Supreme Court New South Wales Medium Neutral Citation: Firmtech Aluminium Pty Ltd v Xie (No 3) [2022] NSWSC 1187 Hearing dates: 29, 31 August 2022 Date of orders: 5 September 2022 Decision date: 05 September 2022 Jurisdiction: Equity - Duty List Before: Robb J Decision: See [17] below. Catchwords: CIVIL PROCEDURE — interim preservation — consequential orders — second plaintiff ordered to pay 50 percent of defendants' costs of and incidental to interlocutory hearings, balance to be the parties' costs in the cause Cases Cited: Firmtech Aluminium Pty Ltd v Xie (No 2) [2022] NSWSC 1142 Category: Consequential orders Parties: Firmtech Aluminium Pty Ltd (First Plaintiff) Zhaohui Xu (Second Plaintiff) Xiaoyan Xie (First Defendant) Jiamin Zhang (Second Defendant) Firmtech Aluminum Pty Ltd (Third Defendant) Logikal Façade Solutions Pty Ltd (Fourth Defendant) JKZ (Australia) Pty Ltd (Fifth Defendant) Firmtech Group Pty Ltd (Sixth Defendant) LGK Holdings Pty Ltd (Seventh Defendant) Western Spring Projects Pty Ltd (Eighth Defendant) Z & X Investment Holding Pty Ltd (Nineth Defendant) Haj (Australia) Pty Ltd (Tenth Defendant) JHN Projects Pty Ltd (Eleventh Defendant) Representation: Counsel: A Ogborne & P Lin (Plaintiffs) D Stack (Defendants) Solicitors: Pope & Spinks (Plaintiffs) Piper Alderman (Defendants) File Number(s): 2022/00221710 JUDGMENT 1. On 29 August 2022, I delivered judgment on an interlocutory application by the second plaintiff in these proceedings, Mr Xu, for the continuation of freezing orders that were originally made by Meek J, sitting as Duty Judge, on 28 July 2022 against all the defendants: see Firmtech Aluminium Pty Ltd v Xie (No 2) [2022] NSWSC 1142 ("J"). 2. The purpose of this judgment is to explain the interlocutory orders that will be made based on the reasons in my earlier judgment, and to deal with the costs of the application. These reasons assume knowledge of my earlier reasons. I will use the same terms as in those reasons. 3. I explained in my earlier reasons why I did not think it was appropriate to continue the freezing orders, but instead should make interlocutory orders pending the determination of the proceedings or further order that had the effect of requiring the first four defendants to preserve the businesses operated by the third and fourth defendants, being Aluminum and Logikal, which Mr Xu claims are held by those defendants on a constructive trust for the first plaintiff, Firmtech. 4. I also concluded that interlocutory orders should be made that preserved the profits earned by the two defendants, and that they should be required to maintain accounts and keep vouchers in a way that would facilitate Mr Xu's claim for an accounting by the first four defendants in favour of Firmtech. I set out what I considered were the broad parameters of appropriate interlocutory relief at J [106]-[112], and invited the parties to provide to my Associate draft short minutes of order and short submissions in support of the orders that they proposed the Court should make. 5. Mr Xu and the defendants provided draft short minutes and written submissions and a further oral hearing took place on 31 August 2022. Following the hearing, I prepared my own version of what I considered to be appropriate interlocutory orders, having general regard to the orders proposed by the parties, and provided my proposed orders to the parties to give them a last opportunity to make final submissions as to the form of the orders to reduce the risk that my orders would omit appropriate relief or have unintended consequences. 6. Mr Xu subsequently advised my Associate that he did not consider that my draft orders would have any unintended consequences or contained omissions. The defendants advised my Associate that they also were generally content for the orders that I proposed to be made, save that they made a small number of suggestions as to appropriate revisions to the proposed orders. 7. Orders 1 to 11 below are the orders that I proposed, subject to my following comments on the suggestions made on behalf of the defendants: 1. I accept that the orders should explicitly permit Aluminum and Logikal to pay the legal costs of the proceedings from the fruits of the operation of the businesses, and so have included note 3. This is not a case where the Court in making that order will in a straightforward way be authorising the defendants to pay their legal costs out of an asset that the Court might ultimately find they hold on trust for Firmtech: see the authorities considered at J [41]-[42]. In this case, the asset that is claimed to be held on trust for Firmtech is a business, and if the plaintiffs succeed on a final hearing, that will be because Ms Xie and Mr Zhang have maintained the viability of the businesses of Aluminum and Logikal by their own exertions in the period up to judgment in the proceedings. It would be counter-productive to the success of the plaintiffs in these proceedings if Ms Xie and Mr Zhang were distracted from the efficient management of the businesses of Aluminum and Logikal because of an inability to defend the plaintiffs' claims. 2. The defendants submitted that the obligations imposed on Aluminum and Logikal by order 9(a), (g) and (h) should be qualified by the chapeau to the order being revised to read "… that defendant shall use their best endeavours to …" I have decided that the preferable course is not to insert the general qualification suggested by the defendants, as that will dilute the specificity of the order, but to make specific amendments to the proposed orders. 3. The defendants were concerned that it might be difficult for them to comply with proposed order 9(a) in their dealings with subcontractors, who may not be accustomed to providing their services based on written contracts. As there may be some limited circumstances where subcontractors offer their services on an oral basis, I have provided that in such cases it will be sufficient for Aluminum and Logikal to create and retain their own written record of the arrangement with the subcontractor. Payments made to the subcontractor will be caught by the other parts of order 9. 4. I have revised proposed order 9(g) to provide appropriate protection to Aluminum and Logikal against the possibility that the persons who are instructed to maintain the commercial proprietary accounting system make errors beyond the control of the defendants. 5. In relation to proposed order 11, the defendants suggested an additional term that explicitly permitted Ms Xie and Mr Zhang to comply with their statutory obligations as a director and/or officer of a defendant. That protection was intended to be provided by note 2 at the beginning of the proposed orders, but I see no harm in revising order 11 to make the matter more explicit. 1. Orders 14 to 16 are case management orders agreed by the parties. 2. I now turn to the issue of the order that should be made as to the costs of the interlocutory applications. The position adopted by Mr Xu was that the appropriate costs order was that the costs of the interlocutory applications to date be Mr Xu's costs in the cause. 3. The defendants submitted that, in principle, it would be appropriate for Mr Xu to be ordered to pay their costs of the interlocutory applications as the defendants had substantially succeeded on the applications. However, notwithstanding that position, the defendants accepted that it would be reasonable for the Court to make the following costs order: Orders that the second plaintiff pay 50% of the defendants' costs of and incidental to the interlocutory hearings on 15, 17, 29 and 31 August 2022 and the balance of the costs be the parties' costs in the cause. 1. In essence, the basis of the defendants' submission on costs was that Mr Xu had only applied for and sought freezing orders and that the freezing orders that were made by Meek J and extended on a number of occasions will now be discharged. Mr Xu did not seek interlocutory relief in the terms that will now be made to protect the businesses and profits of Aluminum and Logikal. The defendants noted that, before lunch on the first day of the hearing, I suggested that the preferable relief might be of the form that I have now decided to give. The defendants responded immediately by offering to settle the interlocutory applications on the terms of the undertakings that I have recorded at J [70]. Mr Xu did not accept that offer, but made a counteroffer that I summarised at J [71]. The defendants responded to Mr Xu's offer by agreeing to parts of the offer, but rejecting other parts. The defendants submitted that Mr Xu ought to have accepted the response they made to his offer, and if that had happened the interlocutory hearing before me would have concluded in about half the time that it ultimately took. 2. As I did not set out the terms of Mr Xu's offer verbatim in J [71], it will be necessary for me to give a general description of the parts of Mr Xu's offer that were accepted and rejected by the defendants, and the relationship between the accepted parts and the interlocutory orders that will now be made in these proceedings. 3. That description is: 1. The defendants agreed to give undertakings that preserved three parcels of real property owned by Ms Xie, Mr Zhang and the eleventh defendant. The effect of Mr Xu not accepting the defendants' response, and then failing in his application for property disclosure affidavits by all defendants, was that Mr Xu will not receive the benefit of those undertakings. 2. The second part of the offer made by Mr Xu that was rejected by the defendants was that Ms Xie and Mr Zhang each was to undertake to the Court that they would not engage in what is described in the orders set out below as the Business, other than as conducted by Aluminum and Logikal, without giving Mr Xu Notice, in the sense in which that term is used in the orders. I consider that the combined effect of proposed orders 3 and 11 will be that Mr Xu will in substance achieve a result equivalent to this undertaking that was rejected by the defendants. 3. Aluminum and Logikal also declined to give undertakings that, within 28 days, they would prepare full and proper accounts of the profits of their business from 1 July 2018 to date. Those defendants succeeded in resisting Mr Xu's application for orders against them to that effect. 4. Ms Xie also succeeded in resisting an order that she would not dispose of, deal with or diminish the value of her shares in the fourth, fifth, seventh, ninth, tenth and eleventh defendants without first giving Notice. 5. Finally, Mr Xu has not succeeded in obtaining any continuing interlocutory relief against the fifth to eleventh defendants, so Mr Xu's application for interlocutory relief against those defendants in equivalent terms to the undertakings contained in Mr Xu's offer also failed. 1. The result therefore is that, with only one exception, the decision made by Mr Xu to press on for interlocutory relief in the terms of his offer, as well as with the application for orders that all of the defendants provide asset disclosure affidavits, substantially failed. That failure must be added to the failure of Mr Xu to obtain an order extending the freezing orders against any of the defendants. 2. It is reasonable for the Court to conclude that, if Mr Xu had sought, from the outset, orders that preserved relevant assets of appropriate defendants rather than freezing orders in so great an amount as $10 million, the defendants would – as their conduct in the proceedings has demonstrated – have agreed to some reasonable interlocutory regime to protect the plaintiffs. 3. In those circumstances, I am satisfied that the appropriate order for costs is the order proposed by the defendants. 4. The formal orders that the Court will make are as follows: The Court 1 Notes that in these orders: (a) "Assets" means in respect of any defendant the goodwill, undertaking, property and assets of the defendant. (b) "Business" means in respect of any defendant the business of designing, supplying, project managing and/or installing aluminium windows, doors, curtain walls, façade works, balustrades, metal works or cladding for building projects; (c) "Notice" means 14 days' written notice given to the solicitors for the second plaintiff; and (d) "Vouchers" means in respect of any transaction all vouchers, contracts, invoices, receipts, credit card statements and other documents that evidence the transaction. 2 Notes for more abundant precaution that these orders will not require any defendant to act or refrain from acting in any way contrary to the defendant's legal obligations. 3 Notes that the expenditure by the third defendant and the fourth defendant of the assets of those defendants for the purpose of paying the reasonable legal costs of the defendants' defence of this proceeding will be treated as being within the ordinary course of business of those defendants. The Court, on the second plaintiff by his counsel giving to the Court the usual undertaking as to damages, until the determination of these proceedings or further order of the Court: 1 Orders the third defendant and the fourth defendant severally to use their best endeavours to continue to operate their Business. 2 Orders the third defendant and the fourth defendant severally to refrain from entering into transactions other than in the ordinary course of business. 3 Orders the third defendant and the fourth defendant severally not to divert any business opportunity that becomes available to that defendant that is reasonably capable of being undertaken by that defendant to any party (other than to the other of those defendants) without giving Notice. 4 Orders the third defendant and the fourth defendant severally to refrain from selling, assigning, discounting, mortgaging or otherwise dealing with the Assets of that defendant (other than in the ordinary course of business) without giving Notice. 5 Orders the third defendant and the fourth defendant severally to refrain from making any payment out of the Assets of that defendant to the first defendant or the second defendant or any party on their behalf (other than a reasonable salary or remuneration for goods or services provided by the first defendant or the second defendant to that defendant) without giving Notice. 6 Orders the third defendant and the fourth defendant severally to retain in its bank account any annual profits declared in its annual financial statements and not to apply any part of those profits without giving Notice. 7 Orders the third defendant and the fourth defendant severally to give Notice following the making of these orders of the amount of any salary or remuneration that will from that date be paid to the first defendant or the second defendant or to some other party on their behalf and the terms upon which those payments will be made and to give Notice of any proposed changes to the salary or remuneration payable to the first defendant or the second defendant. 8 Orders the third defendant and the fourth defendant severally to refrain from paying any amounts to the first defendant or the second defendant or to any other party on their behalf whether by dividend or other payment out of the Assets in respect of profits or otherwise or by way of loan (other than the payment of remuneration permitted by these orders) without giving Notice specifying the amount, nature of and reasons for the proposed payment. 9 Orders that in respect of all transactions undertaken by the third defendant or the fourth defendant after the date of these orders that defendant shall: (a) not undertake the transaction unless it is: (i) documented in writing containing adequate particulars of the transaction sufficient to explain the nature and value of the transaction; or (ii) if it is reasonable for the defendant to undertake the transaction on the basis of an oral agreement, the defendant prepares and retains a written record of the terms of the transaction sufficient to explain the nature and value of the transaction; (b) pay all sums received by the defendant into the defendant's bank account; (c) pay all amounts payable by the defendant out of the defendant's bank account or by means of credit card payment in the name of the defendant; (d) refrain from paying any amounts out of the defendant's bank account other than in the ordinary course of business; (e) retain all Vouchers that evidence the transaction; (f) retain all bank statements and credit card statements in relation to the defendant's bank and credit card accounts; (g) cause the transactions to be accurately recorded in a commercial proprietary accounting system (such as MYOB or equivalent system) save for inadvertent errors or other mistakes not caused by the defendant; (h) retain the accounting records created in the commercial proprietary accounting system; and (i) cause annual financial statements to be prepared for the defendant in accordance with the applicable accounting standards within a reasonable time after the end of each financial year. 10 Orders the third defendant and the fourth defendant to retain in respect of the period before the date of these orders: (a) all Vouchers in the possession, custody or control of that defendant in relation to the Business; and (b) all the annual financial statements prepared for that defendant. 11 Subject to compliance with their statutory obligations as a director or officer of the third defendant or the fourth defendant, orders the first defendant and the second defendant by themselves, their servants and agents to use all reasonable endeavours within the authority and the practical capacity of that defendant to cause the third defendant and the fourth defendant to comply with these orders. 12 Orders that the freezing orders made by the Court against the defendants on 28 July 2022 and continued from time to time thereafter be discharged. 13 Orders that the second plaintiff pay 50% of the defendants' costs of and incidental to the interlocutory hearings on 15, 17, 29 and 31 August 2022 and the balance of the costs be the parties' costs in the cause. 14 Grants liberty to the parties to apply to the Court for further orders upon the giving of reasonable notice. 15 Orders that this proceeding be transferred to the Corporations List. 16 Orders that this proceeding be listed for directions before the Corporations List Judge at 10:00 AM on Monday, 12 September 2022. 1. These orders will not be formally made and entered until after counsel for Mr Xu has informed my Associate by email that he has instructions to give to the Court the usual undertaking as to damages on behalf of Mr Xu. ********** Amendments 07 September 2022 - Correction to catchwords DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 September 2022