New South Wales Supreme Court CITATION : Turner & Anor v Universal Home Loans Pty Ltd & Ors [2004] NSWSC 936 HEARING DATE(S) : 6 and 7 October 2004 JUDGMENT DATE : 8 October 2004 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Injunctions dissolved. CATCHWORDS : ASSET PRESERVATION ORDER - Whether sufficient evidence of danger of dissipation of assets to warrant continuance of ex parte injunctions. LEGISLATION CITED : Conveyancing Act 1919 (NSW) - s.37A - Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 CASES CITED : - Jackson v Sterling Industries Ltd (1987) 162 CLR 612 - Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 - Williams v Lloyd (1934) 50 CLR 341 Warren Turner - First Plaintiff Mortgage Elimination Services Pty Ltd - Second Plaintiff PARTIES : Universal Home Loans Pty Ltd - First Defendant Jay Phillip McNabb - Second Defendant Cherie Catherine McNabb - Third Defendant FILE NUMBER(S) : SC 2895/03 COUNSEL : A.J. Sullivan QC, S. Jacobs - Plaintiffs J.S. Drummond - Defendants SOLICITORS : Koffels Solicitors - Plaintiffs Hewitts Commercial Lawyers - Defendants Introduction 1 This is an application by the Defendants to dissolve a Mareva injunction granted ex parte by Hamilton J on 21 May 2003 and subsequently extended to continue until further order. 2 The First Plaintiff ("Mr Turner") and the Second Plaintiff ("MES"), a company controlled by Mr Turner, the Second Defendant ("Mr McNabb") and the First Defendant ("Universal"), a company controlled by Mr McNabb, entered into a business relationship in late 1999. The business concerned was what is called "mortgage origination". It is not necessary to go into the details of the relationship or of the business. 3 In late 2000, difficulties arose between the parties. To resolve those difficulties, Mr Turner, Mr McNabb and Universal agreed to part company upon terms set out in a document called "Heads of Agreement" dated 4 April 2001. Under the Heads of Agreement, Universal was obliged to pay to Mr Turner certain sums at particular times and Mr McNabb guaranteed performance of Universal's obligations. 4 On 14 June 2001, Mr Turner commenced proceeding against Mr McNabb in the Local Court at Maitland, claiming a sum due by Mr McNabb pursuant to his guarantee of the obligations of Universal under the Heads of Agreement. 5 On 5 February 2002, MES commenced proceedings in the District Court at Maitland against Universal and Mr McNabb, claiming a debt due by Universal and claiming under an alleged guarantee of that debt given by Mr McNabb. 6 On 5 November 2002, Mr McNabb transferred to his wife, the Third Defendant, his one-half interest in their matrimonial home, for no consideration. The matrimonial home is at 5 Shaun Close, East Maitland. 7 In May 2003, Mr Turner asked his solicitor to search the title to Mr McNabb's home. The transfer of Mr McNabb's interest to Mrs McNabb was thereupon discovered. 8 On 21 May 2003, Mr Turner and MES made an ex parte application to Hamilton J as Duty Judge for leave to file a Statement of Claim and a Notice of Motion, returnable instanter, seeking Mareva orders against Mr and Mrs McNabb and Universal. 9 The Statement of Claim is difficult to understand but as far as I can ascertain MES makes a claim against Universal for payment of a debt arising under a Dissolution Agreement and a claim against Mr McNabb under an alleged guarantee of that debt. The Plaintiffs further seek an order under s.37A Conveyancing Act 1919 (NSW) avoiding the transfer of Mr McNabb's interest in the family home to Mrs McNabb as a disposition with intent to defraud creditors. 10 An affidavit dated 20 May 2003 was sworn by Mr Turner in support of the application for Mareva orders. In that affidavit Mr Turner gave particulars about the proceedings commenced against Mr McNabb in the Local Court and against Mr McNabb and Universal in the District Court. He said that he had asked his solicitors to carry out a real property search of Mr McNabb's family home because "I had an uneasy feeling as to what he might be doing with his property". He then gave evidence as to the results of that search and said that he had been told that Mr McNabb had been seen putting up a "For Sale" sign on another property in East Maitland, known as Lot 822 Turnbull Drive. He had asked this solicitor to do a search of the title to that property and said that the search had revealed that the property was owned by Mrs McNabb. That statement was incorrect. The property was in fact owned by Mr and Mrs McNabb jointly. 11 On the evidence in Mr Turner's affidavit, Hamilton J made orders up to 26 May 2003 restraining Universal and Mr McNabb from dealing with any of their respective assets and restraining Mrs McNabb from dealing with the half share in the matrimonial home which had been transferred to her by Mr McNabb. 12 On 3 June 2003, the injunctions were, by consent, continued for a further two days, the orders being varied to permit Universal to carry on its ordinary business and to permit Mr and Mrs McNabb to meet their normal living expenses and legal fees. The matter was adjourned on a number of occasions subsequently, and on 12 June 2003 the injunctions were, by consent, continued until further order. 13 On 8 July 2004, the Defendants filed a Notice of Motion seeking, inter alia, that the injunctions be dissolved. The Defendants assert that the Plaintiffs were guilty of a serious non-disclosure in obtaining the ex parte injunctions in that they deliberately failed to disclose to Hamilton J at the date of the application that Mr McNabb had other real estate besides the matrimonial home in his own name, none of which had been transferred to a related party for no, or inadequate, consideration. A veritable mountain of affidavits has been filed by the parties relating to this issue. 14 Part of the battle came before me as Duty Judge on 7 October 2004. It seemed to me that rather than expending further time and money in a contest as to whether or not the Plaintiffs had made full and frank disclosure when obtaining the ex parte injunctions, the parties would be more profitably engaged in debating the question whether, as circumstances now exist, the Plaintiffs are able to demonstrate any sufficient ground for the continuation of the injunctions. If the Plaintiffs failed in that exercise, the injunctions would be dissolved forthwith and there would be no need to investigate whether the Plaintiffs had made full and frank disclosure in the first place, save perhaps in a limited way when dealing with the question of costs. However, if the Plaintiffs succeeded in demonstrating the need for continuing injunctions, the question could then be debated whether the injunctions should nevertheless be dissolved because of the Plaintiffs' alleged failure to make full and frank disclosure. 15 The parties agreed in this course. Accordingly, I am dealing in this judgment with the first question, namely, whether the Plaintiffs have demonstrated sufficient ground for the continuation of the injunctions. Principles 16 The principles upon which a Mareva or asset preservation order will be made are well known and need not be expounded at length. They are encapsulated in decisions such as Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319; Jackson v Sterling Industries Ltd (1987) 162 CLR 612; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. So far as is relevant for present purposes, the principles may be summarised as follows. 17 A plaintiff seeking to obtain a Mareva or asset preservation order must first establish a prima facie cause of action against the defendant. In the present case, there has been no serious debate as to whether or not the Plaintiffs have satisfied that requirement. I take it that the Defendants accept that the Plaintiffs' Statement of Claim raises at the least a serious question to be tried. 18 Second, a plaintiff must establish that there is a danger that he will not be able to recover the fruits of a judgment against the defendant by reason of the defendant absconding, removing assets from the jurisdiction, or otherwise disposing of or dealing with assets in some way such as to defeat the judgment. 19 In considering whether a plaintiff has established such a danger the Court bears in mind that a Mareva or asset preservation order is not made for the purpose of better securing to the plaintiff payment of a judgment debt; such an order is made to prevent an abuse or frustration of the process of the Court by the defendant. To make an order preventing a person dealing with his assets when no claim against him has yet been proved is no light matter and the Court proceeds with caution. 20 While is not appropriate to apply a special standard of proof to a plaintiff's application for a Mareva or asset preservation order, the plaintiff must show that the danger of dissipation of assets is sufficiently substantial to warrant the granting of the injunction. While it is not an essential ingredient of such an application, a prima facie case that the defendant has been dishonest in dealing with the subject matter of the plaintiff's claim will often give rise to a strong inference that the defendant will not, unless restrained, preserve the subject matter of the claim for the benefit of the plaintiff should he be successful in the action. Facts 21 I turn now to the relevant facts. 22 Mr McNabb says that in 1999, before he commenced business in association with the Plaintiffs, he received advice from his solicitor. Part of that advice was the suggestion that the McNabb's family home should be transferred to his wife alone to protect it from possible future claims by creditors of the businesses in which Mr McNabb was to engage. Mr McNabb agreed but took no action at that time. 23 In June 2001, Mr Turner commenced the Local Court against Mr McNabb. In February 2002, MES commenced the District Court proceedings against Universal and Mr McNabb. 24 In July 2002, Mr and Mrs McNabb purchased in their joint names the property known as 822 Turnbull Drive, East Maitland. The property was sold at a profit in April 2003 and the profits were used to pay Mr and Mrs McNabb's tax liabilities and other expenses. 25 In August 2002, Mr and Mrs McNabb purchased in their joint names two parcels of land in the East Maitland area, identified for convenience as Lots 917 and 918. Lot 918 was sold in December 2002 and the proceeds applied in reduction of the liabilities in respect of Lot 917. Lot 917 was sold on 21 May 2003. 26 There is no evidence that Mr McNabb ever sought to transfer his interests in the three properties jointly owned with his wife to a related party or for less than their market value. 27 Towards the end of 2002, Mr McNabb's solicitor again advised him that he should transfer his interest in the family home to his wife in order to protect it against claims by potential creditors. Mr McNabb effected the transfer on 5 November 2002. 28 On 25 February 2003, judgment was entered in the Local Court proceedings against Mr McNabb in favour of Mr Turner in the sum of $43,023.87. That sum was paid in full by Mr McNabb on 8 August 2003. 29 By terms of settlement dated 24 February 2004, judgment was entered in the District Court proceedings in favour of Mr McNabb. By terms of settlement dated 2 March 2004, Universal agreed to pay MES the sum of $75,000 in settlement of MES's claim against it for $155,000. Universal paid the sum of $75,000 to MES on 30 March 2004. 30 The resolution of the Local Court proceedings and the District Court proceedings reduces the claim by the Plaintiffs in the present proceedings from $300,000 to $147,000. 31 Draft financial statements prepared by Universal's accountant for the year ended 30 June 2004 show that both in the 2003 and the 2004 financial years Universal carried on a substantial business and derived a substantial profit from its trading activities. The gross profit for the 2003 financial year was almost $554,000; the gross profit for the 2004 financial year was almost $662,000. As at 30 June 2004 the net assets of Universal were $264,288. 32 Mr Sullivan QC, who appears with Mr S. Jacobs for the Plaintiffs, says that Universal's financial accounts should be given no weight because they were "special purpose" accounts prepared for the use of the directors on the basis of information provided by the directors. The Plaintiffs' expert accountant has reviewed the accounts but there is no evidence that the accounts in fact seriously misstate or do not fairly state Universal's position. 33 There is no evidence whatsoever that either before or after the inception of legal proceedings against it by the Plaintiffs, Universal has engaged in any transaction for the purpose, or which has the effect, of placing any of its assets beyond the reach of a judgment in favour of MES. 34 There is no evidence whatsoever that either before or after the inception of legal proceedings by the Plaintiffs, Mrs McNabb has engaged in any transaction for the purpose of placing her assets beyond the reach of the Plaintiffs. Mrs McNabb is not a defendant in any proceedings instituted by the Plaintiffs, other than the present proceedings in which an order is sought setting aside the transfer of Mr McNabb's interest in the family home. The parties' submissions 35 Mr Sullivan QC submits that the Court should find that the transfer of Mr McNabb's interest in the family home to Mrs McNabb in November 2002 was dishonestly done in order to defeat the claims which the Plaintiffs had instituted against Mr McNabb and Universal in June 2001 and February 2002. He submits that because Mr McNabb was dishonest in so dealing with his interest in the family home there is a real danger that he will be equally dishonest, unless restrained, in dealing not only with his own assets but the assets of Universal, which are under his control as director. 36 I do not think that Mr Sullivan went so far as to suggest that there was evidence that Mr McNabb would be able to procure Mrs McNabb to act dishonestly in disposing of the share in the family home transferred to her by Mr McNabb. 37 Mr Drummond, who appears for the Defendants, submits that the disposition of Mr McNab's interest in the family home to Mrs McNab was entirely honest and was done for the purpose of protecting the family home, not from the specific claims of the Plaintiffs, but from the hazards of business generally. Such asset protection, he says, is entirely legitimate if the purpose of the disposition is to remove family property from the dangers of business enterprise generally: see e.g. Williams v Lloyd (1934) 50 CLR 341, at 372. Conclusions 38 I am of the opinion that the Plaintiffs have failed to show a sufficient danger of dissipation of assets by the Defendants to warrant the continuation of the injunctions. My reasons are as follows. 39 First, the evidence of Mr McNabb as to the reason for the disposition of his interest in the family home to Mrs McNabb is not inherently implausible or improbable. The advice said to have been given by his solicitors in 1999 and again in 2002 that he should remove the family home from the hazards of business enterprise is advice commonly given by accountants and solicitors to people in Mr McNabb's position. 40 Second, if Mr McNabb had really intended to make his assets judgment-proof after the Plaintiffs' proceedings in the Local Court and the District Court had been commenced against him in June 2001 and February 2002, he would scarcely have purchased three real estate properties later in 2002 in his own name; he would have procured the purchases in the name of his wife or some other entity so as to avoid disclosure of his interests in the properties if the Plaintiffs should carry out searches in the Land Titles Office. The fact that Mr McNabb disposed of his interest only in the family home but acquired investment assets in his own name after the Plaintiffs' claims had been made against him suggests quite strongly that he did not intend to make himself judgment-proof and that in transferring his interest only in the family home he was following the advice which he says his solicitor had given him in 1999 and later in 2002. 41 Third, if Mr McNabb was intent on any dishonest design to make Universal judgment-proof, he would surely have procured Universal to make some questionable disposition of assets in or after November 2002, when he is said to have been acting dishonestly in respect of his interest in the family home. Yet no questionable transaction by Universal has been suggested. 42 Fourth, Mr McNabb has in fact paid the judgment entered against him in the Local Court proceedings. Mr Sullivan says that that circumstance should be disregarded because Mr McNabb dishonestly sought to delay or avoid payment of that judgment by lodging an appeal which was doomed to failure and which was withdrawn. However, many appeals which are doomed to failure are lodged: one cannot thereby attribute dishonesty to the appellant. 43 Fifth, Universal in fact paid, and paid promptly, the sum of $75,000 agreed as the compromise of the District Court proceedings. 44 All of these circumstances taken together do not satisfy me that Mr McNabb has, or had at any material time, a dishonest design to render himself or Universal judgment-proof if the claims of the Plaintiffs in these proceedings are successful. Accordingly, I am not persuaded that there is any warrant for the continuation of the injunctions against any of the Defendants and they are dissolved forthwith. – oOo – Last Modified: 10/15/2004 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.