Dai v Zhu

The Proceedings 8The applicants were the second and third defendants in the 2008 Proceedings. The first defendant was Yingle Cultural Exchange (Australia) Pty Ltd ("Yingle"). Yingle was placed in liquidation on or about 17 July 2008. At all material times the applicants were directors of Yingle. 9Yingle conducted business in both China and Australia. It apparently provided English language, travel and sightseeing services in Australia to teachers and students from China. It also appears that Yingle may have offered assistance to Chinese nationals seeking to obtain work visas in Australia. 10By an Amended Statement of Claim ("2008 ASC") filed on 21 January 2009 in the 2008 Proceedings, the respondents alleged that they had been induced by representations made by the applicants to lend substantial moneys to Yingle. The respondents sought judgment against Yingle for $1,068,903.72, being principal and interest said to be due under two separate oral loan agreements with Yingle entered into, respectively, in May 2005 and June 2006. 11The respondents alleged in the ASC that each of the applicants had engaged in misleading or deceptive conduct in contravention of s 42 of the Fair Trading Act 1987. In the alternative, the respondents pleaded a cause of action based on the applicants' fraud. The respondents sought damages against the applicants. Although the claim was not quantified in the 2008 ASC, the respondents alleged that, but for the actions of the applicants, they would not have entered into the loan agreements and therefore would not have sustained any losses in consequence of Yingle's insolvency. 12By a Further Defence to the 2008 ASC filed on 13 May 2009 ("2008 Defence"), the applicants denied the existence of the loan agreements and also denied the allegations of misleading or deceptive conduct and fraud. The 2008 Defence admitted that the respondents had deposited sums of money with Yingle, but alleged that the applicants had done so in order to purchase shares in Yingle and also to provide working capital for the company. 13The respondents commenced the 2011 Proceedings against the applicants on 6 June 2011. They pleaded in their Statement of Claim ("2011 SC") that Yingle's liquidator had assigned to them all Yingle's right, title and interest in respect of the causes of action upon which they relied. In substance, the respondents alleged that the applicants had breached their duties as directors of Yingle by withdrawing very large sums of money from the company otherwise than for its legitimate purposes. The respondents claimed $1,896,824.25, being the total of the applicants' unauthorised withdrawals from Yingle. It appears that the origins of this claim lay in a public examination of Ms Dai by Yingle's liquidator in the course of which she acknowledged that large sums of money had been transferred from Yingle's bank account into her own account. 14The applicants were legally represented in the 2008 Proceedings. However, at about the time the 2011 Proceedings were commenced, the applicants' solicitors ceased to act for them. On 30 September 2011, the applicants filed a defence in the 2011 Proceedings ("2011 Defence"). The defence was signed by Mr Bai, apparently in the offices of the Australian Consulate-General in Shanghai. The 2011 Defence was clearly drawn up without legal assistance and, as is now accepted by the applicants, was not in a satisfactory form and did not disclose an arguable defence. 15On 14 October 2011, Simpson J heard an application by Ms Dai for an order referring her for pro bono assistance. Her Honour made an order referring the application to the Registrar. There is nothing to indicate that Ms Dai received legal assistance as the result of the referral. However, by early January 2012, the applicants had instructed fresh solicitors to act on their behalf in both the 2008 and 2011 Proceedings.

Course of the Litigation 16Neither the White Books nor the parties' submissions set out the complete history of the litigation. The following is a brief account of the more significant applications and orders which preceded the Primary Judgment.

Discovery Orders in the 2008 Proceedings 17On 23 November 2009, the primary Judge heard an application by the respondents for discovery orders in the 2008 Proceedings. His Honour delivered judgment on 26 February 2010: Zhu v Yingle Culture Exchange (Australia) Pty Ltd ACN 113 089 759 (In Liquidation) [2010] NSWSC 107. His Honour delivered a further judgment on 21 April 2010 dealing with certain outstanding issues: Zhu v Yingle Culture Exchange (Australia) Pty Ltd ACN 113 089 759 (In Liquidation) (No 2) [2010] NSWSC 305. By orders made in the later judgment, the applicants were required to serve a verified list of documents by 12 May 2010. The orders incorporated a lengthy schedule specifying the categories of documents to be discovered. 18On 27 July 2010, the respondents filed a motion seeking supplementary orders for discovery because of what was said to be inadequate discovery by the applicants. Apparently for reasons connected with attempts to resolve the issues by agreement and the need to obtain documents from third parties, the motion was not heard until 27 April 2011. In a judgment given on 24 May 2011, his Honour found that the applicants had provided inadequate discovery of documents within several of the categories: Zhu v Yingle Culture Exchange (Australia) Pty Ltd ACN 113 089 759 (In Liquidation) (No 4) [2011] NSWSC 473. The respondents were directed to file short minutes of order giving effect to the judgment. The orders ultimately made do not appear in the White Books.

The 2011 Motions 19On 3 November 2011 the primary Judge heard motions brought by the respondents in both the 2008 and the 2011 Proceedings. Orders had previously been made that both proceedings should be case managed and heard together. Although the applicants had been represented at the earlier interlocutory hearings, on this occasion they were not. Only Ms Dai appeared in court, Mr Bai remaining in China. It appears that Ms Dai received assistance in court from a neighbour, but the neighbour was not legally trained. 20In the 2008 Proceedings, the respondents sought orders striking out the 2008 Defence. The respondents sought the orders pursuant to:

• Civil Procedure Act 2005 ("CP Act"), s 61(3)(c); and
• Uniform Civil Procedure Rules 2005 ("UCPR"), r 12.7. 21Section 61(3)(c) of the CP Act provides as follows: If a party to whom ... a direction has been given fails to comply with the direction, the court may, by order, do any one or more of the following: ... (c) it may strike out any defence filed by a defendant, and give judgment accordingly. The power conferred by s 61(3) does not limit any other power the court may have to take action of the kind referred to in that subsection, or to take any other action that the court is empowered to take in relation to a failure to comply with a direction given by the court: s 61(4). UCPR, r 12.7(2) provides that if a defendant does not conduct the defence with "due despatch", the court may strike out the defence, either in whole or in part, or make such other order as the court thinks fit. 22In the 2011 Proceedings, the respondents sought orders striking out the 2011 Defence. The notice of motion is not in the White Books, but it appears that the motion sought orders pursuant to UCPR, r 14.28(1), which empowers the court to strike out a pleading if it discloses no reasonable defence or has a tendency to cause prejudice, embarrassment or delay in the proceedings.

The 2011 Judgment 23The primary Judge delivered an ex tempore judgment at the conclusion of the hearing on 3 November 2011: Zhu v Yingle Culture Exchange (Australia) Pty Ltd; Zhu v Dai [2011] NSWSC 1339 ("2011 Judgment"). His Honour observed (at [6]) that even without s 61 of the CP Act, the Court would have an inherent jurisdiction to strike out pleadings in circumstances where a party has acted in a manner that disentitles it to the indulgence of the Court or to the benefit of the proceedings before the court. 24The primary Judge noted (at [7]) that the respondents alleged that the applicants had deliberately and contumeliously failed to comply with the directions to provide discovery and had engaged in conduct amounting to an abuse of process. In particular, the respondents relied on the applicants' failure to produce bank statements in relation to accounts held by them, although his Honour observed that the respondents had obtained some of these documents by other means (presumably subpoenas issued to third parties). 25The primary Judge recorded (at [8]) that the proceedings had been before the Court on a number of occasions and that on each of these the respondents had complained about the applicants' failure to produce documents or to comply with directions. His Honour inferred from a letter written by the applicants' then solicitors that, quite apart from the explanation given in the judgment of 24 May 2011 (see at [18] above), the solicitors themselves had explained to the applicants what was necessary to comply with the orders of the Court. 26The primary Judge considered (at [11]) that there was much to be said for the proposition that the applicants had deliberately failed to comply with orders and that their failure to provide information to enable the proceedings to be completed amounted to "contumelious and quite inappropriate (in the sense of dishonest)" conduct. However, his Honour recognised (at [12]) that there could be an innocent explanation for the applicants' conduct, although he held quite "severe reservations" as to whether such an explanation was available. He then observed that the respondents did not have to satisfy the court that deliberate non-compliance had been proved beyond a reasonable doubt: they only had to prove it on the balance of probabilities, bearing in mind the seriousness of the allegation. 27The primary Judge accepted (at [14]) that the inadequacy of the 2011 Defence might have been due to the absence of legal representation for the applicants. Nonetheless, he considered that the 2011 Defence did not address the allegations in the 2011 SC and therefore had to be struck out. 28The respondents had sought judgment in the 2011 Proceedings in default of the filing of a proper defence. In answer, the applicants had raised three matters (at [16]):

• they had fewer resources than the respondents;
• Ms Dai was not well enough to deal with the issues because of the stress and upset she was experiencing by reason of her mother's illness; and
• Ms Dai had taken steps to obtain fresh legal representation. 29The primary Judge stated (at [18]) that he was not satisfied that the applicants had taken all steps or all reasonable steps to obtain advice in a timely manner. His Honour accepted that the applicants had to be given an adequate opportunity to prepare and present their case (at [22]). However, the applicants had been given numerous opportunities and had been provided with "indulgence upon indulgence by the court" (at [23]). Despite the serious allegations made against them, the applicants had provided no answer to the allegations of fraud and the moneys apparently removed by them from Yingle had not found their way to the liquidator. 30While his Honour was sympathetic to the stress caused by the illness of Ms Dai's mother and to the language difficulties Ms Dai experienced, he could not continue "to have non-compliance frustrate the right of another party to have their case heard and determined" (at [25]). He rejected an application by Ms Dai to adjourn the proceedings until the second half of 2012, observing that such an "outrageous delay ... would not be countenanced by the court" (at [26]). His Honour considered it appropriate that the applicants be given a matter of weeks, not months, to regularise the proceedings. For that reason he proposed to make self-executing orders of the kind sought by the respondents (at [27]). 31In the 2011 Proceedings, the primary Judge struck out the 2011 Defence pursuant to UCPR, r 14.28 (which empowers the Court to strike out a pleading if it discloses no reasonable defence). His Honour ordered the applicants to file a proper defence by 25 November 2011. In default of compliance, judgment was to be given for the respondents. 32In the 2008 Proceedings, the primary Judge ordered the applicants to file and serve by 25 November 2011 a full affidavit of discovery, listing all documents that were or had been in the last five years in the applicants' possession, custody or control. In default of compliance:
• the 2008 Defence was to be struck out pursuant to the CP Act, s 61(3)(c) or, alternatively, UCPR, r 12.7; and
• judgment was to be given against each of the applicants pursuant to CP Act, s 61(3)(c) or, alternatively, UCPR, rr 16.2(1)(c) and 16.3 (which rules entitle a plaintiff to apply for judgment against a defendant in default). 33The orders made on 3 November 2011 imposed an extremely stringent timetable on the applicants, particularly since they were unrepresented at the time the orders were made. However, they have never filed an application for leave to appeal against his Honour's judgment.

The 2012 Motions 34On 28 November 2011, the applicants, through Ms Dai, filed a further list of documents in the 2008 Proceedings. She did not, however, file a defence in the 2011 Proceedings. 35In consequence of the applicants' default in the 2011 Proceedings, the self-executing orders made on 3 November 2011 took effect. On 30 November 2011, a default judgment was entered against the applicants in the 2011 Proceedings in the sum of $1,977,794.25. 36On 21 December 2011 freezing orders were made against the assets of the applicants. Those orders were subsequently extended. 37On 17 January 2012, the applicants, who had by then obtained legal representation, moved to set aside the default judgment and sought leave to file a defence in the 2011 Proceedings. They made the application pursuant to UCPR, r 36.16(2), which provides as follows: The court may set aside or vary a judgment or order after it has been entered if: (a) it is a default judgment (other than a default judgment given in open court), or (b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or (c) ... 38The applicants' motion was accompanied by affidavits from Ms Dai and the applicants' newly instructed solicitor. Ms Dai's affidavit stated that she was suffering from major depression and that her husband had left her alone in Australia to deal with the litigation. She said that the 2011 SC had been read to her and she believed she had a good defence. Her affidavit annexed a brief medical certificate from a general practitioner dated 16 December 2011, which "according to the history obtained and examination findings" confirmed a diagnosis of major depression. 39Ms Dai's affidavit also annexed a draft defence to the 2011 SC. The defence admitted some of the respondents' allegations but asserted that the respondents had control of the Yingle books and records in China. The draft defence also asserted that the payments from Yingle's funds were either for the company's legitimate purposes or were paid out with the approval of the respondents. No particulars of these assertions were provided. 40It appears that a hearing took place before Gzell J on 17 January 2012. The Court was informed on that occasion that Ms Dai intended to travel to China for treatment. According to a chronology prepared by the respondents, Ms Dai was ordered to file an affidavit as to her intentions. That affidavit, if it was filed, is not in the White Books. 41On 3 February 2012, the respondents filed a motion in the 2008 Proceedings seeking orders striking out the 2008 Defence and entering judgment in their favour in the sum of $1,896,824.25. The respondents' notice of motion is not included in the White Books, but they presumably sought these orders pursuant to s 61(3)(c) of the CP Act (see at [21] above). 42As I have noted, directions were made by the Registrar that the motions in the 2008 Proceedings and the 2011 Proceedings be heard together. The matters came before his Honour on no less than six separate occasions before his Honour reserved judgment in the 2008 Proceedings on 4 May 2012. 43The first hearing took place on 1 March 2012. The applicants were represented by counsel, who sought an adjournment of both motions, relying on an affidavit of the applicants' solicitor that had been affirmed that day. The affidavit annexed a treatment report from the Jiading Mental Health Centre of Shanghai. The report referred to a consultation held with Ms Dai on 17 February 2012 and recorded a diagnosis (according to the translation) of "schizophrenia with melancholy". 44The applicants' counsel informed the Court that Ms Dai was still in China receiving treatment and was unable to give instructions. She was also unable to appear for cross-examination, as the respondents' counsel had requested. The applicants' counsel also informed the Court that Mr Bai was not present as he only came to Australia twice a year. 45The primary Judge stood the matter over for one week and extended the stay of the default judgment that was already in force. His Honour also made a direction that the applicants: File within one week medical evidence from a qualified medical specialist in psychiatry testifying as to any condition suffered by Ms Dai and the extent to which that condition impacts upon her ability to give instructions and to provide evidence and be cross-examined either in person or by video link. 46On 8 March 2012, the applicants sought a further adjournment for a period of three months. Their counsel indicated that Ms Dai was not in a position to attend court or to give evidence. He read a further affidavit from the applicants' solicitor. This affidavit annexed a second treatment report from the Jiading Mental Health Center, referring to a "psychiatric interview" which had taken place on 2 March 2012. The report, prepared by a different doctor than the author of the first treatment report, confirmed the diagnosis. 47The primary Judge raised with counsel the question of whether a tutor ought not to be appointed, since it appeared that Ms Dai was unable to give instructions. The primary Judge stood the matter over until 16 March 2012 and made a direction that the applicants: Provide any evidence or material that the Court should take into account in determining whether or not to appoint a tutor and any material in affidavits which refer to the withdrawal of funds in cash and explain why the Court should not direct this material to the Department of Public Prosecutions. 48On 16 March 2012, the matter was again stood over until 5 April 2012. The questions of the appointment of a tutor and the possible reference to a law enforcement authority were reserved. 49On 5 April 2012, the applicants' counsel applied for the matter to be adjourned until 4 May 2012. He pointed out that the respondents' counsel still wished to cross-examine Ms Dai, on her affidavit of 17 January 2012. That affidavit annexed a draft defence to be filed in the 2011 Proceedings. 50The respondents' counsel made it clear that his clients wished the matter to proceed. He informed the primary Judge that, in view of the continuing unavailability of the applicants, he no longer required Ms Dai for cross-examination. He also stated that he did not object to Ms Dai's affidavit being read by the applicants. The respondents' counsel took this course notwithstanding that the primary Judge had previously intimated that if Ms Dai was not available for cross-examination, there might be a question as to whether her affidavit would be admitted into evidence. 51The hearing proceeded. Both counsel read affidavits from a number of deponents. None of the deponents was cross-examined. As argument did not conclude on 5 April 2012, his Honour adjourned the matter for one week. 52The hearing resumed on 12 April 2012. At the conclusion of argument, his Honour reserved judgment on the applicants' motion in the 2011 Proceedings. However, he made directions clarifying the effect of the orders made on 3 November 2011, so that they required further discovery to be provided by 19 April 2012. His Honour also directed that: Any evidence upon which the [applicants] rely for an explanation of the delay or non filing of the defence in accordance with the self executing orders or discovery that were made in the 2011 Proceedings or 2008 Proceedings should also be filed by 4pm, 19 April 2012. 53On 4 May 2012, the primary Judge heard argument on the respondents' motion in the 2008 Proceedings. Further affidavits were read including affidavits affirmed by Ms Dai and Mr Bai on 27 April 2012. In her affidavit, Ms Dai gave some evidence of her mental condition, stating that she had been experiencing hallucinations and persecutory delusions since July 2011. Having previously said that there was no interpreter present at the hearing on 3 November 2011, she now acknowledged that there was an interpreter, but said that the interpreter was "not good". Ms Dai also addressed the various categories of documents of which discovery was required and offered explanations as to why there were no further documents to produce or why she was unable to produce such documents as might exist. 54Mr Bai stated in his affidavit that he had not been in Australia since February 2011. He said that he had left his wife in charge of the proceedings, but claimed that he did not realise that she was suffering from a mental illness. He also claimed that he was not aware of the obligation to file "the discovery affidavit", although he acknowledged that his wife had asked him to find certain documents. Mr Bai said that funds deposited into his bank account in Australia were not connected with Yingle, but were transferred pursuant to a commission arrangement with a Mr Wu. Mr Bai explained the absence of his tax returns in the discovery documents on the basis that he had not lodged tax returns for the relevant years.

The Primary Judgment 55The primary Judge delivered judgment nearly six months later, on 26 October 2012. His Honour dealt separately with respondents' motion in the 2008 Proceedings and the applicants' motion in the 2011 Proceedings.

The 2008 Proceedings 56His Honour first considered the delay in the applicants' compliance with their discovery obligation in the 2008 Proceedings. He pointed out (at [25]) that the applicants had filed affidavits and a verified list of documents on 27 April 2012, five months after the date specified in the orders of 3 November 2011. He noted that the applicants relied on Ms Dai's alleged illness as the reason for the delay in compliance. 57The primary Judge referred (at [28]) to the affidavit of the applicants' solicitor, which recorded Mr Bai's claim that he could not provide instructions in relation to discovery of certain categories of documents because he had little or no knowledge of the documents or transactions. His Honour rejected this submission: 28 ... The first order for discovery was made well over two years ago. There is evidence before the Court, including a Second Further Verified List of Documents verified by Mr Bai, that indicates the discovery obligations have been conveyed to the defendants in their native tongue on a number of occasions. Furthermore, the evidence in relation to Ms Dai's mental condition does not suggest incapacity for all of that time. 29 The evidence indicates that ... the current solicitor for the defendants, has now explained to the defendants, in their native tongue, what steps must be taken to comply fully with their current discovery obligations. 58The primary Judge recorded (at [30]) the respondents' submission that the applicants had still not made adequate discovery of several categories of documents. The respondents had submitted (at [31]) that the applicants' failure to comply with their obligations was "intentional and display[ed] a disregard of the Orders". The respondents had also submitted that they were unable to progress the litigation properly and efficiently because of the applicants' default. The primary Judge did not immediately address those submissions, but proceeded to make findings concerning the adequacy of discovery. 59Category 6 required discovery of all documents relating to funds transfers effected by KVB Kunlun (apparently a financial institution which arranges such transfers). Mr Bai was the named person on the transfer documents, but he had claimed in his affidavit of 27 April 2012 that the funds transferred through KVB Kunlun did not belong to Yingle, but were commission payments to him by Mr Wu. 60The applicants had produced some documents but they were not notarised and what purported to be Mr Wu's signature on an agreement was not witnessed. The documents produced pointed to the existence of other documents that should have been produced and "it would be most unusual not to have further supporting documentation" (at [36]). His Honour therefore accepted the respondents' submission that full discovery of the Category 6 documents had not been made by the applicants. 61Category 8 required the production of documents relating to the withdrawal of funds from Yingle's St George Bank account. Some documents had been produced, but no invoices, receipts or other documents relating to the withdrawals. His Honour found (at [41]) that no adequate explanation had been given of the whereabouts of documents within Category 8 that the applicants had not produced. 62Category 2 required production of the applicants' tax returns for the period 2004-2005 to 2007-2008. Mr Bai claimed not to have lodged returns either in Australia or China during this period. His Honour considered that Mr Bai's belated evidence that he had earned about $1 million in commissions as agent for Mr Wu made it likely that he had in fact lodged tax returns (at [46]). Thus his Honour did not accept Mr Bai's claim that no documents within Category 2 existed. 63There was evidence of cash withdrawals totalling $730,000 from a bank account maintained by Ms Yu, the applicants' daughter. There was also evidence of transfers of substantial amounts to Ms Yu's account on the instructions of Ms Dai and of payments by Ms Yu to her parents. His Honour found that there had been no documentation or explanation provided with respect to the whereabouts of the cash withdrawals (at [49]). 64The primary Judge also found (at [50]) that Ms Dai was the controller of two companies in China, but that she had not discovered the bank statements for accounts held by those companies. 65The primary Judge stated his conclusion as follows: 52 It is the Court's duty to facilitate the just, quick and cheap resolution of the real issues between the parties: ss 56, 57 and 58 Civil Procedure Act. Parties and practitioners have complementary duties. I am of the view that the [applicants] have been given a number of opportunities to comply with their discovery obligations. On each occasion, there has been non-compliance with the Court's Orders. 53 It is important to bear in mind that striking out the [applicants'] defence by reason of their default should only be utilised as a last resort: see Hans Pet Construction Pty Limited v Cassar [2009] NSWCA 230. 54 I am satisfied that the [applicants] have, or had, in their possession further documents on the basis that the documents produced thus far point to the existence of, other documents ... As a consequence, the [applicants] failure to comply with the Orders of the Court has not yet been purged. 55 The categories, to which the [respondents] have referred, are clearly relevant to the proceedings. The evidence indicates that there is further documentation that has not been produced. On the evidence before the Court, as it is outlined above, I am satisfied, on the balance of probabilities, that the [respondents] have demonstrated that there has been non-compliance with respect to the [applicants'] discovery obligations. 56 The [applicants] have placed the [respondents] in an impossible position, in which documents available only to the [applicants] have not been disclosed and the [applicants] have, for significant periods, failed in their duty to facilitate the just, quick and cheap resolution of the proceedings. 57 Natural justice requires that the [applicants] be given an adequate opportunity to prepare and to present their case ... They have had that opportunity and failed to utilise it. Further their conduct has frustrated the [respondents'] right to prepare their case.

The Default Judgment in the 2011 Proceedings 66The primary Judge identified (at [61]) three factors relevant to the applicants' motion to set aside the default judgment in the 2011 Proceedings:

• whether the applicants had an arguable defence;
• whether they had provided an adequate explanation for the delay in filing a defence; and
• whether the respondents would be prejudiced if the default judgment were set aside. 67The applicants had sought leave to file the defence annexed to one of Ms Dai's affidavits. As has been noted, the defence alleged that all moneys withdrawn from Yingle or borrowed by the applicants involved transactions approved by the respondents. The defence also alleged that some moneys withdrawn from Yingle were paid at the direction of the respondents to companies controlled by them, while other moneys borrowed by the applicants from the company had been repaid. 68The primary Judge pointed out (at [76]) that the defence, although verified, was not supported by any "substantial or independent material". Such material was discoverable and ought to have been the subject of detailed evidence, but was not. Moreover, allegations in the defence, such as the claim that the applicants had approved the respondents' withdrawals, had not been properly pleaded or particularised (at [77]-[78]). Thus the respondents could not know the case against them. 69The applicants had given several explanations for the delay in filing a defence. His Honour rejected (at [72]) Ms Dai's claim that she did not understand the orders made on 3 November 2011 because of the alleged inadequacy of the interpreter in court on that day. His Honour recorded (at [67]) the applicants' submission that Ms Dai was mentally ill at the time the orders were made. He made no express finding on that claim beyond observing (at [72]) that: if Ms Dai was as incapacitated as is suggested, then Mr Bai has acted recklessly in failing to investigate the state of the proceedings and act in his own as well as Ms Dai's interests. 70The primary Judge found (at [72]) that the applicants had not provided a satisfactory explanation for their delay in filing a defence. Nor had they satisfactorily explained the delay of some six weeks in filing a motion to set aside the default judgment entered on 26 November 2011 (at [70]). 71The primary Judge found that the respondents would be prejudiced if the default judgment were set aside. The applicants had produced no documents to support their contentions, despite the fact that the documents (if they existed) would be subject to discovery obligations in the 2008 Proceedings. His Honour found (at [84]) that the conduct of the applicants in the 2008 Proceedings was relevant to their application to set aside the default judgment in the 2011 Proceedings. In any event, the applicants would need to properly plead their case and produce some evidence to support their bare assertions. 72The primary Judge stated his conclusion on this aspect of the case as follows: 85 This Court has given the defendants indulgence after indulgence. The [applicants] have, on a number of occasions, failed to make the most of the opportunities given to them and as a result have hindered the achievement of a just, quick and cheap determination of the real issues in dispute. Moreover, the [respondents] allege that the [applicants] have acted dishonestly and intentionally disregarded the Orders of the Court, to the extent that it gives rise to an abuse of process. 86 A lack of an adequate explanation for failure to file the defence does not necessarily mean that the [applicants'] application will fail. Delay by itself is unlikely to deprive an individual of the determination of the merits of their position: Cohen v McWilliam (1995) 38 NSWLR 476. An inadequate explanation will be mitigated if there were arguable issues to be tried, which are disclosed adequately and supported by some evidence. 87 In my opinion, the prejudice said to be suffered by the [applicants] has been caused by their own conduct or lack of it and, even if that were not so, is outweighed by that which would be suffered by the [respondents], if default judgment were to be set aside. Moreover, this is not mere delay. The [applicants] have obstructed the proper progress of the justiciable controversy encompassed by the two proceedings. Accordingly, the default judgment should not be set aside and the motion should be dismissed. 73On 22 November 2012, the primary Judge heard an application by the applicants to stay the orders made in the Primary Judgment. His Honour stayed the orders in both sets of proceedings until further order, subject to the condition that within seven days the applicants paid into court or provided security for the amount of the judgments. That condition, so it appears, has not been satisfied and therefore no stay is in effect. 74On 22 November 2012, judgment was entered for the respondents in the 2008 Proceedings in the sum of $1,367,524.85 said to comprise the principal sum claimed of $899,535.50, plus interest. On the same date, orders were entered in the 2011 Proceedings dismissing the applicants' notice of motion. 75It was pointed out in argument that there may be difficulty in entering judgment for a particular sum in proceedings where the plaintiff claims unliquidated damages, in the absence of proof of actual loss: cf UCPR, r 16.7; Emmerton v Clerk of the Supreme Court [1992] NSWCA 65. However, we were informed that the applicants did not take issue with the quantum of the judgment entered against them in the 2008 Proceedings, should this Court otherwise uphold the orders made by the primary Judge.

Flaws in the Primary Judgment 76It should be said at the outset that the Primary Judgment has a number of flaws. They are as follows: (i) His Honour stated (at [10]) that there was no evidence that any shares were issued to the respondents as the result of their claimed investment in Yingle. While it not clear whether or not his Honour intended to suggest that the respondents never held shares in Yingle, the evidence shows that on 7 July 2011 each of the respondents held 75,000 shares in Yingle. (ii) His Honour said (at [34]) that Mr Bai's claim that the transfer of moneys through KVB Kunlun was connected with his dealings with Mr Wu disclosed: the disingenuousness of the submission that Mr Bai knew nothing of the transactions required to be discovered. It does not appear that a submission in such unequivocal terms was made on behalf of Mr Bai. Mr Bai's affidavit of 27 April 2012 did not claim that he "knew nothing" of the transactions, although he did assert that the transfers of money had nothing to do with Yingle. (iii) As the respondents acknowledged in argument, the primary Judge appears to have been mistaken when he found (at [49]) that the applicants had not provided any bank statements for their home loan account. His Honour had previously recorded (at [37]) that the applicants had produced one statement for a Westpac Home Loan Account for the period 22 June 2006 to 22 December 2006. (iv) It is rather difficult to understand why his Honour did not accept Mr Bai's evidence that he had not lodged tax returns for the years 2004-2005 to 2007-2008 (at [46]). Leaving aside the significance of the absence of cross-examination on this point, there does not appear to be anything implausible about Mr Bai not lodging the returns as he claimed. On the evidence, Mr Bai visited Australia only infrequently. A failure to lodge tax returns in this country would presumably breach Mr Bai's obligations under Australian law, but the essence of the respondents' case was not only that the applicants had acted fraudulently, but that they had flouted their obligations under Australian law as directors of Yingle. No doubt the primary Judge was entitled to view Mr Bai's evidence with some scepticism, but Mr Bai asserted unequivocally that he had not lodged the relevant returns. To bridge the gap between what Mr Bai should have done and what he said he did involved speculation rather than reasoning from objective or undisputed evidence. 77The question is whether these flaws and any arguments advanced by the applicants warrant setting aside the orders made by the primary Judge. It is convenient to commence with the 2011 Proceedings.

The Challenge to the Refusal to Set Aside the Default Judgment in the 2011 Proceedings

Applicants' Submissions 78As I have noted, the applicants sought to set aside the judgment entered against them in the 2011 Proceedings pursuant to UCPR, r 36.16(2)(a). Mr Dicker SC, who appeared for the applicants, accepted that the primary Judge's refusal to set aside the default judgment was a discretionary decision pertaining to a matter of practice and procedure. He therefore did not dispute that the Court would be hesitant to grant leave to appeal and would do so only if satisfied that the Primary Judgment was affected by an error of principle or an error of the kind that would vitiate the exercise of discretion: House v R [1936] HCA 40; 55 CLR 499, at 505. However, Mr Dicker submitted that the primary Judge had made errors of the relevant kind. He identified several such errors. 79First, his Honour had failed to take into account that the applicants had not been cross-examined on their affidavit evidence. Mr Dicker recognised that both of the applicants had been in China when their motion in the 2011 Proceedings was heard (finally) on 5 April 2012, but he pointed out that the Respondents had not sought to cross-examine them by video link. His Honour had drawn inferences adverse to the applicants, such as his finding that Mr Bai had been "reckless" in his conduct of the proceedings, without these matters having been put to the applicants for their response. 80Mr Dicker acknowledged that the applicants' counsel had not taken any Browne v Dunn (1893) 6 R 67 (HL) point at the hearing (that is, counsel had not referred to the "rule" that if a party is to invite the court to disbelieve a witness, he or she must have been given an opportunity to deal with the proposed justification for disbelief). Nonetheless, Mr Dicker submitted that the primary Judge should not have made adverse findings against the applicants without taking into account that the matters alleged against them had not been put to them in cross-examination. 81Secondly, Mr Dicker submitted that his Honour, in rejecting the applicants' explanation for their delay in filing a defence and for their failure to comply with court orders, did not give sufficient weight to the fact that Ms Dai was not legally represented at the hearing on 3 November 2011. Nor did his Honour give sufficient weight to the unchallenged evidence as to Ms Dai's mental condition and its impact on her ability to give proper instructions. 82Thirdly, Mr Dicker contended that, contrary to the primary Judge's finding, the applicants had acted reasonably promptly in filing the motion to set aside the default judgment. They had done so within six weeks of entry of the judgment and within a few days of having instructed a new solicitor to act on their behalf.

Principles 83The applicants did not take issue with the primary Judge's identification of the three factors particularly relevant to the exercise of the discretion conferred by UCPR, r 36.16(2)(a) (see at [66] above). The applicants also did not take issue with the primary Judge's proposition, derived from Reinehr Industrial Lease & Finance Pty Ltd v Jordan (New South Wales Court of Appeal, 4 June 1974, unreported), that ultimately it is necessary to consider whether it is in the interests of justice to allow the party seeking to set aside a default judgment to be permitted to defend the proceedings on the merits; see too, Adams v Kennick Trading (Int) Ltd (1986) 4 NSWLR 503, at 506-507, per Hope JA (with whom Glass JA agreed). 84While there was no dispute as to these matters, it is necessary to add two observations. First, as the primary Judge noted (at [52]), the Court is under a duty in exercising a power such as that conferred by UCPR, r 36.16(2)(a), to give effect to the "overriding purpose" stated in s 56(1) of the Civil Procedure Act 2005 ("CP Act"). That purpose is: to facilitate the just, quick and cheap resolution of the real issues in the proceedings. A party and his or her legal representatives are under a duty to assist the Court to further the overriding purpose: s 56(3), (4). 85Section 57 of the CP Act provides as follows: (1) For the purpose of furthering the overriding purpose referred to in section 56 (1), proceedings in any court are to be managed having regard to the following objects: (a) the just determination of the proceedings, (b) the efficient disposal of the business of the court, (c) the efficient use of available judicial and administrative resources, (d) the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties. (2) This Act and any rules of court are to be so construed and applied, and the practice and procedure of the courts are to be so regulated, as best to ensure the attainment of the objects referred to in subsection (1). 86Section 58(1) of the CP Act requires the court, in deciding whether to make any order for the management of proceedings, including an order of a procedural nature, to act in accordance with "the dictates of justice". For the purpose of determining what are the dictates of justice in a particular case, s 58(2) provides that the court: (a) must have regard to the provisions of sections 56 and 57, and (b) may have regard to the following matters to the extent to which it considers them relevant: (i) ... (ii) the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities, (iii) the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties, (iv) the degree to which the respective parties have fulfilled their duties under section 56 (3), (v) the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court, the practice of the court or any direction of a procedural nature given in the proceedings, (vi) the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction. 87Section 59 of the CP Act deals with the question of delay, as follows: In any proceedings, the practice and procedure of the court should be implemented with the object of eliminating any lapse of time between the commencement of the proceedings and their final determination beyond that reasonably required for the interlocutory activities necessary for the fair and just determination of the issues in dispute between the parties and the preparation of the case for trial. 88It is important to appreciate that, as Allsop ACJ pointed out in Hans Pet Constructions Pty Limited v Cassar [2009] NSWCA 230, at [36], these provisions: bring about a new statutory balance among various factors in litigation including court and party efficiency and the delivery of individual justice. As his Honour also pointed out in that case (at [38]), the effect of s 58(2)(a) of the CP Act, where the Court is considering whether to make any order or direction for the management of proceedings, is that the criteria stated in ss 56 and 57 are relevant considerations for the Court, in the sense that these matters have to be taken into account. The criteria include the "just determination of the proceedings". The approach taken by Allsop ACJ is consistent with the High Court's recent emphasis on the importance of the overriding purpose stated in s 56(1) of the CP Act and of the duty of the parties and their lawyers to assist the court in furthering that purpose: Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd [2013] HCA 46, at [51], [56]-[57], per curiam. 89The second observation is that the authorities consistently state that, as a general rule, a defendant who seeks to set aside a judgment by default regularly obtained must show that he or she has a bona fide defence. This ordinarily requires the defendant to file an affidavit demonstrating a prima facie defence on the merits. The rationale for this requirement is that in the exercise of its "unfettered, though judicial, discretion" the Court will consider: (a) whether any useful purpose would be served by setting aside the judgment, and (b) how it came about that the applicant found himself bound by a judgment regularly obtained. Vacuum Oil Co Pty Ltd v Stockdale (1942) 42 SR (NSW) 239, at 243, per Jordan CJ (with whom Davidson and Roper JJ concurred), citing Evans v Bartlam [1937] AC 473, at 482, per Lord Russell; Magnate Projects Pty Ltd v Youma Constructions (No 2) Pty Ltd [2005] NSWCA 331, at [48]-[51], per Hodgson JA (with whom MW Campbell AJA agreed) (holding that the principles stated in Vacuum Oil have not materially been affected by the reasoning of the High Court in Taylor v Taylor [1979] HCA 38; 143 CLR 1, and Allesch v Maunz [2000] HCA 40; 203 CLR 172). 90The authorities referred to in the previous paragraph were all cases in which a judgment had been obtained after a hearing on the merits, but at which the defendant did not appear. In the present case, the respondents entered judgment in consequence of the applicants' failure to comply with a direction to file a defence. However, the principles stated in Vacuum Oil v Stockdale have also been applied to an application to set aside a default judgment entered after a defence has been struck out or the defendant has failed to file a defence. 91In Rubin v Eacott [1912] HCA 55; 15 CLR 386, for example, the High Court refused leave to appeal in a case where the Supreme Court of Western Australia had refused to set aside a default judgment entered in the absence of a defence. The case is striking because the defendant was out of the country and the principal witness had died. Barton J, with whom Isaacs J agreed, said (at 388) that the Supreme Court: was obviously right in refusing the motion to set aside the interlocutory judgment for the plaintiff without the customary evidence that a good defence on the merits existed. See also at 388, per Isaacs J. Similarly, in Ex parte Vigilant Finance (NSW) Pty Ltd; Re Cameron Smith [1964] NSWR 1282, Herron CJ, with whom Brereton J agreed, observed (at 1285) that the principles applicable to an application to set aside a judgment in default of a defence were not in doubt and had been stated in Evans v Bartlam and Vacuum Oil v Stockdale. See also Davison v Queensland [2006] HCA 21; 226 CLR 234, at [33], per Kirby J; Saunders v Hammond [1965] QWN 39, at 48, per Wanstall J; Commonwealth Bank of Australia v Humphreys [2010] NSWSC 581, at [3], per McClellan CJ at CL, where the principles are helpfully summarised. 92In determining whether the defendant has a bona fide defence on the merits, the court does not embark on a hearing of the full merits of the case: Adams v Kennick Trading, at 507; CBA v Humphreys, at [3]. All that is necessary is for the defendant to show that the defence is asserted bona fide and that there is an arguable or triable issue. The nature of the evidence required in a particular case may depend on the circumstances, including the cogency of the defendant's explanation for the delay or failure to comply with the orders of the court: Adams v Kennick Trading, at 506; Nash v Swinburne. 93The application of these principles must now be subject to the provisions of the CP Act. If, for example, the circumstances of a particular case are such that it would be contrary to "the just determination of the proceedings" (s 57(1)(a)) to require a defendant to adduce affidavit evidence demonstrating a bona fide defence, the Court would be unlikely to reject the defendant's application to set aside a default judgment solely on the ground that no such affidavit had been filed. Each case must of course depend on its own facts. But it is fair to say that the principles articulated in the cases decided before the enactment of the CP Act are consistent with the criteria laid down in the legislation.

The Findings 94I do not accept the applicants' contention that the primary Judge erred in rejecting the contention that Ms Dai did not understand the effect of the orders made on 3 November 2011. Even in the absence of cross-examination, the evidence amply justified his Honour in concluding that the accredited interpreter adequately conveyed the terms of the orders made on that day. Ms Dai's own evidence on the point contained glaring inconsistencies. Mr Dicker accepted that the medical evidence could not establish that Ms Dai was incapable of understanding the orders that had been made on 3 November 2011. 95Nonetheless, there is considerable force in the applicants' submission that the primary Judge should not have found that the applicants had not given a satisfactory explanation for the delay in filing both the motion to set aside the judgment in the 2011 Proceedings and the defence (which was an annexure to Ms Dai's affidavit of 17 January 2012). The evidence as to Ms Dai's illness was incomplete and less than satisfactory, particularly in view of the direction given by the primary Judge on 1 March 2012 (see at [45] above). Even so, the evidence suggested that during the period between entry of the default judgment on 30 November 2011 and the filing of the motion on 17 January 2012, Ms Dai was affected to some extent by psychological problems. More importantly, the "delay" in filing the motion was only six weeks or so, a period that encompassed the customary holiday break in Australia. The evidence showed that the applicants' solicitor, once instructed, acted very promptly in filing the motion and supporting affidavits. 96The applicants' solicitor gave uncontested evidence that when he was first consulted in early January 2012, Ms Dai was "extremely upset" and that the process of obtaining instructions was "much slower than usual". It is reasonable to infer that her state of mind, whatever the appropriate clinical diagnosis, affected to some extent her ability to respond to the self-executing orders. 97For similar reasons, I think that the applicants provided an adequate explanation for their failure to comply in a timely fashion with the strict timetable laid down by the orders of 3 November 2011. While the primary Judge took into account the applicants' seriously dilatory approach to the 2008 Proceedings, it was asking a good deal of unrepresented parties to file a proper defence in the 2011 Proceedings within about three weeks, particularly having regard to the language difficulties. 98The primary Judge also took into account (at [73]) that the orders made on 3 November 2011 "issued because of contumelious disregard for Orders made on numerous previous occasions". While there may have been "contumelious disregard" of orders made in the 2008 Proceedings, it is difficult to see how the same could be said about the applicants' conduct in the 2011 Proceedings, which had been commenced only five months earlier. There may have been some overlap between the claims made in the two Proceedings, but the 2011 Proceedings involved different causes of action and different factual allegations.

No Evidence of a Bona Fide Defence 99Despite these difficulties with his Honour's reasoning, the applicants face a fundamental obstacle in this Court. As his Honour pointed out in the Primary Judgment (at [76]), although Ms Dai annexed a verified defence to her affidavit, she did not support the denials and claims made in that pleading by filing an affidavit addressing the factual claims or by seeking to adduce any independent evidence verifying them. Nor did Mr Bai's affidavit descend to providing evidence in support of the pleaded defence. These omissions occurred notwithstanding that over two and a half months had elapsed between the filing of the applicants' motion to set aside the default judgment and the hearing of the motion on 5 April 2012. During the whole of this period, the applicants were legally represented. The primary Judge also found (at [76]) that the defence annexed to Ms Dai's affidavit was not adequately pleaded. 100Mr Dicker did not challenge his Honour's findings on these matters. Nor did he suggest that the applicants had provided any explanation for their failure either to file a properly pleaded defence prior to the hearing on 5 April 2012, or to adduce affidavit evidence at that hearing demonstrating that they had a bona fide defence. 101At the hearing in this Court, Mr Dicker handed up, without objection, an amended draft defence. This document, which was unverified, incorporated some particulars to support affirmative claims advanced in the original draft defence. For example, both the original and amended draft defences admit that the applicants withdrew about $300,000 on about 2 August 2006 from Yingle's account and paid the money into a home loan account in connection with their purchase of a property at Hurstville. The amended defence supports the claim made in the original defence that the funds were withdrawn with the consent of the respondents, by alleging that the respondents orally approved the applicants' request on the basis that two rooms of the property would be used as an office for Yingle for which it would pay no rent. However, no details are provided of the content of the alleged conversations, nor of the manner in which the property was used for Yingle's purposes (if it was). 102The amended draft defence asserts that the applicants repaid the sum of about $300,000 which they admit they borrowed to purchase the Hurstville property. The particulars in support of that claim identify $259,000 in repayments, but some of the alleged repayments are described in vague terms. Thus two amounts totalling $175,000 are said to be loans from Ms Dai to Yingle which were "set off" against the loan to purchase the property. But no particulars of Ms Dai's loan are provided and there is no pleading of facts that would give rise to a set off. 103The applicants appear to admit that a sum of $368,000 was paid to Yingle for services provided by it in China (as alleged by the respondents), but claim that the money was collected on behalf of the respondents by a Mr Yan who worked for them. No particulars are provided of the relationship between Mr Yan and the respondents, nor of the destination of the moneys said to have been collected by them. The dates of the relevant "collections" are simply taken from the 2008 SC. 104Mr Dicker did not rely on the amended draft defence to justify the applicants' contention that the primary Judge had fallen into error. He said that the document was relevant only to any re-exercise of discretion by this Court, should it be found that the primary Judge had erred in the exercise of his own discretion. What is significant, however, is that Mr Dicker did not seek to read any affidavits in this Court that might have provided evidence that the applicants have a bona fide defence to the respondents' claims in the 2011 Proceedings. 105Mr Dicker recognised the difficulty and in his reply submissions pointed to what he described disarmingly as "some little smidgins" that were said to provide evidentiary support for the applicants' pleaded defence. But the evidence to which he pointed amounted to little more than Ms Dai's bare assertion in her affidavit of 17 January 2012 (at a time when she was apparently suffering from psychological difficulties) that she believed that she had a good defence and evidence on information and belief from the applicants' solicitor which took the matter no further. Mr Dicker also attempted to piece together material from the applicants' affidavits dealing with discovery issues that, so he argued, might suggest that they had an arguable defence to the claims in the 2011 Proceedings. However, these affidavits dealt with different issues and fall well short of showing an arguable defence.

Re-Exercise of the Discretion 106Because I consider that the primary Judge erred in finding that the applicants had not given a satisfactory explanation for delay in filing their application to set aside the default judgment and their draft defence, I would be prepared to conclude that the exercise by the primary Judge of the discretion conferred by UCPR r 36.16(2)(a) miscarried. This conclusion requires this Court to re-exercise the discretion. 107In my view, the applicants' failure to adduce evidence demonstrating that they have a bona fide defence to the claims made in the 2011 Proceedings, militates strongly against exercising the discretion to set aside the default judgment in their favour. It perhaps would not have taken a great deal of evidence to show an arguable defence, but the applicants have simply not filed any such evidence. Nor have they given an adequate or indeed any explanation for their failure to do so. 108Mr Dicker did not suggest that the medical evidence provided such an explanation. This is not surprising since the evidence included a report from the Jiading Mental Health Center of Shanghai, dated 17 February 2012, that Ms Dai's condition "had taken a turn for the better". Despite being "down in spirit" and suffering some persecutory delusions, she was showing "no signs of negative action" and had "normal intelligence". A report of 6 April 2012 from the same Center recorded that Ms Dai's condition had improved. Her mood was "more relaxed" and she could "make appropriate communications with the lawyer provided that no serious stimulation is given to her, e.g. presented in the court". 109As I have pointed out, the applicants have been represented since early January 2012. They had ample opportunity to put on affidavit evidence demonstrating a bona fide defence before the hearing on 5 April 2012. Both applicants in fact affirmed affidavits, but did not address the critical question. A fortiori, they had a more than ample opportunity to prepare suitable affidavits before the hearing in this Court with a view to seeking to adduce further evidence, but they have not done so. 110Even if the applicants could establish that the respondents would suffer no material prejudice if the default judgment were set aside, I would not be inclined to exercise the discretion conferred by UCPR r 36.16(2)(a) in the applicants' favour. In any event, I am far from satisfied that the respondents will not suffer prejudice. The unverified draft amended defence is still not properly pleaded and particularised. Important aspects of the applicants' case remain obscure. 111If the judgment were set aside, the applicants would need to reformulate their defence and put on evidence to support it. That would take time and involve the respondents in delay and expense. It is now two years and four months since the 2011 Proceedings were instituted. It is still not clear whether the applicants have a defence to the claims made by the respondents, much less the precise nature of the defence. It would be wrong, having regard to the dictates of the CP Act, to expose the applicants to further delay and expense, particularly when the evidence casts doubt on the ability of the applicants to meet costs orders that may be made against them. 112A defendant who has a default judgment regularly entered against him or her is not entitled as of right, save as specified by statute or the rules, to have it set aside. That is so, even if the defendant provides an adequate explanation for the default that resulted in a self-executing judgment taking effect. The applicants in the present case have not demonstrated - or even attempted to demonstrate - that they have a bona fide defence in the 2011 Proceedings. They have also not shown that the respondents would not suffer prejudice if the default judgment were set aside. Consequently, the applicants have not established that it is in the interests of justice for them to be permitted to defend the 2011 Proceedings on the merits. 113For these reasons, the "dictates of justice", as that expression is used in s 58(1) of the CP Act, are best served in the present case by dismissing the applicants' motion to set aside the default judgment entered against them. More particularly, in the absence of evidence that the applicants have a bona fide defence on the merits, the objective of "the just determination of the proceedings" (s 57(1)(a)), is best served by dismissing their application. 114I should add that none of my conclusions on the application to set aside the default judgment require rejection of clear and unequivocal evidence given by either Mr Bai or Ms Dai. Thus the absence of cross-examination is not of any significance for the conclusions I have reached. 115In the 2011 Proceedings I would grant the applicants leave to appeal, but dismiss their appeal.

The Challenge to the Orders Entering Judgment in the 2008 Proceedings

The Applicants' Submissions 116In seeking to challenge the orders made by the primary Judge in the 2008 Proceedings, the applicants placed particular emphasis on the submission that his Honour should not have made findings adverse to the applicants in the absence of cross-examination. According to Mr Dicker, his Honour should not have rejected the unchallenged evidence of each of the applicants that they had made full discovery. Nor should his Honour have found that Ms Dai's illness was not an adequate explanation for the delay in the applicants' purported compliance with the orders for further discovery on 3 November 2011. 117As in relation to the 2011 Proceedings (see at [80] above), Mr Dicker accepted that the applicants' counsel had taken no Browne v Dunn point before the primary Judge in the 2008 Proceedings. He also accepted that in these circumstances the primary Judge was not obliged to accept the evidence given by the applicants, even though it was not challenged. Nonetheless, he submitted that his Honour should have taken their evidence into account on each of these critical issues and he erred in not doing so.

The Critical Question 118The primary Judge found (at [52]) that the applicants had been given a number of opportunities to comply with their discovery obligations but had failed to do so. His Honour also rejected (at [28]) the applicants' submission that Mr Bai was unaware of the orders made on 3 November 2011 and seemed (at [25], [56]-[57]) to cast doubt on the contention that Ms Dai's illness adequately explained the delay of some five months in purporting to comply with the directions given on 3 November 2011 for further discovery. (The final verified list of documents was not filed until 27 April 2012.) 119As I read the Primary Judgment, however, the critical factor in persuading his Honour to enter judgment for the respondents was that the applicants' failure to comply with the successive orders made for discovery had "not yet been purged" (at [54]). His Honour, despite his obvious dissatisfaction with the evidence given by the applicants, did not expressly find that they had not adequately explained their delay in filing the verified list of documents on 27 April 2012. On my reading, had his Honour found that the applicants had complied, albeit belatedly, with their discovery obligations, he would have refused to accede to the respondents' application to strike out the defence and enter judgment for them. 120There is no dispute that the applicants did not comply with the orders for further discovery made by the primary Judge on 3 November 2011. Nor has there been any challenge to these orders. Thus his Honour correctly found that the power conferred by s 61(3)(c) of the CP Act had been enlivened. 121As I have explained, there are several flaws in his Honour's reasoning. Two concern findings that the applicants, even after filing the verified list of documents on 27 April 2012, failed to make adequate discovery of particular documents or categories of documents (see at [76(iii), (iv)]. I am prepared to assume that these errors were material to his Honour's exercise of discretion pursuant to s 61(3)(c) of the CP Act and thus vitiated his Honour's decision to strike out the defence and enter judgment for the respondents. It then becomes a matter for this Court to re-exercise the discretion for itself. 122In undertaking this task, it is necessary to bear in mind that the 2008 Proceedings have now been under way for over five years. The foundation of the November 2011 Judgment, from which the applicants have not sought leave to appeal, was that the primary Judge had made directions for discovery or further discovery on a number of occasions, but that the applicants had not properly complied with the directions. The primary Judge found in the November 2011 Judgment (at [25]) that the applicants' repeated failures to comply with their discovery obligations had "frustrate[d] the right of [the respondents] to have their case heard and determined". His Honour observed (at [11]) that there was "much to be said" for the submission that the applicants had deliberately failed to comply with court orders. While his Honour refrained from making a finding in those terms, he considered (at [23]) that the applicants had been given "indulgence upon indulgence", yet were still in default. Self-executing orders were required to fulfil the Court's statutory mandate to facilitate the just, quick and cheap resolution of the real issues in the proceedings. 123In the light of these matters, it seems to me that the critical question is whether the primary Judge was correct to find that the applicants were still in substantial default of their obligations to make proper discovery. If so, regardless of whether the applicants' repeated non-compliance with orders could be described as "contumelious" and regardless of whether the delay in filing the final verified list of documents was excusable, it is difficult to see why the 2008 Defence should not be struck out and judgment entered for the respondents. On the primary Judge's findings, the applicants' repeated non-compliance with discovery orders had unreasonably delayed the 2008 Proceedings, materially hindered the respondents' ability to prepare and present their case and run directly counter to their obligation to assist the Court to further the "overriding purpose" stated in s 56(1) of the CP Act.

Principles 124The applicants' submissions did not canvass the authorities dealing with the circumstances in which a court can go behind an affidavit of discovery, although the respondents' submissions did refer briefly to the relevant principles. Giles J examined the authorities in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 20 NSWLR 359. His Honour concluded (at 366) that in general an affidavit of discovery is conclusive in relation to the "amplitude of discovery" and that cross-examination of a deponent will not be permitted. Other authorities take a different view and hold that the court has a discretion to permit cross-examination of a deponent who has verified a list of documents: Hartogen Energy Ltd (in liq) v Australian Gas Light Co (1992) 36 FCR 557, at 560-561, per Gummow J; Commissioner of Australian Federal Police v Propend Finance Pty Ltd [1997] HCA 3; 188 CLR 501, at 574, n 315, per Gummow J; cf Procter v Kalivis [2009] FCA 1518; 263 ALR 461, at [34]-[41], per Besanko J. Of course in the present case, Ms Dai was not cross-examined. 125As Giles J's survey of the authorities demonstrates, there are exceptions to the conclusiveness of affidavits of discovery. Courts have adopted various formulations of the circumstances in which affidavits of discovery may be challenged. A frequently cited authority is Mulley v Manifold [1959] HCA 23; 103 CLR 341, where Menzies J said (at 343): ... it cannot be shown by a contentious affidavit that the discovery made is insufficient. Before 1912, it was thought that the insufficiency had to appear from the pleadings, the affidavit of documents itself or the documents therein referred to. However, in British Association of Glass Bottle Manufacturers Ltd v Nettlefold [[1912] AC 709], it was established that the insufficiency might appear not only from the documents but also from any other source that constituted an admission of the existence of a discoverable document. Furthermore, it is not necessary to infer the existence of a particular document; it is sufficient if it appears that a party has excluded documents under a misconception of the case. Beyond this, the affidavit of discovery is conclusive. Other cases have used somewhat broader language. Thus in Frankenstein v Gavin's House-to-House Cycle Cleaning and Insurance Co [1897] 2 QB 62, AL Smith LJ said (at 64-65) that a plaintiff had to establish: ... by some means other than by a conflicting affidavit that the defendants' affidavit is incorrect. In order that the plaintiff may succeed in doing so, the Court must be satisfied with reasonable certainty either from the defendants' own statements that they have erroneously represented or misconceived the nature of the documents ..., or from some source other than by affidavit that the defendants' affidavit is incorrect. (This passage was cited by Giles J in Fruehauf, at 363). Besanko J's review of the cases in Procter v Kalivis led him to conclude (at [33]) that: reasonable grounds for being fairly certain that there are other relevant documents is a good workable test and is a test supported by the authorities. 126An important consideration in the present case is that, as I have noted, the primary Judge made findings on several occasions that the applicants failed to make full and proper discovery in accordance with the directions of the court. In the judgment of 24 May 2011, his Honour attributed the non-compliance of the applicants, in part, to their having taken a narrower view of the scope of discovery than was appropriate. His Honour also made it clear in the November 2011 Judgment that the applicants had been given indulgence after indulgence in relation (among other things) to discovery, but had not taken advantage of their opportunities to get their house in order. These are matters that can and should be taken into account in determining whether the applicants have even now provided full discovery in compliance with the orders of the Court. 127The primary Judge found that the applicants had made inadequate discovery of the following categories of documents:

• Category 2, being Mr Bai's tax returns for the years from 2004-2005 to 2007-2008;
• Category 6, being documents relating to the transfer of funds through KVB Kunlun;
• Category 8, being documents relating to the withdrawal of funds from Yingle's account;
• Daisy Yu Monies, being documents relating to cash withdrawals of $730,000 from Ms Yu's bank account; and
• Ms Dai's Bank Accounts, being documents relating to overseas bank accounts controlled by Ms Dai.

Category 2 128I have already addressed his Honour's finding on discovery of the Category 2 documents (at [76] above). I think that the challenge to that finding succeeds.

Category 6 129The orders requiring the applicants to make discovery of documents in Category 6 were made by the primary Judge on 21 April 2010. Mr Bai in his affidavit of 27 April 2012 claimed that he was unaware of the orders made on 3 November 2011. He did not claim that he was unaware of the orders made eighteen months earlier. This is not surprising since on 15 July 2010 both applicants verified a list of documents which included a certificate from a solicitor confirming that he had advised the applicants as to their discovery obligations. 130In his affidavit of 27 April 2012, Mr Bai accepted that his solicitor had explained to him that in order to comply with his obligation to discover documents within Category 6 he had to produce further documents relating to how the moneys were deposited into his personal bank account and ultimately transferred to Australia. In this affidavit, as I have noted, Mr Bai asserted that the moneys were due to him as commission pursuant to a 2004 agreement between Mr Wu and himself. Mr Bai said that he was able to produce contracts with Mr Wu and copies of some receipts he had issued to Mr Wu. 131The applicants' list of documents dated 27 April 2012 was verified by Ms Dai, but not Mr Bai. Part 1 of the list identified four categories of documents said to be in the possession of the applicants. The documents were described as follows: Item no. Nature of document/s Number of documents in group (if applicable) - pages Date/period 66 KVB Confirmation of Foreign Exchange Transactions 10 14 December 2005; 15 December 2005; 10 June 2008 to 7 July 2008 67 Deposit slips 5 26 July 2005 to 15 September 2008 68 Agreement between Mr Bai and Jun Wu 2 23 December 2004 Chinese document 69 Receipts signed by Mr Bai 8 29 July 2005 to 29 June 2008

132UCPR, r 21.3(2) requires Part 1 of a list of documents (being documents in the possession of a party making discovery) to include: a brief description (by reference to nature and date or period) of each document or group of documents and, in the case of a group, the number of documents in that group. As a matter of form, the list of documents, insofar as it dealt with Category 6, sufficiently complied with r 21.3(2). 133The primary Judge found (at [35]) that it was not until 28 November 2011, when Mr Dai provided documents to the respondents' solicitors, that the applicants made any reference to Mr Wu. In making this finding, his Honour may have overlooked an affidavit sworn by a solicitor acting for the respondents on 2 February 2012, indicating that none of the documents produced on 28 November 2011 related to the KVB Kunlun transfers. It seems that the first time that the respondents became aware of the alleged role of Mr Wu was when they received Mr Bai's affidavit of 27 April 2012 and the list of documents of the same date. On 2 and 3 May 2012, the respondents requested the production of documents within Category 6. In response, early in the morning of 4 May 2012 (the final day of the hearing before the primary Judge) the applicants emailed copies of what purported to be receipts and a contract (in Chinese) between Mr Wu and Mr Bai. The applicants did not, however, produce the originals and they provided no translations of the copy documents. As the primary Judge observed (at [35]), the documents produced by the applicants were not notarised or certified to be accurate copies. The document purporting to include a signature of Mr Wu was not witnessed. 134The situation concerning the Category 6 documents on 4 May 2012 was less than satisfactory. The final list of documents was provided three weeks after argument had concluded on the respondents' motion in the 2008 Proceedings. The belated filing of the list of documents prevented the respondents from inspecting the discovered documents within Category 6 before the final day of hearing (on 4 May 2012), which was concerned with the 2011 Proceedings, rather than the 2008 Proceedings. Moreover, the unheralded introduction of Mr Wu into the litigation warranted a degree of scepticism. 135Nonetheless, on the evidence before the primary Judge, I do not think that it was open to his Honour to conclude that the applicants had not given proper discovery of the Category 6 documents. Suspicion was no doubt justified, and the respondents were clearly placed at a forensic disadvantage by their inability to inspect the discovered documents in a timely fashion. But I do not think that Ms Dai's affidavit of discovery was incorrect, insofar as it purported to record the Category 6 documents in her possession.

Category 8 136The respondents' solicitor's affidavit of 2 February 2012 recounted that Ms Dai had previously contended that all documents within Category 8 had been provided to the liquidator of Yingle. The affidavit went on to explain that the liquidator had forwarded to the respondents all documents provided by the applicants. An inspection of those documents revealed cheque stubs from Yingle's account with St George Bank and bank statements, but no other documents. 137As the primary Judge recorded (at [39]) Ms Dai's explanation for not producing further documents was that the cheques drawn from the account were drawn at the respondents' direction, given orally. She did not recall whether she had ever had possession of other documents relating to the withdrawals, but she thought that if anyone did have such documents it would be the respondents. 138The applicants were directors of Yingle. During the relevant period Yingle had accountants who prepared financial statements for the company. It seems remarkable that the directors could have acted on oral instructions from the respondents to transfer funds from Yingle's account for purposes apparently unrelated to the company, without some records being kept. Ms Dai was on notice at the time her affidavit was prepared that the respondents were challenging the sufficiency of the applicant's discovery of the Category 8 documents. Yet Ms Dai made no attempt in her affidavit to explain why the directors of Yingle kept no records of the transactions. Indeed, she did not explicitly claim that they did not keep records. 139It is necessary to take into account the history of the matter, the inescapable inference that not all documents within Category 8 have been identified or referred to in the list of documents and the vague and unsatisfactory nature of Ms Dai's evidence relating to the whereabouts of documents within Category 8. Taking these matters into account, the primary Judge was entitled to be satisfied that the applicants had not provided a satisfactory explanation as to the whereabouts of apparently relevant documents within Category 8, such as invoices, correspondence and receipts. His Honour was also entitled to be satisfied that not all documents in the applicants' possession within Category 8 had been discovered.

Daisy Yu Moneys 140The affidavit sworn by the respondents' solicitor established that Ms Yu, Ms Dai's daughter, withdrew amounts totalling at least $730,000 from her bank accounts over the period from 30 July 2008 to 17 January 2011. As the primary Judge found (at [47]) some of the moneys paid into Ms Yu's account were transfers effected through KVB Kunlun. In her affidavit, Ms Yu said that the withdrawals were made on her mother's instructions, including an amount of $100,000 paid to "neighbours". The evidence indicated, as the primary Judge also found (at [47]), that approximately $500,000 was transferred into Ms Yu's account on Ms Dai's written instructions, conveyed to Citibank in the United States. 141The primary Judge, as I have noted, was incorrect to find (at [49]) that no bank statements had been produced for the applicants' loan account. Subject to that qualification, no error has been shown in his Honour's finding that the applicants had neither discovered documentation relating to the transactions nor proffered an explanation as to the ultimate destination of the funds withdrawn from Ms Yu's account. Neither Ms Dai nor Mr Bai in their respective affidavits of 27 April 2012 addressed the apparent failure to produce documents relating to the withdrawal from Ms Yu's account. Nor did the applicants' written submissions to this Court dispute the finding that they had not made proper discovery of the relevant documents.

Ms Dai's Bank Accounts 142The primary Judge found, on the basis of uncontested affidavit evidence from a lawyer based in Shanghai, that Ms Dai controlled the affairs of two Chinese companies. The final verified list does not refer to the bank accounts of these companies and Ms Dai's affidavit of 27 April 2012 does not address the apparent failure to discover documents within this category. The primary Judge's finding that Ms Dai had not properly discovered documents relating to all bank accounts controlled by her was well justified.

Conclusion 143For the reasons I have given, I would not uphold the primary Judge's findings that the applicants, by the last hearing day on 4 May 2012, had not made proper discovery of the Category 2 and Category 6 documents, albeit that they failed to do so in a timely fashion. However, in my view, his Honour's findings that the applicants have not "purged" their failure to comply with the obligation to make full discovery of the Category 8 documents, the Daisy Yu documents and the documents relating to Ms Dai's bank account have withstood challenge. It follows that despite years of disputes concerning discovery and repeated non-compliance with court orders, the applicants continued to be in default at the conclusion of the hearings before the primary Judge. 144As the primary Judge recognised, striking out a defendant's defence by reason of non-compliance with directions of the court is a serious step, involving what Allsop ACJ described in Hans Pet Constructions Pty Ltd v Cassar, at [14], as irretrievable prejudice to the defendant. But as his Honour also pointed out (at [42]), the very terms of s 61(3)(c) of the CP Act contemplate that a defendant who fails to comply with directions may be denied the opportunity to defend the substantive proceedings. A critical question is whether an order striking out the defence and entering judgment for the plaintiff is consistent with the just determination of the proceedings (CP Act, s 57(1)(a)). 145The applicants failed to comply with their discovery obligations over several years of litigation. Notwithstanding that they had been fully apprised of their obligations by their legal representatives, they continued to be in default at the time his Honour was asked to strike out the defence. The default was neither trivial nor easily remedied. As his Honour found, the default has seriously prejudiced the respondents in their conduct of the proceedings. 146In these circumstances, I would exercise the discretion conferred by s 61(3)(c) of the CP Act in the same way as his Honour. That is, I would strike out the applicants' defence in the 2008 Proceedings and enter judgment for the respondents. 147In the 2008 Proceedings, I would grant the applicants leave to appeal, but dismiss their appeal.

Orders 148The applicants' summons seeking leave to appeal has the one case number, namely 2012/362844. The 2008 Proceedings and 2011 Proceedings had separate case numbers in the Court below. Having regard to the numbering in this Court, the following orders should be made:

1. Grant leave to the applicants to appeal.
2. Direct the applicants to file a notice of appeal within seven days.
3. Dismiss the appeal.
4. The applicants to pay the respondents' costs of the application for leave to appeal and the appeal.

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 2013