TZ Ltd v ZMS Investments Pty Ltd

[2010] NSWSC 196

CITATION:	TZ Ltd v ZMS Investments Pty Ltd [2010] NSWSC 196
HEARING DATE(S):	15/03/10
JUDGMENT DATE :	19 March 2010
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	1. Upon the plaintiff by its counsel giving to the court the undertakings contained in Schedule I of Appendix A of the orders made herein on 26 August 2009, order that orders 1 to 7 of the orders made and entered herein on 16 September 2009 be continued as against the first defendant (ZMS Investments Pty Ltd) up to 5pm on 13 August 2010 subject, however, to the following modification, that is to say, the addition of a new paragraph 2(e) as follows: “paying a sum of $150,000 (‘Sum’) to Bridges Lawyers by: (i) drawing the Sum from any account in the name of ZMS including but not limited to an account held with KAS Bank; (ii) borrowing the Sum from any available tender and utilizing the property at 19 Aero Road, Ingleburn as security, by a second mortgage, for such borrowing; or (iii) selling or mortgaging shares owned by ZMS in TZ Limited, on condition that: (A) the Sum be held in the solicitors’ trust account of Bridges Lawyers for the sole purpose of paying legal and accounting expenses reasonably necessary for the defence of winding-up proceedings commenced by the Deputy Commissioner of Taxation against ZMS in the Federal Court of Australia (‘Proceedings’); (B) prior to the conduct in (i), (ii) or (iii) occurring, the partner of Bridges Lawyers responsible for the conduct of the proceedings provides the Court with an undertaking that the Sum will not be used for any purpose other than the payment of legal and accounting expenses reasonably necessary for the defence of the Proceedings; (C) payments from the Sum will be made directly to the law firm or accounting firm required to be paid and, for the avoidance of doubt, no part of the Sum will be paid to Andrew Sigalla, ZMS or BZI Pty Limited or any entity controlled by Andrew Sigalla; (D) a receipt is obtained for each payment in (C) and a copy is provided to the solicitors for TZ within 5 business days of each payment; and (E) the source of the Sum (bank account details and/or lender/mortgagee), and the manner in which it is acquired (the terms of any loan, mortgage or purchase), is disclosed by ZMS to the solicitors of TZ within 5 business days of the Sum’s payment to Bridges Lawyers.” 2. Direct that order 1 be entered forthwith. 3. Order that the plaintiff do give security in the sum of $250,000 for the costs of the defendants. 4. Order that the security be in such form as the Registrar determines. 5. Order that the proceedings be stayed until such security is provided. 6. The costs of the applications heard by me on 15 March 2010 are at this stage reserved for future consideration.
CATCHWORDS:	EQUITY - equitable remedies - injunctions - freezing orders - where proceedings pending - application by plaintiff for continuation of freezing orders against one defendant - whether "good arguable case" shown - whether risk of dissipation shown - balance of convenience considered - PROCEDURE - costs - security for costs - no matter of principle
LEGISLATION CITED:	Australian Securities and Investments Commission Act 2001 (Cth), s 33 Corporations Act 2001 (Cth), Chapter 2E, ss 228(2)(a), 228(4), 228(5), 459S(2), 1323 Uniform Civil Procedure Rules 2005, rules 25.11, 25.14(1)(b)(i), (ii),
CATEGORY:	Principal judgment
CASES CITED:	Acquasun Pty Ltd v Coverdale Ram Pty Ltd [2000] NSWSC 1146 Australian Securities and Investments Commission v Sigalla [2009] NSWSC 1205; (2009) 74 ACSR 710 Felsink Pty Ltd v City of Maribyrnong [2007] VSC 49 Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH & Co KG (The Niedersachsen) [1984] 1 All ER 398 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 Pure Logistics v Scott [2007] NSWSC 595 Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307 TZ Ltd v ZMS Investments Pty Ltd [2009] NSWSC 1465 Wentworth v Wentworth (unreported, NSWSC, 12 June 1997)
TEXTS CITED:	Ritchie’s “Uniform Civil Procedure (NSW)”, paragraph 25.14.5
PARTIES:	TZ Limited - Plaintiff ZMS Investments Pty Limited - First Defendant BZI Pty Limited - Second Defendant Andrew John Sigalla - Third Defendant
FILE NUMBER(S):	SC 2009/00290315
COUNSEL:	Mr A J Meagher SC/Mr D F C Thomas - Plaintiff Mr G A Sirtes SC/Mr D G Healey - Defendants
SOLICITORS:	Landerer & Company - Plaintiffs Somerset Ryckmans - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY 19 MARCH 2010

2009/290315 TZ LIMITED v ZMS INVESTMENTS PTY LIMITED & 2 ORS

JUDGMENT

1 In these proceedings, the plaintiff (“TZL”) sues three defendants. They are ZMS Investments Pty Ltd (“ZMS”), BZI Pty Ltd (“BZI”) and Andrew John Sigalla (“Sigalla”).

2 The trial of the proceedings is fixed for ten days starting on 2 August 2010. On 15 March 2010, I heard certain interlocutory applications. They raise, first, questions about freezing orders pending trial and, second, the question of security for costs. I shall deal with matters in that order.

3 The question for decision in relation to freezing orders affects only one defendant, ZMS. Orders were made against ZMS at an early stage of the proceedings. The orders now in force were made on 16 September 2009 and remain in force until today which, according to an earlier listing, was to have been the last day of the ten day trial.

4 TZL applies for continuation of the freezing orders against ZMS until 13 August 2010, being the last day of the re-scheduled ten-day trial. ZMS opposes that application.

5 Provision with respect to freezing orders is now made by the Uniform Civil Procedure Rules 2005. Rule 25.11 makes general provision as follows:

“(1) 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.

(2) 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.”

6 This rule and the more detailed rules that follow it may, I think, be regarded as, in broad terms, a distillation or restatement of the general law or, at least, susceptible to approaches similar to those the general law adopts. The relevant rules apply where a party “has a good arguable case on an accrued or prospective cause of action” justiciable in the court (rule 25.14(1)(b)(i)). They contemplate the making of a freezing order against a “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 the assets of the prospective judgment debtor are “disposed of, dealt with or diminished in value” (rule 25.14(4)(b)(ii)).

7 Before addressing the questions thus raised, I should describe TZL’s substantive claims. Those claims are pleaded in a statement of claim filed on 22 October 2009. As they affect ZMS, TZL’s claims include principally a claim for the payment of $2,380,769.37 and a claim for the recovery of all amounts paid by TZL to ZMS pursuant to a “mandate agreement” dated 26 July 2004 (which amounts are said to be at least $5.4 million).

8 ZMS is a company that has been, at all material times, owned by Sigalla and his wife. It is controlled by Sigalla. On the evidence as it stands, he was a director of TZL from 8 January 2004 to 15 July 2004 and from 29 January 2007 to 18 June 2009.

9 In advancing the first of the claims just mentioned, TZL relies on its business records and those of its auditors produced to Australian Securities and Investments Commission where, it is said, the debt owing by ZMS is recorded. ZMS’s position, stated in Sigalla’s affidavit of 11 March 2010 referring particularly to a letter from TZL’s then accountant (who was also a director), is that the recording was an “error”.

10 In advancing the second claim related to the mandate agreement, TZL points to some $5.4 million paid by it to ZMS in response to five invoices raised over the period March 2005 to January 2009. Each was an invoice for services said to have been rendered by ZMS to TZL pursuant to the mandate agreement.

11 The mandate agreement purports to have been made in July 2004 between TZL and ZMS and to have provided for ZMS to render services to TZL by obtaining capital needed by it, with ZMS to receive a fee of 8% of capital raised by it for TZL. Sigalla was the human instrumentality through which ZMS acted for these purposes. That was no doubt the intention in July 2004 when the agreement was supposedly made.

12 TZL’s case in relation to the mandate agreement is that:

(a) the agreement was not entered into by TZL and is not binding on TZL;
(b) if the agreement did become binding on TZL, it was not operative after 25 January 2007 when another agreement was made between the same parties; and
(c) the agreement was, in any event, a transaction by TZL with a “related party” within the meaning of s 228(4) of the Corporations Act 2001 (Cth) and therefore prohibited by Chapter 2E of that Act.

13 As to (a), TZL points to a number of matters: the agreement was not executed under seal; TZL does not admit the genuineness of what purport to be the signatures of two TZL directors on the document; if the two directors did sign, they did so without the authority of TZL (which ZMS, through Sigalla, must be taken to have known); neither the agreement nor the invoices were approved by TZL’s board; the payments under the invoices were not referred to in the financial statements of TZL for any of the years ending 30 June 2005, 2006, 2007 and 2008; and neither the agreement nor the invoices were retained in the books and records of TZL.

14 As to (b), TZL refers to an agreement of 25 January 2007 the parties to which are TZL, ZMS and Sigalla. It is styled “consulting agreement” and provides for ZMS to render various services to TZL, including in relation to “capital raising and management”, that being the field covered by the mandate agreement. Clause 21 of the agreement of 25 January 2007 is in these terms:

“This Agreement constitutes the entire Agreement of the parties in respect of the matters dealt with in this Agreement and supersedes all prior agreements, understandings, undertakings and negotiations in respect of the matters dealt with in this Agreement.”

15 This, TZL says, caused the mandate agreement, if otherwise operative, to cease to be operative on 25 January 2007.

16 As to (c) at paragraph [12] above, TZL points to the fact that Sigalla was a director of TZL up to 15 July 2004 and that the mandate agreement was made on either 22 or 26 July 2004 (both dates are mentioned in it, with reference to purported signing by different persons). Under the “related party” provisions in Chapter 2E of the Corporations Act, one species of “related party” of a public company (such as TZL), at any given time, is an entity controlled by a person who was a director of the public company within the immediately preceding six months (this, in general terms, is the effect of ss 228(2)(a), 228(4) and 228(5)). TZL argues that the making of the mandate agreement by TZL (if it was in reality entered into by TZL) involved the giving of a financial benefit by TZL to ZMS in contravention of Chapter 2E.

17 ZMS says several things about the mandate agreement. First, it points to a statement of Sigalla in an affidavit that he was not a director of TZL on 26 July 2004 (nor, it may be noted, was he a director on 22 July 2004) and that “there was no disclosure of the agreement as there was no related party transaction involved”. This seems to suggest a defence based on an argument that the “related party” provisions did not apply – an argument that, as matters now stand, seems simply untenable.

18 ZMS also seems to derive comfort from a warranty by TZL to ZMS within the mandate agreement itself that the agreement is “legally valid and binding on TZL and enforceable against it in accordance with its terms”. But how that content of the agreement itself would avail ZMS if the agreement had not been executed or authorised by TZL is not explained.

19 Submissions made by ZMS refer in detail to various capital raisings said to have been undertaken by TZL under the auspices or with the assistance of Sigalla. But that, if accepted, says little, if anything, about the status of the mandate agreement.

20 I did not understand any explicit submission to be made by ZMS against the proposition that the agreement of 25 January 2007, by its terms, supplanted and superseded the mandate agreement. Nor, having regard to the five invoices on which ZMS bases its right to payments, is there any apparent room for dispute that some $3.15 million of the invoiced total is attributable to invoices raised after 25 January 2007.

21 Having outlined the two main aspects of the case TZL seeks to make against ZMS, I return to the question posed by rule 25.14, that is, whether TZL has a “good arguable case” on those two aspects.

22 At paragraph 25.14.5 of Ritchie’s “Uniform Civil Procedure (NSW)”, there is reference to the judgment of Mustill J in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH & Co KG (The Niedersachsen) [1984] 1 All ER 398 in connection with the “good arguable case” test. I quote, in that connection, the following observations of McDougall J in Pure Logistics v Scott [2007] NSWSC 595 relevant to rule 25.14:

“In this regard, the plaintiff submitted that it was not necessary for it to show that it was more likely than not to succeed in making out its case in the manner that I have indicated. It relied on the judgment of Mustill J in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG ‘The Niedersachsen’ [1984] 1 All ER 398. In that case, his Lordship considered a number of authorities bearing on the English equivalent of r 25.14, which required the court to be convinced that the plaintiff has ‘at least a good arguable case’. His Lordship concluded at 404 ‘that the right course is to adopt the test of a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50 percent chance of success’. His Lordship followed this by warning that ‘the court should not be drawn into a premature trial of the action, rather than a preliminary appraisal of the plaintiff's case’. Although that warning was directed to the circumstance that, in the case before his Lordship, the dispute was to be resolved by arbitration, it is I think something to be borne in mind more generally. The Court is approaching the question on the basis of very limited evidence compared to what is likely to be led at trial. The Court should not - indeed, in my view, cannot - undertake more than a preliminary appraisal for the purposes of r 25.14.”

23 Two important points are made here: first, that, at a stage such as the present, the court is working with limited material and cannot be expected to make more than a preliminary appraisal of the viability of the plaintiff’s case; and, second, that the threshold represented by the “good arguable case” test is not a particularly exacting one and is satisfied if the case put forward is “more than barely capable of serious argument” – with “more than barely” indicating a degree of substance that is real rather than imagined and appreciable even though falling short (and perhaps markedly short) of a 50% probability of success.

24 At this stage of the proceedings, the claims of TZL I have outlined must be accepted as amounting to a “good arguable case”. I say this because each has been shown to be based on a factual foundation sufficiently articulated and explained to be plausible and with the justifications, explanations or rationalisations offered by ZMS in response appearing very much less plausible. I would add that, even on the limited evidence now available, aspects (b) and (c) of the mandate agreement claim can be said to present particular prospects of success for TZL, based, as they are, on relatively straightforward legal arguments and arguments of construction.

25 Because I am thus satisfied that the condition upon which rule 25.14 is predicated is satisfied, I turn to the second question posed by the rule, that is, whether there is a danger that any judgment obtained by TZL against ZMS will be wholly or partly unsatisfied because assets of ZMS might be disposed of, dealt with or diminished in value. This is, in essence, a reflection of the general law concepts recognised in decided cases. In Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, Gleeson CJ described the relevant inquiry as whether there is “a danger that by reason of the defendants absconding or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion the plaintiff, if he succeeds, will not be able to have his judgment satisfied”.

26 A general law freezing order is warranted only if, in the words of Bryson J in Acquasun Pty Ltd v Coverdale Ram Pty Ltd [2000] NSWSC 1146, there has been “conduct on the part of the defendants which can reasonably be interpreted as potentially having the effect of frustrating the ordinary processes of the court and the enforcement of its judgments or of being intended to do so or of being in any way evasive indicating dishonesty or otherwise indicating actually or potentially that the assets of the company have been or will be dealt with in an irregular way”.

27 In addressing the dissipation question, it is necessary to refer to further facts and, in doing so, to look to a context wider than ZMS itself that comprehends the other defendants in these proceedings, namely, Sigalla and BZI.

28 These present proceedings were commenced by TZL on 26 August 2009. On the same day, Australian Securities and Investments Commission (“ASIC”) commenced proceedings against five defendants, including Sigalla and BZI. ASIC’s proceedings were brought under s 1323 of the Corporations Act. ASIC sought asset preservation orders in aid of an investigation it had commenced. Asset preservation orders are in force in those proceedings against Sigalla and BZI: see Australian Securities and Investments Commission v Sigalla [2009] NSWSC 1205; (2009) 74 ACSR 710. No freezing orders were made against Sigalla and BZI in these present proceedings. However, each of them has, in these proceedings, consented to the imposition of orders the same as those now in force in the ASIC proceedings if those last-mentioned orders are not continued. As things now stand, the orders in the ASIC proceedings are in force until 13 August 2010.

29 On 23 December 2009, ZMS was adjudged guilty of contempt of court by the action of its agent, Sigalla, in causing it to exchange contracts for the sale of a factory unit at Ingleburn, contrary to a freezing order made against ZMS in these proceedings. It is pertinent to quote as follows from the judgment of Austin J of 23 December 2009 (TZ Ltd v ZMS Investments Pty Ltd [2009] NSWSC 1465):

“29 Therefore, by giving instructions for the exchange, Sigalla as agent for ZMS intentionally and knowingly caused ZMS to contravene the freezing orders: specifically, by selling an asset of ZMS contrary to order 1(a)(ii), the asset in question being specifically identified in order 1(b)(ii)(A). The breach was deliberate and constituted civil contempt. There is no basis for arguing that his conduct in authorising the exchange was ‘casual, accidental or unintentional’ for the purposes of the fourth principle stated by Finn J in the Metcash Trading case. Although the Metcash Trading decision, and other cases, indicate that it is not necessary to demonstrate that the contemnor knew that their conduct constituted a breach, my finding in the present case is that Sigalla had that knowledge at the time when he issued the instructions to exchange.

30 In my opinion, his false evidence that he had not been thinking about the court's orders when he authorised exchange of contracts, adds to the seriousness of the contravention. Later in his cross-examination, while continuing to insist that he was not thinking about the court's orders when he gave the instruction to exchange contracts, he said, ‘In retrospect I know now it's a breach of the court's order and I apologise’. Any benefit he might otherwise have obtained from apologising to the court is heavily qualified by the fact that he continued to insist, falsely, that the court's orders were not a matter under consideration by him when he gave the instruction to exchange.

31 Senior counsel for ZMS and Sigalla made the incredible submission that an exchange of contracts for sale does not constitute a breach of order 1(a)(ii) because an exchange of contracts is not a ‘sale’ for the purposes of the order. ‘Sale’ is defined in Butterworths' Australian Legal Dictionary (1997) as including an agreement to transfer property, and there is no basis for concluding that this ordinary meaning was intended to be departed from in favour of a narrower concept; on the contrary, the scope of the order is expanded in various ways in order 1(b). Additionally, upon the exchange of contracts for the sale of land the purchaser acquires an immediate equitable interest in the property and an enforceable right to possession on completion, and so there is a dealing and disposal of property at that time, contrary to the order.”

30 Austin J also said:

“42 As I have explained, I regard the evidence as showing that Sigalla knowingly and intentionally caused to ZMS to exchange contracts on Unit 6 in breach of the court's orders, and that his false evidence in cross-examination, to the effect that he was not thinking of the court's orders when he gave the instruction to exchange, made the breach all the more serious. …”

31 The factory unit concerned was one of eighteen developed by ZMS. Upon the hearing before me on 15 March 2010, it was explained that fifteen of these had been sold before any freezing orders were made. After the sale made by ZMS in contravention of the orders, as found by Austin J, a mortgagee exercised its power of sale in respect of the remaining two.

32 ZMS, speaking through counsel no doubt instructed by Sigalla, submitted upon the present application that the contempt constituted by the exchange of contracts on 10 November 2009 was motivated by a desire to preserve the net assets of ZMS. A picture was painted of circumstances in which a mortgage debt was due but unpaid, ZMS was prevented by the freezing orders from refinancing and the mortgagee was waiting in the wings for an opportunity to enter the arena and effect a fire sale, only to be held at bay by ZMS which, for the benefit of its own constituency, triumphed by selling the particular unit at a better price (reference was made to a finding by Austin J that Sigalla believed he had “no practical alternative” but to proceed with the exchange of contacts, even though he knew that the orders would thereby be breached).

33 It does neither ZMS nor its controller, Sigalla, credit to seek to invest with some form of nobility of purpose an intentional and knowing contravention of an order of the court. The true position is as submitted by counsel for TZL, that is, that the conduct of ZMS through Sigalla demonstrated disdain for the orders of the court and a serious lack of probity on the part of Sigalla and ZMS. They could have come back to court seeking variation of the orders to allow the sale. They obviously preferred deliberate defiance of the orders.

34 It is necessary to refer, in this connection, to Sigalla’s evidence that refinancing of the mortgage loan had been rendered commercially impossible by the making of freezing orders. He refers in an affidavit to receipt of an “in principle” offer of new finance from the Commonwealth Bank some time shortly before freezing orders were made against ZMS on 26 August 2009. He was living in the United States at the time and had retained an intermediary, CDS Financial Services (Mr Shaun Smith), to seek out sources of finance. Sigalla says that “about mid-September”, the Commonwealth Bank withdrew its offer of finance and he had a conversation with Mr Smith in which Mr Smith said words to the effect:

“Andrew, the CBA has been made aware of your freezing orders by ASIC and as a result have decided to withdraw the offer of finance.”

35 Sigalla then refers in his affidavit to email correspondence between Mr Smith and himself. That correspondence does not appear to bear out the version of events concerning the Commonwealth Bank given by Sigalla and repeated above. The central email is from Mr Smith to Sigalla and is dated 28 September 2009. It followed receipt by Mr Smith of an email from ASIC enclosing a notice under s 33 of the Australian Securities and Investments Commission Act 2001 (Cth). Having regard to the content of Mr Smith’s email, it may be inferred that the notice under s 33 required him or his company or both to produce loan documents, including but not limited to loan applications, bank contacts and file notes concerning ZMS. After referring to the s 33 notice and a telephone call he had received from an ASIC officer on 24 September 2009, Mr Smith said:

“They [ie, ASIC] advised that they would also be contacting Chris Tracey of CBA in relation to the matter.
Given the above occurrence I can confirm CBA shall be unable to assist you until the matter is suitably resolved. I am unable to seek alternate funding until this occurs.”

36 Having regard to this email, there is a distinct possibility that ASIC did not contact the Commonwealth Bank until 24 September 2009 or later and that the assessment that CBA would not proceed with its offer of finance was an assessment made by Mr Smith and conveyed by him to Sigalla. Mr Smith’s email does not refer to freezing orders or their effect on the Commonwealth Bank’s thinking. It is also relevant to note that, on 19 June 2009 (some two months before any freezing order was in place), National Australia Bank, with which Sigalla, ZMS, BZI and other Sigalla companies maintained accounts, unilaterally terminated the banker customer-relationship by a letter addressed to Sigalla reading in part as follows:

“The continued conduct of drawing cheques on your accounts prior to arranging for sufficient clear funds to be available has left us with no other choice. Further the outstanding lease residual for ZMS Investments Pty Ltd, having not cleared as contracted, is of ongoing concern.
It is also apparently clear that the banking relationship has become untenable and we recommend you seek an alternate financial institution for any future relationship.”

37 There is thus room for an inference that the inability of ZMS to refinance the Ingleburn mortgage was not a direct result of the freezing orders made against ZMS in these proceedings. If that matter were somehow to become an issue in the future, it is quite possible that the cause and effect asserted by Sigalla would be found to be lacking.

38 ASIC has instituted contempt proceedings against Sigalla. The charges are detailed in an amended statement of charge filed on 1 March 2010 alleging no fewer than forty-one contraventions of freezing orders made by the court against Sigalla in the ASIC proceedings. The application under s 1323 of the Corporations Act on which those orders were made no doubt sought the appointment of a receiver of Sigalla’s assets and thereby became the vehicle for the making of freezing orders as a “less drastic remedy”: Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307. The forty-one contraventions of orders alleged by ASIC have yet to come before the court. I therefore do no more than note the ASIC allegations.

39 Returning to the finding of contempt by Austin J and my observation that ZMS and Sigalla demonstrated a serious lack of probity, I note the submission made by counsel for TZL that that of itself is sufficient to demonstrate a risk of dissipation of assets. Counsel referred to part of the judgment in the Ninemia Maritime case (above) in which Mustill J said (at 406), in relation to proof of risk of dissipation:

“It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way that shows that his probity is not to be relied on.”

40 TZL has, on this application, led direct evidence that ZMS, at the instigation of Sigalla, has previously acted in a way that shows that the probity of ZMS and Sigalla is not to be relied on. That, to my mind, is alone sufficient to warrant the continuation of the freezing order.

41 I nevertheless move to another aspect of the evidence relevant to the dissipation question. Sigalla refers in an affidavit to activities that he would like to have ZMS undertake but will not be able to pursue if freezing orders are in place. I quote from the affidavit:

“79. From time to time ZMS has engaged in consulting work, for example work in the nature of that of an investment bank facilitating finance or capital raising or investment projects. Often, this work can be speculative in that it depends upon the success of the outcome, in other words, if capital is unable to be raised by a client, ZMS may not be paid anything or might get a relatively small fee. However, if for example a capital raising was successful, ZMS could earn very substantial profits.
80. Where ZMS has taken on such engagements in the past, it has engaged other consultants or analysts to assist in carrying out subordinate yet necessary tasks. ZMS would have to carry those costs until it is paid, if it does get paid at all under the engagement.
81. The operation of the freezing orders deny the opportunity to tender for and carry out that work and earn profits because ZMS is not able to disperse funds for costs it would have to carry until or if and when it gets paid for the engagements it might undertake.
82. I have not sought out such opportunities since the freezing order was made because it would be fruitless to do so. Thus, ZMS is, in practical terms is being denied the opportunity to undertake such profitable work. ZMS has undertaken no income generating activity since the freezing orders were entered.”

42 The distinct possibility disclosed here is that ZMS, if free to do so, will undertake assignments and pay sub-contractors from its own pocket in circumstances where it receives nothing or a small fee. There is thus a clear foreshadowing of outlay of assets for no return – in other words, dissipation.

43 Later in the same affidavit, Sigalla refers to a desire for ZMS to be able to undertake share trading. TZL makes the point, which has substance, that share trading is an inherently speculative activity which, while capable of making profits, also often results in losses.

44 The conclusion stated at paragraph [40] above is consolidated and strengthened by the matters stated in paragraphs [40] to [43]. I am therefore satisfied, having regard to all the circumstances, that there is a danger that any judgment TZL obtains against ZMS will be wholly or partly unsatisfied because assets of ZMS are disposed of in such a way as to effect a reduction in the totality of ZMS’s assets.

45 It follows that TZL has made out a case for the continuation of freezing orders against ZMS, subject to two related matters to which I now turn. The first concerns various aspects of the balance of convenience put forward by ZMS. The second goes to a particular aspect of the balance of convenience, that is, the capacity of TZL to meet the undertaking as to damages that it will be expected to give to the court as the price of the continuation of the restraints. Balance of convenience questions are obviously material to the exercise of the court’s discretion.

46 ZMS points to various activities it would like to undertake but will be unable to pursue if freezing orders are in place. I have already referred to a desire to undertake potentially speculative consulting assignments and potentially speculative share trading. Another matter concerns undeveloped land at Ingleburn. Sigalla says in his affidavit that this land can be developed so as to produce a profit of the order of $2.5 to $3 million. Development consent is said to be in hand. Sigalla says that, but for the freezing orders, development would have started in October 2009. If the orders are continued, he says, there will be a severely diminished likelihood of obtaining bank finance to carry out the development.

47 The thesis here propounded by Sigalla is that, if the freezing orders expire and are not continued, ZMS’s prospects of obtaining bank finance will no longer be severely diminished. That simply cannot be so. No bank is so naïve as to say to itself, “Oh well, now that those freezing orders have gone we can prudently go ahead and make a large development loan to this private company that not only has pending against it litigation in which claims of the order of $7.7 million are made but also is controlled by a person who is being pursued in both that litigation and in separate ASIC litigation, is himself bound by freezing orders, has already been punished for contempt of court because of his role in one breach of freezing orders and is the subject of ASIC allegations of forty-one more breaches of such orders.”

48 The hypothetical banker just quoted would also take into account in his or her cautious assessment – and give significant weight to – the next matter to be mentioned, that is, that there is pending in the Federal Court of Australia an application by the Commissioner of Taxation for an order that ZMS be wound up in insolvency and an order that a liquidator be appointed.

49 The Commissioner’s application is advanced with the benefit of a presumption of insolvency arising from non-compliance by ZMS with a statutory demand for the payment of approximately $3.3 million (being about $1.5 million for goods and services tax and the balance for interest and penalties). There was apparently no application by ZMS for an order setting aside the statutory demand (even though Sigalla, in an affidavit, refers to “a disputed liability for goods and services tax”) with the result that, absent leave on the special and restricted ground in s 459S(2) of the Corporations Act, ZMS will be unable, on the hearing of the winding up application, to rely on the ground that there is a genuine dispute as to the existence or amount of the Commissioner’s debt.

50 The winding up application has already been before the Federal Court and was adjourned. It appears that ZMS is taking steps towards defending the proceedings. There is reference in the evidence to a proposal to commission an appropriate expert to prepare a solvency report. From this it may be inferred that there may be an attempt by ZMS to prove itself solvent despite the debt of $3.3 million to the Commissioner. In submissions, however, greater emphasis was placed on prospects of being able to reach some accommodation or settlement with the Commissioner – something apparently not previously attempted despite winding up proceedings having been commenced and having actually come before the court. Sigalla deposes in relation to this:

“However, ZMS has no ability to come to any settlement with the ATO because the freezing order denies the ability of ZMS to disburse funds by way of settlement.”

51 There is a certain disingenuousness here. The thesis is that freezing orders will prevent negotiation of a settlement because any settlement agreed will not be able to be implemented. The obvious answer is that, if a settlement were agreed and the Commissioner were willing to accept a given amount in discharge of the liability, there would be very good prospects indeed that ZMS would, with ease, obtain from the court dispensation enabling it to pay that amount to the Commissioner. Freezing orders do not have the purpose of preventing payment of legitimate debts; nor do they represent some form of security or priority for the party at whose suit they have been made. The sole purpose is to prevent dissipation in the form of an unwarranted diminution of the net asset base. The proposition that the existence of freezing orders will make it impossible to reach a settlement with the Commissioner must be rejected; and as to implementation of any settlement that might be reached subject to a proviso regarding the court’s granting dispensation from the freezing order, it need only be said that the prospects of that proviso being satisfied must be rated as excellent.

52 The various matters going to the balance of convenience already canvassed do not militate against the making of freezing orders.

53 I turn now to a separate issue that also goes to the balance of convenience, that is, the capacity of TZL to honour the undertaking as to damages (when I say that this goes to the balance of convenience, I mean to indicate that doubt about an applicant’s ability to honour an undertaking as to damages may militate against the making of orders unless security for the undertaking is forthcoming).

54 ZMS and Sigalla maintain that TZL is insolvent. Sigalla was a director of TZL until June 2009 and may therefore be taken to have intimate knowledge of its financial position, at least as it existed at that and earlier times during his tenure. He makes the point that, as TZL’s sole asset, in commercial terms, is technology which has yet to be turned to profitable account, the company remains reliant on the ability to access capital while the commercialisation program continues. He points to very substantial excess of current liabilities over current assets at 31 December 2009 – of the order of $30 million. This, coupled with a loss of more than $5.3 million for the half year to 31 December 2009 and net cash outflows from operating activities of more than $2.4 million, caused the auditors to say in their report:

“The ability of the consolidated entity to continue as a going concern is dependent on the continued support of the group’s lenders and shareholders and the ability to generate future profits and positive cash flows.”

55 There is also evidence, however, that TZL has been able to raise capital and has exercised this ability in recent times. At the annual general meeting held on 26 February 2010, shareholders passed resolutions approving a substantial conversion of debt to equity and the issue of further shares.

56 There can be no doubt that TZL has financial problems, but the evidence before the court does not bear out Sigalla’s assertion that it is insolvent. TZL, in any event, puts forward reasons why the court should not afford weight to TZL’s financial position when considering the balance of convenience. It is to those that I now turn.

57 The first point TZL makes is that the orders already in force were made by consent and make no provision for security for TZL’s undertaking. ZMS’s response is that the financial position has deteriorated since then. The riposte is that the position has improved in that the debt to equity conversion and capital raising approved by the annual general meeting have occurred. The correct time for expressing the present concerns about TZL’s financial state, according to TZL, was when the orders were first made; and ZMS should not be heard to make that complaint now.

58 Second, TZL points to a matter referred to as follows at paragraph 9 of my judgment of 10 November 2009 in Australian Securities and Investments Commission v Sigalla (above):

“Certain asset preservation orders were made in the TZL proceedings, culminating in orders of 16 September 2009. But no such order was made in those proceedings against Mr Sigalla or BZI. Rather, in item 7(a) of short minutes of orders made on that day, the court noted a consent of Mr Sigalla and BZI to the making against them in the TZL proceedings of freezing orders in the same terms as those that had been made in these present proceedings, if TZL served a statement of claim on them in the TZL proceedings by 23 October 2009 and if the asset preservation orders sought by ASIC were not continued. The condition concerning filing of a statement of claim by TZL was satisfied, with the result that, although no asset preservation orders are extant against Mr Sigalla and BZI in the TZL proceedings, those defendants to those proceedings have consented to the imposition there of asset preservation orders the same as those made in these proceedings, if the last-mentioned orders are not continued.”

59 The point TZL makes is that the consent given by Sigalla and BZI in these proceedings, as referred to in the judgment in the ASIC proceedings, was not predicated on TZL’s giving any undertaking as to damages. Thus, Sigalla showed himself willing to accept the imposition of freezing orders against himself and BZI in these proceedings without any undertaking as to damages by TZL (much less security for any such undertaking) but now seeks to say that the worth of such an undertaking as regards orders affecting ZMS – another Sigalla emanation – is an important factor bearing on the question whether such last-mentioned orders should be made.

60 In the same vein, Sigalla and BZI submitted in the ASIC proceedings that the ability of TZL to obtain freezing orders against them in these was a reason why those orders were not “necessary or desirable” (in s 1323 terms) in the ASIC proceedings.

61 These submissions about past attitudes and stances of Sigalla and his companies are persuasive. When it suited him to do so, Sigalla adopted the position that absence of an undertaking as to damages by TZL or doubt about the worth of that undertaking was not a matter of concern to him. He took that attitude in order to achieve some result desired at the time. Now, when it suits him to take the opposite stance, he simply abandons the attitude that was previously convenient. This seriously calls into question the genuineness of his fear (and therefore that of ZMS) that TZL will be unable to honour the undertaking as to damages.

62 The relevance to be attached to doubt about a plaintiff’s financial capacity should now be brought into focus. A conclusion that such doubt exists does not lead inexorably to the result that interlocutory restraint will be refused. In Wentworth v Wentworth (unreported, NSWSC, 12 June 1997), Hodgson J said:

"As regards the undertaking as to damages question, it is clear in my opinion that the inability of a plaintiff to give a valuable undertaking as to damages does not necessarily preclude the granting of relief. However, where one is balancing monetary disadvantages as between a plaintiff and a defendant, the inability of a plaintiff to give a valuable undertaking as to damages is a factor which can be taken into account in assessing the balance of convenience and may even be decisive."

63 In the present case, the fact that Sigalla has shown himself to be, in essence, unconcerned about the existence and worth of an undertaking as to damages from TZL causes me to attach no real weight to the possibility that TZL may in the future not have the funds to honour its undertaking in full. I say this in a context where, on the case TZL makes against ZMS (which, as I have found, is a “good arguable case”), any shortage of funds to TZL has been contributed to, to the extent of about $7.7 million, by payments wrongfully made to ZMS.

64 The outcome on the question of the continuation of freezing orders against ZMS is accordingly that the orders made on 16 September 2009 will be continued up to 5pm on 15 August 2010, if TZL by its counsel or solicitor again gives to the court the undertakings contained in Schedule 1 of Appendix A of the orders entered on 26 August 2009.

65 There is, however, one possible qualification to this to which I must now turn. ZMS seeks an exception allowing the expenditure of funds by ZMS on the defence of the winding up proceedings to which I have referred. TZL does not oppose an order creating a suitable exception. There is some dispute between the parties as to the appropriate form of a “carve-out”, including as to amount (ZMS says that $200,000 should be allowed; TZL proposes $150,000). The appropriate course, in my view, is to create an exception in the form proposed by TZL. ZMS can always seek to have it expanded if the need arises. There will therefore be an order that the orders made on 16 September 2009, as continued by orders made today, be amended in the manner set out on the final page of the annexure B to the affidavit of Leslie Michael Steven Pozniak sworn on 15 March 2009.

66 Finally, I turn to the question of security for costs, as sought by all three defendants, that is, ZMS, BZI and Sigalla. TZL does not contend that it should not be ordered to provide security for the defendants’ costs of the proceedings. The contest is as to the amount.

67 ZMS seeks security in the sum of $497,975. TZL says that an appropriate sum is $250,000; indeed, it has offered that sum but the offer has not been accepted.

68 The defendants’ estimate of costs is detailed in an affidavit of their former solicitor, Mr Ward. Several aspects became the subject of submissions by TZL.

69 TZL noted that the defendants’ estimate includes $128,000 for counsel and solicitors for the full ten days of estimated hearing time. TZL refers, in that connection, to an observation of Smith J in Felsink Pty Ltd v City of Maribyrnong [2007] VSC 49 at [33]:

“I consider that the first defendant is entitled to have security for costs in respect of costs incurred in preparation for trial and for the first two days of the trial. It is appropriate to limit any security to the first two days of the trial because it places an unfair burden on the plaintiff to be required to provide security for costs which may never be incurred. Further, the issue can be revisited if the trial is continuing at the end of the second day and appropriate orders made if necessary.”

70 The clear message here is that any estimate should take account of the possibility of settlement either before trial or in the early stages – a possibility that may be more pronounced where, as here, the hearing is expected to be long. On this basis, I am of the opinion that the $128,000 should be reduced by $102,400 (representing eight hearing days) so that the total is reduced to $395,575.

71 TZL next says that this balance should be discounted by a factor recognising that assessed costs should be expected to be lower than costs actually charged. There were competing submissions on this but they went to quantum rather than the principle. A discount of 30% should be applied to produce a figure of $276,902.50.

72 TZL refers to the fact that proceedings brought by Sigalla against TZL will be heard at the same time as these proceedings, so that some part of the court time actually occupied will be devoted to that other matter. Reference is also made to delay on the defendants’ delay in seeking security and Sigalla’s breach of orders.

73 Having regard to all these factors, security should, at this stage, be ordered in the sum for which TZL contends, that is, $250,000.

74 Subject to the contemplated undertakings being given by TZL, the orders will be as follows:

1. Upon the plaintiff by its counsel giving to the court the undertakings contained in Schedule I of Appendix A of the orders made herein on 26 August 2009, order that orders 1 to 7 of the orders made and entered herein on 16 September 2009 be continued as against the first defendant (ZMS Investments Pty Ltd) up to 5pm on 13 August 2010 subject, however, to the following modification, that is to say, the addition of a new paragraph 2(e) as follows:

“paying a sum of $150,000 (‘ Sum ’) to Bridges Lawyers by:
(i) drawing the Sum from any account in the name of ZMS including but not limited to an account held with KAS Bank;
(ii) borrowing the Sum from any available tender and utilizing the property at 19 Aero Road, Ingleburn as security, by a second mortgage, for such borrowing; or
(iii) selling or mortgaging shares owned by ZMS in TZ Limited,
on condition that:
(A) the Sum be held in the solicitors’ trust account of Bridges Lawyers for the sole purpose of paying legal and accounting expenses reasonably necessary for the defence of winding-up proceedings commenced by the Deputy Commissioner of Taxation against ZMS in the Federal Court of Australia (‘ Proceedings ’);
(B) prior to the conduct in (i), (ii) or (iii) occurring, the partner of Bridges Lawyers responsible for the conduct of the proceedings provides the Court with an undertaking that the Sum will not be used for any purpose other than the payment of legal and accounting expenses reasonably necessary for the defence of the Proceedings;
(C) payments from the Sum will be made directly to the law firm or accounting firm required to be paid and, for the avoidance of doubt, no part of the Sum will be paid to Andrew Sigalla, ZMS or BZI Pty Limited or any entity controlled by Andrew Sigalla;
(D) a receipt is obtained for each payment in (C) and a copy is provided to the solicitors for TZ within 5 business days of each payment; and
(E) the source of the Sum (bank account details and/or lender/mortgagee), and the manner in which it is acquired (the terms of any loan, mortgage or purchase), is disclosed by ZMS to the solicitors of TZ within 5 business days of the Sum’s payment to Bridges Lawyers.”


2. Direct that order 1 be entered forthwith.

3. Order that the plaintiff do give security in the sum of $250,000 for the costs of the defendants.

4. Order that the security be in such form as the Registrar determines.

5. Order that the proceedings be stayed until such security is provided.

75 The costs of the applications heard by me on 15 March 2010 are at this stage reserved for future consideration. I will arrange for the matter to be listed for submissions on costs at a suitable time, assuming that the parties do not come to some agreement in the meantime.

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