Probis Financial Services Pty Ltd (administrators appointed) v Kong

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FEDERAL COURT OF AUSTRALIA

Probis Financial Services Pty Ltd (administrators appointed) v Kong [2023] FCA 1398  

File number(s): NSD 1005 of 2023
Judgment of: GOODMAN J
Date of judgment: 14 November 2023
Catchwords: PRACTICE AND PROCEDURE – freezing order – inter partes hearing – whether freezing order made ex parte should be continued – freezing order continued   
Legislation:

Corporations Act 2001 (Cth), s 915B

Federal Court of Australia Act 1976 (Cth), s 23

Federal Court Rules 2011 (Cth), Div 7.4

Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (NZ), s 56
Cases cited:

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; (2018) 265 CLR 1

Associated Alloys Pty Limited v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588

Basi v Namitha Nakul Pty Ltd [2019] FCA 743

Baxter Global Investments Pty Ltd v Marco [2020] NSWSC 1293

Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253

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

Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) [2012] FCA 1064; (2012) 90 ATR 711

Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014; (2010) 273 ALR 194

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89

Fine China Capital Investment Limited v Qi (No 2) [2023] FCA 1059

Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 243 FCR 516

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296

Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609

Hurst, in the matter of Lloyds Curry Shop Pty Ltd (in liq) v Prasad [2021] FCA 1562

Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6; (2015) 255 CLR 62

KTC v David [2022] FCAFC 60

Merryport Pty Ltd v Lawson [2023] FCA 838

National Australia Bank Ltd v Bond Brewing Holdings Limited [1990] HCA 10; (1990) 169 CLR 271

Nicols as trustee of the bankrupt estate of Manietta v Manietta, in the matter of Manietta [2022] FCA 39

Patterson v BTR Engineering (1989) 18 NSWLR 319

Pittmore Pty Ltd v Chan [2020] NSWCA 344; (2020) 104 NSWLR 62

Rambaldi (Trustee) v Sumpton [2021] FCA 1199

Re Courtenay House Capital Trading Group Pty Ltd (in liq) [2018] NSWSC 404; (2018) 125 ACSR 149

Royal Express Pty Ltd (Recs and Mgrs Apptd) (Admins Apptd) v Huang [2021] FCA 585

Scrivener v Cappello [2021] NSWCA 330

Spotlight Pty Ltd v Mehta [2019] FCA 1796

Zibara v Ultra Management (Sports) Pty Ltd [2021] FCAFC 4; (2021) 283 FCR 18
Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Number of paragraphs: 57
Date of hearing: 31 October 2023
Counsel for the Applicants: Mr P Knowles SC
Solicitor for the Applicants: O’Loughlin Westhoff
Counsel…
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Details
Case
[2023] FCA 1398
Decision Date

CaseChat Overview and Summary

The case of Probis Financial Services Pty Ltd (administrators appointed) v Kong involves a dispute over a freezing order and the disclosure of an affidavit. Probis, the applicant, seeks to continue a freezing order against Mr Kong, the respondent, who is the sole director of Mars Cap Limited (MCL), a company that engaged in financial services. The applicants argue that Mr Kong, knowing that MCL had breached its fiduciary obligations, paid out trust funds to third parties. The legal issues before the court include whether the freezing order should be continued and if the applicants should have access to Mr Kong's disclosure affidavit. The court had to consider whether the applicants had a sufficiently arguable case for relief, the risk of asset dissipation, and discretionary considerations before deciding on the continuation of the freezing order and the disclosure of the affidavit.

The court found that there was a sufficiently arguable case for relief, as it was arguable that Mr Kong had knowledge of circumstances indicating a breach of fiduciary obligations by MCL. The court noted that while Mr Kong argued that his subjective understanding of market practices might negate his knowledge, this did not necessarily counter the evidence suggesting he was aware of the breach. Regarding the risk of asset dissipation, the court was satisfied that there was a real risk that Mr Kong might deal with his assets in a way that could frustrate the court's processes, particularly given the nature of the allegations. The discretionary considerations, including the lack of evidence from Mr Kong regarding the impact of the freezing order and the applicants' undertaking as to damages, supported the continuation of the freezing order. Consequently, the court decided to continue the freezing order and grant the applicants access to the disclosure affidavit. The court lifted the suppression and non-publication order, and made orders for the freezing order to continue, disclosure of the affidavit, and reserved costs.

Orders

Orders of the court

Freezing order

1. Upon the undertakings given to the Court by the applicants set out in Schedule A to the (second) set of orders made on 14 September 2023, the freezing order made by those orders be extended until further order of the Court.

Disclosure affidavit

2. Order 3 of the orders made on 11 October 2023 be vacated.

3. The respondent serve the affidavit of the respondent filed in accordance with order 2 of the orders made on 11 October 2023 upon the applicants forthwith.

Case management

4. The parties have liberty to apply.

5. Costs be reserved.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

A. INTRODUCTION

[1]

B. ....... BACKGROUND

[4]

C........ SHOULD THE FREEZING ORDER BE CONTINUED?

[29]

C.1. Good or arguable case

[31]

C.1.1 .. Is it sufficiently arguable that MCL owed fiduciary obligations to Probis with respect to the moneys provided by Probis to MCL?

[36]

C.1.2.... Is it sufficiently arguable that MCL, qua fiduciary, engaged in a dishonest and fraudulent design?

[43]

C.1.3.... Is it sufficiently arguable that Mr Kong had the requisite knowledge of MCL’s dishonest and fraudulent design?

[46]

C.2. The risk that a prospective judgment will be unsatisfied in whole or part because the assets of Mr Kong will be disposed of, dealt with or diminished in value

[48]

C.3. Discretionary considerations

[52]

D........ THE DISCLOSURE AFFIDAVIT

[56]

E......... CONCLUSION

[57]

Background

Background to the litigation

The issues for present determination are whether the freezing order should be continued; and whether the applicants should have access to the disclosure affidavit. B. BACKGROUND The following summary is taken from the affidavit evidence read on this application, namely: (1) the affidavits of Mr Jonathan O’Loughlin (the solicitor for the applicants) sworn 13 September 2023 and 20 October 2023; (2) the affidavit of Mr Richard Albarran (one of the administrators) sworn 20 October 2023; and (3) the affidavits of Mr David Jenaway (the solicitor for Mr Kong) sworn 11 and 30 October 2023. Mr Kong’s disclosure affidavit was not read and I have had no regard to it. Until 28 July 2023, Probis, the holder of an Australian Financial Services Licence (AFSL) conducted a financial services business. Mars Cap Limited (MCL), a company incorporated in New Zealand, engaged in business as a provider of various financial services (see [9(1)] below for further detail). Mr Kong was at all material times the sole shareholder and director of MCL. Mr Chen (James) Yu was a director of Probis from 1 March 2018 until 15 May 2023. The evidence suggests that he was also engaged by MCL as its compliance manager, although the precise period of such engagement is not clear. Between 15 July 2019 and 23 August 2019, a series of emails was exchanged between Mr Yu (from an MCL email address), Mr Kong, and solicitors from Chapman Tripp, a law firm in New Zealand retained by MCL, concerning an Anti-Money Laundering and Countering Financing of Terrorism Risk Assessment and Compliance Programme (Policy). The emails suggest that Mr Yu and Mr Kong were actively involved in the formation of the Policy and that various drafts of the Policy were created and circulated for comment before a final version was approved for lodgement with the New Zealand Financial Markets Authority. The Policy includes the following:(1)RISK ASSESSMENT AND COMPLIANCE PROGRAMME (THE POLICY)PART 1: BACKGROUNDThis Policy contains a Risk Assessment and Compliance Programme for the purposes of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act). The Policy has been prepared for Mars Cap Limited (MCL) in respect of its financial activities that are subject to the Act. 1 About MCLMCL has been established as a brokerage and custodial company to better service the JY Quantitative Management Limited (JY) group of companies. MCL is a limited liability company incorporated in New Zealand and registered on the New Zealand Financial Service Providers Register. JY and its affiliates currently provide custodian services for a number of products including funds, shares, structured products and other financial products for overseas investors. The investors are based in a range of jurisdictions including the Cayman Islands, Hong Kong, the United States and Japan. MCL will provide brokerage and custodial services to JY and its affiliates, and to their investors. MCL’s sole shareholder is Mr William Waileung Kong, who is also the co-founder of JY and is internationally qualified (CFA, CAIA). JY currently has 6 Hedge Funds based in the Cayman Islands under management, with a total fund size of over USD $600 million. The following corporate structure summarises MCL’s business:2 MCL is registered on the New Zealand Financial Service Providers RegisterMCL is registered on the Financial Service Providers Register (FSPR). Under its FSPR Registration, MCL is registered to provide the following financial services to its clients:a)brokering service (including a custodial service);b)keeping, investing, administering, or managing money, securities, or investment portfolios on behalf of other persons; andc)trading financial products or foreign exchange on behalf of other persons.MCL will also provide administrative support associated with the services above.MCL is a member of the Financial Dispute Resolution Scheme. MCL currently plans to provide its Services to wholesale clients in New Zealand, and financial institutions and managed funds around the world, in particular, Japan, United Kingdom, Cyprus, Hong Kong and Australia. The majority of other wholesale clients will be residents of Taiwan, Hong Kong, Singapore and Mainland China. The targeted managed funds will be based in the Cayman Islands and underlying investment products within the portfolio are based across the globe. MCL will also be trading financial products and foreign exchange on behalf of its clients. A summary of MCL’s clients and its geographical locations are listed below:•Types of MCL’s clients: wholesale clients, financial institutions, managed funds, and high net worth individuals;•Geographical locations: New Zealand, Cayman Islands, Japan, United Kingdom, Cyprus, Hong Kong, Australia, Taiwan, Hong Kong, Singapore and Mainland ChinaMCL does not intend to provide its Services to retail clients based in New Zealand. MCL may consider providing its Services to New Zealand based retail investors should its operations expand, and is fully aware of the regulatory requirements if it wishes to provide such Services. Should MCL provide its services to retail clients based in New Zealand, MCL will update this Policy to reflect the risks of these additional business activities accordingly. Because MCL will hold client money and property on their behalf, MCL is required to meet the brokers and custodian obligations under the Financial Advisers Act 2008 (FAA). MCL will initially on-board existing hedge funds managed by JY. Once the funds are on-boarded by MCL, they will trade through MCL. The platforms offered will include JY’s proprietary trading platform and MT4/MT5. Before the clients can start to trade, they will deposit funds with MCL for settlement with the counterparties. MCL will hold the funds on trust for its clients. MCL will automatically execute the trades on behalf of its clients as clients give instructions through the trading platform by placing a trade order. MCL then will settle the trade with the counterparties once it receives instructions from the clients to close their positions. ...(2)

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

I am satisfied that it is sufficiently arguable that Mr Kong had knowledge (at least) of circumstances which would indicate the fact of MCL’s breach of its fiduciary obligations to an honest and reasonable person. In particular, it is sufficiently arguable that Mr Kong, the sole director of MCL was aware: (1) of the contents of the Policy and thus that funds provided to MCL by its clients were to be held on trust until instructions to trade had been received; and (2) that, contrary to the Policy, such funds had not been held on trust and instead had been distributed to third parties. It is sufficiently arguable that those circumstances would indicate to an honest and reasonable person that MCL had breached the fiduciary obligations it owed as trustee of the trust. Whilst Senior Counsel for Mr Kong contended that it was not sufficiently arguable that Mr Kong had the requisite knowledge because of the evidence of his subjective understanding of usual market practice (see [24] above), such a contention, even if accepted, may not provide a persuasive answer to the fourth category of knowledge (i.e. knowledge of circumstances which would indicate the fact of MCL’s breach to an honest and reasonable person).C.2 The risk that a prospective judgment will be unsatisfied in whole or part because the assets of Mr Kong will be disposed of, dealt with or diminished in value The applicants bear the onus of establishing that unless the freezing order is continued, there is a reasonable apprehension that Mr Kong’s assets will be dissipated so as to frustrate the Court’s processes: see Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 at 393 to 394 [26], 399 to 401 ([41] to [42]) (Gaudron, McHugh, Gummow and Callinan JJ). As Cheeseman J explained in Hurst, in the matter of Lloyds Curry Shop Pty Ltd (in liq) v Prasad [2021] FCA 1562 at [56], it is not essential for the applicants to demonstrate a positive intention on the part of Mr Kong to frustrate a judgment (see National Australia Bank Ltd v Bond Brewing Holdings Limited [1990] HCA 10; (1990) 169 CLR 271 at 277 (Mason CJ, Brennan and Deane JJ); Cardile at 394 [26]) or that the risk of dissipation is more probable than not (see Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014; (2010) 273 ALR 194 at 196 to 197 ([8] to [10]) (Kenny J); Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) [2012] FCA 1064; (2012) 90 ATR 711 at 717 [23] (Perram J); Basi v Namitha Nakul Pty Ltd [2019] FCA 743 at [9] (Wigney J)). Rather, it is sufficient for the applicants to establish that, in the absence of a freezing order, there is a danger or real risk that Mr Kong’s assets will be dealt with in a way which would frustrate the processes of the Court, such that a freezing order is warranted. The risk of dissipation must, however, be demonstrated by evidence: see Fine China at [22(b)]. There is no direct evidence in the present case that there is a real risk Mr Kong may deal with his assets in a way in which the processes of the Court would be frustrated. However, direct evidence is not necessary and the risk of dissipation of assets to avoid the consequences of a judgment may be inferred. The evidence supporting such an inference may include the evidence relied upon to establish a sufficiently arguable case for relief, particularly when that case includes “serious dishonesty involving the diversion of money from its proper channel”: see Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 325F-G (Gleeson CJ). See also Patterson at 326B-C and D‑E (Meagher JA); Nicols at [51] (Cheeseman J); Fine China at [22] (Moshinsky J); Spotlight Pty Ltd v Mehta [2019] FCA 1796 at [23] (Anderson J).

Ratio Decidendi

Legal Principle Established

I am satisfied on the evidence presently before the Court that there is a real risk that a judgment against Mr Kong will be wholly or partly unsatisfied because Mr Kong’s assets will be disposed of, dealt with, or diminished in value. The nature of the claim and the evidence outlined above suggest that there is a real danger that Mr Kong may act in a manner which will frustrate the processes of the Court. In particular, the applicant has a sufficiently arguable case that, if ultimately accepted, would establish that: Mr Kong was the sole director of MCL; MCL received funds from Probis which to Mr Kong’s knowledge were funds that were subject to a trust in favour of Probis, consistent with solemn representations that MCL had apparently made to the New Zealand Financial Markets Authority; and in breach of that trust and to Mr Kong’s knowledge the trust funds were paid out to third parties as part of what Mr Kong apparently considers to be an acceptable practice.C.3 Discretionary considerations It was common ground, and I accept, that the imposition of a freezing order is a drastic step and not a step to be taken lightly. A freezing order usually constitutes a serious interference with the rights of a person to deal with their assets as they wish. However, the following matters point in the other direction in the present case. First, Mr Kong did not adduce any evidence, nor make any submission as to the particular effect upon him of the freezing order in the almost seven-week period between the making of the freezing order on 14 September 2023 and the hearing of the inter partes application on 31 October 2023; or as to its likely effect upon him in the future if it were to continue. Secondly, the applicants have provided an undertaking as to damages and there is no suggestion that the undertaking proffered is inadequate or otherwise inappropriate. If the freezing order were to be set aside or discharged, the risk described at [51] above would be present without such protection as the freezing order provides. In view of the nature of the case alleged, I regard this as a significant risk. Weighing each of these considerations, I am satisfied that the discretion should be exercised so as to continue the freezing order.D. THE DISCLOSURE AFFIDAVIT It was common ground that the answer to the question whether the disclosure affidavit should be provided to the applicants would follow the success or failure of the application to continue the freezing order. As I have decided that the freezing order should be continued, the applicants should have access to the disclosure affidavit. E. CONCLUSION For the reasons set out above, I am satisfied that the freezing order made by Yates J on 14 September 2023 should continue and that the disclosure affidavit should be provided to the applicants. Consequently, the suppression and non-publication order made by Shariff J should be lifted. I will make orders accordingly.