Advanced National Services Pty Ltd v Daintree

Parties

1. The first plaintiff is Mrs Liu.
2. The second plaintiff, Mr Ji, is Mrs Liu's son.
3. The third plaintiff, Mr Chen, is Mr Ji's friend and former classmate.
4. The first defendant is Mrs Xiao.
5. The second defendant, Mr Zhou, is Mrs Xiao's son.
6. The third defendant is Fujian Xingxing Restaurants Pty Ltd. It was incorporated in New South Wales and carries on the two Chinese restaurant businesses in Haymarket, Xing Xing Sichuan Dish and Meetfresh. At all material times, the first and second defendants were directors of the third defendant.
7. The fourth defendant, Mr Zhen Chen, is the first defendant's husband.

The alleged agreements and payments

1. Between November 2016 and January 2017, Mrs Liu, Mr Chen, Mrs Xiao and four other persons had several meetings in China to negotiate starting Chinese restaurant businesses in Australia. The plaintiffs allege that these meetings and conversations culminated in an oral agreement ('the first agreement') between those parties for the conduct of a joint venture that would carry on a Chinese restaurant business in Sydney through a corporation that they would acquire or establish.
2. The plaintiffs further allege that the express terms of the first agreement included that the issued capital of the joint venture corporation would be held by Mrs Liu (25%), Mr Chen (10%), Mrs Xiao (25%) and the other persons (10% each); that each shareholder would contribute his/her respective proportion of the funding requirements of the corporation; that Mrs Liu would lend Mrs Xiao the funds required for Mrs Xiao's capital contribution, with such loan repayable by Mrs Xiao upon demand by Mrs Liu; and that the corporation would distribute a dividend every calendar month.
3. Mrs Xiao denies that there was any final agreement and disputes the terms of the proposed agreement.
4. Mrs Liu claims to have paid a total sum of $404 450.77 to Mrs Xiao between January 2017 and March 2017 pursuant to the first agreement. The following table was set out in the pleadings: Date of payment Amount (AUD$) 19/01/2017 $164 605.74 $26,300 19/01/2017 $29,400 07/02/2017 $65,445.03 07/02/2017 $40,000 26/02/2017 $40,000 02/03/2017 $65,000 18/03/2017 $60,000 18/03/2017 $190,000 $404,450.77 (sic)

1. Counsel for the plaintiffs corrected the first entry during submissions on 19 February 2020 and noted that the correction did not affect the total as the calculation had been made using the $26,300 figure. The payments do not in fact total $404,450.77. However, as will be explained below, nothing much turns on this point.
2. Mrs Xiao admits that she received the amounts of $26,300, $60,000 and the first $40,000. She admits that she received $130,000 on 18 March 2017. However, the other amounts are disputed and Mrs Xiao denies that the funds were paid pursuant to any joint venture agreement.
3. The plaintiffs say that in early March 2017, Mrs Liu, Mrs Xiao, Mr Chen and the other persons agreed to terminate the first agreement, and that Mrs Liu, Mrs Xiao and Mr Chen made another agreement ('the second agreement'), partly oral and partly implied, for the conduct of the joint venture. Important differences in the express terms of the second agreement are said to have included that the issued capital of the joint venture corporation would be legally and beneficially held by Mrs Liu (45%), Mrs Xiao (45%) and Mr Chen (10%), and that Mrs Xiao would pay compound interest on the loan funds received from Mrs Liu at a rate of 2.5% per month. The plaintiffs also say that it was an implied term of the second agreement that 50% of the moneys already paid by Mrs Liu to Mrs Xiao would be used for Mrs Liu's capital contribution to the joint venture corporation and the other 50% was a loan to Mrs Xiao.
4. Mr Chen claims to have paid $50,000 to Mrs Xiao on 18 March 2017 pursuant to the second agreement.
5. Mrs Liu claims to have paid $1,151,173 to Mrs Xiao, 50% to be used for her own capital contribution and 50% as a loan to Mrs Xiao, between 31 March 2017 and 5 October 207 pursuant to the second agreement. No further funds were advanced by the plaintiffs to Mrs Xiao after these dates. The following table was set out in the pleadings: Date of payment Amount (AUD$) 31/03/2017 $130,000 01/04/2017 $55,103 01/04/2017 $56,353 01/04/2017 $64,982 01/04/2017 $64,982 01/04/2017 $105,103 20/06/2017 $49,000 07/07/2017 $46,050 03/08/2017 $79,600 05/10/2017 $250,000 $1,151,173 (sic)

1. Again, the amounts do not total the final figure of $1,151,173 and it is unclear why this is the case.
2. Again, Mrs Xiao denies that there was any final agreement. However, she admits that she received all of the abovementioned amounts from Mrs Liu except for the $105,103 amount, which she does not recall being paid. She also admits receipt of funds from Mr Chen but denies the alleged amount.
3. On 21 March 2017, the third defendant was registered. Mrs Xiao and Mr Zhou were recorded as its directors and shareholders. Subsequently, the corporation carried on the 'Xing Xing Sichuan Dish' and 'Meetfresh' restaurant businesses.
4. On 1 November 2017, Mrs Liu, Mrs Xiao and Mr Chen signed a written document titled 'Fujian Xingxing Food and Drink Co., Ltd / Shareholders Agreement Scheme Cooperative Business: Sydney China Town Fujian Xingxing Sichuan Cuisine Sydney China Town Xian Yu Xian'. The plaintiffs claim that by an agreement ('the third agreement'), which was partly constituted by that written document and partly implied, those parties agreed to terminate the second agreement and conduct the joint venture through the terms of the third agreement.
5. The plaintiffs say that the express terms of the third agreement included that the issued capital of the joint venture corporation would be held by Mrs Liu (45%), Mrs Xiao (52%) and Mr Chen (3%) and that dividends would be distributed quarterly. They say that the implied terms of the third agreement included that 45% of the moneys already paid by Mrs Liu to Mrs Xiao would be used for Mrs Liu's capital contribution to the joint venture corporation and the other 52% was a loan to Mrs Xiao. It is not clear from the pleadings what the final 3% was intended to be used for.
6. Mrs Xiao pleads that the 1 November 2017 document was a 'memorandum of share transfer' and denies that the document was a final shareholding agreement.
7. On 12 December 2017, Mr Ji (as Mrs Liu's agent and on his own behalf), Mrs Xiao, Mr Zhou and Mr Chen signed a second written document titled 'Fujian Xingxing Food and Drink Co., Ltd / Shareholders Agreement Scheme Cooperative Business: Sydney China Town Fujian Xingxing Sichuan Cuisine Sydney China Town Xian Yu Xian.' The plaintiffs claim that by an agreement ('the fourth agreement'), which was partly constituted by the second written document, partly oral and partly implied, the parties agreed to terminate the third agreement and to conduct the joint venture through the terms of the forth agreement.
8. The plaintiffs say that the express terms of the fourth agreement include that the issued capital of the joint venture corporation would be held by Mr Ji (45%), Mr Zhou (52%) and Mr Chen (3%) and that dividends would be distributed quarterly. However, in the translated document, Clause V provides that a dividend will be paid every two months. The plaintiffs say that an implied term of the fourth agreement is that the moneys already paid by Mrs Liu to Mrs Xiao would be used partially for Mr Ji's capital contribution and partially as a loan to Mrs Xiao for Mr Zhou's contribution. Mrs Xiao and Mr Zhou deny that the 12 December 2017 document is a final shareholding agreement.
9. Mrs Xiao claims that repayments totalling $304 000 were made to Mrs Liu between October 2017 and May 2018. The following table was included in the defendants' written submissions: Date of payment Amount (AUD$) 29/10/17 10,000 1811/17 5,000 23/11/17 12,000 3/12/17 5,000 5/12/17 2,000 26/12/17 100,000 17/4/17 100,000 24/4/18 50,000 15/5/18 20,000 Total 304,000

1. These amounts are disputed by the plaintiffs. The plaintiffs also deny that the payments made were repayments of the loan principal.
2. On 12 July 2018, Mrs Liu and Mrs Xiao signed a written document titled 'Statement of Account Settlement'. It records the funds advanced by Mrs Liu and the amounts repaid by Mrs Xiao with respect to their Chinese and Australian dealings. Clause 2(1) states that Mrs Liu 'has advanced an investment of 1321120.77 Australian dollars.' Clause 2(2) states that Mrs Xiao 'has repaid RMB one million Yuan (¥ 1000000 Yuan) out of the investment advanced by [Mrs Liu].' This document is accompanied by detailed annexures which set out the separate amounts paid and received by these parties on various dates.
3. Each of the abovementioned documents were written in Chinese language and translated for the purposes of these proceedings. All conversations between the parties were also conducted in Chinese language. No translations were the subject of any dispute.
4. On 1 February 2019, Mrs Xiao and Mr Zhou changed the shareholdings in the third defendant corporation so that Mr Zhen Chen (the fourth defendant) held 85%, Mrs Xiao held 8% and Mr Zhou held 7%. However, on 15 April 2015, Mr Zhen Chen and Mr Zhou transferred all of their shares to Mrs Xiao.
5. Mrs Liu says that she requested that Mrs Xiao repay the loan principal and interest on 10 May 2019 and claims that Mrs Xiao has not done so.

Mrs Liu

1. Mrs Liu affirmed three affidavits, one on 11 June 2019, one on 10 September 2019, and the other on 16 September 2019. The June affidavit is accompanied by an affidavit affirmed by Mrs Liu's solicitor and qualified Chinese interpreter, Hong Zou, on 11 June 2019, which states that Hong Zou interpreted to the best of his/her ability the contents of Mrs Liu's June affidavit, the warning provided to Mrs Liu by the Qualified Witness, and the questions that the Qualified Witness asked Mrs Liu before Mrs Liu signed the affidavit.
2. In the June affidavit, Mrs Liu set out in detail telephone conversations and discussions she says she had with Mrs Xiao and other relevant parties in relation to their negotiation of the four alleged shareholders agreements.
3. In relation to the first agreement, Mrs Liu asserted that she and Mrs Xiao agreed they would run a food or restaurant business through a company in Sydney, Australia, to which they would contribute capital funds in equal shares and equally share profits. Mrs Liu further asserted that Mrs Xiao did not have the funds required to pay her share of the capital contribution, so she agreed to lend her the funds. Mrs Liu stated that she advised Mrs Xiao of the rate at which she had to borrow funds to lend to her (3-3.5% per month). She also asserted that they agreed to consider additional investors (subsequently, however, only Mr Ming Chen, the third plaintiff, joined in).
4. Mrs Liu deposed that, thereafter, she made or caused payments to be made to Mrs Xiao between January and March 2017 (see table above) and gave detailed explanations of the circumstances in which those payments occurred. Notably, many of the payments were made in cash (the others were bank transfers). Mrs Liu stated that she obtained written receipts from Mrs Xiao for most of the payments (see list of annexures below). However, she also said that some of the receipts were torn up during an account conciliation that took place on either 23 November or 23 December 2017 (the dates recorded in Mrs Liu's affidavit and in the relevant annexure are inconsistent and this issue was not cleared up during cross-examination, however, the English translation of the document is dated 23 December 2017).
5. In relation to the second agreement, Mrs Liu gave an account of a conversation which she said occurred between herself, Mrs Xiao and Mr Chen in which they agreed to carry on with opening the business despite other potential investors withdrawing. Mrs Liu recounted that Mrs Xiao agreed pay interest on the loan: Liu …I will help you for the fund, however, you must keep your promise and repay the money with interest in time… Xiao of course, it is no problem.
6. Mrs Liu gave further explanations of the events surrounding her subsequent payments to Mrs Xiao. Again, these payments were often made in cash and/or through other people, and receipts were obtained in relation to some of them.
7. In relation to the third agreement, Mrs Liu stated that Mrs Xiao asked her and Mr Chen to sign a shareholders' agreement which had been drafted by Mrs Xiao's lawyers.
8. In relation to the fourth agreement, Mrs Liu stated that she decided to substitute her son's names for her own because she would be ineligible to obtain an employer sponsored visa in Australia due to her age.
9. Mrs Liu also stated that she 'understands' that the payments Mrs Xiao made to her were for Mr Ji's and Mr Chen's dividends and interest payments on the loan (but not for repayment of the loan principal). She stated an amount of $170,000 was paid to her after she, Mr Chen, Mrs Xiao and a Wang Ying sat down and calculated the dividends payable.
10. In relation to the amounts recovered in the Chinese proceedings, Mrs Liu stated that four of the amounts mentioned in the pleadings and set out in the tables above have been dealt with in the Chinese proceedings. These are the amounts of $164,605.74 (19/1/2017), $65,445.03 (7/2/2017), $65,000 (2/3/2017), and the two payments of $64 982 (both said to have been paid on 1/4/2017). These amounts total $425,014.77 rather than $398 714.77. As noted above, Counsel submitted that the $164,605.74 was not actually claimed. However, removing that figure then gets a total of $260,409.03 (again, not $398,714.77).
11. The documents annexed to Mrs Liu's 11 June 2019 affidavit include:

• A copy of the judgement from the Chinese proceedings (Annexure 'A').
• A receipt dated 19 January 2017 which is written in Chinese language with an English translation attached (Annexure 'B'). It is signed by Mrs Xiao and notes a cash amount of $26,300. It also states: 'This is to confirm that I received AUD 164,605.64 … for Australian investment in restaurant project from LIU Qiujiao.' In her affidavit, Mrs Liu stated that she 'understands' these transactions to mean that she 'contributed $164,605.74 (sic) into the restaurant business in Australia, and the rest [$23,000] is a debt which Xiao owes [her].'
• A receipt dated 7 February 2017 which is written in Chinese language with an English translation attached (Annexure 'C'). It is signed by Mrs Xiao and states that she received $40,000 'for Australian investment' from Mrs Liu.
• A copy of WeChat records of the 'Sydney Xingxing shareholder WeChat group' which have been translated from Chinese to English (Annexure 'D'). During oral submissions, Counsel for the plaintiffs drew my attention to two WeChat messages. The first is dated 2:48PM 30 January 2018 and was said to have been sent from 'Little Luo, the accountant of Manager Xiao' to 'Sister Liu' within the group chat. In the message, 'Little Luo' states that he/she is going to report on incoming and outgoing investments in Australia and notes four payments received from Mrs Liu: $26,300 (received 19/1/2017); $40,000 (received 7/2/2017); $40,000 (received 26/2/2017); and $49,000 (received 20/6/2017). These reflect some of the money advances included in the pleadings. Mrs Xia disputes one of them. The second message is dated 11:10AM 6 February 2018. It states: Everybody, listen, there is an amount over AUD 30,000 left in our account, and we have to pay for salaries over AUD 30,000, a quarter's taxes for two restaurants have not been declared by the accountant yet, we'll reserve AUD 50,000 for it, then we have to pay to suppliers. Now we need to prepare a fund of AUD 100,000. I will bear [Mrs Liu's] AUD 45,000 as the money I repaid to you, Aiming needs to prepare AUD 3,000.
• A receipt dated 18 March 2017 which is written in Chinese language with an English translation attached (Annexure 'E'). It is signed by Mrs Xiao and states that she received $50,000 'for Australian investment' from Mr Chen. Accompanying this annexure are documents which are said to be receipts from Mr Chen's bank accounts. However, it does not seem that all of the documents have been translated.
• A second receipt dated 18 March 2017 which is written in Chinese language with an English translation attached (Annexure 'F'). It is signed by Mrs Xiao and states that she received $190,000 'for Australian investment' from Mrs Liu. Accompanying this annexure are copies of three bank transfers which confirm that three amounts of $20,000 were paid by Mr Chen to Mr Zhou on 25 March 2017, 26 March 2017 and 27 March 2017. Mrs Liu said that she asked Mr Chen to pay these amounts on her behalf.
• A receipt dated 20 June 2017 which is written in Chinese language with an English translation attached (Annexure 'G'). It is signed by Mrs Xiao and states that she received $49,000 from Mrs Liu.

1. Some of the annexures appeared to be out of order. The documents described and labelled above reflect what was provided to the court in the court book, however, some of the documents do not match those described by Mrs Liu in her affidavit. For example, Mrs Liu described Annexure I as 'a copy of the transfer from Liang CAO's bank account and the IOU signed by the defendant.' As noted above, the Annexure I provided to the court was copy of the 1 November 2017 shareholders' agreement.
2. Mrs Liu was cross-examined on the 12 July 2018 Statement of Reconciliation document. Mrs Liu confirmed that she had signed and thumb-printed the document. She also stated (through her interpreter) that '[Mrs Xiao] spent 30 minutes to persuade me to sign this document.'

Mr Chen

1. Mr Chen affirmed one affidavit on 28 January 2020. He provided descriptions of the events surrounding the negotiation of the four alleged agreements and the associated payments he was involved in which accord with the accounts given by Mrs Liu. He also provided details of the payments he made to Mrs Xiao and Mr Zhou, totalling $50,000. He did not receive any receipts at the time the payments were made and said that he was unaware of the receipt written by Mrs Xiao on 18 March 2017 for $50,000 (see above) before the commencement of these proceedings.
2. Annexures to Mr Chen's affidavit include:

• The Chinese version and an English translation of the Statement of Reconciliation signed and fingerprinted by Mrs Liu and Mrs Xiao on 18 July 2018, along with annexures detailing the transactions between those parties (Annexure 'C').
• A series of WeChat messages between members of the 'Xingxing Financial Group'. During oral submissions, Counsel for the plaintiffs drew my attention to a series of messages which were sent between Mrs Xiao and a person identified as 'Lina (the accountant)' on 26 December 2017. Mrs Xiao referred to an amount of AUD $100,000 and asked, 'Shall I record as withdrawal for expenditure?' The person who is identified as Lina replied, 'Just record as shareholders returned dividend.'

Mrs Xiao

1. Mrs Xiao affirmed two affidavits, one on 28 June 2019 and the other on 13 November 2011. In her June affidavit, Mrs Xiao recounted conversations that she said she had with Mrs Liu in October and November 2016, before any documents were signed. She said that Mrs Liu tried to convince her to open a business in Australia, and that she, Mrs Liu and Mr Chen had numerous discussions in relation to the business structure. In her view, they never reached a final agreement.
2. Mrs Xiao stated that the IOU document she signed on 23 December 2017 (see above) was made in relation to the funds lent to Mrs Liu in China and not those claimed in these proceedings. She also stated that she, Mrs Liu and her accountant 'spent hours calculating the amounts lent and repaid and signed a statement in relation to this' on 18 July 2018. Another English translation of the 12 July 2018 Statement of Reconciliation (Annexure C to Mr Chen's affidavit) is annexed to Mrs Xiao's affidavit (Annexure 'H' to Mrs Xiao's June affidavit).
3. Receipts for all but three of the repayments Mrs Xiao said she made are annexed to her June affidavit. Some of these payments were made by Mr Zhou to Mr Ji, however, Mrs Xiao stated that these payments were made at her request to repay the loan given to her by Mrs Xiao.
4. Mrs Xiao's 13 November 2019 affidavit was made in response to Mrs Liu's evidence. She denied many of the conversations and transactions that Mrs Liu says occurred.

Mr Zhou

1. Mr Zhou affirmed two affidavits, one on 18 August 2019 and the other on 15 November 2019. Mr Zhou's November affidavit responds to Mrs Liu's 11 June 2019 affidavit. In this affidavit, Mr Zhou provided a different version of the events surrounding the making of the 23 November or 23 December 2017 account conciliation and IOU note and 12 December 2017 agreement to that provided by Mrs Liu.

Submissions

1. Counsel for both sides provided several versions of written submissions to the Court over the course of the hearing and made further oral submissions during the hearing.

The Plaintiffs' submissions

1. The plaintiffs submit that there are two principle issues in dispute: (i) how much money did Mrs Liu advance to Mrs Xiao in connection with what might be called the Australian restaurant businesses; and (ii) what is the correct characterisation or purpose of the advances?
2. It is submitted that the issue of the correct characterisation of the advances is bound up with the question of whether there were ever any agreements between the relevant persons for the joint conduct of the restaurant businesses. The plaintiffs also addressed the applicability of interest on the loan made by Mrs Liu to Mrs Xiao, dividends, and the repayments said to have been made to Mrs Liu by Mrs Xiao and/or the third defendant company.

The amounts advanced by Mrs Liu to Mrs Xiao

1. As noted above, the plaintiffs' case is that Mrs Liu advanced a total of $1,555,623.77 to Mrs Xiao for investment in the restaurant businesses conducted by the third defendant. The plaintiffs note that, in her affidavit, Mrs Xiao conceded that she received at least $922,406 from Mrs Liu and that the amount in issue between them is $234,503. The plaintiffs further submit that Mrs Liu's evidence ought to be preferred because she provided substantial explanations about the means by which she obtained and advanced certain funds in dispute, whereas Mrs Xiao failed to address some of the alleged payments adequately or at all. The plaintiffs also rely upon the written receipt for $190,000 dated 18 March 2017 (Annexure 'F' to Mrs Liu's 11 June 2019 affidavit) and the account conciliation of 23 November or 23 December 2017 (Annexure 'J' to Mrs Liu's 11 June 2019 affidavit).
2. The plaintiffs say that while the Statement of Reconciliation of 18 July 2018 contains an admission by Mrs Liu that the total amount advanced was $1,321,120.77, that admission was qualified by paragraph 4 of that Statement which provides that '[Mrs Liu] shall, prior to 30 October 2018, provide certificate proof for additional expenditure that [Mrs Liu] claims to have incurred.'

Agreements and characterisation of Mrs Liu's advances

1. The plaintiffs submit that the overwhelming evidence is of an agreement to jointly establish, contribute to and conduct through the third defendant company the restaurant businesses in Haymarket, Sydney, and that this supports their position that part of the funds advanced by Mrs Liu to Mrs Xiao were capital contributions.
2. The plaintiffs rely on Mrs Liu's affidavit evidence, Mrs Liu's payments to Mrs Xiao, the receipts annexed to Mrs Liu's 11 June 2017 affidavit (which record payments for 'the Australian investment'), the WeChat messages which record payments made by Mrs Liu, the WeChat group name of the 'Sydney Xingxing Shareholders Group', the third and fourth agreements, the IOU note and the account conciliation.

Interest

1. The plaintiffs submit that the IOU note of 23 November or 23 December 2017 evidences the applicability of the 2.5% per month interest rate. The amount recorded in that IOU note is different to that claimed by Mrs Liu and is recorded in Chinese Yuan. However, the plaintiffs submit that the amount is of the approximate order of the total funds advanced by Mrs Liu.

Dividends

1. The plaintiffs submit that each of the written shareholder agreements provide for the entitlement to the dividend payout by the third defendant company to shareholders based on their shareholding rations. They also rely on the WeChat message in which 'Lina (the accountant)' directs Mrs Xiao to record $100,000 as 'shareholders returned dividend.'
2. However, the plaintiffs also submitted that the issues of company profit and whether dividends have been overpaid or underpaid are impossible to resolve on the papers and therefore that there ought to be a taking of account.

Repayments

1. As noted above, it is the plaintiffs' case that all repayments made to Mrs Liu were dividend or interest payments.
2. The plaintiffs also submit that if the 12 July 2018 Statement of Reconciliation is found to be a final and binding admission, the RMB one million Yuan (¥ 1000000) repayment should be deducted from the total advances and not subsequently from so much of the advances as represents the principal of loan funds because that is the way the document was treated in the Chinese proceedings.

Amount recovered in Chinese proceedings

1. In written submissions, the plaintiffs clarified that the $398,714.77 reduction to the amount claimed in these proceedings was calculated on the basis that the following amounts were recovered in the Chinese proceedings: Date Amount 19/01/2017 $138,305.74 7/02/2017 $65,445.03 2/03/2017 $65,000 01/04/2017 $129,964 (two payments of $64 982) Total $398,714.77

1. The first amount ($138,305.74) is less than the amount mentioned in Mrs Liu's 11 June 2017 affidavit ($164,605.74) and no explanation has been provided for this discrepancy.

The amounts advanced by Mrs Liu to Mrs Xiao

1. The defendants also submit that the main issue in dispute is the amount owed by Mrs Xiao to Mrs Liu.
2. The defendants assert that the 12 July 2018 Statement of Reconciliation makes clear that Mrs Liu's total contribution was $1,321,120.77 and that, when the amount recovered in the Chinese proceedings ($398,714.77) is deducted from that amount, you get an amount that equals that which Mrs Xiao admits she received from Mrs Liu ($922,406). The defendants assert that at least from a mathematic point of view Mrs Xiao's case would appear to be correct.

Agreements, shareholdings and characterisation of Mrs Liu's advances

1. While Mrs Xiao asserts that no final shareholders agreements had been reached in her defence, in their final written submissions, the defendants agree that the shares in the third defendant ought to be held as to 52% by Mr Zhou, 45 % by Mr Ji and 3% by Mr Chen.
2. Working from the 12 July 2018 Statement of Reconciliation document, the defendants submit 52% of Mrs Liu's total contribution ($686,982.8) should be characterised as a loan and that the remainder should be characterised as a capital contribution.

Amount recovered in Chinese proceedings

1. As noted above, the defendants agree that $398,714.77 was erroneously recovered in the Chinese proceedings and submit that this ought to reduce the debt to $288,264.

Repayment

1. The defendants submit that the 12 July 208 document contains an admission by Mrs Liu that she received RMB one million Yuan (¥ 1000000), which roughly equates to $200,000, in repayments from Mrs Xiao and thus that the debt has been reduced to about $88,264.
2. In their final written submissions, the defendants altered their original position, stating that they no longer claim that the payments Mrs Xiao says she made to Mrs Liu between October 2017 and May 2018 were repayments of the loan principal. Rather, they rely on the 12 July 2018 document and submit that an independent accountant ought to be retained to ascertain the nature of all payments made by the third defendant company to any parties including Mrs Liu during that period.

Interest

1. The defendants submit that the IOU note completed on 23 November or 23 December 2017 is in Chinese Yuan or RMB and should therefore be taken as relating to the parties' unrelated Chinese investment. They also note that the 12 July 2018 document recorded an interest rate payable on funds borrowed in China but did not mention any interest rate applicable to the Australian investment. The defendants assert that this supports their position that no interest was payable on the funds loaned by Mrs Liu to Mrs Xiao in Australia.

Dividends

1. As noted above, the defendants submit that an independent accountant should be retained to determine what dividends are owed.

Total investment in the third defendant corporation

1. The defendants assert that the initial cost of setting up the restaurants was $1,790,788 with $300,000 being contributed by the third defendant itself, reducing the total investment cost to $1,490,788. However, the defendants also recognise that the third and fourth written agreements refer to a total initial investment of $1,750,000. They submit that, as Mrs Liu or her son's contribution to the capital should be 45% of that amount, they ought to have contributed $787,500, which is less than the amount Mrs Liu actually contributed (once 52% of the $1,321,120.77 is attributed to the loan).

Legal Principles

1. Whether an agreement exists is to be determined objectively and this exercise may involve recourse to events, circumstances and things which are external to the contract itself. In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (S99/2015; S102/2015) (2015) 256 CLR 104 ('Mount Bruce Mining') at [46]-[52], French CJ, Nettle and Gordon JJ explained the principles to be applied in determining the existence of a contract and its terms: "[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". [52] These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Walesand Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Incv Jireh International Pty Ltd." (citations omitted)
2. Mount Bruce Mining was most recently cited by the High Court in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 at [73] (Nettle J) and applied by the New South Wales Court of Appeal in Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWCA 270 at [54] (Gleeson JA).
3. The alleged agreements in this case are said to be partly oral, partly written and partly implied. In Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382 (at [90]), Campbell JA (with whom Allsop P and Basten JA relevantly agreed) set out principles that are applicable in deciding whether an agreement that parties have entered is one that is wholly in writing or partly written and partly oral: (1) When there is a document that on its face appears to be a complete contract, that provides an evidentiary basis for inferring that the document contains the whole of the express contractual terms that bind the parties... (2) It is open to a party to prove that, even though there is a document that on its face appears to be a complete contract, the parties have agreed orally on terms additional to those contained in the writing... Conversely, it is open to a party to prove that the parties have orally agreed that a document should contain the whole of the terms agreed between them.... (3) The parol evidence rule applies only to contracts that are wholly in writing, and thus has no scope to operate until it has first been ascertained that the contract is wholly in writing... (4) Where a contract is partly written and partly oral, the terms of the contract are to be ascertained from the whole of the circumstances as a matter of fact... (5) In determining what are the terms of a contract that is partly written and partly oral, surrounding circumstances may be used as an aid to finding what the terms of the contract are ... If it is possible to make a finding about what were the words the parties said to each other, the meaning of those words is ascertained in the light of the surrounding circumstances... If it is not possible to make a finding about the particular words that were used (as sometimes happens when a contract is partly written, partly oral and partly inferred from conduct) the surrounding circumstances can be looked at to find what in substance the parties agreed...
4. Specifically in relation to oral contracts, Spigelman CJ explained in County Securities Pty Ltd v Challenger Group Holdings Pty Lts [2008] NSWCA 193 at [7]: The subject matter and the concomitant terms of the [oral] contract must be inferred from a combination of surrounding circumstances including conversations, documents and conduct none of which provide a definitive form of words. The issue is not one of interpretation, because there are no words to interpret. The issue is one of fact: what did the parties agree?"
5. In Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, Heydon JA (as his Honour then was) helpfully observed that the question is 'whether the conduct of the parties, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement.'
6. There are two further lines of authority that are relevant to the resolution of this case. They relate to the difficulties that plaintiffs face in discharging their onus of proof in relation to contracts said to be based on oral conversations or conduct that occurred years before proceedings are commenced.
7. First, the reasons for the difficulty are to some extent obvious but were discussed by McClelland J with his customary precision and insightfulness in Watson v Foxman (1995) NSWLR 49 as follows (at 319) : Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
8. In similar vein Hammerschlag J captured the difficulties associated with such an exercise in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 (at [94]): Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences.
9. Secondly, as I have said previously (see e.g. Diransson Pty Ltd v Hassan El Dirani [2019] NSWSC 617 [466]), many judges still advert to what might be described as findings on demeanour and the manner and mode of delivery of a witness's testimony, especially during cross-examination, may have some influence on the Judge's view of the witness's credibility. However, as the High Court in Fox v Percy (2003) 214 CLR 118 stated (at [31]): Further, in recent years, judges have become more aware of scientific research that has cast doubt on the ability of judges (or anyone else) to tell truth from falsehood accurately on the basis of such appearances. Considerations such as these have encouraged judges, but at trial and on appeal, to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events. This does not eliminate the established principles about witness credibility; but it tends to reduce the occasions where those principles are seen as critical.
10. In a case such as this, where partly oral agreements are alleged and cross-examination was unsatisfactory, the most reliable guide is to seek out and identify if possible relevant corroboration, especially any contemporaneous documents made by the parties.

General approach

1. The hearing before me was in many respects conducted unsatisfactorily. I hasten to state that this should not be taken as any adverse reflection on the parties' counsel or solicitors. It was in part due to time constraints. It was also due to the fact that neither principal witness for the plaintiffs or the defendants spoke English. While interpreters were present at the hearing, the process of cross-examination was significantly hampered and therefore no findings of credit could confidently be made in favour of either party on most issues. This also meant that key documents, which were all translated from Mandarin to English, were not subjected to the scrutiny they would have been if language was not a barrier.
2. Overall, there is a lack of contemporaneous documentation (such as emails or diary entries, for example), particularly in relation to the oral agreements which the plaintiffs allege were made, as well as the purposes of several transactions that occurred between the parties. The written components of the third and fourth agreements do not on any view set out the entire agreements as alleged. There are some unexplained inconsistencies within and between parties' pleadings, evidence and submissions, and many calculations simply do not add up. The result of all this is that a number of core contemporaneous documents, and in particular the 12 July 2018 Statement of Reconciliation, receive greater focus than they perhaps otherwise would.

12 July 2018 Statement of Reconciliation

1. The 12 July 2018 document contains admissions in my view by Mrs Liu and Mrs Xiao that, at that date, the total investment advanced by Mrs Liu was $1,321,120.77 and the total repayment made by Mrs Xiao was RMB one million Yuan (¥ 1000000 Yuan), which the parties submit is equivalent to approximately $200,000. It is signed and fingerprinted by both of these parties. It is accompanied by detailed annexures that set out various transactions that took place between the parties in China and Australia, suggesting that some considerable time was taken to work out what moneys had been paid by each of them, likely with the assistance of contemporaneous documents. The relevant amounts contained in the annexures, when summed together, do appear to equal the total amounts admitted by the parties (which also appear to accord with the amounts admitted in Mrs Xiao's pleadings).
2. In the witness box, Mrs Liu asserted that Mrs Xiao took 30 minutes to persuade her to sign the document. However, I cannot accept that. The detail in the annexures tells against it. No case of duress or unconscionable conduct has been raised. As noted above, the plaintiffs also assert that paragraph 4 of the document left it open to Mrs Liu to prove further expenditure. However, no evidence of her doing so was provided to the Court.
3. For these reasons the 12 July 2018 document is the most reliable guide to determining what amounts were paid and repaid by Mrs Liu and Mrs Xiao, respectively, and I place considerable weight upon it. There is no evidence of any further advances being made by Mrs Liu after that date. Equally, it does not appear to me that there is any evidence that Mrs Xiao made any repayments after that date.
4. The 12 July 2018 document certainly evidences the fact that Mrs Liu and Mrs Xiao had reached some agreement that involved Mrs Liu contributing money towards a restaurant venture in Australia, although the exact terms of that agreement are not illuminated by that document. The written parts of the third and fourth agreements indicate some terms but, as I have already said, in no sense do they represent entire agreements. Some terms may have been set out in conversations. The issues that remain are (i) what proportion of the funds advanced by Mrs Liu was a capital contribution and what proportion was a loan; (ii) the amount owed to Mrs Liu by Mrs Xiao for the outstanding loan principal; (iii) whether interest is payable on the loan; and (iv) dividends.

Mrs Liu's loan and capital contribution and the parties' associated shareholdings

1. I accept that the written shareholders agreements dated 1 November 2017 and 12 December 2017 represent final agreements. The November document is signed by Mrs Xiao, Mrs Liu and Mr Chen, who are listed as shareholders in Clause 1. The December document is signed by Mrs Xiao, Mr Chen, Mr Zhou and Mr Ji (apparently on his own behalf and as an agent for Mrs Liu, although this is not stated in the translated version of the document). In both documents, Clause 2(a) states that the contract is to come into force upon signing by the last shareholder. The December document appears to supersede the November one with the shareholders being altered to Mr Zhou (52%), Mr Ji (45%) and Mr Chen (3%). In their final submissions, the defendants accepted that the shares in the third defendant company ought to be held by those parties in those proportions.
2. Although the 12 July 2018 document does not refer to the earlier written agreements or seek to deal with the shareholder ratios, there is no reason why the 12 July 2018 document should cause those agreements to be ignored or displaced. It did not seek to deal with shareholder ratios or dividends. Rather, it simply sought to identify with some precision what money had been paid and repaid by Mrs Liu and Mrs Xiao, respectively. As I have already mentioned above, it corroborates the evidence that an agreement did exist. Therefore, I consider that the 12 July 2018 should be read in light of the earlier written agreements and the shareholder ratios should be applied to determine what proportion of the funds provided by Mrs Liu to Mrs Xiao should be characterised as a loan.
3. While Clause 1 of both written shareholder agreements require the shareholders 'to ensure that, prior to this agreement coming into force, approximate (sic) A$1,750,000 in total is to be made ready for appropriation…', there does not appear to be any evidence before the Court as to the total amount that was actually invested in the third defendant company by all of the parties concerned. I accept that Mr Chen provided $50,000 and that this entitles him to a 3% shareholding. However, there is no evidence, apart from bare assertions by the defendants themselves, that Mrs Xiao or Mr Zhou provided any funds of their own.
4. Therefore, I consider that the most reliable guide is to treat Mrs Liu's $1,321,120.77 contribution and Mr Chen's $50,000 contribution as the only investment amounts. These figures sum to $1,371,120.77. Applying the shareholder ratios from the written agreements, approximately 52% of that amount ($712,982.80) should in my view represent the loan made by Mrs Liu to Mrs Xiao for the purposes of Mrs Xiao's or Mr Zhou's capital contribution in the third defendant company, and the remainder ($658,137.97) should in my view represent the amount provided for Mrs Liu's or Mr Ji's own capital contribution in the third defendant company. On balance, I think this is the most logical conclusion based on the evidence and documents as a whole and would find accordingly.

Outstanding loan principal

1. As noted above, the plaintiffs submit that Mrs Xiao's ¥ 1,000,000 repayment recorded in the 12 July 2018 document ought to be deducted from Mrs Liu's total advances and not subsequently from so much of the advances as represents the principal loan funds. That course in my view is illogical given that the amount paid is characterised as a 'repayment'; capital investments are not generally repaid, although, dividends may be paid to shareholders. The best course is to deduct the ¥ 1,000,000 (approximately $200,000) figure from that part of the funds that were provided as a loan, reducing the outstanding amount of loan principal to approximately $512,982.80.
2. On the basis that both parties have agreed that a further $398,714.77 ought to be deducted from the amount owed to avoid any double recovery on Mrs Liu's part, the outstanding amount of loan principle is therefore approximately $114,268.03. I am satisfied that is the total amount owed by Mrs Xiao to Mrs Liu and would enter judgment accordingly. This is of course subject to any amount of dividends that might be outstanding.

Interest

1. Arguments for and against the applicability of interest can be made on the basis of the 23 November or 23 December 2017 IOU note (Annexure 'K' to Mrs Liu's affidavit). In favour of the plaintiffs, it refers to Mrs Liu and Mrs Xiao's 'mutually operated restaurant'; the evidence provided in relation to the parties' Chinese investment is sparse, however, there is no evidence that they run a mutually operated restaurant in China as well as in Sydney. On the other hand, the figure is recorded in Chinese Yuan rather than Australian dollars.
2. What does tell against the applicability of interest is the absence of its mention in the 18 July 2018 document. That document records that a monthly interest rate of 2% was to apply to the loan made in China but it seems not to any part of the Australian investment. Given the detail contained in this document and its annexures and the time and effort it would have taken to prepare, I find it inconceivable that interest was intended to apply but omitted in this document.
3. As against that it might be thought unlikely that the Australian arrangement was to be interest free given the commercial nature of the arrangement. However, I regard it inconceivable that at 18 July 2018 the parties had forgotten that issue. In addition, neither written agreement refers to interest. I think the better view is that the parties did not intend to have interest accrue on the Australian arrangement. More likely, dividends were to be paid in lieu, at least by implication. I also observe that no suit for rectification was sought in relation to any payment of interest. However, what is important is that dividends were intended to be paid in Australia.

Dividends

1. The parties agree that a referee should be appointed to determine the company profits and whether dividends have been overpaid or underpaid.
2. I should note however that although I am satisfied that dividends should be paid, neither of the written agreements made on the 1 November 2017 or the 12 December 2017 make reference to any methodology by which dividends ought to be calculated. The 12 July 2018 made no reference to any agreement about dividends and did not characterise any of the relevant repayments as dividends. The 1 November 2017 written agreement provided that dividends were to be paid quarterly. Under the 12 December 2017 written agreement, dividends are to be paid every two months.
3. In her 11 June 2019 affidavit, Mrs Liu referred to a number of payments made by Mrs Xiao which she said were dividends. She also recounted an occasion on which she, Mr Chen, Mrs Xiao and a Wang Ying calculated a dividend payment. However, much of this evidence was evidence of Mrs Liu's understanding only. Otherwise, I do not regard Mrs Liu's evidence as to the calculation of dividends as reliable given the lack of any written methodology. Further, I do not regard the WeChat conversation involving 'Lina (the accountant)' as anything more than an accountant saying that one payment could be characterised as dividends.
4. For these reasons, I would hear further submissions from the parties on the methodology to be employed in calculating dividends and the appropriateness of appointing a referee.

Conclusion

1. Otherwise, I would invite the parties to prepare short minutes reflecting these reasons. Amongst the relief I would be prepared to grant is the entry of judgment in favour of the first plaintiff in the amount identified plus any relevant interest, together with an order affecting the registration of relevant shareholdings. I would also entertain any other relief thought to be appropriate. In addition, I would invite the parties to arrange a further hearing to discuss the question of dividends and any issues concerning 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: 25 March 2020