FEDERAL COURT OF AUSTRALIA Coal of Africa Limited v Sergeant (No 2) [2012] FCA 1169 Citation: Coal of Africa Limited v Sergeant (No 2) [2012] FCA 1169 Parties: COAL OF AFRICA LIMITED ACN 008 905 388 v BLAIR SERGEANT File number: NSD 1427 of 2012 Judge: ROBERTSON J Date of judgment: 25 October 2012 Catchwords: PRACTICE AND PROCEDURE – freezing orders – making of freezing orders where original orders made ex parte – relevant factors – whether initial freezing orders obtained in circumstances where there was material non-disclosure Legislation: Federal Court Rules 2011 (Cth) r 7.35 Cases cited: Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 applied Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194 followed MG Corrosion Consultants Pty Ltd v Gilmour (2012) 202 FCR 354 cited Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 applied Date of hearing: 18 October 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 26 Counsel for the Plaintiff: Mr MJ Leeming SC with Mr R Bhalla Solicitor for the Plaintiff: Corrs Chambers Westgarth Counsel for the Defendant: Mr JM Ireland QC with Ms JK Taylor Solicitor for the Defendant: Tottle Partners IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1427 of 2012 BETWEEN: COAL OF AFRICA LIMITED ACN 008 905 388 Plaintiff AND: BLAIR SERGEANT Defendant JUDGE: ROBERTSON J DATE OF ORDER: 25 OCTOBER 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: INTRODUCTION 1 Subject to the next paragraph, this order has effect up to and including the conclusion of the final hearing of this proceeding, presently 19 March 2013, or until further order. 2 Anyone served with or notified of this order, including you, may apply to the Court at any time to vary or discharge this order or so much of it as affects the person served or notified. 3 In this order: (a) 'applicant', if there is more than one applicant, includes all the applicants; (b) 'you', where there is more than one of you, includes all of you and includes you if you are a corporation; (c) 'third party' means a person other than you and the applicant; (d) 'unencumbered value' means value free of mortgages, charges, liens or other encumbrances; (e) 'Notice Address' means brad.woodhouse@corrs.com.au and aditi.kogekar@corrs.com.au. 4 (a) If you are ordered to do something, you must do it by yourself or through directors, officers, partners, employees, agents or others acting on your behalf or on your instructions. (b) If you are ordered not to do something, you must not do it yourself or through directors, officers, partners, employees, agents or others acting on your behalf or on your instructions or with your encouragement or in any other way. FREEZING OF ASSETS 5 (a) You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia ('Australian assets') up to the unencumbered value of AUD$6,000,000 ('the Relevant Amount'). (b) If the unencumbered value of your Australian assets exceeds the Relevant Amount, you may remove any of those assets from Australia or dispose of or deal with them or diminish their value, so long as the total unencumbered value of your Australian assets still exceeds the Relevant Amount. (c) If the unencumbered value of your Australian assets is less than the Relevant Amount, and you have assets outside Australia ('ex-Australian assets'): (i) You must not dispose of, deal with or diminish the value of any of your Australian assets and ex-Australian assets up to the unencumbered value of your Australian and ex-Australian assets of the Relevant Amount; and (ii) You may dispose of, deal with or diminish the value of any of your ex-Australian assets, so long as the unencumbered value of your Australian assets and ex-Australian assets still exceeds the Relevant Amount. 6 For the purposes of this order, (1) your assets include: (a) all your assets, whether or not they are in your name and whether they are solely or co-owned; (b) any asset which you have the power, directly or indirectly, to dispose of or deal with as if it were your own (you are to be regarded as having such power if a third party holds or controls the asset in accordance with your direct or indirect instructions); and (c) the following asset in particular: (i) the property known as 28 Russell Street, Fremantle or, if it has been sold, the net proceeds of the sale. (2) the value of your assets is the value of the interest you have individually in your assets. EXCEPTIONS TO THIS ORDER 7 This order does not prohibit you from: (a) paying up to $4000 a week on your ordinary living expenses; (b) paying reasonable legal expenses; (c) dealing with or disposing of any of your assets in the ordinary and proper course of your business, including paying business expenses bona fide and properly incurred; (d) in relation to matters not falling within (a), (b) or (c), dealing with or disposing of any of your assets in discharging obligations bona fide and properly incurred under a contract entered into before this order was made, provided that before doing so you give the applicant, if possible, at least two working days written notice of the particulars of the obligation; and (e) dealing with or disposing of any of your assets if you provide the Applicant with 7 days written notice, sent to the Applicant at the Notice Address, of your intention to deal with or dispose of that asset. 8 You and the applicant may agree in writing that the exceptions in the preceding paragraph are to be varied. In that case the applicant or you must as soon as practicable file with the Court and serve on the other a minute of a proposed consent order recording the variation signed by or on behalf of the applicant and you, and the Court may order that the exceptions are varied accordingly. 9 (a) This order will cease to have effect if you: (i) pay the sum of $6,000,000 into the Court; or (ii) pay that sum into a joint bank account in the name of your solicitor and the solicitor for the applicant as agreed in writing between them; or (iii) provide security in that sum by a method agreed in writing with the applicant to be held subject to the order of the Court. (b) Any such payment and any such security will not provide the applicant with any priority over your other creditors in the event of your insolvency. (c) If this order ceases to have effect pursuant to (a), you must as soon as practicable file with the Court and serve on the applicant notice of that fact. COSTS 10 The costs of this application are costs in the cause. PERSONS OTHER THAN THE APPLICANT AND RESPONDENT 11 Set off by banks This order does not prevent any bank from exercising any right of set off it has in respect of any facility which it gave you before it was notified of this order. 12 Bank withdrawals by the respondent No bank need inquire as to the application or proposed application of any money withdrawn by you if the withdrawal appears to be permitted by this order. 13 Persons outside Australia (a) Except as provided in subparagraph (b) below, the terms of this order do not affect or concern anyone outside Australia. (b) The terms of this order will affect the following persons outside Australia: (i) you and your directors, officers, employees and agents (except banks and financial institutions); (ii) any person (including a bank or financial institution) who: (A) is subject to the jurisdiction of this Court: and (B) has been given written notice of this order, or has actual knowledge of the substance of the order and of its requirements; and (C) is able to prevent or impede actions or omissions outside Australia which constitute or assist in a disobedience of the terms of this order; and (iii) any other person (including a bank of financial institution), only to the extent that this order is declared enforceable by or is enforced by a court in a country or state that has jurisdiction over that person or over any of that person's assets. 14 Assets located outside Australia Nothing in this order shall, in respect of assets located outside Australia, prevent any third party from complying or acting in conformity with what it reasonably believes to be its bona fide and properly incurred legal obligations, whether contractual or pursuant to a court order or otherwise, under the law of the country or state in which those assets are situated or under the proper law of any contract between a third party and you, provided that in the case of any future order of a court of that country or state made on your or the third party's application, reasonable written notice of the making of the application is given to the applicant. LIBERTY TO APPLY 15 The parties have liberty to apply on 24 hours notice. SCHEDULE A UNDERTAKINGS GIVEN TO THE COURT BY THE APPLICANT (1) The applicant undertakes to submit to such order (if any) as the Court may consider to be just for the payment of compensation (to be assessed by the Court or as it may direct) to any person (whether or not a party) affected by the operation of the order. (2) As soon as practicable, the applicant will cause anyone notified of this order to be given a copy of it. (3) The applicant will pay the reasonable costs of anyone other than the respondent which have been incurred as a result of this order, including the costs of finding out whether that person holds any of the respondent's assets. (4) If this order ceases to have effect the applicant will promptly take all reasonable steps to inform in writing anyone to who has been notified of this order, or who the applicant has reasonable grounds for supposing may act upon this order, that it has ceased to have effect. (5) The applicant will not, without leave of the Court, use any information obtained as a result of this order for the purpose of any civil or criminal proceedings, either in or outside Australia, other than this proceeding. (6) The applicant will not, without leave of the Court, seek to enforce this order in any country outside Australia or seek in any country outside Australia an order of a similar nature or an order conferring a change or other security against the respondent or the respondent's assets. Date that entry is stamped: Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1427 of 2012 BETWEEN: COAL OF AFRICA LIMITED ACN 008 905 388 Plaintiff AND: BLAIR SERGEANT Defendant JUDGE: ROBERTSON J DATE: 25 OCTOBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 21 September 2012 the applicant commenced these proceedings and obtained ex parte freezing orders against the respondent: Coal of Africa Ltd v Sergeant [2012] FCA 1054. Those orders were extended by the Court by consent on 27 September 2012 until 5pm on 18 October 2012. At the interlocutory hearing before me on 18 October 2012 the matter was contested and each side read affidavits and tendered evidence. I heard argument and on that day extended the freezing orders, with one minor variation, to 5pm today, 25 October 2012 so that I could more fully consider the evidence which had been adduced before me. In form, the question was whether the original orders should be further extended. In substance, the matter having been contested for the first time, the question was whether there was a proper basis on the material before me for making the freezing orders sought by the applicant and whether in the exercise of the Court's discretion those freezing orders should be made. 2 Division 7.4 of the Federal Court Rules deals with the making of freezing orders by this Court. The language used in rule 7.35 of those Rules is, relevantly, that an applicant has a good arguable case on an accrued cause of action that is justiciable in the Court. I have considered the evidence on that basis. I have then considered whether, on the evidence currently before the Court, there is a danger that a prospective judgment will be unsatisfied because assets are removed from Australia or disposed of, dealt with or diminished in value. I have also considered as an overarching question whether, in all the circumstances, the case is one in which the interests of justice support the freezing order: this includes the likely consequences to the applicant if the assets are dealt with in the manner I have just described and the hardship on the respondent: see generally Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194 at [8]-[13] per Kenny J, followed in MG Corrosion Consultants Pty Ltd v Gilmour (2012) 202 FCR 354 at [47] per Barker J. 3 What follows are the short reasons for my conclusions and orders on the material presently before me. 4 In my opinion the applicant has established a good arguable case of serious breach of duty by the respondent, its former Finance Director. I base this conclusion on the three matters relied on by the applicant in support of this application. Those matters are, first, that the respondent acquired, through a company called Orica Investments Ltd (Orica), what was referred to as the Kaiser debt of ZAR52,762,500 (approximately A$6,000,000) for €1,000; second, that the respondent, through a company called Newport Investments Ltd (Newport), invoiced Belvedere Investments (Belvedere), a company registered in the Turks and Caicos Islands, for US$400,000 purportedly for services associated with the sale of NuCoal Mining (Proprietary) Ltd (NuCoal); and third, the respondent authorised payment of US$552,000 by the applicant to Belvedere in relation to the applicant's capital raising for services which, the applicant arguably contends, that company did not provide. In relation to this last amount the evidence presently before the Court shows the respondent suggesting to Mr Hewetson, the former Chief Executive of NuCoal, that the amounts in a draft invoice be changed and that Mr Hewetson remove his name from the draft invoice. 5 It was common ground, for the purposes of the interlocutory application, that the respondent had some role in relation to Orica and Newport, it being a live issue as to whether or not he controlled either of those entities and owned any funds that they may hold. The evidence suggests that these companies are managed out of Hong Kong and owned by a company in Belize. 6 I also note as background a matter not relied on by the applicant, and on which therefore I do not base my decision, that the applicant, with the involvement of the respondent, acquired all the shares in NuCoal by a share sale agreement in late 2009 and early 2010 and failed to take advantage of its rights under an option and lost a US$2,000,000 option fee, in circumstances where the next day, or the day after, instructions were received for the applicant to acquire the relevant shares but, apparently, to lose the benefit of that very substantial option fee. 7 A relevant factor is that the statement of claim in substance makes claims of fraud against the respondent. I reject the respondent's submissions to the contrary. Related to the claims of fraud, on the evidence as it stands, there is a sufficient basis for concluding that the respondent misled the applicant's auditors when they made inquiries of him in relation to the Kaiser debt. 8 The applicant submitted that the claims that the respondent in effect acquired the Kaiser debt for €1,000; that he misled the applicant's auditors; and the issues surrounding the two invoices of US$400,000 and US$552,000 had only come to light after the respondent has ceased to be the Finance Director of the applicant through an examination of his emails, following conversations with the respondent in which officers of the applicant and its lawyers found him to be generally unhelpful. I proceed on that basis for the purposes of the present application. 9 A further consideration is that although a number of affidavits were filed and read on behalf of the respondent in resisting the making or continuation of the freezing orders, the respondent himself gave no evidence. It was submitted on his behalf that the respondent had not yet had a genuine opportunity to give his affidavit on all of the matters raised in the proceedings. I reject that submission. The respondent had an opportunity to file at least some evidence. There was no evidence or suggestion that the respondent was out of communication or unwell or otherwise not available in the period between the making of the ex parte orders on 21 September 2012 and the contested hearing before me on 18 October 2012. Thus in my view the respondent's present silence is significant: Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 per Lord Mansfield. 10 The matters put on behalf of the respondent to resist the making or continuation of the freezing orders were, first, that this was a conventional case of negligence and associated matters insofar as the claim related to the loss of the option fee of $2,000,000. However, as I have said, this option fee was not a matter relied on by the applicant to found its interlocutory application. I leave aside the accuracy of the respondent's characterisation of this part of the claim. 11 Next, the respondent submitted that at the time of obtaining the freezing orders ex parte the applicant had failed to tell the Court in relation to the Kaiser debt that it had been "regurgitated" by Orica and found its way into the balance sheet of the applicant by assignment such that the debt had been effectively recovered and therefore whatever losses might have initially been suffered by the adjustment in price about which the applicant complained did not endure into the loss of the type characterised. 12 However the Court was told by the applicant on 21 September 2012, when the ex parte orders were made, that ultimately there was a settlement of the dispute between the applicant and the vendors of NuCoal, pursuant to which, inter alia, the applicant received an indemnity from Mr Hewetson for the Kaiser debt. What was missing when the matter proceeded ex parte was the promise of release from Orica but I do not see that as a material non-disclosure. 13 Further, in my opinion, it is sufficiently arguable that the acquisition of the outstanding Kaiser debt by the applicant for £3,000,000 as part of a wider settlement did not necessarily answer the applicant's claim against the respondent for breach. 14 In relation to Orica and Newport, it was submitted on behalf of the respondent that the server records of the applicant showed, for present purposes, that the respondent was clearly communicating on matters well outside the affairs of the applicant but it could not be said that this other business which the respondent was engaged in was in some way a breach of duty. The respondent submitted that the dealings did not lead to the conclusion that the monies involved were somehow the respondent's monies. 15 As to the US$400,000 amount, it was submitted for the respondent that although the evidence suggested that the invoice was made there was no comparable evidence of payment of that invoice by anybody to anybody and that what lay behind the transaction between Newport on the one hand and Belvedere on the other remained unresolved. 16 In my view, for present purposes, this does not answer the applicant's contention that this amount was an improper profit obtained by the respondent in breach of his duty. 17 As to the separate and distinct US$552,000 amount, the respondent characterised the claim as being that the respondent had massaged an invoice which went to Mr Farrell, former Managing Director of the applicant, for signature. It was submitted that what was absent was any suggestion in the applicant's evidence that the applicant had explored the position with Mr Farrell who was the Managing Director of the applicant until August 2012 and therefore relevantly present when these matters were first being examined. The respondent appears to accept, for present purposes, that the fees were paid but the reason for the fees and what lay behind Mr Farrell's approval of the fees were a matter that ought to have been examined with Mr Farrell and his explanations placed before the Court. 18 I accept the force of the respondent's contention that Mr Farrell's evidence would have been important on this application. However I take into account the countervailing material presently before the Court showing the respondent suggesting to Mr Hewetson, the former Chief Executive of NuCoal, that the amounts in the invoice be changed and that Mr Hewetson should remove his name from the draft invoice. I also take into account in this respect that there is no reference to Belvedere in the applicant's documents at the time of the capital raising to which this invoice appears to relate, although there is reference to the applicant's brokers. Belvedere appears only some eight months later claiming this fee in respect of its involvement in the capital raising. 19 It was also submitted on behalf of the respondent that his activities were not covert since most of them had been retained in email records of the applicant after his departure. This is not a consideration on which I would act on this application in the abstract and in the absence of evidence from the respondent. 20 Further it was submitted that there was no covert behaviour because the relationship between the respondent on the one hand and Orica and Newport on the other could not, on the evidence as presented, be sustained. However, as I have said, it was common ground, for the purposes of the interlocutory application, that the respondent had some role in relation to Orica and Newport and it was a live issue as to whether or not he controlled either of those entities and owned any funds that they may hold. In my view, that there was a relationship between the respondent and Orica and Newport is sufficient for present purposes. 21 It was also submitted that absent from the case was any suggestion of the respondent fleeing the jurisdiction: he lives in Perth in employment by a company in which the applicant has a substantial stake. Further there was no evidence about disposition of assets or attempts by the respondent to dissipate assets by sending them outside Australia or the like. There was no money which had gone offshore that could be characterised as the respondent's own money. The respondent submitted that what lay behind the application was the idea that there were offshore funds which could somehow be manipulated in a manner which would take them out of reach. The defect in the applicant's case in that respect was that the funds of Orica and Newport, which were utilised from time to time, had not been shown to be the respondent's funds. 22 For the purposes of this interlocutory hearing, I am satisfied that the respondent has from time to time dealt with assets in offshore companies. I accept that there is no suggestion of the respondent fleeing the jurisdiction. However given the nature of the claims alleging serious breach of duty by the respondent and the evidence suggesting dishonest or covert dealings by him, and an ability to move assets to foreign entities, in my view there is a danger that a prospective judgment will be unsatisfied because of assets being removed from Australia: I refer to Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 325 per Gleeson CJ. 23 Lastly, the respondent submitted that there was an element here of delay by the applicant: suspicions or problems were first identified in about March 2012 but it was not until September 2012 that an ex parte application was made. Given the factual complexity of the matter, I am not persuaded that there has been disqualifying delay on the part of the applicant. I also note that Mr Farrell left the applicant in early August 2012. 24 For these reasons I order that the substance of the freezing orders made be continued to the end of the hearing of the proceedings or until further order. In so concluding, I am willing to hear any submissions as to matters of detail. I note the form of order which requires the respondent to give the applicant seven days notice before dealing with his assets. 25 I have not dealt with the applicant's application in so far as concerned ancillary disclosure orders as it was accepted on behalf of the applicant that it might well be more appropriate to revisit that question once the respondent's defence, due to be filed on Friday 19 October 2012, was available. 26 The costs of the interlocutory application should be costs in the cause. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson. Associate: Dated: 26 October 2012