183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd

Court of Appeal (NSW)|2023-06-19|Before: Peden J

Solicitors: Ma & Company Solicitors (Applicant) Lexsons Law Firm (Respondent) File Number(s): 2022/214958 Decision under appeal Court or tribunal: Supreme Court of NSW Jurisdiction: Equity Citation: [2022] NSWSC 910 Date of Decision: 6 July 2022 Before: Peden J File Number(s): 2019/67418

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Factual background

The applicant is the trustee of a Unit Trust which was declared on 29 August 2016. The directors and shareholders of the applicant were then Mr Eric Naijing Lin and Mr John Tak Ching Lau. The secretary was Mr Steve Zuehong Ju. The applicant was the owner of a property in the Sydney suburb of Eastwood on which it proposed to build a 23 unit residential development. The purpose of the Unit Trust was to provide a vehicle for investment by Unit holders. Mr Lin and Mr Lau were both directors and sole shareholders of different companies that held units in the Unit Trust.
LCC Property Development Pty Ltd, of which Mr Lin's brother-in-law Scott Chan was the sole director and shareholder, held 46 of the 100 units in the Unit Trust. On 23 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan fraudulently procured the alteration of the ASIC Register to remove the names of Messrs Lin and Lau as directors and Mr Ju as secretary of the applicant and to insert his own name as sole director and secretary.
Thereafter Mr Chan changed the registered office of the applicant, opened a bank account in its name, and raised $4 million by way of mortgage over the Eastwood property.
Messrs Lin, Lau and Ju became aware of the name substitution in the ASIC records, of the change of registered office of the applicant, and of the fraudulent mortgage on 26 February 2018. For a time thereafter they, together with other unit holders, sought to negotiate with Mr Chan. The negotiations were directed to the purchase by Mr Chan or LCC Property Development of units in the Unit Trust. At that time they took no steps to correct the ASIC register.
On 24 April 2018 (57 days after Messrs Lin, Lau and Ju became aware of the alteration of the ASIC Register) Mr Chan, purportedly acting as director of the applicant, and Dragon Property Development & Investment Pty Ltd (the present respondent) executed a Deed for the transfer of 19 units of the Unit Trust to the respondent. $1,672,000 was paid on behalf of the respondent into the account Mr Chan had opened in the name of the applicant. No units were transferred to the respondents. Mr Chan withdrew the entire amount of $1,672,000 from the account.
On 22 June 2018 Messrs Lin, Lau and Ju took steps to have the ASIC Register corrected. Mr Chan's name was removed as director and secretary, and those of Messrs Lin and Lau as directors restored, as was the name of Mr Ju as secretary.

Litigation history

In 2018 the applicant and some of the unitholders commenced proceedings in the Supreme Court against Mr Chan and a number of others ("the 2018 proceedings"). Although those proceedings have not been finalised, it seems that an amount of $6,974,695.69 (affidavit of Ms Rongjie Yuan, see below) was paid into court and eventually (in June 2021) paid out to the applicant.
In 2019 the respondent commenced the Equity Division proceedings, initially naming Mr Chan and the applicant as defendants. Ultimately, it abandoned the proceedings against Mr Chan and claimed that the applicant was liable to it in contract for the loss it had incurred by payment of the money to Mr Chan (or to LCC Property Development). In its defence the applicant denied that it had entered into the Deed and denied that Mr Chan had authority to enter into the Deed on its behalf. In response, the respondent pleaded that Mr Chan acted with the applicant's ostensible authority. Its claim was, in brief, that, in failing to correct the register during the period from 26 February 2018 (when Messrs Lin, Lau and Ju first became aware of the alteration of the ASIC register) to 22 June 2018 (when Messrs Lin and Lau took steps to correct the Register) the applicant, through its directors, had "armed" Mr Chan with the "means to represent to the world that he was its sole director and secretary and able to sign documents in its name" (primary judgment at [29]). That period included 24 April 2018, when Mr Chan entered into the Deed with the respondent, pursuant to which the respondent paid the $1,672,000 in the belief that it was dealing with the applicant.
The primary judge upheld the respondent's claim: Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd [2022] NSWSC 910. Applying the principles relevant to assertions of ostensible authority, her Honour accepted that Mr Chan was held out by the applicant as possessing authority to bind it (the applicant) to contracts such as that into which he had entered with the respondent. This arose from the failure by the applicant to do anything to correct the register. Her Honour accepted that the respondent had relied on the information in the ASIC Register in deciding to enter into the Deed with Mr Chan. She gave judgment against the applicant in the sum of $1,672,000 together with costs.
The applicant appealed to this Court. On 5 October 2022, upon certain undertakings being given to the Court, Meagher JA ordered that execution of the judgment be stayed pending determination of the appeal or further order of the Court: 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd [2022] NSWCA 195. The conditions included payment into Court of $50,000 by way of security for the respondent's costs of the appeal.
On 19 April 2023 the appeal was unanimously dismissed: 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd [2023] NSWCA 72 (Bell CJ, Ward P and Leeming JA).
An issue in the appeal concerned the principles applicable to the question of ostensible authority. A finding of ostensible authority gives rise to an estoppel. The applicant contended that, in cases where (as in this case) a representation is asserted to have been made by silence, before a finding of ostensible authority giving rise to an estoppel could be made, it is necessary to establish that a duty is owed to the party to whom the representation is made and that the duty has been breached (see reasons of Leeming JA at [166]). The duty in this case was a duty to correct the register. The breach of duty lay in the failure to correct the register. The applicant contended that it owed no such duty to the respondent, and there was therefore no breach of duty, and no conferral of ostensible authority, and consequently no estoppel.
The Court did not find it necessary to address directly whether, as a matter of principle, it is necessary in cases of asserted representation by silence to establish a duty to speak, nor whether, in this case, the applicant owed a relevant duty to the respondent. Rather, it determined the appeal by reference to general principles applicable to ostensible authority (as had the primary judge).
Ward P, with whom the Chief Justice and Leeming JA agreed, said: "136 …Irrespective of whether the test as to a representation by silence is framed as requiring 'the existence of duty', 'an unjust departure from an assumption' or 'circumstances which call for action', in my opinion the primary judge was correct to find that a representation was made in the appellant's failure to take steps to correct the ASIC Register."
Her Honour had already held that a reasonable person in the position of the respondent would expect that if the true office holders of the applicant (that is, Messrs Lin, Lau and Ju) were aware of the false information on the ASIC register and that Mr Chan had already acted as he had on the false representation of his authority conveyed by the information on the ASIC register, then those true office holders would act within a reasonable time of that discovery to correct the information on the public register. Her Honour considered (as did Leeming JA in additional reasons) that the use of the term "duty" tended to be a "distraction" from the critical question of: "…whether it is unjust for there to be a departure from the assumption adopted by the respondent as to the position and authority of Mr Chan."
In his additional reasons, with which the Chief Justice also agreed, Leeming JA agreed that the use of the term "duty" may be a distraction in this context and said that: "69 …The issue is whether there is ostensible authority, thereby giving rise to an estoppel. The availability of estoppels in this context is not circumscribed by the existence of a duty."
Assuming, however, favourably to the applicant, that, for an estoppel to operate, a duty must be established, his Honour was satisfied that it was plain, in this case, that there was a duty to speak out on the part of those who knew that the ASIC Register had been falsified.
The applicant filed an application for special leave to appeal to the High Court. A single ground of the proposed appeal is identified. It is: "The Court of Appeal erred [in] finding that Mr Scott Chan had ostensible authority to bind the Applicant to the impugned transactions."
As amended, the application identifies as the only special leave question the following: "Is a duty to speak (and breach of such a duty) an essential element of a representation by silence so as to found ostensible authority?" The argument in support of the applicant's case, that a duty must exist for the estoppel to operate, is set out in the amended special leave application. The respondent filed a Response, to which the applicant filed a Reply.

The notice of motion seeking stay of execution

On 18 May 2023 the applicant filed the notice of motion the subject of the present proceeding. The notice of motion was supported by an affidavit, affirmed by Ms Li Min, a solicitor employed by the applicant's solicitors, on 17 May 2023.
Inter alia, Ms Min deposed that the applicant has $111.20 in a bank account, and that she had been informed by the current directors that, apart from that money, and the value ("whatever it might be") of the 2018 proceedings, the applicant has no assets.
The respondent filed an affidavit sworn by Ms Natalie Lim, the solicitor for the respondent, on 5 June 2023. Ms Lim referred to evidence in the proceedings before Meagher JA that the applicant had, in 2021, received a sum of $6,725,000, all of which was (according to an affidavit sworn on behalf of the applicant in those proceedings) disbursed in repayment of debt and loans. (The minor difference of the amounts (see [9] above) said to have been received is of no present significance.)
Ms Lim commented that the applicant had provided no evidence explaining the payments made out of that fund, or, specifically, whether the payments were made for commercial purposes.
The applicant thereupon filed an affidavit of Ms Rongjie Yuan, by then a director of the applicant, affirmed on 9 June 2023. Ms Yuan gave an account of the payments made out of the monies received in 2021. More than $6 m was used to repay loans from unit holders. Other money was used to pay what may be seen to be running expenses and the costs of litigation. The bulk of these payments appear to have been made in the period up to 4 July 2021.
The 2018 proceedings are fixed for mediation in July 2023. Ms Yuan deposed that the applicant is "hopeful that the proceedings will settle favourably at mediation" and the applicant will thus be "put in substantial funds". The applicant has offered an undertaking to notify the respondent of any compromise of those proceedings and not to dispose of any proceeds of those proceedings without further order of the Court. The applicant has proffered a further $50,000 by way of security for the costs of the High Court proceedings.
On 28 April 2023, pursuant to s 459E of the Corporations Act 2001 (Cth), the respondent served on the applicant a statutory demand claiming the sum of $1,727,526.80. The applicant has moved to set aside the statutory demand, apparently (see respondent's written submissions par 16) on the ground that there is a genuine dispute about the existence of the debt (see Corporations Act s 459H). I was informed that the motion to set aside the statutory demand was fixed for hearing on Monday 26 June. Notwithstanding that an appeal (or application for special leave to appeal) has been filed, there can be no genuine dispute about the existence of a judgment debt that has not been set aside: Re Amy Holdings Pty Ltd [2014] NSWSC 1176 at [14] (Brereton J). Unless a stay is granted, the strong likelihood is that the application to set aside the statutory demand will fail, and that the judgment debt will, in due course, become the foundation for an application that the applicant be wound up.

Relevant legal principles

The principles applicable to an application for stay of execution of a judgment of the Court of Appeal pending the outcome of an application for special leave to appeal to the High Court have most recently been stated, pithily, by Kirk JA in 123 259 932 Pty Ltd v Cessnock City Council (No 2) [2023] NSWCA 89 ("Cessnock"). The starting point is that exceptional circumstances must be shown: Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd [No 1] (1986) 161 CLR 681; [1986] HCA 84 ("Burgundy Royale"); Obeid v The Queen [2016] HCA 9; (2016) 90 ALJR 447; Rinehart v Welker (2012) 83 NSWLR 347; [2012] NSWCA 1 ("Rinehart"). Significant factors in that respect are: (i) whether the applicant has substantial prospects of success in the special leave application (as distinct from the prospects of success in any appeal for which special leave might be granted); (ii) where the balance of convenience lies; (iii) whether, if a stay is refused, the application for special leave will or might be rendered nugatory; and (iv) whether a grant of a stay will or might cause loss to the respondents. The third and fourth considerations may be seen as aspects of the second, the balance of convenience.
A conclusion that the special leave application has "substantial prospects of success" on the special leave application does not depend on a conclusion that a grant of special leave is likely. The overall question is whether, taking account of all the circumstances, there are sufficiently significant prospects of obtaining special leave to warrant the grant of a stay: Cessnock at [10].
Failure by an applicant to establish substantial prospects of obtaining special leave is not necessarily fatal to the application for stay: Rinehart at [49]. In some cases factors other than the prospects of success on the special leave application may warrant the grant of a stay.

Prospects of success in the special leave application

Invidious as it may be (see Cessnock at [8]), the authorities impose an obligation on this Court to make an assessment of the prospects that special leave may be granted to the applicant to appeal against the unanimous and closely reasoned judgments of the President and Leeming JA (with each of which the Chief Justice agreed) upholding the orders of Peden J. Delicacy about a perception of presuming to pre-empt the High Court decision should not inhibit that exercise: see Burgundy Royale at 684.
I have read the argument, on both sides, to be advanced to the High Court as recorded in the special leave application, the Response and the Reply.
The issues before the primary judge and this Court were: (i) whether the applicant had represented to the respondent that Mr Chan had the applicant's authority to enter into a contract of the kind he entered into with the respondent; (ii) if so, whether the respondent relied on the representation in deciding to enter into the contract (see primary judgment at [33]-[34], Court of Appeal reasons at [122]).
The contention of the respondent was that, by failing to correct the register, the applicant represented that the register was correct, and therefore that Mr Chan had the requisite authority to enter into the contract with the respondent on the applicant's behalf. That is the issue the applicant will seek to agitate in the High Court. It will contend that "mere silence" (that is, failure to correct the register) cannot amount to a representation unless a duty to speak (that is, to correct the register) is established. By reference to s 128 and s 129 of the Corporations Act, the applicant contended in this Court and will contend in the High Court that it had no duty to the respondent (as distinct from persons dealing with the applicant, which was not the case because the respondent was not in fact dealing with the applicant) to ensure that the register accurately identified the office holders of the applicant.
Ward P expressly rejected an argument to this effect, observing at [121] that it was: "…tantamount to saying that the general law as to ostensible authority is ousted by those statutory provisions (a submission which the appellant has expressly disavowed)."
The central proposition that the applicant will seek to advance in the High Court is that it cannot be estopped, by reason of its failure to correct the register, from denying Mr Chan's authority to enter into the contract on its behalf, unless it is shown to have owed a duty to the respondent to take steps to correct the register. Such a duty is not owed under the relevant Corporations Act provisions.
The arguments sought to be advanced by the applicant in the High Court were, essentially, put to this Court and rejected with comprehensive reasons given by a unanimous court upholding the decision of the primary judge, for essentially the same reasons. I am not persuaded that an application for special leave to appeal against the orders of this Court has substantial prospects of success.
That does not conclude the issue. It is necessary to determine whether, notwithstanding that the applicant has not established that it has substantial prospects of success in its special leave application, a stay should, nevertheless be granted.

Balance of convenience

In this case the issues on the balance of convenience are finely balanced. The respondent suggested that, if a stay is granted, that may be causative of loss to it. It relied on the evidence of the receipt in 2021 by the applicant of in excess of $6 m, and the disbursement of that money. The point made on behalf of the respondent was that the transactions pursuant to which that money was disbursed may be voidable under the "relation back" provisions of the Corporations Act (see s 588FE). By those provisions, transactions by a company in liquidation within two years prior to the date that the application is made to wind up the company may be voidable if they are shown to be for "uncommercial" purposes. In that case, the funds represented by the transactions may be recoverable and available for distribution to creditors on a winding up. The respondent did not accept that the affidavit evidence of Ms Yuan established that the payments were for legitimate (and not "uncommercial") purposes and would not therefore be voidable under the "relation back" provisions.
It may be assumed that, if the statutory demand is not set aside, an application for winding up will be made promptly - that will likely be a date in July 2023. Thus, any payments after July 2021 would, potentially, be voidable under the "relation back" provisions, if they can be shown to be "uncommercial".
A second point made on behalf of the respondent was that because a stay would delay any application for winding up, the investigation of its affairs would be made more difficult. A third point was that, while the applicant asserts that it has insufficient funds to pay the judgment debt, it has not explained the source of its funds to pursue the special leave application. These are incontrovertible, but they do little to throw light on whether a stay should be ordered. Counsel for the applicant said that the litigation is being funded by unit holders. That does not advance the argument.
The applicant also identified three factors relevant to the balance of convenience exercise, the first and second of which point to the consequences of refusal of a stay. The argument was that, unless the statutory demand is set aside, proceedings to wind up the applicant will be taken and will take their course, the consequence being that all proceedings to which the applicant is a party will be stayed, including the special leave application (unless the liquidator decides to pursue it). The applicant will lose any prospect of setting aside the judgment against it and will be liable for the judgment debt. The present directors will lose control of that proceeding (and the 2018 proceedings) and their continuation (or otherwise) will be in the hands of the liquidator. The special leave application would, in effect, be rendered nugatory unless the liquidator elected to proceed with it. As a creditor of the applicant the respondent would be entitled to a say in whether the liquidator made such an election.
The applicant's second point responds to the respondent's concerns about the loss of recoverability of funds paid out by the applicant for uncommercial transactions by reason of the delay caused to the commencement of the winding up proceeding, and the deferral of the "relation back" date. The applicant's answer lies in the affidavit evidence of Ms Yuan detailing payments made from July 2021 to June 2023, none of which, the applicant contends, would be treated as "uncommercial". Accordingly, the delayed commencement of the "relation back" period would cause no practical prejudice to the respondent.
Moreover, Ms Yuan's affidavit suggests that only relatively minor sums were paid out after July 2021. It appears that the bulk of the payments were made before that date. If that is so, then the detriment to the respondent by the passage of time affecting the "relation back" period would also be relatively minor.
Third, the applicant relied on the undertaking proffered in the affidavit of Ms Yuan to notify the respondent of any resolution of the 2018 proceedings and the quarantining of any proceeds of that litigation, and the offer of provision for security for costs of the special leave application.

Determination

I came to the conclusion that the stay sought should not be granted. It was apparent that, whatever course was taken, some prejudice would be suffered by the unsuccessful party. Refusal of a stay would (subject to any decision of the liquidator to proceed, which would, in the light of the evidence of the applicant's financial position, be dependent on an injection of funds from, presumably, unit holders) bring to an end the applicant's pursuit of the special leave application and any prospect that it has of setting aside the orders of the primary judge, as well as the 2018 litigation. It was not possible to make any assessment of the applicant's prospects of success in that litigation and therefore its value. Again in light of the evidence of the applicant's financial position, I was not satisfied that the grant of a stay would, in any substantial way, be harmful to the respondent's prospects of recovery of the judgment debt, which are minimal. The evidence does not permit any conclusion to be drawn about the prospects of recovery under the "relation back" provisions.
Balance of convenience considerations did not significantly favour either party. That meant that the absence of any substantial prospect of a grant of special leave was determinative. For those reasons I dismissed the notice of motion with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 June 2023

Corporations Act 2001(Cth)ss 128, 129, 459E, 459H, 588FE

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