In the recent decision of SP98970 v Capitol Property [2021] NSWSC 950 the Supreme Court of New South Wales considered the circumstances in which asset freezing orders will be extended.
P was an owners corporation that owned the common property in a building. P sued the developer, D, in relation to alleged defects P said were afflicting the building, and that were a breach of the Home Building Act statutory warranties.
P tried to organise site inspections of various experts to investigate and hopefully quantify the defects but COVID lockdown restrictions frustrated that
P’s pre-inspection estimate of damage was around a million dollars and, P said, that was likely to increase after inspection.
D owned Lot 2 in the building.
P’s lawyers became concerned that D might sell Lot 2 and P’s lawyers raised this issue with D’s lawyers.
Without P’s knowledge, D transferred Lot 2 to Q (a person who had a relationship with D) for a recorded price of $3.78m, but with no money changing hands.
This left D with around $900K to pay any judgment P might get in the defect proceedings.
P applied for, and got, a “freezing order” preventing Q from selling Lot 2, unless in an arm’s length transaction with the price paid to be held on terms both agreed.
At the time the order was made, D had around $635K.
The Court accepted there was a good, arguable case that the transfer of Lot 2 to Q was voidable, a transaction to defraud D’s creditors: s37A, Conveyancing Act.
At the time of the hearing Q was already restrained by freezing orders. The case we are discussing is P’s application to extend them. P sought an extension of the freezing orders to get its defect evidence on.
D and Q did not oppose an extension but sought a reduction from the full value of Lot 2 to $800K, following a deposit of $200K into a trust account, and after giving an undertaking not to deal with Lot 2 without P’s knowledge.
The Court accepted a freezing order is a drastic remedy, not to be used improperly as additional security. Because P undertook to bring s37A proceedings, with the potential to void the transfer of Lot 2 from D to Q, the Court extended the freezing order for Lot 2 (or its sale proceeds) by 4 months.
Asset protection orders can be tricky, but are a very useful way to protect your client’s rights if your client is pursuing a party who might be divesting themselves of assets.