De Kun Holding (Aust) Pty Ltd v Yuan

The Context

1. The context was important. The defendant was the plaintiff's sole representative in Australia. He was appointed because of his long-standing residence in Australia, his ability to speak both English and Mandarin and his contacts in Australia. The plaintiff is effectively controlled from China. The controlling mind is Ms Jun Zheng, who speaks no English and resides in Guangdong. The shareholders of the plaintiff are all related to her in one way or another. Most of them are her nephews and nieces. She is the chairwoman of Guangdong Kangli Pharmaceuticals Co Limited in the People's Republic of China. That company carries on the business of manufacturing and distributing pharmaceuticals. The directors and shareholders of the plaintiff are accustomed to acting in accordance with her instructions. The shareholders of the plaintiff are also the shareholders in Guangdong Kangli Pharmaceuticals Co Limited. Ms Zheng has invested her own funds in the plaintiff in order for it to carry out investments in Australia.
2. Ms Zheng reposed significant trust and confidence in the defendant. She was entitled to expect nothing less. The circumstances required scrupulous adherence by the defendant to his obligations of fidelity and loyalty and the avoidance of any conflict between his personal interests and those of the plaintiff.
3. Counsel for the defendant suggested that there may have been mistake and misunderstanding by the defendant and not the wilful serious or dishonest conduct which is usually necessary to justify summary dismissal. At one stage that did seem to me to be a possible construction of the events. But the defendant's own evidence put his case on a different footing and effectively excluded any possibility of genuine mistake.

The Trust

1. At issue was a trust established by the defendant in November 2013. I accept Ms Zheng's evidence that she wanted the plaintiff to establish some sort of 'charity fund' to benefit elderly Chinese persons in Sydney. She did not know what a trust was and did not request or authorise the establishment of a trust. Her primary requirement was that the intended fund, which would consist of moneys made available by her or companies under her control, be for the specific charitable purpose that she intended.
2. Without informing Ms Zheng or the defendant's fellow director of the plaintiff, Mr Yu, the defendant consulted the accountant, Mr Teh, and arranged for solicitors to prepare a trust deed. The defendant did not show the trust deed to Ms Zheng or Mr Yu until they came to Sydney in April 2015 and required the production of all of the plaintiff's documents. There seems to have been an understandable reason for not showing Ms Zheng or Mr Yu the trust deed. The trustee was a company called Angel (Sydney) Pty Ltd, which was owned and controlled by the defendant. The primary beneficiaries were the defendant and his family. The objects of the trust were not charitable. There was nothing whatsoever charitable about the trust and there was certainly no reference to Ms Zheng's desire to assist elderly Chinese persons in Sydney. This may have all been a dreadful mistake by the defendant but, as I said, he relied in his evidence on an express authorisation by Ms Zheng. At the hearing he produced a fresh affidavit setting out the following conversations, none of which had appeared in his earlier affidavit. He said he had a conversation with Mr Teh in Mandarin as follows: ME Kai Yu said to me he has heard that you can set up a trust in Australia to protect assets and save on tax, should we set one up? I told him that I would speak to you about setting up a trust. TEH Overseas residents cannot set up a trust and cannot be a beneficiary, only Australian residents can be beneficiary. We then telephoned Zheng on my mobile telephone, and at the conclusion of the telephone conversation the following was said in Mandarin: ZHENG I agreed that Yuan's family can be beneficiary and Yuan's company will be the trustee. I will have control of the trust as I will control the appointment of Yuan's company as trustee, so I can change the trustee and the trustee can nominate new beneficiaries and remove beneficiaries. TEH I will have Munro Lawyers do the paperwork to set up the trust.
3. I have no hesitation in rejecting this evidence. It is contrary to the probabilities and was contradicted by Ms Zheng, a former military officer who served thirty years in the People's Liberation Army. Her evidence was sound and reliable. The defendant's evidence on the other hand seemed desperate and implausible. It amounted to overreach.
4. Ms Zheng said, and I accept: I deny I ever spoke to an accountant about the setting up of the trust. I deny that I was ever told by Yuan, the accountant or anyone else about the laws of Australia for trusts. I deny I ever agreed that Yuan and his family would be the beneficiaries of the trust and I deny that I ever agreed for Yuan to be the director or that I would control his appointment.
5. If there had been any misunderstanding, the natural person to clarify what truly happened was Mr Teh, the accountant. There was no evidence from him. Nor was there any evidence from Mr Teh to corroborate the belated assertion in the defendant's last-minute affidavit that Ms Zheng knew and understood precisely what was proposed and expressly authorised the establishment of the trust - a trust of which the defendant's company was the trustee and the defendant's family were the primary beneficiaries.
6. Counsel for the defendant attempted skilfully to characterise the defendant's conduct in establishing the trust as innocent, not reflecting any dishonest intention and not justifying his summary dismissal. He pointed in particular to the fact that Ms Zheng was nominated as the Appointor under the deed, that clause 14 gave the Appointor the usual powers to remove the trustee and that clause 17.1 enabled the trustee to appoint additional beneficiaries only with the consent of the Appointor.
7. But none of these peripheral matters would have allayed the legitimate concern and alarm that Ms Zheng and Mr Yu were justifiably entitled to feel when they were shown the trust deed in April 2015 on their visit to Sydney. The substance of the matter was that the defendant had put his own interests and those of his family before the interests of the plaintiff and those of Ms Zheng. Worse, his conduct was flagrant. He could not possibly have genuinely believed that Ms Zheng would have agreed to the establishment of a trust of which his company was the trustee and his family was the primary beneficiary. No rational or plausible reason for doing so was given in evidence.
8. It does not matter that, before discovery in April 2015 the defendant did not distribute any part of the $10,000 that constituted the initial fund. Nor does it matter that when it was discovered he cooperated in the return of the $10,000 to the plaintiff. He had put himself in a position of conflict and he did so when he was the plaintiff's sole representative in Australia, in whom the plaintiff and Ms Zheng necessarily reposed the utmost confidence and faith. It was a breach of good faith, highlighted by his belated and unlikely assertion that Ms Zheng expressly authorised his conduct. It was also highlighted by his failure from November 2013 to April 2015 to show the trust deed to Ms Zheng, Mr Yu or any of the other shareholders of the plaintiff in China.
9. I am quite satisfied that the defendant's conduct meets the time-honoured requirement for dismissal described by Dixon and McTiernan JJ in Blyth Chemicals Limited V Bushnell (1933) 49 CLR 66 at 81 as follows: Conduct which, in respect of important matters, is incompatible with the fulfilment of an employee's duty or involves an opposition or conflict between his interest and his duty to his employer or impedes the faithful performance of his obligations or is destructive of the necessary confidence between employer and employee, is a ground of dismissal.

The Shareholders' Meeting

1. I should now turn to the shareholders' meeting. The plaintiff chose to terminate the defendant's employment by a resolution of its shareholders. It was not required to do so but that is the method which it adopted. I accept the evidence of Mr Yu that he spoke to each of the shareholders, who constituted 95 percent of the membership, by telephone or VideoLink. Understandably, the only person he did not consult was the defendant, who held a 5 percent parcel of shares by virtue of a somewhat ambiguous provision of his employment contract. It seems possible that the defendant's shares were in a special category and may not, in any event, have had any voting rights attaching to them. The plaintiff's Constitution was not in evidence but the sole purpose of the allocation of shares to the defendant seems to have been to provide him with remuneration in the form of 'net profit by form of dividend'. It was, it seems, a 'bonus allocation mechanism' intended to be a source of income rather than the provision to him of personal property in its own right. It is not however necessary to decide.
2. Assuming he was entitled to vote, the defendant was not given any notice, let alone written notice, of the meeting in accordance with Section 249J of the Corporations Act 2001 (Cth). Mr Yu did not speak to him because there was no practical point in doing so. I am satisfied that if he had done so it would have made no difference to the outcome. I am satisfied that the opportunity of explaining and seeking to justify the defendant's position would not have altered the minds of the other members. I infer that, as is permitted by Section 249H(2)(b) of the Act, 95 percent of the members agreed to the meeting taking place without the usual 21 day notice period. They acquiesced in the meeting taking place without adhering to any of the usual formalities.
3. There was a formal written minute of the meeting individually signed by each of the members who constituted 95 percent of the membership. It was brought into existence in the weeks following the meeting on 17 April 2015. The meeting itself was not a formal meeting in the strict sense. The members were not in the one place together and they were not all available by telephone or VideoLink at the same time. It was not a conference call. This is not necessarily fatal: Bell v Burton (1993) 12 ACSR 325 at 328. Nonetheless, the substance of what they sought to achieve is clear and obvious. And the signing of the minute of the meeting as well as the commencement of these proceedings seeking to affirm the decisions taken at the meeting constitute 'the clearest possible evidence' of ratification of the termination by the plaintiff of the defendant's employment: Magnacrete Ltd v Hill (1988) 15 ACLR 325.
4. The plaintiff seeks the exercise of the Court's discretion under Section 1322(4)(a) of the Act declaring that 'any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation'.
5. The only express limitation on the exercise of the Court's discretion is imposed by Section 1322(6). It provides that the Court must not make an order unless it is satisfied that the act, matter or thing or the proceeding is essentially of a procedural nature, or that the persons concerned in the contravention or failure acted honestly or that it is just and equitable that the order be made. In addition, in every case it must be demonstrated that no substantial injustice has been or is likely to be caused to any person. Only one of the three sub-paragraphs of Section 1322 (6)(a) needs to be satisfied.
6. I have reached the conclusion that the circumstances of this case are ripe for the application of the Court's discretion pursuant to Section 1322(4)(a) of the Act. It does not matter, in my view, that the omission to give notice to the defendant and to include him in the meeting was deliberate. The comprehensive analysis and reasoning by Middleton J in Nenna v Australian Securities and Investments Commission [2011] FCA 1193 at paragraphs 46-82 are compelling in that regard. His Honour's conclusions warrant setting out in full: [76] In my view, the issue of whether an 'irregularity' or 'procedural irregularity' can be one which is a deliberate act of non-compliance with the Act can be resolved by construing its meaning in its context. Three points can be made in this regard. [77] The first is that 'irregularity', by definition, means: Want of conformity to rule; deviation from or violation of a rule, law, or principle; disorderliness in action; deviation from what is usual or normal; abnormality, anomalousness. And: An instance of this; a breach of rule or principle; an irregular, lawless, or disorderly act. See Oxford English Dictionary (2nd ed, Clarendon Press 1989) vol VIII at 94. [78] The definition does not include an express or implied requirement that an irregularity must be inadvertent or accidental. An irregularity (as defined) could occur as the result of a deliberate act or omission. [79] Secondly, s 1322(3) contemplates that 'accidental omission to give notice' of a meeting in accordance with the Act will be automatically validated by s 1322(3). That the Act specifically refers to 'accidental omissions' in s 1322(3) but fails to refer to accidents or omissions in s 1322(2), (4) or (6) tends to indicate that these subsections are not so confined. [80] Thirdly, s 1322(6)(a) envisages that the court can make an order under s 1322 even where the court is not satisfied that the person concerned in the contravention acted honestly. So even where a person acts dishonestly, which would normally involve an element of deliberate behaviour, the legislation will permit the court to make an order under s 1322(4)(a). For instance, if the court is satisfied that it is just and equitable that the order sought be made (see s 1322(6)(a)(iii)), then an order under s 1322(4)(a) can be made, even though an element of dishonesty is involved. The court, of course, may not make the order sought, but s 1322(6) does not prevent the court from doing so in the appropriate circumstance. [81] In my view, the terms 'irregularities' and 'procedural irregularity' can involve deliberate acts of non-compliance. The question will then arise, if the act is deliberate, whether the requirements of s 1322(6) are otherwise complied with so the court can make an order under s 1322. This latter enquiry is quite separate from whether there was an irregularity.

Mistaken Payment

1. That leaves one remaining issue. The return of the defendant's car and the status of his shareholding are no longer in issue. The plaintiff seeks restitution of the sum of $15,043 which it says was paid by mistake to the defendant between 1 July and 30 September 2015.
2. Unfortunately, the evidence to support this claim fell well short of what the law requires, especially when an arguably plausible explanation has been put forward by the defendant. The relevant decision maker was a woman called 'Kelly' who did not give evidence. And there was no indirect evidence of her state of mind. The cause of action for the recovery of money paid by mistake is not proved by someone saying, as Mr Yu did, that the payment was mistaken. There must be evidence of the decision maker's state of mind sufficient to rule out any reasonable possibility that the payment was made voluntarily and knowingly for the benefit of the defendant.
3. As Brennan J said in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 396: 'It is essential to retain the state of mind of the payer as the criterion of voluntariness' and as Dawson J said in the same case at 405: 'The first question should be whether the appellants turned their minds to the question of their legal obligation at the time they made the relevant payments'. There was no evidence of this nature. The circumstances in which the payments totalling $15,043 were made were not investigated adequately or at all. I am not prepared simply to assume that they were mistaken.

Relief

1. I make the declarations set out in prayers 1 and 1A of the second further amended statement of claim. I will hear submissions on costs on Friday, 10 March 2017.

Amendments 21 February 2017 - Changed name of solicitors for plaintiff 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: 21 February 2017