On 18 June 2020, the Supreme Court of Queensland handed down its decision in BluePoint Property Pty Ltd v Zuri Properties Pty Ltd [2020] QSC 219 ('BluePoint'). The dispute concerned the rights of two parties in relation to a parcel of land. Over the course of the proceedings, the plaintiff made numerous attempts to prevent the defendant from exercising their rights in relation to development of the property. This included making an application for an injunction followed by an attempt to obtain a caveat over the property. Finally, an application for a freezing order was brought before the Supreme Court of Queensland. This was an attempt to preserve the assets of the defendant as there were proceedings on foot.
This case highlights that great care must be taken when dealing with freezing orders. Any delays on the plaintiff's part could buy time for the defendant to deal with the assets in question – ultimately making a freezing order futile.
WHAT IS A FREEZING ORDER?
A freezing order restrains a party from dealing with certain assets pending the outcome of a court proceeding. This is often necessary where one of the parties to a proceeding attempts to deal with an asset in such a way that it would prevent a prospective judgment from being satisfied.
Three key elements must be established before a court will make a freezing order:
- the plaintiff must have a solid case with a legitimate argument, notwithstanding the fact that the plaintiff may have less than a 50% chance of success;
- there must be a real risk of an unjustifiable disposal of assets occurring which would affect future court proceedings and subsequently, the enforcement of any judgement in the plaintiff's favour; and
- finally, the order must be made in the interests of justice, in other words, taking into account the effect of the order on all parties involved.
The presence of dishonesty is considered in determining what is in the interests of justice. Whilst the threshold requires there to be more than a presence of dishonesty during the court proceedings, dishonest conduct coupled with the dissipation of assets will support a freezing order being made.
THE INITIAL DISPUTE
In Bluepoint, the dispute involved an agreement entered into by the plaintiff and defendant regarding the development of a parcel of land which was owned by the defendant. The plaintiff subsequently sought damages as a result of the defendant dealing with the property in contravention of the development agreement.
The plaintiff pursued numerous avenues to stop the defendant from proceeding with their plans to develop the lot which included applying for an interlocutory injunction. The Court dismissed the plaintiff's application because the injunction would likely disrupt the defendant's development of the land which was already in progress. Taking into consideration the element of convenience, the Court allowed the defendant to continue to develop the land in contravention of the agreement. This left the plaintiff with only one option, to pursue a claim in damages as the land was already encumbered.
ABILITY TO ENFORCE JUDGEMENT
A further issue arose when the defendant took out a second mortgage on the property in an attempt to protect his equity in the asset. The plaintiff speculated that there were suspicious circumstances surrounding the mortgage. The plaintiff alleged the debt was not truly owed under the second mortgage and was in effect, a sham. This tactic has been observed in cases where defendants have taken out multiple mortgages to essentially siphon the equity out of the property to defeat judgment.
THE DECISION
The Supreme Court of Queensland dismissed the plaintiff's application for a freezing order which ultimately allowed the defendant to get away with dissipating their main asset, the property. This was notwithstanding the fact that earlier in the proceedings the defendant had given evidence the property would make a $3 million profit on its sale. At that stage of the proceeding, due to that evidence, the court found that the plaintiff had no risk of not being able to enforce their judgment against the property. However, by the time the application was brought by the plaintiff, the defendant had encumbered the property with a second mortgage. This effectively negated any opportunity of a $3 million profit on its sale (and thereby diluted the equity in the property).
Considering the circumstances at the time the application was brought by the plaintiff for the freezing order, the Court held it was simply too late. The damage had been done. Once an asset has been dealt with either by way of payment to creditors, mortgages or other third parties, a freezing order is essentially futile. This puts the plaintiff in a difficult situation where they always have to be two steps ahead of the defendant. Unfortunately, until a second mortgage is registered, a plaintiff is usually unaware of any security being granted over an asset.
IMPLICATIONS FOR FREEZING ORDERS
Whilst freezing orders are not granted by the courts on a frequent basis due to the significant interference they can have on a person's property rights, they will be granted in exceptional circumstances where it is necessary in the interests of justice.
This case is a timely reminder that applications for freezing orders must be made quickly and often without notice to the other side. This is to ensure they have the desired effect of preventing the dissipation of assets. Where a plaintiff delays applying for freezing order, the defendant can take irrevocable steps which will ultimately prevent their ability to satisfy any judgment they obtain.
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.
