Case Note: Deputy Commissioner of Taxation v Huang – By Stephanie Lo

Deputy Commissioner of Taxation v Huang: High Court confirms broad and flexible approach to freezing orders over foreign assets

STEPHANIE LO, SENIOR ASSOCIATE, LK LAW

In the recent decision of Deputy Commissioner of Taxation v Changran Huang [2021] HCA 43, a majority of the High Court of Australia confi rmed the Federal Court of Australia’s power to make freezing orders over assets outside of Australia did not require proof that there be a realistic possibility of enforcement of a judgment debt in each foreign jurisdiction to which the proposed order relates.

The Deputy Commissioner of Taxation fi led proceedings in the Federal Court of Australia against Mr and Mrs Huang - who had been tax residents in Australia since 2013, but who had moved to the People’s Republic of China (PRC) in 2018-2019 - seeking summary judgment with respect to a tax penalty of approximately $140.9 million with respect to the 2013, 2014 and 2015 fi nancial years. To preserve the status quo, freezing orders which applied to assets held by Mr Huang in Australia, the PRC and Hong Kong were made by a single Judge.

Appeal to the Federal Court: no realistic possibility of enforcement in the PRC or Hong Kong

Before the Full Court of the Federal Court in Huang v Deputy Commissioner of Taxation (2020) 280 FCR 160; [2020] FCAFC 141, Mr Huang sought to challenge the orders against him relating to assets outside of Australia. Amongst other things, Mr Huang asserted that the primary judge erred by failing to fi nd that a freezing order in respect of Mr Huang’s assets outside Australia was beyond power, in that it would not serve the purpose of preventing or inhibiting the frustration of the Court’s process within the meaning of rule 7.32(1) of the Federal Court Rules 2011 (Cth) (“the Rules”).

Rule 7.32 of the Rules is in the following terms: • the Court may make an order (a freezing order), with 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 unsatisfi ed. • a freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

The Full Court of the Federal Court (Besanko, Thawley and Stewart JJ) held that there must be a “realistic possibility” that any judgment obtained by a plaintiff can be enforced against assets of the defendant in the place to which the proposed freezing order related. In considering whether there was such a “realistic possibility” in Mr Huang’s circumstances, their Honours considered that there was no realistic possibility that the Deputy Commissioner’s judgment debt would be enforceable in the PRC or Hong Kong. Accordingly, the appeal was allowed and the freezing orders challenged by Mr Huang were varied to remove Hong Kong and the PRC.

The Deputy Commissioner appealed to the High Court.

The High Court: freezing order power not constrained by proof of a “realistic possibility” of enforcement

The High Court by a majority (Gageler, Keane, Gordon and Gleeson JJ, with Edelman J dissenting) held that the Full Court of the Federal Court had asked itself the “wrong” question in considering whether there was a realistic possibility that the prospective judgment could be enforced against the defendant’s assets in any relevant foreign jurisdiction. The majority held that the correct question to be asked in determining whether the Court had power to make such a freezing order was whether the order would seek to meet a danger that the prospective judgment will be wholly or partly unsatisfi ed and that the power conferred by rule 7.32 is a broad and fl exible one (at [31]).

In their analysis of the power conferred by rule 7.32, their Honours concluded that rule 7.32: • is subject to two express limitations set out in the rule – the purpose of the order must be “the purpose of 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 unsatisfi ed”: [17] and [18]; • explicitly contemplates that a freezing order may apply to assets located outside Australia: [19]; • did not require the Court to be satisfi ed of the matters set out in rule 7.35 (which allows the Court to make a freezing or ancillary order against a judgment debtor or prospective judgment debtor or third party) in deciding to make a freezing order under rule 7.32: [21]; • is not to be read as requiring a further requirement of possible effi cacy of the freezing order: the rule does not say this, there is no reason to imply an unexpressed limitation on the scope of the power, such a requirement would be inconsistent with the in personam nature of a freezing order and would restrict the power in a manner that would signifi cantly impair its capacity to protect the Court’s processes: [23]-[26].

In the course of their reasons, the majority noted that the Full Court had

ignored the other ways that a judgment may eventually be satisfi ed and that a defendant may be induced by the inconvenience of a freezing order to comply with the Court’s process: [27]. It was also held by the majority that a requirement for proof of a realistic possibility of enforcement was effectively inconsistent with the power to make freezing orders over assets in foreign jurisdictions – it would necessitate identifi cation of the defendant’s foreign assets as well as the potential means of enforcement in that foreign jurisdiction: [28].

However, the majority did acknowledge that the likely utility of a freezing order is undoubtedly relevant to the exercise of the Court’s discretion to grant the order – for example, a court may decline to make a freezing order in circumstances where a defendant is outside of Australia and is likely to ignore any such order.

Edelman J dissented, fi nding that the Full Court of the Federal Court was correct in concluding that such a freezing order could not be made.

While his Honour agreed with the majority on the express requirements of rule 7.32, his Honour dissented on the basis that: (i) the purpose of “preventing the frustration or inhibition of the Court’s process” required an applicant to identify the process of the Court that would be frustrated or inhibited; and (b) if there is no realistic possibility that any process of the Court would be frustrated or inhibited without the freezing order, then it followed that the Court cannot be acting for the purpose of preventing the frustration or inhibition of the Court’s process: [40].

As such, since there was no realistic possibility of any enforcement against Mr Huang in the PRC or Hong Kong, a freezing order over his assets in those jurisdictions “could not have had the purpose of preventing or frustrating the enforcement process of the Federal Court”: [44].

Notwithstanding his position, his Honour recognised that the decision of the majority had “salutary commercial consequences” (at [33]).

Observations

Although the High Court accepted that it was not a requirement that there be a realistic possibility of enforcement in a foreign jurisdiction in order for the Federal Court to make a freezing order over assets in that foreign jurisdiction, this does not mean that such a consideration is irrelevant in the exercise of the discretion to make such freezing orders. In seeking such orders, parties should consider whether such an order would have utility in circumstances where a defendant outside the jurisdiction could effectively ignore such orders. B

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