BCEG International (Australia) Pty Ltd v Xiao

Supreme Court of NSW|2022-08-17|Before: Rees J

Solicitors: Thomson Geer (Plaintiff) HWL Ebsworth (Defendants) File Number(s): 2019/310768

Judgment

HER HONOUR: In April 2022, I heard a three-week fraud trial brought by the plaintiff, BCEG International (Australia) Pty Ltd (BCEG) against its former director, Yu Xiao, wife Yanying Chen (who I found was a de facto director of BCEG) and the couple's three companies, Interlink Laboratory Pty Ltd, Interlink Wagga Central Pty Ltd and West Wyalong Marketplace Pty Ltd.
As detailed in my judgment given in July 2022, the fraudulent activity engaged in by Mr Xiao and Ms Chen was extensive, taking place over several years, several property developments, numerous transactions and involving considerable sums: BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972. (I have adopted defined terms from my primary judgment in what follows.) BCEG sought a variety of forms of relief against each of the defendants, some of which was sought in the alternative and some of which required BCEG to elect between equitable compensation and an account of profits. BCEG made an election in respect of some claims before or during the trial and, in respect of other claims, deferred making an election until after my judgment.
On delivering judgment, I made orders, directions and notations requiring BCEG to attend to various matters, including calculating interest, ascertaining the Australian dollar equivalent of payments made in US dollars, providing a copy of my judgment to the liquidators of two non-party companies pending the proposed rescission of contracts between BCEG and those companies, and orders for the taking of accounts. In addition, I directed the parties to notify any errors or omissions within 14 days. Having published my reasons, I raised the following matter with counsel: HER HONOUR: The second matter that I wanted to raise is that I've directed the parties to notify any errors or omissions within 14 days. Now in that respect, I have tried very hard to track through each of the causes of action and the relief sought against particular defendants and I hope I've got it right. But if I've missed something, then please feel free to inform me, if you think I have. I might not agree with you, within the errors or omissions, in particular the omissions aspect of that order. You'll see in particular that most of the misappropriation of funds in respect of the sham subcontractors, West Wyalong payments and Beijing Dragon, all seem to filter in through the Varsity Lakes account. So to the extent that that account has been repaid, those misappropriations have also appeared to me to have been repaid, but I may have missed something. I don't think I have, I've tried to be very careful, but I'd hate to have missed something. If I have, please let me know and no doubt Mr Hicks will do the same.

Rule 36.16

Rule 36.16 provides: 36.16 Further power to set aside or vary judgment or order (1) The court may set aside or vary a judgment or order if notice of motion for the setting aside or variation is filed before entry of the judgment or order. … (3A) If notice of motion for the setting aside or variation of a judgment or order is filed within 14 days after the judgment or order is entered, the court may determine the matter, and (if appropriate) set aside or vary the judgment or order under subrule (1), as if the judgment or order had not been entered.
In Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300, Mason CJ explained that the jurisdiction to reopen a judgment is to be exercised with great caution, having regard to the importance of the public interest in the finality of litigation; generally speaking, it will not be exercised unless the applicant can show that by accident and without fault on their part, they have not been heard: at 301-302. Further, at 302-303: But these statements do not exclude the exercise of jurisdiction to reopen a judgment which has apparently miscarried for other reasons, at least when the orders pronounced have not been perfected by the taking out of formal orders. So much was acknowledged by Brennan, Dawson, Toohey and Gaudron JJ in Smith v NSW Bar Association (No 2) when their Honours said: ``if reasons for judgment have been given, the power is only exercised if there is some matter calling for review.'' … the public interest in the finality of litigation will not preclude the exceptional step of reviewing or rehearing an issue when a court has good reason to consider that, in its earlier judgment, it has proceeded on a misapprehension as to the facts or the law. As this court is a final court of appeal, there is no reason for it to confine the exercise of its jurisdiction in a way that would inhibit its capacity to rectify what it perceives to be an apparent error arising from some miscarriage in its judgment. However, it must be emphasised that the jurisdiction is not to be exercised for the purpose of reagitating arguments already considered by the court; nor is it to be exercised simply because the party seeking a rehearing has failed to present the argument in all its aspects or as well as it might have been put. What must emerge, in order to enliven the exercise of the jurisdiction, is that the court has apparently proceeded according to some misapprehension of the facts or the relevant law and that this misapprehension cannot be attributed solely to the neglect or default of the party seeking the rehearing. The purpose of the jurisdiction is not to provide a backdoor method by which unsuccessful litigants can seek to reargue their cases. See also Rock Cote Enterprises Pty Ltd v FS Architects Pty Ltd (No 2) [2008] NSWCA 205 at [9] (per Campbell JA with whom McColl JA and Handley AJA agreed).

Primary judgment

I have had the benefit of written submissions from the parties' counsel and oral submissions this morning in respect of the portion of my primary judgment where things may have gone awry (being [436]) and the resulting alteration sought to Order 11 to set matters to rights. It concerns BCEG's claim against West Wyalong Marketplace for an account of profits in respect of the West Wyalong project.
In short, BCEG China borrowed US$35 million to fund construction of a hospital on the Gold Coast (the Varsity Lakes project) but, from 2010 to 2012, Mr Xiao and Ms Chen used $3,423,739 of this loan facility to wholly pay for the construction of their personal project in West Wyalong, owned by West Wyalong Marketplace.
BCEG sought equitable compensation against its director and de facto director in the sum of $3,423,739. As to quantification of equitable compensation, I concluded at [401]-[402]: [401] Where the object of equitable compensation is to restore BCEG to the position it would have been in if there had been no breach of the directors' fiduciary obligations, the amount of compensation is the amount of the Varsity Lakes facility diverted to the West Wyalong project. … The figure of $3,423,739 thus provides a starting point for quantifying appropriate compensation. But is it not the end of the matter. [402] The West Wyalong payments added to BCEG's indebtedness to BCEG China under the Varsity Lakes facility. But by the trial, BCEG's indebtedness had been reduced by the defendants' repayments, in particular, by Interlink Laboratory. The only evidence of the balance owing under the Varsity Lakes facility was BCEG's financial statements or, more recently, the 2017 agreement where "the outstanding principal of the private hospital project" was agreed to be $2,528,949.42. Awarding equitable compensation in excess of this amount would, on the limited evidence available, do more than restore BCEG to the position it would have been in if there had been no breach of the directors' fiduciary obligations.
Ultimately, I awarded equitable compensation against Mr Xiao and Ms Chen in the amount of $2,528,949.42. This amount covered not only BCEG's claim in respect of the West Wyalong payments but overlapped with BCEG's claim in respect of sham sub-contracts and partially overlapped with BCEG's claim in respect of the Beijing Dragon payments.
Separately, BCEG pursued a claim for accessorial liability against West Wyalong Marketplace and elected an account of profits, comprising rental income enjoyed on the property since its completion ($1,234,632.72) together with capital gain on the sale of the property in February 2019 ($1,710,000). I concluded that BCEG was entitled to this amount, together with interest: at [435]. At [436]: (emphasis added) There is no obstacle of principle standing in the way of a plaintiff making a split election where there are multiple defendants: Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [37]. BCEG has sought equitable compensation from the directors and an account of profits from West Wyalong Marketplace. BCEG is entitled to both remedies in principle, although I have concluded that no particular award of equitable compensation will be made in respect of the West Wyalong payments where it overlaps with equitable compensation in respect of the sham sub-contracts and where, applying the rule in Clayton's Case, the West Wyalong payments should be regarded as having been repaid by the defendants. That must also have consequences for the profit for which an account must be given: if the defendants have already repaid the West Wyalong payments, then these payments should be deducted from the profit as having been, effectively, made by the defendants. Where the sum of the capital gain and rental income is $3,244,632.70, before interest is added, then it may be that there is nothing left after accounting for the West Wyalong payments. I will wait to hear from the plaintiff in this regard, once the relevant interest calculations have been done.
It is the italicised portion which BCEG submits has proceeded on a misapprehension as to the facts or the law and which the defendants, for their part, embrace.

Consideration

BCEG observed that, where I had earlier found that the West Wyalong payments should be regarded as having been repaid by "the defendants", the evidence of the defendants' accounting expert, Tony Samuel, was that Interlink Laboratory paid $37,114,387 to BCEG while West Wyalong Marketplace paid $267,436: at [312]. Any deduction of the profits to be disgorged by West Wyalong Marketplace should be limited to payments which it made, not payments made by "the defendants". Further, given the details of the payments provided by Mr Samuel, no deduction should be made at all.
The defendants submitted that there could be no question of any misapprehension of fact or law and the proper course was for BCEG to appeal. The defendants pointed to a portion of my judgment where I dealt with the defendants' submission in respect of BCEG's contractual claim against Interlink Laboratory, at [314]: To this, the defendants submitted that the fact that BCEG paid these monies out, in many cases immediately and back to Interlink Laboratory or other companies associated with Mr Xiao and Ms Chen, was of no moment as each were distinct legal entities. If BCEG decided to pay those monies out, that was a matter for BCEG and did not detract from the fact that Interlink Laboratory had paid BCEG. There was an air of unreality to this submission. The bank accounts of BCEG and Interlink Laboratory were operated by Mr Xiao and Ms Chen. Decisions as to what money was paid and to where were made by them, in respect of both companies. The flow of funds evident from the bank statements may be described as watching a ball ricochet in a pinball machine. Funds deposited into BCEG's accounts were frequently withdrawn the same or next day. Tracing any particular payment to its ultimate destination - and there were a great number of payments - would require the investment of significant time. Ultimately, the only person who is likely to know what went where is Ms Chen. In short, repayments by Interlink Laboratory were often notional as the funds were immediately retrieved.
The defendants submitted that this conclusion applied to the issues, claims and defences in the proceedings generally, including in respect of the conclusions reached at [436] and in Order 11. The defendants submitted that the Court there held that, as the repayments by the defendants in respect of the West Wyalong projects had consequences for equitable compensation, there were also consequences for the profit, for which an account must be given. The profit should be calculated on the basis that the construction costs were paid to BCEG by the defendants.
The defendants' submissions, with respect, rather highlight and repeat where I have gone wrong. One cannot take a finding in respect of a contractual claim, filter it through a comment made in respect of the assessment of equitable compensation, and then apply it to an account of profits claim against a separate corporate entity. Each cause of action against each party must be considered having regard to the principles and evidence relevant to that cause of action alone. Whilst it was certainly the defendants' thesis at trial that BCEG rendered invoices to Interlink Laboratory for the Varsity Lakes project which included the West Wyalong payments and Interlink Laboratory, somehow, thereby repaid the construction costs of the West Wyalong project, I should not be taken to have accepted that submission: see [384]. It was certainly the case that BCEG's accounting and banking records - maintained by Mr Xiao and Ms Chen - were "as clear as mud": at [407]. But this should not result in muddied thinking on my part.
BCEG is right to say that I have elided the separate corporate entities and individuals at [436] and, by proceeding on the basis that the payor of the West Wyalong payments were "the defendants" collectively, the Court has bestowed a set-off on West Wyalong Marketplace against profits it was otherwise obliged to disgorge. Where the principal payor of the repayments identified at [402] was Interlink Laboratory, no such setoff ought to have been allowed in favour of West Wyalong Marketplace at [436].
There is no evidence that West Wyalong Marketplace paid for the construction of the project. The only payments made by West Wyalong Marketplace identified by Mr Samuel post-dated completion of construction by several years. So far as the supporting invoices - where available - suggest, those payments had nothing to do with the construction of the project. The misapprehension, probably both as to the facts and the law, was mine alone and cannot be attributed to the neglect or default of BCEG. Indeed, it was on this very subject that I sought the parties' assistance, when handing down judgment, to notify the Court if "I have missed something".
For these reasons I make the following orders: 1. Pursuant to rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW), vary Order 11 made on 22 July 2022 to delete the words "less the West Wyalong payments, as described in the judgment of Rees J". 2. The monetary judgment in Order 11 made 22 July 2022 be varied to $3,731,547.75.

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: 17 August 2022

At a glance

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Judgment (6 paragraphs)

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Legislation Cited (1)

Cases Cited (4)

Cited By (4)