BCEG International (Australia) Pty Ltd v Xiao

CONTRACT CLAIM AGAINST INTERLINK LABORATORY

1. I will deal with the most straight forward cause of action first. The Main Contract between BCEG and Interlink Laboratory in respect of the Varsity Lakes project was described as "Cost Plus", being cost plus 12%, with 5% payable to Trojjan and 7% payable to BCEG: special condition 2.2. It will be recalled that BCEG was to provide a progress claim to Interlink Laboratory each month, where "The monthly values will be total[l]ed at the end of the project to form the final contract value": special condition 6.4. Interlink Laboratory was also obliged to pay the final 5% of the contract value to BCEG, as a form of retention, on practical completion or 30 months from the commencement date of 22 March 2010, whichever was the earlier of the two: special condition 6.6. These obligations form the basis of BCEG's claim in contract against Interlink Laboratory, being the balance of unpaid progress claims plus 7% of the final contract value.

Claim based on BCEG invoices

1. One way to establish BCEG's entitlement under the Main Contract is to rely on BCEG's progress claims provided to Interlink Laboratory in respect of the Varsity Lakes project. BCEG tendered all such invoices, which revealed some curious features. The invoices adopted a variety of invoice numbering systems (00000002, Inter-03, 00311210), the last apparently reflecting the invoice date. A number of invoices had the same invoice number despite being for different amounts and issued on different dates. Many of the invoices said to have been issued prior to 1 March 2011 had the Market Street address in the footer, and thus were likely issued after 1 March 2011 rather than the date of the invoice. Invoices from 31 August 2011 to 31 March 2014 used a different letterhead, referring to an address in Day Street, Sydney, although BCEG never occupied such premises.
2. In total, BCEG invoiced Interlink Laboratory for construction costs of $38,162,995.94 and construction management costs of $308,000 in respect of the Varsity Lakes project. As the margin payable to BCEG under the Main Contract was 7% of the costs of construction, BCEG was also entitled to $2,671,409.74. Alternatively, BCEG relied on the construction costs of $32,359,627.42 referred to in the 2014 agreement, of which 7% was $2,265,173.92. BCEG contended that, in breach of the Main Contract, Interlink Laboratory had not paid BCEG these amounts on the earlier of the date of practical completion or 22 September 2012. Rather, various repayments were made from October 2013 to November 2017 totalling $29,880,678, leaving an outstanding amount of $14,652,983.95 (based on the invoices) or $11,261,728.68 (based on figures in the 2014 agreement), on which pre-judgment interest was also sought.
3. The defendants' accounting expert, Mr Samuel, was instructed to reconcile monies paid by Interlink Laboratory, West Wyalong Marketplace or Mr Xiao or Ms Chen to BCEG. After reviewing bank statements, Mr Samuel concluded that Interlink Laboratory had paid $37,114,387 to BCEG, West Wyalong Marketplace had paid $267,436 while Mr Xiao and Ms Chen had paid nothing. As such, the defendants submitted that all amounts owed had been paid, both according to the invoices or under the 2014 agreement.
4. However, Mr Samuel agreed that he "only looked at the money going one way". Mr Samuel was not instructed to look at monies being paid from BCEG to the defendants and agreed that his report "doesn't tell you anything about the monies paid by BCEG to the other parties." Mr Samuel readily accepted that payments made by Interlink Laboratory to BCEG were transferred back to Interlink Laboratory the same day or the next day, but were not referred to in his report.
5. 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.
6. Mr Samuel also did not consider whether payments made to BCEG were in respect of monies then owed under the fit-out contract in respect of the Varsity Lakes project (see [278]), or monies owed in respect of the Main Contract. Mr Xiao had made a statutory declaration on 22 April 2015 in support of a progress claim (apparently provided to the National Australia Bank) recording that Interlink Laboratory had paid BCEG $9,017,896 under the fit-out contract. This amount should probably also be deducted from Mr Samuel's calculations.
7. The defendants submitted that BCEG could not seek to recover on the basis of these invoices, which were said to give rise to multiple queries. BCEG fairly acknowledged that it was not confident that the invoices were of sufficient validity to enable BCEG to claim outstanding monies from Interlink Laboratory. It was for this reason that BCEG relied on the 2017 agreement or, alternatively, the 2014 agreement as subsuming all interrelated transactions that had occurred up until that point in time. As a consequence, Mr Samuel's analysis was otiose as it concerned the transfer of funds preceding the 2017 agreement.
8. There is much to commend BCEG's approach. Whilst BCEG's invoices are business records on which the Court would be entitled to rely, it is also the case that the methods by which these invoices were calculated and rendered engenders little confidence in the veracity of the figures. Mr Samuel's analysis does not advance matters; this is not to criticise Mr Samuel but to recognise that the limited instructions he was given rendered his conclusions largely irrelevant. The figures documented in the 2014 and 2017 agreements, following contemporaneous and lengthy negotiations, are more likely to reflect the amounts then acknowledged as owing by Interlink Laboratory and, in respect of the 2017 agreement, post-dates the period reviewed by Mr Samuel such that his analysis can be put to one side. As BCEG's claim, under either the 2014 or 2017 agreements, is substantially less than that based upon the invoices, proceeding in this manner may also be to the defendants' benefit.

Claim based on 2014 and 2017 agreements

1. There was no dispute that, by the 2014 agreement, Interlink Laboratory and BCEG entered into a contract to settle an outstanding dispute relating to the Varsity Lakes' Main Contract. Under the contract, the parties agreed on the construction costs of the Varsity Lakes project and the amount of Interlink Laboratory's indebtedness, together with the repayments by which that indebtedness would be discharged. The point of difference is that BCEG contends that Interlink Laboratory failed to make the agreed repayments whilst the defendants say that, according to Mr Samuel's analysis, all repayments were made and, indeed, the defendants paid more than they should have by some $3.2 million.
2. The defendants' submission cannot be accepted, for two reasons. First, Mr Samuel's analysis is of limited utility, for reasons already given. Second, if the defendants had already paid - and over-paid - the repayments due under the 2014 agreement, it begs the question why Mr Xiao signed the Memorandum of Loan repayments on 5 November 2017 - after lengthy meetings - which acknowledged that Interlink Laboratory continued to owe substantial sums. The Memorandum of Loan Repayments stated: The private hospital project was settled with signing of a settlement sheet and agreement on 30 June 2014 [the 2014 agreement]. … Given the fact that [Interlink Laboratory] failed to make the repayments to [BCEG] as required by the settlement agreement, [Interlink Laboratory] and [BCEG] have held a negotiation on the outstanding principals, management fees and interest and have reached a consensus in the following matters: 1. By 31 October 2017, the outstanding principal of the private hospital project to be paid by [Interlink Laboratory] to [BCEG] was 2,528,949.42 Australian dollars (this principal amount was calculated based on the 50 thousand Australian dollars [Interlink Laboratory] will pay to [BCEG] on 6 November). [Interlink Laboratory] will also pay [BCEG] 1,617,981,37 Australian dollars of management fees and 1,548,544.34 Australian dollars in interest. Adding the three items, [Interlink Laboratory] will pay [BCEG] a total of 5,695,475.13 Australian dollars (hereafter referred to as "the total outstanding amount"); 2. [Interlink Laboratory] agrees to be cooperative in loan repayment and will put forward a repayment plan two weeks after signing this memorandum. The repayment plan will be based on the following principles: 1) [Interlink Laboratory] agrees to pay back the total outstanding amount … 2) Before the loan is paid out, [Interlink Laboratory] will provide material asset and shareholder rights as a collateral … [including an office in Beijing] … 3. [Interlink Laboratory] and [BCEG] will sign the legal documents … before 30 November 2017 that clearly set out the relationship between the creditor and debtor and loan repayment schedule. …
3. The agreement also provided that interest would accrue at 4% per annum on the principal of $2,528,949.42 and, after 30 June 2018, 5% per annum against the unpaid amount.
4. BCEG contended that, by the memorandum, Interlink Laboratory and BCEG entered into a contract to settle their dispute, by which the parties agreed that Interlink Laboratory was indebted in the sum of $5,695,475.13 and agreed that interest would be payable on the unpaid sum. Interlink Laboratory breached the 2017 agreement by failing to repay the debt and accrued interest. Alternatively, by the 2017 agreement, Interlink Laboratory settled upon an account stated by which Interlink Laboratory admitted and acknowledged that it was indebted in the amounts recorded in the agreement. Either way, BCEG sought judgment against Interlink Laboratory in the amount of the agreed debt, together with interest.
5. The defendants submitted that the 2017 agreement was not, in fact, an agreement: Masters v Cameron (1954) 91 CLR 353 at 361; Skilled Group Ltd v CSR Viridian Pty Ltd [2012] VSC 290; GC NSW Pty Ltd v Galati [2020] NSWCA 326 at [58]-[60] (per Gleeson JA). Whilst the document indicated some consensus, it left unresolved essential terms of the security to be provided and the loan repayment schedule. The document was subject to the parties, by their legal representatives, preparing and executing legal documents by 30 November 2017. It was 'subject to contract', such that there was no binding agreement unless and until formal documentation is executed. The defendants denied that there was any account stated as any inference of the debt was rebutted by Interlink Laboratory's defence of the proceedings.
6. I agree with the defendants that the Memorandum of Loan Repayments does not constitute a binding agreement in respect of when and how Interlink Laboratory would repay monies then owed to BCEG. This was to be the subject of a repayment plan to be put forward by Interlink Laboratory within two weeks, which plan was to proffer security over property and shares and to be documented by the end of the month in "legal documents". That part of the Memorandum of Loan Repayments did not eventuate and, as Ms Dong said, Mr Xiao proceeded to sell the Beijing apartment which had been discussed as security, without her knowledge. I do consider, however, that the Memorandum of Loan Repayments recorded a concluded agreement in respect of interest, which was not dependent on the repayment plan to be put forward, nor security, nor 'legal documents'.
7. As to whether the Memorandum of Loan Repayments gave rise to an account stated, in Lockyer v Macready (1965) 66 SR (NSW) 369, Brereton J observed that an account stated "involves no more than an admission of liability for a specified sum. An IOU is a simple instance of this type of account stated": at 371. In Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR (NSW) 397, Jordan CJ explained at 401: An action for money found to be due on accounts stated may take one of two forms. It is always essential in such an action that there should have been before action brought an admission by the defendant or his agent to the plaintiff or his agent that the sum claimed is due by the defendant to the plaintiff: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 135. But this admission may be so framed as to be merely an acknowledgment of indebtedness, in which case although it supplies evidence of the debt the evidence may be rebutted by proof that no debt in fact existed. Or it may take the form of an account stated and agreed to between two parties, by which it is in effect agreed that the items on both sides shall be set off and the balance paid. In the latter type of case, the agreement for set-off supplies good consideration for the promise to pay the amount of the balance; and the account stated is itself an agreement for valuable consideration constituting a cause of action, and not merely evidence of liability: Siqueira v Noronha [1934] AC 332 at 337-338; Camillo Tank Steamship Co Ltd v Alexandria Engineering Works (1921) 38 TLR 134.
8. In Lewis v Wilson (1997) 42 NSWLR 228, where the first form of the action on an account stated was in issue, Sperling J noted that all that was required was "an admission or acknowledgement of a debt for a sum certain … the certainty of the sum admitted may be established by the express terms of the admission or by other evidentiary material such as a bill that has been sent which is expressly or impliedly referred to in the admission": at 232.
9. I understood BCEG to rely on the second type of account stated, but I do not consider that it makes a difference in this case. The Memorandum of Loan Repayments contains a clear and unequivocal admission of indebtedness on the part of Interlink Laboratory to BCEG of $5,695,475.13. The clarity of this admission is confirmed by the fact that Interlink Laboratory proceeded to pay BCEG the first repayment described in the document, on which "the total outstanding amount" of $5,695,475.13 depended. Whilst this admission supplies evidence of a debt which may be rebutted by proof that no debt in fact existed, this evidence has not been rebutted. The last payment referred to in Mr Samuel's report was the $50,000 anticipated by the Memorandum of Loan Repayments. There is no doubt that no further payments were made to BCEG after that date.
10. As such, BCEG is entitled to judgment against Interlink Laboratory in the sum of $5,695,475.13 together with pre-judgment interest under section 100(1) of the Civil Procedure Act 2005 (NSW). Where the parties agreed, in the Memorandum of Loan Repayments, that interest on unpaid amounts was 4% per annum on $2,528,949.42 to 30 June 2018 and 5% per annum on $5,695,475.13 thereafter, BCEG is also entitled to interest on this basis. Such interest should be calculated from 8 November 2017, when the $50,000 was paid. Interest should be calculated on the basis of simple interest, where the Memorandum of Loan Repayments did not specify compound interest.

BREACH OF DIRECTORS' DUTIES

1. BCEG sued Mr Xiao and Ms Chen for breach of their duties as directors of BCEG, as a consequence of which BCEG claimed to have suffered loss and damage for which equitable compensation or, alternatively, an account of profits was sought. Whilst Mr Xiao was a director of BCEG, Ms Chen was not. Thus, the first issue is whether Ms Chen was a de facto director of BCEG.

De facto director

1. Ms Chen was appointed as secretary of BCEG on 15 June 2011, but not a director. Section 9 of the Corporations Act 2001 (Cth) provides: director of a company … means: … (b) … a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
2. There is no suggestion that Mr Xiao was accustomed to act in accordance with Ms Chen's instructions or wishes and, thus, the question is whether Ms Chen "act[ed] in a position of a director". In considering this question, the courts apply an objective test; the intention of the purported de facto director and the subjective thoughts of others involved in the corporation are irrelevant: Binetter (No 4) at [241]. The following factors assist in determining this question: 1. Does the person exercise the "top level of management functions": Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 at 569. Did they make high level management decisions on matters that affect the company's financial standing: Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129; (2010) 28 ACLC 10-073 at [199]. Has the person "involved [themselves] in the affairs of [the company] as only a director of the company would have been expected to do": Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173 at 182. 2. Did the company hold out a person as a director: Grimaldi v Chameleon Mining NL (No 2) (2012) [2012] FCAFC 6; (2012) 87 ACSR 260 at [130]-[131]. 3. Did outsiders reasonably perceive the person to be the manager or director of the company: Murchison Metals at [200]-[201].
3. As Madgwick J noted in Austin, "Whether a person does so act will often be a question of degree, and requires consideration of the duties performed in the context of the operations and circumstances of the particular company involved": at 570. The size of the company, the "internal practices or structure of the company may be relevant": at 570. Further, specific actions by the person purported to be the de facto director should not be looked at in isolation. Rather, regard should be had to the actual functions and duties undertaken by the person, rather than the job title they have been given; the Court "should look at all the circumstances 'in the round' … [and] in their context. A single act might lead to liability in an exceptional case": Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 WLR 189 at [38]-[41]. Where a person signs their name on documents with the job title "director", such representation may be determinative: Forkserve Pty Ltd v Jack [2000] NSWSC 1064; (2001) 19 ACLC 299 at [38]-[42].
4. The defendants submitted that Ms Chen was not a de facto director as she did not exercise "top level" management functions or act unilaterally: section 9(b)(i), Corporations Act; In the matter of Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 at [27]-[32]; In the matter of ACN 092 745 330 [2017] NSWSC 241 at [110]-[113]. Whilst the evidence supported a conclusion that Ms Chen had a day-to-day financial management role within BCEG, this was not enough. Ms Chen was not performing tasks of great importance but a role of bookkeeper, accounts manager or financial controller. Ms Chen acted on Mr Xiao's instruction and lacked independence to make decisions of substance.
5. I do not consider that, in order to be a director, a person must make decisions independently of other directors. Where a corporation has more than one director, it is unremarkable that decisions are made by the directors in consultation with one another, including at board meetings. Further, as the Full Court observed in Grimaldi, the fact that a company has an active director apart from the alleged de facto director does not preclude a finding that that person was a de facto director: at [74]; Swan Services at [29]. As Barrett AJA described it in ACN 092 745 330, "The focus is thus upon the way the person operates within the particular corporate governance context, the degree of autonomy exercised and the appearance (and reality) of authoritative operation as a primary level decision-maker for the company": at [113].
6. It is obviously more difficult to assess whether Ms Chen was a de facto director, where she did not give evidence. Mr Xiao's description of his wife's role in BCEG can be put to one side as self-serving and unreliable. As to whether Ms Chen engaged in "top level" management functions and decisions, the evidence has been reviewed at [76]-[90]. BCEG was a small company. Mr Xiao and Ms Chen worked closely together, having adjoining offices and regularly consulting with each other. As mentioned, the evidence of Mr Piercy, Ms Zhang and Eunson Yang gave a consistent picture: Mr Xiao ran the company with the assistance of his wife, who was in charge of finance, including the bank accounts, invoicing and accounting. Mr Xiao approved all contracts and invoices for payment, as well as all communications with BCEG China. Mr Xiao and Ms Chen closely supervised the project and finance sides of the business respectively.
7. According to immigration records, after BCEG was incorporated in 2010, Mr Xiao was in Australia for 92 days of the rest of the year, or 45% of the time. During this time, the first drawdown of the Varsity Lakes facility was received and $1.28 million disbursed to the defendants and used inter alia to purchase an apartment in the Rocks. The first, second and third West Wyalong payments were made.
8. In 2011, Mr Xiao was in Australia for 162 days, or 44% of the year. The company moved to new premises in Market Street. West Wyalong payments continued; the evidence indicates that Ms Chen prepared, or supervised the preparation of, Trojjan invoices and approved the West Wyalong payments: see [148]-[150]. The second drawdown occurred, from which $2.05 million was used to fund the purchase of the Wagga land by CX & DN Holdings. The third drawdown request was submitted, supported by sham sub-contracts and, after questions were raised by Ms Dong, computer access to a folder containing "Documents sent to china" was confined to three people, being Mr Xiao, Ms Chen and Mr Piercy. Also as part of the third drawdown, the 'Applications and Certificates for Payment' forms with the higher figure from the second set of books were prepared, certified by Ms Chen, and submitted to BCEG China. The first payments to Beijing Dragon were made.
9. In 2012, Mr Xiao was in Australia for 188 days, or 51% of the year. During this time, the West Wyalong project was completed and the final West Wyalong payments made. The fourth and fifth drawdowns of the Varsity Lakes facility took place, almost entirely supported by sham sub-contracts. Further payments were made to Beijing Dragon.
10. In 2013, Mr Xiao spent 238 days, or 65% of the year, in Australia. By now, work was underway on the Wagga project. The remaining payments were made to Beijing Dragon. Negotiations began with BCEG China to repay the Varsity Lakes facility, ultimately leading to the 2014 agreement. Mr Xiao's time spent in Australia increased markedly in the following years (84% in 2014 and 87% in 2015).
11. In short, while Mr Xiao was often at BCEG's offices, Ms Chen was always there. More significantly, during the years where the bulk of the fraudulent transactions occurred, Mr Xiao was in Australia less than half the time. When Mr Xiao was overseas, he described Ms Chen as "my eye in the company"; Ms Zhang said that Ms Chen ran the office in Mr Xiao's absence. As a matter of practicality, it must have fallen to Ms Chen to make the decisions necessary to support the day-to-day activities of the company. Whilst there is no doubt that Mr Xiao remained in contact whilst he was overseas and participated in, or even dominated, decision-making, it is inherently likely that Ms Chen involved herself in the affairs of BCEG as only a director of the company would have been expected to do.
12. In internal BCEG communications, Ms Chen was not referred to as a director. A BCEG Payment Authorisation Sheet in respect of the Varsity Lakes project, signed in April 2013, included, at the bottom, a place for a number of BCEG employees to note that they had prepared, checked or approved the payment. The form included provision for the signature of Ms Chen, listed as "director". However, the word "director" was crossed out. Ms Chen did not sign the form; Mr Xiao approved the payment. Generally, Ms Chen either did not sign these forms or no position was marked against her name.
13. Externally, Ms Chen often described herself as "financial controller", and there is no doubt she performed this role, albeit Mr Xiao said he was not aware that his wife described herself as such. On 10 August 2011, 30 September 2011 and 14 May 2012, Ms Chen wrote to the Commonwealth Bank as Financial Controller of BCEG. A customer particulars report printed by the National Australia Bank on 25 November 2014 described Ms Chen's employment with BCEG as "financial controller". The report is signed by Ms Chen.
14. On occasion, Ms Chen also described herself as a director. On 19 August 2011, Ms Chen sent a letter on behalf of BCEG, describing herself as director. The letter concerned a trivial matter - opening a post office box - and is not signed. More significantly, on 29 April 2013, Ms Chen wrote a letter to the Commonwealth Bank as director of BCEG, giving instructions to transfer US$2.6 million from BCEG's Foreign Currency Account.
15. How was Ms Chen reasonably perceived by outsiders of the company? The letter from BCEG China of 24 February 2011 referred to Mr Xiao and Ms Chen as "the Australian branch leaders". In June 2011, a submission prepared by a bank officer in support of an application for finance (to purchase the Wagga land) observed, "Yu Xiao and his wife Yanying Chen are the economic buying influences and public face for the BCEG Group in Australia." These contemporaneous documents reveal that, externally at least, Mr Xiao and Ms Chen were viewed as occupying comparable positions of seniority with the company.
16. Whilst I would have preferred to reach a conclusion on this question having heard from Ms Chen, I am entitled to infer that her evidence would not have assisted her. Of course, the rule in Jones v Dunkel does not permit the Court to infer that the uncalled evidence would have been damaging, nor to fill gaps in the evidence: Cubillo v Commonwealth of Australia (No 2) (2000) 103 FCR 1; [2000] FCA 1084. Overall, I am satisfied that Mr Xiao and Ms Chen both acted as directors of BCEG. Mr Xiao was clearly the primary liaison with BCEG China whilst Ms Chen ran the financial side of the business. Mr Xiao was in charge of decisions made in respect of the projects being undertaken by the company, whilst Ms Chen was in charge of funds, invoicing and payments, albeit Ms Chen would not pay an invoice until Mr Xiao had approved it, presumably because Mr Xiao had a detailed knowledge of the underlying project. I consider that Ms Chen acted in the position of a director of BCEG and owed duties to the company as such.

Directors' duties

1. There was no dispute between the parties as to the duties and obligations owed by a director. The relationship between a director and corporation is one of the archetypal categories of fiduciary relationships: Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 46 (per Gibbs CJ), 96-97 (per Mason J), 141 (per Dawson J). The strict standard applicable to trustees of traditional trusts applies equally to directors due to the inherently vulnerable nature of a corporation. As Spigelman CJ noted in O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 277: Policy favours a stringent test in the circumstances of this case. It is the vulnerability of a company which places its property in the power of directors, that makes it appropriate to adopt the approach to causation applicable to the trustee of a traditional trust in deciding issues of causation for the contravention by a company director of his or her duty not to exercise the power to dispose of property for an improper purpose. As McLachlin J put it in Canson Enterprises v Boughton (at 154): "… equity is concerned, not only to compensate the plaintiff, but to enforce the trust which is at its heart".
2. The director, as fiduciary, has a duty not to promote their personal interests by making or pursuing a gain in circumstances where there was a conflict or a real or substantial possibility of a conflict between those personal interests and the interests of the company (the "no conflict" rule). Directors have a duty not to obtain any unauthorised benefits or profits from their positions as directors (the "no profit" rule): Chan v Zacharia (1984) 154 CLR 178 at 198-199 (per Deane J, Brennan and Dawson JJ agreeing); Clay v Clay (2001) 202 CLR 410; [2001] HCA 9 at [56] (per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ); Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57. Directors have a duty to exercise their powers and discharge their duties in good faith in the best interests of the company: Mills v Mills (1938) 60 CLR 150 at 185 (per Dixon J); Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307; (2016) 339 ALR 659 at [75] (per Meagher JA; Bathurst CJ and Beazley J agreeing); BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597 at [597]. These fiduciary duties operate alongside the statutory duties in sections 180 to 183 of the Corporations Act: section 185.
3. The defendants did not accept that Mr Xiao or Ms Chen had breached any fiduciary duties owed to BCEG in the circumstances of this case, where each project accommodated the inherent conflict between their interest in the land owner, BCEG and Trojjan. This structure assumed that they would occupy positions of conflict and would profit from the project; the fiduciary relationship was said to be modified accordingly. To establish a breach and loss, BCEG must show that the scope of the duty extended to a prohibition on the conduct the subject of these proceedings and, it was said, BCEG had failed to do so.
4. Certainly, the content and subject matter over which the fiduciary duty extends will depend on the circumstances of the case at hand: Mudgee v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12; (2022) 398 ALR 658 at [81] (per Leeming JA). As French CJ and Keane J held in Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [34]: (emphasis added) Despite their broad judicial formulations fiduciary duties are not infinitely extensible. That point was made in Chan v Zacharia, which concerned the content of the fiduciary duties of members of a partnership inter se. The limits of those duties were to be determined by the character of the venture for which the partnership existed, the express agreement of the parties and the course of dealings actually pursued by the firm. The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be 'moulded according to the nature of the relationship and the facts of the case'. See also Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166; (2011) 285 ALR 93 at [206] (per Jacobson J); Boardman v Phipps [1967] 2 AC 46 at 127 (per Lord Upjohn); United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11; Hospital Products at 69 (per Gibbs CJ), 102 (per Mason J).
5. For example, a fiduciary may overcome the operation of the "no profit" rule by making a full and frank disclosure of their material interest in the outcome of the relationship subject to that duty and seeking the active consent of the other party: Parker v McKenna (1874) LR 10 Ch App 96. However, the mere fact that fiduciary duties tailor themselves to a particular factual situation or relationship does not leave them devoid of content, nor does it excuse a fiduciary from endeavouring to comply with those duties. It remains to consider whether the directors' fiduciary duties were modified to permit the alleged breaches in respect of the specific transactions for which relief is sought.

Claim in respect of West Wyalong payments

1. When Trojjan rendered an invoice in respect of the West Wyalong project, a fake invoice was prepared for the same amount but said to be for the Varsity Lakes project. The true nature of the invoice was recorded in Trojjan's MYOB accounts, being income in respect of the West Wyalong project. The fake invoice was attached to BCEG's cheque requisition. Finance obtained by BCEG for the Varsity Lakes project, and to be used only on that project, was in fact used on the West Wyalong project without the knowledge or agreement of Exim Bank, BCEG China or BCEG's Beijing-based directors.
2. I am comfortably satisfied that Mr Xiao and Ms Chen were the architects of this arrangement. Mr Xiao was the principal decision-maker for BCEG whilst Ms Chen was clearly in charge of the preparation of invoices, operation of the bank accounts and maintaining accounting records. Ms Chen, assisted by Mr Oconer, prepared the relevant documents. Ms Zhang was not involved in the payment of these invoices until February 2011, by which time four West Wyalong payments had already been made; Ms Zhang subsequently counter-signed cheque requisition forms on occasion, subject to the constraints described at [152]-[153]. Mr Xiao and Ms Chen owned and controlled the West Wyalong project and were the only persons who benefitted from this arrangement.
3. The two explanations proffered by Mr Xiao to justify his actions do not bear close scrutiny: there was no deferral of earthworks on the Varsity Lakes project in September 2010 (it was never anticipated that earthworks would commence that month); there were no difficulties with Platinum Blue which delayed in the Varsity Lakes project. It is also unlikely that funds advanced by a bank for a particular construction project would be permitted to be used on another construction project, where the Beijing-based directors of BCEG, on Mr Xiao's version of events, knew nothing about the West Wyalong project other than that it was his.
4. In respect of each of the West Wyalong payments, Mr Xiao and Ms Chen caused Trojjan to issue a false invoice to BCEG, which purported to be in respect of the Varsity Lakes project but, in fact, concerned the West Wyalong project. Each invoice contained fraudulent representations: that Trojjan had performed works on the Varsity Lakes project, when it had not, and that Trojjan was owed monies in respect of that work, when it was not. Ms Chen then caused BCEG to complete a cheque requisition form, repeating the fraudulent representations. BCEG transferred funds to Trojjan accordingly, where this was not in the best interests of BCEG.
5. Mr Xiao and Ms Chen knew the representations to be false. Their conduct was intentional, undertaken in the knowledge that it was not in the best interests of BCEG and for an improper purpose, where BCEG had no interest in the West Wyalong project. The funds were to be used for the Varsity Lakes project only; using the funds in this manner resulted in BCEG incurring liabilities to BCEG China to which it would not otherwise have been subject. They did not act in good faith in the best interests of BCEG but in pursuit of self interest, where Mr Xiao and Ms Chen held an interest in, and stood to profit from, the West Wyalong project. Their self-interest conflicted with their duties to BCEG. By acting in this manner, Mr Xiao and Ms Chen breached their duties as directors of BCEG.
6. There is little scope to modify the fiduciary duties owed by the directors to BCEG in respect of the West Wyalong payments where I have found that BCEG China was unaware of the West Wyalong project at the time. No full and frank disclosure was made by Mr Xiao or Ms Chen of any conflict between their personal interests and the interests of BCEG before diverting the Varsity Lakes facility to their own project.

Claim in respect of sham sub-contracts

1. BCEG's pleading came under scrutiny in respect of its allegation that Mr Xiao and Ms Chen had breached their directors' duties in respect of sham sub-contracts. For each of the sham sub-contracts, BCEG pleaded that Mr Xiao and/or Ms Chen caused the sham sub-contracts, including the false representations embodied therein, to be created, "with the intention that they would form the basis of a request for funding from BCEG China. Any transfer requests submitted by BCEG to BCEG China purportedly including the cost of works performed by [the sub-contractor] in excess of [amounts payable under legitimate sub-contracts] were caused, directed or ratified" by Mr Xiao and/or Ms Chen.
2. The pleading did not particularise what was meant by "transfer request" - and the defendants submitted that there was no evidence of a transfer request - but I consider that drawdown requests fall comfortably within the pleading. Further, whilst the defendants submitted that there was no evidence that the sham sub-contracts were ever provided to BCEG China (noting that I have found otherwise), nor does the pleading allege that the sham sub-contracts were so provided. Rather, BCEG simply alleged that transfer requests submitted by BCEG to BCEG China included the cost of works in the sham sub-contracts. As I have endeavoured to describe, the drawdown requests itemised these amounts. I do not accept the defendants' submissions in respect of the pleading.
3. As to whether Mr Xiao and Ms Chen were involved in the sham sub-contracts, Mr Xiao did not respond, in his affidavits, to the suggestion that sham sub-contracts had been used in support of drawdown requests. In cross-examination, Mr Xiao maintained that he had no knowledge of the sub-contractors and no involvement in the sham sub-contracts. Mr Xiao said he simply approved whatever Mr Piercy had approved in respect of sub-contractors. Against this, Mr Xiao agreed that it was his job to keep a close eye on the invoices coming in for the Varsity Lakes project, "I do my best" and, when he was in the office, was familiar with the costs being expended on the project including by sub-contractors.
4. Mr Piercy said sub-contracts were prepared in the office and approved by Mr Xiao. Mr Piercy then executed contracts on behalf of Trojjan. Mr Piercy denied signing any of the sham sub-contracts; nor was it squarely put to him in cross-examination that he was responsible for the sham sub-contracts. In closing submissions, the defendants accepted that Mr Piercy was not on a frolic of his own and, in any event, the extent of Mr Piercy's role in the creation of sham sub-contracts was not particularly relevant to BCEG's claim against the defendants.
5. There is no doubt that Mr Xiao and Ms Chen were active participants in the creation and dissemination of the sham sub-contracts. As far as Mr Xiao is concerned, he was provided with the sham sub-contracts by email on several occasions as documents to be submitted to BCEG China in support of a drawdown request. The suggestion that he had no knowledge of the sham sub-contracts cannot be accepted. Obtaining these funds would have been a matter of keen interest to him as the director of BCEG; the Varsity Lakes project was a major project then underway. Ms Dong squarely queried the sham sub-contracts when submitted and it is clear that Mr Xiao was involved in giving instructions to his staff to formulate a response.
6. Ms Chen did not give evidence and thus ascertaining her position is more difficult. However, it is apparent that Ms Chen was centrally involved in the provision of sham sub-contracts to BCEG China. Of particular significance, when Ms Dong queried the sham sub-contracts submitted in support of the third drawdown request, access to these documents was immediately restricted to only three people, including Ms Chen: see [229]. In addition to the sham sub-contracts, BCEG China was also provided with 'Applications and Certifications for Payment', often signed by Ms Chen on behalf of Interlink Laboratory or otherwise with her name in type and, from the third drawdown on, from a second set of books containing higher figures. Where provision of these documents to BCEG China appears to have been done to assist in the overall justification of figures in these drawdown requests, and where these documents were clearly prepared or, at least, approved by Ms Chen, this is consistent with Ms Chen being aware that inflated figures were being put forward to BCEG China in the drawdown requests, which needed to be supported by documents, including documents authorised by her. These matters, together with Ms Chen's absence from the witness box, lead me to conclude that Mr Chen was aware that sham sub-contracts were being provided in support of drawdown requests.
7. Each of the sham sub-contracts made fraudulent representations that any work claimed to have been undertaken on the Varsity Lakes project which answered the description in the sub-contract was authorised by Trojjan, when it had not, and that any progress claim submitted by Trojjan to BCEG in respect of the works had a proper basis, when it did not. Mr Xiao and Ms Chen knew that the representations were false. Mr Xiao and Ms Chen knowingly caused BCEG to submit drawdown requests to BCEG China for amounts referable to sub-contracts which they knew to be shams in order to support drawings under the Varsity Lakes facility in amounts which exceeded that which was in fact necessary to undertake the Varsity Lakes project. This was not in the interests of BCEG, as it caused the company to incur a liability to BCEG China to which it would not otherwise have been subject. The conduct of Mr Xiao and Ms Chen was intentional, undertaken in the knowledge that it was not in the interests of BCEG but actuated by self-interest. How the funds advanced in the third, fourth and fifth drawdowns were used is not known.
8. The defendants submitted that, even if Mr Xiao was aware of the sham subcontracts and they were of import in the drawdowns, the sham subcontracts were simply a means by which an authorised end was to be achieved - being to divert funds to West Wyalong - and therefore permitted by BCEG China and BCEG directors. I have already found that there was no agreement with Qing Yang to divert the Varsity Lakes facility to the West Wyalong project. I also note that the funds advanced by BCEG China as a consequence of the sham sub-contracts far exceeded the funds required to construct the West Wyalong project. This breach of directors' duties has been established.

Claim in respect of Beijing Dragon

1. BCEG held no interest in Beijing Dragon, which was controlled by Mr Xiao. The defendants contended that the payments made by BCEG to Beijing Dragon were justified as reimbursement of pre-BCEG funding and made with the knowledge and agreement of Qing Yang. I considered the evidence in respect of pre-BCEG funding at [58]-[67]; I was not satisfied that funding was provided in the amounts suggested by Mr Xiao, nor was it clear what amounts of funding were provided. I also preferred Qing Yang's evidence, who said he did not agree that Mr Xiao could transfer monies from BCEG to Beijing Dragon to offset monies which Beijing Dragon has previously transferred to BCEG (Australia). Rather, I found that the payments from BCEG to Beijing Dragon were fraudulent transactions effected by Mr Xiao and implemented by Ms Chen, in full knowledge that the payments were fraudulent.
2. The payments to Beijing Dragon were not made for any purpose advancing the interests of BCEG and were not made for valuable consideration, albeit I have assumed in Mr Xiao's favour that the last payment was reimbursement of a travel ticket purchased for the purposes of BCEG. As a result of the interest Mr Xiao held in Beijing Dragon at the time, he and Ms Chen were in a position of conflict when they caused BCEG to make the payments. The only apparent purpose of the payments was to benefit Mr Xiao. By reason of their positions as directors of BCEG or their day-to-day role in managing the affairs of the company, Mr Xiao and Ms Chen knew this. Their conduct and actions were not undertaken in good faith and the best interests of BCEG but actuated by the pursuit of self-interest, in conflict to their duties to BCEG. Mr Xiao and Ms Chen acted in breach of their fiduciary duties to BCEG on each occasion they caused BCEG to make unauthorised payments to Beijing Dragon.

Diversion of first and second drawdowns

1. This brings us to the final allegations of breach of directors' duties, being the diversion of $1.28 million from the first drawdown and $2.05 million from the second drawdown. The defendants rightly complained that these matters were not pleaded. The defendants submitted that, as the monies used to pay for the Rocks apartment and the Wagga land were paid before the third drawdown, and thus before any sham sub-contracts had been deployed in support of a drawdown request, no claim for breach of fiduciary duty could be sustained in respect of these payments. Nor were the funds obtained as a consequence of the West Wyalong payments.
2. BCEG did not seek an account of profits, nor tracing, in relation to the Rocks apartment. Rather, BCEG submitted that it sought equitable compensation; it did not matter where the money had been spent, although it seemed that the money had, in fact, been spent to purchase an apartment. As to the funds used to buy the Wagga land, BCEG submitted that the fact that funds were applied in this manner entitled BCEG to an account of profits, which was sought in respect of the Wagga project. The appropriation of these funds to the project could be taken into account in that exercise.
3. As to the extent to which BCEG should be held strictly to its pleading, parties are under an obligation to plead their case with sufficient particularity so that their cases may be fully understood and so that no party is taken by surprise: rule 14.14, Uniform Civil Procedure Rules 2005 (NSW). This obligation is heightened in fraud cases, where "[a]n allegation of fraud should be clearly and distinctly pleaded and put": Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25 at [38] (per McHugh, Kirby and Callinan JJ); Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279; Magill v Magill (2006) 226 CLR 551; [2006] HCA 51; Ritchie's Uniform Civil Procedure NSW at [14.14.25].
4. Commercial list statements and responses are not, in the formal sense, "pleadings" for the purposes of Part 14 of the Uniform Civil Procedure Rules, as Part 14 applies only to "proceedings commenced by statement of claim and to proceedings in which a statement of claim has been filed": rule 14.1. But while the commercial court "does not operate as one of strict pleading, it is also not one of no pleading": Swiss Re International SE v Simpson [2018] NSWSC 233; (2018) 354 ALR 607 at [34] (per Hammerschlag J). Accordingly, while rule 14.14 does not technically apply to commercial list statements and responses, parties to litigation in this List must still comply with the obligations in sections 56 to 58 of the Civil Procedure Act, which require parties to co-operate to articulate the issues clearly and precisely, such obligation continuing during trial: Nowlan v Marson Transport Pty Limited (2001) 53 NSWLR 116; [2001] NSWCA 346.
5. Procedural fairness also requires that the parties be held to their pleaded case and that any relief be confined to that properly pleaded: Banque Commerciale SA at 286-287; Gould & Birbeck & Bacon v Mount Oxide Mines (1916) 22 CLR 490 at 517 (Issacs and Rich JJ). However, the factual substratum of a case may change during trial as further evidence is given during cross-examination or existing documentary evidence takes on a new light when viewed against the body of evidence as a whole. In that event, Allsop P observed in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2008] NSWCA 243 at [164]: Litigation is a dynamic human activity. Changes in how a case is put can be expected. This often occurs in large commercial cases. Such change, and the potential for it, makes it, however, all the more important that legal practitioners and parties ensure that the clear enunciation of issues keeps pace with that growth and change. This responsibility will encompass parties and their legal representatives making clear what is being put and also what they regard as not legitimately part of the controversy, if it is apparent to them that an issue not pleaded or presented is being relied on.
6. A divergence from the facts which emerge during trial, and those pleaded, does not necessarily disentitle a plaintiff from the relief sought. In Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437, the evidence of negligence that emerged during trial was different to that pleaded and particularised. However, Stephen, Mason and Jacobs JJ considered that, if the cause of action upon which the plaintiff sued had emerged at the conclusion of the evidence, the trial judge was right to put the matter to the jury. Whilst the pleadings should have been amended to make the facts alleged and the particulars of negligence precisely conform to the evidence which had emerged, their Honours considered at 446: Now, and for many years past, a plaintiff does not fail … through failure formally to apply for amendment, where the evidence has disclosed a case in the cause of action fit to be determined by the tribunal of fact. Particularly is this so when the action finally determines the rights of the parties in the cause of action.
7. Likewise in Dare v Pulham (1982) 148 CLR 658 at 664: (citations omitted, emphasis added). … the relief which may be granted to a party must be founded on the pleadings. But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed, though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence.
8. It is certainly the case that the facts which emerged during the trial were somewhat different than those pleaded. Documents which appeared, on their face, to record the arrangements between the parties turned out, following evidence given by Mr Piercy on subpoena and by Mr Xiao during cross-examination, to bear no relationship to the contractual arrangements in place. Many documents were backdated, bore false signatures or were difficult to understand in the absence of a person 'speaking' to the document. Further transactions, also fraudulent in nature, were revealed during the course of the trial. The plaintiff's pleading probably described what the plaintiff thought had happened, whilst a clearer picture of what had happened emerged at trial.
9. It is not difficult to see how this unfolded. Until shortly before trial, Mr Xiao and Ms Chen asserted a right to their privilege against self-incrimination and exposure to civil penalty such that there was neither a detailed defence nor evidence served by the defendants to shed light on what had occurred. Shortly before trial, the defendants abandoned their claims for privilege, the hearing was vacated, the defendants filed an Amended Response and proceeded to serve evidence, including an affidavit from Mr Xiao on 25 January 2022. It was Mr Xiao's affidavit that provided the first hint of misappropriation of monies from the first and second drawdowns, when Mr Xiao referred to and annexed bank statements and invoices said to evidence pre-BCEG funding. BCEG served affidavits in reply on 22 and 23 March 2022, to which Mr Xiao also replied on 1 April 2022, before the trial began on 4 April 2022. BCEG's ability to get to the bottom of the matter may have been hampered by the defendants' discovery of some 280,000 documents on 31 January 2022, which BCEG's legal representatives were still reviewing when the trial finally began, two and a half years after the commencement of proceedings and after a difficult procedural history: see [305]-[307].
10. Having regard to the fact that the matters which gave rise to these additional claims of breach of directors' duty was Mr Xiao's first affidavit, any surprise which the defendants might otherwise experience by reason of these allegations is necessarily lessened. The contrary factual position advanced by BCEG was disclosed in the affidavits in reply served by its witnesses, to which Mr Xiao responded. These matters were canvassed in cross-examination. BCEG's cause of action remained the same, being a claim for breach of directors' duties as against Mr Xiao and Ms Chen. The relief sought was also the same, being either equitable compensation or an account of profits. The additional misappropriations from the first and second drawdown were in the same vein as the West Wyalong payments and the sham sub-contracts, albeit less complex and without any documentation and thus more akin to the Beijing Dragon payments.
11. The fact remains that the allegations now sought to be relied upon by BCEG in respect of the diversion of $1.28 million from the first drawdown and $2.05 million from the second drawdown are not pleaded. Ideally, BCEG should have sought leave to amend its pleadings on becoming aware that it had a basis to contend that these funds had been misapplied, either shortly before the commencement of the trial or during the course of the hearing. It did not do so but contended that it was entitled to seek relief in respect of these matters given its existing pleading. Balancing the need to clearly put an allegation of fraud to a defendant with the need to finally resolve all issues between the parties, including after protracted litigation, I have concluded that BCEG is not entitled to seek relief in respect of these additional allegations.
12. To be clear, however, the defendants put forward a case which concerned these payments, being generally that BCEG payments to them were justified by reference to pre-BCEG funding or Qing Yang's endorsement. In considering these matters, I have made findings of fact which are not precluded by the absence of any reference to these payments in BCEG's pleading. Further, to the extent that BCEG already sought an account of profits in respect of the Wagga project, the findings of fact which I have made in respect of the $2.05 million continue to apply in that exercise, being that the funds were provided by BCEG and not the defendants. BCEG is not however entitled to any findings that these payments amounted to a breach of directors' duties nor specific relief in respect of these payments.

DEFENCES

1. Mr Xiao and Ms Chen relied upon four defences to any breach of fiduciary duty. First, BCEG by its shareholder, BCEG China, was said to have manifested fully informed consent to Mr Xiao's conduct. This was said to have been demonstrated by Mr Xiao's dealings with Qing Yang over the years. In addition, informed consent was said to be demonstrated by the inclusion of West Wyalong in the financial reports of BCEG and reports provided to Ms Dong.
2. As the defendants' submitted, a fiduciary who obtains informed consent from her or his principal cannot be held to account for profits made by her or his position or in circumstances of conflict: Maguire v Makaronis (1997) 188 CLR 449 at 466 (per Brennan CJ, Gaudron, McHugh and Gummow JJ). To obtain informed consent, the fiduciary must give full and frank disclosure of the material facts that give rise to the conflict or opportunity to profit: Breen v Williams (1996) 186 CLR 71 at 125-126 (per Gummow J) citing Boardman v Phipps [1967] 2 AC 46 at 104, 105, 112 and 117. What constitutes adequate disclosure depends upon the facts and circumstances of the particular case: Maguire at 466 (per Brennan CJ, Gaudron, McHugh and Gummow JJ). It may also depend upon the sophistication and intelligence of the person to whom disclosure must be made: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [107]. Disclosure may be a composite of information conveyed at different times and in different ways: Farah Constructions at [107]; Mualim v Dzelme [2021] NSWCA 199; (2021) 157 ACSR 367 at [115] (per Gleeson JA, with whom Bathurst CJ and Brereton J agreed). The consent must be that of the sole shareholder: North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589, 593-4 (per Bagallay LJ); Furs Ltd v Tomkies (1936) 54 CLR 583; Hogg v Cramphorn Ltd [1967] Ch 254; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378; Bamford v Bamford [1970] Ch 212; [1968] 2 All ER 655; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.
3. This defence critically depended on an acceptance of Mr Xiao's evidence over the evidence of Qing Yang and other witnesses. As I have preferred the evidence of Qing Yang and found that there was no agreement that the defendants could use BCEG funds as they did, the evidential basis for fully informed consent has not been established.
4. Nor did the belated inclusion of the West Wyalong project in BCEG's financial reports and reports provided to Ms Dong evidence the fully informed consent of BCEG China to the defendants' actions. As to the financial reports, these representations were made from January 2015 onwards and post-date the diversion of funds to the West Wyalong project. The change in accounting treatment does not prove that BCEG China gave fully informed consent before the funds were diverted. As to the BCEG reports, it is apparent that, on becoming a director of BCEG following Qing Yang's retirement, Ms Dong accepted what she was then told by Mr Xiao in relation to the activities of BCEG and its projects. The inclusion of the West Wyalong project in BCEG reports from May 2016 on clearly confused Ms Dong. In any event, these representations, made by Mr Xiao, post-dated the diversion of funds to the West Wyalong project and do not prove that BCEG China gave fully informed consent before the funds were diverted. This defence fails.
5. Second, BCEG China is said to have ratified the actions of Mr Xiao. The defendants submitted that, on the basis of the same evidence, BCEG China was aware that the West Wyalong project was a BCEG project funded by the allocation of funds earmarked for the Varsity Lakes project. Otherwise, it was said that BCEG China was aware that the West Wyalong project was a BCEG project and implicitly aware that the West Wyalong project was funded in this manner as there was nothing to suggest that West Wyalong Marketplace was funding the project itself, or that Trojjan was funding the project, "There was simply no other source of funds available." I note that the defendants appear to accept that the funding for the project came entirely from the Varsity Lakes funding.
6. As the defendants submitted, ratification can only come from the sole shareholder of the plaintiff. The relevant person must be fully informed. The first that BCEG China became aware that the West Wyalong project was said to be an asset of BCEG, or a BCEG project, was from January 2015 onwards. The representations then made, in particular, in reports provided to Ms Dong describing BCEG's Australian projects, were less than fullsome. The first reference to the West Wyalong project in a report was in May 2016: see [287]. The first reference to the diversion of funds from the Varsity Lakes facility to the West Wyalong project was in March 2017: see [291]. Ms Dong was confused by this information and sought clarification, but there is no evidence that her questions were answered: see [292]-[294]. To the extent that any of these reports were drafted by Ms Dong, an explanation has been given: Ms Dong prepared the draft report by cutting and pasting from reports that had previously been provided to her by BCEG. This does not amount to ratification by BCEG China having been fully informed of the circumstances in which the defendants diverted the Varsity Lakes facility to the West Wyalong project, including by preparing false Trojjan invoices approved by Ms Chen for payment.
7. The defendants also submitted that BCEG ratified the West Wyalong payments by seeking, in these proceedings, to recover invoices rendered by BCEG to Interlink Laboratory for the Varsity Lakes project, which included the false invoices relating, in fact, to the West Wyalong project. The defendants' submissions included a table setting out the connection between the false Trojjan invoices and the corresponding BCEG invoice rendered to Interlink Laboratory. Assuming that the table correctly states the position, I can only say that the connection is not apparent on the face of the BCEG invoices and was likely not apparent to BCEG when commencing these proceedings. There is no other evidence that BCEG was otherwise aware, before commencing these proceedings, of the suggested connection between BCEG's invoices to Interlink Laboratory and the West Wyalong payments. The defence of ratification fails.
8. Third, the defendants relied on promissory estoppel. The defendants were said to have been induced, or the plaintiff acquiesced in the adoption of, an assumption that the plaintiff would not assert its strict legal rights, such that it would now be unconscionable for the plaintiff to insist on its strict legal rights: Moratic Pty Ltd v Gordon [2007] NSWSC 5 at [33] (per Brereton J); Waltons Stores at 428. Alternatively, the defendants relied on estoppel by convention, where parties make an assumption about the conventional basis of their relationship: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 at 244-5; Legione v Hateley (1983) 152 CLR 406 at 430 (per Mason and Deane JJ); Moratic at [32]; Taouk v Assure (NSW) Pty Ltd [2017] NSWSC 534 at [90] (per Sackar J).
9. The defendants submitted that Mr Xiao had assumed a particular legal relationship existed between the parties (or expected that it would): the West Wyalong project would be funded by BCEG using the Varsity Lakes facility. To facilitate the receipt of those monies, Mr Xiao would prepare and render invoices which recorded the work the subject of the invoices as pertaining to Varsity Lakes project. Mr Xiao relied on the assumption by acting in a manner that would otherwise constitute fraudulent conduct; such reliance was said to have been known to Ms Dong and others at BCEG. For BCEG to depart from this assumption would occasion detriment to the defendants coextensive with their liability in relation to the West Wyalong project. To depart from the assumption would be unconscionable. The defendants relied on the same evidentiary premise to submit that a conventional estoppel arose as to how the West Wyalong project was to be funded. The parties were said to have conducted their relationship based on the common assumption. For BCEG to depart from this common assumption would occasion detriment to the defendants.
10. These defences critically depend on an acceptance of Mr Xiao's evidence over the evidence of other witnesses as to the diversion of funding from the Varsity Lakes facility to the West Wyalong project. I have found otherwise. These defences fail accordingly.
11. Fourth, BCEG was said to have acquiesced: Halford v Halford [2022] WASCA 1 at [147]; Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619 at 651 (per Dixon J); Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601 at 614-615 (per Isaacs J); Orr v Ford (1989) 167 CLR 316 at 345 (per Deane J). The defendants submitted that, on receipt of the financial statements for BCEG in January 2015, or the report on Australian projects in May 2016, BCEG became aware of the West Wyalong project but did not commence legal proceedings until 2019 (which I note was less than six years after becoming aware of the project). The same submission was made in respect of the Beijing Dragon payments, where it was said that BCEG became aware of these payments during the audit (although I note that, by and large, the audit did not refer to the payments in question). This was said to amount to acquiescence. To allow the claim in these circumstances was said to be unfair and unjust.
12. BCEG submitted that the defence of acquiescence requires the defendants to establish calculated (that is, deliberate and informed) inaction by BCEG or standing by, which encouraged them reasonably to believe that their conduct was accepted or not opposed: Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [79] (per French CJ). There was no evidence that BCEG was aware, when West Wyalong came to be included in the financial statements or reports on Australian projects provided to Ms Dong, of the breaches of fiduciary duty that Mr Xiao and Ms Chen had committed. BCEG was not well-informed and cognisant of their wrongdoing, nor stood by so as to encourage Mr Xiao and Ms Chen to believe that they would take no action against them. It was said to be evident from Ms Dong's email of 22 March 2017 that BCEG remained in the dark as to whether West Wyalong was a BCEG project or not. I agree. For the reasons advanced by BCEG, this defence also fails.

CAUSATION AND REMEDIES

1. The principles in respect of causation and remedies following a breach of fiduciary duty were not in dispute and set out in BCEG's written submissions, which I gratefully adopt. Where the fiduciary owes custodial duties, such as a trustee or a company director, the causation inquiry is a strict one: O'Halloran at 277 (per Spigelman CJ). In such a case, a sufficient connection will exist, irrespective of whether separate or concurrent causes can be identified, when the loss would not have occurred if there had been no breach of duty: O'Halloran at 276-277; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 215. In O'Halloran, Spigelman CJ reasoned that the strict standard of causation applicable to a trustee of a traditional trust with respect to the improper application of trust property applies equally to the case of a director of a company who has the power to dispose of company property and who does dispose of such property for an improper purpose: at 277.
2. The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: Nocton v Lord Ashburton [1914] AC 932 at 952; Hill v Rose [1990] VR 129 at 144; O'Halloran at 272. Where the loss suffered by the plaintiff is the misapplication of company money or property, the obligation is on the defaulting fiduciary to restore or pay to the company either the assets which have been lost by reason of the breach or compensation for such loss: Maguire at 469, approving Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434; Re Dawson at 214. The amount of compensation is to be assessed at the time of trial, with the full benefit of hindsight and common sense, not at the date of breach: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]; O'Halloran at 273, 276. Where a defendant's actions have made the assessment of loss difficult, doubtful questions should be resolved against that party: Armory v Delamirie (1722) 1 Stra 505; (1772) 93 ER 664; Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415 at [122]. It is also open to the Court to order an assessment of equitable compensation: Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027; (2015) 107 ACSR 445 (per White J).
3. When assessing causation for the purposes of disgorging a fiduciary of profits he or she has obtained as a result of a breach of duty, all that need be shown is that the profit would not have been made but for the wrongdoing: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [9] (per Kiefel CJ, Keane and Edelman JJ) and [88] (per Gageler J). As the policy underlying causation for breach of fiduciary duty is to vindicate the equitable obligation that has been breached, the 'but for' connection will suffice even where there are other contributing causes: Ancient Order at [84]. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the plaintiff by the gain of the defaulting fiduciary: Furs Ltd at 592.
4. The measure of the profit or benefit does not require mathematical exactness but only a reasonable approximation, with the purpose being to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty: Warman International Ltd v Dwyer (1995) 182 CLR 544 at 558. A court may make assumptions against the interests of the wrongdoer in determining the appropriate measure of an award, and in cases where an asset has fluctuated in value over a period of time, the court may value the asset at its highest value: Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2014] HKC 368 at [171] (per Lord Millett NPJ).
5. Where the breach of fiduciary duty involves the misapplication of trust property (or company property, by analogy: O'Halloran at 277-278) to the use of the defaulting fiduciary, compound interest is appropriate: Hagan v Waterhouse (1991) 34 NSWLR 308 at 392-393, Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45 at 47; Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10 at [303]-[304]. The purpose of an award of compound interest is not to punish the defendant but to ensure that no profit should remain in the hands of the defaulting fiduciary "from so gross a breach of trust": Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 848; Wallersteiner v Moir (No 2) [1975] QB 373 at 388; Harris v Digital Pulse at [303]. Whether an order for interest ought to be made is a matter which remains entirely within the discretion of the court: Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480 at [11]. In Hagan, Kearney J concluded that the appropriate rate of interest was that specified in the Supreme Court practice note applicable at the time and that interest should be compounded on yearly rests: at 393. The same formula was used in Lewis v Nortex in similar circumstances at [13].

Relief against directors: West Wyalong payments

1. As a consequence of Mr Xiao and Ms Chen's breach of their directors' duties in respect of the West Wyalong payments, each of the West Wyalong payments was made which, according to Trojjan's MYOB records as considered by Ms Exner, totalled $3,033,053. The figure of $3,033,053 likely understated the amounts that were applied in satisfaction of Trojjan's liabilities in connection with the West Wyalong project because, in BCEG's 2014 financial statements, the figure of $3,423,739 is given as "Working Capital - WWMP". The defendants also relied, in their submissions, on the entry in the financial statements as reporting the borrowings in respect of the West Wyalong project. The entry appears to have recorded the proportion of the Varsity Lakes facility that was diverted to this project.
2. The defendants submitted that there was no evidence that false Trojjan invoices were issued to BCEG China or Exim Bank. Thus, it was said that there was no proof that these documents were causative, nor evidence that the false Trojjan invoices led to any loss. As already described, some of the false Trojjan invoices were amongst BCEG China's records, but the question is not whether the false invoices were causative of loss but whether the breach of fiduciary duty caused loss. It is clearly the case that funds advanced to BCEG for its corporate activities were diverted to the directors' personal project, with the result that BCEG was liable to repay funds which it did not use and which it would not otherwise have been obliged to repay.
3. As to how much the West Wyalong project actually cost, Mr Piercy said the construction costs, excluding fit-out, were "one four, one four one two at the most", which I took to mean between $1.4 million and $1.412 million. On 13 December 2010, Steve Mao of Trojjan emailed Mr Xiao, copied to Mr Piercy, regarding progress on the West Wyalong project, noting "We roughly paid 77.65% of the budget which is $2.9m." Using either figure, the funds diverted from the Varsity Lakes project to the West Wyalong project covered the entire cost of construction.
4. Against this, I note that the construction contract with Trojjan was for $4.2 million: see [54]. However, National Australia Bank reports in respect of applications for finance by Mr Xiao and Ms Chen record that the construction costs of the West Wyalong project were "paid out of cashflow" and that the "customer paid cash for construction of this centre". A finance submission prepared by a bank officer on 20 March 2013 noted, "Customer paid [in] full the entire centre from their own cash funds."
5. I note also that the defendants submitted that there was nothing to suggest that West Wyalong Marketplace was funding the project itself, or that Trojjan was funding the project, "There was simply no other source of funds available." That is, the defendants appear to accept that the funding for the West Wyalong project came entirely from the Varsity Lakes funding. This is consistent with the contemporaneous documents, save for Trojjan's construction contract. Where the contracts in evidence appear to have routinely over-stated contract sums, I conclude that the construction of the West Wyalong project was entirely funded by the Varsity Lakes facility.
6. As such, BCEG submitted that $3,423,739 was the proper measure of equitable compensation against Mr Xiao and Ms Chen, on which compound interest should be paid. The defendants submitted that it would be precipitate to make any award of compensation against West Wyalong Marketplace until an inquiry and account of profit had been completed.
7. 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 best evidence of the final amount is recorded in BCEG's 2014 financial statements, presumably on the instruction of Mr Xiao and Ms Chen: Ms Chen was responsible for the financial side of the business and Mr Xiao provided the financial statements to Ms Dong, following a change of accounting treatment in respect of 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.
8. 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.
9. I agree that an award of compound interest is also appropriate in the circumstances. The breach of fiduciary duty involved the misapplication of company property; no profit should remain in the hands of the defaulting fiduciaries from so gross a breach of trust. I will return to whether awarding equitable compensation in this sum will involve double-counting having regard to equitable compensation awarded in respect of sham sub-contracts and Beijing Dragon payments at [412].

Relief against directors: sham sub-contracts

1. In making drawdown requests which included the cost of works derived from sham sub-contracts, Mr Xiao and Ms Chen intended that BCEG China would act on the requests and make the payments. From the third drawdown, 73% of the funds sought, being some $5.2 million, were referrable to sham sub-contracts. From the fourth drawdown, 94% of the funds sought, being some $5.6 million, were referrable to sham sub-contracts. From the fifth drawdown, 95% of the funds sought, being some $7.6 million, were referrable to sham sub-contracts. In response to each of the drawdown requests, BCEG China advanced the funds sought. Applying the percentage of the drawdown request referrable to sham sub-contracts, the funds advanced by BCEG China in response to these drawdown requests was at least $18.4 million, which would not otherwise have been forthcoming. More likely, if BCEG China had known that the drawdown requests were supported by false documents, it would not have advanced any funds. All of the funds advanced in the third, fourth and fifth drawdowns totalled US$22.9 million. Using the exchange rates evident from the BCEG Foreign Currency Account and BCEG Holding Account at the time of each drawdown, this equated to $23,205,444.
2. The defendants submitted that there was no evidence that sham sub-contracts were issued to BCEG China or Exim Bank (I have found otherwise). Thus, it was said that there was no proof that these documents were causative, nor evidence that the sham sub-contracts led to any loss. BCEG was said to have failed to identify the actual construction cost of the Varsity Lakes project or elucidate the causal connection between the sum comprising the difference between that figure and the figure obtained through the drawdowns and associated breaches of fiduciary duty. There was said to be no evidence that BCEG paid additional interest on the borrowings in respect of the Varsity Lakes as a consequence, nor that Mr Xiao and Ms Chen obtained monies and derived profits from these drawdowns.
3. There is no doubt that BCEG incurred additional indebtedness to BCEG China as a result of the sham sub-contracts than would otherwise have been the case. However, the only evidence of what BCEG owed BCEG China was BCEG's financial statements maintained during the period when Mr Xiao and Ms Chen ran the company. BCEG owed BCEG China $36,523,010 in the 2013 financial year, after receipt of the final drawdown: see [281]. It is difficult to say precisely what portion of this figure was referrable to the sham sub-contracts but it was likely at least $18.4 million and, more likely, $23.2 million.
4. After the 2013 financial statements, it will be recalled that Mr Xiao and Ms Chen brought the West Wyalong project onto the balance sheet in January 2015, merged BCEG China's loans in respect of the Varsity Lakes project and the Wagga project and then apportioned BCEG China's loans across five projects including the Varsity Lakes, Wagga and West Wyalong projects. The position was now as clear as mud. But nor did BCEG China adduce evidence of the funds which it said remained owing from BCEG in respect of the Varsity Lakes facility, where one would think such a record would be readily available to BCEG China.
5. As such, the most likely repository of the amount owing from BCEG to BCEG China, following the defendants' repayments, is the 2014 and 2017 agreements. I say this because, whilst the lending relationship between BCEG China and BCEG was different from Interlink Laboratory's obligation to refinance the facility, negotiations between Ms Dong and Mr Xiao do not appear to have drawn any clear distinction between these obligations. Under the 2017 agreement, $2,528,949.42 remained outstanding in respect of the Varsity Lakes facility.
6. What portion of this remaining indebtedness is referable to the third, fourth and fifth drawdown, obtained using sham sub-contracts? One could approach the matter on the basis that repayments are applied on a first-in, first-out basis, relying on Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572; (1816) 35 ER 781 (per Sir William Grant MR). As the High Court explained, this is "the ordinary rule of appropriation of debits against credits (and vice versa) in a single running account between banker and customer": Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676; see also In the matter of French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [20]-[34] (per Campbell J).
7. The rule in Clayton's Case was not applied in Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109, where Chernov JA, with whom Warren CJ agreed, found, "the parties conducted their affairs on the basis that each of the six loans constituted a separate transaction, as distinct from a current account. Similarly, each loan was subject to separate documentation, and the communications between the parties relevantly bear out that they treated each loan as being independent of the other loans": at [26]. Here the Varsity Lakes facility was a single loan. Thus, I propose to proceed on the basis of the rule in Clayton's Case, noting also that, where a defendant's actions have made the assessment of loss difficult, doubtful questions should be resolved against that party: Armory v Delamiri. Applying this rule, repayments made by the defendants repaid amounts advanced under earlier drawdowns, such that the remaining indebtedness is entirely referable to the later drawdowns.
8. No figure was proffered by BCEG as to an appropriate amount of equitable compensation. No account of profits was sought. I consider that the amount of equitable compensation which will restore the plaintiff to the position it would have been if there had been no breach of Mr Xiao and Ms Chen's equitable obligations is to require them to pay compensation sufficient to discharge BCEG's remaining indebtedness to BCEG China under the Varsity Lakes facility. The parties agreed, in the 2017 agreement, that this figure was $2,528,949.42. BCEG is also entitled to compound interest given the egregious breach of fiduciary duties.
9. Equitable compensation in respect of the sham sub-contracts appears to me to overlap with equitable compensation in respect of the West Wyalong payments. The West Wyalong payments were made from funds obtained in the first to fourth drawdowns. Applying the rule in Clayton's Case, the West Wyalong payments - and the associated increase to BCEG's borrowings from BCEG China - have been repaid by the defendants, in particular, Interlink Laboratory already.

Relief against directors: Wagga project

1. If BCEG had known that Mr Xiao and Ms Chen had diverted the Varsity Lakes funding to the West Wyalong project by rendering false invoices from Trojjan to BCEG, or known of the sham sub-contracts, then BCEG would not have entered into contracts with Interlink Wagga Central and Trojjan Constructions in respect of the Wagga project; BCEG would not have been willing to commit to an ongoing commercial relationship with entities associated with the couple. This is an unremarkable proposition and it was not suggested to BCEG's witnesses that they would have proceeded otherwise. BCEG was ignorant of the fraud at the time it approved the Wagga project in November 2011 and continued to be so at the time it assumed contractual liabilities in connection with the project between July 2012 and February 2013.
2. BCEG advanced amounts to Trojjan or Trojjan Constructions that it would not otherwise have been required to advance, but for the breaches of duty committed by Mr Xiao and Ms Chen. The best evidence of the sums advanced in connection with the Wagga project is contained in the 2014 financial statements, which record the value of the 'Working Capital The Mill Resid' as $8,249,974. (The defendants also relied on this figure.) BCEG sought equitable compensation of $8,249,974, together with compound interest or, alternatively, a taking of accounts and an account of profits in respect of the Wagga project.
3. The defendants submitted that there was no evidence of any loss suffered by BCEG in relation to the Wagga project. While BCEG identified an amount stated in the 2014 financial statements for working capital of $8,249,974, it ignored the sum stated in the 30 June 2014 financial report of $3,241,526 as income received from that project. This, with respect, made no sense. Figures appearing in a profit and loss statement cannot be readily offset against balance sheet items. It does appear that, as at 31 December 2014, some $8.25 million had been used on the Wagga project. Further, it was said that this was a 'no transaction' case and there was no pleaded claim for relief in the form of a taking of accounts. That is incorrect. BCEG clearly sought equitable compensation or, alternatively, an order for the taking of accounts and an account of profits in respect of the Wagga project.
4. The plaintiff must elect between equitable compensation and an account of profits when (but not before) judgment is given. BCEG said it was presently unable to make an election, given the paucity of information available in respect of the Wagga project and thus sought an order for the taking of accounts. Where the plaintiff does not know which remedy is more favourable at the time of judgment on liability, the court may order discovery or other orders designed to give the plaintiff the information it requires to make its election: GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113 (per Warren CJ, with whom Chernov JA and Dodds-Streeton JA agreed) at [56]. As there was very little information available at trial concerning the status and fate of the Wagga project, I consider that BCEG is entitled to this relief.
5. BCEG also sought orders rescinding or avoiding the contract with Interlink Wagga Central and Trojjan or Trojjan Constructions, and an order indemnifying BCEG for any liabilities it may occur to third parties by reason of the contracts with Interlink Wagga Central, Trojjan or Trojjan Constructions in respect of the Wagga project. I consider whether the contract with Interlink Wagga Central should be rescinded at [440]-[442]. As to Trojjan and Trojjan Constructions, these companies are in liquidation and were not parties to these proceedings. The liquidators should be appraised of the relief sought and given an opportunity to consent or oppose rescission of any contractual arrangements with these companies.

Relief in respect of Beijing Dragon payments

1. BCEG sought equitable compensation against Mr Xiao and Ms Chen in the AUD amount equivalent (at the time of judgment) of the total of the Beijing Dragon transactions, where BCEG suffered loss as soon as the monies were paid without authority: Youyang at [63]. BCEG is clearly entitled to this relief, with compound interest.
2. I am again concerned whether such an order will result in duplication, to the extent that the Beijing Dragon payments increased BCEG's indebtedness under the Varsity Lakes facility, which has since been reduced by the defendants' repayments. Having regard to the bank statements, the following emerges: 1. The third drawdown was deposited to BCEG's Foreign Currency Account on 19 September 2011, resulting in a credit balance of US$6,880,325.30. Payments to Beijing Dragon on 3 and 25 November 2011 (US$30,000 and US$300,000) were made from this account, that is, with funds from the third drawdown. 2. The payment of $23,600 on 22 August 2012 was made from the BCEG Operating Account. The connection with the Varsity Lakes facility or any particular drawdown is unclear. 3. The fifth drawdown was deposited to BCEG's Foreign Currency Account on 14 September 2012 and the payment to Beijing Dragon on 21 September 2011 (US$300,000) was made from this account, that is, with funds from the fifth drawdown. 4. On 11 March 2013, BCEG China's loan in respect of the Wagga project was deposited to BCEG's foreign currency account opened with the National Australia Bank ending "AUSD01". On 18 March 2013, a payment was made from this account to Beijing Dragon of US$600,000, that is, with funds from the Wagga loan. 5. The final payment on 29 July 2013 ($10,000) was made from the BCEG Operating Account. The connection with the Varsity Lakes facility or any particular drawdown is unclear. (I have assumed in the defendants' favour that the payment on 28 August 2013 ($6,607.60) was legitimate).
3. As such, where equitable compensation awarded in respect of the sham sub-contracts will already cover the Beijing Dragon payments referred to in sub-paragraphs (a) and (c), an amount of equitable compensation in respect of the remaining Beijing Dragon payments only is appropriate, together with compound interest.

ACCESSORIAL LIABILITY

1. BCEG relied on the rule in Barnes v Addy to pursue claims against Interlink Wagga Central and West Wyalong Marketplace. In Barnes v Addy itself, Lord Selborne LC (with whom James and Mellish LJJ agreed) said, after referring to trustees de son tort and fraudulent participants in breach of trust: (emphasis added) But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
2. The emphasised portion is said to give rise to the two "limbs" of Barnes v Addy: "knowing receipt" and "knowing assistance": Farah Constructions at [112]. As the learned authors of Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis) note at [13-34], the essential characteristic of the first limb is transfer of property in breach of a fiduciary obligation, whilst the second limb deals with assistance by a third party not involving the receipt of property. As Jacobs' explains, the remedies available on a Barnes v Addy claim include (citations omitted): A defendant who retains property or its traceable proceeds will be subject to a constructive trust of a proprietary kind, and will be liable to restore what is retained. The defendant is also liable to pay equitable compensation or to an account of profits, subject to questions of election. Interest may be payable at mercantile rates on a compound basis. The defendant may be jointly and severally liable with the fiduciary in relation to money remedies, and may be jointly and severally liable to account for profits made by the fiduciary.
3. In Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405; (2014) 17 BPR 33,717, Gleeson JA, with whom Beazley P and Barrett JA agreed, summarised what needs to be proved to establish a claim for equitable compensation under the first or second limb of Barnes v Addy at [88], [90], [92] and [111]-[115]. In cases of knowing receipt, it is necessary to establish: 1. breach of fiduciary duty by the primary wrongdoer; 2. the third party received property by reason of the breach of duty; and 3. at the time of receiving that property, the third party knew of the "trust" (or duty) and of the misapplication of the relevant property.
4. The knowledge requirement contemplated by the third element in knowing receipt claims encompasses: 1. actual knowledge; 2. the wilful shutting of one's eyes to the obvious; 3. wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and 4. knowledge of circumstances which would indicate the facts to an honest and reasonable person.
5. As to the knowledge of corporations such as Interlink Wagga Central and West Wyalong Marketplace, knowledge may be imputed through the principles of agency law or the directing mind and will theory. In either case, it is the knowledge of natural persons that is to be attributed to the corporation. In relation to the latter, the focus is on the connection between the natural persons with knowledge and the corporation for which they are acting: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 582-583 (per Brennan, Deane, Gaudron and McHugh JJ); El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (per Hoffman LJ). Mr Xiao and Ms Chen were directors of Interlink Wagga Central and West Wyalong Marketplace. Their knowledge is to be imputed to the companies such that each company received funds or other benefits, knowing that those funds or benefits were a consequence of a breach of directors' duties by Mr Xiao and Ms Chen.
6. In claims for knowing receipt of property in relation to which fiduciary duties existed, the cause of action is complete when it is established that the defendant received the property with the requisite knowledge without having to examine causation questions: Farah Constructions at [199]. Where the action is to recover profits obtained by a knowing participant in a breach of fiduciary duty, the focus of the causation inquiry centres on whether the knowing participant's benefit or gain would not have been obtained but for the fiduciary's breach of duty: Ancient Order at [9] and [88]. In such cases, as the breach of fiduciary duty necessarily involves fraud, a defendant cannot avoid liability to disgorge profits dishonestly obtained by showing that those profits might have been made honestly: Ancient Order at [9]. Equally, where the case involves non-disclosure, "it is neither here nor there to speculate whether, if [the fiduciary] had done his duty, [the knowing participant] would not have been left in possession of the same amount of profit": Ancient Order at [9].
7. If the directors of the company in breach of their fiduciary duties misapply the funds of the company so that they come into the hands of a stranger to the trust who receives them with knowledge (actual or constructive) of the breach, the third party cannot conscientiously retain those funds (or property acquired with those funds) unless the third party has some better equity. It becomes a constructive trustee of the misapplied funds or property acquired with those funds: Grimaldi at [563]; Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027. The Full Court in Grimaldi held (at [567]) that "a court would ordinarily as of course award proprietary relief against a knowing recipient where the property received (or its proceeds) was still extant." And to similar effect: "A knowing recipient will ordinarily be liable to hold what is trust property in the strict sense (or its traceable proceeds) as well as any profit received which is attributable to the trust property, to the extent that these remain extant and to return these to the claimant": at [510], quoting Hospital Products at 108 (per Mason J).

Relief against West Wyalong Marketplace

1. BCEG submitted that West Wyalong Marketplace was liable to BCEG as a knowing recipient within the first limb of Barnes v Addy and sought orders to denude West Wyalong Marketplace of the profits made from its unconscientious receipt of the benefits of BCEG's funds that were wrongfully paid to Trojjan to meet expenses on the West Wyalong project, which expenses would otherwise have been passed on to West Wyalong Marketplace.
2. The defendants submitted that there was no accessorial liability as there was no primary wrongdoing: I have found wrongdoing, thus this argument fails. Further, it was said that BCEG had not established causation as a result of the conduct and knowledge of that conduct: Gray v National Crime Authority [2003] NSWSC 111 at [254]-[255]. I have also concluded otherwise: see [396].
3. Mr Xiao was a director of West Wyalong Marketplace; his knowledge was also the knowledge of the company. As such, West Wyalong Marketplace received the benefit of the West Wyalong payments with actual or constructive knowledge of Mr Xiao's breaches of his fiduciary obligations owed to BCEG, which gave rise to the payments. West Wyalong Marketplace was liable as a knowing recipient of property in breach of fiduciary duty; the West Wyalong project constituted the traceable proceeds of the West Wyalong payments made in consequence of the company's knowing receipt. West Wyalong Marketplace held the West Wyalong project on constructive trust for BCEG and was liable to account for the benefits obtained since completion of the project, including any proceeds of sale.
4. BCEG sought two items of profit: the capital gain on the sale of the property and the rental income, together with compound interest from the date the profit was received until to the date of judgment, calculated at yearly rests: Warman International at 570; Hagan v Waterhouse at 392-393, approved in Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45 at 47 (per Handley JA).
5. As to capital gain, West Wyalong Marketplace bought the land for $300,000 and sold it for $2,010,000 on 28 February 2019. That represented a capital gain of $1,710,000. As BCEG paid the whole cost of construction, it should have the full capital gain, where the defendants had not led any evidence to establish why the full value of this advantage should not be disgorged: Warman at 561-562; Ancient Order at [13] (per Kiefel CJ, Keane and Edelman JJ) and [91] (per Gageler J).
6. As to rent, on 6 July 2012, West Wyalong Marketplace leased the West Wyalong site to Khaled El Sheikh Pty Ltd for ten years, with initial rent of $144,813 per annum, for a medical centre. The registered lease contemplated rental increases of 3.5% per annum. By BCEG's calculations, West Wyalong received rent from Kahled El-Sheikh totalling $1,234,632.72 from July 2012 until the sale of the property.
7. The defendants submitted that the calculation of capital gain was superficial, omitting the costs of construction paid by Interlink Laboratory. The claim for rent of $1,234,632.72 was said to be equally superficial, where there was no evidence that the rents had been paid nor of the costs of leasing. To this, BCEG submitted that no account need be taken of the costs of construction where those costs had been paid by BCEG. Rather, the defendants had simply omitted to put on evidence to reduce the profits it should otherwise be ordered to pay.
8. Where the claim is for the disgorgement of profits or benefits obtained by the fiduciary, once causation is established, the onus shifts to the fiduciary to establish why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged: Warman International at 561-562; Ancient Order at [13] and [91]. The burden of proof on the defendant is persuasive, and it falls to the defendant to justify his or her gains or the private advantage that has been obtained: Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 398 (per Isaacs J). The onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer: Ancient Order at [13] (per Kiefel CJ, Keane and Edelman JJ). Whilst BCEG's calculation of the profits enjoyed by West Wyalong Marketplace is certainly simple, it is a reasonable calculation of the full value of the advantage obtained by the company as a consequence of Mr Xiao's breach of fiduciary duties. No evidence has been adduced by the defendants to reduce this figure by reason of, say, managing agent fees or repairs and maintenance. In the absence of such evidence, BCEG is entitled to the amount calculated, together with interest.
9. 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.

Relief against Interlink Wagga Central

1. As Mr Xiao and Ms Chen were directors of Interlink Wagga Central, their knowledge was also the knowledge of the company. Interlink Wagga Central, as the owner of the site, benefitted from BCEG's advances to the Wagga project, which funded the construction of Buildings 1, 2 and 3. While Interlink Wagga Central received the benefit of these improvements to its land, the company had actual or constructive knowledge of Mr Xiao and Ms Chen's breaches of their fiduciary duties owed to BCEG. As such, Interlink Wagga Central is liable as a knowing recipient of property in breach of financial duty; the profits derived by the company as a result of the improvements to the Wagga land constituted traceable proceeds of its knowing receipt.
2. A profit or a benefit made or obtained in breach of fiduciary duty may be held by the defaulting fiduciary on constructive trust: Furs Ltd at 592 (per Rich, Dixon and Evatt JJ); Hospital Products at 107-110 (per Mason J). The remedy especially will be appropriate where the gain takes the form of an identifiable asset: Grimaldi at [583]; Hospital Products at 107-108; Furs Ltd at 592 (per Rich, Dixon and Evatt JJ). A constructive trust ought not to be ordered if a less drastic form of relief is capable of doing full justice or if such an order will go beyond the necessities of the case: John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [128]-[129]. It will not be appropriate where it will affect the rights of innocent third parties: Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ). The personal remedy (compensation) as opposed to the constructive trust remedy is usually needed where the recipient has not retained the property: Grimaldi at [254].
3. BCEG is entitled to a constructive trust over the profits derived from the proceeds of sale of the residential apartments, the construction of which was funded by BCEG. Interlink Wagga Central holds the profits of the Wagga project on constructive trust for BCEG and is liable to account to BCEG for these profits. BCEG sought an order that Interlink Wagga Central account to it for these profits. BCEG also sought an order that compound interest be paid on these profits. In either case, an inquiry was necessary to ascertain the profits that Interlink Wagga Central in fact derived in connection with its liability as a knowing recipient.
4. As the plaintiff submitted, rescission is another remedy available to a plaintiff to answer a breach of fiduciary duty: McKenzie v McDonald [1927] VLR 134 at 146; Maguire at 467; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387-390 (per Brennan J). Its object is to restore the plaintiff to its former position before the breach of duty occurred. Unlike in common law, recission in equity is not constrained by the strict requirement of restitutio in integrum. Instead, equity retains its flexibility through the exercise of its powers to make such adjustments as may be necessary upon setting aside the transaction to achieve practical justice, with a view to the parties being restored substantially to their former position, even though perfect restitution may no longer be possible: Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [29]-[30]; Alati v Kruger (1955) 94 CLR 216 at 223-224. In equity, unlike at law, rescission is achieved by the decree of the court. In this case, the debate does not matter because even if the former view were to prevail, the act of claiming rescission in a pleading is sufficient notice: Ripani v Century Legend Pty Ltd [2022] FCA 242 at [246], citing Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 570 (per Brennan J).
5. Rescission will not be awarded where the order will adversely affect the rights of third parties who took their interest without notice, or where the party claiming rescission has, with full knowledge of the circumstances giving rise to the right to rescind, affirmed the transaction: Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [2003] NSWCA 71 at [73]-[74] (per Mason P, with whom Stein JA and Giles JA agreed); Giumelli at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ); Grimaldi (2012) 200 FCR 296 at [277]; Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29 at [193]-[194].
6. BCEG is entitled to rescission of its contract with Interlink Wagga Central in respect of the Wagga project. BCEG would not have entered into the contract if it had known of Mr Xiao and Ms Chen's breaches of fiduciary duty, of which Interlink Wagga Central had constructive knowledge. BCEG should be restored to the position it would have been in if the breaches of fiduciary duty had not occurred. The company should be released from any obligations under this contract where Interlink Wagga Central had full knowledge of the circumstances in which the contract was entered into.

Alternate relief against Ms Chen

1. If I am wrong about the fact that Ms Chen was a de facto director of BCEG, I am comfortably satisfied that Ms Chen was an accessory to the misconduct of Mr Xiao. Ms Chen was intimately involved in the financial operations of the company, including its invoicing, payments, transactions on its bank accounts and the accounting treatment given to these transactions. Ms Chen worked closely with her husband in running the company. Ms Chen either prepared, or supervised the preparation of, false invoices for the West Wyalong payments. Ms Chen approved the West Wyalong payments and must have known that the Varsity Lakes facility was being used for an impermissible purpose. The funds so obtained benefited her and her company, CX & DN Holdings. Most likely, Ms Chen had actual knowledge but, at the very least, knew of circumstances which would indicate these facts to an honest and reasonable person. Ms Chen was knowingly involved in Mr Xiao's breach of fiduciary duties which he owed to BCEG and a knowing recipient of the proceeds of these breaches.
2. Mr Xiao's actions in respect of the sham subcontracts transgressed ordinary standards of honest behaviour amounting to dishonest and fraudulent breaches of his fiduciary duties. Ms Chen knew that Mr Xiao was a director owing fiduciary duties to BCEG but assisted Mr Xiao to give effect to his fraudulent design: Ms Chen was one of only three people at BCEG to whom access to a folder containing the sham sub-contracts was restricted. Ms Chen also certified BCEG invoices for payment by Interlink Laboratory and provided certifications to BCEG China from a 'second' set of books containing higher figures, apparently to corroborate the inflated figures sought in the drawdown requests supported by sham sub-contracts.
3. Likewise in respect to the Beijing Dragon payments, Ms Chen had actual knowledge that Mr Xiao's conduct in respect of the Beijing Dragon payments amounted to dishonest and fraudulent breaches of his fiduciary duties owed to BCEG. Ms Chen assisted Mr Xiao to give effect to this dishonest and fraudulent design as she controlled BCEG's bank accounts and effected the payments. Ms Chen had knowledge of circumstances which would indicate Mr Xiao's dishonesty to an honest and reasonable person. As a result, I would have made orders for equitable compensation against Ms Chen as an accessory.

ORDERS

1. For these reasons I make the following orders, directions and notations: Claims against directors 1. Award equitable compensation against the first and second defendants in the amount of $2,528,949.42 (sham sub-contracts) together with $23,600, US$600,000 and $10,000 (Beijing Dragon payments) together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests. 2. NOTE that the plaintiff has yet to elect between equitable compensation and an account of profits against the first and second defendants in respect of the Wagga project, as that term is described in the judgment of Rees J. 3. Direct the plaintiff to provide a copy of this judgment to the liquidators of Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd within 14 days, together with a request that the liquidators provide their consent or advise their opposition to an order rescinding any contract between the plaintiff and the company in respect of the Wagga project within 14 days thereafter. 4. Grant liberty to apply in respect of the rescission of any contracts between the plaintiff and Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd. Claim against Interlink Laboratory 1. Judgment against the third defendant in the sum of $5,695,475.13 plus interest under section 100(1) of the Civil Procedure Act 2005 (NSW) at 4% per annum on $2,528,949.42 from 8 November 2017 to 30 June 2018 and 5% per annum on $5,695,475.13 thereafter, calculated on the basis of simple interest. Claim against Interlink Wagga Central 1. Rescind the contract between the plaintiff and the fourth defendant dated 1 July 2012. 2. Order the taking of accounts and an account of profits in respect of the Wagga project. 3. Declare that any benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project are held on constructive trust for the plaintiff. 4. Order the fourth defendant to account for the benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project. Claim against West Wyalong Marketplace 1. Declare that any benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project are held on constructive trust for the plaintiff. 2. Order the fifth defendant to account to the plaintiff for the benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project, if any, in the sum of $1,710,000 for capital gain and $1,234,632.72 rental income less the West Wyalong payments, as described in the judgment of Rees J, together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests. 3. Direct the plaintiff to provide a calculation of equitable compensation or profits in Australian dollars, together with interest calculations within 14 days, such that Orders 1, 5, 11 may be varied accordingly. 4. Order the defendants to pay the plaintiff's costs of these proceedings. 5. In the event that either party seeks to vary Order 13, direct: 1. the party seeking a variation to provide any affidavits and submissions (limited to three pages) within 28 days; 2. the other party to provide any affidavits and submissions in reply (limited to three pages) within 14 days of receipt of the material in Order 14(a); 3. such application to be determined on the papers. 1. Grant liberty to the plaintiff to re-list the matter for further directions in respect of the taking of accounts in respect of the Wagga project. 2. Direct the parties within 14 days to notify any errors or omissions. 3. The exhibits are to be returned forthwith.

POSTSCRIPT On 5 August 2022, the plaintiff filed a notice of motion seeking variation of Order 11 of this judgment pursuant to rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW). Order 11 was originally cast in terms ordering West Wyalong Marketplace to account to the plaintiff for the benefits, profits or traceable proceeds it derived in respect of the West Wyalong project in sums less the West Wyalong payments. The variation sought was to delete the emphasised words from this order, such that no deduction should be made from the payments for which the account was sought. BCEG contended that, at [436] of this judgment, I should not have conflated the defendants and instead only limited the deduction of payments to be disgorged to payments actually made by West Wyalong Marketplace. On 17 August 2022 I heard that application and, for the reasons in that judgment, granted the application and made the variation sought: BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102.

Amendments 23 August 2022 - Postscript explanation regarding [436] and variation of Order 11 of the judgment. 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: 23 August 2022