Supreme Court New South Wales

• Medium Neutral Citation: Helena Hu v PS Securities Pty Ltd as trustee of the Joseph Family Trust & anor [2011] NSWSC 98
• Hearing dates: 22 February 2011
• Decision date: 02 March 2011
• Before: Ward J

Decision

Freezing order granted

• Catchwords: PROCEDURE - application for freezing order under rule 25.11 of the Uniform Civil Procedure Rules - effect of lodgement of proof of debt on ability to claim a right of subrogation to former trustee's right of indemnity out of trust assets to meet judgment debt - whether plaintiff has standing to maintain such a claim - HELD -sufficiently arguable case as to existence of right of subrogation - reasonable apprehension of risk or dissipation of assets - freezing order granted
• Legislation Cited: Corporations Act 2001 (Cth)
• Cases Cited: ACT Commissioner for Revenue v Slaven [2009] FCA 744; Adams v Zen 28 Pty Ltd [2010] QSC 36; Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 9 ACLC 1530; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; Clyne v DCT (No 3) (1984) 154 CLR 589; 55 ALR 143; Corowa Fertilizers Pty Ltd v Cranney Farm (Unreported 09/291644); Coxton Pty Ltd v Milne (Unreported Judgment, 20 December 1985); Crawford v Oswald Park Pty Ltd (in liq) [2006] NSWSC 987; CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345; Dean -Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209; Dowse v Gorton [1891] AC 190; Helena Hu v Kathy Ho and Alphena Pty Ltd (Unreported 2008/4115); HIH Casualty and General Insurance Ltd (in liq) v Building Insurers' Guarantee Corporation & Anor (2003) 202 ALR 610; Jennings v Mather [1901] 1 KB 1; Lerinda Pty Ltd v Laertes Investments Pty Ltd as Trustee for Ap -Pack Deveney Unit Trust [2009] QSC 251; Ninemia Maritime Corporation v Trave GmbH & Co KG (The Niedersachsen) [1983] 1 WLR 1412; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; S & D International v MIG Property Services [2010] VSC 336
• Texts Cited: Austin & Black's Annotations to the Corporations Act; Fore & Austin's Principle's of Corporations Law (7th edn)
• Category: Procedural and other rulings
• Parties: Helena Hu (Plaintiff); PS Securities Pty Ltd as Trustee of the Joseph Family Trust (First Defendant); Alphena Pty Ltd (in liq) (Second Defendant)
• Representation: Counsel: M W Young with S O'Brien (Plaintiff); B Skinner (First Defendant); Solicitors: Dixon Holmes du Pont Lawyers (Plaintiff); Sally Nash & Co (First Defendant)
• File Number(s): 10/425147

Judgment

1 Before me on 22 February 2011 was an application brought by Ms Helena Hu by notice of motion filed 14 January 2011 for a freezing order under rule 25.11 of the Uniform Civil Procedure Rules against PS Securities Pty Ltd (PS Securities) as trustee of the Joseph Family Trust, in order to preserve sufficient assets of the trust (pending the determination of an application that is to come before the Court on 25 March 2011 in relation to the bringing of proceedings by Ms Hu against PS Securities seeking to recover trust assets) to meet a District Court judgment debt in her favour obtained against the former trustee of the said trust (Alphena Pty Limited). The application was brought on the basis of an apprehension by Ms Hu that steps may be taken by PS Securities which will have the effect of depriving Ms Hu of the benefit of the judgment debt.

2 At the conclusion of the hearing of Ms Hu's application on 22 February 2011 I made orders on an interlocutory basis as sought by Ms Hu (on the usual undertaking by Ms Hu as to damages), but granting liberty to apply on 3 days' notice to discharge or vary the freezing order. I indicated that I would publish my reasons as soon as possible thereafter. These are those reasons.

Background

3 On 20 November 2009, Ms Hu obtained judgment in the District Court against a number of parties, including Alphena (the then trustee of the Joseph Family Trust). In relation to Alphena, Ms Hu had sought the recovery of moneys said to have been advanced by her to the company (but which Alphena maintained had been borrowed by someone else). Sidis J ordered judgment for Ms Hu against Alphena in the sum of $419,176.62 and ordered that Alphena pay Ms Hu's costs of the proceedings on an indemnity basis. The imposition of an indemnity costs order was due to the manner in which Alphena had defended the litigation (her Honour finding that it had put forward a knowingly false defence and had resisted requests for production of documents - Helena Hu v Kathy Ho and Alphena Pty Ltd (4115/2008)).

4 At the time of the District Court judgment, Alphena held various assets as the trustee of the Joseph Family Trust, including land on which there is a shopping centre (the Land). Paul Joseph is the principal of Alphena and he is the appointor of the Joseph Family Trust under a deed dated 31 January 1995, as amended.

5 On 9 December 2009, shortly after the District Court judgment was handed down against Alphena, PS Securities was registered. Mr Joseph is a director and the secretary of that company. On 30 December 2009, Ms Shirley Therese Joseph (whose residential address is the same as that of Mr Joseph) was appointed as a co -director of PS Securities. On that date, PS Securities was appointed by Mr Joseph as co -trustee of the Joseph Family Trust pursuant to a Deed of Appointment of Co -Trustee of the Joseph Family Trust. The recitals to that Deed included the statement that the appointor (Mr Joseph):

... has become aware of a possible adverse court decision and having reviewed the deed establishing the trust has noted the possible application of clause 8(8) that results in the office of trustee ipso facto determined and vacated if the trustee makes any arrangement or composition generally, or enters into liquidation, or has a receiver or manager appointed, or makes or enters into any composition or scheme of arrangement with its creditors.

6 I interpose to note that, insofar as the Deed of Appointment of Co -trustee identified a "possible" adverse court decision, the recital is somewhat misleading, given that there had already been judgment delivered against the company prior to the date of the Deed and there being no indication of any other possible adverse judgment to which the recital could have referred. It is also not apparent from the Deed the basis on which it seems to have been feared that Alphena would, as a result of the court decision, be faced with an insolvency situation (particularly when around that stage the view seems to have been formed by Mr Joseph's adviser, Mr Joseph Lombardo, that the trust assets were worth significantly more than the book value suggested and when they were not long afterwards substantially revalued upwards once the new trustee took control of the trust). It might perhaps be inferred that Mr Joseph either did not intend to cause Alphena to pay the judgment debt or did not believe it was in a position to do so and hence his concern at this potential termination of the office of trustee.)

7 On 5 January 2010, a resolution was passed by the sole member of Alphena to wind up that company and liquidators were appointed to the company. Simultaneously, Alphena ceased to act as a trustee of the Joseph Family Trust. (According to Counsel for PS Securities, Mr Skinner, the reason for the winding up of the company at that stage was the issue of a statutory demand by Ms Hu in respect of the judgment debt. There was seemingly no application to set aside that statutory demand, nor was I told of any appeal from the decision of Sidis J.)

8 The effect of this series of events was to leave the control of the trust assets (including the Land) solely in the hands of PS Securities, a new company of which Mr Joseph and Ms Joseph were then the sole directors.

9 On 13 January 2010, Ms Hu lodged a proof of debt with the liquidators of Alphena in the amount of $558,912.85 in respect of the District Court judgment. No little significance is placed on this fact by Mr Skinner (on the basis of this operating to merge the debt owing to Ms Hu into a claim against whatever fund is held by the liquidator on the winding up of the company for the general body of creditors). Hence, as I understand Mr Skinner's submission, this is relied upon as precluding Ms Hu from seeking to recover the moneys owing to her by any other legal action against the company.

10 On 2 March 2010, PS Securities was registered as the new proprietor of the Land and on that day a mortgage was registered in favour of NAB over the Land in the amount of $1,850,000. (It does not seem to be disputed that the Land constitutes the major asset of the Joseph Family Trust.)

11 It is submitted by Counsel for Ms Hu (Mr Young) that the transfer of the Land to PS Securities has resulted in Alphena being unable to satisfy the judgment debt in favour of Ms Hu obtained in the District Court proceedings (at least without reference to any right of indemnification out of the trust assets formerly held by it) and this must be the case given that the liquidators of Alphena have reported to creditors that the company has no assets.

12 What next occurred was a course of correspondence with the liquidators of Alphena from August 2010 (when Ms Hu became aware that the Land had been transferred to PS Securities) through to late November 2010, in which the solicitors acting for Ms Hu urged the liquidators to take action against PS Securities in order to recover the sum referable to the District Court judgment debt (in reliance upon the trustee's right of indemnification in respect of that debt). That correspondence included an offer on behalf of Ms Hu to indemnify the liquidators for the purposes of funding the issue of a demand on PS Securities and subsequent litigation in relation to a claim against it. That correspondence (not, it must be said, favoured with a prompt response from the liquidators) led to a qualified acceptance of the funding offer but seemed to contemplate the holding of liquidators' examinations before any decision to commence proceedings (something Mr Young submits may be unnecessary given that Mr Joseph has already given evidence in the District Court proceedings). Ultimately, Ms Hu's lawyers advised that she intended to commence a derivative suit.

13 These proceedings were instituted on 23 December last year with the filing of a Statement of Claim. Ms Hu, as an unsecured creditor of Alphena, asserts an entitlement to be subrogated to Alphena's right of indemnity out of the trust assets for the debt incurred by Alphena in defending the District Court proceedings on behalf of the Trust or to exercise on behalf of Alphena that right of indemnification in order to permit it to satisfy the District Court judgment debt.

14 On 7 February this year, Mr Lombardo (a former partner of KPMG) was appointed a director of PS Securities. In his affidavit sworn 10 February 2011 on behalf of PS Securities, Mr Lombardo deposed to an extensive period of experience "in assisting clients advance their businesses" and that he seeks to bring "different parties together to create more profitable and economically independent and sustainable businesses". He deposed in general terms to discussions with Mr Joseph as to business opportunities for the Joseph Family Trust to expand its investment portfolio.

15 This affidavit, read on the application before me, is the only affidavit sworn following the making of orders by Pembroke J as duty judge on 19 January 2011 regarding the provision by PS Securities of an affidavit setting out the assets of PS Securities with various particulars of those assets. (Mr Young complains that Mr Lombardo's affidavit fails to comply with those orders - in particular that it does not contain the information one would expect an experienced accountant to provide as to the assets of the company and is vague in the limited information it does provide.)

16 Mr Lombardo deposed to the main assets of the trust including "an indirect interest in a shopping centre that was acquired in 2003". It is not clear to me how it is that Mr Lombardo considered a property held by a company as trustee for the trust would constitute an asset in which the trust had an "indirect interest", unless by that he is somehow referring to the interest of the beneficiaries of the trust (which ordinarily does not entitle them to a particular share of the trust assets in specie but gives a right to compel performance of the trustee's obligations). In any event, Mr Lombardo was unable (despite his earlier due diligence) to provide an estimate of the value of the "indirect interest in the shopping centre of the Joseph Family Trust" or the value of the property, though it seems to have been sufficient to permit a significant borrowing on the security of the Land.

17 Mr Lombardo, in his affidavit, referred to the due diligence carried out by him in October 2009 (ie before the arrangements pursuant to which PS Securities became a co -trustee) on Mr Joseph's financial resources and deposed that he had formed the view that the assets of Alphena (acting as trustee for the Joseph Family Trust) were worth about $5m net equity (the June 2009 accounts produced at the commencement of the hearing of this application in answer to a notice to produce instead reflected a negative net equity of some $49,000).

18 Mr Lombardo also deposed to various discussions in October 2010 with one of the liquidators of Alphena in which it would seem that he was exhorting the liquidator not to "abandon his duties in favour of a creditor" (I can only assume this was in reference to the demands that had been made by Ms Hu's solicitors in respect of the institution of or investigation into the proceeding against PS Securities).

19 Mr Lombardo deposed generally to various new ventures that he was negotiating and that he anticipated that "significant liabilities" might arise if PS Securities did not meet the (unidentified) obligations in relation to those new ventures but it is not clear that any such ventures have yet been concluded. He asserted, again in general terms, that "significant damages will arise" to PS Securities if it "fails to perform as has been planned for more than 12 months and if a freeze order is made against it". (Mr Lombardo said that he was prepared to provide the Court and Counsel with more detailed information, but did not publish further detail in his affidavit as it was said to be "sensitive commercial negotiations", thus again suggesting that nothing had been finalized at that stage.)

20 Mr Lombardo's affidavit asserts that PS Securities "as Trustee for the Joseph Family Trust will not be transferring, securing or dealing with its property other than in the ordinary course of its ordinary business".

21 To similar effect, an undertaking was proffered (on a without admissions basis) by PS Securities which Mr Young conceded went some way to curing the problem Ms Hu faces. However, he took issue with the wording of the undertaking (which, it was said, did not make it clear with sufficient clarity what was prohibited). That undertaking referred to the "property" of the trustee company. (It was an undertaking that the first defendant, as trustee of the Paul Joseph Family Trust, not transfer or deal with its property other than in the ordinary course of business.) Mr Young submits that for such an undertaking to be acceptable it would need to be absolutely clear that what the undertaking covers is not simply PS Securities' property but all trust assets as well.

22 In this regard, Mr Young submits that Mr Lombardo's affidavit does not make it clear whether Mr Lombardo is actually acknowledging PS Securities' ownership of the shopping centre as a trust asset and says that there is sufficient doubt to make the undertaking proffered by PS Securities not suitable protection for Ms Hu (since any contempt proceedings for breach of the undertaking or proceedings to prevent either the transfer of the shopping centre or any further encumbrance that would prevent the judgment debt being satisfied would be left in doubt due to the uncertainty of the scope of the undertaking).

23 As far as the liquidators are concerned, Mr Young submits that Mr Joseph has been the sole source of information that the liquidators have in relation to the company. Certainly, as at August 2010, the liquidators appeared to have relied on information provided by him (a statutory declaration confirming that PS Securities is the current and only trustee of the trust, for example, and a signed report from Mr Joseph that did not disclose any an interest in any real property) although they appear also to have tested some of Mr Joseph's assertions (such as his advice that Alphena also traded in its own limited capacity) against the documentary evidence and tax returns, so it cannot in my view be said that they have simply accepted at face value his assertions.

24 Furthermore, Mr Young points to evidence that suggests that the position of the liquidators has been privately funded by directors' contributions (presumably including contributions by Mr Joseph). However, other than the suggestion that the liquidators might have been too 'credulous' of Mr Joseph's assertions, there was no submission that the liquidators were not acting properly (if not as proactively as Ms Hu might have wished in relation to the claim against PS Securities).

Legal Principles

25 As Mr Young submits, a freezing order is justified where there is a danger or real risk that a judgment or prospective judgment of the court will be unsatisfied as a result of the defendant or a third party dealing with or disposing of its assets so as to frustrate the court's process ( Uniform Civil Procedure Rules 25.11; Ninemia Maritime Corporation v Trave GmbH & Co KG (The Niedersachsen) [1983] 1 WLR 1412 ; Cardille v LED Builders Pty Ltd ( 1999) 198 CLR 380 at [428] per Kirby J) . There is no need to prove that there is an intent to do so, simply that the purpose or effect of so doing would be to frustrate or inhibit the court process.

26 In Ninemia the Court of Appeal in England [1983] 1 WLR 1412 confirmed (at 1422) that what must be shown in order to obtain a Mareva (or freezing) order is that the plaintiff would suffer some prejudice as a result of a dissipation of assets in the event of the injunction being refused. Their Lordships said (at 1422):

In our view the test is whether, on the assumption that the plaintiffs have shown at least 'a good arguable case,' the court concludes on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiffs would remain unsatisfied.

27 Their Lordships expressly rejected the suggestion that there was a requirement to show "nefarious intent" and did not consider that a distinction between "object" and "effect" was the right basis for providing the appropriate test.

28 In CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345 at [391], it was said that "the counterpart of a court's power to prevent its processes being abused is its power to protect the integrity of those processes once set in motion".

29 Reference was also made to in Coxton Pty Ltd v Milne (Unreported Judgment, 20 December 1985) where the Court of Appeal said that "without attempting to define or to limit the extent of the exception, the necessary circumstances [for the grant of a Mareva order] will exist when the affairs of a defendant sued by a creditor for an alleged debt and of the third party against whom the injunction is sought are intermingled, the alleged debtor and the disposition of its assets are effectively controlled, de jure or de facto, by the third party, the debtor's assets will be insufficient to meet the debt, the creditor, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or his assets to meet his debt, and there is a danger that the third party will send his assets abroad or otherwise dispose of them".

30 Therefore, the questions before me are as to the existence of assets presently under the control of PS Securities (that could be available to satisfy a judgment against it if Ms Hu is given leave to commence proceedings in the name of Alphena to recover trust assets held by it or otherwise to establish and invoke a right of indemnification on the part of Alphena) and, secondly, as to whether there is a danger or real risk of such assets being dealt with in such a way by PS Securities that the court's process would be frustrated. If those answers are in the affirmative then the question arises as to where the balance of convenience lies.

Is there a basis on which assets of PS Securities might be recovered by Ms Hu (or Alphena) in satisfaction of the judgment debt?

31 Mr Young submits that the facts establish a strongly arguable case that the Land was held by Alphena on trust and is therefore properly described as trust property and that, in the circumstances, Ms Hu has a strongly arguable case that upon the liquidation of Alphena (as creditor of the trustee company) she has a right to be subrogated to Alphena's right of indemnity out of trust assets for liabilities incurred on behalf of the trust (citing Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367, 370).

32 In Octavo, at 367, the Court said:

We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets ... it applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on business: Dowse v Gorton [1891] AC 190; [1891-4] All ER Rep 1230.

In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the businesses being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied ( Vacuum Oil ).

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution... but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee ( Vacuum Oil; ex parte Garland ) .

These principles lean naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of that bankrupt divisible amongst his creditors Savage v Union; Bank of Australia; Jennings v Mathers; Governor of St Thomas' Hospital v Richardson.

33 It is not disputed that property which is an asset of a trading trust is properly described as trust property (Mr Young referring to Octavo , citing Dowse v Gorton [1891] AC 190 and Jennings v Mather [1901] 1 KB 1 at 111). Although there was a dispute recorded in Mr Skinner's written submissions as to whether Ms Hu was a creditor of Alphena in its capacity as trustee, this did not seem to be a principal point of contention. In that regard, it seems to me that the evidence is sufficient to establish an arguable case as to the judgment debt having been incurred by Alphena in its capacity as trustee of the Joseph Family Trust.

34 The liquidators reported to creditors that the main purpose of Alphena was to act as trustee of the Joseph Family Trust (apparently relying on information provided by Mr Joseph to that effect) and they confirmed this in a letter dated 12 August 2010 to the solicitors acting for Ms Hu. The suggestion that Alphena had traded to a limited extent in its own capacity was not, they concluded, supported by the financial documentation they had reviewed.

35 I was taken to the transcript of Mr Joseph's cross -examination in the District Court proceedings in which he accepted that the Joseph Family Trust was the only trust of which Alphena was a trustee and that it had operated as a trading trust with a view to making profits. Discredited as Mr Joseph may have been as a witness in the District Court proceedings, the instructions he has apparently given to the liquidators are consistent with a finding being open to be made that Alphena did incur the debt to Ms Hu as a trustee of the trust.

36 If so, then there must be a reasonable basis for the argument that Alphena would have a right of indemnification out of the trust assets in respect of the debt (and Mr Skinner did not suggest otherwise).

37 The trustee's right of indemnity is a proprietary right ( Octavo ) and once the right has accrued it continues after the trustee has ceased acting in that position. In Corowa Fertilizers Pty Ltd v Cranney Farm, unreported 09/291644, Bryson AJ expressed the view that the former trustees' entitlement to indemnification out of the assets of the trust crystallised (if it did not exist earlier) into a proprietary right when they retired as trustees and control of the assets of the trust passed out of their hands. His Honour saw this as a property right "subject to the ordinary qualifications when rights are enforceable, in equity are conceived of as property rights" (at [5]).

38 There, in a bankruptcy context, his Honour observed that it is not usually the case that proceedings under bankruptcy legislation have any impact on the rights of persons interested in a trust of which the bankrupt was trustee and considered that the creditor's right to be subrogated to the bankrupt trustees' right of indemnification was not extinguished by the operation of the personal insolvency agreements that the former trustees had entered into under the provisions of the bankruptcy legislation. (In HIH Casualty and General Insurance Ltd (in liq) v Building Insurers' Guarantee Corporation & Anor (2003) 202 ALR 610, however, Barrett J at [132] -[133] contemplated that what would otherwise be an equity of subrogation may be displaced by the existence of a statutory provision which evinces an intention to substitute another right or remedy.)

39 I note that in Lerinda Pty Ltd v Laertes Investments Pty Ltd as Trustee for Ap -Pack Deveney Unit Trust [2009] QSC 251, McMurdo J (in the context of a corporate trustee which had become insolvent and had entered into a deed of company arrangement) had held that the applicant's right to subrogation was precluded by the deed of company arrangement. His Honour said "the applicant's case assumes that the equitable remedy of subrogation would be granted in this case, and on terms which would have its debt paid in full. But unless and until it is granted, the applicant has no equitable interest in the trust assets or equity which appears to have priority over those of other creditors of the trustee." His Honour held that there was no proprietary interest derived by the commencement of proceedings for subrogation and that unless and until some order would be made for the application of property held by the trustee specifically in favour of the applicant, it would enjoy no priority over other creditors of the company.

40 In Adams v Zen 28 Pty Ltd [2010] QSC 36, Daubney J said that the applicant (there seeking a remedy of subrogation) had, at the highest, at the date of execution of the deed of company arrangement and inchoate right to seek to be subrogated to the trustee's right of indemnity and the lien or charge which the trustee enjoys over trust assets.

41 I accept that there may be dispute as to the effect, on a claim of subrogation of the kind presently asserted, of steps taken in the liquidation of the trustee company in whom the right of indemnification reposes (and I note that the decision in Corowa Fertilizers is presently the subject of an appeal). However, for the purposes of considering whether there is a sufficiently arguable case to sustain the relief claimed by Ms Hu on the present application (i.e. that Ms Hu could claim a right of subrogation to the trustee's right of indemnification), I am of the view that there is. Indeed, at one level Mr Skinner did not seek to contend otherwise. Rather, what he submitted was that the claim for indemnification was a claim that lay with Alphena (through its liquidators) and was not one that Ms Hu had standing to bring.

42 Mr Skinner's principal submission was that the present application was wholly misconceived; in particular, as to the effect of the winding up resolution and the lodgment of the proof of debt by Ms Hu.

43 In essence, what Mr Skinner submitted was that Alphena's right to seek indemnity out of the trust assets in the hands of the new trustee (PS Securities), in reliance on the principles in Octavo , was solely the right of the liquidator (more precisely, this must be a reference to Alphena) and that Ms Hu could not pursue that right because of the merger in the winding up of her debt claim, arising by the lodgment of the proof of debt. Mr Skinner invoked s 553 of the Corporations Act in support of that submission.

44 Section 553, however, addresses the debts or claims that are provable in a winding up (being those legally enforceable in an action against the company). Section 553 does not in terms provide that a creditor who has lodged a claim in a winding up cannot (at least until that claim is satisfied by a distribution out of the assets of the company on winding up) separately maintain a claim seeking to be subrogated to the right of indemnification of the bankrupt or insolvent trustee (and I do not read Octavo or Corowa Fertilizers as suggesting otherwise). As to the doctrine of merger, Ford notes that on the making of an order for the liquidation of the company a creditor's debt is not extinguished but remains an existing debt, stating that "The debt is, however, at least provisionally merged in an equitable execution (because the claim is then against the fund held on trust for the general body of creditors)" though noting that amounts owing may still be described as debts (citing Clyne v DCT (No 3) (1984) 154 CLR 589 at 594; 55 ALR 143). Ford goes on to recognize that a creditor has a right to have all assets realized and applied pro rata for the benefit of all unsecured creditors [5.6.0205].

45 The nub of Mr Skinner's submissions, as expounded orally, seemed to rest on the fact that Ms Hu has not yet obtained leave to commence proceedings in the name of Alphena against PS Securities. Mr Skinner drew my attention to the fact that the application before the Court later this month is in fact for leave under s 500(2) to commence or continue proceedings against a company in liquidation, not an application for leave to commence a derivative suit or an application under s 511 as such. (Pausing there, the Statement of Claim itself seeks relief by way of a declaration that Ms Hu is entitled as a creditor of Alphena to be subrogated to its right of indemnity for the debt and to exercise that right of indemnity "on behalf of" Alphena, which seems to contemplate a derivative suit of the kind adverted to by Mr Young.)

46 Mr Skinner submitted that the lodgment of a proof of debt converted Ms Hu's debt into a right to prove in the winding up of the company and that she therefore lost any right to bring proceedings against PS Securities in her own name when the proof of debt was lodged due to the doctrine of merger. I am by no means satisfied that the lodgment of the proof of debt precludes action by the creditor to compel the realization of assets for the purposes of the liquidation. However, insofar as Mr Skinner accepts that the trustee's right of indemnification is not extinguished by the entry of the trustee into liquidation and remains with that company (Mr Skinner asserting that the critical part of the Slaven decision was that legal title to all the company property including the trust property remains in the company and is not passed to the liquidator), and that the change in the identity of the trustee does not extinguish the retired trustee's property rights, then it seems to me it follows that there is a sufficiently arguable case (and a serious question to be tried) as to the claim by Ms Hu to be subrogated to Alphena's (acknowledged) right of indemnity for trust debts against any assets of the Joseph Family Trust, notwithstanding the lodgment of the proof of debt.

47 As to the perceived difficulty that Ms Hu is said not to be seeking to sue in the name of Alphena, as noted above the pleading suggests that she is indeed seeking the benefit of declaratory relief on behalf of Alphena. In any event, the matter comes before me on an interlocutory application. Mr Young informs me that the purpose of the application is to preserve the status quo pending the application on 25 March 2011 (by which occasion presumably any amendment to the motion necessary to accommodate the pleading issues raised by Mr Skinner will have been made).

48 Mr Young, in reply, submitted that there were three different routes by which Ms Hu could proceed to seek relief in relation to the trust assets held by PS Securities - first, by exercising the right of subrogation to Alphena's right of indemnification; secondly, by the general law as a creditor able to sue in Alphena's name; and, thirdly, by way of an application for the determination of questions as to the liability of PS Securities to account to Alphena (or perhaps Ms Hu) under s 511 of the Corporations Act.

49 I have considered the first of those avenues above and consider that there is a strongly arguable case that such an entitlement exists or will be found to be exercisable by Ms Hu.

50 As to the second, in circumstances where it was said that the liquidators have to date failed and/or refused to bring proceedings against PS Securities (or may be unable to do so through lack of funds) to recover the judgment debt, it is submitted that Ms Hu has an arguable basis on which to seek to bring a creditor's derivative action under the general law to enforce the trustee's right of indemnity against trust assets in the hands of PS Securities (Mr Young relying upon Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 9 ACLC 1530 ; ACT Commissioner for Revenue v Slaven [2009] FCA 744).

51 Similarly, as to the third avenue, as noted in Slaven , under s 511, a creditor may apply to the court to exercise all of any of the powers that the Court might exercise if the company were being wound up by the court and if the Court is satisfied that the determination of the question or exercise of the power will be just and beneficial, the Court may accede wholly or partially to such an application on such terms and conditions as it thinks fit or make such other order on the application as it thinks just. Rares J in Slaven was satisfied that s 511 was the source of "the Court's undoubted jurisdiction and power to permit a person other than the liquidator to commence proceedings in the company's name when it is in voluntary liquidation".

52 Section 511, relevantly, provides:

(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

53 Although there are some differences (and in this regard I note that the Court's power to give directions under s 479(3) in a court ordered winding up is not limited by the requirement that it be satisfied it is 'just and beneficial' to do so as is here the case), applications made under s 511 in a voluntary winding up are determined in much the same way as applications in a court ordered winding up under s 479(3) of the Corporations Act (Dean -Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209 at 212 ; Crawford v Oswald Park Pty Ltd (in liq) [2006] NSWSC 987 at [10] ; and S & D International v MIG Property Services [2010] VSC 336 at [7]) .

54 The requirement that the Court be satisfied that it is "just and beneficial" to determine the question or exercise the power the subject of the application is said to involve a similar concept to that comprised by the expression "just and equitable" (Austin & Black's Annotations to the Corporations Act [5.511]), allowing the Court a discretion whether to make such an order by reference to whether the relief sought by the liquidator is "of advantage in the liquidation" ( Soluble Solution Hydroponics at [212] ; S&D International at [7]).

55 The advantage identified (for the liquidation) of the relief now sought is presumably the potential for the recovery of assets to permit the satisfaction of the judgment debt (Ms Hu being the largest creditor of the company).

56 Mr Skinner submits that the liquidators have not yet refused to bring proceedings and I accept that is the case. However, it seems fair to say that they have not shown any real alacrity in their response to the pleas for action by Ms Hu and, in any event, all that is required to be shown for present purposes is that there is a serious question to be tried or sufficiently arguable case that Ms Hu would be permitted to bring such an action (or that there are assets in PS Securities' hands that could by this means become available to satisfy the judgment). If, on the determination of the 25 March 2011 application, a different result ensues, then it may be that any interlocutory freezing orders would properly be discharged at that stage.

57 (In that regard, I note that I was informed that directions were made the week before the application came before me for the liquidators to serve a draft statement of claim and evidence in the matter. Mr Young says that if the liquidators identify an intention (with funding) to commence the proceedings then Ms Hu may not need to pursue an application for derivative suit.)

58 For present purposes, I simply say that I consider there to be a sufficiently arguable case that Ms Hu may, through one or other of the avenues identified by Mr Young, maintain a claim against the assets of the Joseph Family Trust in the hands of PS Securities.

Risk of dissipation of assets

59 It is submitted that there is a strongly arguable case for Ms Hu on this issue as well. I am invited, in effect, to infer that the appointment of a new trustee (and the subsequent resolution to wind up Alphena) was an attempt to place the trust assets beyond the reach of Ms Hu and to deprive Alphena of the ability to meet the judgment debt. I am informed by Mr Young that Ms Hu fears that because Mr Joseph (as appointor of the Joseph Family Trust and director of PS Securities) has already once taken steps pursuant to which trust assets have been transferred to a new trustee and is now a director also of the new trustee company, she is at risk of further such action which could leave her unable to obtain satisfaction of the judgment debt.

60 In this regard, reliance is placed on a number of matters - the circumstances in which the trust assets were removed from the hands of Alphena (the judgment creditor) shortly after the adverse judgment; the significant encumbrance placed over the Land once in the hands of PS Securities; the intimation from Mr Lombardo that there will be significant investment in other ventures by PS Securities as trustee of the trust; and the background to the matter itself.

61 As to the first, while Mr Lombardo explains in his affidavit the process of due diligence undertaken by him in 2009, it does not explain why it would have been thought that it was necessary (to avoid the collapse of the trust) to appoint a co -trustee - if, in fact, the assets of the trust as valued by Mr Lombardo are in the order of $4 or 5m, then the likelihood of a forced insolvency event (by reference to the unpaid District Court judgment debt) seems low. Mr Young submits that what has occurred has been an attempt to place the funds outside the hands of creditors. That may or may not be the case but suffice it to say that the involvement of Mr Joseph in the transitional trust arrangements (without any explanation by him as to the reason for those arrangements and without first making any provision for the payment of the judgment debt) seems to me to have the flavour of a restructure for a purpose or with the effect of the kind asserted by Mr Young. At the very least, it, coupled with the apparent difficulty of extracting solid information as to the company's assets (Mr Lombardo's affidavit being criticised, as noted above, and the plaintiff's 17 February notice to produce being complied with only by the production of some documents at the commencement of the hearing of the application), suggests that the risk of dissipation of assets is not so far -fetched as to be dismissed out of hand.

62 More significantly, there is a clear indication in Mr Lombardo's affidavit of an intent to enter into various business opportunities or ventures that may require significant funding - and the encumbrance over the Land at present is some indication of this. In paragraph 28 of his affidavit, Mr Lombardo said that "currently [PS Securities] as trustee of the Joseph Family Trust is committed to supporting and participating in investments in new ventures. The assets of the trust are be used to fund expansion and investments in small and medium enterprises which have good business models but are struggling to fund those businesses because of the global financial crisis. ... [PS Securities] as trustee of the Joseph Family Trust will be taking up equity in due course in the new ventures and significant damages will arise to it and other parties who will not be able to fund its expansion and growth if [PS Securities] fails to perform as has been planned for more than twelve months and if a freeze order is made against it."

63 As noted earlier, Mr Lombardo affirmed that PS Securities, as trustee for the Joseph Family Trust, "will not be transferring, securing or dealing with its property other than in the ordinary course of its ordinary business." However, it is somewhat unclear to me what the ordinary course of this trustee's business is thought to be (or whether PS Securities acknowledges that the Land is a trust asset).

64 Mr Young submits that the Land was transferred to the new trustee when both Alphena and PS Securities must be taken to have been aware of the judgment debt (given the involvement of Mr Joseph in both companies) and chose to do so rather than Alphena retaining possession as trustee to satisfy a liability incurred on behalf of the trust. It seems to me that there is some force in that submission and that it is such as to give rise to a real apprehension or risk that if a freezing order is not made then the assets may be dealt with in such a way as would have the effect of defeating a claim under the trustee's right of indemnification.

65 That then raises the issue as to the undertaking proffered by PS Securities. If that were sufficient to protect the position of Ms Hu, then it would be difficult for her to contend that a freezing order should be made. While this issue gave me some pause, in the end I accepted that the general terms in which it was expressed (coupled with the reference to the Land in Mr Lombardo's affidavit as an 'indirect interest' of the trust - see for example paragraph 27 in which he said "I have no current valuation of the indirect interest in the shopping centre of the Joseph Family Trust and am unable to provide an estimate of the value of the property") meant that I could not be confident that Ms Hu's position was protected in the absence of such an order. (I note that an undertaking in accordance with the usual freezing order was not proffered by PS Securities notwithstanding that it was on notice of the criticisms made by Mr Young of the content of the undertaking it had earlier proffered.)

66 (I should for completeness note that I have not placed reliance in this regard on the findings made in the District Court proceedings or the history of the matter to date as I am not satisfied that I can infer a propensity on Mr Joseph's part to frustrate the processes of the court in avoiding payment of the judgment debt by reference to the conduct that had led indemnity costs to be awarded against Alphena in those proceedings.)

67 I nevertheless accept that the effective transfer of ownership of the trust assets, without provision for the payment of the judgment debt, and the substantial encumbrance of the Land (coupled with the expansive investment plans referred to in general terms by Mr Lombardo) gives rise to a sufficient risk or danger of the court's process being frustrated, so as to satisfy this second requirement.

Balance of convenience

68 I have noted above the concerns expressed by Mr Lombardo as to the significant damages PS Securities claims it will suffer by the imposition of a freezing order. However, those business plans do not appear yet to have been finalized (his affidavit being couched in prospective terms) and the duration of the freezing order is relatively limited in the first instance, whereas the prejudice Ms Hu will suffer if the trust assets are disbursed will be substantial (given that Alphena has no assets of its own to meet the judgment debt and it is for a not inconsiderable amount).

69 As to discretionary factors generally, it was noted that Ms Hu was the major creditor of Alphena in liquidation; that the transfer of the Land occurred without her knowledge (she did not become aware of the transfer until early August 2010); and that the Land is now valued at some $6 million and therefore it might be inferred that it is unlikely that a freezing order limited to a far smaller amount will materially impinge upon the trustee carrying on business in the ordinary course. Mr Young submitted that, on balance, the risk of the court's processes being frustrated by the transfer of the Land to a new trustee and/or PS Securities encumbering the land in a manner that would wholly or partly avoid satisfaction of the judgment debt as a result of the proceedings, was a real risk greatly outweighing any potential prejudice to PS Securities caused by the grant of a freezing order. On balance, I agree.

70 Mr Lombardo, in his affidavit, asserts that any undertaking as to damages by Ms Hu will be insufficient to protect PS Securities in its trustee capacity from damage if it cannot otherwise deal with all of its assets in ordinary course of its ordinary business. However, the assertion of damage by PS Securities is expressed without any precision and it is by no means apparent that the preservation of an amount referable to the judgment debt (for what may be a limited time) will have such an impact.

71 It is further submitted that the imposition of a freezing order would be oppressive having regard to the "yet unresolved" standing of Ms Hu to commence these proceedings (and to the submission that Ms Hu's rights have merged into her right to lodge a proof of debt in the liquidation under s 553 of the Corporations Act) . It was submitted that any right to subrogation (and hence any freezing order) must necessarily be postponed to the rights of the liquidators (although that would not seem to be the effect of Bryson AJ's judgment in Corowa Fertilizers ) but that in any event should be postponed until the determination of the application on 25 March 2011.

72 On balance, it seemed to me that the discretionary considerations favoured the imposition of a freezing order (at least pending the determination of the March application and perhaps until the determination of the proceedings as a whole). I therefore made orders in accordance with the standard freezing order but, on Mr Skinner's application, I gave liberty to apply on three days' notice to discharge the freezing order.

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Decision last updated: 02 March 2011