Helena Hu v PS Securities as trustee of the Joseph Family Trust [2011] NSWSC 98

Ms Helena Hu lent money to a trust and obtained a judgement debt against the former trustee. The principal of the former trustee attempted to avoid paying the debt by appointing a new trustee and winding up the old trustee. The only valuable asset of the trust, land valued at $6m, was transferred from the old trustee to the new trustee, leaving the old trustee with no assets and unable to pay the judgment debt. Ms Hu as an unsecured creditor of the former trustee claimed she was subrogated to the former trustee’s right of indemnity to have that debt paid to her out of the trust assets and sought a freezing order to preserve trust assets.

Freezing Order

Rule 25.11 of the Uniform Civil Procedure Rules provides:

 The court may make an order (a “freezing order”), upon or without notice to a  respondent, 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.

The law requires the following:

  1. A danger or real risk of assets being disposed of but no need to prove intent to frustrate the court process. The court found a strongly arguable case on this issue given steps had already been taken to transfer trust assets beyond Ms Hu’s reach shortly after the judgment in her favour by appointing a new trustee and winding up the old trustee; the land was then encumbered and the intention to enter into further business ventures and potentially encumber trust assets was disclosed in evidence.
  2. A sufficiently arguable case or a serious question to be tried. The court found Ms Hu had a strongly arguable case that upon the liquidation of the former trustee, she has a right to bring proceedings and be subrogated to the former trustee’s right of indemnity for liabilities incurred. The technical question of whether lodging a proof of debt converts the debt into a right to prove in the winding up only and removes any right to sue can be dealt with by amending the pleadings to make it clear that the action is brought in the name of the old trustee.
  3. A comparison of the prejudice suffered by the plaintiff if the freezing order is not made and by the defendant if the freezing order is made and where on balance the prejudice lies. The courts refer to this as an assessment of where the “balance of convenience” lies. The court found that the prejudice to Ms Hu if the trust assets were encumberered/sold taking account of the fact that the transfer of trust assets occurred without her knowledge and a freezing order would only apply to a small amount as compared to the value of the land and so not affect the business was considered by the court to be substantial and to outweigh the prejudice caused to the new trustee as regards new business plans not yet finalised.

The court granted the freezing order.

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