Chen v Marcolongo; Chen v Lym International Pty Ltd [2009] NSWCA 326

2. The declaration and orders of the Court made on 18 March 2009 and entered on 23 March 2009 in favour of the first respondent, Mrs Marcolongo, be set aside.

3. Order that Mrs Marcolongo's proceedings be dismissed with costs.

4. Order that Mrs Marcolongo pay the costs of the appeal but Mrs Marcolongo to have a certificate under the Suitors' Fund Act 1951.

2. Vary the order made by the Court on 18 March 2009 and entered on 19 March 2009 as follows:

4. Order that upon the plaintiffs and Westpac Banking Corporation agreeing that there can be an assignment of registered mortgage AC 5480628 to the first defendant with no future liability on the appellant or upon the first plaintiff tendering to the appellant the amount of money necessary to discharge the said mortgage, the appellant forthwith execute a transfer in registrable form of the Units in favour of the first plaintiff and do all things and take all other steps necessary to convey the Units to the first plaintiff.

(B) Delete the words from order 8 "and to certify the results of the inquiry to the Court" and insert the words "and to give judgment for the party or parties whom such inquiry finds liable to pay monies to some other party."

(D) (i) delete from order 17(a) the words "and Mrs Marcolongo";

(ii) add to the end of order 17(c) "provided that this order 17(c) shall cease to have effect upon the judgment in order 12 and the judgment in order 13 both being fully satisfied".

(E) Delete from order 18(a) the words "and Mrs Marcolongo".

(F) Add new order 24: "Liberty to any party to apply to a judge of the Equity Division on 5 days' notice to discharge any order that may have become otiose by way of changing circumstances and generally".

4. Order that the appellant pays 95% of the costs of the first, second and third respondents and the whole of the costs of the fourth respondent as a submitting respondent.

5. The parties have 14 days to make any protest about the form of order or any clerical mistake in these reasons.

CHEN v MARCOLONGO; CHEN v LYM INTERNATIONAL PTY LTD

The two appeals, the "Lym appeal" (CA 40119/09; SC 5533/06) and the "Marcolongo appeal" (CA 40118/09; SC 5049/06) arise from matters in the Supreme Court involving the same factual substratum and were heard together. The appellant in both is Mr Chen, a New Zealand businessman of Chinese origin and principal of Heard Park Ltd. Both appeals concern the purported sale of a partially developed residential property of Lym International Pty Ltd by Mr Chen, on behalf of the company, to himself.

In the "Lym appeal" the first respondent (the first plaintiff at trial) is Lym International and the second respondent (second plaintiff at trial), Ms Yang, was a director of Lym International. The third respondent (third plaintiff at trial), Ms Liu, is the daughter of Ms Yang. The fourth respondent (the second defendant at trial), Westpac Bank, obtained a mortgage over the property on completion of the sale to the appellant. The appellant and his wife and Ms Yang and her husband, Mr Liu (an original shareholder in the first respondent company until he sold his shares to his wife) were friends and business associates. Ms Yang's limited English, her residence in New Zealand and her husband's detention in China meant that in the time prior to the sale she required assistance in dealing with the property and affairs of Lym International. The company had debts relating to development and repayments of mortgages over properties in Mona Vale that needed to be managed. Mr Liu and Ms Yang had also borrowed money from the appellant's company, Heard Park on various occasions, including to make repayments on their mortgages. The appellant then obtained a power of attorney of Lym International from Ms Yang in circumstances where Ms Yang was named, erroneously, as a sole director of the company. Ms Yang signed the contract for sale and transfer to the appellant on behalf of Lym International as its apparent "sole director". At trial, the first, second and third respondents sought to set aside the sale of the property to the appellant.

In the "Marcolongo appeal", the appellant was the second defendant at trial. The first respondent (the plaintiff at trial) is Mrs Marcolongo who owns property adjoining another property of the second respondent (the first defendant at trial), Lym International. Mrs Marcolongo has a claim against the company in the District Court for unliquidated damages claimed as a result deleterious effects to her property from development of that adjoining property. At trial, Mrs Marcolongo sought to have the sale of the property set aside pursuant to Conveyancing Act 1919 (NSW), s 37A.

The trial judge found against the appellant, Mr Chen, in both matters and set aside the sale of the Golf Avenue property. The appellant seeks to have the transfer upheld on the appeals.

In the "Lym Appeal" the central issue to a number of appeal grounds was whether the trial judge erred in finding that the appellant was liable for breach of fiduciary duties in transferring the property to himself. The appellant submitted that once the limited nature of his fiduciary obligations were appreciated, most of the alleged breaches of fiduciary duty underpinning the trial judge's decision became unsustainable. There were also appeal grounds in relation to the form of the primary judge's orders should liability be upheld.

The issue in the "Marcolongo Appeal" was whether the trial judge erred in holding that Lym International, through its director Ms Yang, sold the land with an intention to defraud creditors and therefore Conveyancing Act, s37 provided grounds on which to set aside the sale.

In relation to the "Lym appeal" Young JA (Allsop P and Giles JA agreeing) held that all appeal grounds in relation to liability should be dismissed. As holder of power of attorney Mr Chen was found to be an agent of Lym International. His conduct was a clear case of breach of fiduciary duty owed by an agent to a principal as, whatever the extent of an agent's disclosure, an agent will be in breach of his or her fiduciary duties if non-disclosure amounts to a preference to the agent's own interests. There was no error in the transfer being set aside in equity. Young JA (Allsop P and Giles JA agreeing) then held that some of the appeal grounds on the form of the orders setting aside the property transfer and dealing with subsequent interests in the property should be allowed, in particular on the basis that the receiver of equity is required to do equity and that the breach of fiduciary duties does not bar a claim for contribution to the current value of the property.

In relation to the "Marcolongo appeal" Allsop P (Giles JA agreeing) held that the appeal should be allowed on the basis that the primary judge failed to direct attention to the question of the necessary fraudulent mental state required for s 37A. Their Honours held that s37A requires an element of dishonesty as it is an actual intent to deprive creditors of their rights or the fruits of their rights. The evidence was inadequate to attribute this requisite intention to Ms Yang when she signed the contract of sale to the appellant.

In separate reasons Young JA concurred in allowing the "Marcolongo appeal". His Honour held that while Mrs Marcolongo was a creditor for the purposes of s 37A, as a disputed claim for damages is capable of enlivening the section, she did not have standing to bring a claim. There was no standing because she was not a "person prejudiced" at the time of the application as she was not then owed a debt by the disponor of the property. Young JA went on to hold that if there was standing, under s 37A it is necessary to establish real, actual fraud, which in the ordinary case, though not always, involves some element of dishonesty, and there was no evidence that Ms Yang acted with an intent to defraud Mrs Marcolongo when she signed the contract of sale to the appellant.

CHEN v MARCOLONGO; CHEN v LYM INTERNATIONAL PTY LTD

1 ALLSOP P: I have had the advantage of reading in draft the reasons of Young JA. I agree with the orders proposed by his Honour. I also agree with his Honour's reasons in the "Lym International appeal" (CA 40119 of 2009). My reasons in the "Marcolongo appeal" (CA 40118 of 2009) can be expressed shortly in the light of the discussion of the evidence by Young JA.

2 The principal error of the primary judge was a failure to direct attention to the question of the necessary fraudulent mental state required for Conveyancing Act 1919 (NSW), s 37A. When one adequately appreciates this requirement, the evidence is inadequate to attribute it to Ms Yang.

3 Before dealing with this central issue, I should note two matters that were not the subject of argument. First, no argument was put on behalf of the appellant that s 37A did not extend to "delay or hinder", as well as "defraud" creditors. The Bankruptcy Act 1966 (Cth), s 121 was expressly so extended by s 6 of that Act ("an intent to defraud the creditors of a person ... shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors").

4 The original Statute of Elizabeth (13 Eliz I, c5) used the expression "the purpose of delaying, hindering or defrauding creditors ...". The Law of Property Act 1925 (UK), s 172 (1) replaced the Statute of Elizabeth in the United Kingdom, repealing it by s 207, Sched 7. The terms of s 172(1) were:

"Save as provided in this section, every conveyance of property, made whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced."

5 The introduction in 1930 of s 37A into the Conveyancing Act by the Conveyancing Amendment Act 1930 (NSW) (Act No 44 of 1930) was accompanied by the repeal of the Statute of Elizabeth in New South Wales. Like the other Australian States and Territories, the model for the replacement of the Statute of Elizabeth in New South Wales was the Law of Property Act, s 172.

6 In Re Cummins; Richardson v Cummins (1951) 15 ABC 185 at 191, Clyne J noted as a point of distinction that s 37A does not include any reference to "hinder or delay" and was thus narrower than or at least different to the Statute of Elizabeth. Pincus JA in World Expo Park Pty Ltd v EFG Australia Ltd (1995) 129 ALR 685 at 708 agreed.

7 On the other hand, Dixon J in Williams v Lloyd [1934] HCA 1; 50 CLR 341 at 372 in dealing with s 37A (there being no equivalent of s 121 in the Bankruptcy Act 1924 (Cth)) said a "real intent to defeat or delay creditors must exist". See also Trautwein v Richardson [1946] Arg LR 129 at 133 where Dixon J expressed the view that the modern attempts to re-express in short form the wordier 16th century text of the Statute of Elizabeth should not be taken to have disturbed the traditional and well-settled branch of the law. This was the view of Lukin J in Re Kelly (1932) 4 ABC 258 at 261, citing Williams on Bankruptcy (14th Ed 1932) at 312; see also Williams and Muir Hunter on Bankruptcy (19th Ed 1979) at 7. The point was settled by the Full Court of the Federal Court in PT Garuda Indonesia Ltd v Grellman [1992] FCAFC 188; (1992) 35 FCR 515 at 522 where the Court, citing Re Kelly, said that the short statutory re-enactments of the Statute of Elizabeth did not alter the pre-existing law.

8 The second matter not argued was that any intent was only directed to Mrs Marcolongo and not creditors generally. The sufficiency of such a limited intent may be seen to be supported by what Fitzgerald B said in Smith v Tatton (1879) 6 LR (Ir) 32 at 41. Nevertheless, the matter may not be free from doubt. As was implied in Smith v Tatton, the intent to defraud one creditor may be evidence of an intention to defraud creditors generally. Certainly, however, the intent to prefer one creditor over another is not sufficient to invoke the section: see [12] below. It is to be noted that the Bankruptcy Act, s 6 deals with this issue ("... any one or more of those creditors") in a statutory insolvency context giving primacy to pari passu distribution.

9 There was debate as to the proper mental state for s 37A. The cases in the 19th and 20th centuries revealed a tension between those which stated that the fraud required to be proved was "real" or "actual" and those which provided for constructive fraud based upon the consequences of the acts undertaken and impugned. The former cases rejected the notion that intent under the Statute of Elizabeth was a conclusion from the necessary effect of what was done: see generally Ex parte Mercer (1886) 17 QBD 290; Williams v Lloyd at 372; Lloyds Bank v Marcan [1973] 1 WLR 1387 at 1390 and 1392. On this view, fraud may not involve deceit, but does involve dishonesty. The latter cases looked to the "necessary effect" of a disposition: Freeman v Pope (1870) 5 Ch App 538. See, generally, the discussion by W A Lee "Trusts and Bankruptcy" (1973) 47 Australian Law Journal 365.

10 As Gummow J said in Cannane v J Cannane Pty Ltd (In Liquidation) [1998] HCA 26; 192 CLR 557 at 578 [54], the expression "intent to defraud" does not have a universal connotation in all statutory contexts. The same can be said about the word "fraudulent."

11 Great care needs to be exercised in interpreting s 37A not to rely too heavily upon cases from a related, but different, context in particular the law of the so-called fraudulent disposition as an act of bankruptcy under provisions such as the Bankruptcy Act 1914 (UK) s1(1)(b) and the Bankruptcy Act 1924 (Cth), s 52(b). Infusing many of these cases are the fact of actual bankruptcy, the statutory objective of rateable distribution in the administration of a bankrupt estate and the precise terms of particular provisions. For instance, the Bankruptcy Act 1914 s 1(1)(b) had its origins in the 1601 Statute (1 Jac 1, c15) which used the expression "... to the intent or whereby his creditors shall or may be defeated or delayed ..." In any event, a significant body of cases grew up in which "fraudulent conveyances" were found where there was no dishonesty, but there was perceived to be a fraud on the creditors in the sense there was a design to prevent the distribution of the insolvent's estate in accordance with the bankruptcy laws: Dutton v Morrison (1809) 7 Ves 193 at 197; 34 ER 75 at 76; and Ex parte Chaplin; Re Sinclair (1884) 26 Ch D 319 at 335. See generally Williams on Bankruptcy (15th Ed) at 6-19; Williams and Muir Hunter on Bankruptcy (19th Ed) at 8-16; Halsbury's Laws of England (2nd Ed 1931) Vol 2 at 20-27; (3rd Ed 1953) Vol 2 at 263-268.

12 The point is exemplified by the fraudulent preference in England which involved an intent that was contrary to (and in fraud of) the statutory bankruptcy regime as seeking to undermine or defeat pari passu distribution; but such an intention was insufficient to exhibit fraudulent intent for the Statute of Elizabeth: PT Garuda at 525 citing HW May The Law of Fraudulent and Voluntary Conveyances (3rd Ed 1908) at 76-78 and 139 and the many cases there cited.

13 The High Court decision in Cannane made clear that the disponor's intent was critical. Brennan CJ and McHugh J at 567 said:

"It is the disponor's intent to deprive creditors of assets against which (or against the proceeds of which) they would otherwise be entitled to prove their debts that enlivens the operation of s 121. As Dixon CJ said in Hardie v Hanson [[1960] HCA 8; [1960] HCA 8; 105 CLR 451 at 456]:

'The phrase 'intent to defraud creditors of the company' suggests that present or future creditors of the company will, if the intent is effectuated, be cheated of their rights'".

14 Their Honours went on to say that the relevant intent could be inferred from the surrounding facts. Nevertheless, their Honours' statement of the intent in the context of employing the words of Dixon CJ makes clear their view of the requirement to demonstrate a real intent to defraud.

15 Gaudron J at 571-572 adopted Dixon J's view in Williams v Lloyd of a "real intent". Her Honour said at 572 that the fraud or intent to defraud involved (the real and actual state of mind) of detrimentally affecting the property and rights of others which the law affords others:

"'Fraud' involves the notion of detrimentally affecting or risking the property of others, their rights or interests in property, or an opportunity or advantage which the law accords them with respect to property. Conversely, it is not fraud to detrimentally affect or risk something in or in relation to which others have no right or interest or in respect of which the law accords them no opportunity or advantage. And there is no intent to defraud if the person in question believes that others have no right or interest in or in relation to the property concerned and that the law accords them no opportunity or advantage with respect to that property."

16 Gummow J at 578 said that the appellants properly relied on Dixon CJ in Hardie v Hanson. He also referred to Kitto J in the same case as referring to an actual purpose of "swindling" creditors out of their money.

17 It is clear from Cannane that s 37A requires (as does s 121) an element of dishonesty. It is an actual intent to deprive creditors of their rights or the fruits of their rights. Moral obtuseness will not save a disponor whose state of mind is one which is intent upon removing assets from the reach of creditors in order to defeat them. Fraud is not a superadded requirement; it is an integral aspect of the operation of the section. It is a serious finding of an actual and real intent to defraud, whether it is by defeating, delaying or hindering creditors.

18 The existence of the requisite intention is a question of fact, which, of course, can be inferred in all the circumstances. The difference in Williams v Lloyd between an intention of Mr Williams to make provision for, and ensure the security of, his family before embarking on a business venture with risks, and an intention of defeating future creditors was real, but not to be found merely in a realisation that if he gave assets to his family they would not be available to future creditors. The relevant question was what was his intention - to defraud creditors or to provide for his family.

19 On the facts here, as Young JA explains, there was insufficient material upon which to conclude that an operative intention of Ms Yang was to defraud Mrs Marcolongo. Ms Yang had a belief that the sale would produce some financial benefit to Lym International. She was not causing Lym International to give the property away. It was to obtain what she saw as value.

20 To the extent that money may be a more liquid asset and easier to move to defeat Mrs Marcolongo than the holding of land that proposition was never put to her.

21 Any desire on Ms Yang's part to avoid the "freezing" of assets can be seen as one capable of being held by someone who had no intention to deprive a creditor of the benefit of its rights.

22 Ms Yang's evidence was clear that she was very worried about a great number of factors, including the incarceration of her husband in China, the stalled building project, the claims from the first project and her inability to fund the project. In cross-examination she said:

"Q. Did you understand that if the property was to be transferred out of Lym International's name, then there would be no asset or no moneys available to meet claims being made against the company?

A. INTERPRETER: Well, Paul just told me that I need to transfer it as soon as possible. He said otherwise Lym International will suffer a big loss. I didn't realise what result it would lead to.

Q. Do you recall also having a conversation on the telephone with Mr Chen's wife Amanda?

A. INTERPRETER: Yes, we contact each other very frequently.

Q. But do you recall having a conversation after Paul left New Zealand and flew to Sydney and you signing the contract document at CB1056?

Q. And she said to you, didn't she, that you should transfer the project quickly otherwise the company will suffer a big loss?

A. INTERPRETER: Yes. I trusted them at that time.

Q. So the judge should understand that when you came to sign the contract in Tim MacAvoy's office, you did so because you wanted to get the property, the second project, out of Lym International's name and away from those who might be making a claim against the company. Is that right?

A. INTERPRETER: That's one of the reasons. There are many reasons why I sold the project. Because at that time the Lym International has a large amount of loan and I was told that another 3.4 million is required to complete the project and I have to invest that amount of money within two months, otherwise the project will be freeze. And I was told I have to repay that debt, otherwise I could go to gaol."

23 Amanda Chen also told Ms Yang that the company would receive funds from the transaction.

24 In such circumstances, it was necessary, in my view, to take the matter further than was done in the last question set out above. For s 37A to be available avoid the transaction it was necessary to find that Ms Yang had an actual and real intention to defraud Mrs Marcolongo by depriving her of what Ms Yang appreciated to be Mrs Marcolongo's rights and that this intention was operative as one of the reasons for the transaction.

25 The primary judge did not direct himself to this central question.

26 On the evidence here, like Young JA, I am not prepared to conclude that it has been shown that Mr Yang had the requisite intent.

27 On the question of the meaning of the phrase "any person thereby prejudiced", the evidence disclosed that Mrs Marcolongo had a bona fide claim for unliquidated damages and that Mr Mao (a director, or erstwhile director, of Lym International) accepted that the claim had force. I do not think that s 37A requires the proof, by a trial within a trial, that the claim will necessarily or even probably succeed. In advance of a hearing a party with a bona fide claim is prejudiced if a disposition of property by the defendant would leave the claimant without a likely adequate fund against which to proceed. This is consistent with the proposition that prospective creditors are included in the concept of creditors: Green v Schneller [2001] NSWSC 897; 189 ALR 464 at 468 [16]. The statute should be read liberally as one for the suppression of fraud.

28 GILES JA: I agree with the reasons of Young JA in the Lym International appeal, and with the reasons of Allsop P (in the light of the discussion of the evidence by Young JA) in the Marcolongo appeal.

30 YOUNG JA: These two matters, which were heard together both at first instance and on appeal, concern the property and affairs of Lym International Pty Ltd ("Lym").

31 Lym is a company which was set up by a Mr Mao in 1998 and its shareholders were initially Mr Liu and Mr Mao. During 2000, Mr Liu transferred his shares to his wife, Ms Yang. Ms Yang and Mr Mao remained directors of Lym. However, there is in evidence a letter bearing date 29 January 2006, apparently signed by Mr Mao, resigning as a director of Lym. However, everybody accepts that this was a forgery and Mr Mao remains a director.

32 The litigation before the Court involves two separate claims. The first (SC 5533/06; CA 40119/09) is a claim by Lym to set aside a purported sale of land in Golf Avenue, Mona Vale to Yu Po Chen ("Mr Chen") for $15 million. The second (SC 5049/07; CA 40118/09) is a claim by Mrs Marcolongo to declare the conveyance of the Golf Avenue property to Mr Chen as invalid because it was effected in fraud of creditors pursuant to s 37A of the Conveyancing Act 1919.

33 Both matters were decided against Mr Chen by Hamilton J who gave his principal judgment on 2 March 2009 ([2009] NSWSC 98) and gave supplementary judgments on 16 March 2009 ([2009] NSWSC 167) and 18 March 2000 ([2009] NSWSC 182).

35 The basal facts are uncontroversial and these can be set down more or less as they appear from the principal judgment of the primary judge.

36 Mr Liu is a Chinese businessman who was Chairman of Directors of what is claimed to be one of China's largest public companies. He has substantial investments in Australia and New Zealand. However, in May 2006 Mr Liu was detained by Chinese authorities and remains in prison. Although it does not appear that he has been charged with any offence, it would seem his detention arose out of the affairs of the large company.

37 His wife, Ms Yang, and their daughter, Jasmine, became residents of Sydney in 1998 and residents in New Zealand in 2003. Neither Mr Liu nor Ms Yang can speak or read English, but Jasmine has a New Zealand university degree and has some ability to speak, read and write English, though her ability in spoken English is far from perfect. Jasmine is now 27 years of age.

38 Lym had only two assets in Australia, the land in Golf Avenue as well as land in Darley Street, Mona Vale. It developed the Darley Street land in what was called "Project 1" by building townhouses, all of which have now been sold.

39 Mrs Marcolongo, the first respondent in appeal 40118/09, owned land adjoining Project 1 and she claims that her land was deleteriously affected to the tune of $600,000 by the activities of Project 1. The people who primarily caused the problem are the builder or the sub- contractor, but they are of doubtful worth and a claim has been made against Lym for that damage. The claim is pending in the District Court and we were told from the bar table that it was to be heard in August 2009.

40 By mid-2006, the Golf Avenue development known as "Project 2" was partly completed. Mr Mao was managing it. To fund the development, Lym raised a loan of $12 million on mortgage from Kingsway Group Ltd. This is referred to as the "Kingsway Mortgage". The limit on the Kingsway Mortgage was later raised to $13 million. By December 2005 the Kingsway Mortgage secured $12.5 million.

41 Before December 2005, the estimated value of the Golf Avenue property once that Project 2 was completed, was $22.5 million. In that month, the estimated value was revised downwards to $18.5 million. Lym's debts exceed that sum.

42 Also by late 2005, a major dispute had arisen between Lym and its builder. It would seem that it may have owed the builder $400,000 and could not pay.

43 In January 2006, there were disagreements between Mr Mao on the one hand, and Mr Liu and Ms Yang on the other, concerning the management of Project 2. The upshot was that, by agreement, Mr Mao withdrew from the management of both Project 2 and of Lym. He acknowledged a debt to Lym of $2.1 million. He returned to China to pursue his business interests there.

44 After Mr Mao returned to China in February 2006, Ms Sandy Lai was appointed to manage Project 2 and the affairs of Lym in Australia. Sandy Lai had worked in the Commonwealth Bank, spoke fluent English and Mandarin and had business experience.

45 In early March 2006, the builder terminated its retainer in relation to Project 2. On 7 April 2006, Lym's Quantity Surveyor, Mr Richmond, estimated it would cost around $3.4 million to complete Project 2. This was approximately double the estimated cost to complete in January 2006, the increase due to defective work that had come to light.

46 In April 2006, Kingsway revalued the subject property on an "as is" basis at $11.45 million. As a result, Kingsway required an additional $4.2 million to be paid at once under the Kingsway Mortgage.

47 Sandy Lai told Ms Yang that $4.5 million was needed to be paid.

48 I now break off the narrative to focus on Mr Chen.

49 Mr Chen is a New Zealand businessman of Chinese origin who speaks fluent English and Mandarin. He is the principal of a company, Heard Park Ltd ("Heard Park"). He is married to Amanda Chen, who throughout the proceedings below was referred to simply as "Amanda". I will do the same in these reasons without meaning any disrespect.

50 Amanda is a chartered accountant with Liew & Associates In New Zealand.

51 In early 2003, Mr Liu and Ms Yang engaged Liew & Associates as their accountants for themselves and their companies and it was through this connection that they began their association with Mr Chen and Amanda.

52 A business and personal association developed between the couples. Mr Chen, in particular, provided Mr Liu and Ms Yang with advice concerning their business interests in New Zealand, which he was able to do, due to his business experience in New Zealand and his fluency in English. Mr Liu made Mr Chen director of one of his New Zealand companies, Top International Ltd. He also introduced Mr Chen to business opportunities in China.

53 There were dealings between Mr Liu and Mr Chen outside the activities of Lym. Mr Chen says that Mr Liu or his companies borrowed from Heard Park, in particular there were borrowings from companies whose names included the word "Shenzhen", which were referred to by the primary judge as the "Shenzhen Loans". The primary judge said that he found difficulty in establishing how much was owing in respect of any particular Shenzhen Loan, see [18] of the primary judgment, though at Black 883 Mr Chen had given evidence that as at 15 August 2006, Shenzhen Ltd owed $5,311,531.67 to Heard Park.

54 I can now resume the narrative as at April 2006.

55 Mr Liu and Ms Yang told Mr Chen that they needed $4.5 million and asked him if he could arrange for it to be made available for repayment to Kingsway. Heard Park lent $4.5 million to Lym in late April 2006 out of which $4.2 million was repaid to Kingsway. It would appear there was no other source from which Ms Yang and Mr Liu were able or willing to provide money to pay Kingsway.

56 With Mr Liu's detention by the Chinese authorities in May 2006, Ms Yang became more dependent on Mr Chen and Amanda for friendship, business advice and assistance in attempts to conceal herself and her assets from the Chinese authorities.

57 During this time, Ms Yang withdrew funds from her bank and deposited them in Heard Park's name and also transferred shares in family companies to Mr Chen. These transactions are currently before the High Court of New Zealand.

58 Little substantive work had been done on Project 2 since January 2006. After the repayment of the $4.2 million to Kingsway, Lym had a liability of around $7.6 million in respect of the Kingsway Mortgage. Ms Yang had guaranteed that debt personally.

59 In the light of her obligation to Kingsway and the apparent need for $3.4 million to complete Project 2 and the loss of support of her husband, Ms Yang made inquiries concerning the possible sale of Project 2 or finding an investor who would be prepared to fund its future. However, the primary judge found that Ms Yang had not by 24 July 2006, made any firm decision to sell the property.

60 On 15 July 2006, Ms Yang met Sandy Lai at Auckland Airport where Ms Yang signed two documents: (a) a letter bearing date 11 July 2006 authorising Sandy Lai to transfer $3.5 million from the Kingsway Mortgage to Heard Park and; (b) a letter dated retrospectively 1 February 2006 appointing Sandy Lai as the manager of Project 2.

61 On 16 July 2006, Ms Yang and Jasmine met socially at their home with Mr Chen and Amanda. Ms Yang mentioned that she had signed the documents brought by Sandy Lai the previous day. At Mr Chen's suggestion, Ms Yang telephoned Sandy Lai and asked her to fax the documents to the Chens' home as Ms Yang did not have a fax machine. This Sandy Lai did. They discussed the documents and Sandy Lai's role, and Mr Chen offered to go to Sydney (where Ms Yang was reluctant to go) to investigate Lym's affairs if Ms Yang would give him a power of attorney.

62 The primary judge found at [29] that it was clear on Mr Chen's evidence, that by 24 July 2006, he considered as a possible course that he should buy the subject property from Lym as a means of obtaining the discharge of debts from the Liu interest to him or his associates.

63 On 24 July 2006, Amanda made an appointment to see Timothy MacAvoy ("Mr MacAvoy") at Kensington Swan, Solicitors of Auckland. Later that day there was a meeting at the offices of Kensington Swan at which Mr MacAvoy, Mr Chen, Amanda, Ms Yang and Jasmine were present.

64 At that meeting Mr MacAvoy was told about the loan agreement between Heard Park and Lym. The judge found Mr MacAvoy's diary notes were scrappy, but noted that there was no mention of the Shenzhen Loans or of any intention by Mr Chen to buy the Golf Avenue property.

65 However, it was clear that instructions were given by Ms Yang that Sandy Lai's authority from Lym was to be revoked and that Mr Chen should be given a power of attorney by Lym. Mr MacAvoy prepared those documents.

66 Mr Chen travelled to Sydney on 25 July 2006, arriving mid-morning. His first call was on Mr Mackay who is a partner of Middletons, Solicitors of Sydney, whom Mr MacAvoy had contacted for the purpose of him acting as Sydney lawyer in transactions affecting Lym.

67 By 2pm on 25 July 2006, Mr Mackay had obtained a Real Property search of the Golf Avenue property and Mr Chen had instructed Mr Mackay to act for him on the purchase of the property. Mr Mackay, and under his supervision, Mr Ben Everett, acted for Mr Chen in that transaction.

68 In the afternoon Mr Chen went to the Haymarket Branch of the Commonwealth Bank where, using the powers of attorney, he gained access to three bank accounts, one in the name of Lym, one in the joint names of Ms Yang and Mr Liu (the "Yang Account") and one in Jasmine's name. He had himself made as signatory on those accounts and removed Sandy Lai as a signatory, in so far as she was.

69 After doing that, Mr Chen telephoned Sandy Lai and informed her of her dismissal and his appointment as her replacement.

70 Later in July 2006, Ms Yang asked Sandy Lai to pay the $1.08 million that Sandy Lai owed to Ms Yang. Sandy Lai did so and paid the money into the Yang Account and this formed part of $1.2 million taken from that account by Mr Chen in August 2006 and paid into the Lym account.

71 On 26 July 2006, Mr Chen inspected the Golf Avenue property. He also made inquiries concerning Project 2 and learnt that many contractors needed to be paid. He collected from Sandy Lai a large quantity of books and records.

72 We were taken to a receipt seemingly prepared by Sandy Lai when she handed over those records. These are set out at Blue 424 and following. There was debate before us as to whether this was an exhaustive list of documents. This was because there was evidence that Mr Chen had picked up a greater bulk of documentary material than seemed to be covered by the list. However, in the end result, no further finding is required.

73 There is no doubt that whilst he was in Sydney and she was in Auckland, Mr Chen had numerous telephone conversations with Ms Yang. In them he conveyed to her various pieces of information concerning Project 2. It was in these conversations that it was agreed that Mr Chen would buy the subject property from Lym. There is no doubt that the price of $15 million was specified by Mr Chen and was not the subject of any negotiation.

74 As early as 27 July 2006, Middletons had prepared a contract for sale and they emailed this, together with a transfer, to Mr MacAvoy for execution by Ms Yang on behalf of Lym.

75 On 31 July 2006, Ms Yang, Jasmine and Amanda attended Mr MacAvoy at his office in Auckland. Mr MacAvoy was given the forged resignation of Mr Mao which seemed to him to make Ms Yang the sole director of Lym.

76 On that day, Ms Yang signed the contract for sale and transfer on behalf of Lym as sole director. She also signed a document confirming that Mr MacAvoy had not provided any legal advice in respect of the transaction.

77 The contract for sale was in the usual form for sales of land in NSW. The purchase price was $15 million. However, it contained a rather unusual special condition 33 as follows:

"Price

The Purchaser must pay the Purchase Price as follows:

(b) the balance to be applied to the debts owed to the

Purchaser by the Vendor or a related entity (as that term is defined in the Corporations Act 2001 (Cth)) of the Vendor."

78 As the primary judge observed, it is significant that by the terms of the special condition the debts referred to included debts not only owed by the vendor but also by entities related to the vendor, but they only included debts to the purchaser personally and not to entities related to the purchaser.

79 The contract for sale and transfer executed by Ms Yang were sent to Middletons in Sydney, but were not executed by Mr Chen until 15 August 2006.

80 Between 1 August and 15 August 2006, Mr Chen transferred $1.2 million from the Yang Account and $120,000 from Jasmine's account to the Lym account. It would seem that Mr Chen believed that these monies were Lym monies. This was erroneous and, particularly with respect to Jasmine's account, an error that is hard to justify.

81 On 15 August 2006, not only did Mr Chen sign the contract for sale, but pursuant to special condition 32 he nominated that same day, 15 August 2006, as the completion day and completion took place accordingly.

82 Completion took place without any reference to Ms Yang. Mr Chen also made arrangements to discharge the Kingsway Mortgage. There was no settlement statement provided to Lym showing the amount paid to discharge the Kingsway Mortgage. The only document that shows any of these matters is the resolutions of Heard Park prepared by Amanda at some later date and backdated.

83 The judge accepted that the evidence showed that Kingsway was paid a total of $7,679,645.31 on settlement to procure the discharge of its mortgage.

At a glance

Court

Decision date

Before

Source

Judgment (587 paragraphs)

Legislation Cited (22)

Cases Cited (7)