These proceedings were commenced by originating process filed on 10 November 2020.
The first plaintiff, Timesgarden Pty Limited (Timesgarden) is a member of the third defendant, Anna Bay Resort Pty Limited (the Company). The second plaintiff, Mr Wilson Hu, is the sole director and shareholder of Timesgarden.
The other member of the Company is the second defendant, Wisemans Group Pty Ltd (Wisemans). Mr Hu's evidence is that Wisemans is controlled, directly or indirectly, by the first defendant, Mr Frank Shi. I do not understand that to be the subject of any dispute.
The relief claimed in the Originating Process may be summarised as follows:
1. an order setting aside the issue of 10 shares in the Company to Wisemans on 15 August 2020 and an order pursuant to s 175 of the Corporations Act 2001 (Cth) that the shareholders register of the Company be rectified accordingly.
2. the following relief under s 233 of the Corporations Act:
1. an order authorising Timesgarden to commence proceedings against Mr Shi in the name of and on behalf of the Company seeking:
1. a declaration that Mr Shi has breached his fiduciary and statutory duties as a director of the Company, and equitable or other compensation or damages for that alleged breach or an account of profits;
2. a declaration that Mr Shi holds on constructive trust for the Company "funds he has taken without authority".
1. An order under s 233(1)(j) of the Corporations Act requiring Wisemans to purchase Timesgarden's shares in the Company at a price determined by the Court; and
2. an order under s 233(1)(j) of the Corporations Act requiring the Company to repay a loan of $300,000 made by Mr Hu to the Company.
1. The Originating Process also claims an order that Mr Shi repay a loan of $100,000 to Mr Hu.
In order to establish its claims for relief under s 233 of the Corporations Act, the plaintiffs will ultimately have to establish that the conduct of the Company's affairs, or actual or proposed act or omission of the Company or a resolution or proposed resolution of its members is either contrary to the interests of members as a whole or oppressive or unfairly prejudicial to or unfairly discriminatory against Timesgarden.
The $300,000 loan that is the subject of one of the claims for relief under s 233 of the Corporations Act is secured by an unregistered second mortgage in favour of Mr Hu over land owned by the Company at 74-84 Gan Road, Anna Bay in New South Wales, being the land described in folio identifiers 31/1146884 and 2/502820 (the Land). National Australia Bank Limited (NAB) holds a first registered mortgage over the Land. It is common ground that the Company is in default under that mortgage. Correspondence from the defendants' solicitors adduced in evidence states that the amount owing under the mortgage is approximately $656,000, but there was no other evidence of the amount owing and counsel for the plaintiffs did not have instructions as to whether this amount was disputed.
Mr Hu's equitable interest in the Land as unregistered mortgagee was the subject of a declaration made by this Court in other proceedings on 12 September 2019 and is protected by a caveat lodged against the title to the Land.
The plaintiffs' only substantive claim for relief against the Company is a claim for repayment of the $300,000 loan that is secured by the unregistered mortgage and protected by the caveat.
By Interlocutory Process filed at 10.53pm on 24 February 2021, the plaintiffs applied for an order restraining the defendants - that is, the Company, Mr Shi and Wisemans - from selling or dealing with the whole or part of the Land, including participating in an auction for sale of the whole or part of the Land.
The application was heard by before me the following morning. Mr Campbell of counsel appeared for the plaintiffs. Despite having very short notice of the application, Mr Rozdal, solicitor, appeared for the defendants.
The Interlocutory Process stated that the application was made under s 1324 of the Corporations Act 2001 (Cth), r 25.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) "and other applicable laws". Despite the reference to UCPR r 25.11, the plaintiffs did not comply with the Court's Practice Note relating to freezing orders. During the hearing counsel for the plaintiffs clarified that the application was for an interim injunction and not for a freezing order.
That being the case, the principles that I must apply are those articulated in the leading cases of Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, especially at [8]-[13], [18] (Gleeson CJ), [91] (Gummow and Hayne JJ, Gaudron JJ agreeing) and Papas v Grave [2013] NSWCA 308 at [83] (Emmett JA, Sackville AJA agreeing).
The purpose of an interim injunction is to preserve the status quo until the rights of the parties can be determined at a final hearing of the proceeding or, to adopt the language of Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd, supra at [12], to "prevent the practical destruction" of the right in respect of which the plaintiff claims final relief "before there has been an opportunity to have its existence finally determined".
The plaintiffs must establish that:
1. their claim for final relief raises a serious question to be tried in the sense that, if the evidence remains as it is, there is a probability that at the trial of the action the plaintiffs will be entitled to relief;
2. if the interim injunction is not granted, the plaintiffs will suffer irreparable harm for which damages will not be an adequate remedy; and
3. the balance of convenience favours the grant of the interim injunction.
The inadequacy of a remedy in damages is often stated as a separate factor to be considered, but it is more accurately assessed as one aspect of the balance of convenience. However, the extent to which it is necessary to examine the strength of the plaintiffs' case will depend on all the circumstances of the case.
The plaintiffs relied on an affidavit of Mr Hu affirmed on 10 November 2020 and a further affidavit of Mr Hu affirmed on 24 February 2021, together with title searches for the Land and Mr Hu's caveat lodged against the Land. The defendants tendered certain emails that have been exchanged within the last week.
The evidence shows that part of the Land is presently the subject of an online auction being conducted by a real estate agent, that a process referred to as "open negotiation", has commenced and the highest bid received as at the evening of 22 February 2021 was $320,000.
The part of the Land being sold is described on the real estate agent's website as being an area of approximately 1,000 square metres identified as Lots 23 and 24 (also known as Block "K") within an unregistered strata plan over part of the Land. Correspondence from the defendants' solicitors adduced in evidence states that the whole area of the Land is 42,000 square metres. I will refer to the part of the Land that is the subject of the auction advertised on the real estate agent's website as Block K.
The real estate agent's website states: "Auction 25th February 2021 at 2.00pm". It is not clear whether this is the time at which the auction will start, or whether this is the time at which bids that have already commenced will be closed. The parties did not adduce any evidence or assist me with any submissions about whether, if the auction has commenced and is precluded from completing by an interim order of the kind sought by the plaintiffs, the Company might be exposed to liability.
The defendants informed the Court that they consent to an order that the proceeds of sale of Block K be applied in the following manner:
1. first, in payment of the reasonable costs and disbursements of the marketing and sale of Block K; and
2. secondly, in payment of the amount secured by NAB first registered mortgage over the Land.
The defendants also informed the Court that they do not object to an order that any surplus over and above these two categories of payments be paid into Court pending further order of the Court. I note, however, that the defendants do not expect there to be any such surplus.
The plaintiffs submitted that there is a serious question to be tried as to whether Mr Shi has caused the Company to take steps to sell Block K without authority because Mr Hu is, in truth, a director of the Company, and he has not been consulted about or authorised the proposed sale.
Assuming that the evidence remains as it presently stands, I do not consider that there is a probability that Mr Hu will succeed in establishing at trial that he is a director of the Company and that Mr Shi has caused the Company to take steps to sell Block K without authority.
In his two affidavits, Mr Hu acknowledges that he ceased to be a director of the Company on 26 June 2016. In his first affidavit, he asserts (without further explanation) that his directorship "was resumed" during the period 10 January 2018 to 9 November 2018, and was "ceased" on 9 November 2018 without his knowledge.
In his second affidavit, Mr Hu gives evidence that Mr Shi agreed to re-appoint Mr Hu as a director of the Company at a meeting on 26 February 2018 because Mr Shi had failed to fund the repayment of the Company's loan from NAB. However, the minutes of that meeting annexed to Mr Hu's affidavit make no reference to him being re-appointed as a director. Mr Hu's evidence is that Mr Shi signed ASIC forms after that meeting that had been prepared by Mr Hu to give effect to the agreement that he says was reached. However, the forms annexed to Mr Hu's affidavit do not include notification of Mr Hu being appointed as a director. The only evidence that Mr Hu was re-appointed as a director is a form signed by Mr Hu himself and dated 8 November 2018, notifying ASIC of his appointment as a director backdated to 10 January 2018. There is no evidence of any discussion or resolution concerning Mr Hu being appointed with effect from that date (or at all), save for Mr Hu's evidence of the 26 February 2018 discussion or meeting which is inconsistent with the contemporaneous record of that meeting.
Finally, the defendants tendered an email dated 18 February 2021 from Mr Hu to "Frank" stating:
"I understand that you will be selling lots 23 and 24 on 18 February 2021 at the price around $300,000. As a shareholder I do not believe that is a reasonable market price. The property to be sold should be worth much more than the selling price. I believe if you sell the property around the selling price it will be utterly detrimental and against the company's interests. As a shareholder I strongly object to selling the property at or around the reserved price and I will take the matter to Court to sue you personally for damages suffered by the company due to your action and disregards of the company's interest."
The fact that the email makes no reference to Mr Hu's contention that he is a director and makes no objection to the sale on the basis that it is occurring without having been properly authorised by the Company is, on the face of it, inconsistent with Mr Hu's contention that he is a director of the Company and that the sale has not been authorised by the company.
For those reasons, I do not consider that the plaintiffs have established a serious question to be tried as to whether Mr Shi has caused the Company to take steps to sell Block K without authority.
The plaintiffs also submitted that there is a serious question to be tried as to whether Mr Shi is acting in breach of s 182 of the Corporations Act by causing the Company to sell Block K because, in using the sale proceeds of Block K to pay down the amount owing by the Company to NAB under the registered mortgage, Mr Shi is obtaining a benefit for himself or for Wisemans. The argument that this application of the sale proceeds would benefit Mr Shi rather than the Company was put in various different ways during the course of the short hearing this morning. Ultimately, counsel for the plaintiffs submitted that the purpose of the loan was not to fund the Company's purchase of the Land, but to fund the capital contribution that Wisemans was required to make to the Company in order to enable the Company to acquire the Land.
The substance of the evidence adduced by the plaintiffs may be summarised as follows:
1. the Company settled its purchase of the Land on about 2 November 2016, funded by a loan of about $1.1 million from NAB which is now secured by the registered first mortgage, and a further sum of about $1.6 from the Company's own funds. There is no dispute that Mr Hu or Timesgarden had contributed the vast majority of the $1.6 million;
2. Mr Hu and Mr Shi had agreed during a discussion in about May 2016 that Mr Shi could "use the Company" to borrow $1.1 million secured by mortgage over the Land on the basis that Mr Shi would "repay the mortgage for the Company" in a timely manner;
3. the NAB mortgage is in default because Mr Shi failed to make the mortgage repayments; and
4. NAB served a notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) on the Company in January 2020.
It was common ground at the hearing that the Company remains at risk of NAB taking action to enforce its security by selling the whole of the Land.
I do not consider that this evidence reveals a serious question to be tried that the sale of Block K involves a breach by Mr Shi of s 182 of the Corporations Act. The Company is in default of its obligation to NAB to repay the loan secured by the mortgage and is at risk of NAB enforcing its registered mortgage. Some payment against the amount owing, and demonstration to NAB that an off the plan sales are being generated from the Company's development activities in respect of the Land is likely to ameliorate that risk. That is a benefit for the Company.
In an email sent to my associate after the hearing, counsel for the plaintiffs made a submission to the effect that the proposed sale of Block K would not benefit the Company because exchange of contracts would raise a deposit of only approximately $32,000 and this would make no appreciable difference to the mortgage with NAB. However, as I have said, any ability of the Company to demonstrate that steps are being taken towards repayment of the loan is likely to reduce rather than increase the risk that the Company presently faces of having the whole of the Land sold in a mortgagee sale.
The question of any liability of Mr Shi to the Company or to Timesgarden or Mr Hu in relation to contributions to the Company's purchase of the Land seems to me to be separate matter. I will say nothing more about that at this time, as pleadings have not been filed other than the Originating Process setting out the bare form of the final relief claimed.
In circumstances where the evidence does not establish a serious question to be tried in respect of the two claims articulated by the plaintiffs during the hearing of the Interlocutory Process, it is not necessary for me to consider the balance of convenience or whether damages would be an adequate remedy. However, I note that the relief sought in the Originating Process does not include any claim in respect of the Land or any claim against the Company other than repayment of the $300,000 loan that is secured by the unregistered mortgage in favour of Mr Hu and protected by the caveat lodged by Mr Hu. That caveat would appear to preclude registration of any strata plan of subdivision or sale of Block K to any purchaser, and the defendants' solicitor acknowledged this during the hearing. Mr Hu's interests in the Land are therefore protected.
For those reasons I make the following orders:
1. The Interlocutory Process filed by the plaintiffs on 25 February 2021 is dismissed.
2. By consent of the defendants, but without admissions, order that the proceeds of any contract for sale entered into by the third defendant in respect of that part of the land comprised in Lot 31 in Deposited Plan 1146884 and Lot 2 in Deposited Plan 502820 that corresponds with Lots 23 and 24 in an unregistered strata plan in respect of that land (also known as "Block K") be applied as follows:
1. first, in payment of the Company's reasonable costs and disbursements of marketing the sale of those Lots 23 and 24; and
2. second, in payment of the amount secured by registered mortgage AK917659 in favour of National Australia Bank Pty Ltd.
1. Without opposition from the defendants, but without admissions by the defendants, order that any remaining proceeds of sale of any contract referred to in order 2 above after the payments permitted by order 2 above be paid into Court pending further order of the Court.
2. Liberty to the parties to apply on 48 hours' notice.
3. Reserve costs of the interlocutory process.
4. Any party wishing to seek a costs order of the interlocutory process other than that the costs be reserved may send written submissions in support of the costs order for which they contend of no more than 2 pages to my Associate by close of business on 1 March 2021.
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Decision last updated: 26 February 2021