FEDERAL COURT OF AUSTRALIA Concept Commercial Interiors Pty Ltd v Baxter [2022] FCA 1388 File number: VID 659 of 2022 Judgment of: ANDERSON J Date of judgment: 11 November 2022 Catchwords: CORPORATIONS – ex parte application for freezing order over assets of director of a company in liquidation – where there is a prima facie case made out for insolvent trading under s 588M of the Corporations Act 2001 (Cth) (Act) – contravention of s 588G of the Act – where there is a risk of the dissipation of assets – freezing order granted Legislation: Corporations Act 2001 (Cth) Cases cited: Australian Securities and Investments Commission v Plymin [2003] VSC 123; 46 ACSR 126 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 11 Date of hearing: 11 November 2022 Counsel for the Applicant: Mr S Morris Solicitor for the Applicant: Soho Lawyers Counsel for the Respondent: The Respondent did not appear ORDERS VID 659 of 2022 BETWEEN: CONCEPT COMMERCIAL INTERIORS PTY LTD Applicant AND: DAN BAXTER Respondent order made by: ANDERSON J DATE OF ORDER: 11 NOVEMBER 2022 PENAL NOTICE TO: DAN BAXTER IF YOU (BEING THE PERSON BOUND BY THIS ORDER): (A) REFUSE OR NEGLECT TO DO ANY ACT WITHIN THE TIME SPECIFIED IN THIS ORDER FOR THE DOING OF THE ACT; OR (B) DISOBEY THE ORDER BY DOING AN ACT WHICH THE ORDER REQUIRES YOU NOT TO DO, YOU WILL BE LIABLE TO IMPRISONMENT, SEQUESTRATION OF PROPERTY OR OTHER PUNISHMENT. ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS YOU TO BREACH THE TERMS OF THIS ORDER MAY BE SIMILARLY THE COURT ORDERS THAT: INTRODUCTION 1. (a) The application for this order is made returnable immediately. (b) The time for service of the application, supporting affidavits and originating process is abridged and service is to be effected by 4:00pm on 16 November 2022. 2. Subject to the next paragraph, this order has effect up to and including 23 November 2022 (the Return Date). On the Return Date at 9:30am on 23 November 2022 there will be a further hearing in respect of this order before Justice Anderson. 3. 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. 4. 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. 5. (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 6. (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$1,218,756.92 ('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 (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. 7. For the purposes of this order, (1) your assets include: (i) all your assets, whether or not they are in your name and whether they are solely or co-owned; (ii) 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 (iii) the following assets in particular: A. any cash proceeds from the sale of real property; B. any cash held or controlled by you; and C. any money in bank account operated by you. (2) the value of your assets is the value of the interest you have individually in your assets. PROVISION OF INFORMATION 8. Subject to paragraph 9, you must: (a) at or before the further hearing on the Return Date (or within such further time as the Court may allow) to the best of your ability inform the applicant in writing of all your assets in Australia and world-wide, giving their value, location and details (including any mortgages, charges or other encumbrances to which they are subject) and the extent of your interest in the assets; (b) within [2] working days after being served with this order, swear and serve on the applicant an affidavit setting out the above information. 9. (a) This paragraph (9) applies if you are not a corporation and you wish to object to complying with paragraph 8 on the grounds that some or all of the information required to be disclosed may tend to prove that you: (i) have committed an offence against or arising under an Australian law or a law of a foreign country; or (ii) are liable to a civil penalty. (b) This paragraph (9) also applies if you are a corporation and all of the persons who are able to comply with paragraph 8 on your behalf and with whom you have been able to communicate, wish to object to your complying with paragraph 8 on the grounds that some or all of the information required to be disclosed may tend to prove that they respectively: (i) have committed an offence against or arising under an Australian law or a law of a foreign country; or (ii) are liable to a civil penalty. (c) You must: (i) disclose so much of the information required to be disclosed to which no objection is taken; and (ii) prepare an affidavit containing so much of the information required to be disclosed to which objection is taken, and deliver it to the Court in a sealed envelope; and (iii) file and serve on each other party a separate affidavit setting out the basis of the objection. EXCEPTIONS TO THIS ORDER 10. This order does not prohibit you from: (a) paying up to $5,000 a week on your ordinary living expenses; (b) paying $50,000 on your 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; and (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. 11. 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. 12. (a) This order will cease to have effect if you: (i) pay the sum of AUD$1,218,756.92 into Court; or (ii) pay that sum into a joint bank account in the name of your lawyer and the lawyer 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 12(a) above, you must as soon as practicable file with the Court and serve on the applicant notice of that fact. COSTS 13. The costs of this application are reserved to the Court hearing the application on the Return Date. PERSONS OTHER THAN THE APPLICANT AND RESPONDENT 14. 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. 15. 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. 16. 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 acts 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. 17. 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. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (Revised from transcript) ANDERSON J: 1 This is an ex parte application seeking a freezing order against the respondent, Dan Baxter, including an order that he file and serve an affidavit of assets and liabilities. The applicant, Concept Commercial Pty Ltd (Concept), is willing to give the usual undertaking of damages, as the applicant's counsel, Mr Morris, has proffered to the court. Concept, seeks an award of damages against Mr Baxter for insolvent trading under section 588M of the Corporations Act 2001 (Cth) (Act) for a contravention of s 588G, arising from being a director of Victory Offices (Projects) Proprietary Limited (Company). 2 The Company was placed into liquidation on 24 June 2022 and Mr David Mutton was appointed liquidator. Mr Baxter was a director of the company from 14 May 2019 to 20 May 2022. The Company is a wholly-owned subsidiary of Victory Offices Limited (VOL), which is listed on the Australian Stock Exchange under the ticker: VOL. VOL's is an operator of flexible workspace for short-term rent in various locations across Australia. Concept relies upon two affidavits. First, an affidavit by its director, Mr Richard Mensink, sworn 4 November 2022 and, second, an affidavit by Concept's solicitor, Mr Scott Munro, sworn 9 November 2022. The substantive affidavit is that of Mr Mensink. 3 An outline of the relevant facts are as follows. Concept is a creditor of the Company and filed a proof of debt in the liquidation in the sum of $1,218,756.92 for work it has completed in fitting out offices in both Richmond, Victoria and an office in Canberra, Australian Capital Territory. Mr Baxter was a director of the Company from 14 May 2019 when the Company was registered until 20 May 2022, just prior to the Company being placed into liquidation on 24 June 2022. Mr Mutton was appointed liquidator of the company on 24 June 2022 and has assigned his right for Concept to sue Mr Baxter for insolvent trading. 4 The test for determining whether the court should exercise its discretion to grant a freezing order is well-known and I need not restate it here. The court must be satisfied that there is a prima facie case that the Company was insolvent or became insolvent at the time the Company incurred the debt to Concept. In this case, the applicant, Concept, relies upon the following. First, the presumption of insolvency arising under s 588E(4) of the Act by reason of the failure of the company to keep financial records. This was noted by the liquidator in the liquidator's statutory report dated 13 September 2022, which is exhibit 127 to Mr Mensink's affidavit. Second, the test for insolvency, as outlined in Australian Securities and Investments Commission v Plymin [2003] VSC 123; 46 ACSR 126 at [386], where Mandie J identified certain indicia of insolvency. His Honour observed this checklist to contain: continuing losses; liquidity ratios below 1; no access to alternative finance; inability to raise further equity capital; creditors unpaid outside trading terms; solicitors' letters, summonses, judgments or warrants issued against the company; payment to creditors of rounded sums which are not reconcilable to specific invoices; and, inability to produce timely and accurate financial information to display the company's trading performance and financial position and to make reliable forecasts. See also Morris v Danoz Directions Pty Ltd (in liquidation) (No 2) [2010] FCA 836 at [13] per Perram J and Hancock v Conergy Pty Ltd (in liquidation), in the matter of DCM Solar Pty Ltd (in liquidation) [2015] FCA 738 at [63] per Yates J where these indicia were adopted in this Court. 5 Whilst the applicant has not yet sought to provide any expert report on insolvency, the applicant relies upon the following indicia as described in the liquidator's report dated 13 September 2022. First, continuing losses which are deposed to by Mr Mensink at exhibit 131. Secondly, a liquidity ratio below one, as deposed to by Mr Mensink and evidenced in exhibit 131. Thirdly, the inability for the Company to produce timely and accurate financial information, which is referred to in the statutory report at exhibit 130 to Mr Mensink's affidavit, which has also resulted in the liquidator making a formal report to ASIC under s 533(1) of the Act. 6 In addition to the above, the applicant, Concept, relies on the following from the liquidator's statutory report. First, the Company has outstanding activity statements and income tax returns. See exhibit 130 to Mr Mensink's affidavit. Second, the liquidator estimates that the company's assets are nil, see: exhibit – page 127 to Mr Mensink's affidavit. Third, the liquidator has stated that there is evidence to suggest that the date of insolvency may be as early as 3 July 2019, being the date that Company deposited an amount of $18,000 into the NAB bank account, given that it is unclear how the Company was ever going to repay the funds it received from Company as it did not generate any revenue. I also note that the Company does not appear to have any retained source of documents for many of the transactions identified in the NAB bank statements. Accordingly, pursuant to s 588E of the Act, the Company may be presumed to be insolvent where it has failed to retain financial records in relation to the period for the seven years required by s 286(2) of the Act. 7 The liquidator also relies upon the report filed with ASIC under s 533(1) of the Act, which refers to several failures, including breach of director's duty, failure to keep financial records, failure to prevent the company from trading whilst insolvent and failure to assist the liquidator. In this regard, see exhibit page 136 of Mr Mensink's affidavit. Concept submits, and I accept, that the statutory report of the liquidator paints a picture of an insolvent company where the director, Mr Baxter, has not fulfilled his statutory obligations. I am satisfied that a prima facie case has been made out. 8 Turning to the debt which is owed by the Company to Concept, the amount claimed is some $1,218,756.92. Mr Mensink, in his affidavit at paragraph 15 and following, identifies the basis upon which Concept claims this sum became due. The sum due is for the provision of a fit-out at a store in Richmond, Victoria and premises in Canberra, Australia Capital Territory. I am satisfied that the evidence filed by Mr Mensink establishes that there is a debt – at least on a prima facie basis – owing by the Company to Concept. 9 I now then turn to the risk of dissipation and the balance of convenience. Mr Morris made submissions on, and took me to, the email correspondence which is exhibited to Mr Mensink's affidavit at paragraphs 30 to 32. That email correspondence appears to reproduce what may be a false receipt on what appears to be a Westpac Bank letterhead purporting to have recorded a receipt of moneys paid by the Company to Concept. 10 It is unclear at this stage whether there is any substance to that allegation that the exhibit may, in fact, be a falsified document. Notwithstanding this, and on the basis of the application before me today, it raises sufficient concern to a basis that there may be a risk of dissipation of assets if a freezing order is not made. There is limited information about the assets which Mr Baxter holds in his name; however, there does appear to be a shareholding in VOL which has a value of, potentially, $5 million. I was informed this morning that VOL was placed into external administration yesterday. So the value of that shareholding may have depreciated significantly. In addition, there is evidence that Mr Baxter owns shares in Mishmak Holdings Proprietary Limited (receivers appointed), which is, or was, the registered proprietor of a property in Toorak which was sold on 5 October 2022. 11 I am satisfied on the evidence that it is appropriate to exercise my discretion to grant a freezing order. I am satisfied there is a prima facie case made out for insolvent trading. I am satisfied that the status quo is best preserved by the granting of the freezing order sought as there is, in my view, a risk of dissipation of Mr Baxter's assets. I will make the orders sought for those reasons. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson. Associate: Dated: 11 November 2022