Want freezing orders? There’s a ceiling on those
Nicols as trustee of the bankrupt estate of Manietta v Manietta, in the matter of Manietta [2022] FCA 39 (31 January 2022)
Nicols as trustee of the bankrupt estate of Manietta v Manietta, in the matter of Manietta (No 2) [2022] FCA 142 (24 February 2022)
Cheeseman J made orders in favour of a Trustee in bankruptcy for the continuation of freezing orders and their extension. However, due to the Trustee’s conduct in failing to specify an appropriate monetary cap on those freezing orders, her Honour ordered that the Trustee pay 50% of the respondents’ costs.
Following this case, prudent insolvency practitioners should adduce evidence of the likely amount required to finalise a bankrupt estate before seeking to freeze assets, the value of which may well exceed that amount.
A Trustee of a bankrupt estate conducted investigations in respect of a complex structure of several entities and trusts.
The Trustee believed that a particular “superfund” was a sham, in that it was not operated to create a superannuation or retirement benefit, but rather to hide assets – whether directly or indirectly held by the bankrupt and related parties – beyond the reach of the bankrupt’s creditors.
The Trustee filed proceedings seeking relief in respect of the alleged sham. But before that, in June 2020, the Trustee sought urgent interlocutory relief, on an ex parte basis, to restrain the bankrupt, his wife and other entities (the respondents) from dealing with their assets, so as to protect those assets before the proceedings are determined. Those freezing orders were duly made Perram J, and then extended by Gleeson J to cover more property.
Later, the Trustee realised, by some oversight, that a certain property was not caught by those freezing orders. The Trustee applied to extend the freezing orders to cover that property. At the same time, the respondents sought to discharge the freezing orders.
Cheeseman J said that it was an unusual feature of the 2020 freezing orders that they were not limited to a specified monetary value or percentage of the restrained assets (and that the proposed additional freezing orders sought were similarly unlimited).
The creditors’ claims totalled about $5.9 million, whilst the value of all restrained assets exceeded that sum by a significant amount (even taking into account costs of the administration and legal costs).
The three factors to consider
In considering whether to grant the additional freezing orders, her Honour needed to consider whether:
the trustee had a good or reasonably arguable case – her Honour found this to be so, even though the case based on the legal doctrine of a sham was difficult one;
there was a risk that the assets would be dissipated – her Honour found that there was, having regard to the elaborate arrangements put in place by the bankrupt; and
the balance of convenience favours the making of the additional freezing orders.
As to the last factor, her Honour observed that freezing orders are an extraordinary remedy that inevitably prejudice those against whom they are made (even if the Trustee gave the usual undertaking as to damages).
Her Honour found that even though the respondents sought to discharge the freezing orders, the onus was on the Trustee to justify them, including necessarily, to identify the appropriate monetary or value cap on those orders if they are to be continued and extended.
Her Honour concluded, after weighing all the considerations, that the balance of convenience favoured the continuation of the 2020 freezing orders and making the additional orders sought, subject to a monetary or value cap being agreed.
Proceedings No 2
A few weeks later, her Honour observed that the Trustee had not led evidence on the likely amount required to finalise the bankrupt estate, other than to allow a rough impression.
Her Honour ultimately decided to make orders to impose an effective cap of $5.9 million on the freezing orders – that sum reflecting the apparent value of the creditor claims only, not the costs of the administration on which there was no evidence at all – with that money to be paid into a joint controlled monies account.
Despite the Trustee’s success, her Honour ordered the Trustee to pay 50% of the respondents’ costs. Her Honour said that the Trustee’s omission to specify an appropriate cap was a factor giving rise to the incursion of unnecessary costs, and hindered the prospect of a consensual resolution.
