Can you get an Asset Freezing Order against a party to Court proceedings?

By March 17, 2022 May 17th, 2022 Blogs, Dispute Resolution, Litigation
Asset Freezing Order

March 2022

Can you get an Asset Freezing Order against a party to Court proceedings?

Overview

On 19 November 2021, Teneo Corporate Lawyers successfully obtained a judgment from the Supreme Court of New South Wales (NSWSC) in favour of our client in respect of an application for ‘freezing orders’.  Our firm represented the Plaintiff in this matter, with Mr Sean Docker of Counsel appearing on our client’s behalf.

Justice Robb’s decision on this matter is published on the NSW Case Law website: Zhang v Woo [2021] NSWSC 1496 (Zhang v Woo).

In Zhang v Woo, the NSWSC was satisfied that:

  • the Plaintiff had established a good arguable case that involved dishonesty on the part of the Defendants;
  • there is a risk that the Defendants will dissipate their assets; and
  • the balance of inconvenience favoured making the freezing orders against the Defendants.

Justice Robb made orders restraining both Defendants, Mr Eric Woo (Eric) and Ms TingTing Zhan (TingTing), from disposing of or encumbering any interest in real property owned by them until a final judgment is made on our client’s claims for tort of deceit and misleading and deceptive conduct.

Key Takeaways

  • It is possible to get a Court Order freezing the assets of a party to Court proceedings.
  • The test is:
    • You must have a “good, arguable case”.
    • You must show a risk of dissipation of assets.
    • You must demonstrate the balance of convenience favours granting a freezing order.
  • You must act quickly if you wish to obtain a freezing order.
  • Evidence of your case and the likelihood that the other parties’ assets are likely to be dissipated, are critical to successfully obtaining freezing orders.

Relevant Background of the Zhang v Woo Case

Our client commenced proceedings against Eric and TingTing on the following grounds:

  • claims for breaches of agreements;
  • tort for deceitful representations; and
  • claims for misleading and deceptive conduct.

The proceedings regarding the above claims are currently ongoing.

The Plaintiff, Ms Teresa Zhang, is claiming monetary relief for investments she made with Eric relating to the Sensation Dance Festival in 2017 (Sensation Dance Event) and the Seadeck harbour cruise business in 2018 (Seadeck Business).

The Plaintiff claims that she paid a total of $2,550,000.00 to Eric’s company, Culture Map Pty Ltd, at Eric’s direction, to purchase 30% ownership of the Seadeck Business.

The Plaintiff also claims that she paid a total of $920,000.00 to Eric, entitling her to 25% of the net profits from the Sensation Dance Event, payable within 14 days from the date of the event.

The Plaintiff alleges that Eric did not repay the Plaintiff her investment in the Sensation Dance Event or pay the profit she was entitled to from the event.  The Plaintiff also alleges that Eric and TingTing made misleading and deceptive representations regarding the Seadeck Business, and the Plaintiff did not receive any interest or shares in that business.

The Plaintiff sought  ‘freezing orders’ from the NSWSC against Eric and TingTing to prevent them from dissipating their assets in Australia.

What is a Freezing Order?

A freezing order (also known as a ‘Mareva injunction’) is granted in exceptional circumstances.  The purpose of a freezing order is to prevent a defendant from dissipating his or her assets with the intention or effect of frustrating enforcement of a prospective Court judgment against him or her.

Granting of a freezing order does not give a plaintiff any proprietary or security interest in the defendant’s assets.  All that changes is the defendant’s assets are “frozen”.  In other words, the defendant is prohibited from removing, disposing of, dealing with, or diminishing the value of his assets.

There are three basic requirements to be satisfied before a Court will grant a freezing order.  These are:

  1. the plaintiff has a ‘good arguable case’;
  2. there is a risk of dissipation of assets so as to render the recovery of any judgment which the plaintiff may obtain futile; and
  3. the balance of inconvenience favours granting of a freezing order.

These requirements are further explained below.

Good arguable case

The concept of a “good arguable case” requires that the plaintiff must establish they have a sufficiently strong cause of action against the defendant.  A “good arguable case” is also referred to as a “prima facie case” in other Court judgments or legislation.

In Zhang v Woo, Justice Robb was satisfied with the evidence presented in our application for freezing orders that the Plaintiff had at least a good arguable case that Eric and TingTing committed breaches of the agreements relating to the Seadeck Business.

His Honour concluded in paragraphs [52] and [107] that it is “inherently extremely improbable” and “commercially improbable” that the Plaintiff would have risked her money by entering into an agreement to obtain 30% interest in the Seadeck Business on the basis that performance of the contract by Eric was entirely contingent on a successful outcome of another Federal Court proceedings, and that money paid by the Plaintiff to Eric would be used to pay the legal costs of these proceedings.   Eric and his company were the defendants in the Federal Court proceedings, and were unsuccessful.

The NSWSC concluded that the sense of the WeChat messages between the Plaintiff and Eric was that the litigation had intervened and prevented Eric from performing his obligations to the Plaintiff in respect of the Seadeck Business, rather than the “litigation was the subject of the contract and the [P]laintiff had agreed to fund it”.

Risk of Dissipation of the Defendants’ Assets

The concept of “risk of dissipation of assets” pertains to a real danger that the defendant will default on enforcement if a judgment is obtained against him/her because, for example, the defendant will abscond or fraudulently misappropriate his/her assets so that no judgment payment can be made to the plaintiff.

The defendant’s previous conduct of dishonesty can be taken into account in assessing the risk of dissipation of assets.

In Zhang v Woo, the NSWSC noted the following facts from the evidence presented:

  • the Plaintiff deposited money for the purchase of 30% interest in the Seadeck Business to the bank account of Eric’s company;
  • Eric’s company remitted the whole amount paid by the Plaintiff into the personal bank account of TingTing; and
  • TingTing made several payments to Eric’s personal bank account;

Justice Robb stated in paragraph [73] that Eric has not given a “credible and substantial explanation of why he was entitled to receive those monies, nor has he accounted for them.”  His Honour also made further comments in paragraph [76] that the evidence provided by Eric for the money he had received from TingTing was “incomplete and wholly unpersuasive”.

As discussed above, the Court did not accept Eric’s submission that the Plaintiff’s investment in the Seadeck business was contingent on a successful judgment in the Federal Court proceedings.  Accordingly, the NSWSC concluded in paragraph [83] that Eric acted dishonestly in the circumstances in which he entered into a contract with the Plaintiff for the Seadeck Business and how he applied the Plaintiff’s money.

Balance of inconvenience favouring the freezing order

The concept of “balance of inconvenience” relates to balancing the two possible effects of a freezing order between the parties.  In particular:

  • the inconvenience that may cause the defendant if the freezing order is granted; and
  • the inconvenience that may cause the plaintiff if the freezing order is not granted.

The “balance of inconvenience” is dependent on the plaintiff’s strength of the arguable case.  In other words, the balance of inconvenience moves in favour of the plaintiff if the arguable case is strong, and vice versa.

Eric and TingTing claimed that the freezing order would cause them to lose a significant amount of money.  In particular, they did not want to be prevented from selling their real properties.  However, Justice Robb rejected this claim because if Eric and TingTing wish to sell their properties, a freezing order can be formulated in a way that permits them to sell their properties, provided that the proceeds of the sale will also be subject to the freezing order.

Eric and TingTing also submitted that they had started a new marketing/events business and would require additional capital to operate this new business.  However, His Honour observed from the information provided in their submission that the business activities were described in the most general terms and were not specific as to what the business would involve.  Accordingly, the NSWSC could not make any practical assessment of the risk of loss that the freezing orders would create if such orders were made.

The Court’s decision

Justice Robb concluded in paragraph [112] that:

  • there is a sufficient danger that any judgment the Court may give in favour of the plaintiff will not be satisfied if the freezing orders are not made against Eric and TingTing;
  • that the plaintiff has established a good arguable case that involves dishonesty of Eric and TingTing; and
  • there is a risk that Eric and TingTing will dissipate their assets.

Accordingly, the Spreme Court made freezing orders against both Eric and Tingting’s assets.

Conclusion

Before commencing legal proceedings involving monetary claims, you should consider whether:

  • the other party has sufficient assets to satisfy the Court judgment; and
  • there is a risk that the other party will dissipate their assets to frustrate any Court judgment in your favour.

If there is a risk of asset dissipation, it is prudent to seek a freezing order from the Court to ensure that, if you are successful, the other party can comply with the Court’s order.

Contact Us

We are experts in dispute resolution and commercial litigation.  If you are dealing with any commercial issues, we would be happy to assist and provide you with specific advice on the best course of action available.

For further information, please call us on (02) 8920 0475 or send us an email at mail@teneolaw.com.au.

Richen Mojica and Craig Higginbotham
17 March 2022

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