BCEG International (Australia) Pty Ltd v Xiao

Defendants' application for security for costs

1. BCEG accepts that the defendants have satisfied the jurisdictional threshold for an order for security for costs in Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21(1)(d).
2. However, BCEG submits that no order for security should be made because it has a strong case that Mr Xiao and Ms Chen have fraudulently breached their fiduciary duties as director and de facto director of the plaintiff (or alternatively in the case of Ms Chen, that she knowingly assisted Mr Xiao in his breaches of duty) and a strong case that WWM and IWC knowingly received the proceeds of those alleged breaches. BCEG submits that this is an important consideration in the exercise of the discretion under UCPR r 42.21 because, with a strong case that it has been deprived of significant funds by the defendants' allegedly fraudulent conduct, BCEG should not be required to part with further funds to provide security for the defendants' costs of defending these proceedings.
3. Although the defendants bear the ultimate burden of proof in relation to the application for security for costs, BCEG bears the evidentiary burden of establishing that the strength of its case is such that the Court should not exercise its discretion to make an order for security: Farag v Blobal Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; [2014] NSWCA 65 at [18]-[20] (Macfarlan JA, Ward JA and Tobias AJA agreeing).
4. The defendants submit that the Court should not embark on any assessment of the strength of BCEG's case because, even if the Court concluded that it has a strong case, that would be a neutral factor in the exercise of the discretion in relation to the security for costs. I reject that submission. Rule 42.21(1A)(a) expressly permits the Court to have regard to the prospects of success or merits of the proceedings when determining whether to make an order for security for costs. In this case, BCEG's evidence in support of its case has been served. Part of that evidence was tendered at the hearing of the security for costs application and relied on by BCEG in support of its contention that it has a strong case. It is possible to undertake a meaningful assessment of the merits of its case. In my opinion, such an assessment is relevant to determining the defendants' application for security for costs in this case: Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 at [97]-[101].
5. I acknowledge that the defendants have exercised their privilege against self-incrimination. However, I reject the defendants' submission that it is therefore inappropriate to examine the merits of BCEG's case for the purpose of determining the security for costs application. The consequence of the defendants' exercise of the privilege is that the Court is constrained to assessing the merits of BCEG's case as pleaded, assuming that the evidence remains as it presently stands. The defendants' exercise of the privilege does not permit any adverse inference to be drawn about the availability of defences or the extent to which any evidence that they may ultimately adduce will assist their defence. Equally, the assessment cannot speculate in the defendants' favour about possible defences that they have not yet pleaded, or about their evidence that they have not yet been required to serve. In weighing the assessment with any other factors relevant to the exercise of the security for costs discretion, it will be necessary to bear in mind that the assessment is of BCEG's case at its highest, prior to any challenge. The defendants are entitled to exercise the privilege against self-incrimination, but they are not entitled to rely on that to effectively preclude BCEG from opposing the defendants' application for security for costs.
6. It will, of course, be a matter for the trial judge to make a final determination about the merits of BCEG's case taking into account all of the evidence, including the whole of the documentary evidence tendered by BCEG at trial and any evidence given by witnesses in cross-examination. On the basis of the evidence adduced by BCEG at the hearing of the interlocutory applications, I consider that: 1. for the reasons explained at [33]-[46] below, BCEG has a strong prima facie case for equitable compensation or an account of profits from Mr Xiao and/or Ms Chen in respect of approximately $2,321,891 of the allegedly inflated and misleading progress claims; 2. BCEG has failed to demonstrate a strong prima facie case against Mr Xiao and Ms Chen for equitable compensation in respect of losses allegedly incurred in relation to The Mill Project contracts, as BCEG's evidence and submissions did not address those alleged losses; 3. for the reasons explained at [47]-[55] below, BCEG has not demonstrated for the purpose of the present applications that it has a strong prima facie claim for relief against Mr Xiao and/or Ms Chen in respect of the disputed subcontracts, although those disputed subcontracts may arguably support its claims relating to the allegedly inflated and misleading progress claims referred to above; 4. on the basis that Mr Xiao was the sole director of WWM at relevant times, BCEG has a strong prima facie case that WWM knowingly received benefits of Mr Xiao's alleged breaches of fiduciary duty in relation to some of the16 progress claims in the form of credits to its loan account with Trojjan; 5. BCEG's evidence and submissions did not address the tracing claim against WWM and therefore failed to demonstrate a strong prima facie case that the West Wyalong Project is the traceable proceeds of those alleged breaches of fiduciary duty; 6. BCEG's submissions did not refer to The Mill Project or direct the Court to any evidence relevant to an assessment of the strength of the claims against IWC. BCEG therefore failed to demonstrate a strong prima facie case against IWC; and 7. BCEG's submissions did not direct the Court to any evidence relevant to an assessment of the strength of the claims against IL and it therefore failed to demonstrate a strong prima facie case against IL.
7. When I refer to "BCEG's evidence", I am referring to the affidavits and documents tendered by BCEG at the hearing of the interlocutory applications as the evidence on which it will rely at the final hearing.

BCEG's case against Mr Xiao and Ms Chen in relation to the allegedly inflated and misleading invoices

1. ASIC extracts included in BCEG's evidence establish Mr Xiao's role as a director of BCEG referred to at [3] above. There is no dispute that Ms Chen is the wife of Mr Xiao.
2. ASIC extracts included in BCEG's evidence also establish Mr Xiao's and Ms Chen's shareholding and directorship of CXDN, and CXDN's shareholding and Mr Xiao's directorship of WWM referred to at [5] and [9] above.
3. BCEG's evidence includes an outline of evidence expected to be given by Mr Paul Piercy when he is subpoenaed to give evidence at the hearing. Mr Piercy is expected to give evidence that he incorporated Trojjan in May 2007, and that both BCEG and CXDN became shareholders in that company in about February 2010. Mr Piercy understood that Mr Xiao became a director of Trojjan at the same time. ASIC documents included in BCEG's evidence record that Ms Chen was appointed as a director on 3 February 2010 but resigned on 12 April 2010 and Mr Xiao was not appointed as a director until 15 June 2011. Mr Piercy was a director throughout the whole of that period. ASIC documents record that CXDN's shareholding in Trojjan increased significantly in October 2011. CXDN no longer holds shares in Trojjan. Mr Xiao has been the sole director of Trojjan since Mr Piercy's resignation in June 2019.
4. Mr Piercy is expected to give evidence that Mr Xiao and Ms Chen took over the day to day operations of Trojjan from about February 2010. His outline of evidence describes the specific functions performed by Ms Chen, including approval and payment of invoices. Mr Piercy is expected to give evidence that his role was to identify and investigate potential development opportunities for BCEG and to projectmanage those opportunities that came to fruition. He did not have any involvement in accounting functions for BCEG or Trojjan after February 2010.
5. In relation to the Varsity Lakes Project, BCEG's evidence includes: 1. a copy of the contract between IL and BCEG pursuant to which BCEG was engaged to design and construct the project on a costs plus 12% basis (with the 12% including 5% payable to Trojjan); 2. a copy of an "Internal Loan Agreement" dated 25 August 2010 between BCEG (as borrower) and Beijing Construction Engineering Group International Ltd for a loan of US$35 million for the purpose of the construction of Varsity Lakes Private Hospital and on terms prohibiting the use of the loan funds for any other purpose, and with interest payable quarterly at a rate referable to LIBOR (the Facility); 3. a copy of a contract dated 15 May 2010 between BCEG (as principal) and Trojjan (as head-contractor) pursuant to which BCEG engaged Trojjan to undertake the construction of the Varsity Lakes Private Hospital at 2 Lake Street, Varsity in Queensland for a fixed price of $35,185,185 (plus GST). The contract permitted Trojjan to sub-contract the work, subject to certain conditions requiring quotations to be obtained and requiring Trojjan to liaise with BCEG in selecting the sub-contractors to be engaged. 4. the outline of the evidence expected to be given by Mr Piercy to the effect that he was involved in the process which resulted in Trojjan entering into agreements with a number of subcontractors for work required for the Varsity Lakes Project and he signed those subcontracts on behalf of Trojjan; and 5. the outline of the evidence expected to be given by Mr Piercy that subcontractor invoices were issued to Trojjan, which was then operating out of the same office as BCEG where Mr Xiao and Ms Chen worked, and Mr Piercy had no involvement in the process by which those invoices were paid (including the issue of invoices by Trojjan to BCEG).
6. In relation to the West Wyalong Project, Mr Piercy is expected to give evidence that WWM owned the property at 29 Ungarie Road, West Wyalong in New South Wales on which that project was developed. This is consistent with New South Wales Land Registry Services documents included in BCEG's evidence. Mr Piercy is also expected to give evidence that the project commenced after CXDN become the sole shareholder of WWM and Mr Xiao was appointed as its sole director in October 2009. Construction began in about mid-2010, with Trojjan undertaking the building work. Mr Piercy is expected to give evidence that he does not recall there being a signed contract between WWM and Trojjan, but that the arrangement was that Trojjan would receive a 5% construction profit. Mr Piercy projectmanaged the construction works and engaged subcontractors on behalf of Trojjan and generally forwarded invoices to the office from which Ms Chen worked for processing and payment. The project was completed in 2011.
7. As I have already mentioned, BCEG had no interest in WWM. CXDN was the sole shareholder of WWM at all relevant times.
8. BCEG's evidence includes the following contemporaneous records in relation to 13 of the 16 allegedly inflated and misleading progress claims: [1] 1. an invoice issued by Trojjan to BCEG for works described as being for the Varsity Lakes Project; 2. "BCEG International" requisition for payment to Trojjan of the invoiced amount, referring to the Varsity Lakes Project, citing the invoice number on the Trojjan invoice referred to above, and bearing the name of Ms Chen (and, in many instances, a signature appearing or purporting to be that of Ms Chen); 3. a bank transaction record showing the payment of the invoiced amount by transfer from an account of "BCEG International" to an account of Trojjan; and 4. Trojjan's MYOB cash receipts journal recording the payments from "BCEG International" (and, in many instances, describing the payments as being for "Wyalong exp") and crediting the payments either to Trojjan's ledger for "Other Debtors - WWMP Loan" or to Trojjan's trade debtors ledger. The MYOB records are sourced from copies retained by Trojjan's former external accountant, and BCEG intends to rely on an affidavit of the accountant to prove the source of these records.
9. To the extent that the amounts invoiced by Trojjan to BCEG correlate with payments made by "BCEG International" to Trojjan that were credited to Trojjan's "WWMP Loan" ledger and/or described in Trojjan's cash journal as relating to "Wyalong exp", the inconsistency between those Trojjan accounting records and the description of the invoiced amount on the Trojjan invoices as relating to the Varsity Lakes Project, provides a basis for inferring that description in Trojjan's invoice is false. The total amount of the invoices in respect of which BCEG's evidence demonstrates that inconsistency is $2,321,891. [2]
10. It is my opinion that the records referred to above, together with the evidence expected to be given by Mr Piercy as to the role of Ms Chen, and the evidence concerning CXDN's ownership of WWM, Mr Xiao and Ms Chen's ownership of CXDN, and the lack of any interest of BCEG in the West Wyalong Project, establishes for the purpose of the defendant's security for costs application that BCEG has a strong prima facie case that it has suffered loss in the order of $2,321,891 (plus interest incurred on that sum under the terms of the Facility) as a result of alleged breaches of fiduciary duty by Mr Xiao and Ms Chen (or Ms Chen allegedly knowingly assisting Mr Xiao's breaches of fiduciary duties) in relation to 13 of the 16 allegedly misleading progress claims. The documentary evidence concerning those progress claims is not sufficient to demonstrate a strong prima facie case in relation to the full amount of $3,033,053 claimed by BCEG, in my opinion.
11. In submitting that BCEG's evidence does not reveal a strong case at all, the defendants emphasised that Mr Piercy has not provided an affidavit and suggested that he may not comply with a subpoena. However, there is no basis to suggest that Mr Piercy would fail to comply with a subpoena. Even if that were to occur, the subpoena could be enforced. The detailed outline of evidence that Mr Piercy is expected to give has plainly been prepared with some care on behalf of BCEG. There would be no be forensic advantage for BCEG to serve an outline that did not reflect the substance of the evidence that its solicitors expect Mr Piercy to give. It is not to the point that some parts of the outline would be inadmissible if included in an affidavit. The outline sets out the substance of Mr Piercy's anticipated evidence in chief, which will be given orally. For the most part, the basis of that evidence appears from the outline to be Mr Piercy's observations made during his work on the Varsity Lakes and West Wyalong Projects, particularly his dealings with subcontractors on those projects.
12. The defendants also submitted that the MYOB accounting records of Trojjan do not support the serious allegations made against Mr Xiao and Ms Chen in the absence of the evidence expected to be given by Mr Piercy. In my opinion, these submissions overlook the fact that the transactions recorded in those accounting records, and the corresponding invoices, transfer requests and payment records referred to at [40] above, occurred in a context in which BCEG's evidence of the corporate relationships relevant to these proceedings is to the effect that only WWM, CXDN, Mr Xiao and Ms Chen stood to benefit from BCEG drawing down on the Facility to make funds available for the payment of expenses for West Wyalong Project or to reduce the amount owing by WWM to Trojjan in relation to the West Wyalong Project.
13. The defendants' submissions in relation to the MYOB accounting records of Trojjan also referred to the allocation of monies received by Trojjan from BCEG International to the West Wyalong Project as "notional". However, there is nothing in the cash receipts ledger referred to at [40] above that would warrant those descriptions being treated as "notional" for present purposes.
14. In my opinion, the evidence presently before the Court that I have summarised above demonstrates that BCEG has a strong prima facie case to recover $2,321,891 plus interest against Mr Xiao and Ms Chen in respect of alleged breaches of fiduciary duty relating to progress claims for the Varsity Lakes Project.

BCEG's case against Mr Xiao and Ms Chen in relation to the disputed subcontracts

1. The outline of evidence expected to be given by Mr Piercy identifies subcontracts that he recalls having executed on behalf of Trojjan in relation to the Varsity Lakes Project, and documents that appear to be subcontracts between Trojjan and the same subcontractors in relation to the Varsity Lakes Project but that Mr Piercy has no recollection of executing on behalf of Trojjan or having seen during the period in which he was project managing that project. In some instances, Mr Piercy's outline of evidence states that the work done by the relevant subcontractor on the Varsity Lakes Project did not include work of the kind described in the subcontract that he does not recall executing. The subcontractors and the relevant documents are: Subcontractor Date & value of subcontract that Mr Piercy recalls executing Date & value of subcontract that Mr Piercy does not recall executing Concrete Systems Australia Pty Ltd 23 March 2011 23 March 2011 $348,000 $4,352,650 27 May 2011 AJA Electrical Pty Ltd 28 March 2011 $405,000 $39,985 30 August 2011 $2,087,300 30 March 2011 $6,555,000 1 April 2011 Reid Plumbing Pty Ltd 30 March 2011 $2,587,350 $178,620 4 April 2011 $2,605,000 19 May 2011 $635,000

1. BCEG's evidence also includes: 1. an affidavit of Mr Jason Bonney, who was one of two directors of Concrete Systems Australia Pty Ltd (Concrete Systems) in May 2011 and is now the sole director of that company. Mr Bonney deposes that he recalls that Concrete Systems did enter into the 23 March 2011 subcontract referred to in the second column of the table above and that his co-director at the time signed that contract on behalf of Concrete Systems. Mr Bonney deposes that a contract to the value of $348,000 was significant to Concrete Systems at that time and he attended meetings with Trojjan and his co-director at which the terms of that contract were settled. He does not recall any discussion about a second contract to the value of $4,352,650, he had not seen any such contract before BCEG's solicitors showed him a copy of the 23 March 2011 document referred to above and he has not located any record of any such contract in the books and records of Concrete Systems; 2. an affidavit of Mr James Williams, the sole director of AJA Electrical Pty Ltd, deposing that he did not sign the 27 May 2011 and 30 August 2011 documents referred to in the table immediately above and did not perform the work described in the schedules to those documents; and 3. an affidavit of Mr Earl Reid who is the sole director of Reid Plumbing Pty Ltd and held that position during the period from March to May 2011. Mr Reid deposes that Reid Plumbing Pty Ltd entered into three contracts with Trojjan for work relating to the Varsity Lakes Project for works to the value of $178,620 (following a quotation dated 28 March 2011), $134,500 (following a quotation dated 3 May 2011) and $534,320 (under a contract date 18 February 2013). Mr Reid deposes that he does not recall signing any of the contracts listed in the third column of the table above, each of which bears a signature attributed to "Earl Reid". Mr Reid deposes that the combined value of these contracts is so significant that he would remember if Reid Plumbing Pty Ltd had been contracted to undertake works of that value.
2. Mr Piercy is also expected to give evidence that documents that appear to be subcontracts executed by him on behalf of Trojjan in relation to the Varsity Lakes Project relate to subcontractors that did not perform any work on the project at all, or (in one instance) did not perform work of the kind or to the extent described in the document. In two instances, Mr Piercy is expected to give evidence that the subcontractors named in the documents did not perform any work on the Varsity Lakes Project but did perform work on the West Wyalong Project. The subcontractors and the relevant documents are: Subcontractor Date & value of subcontract Riverina Terrazzo Pty Ltd 13 April 2011 $390,000 Fosters Joinery 16 May 2011 $619,000 21 April 2011 Larfarge Plastamasta Pty Ltd $392,500 21 April 2011 $415,500 Somewhere Landscape Architects 4 May 2011 $1,510,000 Action Formwork Pty Ltd (ABN 85 067 639 203) 9 May 2011 $2,073,800 C&C Fire Protection 28 March 2011 $1,784,100 Primat Glass Pty Ltd 3 February 2012 $2,297,350

1. BCEG's evidence also includes an affidavit of a director or business owner of each of the entities in the table immediately above deposing that the entity did not enter into the relevant subcontract, did not do work on the Varsity Lakes Project at all (or, in two cases, did work of significantly less value than that stated in the disputed subcontract), and did not receive payment of the amount stated in the disputed subcontract. In each instance, the deponent denies that the signature appearing to be theirs on the disputed subcontract is not in fact their signature.
2. BCEG's evidence includes a small number of documents which record the amounts for Concrete Systems, Reid Plumbing, AJA Electrical and C&C Fire Protection that are specified in the disputed subcontracts. On the basis of the structure and English language content of those documents, one available inference is that they are documents setting out progress payments said to be due to those subcontractors in relation to the Varsity Lakes Project, each such progress payment being expressed as a percentage of an amount specified in one of the disputed subcontracts. Whether or not that inference might be drawn at final hearing would depend on the translations of the non-English parts of the documents and any other evidence shedding light on the purpose for which the documents were created and how (if at all) they were used.
3. I consider that BCEG's evidence referred to at [49]-[51] above establishes a strong prima facie case that the disputed subcontracts are not genuine. However, in my opinion, that does not amount to a strong prima facie case for relief against Mr Xiao and Ms Chen in excess of the relief referred to at [46] above in relation to the 16 allegedly inflated and misleading progress claims.
4. Paragraphs C353-452 of BCEG's Commercial List Statement do not identify any funding requests alleged to have been made by Mr Xiao or Ms Chen purportedly on behalf of BCEG in reliance on the disputed subcontracts. Rather, BCEG states that the disputed subcontracts were created or procured by Mr Xiao and/or Ms Chen with the intention that they would form the basis of requests for funding from BCEG China and that any transfer requests submitted to BCEG China including the costs of works in the disputed subcontracts were caused, directed or ratified by Mr Xiao and/or Ms Chen. [3] The balance of the claim in relation to each disputed subcontract appears to proceed on the assumption that such transfer requests were made. The references to any transfer requests become references to the transfer requests for the purpose of allegations that the transfer requests conveyed false representations to the knowledge of Mr Xiao and/or Ms Chen, allegations that Mr Xiao and/or Ms Chen intended that BCEG China would act on the transfer requests, allegations that the making of the transfer requests resulted in BCEG paying to Trojjan the monies the subject of the transfer requests, and allegations that the making of the transfer requests was not in the best interests of BCEG. [4] The allegations of alleged breaches of fiduciary duties against Mr Xiao and/or Ms Chen, and loss and damage suffered by BCEG as a result of such alleged breaches, are similarly dependent on the assumption that transfer requests were made and were supported by the disputed subcontracts. [5]
5. BCEG's submissions in relation to the strength of its case did not identify any evidence of transfer requests made in reliance on the disputed subcontracts. BCEG relied on the documents referred to at [53] above and submitted that they bear out the hypothesis that the disputed subcontracts were created in furtherance of the alleged fraud in relation to the 16 Trojjan invoices referred to above, with a view to misleading BCEG China into believing that the construction costs of the Varsity Lakes Project were considerably higher than they were. BCEG submitted that the object was to justify the alleged sham Trojjan invoices that Mr Xiao and/or Ms Chen are said to have caused BCEG to submit to BCEG China in order to cover Trojjan's costs on the West Wyalong Project. BCEG submitted that there would be no point in creating the disputed subcontracts "if no wider object were in mind".
6. I consider that the inferences for which BCEG contends are open, but the defendants' submissions make sound points concerning the unknown provenance of the documents referred to at [53] above and the fact that those documents are not wholly in English. However, it is not necessary to grapple with these matters or to consider the strength or otherwise of the inferences for which BCEG contends given that the evidence and allegations concerning the disputed subcontracts are presently relied on by BCEG only as providing further support for the allegations referred to at [33]-[46] above, in respect of which I have already determined that BCEG has demonstrated a strong prima facie case.

Determination of security for costs application

1. For all of the reasons explained above, the discretion in relation to security for costs falls to be exercised on the basis that the evidence presently before the Court demonstrates that BCEG has a strong prima facie case to recover $2,321,891 plus interest against Mr Xiao and Ms Chen in respect of alleged breaches of fiduciary duty relating to progress claims for the Varsity Lakes Project and a strong prima facie claim against WWM for equitable compensation on the basis that WWM knowingly received the proceeds of some of those alleged breaches of fiduciary duty.
2. Thus, on the basis of the material presently before the Court, the prospects of Mr Xiao, Ms Chen and WWM obtaining an order for costs against BCEG are low and, in my opinion, do not warrant any order for security.
3. As I have already said, the evidence adduced and submissions made by BCEG at the hearing of the interlocutory applications did not demonstrate a strong prima facie case against IWC and IL. However, its claims against IWC arise out of the same alleged facts as its claims against Mr Xiao, Ms Chen and WWM and all defendants are represented by the same solicitors and counsel. BCEG's claims against IL are not related to the alleged breaches of fiduciary duty. I would have been inclined to make an order for security in favour of IL only, if the defendants had adduced evidence of IL's estimated costs of defending the contract claim. They did not do so. The evidence of the defendants' solicitor in relation to costs did not distinguish between the costs of different defendants, or the costs associated with IL's defence of the contract claim as opposed to the defence of the other claims. It is well established that the applicant for security bears the onus of adducing evidence that enables the Court to estimate the costs of litigation. [6]
4. Due to the strength of the prima facie case against Mr Xiao, Ms Chen and WWM and the absence of evidence that would enable to the Court to fairly estimate the costs of IWC and IL, the defendants' application for security for costs is dismissed.

BCEG's application for asset preservation orders

1. BCEG's solicitor gave evidence that real property searches undertaken by her firm since the commencement of these proceedings in October 2019 have revealed that: [7] 1. Mr Xiao owned twelve properties as at February 2020 and as at June 2021. The properties were the same, save that Mr Xiao appears to have disposed of a property at Gordon and acquired a property at Rhodes in the period between February 2020 and June 2021; 2. Ms Chen is the co-owner with Mr Xiao of five of the twelve properties referred to above; 3. WWM owns two lots in a strata plan in Wagga Wagga, but those lots are listed for sale and were described on the real estate agent's website as being "under offer" as at 27 July 2021; 4. IWC owned fifteen lots in the same strata plan in Wagga Wagga until June 2021, when one of those lots was transferred to CXDN; and 5. IL does not own any real property.
2. The defendants' solicitor gave evidence on information and belief that WWM has been marketing the two lots in the Wagga Wagga strata plan since approximately mid-2019 in the ordinary course of its business of developing and selling properties. [8]
3. There is no evidence concerning the reasons for the transfer of one of the lots in the Wagga Wagga strata plan from IWC to CXDN in June 2021. However, I note that IWC remains the owner of 14 of those lots.
4. BCEG seeks what it describes as a limited form of asset preservation order requiring each of the defendants: 1. to notify BCEG of any sale of real property owned by that defendant within 24 hours after entering into the contract for sale (including details of the sale price and the purchaser) and to give further notice of the date for completion of the contract and the cheque directions for settlement; 2. to pay the net proceeds of any such property sale into an interest bearing account administered by the defendants' solicitors, which must not be encumbered, diminished or disbursed to any person until further order of the Court; and 3. to give BCEG 7 business days' notice of the defendants' intention to apply to the Court for an order permitting them to encumber, diminish or disburse the funds in that account.
5. BCEG submitted that no undertaking as to damages should be required, but offered the undertaking if the Court were minded to make the orders sought only on the basis of an undertaking as to damages. BCEG has no assets in Australia, and offered security of $100,000 for the undertaking as to damages.
6. BCEG submitted that the Court should make the orders having regard to: 1. the strength of its case against the defendants; 2. the heightened risk that a prospective judgment may be unsatisfied by reason of the propensity of Mr Xiao and Ms Chen to engage in dishonest conduct of the kind alleged against them in these proceedings; 3. "the less intrusive formulation of the asset preservation order itself, targeted as it is at the net proceeds of any sale of real property only (unlike a conventional freezing order, which has a much wider reach)"; and 4. "the lack of any evidence as to prejudice".
7. For the reasons already explained, BCEG demonstrated at the hearing of these interlocutory applications a strong case against Mr Xiao and Ms Chen for approximately $2,321,891 plus interest. The effect of the proposed orders would be to preclude the defendants from dealing with their entire property portfolio, except on terms that the net proceeds be paid into a specified account.
8. It is well established that, where a plaintiff's case against the defendant involves proof of fraud, demonstration of a good arguable case may have a bearing on whether there is a danger that any prospective judgment in favour of the plaintiff will be wholly or partly unsatisfied due to disposition of or other dealings with the defendant's assets. Depending on all the circumstances, demonstration of a good arguable case of fraud may even be sufficient to establish that such a danger exists: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 325-326 per Gleeson CJ and 326 per Meagher JA.
9. The present case is unusual because the proceedings have been on foot since October 2019. There has been a period of almost two years for the defendants to deal with their property if they were inclined to take steps calculated to frustrate the enforcement of any prospective judgment against them. Mr Xiao and Ms Chen have not diminished their personal property portfolio during that period. They have disposed of one property, but they have also acquired one property. WWM is in the process of selling two properties in the course of its business of developing and selling properties. The process of selling the two properties began prior to the commencement of these proceedings. IWC has recently transferred one property to CXDN in circumstances that are not explained, but IWC retains significant property holdings. In the context of the overall stability of the defendants' real property holdings in the period since the proceedings were commenced, I do not regard this transfer as indicating a danger that the defendants' dealings with their property will frustrate the enforcement of any judgment in favour of BCEG.
10. Even if I were satisfied that there was a danger that the defendants' dealings with their assets would frustrate the enforcement of a prospective judgment in favour of BCEG, I would not have made the orders sought by BCEG for the following reasons.
11. There was no evidence of the value of the property portfolio, but I infer from the number of properties that it is likely to exceed the sum in respect of which BCEG has demonstrated a strong case. It may or may not exceed the amount of BCEG's total claims. The amount of BCEG's claims are not quantified in the Commercial List Statement, with the exception of the contract claims against IL. IL does not own any real property.
12. The orders proposed by BCEG would require the defendants to make an application to the Court for an order permitting them to have the benefit of any of the net sale proceeds of the sale of their properties. Contrary to BCEG's submissions, I regard this as more intrusive than a "conventional freezing order", which restrains a defendant from dealing with their assets only up to a specified value which corresponds with the value of the plaintiff's claim in respect of which the plaintiff has demonstrated a good arguable case.
13. Given the number and likely value of properties involved, I do not accept BCEG's submission that the defendants would not be prejudiced by the proposed orders. In my opinion, the defendants would be self-evidently prejudiced by having to apply to the Court for permission to deal with the net proceeds of sale of their own properties. As the Court of Appeal said in Frigo v Culhaci [1998] NSWCA 88 at page 6 per Mason P, Sheller JA, Sheppard AJA, in a passage subsequently approved in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 at [51] per Gaudron, McHugh, Gummow and Callinan JJ, an asset preservation order: "… is a drastic remedy which should not be granted lightly ... if granted, [it] imposes a severe restriction upon a defendant's right to deal with his or her assets. It is granted at the suit of a plaintiff whose status as a creditor is in dispute … Its purpose is to preserve the status quo, not to change it in favour of the plaintiff. The function of the order is not to provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied…"
14. After the hearing of the interlocutory processes on 22 July 2021, I made an interim order requiring the defendants to notify BCEG of any sale of transfer of their properties. That order was intended to apply pending the determination of BCEG's application for an asset preservation order, in circumstances where the defendants sought and were granted further time to respond to BCEG's submissions concerning the strength of its case. The defendants submit that this order should be continued. The continuation of the order will provide BCEG with the opportunity to apply for an asset preservation order if it considers that any future dealings with the defendants' property give rise to a danger of the kind that may justify such an order.
15. For all of those reasons, BCEG's application for orders restraining the defendants' dealings with their properties and the net proceeds of any sale of their properties in the terms of prayers 2 to 6 of the notice of motion filed on 5 July 2021 is dismissed.

Notice to produce

1. The parties ultimately reached agreement in relation to all disputed categories in the notice to produce issued by the defendants on 31 May 2021, with the exception of categories 17 and 18. Orders will be made giving effect to that agreement.
2. The parties reached partial agreement in relation to paragraph 17 by limiting the category to a specified period in time. The category is to be applied as if it read as follows, with the words highlighted pressed by BCEG and opposed by the defendants: "All emails between the Plaintiff (including any representative of the Plaintiff and BCEG International Investment Co Ltd (BCEG China) which contain requests for transfer, of US Dollars (or other foreign currency) from BCEG China to bank accounts held by the Plaintiff during the period 1 January 2010 to 31 December 2015 but to the extent only that the requests concern one or more of the Varsity Lakes and Wagga Mill Projects."
3. The defendants oppose the addition of the disputed words on the basis that the legitimate forensic purpose of category 17 (without those words) is to furnish them with material that may be used in testing evidence given by China-based directors of BCEG to the effect that Mr Xiao and Ms Chen "managed" the day to day business affairs of BCEG. The defendants rely on Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145 at [65], [69], [89] and [100].
4. I accept the defendants' submissions, having regard to the very general terms in which the China-based directors depose to management of the day to day affairs of BCEG.
5. Category 18 is the reverse of category 17, and requires production of emails between BCEG China and BCEG requesting transfer from BCEG's accounts to third parties outside of Australia. BCEG presses the same limiting words as for category 17 above, and the defendants oppose those additional words for the same reasons. I accept the defendants' submissions for the same reasons given immediately above in relation to category 17.

Subpoena issued to the Department of Home Affairs

1. The notice of motion filed by BCEG on 4 June 2021 sought an order setting aside a subpoena issued by the defendants to the Department of Home Affairs on 12 May 2021.
2. The subpoena sought production of two categories of documents (labelled categories 2 and 3 in the schedule to the subpoena).
3. The parties have agreed to read the first category (labelled category 2) in a manner that limits its scope to travel records relating to the China-based directors of BCEG entering or exiting Australia in the period from 1 January 2010 to 31 December 2015. An order will be made giving effect to that agreement in order to provide certainty for the Department of Home Affairs in complying with the subpoena.
4. The defendants have agreed to read down the second category (labelled category 3) so that it is limited to travel records for entry to and exit from Australia during the period from 1 January 2010 to 31 December 2015 of all person who have declared that they are an employee of representative of BCEG China or its related entities or that their purpose for entering into Australia was to meet with BCEG. BCEG maintains its objection to that category of documents.
5. The defendants press the second category on the basis that the presence in Australia of other employees or representatives of BCEG China, who report to the China-based directors of BCEG, is relevant to the extent to which day to day business affairs of BCEG were managed or controlled by Mr Xiao and Ms Chen.
6. Applying the principles articulated in Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145 at [33]-[80] (Bell P, McCallum JA agreeing) and [86]-[90] (Brereton JA), I accept the defendants' submissions that the second category has a legitimate forensic purpose in this case.
7. An order will be made to give effect to the second category in the terms in which it is now to be read.

Subpoenas issued to financial institutions

1. BCEG withdrew its objections to the subpoenas issued by the defendants on 12 May 2021 to the Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation. The orders to be made will formally note that BCEG did not press its notice of motion filed on 4 June 2021 to the extent that it relates to those subpoenas.

Subpoenas issued to RSM Australia Partners and Wis Partners Group Pty Ltd

1. BCEG's application to set aside these subpoenas is now limited to category 1 of each subpoena, which requires production of all of BCEG's MYOB files for the financial years ended 30 June 2010 to 30 June 2018, including any part of those financial years.
2. I accept BCEG's submission that this category is too wide. It extends well beyond material that has an apparent relevance to the issues in this case. That is not to say that subpoenas for ledgers maintained in MYOB in relation to the Varsity Lakes Project, the Facility, or particular kinds of revenue or outgoings of BCEG might not have a legitimate forensic purpose. However, it is not for the Court to redraft the subpoenas.
3. The defendants submitted that Mr Xiao would be entitled to the documents in category 1 of these subpoenas pursuant to s 198F of the Corporations Act 2001 (Cth). That section confers on directors and former directors of a company a statutory right to inspect the books of the company for the purposes of a legal proceeding to which the director or former director is a party. However, as BCEG submitted, s 198F does not entitle Mr Xiao to inspect a broader range of BCEG's books than is relevant to the issues in this case: Re Motasea Pty Ltd (2014) 97 ACSR 589; [2014] NSWSC 69 at [53].
4. For those reasons, the subpoenas issued to RSM Australia Partners and Wis Partners Group Pty Ltd are set aside insofar as they require production of the documents in category 1 of the schedule to each subpoena.

Plaintiff's application for leave to amend

1. BCEG's proposed amendments to the Summons and Commercial List Statement are set out in the draft Amended Summons and draft Amended Commercial List Statement in Exhibit JW-5 to the affidavit sworn by BCEG's solicitor on 20 July 2021.
2. The defendants objected to the proposed amendments only insofar as they relate to the proposed insertion of paragraphs C498A-C498W in the Commercial List Statement. Those paragraphs allege that Mr Xiao and Ms Chen allegedly caused or procured BCEG to make certain payments to an offshore entity named Beijing Dragon International Decoration Engineering Co.
3. After the hearing of the interlocutory applications, BCEG formulated a revised version of C498A to C498W which was attached to its written submissions dated 30 July 2021. The defendants then indicated their consent to those proposed amendments, save in respect of two matters.
4. First the defendants submit that the matters particularised under subparagraphs (i) and (iii) of paragraph C498A and under subparagraph (i) of C498B should be pleaded as material facts rather than specified as particulars. In my view, the revised paragraphs C489A and C498B adequately plead and particularise the allegations of fraud and give the defendants proper notice of the case that they are required to meet: see UCPR, r 14.4(3) and 15.3. The defendants would be entitled to object to any attempt by BCEG at the final hearing to rely on matters outside the scope of the revised pleading and particulars in support of its fraud case concerning the Beijing Dragon transactions.
5. Second, the defendants object to sub-paragraph (iii)(B) under paragraph C498A, which is included in the particulars of the allegation that Mr Xiao procured the payments to Beijing Dragon. Paragraph (iii)(B) states that Mr Xiao is only one of two signatories on BCEG's account from which the payments were remitted to Beijing Dragon (the other signatory being Ms Chen), and was therefore in a position of control over, and had responsibility for, all payments transacted on that account. On that basis, paragraph (iii)(B) states that it is to be inferred that Mr Xiao authorised the payments to Beijing Dragon.
6. The defendants submit that paragraph (iii)(B) is "unsound on its face", "lacks any material facts or history other than the assertion that Mr Xiao was a signatory to the CBA account" and fails to particularise any fact relevant to the allegation of procurement. I accept BCEG's submission that this complaint is misconceived because it reads sub-paragraph (iii)(B) of the particulars to paragraph C498A in isolation from the other particulars provided, including the particulars at (iii)(A) relating to Mr Xiao allegedly providing the account details for Beijing Dragon to Ms Chen immediately prior to the first payment made to Beijing Dragon allegedly on Ms Chen's written instructions.
7. For those reasons, leave is granted to BCEG to amend its Commercial List Statement by making the amendments set out in Exhibit JW-5 to the affidavit of Jodi Anne Walkom sworn on 20 July 2021 (save for C498A-C498W), and by inserting paragraphs C498A-498W in the terms annexed to BCEG's written submissions dated 30 July 2021. That order will be accompanied by the usual order that BCEG pay any costs thrown away by the defendants as a result of the amendments.

Costs

1. The parties were able to resolve by consent certain aspects of BCEG's notice of motion filed on 4 June 2021 in relation to the notice to produce and the subpoenas. The parties also formulated consent orders disposing of prayers 7 and 8 of BCEG's notice of motion in relation to overseas witnesses giving evidence by audio-visual link and the conduct of the proceedings after the first stage of the trial. BCEG and the defendants have otherwise each had an approximately equal degree of success and failure in the interlocutory applications that are the subject of these reasons. In those circumstances, the appropriate costs order is that each party should bear their own costs of those interlocutory applications.

Orders

1. For the reasons above, I make the following orders: Notice of motion filed on 28 June 2021 1. The defendants' notice of motion filed on 28 June 2021 for security for costs is dismissed. Notice of motion filed on 5 July 2021 1. In relation to prayer 1 of the plaintiff's notice of motion filed on 5 July 2021, grant leave to the plaintiff to file and serve an Amended Summons and Amended Commercial List Statement incorporating paragraphs C498A-498W annexed to the plaintiff's written submissions dated 30 July 2021 and otherwise in the form set out in Exhibit JW-5 to the affidavit of Jodi Anne Walkom sworn on 20 July 2021 2. Order the plaintiff to pay any costs thrown away by the defendants as a result of the amendments referred to in order (2) above, as agreed or assessed. 3. Prayers 2 to 6 of the plaintiff's notice of motion filed on 5 July 2021 seeking asset preservation orders are dismissed. 4. Note that orders 6 and 7 made on 26 July 2021 continue until further order of the court, without opposition by the defendants and without admissions. 5. Note prayers 7 and 8 of the plaintiff's notice of motion filed on 5 July 2021 were disposed of by orders 5 and 8 made on 26 July 2021. Notice of motion filed on 4 June 2021 1. In relation to prayer 1(a) of the plaintiff's notice of motion filed on 4 June 2021 and the subpoena issued by the defendants to the Department of Home Affairs on 12 May 2021: 1. category 2 of the subpoena is set aside except insofar as it requires production of: "A copy of all travel records, including but not limited to all passport documents, immigration records, Movement Records, Incoming and Outgoing Passenger Cards, flight/carrier numbers, dates of exiting Australia and dates of entry into Australia for the period 1 January 2010 to 31 December 2015, as these records relate to: (a) Tieshan M, DOB: 12 August 1961; (b) Yan Xing, DOB: 11 December 1966; (c) Qing Yang, DOB: 9 January 1955; and (d) Wenjing Dong, DOB: 26 July 1978." 1. category 3 of the subpoena is set aside except insofar as it requires production of: "A copy of all travel records, including but not limited to all passport documents, immigration records, Movement Records, Incoming and Outgoing Passenger Cards, flight/carrier numbers, dates of exiting Australia and dates of entry into Australia for the period 1 January 2010 to 31 December 2015, as these records relate to people who have declared: (a) being an Employee or Representative of BCEG or Beijing Construction Engineering Group or BCEG International Investment Co Ltd; or (b) that the purpose of entry into Australia was to meet with BCEG International (Australia) Pty Ltd." 1. Note that the plaintiff does not press prayers 1(b) to 1(d) of its notice of motion filed on 4 June 2021. 2. In relation to prayer 1(e) of the plaintiff's notice of motion filed on 4 June 2021, order that the subpoena issued by the defendants to Simon Aitken & others trading as RSM Australia Partners on 12 May 2021 be set aside insofar as it requires production of the documents in item 1 of the Schedule. 3. In relation to prayer 1(f) of the plaintiff's notice of motion filed on 4 June 2021, order that the subpoena issued by the defendants to Wis Partners Group Pty Ltd on 12 May 2021 be set aside insofar as it requires production of the documents in item 1 of the Schedule. 4. In relation to prayer 2 of the plaintiff's notice of motion filed on 4 June 2021 and the notice to produce issued by the defendants on 31 May 2021: 1. note the parties' agreement that the plaintiff is to produce documents in response to categories 1, 2 and 3 on the basis that "West Wyalong Project" in those categories has the same meaning as in the Commercial List Statement, and that the plaintiff is not required to produce documents in response to categories 1, 2 and 3 that it has previously provided to the defendants; 2. note that parties' agreement that the plaintiff is not required to produce documents in response to category 4, save for: "Any invoices received by the Plaintiff from any third party (including Trojjan and Trojjan Constructions) which appear on their face to represent project costs (e.g. subcontractors, suppliers, consultants, and authority fees), including but not limited to the Schedule of Payees in Annexure 1 relating to the Interlink Projects." 1. note that the defendants do not press for production of the documents in categories 7, 8, 9, 10, 11, 12, 13, 15 and 19; 2. note that parties' agreement that the plaintiff is not required to produce documents in response to category 14, save for: "All Documents evidencing communications (including Short Message Services) between the Plaintiff, on the one hand, and Paul Piercy, on the other hand, concerning the folder referred to in paragraph 97 of Mr Piercy's outline of evidence dated 6 November 2020." 1. set aside category 17 except insofar as it requires production of: "All emails between the Plaintiff (including any representative of the Plaintiff and BCEG International Investment Co Ltd (BCEG China) which contain requests for transfer, of US Dollars (or other foreign currency) from BCEG China to bank accounts held by the Plaintiff during the period 1 January 2010 to 31 December 2015" 1. set aside category 18 except insofar as it requires production of: "All emails between BCEG China and the Plaintiff (or any representative of the Plaintiff) which contain requests for transfer, from bank accounts held by the Plaintiff to third party entities outside Australia between the period 1 January 2010 to 31 December 2015" 1. note that parties' agreement that the plaintiff is not required to produce documents in response to category 20, save for: "Any letters from the Plaintiff during the period 1 January 2010 to 31 December 2015, which contain or refer to invitations to visit Australia to any director of BCEG who held that appointment during the period 1 January 2010 to 31 December 2015."

Costs (12) Each party is to bear their owns costs of and incidental to: 1. the plaintiff's notice of motion filed on 4 June 2021; 2. the defendants' notice of motion filed on 28 June 2021; and 3. the plaintiff's notice of motion filed on 5 July 2021.

Endnotes

1. Excluding December 2011, March 2012 and April 2012, in respect of which there are no bank payment records.
2. Corresponding with the amounts received on the following dates as recorded in Trojjan's MYOB records:19/10/2010 - $415,737.26; 1/11/2010 - $100,000.00; 9/11/2010 - $448,639.95; 15/12/2010 - $210,966.47; 31/12/2010 - $92,122.83; 23/02/2011 - $362,499.96; 3/03/2011 - $50,000.00; 10/03/2011 - $273,692.02; 28/04/2011 - $163,980.44; 24/06/2011 - $204,252.43.
3. See, for example, paragraphs C355-356.
4. See, for example, paragraphs C357-362.
5. See paragraphs C454-466 and the particulars thereto.
6. See, for example, Vertical Australia Pty Ltd v Air Company Vertical-T LLC; Air Company Vertical-T LLC v Vertical Australia Pty Ltd [2012] NSWSC 719 at [106].
7. Affidavits of Jodi Ann Walkom sworn 7 July 2021 and 27 July 2021.
8. Affidavit of Neil Martin Wallman affirmed on 4 August 2021. 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: 16 August 2021