(2012) 293 ALR 335
- Australian Competition and Consumer Commission v Telstra Corporation Ltd [2007] FCA 1904
(2007) 244 ALR 470
- Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54
(2013) 250 CLR 640
- Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc [2009] QSC 58
(2009) 71 ACSR 1
- Australian Securities and Investments Commission v Narain [2008] FCAFC 120
Source
Original judgment source is linked above.
Catchwords
(2012) 293 ALR 335
- Australian Competition and Consumer Commission v Telstra Corporation Ltd [2007] FCA 1904(2007) 244 ALR 470
- Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54(2013) 250 CLR 640
- Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc [2009] QSC 58(2009) 71 ACSR 1
- Australian Securities and Investments Commission v Narain [2008] FCAFC 120(2008) 169 FCR 211
(2008) 66 ACSR 688
- Banque Commerciale SA v Akhill Holdings Ltd [1990] HCA 11
(2006) 225 CLR 553
- Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317
- Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44
(1982) 149 CLR 191
- Pramoko v Grande Enterprises Ltd [2015] WASCA 157
(2015) 108 ACSR 469
- Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789
Judgment (9 paragraphs)
[1]
ustees of the Roman Catholic Church for the Diocese of Parramatta v Doepel [2016] NSWSC 1566
- ZX Group Pty Ltd v LPD Corp Pty Ltd [2013] VSC 542
Category: Principal judgment
Parties: Yaohua Shi (Plaintiff)
William Cai (First Defendant)
William Enterprise Holdings Pty Ltd (Second Defendant)
Representation: Counsel:
J E Thomson (Plaintiff)
No appearance by the First Defendant
H Collins (Solicitor - Second Defendant - excused from attendance)
By Originating Process filed on 22 March 2016 the Plaintiff, Mr Yaohua Shi originally sought relief under ss 232-233 of the Corporations Act 2001 (Cth) and several provisions of the Australian Securities and Investments Commission Act 2001 (Cth) and the Australian Consumer Law. Mr Shi also originally sought relief including declarations that the affairs of the Second Defendant, William Enterprise Holdings Pty Ltd ("WEH") were being conducted contrary to the interests of members as a whole and in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against Mr Shi and consequential orders. Any utility of the relief was reduced when WEH and several other corporate defendants were placed in voluntary administration, and later transitioned to a creditor's voluntary winding up. Mr Shi now pursues the proceedings only against the First Defendant, Mr Cai, and WEH and primarily seeks orders for rescission of his subscription for shares in WEH and compensation as against Mr Cai and WEH.
Mr Cai removed his solicitors shortly before the hearing of the proceedings and filed a Defence on his own behalf, but did not appear when the matter was called for hearing. Although Mr Cai did not appear, I have had regard to the defences raised in his Defence in determining the matter: Banque Commerciale SA v Akhill Holdings Ltd [1990] HCA 11; (1990) 169 CLR 271; Trustees of the Roman Catholic Church for the Diocese of Parramatta v Doepel [2016] NSWSC 1566 at [47]. A large part of that Defence involved the denial of allegations pleaded by Mr Shi and required me to determine, as I do below, whether those allegations were established. The Defence also raised, inter alia, issues as to whether the Share Agreement referred only to an investment in a particular company, William Enterprise Group Pty Ltd ("WEG") (Defence [4]), rather than in WEH and the William Enterprise group of companies, which I address below; the nature of any representation that Mr Cai had previously "invested" $3.9 million in WEG or the William Enterprise group of companies (Defence [9]) which I address below; the effect of any representation that WEH "plan[ned]" to make specified future profits (Defence [10]) which I also address below; and matters of translation of and qualifications to communications that originally occurred in Mandarin (Defence [21]ff) as to which Mr Cai led no evidence at the hearing.
Mr Shi was granted leave to continue the proceedings against WEH under s 500(2) of the Corporations Act on terms that he may not enforce a judgment against it without leave of the Court, and the liquidator for WEH submitted to any orders made by the Court in the proceedings except as to costs. Mr Shi discontinued the proceedings against several other companies within the William Enterprise Group which were also in liquidation.
Mr Shi claims that he was induced to pay $2,003,767.96 to acquire 2,000,000 shares in WEH by false and misleading or deceptive representations concerning its financial status, the scope and nature of its business and the improved trading performance to be achieved using the proceeds of the share issue, and that Mr Cai falsely represented that the share issue would secure Mr Shi a 20% equity interest in the businesses that were being conducted by other group companies. The chronology of events emerges from Mr Shi's Statement of Claim and from the affidavits he reads in support of his claim. Mr Shi's affidavit evidence was not challenged where Mr Cai did not appear in the proceedings. Mr Shi also tendered part of Mr Cai's affidavit evidence, which was admissible so far as it was adverse to Mr Cai's and WEH's interests.
Mr Shi's evidence (Shi 10.3.16) is that he was introduced to Mr Cai by another shareholder of WEH, Mr Sun (Shi 10.3.16 [2]); he and Mr Sun visited the business of WEH in Sydney in November 2012; he was told by Mr Cai that "William Enterprise" was a 'well known business' and he was invited to provide capital to WEH (Shi 10.3.16 [5]-[6]). The companies within, or associated, with that group included WEG which was a retail and wholesale distributor of fencing and steel products in Sydney; William Enterprise Trading Pty Ltd ("WET") which provided wholesale services in several states; William Powdercoating and Fabrication Pty Ltd ("WPF") which provided powdercoating services; and was associated with Eversure Fencing Pty Ltd ("Eversure Fencing") which undertook fence installation.
Mr Shi's evidence (Shi 10.3.16 [8]) is that he subsequently applied for permanent residency in Australia after his return to China; that application was rejected; and, after he informed Mr Cai of that:
"[Mr Cai] agreed that [Mr Shi] would lend [Mr Cai] AUD 500,000.00 for 3 years and he would assist [Mr Cai's daughter] to obtain a subclass 457 temporary residency visa."
Mr Shi's evidence (Shi 10.3.16 [9]) is that, at Mr Cai's direction, he then paid two amounts of $250,000 on 1 July and 19 July 2013. There is evidence that those payments were made to Tianjin Jinshengde Steel Tube Produce Co Ltd, a Chinese entity which was a supplier to WEH, with which Mr Cai's sister was associated, prior to entry into the Investment Collaboration Agreement relating to WEH to which I refer below.
Mr Shi's evidence (Shi 22.3.16 [11]) is that then attended a further meeting with Mr Cai and Mr Sun on 30 October 2013 and Mr Cai told him that:
"a. William Enterprises consists of several companies such as William Funds, William Holdings, William Group, William Trading, William Powdercoating, and a franchise called Eversure.
b. The Various companies were set up to 'deal with the government'.
c. William [Cai] is the sole Director and Shareholder of the companies and no other person owns shares in those companies."
Mr Shi's evidence is that he was also provided with a "Financial Report" of the business at that meeting (Shi 22.3.16, Annexure "A") and with a brochure (Shi 22.3.16, Annexure "B") that was said to provide detailed information about the William Enterprise group of companies. Mr Shi's evidence (Shi 22.3.16 [13]) is that:
"Mr Cai took [Mr Shi and Mr Sun] through the brochure and highlighted the projected increased sales and profits that would be earned by the company using the funds proposed to be invested, and how various problems with the business would be addressed using those invested funds."
Mr Shi acknowledges that Mr Cai referred, in that meeting, to a reported loss of the business not exceeding $700,000 which he said was caused by the set up "of a revolutionary horizontal powdercoating production line in 2012, not by operational loss" (Shi 22.3.16 [14]).
The balance sheet as at 30 June 2013 included in the "Financial Report" for the "William Enterprise Group consolidated entities" for the year ended 30 June 2013 recorded total net assets of $3,234,676, derived from total assets of $10,546,137 and total liabilities of $7,311,461. The brochure (Annexure "B") contained a diagram of shareholdings which did not disclose third parties' interests in several subsidiaries of WEH.
Mr Cai signed an Investment Collaboration Agreement with Mr Cai and Mr Sun on 30 October 2013 (Shi 22.3.16 [15]; a corrected translation is at Wong 7.12.16, Annexure "A") which provided for him to buy 2 million shares in WEH for a total consideration of $2,003,767.96. I do not accept the contention in paragraph 4(e) of Mr Cai's Defence (if that paragraph is directed to the substance of the transaction and not only a matter of translation) that the Investment Collaboration Agreement refers to a shareholding in WEG rather than WEH. That contention is inconsistent with the title of that document which expressly refers to WEH, the references to WEH in that document (particularly in section II dealing with "new equity structure") and the communications between the parties directed to matters relating to companies with the William Enterprise group of companies rather than specifically to WEG.
The Investment Collaboration Agreement stated that:
"According to the Audit Report, as of June 30, 2013, the company's total assets was $10,546,000 with total liabilities of $7,311,000 and net assets of $3,234,000. Formerly [Mr Cai] has invested $3,900,000, therefore, the decision is made by the three parties through mutual consultation that the assets of [Mr Cai] is approved as $4,000,000, including net assets plus intangible assets, which shall be accounted for as original equity."
That agreement provided that the amount of $500,000 previously lent to Mr Cai would be transferred to an investment in WEH, stating that:
"The rest of $500,000 was originally used as replenishment for [Ms Shi] to apply for Subclass 457 visa, which was currently deposited into the account of Jinshengde (Tianjin). [Mr Cai] shall be responsible for transferring this fund into [WEH] and all investment funds shall be all in place."
The Investment Collaboration Agreement also recorded that:
"By June 30 2014, the company plans to make a profit of $1,000,000 or at least make up the current deficient of AUD 700,000.
By June 30 2015, the company plans to make a profit of AUD 2,000,000.
By June 30 2016, the company plans to make a profit of no less than of AUD 2,000,000.
The above plan shall be the assessment target of the company's General Manager, and the shareholders are entitled to ask for changing the company's General Manager if the target fails to be accomplished in three consecutive years."
Mr Shi also relies on several paragraphs of Mr Cai's affidavit dated 17 June 2016 which were tendered in his case (Ex P3). Mr Cai's affidavit evidence (Ex P3, [29]) was that, during the presentation on 30 October 2013, he explained the 2013 Financial Report as:
"[A] consolidation of the financial reports for each of the following companies:
WEH, WEG, WET, WPS and ES."
Mr Cai's affidavit evidence was also that, at the time of the 2013 Financial Report, the companies had not yet finalised their financial year reports, which would normally be completed in the following year, 2014 (Ex P3, [40]).
Mr Cai's evidence was also that he had given instructions to his internal accountant to convert the investments made by Mr Shi into shares, although the accountant had failed to carry out that instruction, with the result that Mr Shi's shares in WEH were recorded as unpaid in WEH's financial report for the 2014 financial year (Ex P3, [43]-[45]). Mr Cai also referred to the receipt of funds from Mr Shi, and claimed that the first two amounts paid on 1 July 2013 and 19 July 2013, made directly to Tianjin Jinshengde Steel Tube Produce Co Ltd, were used as a payment towards the trading account of the William Enterprise group of companies with that entity. Mr Cai also refers to the several other payments made by Mr Shi, although he says he cannot locate the payment receipts for several of those payments, and refers to payments made by a foreign exchange service, the receipts of which are in evidence (Ex P3, [52]-[63]).
By a subsequent document dated 20 November 2013 (Shi 10.3.16 Annexure "D"), Mr Shi identified several "unsettled issues" in respect of the investment, including the breakdown of WEH's assets of $3,324,000 "before joining equity". Mr Shi gives evidence of subsequent unsatisfied inquiries, although it appears the lack of a substantive response to those inquiries did not deter him from paying further amounts. Mr Shi's evidence is that those amounts (in addition to the two amounts of $250,000 paid in China prior to entry into the Investment Collaboration Agreement) were paid in several separate transactions, by payments of $30,000 on 3 December 2013, approximately $120,740 on 4 December 2013, $30,000 on 9 December 2013, $20,000 on 10 December 2013, $93,675 on 15 January 2014 (which also appears to have been paid to Tianjin Jinshengde Steel Tube Produce Co Ltd, the Chinese supplier associated with Mr Cai's sister), $29,861 on 25 February 2014, $679,025 on 6 March 2014 and $500,464 on 15 April 2014. The receipt of those amounts was acknowledged by a document dated 31 October 2014, signed by, inter alia, Mr Cai on 6 November 2014 (Shi 10.3.16, Annexure "E"). Mr Shi explained the indirect mechanism of several of those payments by reference to Chinese regulatory requirements in respect of payment of funds offshore.
Mr Shi subsequently sought to withdraw his investment in WEH by a letter dated 29 December 2014 (Shi 22.3.16, Annexure "F"). That letter referred to an "incorrect explanation" provided to Mr Shi at the point of his investment and made clear Mr Shi's wish to "go back to the economic status before joining equity".
On 13 May 2016, after WEH was placed in voluntary administration, its administrators made a demand for $2 million on Mr Shi, described as unpaid share capital, although they left open the opportunity for Mr Shi to provide further evidence of payment. Mr Shi responded, by his solicitor's letter dated 31 May 2016, referring to the affidavit evidence which he had led in these proceedings as to payment of the subscription amount of $2,003,767.96.
[4]
The applicable legal principles
Mr Shi alleges that Mr Cai and WEH made several representations that are alleged to have been misleading and deceptive or likely to mislead or deceive in contravention of s 12DA of the Australian Securities and Investments Commission Act and s 18 of the Australian Consumer Law. In closing submissions, Mr Thomson, who appeared for Mr Shi, rightly recognised that the claim was not properly brought under the Australian Consumer Law so far as it related to the subscription for shares in WEH. It seems to me that the alleged representations were made in relation to a financial product, being shares in WEH, and s 1041H of the Corporations Act likely applies to the exclusion of s 18 of the Australian Consumer Law, by reason of s 131A of the Competition and Consumer Act 2010 (Cth): Australian Competition and Consumer Commission v Fisher & Paykel Customer Services Pty Ltd [2014] FCA 1393 at [24]. Although Mr Shi did not expressly plead a claim under s 1041H of the Corporations Act, it seems to me that there is no disadvantage to Mr Cai or WEH in determining the proceedings as a claim under that section where the scope of the prohibition in that section broadly corresponds to s 12DA of the Australian Securities and Investments Commission Act and s 18 of the Australian Consumer Law. On that basis, I need not determine whether s 12DA of the Australian Securities and Investments Commission Act is capable of application, which would require that the relevant conduct could be treated as conduct in relation to "financial services" as defined in s 12BAB of the Australian Securities and Investments Commission Act. Mr Shi did not make substantive submissions as to that question.
I should now briefly refer to the legal principles applicable to a claim for misleading conduct, and I have drawn on my summary of those principles in Redmond Family Holdings v GC Access Pty Ltd & Ors [2016] NSWSC 796 in this regard. In Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [109], approved by the majority in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [102], McHugh J observed that:
"The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 [of the then Trade Practices Act 1974 (Cth)] has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself. It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole. The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document." [Citations omitted]
[5]
The alleged representations
The representations on which Mr Shi relies are referred to in paragraphs 5-15 of Mr Shi's affidavit dated 10 March 2016 and he relies on the "Financial Report for year ending 30 June 2013" (Shi 10.3.16, Annexure "A"), the brochure for the investment (Shi 10.3.16, Annexure "B") and the Investment Collaboration Agreement (Shi 10.3.16, Annexure "C") to which I have referred above.
The first alleged representation was that Mr Cai was the sole owner of all the corporations in the William Enterprise group of companies and no other person owned shares in that group of companies. Mr Shi's evidence (Shi 10.3.16 [11]) is that Mr Cai said, at the meeting on 30 October 2013, inter alia, that he was the sole shareholder of the companies and no other person owned shares in those companies. That statement was not contested by cross-examination, and Mr Cai and WEH did not lead evidence to the contrary. Mr Shi's evidence is also that Mr Cai did not at any time inform him that other persons were involved in the ownership of other companies within the William Enterprise group of companies (Shi 10.3.16 [26]). The brochure provided at the meeting on 30 October 2013 contained a diagram of shareholdings which did not refer to the substantial interests held by third parties in several companies within the corporate group. I am satisfied that such a representation was made by Mr Cai and that an inference should be drawn that it was also made by Mr Cai on WEH's behalf, where it would have the benefit of the proposed subscription for shares. The liquidator of WEH, which submitted to any order of the Court other than as to costs as noted above, did not seek to distinguish WEH's position from Mr Cai's position in this respect.
Mr Shi alleges that the ownership representation was false because, at the time it was made, WEH was not the sole owner of all shares in each of the several companies in the William Enterprise group of companies. The pleaded representation is falsified by company searches that are in evidence. The administrators' report to creditors under s 439A of the Corporations Act (Ex P1, pp 133ff) also records that, although WEH had a shareholding in each of several subsidiary companies, there were other shareholders in each of those companies, including Mr Lin who held a 60% interest in WEG, Mr Cai who held a 60% interest in WET and Mr Su who held a 50% interest in WPF, and that WEH had no interest in Eversure Fencing, the shares in which were held by Mr Cai and Mr Liu. I am satisfied that this representation was misleading or deceptive or likely to mislead or deceive for this reason.
[6]
Causation and relief
Mr Shi alleges that, in reliance on the alleged representations, he entered into the Investment Collaboration Agreement and paid the amount provided under that agreement as consideration for the issue of shares in WEH. Mr Shi claims that he has suffered loss and damage, on the basis that the shares issued to him were worthless. By his Amended Statement of Claim, Mr Shi seeks an order for rescission of the Investment Collaboration Agreement and remedies under the Australian Consumer Law or the ASIC Act, including the avoidance ab initio of the Investment Collaboration Agreement pursuant to s 243 of the Australian Consumer Law or s 12GM(7) of the ASIC Act and damages under s 236 of the Australian Consumer Law or s 12GF of the ASIC Act.
The evidence to which I have referred above indicates that the two amounts totalling $500,000 paid to Tianjin Jinshengde Steel Tube Produce Co Ltd in July 2013 were a loan to Mr Cai; were associated with an arrangement for Mr Shi's daughter to obtain permanent residency in Australia, which appears to have been implemented; and were made prior to the alleged representations in respect of WEH made at the meeting on 30 October 2013 or in the Investment Collaboration Agreement. Although there is reference to a changed treatment of those payments in the Investment Collaboration Agreement, it has not been established that the payments were induced by or caused by the representations later made in respect of WEH and they are not recoverable either against Mr Cai or WEH in these proceedings. It is not necessary to determine whether they are recoverable against Mr Cai as a debt since no such claim on that basis was made by Mr Shi in the proceedings.
I am satisfied that Mr Shi's evidence establishes reliance and causation in respect of the representations concerning the payments made (including one further payment made to Tianjin Jinshengde Steel Tube Produce Co Ltd) after the meeting on 30 October 2013 and the execution of the Investment Collaboration Agreement. In particular, Mr Shi's evidence was that he would not have invested in WEH, which he knew did not trade or hold any assets, if he knew that there were other shareholders in its several subsidiaries, and also that he would not have recognised Mr Cai's initial investment as $3,900,000 under the Investment Collaboration Agreement if Mr Cai had disclosed that the sum consisted of funds advanced to him or WEH by others (Shi 2.12.16). Mr Shi's evidence in that respect was not challenged where Mr Cai and WEH (by its liquidators) did not participate in the hearing. That evidence seems to me to be consistent with the commercial probabilities, since Mr Shi's equity investment in WEH would have been structurally subordinated to the claims of other shareholders in subsidiary companies which held the relevant assets, and Mr Shi would have had little security in investing in a holding company if all that it held was interests in other companies and the shareholders in those other companies would have had first call upon any surplus available to shareholders on a winding up.
[7]
Other matters that need not be determined
Mr Shi alternatively pursued a claim in deceit. Mr Thomson rightly acknowledged that it was not necessary to determine that claim if Mr Shi succeeded in his claim for misleading and deceptive conduct and was entitled to the relief sought under that claim. I do not need to determine this claim, which could not lead to a different result from that which I have reached in respect of the claim for misleading or deceptive conduct.
Mr Shi alternatively pursued a claim that Mr Cai was knowingly concerned in the alleged misleading and deceptive conduct, on the basis that he was at all material times the sole director and controlling mind of WEH and made the relevant representations on its behalf, and either knew the falsity of the first four representations at the time they were made or was indifferent to their truth or falsity, or had no reasonable basis for making the fifth representation as to the planned profitability of the William Enterprise group of companies and made that representation with reckless indifference to its truth or falsity. A person who suffers loss or damage by conduct of another person who contravened the prohibition on misleading or deceptive conduct in s 1041H of the Corporations Act may recover the amount of that loss or damage against, inter alia, another person involved in the contravention under s 1041I of the Corporations Act.
It is not necessary to determine the claim for accessorial liability against Mr Cai since I have held that both he and WEH are liable as principal for the misleading conduct which he undertook as a director of WEH: compare Houghton v Arms [2006] HCA 59; (2006) 225 CLR 553; Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211; (2008) 66 ACSR 688 at [98]; CH Real Estate Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37; Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc [2009] QSC 58; (2009) 71 ACSR 1 at [221]. For completeness, I note that Mr Shi also sought other declaratory and injunctive relief which does not seem to me to be necessary where the primary relief which he sought has been granted to the extent that it should properly be granted.
[8]
Orders
Mr Shi should bring in short minutes of order to give effect to this judgment and as to costs within 14 days.
[9]
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: 09 February 2017
Parties
Applicant/Plaintiff:
Ambergate Ltd
Respondent/Defendant:
CMA Corporation Ltd
Legislation Cited (5)
Corporations Amendment (Sons of Gwalia) Act 2010(Cth)
The approach to be adopted in assessing whether conduct is misleading or deceptive was summarised by Gordon J in Australian Competition and Consumer Commission v Telstra Corporation Ltd [2007] FCA 1904; (2007) 244 ALR 470 at [14]-[15], in a passage which Griffiths J followed in Forty Two International Pty Ltd v Barnes [2014] FCA 85; (2014) 97 ACSR 450 at [446] (reversed on appeal on other grounds) and I followed in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [86], as follows:
"The relevant legal principles have been well traversed by Australian courts. A two-step analysis is required. First, it is necessary to ask whether each or any of the pleaded representations is conveyed by the particular events complained of … Second, it is necessary to ask whether the representations conveyed are false, misleading or deceptive or likely to mislead or deceive. This is a 'quintessential question of fact'" … [citations omitted]
Conduct is misleading or deceptive or likely to mislead or deceive if it tends to induce error: Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 250 CLR 640. It is not necessary for Mr Shi to establish that Mr Cai or WEH intended to mislead or deceive and the relevant question is whether, viewed objectively, the relevant conduct was misleading or deceptive or likely to mislead or deceive: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 197 per Gibbs CJ, 216 per Brennan J; Australian Competition and Consumer Commission v Jewellery Group Pty Ltd [2012] FCA 848; (2012) 293 ALR 335 at [66]. Conduct is likely to mislead or deceive if there is a real and not remote chance or possibility that a person is likely to be misled or deceived, and this is so even though the possibility of that occurring is less than 50 per cent: Butcher v Lachlan Elder Realty Pty Ltd at [112] per McHugh J; Colorado Products above at [87]. The fact that a representation does not come to pass is not sufficient to establish that it was made without reasonable grounds: Ambergate Ltd v CMA Corporation Ltd (admins apptd) [2016] FCA 94; (2016) 110 ACSR 642 at [29].
The second alleged representation was that Mr Shi's investment amount procured for him a 20% total equity holding in the corporate group. Mr Thomson submits that this representation is a corollary of the first representation which I have addressed above. Mr Shi alleges that this representation was also false because, at the time it was made, Mr Cai was not the sole owner of all shares in each of the other companies within the William Enterprise group of companies and several entities shown as part of that Group were not wholly owned by WEH and were not part of the Group. It is by no means clear that a representation in those terms was made or was necessarily to be implied from the first representation that was made. However, it is not necessary to determine that question, since this representation would add nothing of substance to the first representation which I have held was made and was misleading or deceptive or likely to mislead or deceive.
The third alleged representation was that shareholders equity in the corporate group was $3.23 million at 30 June 2013. It seems to me that the statement to that effect in the Financial Report provided by Mr Cai to Mr Shi at the meeting on 30 October 2013 can properly be treated as a representation by Mr Cai and WEH to that effect. Mr Shi alleges that this representation was false because the William Enterprise group of companies had negative equity at 30 June 2013. I am satisfied that that representation was misleading or deceptive or likely to mislead or deceive. The administrators' report to creditors under s 439A of the Corporations Act (Ex P1, pp 133ff) disclosed that WEG had incurred losses before taxation in the year ended 30 June 2013 and had substantial negative net assets in that year; WPF had incurred losses in 30 June 2013 and had negative net assets in that year; and Eversure Fencing, which had incurred a modest profit in the year ended 30 June 2013 but had negative assets in that year, was not part of the William Enterprise group of companies. Although Mr Shi did not lead expert accounting evidence as to the amount of shareholders' equity at that time, I am satisfied that it was less than, and likely substantially less than, the amount represented and that this representation was misleading or deceptive or likely to mislead or deceive.
By his Amended Statement of Claim filed on 30 August 2016, Mr Shi also relied on a fourth alleged representation that Mr Cai had previously invested $3.9 million in the companies within the William Enterprise group of companies, which was also alleged to have been misleading or deceptive or likely to mislead or deceive. It seems to me that the statement in the Investment Collaboration Agreement as to Mr Cai's investment at least amounts to an implied representation to that effect by Mr Cai, although it is by no means clear that it should also be treated as a representation to that effect by WEH. By his Defence to the Amended Statement of Claim filed on 5 December 2016, Mr Cai responded that this representation was directed to an investment of approximately $3.9 million in the Group companies and that reference to "invested" was to a combination of equity, loans and third party loans secured by Mr Cai. It seems to me that, on any view, Mr Cai had not himself invested that amount in the William Enterprise group of companies and that loans made by third parties to companies within the group, whether or not secured by Mr Cai, could not properly be characterised as an investment by Mr Cai in the William Enterprise group of companies. I am satisfied that this representation was misleading or deceptive or likely to mislead or deceive for this reason.
The fifth alleged representation was that William Enterprise group of companies had realistic prospects of becoming profitable such that it was capable of earning a profit in the year ended 2015 of $2 million and of no less than $2 million in the following year. It seems to me that the statements as to planned future profitability made in the Investment Collaboration Agreement can properly be treated as a representation by Mr Cai and WEH to that effect. In his Defence to the Amended Statement of Claim, Mr Cai responds to this allegation by pleading that the representation was that the Company was "planning" to make various profit amounts in various financial years. It seems to me that such a representation necessarily conveys an implication not only that such a plan existed but that that plan had a reasonable basis.
Mr Shi alleges that this presentation was a representation as to a future matter and Mr Cai and WEH did not have reasonable grounds to make it. Whether a person had reasonable grounds for making a representation as to a future matter must be assessed at the date of the representation: Pramoko v Grande Enterprises Ltd [2015] WASCA 157; (2015) 108 ACSR 469 at 481. In a claim under s 1041H of the Corporations Act, s 769C of the Corporations Act has the effect that a representation with respect to a future matter would be taken to be misleading unless the relevant defendant had reasonable grounds for making it, but there is no shift of an evidentiary onus to the defendant. If a claim under s 12DA of the Australian Securities and Investments Commission Act were available, then s 12BB of the Australian Securities and Investments Commission Act would have the effect that a representation with respect to a future matter would be taken to be misleading unless the relevant defendant had reasonable grounds for making it, and the defendant would be taken not to have reasonable grounds for making the relevant representation unless evidence was adduced to the contrary. In this case, it seems to me that the evidence as to past losses and the asset position of companies within the William Enterprise group of companies, and the absence of evidence of any basis for an expectation of changed operational or financial performance, is sufficient to falsify this representation. I am satisfied that this representation was misleading or deceptive or likely to mislead or deceive for this reason.
I am satisfied that an order should be made under s 1325 of the Corporations Act setting aside Mr Shi's obligation to subscribe for shares in WEH, and any obligation of WEH to issue those shares, under the Investment Collaboration Agreement. That section allows the court to make orders in respect of a contravention of, inter alia, Pt 7.10 of the Corporations Act (which includes s 1041H of the Corporations Act), including an order declaring a contract to be void or refusing to enforce any of the provisions of that contract. The Court may make such an order where a party entered such a contract in reliance on another party's misrepresentation, and will, by analogy with the general law, have regard whether rescission is "just and fair" and will more readily make an order in the nature of rescission on the innocent party's application where a contract has been induced by fraud, in order to deny the defendant the benefit of the fraud at the expense of the innocent party: Spence v Crawford [1939] 3 All ER 271 at 288-9; Senanayake v Cheng [1966] AC 63 at 83; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; 79 ALR 83; Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 at 621; ZX Group Pty Ltd v LPD Corp Pty Ltd [2013] VSC 542 at [141]. There is evidence that Mr Shi has not obtained any financial return from his subscription for shares in WEH under the Investment Collaboration Agreement (putting aside the loan of $500,000 made to Mr Cai prior to that agreement which, as I noted above, appears to have, in some way, assisted Mr Shi's daughter to obtain Australian residency as to which I have not ordered relief). By his affidavit dated 8 December 2016, Mr Shi led evidence that he had not been paid any dividend or any monies in respect of his shareholding in WEH. The administrators' report to creditors under s 439A of the Corporations Act (Ex P1, pp 133ff) indicated that there was likely to be no return to shareholders in respect of the administration.
I note, for completeness, that the principle in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317, which may previously have prevented the recovery of damages against a company where the plaintiff was a subscriber to shares in a company and remained a member of the company, in respect of misrepresentations alleged to have induced that subscription, has been overturned by s 247E of the Corporations Act, introduced by the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth). That section provides that a person is not prevented from obtaining damages or other compensation from a company only because the person holds, or has held, or subscribed for shares in the company.
An order should therefore be made setting aside Mr Shi's obligation to subscribe for shares in WEH, and any obligation of WEH to issue those shares under the Investment Collaboration Agreement. An order for compensation should also be made against WEH and Mr Cai for the amount Mr Shi invested in WEH after 30 October 2013, excluding the amount of $500,000 previously advanced by Mr Shi as a loan to Mr Cai. Mr Cai's claim for compensation against WEH will be postponed by s 563A of the Corporations Act and in any event cannot be enforced against WEH without further leave of the Court.