Soon after, in another decision of the WA Supreme Court, Ipp J in DFC of T v Hickey; DFC of T v Horne 96 ATC 4892 specifically rejected the proposition that a Mareva injunction can only apply to assets within the jurisdiction of the court, noting that it was now “generally accepted” that the court had the power to restrain a defendant from dealing with assets that were out of its territorial jurisdiction. However, barely 2 months later the decision of FC of T v Karageorge & Ors 96 ATC 5114 was handed down by the NSW Supreme Court suggesting otherwise.
In Karageorge, the Commissioner had obtained a Mareva injunction restraining the taxpayer from dealing with any assets belonging to him. When the Commissioner sought to have the order extended the court ruled it should be discharged, saying it was not prepared to find there was a danger of the taxpayer absconding or dealing with assets so as to frustrate collection of the tax debt. In reaching that decision, Hamilton JA noted that the bulk of the assets sought to be restrained were in Greece and the court would exercise jurisdiction in relation to overseas assets only in “exceptional circumstances”.
With that said, we now fast forward to 2021, to the jurisdiction of the Federal Court, to a taxpayer who has “absconded”, and to assets that are (presently at least) beyond the reach of the court’s enforcement processes.
Relevant rules of civil procedure
How courts exercise the power to make freezing orders is the subject of rules of civil procedure in each jurisdiction. The practice of the Federal Court is found in Div 7.4 of the Federal Court Rules 2011. Specifically, r 7.32 of those Rules provides that the Federal 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”. Such an order can restrain an individual from removing any assets located in or outside Australia, or from disposing of, dealing with, or diminishing the value of, those assets.
The power conferred by r 7.32 is thus expressly subject to 2 limitations, ie the purpose of the order must be “preventing the frustration or inhibition of the Court’s process” and the order must address that purpose “by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied”. In seeking such order the Commissioner, like any other creditor, must show:
- a sufficiently strong case pending determination of the principal matter
- a risk that a prospective judgment will be unsatisfied because of the removal or dissipation of assets, and
- that the balance of convenience requires the making of the order.
The Huang saga
Mr Changran Huang and his wife had been tax residents of Australia since 2013. In December 2018, after the ATO began an audit into his tax affairs. Mr Huang relocated to China and began divesting himself of his financial interests in Australia and transferring money overseas. The results of the tax audit indicated an intention to avoid paying tax by grossly understating income. On 19 September 2019 Mr Huang was issued with assessments for primary tax and penalties of over $140 million. On the same day, Mr Huang’s wife left Australia for China. By that time Mr Huang had significant business interests in China and Hong Kong, while his Australian assets did not appear to satisfy his tax liability.
In addition to seeking summary judgment, the Deputy Commissioner sought a worldwide freezing order against Mr Huang under r 7.32. In granting the order ( FCA 1728), the primary judge rejected Mr Huang’s contention that an order affecting his significant assets in China and Hong Kong did not serve the purpose of protecting or preventing the frustration of the Federal Court’s process because there was no process available for enforcement of any judgment in the Commissioner’s favour in China or Hong Kong. Her Honour considered at  that there were sufficient possibilities of enforcement to enable the conclusion that the purpose specified in r 7.32(1) was satisfied; as a result of those possibilities, it was “not impossible” that the Deputy Commissioner could take enforcement action against Mr Huang.
(Note that the Deputy Commissioner did not dispute that there was presently no realistic possibility that the judgment would be enforceable in China or Hong Kong, which have each entered a reservation to the Convention on Mutual Administrative Assistance in Tax Matters that they “shall not provide assistance in the recovery of tax claims, or in conservancy measures, for all taxes”.)
On appeal to the Full Federal Court ( FCAFC 141), Mr Huang was successful in having the order varied to exclude his non-Australian assets. In a unanimous decision, the full court found that a test of “not impossible” was somewhat indefinite in meaning and set the bar too low. Rather, there must be “a realistic possibility” that any judgment obtained could be enforced against assets of the judgment debtor in the place to which the proposed order related. Moreover, a test of a realistic possibility was “consistent with the approach taken by the courts in determining what must be shown in terms of the risk of the removal of assets or the disposal of assets, matters to which a freezing order is directed” .
From that decision the Deputy Commissioner appealed to the High Court, where Mr Huang sought to defend the full court’s conclusion (that an order under r 7.32 could not be for the requisite purpose of preventing the frustration or inhibition of the Federal Court’s process unless there was a realistic possibility of the freezing order’s efficacy) on the basis of the asserted effect of r 7.35 on r 7.32 or, alternatively, on the purposive requirement in r 7.32. Relevantly, r 7.35 provides that an order may be made over assets held by third parties if there is a danger that a judgment or prospective judgment would be wholly or partly unsatisfied because the third party had a power of disposition over the judgment debtor’s assets, or was in a position of control or influence concerning those assets.
The High Court decision
A majority of the High Court (Gageler, Keane, Gordon and Gleeson JJ; Edelman J dissenting) allowed the Deputy Commissioner’s appeal, finding that r 7.35 was not expressed to affect the operation of r 7.32, and there was no reason to read r 7.32 as subject to r 7.35. Rather, r 7.35 extended the scope of r 7.32, including by confirming the rule’s application to cases that may have otherwise been in doubt. The argument that the purposive requirement in r 7.32 entailed a further requirement of possible efficacy of the freezing order was also rejected. r 7.32 did not expressly say as much, and there was no reason to imply an unexpressed limitation on the scope of the power.
The majority held that the efficacy requirement put forward by the full court was inconsistent with the in personam nature of a freezing order. Reminiscent of the reasoning of Brooking J in National Australia Bank discussed earlier, the majority said it was the court’s authority to make orders against a person who was subject to the court’s jurisdiction that was relevant to the court’s power to make a freezing order and not the location of the person’s assets. The efficacy requirement was also inconsistent with the evident purpose of r 7.32, restricting the power in a way that would significantly impair its capacity to protect the Federal Court’s process. The majority noted that, unaffected by a worldwide freezing order, a person would be free to move assets surreptitiously to a jurisdiction not covered by the order.
The efficacy requirement was found to be problematic for other reasons. The majority said that it would substantially defeat the utility of the power in r 7.33 to make an order ancillary to a freezing order for the purpose of eliciting information relating to the relevant assets because such information could only concern assets that had been identified. It was also inconsistent with the power to make a worldwide freezing order generally because it necessitated identification of the judgment debtor’s foreign assets as well as a potential means of enforcement in a relevant foreign jurisdiction.
The High Court concluded that the full court had asked itself the wrong question in considering, as a matter going to the existence of the broad and flexible power conferred by r 7.32, whether there was a realistic possibility that the judgment could be enforced against the assets in a foreign jurisdiction. The question the full court should have asked itself was whether the freezing order would seek to meet a danger that the prospective judgment would be wholly or partly unsatisfied.
No contumelious deed goes unpunished
As the majority of the High Court observed, the likely utility of a freezing order remains relevant to the exercise of the court’s discretion to grant the order. However, the fact that the judgment debtor has removed him or herself from the relevant jurisdiction and was likely to ignore the order should not deter courts from making an order that was otherwise appropriate. Courts should be able to assume that those who are subject to its jurisdiction will obey its orders, including a final judgment to pay a tax debt.
Even if such obedience was unlikely in practice, that did not render a worldwide freezing order futile. In this regard it is worth noting several other points made by judicial members throughout the Huang saga:
- regardless of whether there was a process available for enforcement of a judgment in the Commissioner’s favour, the issue was the preservation of the integrity or efficacy of any process ultimately enforceable by the Court ( FCA 1728 at )
- possibilities of enforcement in regard to Mr Huang included the potential use of bankruptcy procedures, the potential willingness of the courts of Hong Kong and China to enforce Australian insolvency laws or Australian laws relating to the payments of penalties and interest, and the possibility of Mr Huang moving assets to other jurisdictions where enforcement was available ( FCA 1728 at )
- other ways that a judgment may eventually be satisfied included the appointment of a receiver pursuant to s 57(1) of the Federal Court of Australia Act 1976, as well as the possibility that a defendant may be induced by the inconvenience of a freezing order to comply with the court’s process (2021 ATC ¶20-814 at ).
Even in dissent, Edelman J found that the majority’s decision had “salutary commercial consequences”, saying that:
- it will deter fraud, lessen the evidentiary burden on the Commissioner, and enhance the efficacy of the worldwide freezing order in preventing the legal process being defeated (2021 ATC ¶20-814 at )
- a worldwide freezing order may be appropriate to preserve any realistic prospect of enforcement in unidentified foreign jurisdictions where there is evidence that the relevant individual might have assets (2021 ATC ¶20-814 at ).
However, any reluctance Edelman J felt in dissenting from the majority judgment was ultimately outweighed by his concern to reign in the “drastic” power to make a freezing order, which “deprives a person of their assets” and whose commands are made “under the threat of contempt proceedings, and the sanction of imprisonment”.
For Edelman J, and as per the full court’s decision, since there was no realistic possibility of any enforcement of the prospective judgment against Mr Huang in either China or Hong Kong, a freezing order over his assets in those jurisdictions could not have the purpose of preventing or frustrating the enforcement processes of the Federal Court. Indeed, he thought it could have the opposite effect. That is, in complying with the order, Mr Huang might maintain his assets in China or Hong Kong rather than moving them to another jurisdiction where there was a realistic prospect of enforcement against them.
In this regard it is worth noting DFC of T v Ma & Ors  FCA 1317, where the Federal Court made freezing orders to recover tax liabilities owed by 3 individuals to the New Zealand Commissioner of Inland Revenue pursuant to Art 27 of the double tax treaty between Australia and New Zealand. Just as a freezing order may be sought by the Commissioner on behalf of another country’s revenue authority, so too may another country’s revenue authority seek a freezing order on behalf of Australia. Presumably Mr Huang would be well aware of that and locate his assets accordingly.
As mentioned above, pursuant to r 7.35(5), a freezing order may also be made over assets held by third parties if there is a danger that a judgment will be wholly or partly unsatisfied because the third party has a power of disposition over the judgment debtor’s assets or is in a position of control or influence concerning those assets. This ancillary relief has the potential to circumscribe Mr Huang’s future commercial dealings, especially those outside China and Hong Kong. Again, Mr Huang would no doubt be conscious of that and organise his business affairs accordingly.
Perhaps the only real power of a worldwide freezing order in Mr Huang’s situation lies not its financial effect (noting that any restriction imposed on his assets can be alleviated at any time by payment of the judgment debt, which he appeared not to dispute:  HCA 43 at ) but rather in the ignominy that comes with being a named party in an unfavourable High Court decision. Whether that is a deterrent to other wealthy individuals tempted to follow in Mr Huang’s flightsteps remains to be seen. However, the High Court has now made it clear that such individuals may well find themselves the subject of a worldwide freezing order, wherever they (or their assets) choose to abscond to.