Aqualand North Sydney Lavender Development Pty Ltd v The Owners — Strata Plan No 102091 [2025] NSWCA 143

An important decision handed by the NSW Court of Appeal in July has given Owners Corporations engaging in defect litigation against developers utilising a typical special purpose vehicle corporate structure, a degree of confidence that the Courts will not sit idly by while a developer divests itself of assets leaving the Owners Corporation with the prospect of obtaining a judgment with no recovery.

Typically, developers utilise a special purpose corporate vehicle structure. This means that a company will be incorporated for the sole purpose of owning and developing a particular property. Once the project is completed and the properties are sold the funds are distributed out of the company for example, by issuing dividends to shareholders. Such a structure seeks to mitigate liability by quarantining the risks of the particular development to the special purpose vehicle company.

In this case, the applicant, Aqualand North Sydney Lavender Developments Pty Ltd (Aqualand), was a special purpose vehicle (SPV) used to develop a mixed-use building in Milsons Point, Sydney, containing 125 residential lots and 2 commercial lots. Aqualand is one of a group of companies trading under the 'Aqualand Group'.

The Owners Corporation sued Aqualand and a related entity in the Supreme Court for damages arising out of alleged building defects. By the time the Owners Corporation had prepared and served its evidence Aqualand North had sold all but 4 of the residential lots in the development.

Concerned the developer was divesting its only assets, the Owners Corporation made an application to the NSW Supreme Court for a freezing order to prevent Aqualand from 'disposing of its assets up to a value of $10.6 million," being the sum of the Owners Corporation's claim.

Aqualand resisted the order.

At first instance, Stevenson J agreed to grant freezing orders finding that there was a sufficiently serious risk that in the absence of the order the developer would continue to sell the four remaining assets and would distribute the sale proceeds. Relevantly, His Honour relied, "albeit perhaps faintly" on the fact that the developer had refused a request to give an undertaking not to dispose of the proceeds of sale as evidence consistent with Aqualand's intention to do just that.

Aqualand sought leave to appeal this decision on the basis that the primary judge misapplied the "test" for freezing orders as set out in rule 25.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and/or the Court's inherent jurisdiction requiring the Court be satisfied that there was a "danger" that any prospective judgment would not be satisfied unless Aqualand was restrained from selling its remaining assets.

Aqualand's main contention was that the primary judge erred in granting a freezing order where his Honour had found that Aqualand sold units "in the ordinary course" of its business and that its conduct in distributing profits by way of dividend or loan was "normal" and "commercially rational". Aqualand argued that although there is no requirement that a party hold a 'positive intention' to frustrate a judgment, nonetheless, there had to be "something about the conduct to justify the remedy" when all Aqualand was doing was acting in the ordinary course of its business irrespective of the court proceedings.

The Court of Appeal did not agree. In dismissing the application, the Court held that:

1. Aqualand's emphasis on the need for a finding of "something more" in the conduct of Aqualand put an "unnecessary gloss" on the test set out in r 25.11 UCPR.
2. It was reasonable for His Honour Stevenson J to:
   • find that notwithstanding the sale of the units occurred in the ordinary course of business, that the distribution of the proceeds of sale "were not ordinary course transactions" such as the payment of wages, which may have protected them from any order.
   • infer based on past conduct in the sale of 121 of the 125 units that absent restraint Aqualand would proceed to sell and distribute the sale of proceeds with the risk that any judgment would be frustrated.
   • made the freezing order in circumstances in which Aqualand had not identified any prejudice to it.

For His Honour Justice Ball (with whom Acting Justice Free agreed), the discussion as to whether the distribution of the sale proceeds was within the "ordinary" course of business or not was irrelevant to the question of whether the jurisdiction to grant an order was enlivened. As observed by Ball J, given the structure and purpose of an SPV, once Aqualand had sold the remaining units and distributed the proceeds of sale it had served its purpose. Therefore the "clear consequence of permitting it to distribute its remaining profits before the defects claim were resolved" would be to deprive the Owners Corporation of a remedy if its claim succeeded.

The rejection by the Court that an applicant must demonstrate that "something more" in the conduct of the respondent before relief in the form of freezing orders will be ordered is an important step to overcoming difficulties faced by Owners Corporations seeking remedy against SPVs in Court. Unfortunately, the litigation process is often an unavoidably lengthy one with any delays inadvertently facilitating an SPV in selling the last few units it continues to hold in a development following commencement of proceedings.

It is important for Owners Corporations who have commenced or are contemplating proceedings for building defects against a developer who has retained lots in the development, to be vigilant in gathering information as to retention or sale of those units and to seek legal advice early with a view to requesting an undertaking from the developer, and if that undertaking is refused to apply for a freezing order.

In bringing such an application, the Owners Corporation will need:

1. to consider the nature of and corporate structure of the developer and any related holding company, the history of dealings by SPVs within that corporate group and the considerable cost in obtaining expert evidence required.
2. to demonstrate an arguable defects claim, including providing evidence as to quantum of the claim required on an application not a final hearing basis.
3. to provide an undertaking as to damages (and to understand the implications of giving such an undertaking having regard to the peculiar circumstances of the developer noting however that if the developer is an SPV any issue of damage or prejudice is likely to be limited).

For further information please contact:

Jen­nifer Hold, Special Council
Phone: + 61 2 9233 5544
Email: jjh@swaab.com.au

Daniela Ter­ru­so, Senior Associate
Phone: + 61 2 9777 8342
Email: dxt@swaab.com.au

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.