Putting assets on ice: Freezing orders to benefit a future liquidator

Background

In the recent case of Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia [No 2] [2020] WASC 245 the Supreme Court of WA considered the novel question of whether an administrator can apply for freezing orders to preserve assets that might later become a target for a recovery action by a liquidator.

Freezing orders

Pursuant to the Rules of the Supreme Court 1971 (WA) the Court can make a freezing order to preserve assets to meet “a judgment or prospective judgment” of the Court. 

A party applying for a freezing order must show that there is a risk that the assets will be removed from the jurisdiction or diminished in value such that there is a danger that the judgment or prospective judgment will be wholly or partly unsatisfied.  The resulting freezing order can then prevent the other party from removing, disposing of, dealing with or diminishing the value of the assets.

Importantly, where the freezing order is sought in relation to a “prospective judgment”, the applicant must show that it has a good or arguable case on “an accrued or prospective cause of action”.

The application

Duro Felguera Australia Pty Ltd (Administrators Appointed) (Duro) and Dalian Huarui Heavy Industry International Company Ltd (Dalian) had previously been parties to an international arbitration seated in Singapore.  In the course of the arbitration, the tribunal ordered Duro to pay approximately $27m into the trust account of Duro’s solicitors, Clyde & Co, as security against a potential award against Duro.

Dalian was ultimately successful and the arbitral tribunal issued an award against Duro for $50m and gave a direction that the $27m held by Clyde & Co be released to Dalian.  A separate dispute about that direction was resolved in Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia (a firm) [2020] WASC 132 where it was found that the $27m had vested in Dalian when the award was made in Dalian’s favour.

Duro then applied for a freezing order in relation to the $27m on the basis that:

• the administrators of Duro had assessed that Duro likely became insolvent on a date prior to the $27m being paid into trust;
• if Duro was subsequently placed into liquidation, it was possible that the future liquidator of Duro might seek to challenge the payment of the $27m into trust as a voidable unfair preference payment; and
• there was a risk that Dalian might remit the $27m to its accounts in China, with the result that a liquidator of Duro would have no recourse to enforce payment of a successful unfair preference claim as there is no relevant enforcement treaty as between China and Australia.

Decision

Kenneth Martin J held that in summary, Duro had to establish three essential elements in support of its application, namely (1) that Duro had a good arguable case against Dalian, (2) that there was a risk that Dalian might remove the $27m from the jurisdiction, and (3) that it would be in the interests of justice for the freezing order to be made.

K Martin J then went on to consider what he considered to be concerning issues in relation to each of these three elements.

First, as to the good arguable case, K Martin J noted that the prospective cause of action (to seek recovery of a voidable unfair preference) was one that could only belong to a liquidator of Duro and not to Duro itself.  This immediately raised the question of whether it could be said that Duro, as the applicant, had a prospective cause of action.  While K Martin J was not willing to dismiss the application on this basis alone, he expressed substantial discomfort with whether the link between the applicant and a future liquidator of the applicant was sufficient.

K Martin J also noted that while he was willing to accept that there was an arguable case, the prospective claim was entirely contingent upon such a number of hypothetical matters coming to pass that it was impossible to say that there was a good arguable case of any strength.

Secondly, as to the risk of Dalian remitting the $27m to China, while K Martin J accepted that there was a risk that this could occur, he was very concerned that the entire history and context of the dealings between Duro and Dalian contemplated that Dalian could and would remit payments received from Duro to China.

Finally, as to whether it would be in the interests of justice to grant the freezing order, K Martin J noted the substantial authority to the effect that the court should not exercise its discretion to grant a freezing order where the risk being complained about arises from the respondent party making normal payments in the ordinary course of business.  K Martin J repeated his observations that the nature of the dealings between Duro and Dalian contemplated Dalian remitting funds to China to meet its own costs of performing the contract, and found that any remission of funds to China would be a dealing within Dalian’s ordinary course of business.

In weighing up all of the above matters, K Martin J ultimately dismissed the application on the grounds that it was not in the interests of justice that Dalian be restrained from dealing with its own funds in the ordinary course of its business.

Conclusion

While K Martin J was very careful not to ‘close the door’ on whether a company in administration could seek a freezing order to preserve assets against a potential liquidator action, this decision highlights how difficult it would be to successfully obtain a freezing order for that purpose.  Administrators should consider whether they should act to preserve assets that might later be the subject of a liquidator recovery action.  However, the decision as to whether to proceed with an application for freezing orders will be complex and should be carefully considered.