The High Court of Australia has confirmed that Freezing Orders made by the Federal Court of Australia can apply to a party’s assets outside Australia, in a judgement involving a Chinese billionaire who has a $141 million tax bill from the Australian Taxation Office.
The judgement – Deputy Commissioner of Taxation v Huang  HCA 43 – is a clear and unequivocal statement that the courts may grant Freezing Orders against a party and cover their assets wherever they are.
The judgement means that a party wanting to recover debts and prevent assets from being dissipated can seek a Freezing Order and have it apply to assets anywhere in the world.
The case involved a Mr Huang and his wife who were tax residents of Australia for several years until they left Australia and returned to the People’s Republic of China in 2018 and 2019 where they currently reside.
They had been the subject of a tax audit which led to the DCT issuing an assessment of approximately $141 million in September 2019. The DCT when issuing the proceedings had obtained a Freezing Order – formerly commonly known as a Mareva order – over the assets of Mr Huang which was in the form of a Worldwide Freezing Order.
In particular, a component of the order froze the assets of Mr Huang which were outside Australia to the extent that the value of his unencumbered Australian assets was less than the amount claimed by the DCT in the proceedings.
At the time the original Freezing Order was made, the DCT had not obtained a judgement against Mr Huang. The Federal Court determined that the DCT had a good arguable case against Mr Huang and decided to grant the orders because the Court found that there was a danger that the prospective judgement being obtained by the ATO might be wholly or partly unsatisfied because his assets might be removed from Australia, or disposed of or dealt with or diminished in value.
The Federal Court made this determination because:
- Mr Huang’s tax liability of over $140 million was considerable;
- The result of the tax audit indicated an intention to avoid paying tax by grossly understating income;
- Mr Huang was a Chinese national, was living overseas and since leaving Australia had taken a number of steps to sever his ties with Australia;
- The Australian assets of Mr Huang did not appear sufficient to discharge the tax liability;
- He was likely to be a person of substantial wealth with significant business interests in the PRC including Hong Kong such that he was able to move assets between jurisdictions which led the Court to conclude that he had both a motive and the means to dispose of his Australian assets;
- He had already moved assets out of Australia although before becoming aware of his taxation liability;
- The recent issue of the Notice of Assessment increased the risk of dissipation.
So the order was made. Subsequently the DCT obtained a judgement for the amount of the tax debt. Mr Huang acknowledged that he had no defence to the tax debt and it was due and payable.
Mr Huang appealed the scope of the Freezing Order to the extent that it extended to assets of his which were located outside of Australia.
The Full Federal Court overturned that component of the order which was a Worldwide Freezing Order to the extent that it related to assets in the PRC or Hong Kong because the evidence before the Primary Judge did not provide a basis for concluding that enforcement of the (then) prospective judgement debt against Mr Huang in the PRC or Hong Kong was a realistic possibility.
The Freezing Order was discharged by the Full Court except to the extent that it applied to Australia assets.
It is interesting to note that the DCT when the matter was before the High Court, did not dispute the finding of the Full Court of the Federal Court that there was presently no realistic possibility that the judgement it had obtained would be enforceable in the PRC or Hong Kong.
This was not just because of the general difficulties in enforcing judgements in a foreign jurisdiction, but also because there had been an agreement concluded between the respective governments of Australia and China, that they would not render assistance to each other in relation to the recovery of tax liabilities.
The approach of the High Court
The High Court by a 4:1 majority overruled the judgement of the Full Court of the Federal Court and restored the scope of the Freezing Orders to extend to all assets of Mr Huang wherever located.
Its approach can be summarised as follows:
- A court of superior jurisdiction such as the Federal Court or a State Supreme Court has a power to make an order to avoid its processes being frustrated such as by the dissipation of assets located in a foreign jurisdiction both at common law and pursuant to the specific rules of Court governing its operation;
- The making of such an order in an appropriate case, is justified so as not to frustrate the processes of the Court by depriving, in this case, the assets of Mr Huang which the DCT would seek for the purpose of enforcing its judgement;
- The argument put forward by Mr Huang that an order should not be made to extend to foreign assets unless there was a realistic possibility of the efficacy of such an order being demonstrated, was rejected;
- The High Court emphasised that the nature of a freezing order is that it establishes a personal, not proprietary claim, against the party the subject of the Freezing Order. It is the person the subject of the order who is bound not to deal with their assets other than in accordance with the terms of the order. The order did not create in favour of the DCT a specific interest in the assets themselves. Accordingly, the location of the specific assets which in this case Mr Huang could not deal with, was irrelevant. This approach followed a line of earlier cases.
- To limit the scope of the Freezing Order in the manner argued by Mr Huang in a case where there is evidence of overseas domiciled assets, would impair the processes of the Court and would render the power to grant the Freezing Orders, largely impotent in cases where assets could be rapidly moved between various foreign jurisdictions.
What does this mean?
The judgement is a clear and unequivocal statement that the Courts may grant Freezing Orders against a party, which extend to all of their assets wherever located, in circumstances where an aggrieved party can demonstrate that it is needed in order to prevent that party from dissipating or dealing with assets with the intention of seeking to frustrate the claims of that party. In the current circumstances and given some notable ongoing fraud matters in Courts involving the transfer of funds out of Australia, it is a useful statement of the law.
A party confronted with a situation similar to that facing the DCT in this case, can seek further protection against the risk of dissipation by seeking such an order. Practical difficulties clearly will arise as to how such judgements and orders will be recognised in international jurisdictions on various registers such as those relating to land ownership, share registrations, bank accounts plant and equipment and other similar assets. But the power is there and available to be exercised in the right case.