fact, not by considering the evidence directly relating to that fact in isolation, but in the light of the whole evidence, and that they can draw an inference of guilt from a combination of facts, none of which viewed alone would support that inference. Nevertheless the jury cannot view a fact as a basis for an inference of guilt unless at the end of the day they are satisfied of the existence of that fact beyond reasonable doubt. When the evidence is circumstantial, the jury, whether in a civil or in a criminal case, are required to draw an inference from the circumstances of the case; in a civil case the circumstances must raise a more probable inference in favour of what is alleged, and in a criminal case the circumstances must exclude any reasonable hypothesis consistent with innocence.

[Citations omitted]

[64](1984) 153 CLR 521 at 536.

1. Luxton v Vines was followed by the Court of Appeal in Victoria in Transport Industries Insurance Co Ltd v Longmuir.[65]  It was also cited with approval by Nettle J (as he then was) in Berlyn v Brouskos, [66] where His Honour said: 

To those observations, however, there must be added the consideration that whereas when satisfaction on the civil standard of proof depends on inference, it is enough that there is something more than mere conjecture, guesswork, or surmise to prefer one competing inference over another, under the criminal standard of proof the facts must be such as to exclude any reasonable hypothesis consistent with innocence: Transport Industries Insurance Co Ltd v Longmuir.

[65](1997) 1 VR 125 at 141

[66][2002] VSC 377 at [32]

Whether a ‘Good Arguable Case’

Whether the Loan Moneys Advanced Were Secured by the Mortgages

1. The first substantive legal argument advanced by the applicants was that the loan moneys advanced by the respondents, or part of those moneys, were not “secured moneys” for the purposes of the mortgages.  The applicants contended that both equitable mortgages purported to secure obligations pursuant to loan facility agreement dated 12 February 2010.  The mortgages in question were both dated 12 February 2010.  The provisions contained in the Memorandum of Common Provisions, retained by the Registrar of Titles in Number AA 689, were incorporated into the mortgages.  Both contained a covenant in the following terms:

This mortgage secures the Debtor’s obligations pursuant to the loan facility Agreement between the parties date[d] the 12 day of February 2010.

1. Reference was made by the applicants to the affidavit of Chris Nolten, sworn 16 December 2010, where it was deposed that: on 6 March 2009 he advanced 25,000 euros to Walter Nolten;  on a date shortly after 15 December 2009, he advanced 28,000 euros to Walter Nolten;  the second advance was made pursuant to a loan agreement dated 15 December 2009 made in Dutch;  and on 7 February 2009 he executed a loan agreement between himself and Walter Nolten dated 15 December 2009.  Accordingly, it was said that on Chris Nolten's evidence, the moneys he sought to secure under the mortgage granted in his favour were not advanced pursuant to a loan facility agreement dated 12 February 2010 as referred to in that mortgage.

1. The applicants then submitted, relying on the affidavit of Diederick Nolten sworn 15 December 2010, that: in about September 2009, Vastgoed advanced 60,000 euros to Walter Nolten;  on dates between or on a date between 16 February 2010 and 17 May 2010, Vastgoed advanced 156,500 euros to Walter Nolten;  the first Vastgoed advance was made pursuant to a loan agreement dated 14 October 2009 recorded in the Dutch language; on 4 February 2009, Vastgoed and Walter Nolten executed a loan agreement;  then on an unspecified date, Vastgoed and Walter Nolten executed what is described as the Vastgoed February 2009 loan agreement.

1. The applicants further asserted that Diederick Nolten's evidence was that the first Vastgoed advance made pursuant to the 14 October 2009 loan.  The second advance also appears to have been made pursuant to the 4 February 2010 Vastgoed agreement. 

1. The applicants said further that if the moneys were not secured by the mortgages, they were payable to Walter Nolten. Accordingly, it is said that a trustee in bankruptcy, or a trustee appointed in anticipation of bankruptcy, would have a claim over these moneys for the benefit of the creditors as a whole. 

1. It is on this basis that the applicants seek to preserve the proceeds of the sale pending determination of their claim, because the proceeds of the sale of the Gisborne property are not secured moneys for the purposes of the mortgages.

1. However, on the evidence in this application, when considered in its entirety, I am satisfied that the moneys advanced were in fact secured by the mortgages, and they were “secured moneys” for the purposes of those mortgages, and there is no good arguable case to the contrary. The relevant Memorandum of Common Provisions relating to each mortgage under s.91A Transfer of Land Act1958 was produced.  Clause 31(1)(f) provides:

(f)“moneys hereby secured” means the principal moneys secured and each and all sums of money in which the Mortgagor may now or hereafter be indebted or liable or contingently indebted or liable to the Mortgagee in any manner or on any account whatever including interest, whether capitalised as provided in Clause 6(2) or not, except such moneys (if any) as the parties in writing agree do not form part of the moneys hereby secured.

There is no evidence that the ‘moneys hereby secured’ were brought within the exception contemplated by Clause 31(1)(f).

1. The loan agreement in both cases dated 12 February 2010 contained the following in Clause 2:

The Lender will advance the Loan to the Borrower of the Effective Date or such other date as the Borrower and Lender agree and the Borrower agrees to accept the Loan on the effective Date or the date of any further advance upon the terms and subject to the conditions of this agreement.

This clause operated to incorporate the loans actually advanced to Walter Nolten within the terms of the loan agreement dated 12 February 2010 referred to in the mortgages.

1. Further, the unchallenged evidence is that the moneys loaned by the respondents were in fact advanced to the borrower Walter Nolten.  In each case, although the loan transactions were negotiated over a period of time and took different forms as the transactions evolved, in truth the consistent evidence advanced by Deiderick Nolten and Chris Nolten, as supported by their solicitor Mr Wood, was that the moneys loaned were secured by the mortgages granted over the Gisborne property and this was intended to occur by all parties to those transactions.

1. In my opinion, there is no good arguable case to the contrary.

1. I would dismiss this as a basis for ordering a freezing order against the respondents in this application.

The Claim Under s.172 of the Property Law Act

1. I now turn to the applicants’ claim under s.172 of the Property Law Act.

1. In my opinion, even though there may be a slight degree of proof that the loan transactions were fraudulent and in breach of s.172(1) of the Property Law Act, I am not satisfied that there is any evidence that all (and I emphasise the word all) the relevant facts as to the alleged fraudulent character of the loan transactions were known to the respondents.  Indeed, such is expressly denied by Diederick Nolten and Chris Nolten in their affidavits to which I have already referred.

1. Accordingly, the burden of proof in this case, in my opinion, does not shift to the respondents. 

1. Further, even if I am wrong about that position and the burden has shifted to the respondents to explain their position, I am satisfied on the evidence that they have established to the requisite standard that they acted in good faith without notice of any fraud or intended fraudulent preference contrary to s.172 of the Property Law Act and were not privy to any such fraud.  The facts relied upon by the applicants do not give rise to the inference that the respondents knew that all was not being regularly and properly done and that they were privy to any intention of Walter Nolten to defraud his creditors, particularly when those facts are considered in the context of the unchallenged evidence advanced by the respondents in explanation of the loan transactions.

1. The evidence as a whole also points to all of the nine "badges of fraud",  as described by Lord Hatherley LC in Allen v Bonnett,[67] as being notably absent.  I list each of  the elements and consider them in turn, in the brief analysis which follows:

   [67](1870) LR 5 Ch App 577 at 579.

(1)A conveyance of the whole of a person's property is a badge of fraud.  (There is no evidence that all of Walter Nolten’s property was conveyed.  He only granted a mortgage over his Gisborne property, and to the extent of the loans secured);

(2)The second badge of fraud is the donor's continuance in possession of the property.  (The Gisborne property has been sold);

(3)Secrecy of transfer.  (The loan transactions and the mortgage securities were not secret.  They were supported by caveats lodged on the public record in the Land Registry);

(4)Conveyance made pendente lite.  (The loan transactions were not undertaken contingent on the outcome of any litigation);

(5)       A trust or reservation for the grantor's benefit.  (This did not arise);

(6)Unusual statements of fact in the deed, so a statement that the deed is made without any fraudulent intent is a suspicious circumstance.  (No such statement was present in any of the loan documents);

(7)       Power of revocation.  (This did not arise);

(8)       False statements in the deeds.  (This did not arise);

(9)Inadequacy of consideration.  (The mortgages were supported by the loans made).

1. Turning back to the requisite test for satisfying the civil standard where the relevant conclusions depends on inferences from proven facts, I am not satisfied that what is relied upon by the applicants by way of evidence in this application goes beyond mere conjecture.  It does not and could not enable the Court to prefer one competing inference over another.

1. It follows that there is no good arguable case which has been established to justify the Court making the freezing orders sought by applicants against the respondents.  In particular, there is no good arguable case that there is a process which may ultimately be available to the applicants as a result of a judgment or prospective judgment of the Court, under which process the respondents may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.

Balance of Convenience

1. In Cardile the High Court provides insight as to discretionary considerations which should be considered before a freezing order is made:

Discretionary considerations generally also should carefully be weighed before an order is made. Has the applicant proceeded diligently and expeditiously? Has a money judgment been recovered in the proceedings? Are proceedings (for example civil conspiracy proceedings) available against the third party? Why, if some proceedings are available, have they not been taken? Why, if proceedings are available against the third party and have not been taken and the court is still minded to make a Mareva order, should not the grant of the relief be conditioned upon an undertaking by the applicant to commence, and ensure so far as is possible the expedition of, such proceedings? It is difficult to conceive of cases where such an undertaking would not be required. Questions of this kind may be just as relevant to the decision to grant Mareva relief as they are to a decision to dissolve it. These are matters to which courts should be alive.[68]

[68]Ibid at [53].

1. In this case, there is no reason, absent the granting of a freezing order, why the applicants cannot pursue any action as they should be advised against the respondents.  There is no evidence before the Court as to the inability of the respondents to meet any judgment which may ultimately be pronounced against them.

1. The balance of convenience in this instance favours the position that the freezing order should not be granted

Conclusion

1. Accordingly, I dismiss this application and I will hear the parties on costs.

1. I will not pronounce any order which is effective until Wednesday 9 February 2011 at 4.15 pm.

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[36]Ibid at 211.

[37]Ibid at 212.

[50]Ibid at 225.

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