McLeary v Swift

[2013] NSWSC 216

Supreme Court

New South Wales

Medium Neutral Citation:

McLeary v Swift [2013] NSWSC 216

Hearing dates:

11 March 2013

Decision date:

22 March 2013

Jurisdiction:

Equity Division

Before:

Young AJ

Decision:

Freezing order made

Catchwords:

EQUITY - equitable remedies - injunctions - interlocutory injunctions - injunctions to preserve status quo or property pending determination of rights - freezing orders - orders against third parties - whether available in absence of property currently held by defendant - property of defendant transferred to discretionary trustee - where defendant with power of appointment and contingent beneficiary of discretionary trust

EQUITY - equitable remedies - injunctions - interlocutory injunctions - injunctions to preserve status quo or property pending determination of rights - freezing orders - nature and effect of order - appropriate form of order

PRACTICE AND PROCEDURE - rejection of affidavit where witness unavailable for cross-examination - rejection notwithstanding absence of timely notice to attend for cross-examination

Legislation Cited:

Uniform Civil Procedure Rules 2005 r 35.2
Corporations Act 2001 (Cth) s 256D
Bankruptcy Act 1966 (Cth)
Family Law Act 1975 (Cth)

Cases Cited:

Yanner v Eaton [1999] HCA 69; 201 CLR 351
Scaffidi v Montevento Holdings Pty Ltd [2011] WASCA 146; 6 ASTLR 446
Montevento Holdings Pty Ltd v Scaffidi [2012] HCA 48; 87 ALJR 15; 6 ASTLR 480
Re Burton (1994) 126 ALR 557
Keenon v Spry [2008] HCA 56; 238 CLR 366
Derby & Co Ltd v Weldon (No 3 and 4) [1990] Ch 65
Jackson v Sterling Industries Ltd [1987] HCA 23; 162 CLR 612
Cardile v Led Builders Pty Ltd [1999] HCA 18; 198 CLR 380

Category:

Principal judgment

Parties:

Plaintiff - Jeffrey John McLeary
Defendant - Martin Swift
Named entities - Balook Investments Pty Ltd; Astbury Enterprises Pty Ltd; Coolbrew Pty Ltd; Crown on Darby Pty Ltd; 40 Enterprise Drive Pty Ltd; Murri Wunda Pty Ltd; Birraba Pty Ltd; 1 Ross Road Pty Ltd; Blue Sky Developments Pty Ltd; The Swift Family Trust

Representation:

Counsel:
Plaintiff - FG Kalyk
Defendant - JT Johnson
Named entities - Ms SS Nash (sol)
Solicitors:
Plaintiff - Shotters Lawyers
Defendant - Beazley Singleton Lawyers
Named entities - Sally Nash & Co Lawyers

File Number(s):

2011/69385

Judgment

1. HIS HONOUR: I am trying the issue raised by Notice of Motion filed by the plaintiff on 8 February 2013 and Amended on 12 February 2013 seeking various freezing orders with respect to the property of the defendant and corporations in which he has an interest because of a fear that the judgement in these proceedings might be nullified by the defendant's activities.

1. The background facts are that the plaintiff and the defendant formerly carried on business together as air conditioning contractors. They carried on business under a number of corporate vehicles. Their relationship broke down and they entered into an agreement dated 27 February 2009 to deal with their ongoing relationships.

1. Clause 5.9 of the agreement provided that financial statements for various corporate entitles would be submitted to the Australian Taxation Office and that Messrs McLeary and Swift "acknowledge and agree that they will each be liable for one half of the taxation liability assessed as payable by the Australian Taxation Office... up to and including the financial year ended 30 June 2008."

1. One of the companies covered by this clause was Teffcog Pty Ltd. That company was originally assessed income tax for the financial year 2006 in the sum of $103,529. However after an audit the tax office issued a notice of amended assessment for an additional sum of $970,200 and also a penalty notice for a further $485,100. The plaintiff has paid some amounts on account of his liability to pay half that tax, but complains that the defendant did not. The plaintiff commenced specific performance proceedings and on 21 November 2012 Windeyer AJ held that the plaintiff should succeed and ordered that by 24 December 2012 the defendant pay to the Deputy Commissioner of Taxation for the credit of Teffcog Pty Limited the sum of $ 822,995.47.

1. The defendant appealed against that decision: the appeal has not yet been argued. However, no stay has been granted and the defendant did not make payment by 24 December as ordered.

1. I should note that no party wished to argue that the defendant not be permitted to argue this motion because he was in contempt of court having disobeyed Windeyer AJ's order.

1. The plaintiff complains that since the judgment he has evidence that the defendant has transferred shares in companies to another entity and fears that unless restrained the defendant will strip himself of assets so as to be unable meet the judgment.

1. The Amended Notice of Motion seeks very specific orders with respect to the holdings of the defendant in two principal companies Astbury Enterprises Pty Ltd and Murri Wunda Pty Ltd, as well as interests in six other companies which have been described in evidence as "the Entities". As the defendant did not give evidence, the nature of the defendant's interests in the Entities is a little obscure, but it would seem that they are single venture companies developing properties in the Newcastle area in which the defendant and various investors own equity shares.

1. Almost every corporation (other than perhaps some of the Entities) is a trust corporation in the sense that it holds all its property on discretionary trusts. So far as Astbury and Murri Wunda are concerned, the defendant has the role of appointor so that it appears that he can remove the Trustee and appoint a new Trustee at whim. He is also one of the contingent beneficiaries.

1. As I have said, the Amended Notice of Motion seeks very specific freezing orders. These orders were so draconian that it inspired the defendant's counsel and the Entities' solicitor to focus on their impracticality. I tried to move away from that position because it seemed to me that it was far more useful to focus on whether orders should be made at all (and, if so, their ambit) and only if that question was answered in favour of the plaintiff to turn attention to the form of the orders.

1. The oral hearing took place before me on Monday 11 March 2013. Mr FG Kalyk appeared for the plaintiff, Mr JT Johnson appeared for Mr Swift, and Ms SS Nash (solicitor) appeared for the Entities even though the Entities are not actually a party to these proceedings.

1. The plaintiff read his affidavit and was then cross-examined. The cross examination seemed to me to be removed from the question I had to decide, but in any event it did not get anywhere because Mr McLeary showed very little knowledge of what technically was going on in the various corporate entities controlled by him and his former partner.

1. Mr Johnson then attempted to read the affidavit of Mr Swift. Mr Kalyk objected on the basis that Mr Swift was not present for cross-examination. Mr Swift's affidavit was sworn on 11 February 2013. It was sworn because Mr Swift was ordered to file an affidavit as to his assets and liabilities at an earlier directions hearing in these proceedings.

1. On the Friday evening prior to the hearing the plaintiff sent a missive to the defendant's solicitors that the defendant should attend for cross-examination. This missive was only received by the solicitor for the defendant in Newcastle early on the morning of the hearing and Mr Johnson gave me to understand that at that stage the solicitor did not know where the defendant was.

1. I declined to read the affidavit. Assuming it was an affidavit merely dealing with assets and liabilities it did not seem to me to have any relevance to the issue I had to try. Apart from that, my experience is that, particularly in this sort of case, parties are normally expected to attend the Court and that Notices to Attend for Cross Examination are really only given for more abundant caution.

1. However, Mr Johnson of counsel vigorously protested at my ruling and insisted that I give reasons. He pointed to UCPR 35.2 which says that a party may, by written notice given a reasonable time before the hearing and served on the party proposing to use an affidavit, require the attendance for cross-examination of the person who made the affidavit.

1. It is clear that no such notice was given within a reasonable time. However the fallacy in Mr Johnson's argument is to assume that UCPR 35.2 must be read to mean that, if no notice is given, the plaintiff is not required for cross examination. The question as to whether an affidavit will be read is primarily in the hands of the lawyer presenting his or her case, but the Judge is in ultimate control. That control must be exercised with fairness to both parties. It is to be expected in most cases that parties will attend the hearing; after all, it is the Supreme Court and there is in this case almost a million dollars in issue. Litigants would normally expect the opposing party to be present in the courtroom, and, as he or she would be in the courtroom, to be available for cross examination. A fortiori is that the case where the allegation is that the opposing party is a person who is carrying out some sharp practices in order to evade the compliance with the judgment of the Court.

1. Accordingly, when a party to these sort of proceedings absents himself from the Court without any explanation other than he has not been given notice for cross examination and then seeks to read an affidavit, and the other side protests, the Court may very well decide that it would not be appropriate in the interests of justice for that person to take advantage of having his or her affidavit read without being liable to cross examination.

1. As no explanation was given as to why the defendant was not present or why he had not been in communication with his solicitor so as to be able to hear what was happening in his court case it seemed to me appropriate not to read the affidavit and I so ruled.

1. It would be a completely different matter if the solicitor for the defendants communicated with the plaintiff and said, "our client is unable to be present at the hearing on 11 March 2013 and as we have received no notice of cross examination we assume that his affidavit may be read without objection" and there was not response. That is not this case. Nor was any adjournment sought, after I made my ruling.

1. I must say that I cannot really see how the reading or non reading of the affidavit if it only dealt with assets and liabilities of Mr Swift could have any pivotal bearing on the result of this motion. I have only spent time giving these reasons because I was specifically asked to do so.

1. I turn now to the merits of the motion.

1. There is not doubt at all that under Windeyer AJ's order the defendant should have paid to the Australian Taxation Office some $822,597 on account of Teffcog Pty Ltd and that it did not do so. Between 10 December and 29 January however, he divested himself of his beneficially owned share in five of the Entities. The transferee in each case was Astbury Enterprises Pty Ltd, a company which is the Trustee of one of Mr Swift's discretionary trusts under which he is merely appointor and contingent beneficiary. He has thus divested himself of his beneficial interest in that property.

1. Mr Johnson says, "so what". The defendant is a man who held shares in single venture companies which appear to be trustees for discretionary trusts; in other words, companies whose assets are nil or close to $1. That transfer must be of no moment.

1. However, an ordinary tribunal of fact, such as I am, reasons that experienced business men (as these people appear to be) do not just do things for the love of it but because there is some commercial reason in doing it. We do not know what, if any, trusts affect the Entities - whether they are trustee companies for the discretionary trusts or not - but one can assume that there was some purpose in the transfer. Before the transfer Mr Swift had beneficial interests as a 50 per cent or lesser shareholding. Afterwards it was Astbury, the discretionary trustee, who held that interest and Mr Swift himself was merely a beneficiary in a discretionary trust.

1. Running against that is the fact that by his actions Mr Swift transferred his four ordinary shares in Astbury which held as beneficiary to Astbury itself. The effect of this rather strange transaction was not argued before me. It may be that it is an unauthorised reduction which left Mr Swift liable to a penalty under s 256D of the Corporations Act 2001 (Cth) or an unauthorised by-back. It may be that his ex-wife is now the sole shareholder in Astbury. I merely mention it to counter balance the thought that there was some purpose in the transfer of the shares. It may be just profound ignorance, though that was not argued.

1. I should also note, though whether this has any significance or not is unclear, that Mr Swift did not shed himself of his beneficial interests in Crown on Darby Pty Ltd which is evidently building in one of Newcastle's principal streets (Mr Swift owned one share out of 606 ordinary shares though Astbury held another 120). He also continued to hold beneficially his one out of two ordinary shares in Blue Sky Developments Pty Ltd, one of the Entities.

1. Mr Johnson's principal defences to the motion were:

1. That the effect of the order would be to give the plaintiff security for Windeyer AJ's judgment to which it was not entitled;

2. That there was no property against which a freezing order could operate; and

3. There was no proper undertaking as to damages proffered.

1. I will deal with these matters in turn and then come back to any general considerations that need to be taken into account.

1. 1. Mr Johnson puts that if any of the orders were made as sought by the plaintiff the effect would be to give the plaintiff security for his judgment. I do not consider that the effect of the order is of any moment. The authorities quite clearly show that a freezing order does not give any security.

1. It would seem common ground from what counsel submitted that Mr Swift does have other liabilities and in particular he has been ordered by the Family Court to make substantial provision for his former wife. It may be that the making of a freezing order will affect the ability of the wife or other creditors to realise assets but it will not give this plaintiff any security over the funds which are subject to it. The only effect is that for a time there will be a freeze on those assets.

1. Accordingly I cannot see any merit in this submission.

1. 2. Mr Johnson quoted from in Yanner v Eaton [1999] HCA 69; 201 CLR 351 at 365-6 where the plurality stated that "property" is often used to refer to something that belongs to another, but that sometimes it is a description of a legal relationship with a thing. He then said, "the only legal relationship my client has with the Swift Family Trust is parent equivalent to appointor. He is a discretionary beneficiary under that Trust. That does not mean he can force a distribution to himself as a beneficiary." Mr Johnson argued that if Mr Swift were to do that it would be a fraud on the power.

1. Ordinarily a power to appoint trustees is considered a fiduciary power and must be exercised bona fide for the purpose for which it was conferred, see Scaffidi v Montevento Holdings Pty Ltd [2011] WASCA 146; 6 ASTLR 446, 470-1 and cases there mentioned. The fact that the result of the case was reversed by the High Court in Montevento Holdings Pty Ltd v Scaffidi [2012] HCA 48; 87 ALJR 15; 6 ASTLR 480 does not affect that passage.

1. Because Mr Swift's affidavit was not read, the precise terms of the Trust Deed are not before me, but it is not unknown in this Court to have cases where persons effectively in control of discretionary trusts do organise appointments to themselves and no one considers it worthwhile to challenge on the basis of fraud on a power.

1. Mr Johnson then says that interest under a discretionary trust is not "property" within the definition of that term in s 5 of the Bankruptcy Act1966 (Cth).

1. That may well be right, see Re Burton (1994) 126 ALR 557. "Property" has a wider meaning under the Family Law Act 1975 (Cth) as Mr Johnson acknowledges, but he says that that is because of the wide definition in s 79 of the Family Law Act and that the decision of the High Court in Keenon v Spry [2008] HCA 56; 238 CLR 366 can be put to one side because of this. Whilst that submission is basically correct, it is noteworthy that French CJ thought that an interest in a discretionary trust might be property under the general law, though Heydon J vigorously denied that proposition.

1. In my view the whole question is irrelevant. There is no warrant to my mind for restricting the operation of the Court's power to make a freezing order to situations where, technically speaking, the defendant is involved in manoeuvring property rights. Here we have a case where the defendant has in fact moved property out of his own beneficial control to place it in a discretionary trust where, if he is to be accepted, he has only slight control. Why would someone do that, one might ask rhetorically, if it was of no purpose?

1. It has been said over and over again that the Court's power to give relief by way of freezing order is a very wide power and is not to be limited by consideration of technicalities. It is a power to protect the integrity of the Court process and, speaking very generally, if the Court can see that there is a serious attempt to evade complying with the Court's order the Court may make the appropriate order to neutralise or minimise the effect of what has happened.

1. In Derby & Co Ltd v Weldon (No 3 and 4) [1990] Ch 65 at 76, Lord Donaldson MR (with whom Neill and Butler-Sloss LJJ agreed) said:

"The fundamental principle underlying this jurisdiction is that, within the limits of its powers, no court should permit a defendant to take action designed to ensure that subsequent orders of the court are rendered less effective than would otherwise be the case. ... [W]hilst one of the hazards facing a plaintiff in litigation is that, come the day of judgment, it may not be possible for him to obtain satisfaction of that judgment fully or at all, the court should not permit the defendant artificially to create such a situation."

1. In Jackson v Sterling Industries Ltd [1987] HCA 23; 162 CLR 612, Brennan J said that the power to make a freezing order "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" (at 621). That utterance has been cited favourably since, see e.g. Cardile v Led Builders Pty Ltd [1999] HCA 18; 198 CLR 380 at [41], 400.

1. As I have said, Mr Johnson, and indeed Ms Nash, emphasise that to make an order in the present case would be to give the plaintiff security for its judgment and arguments were put to me as to the distinction between freezing orders and equitable execution. It is clear and it has been said over and over again by the Courts (see e.g. Jackson v Sterling Industries Ltd at 625) that a freezing order does not create security for the plaintiff: its purpose is merely to stop the defendant dealing in certain assets for the benefit of himself and his creditors generally.

1. It is significant in this case that the defendant did not attend court nor, apart from the affidavit which he was ordered to file as to his assets, did he attempt to give evidence. He made no attempt to tell the Court why the transactions of December 2012 took place.

1. Accordingly, in my view the plaintiff has made out his case for some form of freezing order.

1. However, the form of that order is very troublesome. The plaintiff's notice of motion sets out some very detailed orders which clearly are excessive. Because of the defendant's reluctance to give any evidence, one just does not know how far he needs protection so he can get income in order to pay his ordinary debts. One possibility is that he is deriving income from some of his development projects so that one need not consider further any question of how much should be exempted from any freezing order to ensure that the defendant continues to survive as a human being. However, this is unlikely as development projects, before they are completed, usually absorb money rather than produce money.

1. The defendant's only beneficial asset seems to be his real property at Salamander Bay on Port Stevens, but that, it would seem, is subject to an order for disposal made by the Family Court. Thus the Court is left in a position where it would appear from the defendant's conduct that he perceives some advantage in having some of his beneficial assets transferred to Astbury Enterprises Pty Ltd to be subject to a discretionary trust. That company appears to own two unencumbered pieces of real estate.

1. The position of Murri Wunda Pty Ltd is unclear. All I know is that Mr Swift did own the only four ordinary shares issued and that these were transferred to Astbury Enterprises to hold on trust as a discretionary trust. Murri Wunda does not appear to own any real property.

1. Accordingly, the orders that should be made should restrict Astbury Enterprises from dealing in any way with its property other than in the ordinary course of its ordinary business. As the defendant does not claim to have any proprietary rights with respect to that property there is no need to make any exceptional orders to provide for his maintenance, etc.

1. It is clear that under the power to make freezing orders the Court may make an order against a third party.

1. The order should continue until the disposal of the appeal or until further order.

1. Currently there is an undertaking to the Court holding the status quo until I give this judgment. It seems to me that the only orders that I need make are:

(a) as against Astbury Enterprises Pty Ltd, that it not permit any dealing with its shares nor any disposal of assets or rights other than in the ordinary course of its ordinary business pending the disposal of these proceedings in the Court of Appeal with liberty to apply on 5 days' notice.

(b) as against the defendant, I should order that he not be permitted to make any disposition of property without the consent of the plaintiff or the Court save and except as to his living expenses up to $900 per week and the costs of this litigation not exceeding $15,000 or such other amount as the plaintiff may consent to again with liberty to apply on 5 days' notice. The costs of this notice of motion must be paid by the defendant.

(c) I give liberty to either party to apply to vary these orders. However, I should note that I will not personally be sitting in Equity after 22 March until 29 April 2013 so that in between those times applications should be made to the Duty Judge.

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Decision last updated: 22 March 2013