L.E.D. Builders Pty Ltd v Eagle Homes Pty Ltd
[1997] FCA 826
•22 August 1997
FEDERAL COURT OF AUSTRALIA
Practice and procedure - Mareva injunction - the jurisdiction of the Federal Court to grant Mareva relief - the grant of Mareva relief to prevent the abuse or frustration of the Court’s process - whether Mareva relief is available against third parties - whether the respondent in an application for a Mareva injunction must hold a specific proprietary interest in the third party’s assets - Mareva relief and proprietary remedies - whether a Mareva injunction can enjoin a party against whom there is no pre-existing cause of action in respect of which the party is subject to the Court’s jurisdiction - findings of fact that the third parties had embarked upon a scheme aimed at frustrating the Court’s process - divesture of assets by a debtor to its controlling shareholders - divesture of assets by a debtor to a related company - risk of dissipation of assets.
Practice and procedure - considerations relevant to an appellate court’s decision to grant leave to appeal - leave to appeal when the application for leave involves questions of practice and procedure.
Federal Court of Australia Act 1976 - s 23
Corporations Law - Div 2 of Part 5.7B
Conveyancing Act 1919 (NSW) - s 37A
Federal Court Rules - O 6 r 8(1)
Aiglon Ltd v Gau Shan Co Ltd [1993] 1 Lloyd’s Rep 164 - cited
Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155 - cited
Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 - considered
Coxton Pty Ltd v Milne, NSW Court of Appeal, 20 December 1985, unreported - cited
CSR Ltd v Cigna Insurance Australia Ltd, High Court of Australia, 5 August 1997, unreported - applied
Galaxia Maritime S.A. v. Mineralimportexport [1982] 1 WLR 539 -considered
Jackson v Sterling Industries Ltd (1987) 162 CLR 612 - applied
Mercantile Group (Europe) A.G. v Aiyela [1994] QB 366 - cited
Mercedes Benz A.G. v Leiduck [1996] 1 AC 284 - applied
Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 - cited
Searose v Seatrain [1981] 1 WLR 894 - considered
Siskina (Owners of cargo lately laden on board) v Distos Compania Naviera S.A. (“The Siskina”) [1979] AC 210 - considered
Tomlinson v Cut Price Deli Pty Ltd, Kiefel J, 23 June 1995, unreported - applied
L.E.D. BUILDERS PTY LTD v EAGLE HOMES PTY LTD
No. NG 817 of 1993
No. NG 862 of 1994
JUDGES: BEAUMONT, BRANSON AND TAMBERLIN JJ PLACE: SYDNEY DATED: 22 AUGUST 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 817 of 1993 ) NG 862 of 1994 GENERAL DIVISION )
BETWEEN: L.E.D. BUILDERS PTY LTD
ApplicantAND: EAGLE HOMES PTY LTD
Respondent
JUDGES: BEAUMONT, BRANSON AND TAMBERLIN JJ PLACE: SYDNEY DATED: 22 AUGUST 1997
MINUTES OF ORDERS
THE COURT ORDERS THAT:
Leave to appeal be granted.
The appeal be allowed, with costs.
The order made at first instance on 25 June 1997 dismissing the notice of motion for orders against Ultra Modern Developments Pty Ltd, Paul Cardile and Lucy Cardile be set aside.
The matter be remitted to a single Judge of the Court for the making of orders in accordance with these reasons for judgment, including orders as to costs at first instance.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 817 of 1993 ) NG 862 of 1994 GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: L.E.D. BUILDERS PTY LTD
ApplicantAND: EAGLE HOMES PTY LTD
Respondent
JUDGES: BEAUMONT, BRANSON AND TAMBERLIN JJ PLACE: SYDNEY DATED: 22 AUGUST 1997
REASONS FOR JUDGMENT
BEAUMONT AND BRANSON JJ:
INTRODUCTION
This is an application for leave to appeal from the refusal by a Judge of the Court to grant Mareva relief against Paul Cardile, Lucy Cardile and Ultra Modern Developments Pty Ltd (“the prospective respondents”).
The applicant (“LED”) and the respondent (“Eagle”) each carried on business as builders of project homes. LED sued Eagle in this Court in October 1993 for infringement of copyright in floor plans. In LED Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 35 IPR 215, another Judge of this Court, Davies J, found that there had been infringement. LED then elected for an account of profits. Although these accounts have not yet been taken, the expert affidavit evidence filed on behalf of Eagle indicates that the profits were in the range $196,982 - $444,619. Pending their taking, LED applied for Mareva relief against both Eagle and the prospective respondents. LED contended that, unless restrained, Mr and Mrs Cardile would take steps to deprive LED of access to assets which would satisfy its judgment on the taking of the accounts. LED relied on, first, the declaration of two substantial dividends, in 1994 ($400,000) and in 1996 ($800,000) by Eagle in favour of Mr and Mrs Cardile, and secondly, the informal transfer of much of Eagle’s business to Ultra Modern Developments Pty Ltd (“Ultra”). It was argued for LED that it expected to obtain a substantial judgment against Eagle and that it proposed to challenge the declaration of the two dividends and the assumption of Eagle’s business by Ultra, on the grounds that this conduct involved alienation of property with intent to defraud creditors. Section 37A of the Conveyancing Act 1919 (NSW) and Division 2 of Part 5.7B of the Corporations Law were to be relied upon. LED also foreshadowed a claim, in this connection, that a cause of action was available to be pursued by a liquidator of Eagle for breach of fiduciary duty on the part of Mr and Mrs Cardile as directors of Eagle. The primary Judge granted the relief sought as against Eagle (as to which no question now arises) but refused it as against the prospective respondents. LED now applies for leave to appeal against this refusal. It is common ground that the relief sought was interlocutory, so that leave to appeal is required.
BACKGROUND
The background facts, which were not in dispute, were as follows:
Mr and Mrs Cardile have, at all material times, owned and controlled Eagle, and Ultra’s only shareholder, Eagle Developments Australia Pty Ltd.
Eagle’s balance sheet for the year ended 30 June 1994 shows total share capital and reserves at $538,616 (being issued capital of $30,002, unappropriated profits of $508,614); and net assets of $538,616, current assets and liabilities being shown at $1,230,224 and $1,126,452 respectively. The company’s trading, profit and loss statement for that year shows gross and net profit respectively at $2,807,166 and $735,237; and the payment of the dividend of $400,000.
The minutes of a meeting of the directors of Eagle state that on 1 July 1993 Mr and Mrs Cardile resolved that Eagle declare and pay the dividend; and that the company sell its plant, equipment and motor vehicles to Eagle Management Australia Pty Ltd for $126,608.
Eagle’s balance sheet for the year ended 30 June 1996 shows total share capital and reserves
substantially reduced to $32,734 (being issued capital, as before, at $30,002, but with unappropriated profit now only $2,732). Net assets are shown at only $32,734. Current assets are shown at $56,247 (including $38,416 shown as “Loan - Unsecured Related Entitles”). Current liabilities aree shown at $219,694 (including $108,790 for trade creditors). The company’s trading, profit and loss statement for that year shows gross profit at $2,239,757 and net profit at $219,859. The net operating profit is shown at $140,571 and “Retained Profits - Beginning of Year” was shown at $662,161. The payment of the dividend of $800,000 is recorded.
The minutes of a meeting of Eagle’s directors held on 1 July 1995 state that the company resolved to pay that dividend.
Ultra was incorporated in May 1995. In June 1995, Eagle registered the business name “Eagle Homes”. Ultra thereupon became the registered proprietor of the name. In October 1995, Ultra obtained a builder’s licence. Those responsible for the affairs of Eagle became responsible for Ultra’s affairs.
THE FINDINGS AT FIRST INSTANCE
With respect to the circumstances in which the dividend of $400,000 was declared, the primary Judge said (at 8):
“I consider that there is sufficient material to justify an inference being drawn that the decision to declare the dividend was prompted by the commencement of the proceedings by LED. It is of course a serious matter to conclude that a document was brought into existence which purported to record a meeting as having taken place on a day earlier than the day on which it did take place. Further, I have not had the advantage of oral evidence from either Mr and Mrs Cardile or any of those who might have been responsible for preparation of the accounting records and other records of Eagle Homes. Accordingly, it is difficult to make any finding as to the credit of Mr and Mrs Cardile.
However, I am only concerned to determine whether... there is a danger that the dividends were motivated by the desire to ensure that assets of Eagle Homes were not available to meet a judgment in favour of LED. For the purpose of this application, I would be prepared to conclude that that was a motivation for the declaration of the dividend of $400,000.”
As to the context in which the dividend of $800,000 was declared, the primary Judge said (at 8-9):
“The dividend of $800,000 was declared, on any view, after commencement of the proceedings. It too is evidenced by a minute of a meeting of the directors of Eagle Homes. Similar considerations to those outlined above in relation to the first dividend were relied upon as suggesting that the declaration and payment of the dividend in fact occurred a considerable time after 1 July 1995.
The hearing [before Davies J] did not commence until 4 March 1996. Judgment was given on 29 July 1996. It would be significant if the decision to declare a dividend were made after the hearing and even more significant if made after judgment. Generally, for the reasons which I have outlined above in relation to the first dividend, I would be prepared to draw the inference that the second dividend was also prompted by a desire to remove assets from Eagle Homes which would otherwise be available to satisfy a judgment in favour of LED.”
With respect to the circumstances in which Eagle’s business was transferred, informally, to Ultra, the primary Judge said (at 10):
“In the proceedings before Davies J, Mr Cardile was asked about the circumstances relating to the winding down and offered no explanation which would prevent adverse inferences being drawn. In the absence of any evidence before me from Mr and Mrs Cardile offering any explanation I am prepared to draw the inference that the decision to incorporate Ultra Modern and to ensure that all future business in relation to new designs be channelled through Ultra Modern was undertaken so that future profits would not be available to satisfy any judgment in favour of LED. That inference is reinforced by other findings made by Davies J. One of the issues before Davies J was whether or not the drawings of Eagle Homes had been brought in to being prior to the comparable plans of LED. Davies J was not satisfied that there was any objective evidence or any reliable oral evidence which established that fact.
Davies J considered that the evidence concerning the transfer to Ultra Modern of the business name was a matter which weighed against the credit of Mr Cardile and against the reliability of the case put forward for Eagle Homes. There was no evidence before Davies J as to why that [transfer] was thought necessary. Davies J concluded that one possible explanation was that Eagle Homes considered itself to be at risk in the proceeding.”
THE REASONING AT FIRST INSTANCE FOR REFUSAL OF THE RELIEF SOUGHT AGAINST THE PROSPECTIVE RESPONDENTS
His Honour said (at 19):
“The causes of action, prospective or otherwise, which Eagle Homes has against the Prospective Respondents might be rendered futile or worthless if, when a judgment against them is obtained in favour of Eagle Homes or in favour of a liquidator of Eagle Homes, they had no assets to meet that judgment. However, there has been no evidence to suggest that Mr and Mrs Cardile or either of them might depart the jurisdiction or have made any attempt to dispose of assets out [of] the jurisdiction. ... Nor is there any evidence to suggest that Ultra Modern may cease to carry on business or is proposing to dispose of any assets.
The most that can be said by LED is that, since Mr and Mrs Cardile have been prepared in the past to engage in transactions of the nature described above, there is reason to think that they may do the same in relation to the assets of Ultra Modern or may dispose of their own assets.”
The primary Judge went on to say (at 21):
“Where there is an issue between a defendant/debtor and a third party as to ownership of property which is intended to be the subject of a Mareva injunction, that issue would have to be examined in the hearing of the application for Mareva orders. Such an issue, however, could not be finally resolved, as between defendant and third party, in proceedings brought by the plaintiff against the defendant. That appears to me to constitute a fundamental difficulty for LED in seeking relief in the form sought against the Prospective Respondents.
If a defendant will not pursue such an issue as against a third party, such that the property is in danger, the appointment of a receiver... may be an answer. It would then be a matter for the receiver, on behalf of the debtor/defendant, to commence proceedings against the third party to preserve the property in question by enforcement of the cause of action which will resolve the issue as to ownership of the property in question. The appointment of a receiver would be in the nature of a Mareva order in the sense that it is to preserve the assets of a prospective judgment debtor to meet a judgment.
I was referred by LED to authorities said to support the proposition that Mareva orders will lie directly against third parties. Close analysis of the authorities, however, suggests that they are instances where the claim against the third party was in respect of specific property in relation to which it was asserted that the defendant/debtor of the claimant had a proprietary interest.”
His Honour cited a statement from the decision of the NSW Court of Appeal in Winter v Marac Australia Ltd (1986) 6 NSWLR 11 (at 12) that where a Mareva injunction is sought against a third party -
“it must be shown that the person against whom judgment may be obtained has some right in respect of or control over or other access, direct or indirect, to the relevant assets so that they or the proceeds of their sale could be required to be applied in discharge of the judgment debt.”
The primary Judge also cited the remarks of Hope JA in Coxton Pty Ltd v Milne, NSW Court of Appeal, 20 December 1985, unreported, (at 13), that Mareva relief may lie where -
“the alleged debtor and the disposition of its assets are effectively controlled, de jure or de facto, by the third party, the debtor’s assets will be insufficient to meet the debt, the creditor, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or his assets to meet his debt, and there is danger that the third party will send his assets abroad or otherwise dispose of them.”
His Honour then said (at 22):
“The question is whether Eagle Homes has control over or access to the assets of Ultra Modern or Mr and Mrs Cardile such that the proceeds of the sale of those assets could be applied in discharge of any judgment against Eagle Homes. There must be evidence to support a conclusion that there is a danger that the assets of the Prospective Respondents, which might otherwise be available to satisfy a judgment in favour of LED against... Eagle Homes, will not be available.
The bases for suggesting that assets of the Prospective Respondents might be available to satisfy a judgment in favour of LED are those outlined above. There is no other basis for contending that Eagle Homes has any interest in the assets of the Prospective Respondents. As I have indicated, questions of whether their assets will be available to satisfy any judgment will depend upon the outcome of proceedings on causes of action as between Eagle Homes and the Prospective Respondents which, for the most part, have not yet arisen. It is inappropriate for those questions to be litigated in these proceedings, particularly at the stage which these proceedings have now reached.”
In expressing his conclusions, the primary Judge said (at 24-5):
“If there were any evidence that the prospective causes of action which have been foreshadowed as being available to Eagle Homes are being prejudiced in any way, it would be appropriate for further relief to be given, for example, the appointment of a receiver. That relief is not presently sought and, on the present evidence, I would not be disposed to make any further orders against Eagle Homes. However, I would be prepared to entertain, on short notice, any further application which LED wished to bring against Eagle Homes if there is evidence that any prospective cause of action is in jeopardy.
I do not consider that, on the material before me, LED has made out a case for Mareva orders against any of the Prospective Respondents. In those circumstances, it is pointless making orders, at this stage, that they be joined as parties to the proceedings. Accordingly, I propose to dismiss the notice of motion for joinder and for Mareva orders against them.”
LED’S SUBMISSIONS IN ITS APPLICATION FOR LEAVE TO APPEAL
In support of its application, LED contends that:
The case raises an important question of legal principle, namely whether the only situation in which a Mareva injunction is available against a third party is where the third party holds legal title to an asset beneficially owned by the respondent to the substantive cause of action.
Where the respondent to the substantive cause of action has disposed of assets to third parties for the purpose of defeating a judgment in favour of the applicant, the third parties who receive the assets are liable to a Mareva injunction; that liability arises because the applicant will have indirect access to the disposed assets through s 37A of the Conveyancing Act or in the winding up of the respondent to the substantive cause of action and the consequential recovery of the assets by a liquidator of the respondent.
A similar claim was upheld in Aiglon Ltd v Gau Shan Co. Ltd [1993] 1 Lloyd’s Rep 164, where the likelihood of a liquidator being appointed and instigating recovery proceedings was the basis for the third party Mareva injunction.
His Honour erred in law in considering that an applicant for a Mareva injunction against a third party must establish a cause of action against the third party (e.g. under s 37A), rather than relying on the likelihood that an external administrator of the respondent will have one (such as under the voidable transactions provisions of the Corporations Law or for breach of directors’ duties).
Although a narrow view of the jurisdiction to grant Mareva relief may be thought to be supported by the position after the decision of the House of Lords in Siskina (Owners of cargo lately laden on board) v Distos Compania Naviera S.A. (“The Siskina”) [1979] AC 210 and decisions following it, e.g. Bank of Queensland Ltd v Grant [1984] 1 NSWLR 409; Vereker v Choi (1985) 4 NSWLR 277, yet in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 the House of Lords distinguished The Siskina; and the Court of Appeal has subsequently held that there is no requirement for an applicant to have a substantive cause of action against the third party, the High Court’s jurisdiction to make such an order being incidental to the enforcement of the applicant’s substantive right against the respondent under s 37 of the Supreme Court Act 1981 (UK): Mercantile Group (Europe) A.G. v Aiyela [1994] QB 366 (and see TSB Private Bank International S.A. v Chabra [1992] 1 WLR 231). The Federal Court has similar jurisdiction under s 23 of the Federal Court of Australia Act 1976 and its incidental power as a superior court of record: see Jackson v Sterling Industries Ltd (1987) 162 CLR 612. And that jurisdiction will be exercised when: (a) the affairs of the respondent and of the third party are intermingled; (b) the respondent and its assets are effectively controlled, de jure or de facto, by the third party; (c) the respondent’s assets will be insufficient to meet the applicant’s claim; (d) the applicant, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or its assets to meet the applicant’s claim; and (e) there is a danger that the third party will send its assets abroad or otherwise dispose of them: see Coxton Pty Ltd v Milne, above; Winter v Marac Australia Ltd, above.
All of these elements are established here. A Mareva injunction ought to be granted against the prospective respondents as third parties in view of the fact that Mr and Mrs Cardile are the natural persons who have to date orchestrated the movement of assets from Eagle to themselves and to Ultra. The primary Judge found that their conduct in transferring those assets was with an intent to deprive the applicant of those assets. There is no reason to suppose that they will cease to dispose of any of those assets merely because they hold them in their own name, given that they face a prospective action by a liquidator of Eagle to recover those assets.
His Honour’s finding that it could be inferred that the claims were not in jeopardy does not depend on the credit of any witnesses, as Mr and Mrs Cardile did not give any evidence or proffer any explanation for their conduct to date, and it is not a reasonable inference to draw, given his Honour’s findings that: (a) the decisions to declare both dividends were prompted by the commencement of these proceedings by LED; (b) the desire to ensure that assets of Eagle were not available to meet a judgment in the applicant’s favour was a motivation for declaring the dividend; and (c) the decision to incorporate Ultra and to ensure that all future business be channelled through it was undertaken so that future profits would not be available to satisfy any judgment in favour of LED.
EAGLE’S SUBMISSIONS IN OPPOSING THE APPLICATION FOR LEAVE TO APPEAL
In opposing the application for leave to appeal, Eagle contends that:
The decision at first instance was discretionary, and related to a matter of practice and procedure, rather than to any issue of substantive rights; accordingly an appellate court must exercise particular caution in considering its review (see In re The Will of F P Gilbert (dec.) (1946) 46 SR (NSW) 318 at 323; Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 176-177).
Absent clear demonstration that the primary Judge erred in principle, his Honour’s decision must be regarded as correct (see House v The King (1936) 55 CLR 499 at 504-5; Lovell v Lovell (1950) 81 CLR 513 at 532-534; Mace v Murray (1955) 92 CLR 370 at 378; Rodgers v Rodgers (1964) 114 CLR 608 at 619-620).
The primary Judge did not err in either his appreciation of the relevant principles or in his application of them to the facts as found by him.
LED’s contention, that the so-called “narrow” view of the Mareva injunction has been departed from since The Siskina was decided, should be rejected.
CONCLUSIONS ON THE APPLICATION FOR LEAVE TO APPEAL
Generally speaking, the relevant considerations in deciding to grant, or to refuse, leave to appeal are: (a) whether in all the circumstances the judgment of the primary Judge is attended by sufficient doubt to warrant reconsideration by the Full Court; and (b) whether substantial injustice would result if leave were refused, supposing the decision were wrong (see e.g. Jarrett v Seymour (1993) 46 FCR 557 at 559). Leave is more readily granted where substantive rights, rather than points of practice, are in issue (see Jarrett at 560).
We have now heard full submissions from Counsel, not only on the leave application, but also on the appeal itself, supposing that leave were to be granted. In our opinion, the questions arising here, whether in terms of power, or in terms of discretion, given especially the possible impact of the relief sought upon third parties, are complex and difficult. The correctness of the decision to refuse that relief is, we think, open to dispute. Moreover, if that decision were wrong, significant consequences would result for LED.
Although, in one sense, the present issues are concerned with practice and procedure, when looked at from another aspect, they involve substantive questions as well; on any view, the adjectival issues have considerable significance (see Christianos v Aloridge Pty Ltd (1995) 59 FCR 273 at 280-1).
Leave to appeal will, accordingly, be granted.
CONCLUSIONS ON THE APPEAL
(a) The nature of the Court’s power to grant Mareva relief
The general power to grant a Mareva injunction in relation to a matter in which this Court has jurisdiction was considered by the High Court in Jackson v Sterling Industries Ltd (1987) 162 CLR 612. The High Court, by a majority (Mason CJ, Wilson, Brennan, Deane and Dawson JJ; Toohey and Gaudron JJ dissenting), held that the particular order made there at first instance that the defendant provide the plaintiff with substantial security (see Sterling Industries Ltd v Nim Services Pty Ltd (1986) 12 FCR 164 per Sheppard J) was not “appropriate”. However, the members of the High Court were unanimous in holding that, by virtue of the grant by s 23 of the Federal Court of Australia Act 1976 to the Court of power in relation to matters in which it has jurisdiction, “to make orders of such kinds, including interlocutory orders.... as the Court thinks appropriate”, this Court possessed a general power to grant Mareva relief where the circumstances are such that there is a danger of the defendant absconding, or of the defendant’s assets being removed out of the jurisdiction, or disposed of within the jurisdiction, or otherwise dealt with so that there is a danger that a successful plaintiff will not be able to have the judgment satisfied.
Mason CJ, Wilson, Deane, Dawson and Gaudron JJ were also of the opinion that, even in the absence of s 23, this Court would have possessed power to make such orders in relation to matters properly before it, as an incident of the general grant to it, as a superior court of law and equity, of jurisdiction to deal with such matters.
In the latter connection, Wilson and Dawson JJ said (at 617):
“Initially the Mareva injunction was of limited scope being available only against a foreign defendant with movable assets within the jurisdiction which, unless retrained, he was likely to remove. Some broader rationale was needed both to explain and fashion the eventual extension of the remedy to defendants resident within the jurisdiction and to the dissipation of assets within the jurisdiction for the purpose of defeating any judgment.... It was to be found in the notion that the purpose of the Mareva injunction was to prevent the abuse of the process of the court by the frustration of its remedies... The enactment in England of s. 37(3) of the Supreme Court Act 1981 (U.K.), which confirmed the Mareva injunction in its extended form, rendered somewhat academic further debate in England upon the foundation of the remedy.
However, if the power of a court to grant injunctions of the Mareva type and associated relief is to be found in its capacity to prevent the abuse of its process, then it is as much to be found in its inherent power as in any statutory power to grant such relief as is ‘just or convenient’ or ‘appropriate’.”
Their Honours went on to say (at 619):
“[The Mareva injunction] exists not to create additional rights but to enable a court to protect its process from abuse in relation to the enforcement of its orders.”
Brennan J said (at 621):
“[A] Mareva injunction... [is] a remedy which is incidental to the exercise by a court of its jurisdiction to enter judgment for a debt or damages and which is designed to prevent the defendant from divesting himself of his assets whereby enforcement of such a judgment might be frustrated.”
His Honour added (at 621):
“A judicial power to make an interlocutory order in the nature of a Mareva injunction may be exercised according to the exigencies of the case and, the schemes which a debtor may devise for divesting himself of assets being legion, novelty of form is no objection to the validity of such an order. In this case, however, an objection to the order made is not novelty of form but error in principle.”
Deane J said (at 623):
“To some extent, the general power of the English High Court of Justice to grant a Mareva injunction was initially seen as based on the provisions of s. 45(1) of the Supreme Court of Judicature (Consolidation) Act 1925 (U.K.): see also the Supreme Court Act 1981 (U.K.), s. 37(3). That general power should, however, now be accepted as an established part of the armoury of a court of law and equity to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction.”
His Honour later said (at 625):
"[The purpose of a Mareva injunction] is to prevent a defendant from disposing of his actual assets (including claims and expectancies) so as to frustrate the process of the court by depriving the plaintiff of the fruits of any judgment obtained in the action.”
Toohey J said (at 634):
"This Court is presently concerned with an order of an interlocutory nature designed to ensure that a judgment, if obtained against the appellant, will not prove useless.”
Gaudron J said (at 639):
“In Connelly v. Director of Public Prosecutions, Lord Morris held that ‘There can be no doubt that a court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction’; and this power has not, traditionally, been restricted to defined and closed categories (Tringali v. Stewardson Stubbs & Collett Ltd. but may be exercised where the administration of justice demands it: Cocker v. Tempest; Ferris v. Lambton. An asset preservation order of the Mareva variety, issued only where the court is satisfied that a defendant is deliberately disposing of his assets with the object of defeating or frustrating the ultimate judgment of the court, would be within the scope of such power.”
As was recently noted by Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ in CSR Ltd v Cigna Insurance Australia Ltd, 5 August 1997, unreported, (at 41):
“The counterpart of a court’s power to prevent its processes being abused is its power to protect the integrity of those processes once set in motion.”
Having referred to the power to grant a Mareva injunction as an example of the court’s power to protect its processes, their Honours then noted that (at 41): “[T]he [court’s] inherent power... is not to be restricted to defined and closed categories."
(b) Does the Court have power to grant a Mareva injunction against a third party?
This is the present question. As is identified above, the power of the Court to make interlocutory orders, including Mareva injunctions, derives from s 23 of the Federal Court of Australia Act. It is on its face a wide power. Ought it nonetheless be understood, at least so far as Mareva injunctions are concerned, as being a power to make such injunctions against persons other than parties to the proceedings ?
As one commentator has observed, the status of a third party in relation to the principal action in this context raises fundamental questions as to the juridical basis of injunctive relief, and the classification of a party’s status needs to be considered both as a jurisdictional issue and as a fact-based determination (see Peter Devonshire, “The implications of third parties holding assets subject to a Mareva injunction” [1996] LMCLQ 268).
In Sterling Industries, above, at first instance Sheppard J, applying Coxton v Milne, above, rejected (at 180) a submission that “an injunction should not be made if it restrains a party against whom principal relief is not claimed”.
In the Full Federal Court in that case (see Jackson v Sterling Industries Ltd (1986) 12 FCR 267), Woodward J, who would have dismissed the appeal, noted (at 279) that it had been held in England that a Mareva injunction “may apply to assets held by third parties, such as banks (see Z Ltd v A-Z and AA-LL [[1982] QB 558]...).”
In Z Ltd v A-Z and AA-LL, it was held that a Mareva injunction operated in rem and took effect on every asset of the defendant which it covered; that everyone with knowledge of the injunction had to do what he reasonably could do to preserve those assets; and that if he assisted in their disposal, he would be guilty of contempt of court as being involved in an act of interference with the course of justice.
In Jackson v Sterling Industries in the High Court, Toohey J noted (at 633) that a Mareva injunction “has, in some circumstances, been made available against a third party if that party is in possession or control of the defendant’s property: Galaxia Maritime S.A. v. Mineralimportexport [[1982] 1 WLR 539].”
In Galaxia, the Court of Appeal discharged a Mareva injunction, insofar as it affected the right of an innocent third party to use its ship.
Kerr LJ said in that case (at 542):
“A plaintiff seeking to secure an alleged debt or damages due from the defendant, by an order preventing the disposal of assets of the defendant, cannot possibly be entitled to obtain the advantage of such an order for himself at the expense of the business rights of an innocent third party, merely by proffering him an indemnity in whatever form.
In this connection, it is crucial to bear in mind not only the balance of convenience and justice as between plaintiffs and defendants, but above all also as between plaintiffs and third parties. Where assets of a defendant are held by a third party incidentally to the general business of the third party - such as the accounts of the defendant held by a bank, or goods held by a bailee as custodian, for example in a warehouse - an effective indemnity in favour of the third party will adequately hold this balance, because service of the injunction will not lead to any major interference with the third party’s business. But where the effect of service must lead to interference with the performance of a contract between the third party and the defendant which relates specifically to the assets in question, the right of the third party in relation to his contract must clearly prevail over the plaintiff’s desire to secure the defendant’s assets for himself against the day of judgment.”
In Jackson v Sterling, Gaudron J said (at 642):
“The development of the law and practice relating to the making of orders in restraint of dealing with assets has made it clear that such an order creates no right in the plaintiff in the assets the subject of the order: see The ‘Angel Bell’. The practice has developed that such orders may and should be varied to allow payment of debts incurred in the ordinary course of business even if not legally enforceable... to allow the defendant sufficient funds to meet reasonable living expenses... and to prevent interference with the rights of third parties: Galaxia Maritime S.A. v. Mineralimportexport (The ‘Eleftherios’); Clipper Maritime Co. Ltd. v. Mineralimportexport (The ‘Marie Leonhardt’); and Searose Ltd. v. Seatrain U.K. Ltd. The practice is thus inconsistent with acquisition by a plaintiff of rights in respect of assets the subject of such order.”
In Searose v Seatrain [1981] 1 WLR 894, Robert Goff J said (at 897):
“[C]are must be taken to ensure that such injunctions are only given for the purpose for which they are intended, viz. to prevent the possible abuse of a defendant removing assets in order to prevent the satisfaction of a judgment in pending proceedings: and likewise, care must be taken to ensure that such injunctions do not bear harshly upon innocent third parties. If these principles are not observed, a weapon which was forged to prevent abuse may become an instrument of oppression.
It follows that, first, an order for a Mareva injunction should not be sought in terms wider than are reasonably required in the circumstances of the case. Secondly, any asset in respect of which an order for a Mareva injunction is sought should be identified with as much precision as is reasonably practicable.”
In Clipper Maritime [1981] 1 WLR 1262, Goff J said (at 1264):
“The Commercial Court is very anxious to provide a service to the commercial community which is sensitive to its needs: and in particular it is anxious that the Mareva jurisdiction, in the administration of which the Commercial Court plays so substantial a part, should be implemented in a manner which takes account of the interests of innocent third parties.”
In Tomlinson v Cut Price Deli Pty Ltd, Kiefel J, 23 June 1995, unreported, Mareva injunctions were granted against a respondent to the proceedings, but also against a company related to the respondent, to which the respondent’s assets had been assigned during the currency of the proceedings.
Her Honour said (at 10-11):
“In T.S.B. Private Bank International S.A. v. Chabdra & Anor [1992] 1 WLR 231, 241-2 the view was expressed that an injunction against a third party may also be seen as ancillary to the cause of action against the defendant. But in any event it seems to me it can be viewed here as ancillary to the injunction against CPD, that injunction being incidental to the cause of action against it, and as in aid of that injunction: and see McIntyre v. Pettit (1988) 90 FLR 196. Orders against third parties in aid of an injunction, where the third party has become mixed up in the transaction have been made: see eg. Mercantile Group (Europe) AG v. Aiyela & Ors [1994] 1 All ER 110, and would, I consider, be made where the third party has actively participated in the deliberate removal of assets, as here alleged. In effect the further injunction is simply recognising that a party such as CPD and those associated with it effectively controls Aust (or the same people in any event control both entities) and makes clear that they are not to act through Aust to further deal with or encumber the assets.”
We respectfully agree with these observations, which are equally pertinent here.
In discussing the procedural issues that can arise in the present context, Peter Devonshire, above, correctly states the position (at 271-2):
“Usually a third party holding a defendant’s assets is not directly enjoined by a Mareva injunction. Instead, such persons are notified of the order and its terms. However, in certain circumstances the plaintiff may apply for a third party to be joined as a party to the action. Persons named as a co-defendant may then be directly restrained by injunction. If the third party is a neutral depository of the defendant’s funds, such as a bank, this will operate as an exception to the established principle that an injunction must be founded upon a pre-existing cause of action in respect of which the defendant is subject to the court’s jurisdiction.”
As Devonshire notes (at 271), where a third party is not directly enjoined, that party may be liable to contempt once notified of the order; but joinder of the third party may be ordered under a provision, similar to O 6 r 8(1) of the Federal Court Rules, if for instance, the inference is drawn that one party is subject to the defendant’s control and direction, or where the nature of their relationship is such that collusion cannot be ruled out (at 272-278).
(c) Should Mareva relief have been granted against the prospective respondents?
In our opinion, the observations detailed above are applicable in the present circumstances. On the undisputed facts, Mr and Mrs Cardile control both Eagle and Ultra. Having regard to his Honour’s finding as to the earlier involvement of Mr and Mrs Cardile in the disposition of assets by Eagle, we do not consider that it was open to his Honour to conclude, if he did so conclude, that there is no risk that assets will be disposed of by Ultra, at the direction of Mr and Mrs Cardile, with a view to abusing or frustrating the Court’s process. In those circumstances, the Court should intervene to prevent any such abuse or frustration. To that end, Ultra should be temporarily restrained from disposing of its assets, subject to the usual exceptions so that, for example, it may make a disposition in the ordinary course of its ordinary business. Mr and Mrs Cardile should be similarly enjoined. LED will, of course, be required to give the usual undertaking as to damages.
We must add that, with all respect, we cannot accept, as the primary Judge appears to suggest, that it is an ingredient of the Mareva jurisdiction that the debtor has a specific proprietary interest in the third party’s assets (see e.g., Mercedes Benz A.G. v Leiduck [1996] 1 AC 284 where (at 300) Lord Mustill emphasises that Mareva relief takes effect in personam only and distinguishes tracing and other such remedies protecting proprietary rights). It is sufficient, for present purposes, that the assets of the defendant and the third parties are “mixed up” and “controlled”, in the sense explained by Kiefel J in Tomlinson, above.
It is true, as has been seen, that in the exercise of the Mareva injunction, the position of innocent third parties needs to be treated with caution and with due regard to their legitimate interests. But it could not be suggested, and is not suggested, that these third parties were innocent. Neither Mr nor Mrs Cardile gave evidence, and the findings of Davies J and of the primary Judge that they, and their companies, had embarked upon a scheme aimed at frustrating the Court’s process are not, and could not be, challenged.
We must further say that we cannot agree with the approach, apparently taken here by the primary Judge, that the relevant question is to be looked at, in effect, in terms of the grant of final relief on a substantive cause of action. This is no more than interlocutory relief. At the jurisdictional level, the only real questions for the primary Judge were first, whether there was a serious question to be tried as to whether assets presently under the control of Ultra and Mr and Mrs Cardile could be available to satisfy a judgment against Eagle in favour of the applicant, and secondly, whether there was a danger of such assets being dealt with by Eagle, or the prospective respondents, so that the Court’s process would be frustrated.
In our view, on the undisputed facts, suitable Mareva relief should have been granted against the prospective respondents. However, we think that it is appropriate that the matter now be remitted to a single Judge so that all outstanding adjectival questions may be determined. They include the joinder of the prospective respondents, the giving by the applicant of undertakings as to damages in favour of the prospective respondents and the form, including appropriate conditions, of the negative injunction to lie against the prospective respondents to prevent further dissipation of Eagle’s assets. Although the relief sought against those respondents by the applicant in its notice of motion appears to us to be appropriate in principle, all parties, including the prospective respondents, should have the opportunity to address a single Judge on the form of that relief and on the question of costs at first instance generally.
We propose to make the following orders:
Leave to appeal granted.
Appeal allowed, with costs.
Set aside the order made at first instance on 25 June 1997 dismissing the notice of motion for orders against Ultra Modern Developments Pty Ltd, Paul Cardile and Lucy Cardile.
Remit the matter to a single judge of the Court for the making of orders in accordance with these reasons for judgment, including orders as to costs at first instance.
I certify that this and the preceding fourteen (14) pages are a true copy of the Reasons for Judgment herein of the Honourable Justices Beaumont and Branson .
Associate:
Dated: 22 August 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NG 817 of 1993 NEW SOUTH WALES DISTRICT REGISTRY ) ) NG 862 of 1994 GENERAL DIVISION )
ON APPEAL FROM A SINGLE JUDGE
OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: L.E.D. BUILDERS PTY LIMITED
(ACN 002 351 957)
ApplicantAND: EAGLE HOMES PTY LIMITED
(ACN 002 800 115)
Respondent
JUDGES: BEAUMONT, BRANSON AND TAMBERLIN JJ PLACE: SYDNEY DATED: 22 AUGUST 1997
REASONS FOR JUDGMENT
TAMBERLIN J:
Introduction
This is an application for leave to appeal from a judgment of this Court and if leave is granted for the hearing of the appeal. The judgment below dismissed a motion by the applicant (“LED”) for Mareva relief in respect of assets divested from the respondent (“Eagle”) to Mr and Mrs Cardile and a company indirectly controlled by them, Ultra Modern Developments Pty Limited (“Ultra Modern”). I will refer to the latter three parties as the “prospective respondents”. They are so described because they are not presently parties to the application but LED seeks to join them as respondents.
For the reasons set out below I am satisfied that leave to appeal should be granted.
The grounds of appeal are that:
· The primary judge erred in finding that a Mareva injunction is only available against a person other than the respondent to the substantive cause of action where that person holds legal title to an asset beneficially owned by the respondent to the cause of action.
· The primary judge erred in finding that any claims by the applicant against assets divested to the prospective respondents were not in jeopardy.
Background
LED and Eagle are companies which, at all material times, carried on business as project home builders. LED, on 28 October 1993, instituted proceedings against Eagle claiming breach of copyright by Eagle in respect of building floor plans. The application was heard over five days by Davies J who, on 27 August 1996, made a declaration that Eagle had infringed the copyright of LED in floor plans for certain project homes. The reference to this decision is LED Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 35 IPR 215.
LED chose to seek an account of profits. It is anticipated that the hearing of any dispute as to this account will take place later this year.
Prior to the hearing of the account issue LED applied for two Mareva injunctions. The first is against Eagle, the respondent to the main proceeding. The other is against the prospective respondents. LED also seeks an order for their joinder as respondents in the proceeding.
Mr and Mrs Cardile are the sole shareholders of Eagle. Mr Cardile is its only director. Another company, Eagle Developments Australia Pty Limited (“Eagle Developments”) is the sole shareholder of Ultra Modern, the other prospective respondent. The primary judge found that Eagle Developments was controlled by Mr and Mrs Cardile. Accordingly, the position is that Mr and Mrs Cardile control Eagle and through Eagle Developments indirectly control Ultra Modern.
The primary judge made a Mareva order in relation to the respondent, Eagle. There is no cross-appeal in respect of that determination. This appeal only concerns the Mareva relief sought against the prospective respondents.
The primary judge made the following findings for the purposes of the Mareva proceedings:
· Eagle was motivated by a desire to ensure that the assets of Eagle were not available to meet a judgment in favour of LED and for this purpose, declared a dividend during the year ended 30 June 1994 of $400,000. This was paid by book entry crediting the loan accounts of Mr and Mrs Cardile.
· During the year ended 30 June 1996 a further dividend of $800,000 was declared by Eagle for the same purpose. This was paid by crediting shareholders’ loan accounts. This dividend was also prompted by a desire to remove assets from Eagle which would otherwise be available to satisfy any judgment in favour of LED in the copyright proceeding.
· Ultra Modern was incorporated on 22 May 1995, some nineteen months after commencement of the breach of copyright proceedings in October 1993.
· On 6 June 1995, less than three weeks after incorporation, Eagle registered the name “Eagle Homes” and on the same day Ultra Modern became registered as the proprietor of the business name. In October 1995 Ultra Modern obtained a builder’s licence.
· The controlling parties of Eagle are now responsible for the affairs of Ultra Modern.
· The decision to incorporate Ultra Modern was made to ensure that all future business in relation to new designs would be channelled through Ultra Modern. This was undertaken so that future profits would not be available to satisfy any judgment in favour of LED.
· LED has already established that it had a good cause of action against Eagle and that it will be entitled prima facie to recover a substantial judgment against Eagle in the vicinity of $200,000 at least.
· LED will not recover in full the amount of any judgment which is obtained following the taking of accounts.
· The causes of action prospective or otherwise which Eagle has against the prospective respondents might be rendered futile or worthless if, when a judgment against them is obtained in favour of Eagle, or any liquidator of Eagle, they have no assets to meet that judgment.
In addition to the above findings, his Honour noted that Davies J on the hearing of the substantive application as to breach of copyright was not satisfied that Mr Cardile’s evidence was truthful. He also found that there had been false dating of a plan. He found Mr Cardile lacked credit and was an unreliable witness. The findings were based partly on the fact that the name “Eagle Homes” had, during the currency of the proceedings, been transferred from Eagle to Ultra Modern, and that Ultra Modern was continuing the business under the name of “Eagle Homes”. Davies J was satisfied that there was deliberate copying by Eagle of LED’s plans, though the copying was achieved by the giving of instructions for change, rather than the direct tracing of one plan from another.
The reasoning below in relation to the prospective respondents
The case, as the primary judge saw it, advanced against the prospective respondents was that they had benefited from the payment of dividends and the incorporation of Ultra Modern, enabling it to continue the business of Eagle Homes. LED was entitled to preserve the status quo in relation to all assets in the hands of the prospective respondents because, upon judgment being obtained against Eagle, an attack would be mounted on the dividends and on the apparent transfer to Ultra Modern of the business formerly conducted by Eagle. The effect of such actions would enable Eagle to pay any amount found due from Eagle as a result of the taking of accounts.
His Honour pointed out that while LED had sought to join the prospective respondents in the proceedings before him, no pleading had been formulated alleging any specific cause of action available to LED against any of them.
He noted that, in the course of argument, it was indicated on behalf of LED that one possible proceeding which might be brought against the prospective respondents would be under s 37A of the Conveyancing Act 1919 (NSW), which is concerned with voluntary alienations to defraud creditors. The effect of the section is to make voidable an alienation of property made with the intent to defraud creditors. Any person thereby prejudiced is given standing to invoke this provision. He noted the contention of LED that, if it obtained a substantial judgment and could persuade a court that the declaration and payment of dividends or the assumption of the business name by Ultra Modern were undertaken with the intention to defraud creditors, those transactions could be avoided.
His Honour also noted that there were said to be prospective causes of action available to Eagle under ss 588FB, 588FC, 588FE(3), (4), (5) and 588FF of the Corporations Law. Those sections are concerned with the avoidance of uncommercial or insolvent transactions of a company. There was also reference to possible proceedings for breach of fiduciary duty.
His Honour pointed out that causes of action of the types indicated were dependent upon further steps being taken, such as the making of an order for the winding up of Eagle or the appointment of a receiver. There was no application before any court for the winding up of Eagle nor was it suggested that Eagle was likely to be wound up, except possibly pursuant to an application by LED, assuming it became a judgment creditor. His Honour also pointed out that before LED became a judgment creditor it must obtain a judgment against Eagle and it was only if that judgment was not satisfied in full that LED could then make an application for a liquidator to be appointed. He noted that any cause of action, which Eagle might have against the prospective respondents, could be rendered futile if, when a judgment is obtained in favour of Eagle or its liquidator, the prospective respondents had no assets to meet that judgment.
He concluded that there was no evidence to suggest that Mr and Mrs Cardile might depart the jurisdiction or that they had made any attempt to dispose of assets out of the jurisdiction. Nor, he concluded was that there was any evidence to suggest that Ultra Modern may cease to carry on business or dispose of any assets. In his judgment at 19, his Honour said:
“The most that can be said by LED is that, since Mr and Mrs Cardile have been prepared in the past to engage in transactions of the nature described above, there is reason to think that they may do the same in relation to the assets of Ultra Modern or may dispose of their own assets. It is said that they might be disposed to take such steps in order to avoid the prospective claims that might be made against them by a liquidator of Eagle Homes if judgment is given in favour of LED or to avoid the consequences of an order under section 37A if proceedings were taken under that provision by LED.”
His Honour went on to say that even if the claims under s 37A or by a liquidator were on foot he was not satisfied that they were in jeopardy. He emphasised that the causes of action, for the most part, had not yet even arisen.
At 21-22 his Honour said:
“I was referred by LED to authorities said to support the proposition that Mareva orders will lie directly against third parties. Close analysis of the authorities, however, suggests that they are instances where the claim against the third party was in respect of specific property in relation to which it was asserted that the defendant/debtor of the claimant had a proprietary interest. In Winter v Marac Australia Ltd (1986) 6 NSWLR 11 a Mareva injunction was sought against the assets not only of the defendant’s wife but also of his sister. The Court of Appeal held that where a Mareva injunction is sought against a third party:
‘it must be shown that the person against whom judgment may be obtained has some right in respect of or control over or other access, direct or indirect, to the relevant assets so that they or the proceeds of their sale could be required to be applied in discharge of the judgment debt.’ (at 12)
In Coxton Pty Ltd v Milne (New South Wales Court of Appeal, 20 December 1985, unreported), Hope JA (with whom Glass and Priestley JJA concurred) said (at page 13) that a Mareva injunction may lie where:
‘the alleged debtor and the disposition of its assets are effectively controlled, de jure or de facto, by the third party, the debtor’s assets will be insufficient to meet the debt, the creditor, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or his assets to meet his debt, and there is danger that the third party will party will send his assets abroad or otherwise dispose of them.’
The question is whether Eagle Homes has control over or access to the assets of Ultra Modern or Mr and Mrs Cardile such that the proceeds of the sale of those assets could be applied in discharge of any judgment against Eagle Homes. There must be evidence to support a conclusion that there is a danger that the assets of the Prospective Respondents, which might otherwise be available to satisfy a judgment in favour of LED against the Eagle Homes, will not be available.
The bases for suggesting that assets of the Prospective Respondents might be available to satisfy a judgment in favour of LED are those outlined above. There is no other basis for contending that Eagle Homes has any interest in the assets of the Prospective Respondents. As I have indicated, questions of whether their assets will be available to satisfy any judgment will depend upon the outcome of proceedings on causes of action as between Eagle Homes and the Prospective Respondents which, for the most part, have not yet arisen. It is inappropriate for those questions to be litigated in these proceedings, particularly at the stage which these proceedings have now reached.”
Availability of Mareva relief against third parties
The first alleged error of law is that his Honour adopted the wrong test to determine whether Mareva relief was available against the prospective respondents; namely, whether it could be shown that Eagle had a proprietary interest in the dividends and the goodwill alienated to the prospective respondents.
After considering the authorities, his Honour concluded that the authorities cited to him were instances in which the claim against the third party was in respect of specific property in relation to which it was asserted that the respondent had a proprietary interest. He referred to Winter v Marac Australia Ltd (1986) 6 NSWLR 11 and Coxton Pty Ltd v Milne (New South Wales Court of Appeal, unreported, 20 December 1985).
The question formulated by his Honour for determination was whether Eagle has control over or access to the assets of the prospective respondents, such that those assets could be applied in discharge of any judgment against Eagle.
The judgment continues at 22:
“The bases for suggesting that assets of the Prospective Respondents might be available to satisfy a judgment in favour of LED are those outlined above. There is no other basis for contending that Eagle Homes has any interest in the assets of the Prospective Respondents.” (Emphasis added)
The reference to Eagle having an interest in the assets is consistent with the conclusion which his Honour drew from his consideration of the authorities, namely that Mareva relief against third parties was granted where the applicant’s claim against the third party was in respect of specific property in which the respondent had a proprietary interest.
LED submits that this approach was unduly restrictive and wrong. The principle for which LED, in substance, contends is that:
· where there is a respondent and third parties who are under the same “control”; and
· they mix up their business affairs so that as a result of transfers of property from the former to the latter a real probability arises that a liquidator or official receiver/trustee of the respondent will have a claim under s 37A of the Conveyancing Act or similar legislation (e.g. CorporationsLaw) or for breach of fiduciary duty;
· there is jurisdiction to grant Mareva relief, if there is a danger of dissipation or disposal by the third party.
This approach is substantially broader than that accepted by his Honour because it does not limit the grant to circumstances where the respondent has any “interest” in or “accrued right” in relation to the assets of the third party.
LED’s submission is derived from the judgment of Hope JA in Coxton (with whom Glass and Priestly JJA agreed) where his Honour said at 13:
“ .... Without attempting to define or to limit the extent of the exception, the necessary circumstances will exist when the affairs of a defendant sued by a creditor for an alleged debt and of the third party against whom the injunction is sought are intermingled, the alleged debtor and the disposition of its assets are effectively controlled, de jure or de facto, by the third party, the debtor’s assets will be insufficient to meet the debt, the creditor, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or his assets to meet his debt, and there is a danger that the third party will send his assets abroad or otherwise dispose of them.” (Emphasis added)
The correct approach, according to the prospective respondents, is that Mareva relief is only available against them if it can be shown that they hold assets beneficially owned by Eagle. If this were established, then the power might be exercised to preserve the assets of the prospective respondents on the basis that the grant of Mareva relief is ancillary to the right which LED has against Eagle.
In order to determine between the two conflicting approaches it is necessary to consider the principles applicable in Australia to the grant of Mareva relief against third parties. The subject is one of considerable importance and some complexity. It has not escaped the attention of commentators: see, for example, the article by Peter Devonshire, “The Implications of Third Parties Holding Assets Subject to Mareva Injunction” [1996] LMCLQ 268.
The principles which apply to the grant of Mareva injunctions were considered by the High Court in Jackson v Sterling Industries Ltd (1987) 162 CLR 612. That case did not, of course, involve Mareva relief against a third party. The circumstances were that an applicant for damages, arising from an alleged breach of s 52 of the Trade Practices Act 1974 (Cth), sought an order that the respondent provide security in the sum of $3,000,000 to satisfy any judgment that may be delivered against the respondent. The trial judge, Sheppard J, ordered that the respondent provide “security in the sum of $3,000,000”. The High Court decided that his Honour’s order should be set aside because it was not the function of Mareva relief to create “security” for an applicant but rather to prevent a defendant from disposing of assets so as to deprive the applicant of the fruits of any judgment and so frustrate the process of the court.
The principal judgment was given by Deane J with whom Mason CJ, Wilson, Brennan and Dawson JJ, in substance, agreed.
His Honour considered that the source of the Federal Court’s power to grant Mareva relief in general was derived from s 23 of the Federal Court of Australia Act 1976 (Cth) which provides:
“The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.”
He also noted (at 623) that, even in the absence of s 23, the Federal Court would have power to make such orders in relation to matters properly before it, as an incident of the general grant to it as a superior court of law and equity, of the jurisdiction to deal with such matters. He agreed with the comments of Bowen CJ in the judgment of the Full Federal Court below in Sterling Industries, who said:
“... a statutory court which is expressly given certain jurisdiction and powers must exercise that jurisdiction and those powers. In doing so it must be taken to be given by implication whatever jurisdiction or powers may be necessary for the leave given by implication whatever jurisdiction or powers may be necessary for the excise of those expressly conferred. The implied power for example to prevent abuse of process, is similar to, if not identical with, inherent power.” ((1986) 12 FCR 267 at 272).
At 623 Deane J summarised the position:
“As a general proposition, it should now be accepted in this country that ‘a Mareva injunction can be granted .... if the circumstances are such that there is a danger of [the defendant’s] absconding, or a danger of the assets being removed out of the jurisdiction or disposed of within the jurisdiction, or otherwise dealt with so that there is a danger that the plaintiff, if he gets judgment, will not be able to get it satisfied’.”
It is apparent from the judgments in Sterling Industries that the underlying jurisdiction is to be found in the power to prevent abuse, or frustration of the efficacy of the Court’s process, which might otherwise result from divestiture of assets by a respondent.
The question in the present case is whether the principles set out in Sterling Industries extend to enable this Court to grant Mareva relief to preserve funds in the hands of non-innocent third parties in circumstances where there is a significant prospect of an action to set aside the alienation of property from the respondent to those third parties.
In Australia, while there have been a number of recent decisions concerning the grant of Mareva relief, no decision has specifically dealt with the question of relief against third parties in circumstances such as the present.
The most apposite recent decision is that of Kiefel J in Tomlinson v Cut Price Deli Pty Ltd (unreported, 23 June 1995). In that case her Honour granted Mareva relief against a third party. After reviewing the authorities her Honour said at 10-11:
“No debt is presently due to the applicants from CPD. They have foreshadowed proceedings to set aside the transactions as an alienation of property by CPD with intent to defeat its creditors and have sought a declaration that Aust holds the assigned interests on trust for CPD. CPD and Aust submit that unless the applicants can now show that an accrued cause of action against Aust they cannot have an injunction against it...”
... it [Mareva relief] can be viewed here as ancillary to the injunction against CPD, that injunction being incidental to the cause of action against it, and as in aid of that injunction ... Orders against third parties in aid of an injunction, where the third party has become mixed up in the transaction have been made: see eg. Mercantile Group (Europe) AG v Aiyela & Ors [1994] 1 All ER 110, and would, I consider, be made where the third party has actively participated in the deliberate removal of assets, as here alleged. In effect the further injunction is simply recognising that a party such as CPD and those associated with it effectively controls Aust (or the same people in any event control both entities) and makes clear that they are not to act through Aust to further deal with or encumber the assets.”
The reasoning in Sterling Industries has been followed and applied in many subsequent decisions, some of the more recent being: Fletcher v Foodlink Ltd (1995) 60 FCR 262; Haydon v Teplitzky (Lindgren J, unreported, 9 April 1997); Biscen Pty Ltd v Temsign Pty Ltd (Carr J, unreported, 7 October 1995).
There is no reason in principle, either pursuant to s 23 or the implied jurisdiction of the Court, why it is necessary to impose a limitation on the grant of Mareva relief against a third party to the effect that a respondent must have a proprietary “interest” in the divested assets. The power is purposive. Its aim is to prevent frustration of the Court’s process.
As Jackson J pointed out in his judgment in the Full Court in Sterling Industries (1986) 12 FCR 267 the requirement of s 23 is simply that the order be one which the Court, in the light of the nature of the particular jurisdiction which it is being called on to exercise, and in the light of the particular facts before it, “thinks appropriate”. The power, of course, is one to be exercised judicially. A similar view was taken by Gaudron J in Sterling Industries at 641-642.
Mareva relief has been developed in this country on a case by case basis and although its development must be approached cautiously it must not be unduly prevented or restricted. As Glass JA pointed out Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155 at 164, Mareva relief is to be developed and applied in accordance with the dictates of logic and commercial reality.
The question in the present case was foreshadowed in the judgment of Street CJ in Ballabil where his Honour said at 159:
“It may be that the judicial philosophy that has enabled the courts to disregard the presence of a proprietary interest or ‘equity’ as an essential prerequisite to the right to obtain a Mareva injunction might ultimately lead to the courts departing from what has ... thus far been the prerequisite for the appointment of a receiver, namely that the party seeking an appointment should establish some interest in the property over which receivership is sought.”
The mischief at which Mareva relief is directed and the need for flexibility in its terms were adverted to by Brennan J in Sterling Industries where he said at 621:
“A judicial power to make an interlocutory order in the nature of a Mareva injunction may be exercised according to the exigencies of the case and, the schemes which a debtor may devise for divesting himself of assets being legion, novelty of form is no objection to the validity of such an order.”
A further important consideration is that in blatant circumstances, such as the present, public confidence in the Court will be eroded if ingenious respondents can be seen to easily divest assets so as to effectively place them beyond the reach of a successful applicant, thereby converting the determination of the Court to a hollow exercise.
English authorities
Counsel for LED also referred to a number of English authorities.
A convenient starting point is the House of Lords’ decision in Siskina (Owners of cargo lately laden on board) v Distos Compania Naviera SA (“The Siskina”) [1979] AC 210. In that case the leading speech was given by Lord Diplock, who approached Mareva relief as being a species of interlocutory injunction. His Lordship said at 256-257:
“A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependant upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action....
In the instant case the cargo-owners have no legal or equitable right or interest in the insurance moneys payable to the shipowners in respect of the loss of the Siskina, which is enforceable here by final judgment of the High Court. All that they have is a claim to monetary compensation arising from a cause of action against the shipowners which is not justiciable in the High Court....”(Emphasis added)
In the subsequent House of Lords’ decision in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 Lord Mustill, delivering the principal speech, said at 362:
“For present purposes it is sufficient to say that the doctrine of the Siskina, put at its highest, is that the right to an interlocutory injunction cannot exist in isolation, but is always incidental to and dependant on the enforcement of a substantive right, which usually although not invariably takes the shape of a cause of action. If the underlying right itself is not subject to the jurisdiction of the English court, then that court should never exercise its power under section 37(1) by way of interim relief. If this is a correct appreciation of the doctrine, it does not apply to the present case.”
Subsequent decisions in the English Courts have queried the restrictive approach to the availability of Mareva relied taken by Lord Diplock in The Siskina. See Castanho v Brown & Root (UK) Ltd [1981] AC 557 at 573; South Carolina Insurance Co v Assurantie Maatschappij “De Zeven Provincien” N.V. [1987] AC 24 at 44; Channel Tunnel Group at 340-341, 343, and Mercedes Benz AG v Leiduck [1996] AC 284 at 307-308. However, the majority of the Privy Council in Mercedes Benz left open the question as to the current standing of The Siskina, pointing out that it had not, so far, been reversed by anything in decisions of the House of Lords up to the date of their advice.
Several recent English judgments adopt a broader approach than that taken in The Siskina. For example, in Aiglon Ltd v Gau Shan Co Ltd [1993] 1 Lloyd’s Rep. 164 at 170 Hirst J speaking of an application for Mareva relief by the plaintiff against a company described as “SA” said:
“Mr Falconer stressed that .... s 238 gives the defendants no direct claim against SA. However, he submitted that the Court has jurisdiction to grant a Mareva injunction against a third party such as SA as ancillary to the relief sought against Ltd.... I accept that here also Mr Falconer has established a good arguable case... on the footing that there is credible evidence that the assets of SA may in part be the assets of Ltd., who have as a result of the asset-stripping operation clearly put it out of their own power to meet the arbitration award, with the result that an injunction against Ltd. alone is likely to be inadequate to protect the defendants from the risk that they will be unable to enforce the arbitration award directly.”
See also TSB Private Bank International SA v Chabra [1992] 1 WLR 231 at 242.
The English Court of Appeal in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 granted Mareva relief to preserve assets in the hands of a third party on the basis that such relief was incidental to and dependant on the enforcement of a substantive right. Sir Thomas Bingham MR said at 377:
“Both principle and authority persuade me that the judges who made these orders did have jurisdiction to make them. I am very pleased to reach that conclusion, for if jurisdiction did not exist the armoury of powers available to the court to ensure the effective enforcement of its orders would in my view be seriously deficient. That is in itself a ground for inferring the likely existence of such powers, since it would be surprising if the court lacked power to control wilful evasion of its orders by a judgment debtor acting through even innocent third parties. The jurisdiction is of course one to be exercised with caution, restraint and appropriate respect for the legitimate interests of third parties. But that the jurisdiction exists, both in relation to the disclosure order and the Mareva injunction, I do not doubt.”
In summary, as the Privy Council pointed out in Mercedes Benz, the current standing of the principles applied in The Siskina is not settled. There is a discernible trend to a less restrictive approach which moves away from limited categories. In addition neither s 23 nor the implied jurisdiction of the Federal Court to make interlocutory orders, require this Court to proceed on the basis that Mareva relief is in substance a form of interlocutory injunction The essential difference between Mareva relief and an interlocutory injunction is that Mareva relief decides no rights and calls into existence no process by which rights will be decided. As Lord Mustill points out in Mercedes Benz, at 302, by contrast an interlocutory injunction “in a provisional and temporary way does seek to enforce rights”. There is no necessity to import The Siskina principles, or indeed any other rigid limitations, into the broad powers conferred by s 23 or to constrain the Court’s implied jurisdiction by reference to such principles.
In the present case the essential question is whether Mareva relief is available to preserve assets of Eagle alienated by its controllers, to themselves and an entity indirectly controlled by them, if it can be established that those assets are in danger of dissipation.
In my view, the Mareva relief sought in this case relates to a matter properly before the Court, namely the breach of copyright proceedings. This is a matter in which the Court is part heard. The relief is sought on the ground that there is a risk that the assets divested from Eagle will be dissipated, or disposed of, and thereby put beyond the reach of the applicant. If such risk can be established then, as a matter of power, this Court can grant the relief sought against the prospective respondents. The authorities do not require that there be any proprietary or beneficial interest in the assets on the part of Eagle.
For these reasons the judgment under appeal was in error in deciding that it is necessary for the respondent to have a proprietary interest in the assets before Mareva relief can be granted.
Danger of disposal or dissipation
This question was approached by the primary judge on the basis that any possible liability in the prospective respondents was remote and contingent. The judgment emphasises that no liquidator or receiver has yet been appointed or sought to be appointed; no cause of action against the prospective respondents by Eagle or LED has been formulated, and no detailed evidence has been provided to support the serious allegations in relation to any prospective proceeding under s 37A of the ConveyancingAct. Moreover, the prospective respondents were not even parties to the proceedings before his Honour.
These contingencies led his Honour to conclude that (at 22):
“... questions of whether their [the prospective respondents] assets will be available to satisfy any judgment will depend upon the outcome of proceedings on causes of action as between Eagle Homes and the Prospective Respondents which, for the most part, have not yet arisen. It is inappropriate for those questions to be litigated in these proceedings, particularly at the stage which these proceedings have now reached.”
These remarks indicate that his Honour did not think it necessary, as a matter of discretion, to give weight to the suggested causes of action because they were too remote or because they were inchoate. They were matters for later consideration. This approach is unduly restrictive. There is no reason in principle why an inchoate right of action should not be taken into account in determining whether to grant Mareva relief to preserve assets from dissipation. The question of risk or jeopardy is another matter.
The second basis on which his Honour refused relief was his conclusion that there was no evidence that the prospective respondents had taken or proposed to take any steps to diminish, divest or dissipate assets.
His Honour emphasised the absence of this evidence in reaching his conclusion that relief should not be granted.
LED points to the primary findings of fact made by his Honour and submits that these justify a clear inference that the prospective respondents have deliberately engaged in a scheme calculated to remove assets from the reach of the applicant. The divesting of assets to the prospective respondents was not to strangers or disinterested parties, but rather a diversion by the controllers of Eagle to the controllers themselves and to another entity also controlled by them. It is submitted that the danger was glaringly obvious.
In addition, as his Honour noted, Davies J made important adverse findings as to the credibility of Mr Cardile, who clearly was the principal party to the divestiture. His evidence was found unbelievable in important respects. The declaration of dividends and consent to the use of the business name are evidence of a carefully structured scheme implemented over several years, after proceedings were anticipated or had commenced. There is no reason to suppose that the prospective respondents have had a sudden change of heart in relation to the availability of funds to meet the substantial likely indebtedness.
As Meagher JA pointed out in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 326:
“To obtain such an injunction a plaintiff must prove two ingredients: first, that he has a prima facie case against the defendant, and secondly, that there is some risk of a dispersal by the defendant of his assets so as to defeat the value of the plaintiff’s victory if he ultimately wins.... in exceptional cases (of which the present is unfortunately one) one can infer the existence of the latter ingredient partly or wholly from proof of the former. This may well be the situation in all cases where the plaintiff’s prima facie case against the defendant involves proof of gross dishonesty..... the trial judge was justified, in dealing with the second ingredient, to take into account that a defendant against whom it had been proved at a prima facie level that he was guilty of theft of $10 million of the plaintiff’s property would not be likely to preserve it intact on his theft having been discovered, or indeed to preserve intact any property he may legitimately own.”
In the present case it is inherently unlikely given the history of this matter that there is no reasonable risk (and that is the question) of these same controllers completing their scheme by further disposal or dissipation of assets with the result that the entitlement of the applicant is frustrated. So powerful are these considerations in both logic and commercial experience, that an inference must be drawn that there is a risk to the assets in the hands of the prospective respondents. The concept of risk or danger that something will occur is a broader criterion than the notion of the probability that it will occur. The question is whether the assets are at risk. Accordingly, LED has made good its contention that there was evidence available to support a conclusion that there was a danger of dissipation or disposal of the assets.
In considering the judgment under appeal it is necessary to bear in mind that this matter is both procedural and interlocutory in nature. These factors call for restraint by an appellate court in reviewing a decision such as the present. However, in the light of the circumstances and the reasons referred to above, it is sufficiently evident that there has been an error in the approach taken to the issue of whether there is a risk of further alienation or dissipation of the divested assets.
Conclusions
The case is a proper one in which to grant leave and to allow the appeal.
The Court below erred in law concluding (i) that it was necessary that an interest be demonstrated on the part of Eagle in the assets alienated to the prospective respondents, and (ii) that there was no evidence to warrant a conclusion that there was a risk or danger of such assets being diminished or placed beyond the reach of the applicant.
The appropriate orders therefore are that leave to appeal is granted; the appeal is allowed; the orders made by the primary judge are set aside. The matter is remitted to the primary judge for determination in accordance with these reasons. The prospective respondents should pay the applicant’s costs of this appeal.
I certify that this and the preceding fourteen (14) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin
Associate:
Dated: 22 August 1997
Counsel for the Applicant: Mr T E F Hughes QC
Mr I M Jackman
Mr A GrantSolicitor for the Applicant: Speed & Stracey Counsel for the Respondent: Mr D E Grieve QC
Mr D M Yates
Mr D SibtainSolicitor for the Respondent: Castrission & Co Date of Hearing: 12 August 1997 Date of Judgment: 22 August 1997
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