Duro Felguera Australia Pty Ltd v Trans Global Projects Pty Ltd (In Liquidation) [2018] WASCA 174

JURISDICTION: SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT: THE COURT OF APPEAL (WA)

CITATION: DURO FELGUERA AUSTRALIA PTY LTD -v- TRANS GLOBAL PROJECTS PTY LTD (IN LIQUIDATION) [2018] WASCA 174

CORAM: BUSS P, MURPHY JA and MITCHELL JA

HEARD:  20 JULY 2018

DELIVERED: 11 OCTOBER 2018

FILE NO/S: CACV 49 of 2018

BETWEEN: DURO FELGUERA AUSTRALIA PTY LTD ACN 164 834 753

Appellant

AND

TRANS GLOBAL PROJECTS PTY LTD (IN LIQUIDATION) ACN 112 290 089

Respondent

ON APPEAL FROM:

Jurisdiction: SUPREME COURT OF WESTERN AUSTRALIA

Coram: TOTTLE J

Citation: TRANS GLOBAL PROJECTS PTY LTD (IN LIQUIDATION) -v- DURO FELGUERA AUSTRALIA PTY LTD [2018] WASC 136

File Number: ARB 5 of 2018

Catchwords:

International commercial arbitration – Interim orders – Appeal against granting of freezing order – Concurrent sources of power to make freezing order – Whether it was open to be satisfied of danger that a prospective judgment will be unsatisfied – Parent and subsidiary company – Parent company in financial difficulties – Whether disposition of assets must be irregular – Whether respondent to freezing order application must intend that conduct will prevent prospective judgment from being satisfied – Whether freezing order should have been made operative ‘until further order’

Legislation:

International Arbitration Act 1974 (Cth), s 2A, s 7(2), s 7(3)
Supreme Court (Arbitration) Rules 2016 (WA), r 14
Rules of the Supreme Court 1971 (WA), O 52A, O 52A r 5(4)
United Nations Commission on International Trade Law – Model Law on International Arbitration, Art 9, Art 17A, Art 17J, Art 35

Result: Appeal dismissed

 

JUDGMENT OF THE COURT:

 

Summary

  • In May 2014, the appellant (Duro) and the respondent (TGP) entered into a subcontract under which TGP would transport processing facility components for the Roy Hill Iron Ore Project (Project).  Duro is a party to a head contract with Samsung C&T Corporation (Samsung), pursuant to which Duro agreed to perform work required for the Project.  Duro is engaged in arbitration proceedings in which Duro claims payment of approximately $310 million from Samsung.
  • By May 2015, Duro and TGP had substantial claims against each other under the subcontract.  TGP claimed approximately $30 million from Duro and Duro claimed approximately $26 million from TGP.  On 19 June 2015, TGP served notice of a reference to arbitration.  It is common ground that the International Arbitration Act 1974 (Cth) (Act) applies to the arbitration between Duro and TGP.
  • TGP was placed into voluntary administration on 30 July 2015, and into liquidation on 15 September 2016.  On 11 April 2018, the liquidators of TGP gave notice of their intention to pursue TGP’s claims under the subcontract.  An undertaking not to deal with assets was sought from Duro, but was not provided.  On 19 April 2018, TGP applied for a freezing order against Duro, in relation to the prospective judgment enforcing the arbitral award which TGP hopes to obtain against Duro.  On 7 May 2018, the primary judge granted a freezing order.  The primary judge published written reasons for that decision, as well as short oral reasons for making the freezing order operative ‘until further order’.
  • Duro now appeals against the freezing order on two grounds.
  • The primary judge made the freezing order under Order 52A r 5 of the Rules of theSupreme Court 1971 (WA) (Rules).  Under r 5(4), one condition for the exercise of the discretion is, relevantly, the court’s satisfaction that:

having regard to all the circumstances, that there is a danger that a … prospective judgment will be wholly or partly unsatisfied because any of the following might occur:

(b)          the assets of the … prospective judgment debtor … are:

(i)          removed from Australia or from a place inside or outside Australia; or

(ii)         disposed of, dealt with or diminished in value.

  • Order 52A is expressed not to diminish the court’s inherent, implied or statutory jurisdiction to make a freezing order. Order 52A r 5(6) provides that nothing in r 5 affects the court’s power to make a freezing order if it considers it is in the interests of justice to do so. Notwithstanding these provisions, it is convenient in these reasons to refer to the state of satisfaction referred to in O 52A r 5(4) as a ‘jurisdictional requirement’. This reflects the need for the court to be satisfied of one or more of the matters referred to in r 5(4) before its discretion to make a freezing order under r 5 is enlivened.
  • Ground 1 of Duro’s appeal contends that the primary judge erred in fact and law in being satisfied of this jurisdictional requirement.
  • In our view, ground 1 is not established.
  • Although it has unsuccessfully tendered for other work, Duro’s only current operations in Australia involve litigation arising from the Project.  The primary judge found that, if Duro received funds following significant success in its proceedings against Samsung, then Duro’s Spanish parent company Duro Felguera SA (Duro SA) would exert its control over Duro to obtain the benefit of those funds.  An inference that Duro might lend Duro SA funds which were excess to Duro’s operational requirements was open on the evidence.  The evidence as to Duro SA’s current financial difficulties also indicated a real risk that Duro SA will not have the capacity to repay such a loan when it becomes due or is sought to be enforced.  In that manner, the evidence supported the primary judge’s finding that there was a danger that a prospective judgment will be wholly or partly unsatisfied because Duro SA might obtain the benefit of Duro’s funds.
  • The primary judge also found that there was a danger that, as part of any refinancing of Duro SA, security over Duro’s claims against Samsung will be granted to Duro SA’s financiers.  In our view, the finding that such a danger existed was not open on the evidence.  However, the primary judge’s ultimate finding as to the satisfaction of the jurisdictional requirement was supported in the manner indicated in the previous paragraph.
  • Ground 2 of Duro’s appeal is expressed in the alternative, and only arises for determination if ground 1 fails.  Ground 2 contends that the primary judge erred in making the freezing order operate ‘until further order’.  Duro contends that any freezing order should have operated only until the arbitral tribunal had been constituted and had a reasonable opportunity to consider for itself whether to grant relief equivalent to a freezing order.
  • In our view, ground 2 is not established.  Having regard to the terms of the Act and the circumstances of the present case, the making of a freezing order that operated until further order was not inconsistent with the arbitration agreement and did not usurp the role of the arbitral tribunal.
  • Therefore, we would dismiss the appeal.

Power to make a freezing order

  • The court’s power to make a freezing order derives from two concurrent sources.

Power under the Model Law

  • The first source of power is found in the UNCITRAL Model Law on International Commercial Arbitration(Model Law).  The Model Law has the force of law in Australia under s 16 of the Act.  Article 17J of the Model Law provides:

A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration.

  • Article 17(1) of the Model Law empowers the arbitral tribunal to grant interim measures.  Art 17(2)(c) relevantly defines an interim measure to be:

any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:

(c)           Provide a means of preserving assets out of which a subsequent award may be satisfied.

  • In resolving the justiciable controversy as to whether the court should make an order under art 17J of the Model Law, the court is exercising federal jurisdiction in a matter arising under the Act. That jurisdiction is conferred by s 39(2) of the Judiciary Act 1903 (Cth), read with s 76(ii) of the Commonwealth Constitution.

Inherent or implied power

  • The second source of power is the inherent or implied power of the court to make a freezing order to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction.  The inherent or implied power arises in the following manner.
  • Article 35(1) of the Model Law provides:

An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36.

Article 35(2) provides for a party relying on an award or applying for its enforcement to supply the original award or a copy thereof.  Article 36 identifies the limited circumstances in which recognition or enforcement of an arbitral award may be refused.

  • Under r 14 of the Supreme Court (Arbitration) Rules 2016 (WA), an application under art 35 of the Model Law to enforce an award must be made by originating summons, accompanied by an affidavit deposing to specified matters.  In dealing with such an application, the court is exercising federal jurisdiction in a matter arising under the Act.  If the court determines that the arbitral award is binding and should be enforced, the result is a judgment of the court in terms of the award, or (to the same practical effect) an order of the court that the arbitral award be enforced as if it were a judgment of the court.   Such a judgment or deemed judgment is enforceable under the Civil Judgments Enforcement Act 2004 (WA).
  • Implicit in the conferral of federal jurisdiction in a Supreme Court is the conferral of power to make such orders as are needed to ensure the effective exercise of the jurisdiction. The court has that inherent or implied power to make such orders as it may determine to be appropriate to prevent the abuse or frustration of its processes in relation to matters coming within its jurisdiction.  A freezing order is the paradigm example of an order to prevent the frustration of a court’s process.
  • The court’s inherent or implied power extends to making a freezing order in relation to an anticipated arbitral award of which there is a sufficient prospect of the court being asked to enforce under art 35 of the Model Law, when the award is made.  The exercise of that power to protect the court’s prospective exercise of federal jurisdiction is itself an exercise of federal jurisdiction in a matter arising under the Act.

Purpose of the concurrent powers

  • The purposes for which the above concurrent powers are exercised are slightly different.  The purpose of the power conferred by art 17J of the Model Law is to protect the integrity of the arbitral process.  The purpose of the inherent or implied power is to protect the prospective exercise of the court’s jurisdiction to determine the binding effect of, and enforce, the award.  In many cases there will, in practical terms, be little, if any, difference between these two purposes.  In each case the purpose is to prevent the relevant process from being frustrated by dealings which will prevent the satisfaction of the prospective arbitral award and of the judgment recognising the award and providing for its enforcement.

Application of O 52A of the Rules

  • Order 52A applies to the exercise of both of the court’s concurrent powers to make a freezing order.
  • Article 17J of the Model Law requires the court to exercise the power conferred by that article ‘in accordance with its own procedures’. That reference picks up the provisions of O 52A of the Rules and applies O 52A to an exercise of power under art 17J of the Model Law. However, O 52A, in its application to the exercise of the power conferred by art 17J, must be implicitly modified so that a reference to a ‘judgment’ includes an arbitral award.
  • In the case of the inherent or implied power, O 52A is picked up and applied as federal law by s 79 of the Judiciary Act.

Operation of Order 52A of the Rules

Provisions of the Order

  • Under O 52A r 2(1) of the Rules, the court may make a freezing order:

for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.

  • For these purposes a ‘judgment’ is defined to include an ‘order’. As discussed above, for the purposes of the exercise of the power under art 17J of the Model Law, the reference to a judgment must also be taken to include an arbitral award.
  • Order 52A r 2(2) defines a freezing order in the following terms:

A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

  • Order 52A r 3 provides for the court to make an order ancillary to a freezing order or prospective freezing order as the court considers appropriate. Under O 52A r 4, the court may make a freezing order or an ancillary order against a respondent even if the respondent is not a party to a proceeding in which substantive relief is sought against the respondent.
  • Order 52A r 5 of the Rules applies in the circumstances defined by sub-rules (1) – (3). Relevantly for present purposes, r 5 applies where:

an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in:

(i)          the Court; or

(ii)         in the case of a cause of action to which subrule (3) applies: another court.

  • Sub-rule (3) applies where:

(a)          there is a sufficient prospect that the other court will give judgment in favour of the applicant; and

(b)          there is a sufficient prospect that the judgment will be registered in or enforced by the Court.

  • Again, for the purposes of the exercise of the power under art 17J of the Model Law, the reference to a judgment must also be taken to include an arbitral award and the reference to ‘another court’ must be taken to include an arbitral tribunal.
  • Where O 52A r 5 applies, sub-rule (4) provides:

The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:

(a)          the judgment debtor, prospective judgment debtor or another person absconds; or

(b)          the assets of the judgment debtor, prospective judgment debtor or another person are:

(i)          removed from Australia or from a place inside or outside Australia; or

(ii)         disposed of, dealt with or diminished in value.

  • Order 52A r 5(5) provides for when the court may make a freezing order against a third party.
  • Under O 52A r 5(6):

Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so.

  • Similarly, O 52A r 6 provides:

Nothing in this Order diminishes the inherent, implied or statutory jurisdiction of the Court to make a freezing order or ancillary order.

  • These last two provisions make it clear that the court retains its inherent or implied power to make a freezing order to prevent the abuse or frustration of its processes in relation to matters coming within its jurisdiction.

Order 52A r 5(4) of the Rules

  • The language of O 52A r 5(4) reflects that which has been adopted under the general law in relation to the inherent or implied power of a superior court to grant a Mareva As Deane J, with whom other members of the majority agreed, noted in Jackson v Sterling Industries Ltd:

As a general proposition, it should now be accepted in this country that ‘a Mareva injunction can be granted … if the circumstances are such that there is a danger of [the defendant’s] absconding, or a danger of the assets being removed out of the jurisdiction or disposed of within the jurisdiction, or otherwise dealt with so that there is a danger that the plaintiff, if he gets judgment, will not be able to get it satisfied’. (citations omitted)

  • Order 52A r 5(4) identifies a state of satisfaction by the court as a condition for the exercise of the court’s power to make a freezing order under that rule. The court must be satisfied of three elements:

(1)          one or more of the events described in par (a) or par (b) might occur;

(2)          there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied; and

(3)          that danger arises because one or more of the events described in par (a) or par (b) might occur.

  • That is, it is not sufficient for the court to conclude that one or more of the events described in O 52A r 5(4)(a) or (b) might occur. The court must be satisfied that the identified danger arises becauseone or more of those events might occur. That is, the court must be satisfied that there is a causal connection between the event and the danger. So, for example, the court’s satisfaction that property might be removed from the State (a place inside Australia) to another State would not ordinarily give rise to a relevant danger so as to enliven the court’s power to make a freezing order under O 52A r 5(4) of the Rules. Equally, the mere removal of property from Australia will not necessarily give rise to a relevant danger, particularly where the property is removed to a country where judgments of the court are enforceable.
  • The events referred to in O 52A r 5(4)(a) and (b) must give rise to a ‘danger’ that a judgment or prospective judgment will be wholly or partly unsatisfied. The reference to a ‘danger’ is to a risk of that outcome.
  • The risk or danger must be real or substantial, as opposed to a remote, speculative or theoretical possibility.   The applicant must prove facts from which the court can infer the existence of a real or substantial risk or danger that the respondent will dispose of or otherwise deal with its assets in a way such that the applicant will not be able to satisfy any judgment obtained against the respondent. The facts from which the risk or danger is to be inferred must be proved on the balance of probabilities. However, it is not necessary to establish that it is more probable than not that judgment will be unsatisfied unless a freezing order is made.
  • There is little utility in attempting a more precise quantification of the degree of danger or risk which will justify the grant of a freezing order. The test must be applied in a variety of circumstances.  Ultimately, it is a question for evaluation by the issuing court as to whether the degree of the danger or risk is sufficient to justify an order in the terms which the court is asked to make.  In making that evaluative assessment, the court will bear in mind that a freezing order is a drastic remedy which imposes a severe restriction on a respondent’s right to deal with its assets, and that the purpose of the order is not to provide security for a judgment which the applicant hopes to obtain and fears might not be satisfied.  Nor is a freezing order designed to stop a debtor from sliding into insolvency.
  • In Hua Wang Bank, Kenny J referred to facts from which a prudent, sensible commercial person can properly infer a danger of default if assets are removed from the jurisdiction.  That passage of Kenny J’s decision was cited with approval by the New South Wales Court of Appeal in Severstal Export. The observation was made by reference to the reasons in Third Chandris Shipping Corporation v Unimarine SA, where Lawton LJ said:

There must be facts from which the Commercial Court, like a prudent, sensible commercial man, can properly infer a danger of default if assets are removed from the jurisdiction.  For commercial men, when assessing risks, there is no commercial equivalent of the Criminal Records Office or Ruff’s Guide to the Turf.  What they have to do is to find out all they can about the party with whom they are dealing, including origins, business domicile, length of time in business, assets and the like; and they will probably be wary of the appearances of wealth which are not backed up by known assets. In my judgment the Commercial Court should approve applications for Mareva injunctions in the same way. Its judges have special experience of commercial cases and they can be expected to identify likely debt dodgers as well as, probably better than, most businessmen.  They should not expect to be given proof of previous defaults or specific incidents of commercial malpractice. Further they should remember that affidavits asserting belief in, or the fear of, likely default have no probative value unless the sources and grounds thereof are set out … In my judgment an affidavit in support of a Mareva injunction … should set out what inquiries have been made about the defendant’s business and what information has been revealed, including that relating to its size, origins, business domicile, the location of its known assets and the circumstances in which the dispute has arisen. These facts should enable a commercial judge to infer whether there is likely to be any real risk of default. Default is most unlikely if the defendant is a long established, well known foreign corporation or is known to have substantial assets in countries where English judgments can easily be enforced either under the Foreign Judgments (Reciprocal Enforcement) Act 1933 or otherwise.  But if nothing can be found out about the defendant, that by itself may be enough to justify a Mareva injunction. (emphasis added)

  • The emphasised parts of the quoted passage indicate that what is contemplated is not an assessment about the risks which a businessman would perceive.  Rather, the inference of danger or risk is an inference drawn by the court from facts proven before the court, which may include facts concerning the lack of available information about a respondent.
  • The passage quoted at [45] above also indicates that the mere fact of removal of assets from the jurisdiction of the court will not necessarily give rise to a danger or risk that judgment will be unsatisfied.  In assessing whether such a danger or risk arises because of a removal of assets from the jurisdiction, it is necessary to take account of reciprocal regimes for the registration and enforcement of judgments, and other means by which a judgment may be enforced.
  • The significance of the enforceability of a judgment in a country to which assets are removed is illustrated by the decision in Severstal Export. In that case, it was sought to restrain a Swiss company from removing from Australia cheques received in satisfaction of a judgment it had obtained in Switzerland against an Indian company. The Indian company sought the freezing order in prospect of it registering judgment in proceedings which it had instituted in India against the Swiss company. The Swiss company relied on a provision of Swiss law which the Indian company contended might bar enforcement in Switzerland of the judgment which it hoped to obtain and register in New South Wales. The New South Wales Court of Appeal upheld the primary judge’s conclusion that the requirements of the equivalent to O 52A r 5(4) were satisfied. It did so on the basis that there was evidence on which the judge was entitled to infer that the Swiss company would resist enforcement by relying on the Swiss provision and, while there was no direct evidence that the provision would bar enforcement:

it was arguable that enforcement of the Indian judgment could be successfully resisted in Switzerland and, therefore, there was a danger that the prospective Indian judgment could not be enforced. [70]

Regular and irregular transactions

  • Duro submits that there must be something irregular in the disposition of assets before the court can be satisfied as to the existence of a relevant danger.
  • We do not accept the submission to the extent that Duro contends that the respondent to an application for a freezing order must act for the purpose of avoiding the satisfaction of judgment before a freezing order can be granted.
  • There is some support for Duro’s position in the English authorities.  In TTMI Ltd v ASM Shipping Ltd, Clarke J observed that something more than a real risk that judgment would go unsatisfied is required and referred to a respondent acting for the purpose of avoiding the possibility of judgment or making an unjustifiable disposal of assets.  In Polly Peck International plc v Nadir (No 2), Lord Donaldson MR said that it is not the purpose of a Mareva injunction to prevent a defendant acting ‘as he would have acted in the absence of a claim against him’.
  • Support for Duro’s proposition may also be found in Official Receiver of the State of Israel v Raveh. In that case, Murray J referred to the general law jurisdiction being exercised where a respondent might deal with assets ‘in a way which is deliberately designed or calculated to have the capacity to defeat the final process of the court’.  However, the decision in Raveh, that a Marevaorder cannot be granted for the purpose of enforcing foreign process, is inconsistent with the later decision of the High Court in PT Bayan.  In the latter case, Keane and Nettle JJ referred to Raveh and, albeit without reference to the element of deliberate design or calculation, indicated that Murray J’s understanding reflected a narrower view of the inherent power to make a freezing order than is warranted by the principle which informs the power.
  • In Jackson, Gaudron J said that an asset preservation order of the Mareva variety, ‘issued only when the court is satisfied that a defendant is deliberately disposing of his assets with the object of defeating or frustrating the ultimate judgment of the court’, fell within the court’s inherent or implied power.  However, subsequently, in Patrick, Gaudron J said that the court’s inherent jurisdiction is not confined to orders of that kind. Gaudron J recognised that the inherent or implied power ‘extends to whatever orders are necessary to enable the Federal Court effectively to exercise its jurisdiction’.  The plurality in Patrick identified the same scope of the inherent or implied power.
  • The jurisdictional basis for, and extent of, the inherent or implied power to make a freezing order recognised in Patrickis inconsistent with the power being limited to cases where a party deliberately acts for the purpose of defeating the court’s process. If the court is empowered to make orders to ensure the effective exercise of the court’s jurisdiction, there is no principled reason why it can only restrain conduct undertaken with the purpose (as opposed to merely having the effect) of frustrating its process.
  • Consistently with the approach in Patrick, the court in PT Bayanperceived no imperative for there to be a finding that the dealing must be for the purpose of defeating the prospective judgment before the jurisdictional requirement in O 52A r 5(4)(b) could be satisfied. In National Australia Bank Ltd v Bond Brewing Holdings Ltd, the court said that a judgment it was considering did not involve ‘a mistaken view that a Mareva injunction cannot be obtained in the absence of a positive intention to frustrate any judgment’.  In Riley McKay Pty Ltd v McKay, the New South Wales Court of Appeal referred to a Mareva injunction as being directed to dispositions, other than the payment of debts in the ordinary course of business, which are either intended to frustrate, or ‘have the necessary effect of frustrating’ a prospective judgment.
  • Further, and more importantly for present purposes, there is no basis in the text of O 52A r 5(4)(b) for a requirement that the respondent to a freezing order application must intend that the relevant conduct will prevent a prospective judgment from being satisfied.
  • Therefore, if the effect of a dealing is to give rise to a danger that a prospective judgment will be wholly or partly unsatisfied, then the jurisdictional requirement in O 52A r 5(4)(b) will be satisfied irrespective of the purpose for which the respondent may act. The court is able to protect the exercise of its jurisdiction by preventing its frustration by conduct which is not intentionally directed to that end.
  • That is not to say that the purpose for which a respondent may enter into a transaction, or the irregular nature of the transaction, will be irrelevant to the exercise of the power to grant a freezing order.
  • If there is evidence that a respondent intends to act with the purpose of frustrating the satisfaction of a judgment, that will be a powerful discretionary consideration once the court is satisfied of the existence of the danger referred to in O 52A r 5(4)(b).
  • Further, evidence as to such an intention held by the respondent will be a factor pointing towards the existence of a real or substantial risk that a prospective judgment will be unsatisfied because assets might be dealt with.  If the evidence demonstrates that the respondent may act for that purpose then it may readily be inferred that there is a real or substantial risk of the purpose being achieved.
  • Conversely, when the court exercises its discretion having found the jurisdictional requirement to be satisfied, the absence of any purpose of defeating the court’s process or any irregularity in the transaction will be a relevant factor. For example, it is difficult to see how the discretion would be exercised in favour of granting a freezing order where the danger referred to in O 52Ar 5(4)(b) arose only because of dealings, such as the payment of normal trading debts, in the ordinary course of trade. In such a case, while the court may be satisfied of the existence of a danger that judgment will be unsatisfied because of such dealings, the court would not exercise its discretion to make a freezing order. It remains the case that a freezing order is not made under O 52A only for the purpose of providing security for judgment or preventing insolvency.
  • In the present case, the ground of appeal does not contend that, if the primary judge was correct in finding the jurisdictional requirement to be satisfied, his Honour erred in exercising his discretion to grant a freezing order. In any event, as discussed below, the kind of dealing which the evidence indicates might frustrate the exercise of the court’s discretion in the present case is not simply the payment of normal trading debts in the ordinary course of trade.

Facts found by the primary judge

  • The primary judge made the following findings as to the background facts, relevant to the matters referred to in O 52A r 5(4) of the Rules. Although some of these facts were deposed to in affidavits, it was apparent that the primary judge implicitly accepted that evidence.
  • Duro has paid up capital of $1.00.  It is a wholly owned subsidiary of Duro SA, a Spanish company.  The sole director of Duro is Mr Ruben Fernandez.  Mr Fernandez was in Spain at the time of the primary judge’s decision, but was expected to return to Perth in a month.
  • Ms Victoria Strong is employed by Duro as a Legal and Commercial Manager and manages Duro’s affairs on a day to day basis.  She reports to, and obtains assistance from, representatives of Duro SA.  Duro SA provides Duro with financial and logistical support.
  • Duro is currently engaged in arbitral proceedings with Samsung.  Those proceedings are being conducted in Singapore.  Duro is also engaged in two other sets of arbitral proceedings.  Duro is managing contracts with some 50 subcontractors engaged for the purposes of the Project and managing disputes arising out of those subcontracts.
  • Duro has no current plans to leave Australia, remove assets from Australia, dispose of assets, or diminish the value of its assets.  Duro is not in the process of winding up its operations in Australia.  Duro has responded to expressions of interest and tenders for construction projects in Australia but has not been successful in winning work.
  • Duro SA has made direct investments in companies in the Australian construction market.  Duro SA holds approximately 10% of the shares in Ausenco Ltd with whom Duro SA has entered a memorandum of understanding to pursue ‘engineering procurement construction’ projects.  If any such projects are secured in Australia, Duro would undertake that work.
  • Duro’s accounts for the financial year ending 30 June 2017 are currently being audited by the accountancy firm KPMG.
  • The most recent publicly available financial statements of Duro are those for the calendar year ending 31 December 2015.  The financial statements include a balance sheet that records total assets of $131,283,858 and total liabilities of $126,942,271, giving a net asset position of $4,341,587.  Duro’s assets principally comprised cash, cash equivalents and receivables.  Its liabilities principally comprised trade debts and a provision of approximately $67 million in respect of a guarantee.
  • The notes to Duro’s accounts for the year ending 31 December 2015 record a loan by Duro to Duro SA of $53,697,442, of which $12,000,000 had been repaid.  It appears from Duro SA’s accounts that the balance of the loan has been repaid.
  • A search of the Personal Property Securities Register established under s 147 of the Personal Property Securities Act 2009(Cth) discloses that security over Duro’s present and after-acquired property (subject to unspecified exceptions) was granted to the Australia and New Zealand Banking Group Ltd on 5 November 2013. It is not possible to glean from the financial statements for the year ending 31 December 2015 what the secured debt is.
  • The financial statements of Duro SA and its subsidiaries for the year ending 31 December 2016 included a report to shareholders dated 17 March 2017 by Duro SA’s auditor.  In that report the auditor referred to Duro SA’s liquidity risk and to the steps being taken to improve its liquidity.  The auditor stated, in effect, that Duro SA’s circumstances indicated that there was a material uncertainty that could give rise to significant doubts surrounding the company’s ability to continue as a going concern.
  • A ‘Results Report’ published by Duro SA in respect of the calendar year ending 31 December 2017 included the following statements about Duro SA’s operations and finances:

Main figures and milestones for the period

  • In FY 2017, the company carried out an intense search for partners in a context of financial difficulty, which limited its business activity.
  • The search for partners in the domestic and international market, with Rothschild as advisor, has led to multiple approaches, visits and due diligences from various different companies and led to a profoundly rigorous review of ongoing projects, including the current status and estimated costs for completion.  The review led to adjustments in diverse projects which were started in previous years.  These adjustments took place both in December, when they were announced by means of a significant deed, and at the close of the year.
  • Reduced business activity, the consequence of the Group’s financial situation, is reflected in both the sales, lower than in 2016, and in the negative margins, related to the greater relative proportion of structural costs, in all divisions except for Services, which took advantage of the Lujan and Matheu projects
  • The Company negotiated in February 2018 the terms and conditions for a proposal for a refinancing agreement with the banks, after three previous standstill agreements (June to September 2017, September 2017 to 15 January 2018 and January to 15 April 2018).  This agreement proposal, with sufficient support from the banks, should be materialized in a refinancing agreement which would be fully effective after a successful capital increase of between 100 and 125 million Euros.  The effectiveness of the agreement will enable a significant reduction in the financial leverage, balancing the company’s own funds, improving liquidity and having sufficient financing for bringing into play a new business plan in the coming years, and in short, relaunching the Company’s business activity.

 

  • The Results Report records that, ‘[o]n 16 January [2018 Duro SA] reported the signing of the extension to the standstill agreement with its banks’.  The Results Report also records that ‘on 7 March [2018 Duro SA] provided further information concerning the refinancing process with its banks’.
  • In a press release dated 19 March 2018, Duro SA stated that $19.1 million had been recovered from Samsung.  Duro SA stated that in the ‘main case’, which was proceeding by way of an arbitration in Singapore, a further $310 million was being claimed from Samsung.  It stated that a final decision was expected at the end of 2018 or in early 2019.

Primary judge’s approach

Relevant questions identified

  • The primary judge noted that it was common ground that there were three primary questions which must be addressed:

(a)          Has [TGP] shown it has a good arguable case on an accrued or prospective cause of action?

(b)          On the evidence before the court is there a danger that a prospective arbitral award and any judgment in respect of it will be unsatisfied because assets are removed from Australia, or disposed of, or dealt with, or diminished in value?

(c)          In all the circumstances is this a case in which it is in the interests of justice to grant a freezing order?

Good arguable case

  • The primary judge concluded that TGP had a good arguable case on its claims.  The primary judge concluded that, while Duro has cross-claims which it claimed to be entitled to set-off, it could not be assumed that Duro would be successful in those cross-claims.  The primary judge said that the existence of Duro’s set‑off was an additional matter which he would take into account when considering how the interests of justice are to be reflected in the relief to be granted. As there is no challenge to this aspect of the primary judge’s reasons, there is no need to say anything more about it.

Danger that a prospective judgment will be unsatisfied

  • The primary judge found that there was a danger that a prospective judgment based on an arbitral award will be wholly or partly unsatisfied because Duro’s assets will be removed from Australia or disposed of, dealt with or diminished in value. That finding is made in terms of O 52A r 5(4)(b) of the Rules.
  • The primary judge identified two kinds of dealing which gave rise to that danger:

(1)          Duro SA exerting its control over Duro to obtain the benefit of the funds which Duro will receive if Duro has any significant success in its claims against Samsung.

(2)          Security over Duro’s claims against Samsung being granted as part of any refinancing of Duro SA.

  • As to the first of those matters, the primary judge said that if Duro has any significant success in its claims against Samsung it will receive funds that exceed its operational requirements as disclosed by the evidence.  In contrast, on the basis of the evidence of Duro SA’s present financial position, it is likely that Duro SA will continue to have a significant need for funds.  To expect Duro SA not to exert its control over Duro to obtain Duro’s funds in those circumstances would be quite unrealistic.  The primary judge further observed that: 

The inference I have drawn is made more compelling by the fact that [Duro] lent over $53 million to Duro SA in 2015.  Even though that loan may have been repaid it is evidence that [Duro] will provide funds to its parent company when required.

  • The primary judge made two observations with respect to Ms Strong’s evidence about the absence of any current plans on the part of Duro to leave Australia, remove assets from Australia, dispose of assets, or diminish the value of its assets.  First, Duro’s current plans may well be reviewed if it receives substantial funds by way of an arbitral award.  Second, the board and management of Duro SA are in a position to exert effective control over the affairs of Duro and it is their plans that are most relevant and they are not matters about which Ms Strong gave evidence.
  • As to the second of the matters referred to at [80] above, the primary judge observed:

Further, to the extent to which the defendant’s financiers, or Duro SA’s financiers, do not have existing security interests in the defendant’s claims against Samsung, I consider that there is a danger that as part of any refinancing of Duro SA – an exercise that the evidence suggests is currently being undertaken – security over those claims will be granted to Duro SA’s financiers.

  • The primary judge noted that, although the evidence suggested that an arbitral award was not expected until late 2018 or early 2019, that expectation did not preclude the possibility that Duro will receive funds in the interim as a consequence of a settlement.
  • The primary judge rejected Duro’s submissions that the application should be refused by reason of the signing of a certificate of urgency by TGP’s solicitor, the absence of prior oral conferral and TGP’s inaction from mid-2015. The primary judge said that the inaction was explicable by TGP’s supervening insolvency, and that there had been a change in circumstances.  The change was described in the following terms:

first, Duro SA is in financial difficulties; second, direct evidence that [Duro’s] assets have been used to fund Duro SA’s activities is now available when it was not in 2015; and thirdly, [TGP] has obtained funding to pursue its claims in arbitration. (emphasis added)

Exercise of discretion

  • The primary judge then concluded that it was in the interests of justice to grant a freezing order, and that the value of the assets to be subject to the freezing order should be $20 million. The primary judge indicated that an undertaking would be required, and that he would make an ancillary order requiring Duro to disclose its assets and liabilities.  No complaint is made about these matters on appeal.

Form of order

  • In the primary decision, the primary judge said that he would hear from the parties as to the precise form of the orders. The primary decision was delivered on 4 May 2018.  A hearing as to the form of the orders was held on 7 May 2018.  At that hearing, there was debate as to whether the freezing order should only operate until an arbitral tribunal had been convened and given an opportunity to consider whether it should make a freezing order.
  • The primary judge gave oral reasons indicating that the freezing order would continue until further order. The primary judge indicated that he was satisfied that an order in those terms will not have the effect of usurping the role of the arbitral tribunal in a manner that is contrary to the observations of Martin CJ in Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd.  The primary judge said that there were essentially three reasons for coming to that conclusion:

(1)          Article 9 of the Model Law expressly provides for the court to grant interim measures and, that being so, the making of a freezing order until further order could not be said to usurp the role of the arbitral tribunal.

(2)          Cape Lambert was concerned with s 7 of the Act.

(3)          The purpose of the freezing order is not only to preserve the arbitral process, but also to preserve the court’s processes in relation to the enforcement of any judgment that may result from the arbitral proceedings.

  • The freezing order made by the primary judge was expressed to have effect ‘until further order’.
  • The freezing order provided that Duro must not remove from Australia or in any way dispose of, deal with or diminish the value of any of its assets in Australia up to the unencumbered value of $20 million. The freezing order allowed for Duro to so act so long as the unencumbered value of its assets in Australia still exceeds $20 million.
  • The freezing order also provided, in effect, that if the value of Duro’s assets in Australia was less than $20 million, Duro could not dispose of, deal with or diminish the value of any of its assets unless the unencumbered value of all of its assets would exceed $20 million after the disposal etc.
  • The freezing order did not prohibit Duro from paying reasonable legal expenses or from dealing with or disposing of assets in the ordinary and proper course of its business, including paying business expenses bona fide and properly incurred.  The freezing order also did not prohibit Duro from otherwise discharging obligations bona fide and properly incurred under a contract entered into before the freezing order was made, provided it gave 2 days’ notice to TGP.

Grounds of appeal

  • Duro appeals against the freezing order on two grounds.
  • Ground 1 contends that the primary judge erred in law and fact in making the finding referred to at [79] above.  The particulars to the ground contend that the evidence before the primary judge was not capable of supporting the findings referred to at [80] above or the ultimate conclusion referred to at [79] above.  The particulars contend that:

The primary judge should have found that there was no, or no evidence from which to infer the existence of a, real risk or real danger that a prospective judgment based on an arbitral award will be wholly or partly unsatisfied because the assets of Duro will be removed from Australia or disposed of, dealt with or diminished in value.

  • Ground 2 contends that the primary judge erred in law by ordering that the freezing order would have effect until further order.  Duro contends that the freezing order should only have had effect until an arbitral tribunal had been constituted and given a reasonable time to consider whether to grant equivalent relief.  Ground 2 only arises for determination if ground 1, which contends that no freezing order ought to have been made, fails.

Duro’s submissions on ground 1

  • Duro submits that the inference that Duro SA would exercise its control over Duro to obtain the benefit of Duro’s surplus funds was, properly understood, a matter of conjecture only.[59] Duro notes that the 2015 loan was made before the dispute arose with TGP, and there was no evidence as to the circumstances in which Duro entered into that loan agreement or the purpose of the loan.  Duro says that the fact that its parent has a significant need for funds does not advance the situation.  Duro says that the available evidence did not go beyond establishing that it was possible that there was a risk that a loan of surplus funds would be made, and there were no facts proven capable of supporting an inference as to the relevant danger.
  • Duro says that the implication of the primary judge’s approach is that, in any case where a subsidiary is shown to have advanced surplus funds to its parent, and the parent is shown to have need for funds, a freezing order is available to a claimant who can establish an arguable case against the subsidiary and that the balance of convenience favours the grant of an order.  Duro characterises that as a surprising outcome which could ‘produce considerable commercial disruption and uncertainty’.
  • Duro submits that the existence of a risk that Duro might grant security over its claim against Samsung, as part of the refinancing of Duro SA, was merely a matter of conjecture.  It says that the only evidence was that Duro SA was negotiating refinancing.  There was no evidence of what security was being offered, or that Duro or other subsidiaries of Duro SA had granted security for the benefit of Duro SA in the past.  Duro also submits that, in the absence of evidence to suggest that it would be in Duro’s best interests to grant such a security, it could not be inferred that Duro would provide the security in a manner that would breach its director’s duties to the company.
  • Duro says that there was no other evidence capable of supporting the primary judge’s ultimate findings as to the existence of the relevant danger.

TGP’s submissions on ground 1

  • In response, TGP contends that the evidence before the primary judge was sufficient to support the conclusion that there was a real danger that Duro might act in a manner that will have the effect of frustrating a prospective order of the court enforcing a prospective arbitral award.
  • TGP notes the following aspects of the evidence before the primary court:

(1)          The evidence was to the effect that Duro has no significant ongoing commercial activity in Australia.  As of January 2018, Duro’s only apparent work in Australia was at an end, and it had two employees: a legal and commercial manager and a person responsible for administration and accountancy.  The day‑to‑day activities of Duro involve the management of disputes associated with the Project.  Duro has not successfully tendered for any other work in Australia.

(2)          There was evidence that Duro had committed an offence by failing to lodge financial statements and directors’ reports with ASIC for the 2016 and 2017 financial years, and that its sole director was no longer resident in Australia.

(3)          In addition to the 2015 loan by Duro to Duro SA, which TGP says was unsecured, there was evidence of a number of loans from apparent subsidiaries to Duro SA.

(4)          Duro had failed to pay TGP the sum of $2 million in accordance with an adjudication determination made under the Construction Contracts Act 2004 (WA), and in defiance of another adjudication determination, continued to assert a set-off against other amounts due to TGP.

(5)          Duro’s last publicly available financial statements record that it has little tangible property and the vast majority of its other assets are of a kind that are easily transferred out of or diverted away from Australia.

  • We do not accept Duro’s submission that it is not open to TGP to rely on the matters referred to at [101] above in the appeal, many of which were not relied on by the primary judge, without having filed a notice of contention.  Ground 1 contends that the evidence before the primary judge was not capable of supporting the conclusion as to the relevant danger, and the primary judge should have found there was no evidence from which to infer such a danger.  It is open to TGP to respond to that ground by pointing to evidence which does support the conclusion as to the relevant danger.  The court’s determination of a ground expressed in those terms necessarily entails a review of all of the evidence before the primary judge, and an assessment as to whether the evidence as a whole is capable of supporting the primary judge’s ultimate finding.
  • TGP submits that, according to common commercial experience, parent companies exert control over subsidiary companies to obtain use of funds surplus to the subsidiary’s requirements and to obtain guarantees or other securities for group related debts.  The conclusion was clearly open to the primary judge to infer that Duro SA will exert its control over Duro to obtain the benefit of Duro’s funds.  Likewise, there was a danger that one of the benefits Duro SA would obtain is security over Duro’s claims against Samsung. TGP says that there is no inference that the provision of intercompany loans and securities would necessarily be a breach of directors’ duties, and points to the 2015 loan from Duro to Duro SA.
  • TGP also invites the inference, from the failure to lodge ASIC reports and satisfy the adjudication determination, that Duro is prepared to act in breach of its legal obligations and has a propensity to avoid paying its debts.
  • TGP submits that it was open to the primary judge to conclude that there was a danger of the relevant kind.

Disposition of ground 1

  • We accept that it was open to the primary judge to infer that, if success in the proceedings against Samsung resulted in Duro receiving funds in excess of its operational requirements, there was a real risk that Duro SA would obtain the benefit of those funds.  That inference was open for the reasons given by the primary judge.  The real prospect that Duro would have funds surplus to its operational requirements at a time when Duro SA would have a need for funds, considered against the history of intercompany lending, gives rise to an inference as to a real risk that Duro will lend surplus funds to Duro SA.  That inference is more easily drawn in circumstances where Duro has not adduced any evidence as to the future intentions of Duro SA, which it would be expected to have adduced if that evidence would assist its case.  It may also be noted that Duro did not offer any enforceable undertaking not to lend proceeds of its claim against Samsung to Duro SA until the arbitration with TGP is resolved.
  • There was little evidence as to the terms and conditions on which such a loan might be made.  The imperative for any loan transaction to be in Duro’s best interests, and the history of past lending, supports the inference that a commercial rate of interest would be charged on the loan. Duro notes that there is no evidence about the extent to which security has been granted for intercompany loans.  In those circumstances, it cannot be inferred that any loan by Duro to Duro SA would necessarily be secured.
  • For the above reasons, the primary judge was correct to conclude that there is a real risk that any funds which Duro receives from the Samsung proceedings will be transferred to Duro SA. That is an inference that the assets of Duro might be removed from Australia or dealt with, for the purposes of O 52A r 5(4)(b) of the Rules.
  • However, the conclusion that Duro’s assets might be removed from Australia or dealt with does not itself satisfy the requirements of O 52A r 5(4)(b). It was also necessary for the primary judge to be satisfied that there is a danger that the prospective judgment would be wholly or partly unsatisfied because that might occur. That is, as explained at [41] above, the court must be satisfied of a causal connection between the relevant removal of or dealing with the asset and the danger that a prospective judgment will not be satisfied. This further step requires consideration of the means by which Duro SA might gain the benefit of funds received by Duro which are surplus to Duro’s requirements.
  • We do not accept TGP’s submission that the evidence as to Duro’s failure to lodge an ASIC report and satisfy adjudication determinations shows that Duro is prepared to act in breach of its legal obligations and has a propensity to avoid paying its debts. As to the latter matter, TGP’s insolvency raises questions as to the availability of a statutory set-off under s 553C of the Corporations Act 2001 (Cth). We are not satisfied that an inference as to general lawlessness is properly drawn from the first matter.
  • Surplus funds could be transferred from Duro to Duro SA by way of gift, dividend or loan.  However, counsel for TGP properly conceded that there was no evidence to support the inference that Duro might make a gift to Duro SA or distribute dividends in a manner that left Duro in a position where it was unable to satisfy its contingent liabilities. That leaves only the prospect of a loan by Duro to Duro SA.
  • If the arbitral proceedings against Samsung result in a significant payment of money to Duro, it will be by way of payment of funds into a bank account held by Duro.  The asset which Duro would then have would be a chose in action: the debt owed by the bank to Duro for the amount standing to the credit of Duro in the bank account.  A transfer of funds by Duro to Duro SA would involve the reduction in the debt owed by the bank to Duro and the creation of a debt in the same amount owed by Duro SA to Duro.  The value of Duro’s net assets would not be affected so long as the debt owed by Duro SA is enforceable by Duro and Duro SA has the capacity to repay the loan on the due date.  In that event, the dealing in Duro’s assets would change the identity of the debtor but would not alter the value of the receivable.  The dealing would not give rise to a danger that the prospective judgment would be unsatisfied.
  • TGP submits that the enforcement of the prospective judgment would be made more difficult if the receivable from which judgment might be satisfied was a debt owed by a foreign company rather than a debt owed by an Australian bank. So much may be accepted.  However, the test is not whether satisfaction of the prospective judgment will be more difficult because of a dealing with Duro’s assets.  The court must be satisfied that there is a danger that the prospective judgment will be wholly or partly unsatisfied because of the relevant dealing.  Increased difficulty in enforcing a prospective judgment will only be relevant if it establishes a danger that the judgment will be unsatisfied.
  • There was no direct evidence as to the extent to which the prospective arbitral award, or a judgment of this court based on such an award, would be enforceable in Spain.  It was common ground that Spain was a party to the Model Law, and so had assumed an obligation under art 35 of the Model Law to recognise a relevant arbitral award as binding and make provision for its enforcement.  There is no evidence that Spanish law does not provide for the enforcement of a judgment or arbitral award by attachment of debts owed to the judgment debtor.  Counsel for TGP also accepted that satisfaction of the prospective arbitral award would also constitute satisfaction of a judgment of this court based on the award.  The evidence does not establish that the fact that Duro SA is located in Spain itself gives rise to a danger that the prospective judgment will not be satisfied if a loan is made by Duro to Duro SA.  In any event, the evidence indicates that Duro SA holds assets in a number of countries, including Australia, where it holds shares in Duro and Ausenco Ltd.
  • TGP’s contention that the evidence supports a conclusion that the jurisdictional requirement was satisfied therefore turns on its submissions as to the financial position of Duro SA.  That is, does the evidence establish the existence of a real risk that Duro SA may not be able to repay a substantial loan made by Duro to Duro SA at the time when the loan becomes payable or is sought to be enforced?
  • The evidence as to the financial position of Duro SA comprises:

(1)          The English language version of consolidated financial statements of Duro SA for the Spanish financial year ended 31 December 2016 (2016 Accounts) and the Directors’ Report for 2016 (2016 Directors’ Report).

(2)           A press release issued by Duro SA on 20 March 2018, reporting on its Annual General Shareholders’ Meeting 2017 (Press Release).

(3)          The 2017 ‘Results Report’ referred to at [74] – [75] above.

  • The 2016 Accounts indicate that, as at 31 December 2016, Duro SA had non-current assets of about €242 million, current assets of about €586 million and total assets of about €829 million.  Most of the non-current assets were comprised of trade and other receivables, and current investments in group companies and associates. At the same time, there were non-current liabilities of about €309 million and current liabilities of about €462 million, leaving a balance of equity of about €57 million.  In the 2016 financial year, Duro SA made a loss of about €23 million, compared to a loss of about €85 million in the 2015 financial year.
  • Note 2.2 to the 2016 Accounts refers to the above position and the distribution of about €9 million in dividends.  The note also refers to an increase in Duro SA’s liquidity risk, ‘basically due to enforcement of the guarantees of the’ Project and financing necessary to complete two other projects.  This led to ‘higher drawdowns from available credit facilities and an increase in the Group’s overall debt’.  As at the authorisation for issue of the 2016 Accounts, Duro SA was ‘in talks with the financial institutions in the bank pool to match its liquidity needs and the maturity of the debt to its business plan’.  Duro SA was also exploring ‘alternative measures to improve liquidity in the short and medium term’, including by ‘bringing in a strategic partner, disposing of non-core assets, and carrying out an organisational streamlining’.  The note continued:

The directors of [Duro SA] have prepared the accompanying financial statements on a going concern basis on the favourable outlook for the conclusions of the negotiation process and the arrival of a strategic partner. Until the process is clear, there are reasonable doubts regarding [Duro SA’s] ability to continue its business if an agreement with the financial institutions is not reached.

  • Note 4.1(c) to the 2016 Accounts repeated the statements as to increased liquidity risk, negotiations with financial institutions and other steps to improve liquidity.  The note gives a negative value for total liquidity reserves in the amount of about €289 million.
  • The 2016 Directors’ Report noted that Duro SA’s balance sheet showed gross cash of €65 million and net debt of €290 million.  The increase in net debt from 2015 was said to be caused mainly by enforcement of guarantees for the Project for €88 million and losses related to two other projects.  It was said that Duro SA had begun taking steps to boost liquidity while litigation involving those projects is underway.  Duro SA had also ‘issued a sales mandate for non-productive assets to avoid any further erosion of its cash position’.  It was also said that Duro SA was ‘in talks with credit institutions to adapt its debt maturities to the likely resolution of these business disputes’.  The report said:

[Duro SA] expects to return to profit in 2017, although the objective for the year is to conclude the negotiations with the main financial institutions in the bank pool to match its liquidity needs and the maturity of the debt to its business plan, not [to] mention take alternative measures to improve liquidity in the short and medium term, such as bringing in a strategic partner, disposing of non-core assets, and carrying out an organisational streamlining.

  • The Press Release noted that the net consolidated result for the group in 2016 was a loss of €18 million.  It indicated that three main reasons for the result were unexpected events at the end of a project in the United Kingdom, high financial costs and the ‘cost of arbitration processes currently underway’.  It referred to a total claim against Samsung of €204 million, and a total amount of outstanding invoices and claims in arbitration of almost €500 million.  The Press Release refers to engaging the investment bank Rothschild to:

reinforce the company’s strategic position in any way possible in order to strengthen its solvency and lead to future growth, and to provide support in renegotiating the debt with banks.

The Press Release indicated that the management team had been ‘reinforced’ by the appointment of two new advisors ‘in the financial restructuring process’.  It stated that:

In relation to the restructuring process, the financial entities have proposed signing a standstill agreement to delay payment of the debt until a definitive agreement is reached; this is being looked into and could be signed very soon.

  • The Results Report began by noting that, in the 2017 financial year, the ‘company’ (which we infer to be Duro SA) ‘carried out an intense search for partners in a context of financial difficulty, which limited its business activity’. The report noted a net loss of the group of €254 million, and a ‘consolidated and individual net worth’ of negative €164 million and negative €181 million respectively.  The report said:

[Duro SA] negotiated in February 2018 the terms and conditions for a proposal for a refinancing agreement with the banks, after three previous standstill agreements (June to September 2017, September 2017 to 15 January 2018 and January to 15 April 2018). This agreement proposal, with sufficient support from the banks, should be materialized in a refinancing agreement which would be fully effective after a successful capital increase of between 100 and 125 million Euros. The effectiveness of the agreement will enable a significant reduction in the financial leverage, balancing [Duro SA’s] own funds, improving liquidity and having sufficient financing for bringing into play a new business plan in the coming years, and in short, relaunching [Duro SA’s] business activity.

  • The Results Report referred to the sale of office buildings as ‘part of the disinvestment process’, and said that Duro SA was ‘still analysing the sale of other non-strategic assets’.  It said that, as at 31 December 2017, the consolidated net debt amounted to about €272 million.
  • Financial tables in the Results Report include reference to a net loss of ‘the parent company’ (which we infer to be Duro SA) of about €254 million, and a negative net worth of Duro SA of about €151 million.  The total liabilities for the group (about €923 million) exceeded total assets (about €759 million) by about €164 million.  Current liabilities for the group (about €825 million) exceeded current assets (about €618 million) by about €207 million.
  • The above material indicates that Duro SA is a large construction company, forming part of a group of subsidiary and associated companies including Duro.  However, just prior to the application for a freezing order, Duro SA had significant negative equity and had entered into a series of ‘standstill’ agreements with its financiers.  While the Results Report referred to the negotiation of ‘a proposal for a refinancing agreement with the banks’, no actual agreement had been reached.  The report suggests that the contemplated refinancing agreement will be ‘fully effective’ only after a successful capital increase of between €100 million and €125 million.  A ‘strategic partner’ which would commit to that investment was being searched for but had not been located.
  • On the basis of this evidence, it was open to the primary judge to conclude that Duro SA ‘will continue to have a significant need for funds’, and was in ‘financial difficulties’. The financial position indicated by the above material was not such that recovery will not be possible.  However, recovery from that position would appear to depend on success in various contested proceedings in which about €500 million is claimed, reaching a suitable refinancing agreement with Duro SA’s financiers and obtaining a further injection of capital into the company.  None of those matters appeared to be assured.  If recovery from Duro SA’s difficult financial position is not achieved, there is a real prospect that Duro SA might not have the capacity to repay a significant loan by Duro to Duro SA at the time when it falls due or is sought to be enforced.
  • The above evidence supported the primary judge’s conclusion that there was a danger that a prospective judgment based on an arbitral award will be wholly or partly unsatisfied because Duro’s assets might be dealt with.  The evidence establishes a real and not remote risk that, if Duro was successful in its claims against Samsung:

(1)          Duro would hold funds in excess of its operational requirements;

(2)          Duro would lend those funds to Duro SA;

(3)          Duro SA would not have the capacity to repay the loan to Duro at the time when it fell due for repayment, or was sought to be enforced; and

(4)          Duro’s remaining assets would be insufficient to wholly satisfy a judgment of the court based on an arbitral award against Duro in favour of TGP.

  • This approach does not involve the surprising or commercially disruptive outcome suggested by Duro in its submissions summarised at [97] above.  The freezing order in this case is not justified merely by the prospect that Duro will lend funds surplus to its operational requirements to Duro SA.  The important additional element is the evidence as to the precarious financial position of Duro SA, which gives rise to a real risk that Duro SA will lack the capacity to repay a significant loan when it falls due or is sought to be enforced.  Duro’s own financial position, and limited presence in Australia at present, is also an important factor.
  • For the purposes of this appeal, it is unnecessary to determine whether it was open to the primary judge to infer that Duro might grant security over its claim against Samsung as part of Duro SA’s refinancing.  The primary judge’s ultimate conclusion that the jurisdictional requirement was satisfied is supported by the inference as to the loan by Duro to Duro SA.  However, we accept Duro’s submissions, summarised at [98] above, that the inference as to the grant of security was not open on the evidence, given the absence of evidence as to the content of the refinancing negotiations, a past history of security being provided and the manner in which the grant of security could be in the best interests of Duro.
  • For these reasons, Duro’s first ground of appeal has not been established.

Duro’s submissions on ground 2

  • Duro submits that, whether it is considering the grant of a freezing order under its implied or inherent power or under art 17J of the Model Law, the court is acting in aid of the prospective enforcement of an arbitral award in accordance with the Act.  In either case, Duro submits that the court is required to pay due regard to the subject matter, scope and purpose of the Act in the exercise of the relevant power.
  • Duro also submits that, by s 39(1)(a)(vi) and s 39(2) of the Act, a court performing functions or exercising powers under the Act or Model Law is required to have regard to the objects of the Act. The following relevant objects are identified in s 2D of the Act:

(a)           to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and

(b)           to facilitate the use of arbitration agreements made in relation to international trade and commerce; and

(c)           to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and

(e)          to give effect to the [Model Law].

  • Duro submits that a court faced with an application for a freezing order in aid of a prospective award to which the Act applies should:[101]

(1)          Exercise judicial power to facilitate the agreement of the parties to resolve their disputes by arbitration; and

(2)          In the absence of a compelling reason to do otherwise, avoid exercising the power in a way which would usurp jurisdiction which the parties have agreed should be conferred upon an arbitrator.

  • Duro submits that the power of a court to grant interim relief under art 9 and art 17J of the Model Law does not detract from that approach, as art 17J recognises that the power to grant an interim measure in relation to arbitral proceedings should be exercised ‘in consideration of the specific features of international arbitration’.
  • Duro submits that the primary judge erred in failing to approach the exercise of the discretion in formulating the freezing order in a way which reflected the requirement that a court exercise its art 17J power sparingly and in a way which gives due recognition and weight to the objects of the Act.
  • Duro contends that, in light of the above matters, any freezing order should have operated only until the arbitral tribunal was constituted and has had a reasonable opportunity to consider for itself whether to grant relief equivalent to a freezing order.

TGP’s submissions on ground 2

  • TGP submits that the court’s power to grant freezing orders is for the purpose of protecting the court’s process and the administration of justice. TGP contends that this is not a power that is shared with the arbitral tribunal, which has an independent, albeit similar, power to protect the arbitral process. TGP refers to articles 9 and 17J of the Model Law, and says that the court’s power to grant freezing orders under those provisions and its implied or inherent power are independent powers which do not involve an encroachment on the exclusive jurisdiction of the prospective arbitral tribunal.  TGP contends that the primary judge made no error, and did not fail to have regard to the objects of the Act, in exercising the court’s discretionary power.

Disposition of ground 2

  • Under art 17(1) of the Model Law, unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.  As noted at [16] above, an ‘interim measure’ is defined by art 17(2) of the Model Law to include an order made prior to the final award to preserve assets out of which a final award may be satisfied.
  • Article 17A of the Model Law provides for the conditions of the exercise of this jurisdiction by the arbitral tribunal.
  • Under art 17H(1):

An interim measure issued by an arbitral tribunal shall be recognized as binding and, unless otherwise provided by the arbitral tribunal, enforced upon application to the competent court, irrespective of the country in which it was issued, subject to the provisions of article 17 I. [which deals with the limited grounds for refusing recognition or enforcement of an interim measure]

  • The terms of art 17J of the Model Law are reproduced at [15] above.
  • Under art 9 of the Model Law:

It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure. (emphasis added)

  • It is also relevant to note the provisions of s 7 of the Act.  In broad summary, s 7(2) provides for a court to stay curial proceedings involving the determination of a matter capable of settlement by arbitration under an arbitration agreement, and refer the parties to arbitration.  Under s 7(3) of the Act:

Where a court makes an order under subsection (2), it may, for the purpose of preserving the rights of the parties, make such interim or supplementary orders as it thinks fit in relation to any property that is the subject of the matter to which the first-mentioned order relates.

  • In Cape Lambert, Martin CJ, with whom Buss JA agreed, held that the power in s 7(3) should be utilised for the purpose of promoting and enforcing the agreement of the parties to resolve their disputes by arbitration, rather than by making orders which would be inconsistent with, or subversive of, that agreement.
  • Martin CJ inferred that the orders contemplated by s 7(3) of the Act:

are orders which are interim, in the sense that they are necessary to preserve the rights of the parties in relation to any property that is the subject of the matter to which the stay orders relate until such time as the arbitral tribunal can itself embark upon the reference and determine whether interim measures in relation to that property should be ordered, or supplementary in the sense that they augment or facilitate the reference of the dispute to arbitration, by preserving those rights until the arbitral tribunal is properly seized of the dispute.

  • Martin CJ also observed that:

This approach to the ambit of the powers conferred upon the court by s 7 of the Act is consistent with the limited role which national courts play when parties have agreed to resolve their disputes by international commercial arbitration. National courts are not properly regarded as competitors or rivals for the jurisdiction which the parties have agreed to confer upon an arbitral tribunal. As I have already noted, the exercise of judicial power to facilitate the agreement of the parties to resolve their disputes by arbitration, and the strictly limited supervisory role usually conferred upon national courts by the lex arbitri, which is generally limited to containing arbitral tribunals within the jurisdiction conferred upon them by the parties and ensuring that the jurisdiction is exercised, is fundamentally different in character to the role of the arbitral tribunal in resolving the dispute by making an award defining the substantive rights and obligations of the parties. International comity requires national courts to faithfully respect these limitations upon their role — in this case by appropriately construing the ambit of the powers conferred upon the court by s 7 of the Act having regard to such limitations.

  • Martin CJ found it unnecessary to deal with the power conferred by art 17J of the Model Law, as there was no ground of appeal against a refusal to exercise that power in Cape Lambert. However, McLure P, who generally agreed with Martin CJ’s reasons, quoted art 17J of the Model Law and observed:

With concurrent jurisdiction of that nature, it seems unlikely that the default position is that a court should formulate its orders to facilitate a review or reconsideration thereof by the arbitral tribunal.  At first blush, it appears that Arts 9 and 17J of the [Model Law] are in tension with the evident policy and purpose of s 7 of the Act.  That tension can be reconciled by the court exercising its Art 17J power sparingly and only if there are compelling reasons to do so.

  • In our view, there is a difference between the exercise of the court’s power under s 7(3) of the Act and art 17J of the Model Law.  The power under s 7(3) is incidental to the power in s 7(2) of the Act to stay proceedings inappropriately commenced in the court and refer the parties to arbitration.  The power in s 7(3) is exercised in a setting where curial proceedings have been commenced contrary to the terms of an arbitration agreement and the policy of the Act.  In that context, it is natural to read the power conferred by s 7(3) as limited to what is required to facilitate the reference of the parties to arbitration.
  • By contrast, the power in art 17J is expressly conferred on a court by the Model Law for the evident purpose of protecting the integrity of the arbitration process.  Further, as noted at [18] – [22] above, the court is also exercising its concurrent power to protect the integrity of the court’s own process and prevent the frustration of a prospective judgment based on a prospective arbitral award.  It may also be noted that the enforcement of an arbitral tribunal’s interim measure in the form of a freezing order would depend on a court making an order under art 17H of the Model Law.
  • We accept that, in exercising its power to make a freezing order in a case such as the present, the court must have regard to the objects of the Act and should not make an order which is inconsistent with an arbitration agreement or that usurps the role of the arbitral tribunal.  However, in assessing that matter it is necessary to take account of art 9 of the Model Law.  Article 9 is one of the ‘specific features of international arbitration’ to which art 17J of the Model Law refers.  Article 9 expressly provides that it is not incompatible with an arbitration agreement for a court to grant an interim measure (which includes a freezing order under art 17J) during arbitral proceedings.  Article 9 is inconsistent with Duro’s submission that the court should only make a freezing order which operates until an arbitral tribunal has been established and has had a reasonable opportunity to make such an order itself.
  • The drafting history of the Model Law counts against the power in art 17J being limited in the manner contended for by Duro.  An Explanatory Note by the UNCITRAL secretariat described that the purpose of introducing art 17J in 2006 was ‘to put it beyond any doubt that the existence of an arbitration agreement does not infringe on the powers of the competent court to issue interim measures and that the party to such an arbitration agreement is free to approach the court with a request to order interim measures’. Proposals to limit art 17J consistently with the approach for which Duro now advocates were considered but not adopted at the drafting stage.
  • There appear to be few reported cases in other jurisdictions which address the question of the appropriate period of operation for court-ordered interim measures.  However, we note that the approach of the primary judge is consistent with that taken, in relation to a pre-judgment garnishment order, by the Supreme Court of British Columbia in Trade Fortune Inc v Amalgamated Mill Supplies Ltd, decided before the addition of art 17J to the Model Law.
  • It may be accepted that the power to make a freezing order, under either the court’s implied or inherent power or under art 17J of the Model Law, should be exercised sparingly and only if there are compelling reasons to do so.  A court is always required to exercise a high degree of caution when invited to make a freezing order. However, where an applicant satisfies the onerous requirements for obtaining a freezing order, there is no reason for a court to adopt a default position that the order should only be made until the arbitral tribunal can consider the question.  That is particularly so when the enforceability of any interim measure granted by an arbitral tribunal will depend on a judgment of the court giving effect to the interim measure.
  • A court may properly be reluctant to make a freezing order except for a limited time in circumstances where there is a serious contest as to whether the applicant for a freezing order has established a good arguable case for final relief.  In such circumstances, the court may be seen to trespass on the role of the arbitral tribunal if it resolves a contest between the parties as to the merits of a claim which the arbitral tribunal will ultimately be required to determine. However, that is not the present case, where Duro’s submissions ‘did not focus on the question of whether [TGP] has a good arguable case’, and on appeal Duro does not challenge the finding that TGP had a good arguable case.
  • In our view, in the circumstances of this case it was open to the primary judge to make the freezing order operate until further order, and his Honour did not make any error of principle in doing so.
  • Duro also makes submissions as to delay by TGP in instituting proceedings, the absence of urgency in the application for a freezing order and the lack of conferral before the application was made.  These matters, which were considered by the primary judge, were relevant to the question of whether it was appropriate to make a freezing order at all.  However, ground 2 does not challenge the exercise of the discretion in that respect.  In our view, those matters do not materially impact on the question of whether, having decided to grant a freezing order, the primary judge should have made it operate until further order.
  • For these reasons, ground 2 is not established.

Orders

  • For the above reasons, neither ground of appeal has been established.  The appeal should be dismissed.

Case(s) referred to in decision(s):

 

BCBC Singapore Pte Ltd v PT Bayan Resources TBK (No 3) [2013] WASC 239; (2013) 276 FLR 273

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; (2013) 298 ALR 666

Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380

Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513

Deputy Commissioner of Taxation v Gashi [2010] VSC 120; (2010) 27 VR 127

Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014; (2010) 273 ALR 194

Federal Commissioner of Taxation v Growth Investment Fund SA [2014] FCA 780; (2014) 98 ATR 865

Frigo v Culhaci [1998] NSWCA 88

Hamersley Iron Pty Ltd v Forge Group Pty Ltd [2018] WASCA 163

Hamersley Iron Pty Ltd v James [2015] WASC 10

Haruki Machinery Pte Ltd v RSM Crane Sales and Hire Pty Ltd [2012] WASC 131

Hayden v Teplitzky (1997) 74 FCR 7

Jackson v Sterling Industries Ltd (1987) 162 CLR 612

National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271

Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG (The Niedersachsen) [1983] 1 WLR 1412; [1984] 1 All ER 413

Official Receiver of the State of Israel v Raveh [2001] WASC 72; (2001) 24 WAR 53

Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1

Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319

Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769

PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2014] WASCA 178; (2014) 288 FLR 299

PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36; (2015) 258 CLR 1

RAB’s Plumbing Services Pty Limited v Elite Civil Management Pty Ltd [2014] FCA 264

Reches Pty Ltd v Tadiran Pty Ltd (1988) 85 FCR 514

Riley McKay Pty Ltd v McKay [1982] 1 NSWLR 264

Severstal Export GmbH v Bhushan Steel Ltd [2013] NSWCA 102; (2013) 84 NSWLR 141

Silver Standard Resources Inc v Joint Stock Company Geolog, Cominco Ltd (1998) 59 BCLR (3d) 196

TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia [2013] HCA 5; (2013) 251 CLR 533

Third Chandris Shipping Corporation v Unimarine SA [1979] QB 645

Trade Fortune Inc v Amalgamated Mill Supplies Ltd (1994) 113 DLR (4th) 116

TTMI Ltd v ASM Shipping Ltd [2005] EWHC 2666; [2006] 1 Lloyd’s Rep 401