East Grace Corporation v Xing

REASONS FOR JUDGMENT Introduction 1 East Grace Corporation (EGC) is a company incorporated in the Peoples Republic of China. Min Wei Xing (Mr Min) is a former director of Min's Australia China Commercial Centre Pty Ltd, (Min's Australia) a company which was incorporated in Australia. 2 On 24 November 2004, EGC filed an application in this Court seeking an order against Mr Xing for preliminary discovery pursuant to O 15A r 6 of the Federal Court Rules. The documents for which preliminary discovery was sought were by way of financial and business records of Min's Australia for the period 1996 to 2002. 3 Min's Australia was deregistered in May 2002 on the application of Mr Min made on 26 April 2002. At the time it was deregistered, and contrary to a declaration contained in the application for voluntary deregistration, apparently made by Mr Min to Australian Securities and Investment Commission (ASIC) on 23 April 2002, it is said that Min's Australia owed EGC a substantial sum of money. EGC contends that the money was owed in respect of machinery parts, rubber tracks and pads which it had supplied The application for deregistration signed by Mr Min contained, declarations that the company's assets were less than $1,000 and that the company had no outstanding liabilities. 4 EGC contends that by a Memorandum of Agreement between itself and Min's Australia made on 25 August 2001: 1. Min's Australia, through Mr Min, acknowledged that it owed EGC money and agreed to pay if off by instalments by the end of 2001. 2. EGC agreed to honour a previous agreement to extend Min's Australia's revolving credit of $US300,000. 3. The parties agreed that Min's Australia could withhold an amount of $US205,364 pending the investigation of allegations that some of the equipment supplied by EGC to Min's Australia was defective. 4. Min's Australia would pay EGC $US82,844.90 forthwith. These contentions are set out in an affidavit sworn by EGC's solicitor, Mr Wyatt. They were not received as evidence because they are argumentative, however they conveniently encapsulate the contentions made by EGC about the effect of the Memorandum of Agreement. 5 EGC says that the documents which it seeks are relevant to whether Mr Min has engaged in any of the conduct said to give rise to the various causes of action which it is suggested may lie against him at the suit of EGC. It is further said that the documents are sought to determine whether assets of Min's Australia may have been dissipated to defeat creditors such as EGC and whether, given the deregistration of the company in circumstances where EGC's debt remains unsatisfied, the company may have been trading with EGC when it was insolvent. 6 EGC submits that it is at least arguable that from on or after 3 December 1999 or at least 29 December 1999 until June 2002 there was a trading relationship between EGC and Min's Australia pursuant to which Min's Australia incurred debts to EGC. It is further submitted that it is at least arguable that after the incorporation of EGC, Mins Australia became responsible to EGC for debts incurred to corporate predecessors of EGC with whom it had been trading. The Documents of which Discovery is Sought 7 The documents for which pre-action discovery is sought pursuant to O 15A r 6 of the Federal Court Rules are the following documents for the years, 1996-2002, that Min's Australia was in existence: 1. Financial statements incorporating the balance sheet, profit and loss statement, cash flow statement and notes to financial statements; 2. Taxation records and supporting working files, business activity statements, activity instalments, Pay as You Go ('PAYG') payment summaries; 3. General ledger accounting records, asset register, inventory listings, contract register and copies of major contracts; 4. Management reports and budgets; 5. Bank statements and monthly bank reconciliations; 6. Sales register, sales invoice register, sales invoice copies or other similar records of sales; 7. Payable register, accounts payable listings, cheque butts, invoice payables register, copies of invoices paid or other similar records of payment; 8. Copies of all insurance documents documents; 10. Copies of all loan agreements/repayment details; 11. Copies of all directors meeting minutes, company returns, share register etc; 12. Copies of contract of employment and employee files. The Rule Relating to Discovery from a Prospective Respondent 8 Order 15A r 6 provides: 'Where - (a) there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained; (b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and (c) there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision - the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).' The Evidence 9 The evidence adduced on behalf of EGC comprised an affidavit of its solicitor, Mr Wyatt, and two affidavits sworn by Fu Dong Ming (Mr Fu), who describes himself as managing director of EGC. 10 EGC was incorporated in December 1999. Mr Fu said he is presently its managing director and duly authorised to represent it. He said that in all its dealings and trading EGC used the English name East Grace Corp. He said that from December 1999 EGC traded in its own capacity with Min's Australia. All transactions between Min's Australia and EGC were conducted in Chinese. 11 Mr Fu exhibited to his principal affidavit what he described as 'random' copies of credit advices from EGC's bank of payments received from Min's Australia between December 1999 and June 2001. Payments received from Min's Australia were applied to outstanding amounts on a first in first out basis. Mr Fu also exhibited a statement which he had made to ASIC by way of complaint against Min's Australia on 15 August 2004. That statement annexed a document called a 'Receivables Statement'. It consisted of a list showing invoice numbers, the nature of the goods supplied in respect of each invoice, the amount of the invoice, the date of each remittance received and the amount received. The shipping date for the various goods was also set out. The records of a number of invoices were incomplete in that no remittance amount was shown. 12 According to Mr Fu, when making payments, Min's Australia did not specify the invoice on which it was paying. EGC therefore used the money paid by Min's Australia to credit its oldest outstanding invoice. He contended that the amount owing from Min's Australia to EGC for the period December 1999 to June 2001 was $US1,397,263.88. He also said that Mr Min and his new company, Global Track Warehouse Pte Ltd continued to trade with EGC after Min's Australia ceased to trade. 13 In his affidavit Mr Fu confirmed the truth of his statement to ASIC. That statement appeared to be by way of complaint about the deregistration of Min's Australia. Parts of it were not able to be received in evidence either because they were hearsay or simply argumentative. It gave the clear impression, however, that one company, EGC, had been dealing with Min's Australia from 1996 continuously. In par 2 of the statement Mr Fu said: 'In or about 1996 onwards, EG Corp and Min's entered into a series of transactions whereby EG Corp would sell and export to Min's in Australia, on cif each basis, machinery and parts, rubber tracks and pads and related products (collectively called "the goods") (the goods were primarily to be used for heavy plant and vehicles such as Caterpillar bull-dozer and the like).' 14 Mr Fu said that between 1996 and 1998 there were numerous transactions between EGC and Min's Australia. Min's Australia paid for the transactions between 1996 and 1998 save for an amount of $US133,551.93 which remained outstanding at the end of that time. Min's Australia alleged there were quality problems with respect to some of the goods but, according to Mr Fu, had never shown or particularised the defects nor returned the goods. 15 From 1999 EGC continued to trade with Min's Australia in good faith and Min's Australia paid, usually within one to two months after invoice, but never in full. Over a period of time the unpaid portion accumulated to $US723,649.93. 16 A meeting took place in August 2001. Mr Fu was not present at the meeting so his account of what occurred was not admissible. However a memorandum which was signed at the meeting between EGC and Min's Australia was admitted in evidence. The Memorandum recited that there had been friendly negotiations by the parties. It had three headings under which agreements were made. They were as follows: