On 29 April 2020, these proceedings were commenced. The defendants were then Mr Dai, Toltz Lawyers, Gemi 130, Bridge Street Capital, the builder, Wallis Island and Maxmara Trinity. Interlocutory relief was sought to restrain Mr Toltz from acting on behalf of the plaintiff and for delivery up of the solicitor's files. Orders were also sought to restrain Gemi 130 and Bridge Street Capital from acting on the third transaction documents of 15 October 2019; their caveat was also sought to be removed on the condition that the plaintiff paid the moneys sought to be secured into Court. As final relief, a declaration was sought that the third transaction documents were void, together with damages.
On 1 May 2020, the first of many lot sales were completed, with the proceeds of sale deployed to pay down the Westpac loan. Toltz Lawyers continued to act on the sale of the lots in the North Rocks development. The plaintiff's solicitors proceeded to request files and documents in respect of the various transactions now the subject of these proceedings, including from the solicitors who had given independent advice to Mr Dai and Ms Zhu, being Ms Yang and Mr Holt.
In July 2020, the plaintiff filed a statement of claim adding further defendants: Ms Zhu, Gemi Investments, Weriton, Saddleback Mountain Estates, Alice Yang & Associates, Piper Alderman, Mr Holt and Maxmara and JA International. Additional declaratory relief was now sought in respect of the first and second transactions, in particular, that the transaction documents were void ab initio insofar as they related to the plaintiff. Further, a declaration was sought that Ms Zhu was not validly appointed as a secretary of the plaintiff.
Since July 2020, Mr Dai had been seeking to transfer 20 units in the Trust from Maxmara Trinity to AUX Real Estate. Mr Liang was not amenable to the transfer. The plaintiff's solicitors communicated repeatedly with Mr Dai, setting out the relevant procedure to transfer units under the Trust Deed and requesting a transfer notice. On 28 July 2020, Mr Dai provided a unit transfer form, executed by Maxmara Trinity and AUX Real Estate. The plaintiff's solicitor advised that the transfer was not valid as it did not comply with the procedure in the Trust Deed; a written transfer notice must first be served on the plaintiff, specifying the units and the price. Mr Dai took issue with this, suggesting that the procedure did not apply where AUX Real Estate was an existing unitholder, to which the plaintiff's solicitors responded that it was not. There the matter lay.
On 11 September 2020, the plaintiff's solicitors wrote directly to AUX Real Estate, enquiring whether the transfer had been completed. AUX Real Estate advised that the transfer had been completed on 22 July 2020 and provided the executed transfer form, bearing the signature of Mr Liang certified by Ms Yuan JP on 28 July 2020. Mr Liang did not execute these forms. The plaintiff's solicitor promptly informed AUX Real Estate that the signature of Mr Liang had been forged and the matter had been reported to NSW Police. The units were cancelled accordingly.
It was not until 12 October 2020 that Toltz Lawyers provided the plaintiff with access to its files; this was not for want of effort on the part of the plaintiff's solicitors. In June 2021, Maxmara and JA International went into external administration. In July 2021, the builder went into liquidation. In September 2021, receivers and managers were appointed to Maxmara Trinity. In December 2021, Westpac was paid out and its mortgages discharged.
In May 2022, the proceedings against Mr Holt were resolved by consent. In June 2022, the proceedings against Ms Yang were also resolved. The proceedings were transferred to the Commercial List. In December 2022, the proceedings against Piper Alderman were resolved.
[2]
DECLARATORY RELIEF
The plaintiff seeks a declaration that Ms Zhu was not validly appointed as the secretary of the company. While the plaintiff has established that Ms Zhu's appointment as secretary on 8 November 2018 was not authorised, it does not necessary follow that a declaration should be made to this effect. The Court may exercise its discretion to refuse relief if the result on the proceedings will be of little practical value: PW Young QC, Declaratory Orders (Butterworths, Second Edition, 1984) at 703; The Dairy Farmers Co-Operative Milk Company Ltd v Commonwealth (1946) 73 CLR 381.
Within three weeks of Ms Zhu's appointment, Mr Liang was made aware of the fact. I have found that Mr Liang he did not have full knowledge of the material facts which led to Ms Zhu's appointment, such that it cannot be said that he, as a director of the company, ratified his co-director's appointment. Mr Liang finally removed Ms Zhu in February 2020, when it became apparent that Mr Toltz proposed to have further loan documents executed by Mr Dai and Ms Zhu, even though Mr Liang had made plain that he did not agree to the loan. Overall, I consider that it remains appropriate to make the declaration sought, to record the true position.
[3]
COMPENSATION FROM DIRECTOR
Sections 180 to 182 of the Corporations Act are civil penalty provisions. Section 1317H(1) of the Corporations Act provides:
(1) A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if:
(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
Only damage that has "resulted from" the contravention of a civil penalty provision may be compensated under section 1317H. To satisfy this test, it must be shown that the defendant's acts or omissions were so connected with the company's losses that, as a matter of "ordinary common sense and experience" they should be regarded as the cause of those losses: Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC1229 at [7311]-[7312] (per Austin J). Courts have also applied a 'but-for' test to causation: Re Earth Civil Australia Pty Ltd (in liq) [2021] NSWSC 966 at [2248] (per Ward CJ in Eq, as the President then was); Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1; [2014] WASC 102 at [451] (per Edelman J). However, common law principles as to the duty to mitigate are not directly applicable to claims under section 1317H: Re Earth Civil at [2249].
But for Mr Dai's breach of his statutory duties as a director, the plaintiff would not have entered into the first disputed transaction, nor the second, nor the third. As a consequence of these transactions, the plaintiff variously became liable to repay the loans, either as the named borrower, a guarantor, or having granted a mortgage over the North Rocks property or executed a general security deed.
Relevant to the amount of any compensation order is whether the plaintiff benefitted from the loans. The lenders submitted that the plaintiff failed to adduce financial records to demonstrate that it did not require additional funds beyond a Westpac construction facility or to demonstrate the absence of benefit from the disputed loans, and suggested that a Jones v Dunkel inference ought be drawn. However, the plaintiff's books and records were under the control of Mr Dai at the relevant time and were incomplete. In these circumstances, whilst the plaintiff bears the onus of proof, its means to prove what happened in the years in which Mr Dai ran the company was somewhat limited. Mr Dai had greater means to contradict the plaintiff's contentions, having created and been responsible for records at the time. In these circumstances, it may be sufficient for the plaintiff to adduce slight evidence if that is all it has the ability to advance, such that the evidential onus may shift to Mr Dai to adduce evidence to show what he says really happened.
Nor do I agree that the onus of proving that the funds were not used for the benefit of the plaintiff necessarily fell on the plaintiff. The fact that the loan funds were provided to the builder and not the plaintiff prima facie indicates that the plaintiff did not receive the benefit of the funds. It was the defendants who contended that, notwithstanding that the funds were provided to the builder, the funds were used for the benefit of the plaintiff. I decline to draw the suggested inference.
The funds from the first loan were promptly disbursed by the builder for a variety of purposes, some of which were clearly unrelated to the North Rocks development, while others were probably related to the North Rocks development. The precise portion which benefited the plaintiff is difficult to quantify given the mixing of the loan funds with funds already in the builder's bank account: see [178]-[180].
Whilst it can be said, in a broad sense, that the plaintiff received a benefit from a portion of the first loan, the builder was effectively using a loan advanced to the plaintiff to discharge the builder's contractual obligation to meet building expenses itself, at least in the first instance: see [130]. To the extent that the loan funds were deployed for the North Rocks development, the builder may have issued a progress claim in respect of those amounts and been reimbursed. Whether the builder did so is unknown, given the paucity of detail in the progress claims.
For the second loan, the builder received $746,164.02 and disbursed these funds promptly to Arc Steel, Selective Labour, Bingo-March, Yisheng Construction and the builder ($50,000). Presumably, some or most of these expenses related to the North Rocks site. It should not be forgotten, however, that the builder was obliged to pay these expenses under the construction contract. These were not the plaintiff's liabilities. The lender also paid some $391,000 to NSW Revenue for land tax. To this extent, it can be said that the plaintiff received a benefit, although not one which it necessarily asked for. The plaintiff received no benefit from the third loan, which was wholly used to pay out the second loan to the builder.
As the first loan was paid out by the second loan, which was paid out by the third loan, a convenient measure of the damage suffered by the plaintiff as a result of Mr Dai's contravention of the civil penalty provisions is the amount now owing to the third round lenders, Gemi 130 and Bridge Street Capital. Section 1317H(1) of the Corporations Act requires that an order for compensation must specify the amount of the compensation. Where the lenders did not adduce evidence as to the amount owing by the plaintiff under these facilities and, in any event, that figure would now be out of date, it is necessary for these lenders to provide this figure in order that an order may be made. The $391,000 paid to NSW Revenue for land tax ought be deducted from this figure, together with interest on the $391,000 from 16 July 2019 on.
The first round lender and second round lenders have also incurred costs in defending these proceedings. Whether these lenders intend to seek these costs from the plaintiff under the terms of their respective loan agreements, including on a solicitor and client basis, is not known. If that be the case, then these sums should also be captured in a further compensation order made when the amount of the lenders' costs is known. I have not made orders in this regard, however, as I suspect that Mr Dai will be in no position to pay the first compensation order, let alone a second compensation order.
I have also found that Mr Dai breached his fiduciary duties to the plaintiff. Where compensation under section 1317H will provide a remedy, it is not necessary to also consider the plaintiff's claim for equitable compensation.
[4]
EQUITABLE COMPENSATION FROM SOLICITOR
The plaintiff contended that, but for the solicitor's breaches of fiduciary duty, the plaintiff would not have entered into the first transaction, nor the second or third transactions required to refinance the first transaction, nor incurred any resulting indebtedness to the lenders. Further, although the solicitor had been asked on 8 February 2017 to copy all emails regarding the plaintiff to Mr Liang, he did not do so. If the solicitor had complied with this instruction, Mr Liang would have told the solicitor that he would not approve the plaintiff obtaining high interest loans.
The solicitor submitted that causation had not been established: Maguire and Another v Makaronis and Another [1997] HCA 23; (1997) 188 CLR 449 at 467 (per Brennan CJ, Gaudron, McHugh and Gummow J); CLGC Pty Limited v Zhang [2021] NSWSC 946 at [196]. The plaintiff would still have proceeded with the transactions but for the alleged conflict because it received independent legal advice from Ms Yang, Piper Alderman and Mr Holt and no complaint was made about the advice so provided. But for the asserted conflict, it was said that Mr Dai's decision to cause the plaintiff to enter into the transactions would not have changed. (This is no doubt true; the problem is that Mr Dai's decision was without authority and in breach of his duties as a director). The plaintiff needed the transactions to occur; it was said to be for the plaintiff to establish otherwise.
The solicitor submitted that the Court would not be satisfied that Mr Liang could or would have come to the plaintiff's aid with the required funds. The Court would treat any such hindsight evidence with caution: Chappell v Hart (1998) 195 CLR 232; [1998] HCA 55 at [32] (per McHugh J); Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 at [24]-[25] (per McHugh J). It was submitted that the Court would be satisfied that Mr Liang had cashflow issues at the time. (There is no evidence of this, beyond Mr Dai's assertion, on which I attach no weight). The plaintiff would have been required to still proceed with the first transaction (and subsequent second and third transactions) even but for the alleged conflict, as there would have been no other way for the plaintiff to obtain the funds it needed. (This submission is based on the premise that the plaintiff received the benefit of the loan funds which, by and large, it did not).
Even if Mr Liang had provided the necessary funds, the solicitor submitted that the plaintiff would be in no better position where Mr Liang provided funds by way of loans. The interest rate proposed to be charged on the Tempe Development loan was between 15-17%. (I note that the proposed Tempe Developments loan agreement was put forward by Mr Toltz on information provided by Mr Dai; whether the interest rate in the proposed agreement was one which Mr Liang had requested is unknown but seems unlikely). There was said to be no evidence that Mr Liang would have provided the funds to the plaintiff at a lower rate than Gemi Investment and at what rate. (Again, this submission is based on the premise that the plaintiff had the benefit of the loan funds when, by and large, it did not).
In the alternative, the solicitor submitted that any loss should be limited so as not to include the default interest rate amounts that had accrued over the years of litigation. The plaintiff was said to have failed to mitigate its loss by paying the lenders what they were owed. Otherwise, the interest bill was said to be too remote such that there is no causal link between the solicitor's alleged breach and the loss complained of.
[5]
Causation
The principles of causation in relation to a claim for equitable compensation for breach of fiduciary duty were summarised in ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2015) 224 FCR 1 at [1090]:
… the principles are distinct. The court must identify "criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty": Maguire v Makaronis (1997) 188 CLR 449 at 473 and O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 276-277. What constitutes an adequate or sufficient connection is not predetermined or formulaic. Each case requires a precise focus on both the nature of the obligations and the nature of the breach: Beach Petroleum at 90 [431] and Maguire at 472-473. Any question of "direct" or "immediate cause" is a red herring. The required focus is the nature of the obligations and the nature of the breach because different obligations and breaches may raise different criteria that supply the necessary connection. So, for example, "several matters appropriately will be taken into account when there falls for consideration, in an action against the fiduciary arising other than out of breach of trust, the criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty" which may not be relevant in breach of trust cases (emphasis added): Maguire at 473.
That is, questions of causation of loss said to arise from breach of fiduciary obligations are to be determined in a different way from breach of common law obligations. Where a defendant breaches an equitable duty and the plaintiff claims to have suffered loss, the criteria for a sufficient connection, or causation, between breach of duty and the loss is not susceptible to the formulation of a single test but instead depends on a variety of matters, including the nature of the equitable duty breached, the remedies sought, the identity of the fiduciary and the purpose of the particular rule underlying the equitable duty: A Abadee et al., Professional Liability in Australia (Thomson Reuters, 4th ed, 2023) at [1.1785]. Each case requires a precise focus on both the nature of the equitable obligations and the nature of the breach: Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 at [430]-[431].
ABN Amro v Bathurst Regional Council is a useful illustration of the application of these principles where a fiduciary acted in a position of conflict, in that case, being a conflict between the fiduciary's duty to the beneficiary and the fiduciary's own interest (a 'conflict of duty and interest'). An investment advisor purchased financial instruments, which it sold to its clients. The investment advisor held some $45 million of the instruments and was concerned that it may end up holding inventory with no available purchaser. The investment advisor's concerns as to its own financial position gave rise to a conflict of interest. Whilst the clients knew that the investment advisor would profit from the sale of the instruments, the clients were not told of the commercial pressures faced by the investment advisor, which made the sale of the instruments commercially imperative. The investment advisor did not disclose this conflict so as to permit the clients to make a free and fully informed decision on whether to proceed: at [1078]. The investment advisor's duty was not to be in a position of conflict of duty and interest and it breached that fiduciary duty: at [1080].
The investment advisor made a gain from its dealings in the financial instruments, while the clients lost a substantial part of their investment: at [1089]. The adequate or sufficient connection between the breach of fiduciary duty and equitable compensation was the non-disclosure of the material facts which the clients were entitled to know in connection with their purchase of the instruments and, in breach of which, the investment advisor sold the instruments to the clients: at [1093]. Given the nature of the fiduciary obligation and the nature of the breach, it was not relevant to enquire whether the clients would have given informed consent; the consequences of non-disclosure of material facts are not discoverable, where justice and policy are against their investigation: at [1096] citing Furs Ltd v Tomkies (1936) 54 CLR 583 at 592. Further, the Court was entitled, with the full benefit of hindsight, not to speculate against the interests of the clients in respect of whom there was a breach of fiduciary duty. The clients were only obliged to establish an adequate or sufficient connection between the equitable compensation claim and the breach of fiduciary duty. Having discharged that obligation, it was for the investment advisor to establish that, as a matter of fact, the clients would have purchased the instruments even if the relevant disclosure had been made: at [1097].
Elsewhere, it has been said that in claims for compensation for loss caused by breach of a fiduciary obligation, the plaintiff will have to establish that they would have acted differently had the fiduciary complied with its obligations: Jackson & Powell Professional Liability (Thomson Reuters, 9th ed, 2022) at 3-019 to 3-020 citing Rama v Millar [1996] 1 NZLR 257 at 260 (per Lord Nicholls). For example, in CLGC Pty Limited v Zhang [2021] NSWSC 946, the plaintiffs sued their solicitor to whom they had also provided loans. The claim failed where their case failed to identify the information which the solicitor should have disclosed and failed to prove that the disclosure of such information would have made a difference in the decision to proceed with the loan: at [196] (per Parker J).
It is not necessary to reconcile these authorities here, where it may readily be seen that the plaintiff would have acted differently had the fiduciary complied with its obligations. Had Mr Toltz contacted Mr Liang - either in the course of obtaining fully informed consent to act for Gemi Investments or, failing that, in discharging the solicitor's obligation to act in the plaintiff's best interests in the first transaction - then Mr Liang would have become aware of the proposed transaction. That would have been the end of the matter. I am satisfied that Mr Liang would not have agreed to the first transaction going ahead, as the purpose for which the loan was sought was predominantly the builder's Baulkham Hills development. (Ultimately, of course, Mr Dai did not use the loan funds for that purpose but for the builder's working capital.) There was no reason why Mr Liang would, or should, have agreed that the plaintiff should obtain a loan, secured over the North Rocks property, for this purpose. To the extent that the North Rocks development - as opposed to Mr Dai and his business - needed further funds, Mr Liang had been a steady source of such funds. It was in Mr Liang's interests to get the development to completion so that the townhouses could be sold and he could see any return on his significant investment.
Assessing compensation where there was a conflict of 'duty and duty' may be difficult, as Professor Finn observed in Fiduciary Obligations at [591]:
The very obvious difficulty which can arise in claims for damages or compensation is that the fiduciary's breach of duty will often be simply a technical one with the consequence that the aggrieved beneficiary will not be able to show that he has suffered more than nominal damage. In many cases, and particularly where the conflict lies only in an undisclosed double employment, the aggrieved beneficiary's position would often not be one bit different had he in fact had the advantage of a fiduciary with undivided loyalties.
There is no such difficulty here. Because of the solicitor's breach of duty to avoid conflicting interests, the solicitor failed to ascertain and act in the plaintiff's best interests with respect to the first transaction. Had the solicitor discharged its obligation to avoid conflicts, it would have taken the steps necessary to ascertain that where the plaintiff's interests lay, in particular, given that there was a disconformity between the borrower and the recipient of the loan funds. The solicitor failed to ensure that the plaintiff, as opposed to Mr Dai, wished to enter into the transaction.
It is necessary to consider the implications of the independent solicitor on the issue of causation, noting that there is no translation into this field of discourse of the doctrine of novus actus interveniens: Maguire v Makaronis at 470.
On the first transaction, Mr Dai and Ms Zhu declared that they had each received independent legal advice from Ms Yang. It is not entirely clear who Ms Yang's client was. Mr Dai and Ms Zhu declared that they had received independent legal advice from Ms Yang in respect of their personal guarantees given in support of the loan. Mr Dai and Ms Zhu also signed a "Declaration by Borrower," which noted their offices of director and secretary of the plaintiff and that they had received independent legal advice regarding the loan and security documents. Whether the advice was to them as director and secretary and their obligations as such, or whether the advice was given to the plaintiff, is not clear.
Beyond the transaction documents and certificates, there is no evidence as to how Ms Yang went about her job, what she was told, or the advice she gave. Where Ms Yang appears to have been brought in at short notice and rendered no fees, it seems unlikely that any substantive advice was given in respect of the proposed transaction beyond the import of documents to be executed. If Ms Yang's client included the plaintiff, then it is unlikely that Ms Yang received comprehensive or accurate instructions as to Mr Dai and Ms Zhu's authority to execute the transaction documents on behalf of the plaintiff, where those instructions came from the couple. Nor did Ms Yang seek to clarify any instructions in respect of the plaintiff by contacting the other director, Mr Liang.
Independent advice must be "meaningful" advice enabling the person advised to make an independent, intelligent choice concerning the transaction: Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 at 36 (per Street J); Rahme at [106]. While an independent solicitor may explain the effect of the documents to be signed, the advice needed may be whether the transaction should be entered into at all: Bester at 33-5. The problem here was that the persons to whom Ms Yang was giving the advice were unauthorised. It did not really matter how comprehensive her advice was; Mr Dai and Ms Zhu were going to execute the documents come what may in order to obtain working capital for the builder.
And why was the plaintiff being 'signed up' with Ms Yang to a loan that was not in its best interests? Because its longstanding solicitor, who was reasonably knowledgeable about the plaintiff's officeholders and corporate history, had decided to act for the lender on the transaction instead. This was why the plaintiff - if it was the plaintiff being advised by Ms Yang - was receiving advice shortly before completion of the transaction from a solicitor, who probably knew very little about the company or the transaction. I do not see the independent solicitor as 'breaking the chain of causation' between the solicitor's breach of fiduciary duty and the consequences which followed for the plaintiff.
[6]
Compensation
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 (per Viscount Haldane LC); Hill v Rose [1990] VR 129 at 144 (per Tadgell J); O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 (per Spigelman CJ); Target Holdings Ltd v Redferns [1996] AC 421 at 432 (per Lord Browne-Wilkinson).
While common law considerations of remoteness and foreseeability are generally irrelevant to remedies for breach of fiduciary duty, in assessing compensation, the courts apply common sense views as to what loss resulted from the breach and so falls to be compensated: Canson Enterprises Ltd V Boughton & Co (1991) 85 DLR (4th) 129 at 163, followed in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]; Jackson & Powell Professional Liability at 3-019 to 3-020 citing Rama v Millar [1996] 1 NZLR 257 at 260 (per Lord Nicholls); Swindle v Harrison (1997) 4 All ER 705 at 733 (per Mummery LJ); Target Holdings Ltd v Redferns [1996] AC 421 at 439.
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: O'Halloran at 273, 276. A duty to mitigate is not relevant to equitable compensation: Re Earth Civil at [2246]; following Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [86]-[87] (per McHugh, Gummow, Hayne and Callinan JJ), at [171]-[173] (per Kirby J).
I accept that, but for the solicitor's breach of fiduciary duty, the plaintiff would not have entered into the first transaction: see [494]. The loss which resulted from the breach was the plaintiff's indebtedness to the lender, which was paid out and became an indebtedness to the second round lenders, which was paid out and became an indebtedness to the third round lenders.
While a duty to mitigate is not relevant to equitable compensation, I do not accept that the plaintiff failed to act reasonably when it did not repay the loans. It is not entirely clear how the plaintiff was supposed to do this, and with what funds. I do not think, however, that the amount of compensation is the whole of the plaintiff's indebtedness to the third round lenders. This is because the loan advanced by the second round lenders not only paid out the first round lender but advanced additional funds. The plaintiff did not press its claim for breach of fiduciary duty against the solicitor in respect of the second transaction. I do not consider that the 'uplift' in the second loan, beyond paying out the first loan, resulted from the solicitor's breach of fiduciary duty on the first transaction and does not fall to be compensated.
Although Weriton placed its solicitor in funds of $4.2 million to complete the second transaction, not all of these funds were ultimately advanced. Surplus funds of $536,757.82 were returned to the lender, such that $3,663,242.22 was advanced. Of this, the first lender was paid out in the amount of $2,355,086.66. Some $391,000 was paid to NSW Revenue for land tax, which benefitted the plaintiff. The remaining $917,155.60 represents an increase in the plaintiff's indebtedness from the first transaction. This accounts for 25% of the loans advanced in the second transaction. Where the third transaction simply refinanced the second transaction, I consider that an appropriate measure of compensation is 75% of the current indebtedness of the plaintiff to the third round lenders.
[7]
Apportionable claim
The solicitor contended that the plaintiff's claim was apportionable for the purposes of Part 4 of the Civil Liability Act 2002 (NSW) and that Mr Dai, Ms Zhu, Piper Alderman, Alice Yang & Associates, Ms Yang and Mr Holt were concurrent wrongdoers. Each of Ms Yang, Piper Alderman and Mr Holt were retained by the plaintiff to act in relation to the first, second and third transactions respectively, and to provide advice with reasonable care and skill. Each failed to provide appropriate advice or obtain proper authority from the plaintiff to act. The plaintiff relied on their advice and entered into the transactions in question, suffering loss.
An apportionable claim is "a claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care": section 34(1), Civil Liability Act. Although an action for common law damages is conceptually distinct from equitable compensation, 'damages' in the Civil Liability Act includes any form of monetary compensation: George v Webb [2011] NSWSC 1608 at [312] (per Ward CJ in Eq). It follows that an action for equitable compensation arising from a breach of fiduciary duties may be treated as an action for damages for the purposes of section 34(1).
What is more difficult is whether the claim against the solicitor in this case can be regarded as a claim 'arising from a failure to take reasonable care.' In Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187, Barrett J expressed the view that the requirement for an action to be 'arising from a failure to take reasonable care' would be made out where if, at the end of the trial, the evidence warrants a finding to that effect and regardless of the absence of any plea of negligence or a failure to take reasonable care: at [30]. In Perpetual Trustee Co Ltd v CTC Group Ltd (No 2) [2013] NSWCA 58, Macfarlan JA disagreed with Barrett J's reasoning in Reinhold, suggesting that section 34(1)(a) required the failure to exercise reasonable care to be an element of the cause of action brought against the defendant: at [22]-[23]. However, Macfarlan JA's views did not form the ratio of that case, as Barrett JA disagreed (at [37]-[38]) and Meagher JA chose not to express a view on the matter (at [36]). In Rahme v Benjamin Khoury Pty Ltd [2019] NSWCA 211; (2019) 100 NSWLR 550, however, the Court of Appeal adopted Macfarlan JA's approach: at [135] (per Macfarlan JA, Bathurst CJ and McCallum JA agreeing).
It follows from Rahme that, for section 34(1) of the Civil Liability Act to be engaged, the failure to exercise reasonable care must be an element of the cause of action pleaded against the defendant. In the present case, the claim brought against the solicitor is for breach of fiduciary duty by acting in a position of conflict. The failure to exercise reasonable care is not an element of that cause of action. Thus, notwithstanding any factual findings of carelessness made against the solicitor, it cannot be said that the cause of action against it is one that arises from a failure to exercise reasonable care for the purpose of section 34(1) of the Civil Liability Act. Accordingly, the proportionate liability regime under Part 4 of the Civil Liability Act does not apply to the claim brought against the solicitor.
[8]
Section 5O
The solicitor contended that it had acted in a manner widely accepted in Australia by peer professional opinion as competent practice and thus was not liable for any loss: section 5O, Civil Liability Act. Section 5O provides a defence to 'liability in negligence,' where 'negligence' is defined as 'failure to exercise reasonable care': section 5.
Section 5O falls within Part 1A of the Civil Liability Act. Section 5A of the Civil Liability Act provides that Part 1A will apply to 'any claim for damages for harm resulting from negligence, regardless of whether the claim is brought in tort, in contract, under statute or otherwise' (emphasis added). Accordingly, a similar question arises as to whether Part 1A of the Civil Liability Act applies to a cause of action for breach of a fiduciary duty to avoid conflicts, in which a failure to exercise reasonable care is not an element.
Different approaches have been taken to this question: Gales Holdings Pty Ltd v Tweedy Shire Council [2011] NSWSC 1128 (per Bergin CJ in Eq) at [346] cf Paul v Cooke (2013) 85 NSWLR 167; [2013] NSWCA 311 (per Leeming JA) at [40]. It is unnecessary to decide this as there is no evidence to suggest that the solicitor acted in a manner widely accepted in Australia as competent practice. Nor do I accept that it did. As the lenders put it, "it may be said that some aspects of Mr Toltz's conduct did not bespeak optimal practice."
[9]
Statutory scheme
The solicitor participated in the Law Society of New South Wales professional standards scheme for the 2018/19 year (from 22 November 2018 to 21 November 2019) and the 2019/20 year. As such, any liability to the plaintiff was said to be limited to $1.5 million. A discretionary higher liability limit of $15 million applied for "Class of case: Property related matters/Transaction Type: All property related matters."
Section 28 of the Professional Standards Act 1994 (NSW) provides:
28 Limit of occupational liability by schemes
(1) To the extent provided by this Act and the provisions of the scheme, a scheme limits the occupational liability, in respect of a cause of action founded on an act or omission occurring during the period when the scheme is in force, of any person to whom the scheme applied at the time when the act or omission occurred.
(2) The applicable limitation of liability is the limitation specified by the scheme as in force at the time at which the act or omission giving rise to the cause of action concerned occurred.
The Law Society of New South Wales Professional Standards Scheme commenced on 22 November 2018. The solicitor, being Gerrard Toltz Pty Ltd, was a member of that scheme. Mr Toltz was also a member of an earlier professional standards scheme, but he is not the defendant in these proceedings.
The Scheme limits the civil liability (arising in tort, contract or otherwise) of a participating member for damages arising from a single cause of action founded on an act or omission in relation to the provision of legal services to the extent that those damages exceed a monetary ceiling specified in clause 4.4: clause 4.1, The Law Society of New South Wales Professional Standard Scheme; section 4(1), Professional Standards Act 1994. If a member of the scheme is able to satisfy the Court that they have the benefit of an insurance policy insuring them against the liability to which the cause of action relates, and the amount payable under that policy is not less than the amount of the monetary ceiling, then the member is "not liable for damages in relation to that cause of action above the amount of that monetary ceiling": clause 4.2.
Clause 4.4 provides that the monetary ceiling applicable "under the Scheme at the Relevant Time" is to be determined according to a table. Relevantly, Class 1, where members "were at the Relevant Time in a Law Practice consisting of up to and including 20 Principals and where the Law Practice generates total annual fee income for the financial year at the Relevant Time up to and including $10m," a monetary ceiling of $1.5 million applies. "Relevant Time" means, when referring to a cause of action founded on an act or omission, the time of that act or omission occurring: clause 1.2.
Here, the act or omission was the solicitor's breach of fiduciary duty in acting for the lenders on the first transaction. Where the first transaction completed on 14 November 2018, the breach of fiduciary duty occurred before the commencement of the Scheme. As such, the monetary ceiling does not apply to the cause of action brought against the member founded on that act or omission.
[10]
ORDERS
The plaintiff's claims against the lenders have failed. Thus, it is not necessary to consider the lenders' cross claims. For these reasons, I make the following orders:
1. DECLARE that the eighth defendant was not validly appointed as the secretary of the plaintiff.
2. NOTE that Court intends to make a compensation order against the first defendant under section 1317H(1) of the Corporations Act 2001 (Cth) for any amount owing by the plaintiff to the third and fourth defendants.
3. NOTE that Court intends to enter judgment against the second defendant for equitable compensation in an amount being 75% of the amount owing by the plaintiff to the third and fourth defendants.
4. DIRECT the third and fourth defendants, within 7 days, to file and serve an affidavit or Dobbs' certificate setting out the balance owing by the plaintiff to the defendants.
5. DIRECT the first and second defendants, within 14 days, to file and serve any affidavit or submissions in respect of the affidavit or Dobbs' certificate served in accordance with Order 4.
6. DIRECT the parties to confer in respect of costs orders and, within 7 days, provide the Court with short minutes of order and, to the extent such orders are not agreed, submissions (limited to 3 pages) in support of the costs order sought by that party.
7. NOTE that the Court will make a compensation order, enter judgment for equitable compensation and make costs orders on the papers, unless any party seeks a further hearing in respect of these matters.
8. Otherwise dismiss the Summons and Cross Claims.
9. DIRECT the parties to notify any errors or omissions within 7 days.
[11]
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: 05 December 2023
Parties
Applicant/Plaintiff:
City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust
compensation where 'conflict of duty and duty' - purpose of duty to avoid conflicts is to ensure that solicitor does not prefer one client's interests over the other - by acting in breach, solicitor disregarded plaintiff's best interests and focussed instead on lender's interests - had solicitor had regard for plaintiff's interests, solicitor would have taken steps to ascertain where plaintiff's interests lay - second director would have been notified of unauthorised loans, which would not have gone ahead - relevance of independent solicitor - solicitor liable to compensate plaintiff for indebtedness incurred as a result of entering and refinancing first loan.
CIVIL LIABILITY ACT - equitable obligations - whether claim against solicitor apportionable under Part 4 of the Civil Liability Act 2002 (NSW) - s 34(1) of Civil Liability Act requires failure to take reasonable care to be an element of the plaintiff's cause of action - claim against solicitor was a claim for breach of 'no conflicts' duty - failure to take reasonable care not an element of claim - claim not apportionable.
PROFESSIONAL STANDARDS SCHEME - whether solicitor's liability limited - scheme not in force when act or omission giving rise to cause of action occurred.
Legislation Cited: Evidence Act 1995 (NSW), s 140(2)t
Corporations Act 2001 (Cth), ss 126, 127, 128, 129, 180, 181, 182, 183, 198A, 204D, 204F, 1317H(1)
Home Building Act 1989 (NSW), s 92(1)
Civil Procedure Act 2005 (NSW), s 100
Civil Liability Act 2002 (NSW), ss 5A, 5O 34(1)
Professional Standards Act 1994 (NSW), ss 4(1), 28
Cases Cited: 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd [2023] NSWCA 72
A v New South Wales [2007] HCA 10; (2007) 230 CLR 500
ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2015) 224 FCR 1
Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1; [2014] WASC 102
Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474
Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201
Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd (2013) 282 FLR 351; [2013] NSWCA 459
Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC1229
BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227
Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1
Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30
Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384
Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362
Bristol & West Building Society v Mothew [1998] Ch 1
Canson Enterprises Ltd V Boughton & Co (1991) 85 DLR (4th) 129
Caratti v Mammoth Investments Pty Ltd (2016) 50 WAR 84; 113 ACSR 31; [2016] WASCA 84
CEO of Customs v Liang [2004] NSWSC 1240 (conviction); CEO of Customs v Liang [2005] NSWSC 591
Chan v Zacharia (1984) 154 CLR 178
Chappell v Hart (1998) 195 CLR 232; [1998] HCA 55
Clay v Clay (2001) 202 CLR 410; [2001] HCA 9
CLGC Pty Ltd v Zhang [2021] NSWSC 946
Correa v Whittingham [2013] NSWCA 263
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72
Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd [2022] NSWSC 910
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd [1988] 14 NSWLR 523
Errichetti Holdings Pty Ltd v Western Plaza Hotel Corporation Pty Ltd [2006] WASC 113; (2006) 201 FLR 192
Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375
Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480
Furs Ltd v Tomkies (1936) 54 CLR 583
Gales Holdings Pty Ltd v Tweedy Shire Council [2011] NSWSC 1128
Gallop Reserve Pty Ltd v Matton Developments Pty Ltd [2019] QSC 113
George v Webb [2011] NSWSC 1608
Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453
Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336
Hill v Rose [1990] VR 129
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Hudson Investments Group Ltd v Atanaskovic [2010] NSWSC 1055
In Perpetual Trustee Co Ltd v CTC Group Ltd (No 2) [2013] NSWCA 58
In the matter of Hot Frog Pty Ltd [2022] NSWSC 6
In the matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) [2007] NSWSC 124; (2007) 63 ACSR 1
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34
Law Society of New South Wales v Harvey [1976] 2 NSWLR 154
Maguire and Another v Makaronis and Another [1997] HCA 23; (1997) 188 CLR 449
Minkin v Landsberg [2016] 1 WLR 1489
Motor Yacht Sales Australia Pty Ltd v Cheng [2021] NSWSC 1141
Neville v Lam (No 3) [2014] NSWSC 607
Nocton v Lord Ashburton [1914] AC 932
Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Parker v McKenna (1874) LR 10 Ch App 96
Paul v Cooke (2013) 85 NSWLR 167; [2013] NSWCA 311
Payne v Parker [1976] 1 NSWLR 191
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31
Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1996) 115 CLR 266
Queensland Mines Ltd v Hudson (1978) 18 ALR 1
Rahme v Benjamin Khoury Pty Ltd [2019] NSWCA 211; (2019) 100 NSWLR 550
Rama v Millar [1996] 1 NZLR 257
Re Earth Civil Australia Pty Ltd (in liq) [2021] NSWSC 966
Re Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602
Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187
Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948
Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308
Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWSC 438
Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39
Roden v International Gas Applications (1995) 18 ACSR 454
Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18
Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29
Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068
Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722
Swindle v Harrison (1997) 4 All ER 705
Target Holdings Ltd v Redferns [1996] AC 421
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Yee v Robert [1997] 3 LRC 138
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15
Texts Cited: A Abadee et al., Professional Liability in Australia (Thomson Reuters, 4th ed, 2023)
Matthew Conaglen, Fiduciary Loyalty (Hary Publishing, 1st ed, 2010)
Patrick Parkinson, The Principles of Equity (Thomson Lawbook Co, 2nd ed 2003)
Paul Finn, Fiduciary Obligations (Federation Press, 2nd ed, 2016)
PW Young QC, Declaratory Orders (Butterworths, Second Edition, 1984)
Solicitors Manual (LexisNexis Butterworths, last updated November 2023)
Category: Principal judgment
Parties: City Garden Australia Pty Ltd (Plaintiff)
Meng Dai (First Defendant)
Gerrard Toltz Pty Ltd (Second Defendant)
Gemi 130 Pty Ltd (Third Defendant)
Bridge Street Capital No 2 Pty Ltd (Fourth Defendant)
Wallis Island Pty Ltd (Sixth Defendant)
Maxmara Trinity Pty Ltd (Seventh Defendant)
Lin Zhu (Eighth Defendant)
Gemi Investments Pty Ltd (Ninth Defendant)
Weriton Finance No 2 Pty Ltd (Tenth Defendant)
Saddleback Mountain Estates No 2 Pty Ltd (Eleventh Defendant)
Maxmara and JA International Pty Ltd (Fifteenth Defendant)
Representation: Counsel:
Mr P A Clarke (Plaintiff)
Mr M Dai (First Defendant self-represented, Sixth, Seventh, Fifteenth Defendants)
Ms M Hall (Second Defendant)
Mr H Somerville/Mr J McEnaney (Third, Ninth Defendants)
Mr MW Young SC (Fourth, Tenth, Eleventh Defendants)
Ms L Zhu (Eighth Defendant self-represented)
ONUS AND INFERENCES
In a case such as this, where the Court has little reliable evidence, inferences, where available, may prove important; onus may prove decisive. The burden of proof rests on the plaintiff. The standard of proof is the civil standard, being proof on the balance of probabilities but qualified having regard to the gravity of the questions to be determined: Evidence Act 1995 (NSW), section 140(2)t; Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362 (per Dixon J). Further, at 361: "The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found."
Here, the plaintiff contends that the actions of its director, Mr Dai, were unauthorised. As to whether the plaintiff has discharged its onus, it has been said that the "difficulty of proving a negative is well known": A v New South Wales [2007] HCA 10; (2007) 230 CLR 500 at [60] (per Gleeson CJ, Gummow, Kirby, Hayne, Heydon and Crennan JJ). As Campbell JA (McColl JA and Handley AJA agreeing) explained in Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78]:
If a plaintiff has the onus of proving a negative proposition, the fact that the defendant has greater means to produce evidence which contradicts that negative proposition, does not mean that the plaintiff ceases to have the onus of proof of that negative proposition. However, once the plaintiff establishes sufficient evidence from which, if that evidence is accepted, the negative proposition may be inferred, an evidential onus shifts to the defendant to adduce evidence that tends to show that the negative proposition is incorrect. If a defendant adduces such evidence, the plaintiff must then, as part of its overall burden of proof, deal with that evidence either by submission or argument. …
Whilst the plaintiff bore the onus in proving that payments were unauthorised, "where material evidence is peculiarly within a party's knowledge, it may be sufficient for the opposing party to adduce slight evidence of a matter in issue": Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453 at [26] (per Beazley P), citing Lord Mansfield CJ's maxim in Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 at 970. As Gleeson J likewise summarised in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227 at [125]:
All evidence "is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted": Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:
[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …
In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …
Mr Liang and related entities
Mr Liang is a businessman who hails from China but has lived in Australia for many years. Mr Liang made his money importing clothing from China. His first company, New Century Clothing Co Pty Ltd, was incorporated in 1998, followed by a series of related companies with "NCC" or "NCC Fashion" in the company name. This is relevant where email addresses with "NCC" or "nccfashions" indicate that Mr Liang or his employee were copied in, and thus aware of, particular communications: see, for example, at [72].
Mr Liang's business activities were not without incident. In 2003, Mr Liang was successfully prosecuted for, essentially, evading customs duty by understating the price paid for imported clothing. Substantial fines were imposed: CEO of Customs v Liang [2004] NSWSC 1240 (conviction); CEO of Customs v Liang [2005] NSWSC 591 (sentence). Of this, Mr Liang said he "had some issues with the custom because my bookkeeping at that time was not properly done … my record was no good." That would appear to be an understatement. Mr Liang said he did not appeal the conviction as he did not have money. That may have been an overstatement. The lenders pointed to this as one of many reasons I should attach no weight to Mr Liang's evidence. I have approached his evidence with caution for the reasons earlier stated. Where the evidence before James J is not before me, and the facts of this case are 'a world away,' I have otherwise taken Mr Liang as I have found him in this case and on the evidence before me.
In 2013, Mr Liang began to dabble in property development. He incorporated a series of companies to be deployed in this endeavour, the first of which was Ronghai Property Pty Ltd. A director and shareholder in this company was Libing Lin, who I infer was Jack Lin: see [72]. Mr Lin was Mr Liang's employee, albeit Mr Liang is no longer on speaking terms with him. Mr Lin later liaised with Mr Dai and the solicitor on behalf of Mr Liang.
In 2015, Mr Liang incorporated Rose Ives Pty Ltd. Mr Liang is the director and secretary of this company, which is wholly owned by himself and his wife's company, LV.Esb Pty Ltd. Rose Ives later held Mr Liang's interests in the North Rocks project.
Mr Liang is an experienced businessman familiar with corporations and the lodgement of documents with the Australian Securities & Investments Commission (ASIC). That said, having regard to Mr Liang's contemporaneous emails, his familiarity with complex finance documents and property transactions does not appear to be well developed.
Actual authority
It is timely to consider any limits imposed on the authority of the plaintiff's directors, either by the constitution or the trust deed, where the plaintiff contends that Mr Dai was not permitted to execute finance documents absent a resolution of the board. The plaintiff's constitution provided:
directors - powers
11.1 The business of the company is to be managed by or under the direction of the directors.
11.2 The directors may exercise all the powers of the company except any powers that the Corporations Act or this constitution (if any) requires the company to exercise in general meeting.
The constitution did not require the company to exercise any powers in general meeting, for the purposes of clause 11.2. As to the requirements for a meeting of directors, the constitution provided that a director could call a meeting of directors by giving reasonable notice to other directors: clause 22.1. The quorum for a meeting of directors was 51% of the directors: clause 24.1; Schedule 4. A resolution of the directors was passed if the majority of the votes cast by directors was in favour of the resolution: clause 25.1.
It will be recalled that the plaintiff was trustee of the Trust. Clause 19(e) of the Unit Trust Deed provided: (emphasis added)
19 TRUSTEE OBLIGATIONS
The Trustee: -
…
(b) Shall keep or cause to be kept proper Minutes of its decisions relating to the Trust Fund.
…
(e) In exercising any of the powers or discretions of the Trustee hereunder, the Trustee, where it is a company shall act on the resolution of the Board of Directors made in accordance with the Constitution … All such resolutions shall be evidenced in writing and held with the records of the Trust.
As will be seen, the obligation for the directors to act on resolutions recorded in writing was observed in the breach.
Clause 27(s) of the Unit Trust Deed also provided:
27 POWERS OF TRUSTEE GENERALLY
… the Trustee in its absolute discretion shall have and may exercise the following powers in respect of the Trust Fund:
…
(k) The Trustee may borrow or raise money from time to time for the purposes of the Trust Fund without limitation … The Trustee shall further have power to give security over the Trust Fund or any part of it for any such raising or borrowing. …
As such, when Mr Dai was the sole director of the plaintiff, he had authority to make decisions on behalf of the company in respect to raising finance. The constitution of the plaintiff company did not require resolutions on this subject to be passed at a general meeting. The plaintiff did not observe the requirements of the Trust Deed, that is, keeping a proper minute of Mr Dai's decisions as the sole director of the company when exercising the power as trustee to borrow or raise money under clause 26(k) of the Unit Trust Deed.
Principles
There was no dispute as to the duties and obligations owed by a director. Directors have a duty of care at general law and pursuant to section 180(1) of the Corporations Act, which provides:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Whether a director has exercised reasonable care and diligence is an objective test; the question is what an ordinary person with the knowledge and experience of the director might be expected to have done in the circumstances if they were acting on their own behalf and involves balancing the risk of harm and potential benefits to the company: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) [2007] NSWSC 124; (2007) 63 ACSR 1 at [1437] (per McDougall J); Daniels v Anderson at 501 (per Clarke and Sheller JJA).
Directors have a duty to act in good faith and for a proper purpose under section 181(1) of the Corporations Act, which provides:
Good faith-directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Section 182(1) of the Corporations Act also provides:
Use of position-directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Similarly, section 183 provides that a person who obtains information because they are a director of a corporation must not improperly use that information to gain an advantage for themselves or someone else or cause detriment to the corporation.
Fiduciary duties operate alongside the statutory duties in sections 180 to 183 of the Corporations Act: section 185. 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".
Statutory assumptions
I have found that Mr Dai did not have actual authority to enter into the first transaction on behalf of the plaintiff: see [105]-[109]. I have also found that Ms Zhu was not validly appointed as secretary, when she executed the transaction documents. The lender contends, however, that it was entitled to make the assumptions in section 129 of the Corporations Act, such that neither matter invalidates the transaction.
Section 127(1)(a) of the Corporations Act provides that a company may execute a document without using a company seal if the document is signed by a director and a company secretary of the company. Sections 128 and 129 of the Corporations Act relevantly provides: (emphasis added)
128 Entitlement to make assumptions
(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
…
(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.
(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.
129 Assumptions that can be made under section 128
Constitution and replaceable rules complied with
(1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.
Director or company secretary
(2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:
(a) has been duly appointed; and
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
The first question is whether Gemi Investments had "dealings with" the plaintiff. "Dealings with a company" embraces purported dealings and is not confined to cases where the person representing the company has actual authority: Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 at 733 (per Gleeson CJ). However, some protection to the company is given by the requirement that the person must be engaged in dealings with the company in the first place: Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068 at [82] (per Hodgson CJ in Eq).
That is, while it is not necessary that the person representing the company has authority to commit the company to the relevant transaction or execute the relevant documents, it remains necessary that the person has authority to undertake some negotiations or steps, so that the dealings in relation to which the document is executed are properly considered to be dealings with the company: Soyfer at [82]. The person with whom the dealings were had must have actual or ostensible authority to engage in communications or negotiations on the company's behalf: Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd (2013) 282 FLR 351; [2013] NSWCA 459 at [32], [41]-[45] (per Meagher JA, Macfarlan and Barrett JJA agreeing); followed in Caratti v Mammoth Investments Pty Ltd (2016) 50 WAR 84; 113 ACSR 31; [2016] WASCA 84 at [592] (per Newnes and Murphy JJA), at [404] (per Buss JA).
"information provided by the company"
As to whether Gemi Investments was entitled to make the assumption in section 129(2) - that Ms Zhu had been duly appointed as company secretary - a question arises as to whether the Form 484 lodged with ASIC in respect of her appointment was "information provided by the company." By its Reply, the plaintiff contended that the Form 484 was not information provided by the plaintiff, as SWA had not been duly appointed. This contention was squarely at odds with the Second Further Amended Statement of Claim, where the plaintiff positively asserted that Mr Dai "through an agent, S[WA], lodged" the Form 484 with ASIC.
Mr Liang addressed this late contention in his seventh affidavit, being in reply, and provided three weeks before the commencement of the hearing. Mr Liang said that the Form 362 notifying ASIC of SWA's appointment was lodged without his knowledge and approval and absent a resolution of the board of directors of the plaintiff. I attach little weight to Mr Liang's late evidence. After its appointment by Mr Dai, SWA continued to be the plaintiff's registered agent and accountant for some time, including after Mr Liang took responsibility for the company's accounts out of Mr Dai's hands in September 2019: see [391]. The fact that Mr Liang continued to work with SWA for more than a year without comment on this subject indicates that he regarded the appointment of the agent as within the scope of Mr Dai's authority as a director at the time. I find that the Form 484 was provided to ASIC "by the company", that is, by the plaintiff's registered agent. Gemi Investments was entitled to assume that Ms Zhu had been duly appointed as company secretary: section 129(2)(a).
Gemi Investments was also entitled to assume that Ms Zhu had authority to exercise the powers and perform the duties customarily exercised or performed by a company secretary of a company like the plaintiff: section 129(2)(b). The secretary's authority ordinarily extends to countersigning documents pursuant to a resolution of the board of directors: Northside Developments at 204-205; Motor Yacht Sales Australia Pty Ltd v Cheng [2021] NSWSC 1141 at [134] (per Payne JA). Here, there was no resolution of the plaintiff's board of directors authorising the secretary to execute the transaction documents, but Gemi Investments was entitled to assume that the plaintiff's constitution had been complied with: section 129(1).
"knew or suspected"
Gemi Investments is not entitled to make the assumptions in section 129 if "at the time of the dealings" it "knew or suspected" that the assumption was incorrect: section 128(4). The onus of proof in relation to section 128(4) lies on whoever is challenging a person's entitlement to make an assumption, being, in this case, the plaintiff: Soyfer at [69]. The entitlement to make an assumption is only lost if it is shown that the person "actually knew or actually suspected" that the assumption was incorrect, where the words of the statute are "plainly not apt to cover the case where circumstances are such as to put a reasonable person upon enquiry": Soyfer at [70].
In Errichetti Holdings Pty Ltd v Western Plaza Hotel Corporation Pty Ltd [2006] WASC 113; (2006) 201 FLR 192, Master Newnes considered that suspicion is more than a mere idle wondering but a positive feeling of actual apprehension or mistrust, applying Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1996) 115 CLR 266 at 303 (per Kitto J). At [74]:
In my view, s 128(4) does not preclude a person from relying upon a s 129 assumption simply because there has been a failure on their part to enquire, even where a reasonably prudent person would have made enquiries. The section does not incorporate the concept of being 'put upon enquiry'. Nor will such a failure be sufficient to establish that the person knew or suspected the fact that such enquiry would have revealed. The person must be found to have had at least an "actual apprehension or mistrust, amounting to a slight opinion" that the fact exists. Of course, in a particular case it might be inferred from what the person did know, or otherwise from the particular circumstances of the case, that no inquiry was made because the person suspected the fact existed and preferred not to have that suspicion confirmed.
See likewise Re Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602 at [45] (per Black J); Caratti v Mammoth Investments Pty Ltd (2016) 50 WAR 84; 309 FLR 1; [2016] WASCA 84 at [377] (per Buss JA), at [591] (per Newnes and Murphy JJA).
The relevant time to determine whether such knowledge or suspicion is present is "at the time of the dealings"; being put on notice after the event is not a sufficient basis: Correa v Whittingham [2013] NSWCA 263 at [127] (Gleeson JA, Barrett JA and Tobias AJA agreeing).
Whilst the plaintiff relied on the solicitor's knowledge said to have been imputed to the lenders, a solicitor's knowledge should not be imputed to their client for the purpose of section 128(4), because the provision "requires actual knowledge or actual suspicion that the relevant assumption is incorrect, not imputed knowledge": Correa v Wittingham at [168(d)]. It follows that the focus of the inquiry in this case should be on what the lender knew.
Scope of retainer
The plaintiff contended that, in July 2016, Toltz Lawyers was retained to act for and advise it in relation to the acquisition and development of the North Rocks site. Toltz Lawyers so acted continuously from July 2016 until April 2020, in particular, on the purchase of the site, in relation to the Westpac facility, in respect of 'off the plan' sales and generally in relation to the development. It was an implied term of the retainer that the solicitor would perform its work with due care and skill. The solicitor owed a duty of care requiring it to use all reasonable care, skill and diligence in the provision of its legal services to ensure that the plaintiff did not suffer loss or damage. In addition, by reason of the relationship of solicitor and client which existed, the solicitor owed fiduciary duties to the plaintiff inter alia to act for the plaintiff with undivided loyalty and not to act in, or put itself in a position of conflict, between the plaintiff and a third party for whom the solicitor also acted. In respect of the first transaction, the plaintiff contended that the solicitor acted as the solicitor for the lender in circumstances where the solicitor had an ongoing retainer to act as the solicitor for the plaintiff.
The solicitor denied the existence of a general retainer in relation to the North Rocks development. Rather, the solicitor was instructed to act on three specific matters, being: the purchase of the North Rocks property; putting into place an initial development structure for the plaintiff to conduct a development at the site; the Westpac facility; and conveyancing associated with 'off the plan' sales. The initial retainer was said to have come to an end in early February 2017, by which time the purchase had been completed and a Development Deed had been executed (and varied) with the previous owners of the site. The retainer in respect of the Westpac facility came to an end in December 2017, when the facility settled. While the conveyancing retainer continued from February 2017 until April 2020, it did not extend to providing advice in relation to the development. At the time of the first transaction, the solicitor admitted that it acted for the lender but denies that it had an ongoing retainer to act for the plaintiff, and only acted for the plaintiff in respect of 'off the plan' sales. The solicitor was not obliged to, or asked to, and did not in fact provide any legal services to the plaintiff in relation to the first transaction.
The terms of the solicitor's initial retainer were wide. The scope of works was "to assist in financing, acquisition of development rights, sale of units and incidental matters relating to the [North Rocks development]." By its description, the retainer was also likely to be of an extended duration, where the plaintiff had yet to acquire the North Rocks site when the costs agreement was issued in August 2016. This broad retainer became confined when the plaintiff retained King & Wood Mallesons to undertake part of the legal work for the plaintiff in August 2016, leaving Mr Toltz to act in relation to the second mortgage and Deed of Development: see [58]. By November 2016, however, the solicitor was invoicing the plaintiff for advice in relation to "the finance and direction of the North Rocks project." In February 2017, Mr Toltz rendered an invoice to the plaintiff for "advising you on funding for this project." From the description in the invoices, the solicitor's role had re-expanded after King & Wood Mallesons completed its retainer. Further, the solicitor's invoices indicate that the solicitor may have been giving more than legal advice, but also strategic or commercial advice.
Fully informed consent
This brings us to the issue of consent. The plaintiff contends that the solicitor did not obtain the fully informed consent of the plaintiff to act on behalf of Gemi Investments in relation to the transaction. The solicitor contended that Mr Dai gave consent to the solicitor acting from Gemi Investments; there must have been informed consent as Mr Dai was aware of who the solicitor was acting for. Mr Dai had authority to give such consent on behalf of City Garden.
While there is no duty as such on the fiduciary to obtain an informed consent, the existence of an informed consent negatives what is otherwise a breach of duty: Maguire v Makaronis at 467. Where one of the two beneficiaries has given an informed consent to the fiduciary's double employment, the resulting conflict is regarded as being that of the beneficiary's own making: Fiduciary Obligations at [583].
What is required for a fully informed consent is a question of fact in all the circumstances; there is no precise formula to determine in all cases if fully informed consent has been given: Maguire v Makaronis (1996) 188 CLR 449 at 455. Generally, the fiduciary must disclose all relevant information necessary for the beneficiary of the obligation to make a proper judgement as to whether to give consent to an activity which would otherwise be a breach of duty: Patrick Parkinson, The Principles of Equity (Thomson Lawbook Co, 2nd ed 2003) at [1027]. The onus of proof is on the fiduciary to demonstrate that informed consent was given: Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 at 398 (per Isaacs J).
As to whether the plaintiff consented to its solicitor acting for the lender on the first transaction, I accept Mr Toltz' evidence that, in July 2017, he told Mr Dai that he would be acting for Mr Fleming and his companies for any loan obtained, and Mr Dai agreed: see [95]. I do not accept, however, that Mr Dai's consent on that occasion constituted fully informed consent for all subsequent transactions involving Mr Fleming and his companies, for two reasons. First, Mr Toltz only sought consent in respect of the transaction in July 2017 and did not seek consent 'for all time'. Second, even if such a consent had been sought and given, circumstances may arise such that it was not possible, or proper, for a solicitor to act even with such consent: Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 170-1 (per Street J); Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201; (2021) 105 NSWLR 542 at [100], [108].
By the time of the first disputed transaction, more than a year had passed since Mr Toltz had spoken to Mr Dai in July 2017. Mr Toltz had then understood that Mr Dai was the sole director of the plaintiff. (Although Mr Liang was then a director, Mr Toltz did not become aware of this until sometime later.) It was now November 2018. The plaintiff had two directors. The solicitor had been aware of this since September 2017 and recently confirmed the position in a company search obtained on 7 November 2018.
Breach of fiduciary duty
The plaintiff contends that the solicitor knew each of the matters described at [218]-[219]. The solicitor breached its fiduciary duties owed to the plaintiff by acting for the lender on the first transaction where there was a conflict between the plaintiff's interests and those of Gemi Investments. Further, the solicitor effectively preferred the interests of its client, Gemi Investments, where it was not in the plaintiff's interests to obtain the loan. The plaintiff had the undrawn portion of the Westpac facility at its disposal, as compared to the more expensive facility provided by Gemi Investments. The Westpac facility required certification of works being performed and completed prior to moneys being released, while the loan from Gemi Investments did not. As a result, there was a real risk that moneys advanced by Gemi Investments would not be applied for the benefit of the plaintiff in respect of the North Rocks development or at all. This risk was said to have been realised. It was said to be in Gemi Investments' interests to advance the loan and thereby earn interest, fees and charges.
Of the matters it was said that the solicitor knew at the time, the solicitor admitted that it knew that Mr Liang was a director of the plaintiff and that Rose Ives was a substantial unitholder of the Trust. Further, the solicitor knew generally that the builder was a building and development company which serviced clients other than the plaintiff. However, the solicitor had no knowledge of Mr Liang's level of involvement in the plaintiff's decision making. Nor did the solicitor know that the moneys were paid to the builder. Rather, the funds advanced to the plaintiff were paid as directed by the plaintiff. The solicitor denied any breach of fiduciary duty. The matters on which the plaintiff suggested that the solicitor should have given advice - in respect of use of the Westpac facility instead of obtaining the loan from Gemi Investments - were not things a solicitor would advise on in any event, being matters relating to financial rather than legal advice.
It is obviously important to focus on the nature of the equitable obligation and the nature of the suggested breach. While the solicitor is classically a fiduciary to their client, it is necessary to ascertain the particular obligations owed to the client and to consider what acts and omissions amounted to failure to discharge those obligations: Maguire v Makaronis at 463-4. Similarly, in Beach Petroleum NL v Kennedy at [188]-[189]:
188 Even in the case of a solicitor client relationship, long accepted as a status based fiduciary relationship, the duty is not derived from the status. As in all such cases, the duty is derived from what the solicitor undertakes, or is deemed to have undertaken, to do in the particular circumstances. Not every aspect of a solicitor client relationship is fiduciary. Conduct which may fall within the fiduciary component of the relationship of solicitor and client in one case, may not fall within the fiduciary component in another.
189 The relationship of solicitor and client has at its core an element of confidence and influence which equity will preserve and protect. Nevertheless, the confidence and influence are not always so pervasive as to require equitable intervention in every facet of the relationship.
Claim in respect of the secretary
The plaintiff contends that the transaction documents were not validly executed by the plaintiff and are void and unenforceable as against it as Ms Zhu was not validly appointed as secretary of the company. Whilst I have found that Ms Zhu was not validly appointed on 8 November 2018, Mr Liang had become aware of her appointment by 28 November 2018 and took no issue with this.
A similar situation was considered in Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd [2022] NSWSC 910, where a rogue lodged a Form 484 with ASIC, appointing himself as the sole director and secretary of a company. Although the true directors became aware of this, they did nothing for a period of time, whilst endeavouring to resolve the rogue's actions through family negotiations. Meanwhile, the rogue effected a fraud involving a third party, as he was able to hold himself out as a director of the company. Peden J observed at [42]-[43]:
42 … another way of looking at the factual situation is that [the company] impliedly ratified [the rogue's] conduct through acquiescence of what he had done, such that his conduct ought to be considered as though it was originally authorised by the true officeholders: see eg Davison v Vickery's Motors Ltd (in liq) (1925) 37 CLR 1 at 19 (Isaacs J). Silence, acquiescence or inactivity may be sufficient to demonstrate implied ratification: Taylor v Smith (1926) 38 CLR 48 at 54 (Knox CJ); Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at 234 (Young CJ in Eq); Pollard v Wilson [2010] NSWCA 68 at [121] (McClellan CJ at CL, with whom Macfarlan and Young JJA agreed).
43 … However, the [company] would have been required to prove that the true officeholders, as principals, had full knowledge of the material facts … : Learn and Play (Rhodes No 1) Pty Limited as Trustee for Rhodes 1 Childcare Centre Unit Trust v David John Frank Lombe [2011] NSWSC 1506 at [21]-[22] (Pembroke J), and the authorities cited therein.
It cannot be said that Mr Liang, as a director of the plaintiff, had full knowledge of the material facts which resulted in Ms Zhu's appointment as secretary by fellow director, Mr Dai. In particular, Mr Liang was not aware that Ms Zhu had been appointed as secretary in order to execute documents in respect of the first transaction, or that the first transaction had been entered into at all: see [205]. Nor was Mr Liang aware that Mr Dai had instructed SWA to prepare the necessary documents to appoint his wife as secretary to bypass the obstacle which Mr Liang had presented to that transaction.
As such, although Mr Liang became aware that Mr Zhu had been appointed as secretary of the company, he did not have full knowledge of the material facts which led to her appointment, such that I do not think it can be said that he, as a director of the company, ratified his co-director's actions.
Of course, the principle from Blatch v Archer does not alter the onus of proof, nor the position that "the circumstances in which … the absence of evidence may be taken to account are confined by known and accepted principles …": Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [165] (per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The Court may draw inferences to choose between competing versions of events. As Buchanan J explained in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151 at [31]: (citations omitted)
Inference does not mean conjecture, even in a civil case. In civil proceedings the inferential process "may fall short of certainty, [but] must be more than an inference of equal degree of probability with other inferences, so as to avoid guess or conjecture" … A court is not authorised to choose between guesses, even on the ground that one guess seems more likely than another or others.
See also Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 at [84]-[88] (per Spigelman CJ).
If the Court is unable to choose between competing versions, the party on whom the onus lies will not succeed. As Beech-Jones J (as his Honour then was) explained in Neville v Lam (No 3) [2014] NSWSC 607 at [99]: (citations omitted)
[I]n some circumstances a Court may find itself unable to choose between competing versions. In such a case, the party upon whom the burden of proof lies will have failed to discharge it.
See likewise Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34 at [60], citing Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 at 955.
The parties submitted that Jones v Dunkel inferences should be drawn in respect of the failure to call various witnesses. I have dealt with these submissions where that witness becomes relevant to a finding of fact: at [114] (Steve Ju), [160] and [196] (Yan (Monica) Su), [167] (SWA) and [338] (Robert Riddell).
In respect of missing documents, a party's failure to produce documentary evidence to corroborate their account, where they might be expected to be in possession of such documents, may give rise to an inference that such documents would not support their account: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 320 (per Windeyer J). The lenders submitted that a Jones v Dunkel inference should also be drawn from the plaintiff's failure to produce financial statements which recorded the existence of the disputed loans, such that Mr Liang may be taken to have been aware of them. A problem with this submission is that the plaintiff's books and records were under the control of Mr Dai at the relevant time and incomplete. In these circumstances, whilst the plaintiff bears the onus of proof, its means to prove what happened in the years in which Mr Dai ran the company was somewhat limited.
It does appear that Mr Liang was initially content to be a silent investor and to leave the North Rocks project to Mr Dai's management, where Mr Liang had previously had a profitable experience working with Mr Dai on the Carlingford development. Mr Liang was, however, watchful of Mr Dai's activities and tasked staff, being Mr Lin and Mr Xu, to variously obtain information about the project from Mr Toltz or to become a director of the plaintiff. However, the funding arrangements for the project strayed from those initially discussed. Mr Liang provided more funding than had been discussed. He was now being asked to provide further funds. Mr Dai had been unable to provide his portion of funding, other than by obtaining loans secured inter alia over the plaintiff's property. I infer that Mr Liang was initially reluctant to become a director himself. As his investment in the North Rocks project increased, Mr Liang overcame that hesitation. He was no longer content to be a silent investor. This was hardly surprising in the circumstances.
Clause 11 of the constitution is in the same terms as section 198A of the Corporations Act 2001 (Cth). As I observed in In the matter of Hot Frog Pty Ltd [2022] NSWSC 6 at [82], while section 198A of the Corporations Act does not confer authority on a single director, directors may nevertheless make 'informal decisions' by a "meeting of the minds" which have the effect of a resolution passed in a duly convened meeting. Whether there was any such decision is a question of fact in each case: Roden v International Gas Applications (1995) 18 ACSR 454 at 456 (per McClelland CJ in Eq); In the matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332 at [122] (per Black J).
Where the plaintiff now had two directors, the question is whether the directors agreed - notwithstanding the absence of any formal resolution - that Mr Dai had authority to enter into the finance transactions without consulting Mr Liang. The very matters which prompted Mr Liang to become a director suggest that he was no longer content to leave financing decisions to Mr Dai alone. I accept that Mr Liang discussed the matter with Mr Dai. Mr Dai was likely aware, as a result of that discussion, that he could no longer make such decisions without conferring with his fellow director; indeed, Mr Dai had conferred with Mr Liang on this subject even before he became a director.
I do not accept the solicitor's submission that Mr Dai's email instruction to the solicitor on 8 February 2017 - to copy all email correspondence regarding the plaintiff to Mr Liang as an important unitholder - meant that Mr Dai had authority to act on the company's behalf and only tell Mr Liang afterwards what he had done. The email was sent before Mr Liang became a director. The suggested authority does not arise from the text of the email. Further, if Mr Toltz had complied with Mr Dai's instruction, Mr Liang would have been copied on communications from the inception of instructions on any particular issue to its conclusion, giving Mr Liang ample opportunity to intervene if he were not agreeable with what was then unfolding.
As to whether Mr Dai agreed that Mr Liang had to approve any decision Mr Dai made for the plaintiff, I consider it likely that Mr Dai understood and agreed that he was not at liberty to embark upon finance transactions without discussing the matter with Mr Liang and making a decision together and I so find. The Unit Trust Deed required such decisions to be documented in a resolution. Even if this formal requirement was not observed, the directors did need to make a decision by a 'meeting of the minds' on the subject That is, Mr Dai did not have actual authority to make such decisions alone, without consultation with his fellow director.
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. 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.
Here, any dealings with the company were had with Mr Dai. Mr Dai did not have actual or ostensible authority to bind the company, where an individual director lacks such authority: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 205 (per Dawson J). The question is whether Mr Dai had authority to engage in communications or negotiations with the lender on the plaintiff's behalf: ANZ v Frenmast at [32]. In determining this question, the principles remain those stated by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480 at 503, as applied in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 at 78. Put shortly, there must be a representation made by the company to the third party - intended to be and, in fact, acted upon by the third party - that the agent had authority to make representations in the course of communicating with the third party on behalf of the principal. As the High Court observed in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [36] and [38]:
It is not enough that the representation should come from the officer alone. Whether the representation is general, or related specifically to the particular transaction, it must come from the principal, the company. That does not mean that the conduct of the officer is irrelevant to the representation, but the company's conduct must be the source of the representation. In many cases the representational conduct commonly takes the form of the setting up of an organisational structure consistent with the company's constitution. That structure presents to outsiders a complex of appearances as to authority. The assurance with which outsiders deal with a company is more often than not based, not upon inquiry, or positive statement, but upon an assumption that company officers have the authority that people in their respective positions would ordinarily be expected to have. In the ordinary case, however, it is necessary, in order to decide whether there has been a holding out by a principal, to consider the principal's conduct as a whole.
… The holding out might result from permitting a person to act in a certain manner without taking proper safeguards against misrepresentation.
These principles were applied in Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375, where Hodgson JA noted (Sheller JA agreeing) at [45]:
In my opinion, one circumstance in which it may be said that representations are permitted to be made is where a principal knows that an agent engaged on the principal's behalf is making representations as to the agent's authority, is able to prevent such representations being made or countermand them, but does not do so. There is arguably, in these circumstances, something like a representation by silence: the circumstances call for some action by the principal to ensure that persons are not misled by the agent, and the principal does not take that action.
For example, in ANZ v Frenmast, one of three directors of a company, "Robert", was held to have apparent authority to communicate on behalf of the company with a bank. Since 2001, the bank had been communicating with Robert in relation to the company's banking facilities. Until 2006, these communications were taking place with the knowledge and agreement of the other directors. After 2006, those directors must be taken to have known, notwithstanding that they were no longer actively participating in the company's business, that Robert was continuing to act on the company's behalf in day to day communications with the bank concerning it ongoing banking facilities: at [33]. In these circumstances, the inactive directors created an apparent authority in Robert to be, at least, a point of communication between the bank and the company. By their conduct, they permitted Robert to manage the company's relationship with the bank, including receiving and responding to communications with the bank: at [34].
As to whether Mr Dai had actual or ostensible authority to engage in communications or negotiations with lenders on the plaintiff's behalf, Mr Dai had been the face of the company when dealing with banks in respect of construction finance, and Mr Liang was aware of this. Mr Liang agreed that he had left it to Mr Dai to try and arrange a construction loan with the Commonwealth Bank, "First of all, his English is better. And second, [Mr Dai] said he knew a manager in Commonwealth Bank, so I let him approach." It should be borne in mind, however, that Mr Dai was the sole director of the plaintiff at the time, being in January 2017, such that Mr Dai, in fact, had actual authority to deal with the bank at that time. The same can be said for Mr Dai's dealing with Kenxue and Weriton in respect of the acquisition finance obtained in February 2017.
After Mr Liang was appointed a director in July 2017, Mr Liang attended a meeting with Mr Dai and Mr Fleming, at which the Commonwealth Bank application was discussed, as well as a loan from Mr Fleming: see [117]. The refinance documents were executed by Mr Dai in August 2017 on behalf of the plaintiff as "sole director/secretary," this being a fact in which the lenders placed great store. This is explained, however, by the fact that the solicitor had last obtained a company search for the plaintiff in January 2017: see [84]. Although Mr Liang had been recently added as a director, the solicitor was not aware of this. Likely, the transaction documents were drafted without the benefit of this information.
I do not accept the lenders' submission that Mr Liang allowed Mr Dai to be sole signatory on the August 2017 documents, thereby holding out Mr Dai as having authority to enter into finance transactions on his own. More likely, this occurred as a result of an oversight by Mr Toltz when preparing the documents, which was not detected at the time. (Nor do I accept that Mr Dai's execution of these documents alone indicated that Mr Liang was unavailable or unwilling to sign such documents, said to support the need to appoint Ms Zhu as secretary more than a year later).
Nor do I accept that this "inevitably impressed on the minds" of the solicitor and Mr Fleming that Mr Dai had the authority to sign loan and mortgage documents on behalf of the plaintiff without requiring Mr Liang to also sign. I doubt that either would have remembered - more than a year later in November 2018 - precisely who had signed the documents in August 2017, when the solicitor actually thought Mr Dai was the sole director. Nor do I accept the even more tenuous submission that the Weriton lenders, that is, being neither the solicitor nor Mr Fleming, would have had the same mindset. Nor that the solicitor continued to hold the same view when acting for the lenders in the third transaction, more than two years' later. In the meantime, the solicitor had obtained updated company searches and proceeded on the basis that Mr Dai was no longer the sole director of the company and two authorised officers needed to sign the documents.
But what the August 2017 transaction does indicate, however, is that Mr Liang was aware that Mr Dai was communicating with, and negotiating with, Gemi in respect of finance to be provided to the plaintiff. Mr Dai also signed the expression of interest in respect of the Westpac construction loan in August 2017 "For and on behalf of City Garden … by its authorised signatory." Mr Liang said Mr Dai did not tell him about this and should have also asked Mr Liang to sign as well, "Only because this was only a proposal. It's not formal." Mr Liang said he thought that Mr Dai had authority to negotiate loans with lenders but that he would need to sign the final loan document, "Of course."
Mr Liang was also aware that Mr Dai was communicating with Mr Fleming in respect of paying out the acquisition finance in December 2017, in order to enable the construction funding to be drawn down: see [140]. Indeed, in October 2018, Mr Liang knew that Mr Dai was negotiating with him in respect of the provision of further funding from NCC Fashion Group: see [150]. In November 2018, Mr Liang was aware that Mr Dai was communicating with SWA in respect of another loan, or potential loan, probably from AUX Real Estate: see [193]-[195].
I am satisfied, having regard to the plaintiff's conduct as a whole, that Mr Dai had authority to communicate, or negotiate, with potential lenders on the plaintiff's behalf. Mr Dai had performed this role for the plaintiff, both while he was the sole director and after Mr Liang became a director. Mr Liang was aware of this and took no steps to curb Mr Dai's activities in this regard. At a time in the plaintiff's business, when construction was underway and Mr Dai was trying to raise funds from Mr Liang and, apparently, AUX Real Estate, Mr Liang must be taken to have known that Mr Dai was continuing to act on the plaintiff's behalf in day-to-day communications with potential financiers. In the circumstances, Mr Liang's inaction created an apparent authority in Mr Dai to engage in communications and negotiations with lenders.
As such, Gemi Investments had "dealings with the company" for the purposes of section 128(1) of the Corporations Act. It follows that Gemi Investments was entitled to make the assumptions in section 129 in relation to those dealings and the plaintiff is not entitled to assert that any of the assumptions are incorrect. There is no need for the person in question to actually make any of the assumptions in section 129: Correa v Whittingham at [115]; Caratti v Mammoth at [351], [619]; Gallop Reserve Pty Ltd v Matton Developments Pty Ltd [2019] QSC 113 at [77] (per Holmes CJ).
Mr Fleming first met Mr Dai in 2016, in the course of lending money to Wallis Island. Mr Fleming met Mr Liang on 21 July 2017: see [113]. Mr Dai had then told Mr Fleming, "Victor is a silent partner. I have all the expertise for construction at North Rocks. Victor is just an investor and doesn't want anything to do with the deal. He wants a share of the profits at the end. I will get a management fee for managing the construction of $3 million." Mr Fleming relied on Mr Dai's representation that he should deal exclusively with Mr Dai in respect of the plaintiff and that it was not necessary to involve Mr Liang in these discussions. All of Mr Fleming's interactions and discussions regarding the loan were with Mr Dai. Mr Fleming was not aware that Ms Zhu may not have been validly appointed as company secretary of the plaintiff.
Mr Fleming had been told by Mr Dai that Mr Liang was a wealthy person but had no interest in investigating whether this was the case, "The reason was we were very satisfied with [the] existing facility that we had [including] presales … it was very clear there was plenty of equity in the development, and we … were satisfied with that." Mr Fleming did not think it was necessary to ask Mr Liang and his company to also guarantee the loan, "Adam indicated that Mr Victor was a very passive investor, and he didn't want to get involved in the details, so on that basis it wasn't necessary." Mr Fleming said he did not necessarily expect all directors to be guarantors of a loan. If a lender believed that there was plenty of security in the property, then it was not necessary to insist that other directors sign. In this case, Mr Fleming was satisfied with the security of the property; guarantees were not that important. He was "absolutely" satisfied that the loan was very secure. Mr Fleming was "not bothered" about Mr Liang.
Mr Fleming said the funds were paid to the builder to meet construction costs for the North Rocks site, "It's not uncommon in our business that the funds are directed to the builder rather than the borrower." Mr Fleming said directions were often received by directors of companies to pay loan funds in a particular manner, "it's not unusual". Mr Fleming did not agree, however, that the loan was actually to the builder, "We lent the money to City Gardens. We took the security of City Garden."
One of the members of the Gemi syndicate which contributed loan funds to Gemi Investments was Vamico, which is the trustee for Mr Cooper's family trust. On 31 July 2017, Mr Cooper had inspected the North Rocks site with Mr Fleming. Construction had not yet started, nor had the existing buildings been demolished. Mr Cooper did not conduct his own due diligence on the loan for Vamico; he understood that Gemi would carry out due diligence and act as loan manager. As such, information regarding the loan, the borrower and the project came from Mr Fleming.
Where the focus is on what the lender actually knew or actually suspected, there is no evidence that the lender knew or suspected that Mr Dai did not have authority to enter into the transaction, nor knew or suspected that Ms Zhu had not been validly appointed as company secretary. The lender was entitled to make the assumptions in section 129; the plaintiff is not entitled to set aside the first transaction.
Whilst the solicitor certainly acted for the plaintiff on the three specific matters identified by the solicitor, the solicitor also acted for the plaintiff on other matters. The solicitor acted for the plaintiff in legal proceedings with Kenxue. In June 2017, the solicitor was also giving the plaintiff advice in respect of the refinancing of the first and second mortgages: see [94]-[96]. The solicitor also assisted the plaintiff in paying out the acquisition finance, to enable the Westpac construction facility to be drawn down: see [140]. From 2017 on, Mr Dai also rang Mr Toltz from time to time and talked about issues to do with finance or other legal issues involving the North Rocks development if it was a matter that needed legal advice.
In Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWSC 438 at [163] (affirmed in Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308), Hoeben CJ at CL, citing Minkin v Landsberg [2016] 1 WLR 1489 at [38]-[39], said with evident approval:
It has been said that solicitors who seek to limit their retainer ought to do so clearly and usually in writing as a matter of prudent practice.
There was no clear limit here. Rather, as the plaintiff submitted, the evidence indicates that the solicitor acted for the plaintiff under a broad, general, and somewhat informal retainer. The solicitor's retainer was not confined in the manner suggested by the solicitor.
Turning then to the lead-up to the first transaction, the contemporaneous documents are agnostic as to whether the solicitor was acting for the lender, the plaintiff, Mr Dai or 'all of the above.' Mr Dai appears to have been speaking with both Mr Toltz and Mr Fleming in respect of obtaining further finance from mid-October 2018: see [145]. On 20 October 2018, Mr Toltz sent Mr Liang a loan agreement and letter regarding the proposed loan from Tempe Development to the plaintiff, prepared on the instructions of Mr Dai. Notwithstanding this, Mr Toltz proposed to act for Tempe Development in respect of the loan, with the plaintiff and the guarantors to receive separate independent legal advice from another firm: see [147]. On or about 23 October 2018, Mr Toltz witnessed Mr Dai's execution of a proposed consolidated Loan Agreement between the plaintiff and Mr Liang's company, NCC Fashion Group: see [150]. These tasks suggest that the solicitor was then assisting Mr Dai to raise further finance for the plaintiff, either from Mr Fleming or Mr Liang. I note that such activities fall within the scope of the solicitor's initial retainer, being "to assist in financing" relating to the North Rocks development.
On 11 November 2018, the solicitor was copied on an email between Mr Dai and Mr Fleming, asking that the first tranche of the proposed loan be paid to the builder's bank account: see [171]. Mr Toltz said this was the first communication that he received in relation to this transaction. In the same email, Mr Dai also instructed the solicitor "please go ahead with the paperwork." The email may be fairly read as Mr Dai instructing Mr Toltz as the plaintiff's solicitor. Mr Toltz replied, copied to both Mr Dai and the lender, "We will arrange the documents asap tomorrow and ask Miles Holt to provide the independent advice. Let me know what time suits you and Julianne."
That is, the contemporaneous documents evidence the solicitor's continuing retainer by the plaintiff at the time of the first transaction, including "to assist in financing … and incidental matters relating to" the North Rocks development. I find that the solicitor had an ongoing retainer to perform such tasks for the plaintiff at the time of the first transaction. The plaintiff proposed to borrow money from Gemi Investments, for which the solicitor also acted. This brings us to the second issue, being conflict of interest.
Where instructions are received from a person purporting to act on behalf of a corporation, the lawyer should confirm that person's authority to act and to bind the corporation: Solicitors Manual (LexisNexis Butterworths, last updated November 2023) (at 3065.5). Where the solicitor is receiving instructions from a director who may not be acting completely in the interests of the corporation, the solicitor has a duty to ensure that the instructions they are receiving are truly the instructions of their client: Hudson Investments Group Ltd v Atanaskovic [2010] NSWSC 1055 at [55]-[56] (per Davies J); see also Yee v Robert [1997] 3 LRC 138, Court of Appeal of Singapore, at [44]-[45]. Nor can the statutory assumptions in section 129 of the Corporations Act be relied upon by a fiduciary who has dealings with a company, to defeat a breach of fiduciary duty owed to the company in circumstances where that duty required the fiduciary to investigate or satisfy themselves as to any of the matters in section 129: Beach Petroleum NL v Kennedy [1999] NSWCA 408; Correa v Whittingham at [142].
Here, it is important to note Mr Toltz' initial response to Mr Dai's email informing him of the first transaction: "I take this as a loan to [the builder] with guarantee from [the plaintiff] … secured by an unregistered mortgage over North Rocks and other security specified by George [Fleming]". This was, with respect, a fairly obvious observation: there was a disconformity between the borrower (the plaintiff) and the recipient of the loan funds (the builder). Mr Toltz also knew that the builder was Mr Dai's company.
In these circumstances, I consider that the solicitor was on notice that the director giving instructions on behalf of the plaintiff may not be acting completely in the interests of the company. The solicitor had a duty to ensure, when obtaining the plaintiff's fully informed consent to the solicitor proceeding to act for the lender on the first transaction, that his instructions were truly the instructions of the corporation. Mr Toltz agreed that he took no steps to confirm that Mr Dai had authority on behalf of all directors in the company.
Whilst I do not doubt that Mr Dai was content for the solicitor to act for the lender on the first transaction, the solicitor made no attempt to contact Mr Liang to ensure that the instructions he was receiving were truly the instructions of the plaintiff. Nor did the solicitor disclose to either director all (or any) of the relevant information necessary for the directors to make a proper judgement as to whether to give consent to the solicitor acting for the lender. The plaintiff did not give its fully informed consent to the solicitor acting for the lender on the first transaction.
As the solicitor submitted, the plaintiff did not allege that the solicitor was obliged to advise the plaintiff in relation to the transaction but failed to do so. No alternative claim for breach of trust, tortious duty or contract is brought. Rather, the plaintiff set out in some detail in the Second Further Amended Statement of Claim the extent to which the solicitor had acted for the plaintiff since July 2016 in relation to the purchase of the North Rocks site, the Westpac facility and 'off the plan' sales, and the knowledge gained by the solicitor of the plaintiff's officeholders and unitholders in the Trust, including Rose Ives, during that time. Having acted for the plaintiff in relation to the Westpac facility, the solicitor knew that Mr Liang had provided a guarantee in respect of that facility and executed the transaction documents. The solicitor also knew that Ms Zhu had only recently been appointed as a secretary of the plaintiff and, unlike the Westpac facility, the transaction documents were to be executed by Mr Dai and Ms Zhu. He also knew that the moneys were to be paid to the builder, which was conducting other business projects.
That is, the plaintiff's complaint is that the solicitor knew or ought to have known that the board of directors of the plaintiff company had not passed a resolution to authorise the transaction, nor Mr Dai and Ms Zhu's execution of the transaction documents. Further, the first transaction was not in the interests of the plaintiff, given the features of the proposed loan and how it could be (and was) used. In this context, where the solicitor owed a fiduciary duty of loyalty to the plaintiff and a duty to avoid conflicting interests, the solicitor placed itself in a position in which it owed a duty to another which was inconsistent with its duty the plaintiff. As a consequence, the solicitor did not perform the duties owed to the plaintiff properly.
As to what the solicitor actually knew, Mr Toltz knew that Mr Liang was a substantial unitholder in the Trust. He knew that Mr Liang had advanced millions of dollars to the project, from the initial $3 million transferred to the solicitor's trust account in August 2016 (see [57]) supplemented by subsequent transfers. While the solicitor had been instructed by Mr Dai on 30 January 2017 that Mr Liang was a passive investor, he had also been instructed by Mr Dai on 8 February 2017 to copy all email correspondence regarding the plaintiff to Mr Liang, as an important unitholder. Apart from temporary observance with this instruction on 8 February 2017, Mr Toltz did not thereafter copy Mr Liang on email correspondence regarding the plaintiff. The solicitor said there was no deliberate intention not to do so. Initially, there was not much happening. Then, "It slipped through the cracks, nothing more than that."
The solicitor had also known, since September 2017, that Mr Liang was a director of the plaintiff. Notwithstanding this, Mr Toltz had continued to communicate with Mr Dai only. Mr Toltz understood (from Mr Dai) that Mr Dai was taking the project risk and that Mr Liang was a silent investor. It is not entirely clear how it was that Mr Toltz understood that Mr Dai was taking the project risk, where both Mr Dai and Mr Liang provided personal guarantees in respect of the Westpac facility, Mr Liang had advanced millions of dollars to the project and was the majority shareholder of the company. Nor is it entirely clear why Mr Toltz understood that Mr Liang was a silent investor, where he was now a director of the company.
The solicitor had obtained a company search in respect of the plaintiff on 7 November 2018, being the day before Mr Dai lodged the Form 484, notifying ASIC that his wife had been appointed as secretary. (I would have been interested to hear from the solicitor as to what prompted this search, in one of his five affidavits.) The search confirmed that the plaintiff had two directors. When asked whether Mr Toltz sought a resolution by the directors of the plaintiff authorising the loan, Mr Toltz replied:
Look, it's - it's an interesting sort of process to go through for me to answer the question or to comment. Essentially, when you start a project, you take it to the end. And you do what has to be done to achieve that objective. And what happened at that start, I'm dealing with Adam, he was a sole director. We then had - there were all these milestones and things happening throughout the project. So, it was a continuation of assisting City Gardens into achieving an objective that they wanted. So far as the - doing anything beyond that, it didn't to see me, at the time, necessary. And I was conscious of, you know, the relevant provisions in - in the Corporations Act about - about execution of documents and that sort of thing.
As I understand Mr Toltz' answer, he was prepared to continue on the basis of his understanding of Mr Dai's authority at the inception of the firm's retainer - when Mr Dai was the sole director - notwithstanding that more than two years had passed and the plaintiff's circumstances, and its board of directors, had materially changed.
Mr Toltz took the view that it was not necessary to check whether Mr Liang was agreeable to the transaction. He knew that Mr Liang previously did not want to provide a guarantee "so, I think that may be I might have been influenced by that." Mr Toltz knew that Mr Liang had not provided guarantees in respect of the acquisition finance or the refinance of those loans, but had given a guarantee to Westpac "when there was no other alternative." Mr Toltz said there was a pattern that Mr Liang was not available as a guarantor. The source of Mr Toltz' instructions in this regard was, of course, Mr Dai. Mr Toltz was also now acting for the lender, not the borrower, and the lender gave him instructions as to what security it required.
And that was really the problem. Having proceeded to act for the lender, Mr Toltz considered himself to be acting in the interests of the lender alone. The solicitor was no longer performing its obligation to act in the best interests of the plaintiff. Discharge of that obligation required the solicitor, as a starting point, to ascertain what the plaintiff's interests were. Specifically, a solicitor acting in the best interests of the plaintiff needed to ensure that the plaintiff - as opposed to Mr Dai - wished to enter into the transaction, particularly where the loan was not sought for the plaintiff's purposes but primarily for the builder's Baulkham Hills development (albeit Mr Dai ultimately did not use the loan funds for that purpose).
This is precisely the problem which the 'conflict of duty and duty' rule seeks to avoid: the risk that a solicitor will prioritise the interests of one client over the other, such that it fails to properly perform its duties owed to the other. By acting for the lender on the first transaction, the solicitor disregarded the plaintiff's best interests, failing to ensure that the board of directors had resolved to obtain the loan. The solicitor could either have sought a formal resolution or simply checked with the plaintiff's other director, Mr Liang. The need to check this matter was highlighted by the disconformity between the borrower (the plaintiff) and the recipient of the loan funds (the builder), where the solicitor knew that the builder was Mr Dai's company. The solicitor thereby breached its fiduciary duties owed to the plaintiff.
There was no informed consent negativing this breach of duty: Maguire v Makaronis at 467. Nor does the involvement of an independent solicitor necessarily fix this problem. As Parker J explained in CLGC Pty Ltd v Zhang [2021] NSWSC 946 at [139]:
A solicitor's duty in the case of a conflict is not a duty to refer the client to an independent solicitor as such. The duty is not to act without fully informed consent. Suggesting that the client take independent advice may be relevant to whether fully informed consent has been obtained, but it is not the same thing. If all the solicitor does is tell the client that independent advice can be obtained, without explaining the reasons why the solicitor's conflict may prejudice the client, the client's consent is unlikely to be fully informed: see Malouf v Constantinou [2017] NSWSC 923 at [103]-[104]. …
I will return to the role of the independent solicitor, Ms Yang, when considering causation and what remedy, if any, follows at [495].