Painting Apprentice Industry Group Scheme Inc v Hapek & Hapek - [2010] SADC 1

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
PAINTING APPRENTICE INDUSTRY GROUP SCHEME INC v HAPEK & HAPEK
[2010] SADC 1
Judgment of Her Honour Judge Shaw
13 January 2010
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS
Whether interim Freezing Order ought to continue.
Held: There was a risk that the defendants might dissipate relevant assets which could frustrate any judgment which the plaintiff may obtain. Quantum of Freezing Order increased and order continued.
District Court Rules 2006 (SA) Rule 247, referred to.
Mitchell v Saengjan (1994) 117 FLR 273; Brew v Crouch [1998] SASC 6633; Bleby J, 23 April 1998; Vereker v Choi (1985) 4 NSWLR 277; Caboche v Southern Equities Corp Ltd [2001] SASC 55; Derby & Co Ltd v Weldon (No 6) [1990] 3 All ER 263; Jackson v Sterling Industries Ltd (1987) 162 CLR 612 , considered.

PAINTING APPRENTICE INDUSTRY GROUP SCHEME INC v HAPEK & HAPEK
[2010] SADC 1
Introduction

The plaintiff seeks a continuation of an interim Freezing Order made pursuant to Rule 247 of the District Court Rules 2006 on 23 April 2009, against the assets of the defendants (“the Freezing Order”) to operate as an interlocutory order until further order. The Freezing Order prevents the defendants from disposing of, dealing with or diminishing the value of any of their assets up to the unencumbered value of $350,000.00. The plaintiff also seeks an increase in the quantum of the Freezing Order from $350,000.00 to $500,000.00 Pursuant to paragraph 8(a) of the Freezing Order, the defendants filed an affidavit of assets on 30 April 2009. The plaintiff gave an undertaking as to damages.[1]
[1] Affidavit of Benjamin Steele Cunningham sworn on 15 April 2009, para 117
The plaintiff is an incorporated association that seeks to promote the placement of apprentices with employers in the painting industry. It also generated income from service fees charged to employers of apprentices. The first defendant was employed by the plaintiff in 2000 as its chief executive officer until his dismissal on 19 October 2006. The second defendant is his wife. In its Amended Statement of Claim, the plaintiff claims damages against both defendants in the sum of $710,000.00. The plaintiff alleges that during the first defendant’s employment by the plaintiff, monies earned by the plaintiff were used inappropriately by the first defendant for his benefit or for the benefit of his family. As against the second defendant, the plaintiff claims that the second defendant was wrongly paid an amount of $20,000.00 over the period November 2002 to September 2006.
The defendants jointly owned a property at 91 Northgate Street, Unley South (“the Unley property”). This property was sold after 28 February 2009.[2] The first defendant, in his affidavit dated 28 April 2009 deposed to its value at $1,115,000.00. It was subject to a mortgage to the Westpac Bank in the approximate sum of $270,000.00. Hence, the joint equity of the defendants in the property was about $910,000.00. Subsequently, the second defendant entered into a contract to purchase a property at 85 Winchester Street, Malvern (“the Malvern property”) for a purchase price of $817,000.00. This property was placed solely in the second defendant’s name. The first defendant’s share of the equity in the Unley property was used to discharge the joint liability to Westpac. The net effect of the transactions was that the first defendant relinquished his equity in the Unley property.
[2] Supra at paras 96-113
Plaintiff’s Claim
Following an audit conducted by the Australian Taxation Office (“ATO”) in November 2006, it was revealed that the plaintiff owed $437,174.00 in group tax and GST.
The plaintiff alleges that following further investigations, it was discovered that the audit reports shown to the Board of the plaintiff, during the previous three years, had been fabricated. The plaintiff alleges that the first defendant presented these fabricated audit reports to cover up his mismanagement and transgressions.
As a result of the plaintiff’s liability to the ATO, the plaintiff ceased its activities and was required to sell its real estate in order to pay the liability.
It is also alleged that there were inappropriate dealings in relation to the plaintiff’s motor vehicles. Vehicles subject to chattel mortgages were sold but the proceeds were not applied to discharge the relevant chattel mortgage.
The failure to pay out the chattel mortgages from the proceeds of sale left the liability with the plaintiff.
It is also alleged that the first defendant overpaid himself wages, long service leave and other monies in the total amount of $65,000.[3]
[3] See Mr Vella’s report dated 22 July 2009
The plaintiff alleges that there was an unauthorised payment by the plaintiff towards the defendant’s building expenses related to the Unley property.
Further, the plaintiff alleges that there were unauthorised fuel purchases calculated at $28,000.[4] It is alleged that other unauthorised payments were made to or benefits received by the defendants and members of their family.
[4] Mr Vella’s report (supra)
It was further alleged that the second defendant wrongly received payments as ‘wages’. The plaintiff alleges that the Board was not informed about her appointment, and there is no documentation about her engagement
The plaintiff relied on the expert accountant’s report of Mr Romeo Vella dated 22 July 2009, two affidavits of Benjamin Steele Cunningham, sworn on 15 April 2009 and 16 October 2009 respectively, affidavits of Robert Malcolm Freeman and Stephen Anthony McGrath both filed on 21 October 2009.
Contentions of the Second Defendant
The second defendant concedes that there is an arguable case against the first defendant but not in the sum of $710,000.00. However, the second defendant argues that there is no legal basis for the continuation of the Freezing Order made in relation to her. The second defendant alleges that the plaintiff does not have an arguable case against her. The defendants in their filed affidavits, allege that the second defendant was employed by the plaintiff as a contractor and paid $105 per week. Further, it is argued that the affidavits show that there is no risk that the second defendant might abscond or that the assets are at risk of disposal or diminution.
Further, the second defendant contends that there is no basis for the continuation of the Freezing Order against her in her capacity as a third party. The second defendant relied on the contents of the affidavits filed by the first and second defendants.
Legal Principles
In order to establish that the Freezing Order ought to be continued, the plaintiff needs to show that it has a “good arguable case”, that there are assets over which an order could be granted and that there is a real risk and legitimate concern of dissipation or secretion of assets which may render any judgment nugatory.[5]
[5] Rule 247 of District Court Rules 2006
District Court Rule 247 subsections (2) and (5) provide:
(2)     Freezing Order
(a)The Court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.
(b)A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.
…..
(5)Order against judgment debtor or prospective judgment debtor or third party
(a)This rule applies if:
(i)      judgment has been given in favour of an applicant by:
(A)the Court; or
(B)in the case of a judgment to which subrule (b) applies – another court; or
(ii)       an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in:
(A)the Court; or
(B)in the case of a cause of action to which subrule (c) applies – another court.
…..
(d)The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:
(i)the judgment debtor, prospective judgment debtor or another person absconds; or
(ii)the assets of the judgment debtor, prospective judgment debtor or another person are:
(A)removed from Australia or from a place inside or outside Australia; or
(B)disposed of, dealt with or diminished in value.
It is enough if the court has a feeling of unease that if the plaintiff succeeded, the defendants might have so dealt with assets so as to deprive the plaintiff of the benefit of any judgment.[6] An order can be extended to include the name of another person where a family asset is involved.[7] Further, the order can extend to non-parties where that is necessary to facilitate the administration of justice.[8]
[6]    Mitchell v Saengjan (1994) 117 FLR 273; Brew v Crouch [1998] SASC 6633; Bleby J, 23 April 1998
[7]    Vereker v Choi (1985) 4 NSWLR 277
[8]    Caboche v Southern Equities Corp Ltd [2001] SASC 55
Submissions on Behalf of the Plaintiff in Relation to the Freezing Order
The defendants jointly owned the Unley property with equity of approximately $900,000.00. The plaintiff submitted that the defendants undertook a transaction that resulted in the discharge of bank liabilities and replaced the jointly owned Unley property with the Malvern property in the sole name of the second defendant. The effect of the transaction was that the first defendant relinquished any interest in a joint equity of $900,000.00 in the Unley property.
The plaintiff alleged that this transaction was carried out under the shadow of these proceedings and that it was for the specific purpose of distancing the first defendant from his former property interest. It is submitted that there was no consideration for the transaction. This is said to support the plaintiff’s claim that the transaction was undertaken for the purpose of frustrating a proper order of this court by denying the plaintiff any ability to recover its losses from the first defendant.
That is, it was submitted that the transaction was designed to defeat the claim of a future creditor, namely the plaintiff and therefore it is liable to be set aside as fraudulent. The first defendant’s remaining assets were a vehicle and household effects. The value of these assets would be completely inadequate to satisfy a prospective judgment in the plaintiff’s favour.
The plaintiff submitted that the claim against the first defendant is in the sum of $710,000.00 and that costs and interest are continuing to accrue. Hence, the sum of $350,000.00 is inadequate in light of the quantum of the plaintiff’s claim against the defendants and the likely costs of the action.
Submissions on Behalf of the Defendants
Both defendants relied upon the detailed explanations to the plaintiff’s allegations in their filed affidavits.
The first defendant submits that there is no legal basis for the continuation of the order made against him. It was submitted that he no longer has an interest in the Unley property, and that he has no interest in the Malvern property. In their respective affidavits, the defendants asserted that this transaction occurred in the context of the second defendant’s threat of divorce if the first defendant did not relinquish his interest in the proceeds of the sale of the Unley property.[9] The first defendant submits that there is no evidence that he might abscond or that his assets might be disposed of.
[9] Affidavit of Andrew John Hapek sworn 3/6/09 at para 98
The second defendant submitted that in any event, in relation to the property transactions, an equitable remedy of tracing of the funding is available to the plaintiff. On behalf of the second defendant, it was submitted that the contents of the affidavits of Mr Cunningham sworn on 15 April 2009 and on 16 October 2009 and the affidavit of the second defendant show that the plaintiff does not have an arguable case against the second defendant. The second defendant maintains that the monies paid to her by the plaintiff represent legitimate payments for work done by her for the plaintiff.
Findings
At this stage, it is not necessary to resolve disputed questions of fact or law.[10] I am satisfied that the affidavit material filed by the plaintiff alleges a series of fraudulent or illegal activities by the first defendant in respect of which the defendants’ explanations need to be carefully evaluated. In my view, the plaintiff has a good arguable case against each of the defendants in a cause of action in this court. I am satisfied that the property over which an order could be granted if the plaintiff is successful in its action, includes the Malvern property.
[10] Derby & Co Ltd v Weldon (No 6) [1990] 3 All ER 263
It is reasonably arguable that the purpose of the transaction relating to the purchase of the Malvern property was to distance the assets of the defendants from the first defendant’s name. It is reasonably arguable that the first defendant continues to have an equitable interest in the Malvern property or that his interest could be traced to that property. I am left with considerable unease in relation to the property dealings of the defendants whilst the proceedings have been on foot and as to what could happen in the future in the absence of a continuation of the Freezing Order.
I am of the view that the plaintiff has a good arguable case against the second defendant in her capacity as a defendant to the action. I find that in the principal action against the second defendant, there is a danger that a prospective judgment will be wholly or partly unsatisfied because the assets of the second defendant might be “disposed of, dealt with or diminished in value”.[11]
[11] DCR 247 (5)(d)(ii)
I am satisfied that the second defendant in her capacity as a third party holds a power of disposition over assets that include interests of the first defendant as a prospective judgment debtor. I am satisfied that there is a danger that a prospective judgment against the first defendant may be wholly or partially unsatisfied because the assets of the second defendant might be “disposed of, dealt with or diminished in value”.[12] I am satisfied in the alternative, that the second defendant in her capacity as a third party is in possession of or controls or has influence over assets that include an interest of the first defendant as a prospective judgment debtor.
[12] supra
I am satisfied that there is a real risk that each of the defendants might dispose of his or her assets or take them out of the reach of execution before the plaintiff can obtain a judgment or execute it.[13] I am satisfied that a prospective order against the first and second defendants may be wholly or partly unsatisfied in the absence of a Freezing Order. Having regard to the plaintiff’s submissions, I am satisfied that the quantum of the Freezing Order ought to be increased to $500,000.00.
[13] Jackson v Sterling Industries Ltd (1987) 162 CLR 612
Order
I order that the quantum of the Freezing Order is increased from $350,000.00 to $500,000.00. I order that the Freezing Order against each of the defendants in that amount will continue to operate as an interlocutory order until further order.
I will hear the parties as to costs.