Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd

Supreme Court of NSW|2022-07-05|Before: Peden J

Solicitors: Lexsons Law Firm (Plaintiff) Francis Lim Barristers & Solicitors (Defendant) File Number(s): 2019/00067418 Publication restriction: Nil

Background

Scott Chan, a rogue, convinced the plaintiff, Dragon Property Development & Investment Pty Ltd, through its sole director, Mr Shaolong Feng, to pay $1,672,000 in return for the promise of the transfer of title to 19 units in the Eastwood Unit Trust (Unit Trust). The units were never transferred, and the money was not repaid.
The sole issue in these proceedings is whether the plaintiff should bear the loss of the fraud, or whether the defendant, 183 Eastwood Pty Ltd (183 Eastwood), the trustee company of the Unit Trust, is liable because Scott Chan was its agent. 183 Eastwood denies it gave Scott Chan any actual or ostensible authority to enable the fraud against the plaintiff.
Scott Chan became bankrupt on 21 May 2019 and is currently facing criminal charges. At the commencement of the hearing, leave was sought and granted to the plaintiff to discontinue the claim against Scott Chan and an amended pleading was filed by consent in Court on 5 July 2022. Therefore, the only remaining defendant is 183 Eastwood.
The following facts are not in dispute.
On 29 August 2016, the Unit Trust was declared and settled with 100 units. It is not necessary to identify all unitholders for the Unit Trust. However, Scott Chan was the sole director and shareholder of LCC Property Development Pty Ltd, which held 46 of the 100 units.

Plaintiff's Claim

The plaintiff expressly disavowed reliance on the statutory expression of the "Indoor Management Rule" in ss 128(1) and 129(2)-(3) Corporations Act 2001 (Cth) (Corporations Act), because the actions of Scott Chan were not a "dealing" with the plaintiff, and the information he placed on the ASIC register was not provided "by the company": see eg Wood v Inglis [2008] NSWSC 1147 at [93]-[94] (Barrett J); Winau Aust Pty Ltd v LCC Property Development Pty Ltd [2020] NSWSC 434 at [113] (Kunc J) (appeal on different grounds dismissed: [2021] NSWCA 9). As the parties made no submissions on the point, I do not consider whether Justice Barrett's decision on the meaning of "dealings with a company" ought to be qualified: see eg Caratti v Mammoth Investments [2016] WASCA 84; (2016) 50 WAR 84 at [154] (Newnes and Murphy JJA); Soyfer v Earlmaze [2000] NSWSC 1068 at [82] (Hodgson CJ in Eq). Neither do I consider whether the plaintiff in fact could have relied upon the statutory assumptions.
Instead, the plaintiff claimed that 183 Eastwood, through the true officeholders, failed to amend the ASIC record and therefore "armed" Scott Chan with the "means to represent to the world that he was its sole director and secretary and able to sign documents in its name".
The plaintiff submitted that it relied upon the representation by reviewing the ASIC record before entering into the Plaintiff's Deed, and that such reliance was detrimental, in that the plaintiff lost its $1,672,000 without receiving any benefit.
The defendant submitted that ostensible authority principles cannot apply in light of the operation of ss 128 and 129 Corporations Act, on the basis that a company can only be liable to a person such as the plaintiff where there has been a "dealing" between them. It was said that 183 Eastwood did not owe the plaintiff any duty to correct the ASIC register and therefore it could not be said that there was any relevant representation by 183 Eastwood. The defendant also submitted that there was no evidence of any reliance on the ASIC register by the plaintiff in entering into the Plaintiff's Deed, and no loss had been proved.

Principles

The general law principles concerning ostensible authority are not in dispute. Courts have variously noted that ostensible authority has a juridical basis in the wider principles of estoppel and agency: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 494 (Willmer LJ), 498 (Pearson LJ), 503 (Diplock LJ) (Freeman and Lockyer); Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 165 (Mason CJ), 174 (Brennan J), 200 (Dawson J), 213 (Gaudron J) (Northside Developments).
The well-known formulation of ostensible authority of Diplock LJ in Freeman and Lockyer (at 506), which has broadly been accepted by the High Court in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72 at 78 (Gibbs, Mason and Jacobs JJ), requires the following to be established: 1. A representation was made to the contractor that the agent had the company's authority to enter into a contract of the kind sought to be enforced; 2. Such representation was made by a person who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract related; and 3. The contractor was induced by such representation to enter into the contract; that is, that he in fact relied upon it. A fourth element identified by Diplock LJ is no longer necessary because the doctrine of ultra vires has been abolished: s 125 Corporations Act.
The second element is not in dispute in these proceedings, as Mr Lin, Mr Lau and Mr Ju were all duly appointed officers of 183 Eastwood. The issues therefore concern the representation and whether there was reliance.
Mason CJ explained the policy underlying the general law principles in Northside Developments at 164: On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.
Also in Northside Developments, Brennan J (at 175-6) characterised ostensible authority as a presumption of regularity, which, in turn, is a presumption of fact recognising the "likelihood that a company has given to its officers and agents the authority needed to carry on its business … within the limits of the authority which officers and agents in their respective positions would ordinarily possess": see also at 196 (Dawson J).
The plaintiff relied on Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 467-468 [38]-[39], where Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ stated: [38] A kind of representation that often arises in business dealings is one which flows from equipping an officer of a company with a certain title, status and facilities. In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd, for example, the Court spoke of the representation that might flow from supplying a particular person with "a blank order form, thus arming him with a document which, when he signed it, would bear the hallmark of authenticity". The reference to corporate administrative procedures under which an officer is armed with a document to which he or she can, by signature, impart an appearance of authenticity is a reminder of the wider principle of estoppel which may be relevant to a question of ostensible authority. The holding out might result from permitting a person to act in a certain manner without taking proper safeguards against misrepresentation. [39] In Thompson v Palmer, Dixon J said: "The object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other's detriment. Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party. He may be required to abide by the assumption because it formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment; or because he has exercised against the other party rights which would exist only if the assumption were correct ... or because knowing the mistake the other laboured under, he refrained from correcting him when it was his duty to do so; or because his imprudence, where care was required of him, was a proximate cause of the other party's adopting and acting upon the faith of the assumption; or because he directly made representations upon which the other party founded the assumption."
Pacific Carriers concerned a bank employee, who did have some actual authority. The issue was whether her signing a document together with the use of a stamp ("chop"), which she had been given by the company without any clear guidelines as to its use, bound the company by way of ostensible authority. In contrast here, Scott Chan never had any express actual authority to bind 183 Eastwood in any way. Instead, here the issues are: 1. whether there has been a relevant "representation" to the plaintiff by the company (here the true officeholders) through the failure to correct the ASIC register; and 2. whether the plaintiff relied on that representation in entering into the Plaintiff's Deed, believing that Scott Chan had authority to bind 183 Eastwood, such that 183 Eastwood is now estopped from denying Scott Chan's authority.
For the purposes of ostensible authority, a representation "may be by words or conduct, including acquiescence, but must be to the effect that [Scott Chan] had authority to act on [183 Eastwood's] behalf": Pollard v Wilson [2010] NSWCA 68 at [122] (McClellan CJ at CL, with whom Macfarlan and Young JJA agreed); see also Haines Bros Earthmoving Pty Ltd v Rosecell Pty Ltd (2016) 92 NSWLR 47 at 55 [35], 61 [61], 63-64 [67]-[68], [71] (Barrett AJA). In Pollard, McClellan CJ at CL made it clear that what is necessary is that, by "words, conduct or by positive act or omission", a belief is instilled in a plaintiff that the requisite authority exists.
Silence in the face of conduct by a purported director has been considered sufficient to establish implied actual authority. For example, in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 2 VR 279, which was not cited by the parties, Mr Goldberg was a director of two entities, Brick and Pipe and Spersea Pty Ltd. Brick and Pipe entered into a Deed of Guarantee in favour of Occidental. Occidental refused to sign the Deed, because the person signing it for Brick and Pipe, Mr Furst, was not listed as a secretary on the company's records. An employee of Brick and Pipe, Mr Durlacher, assured Occidental's solicitor that Mr Furst was the secretary of Brick and Pipe. Mr Goldberg was present and said nothing. Occidental later challenged Mr Furst's authority. The trial judge found that Mr Goldberg had concurred in the assurance that Mr Furst had authority by remaining silent when Mr Durlacher gave the assurance. Accordingly, it was found that Brick and Pipe held out Mr Furst as its secretary and that finding was upheld on appeal (at 362 per McGarvie, Marks and Beach JJ).
Similarly here, there was no positive representation by 183 Eastwood to the plaintiff about Scott Chan's authority. Instead, it seems that the substance of the plaintiff's submission is that the true officeholders stood by after being informed of what Scott Chan had done to the ASIC register.
It may well be that another way of looking at the factual situation is that 183 Eastwood impliedly ratified Scott Chan's conduct through acquiescence of what he had done, such that his conduct ought to be considered as though it was originally authorised by the true officeholders: see eg Davison v Vickery's Motors Ltd (in liq) (1925) 37 CLR 1 at 19 (Isaacs J). Silence, acquiescence or inactivity may be sufficient to demonstrate implied ratification: Taylor v Smith (1926) 38 CLR 48 at 54 (Knox CJ); Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at 234 (Young CJ in Eq); Pollard v Wilson [2010] NSWCA 68 at [121] (McClellan CJ at CL, with whom Macfarlan and Young JJA agreed).
Approaching the case in this way, there would have been no need to consider the issues of the plaintiff's reliance and detriment. However, the plaintiff would have been required to prove that the true officeholders, as principals, had full knowledge of the material facts such as Scott Chan's dealings with Mr Feng: Learn and Play (Rhodes No 1) Pty Limited as Trustee for Rhodes 1 Childcare Centre Unit Trust v David John Frank Lombe [2011] NSWSC 1506 at [21]-[22] (Pembroke J), and the authorities cited therein.
However, no submissions were made by the parties on that alternative approach.

Determination

Three submissions of the defendant can be dealt with at the outset.
First, it is clear that no ostensible authority will arise where the representee knows of the absence of actual authority, or is put on inquiry and required to make further inquiries to determine whether actual authority exists: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 182-183 (Brennan J). The defendant did not suggest that the plaintiff was put on inquiry in its dealings with Scott Chan. In fact, in closing submissions, the defendant conceded that there was nothing that the plaintiff could have done to protect itself from Scott Chan's fraud.
Secondly, contrary to the defendant's submissions, the general law principles of ostensible authority are not ousted by the Corporations Act. The statute did not codify the law: Caratti v Mammoth Investments (2016) 50 WAR 84 at 159 [334] (Buss JA), 204 [555] (Newnes and Murphy JJA); Australian Capital Television Pty Ltd v Minister for Transport (1989) 86 ALR 119 at 157 (Gummow J).
Thirdly, the defendant submitted that 183 Eastwood had no "duty" to correct the ASIC record outside of the very narrow circumstances of ASIC's annual review of the company pursuant to ss 345A, 346A and 346C of the Corporations Act. The defendant did not draw my attention to any authorities which supported that interpretation. Those sections do not speak to a director's obligations to correct errors on the ASIC register, and do not exhaustively cover the field of the circumstances in which directors should monitor the correctness of the company's publicly viewable information in ASIC's registers. Instead, they only concern ASIC's conduct of an annual review of a company and the company's corresponding obligation to correct any of the particulars where they are incorrect. If the defendant's submissions were accepted, it would be unnecessary for the company secretary to notify ASIC of changes to company details as they arise during the year, but such a conclusion is plainly contrary to other provisions in the Corporations Act: see eg ss 205B, 349A. Further, I note that ASIC includes a warning on its documentation, which would otherwise be unnecessary or would provide express reference to a review date: "Please advise ASIC of any error or omission which you may identify".
I turn to the elements of ostensible authority.

Representation

For the reasons below, I find that Scott Chan was held out by 183 Eastwood as possessing authority to bind the company to contracts like that with the plaintiff. This arose from the defendant's failure to do anything to remove Scott Chan's ability to use the false ASIC register to mislead the plaintiff prior to the execution of the Plaintiff's Deed in April 2018.
Only Mr Ju and Mr Lin gave evidence for 183 Eastwood.
I did not find Mr Ju dishonest, however, he appeared to seek to avoid difficult questions and lacked precision in his answers, particularly in relation to issues concerning the timing of events. I do not accept that he was unaware of much of the detail that he disavowed concerning meetings and agreements made by unitholders. However, nothing turns on those matters.
I find that Mr Lin was honest, but also vague on detail. He was clearly (and understandably) very upset about Scott Chan's conduct and the impact it has had on him, his family, and his business interests. I accept that the directors were "shocked" when they became aware of the conduct of Scott Chan, as Mr Lin stated. I also accept that Mr Lin attempted to distance himself from all issues in relation to the company after Scott Chan's conduct was revealed, because he was concerned that unitholders would not trust him and would implicate him in the conduct of his brother-in-law.
Mr Ju and Mr Lin accepted that they knew a sole director was able to sign on behalf of a company and bind it to contracts with third parties (this being the effect of s 127(1)(c) of the Corporations Act). Both men had knowledge between 26 February and 24 April 2018 that Scott Chan had acted fraudulently in relation to third parties by representing that he was the sole director and shareholder of 183 Eastwood, by changing the ASIC register and mortgaging the company's Property. Therefore, objectively, they could know the potential misuse that Scott Chan could make of the false information on the ASIC register. However, neither of them considered that they ought to have taken any step to have the ASIC register corrected before June 2018 for various reasons.
First, they considered that it was the unitholders who were the decision-makers in relation to what steps ought to be taken in relation to Scott Chan's conduct.
Both Mr Lin and Mr Ju's consistent evidence was that: 1. the unitholders were aware of Scott Chan's fraud by early March 2018; 2. the true officeholders were not required to correct the ASIC register without instructions from the unitholders; and 3. the unitholders decided not to change the ASIC register or notify the police until Scott Chan failed to pay for their unitholdings in accordance with the "Scott Chan agreements".
Mr Lin also considered another reason why the unitholders did not act was because they did not believe Scott Chan would engage in further dishonest conduct. Mr Lin said: Because all the stakeholders got knowledge of Scott Chan's fraudulent behaviour, we the stake holders all believed at the time that he wouldn't do it again. … We believed at the time that he dare not do it again having the whole matter be known to everybody.
It appears that because of these views, neither Mr Ju nor Mr Lin actually turned their mind to whether Scott Chan might defraud others beyond the unitholders. For example, on 18 April 2018, Mr Ju knew that Scott Chan had emailed Mr Ip asking for more time to pay $1,710,000 in relation to the first agreement to purchase 20 units, citing delay in obtaining money from "our new investors". Mr Ju's evidence was that he did not ask and did not know who those investors were. It follows he also did not know or ask what representations Scott Chan was making to those "new investors" to obtain funds. As an aside, it is likely the plaintiff was the "new investor", as it was being asked to pay almost $1,710,000 for units at that time.
Secondly, Mr Ju and Mr Lin said that they and the unitholders did not know how to correct the register, and that they required professional assistance. I accept that they did not personally understand how to correct the ASIC register and would require assistance. However, the thrust of Mr Ju and Mr Lin's evidence was not that a delay in correcting the register was because they were waiting for advice about changing the ASIC record, but rather because the unitholders were prepared to give Scott Chan time to pay for the units.
In cross-examination Mr Lin stated: Q: And you still did not change the ASIC record? … A: No. This … is out of my control because the shareholder they got the power. I can't do everything. And I was still waiting for GEA solicitor and accountant to give us [advice], because we can't do anything. Q: So it was the shareholders who said we will not change the ASIC record, is that correct? A: They make decision. They want to - they can change… they make decision. I can't make decision.
Mr Lin said that if Scott Chan did not pay the money in time, then they would go to the police and ASIC, but if he did pay in time, then they would not go to the police and ASIC. Similarly, Mr Ju said: Q: So what ultimately caused you to go to the police and ASIC? A: Well, because he … didn't complete the transaction. Q: Had he completed the transaction, what would you have done? A: Assuming nothing.
It therefore appears that the unitholders were prepared to sell their units and leave 183 Eastwood in Scott Chan's control if he in fact paid for their units as agreed. It was only when he did not that they sought to resume control of the company.
I accept that the true officeholders sought advice on correcting the register in June 2018. However, I do not accept that such advice was sought before that time. For example, there is no objective evidence that any advice was sought on correcting the register earlier than June 2018.
While it does not matter, Mr Lin and Mr Ju volunteered that Mr Lau, the other director, in fact contacted ASIC and was allegedly told that ASIC could not assist in having the register corrected. Mr Lin's convoluted evidence was that the register could not be corrected because Scott Chan had "kick[ed]" the true officeholders out of the company. Mr Ju was unsure of when Mr Lau had sent an email to ASIC, but he placed it around the time of the COVID pandemic, which was well after June 2018: "We did send an email to ASIC. ASIC just not taking on the case, because of COVID, I don't know what's the reason".
The hearsay evidence about Mr Lau's experience and the second hand hearsay evidence about ASIC's response carries little weight. No email sent from Mr Lau to ASIC was in evidence. To accept that Mr Lau contacted ASIC prior to June 2018 would also seem inconsistent with the approach taken by the unitholders in delaying reporting Scott Chan's conduct to ASIC and the police, pending payment by him for their units. Mr Lau was one of those unitholders selling his company's units and is therefore unlikely to have taken a different approach.
Again while it does not matter, without Mr Lau giving evidence, I do not accept that there is a basis for concluding that Mr Lau contacted ASIC before 24 April 2018. As Mr Lau did not give evidence, despite his affidavit having been served by 183 Eastwood, I consider a Jones v Dunkel inference is available that his evidence would not have assisted 183 Eastwood.
I consider the more likely situation is that the true officeholders, on the instructions of the unitholders, decided not to report the false register to ASIC or the police until June 2018, when they in fact took such steps.

Reliance

As already noted, the defendant submitted that there was no evidence that the plaintiff relied on the ASIC register in deciding to enter into the Plaintiff's Deed. I do not accept that submission for the following reasons.
First, Mr Feng, the sole director of the plaintiff, could not speak or read English and gave evidence through an interpreter. He said, "Because I am not good in English, so I appoint [my solicitor] to take a look and explain to me" and, "I would rely on Ms Lim to vet all these documents for me… I rely on Ms Lim", and similar.
Secondly, the plaintiff's solicitor expressly sought a copy of the ASIC register from Scott Chan's lawyers together with many other documents prior to formation and then further negotiated the agreement. It can easily be inferred that she did so on instructions from Mr Feng, and it was not submitted otherwise.
Thirdly, Mr Feng gave evidence that, "I only know that when I purchase this unit trust Mr Scott Chan was the only director at 183 Eastwood Pty Ltd" and, "Ms Lim told me in 2018 that Scott Chan was 183 Eastwood Pty Ltd as only director."
Therefore, I find that the plaintiff relied on the information in the ASIC register in deciding to enter into the Plaintiff's Deed.
For completeness I note that the defendant also relied on s 130 of the Corporations Act, which provides: Information available to the public from ASIC does not constitute constructive notice A person is not taken to have information about a company merely because the information is available to the public from ASIC. Section 130 has no work to do in these proceedings. The plaintiff disavowed sections 128 and 129, and the effect of s 130 is specifically on the operation of the statutory assumptions in s 129: Caratti v Mammoth Investments (2016) 50 WAR 84 at 173 [400] (Buss JA). The effect of s 130 is that a third-party outsider, who could have realised their error if they had searched the ASIC databases, will not be considered to have been put on inquiry if they have not, in fact, searched ASIC's databases. Here, the plaintiff took actual notice of the ASIC record because it was explained to him by his solicitor. The defendant's reliance on s 130 is misconceived.

Loss/damages

Oddly, the Plaintiff's Deed required payment of the purchase price on the day of execution, but did not include an express term as to when 183 Eastwood would transfer the units to the purchaser. Transfer was promised on "settlement" pursuant to cl 2, without a date being identified.
The plaintiff submitted that transfer of the units was therefore required in a 'reasonable time', which was said to be 1 month. The basis for that submission was the parties objectively would have intended a month to be reasonable time in circumstances where Scott Chan's lawyer had already provided evidence that the units were held by 183 Eastwood and very few additional steps would be required to bring about the transfer. The defendant did not make any submissions on this point.
Adopting the plaintiff's timeframe, transfer was required on 24 May 2018. However, the plaintiff terminated the Plaintiff's Deed on 6 September 2021.
The plaintiff sought damages in the following ways: 1. Primarily, on the basis of reliance damages at the value of the sum paid, namely $1,672,000; or 2. When challenged about why expectation damages was not the appropriate measure, counsel for the plaintiff submitted the market value of the units was appropriate, and it could be inferred from either the contract itself or other contracts between Scott Chan and other unitholders at around the same time, that the price per unit was $88,000 or $90,000.
The defendant submitted that there was no evidence of the value of the units and therefore the plaintiff could not succeed.
Usually damages for breach of contract are assessed on the expectation measure to place the plaintiff in the position it expected be in, had the contract been performed: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 85 (Mason CJ and Dawson J). Here, that would require an assessment of the value of the units at the time of breach, and then an application of the difference between market and contract price.
In terms of market value of units in the 183 Eastwood Unit Trust, the only available evidence is that of the agreements in March and April 2018 between unitholders and Scott Chan's company, which priced units at $90,000 each. On 24 April 2018, the plaintiff agreed to purchase units for $88,000 each. The defendant did not challenge that evidence in any way. I accept that the purchase price is a basis for quantifying expectation loss, particularly in circumstances where the Plaintiff's Deed was a commercial arm's length transaction. Reliance loss is appropriate where it is not possible to calculate expectation loss, and would be based on the amount expended by the plaintiff in reliance on the contract, which, if applicable, would also be the contract price.
The plaintiff did not make any submission on pre-judgment interest. I do not award any.

Conclusion

For those reasons, I make the following orders: 1. The defendant is to pay the plaintiff the sum of $1,672,000. 2. The defendant is to pay the plaintiff's costs as agreed or assessed. 3. Grant leave to any party to approach my Associate by email within 7 days of the date of this judgment, should an alternative costs order be sought. 1. That email must provide any evidence relied on together with submissions of no more than 3 pages and be copied to the other party. 2. That other party has leave to provide in response any evidence and submissions of no more than 3 pages within 7 days after receipt of the original material contemplated in order 3(a). 3. The party that made the application has leave to provide reply submissions of no more than 1 page within 2 days after receipt of the response contemplated in order 3(b).

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: 07 July 2022

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