JACKMAN J
1 I have before me an application by the applicants to extend the freezing orders which I first made on an ex parte basis on 17 March 2023. On 22 March 2023, with the consent of the respondents who have appeared, the operation of those freezing orders was extended until 5 pm today, 11 April 2023. The applicants have reached agreement with the first, fifth and ninth respondents that the freezing orders against those respondents will continue until further order of the Court.
2 There were other steps in the litigation which were the subject of agreement with the first, fifth and ninth respondents and I made orders earlier today consistently with that agreement. However, I will vary those orders such that order 5A will be:
The applicants to file and serve any amended statement of claim by 5 May 2023.
Order 6 will be varied such that:
The Tony Parties file and serve any application to strike out the amended statement of claim under rule 16.21 of the Federal Court Rules 2011 (Cth) by 12 May 2023.
And I will delete order 7, which I made earlier today, requiring defences to be filed by 5 May 2023.
3 The applicants also reached agreement with the eighth respondent to discharge the freezing order made against her, and the orders which I made earlier today in that regard note an undertaking provided by the eighth respondent in the terms of annexure A to the proposed orders.
4 That leaves the question of an extension of the freezing orders against the second and sixth respondents, which has been actively resisted by them today. It also leaves the question of the continuation of the freezing orders against the fourth and seventh respondents, who have not appeared. The applicants have proceeded today on an ex parte basis against the fourth and seventh respondents.
5 The relevant facts which are established by the affidavits of Ms Salvo of 17 March 2023 and 4 April 2023, together with the documents exhibited to them, may be summarised as follows.
6 The proceedings arise out of a transaction by which the first applicant (DC) purchased the property located at 30 Denham Court Road, Denham Court, New South Wales 2565. DC purchased the property from 30 Denham Pty Ltd (in liq), (30 Denham) for $45 million under a contract for sale dated 25 July 2019. The sole director of DC in 2019 was the second applicant, Mr Stanley Xue.
7 Stanley's father, Phillip, began investing in property development in 2016 through Vantager Group Pty Ltd (Vantager). The first respondent, Mr Zhang, and Fan He were directors of Vantager from 30 August 2016 to 30 July 2019. Phillip and Stanley were introduced to Mr Zhang in 2016, and given the close relationship between Phillip's family and the person who introduced them, Fan He, they extended their trust of Fan He to Mr Zhang. Between 2016 and July 2019, Phillip and Stanley had invested in four property developments which had been identified and developed by Vantager and its associated entities. They did so through Sit Family Pty Ltd (Sit Family), the third applicant, and Oasis International Pty Ltd (Oasis).
8 Between late June and early July 2019, Mr Zhang and Fan He informed Phillip and Stanley Xue about the opportunity to acquire the property at Denham Court and told Phillip and Stanley Xue that:
(a) The vendor wanted $45 million for that property;
(b) Colliers, the vendor's agent, had informed them that if the site was rezoned, its value would increase significantly;
(c) Colliers had already received another bid for the property for $45 million; and
(d) If Phillip and Stanley placed a bid for $45 million, they would be the successful bidder as they did not need finance and could settle quickly.
9 Between 25 June and 10 July 2019, Phillip inspected the property and Sit Family decided to acquire the property. Mr Zhang informed Phillip and Stanley that he would submit their bid for $45 million to Colliers. At this time, unknown to the applicants:
(a) On 4 July 2019, Colliers issued an information memorandum for the property, which was not provided to the applicants;
(b) Also on 4 July 2019, Mr Zhang submitted an expression of interest to Colliers for the property on behalf of Vantager for $12 million plus GST; and
(c) On 12 July 2019, Mr Zhang submitted a further expression of interest on behalf of Vantager or its nominee for $14 million plus GST.
10 That expression of interest was accepted by Colliers. The applicants first became aware of these matters when they were sued by the liquidators of 30 Denham in November 2022. At about this time in mid-2019, Phillip and Stanley were seeking to replace their accountants with accountants more experienced in property development. Mr Zhang and Fan He strongly recommended that they engage Zhengjun Cai, also known as Bob, the second respondent, of Central Advisory Group, (CAG), the third respondent, as their accountants. Mr Cai, through CAG, had previously provided accountancy services to Vantager, Mr Zhang and Fan He.
11 In late June and early July 2019, Mr Cai and CAG were appointed as the accountants for all entities in which Sit Family had an interest in Australia. In mid-July 2019, Mr Zhang confirmed that Phillip and Stanley's bid for $45 million for the property had been accepted. Mr Cai, through CAG, then incorporated DC on 16 July 2019 with Stanley Xue as its sole director as a special purpose vehicle to acquire the property.
12 On about 18 July 2019, two days after DC was incorporated, Mr Zhang requested payment of a $4.5 million deposit for the property to the vendor's solicitors. Because DC had only just been incorporated, Oasis made the payment on behalf of DC as a loan from Oasis to DC. The making of this payment is confirmed by the bank statements of Oasis, which show a transfer to KPL Lawyers of a little over $4.5 million on 18 July 2019.
13 On 25 July 2019, Stanley executed the contract for the sale of the property on behalf of DC (DC Contract). The vendor was noted as 30 Denham and the vendor's solicitor was noted as KPL Lawyers. Again, unknown to the applicant, the actual vendor was Khengs Pty Ltd (Khengs), which was selling the property to 30 Denham for $14 million plus GST. Khengs entered into that contract with 30 Denham (Khengs Contract) on 25 July 2019, the same day that Stanley executed the DC contract.
14 30 Denham was incorporated on 10 July 2019 with a Mr De Souza as its director. Mr De Souza is an associate of Mr Cai whom Mr Cai recommended to Mr Zhang after Mr Zhang made a request for someone to effect the purchase and sale of the property. Mr De Souza agreed in his public examination conducted by the liquidators of 30 Denham that 30 Denham was incorporated because Mr Zhang did not want to be known as the buyer.
15 On the same day that 30 Denham was incorporated, namely, 10 July 2019, Mr De Souza provided instructions to KPL Lawyers in relation to the back-to-back contracts. The trust account statement of KPL Lawyers, the solicitors for 30 Denham under the Khengs Contract and the DC Contract, shows that:
(a) $4.5 million was received on 18 July 2019, described as "Received from: DC Rd Pty Ltd, reason: deposit";
(b) On 25 July 2019, $1.4 million was paid by cheque to Colliers, that amount being 10 % of the purchase price under the Khengs Contract;
(c) On 31 July 2019, $1.5 million was released to InvestX Investments Pty Ltd (InvestX), a company incorporated on 18 July 2019 of which Mr Zhang was a director until forms were lodged with ASIC on 31 July 2020, seeking to backdate his resignation as a director to 29 July 2019. The same forms purported to record the appointment of Mr David Dawson as a director and shareholder, whom Mr Zhang described as the friend of a taxi driver. The reason recorded for the transfer of $1.5 million is, "Release Deposit as directed by Client"; and
(d) On 31 July 2019, $1.5 million was released to Charm Team Development Ltd (CTD), the fourth respondent, a company incorporated in Hong Kong of which Mr Cai was the director until 15 June 2022 (according to a director resignation form lodged on 28 November 2022). An application for deregistration of CTD was filed on 1 February 2023. The reason for this transfer is also "Release Deposit as directed by Client".
16 On or about 16 July 2019, the same day DC was incorporated, Dentons was appointed as its solicitor in relation to the purchase of the property on Mr Zhang's recommendation. Oddly, Dentons are acting in these proceedings for Mr Cai, CAG and Central Advisory Capital Pty Ltd (CAC), the second, third and sixth respondents. Apart from signing the execution pages for the DC contract, Stanley Xue had no role in instructing Dentons, despite being the sole director of DC.
17 The transaction file from Dentons shows numerous emails between Mr Zhang and a senior associate of Dentons, Anson Pang, in which Mr Zhang provides instructions on behalf of DC in relation to the purchase of the property. It appears that it was Mr Zhang who gave instructions for the release of the deposit directly to Dentons on behalf of DC. On 3 September 2019, DC transferred approximately $47.7 million to Dentons' trust account in anticipation of settlement.
18 Also on 3 September 2019, KPL Lawyers sent an email to "30 Denham Pty Ltd (purchaser)", which confirmed that $14,894,914.29 was required to complete the Khengs Contract and that $45,057,922.90 was due to be paid by DC to Denham under the DC Contract. Settlement under both contracts occurred on 5 September 2019. A transfer from Khengs to 30 Denham was registered, followed immediately by a transfer from 30 Denham to DC.
19 The trust account statement shows that KPL Lawyers received $30,162,735.03 into its trust account on 5 September 2019 with the description "vendor settlement moneys". The statement further shows that on 9 September 2019, $25 million was paid by cheque to InvestX with the description "distribution of part sale funds pursuant to client instructions". On 14 November 2019, $5,232,961.63 was paid by cheque to CTD with the description "sale funds". Accordingly, InvestX received $26.5 million of the sale proceeds and CTD received $6,732,961.63 directly from 30 Denham.
20 Prior to being served with the evidence in proceedings brought by the liquidators of 30 Denham, Mr Stanley Xue:
(a) was not aware of the back-to-back sale and purchase of the property;
(b) was not aware that Tony had submitted bids of $12 million and $14 million to Colliers;
(c) had never heard of or met Mr De Souza; and
(d) was not aware that part of the deposit and purchase price paid by DC was released to InvestX and CTD.
21 Thus, 30 Denham was a company under the control of Mr Zhang which bought the property from the actual vendor, Khengs, for $14 million plus GST and onsold it to DC the same day for $45 million plus GST by way of simultaneous exchange and settlement. So much is confirmed by Mr Zhang's admissions in his public examinations conducted by the liquidators of 30 Denham. Mr Cai was similarly aware of the back-to-back nature of the transactions and that Mr Zhang was on both sides of that transaction, according to admissions which Mr Cai also made in those public examinations.
22 The flow of funds after settlement of the DC Contract on 5 September 2019 is set out in an aide-mémoire which the applicants provided to me on 17 March 2023, which shows, relevantly, that:
(a) On 9 September 2019, $25 million was transferred from 30 Denham to InvestX;
(b) On 10 September 2019, InvestX transferred $341,000 to Central Advisory Group Asia Ltd (CAGA), the seventh respondent. CAGA was incorporated in Hong Kong on 25 April 2016. Mr Cai was a director of CAGA, but signed an application to resign as a director of CAGA on 1 October 2022. An application to deregister CAGA was filed on 1 February 2023;
(c) On 12 September 2019, CAGA transferred $341,000 to CTD;
(d) On 10 October 2019, InvestX transferred $2.5 million to CAC, the sixth respondent. CAC was incorporated on 18 August 2017, with Mr Cai as its sole director. An application for deregistration of the company was filed on 23 December 2022;
(e) On the same day, 10 October 2019, CAC transferred $2.5 million to CTD;
(f) On 19 October 2019, CTD transferred $2.4 million to a joint bank account in the name of Mr Cai and his wife;
(g) On 14 November 2019, $5,232,961.63 was transferred from 30 Denham to CTD;
(h) On 19 December 2019, InvestX transferred a further $2.5 million to CAC, which was transferred to CTD on the same day;
(i) On 27 December 2019, CTD transferred $930,000 to an account in the name of DSZ Accountants Pty Ltd (DSZ Accountants), which is the owner of the property from which Mr Cai's accounting business trades;
(j) On 21 February 2020, InvestX transferred $500,032 to Link Investments Ltd (Link). Link is incorporated in Hong Kong and Mr Zhang is its director. The sole shareholder of Link is a company incorporated in the British Virgin Islands, of which Mr Zhang is the sole director;
(k) On 6 April 2020, InvestX transferred $5,000,032 to Link;
(l) On 27 April 2020, InvestX transferred $8,000,032 to Link;
(m) On 29 May 2020, InvestX transferred $6,239,503 to Link, such that Link received a total of $19,739,599 from InvestX; and
(n) On 2 December 2020, CTD transferred $6 million to CAGA.
23 On 22 December 2020, liquidators were appointed to 30 Denham in a creditors' voluntary liquidation. On 11 July 2022, the ATO lodged a proof of debt in the liquidation claiming over $15 million in unpaid capital gains tax in relation to the property at 30 Denham. On 3 November 2022, the liquidators obtained interim orders in the nature of freezing orders pursuant to s 1323(3) of the Corporations Act 2001 (Cth) against DC, Mr Dawson, Mr Zhang, Mr De Souza and Mr Stanley Xue. Those orders were extended until 23 November 2022 and were discharged during a hearing on 23 and 24 November 2022. On 14 February 2023, the liquidators obtained further orders in the nature of freezing orders pursuant to s 1323(3) against Mr Cai, CTD, CAGA, CAC, DSZ Accountants, Link, Mr Cai's wife and Belrose COB Pty Ltd. Belrose COB is the ninth respondent in these proceedings, and until the lodgement of forms with ASIC to change its shareholder on 27 January 2023, Mr Zhang was its sole director and shareholder.
24 A hearing was listed in this court on 2 March 2023, at which the respondents to the freezing orders obtained by the liquidators sought to set them aside. At the commencement of that hearing, counsel for the liquidators informed the court that the liquidators had reach an in-principle settlement with those respondents. On 3 March 2023, the solicitors for the present applicants wrote to the liquidators' solicitors requesting information about the settlement and requesting 48 hours' notice of any intention to release the freezing orders in place.
25 On 7 March 2023, the liquidators refused to agree to provide that notice. On 15 March 2023, the Court made consent orders in the liquidators' proceedings discharging all the freezing orders. The applicants learned of those orders only by requesting and obtaining them from the Court.
26 There is no controversy before me as to the principles which are to be applied for an extension of the operation of the freezing orders, namely that the applicants must show:
(a) that they have a good arguable case on an accrued or prospective cause of action that is justiciable in the court: r 7.35(1)(b) of the Federal Court Rules 2011 (Cth) (Rules); and
(b) that there is a danger that a judgment or prospective judgment would be wholly or partly unsatisfied because the assets of the judgment debtor, prospective judgment debtor or another person are:
(i) removed from Australia or from a place inside or outside Australia; or
(ii) disposed of, dealt with or diminished in value: r 7.35(4)(b) of the Rules.
27 The threshold to satisfy the requirement of a good arguable case has been described as "a very low one" and also as being one "which is more than barely capable of serious argument, and yet not necessarily one the judge considers would have better than a 50% chance of success": Curtis v NID Pty Ltd [2010] FCA 1072 at [6] (Edmonds J).
28 As for the danger that a prospective judgment would be unsatisfied, the test is whether there is a "real risk" that will occur, or "a sufficient likelihood of risk which in the circumstances of a particular case justifies an asset preservation order": Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014; (2010) 273 ALR 194 at [8]-[9] (Kenny J). It is not necessary for the court to be satisfied that the risk of dissipation is more probable than not. Nor is it necessary for the applicant to adduce evidence of an intention on the part of the respondent to dissipate assets. Although the risk of dissipation must be demonstrated by evidence, in many cases the risk of dissipation of assets to avoid a judgment may be evident from the applicant's strong prima facie case of the defendants having fraudulently misappropriated assets or of serious dishonesty: Gecko Australia Pty Ltd v Montagnese [2022] FCA 488 at [19(c)] (Moshinsky J).
29 In my opinion the applicants have demonstrated a good arguable case to the effect that Mr Cai and CAG were the agents of the applicants in relation to the purchase of the property. The agency relationship arises by reason of Mr Cai and CAG's position as the applicants' accountants in circumstances where there was a reposal of significant trust and confidence in Mr Cai and CAG by the applicants, together with a vulnerability on the part of the applicants if that trust was not repaid. There appears little doubt in the light of the public examinations that Mr Cai was aware of the details of the back-to-back purchase and sale transactions concerning the property at Denham Court. It also appears from the public examinations that Mr Cai recommended Mr De Souza as the director for 30 Denham, and an employee of CAG collected the two cheques of $1.5 million each, made out to InvestX and CTD from the deposit funds.
30 Further, while the relationship of accountant and client is not one of the traditional and recognised categories of fiduciary relationship, it appears to me in the present case that it is sufficiently arguable that the relationship between accountant and client in the present case was fiduciary in nature: see Torlonia v Wright [2016] NSWSC 1139 at [19] (Brereton J). As that case demonstrates at [21], the existence of a fiduciary relationship will depend on factors such as vulnerability, reliance, trust and confidence. It appears to me also to be sufficient arguable on the evidence that Mr Cai, through his involvement in the back-to-back transactions, breached the no profit rule by the payment of $6.7 million to CTD and the payment of other moneys to CPD, CAC and CAGA, and that Mr Cai breached the conflict of interest rule pertaining to fiduciaries. It also appears to me sufficiently arguably that Mr Cai contravened the statutory prohibition on misleading or deceptive conduct by failing to disclose details of the back-to-back transaction to the applicants, applying the reasoning of this court in Demagogue Pty Ltd v Ramensky Pty Ltd [1992] FCA 851; (1992) 39 FCR 31.
31 As to the liability of CTD (the fourth respondent), CAC (the sixth respondent) and CAGA (the seventh respondent), I am also persuaded that there is a sufficiently arguably case against each of those entities. As to CTD, it is alleged that it is liable based on its status either as Mr Cai's alter ego or by reason of Mr Cai's position as the sole director and shareholder of CTD. As a result of that position, if a breach of fiduciary duty is established against Mr Cai, there is an arguable case that CTD is also liable to the applicants. Similarly, as to CAC, Mr Cai was the sole director of CAC, such that if breach of fiduciary duty is established against Mr Cai, there is an arguable case that CAC is also liable to the applicants. As to CAGA, Mr Cai was also the sole director and shareholder of CAGA, which received $341,000 from InvestX and $6 million from CTD. Again, if breach of fiduciary duty is established against Mr Cai, there is an arguable case that CAGA is also liable to the applicants.
32 I am also persuaded that there is a sufficient risk of dissipation on the part of the second, fourth, sixth and seventh respondents. In the first place, the nature of the applicants' case against the respondents is in essence that Mr Zhang and Mr Cai personally and through their entities orchestrated a $31 million fraud upon the applicants. There is no evidence before me which has sought to proffer a legitimate explanation for that transaction. While this is certainly not an occasion for making any ultimate findings of fact concerning the transaction, it appears to me, on the evidence before me at this stage, that the risk of dissipation can and should be inferred from the nature of the applicants' case, which on the preliminary evidence filed to date does appear arguably to have involved the fraudulent misappropriation of funds and serious dishonesty.
33 The transactions which have occurred since settlement of the purchase of the Denham Court property also demonstrate a real risk of dissipation. By the end of 2019, $10.5 million had been transferred offshore to CTD (incorporated in Hong Kong), that figure excluding the $1.5 million from the deposit on 31 July 2019, and within nine months of settlement, $19.7 million had been transferred offshore to Link, also incorporated in Hong Kong. The fact that these transactions occurred about four years ago does not bear materially, in my opinion, on the risk of dissipation of assets. Nor in my opinion does the fact that there was no extant or impending claim in 2019 bear materially on the risk of dissipation of those assets.
34 Third, the risk of dissipation is reinforced by Mr Cai's evidence in the public examinations brought by the liquidators of 30 Denham that, despite receiving $5 million from the transaction, CAC now has no assets, and despite receiving $6.3 million, CAGA also has no assets.
35 In those circumstances, I am comfortably satisfied that there is a sufficient risk of dissipation so as to justify the extension of the operation of the freezing orders against the second, fourth, sixth and seventh respondents.
36 The second, third and sixth respondents have taken me to a letter of some 20 pages which was sent on about 27 March 2023 to the applicants' solicitors requesting a great number of particulars of the statement of claim, and making a number of complaints concerning that pleading. That letter sought a response to the requests by 31 March 2023, at 11 am that day. That was plainly insufficient time to provide a full answer to the request. The solicitors for the applicants, Corrs Chambers Westgarth, made what, to my mind, was a sensible suggestion that the second, third and sixth respondents identify specific matters to which priority may be given in responding to the request for particulars for the purposes of the interlocutory application being heard today. That request was declined and despite the fact that it was repeated on 30 March 2023 it was, again, declined by email that day. Ultimately, I see the question of whether there are any pleading deficiencies in the statement of claim as being of little weight in this application, as r 7.35 of the Rules directs attention to matters of evidence, rather than matters of pleading, and frequently applications for freezing orders are made without a pleading at all, given the urgency of the application.
37 I will leave to a later occasions the question whether the statement of claim is deficient. As the applicants appear to have acknowledged, there is likely to be an amended statement of claim filed pursuant to r 16.51 of the Rules before the next case management hearing. The second, third and sixth respondents are in breach of paragraph 8 of the freezing orders which I made on 17 March 2023 relating to the need to file and serve an affidavit as to assets and liabilities. That is a matter for the second, third and sixth respondents to attend to urgently and I have not extended the time for that to be done on the basis that those respondents will remain in contempt of Court unless and until that deficiency is rectified.
38 The question has arisen before me as to whether paragraph 10(b) of those orders should be amended so as to increase the permissible amount of legal expenses on the part of each of the second and sixth respondents from $50,000 to $300,000. Such an increase is an aspect of the consent orders made between the applicants and Mr Zhang and the fifth and ninth respondents and I see no reason why the second and sixth respondents should not be given a similar increase in the amount of permissible legal expenses. Whether the figure of $300,000 is ultimately sufficient can be addressed on another occasion.
39 The standard form in the Freezing Orders Practice Note (GPN-FRZG) expresses alternatives as to whether the cap on legal expenses should be expressed as a dollar figure or whether it should simply be a reference to "reasonable legal expenses" and, in my opinion, a cap of $300,000 applicable to each of the second and sixth respondents is the appropriate form of order at this stage.
40 As to the costs of the present application, there is, in my opinion, no reason why those costs should not follow the event and, accordingly, I will order that the second and sixth respondents pay the costs of the interlocutory hearing today.
41 Accordingly, the orders which I make are as follows:
(1) Orders 8 and 11 of the orders made on 17 March 2023 and extended on 22 March 2023 (being freezing orders against the second and sixth respondents) be extended until further order of the Court.
(2) Orders 9 and 12 of those orders (being freezing orders against the fourth and seventh respondents) be extended until further order of the Court.
(3) Paragraph 10(b) of annexures B and E to those orders be varied so that the reference to $50,000 by way of legal expenses is deleted and a figure of $300,000 is inserted.
(4) Any amended statement of claim be filed and served by the applicants by 5 May 2023.
(5) Any application to strike out the amended statement of claim be filed and served by 12 May 2023.
(6) Order 5A be inserted into the orders made on 11 April 2023 (concerning the extension of the freezing orders against the first, fifth and ninth respondents) in the following form:
The applicants file and serve any amended statement of claim by 5 May 2023.
(7) Order 6 of the orders made on 11 April 2023 (concerning the extension of the freezing orders against the first, fifth and ninth respondents) be varied so as to read:
The Tony Parties file and serve any application to strike out the amended statement of claim under rule 16.21 of the Federal Court Rules 2011 (Cth) by 12 May 2023.
(8) Order 7 of the orders made on 11 April 2023 (concerning the extension of the freezing orders against the first, fifth and ninth respondents) be deleted.
(9) The proceedings be listed for case management on 19 May 2023 at 9.30 am, to deal with the further conduct of the proceedings, including the question whether there is any opposition to Dentons acting as solicitors for the second, third and sixth respondents.
(10) The second and sixth respondents pay the applicants' costs of the hearing today.
(11) The parties have liberty to apply on two days' notice.
I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.