I have found that each of Ms Xie and Mr Zhang breached their fiduciary duties to Firmtech, and that each of Aluminum and Logikal is liable under the second limb of Barnes v Addy for having knowingly assisted in their breach of duty.
The relief sought by the Plaintiffs in respect of the breach of fiduciary duties included the declaration of a constructive trust, an account of profits and equitable compensation.
The Plaintiffs stated in their closing submissions that they have not yet made an election between compensation and an account of profits if they succeed. In Xiao v BCEG International (Australia) Pty Ltd (2023) 111 NSWLR 132; [2023] NSWCA 48 at [43], Gleeson JA (with Mitchelmore JA and Griffiths AJA agreeing) observed that:
"An account of profits is an alternative to an award of equitable compensation: Warman at 559. The rationale for an election to receive compensation or alternatively an account of profits was stated by Lord Westbury in Neilson v Betts (1871) LR 5 HL 1 at 22, as follows: '[t]he two things are hardly reconcilable, for if you take an account of profits, you condone the infringement'."
An election between these remedies will generally only be irrevocable after one remedy is fully satisfied by the entry of judgment: at [46]. Although a plaintiff cannot obtain both equitable compensation and an account of profits from a single defendant, because the liability of the defendant founding the availability of relief is the same (at [68]), a split election between remedies is available against different defendants (at [71]), such that equitable compensation may be sought against a defendant fiduciary while an account of profits is sought against a knowing participant in that fiduciary's breach.
I address below the scope of the relief available to the Plaintiffs for the breaches of fiduciary duties which have been established.
In addition, I have found that Ms Xie and Mr Zhang breached their statutory duties to Firmtech under ss 180, 181 and 182 of the Act, and that Aluminum and Logikal were involved in those contraventions. Pursuant to s 1317H(1) of the Act, the Court has power to order the Zhang/Xie Parties to compensate Firmtech for damage which resulted from those contraventions. Any such order "must specify the amount of the compensation". Section 1317H(2) provides that: "In determining the damage suffered by the corporation … for the purposes of making a compensation order, include profits made by any person resulting from the contravention …". This provision empowers the Court to compensate for profits made from a contravention, without proof of a corresponding loss: Grimaldi v Chameleon Mining (No 2) at [630]-[631].
It is unlikely (and the Plaintiffs did not submit) that, in the circumstances of this case, the scope of the relief available under s 1317H would be broader than the scope of the relief available in respect of the claims for breach of fiduciary obligations. Accordingly, I do not separately consider below the relief available under s 1317H. Further, for reasons I explain below, the Court is not in a position at this time to assess the quantum of compensation payable to Firmtech, and therefore is not in a position at this time to make an order under s 1317H(1).
The Plaintiffs did not seek, in respect of the oppression claim, any relief additional to that sought in respect of the claim for breach of fiduciary and statutory duties, other than some consequential relief. Specifically, Mr Xu submitted that, if I determined that relief should be awarded to Firmtech, I should exercise the power under s 233(1)(j) of the Act to order that Mr Xu be appointed a director of Firmtech. As matters currently stand, Mr Zhang is the sole director of Firmtech (although each of Mr Xu and Mr Zhang continues to own 50% of the shares). I will give the parties an opportunity to make further submissions on the necessity for, and nature of, any such consequential relief in light of the findings that I have made.
I have determined that Mr Xu's claims that Ms Xie and Mr Zhang breached the terms of their pre-incorporation contract with him and that Ms Xie and Mr Zhang breached fiduciary obligations owed to Mr Xu have not been established.
If the claim for breach of fiduciary duties owed to Mr Xu had been established, this claim would have raised issues in terms of relief similar to those which are addressed below in respect of Firmtech's claims for breach of fiduciary duties (although as a 50% shareholder of Firmtech, Mr Xu would have suffered only half of the amount of the loss suffered by Firmtech, and would be entitled to only half of the profits to which Firmtech is entitled).
If the claim for breach of contract had been established, on the basis that there was the breach of an express term that Aluminum would not compete with Firmtech, then the issue of the damages for the loss which had suffered by reason of such a breach would raise considerations of a type similar to the issues which arise in respect of equitable compensation for loss suffered as a result of the diversion of work from Firmtech to Aluminum.
[2]
Constructive Trust
By prayers 21 and 22 of the Amended Summons, the Plaintiffs seek declarations that each of Aluminum and Logikal holds the assets of its business on constructive trust for Firmtech.
The Plaintiffs relied on the following statement of principle by Mason J in Hospital Products at 115-116:
"There are cases, Timber Engineering Co. Pty. Ltd. v. Anderson being a striking example, where an employee has fraudulently and in breach of his fiduciary duty diverted business from his employer to a company owned and operated by the employee and others who participated in the fraudulent breach of fiduciary duty and the court has declared that the business of the company was held on a constructive trust to the employer. The decision in Timber Engineering rests on the proposition that the business of the company represented the measure of the profit or benefit which was obtained in breach of fiduciary duty, for relief by way of constructive trust is merely a means of giving effect to the fiduciary's basic liability to account. This is how Kearney J. dealt with the matter. He was at pains to demonstrate that (a) every opportunity which the company received was directly attributable to resources and benefits provided by the employer, even to the extent of time and effort expended by the employees for which the employer paid, and (b) every advance made by the company was due to resources and facilities provided by the employer, leading to the conclusion that the business of the company was 'carved out of the business' of the employer."
The Plaintiffs submitted that those observations were apt to apply to the present case, and contended that the preferable form of relief for the breaches of fiduciary obligations "may ultimately be an order that the whole of the businesses of Aluminum and Logikal are held on trust for Firmtech, with the consequence that Mr Xu and Mr Zhang/Ms Xie each have the economic benefit of 50% - as was intended in 2018".
There are two main difficulties with this submission.
First, Firmtech has pleaded, and established, that certain projects were wrongly diverted to Aluminum and Logikal. Leaving aside those specific projects which have been addressed above, Firmtech has not established that, in terms of the passage set out above, every other opportunity which Aluminum and Logikal has received to date, or every advance which those companies have made to date, has been directly attributable to resources and benefits provided by Firmtech. For example, as outlined further below, there was evidence that a substantial part of the work performed by Logikal in the last 12 months has been work for Meriton, which was never a client of Firmtech. The relationship with Meriton is one that has been created by the endeavours of the Zhang/Xie Parties. In the Hospital Products case, Mason J (who was the only member of the Court to hold that there was a relevant fiduciary duty) found that the claim for a constructive trust of all of the assets of the relevant entity, H.P.I., ranged "far beyond the profits and benefits obtained by H.P.I. in breach of its fiduciary duty", and did not "make any allowance for the contribution in time, effort and finance by H.P.I. to the acquisition and creation of the assets which it held" (at 114).
Secondly, the Plaintiffs' submission focuses on the parties' intentions in 2018, when Firmtech was established. However, by the end of January 2021, the parties had agreed to take steps to separate their financial affairs and to close down Firmtech's operations, following which they would be free to pursue separate businesses in the same industry on their own account. The effect of the proposed order would be to force the parties back into a position of equal ownership and control of a company operating a business in the aluminium windows and doors industry, this being a state of affairs which the parties intended to bring to an end several years ago.
The wrong on the part of Ms Xie and Mr Zhang, which gives rise to an entitlement for relief, was not the pursuit of new business opportunities for their own benefit after a point in time when the process of separation had been completed, when Firmtech had ceased to operate and when the parties were pursuing separate business on their own account. Instead, it was the diversion of business opportunities for their own benefit while Firmtech was continuing to trade and while they remained responsible for its Windows and Doors Business.
The Plaintiffs have not established that the whole of the undertaking of Aluminum and Logikal as at the present date is the result of the diversion of business from Firmtech up to around the last quarter of 2021, rather than from the pursuit of new business opportunities and connections which have arisen since that time. I address this issue further below when dealing with an account of profits.
In those circumstances, this is not a case where, to use Mason J's words in Hospital Products at 116, "relief by way of constructive trust is merely a means of giving effect to the fiduciary's basic liability to an account". Instead, I consider that the imposition of a constructive trust over the whole of the assets and undertaking of Aluminum and Logikal would go beyond the scope of the liability for which the Zhang/Xie Parties should account for profits.
[3]
Account of profits
There are two distinct components to the remedy of an account of profits: first, that an account should be taken of the profits which the defendant has earned, and, secondly, that the amount of profits so found to have been earned should be paid by the defendant to the plaintiff: Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 at [84].
Where the rule applies, the liability of the fiduciary does not depend on the fact that the person to whom the duty is owed has suffered injury or loss: Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 394 per Gibbs J; [1975] HCA 8.
A fiduciary must account for a profit or benefit "if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position": Warman International Ltd v Dwyer at 557 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ). Further, a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation: Consul Development v DPC Estates at 397 per Gibbs J.
Although the "assessment of the profit will often be extremely difficult in practice", it is nonetheless necessary "to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty": Warman International v Dwyer at 558.
In that regard, the High Court in Warman International v Dwyer at 558 referred with approval to the following description by Mason J (Hospital Products at 110) of two approaches to determining the fiduciary's liability:
"One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made. … In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty."
In Warman International v Dwyer, the Court continued (at 561) as follows:
"In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources."
The Court added that "the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff" (ibid).
Whether a benefit can be said to have been obtained as a result of a breach of fiduciary duty, or as a result of knowing participation in a breach of fiduciary duty, "is a question of causation or contribution that depends on 'a precise examination of the particular facts' of the case": Ancient Order of Foresters v Lifeplan at [9], Kiefel CJ, Keane and Edelman JJ. In that case, their Honours observed (at [13]) that:
"While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed [Warman International v Dwyer at 561], where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage".
Their Honours added (at [14]-[15]) that there are two ways in which a wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed (although their Honours noted that this "can involve notorious difficulties in attribution of costs"). The second is by demonstrating that "the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits". This might be established "if the profit or benefit has no reasonable connection with the wrongdoing". Their Honours continued (at [16]):
"No precise test has been prescribed for determining when it will be inequitable to account for a benefit on the basis that it has no reasonable connection with wrongdoing. Nor is there any need for such a test. All of the circumstances must be considered, including the nature of the conduct."
In the same case, Gageler J observed (at [83]) that the "cardinal principle of equity" is that the remedy must be fashioned to fit the nature of the case and the particular facts. Identification of the benefit or gain which for which a defendant fiduciary or knowing participant is to be ordered to account is the outcome neither of judicial discretion nor of the determination of "a mere factual issue of causation", but is instead "a matter of judgment informed by equitable principle". However, that does not mean that equity is ignorant of questions of causation. Rather, "questions of causal nexus in a remedial context must be addressed by reference to the equitable obligation breach of which is to be vindicated by the remedy that is sought" (at [84]). Accordingly, his Honour held (at [85], footnotes omitted) that:
"The benefit or gain for which a fiduciary or knowing participant is liable to be ordered to account must, as a baseline requirement, have a causal connection to the fiduciary's breach of equitable obligation. The requisite causal connection was explained in Warman to exist if the benefit or gain has been obtained 'by reason of' the fiduciary position, where the relevant breach is of the conflict rule, or if the benefit or gain has been obtained 'by reason of' the fiduciary taking advantage of an opportunity or knowledge derived from the fiduciary position, where the relevant breach is of the profit rule."
A causal connection will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained "but for" the breach: Ancient Order of Foresters at [9], [88]. Further, whatever the position for wrongdoing that is not marked by dishonesty, a defendant cannot avoid liability to disgorge profits dishonestly made by showing that those profits might have been made honestly: Ancient Order of Foresters at [9]. So, for example, in Ancient Order of Foresters at [19], Kiefel CJ, Keane and Edelman JJ commented that it was important not to be distracted by the consideration that, once the errant fiduciaries had terminated their employment with Lifeplan (which gave rise to the fiduciary relationship), they would have been at liberty to solicit the business connections of Lifeplan for their own benefit and, should they so choose, for the benefit of the entity which was a knowing participant in their breach.
In the present case, each of the projects which was diverted to Aluminum or Logikal during the period while Mr Zhang and Ms Xie were managing Firmtech's Windows and Doors Business represents a profit or benefit obtained in circumstances where there was a conflict between their fiduciary duties and their personal interests, or obtained by reason of their fiduciary positions, or by reason of their taking advantage of opportunity or knowledge derived from their fiduciary positions. Further, Aluminum and Logikal obtained those projects as a result of their knowing involvement in Mr Zhang's and Ms Xie's breaches of their fiduciary obligations.
It follows that the Zhang/Xie Parties are liable to account for the profits obtained by them as a result of the diversion of each of those projects.
The Plaintiffs went further and contended that the account of profits should extend to the whole of the ongoing business of Aluminum and Logikal. This submission was advanced on the basis that the business connections of Firmtech were wrongly appropriated by the defaulting fiduciary.
However, the evidence does not establish that business connections of Firmtech's business underpin the whole, or even a substantial part of, the ongoing business of Logikal and Aluminum. In the year ending 30 June 2024, the work done through Logikal was much greater in extent that the work done through Aluminum. (According to the report of the Plaintiffs' expert, the revenue for this financial year (pro rata) was $24.379m for Logikal and $0.599m for Aluminum.) Significantly, Logikal's current clients - namely, Karimbla Construction Services (which is part of the Meriton group), MN Builders and ORA Constructions - were never clients of Firmtech.
As regards Karimbla Construction Services and MN Builders, there was no evidence as to how these clients had been obtained by Logikal. The Plaintiffs submitted that, in those circumstances, there was no basis to conclude that the profits attributable to Logikal's contracts with these clients have been generated by the skill, efforts, property and resources of Ms Xie and Mr Zhang (see Warman International v Dwyer at 561). However, I do not consider the absence of such evidence to be critical. Whether these business connections were obtained by hard work, luck or through a third party, they were not obtained through the roles which Mr Zhang and Ms Xie performed at Firmtech in the period up to around August 2021. The Plaintiffs did not, in their submissions, refer to any evidence to establish that the connections with these entities were business connections of Firmtech, let alone that Mr Zhang and Ms Xie obtained such business connections from Firmtech as a result of their breach of their fiduciary obligations to Firmtech.
The Plaintiffs referred to evidence that Firmtech had, in 2019, approached Meriton for work. They relied on a statement by Beach J in Directed Electronics v OE Solutions at [232], which is quoted in paragraph [464] above, that directors and senior employees "are precluded from obtaining for themselves or another any property or business advantage belonging to their employer, or for which it has been negotiating … This is particularly so where the director or senior employee has been a participant in the negotiations on behalf of the employer" (emphasis added).
Plainly, each case must depend on its own facts. I do not consider that this statement of principle by Beach J extends to any form of engagement with a potential client which might be caught by the term "negotiation", no matter how distant in the past or how fleeting the engagement.
The extent of the evidence regarding prior communications between Firmtech and Meriton is as follows:
1. On 23 July 2019 at 3.40pm, a Firmtech employee, Mr Skillicorn, sent an email to Helen Williams of Meriton proposing an introductory meeting with Mr Zhang and Ms Xie. Mr Skillicorn suggested "a quick coffee together so you guys could meet face to face, FirmTech are already working in Canberra and it may be good to touch base".
2. The following morning, Ms Williams responded, "respectfully declining your offer to meet". This email stated that Meriton was struggling to keep its "loyal sub-contractors working", and therefore any meeting to discuss potentially taking on Firmtech as a subcontractor "would be not productive for both parties".
3. On the same day, Mr Skillicorn replied asking for Meriton to "keep us in mind" for future work.
4. There was no further communication between Meriton and Firmtech following this exchange.
This exchange could scarcely be described as a "negotiation" between Firmtech and Meriton, even on the widest use of the term. Nor could it be said that Mr Zhang and Ms Xie had been "a participant in … negotiations" between Firmtech and Meriton. There is no evidence that either of them, while at Firmtech, had any communication with any person at Meriton.
As regards ORA Constructions, I have referred above to the Koko Molongo Project. This was a project for which Firmtech had issued a quotation in 2019, and which Logikal subsequently sought, and obtained, in 2021.
That provides some basis to conclude that ORA Constructions was a business connection of Firmtech's business which was, as a result of Mr Zhang's and Ms Xie's breach of duty, diverted to Logikal. I have accepted that Logikal is obliged to account for the profits from this diverted project. However, it does not follow that Logikal has to account for any other profits subsequently made from this business connection.
On 30 January 2021, Mr Xu had agreed with Ms Xie and Mr Zhang to take steps to close down Firmtech, and to go their separate ways. So long as that process was ongoing, and Mr Zhang and Ms Xie remained responsible for operating Firmtech's Windows and Doors Business, they were obliged to act in the best interests of Firmtech and not to promote their own interests, including by diverting opportunities in respect of projects for which Firmtech had tendered (such as the Koko Molongo project) from Firmtech to Logikal or Aluminum.
The position, however, changed after the point in time when Firmtech effectively ceased operations. I have concluded that, insofar as any new work was sought or obtained by Logikal or Aluminum from around the last quarter of 2021 onwards, including by using business connections which Mr Zhang and Ms Xie had obtained as a result of their positions at Firmtech (such as any further projects with ORA Constructions), this did not amount to a breach by Mr Zhang or Ms Xie of any fiduciary obligation owed to Firmtech.
By this time, Mr Xu had established FAWD for the purpose of operating a business in the aluminium windows and doors industry, had taken control of Auscon for the purposes of operating a construction business, and had commenced quoting for jobs through those two entities. I have determined that the parties agreed at the 30 January meeting that when the steps to separate their financial affairs had been completed, and when Firmtech had ceased operations, they would be free to pursue separate businesses on their own account. Given that was the case, it was not a breach of the fiduciary duties which Mr Xu owed to Firmtech for him to pursue, from around the time that Firmtech ceased operations, opportunities for FAWD or Auscon to obtain new work with Firmtech's previous clients or business connections. Similarly, it was not a breach of the fiduciary duties which Ms Xie and Mr Zhang owed to Firmtech for them to pursue, from this point in time, opportunities for Logikal or Aluminum to obtain new work with Firmtech's previous clients or business connections (including any projects with ORA Constructions for which Logikal quoted after Firmtech had ceased operations).
I consider that any benefit which was pursued and obtained by Aluminum or Logikal after Firmtech ceased operations, as a result of using previous business connections of Firmtech's, is beyond the scope of the liability for which the Zhang/Xie Parties should account for profits. By late 2021, the directors and shareholders of Firmtech (Mr Xu and Mr Zhang) were pursuing their own separate businesses, on their own account, and the previous business connections of Firmtech were equally available to their respective businesses. These was no evidence that any projects which were obtained by Aluminum or Logikal from late 2021 onwards were obtained, or performed, using any intellectual property belonging to Firmtech, or any proprietary knowledge which Mr Zhang or Ms Xie obtained through their roles at Firmtech. While Mr Zhang and Ms Xie had a general fund of knowledge and expertise in the aluminium windows and doors industry, that was the result from having worked in the industry for many years (including from well before Firmtech was established).
For those reasons, I have determined that Firmtech is not entitled to an account of profits in respect of the whole of the business of Aluminum and Logikal (nor to a constructive trust over the whole of their assets and undertaking). Instead, Firmtech is entitled to an account of profits in respect of the projects for which Aluminum or Logikal quoted or tendered, or which those companies otherwise sought to obtain, prior to Firmtech ceasing operations. However, there should not be an account of profits in respect of any projects for which Aluminum or Logikal quoted or tendered, or which those companies otherwise sought to obtain, only after Firmtech ceased operations.
Firmtech is therefore entitled to an account of profits in respect of the following projects which Aluminum and Logikal sought or obtained prior to Firmtech ceasing operations in late 2021:
1. the Campbell 5 Project (see paragraphs [86]-[130] above);
2. Embark on Northbourne (see paragraphs [131]-[154] above);
3. the Founders Lane Project (see paragraphs [155]-[167] above);
4. the Epping Apartment Project (see paragraphs [213]-[225] above);
5. the Elara Shopping Centre (see paragraphs [226]-[237] above);
6. Akora Residences and Altair No 1 (see paragraphs [238]-[239] above);
7. the Aire Project (see paragraphs [326]-[353] above);
8. St Dominic's College Project (see paragraphs [354]-[365] above);
9. the Spring Square Project (see paragraphs [366]-[389] above);
10. the Koko Molongo Project (see paragraphs [391]-[394] above);
11. the Ingleburn Project (see paragraph [395(1)] above);
12. the project at 45 Ainslie Avenue, Canberra, ACT (see paragraph [395(2)] above);
13. the project at 121-123 Haig Street, Maroubra, NSW (see paragraph [395(3)] above);
14. the project at 25 Ney Street, Mascot, NSW (see paragraph [395(4)] above); and
15. the project at 32 Picton Street, Mascot, NSW (see paragraph [395(5)] above).
As I explain below, the expert evidence has not addressed the quantification of profits derived from the diverted projects, but has instead addressed profits on a "whole of business" approach. Nonetheless, the Zhang/Xie Parties accepted that it was open to the Court to order an account of profits in relation to specific projects, which would then need to be quantified.
If, contrary to the views I have expressed, the scope of liability for which the Zhang/Xie Parties must account for profits extended to opportunities which arose, and were pursued or obtained, after a point in time when Firmtech ceased operations, I would have considered that there were discretionary grounds for declining to award, or for limiting, an account of profits in respect of any such opportunities.
In Warman International v Dwyer at 559, the High Court observed that an account of profits, like other equitable remedies, is discretionary, and "will be defeated by equitable defences such as estoppel, laches, acquiescence and delay". The Court added (at 559) that:
"The conduct of the plaintiff may be such as to make it inequitable to order an account. Thus a plaintiff may not stand by and permit the defendant to make profits and then claim entitlement to those profits".
There are two aspects of Mr Xu's conduct which are relevant to the question whether relief should be granted in respect of any projects which Aluminum or Logikal sought from the last quarter of 2021 onwards.
First, from around the middle of 2021, Mr Xu was pursuing, through FAWD, opportunities for new work in the aluminium windows and doors industry, using Firmtech's name and logo. In addition, Mr Xu was pursuing, through Auscon, opportunities for new work in the construction industry. As set out at paragraph [412] above, Mr Xu was of the view that, by this time, Firmtech had "expire[d]".
From around 2023, Mr Xu shifted the aluminium windows and doors work from FAWD to Auscon, because of litigation regarding FAWD's use of the Firmtech logo. At some point in time, Mr Xu's brother again became sole shareholder and director of Auscon, but Mr Xu continues to be associated with Auscon, as he holds the building licence upon which Auscon operates, and he is responsible for the aluminium windows and doors component of its business.
In short, since the second half of 2021 (that is, from the time when Firmtech ceased operations or, in Mr Xu's words, "expired"), Mr Xu has been involved in the operations of two companies which have been performing work of the type which had previously been undertaken by Firmtech in the two businesses which it operated, namely, its Windows and Doors Business and its construction business. He did not give any evidence in his affidavits as to the clients, projects or profits of those two businesses.
Secondly, Mr Xu delayed in raising any issue about the profits being made by Aluminum and Logikal, in circumstances where he was himself pursuing business through FAWD and Auscon. As set out in paragraphs [419]-[426] above, on 2 July 2021, Mr Xu's solicitors wrote to Mr Zhang and Ms Xie stating that Mr Xu had become aware that Mr Zhang and Ms Xie were "using the premises and employees at [the Revesby Factory] for projects not associated with Firmtech Aluminum". Mr Xu's solicitors did not demand that this cease, and did not state that this would or might give rise to a liability to account for profits, but instead stated: "If you wish to do so, appropriate arrangements need to be made". This suggested that Mr Xu's main concern was that expenses should be shared between the two competing businesses. On 15 July 2021, the solicitors for Mr Zhang and Ms Xie replied, noting that Mr Xu had been operating FAWD from the Revesby Factory and had "been tendering for work that could be conducted by [Firmtech]", which was asserted to be a breach of his duties to Firmtech. This letter proposed that "the parties agree to meet to discuss a potential resolution of all matters". Mr Xu did not take up this offer. On 13 December 2021, the solicitors for Mr Zhang and Ms Xie sent a further letter to Mr Xu's solicitors, following up on the lack of response to the letter of 15 July 2021. Through this correspondence, Mr Xu did not put the Zhang/Xie Parties on notice that he intended to seek any relief in the nature of an account of profits, and did not take steps to seek any interlocutory relief, prior to commencing proceedings in July 2022 by an ex parte application.
Having regard to those matters, I consider that there is force in the Zhang/Xie Parties' criticism that, following July 2021, Mr Xu stood by and permitted the Zhang/Xie Parties to make profits from new projects of a type previously performed by Firmtech, while he was himself (to the Zhang/Xie Parties' knowledge) undertaking similar projects on his own account, and that in those circumstances it is inequitable for him to claim an entitlement to the Zhang/Xie Parties' profits in that period. However, I do not need to determine whether, and to what extent, any entitlement to profits in respect of contracts sought by the Zhang/Xie Parties from late 2021 onwards should be reduced by reason of this conduct on the part of Mr Xu, since I have determined that there is no entitlement to relief in respect of such contracts.
[4]
Equitable Compensation
Equitable compensation is a remedy available to the victim of a breach of fiduciary duty against both the fiduciary and any other person who knowingly participated in that breach and has thereby become subject to a personal liability as a "constructive trustee" by application of the principles derived from Barnes v Addy: Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 at 153 per McLelland AJA (Priestley and Meagher JJA agreeing).
The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 per Spigelman CJ (Priestley and Meagher JJA agreeing).
In order to obtain equitable compensation for breach of a fiduciary duty, it is necessary for the plaintiff to establish "a sufficient connection (or 'causation') between breach of duty and … the loss sustained": Maguire v Makaronis at 468 per Brennan CJ, Gaudron, McHugh and Gummow JJ. When assessing causation for the purposes of equitable compensation, the "true inquiry is whether the loss would have happened had there been no breach, not whether the loss was caused by or flowed from the breach": O'Halloran at 276 per Spigelman CJ (with whom Priestley and Meagher JJA agreed).
In Ancient Order of Foresters at [88], Gageler J observed as follows (footnotes omitted):
"A causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained 'but for' the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the 'but for' connection will be sufficient even though other contributing causes might be in play. That the fiduciary's breach of fiduciary obligation is dishonest and fraudulent is also good reason for treating a sufficient causal connection as existing if the dishonest and fraudulent breach can be concluded to have played a material part in contributing to the benefit or gain of the fiduciary or knowing participant even in circumstances where it cannot be concluded that the benefit or gain would not have been obtained but for the breach."
The Plaintiffs submitted that, in assessing the counterfactual, the Court "should assume that the defendants did not engage in any of the wrongful conduct; and should then ascertain whether in that counterfactual Firmtech would have nevertheless ceased to conduct its aluminium windows and doors and façade business".
I am satisfied that, in the counterfactual posited by the Plaintiffs, Firmtech would nonetheless have ceased to operate its Windows and Doors Business. By early 2021, Mr Zhang and Ms Xie were dissatisfied with Mr Xu as a business partner and did not want to continue in an endeavour in which the profits were shared with him, in particular because they considered that the profits of the business were largely generated by their own efforts, rather than those of Mr Xu, who was away from the business for extended periods. Mr Zhang acknowledged in cross-examination that he regretted entering into a partnership arrangement with Mr Xu, and had come to the view that an arrangement whereby Mr Xu shared 50% of the profits of the business was a bad deal. Mr Xu, for his part, understood that if Mr Zhang and Ms Xie wanted to end their partnership with him, he had to accept this: "I agree with them to leaving because people decide to leaving you, how you stop them leaving you, how? You can't stop them."
It was not a breach of their duties for Mr Zhang and Ms Xie to seek to separate their affairs from those of Mr Xu or to propose the closing down Firmtech's operations as part of the separation of their affairs. Those are steps which would likely have been taken whether or not Mr Zhang and Ms Xie breached their obligations.
Instead, Mr Zhang and Ms Xie breached their duties by diverting business opportunities from Firmtech to Aluminum and Logikal, including after the parties had agreed to take steps to close Firmtech, but while that process was still being undertaken and while Mr Zhang and Ms Xie remained responsible for running Firmtech's Windows and Doors Business.
The loss suffered by Firmtech as a result of that conduct was the loss of those business opportunities which were diverted from Firmtech to Aluminum and Logikal in the period when Firmtech was operating its Windows and Doors Business (being those projects set out in paragraph [598] above). It is likely that, but for the breach of the fiduciary and statutory obligations which they owed to Firmtech, these particular projects would have been awarded to and performed by Firmtech, rather than Aluminum and Logikal. That inference can be comfortably drawn because in a number of cases, the clients in question had invited Firmtech to tender for those projects, had received quotations from Firmtech and had engaged in discussions with Firmtech about those quotations, prior to Ms Xie and Mr Zhang taking steps to divert those projects to Aluminum or Logikal. Further, the fact that Ms Xie and Mr Zhang were able to negotiate agreements for Aluminum and Logikal to perform these contracts (using Firmtech's premises, staff and equipment) strongly indicates that Ms Xie and Mr Zhang would have been able to negotiate agreements for Firmtech to perform those same contracts at the same price.
However, for the reasons given above, I am not satisfied that any contract which was sought only after the "separation" steps had been completed and after Firmtech had ceased operations, represents a contract which, but for the Zhang/Xie Parties' breaches, Firmtech would have obtained.
Further, for the same reasons, I am not satisfied that Firmtech's loss, as a result of the breaches of duty by Mr Zhang and Ms Xie, is to be measured by calculating the current value of the business of Aluminum and Logikal, on the basis that this represents the loss in value of Firmtech shares (which are currently worth $nil) as a result of the wrongdoing. The Plaintiff's expert noted that such an approach depends on an assumption that all operating and trading income in fact received by Aluminum and Logikal represents income that should have been received by Firmtech, on the basis that it is business that ought to have been performed by Firmtech. I have concluded that this assumption is not made out.
As noted above, there is no evidence before the Court regarding the profits which have been earned by Aluminum and Logikal, or which would have been earned by Firmtech, from the specific projects which were diverted from Firmtech to Aluminum or Logikal up to around July 2021. There is evidence regarding the total quantum of invoices rendered by Aluminum or Logikal, and of payments received by them, in respect of specific projects, and there is evidence (in the form of the financial statements of each entity) of the operating expenses of Firmtech, Aluminum and Logikal, but no attempt has been made to quantify profits which have been lost as the result of the diversion of the particular projects which I have identified in paragraph [598] above. Accordingly, there is not a basis for quantifying any order for equitable compensation at this time. However, in circumstances where I have determined that an account of profits should be ordered in respect of those projects, the issue of the quantification of equitable compensation in the light of these reasons can be addressed as part of that stage of the proceedings.
[5]
Quantification
The parties led expert accounting evidence in relation to the quantification of loss. The Plaintiffs' expert was Mr Martin Cairns of Sapere Forensic, and the Zhang/Xie Parties' expert was Mr Wynand Mullins of FTI Consulting.
The Plaintiffs instructed Mr Cairns to assess Firmtech's loss on the assumption that all "operating and trading income received by Aluminum and/or Logikal after the establishment of Firmtech should have been received by Firmtech on the basis that it is business that ought to have been conducted by Firmtech" but for the alleged wrongful conduct of the Zhang/Xie Parties.
Similarly, the Zhang/Xie Parties instructed Mr Mullins to prepare a response to Mr Cairns' report on the assumption that the "financial performance achieved by Logikal and Aluminum should have been achieved by Firmtech" but for the alleged wrongful conduct.
The experts stated in their joint report that each of them assumed "that the business operated by A&L [Aluminum and Logikal] would have been entirely operated by Firmtech but for the Alleged Wrongdoing / Alleged Wrongful Conduct", and noted that if the Court "finds that this assumption is incorrect, then the Experts' assessments for all instructed questions may change".
Mr Cairns confirmed in cross-examination that he had no input in relation to the formulation of the assumption, and that his calculation of loss was limited to the assumption that he was asked to make.
For the reasons given above, I have found that the assumption on which each expert was instructed to assess loss is incorrect. No assessment of loss has been prepared on the basis of any other assumption. Mr Cairns did not, for example, prepare any calculation of loss based upon an assessment of loss in respect of the specific projects which were pleaded as having been diverted from Firmtech to Aluminum or Logikal.
The Zhang/Xie Parties did not submit that this was fatal to the Plaintiffs' claim for relief. They acknowledged that the Court is not bound by the methodology adopted by the experts on the basis of their instructed assumptions, and could take a different course regarding the assessment of loss (or the account of profits), in the light of the factual findings made based upon the evidence at trial.
I have determined that there should be an account of profits in respect of the projects which were sought, or obtained, by Aluminum or Logikal up to July 2021, but not in respect of those sought and obtained thereafter, when Firmtech had effectively ceased operations and the parties were operating separate businesses in the aluminium windows and doors industry.
Accordingly, it is not necessary to resolve the various disputes which arose between the experts concerning the quantification of loss on the assumption that the whole of the business operated by Aluminum and Logikal would have been operated by Firmtech.
Nonetheless, I have addressed each of the various points of dispute below. I have done so in case any of them is relevant to the account of profits, or the assessment of loss, in respect of the specific projects which were diverted by Aluminum or Logikal, and also in case I am wrong in rejecting the "whole of business" approach.
As recorded in their joint report, the experts agreed to adopt "fair value" as the basis of value (which does not include any discount for lack of control or marketability); agreed to value the combined business of Aluminum and Logikal (A&L) on the premise of it being a going concern, and using an income approach (specifically the capitalisation of future maintainable earnings, or CFME, method); and agreed to apply a capitalisation multiple of 3.8x of EBIT to assess the value. The experts also agreed to adopt the same assessment period, from 1 July 2019 to 31 December 2023.
The specific points of dispute between the experts were as follows:
1. which accounting records should be used in determining the combined profits of A&L;
2. whether the future maintainable earnings of A&L should be adjusted to take account of some $42.1m of purchase orders which Logikal and Karimbla have entered into since 1 November 2023 (the Karimbla Documents); and
3. whether there should be adjustments made, when normalising the profits of A&L, in respect of:
1. remuneration paid to Mr Zhang and Ms Xie;
2. transactions with related companies;
3. legal fees; and
4. "non-business" expenses.
[6]
Different versions of Financial Statements
Aluminum and Logikal discovered various sets of financial statements, which provided different information in respect of the same reporting periods.
Mr Cairns prepared his first report on the basis of documents produced by the Zhang/Xie Parties in discovery in August 2023 and April 2024, including financial reports of Logikal and Aluminum for FY2022 (which were unsigned) and a backup of Logikal's and Aluminum's MYOB accounting software, which he used to assess their financial performance for FY2023.
In contrast, Mr Mullins prepared his report on the basis of financial reports of Logikal and Aluminum for FY2022 which were signed and dated 19 December 2023 (approximately 18 months after the end of FY2022); and financial reports of those entities for FY2023 which were signed and dated 25 June 2024 (around one year after the end of the financial year, and three days before Mr Mullins' report was served). Each of those sets of financial statements disclosed a materially worse financial performance than was disclosed by the documents upon which Mr Cairns had relied. Mr Mullins was instructed to assume that the signed financial statements provided to him were, in each case, the correct and final version. Neither Mr Zhang nor Ms Xie gave any evidence, in their affidavits, regarding the different versions of the financial statements.
In addition, a document was produced on subpoena while the experts were in conclave which was a further version of the FY2021 financial statements of Aluminum. This document was signed by Ms Xie and bore the date 1 July 2021 (that is, one day after the end of the financial year to which the financial statements related). It recorded total sales of around $16.36m and a profit before tax of around $1.22m, whereas the unsigned version of the FY2021 financial statements of Aluminum which the experts used for the purposes of their reports recorded total income of around $4.56m and a profit before tax of $0.113m.
Both experts expressed doubt about the reliability of the version of Aluminum's FY2021 financial statements which was dated 1 July 2021, including because it would be unusual for such statements to be finalised one day after the end of the financial year. Neither expert considered that loss should be assessed on the basis of this document. It can therefore be put to one side.
This leaves the following issues for resolution:
1. for FY2022, which of the two sets of financial reports for Aluminum and Logikal should be used (the unsigned versions originally discovered by the Zhang/Xie Parties, or the restated and signed versions which were dated some 18 months after the end of FY2022); and
2. for FY2023, whether the MYOB data should be used, or the signed financial reports which were signed and dated some 12 months after the end of FY2023.
The Zhang/Xie Parties submitted that the signed financial statements for FY2022 and FY2023 should be used for the assessment of loss. In particular, they noted that, as well as being signed by Ms Xie as director of Aluminum and Logikal, each of these financial statements was signed by the external accountant who prepared them, being Mr Gu of Aurora Accounting.
The Compilation Report signed by Mr Gu contained statements that Aurora Accounting had prepared the financial statements; that the director, Ms Xie, was solely responsible for the information contained in those statements, including the reliability, accuracy and completeness of the information; and that the financial statements had been prepared on the basis of the information provided by the director. It also included a statement that because the compilation engagement was not an assurance engagement, Aurora Accounting were not required to verify the reliability, accuracy or completeness of the information provided by management, and did not express an audit opinion or review conclusion on those financial statements. Given those matters, I do not consider that the fact of compilation by an accountant adds significantly to the weight to be afforded to those statements, particularly in circumstances where it has not been shown that the differences between the financial statements are due to any difference in accounting treatment or accounting policies, as opposed to differences in the underlying data used to compile those statements.
The Zhang/Xie Parties also referred to the fact that the signed financial statements for FY2022 and FY2023 matched the lodged tax returns for those years (whereas the unsigned versions relied upon by Mr Cairns did not). Those tax returns were lodged by Aurora Accounting as the companies' tax agent, and were accompanied by a declaration, given by Ms Xie, that the information provided to the tax agent for the preparation of the tax return was true and correct. Further, the supporting financial statements were accompanied by a declaration signed by Ms Xie that the financial statements fairly presented the company's financial position and performance.
The Plaintiffs contended that there was no evidence from Ms Xie regarding the signed financial statements for FY2022 and FY2023. However, this submission ignores that the evidence included these declarations given by Ms Xie. It was not suggested to her in cross-examination that she did not honestly hold the views expressed in these declarations or that she did not have a reasonable basis for them. I do not consider that it was incumbent on the Zhang/Xie Parties to explain why the signed financial statements did not match earlier, unsigned versions. Instead, I consider that it was for the Plaintiffs to identify some reason why the signed financial statements, which matched the lodged tax returns and which were accompanied by these declarations, should not be accepted as reliable.
In that regard, the Plaintiffs relied on three matters.
First, the Plaintiffs noted that Ms Xie also signed the FY2021 report for Aluminum dated 1 July 2021 which was produced during the experts' conclave, and which both experts agreed is unreliable, and therefore her signature can carry little weight. Although I accept that this matter casts doubt on the care and attention given by Ms Xie when signing the declaration in respect of the FY2021 report that was dated 1 July 2021, I do not consider that this means that doubt is thereby cast on the reliability of the declarations given by Ms Xie to the Australian Taxation Office on the lodging of the tax returns for Aluminum and Logikal for FY2022 and FY2023, particularly because those declarations were given immediately below a notice stating that it is important, before making such a declaration, to "check to ensure that all income has been disclosed and the tax return is true and correct in every detail", and that the "tax law provides heavy penalties for false or misleading statements on tax returns". In circumstances where Ms Xie was not asked any questions about these declarations, I infer that she was aware of this notice at the time she gave the declarations, and considered the material in the tax returns, which matched the information in the financial statements, to be true and correct at the time she gave these declarations.
The Plaintiffs also submitted that, having regard to the financial statements dated 1 July 2021 which were signed by Ms Xie, the Court "is left with the very distinct impression that Ms Xie is content to operate her companies using two different sets of financial records for different purposes". If any such submission were to be advanced, it should have been put to Ms Xie in cross-examination so that she had an opportunity to address it. However, she was not asked any questions about the discrepancy between the sets of financial statements.
Secondly, the Plaintiffs noted that both experts relied on unsigned financial statements for financial years prior to FY2022. However, that is explained by the fact that there were no signed financial statements for those earlier years. This is not a reason for preferring unsigned financial statements, or rejecting signed financial statements, in those years where both signed and unsigned versions are available.
Thirdly, the Plaintiffs submitted that there was a basis to doubt the reliability of the signed FY2022 financial statements, having regard to Mr Cairns' investigation of the material differences between the signed and unsigned versions. Mr Cairns identified that the difference in reported profit between those two versions of the FY2022 financial statements largely arises from an approximate $0.4m increase in sales revenue, and an approximate $1.2m increase in material and contractor costs, and that these differences pertain to eight journal entries. Mr Cairns reviewed these journal entries and requested supporting invoices to understand the nature of the transactions to which those journals related. Mr Cairns set out a number of concerns with this material, including that the journal entries and supporting documents lacked clear explanations, did not identify the specific transactions to which they related, and lacked supporting invoices or did not match the invoices provided. In addition, he noted that materials and contractor costs should be recorded at the time they are incurred and should not be the subject of post year end reconciliations.
Mr Mullins was taken to various of these matters in cross-examination and agreed, in respect of a number of them, that there were matters which it would be reasonable to investigate further, and to seek to understand better, but did not agree that these matters provided a basis to conclude that the signed financial reports were unreliable.
Significantly, Mr Cairns did not express the view, as the result of the concerns which he identified, that the signed financial statements for FY2022 and FY2023 were unreliable. Instead, he concluded that there "are a number of issues as to the reliability of the journals that explain the differences" between the unsigned and signed FY2022 accounts, and that accordingly there "is an increased risk that the [signed] FY2022 Accounts do not provide a reliable basis for assessing Logikal and Aluminum's historical financial performance". However, he did not quantify this risk, and he did not express the view that there was no such risk in respect of the unsigned FY2022 accounts (and instead expressed the view that there were "significant concerns over the integrity of the accounting records provided to the Experts", which included both the unsigned and signed accounts).
The Plaintiffs did not cross-examine Mr Zhang or Ms Xie about any of these journal entries or the material supporting them. The Plaintiffs submitted that, in circumstances where Mr Zhang and Ms Xie did not address these matters in their evidence, no inference should be drawn in their favour, citing Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419. In particular, they submitted that, in the absence of evidence addressing the issues raised by Mr Cairns, the Court should not proceed on the basis that the adjustments to the accounts which are incorporated in the signed financial statements "are any more likely to reflect reality than the accounting records with which Mr Cairns was provided by discovery".
However, Mr Cairns' report in reply, which raised issues about these matters, was only served on Thursday, 18 July 2024, leaving one business day for the Zhang/Xie Parties to review the report before the hearing commenced on the following Monday. In those circumstances, I do not consider that the Zhang/Xie Parties, who were busy preparing for trial, had an adequate opportunity to investigate each of the matters raised by Mr Cairns about the material supporting the journal entries, and to respond to those matters in their lay evidence.
Having regard to the matters outlined above, if it had been necessary to determine this issue for the purpose of quantifying profits or loss on a "whole of business" approach (and to the extent that it may be relevant to an account of profits in respect of specified projects), I would have concluded that the signed financial statements for FY2022 and FY2023, which corresponded with the lodged tax returns for those years, should be used in determining A&L's financial position and performance.
[7]
Increase A&L's FME for Karimbla Documents?
Following the service of Mr Mullins' report, Mr Cairns and Mr Mullins were provided with records from one of Logikal's current customers, Karimbla Construction Services, including contracts, purchase orders and invoices.
The experts agreed that the preferred approach to reflect the consequence of the Karimbla Documents would be to estimate the expected cash flows from the projects and prepare a discounted cash flow (DCF) valuation analysis on A&L's business, instead of using the CFME method. However, the experts explained that the Karimbla Documents did not contain sufficient information to enable such an analysis, and so they were unable to undertake their preferred DCF approach.
The experts had expressed views on the level of the future maintainable earnings (FME) of A&L prior to the Karimbla Documents being produced. These figures were based on the financial information which had been provided to them up to 1 December 2023. Mr Cairns noted that this was a significant limitation on providing an up-to-date assessment of loss and value, particularly since the Karimbla Documents showed that, since 1 November 2023, Logikal has entered into purchase orders with Karimbla of around $42.1m.
Mr Cairns originally assessed A&L's future maintainable revenue as $22.357m and its FME as $2.3m. In light of the Karimbla Documents, he substantially revised these figures, increasing A&L's future maintainable revenue to $55.357m (an increase of $33m), and increasing A&L's FME to $4.2m.
In contrast, Mr Mullins who (prior to receipt of the Karimbla Documents) had assessed A&L's future maintainable revenue to be $24.2m and A&L's FME to be $1.05m, expressed the view that the Karimbla Documents "do not provide information to inform [him] whether they have an adjusting impact on his estimated FME, and therefore do not adjustment his assessment of FME".
This is an issue which goes to the current value of the A&L business. I have rejected the submission that Firmtech's loss, as a result of the breaches of duty by Mr Zhang and Ms Xie, is to be measured by calculating the current value of the business of Aluminum and Logikal, on the basis that this represents the loss in value of Firmtech shares (which are currently worth $nil). Accordingly, it is not necessary to determine this issue.
However, if it were necessary to resolve the dispute between the experts, I would have preferred the views of Mr Cairns to those of Mr Mullins in relation to this issue.
The Karimbla Documents establish that Logikal has entered purchase orders of approximately $42.1m since November 2023. Some $3.5m of this work had been invoiced as at 31 March 2024, such that Logikal could expect to receive a further $38.6m in revenue after that date. Mr Mullins' position was, in effect, this fact did not have any effect on his assessment of A&L's future maintainable revenue, which he had assessed at $24.2m before this information became available.
A&L's total consolidated sales revenue in FY2023 was $21.6m. Mr Mullins did not provide any cogent reason as to why new information, establishing that Logikal would receive a further $38.6m from a single client, would not have an impact on the assessment of future maintainable revenue which he had provided before that information became available.
I acknowledge that there is an issue regarding timing, that is, the evidence did not establish when it was expected that this further $38.6m of revenue would be received. This was a matter which could have been, but was not, addressed by the Zhang/Xie Parties. In the absence of such evidence, Mr Cairns conducted an analysis of other purchase orders from the same customer, Karimbla, which indicated that the average length of time from the date of the purchase order until the date of payment was 151 days.
Mr Mullins acknowledged that Mr Cairns' approach to analysing this issue was "a sensible approach to look at", adding: "but then to just stop and take the average of all of the contracts and PO's [Purchase Orders] over that period, I think that falls short of making it a complete or an appropriate approach". However, Mr Mullins did not undertake any alternative form of analysis.
The Zhang/Xie Parties referred to the fact that only five of the past purchase orders analysed by Mr Cairns had a value in excess of $1m (with the highest being $2.5m), and that those five projects had a timeline which was, on average, more than 333 days. However, even if the purchase orders of $42.1m were received over the course of two years, that would still indicate revenue from a single client for each of those two years which was almost equivalent to the whole of Mr Mullins' estimate of future maintainable revenue before he became aware of the Karimbla Documents (being $24.2m).
The Zhang/Xie Parties drew attention to the fact that the purchase orders in the Karimbla Documents were for amounts far higher than the ones analysed by Mr Cairns, with the two highest being $17.37m and $10.7m, and 99.5% of the purchase orders (by value) being for a sum greater than $1.4m. On this basis, the Zhang/Xie Parties submitted that "the Karimbla purchase orders bore no meaningful relationship with those considered in Mr Cairns' analysis". However, this submission highlights a difficulty with the Zhang/Xie Parties' position, which maintains that there should be no change to FME in light of the Karimbla purchase orders, despite those purchase orders being for amounts significantly in excess of other purchase orders in the past.
The Zhang/Xie Parties also referred to Mr Cairns' acknowledgement, in cross-examination, that in order to make an FME assessment, he needed to know when the construction works would commence and finish, and that this was a matter which he did not know. However, those matters were again within the knowledge of the Zhang/Xie Parties. In the absence of evidence from the Zhang/Xie Parties regarding those matters, and in the absence of any alternative analysis by Mr Mullins regarding when revenue from these projects would be received, I consider Mr Cairns' analysis, based on the period within which revenue was received in respect of past purchase orders of the same customer, to be reasonable and open.
Finally, Mr Mullins expressed the view that it is unclear whether the Karimbla purchase orders would affect A&L's long-term maintainable earnings "as opposed to being a one-off or non-recurring income". He noted that one of the projects in question was described as "Meriton's largest project to date", and said that this "shows that a project of this scale may be rare and non-recurring". Mr Mullins did not point to any reason why A&L could not expect to continue to obtain a significant volume of work from Meriton/Karimbla in the future, whether that work was across a few large projects or across multiple smaller projects. Mr Mullins is not an expert on the construction industry, and did not express any views regarding trends in that industry. Further, Mr Mullins accepted that A&L's actual revenue growth in FY2022 and FY2023 was significantly higher than the IBIS industry growth rate.
Having regard to those matters, I would have determined, if it were necessary to resolve this issue, that the Karimbla purchase orders should be taken into account in determining A&L's future maintainable earnings.
[8]
Miscellaneous adjustments to normalise A&L's profits
The experts agreed on a number of adjustments as being required in order to normalise A&L's profits. For example, they agreed that intercompany transactions between Aluminum and Logikal should be eliminated, and also agreed that a number of other matters (including a difference in their treatment of a "land tax" cost in Aluminum's FY2021 financial statements and the adjustment on bad debts) were immaterial.
There remained a number of points in dispute between them regarding the required adjustments. I briefly address each of these below.
[9]
Adjustments on remuneration
In normalising profits for the purposes of the business valuation claim, Mr Cairns applied an assumption which he was instructed to make, namely, that the total remuneration to be paid to Ms Xie across each of Firmtech, Aluminum and Logikal was $80,000 per annum, and that Mr Zhang ought not to have been paid any salary at all. He stated in his reply report that he considered the assessment of the appropriate remuneration for Mr Xie and Mr Zhang to be a legal matter.
Mr Mullins disagreed. He said that the result of Mr Cairns' instructed assumptions was that his assessment of EBIT omitted the remuneration for a construction manager (Mr Zhang) and understated the remuneration for a general manager (Ms Xie). Mr Mullins accepted that some adjustment to EBIT was necessary because the salaries in fact paid to Mr Zhang and Ms Xie appeared to be above market rates. Accordingly, he allowed full remuneration in determining the loss of profits claim, but allowed only reasonable remuneration in determining the business valuation claim. In particular, for the business valuation claim, he normalised profits by adding back the actual salaries of Mr Zhang and Ms Xie, and then deducting the reasonable remuneration for their roles. He took the figures for reasonable remuneration from an expert report of Mr David May dated 21 June 2024. Mr May's opinions on reasonable remuneration were not challenged (although, as outlined below, the Plaintiffs disputed that the assumptions for those opinions were established).
Mr Cairns acknowledged in cross-examination that it was desirable to make an adjustment for reasonable remuneration, but that he was bound by the instruction that he was directed to make. He also accepted that the effect of eliminating the actual salaries and not replacing them with reasonable remuneration was to overstate EBIT:
"[COUNSEL FOR ZHANG/XIE PARTIES]: It sounds from what you're saying is that your EBIT is too high or you accept that it's too high and the explanation for that is that you've been asked to cut out remuneration?
WITNESS CAIRNS: Effectively, yeah.
[COUNSEL FOR ZHANG/XIE PARTIES]: And then you say … that, 'If I brought remuneration back in which would have the effect of reducing EBIT, it brings it more in line with the industry'?
WITNESS CAIRNS: Yes.
[COUNSEL FOR ZHANG/XIE PARTIES]: That's the explanation as you see it?
WITNESS CAIRNS: Yes.
[COUNSEL FOR ZHANG/XIE PARTIES]: But you were bound by your instructions and that's why you've excluded remuneration--
WITNESS CAIRNS: Yes.
[COUNSEL FOR ZHANG/XIE PARTIES]: In a perfect world, if you weren't bound by your instructions, I take it you would include remuneration or deduct remuneration?
WITNESS CAIRNS: Yes, we're still looking the fair value, so it may be that you do take into account the specificities of, yeah, this company, but, yes."
The Plaintiffs submitted that there was "no safe basis for the Court to find that Mr May's opinion as to reasonable salaries for Ms Xie and Mr Zhang reflects the reality of the work (if any) which Ms Xie and Mr Zhang have been performing for Logikal and Aluminum". In particular, the Plaintiffs submitted that Mr Mullins and Mr May have both proceeded on the basis of extensive assumptions as to the nature of the roles which Ms Xie and Mr Zhang performed for those entities, and that neither Ms Xie nor Mr Zhang gave any evidence regarding those matters.
This submission ignores that two of the four years in respect of which adjustments have been made in respect of remuneration are FY2021 and FY2022. There was extensive evidence regarding the roles which Ms Xie and Mr Zhang played in Aluminum and Logikal in those financial years and, in particular, extensive documentary evidence of their roles in preparing and issuing quotations, engaging in communications with developers, and managing the business of Aluminum and Logikal (being material upon which the Plaintiffs relied in their case on liability). There is no reason to conclude that their roles changed in any substantial way between FY2021/FY2022 and FY2023/FY2024.
Further, Mr Xu acknowledged in cross-examination that, while at the commencement of Firmtech's operations Ms Xie was paid only $80,000 per annum and Mr Zhang received no salary, Mr Xu expected that salaries would be paid if Firmtech became successful. As noted above, A&L's business has achieved substantial growth, well above industry rates. There is a tension between the Plaintiffs' contention that Ms Xie and Mr Zhang are operating businesses which should be regarded as having achieved, in a short space of time, future maintainable revenue of around $55.357m per annum, and the Plaintiffs' contention that it is appropriate to assume that, in such a business, the general manager would be paid only $80,000 per annum and the construction manager would not be paid any salary.
Accordingly, if it had been necessary to resolve this issue for the purpose of the business valuation claim, I would have preferred Mr Mullins' approach, namely, that the actual remuneration of Mr Zhang and Ms Xie should be replaced with the mid-point of the range of reasonable remuneration for their roles that is set out in Mr May's report.
[10]
Adjustments for transactions with related corporations
The experts agreed that intercompany transactions between Aluminum and Logikal should be eliminated. There was, however, a difference between the income recorded by Logikal, in its accounts, for fees which it charged Aluminum and the costs recorded by Aluminum, in its accounts, for the same charges. Mr Cairns eliminated each of the relevant transactions, by eliminating an amount of $7,649,463 from Aluminum's expenses to Logikal, and eliminating an amount of $7,425,281 from Logikal's sales to Aluminum. This resulted in an increase in the aggregated profits of $224,182 for the combined A&L business (being the difference between those two figures) In contrast, Mr Mullins netted these transactions to zero.
Mr Cairns acknowledged in cross-examination that, but for the poor record keeping, it would be expected, ordinarily, that the transactions should cancel each other out, so that no profit is recorded. Given that is so, if it were necessary to resolve the issue, I would have determined that the anomalous "profit" of $224,182 should be disregarded.
Mr Cairns was also instructed to exclude transactions between A&L and other related corporations (each of which is controlled by Ms Xie and Mr Zhang). In contrast, Mr Mullins was instructed that those transactions were entered in the ordinary course of business. Mr Cairns considered that the resolution of this matter was a legal issue.
The Plaintiffs contended that there was no evidence to support the assumption that these expenses were in the ordinary course of business.
Documents were tendered to support at least some of these assumptions regarding expenses. For example, one of the related parties was the HAJ Investment Trust. Mr Mullins was instructed as follows: "HAJ Investment Trust is the registered proprietor of a property at 106/45 Ainslie Ave, Braddon ACT 2612 (Property) which is a commercial office. HAJ allowed Aluminum to rent the Property for various months in the 2021, 2023 and 2024 financial year and these payments relate to that rent". The Zhang/Xie Parties tendered a series of invoices for "office rent" which were issued by HAJ Investment Trust to Aluminum throughout the period in question.
I do not consider that it was necessary for Aluminum and Logikal to prove that every transaction recorded as a business expense in the general ledger was in fact a genuine business expense. Section 286 of the Act requires a company to keep written financial records that correctly record and explain its transactions and financial position and performance, and that would enable true and fair financial statements to be prepared and audited. Section 1305(1) of the Act provides that a book kept by a body corporate under a requirement of the Act "is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book". In Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188 at [129], Gleeson JA (with whom Meagher JA and Simpson AJA agreed) said that:
"Section 1305 has the effect that the statement of a matter in a book kept by a company is sufficient to prove that matter in civil proceedings, unless other evidence convinces the court to the contrary on the balance of probabilities …"
The Plaintiffs have not identified any evidentiary basis for concluding that, despite their entry in the general ledgers of A&L, the transactions with the related corporations were not genuine expenses of the businesses of A&L. Accordingly, if it were necessary to determine the issue, I would have decided that these transactions should not be eliminated.
[11]
Legal fees
The experts agreed that legal costs incurred in the ordinary course of business are costs that should be included in the calculation of A&L's EBIT, but that legal costs incurred in relation to the present proceedings should be excluded.
Mr Cairns was instructed to exclude all payments on account of legal expenses to the Zhang/Xie Parties' solicitors (that is, to add back those payments to the EBIT of A&L). Mr Mullins was given an assumption that certain invoices from the Zhang/Xie Parties' solicitors did not relate to these proceedings, but did not himself review those invoices to determine whether or not this assumption was correct.
The Plaintiffs submitted that, in these circumstances, the truth of the assumption given to Mr Mullins had not been established. In response, the Zhang/Xie Parties tendered the relevant invoices from their solicitors. Those invoices related primarily to services provided in relation to trademark issues, as well as an issue with a developer (and therefore did not relate to these proceedings). In those circumstances, I am satisfied that the assumption provided to Mr Mullins has been substantiated.
[12]
"Non-business" transactions
The experts agreed that, in determining the normalised EBIT of A&L, any non-business expenses should be excluded.
Mr Cairns identified, from the general ledgers, certain transactions which, based on his experience, appeared to be either personal expenditure or not fundamental to the operations of the business. These included, for example, expenses designated as "international travel", "pet" and "staff and other entertainment". Mr Mullins was instructed that these expenses were incurred in the normal course of business, and expressed the view that an amount of $1,000 per month should be allowed for each of "alcohol and tobacconist" and "food and drinks". In response, Mr Cairns said that, while it is not uncommon for a business to incur food and drink costs (such as for a staff lunch), such costs are typically discretionary and not fundamental to the operation of the business, and that the amounts suggested by Mr Mullins were arbitrary.
Mr Xu accepted in cross-examination that Firmtech gave generous gifts of alcohol to clients or potential clients; that this was common in the industry; that Firmtech also took clients out for meals; and that he regarded such expenses as having been incurred in the usual course of the company's business. Mr Cairns agreed in cross-examination that if there was evidence that it was commonplace in the industry to buy gifts of alcohol for clients, he would support include an allowance for alcohol and that the figure which Mr Mullins allowed for this expenses was not reasonable.
However, in respect of the other expenses in issue, I accept Mr Cairns' views. In particular, having regard to the descriptions in the general ledger, I accept Mr Cairns' view that the relevant items were in the nature of discretionary expenditure, rather than being fundamental to the operations of the business. For example, it appears that the entries for "pet" related to an aquarium in the office.
For those reasons, had it been necessary to resolve this issue, I would have determined that - other than making an allowance for alcohol and food in the amount proposed by Mr Mullins - the "non-business" expenses identified by Mr Cairns should be excluded when determining normalised EBIT.
[13]
THE PANANIA AND LANSVALE PROCEEDINGS
It is convenient to deal with the Panania Proceeding and the Lansvale Proceeding together. Although these proceedings concern the sale of two properties owned by different persons, they raise a number of common factual issues.
In each proceeding, claims are brought regarding certain payments which were made from the settlement proceeds for each property. It is alleged that the vendor's conveyancer, Auschn (which was controlled by Mr Xu), did not have authority to make those payments. In particular:
1. the claims in the Panania Proceeding relate to two payments totalling $399,413.47 which were made from the settlement proceeds to Mr Xu's company, Global; and
2. the claims in the Lansvale Proceeding relate to the following payments:
1. a payment of $300,000 made to Mr Xu's wife, Ms Gao, on 2 October 2019, following the refund of GST which had been paid on the purchase of the Lansvale Property;
2. a further payment of $615,500 which was made to Ms Gao in May 2021 from the settlement proceeds following the sale of the Lansvale Property;
3. a payment of $535,000 to Mr Xu's company, FAWD, which was also made in May 2021 from those settlement proceeds; and
4. a payment made to Mr Xu in August 2022 out of the balance of the settlement moneys that were held on trust for Holdings, which Mr Xu used to discharge certain debts of Firmtech.
In response to these claims, Mr Xu contended that he had authority to make each of the payments, and that each was made to discharge a debt owing to himself or to various third parties.
Despite the claims being narrowly confined, there was a wide-ranging factual enquiry at trial regarding the sources from which, and basis upon which, moneys had been contributed to the purchase of the properties and to the establishment and operation of Firmtech; the manner in which those moneys had been disbursed; and the parties' knowledge about these matters.
In circumstances where money for those investments was obtained from family and associates as required, where there was little formal documentation relating to any of these transactions, where there were disputed accounts of conversations about the various transactions, and where the transactions were the subject of opaque WeChat messages, these factual issues were attended with some complexity.
Accordingly, I have not resolved all of the factual issues that were raised in these proceedings, but have focussed only on those which are essential for the determination of the pleaded claims for relief.
[14]
The purchase of the Panania Property
On 12 February 2018, Ms Xie entered into a contract to purchase a property at 10 Tyalgum Avenue, Panania, New South Wales (the Panania Property). The purchase price was $1,025,000. Ms Xie paid a deposit of $102,500.
Auschn acted as Ms Xie's conveyancer in relation to this purchase, and did not charge any fee for its services.
Mr Xu was the sole director and shareholder of Auschn, which was a licensed conveyancer. Auschn provided its services through Mr Xu, who had been a licensed conveyancer since November 2013.
On 28 May 2018, the purchase of the Panania Property completed. After adjustments, a balance of $920,265.52 was payable on completion. This balance was paid, in part, by means of a loan which the National Australia Bank advanced to Ms Xie and, in part, by means of funds provided by Mr Xu. There was an immaterial dispute regarding the precise amount contributed by Mr Xu. Ms Xie pleaded that it was $163,256.22 and Mr Xu pleaded that it was $163,353.05, being a difference of only $96.83. In closing written submissions, Mr Xu was content to adopt Ms Xie's figure.
There was a factual dispute about whether Ms Xie was bound by the terms of a document entitled "Joint Venture Agreement". The parties to this agreement were Mr Xu and Ms Xie. The agreement was signed by each of them and dated 9 May 2018.
Ms Xie contended that she signed this agreement in around June 2018; that she did so without reading it and based on an allegedly misleading statement that Mr Xu made about its effect; and that she did not see the full document until December 2022. In response, Mr Xu maintained that the document was signed on the date it bears, namely, 9 May 2018. He provided a photograph of his computer screen showing that the PDF file for the scanned agreement, including the signature of each of Mr Xu and Ms Xie, was last modified on 11 May 2018. He also denied making misleading statements about its effect.
The photographic evidence supports Mr Xu's evidence regarding the date of the agreement. Nothing turns on the balance of the dispute. In his cross claim in the Panania Proceeding, Mr Xu relied on a term of the Joint Venture Deed to the following effect: "Party B [Mr Xu] is entitled to 50% of the profit for sale of the land with all the contributed money paid by Party B". In closing submissions:
1. Mr Xu confirmed that he did not advance any claim for a share of profits, but only for the repayment of his contribution to the purchase of the Panania Property; and
2. Ms Xie confirmed that, whether or not the Joint Venture Agreement document was signed, she had an obligation to repay Mr Xu the amount of his contribution to the purchase of the Panania Property.
[15]
The purchase of the Lansvale Property
On 18 April 2019, Holdings was incorporated, for the purpose of purchasing and developing a property at 9 Knight Street, Lansvale, New South Wales (the Lansvale Property). Mr Zhang and Mr Xu are, and at all times have been, the directors and equal shareholders of Holdings.
Holdings is the trustee of a unit trust called the Firmtech Holdings Trust (the Holdings Trust). The units in the Holdings Trust are owned, as to 50% each, by:
1. JKZ (Australia) Pty Ltd as trustee for the JKZ Investment Trust; and
2. KG & Co Holdings Pty Ltd as trustee for the KG&CO Holdings Trust.
Ms Xie is the sole director and shareholder of JKZ. Mr Xu is the sole director of KG and his wife, Ms Gao, is the sole shareholder.
On 3 May 2019, Holdings as trustee of the Holdings Trust entered into a contract to purchase the Lansvale Property for $3.77m. The completion date was 15 August 2019. The deposit of $377,000 was paid by Firmtech.
After adjustments (including an allowance of $377,000 for GST), the total sum required for settlement of Holdings' purchase of the Lansvale Property was $3,971,998.44.
An amount of $2,621,563.20 was advanced by NAB. The remaining funds of $1,350,435.24 came from a number of sources.
First, a further amount of $492,860.00 was paid from Firmtech's bank account.
Secondly, an amount totalling $317,862.24 was paid into Auschn's trust account by way of two deposits made by Mr Xu's wife, Ms Gao ($291,862.24), and Mr Xu's mother-in-law, Ms Chen ($26,000.00).
Thirdly, there was a payment of $539,713.00 from Holdings' bank account with NAB. These funds came from two sources:
1. an amount of $400,000 which was deposited into Holdings' bank account by Mr Xu's brother, Jinting (Steven) Xu, by way of two deposits made on 2 and 6 August 2019; and
2. an amount of $139,713 which was sourced from two deposits totalling $150,000 with the description "Trinh Nhan" that were made on 2 and 5 August 2019.
There was a dispute regarding whether the payments from Mr Xu's brother represented a loan by him to Holdings, or whether they represented a pre-payment by him for services which were being rendered by Firmtech (with Firmtech then loaning those moneys to Holdings).
Prior to these payments being made, Firmtech had agreed to construct, at cost, a house for Mr Xu's brother on a property in Carlingford, New South Wales. Work started on this project around the time that the payments were made.
Mr Xu gave evidence that his brother loaned $400,000 to Holdings, in response to a request made by Mr Xu. It was put to Mr Xu in cross-examination that the payments were, in fact, a prepayment for the construction work being undertaken by Firmtech. However, Mr Xu responded that "it's illegal for us to charge it - to prepay more than 10% of a contract, which is not allowed in any form of construction". In giving this answer, Mr Xu appears to have been referring to the effect of s 8 of the Home Building Act 1989 (NSW). This section stipulates that the maximum amount of a deposit for residential building work is 10% of the contract price, and provides that it is an offence for a person to demand or receive the payment of a deposit in excess of that maximum.
Mr Xu was responsible for the construction side of Firmtech's business. It is likely that he was aware, at the time that he requested payment from his brother, of the effect of this provision. Given that is so, I accept Mr Xu's account that the substance of the transaction was not a prepayment for Firmtech's future costs, but instead an advance by his brother for the purpose of Holdings' purchase of the Lansvale Property. In any case, there is no pleaded issue regarding the payments made by Mr Xu's brother.
As regards the payments with the reference "Trinh Nhan", Mr Xu gave evidence that these transactions were "informal currency exchanges organised by me with an associate of mine for Chinese Renminbi". Although this account was challenged in cross-examination, Mr Zhang and Ms Xie did not identify any other explanation for the "Trinh Nhan" funds. Given that Holdings did not trade, and given that the only persons with an interest either in Holdings or in the purchase of the Lansvale Property, were Mr Xu, Ms Gao, Mr Zhang and Ms Xie, it is highly unlikely that the funds came from a third party who had no connection with any of them. Having regard to those matters, I accept Mr Xu's account. In any case, no claim is said to arise from these payments.
In summary, leaving aside the NAB loan funds, the purchase of the Lansvale Property was funded by:
1. $869,860.00 from Firmtech's account (the deposit of $377,000 plus the further amount of $492,860);
2. $400,000.00 from Mr Steven Xu (which was advanced to Holdings); and
3. $457,575.24 from Mr Xu and his family (being the Trinh Nhan payments and the payments by his wife and mother-in-law).
[16]
The Luna Loan and the use of the funds advanced
On 5 August 2019, Mr Zhang, Ms Xie and Mr Xu signed a loan agreement to borrow $1m from a friend of Mr Xu, Liping "Luna" Gu (the Luna Loan Agreement). Mr Zhang and Mr Xu also executed this agreement as directors of Holdings. On 30 August 2019, the Luna Loan Agreement was executed by Ms Gu.
By the Luna Loan Agreement, Ms Gu (described as "Party A") agreed to lend to Holdings, Mr Zhang, Mr Xu and Ms Xie (who were together described as "Party B") the sum of $1m "for the purposes of purchase and develop of" the Lansvale Property. The Luna Loan Agreement provided that Ms Gu would advance the funds "to Party B" within two days of the date of the agreement; that the period of the loan was twelve months from the date of the loan deposit; that interest was payable by "Party B" at a rate of 10% per annum; and that "Party B" would give Ms Gu a second mortgage and a right to lodge a caveat over five specified properties, including the Lansvale Property, which was being purchased by Holdings, and the Panania Property, which was owned by Ms Xie.
The Luna Loan Agreement provided that it would come into effect "when the two parties [that is, Party A and Party B] signed the agreement". This requirement was satisfied when Ms Gu signed on 30 August 2019.
The Luna Loan Agreement further provided that: "Both parties are legally binding, jointly and severally". This evinces an intention, which is supported by the use of "Party B" and the other terms of the agreement, that Mr Xu, Mr Zhang, Ms Xie and Holdings were jointly and severally liable for the repayment of the moneys advanced by Ms Gu, for the payment of interest to Ms Gu, and for any other obligations imposed on "Party B" under the Luna Loan Agreement.
There was a factual dispute as to the circumstances in which the Luna Loan Agreement came to be signed. It is unnecessary to resolve this dispute. In closing submissions, Ms Xie, Mr Zhang and Holdings accepted that the Luna Loan Agreement was entered, and that it was binding on each of them. Counsel for those parties stated in closing address that: "We've got some issues about the way in which the funds are dispersed and that really is where our concern lies, but there's no dispute that we signed the loan."
On about 30 August 2019, Ms Gu lodged a caveat on the title of four of the properties specified in the Luna Loan Agreement, including the Panania Property. The caveat lodged over the Panania Property claimed a "lien" by virtue of a "personal agreement" between Ms Xie and Ms Gu (being the Luna Loan Agreement).
On 5 September 2019, Ms Gu advanced an amount of $872,189, by paying this sum into Auschn's trust account. Mr Xu explained that the balance of the $1m advance under the Luna Loan Agreement (being $127,811) was not paid because it was treated as the repayment of moneys then owing by Mr Xu to Ms Gu.
There was no dispute that this set-off occurred. Instead, the cross-examination of Mr Xu proceeded on the basis that he did not inform Mr Zhang and Ms Xie that the $1m was advanced, in part, by way of this set-off. Mr Xu agreed that he could not recall doing so. There was, however, no pleaded claim arising from the loan funds having been advanced in that manner.
Similarly, although there was a factual dispute as to how the funds advanced by Ms Gu were disbursed, there was no pleaded claim regarding the disbursement of those funds, and therefore this issue can be addressed briefly.
Of the $872,189 which was paid into the Auschn trust account, an amount of $372,189 was paid several days later to Mr Xu's wife, Ms Gao. As noted above, Ms Gao and her mother had advanced $457,575.24 to Holdings for the purchase of the Lansvale Property. The payment of $372,189 to Ms Gao from the funds advanced by Ms Gu effected, in substance, a refinancing of the Lansvale Property: the indebtedness of Holdings to Ms Gao was discharged to the extent of the payment, and replaced with the indebtedness of Holdings, Mr Xu, Mr Zhang and Ms Xie ("Party B") to Ms Gu.
The remaining $500,000 of the moneys advanced by Ms Gu was paid to Ironbrook Properties on 19 September 2019. There was a factual dispute as to whether Mr Zhang and Ms Xie agreed to entering into any arrangement with Ironbrook. It is not necessary to resolve this dispute, given the absence of any pleaded issue about the Ironbrook payment. It is sufficient to note the following matters.
1. On 13 September 2019, Mr Xu sent Mr Zhang a term sheet which Ironbrook had signed on 11 September 2019. The term sheet set out terms for the acquisition by "Kevin Xu (& Partners)" of a 49% interest in Ironbrook Property Group Holdings, including a requirement for an initial payment of $500,000. Given that it was sent to Mr Zhang, it can be inferred that the reference to the "Partners" of Mr Xu was, at least, a reference to Mr Zhang.
2. In a WeChat message posted on the Group Chat on the same day, Mr Zhang sent back a copy of the term sheet with his handwritten comments and said: "Needs to add clause to bind all parties". This message establishes that Mr Zhang was contemplating, at that time, that the parties would enter into a binding agreement on the terms of the term sheet and "Kevin Xu (& Partners)" would pay the stipulate sum of $500,000 to Ironbrook.
3. On 23 September 2019, Ms Xie sent a text message to Mr Xu regarding the Ironbrook term sheet, which included the following statements: "Write Jiamin's name on the previously drafted document. Let's re-sign it and send it to them. Then you have to wait until you receive the shareholder agreement document before paying." The reference to "paying" is plainly a reference to the payment of $500,000 to Ironbrook in accordance with the terms of that document. In closing submissions, Ms Xie and Mr Zhang noted that in this exchange, Ms Xie was outlining steps which she expected to be taken before the Ironbrook payment was made, and that the Ironbrook payment had in fact occurred on 19 September 2019, several days prior to Ms Xie's message being sent. On this basis, they submitted that Ms Xie's message could not amount to authority for Mr Xu to make the Ironbrook payment. While that may be accepted, there is, as noted above, no claim that the Ironbrook payment was unauthorised. For present purposes, the significance of the messages is that they indicate that Ms Xie was aware of the terms of the Ironbrook arrangement, and intended that the arrangement should be entered and that the amount of $500,000 should be paid to Ironbrook pursuant to that arrangement.
4. In September and October 2020, WeChat messages were exchanged on the Group Chat which indicate that Ms Xie and Mr Zhang understood that the principal of $1m had been advanced under the Luna Loan Agreement, that this amount was repayable to Ms Gu, and that half of this amount had been paid to Ironbrook. In particular:
1. On 1 September 2020, Mr Xu wrote "Luna's 1 million is due, need to be repaid" and Ms Xie responded "Have the shares of the old man been transferred to us?". Ms Xie confirmed in cross-examination that the "shares of the old man" was a reference to shares in Ironbrook. Significantly, in these WeChat messages, Ms Xie, unprompted by anything said by Mr Xu, linked the Luna Loan with Ironbrook and sent a message in terms which indicate that she understood that there was a binding arrangement for the transfer of shares by Ironbrook "to us" (that is, to her and Mr Zhang, as well as Mr Xu), which would only have been the case if the Ironbrook payment had been made using the funds advanced by Ms Gu; and
2. On 14 October 2020, Mr Zhang asked "For the 1 million borrowed from Luna, was 500,000 of it given to the old man?", to which Mr Xu responded "Yes." The terms of Mr Zhang's question indicate that he was aware that the amount of $1m had been borrowed from, and was repayable to, Ms Gu; that he understood that these funds were to be used to make a payment of $500,000 to Ironbrook; and that he was seeking confirmation that this had in fact occurred. This confirmation was given by Mr Xu. Mr Zhang did not respond by expressing any surprise that this had occurred, or by saying anything to the effect that Mr Xu had no authority to make this payment.
On 17 August 2020, Mr Xu withdrew $200,000 from Firmtech's account. There is no pleaded issue in relation to this transaction, although it was the subject of cross-examination When questioned about this payment, Mr Xu explained that $100,000 of this amount was paid to Ms Gu by way of interest. As noted above, pursuant to the Luna Loan Agreement, "Party B" was liable to pay interest at a rate of 10% per annum on the advance made at the start of September 2019. Ms Gu's bank statements confirm that the amount of $100,000 was received by her shortly afterwards.
The fact that Mr Xu made this payment to Ms Gu, in discharge of Party B's obligation to pay interest under the terms of the Luna Loan Agreement, was acknowledged in an amended version of the "Closing Down Calculations" which was prepared by Ms Xie on 30 January 2021, after the meeting with Mr Xu earlier that day. The amendments included reducing the amount which was recorded as having been withdrawn by Mr Xu from Firmtech's bank account (marked as "Kevin cash refund") and inserting a new line in the section of the spreadsheet dealing with the Luna Loan, stating "Paid interest $100,000". These amendments indicate that, at the 30 January meeting, Ms Xie and Mr Zhang accepted that, of the $200,000 which Mr Xu had withdrawn from Firmtech's account in August 2020, $100,000 had been paid to Ms Gu in respect of their joint and several liability for interest under the Luna Loan Agreement, and the other $100,000 was retained by Mr Xu (and therefore reduced the balance of the sum which he had advanced to Firmtech as at 30 January 2021).
In closing address, Mr Zhang and Ms Xie made a submission that Ms Gu was in the camp of the Xu parties, that she had not been called to give evidence despite being available, and that "the appropriate inference ought to be drawn that she could not give evidence that would assist the position of Mr Xu and the companies associated with him".
In Ling v Pang [2023] NSWCA 112 at [27], Kirk JA said (Leeming and Mitchelmore JJA agreeing) that:
"What underlies the principle in Jones v Dunkel is that the failure to call the witness 'serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party': Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8; at 320-1 … per Windeyer J; see also Fabre v Arenales (1992) 27 NSWLR 437 at 449 per Mahoney JA."
A Jones v Dunkel inference is not a substitute for evidence. If there is no evidence of a matter, the inference cannot fill the void: Bellevarde Constructions Pty Ltd v L'Officina by Vincenzo Australia Pty Limited [2022] NSWCA 246 at [37] per Brereton JA (White JA and Simpson AJA agreeing).
Ms Xie, Mr Zhang and Holdings did not advance any pleaded issue in respect of the Luna Loan Agreement, which Ms Gu's evidence might have addressed. Nor did they identify any inference which was available on the evidence before the Court which could more confidently be drawn as a result of Ms Gu's failure to give evidence. In those circumstances, there was not a sufficient basis to draw any Jones v Dunkel inference by reason of Ms Gu's absence.
[17]
Payment to Ms Gao - October 2019
On 26 September 2019, the Australian Tax Office paid an amount of $377,047.71 into Holdings' bank account, which was a refund of the GST that had been paid on the purchase of the Lansvale Property.
On 2 October 2019, an amount of $300,035 was withdrawn from Holdings' bank account. Of that sum, $300,000 was paid into the bank account of Ms Gao on the same day, with the narrative "Refund" (the remainder being referrable to a $35.00 bank fee).
On 2 and 3 October 2019, a total of $150,000 was paid out of Ms Gao's account by way of two transfers. It is common ground that this amount was received by Mr Zhang and Ms Xie. The result was that, of the $300,000 paid out of the Holdings' account following the refund of GST, one half was received by Mr Xu's wife and the other half was received by Ms Xie and Mr Zhang.
There was a factual dispute as to the discussions which preceded these payments. Mr Xu gave evidence that he had a conversation with Ms Xie and Mr Zhang between 26 September 2019 and 2 October 2019, in which he informed them that the GST refund had been received. According to Mr Xu, Ms Xie proposed that "we split $300,000 between us", with half of this amount being paid into an account in Mr Zhang's name, and Mr Zhang confirmed that he agreed with this proposal. Following this, Mr Xu paid $100,000 into the bank account of Mr Zhang, and was then instructed to pay the remaining $50,000 into a different account held by Ms Xie. He attached to his affidavit a WeChat message from Ms Xie dated 3 October 2019 providing him with the details of this account.
Ms Xie and Mr Zhang accepted that there was a discussion with Mr Xu about the receipt of $300,000 and an agreement to split this amount, but deposed that Mr Xu told them that the amount of $300,000 represented payments made on a construction project being undertaken by Firmtech, rather than a refund of GST received by Holdings.
I consider that Mr Xu's version of events is more probable. The relevant payments happened immediately after the GST refund was received. It is likely that the receipt of this refund would have triggered some discussion between the parties about what to do with those funds, given that Holdings was not trading and had been established solely in order to purchase and hold the Lansvale Property. Further, the fact that the moneys were split equally between, on the one hand, Ms Gao and, on the other, Ms Xie and Mr Zhang is consistent with the fact that Ms Gao and Ms Xie were, respectively, the sole shareholders of the entities which owned 50% of the units in the Holdings Trust. Mr Xu explained in cross-examination that the reason why he made a single transfer of $300,000 from Holdings' account into his wife's account, and then immediately transferred $150,000 of that amount to Ms Xie and Mr Zhang, rather than making two transfers of $150,000 each from Holdings' account, was that he was thereby able to avoid incurring two bank fees of $35.00 each. That evidence is plausible and readily explains why the transactions occurred in this way.
Further, it is unlikely that, if the $300,000 represented moneys received by Firmtech for one of its projects, Mr Xu, Mr Zhang and Ms Xie would have agreed to take this money out of Firmtech and split it between them. At this time, Firmtech required these funds in order to pay its suppliers. On 30 September 2019, Firmtech only had around $40,000 in its bank account. In addition, Ms Xie stated in a WeChat message on the Group Chat in August 2020 that she had, to date, received "not a single dollar from Firmtech" (see paragraph [174] above). It is unlikely that she would have made this statement if she and Mr Zhang had received $150,000 in cash from Firmtech around 10 months earlier.
For those reasons, I find that $300,000 of the GST refund was, by agreement between the directors of Holdings, equally split between the two families who had an equal interest in the Holdings Trust (Mr Xu/Ms Gao and Mr Zhang/Ms Xie).
[18]
Decision to Sell the Properties
On 5 January 2021, Ms Xie sent the following WeChat message to Mr Xu on the Group Chat:
"Kevin, how much did you pay for the Panania property? It has been losing money now since it has been vacant. Have to pay the mortgage every month too. … I'll find an agent to sell it and return the money to you after calculating it. This investment is a failure."
This appears to have been the first indication from Ms Xie that she wanted to sell the Panania Property. Significantly, her message acknowledged that she would need to calculate the amount of Mr Xu's contribution to the purchase of the property, so that he could be repaid this amount.
On 29 January 2021, Mr Zhang sent the email to Mr Xu which attached the "Closing Down Calculations". The attached spreadsheets related not only to Firmtech, but also to the Lansvale Property and the Panania Property. A number of these items were annotated with the words "need kevin to confirm".
As shown by these spreadsheets, Mr Zhang and Ms Xie recognised that, if their business relationship with Mr Xu was to come to an end, and their financial affairs were to be separated, it would be necessary to deal with each of their investments (including the two properties). Each of those investments would need to be "closed" out. In particular, it would be necessary to agree on the quantum of, and agree on the steps necessary to repay, each of the following amounts: the amount paid by Mr Xu for Ms Xie's purchase of the Panania Property; the amounts paid by Firmtech and by Mr Xu and his family for Holdings' purchase of the Lansvale Property; the amounts advanced by Mr Xu to Firmtech; and the outstanding balance of the Luna Loan for which Mr Xu, Mr Zhang, Ms Xie and Holdings were jointly and severally liable. Mr Zhang stated in cross-examination that, in order for there to be a "separation", there needed to be:
"a discussion because we have a lot of other interests - close the interests - like we also invest some property together. We have Firmtech holdings. We have other matters, so it needs time to think about how to close them. … We need to have time to sort out some closing-down calculations".
It was common ground that the various entries in the "Closing Down Calculations" were discussed at the meeting between Mr Xu, Ms Xie and Mr Zhang on 30 January 2021.
On the evening following that meeting, Ms Xie sent a further version of the "Closing Down Calculations" to Mr Xu. It can be inferred that the amendments reflected matters which had been discussed at that meeting. In particular, the revised calculations:
1. increased the amount of Mr Xu's contribution to the Panania Property from $123,311.22 to $164,791.22 (retaining the notation "need kevin to confirm");
2. increased the amount of Mr Xu's contribution to the Lansvale Property from $330,985 to $398,985 (with the notation "kevin to confirmed [sic]"); and
3. reduced the amount of the cash refunded to Mr Xu from Firmtech, and noted that $100,000 had been paid by way of interest in respect of the Luna Loan.
The amended spreadsheets recorded that the total amount of "cash" which Mr Xu had advanced to Firmtech, less the amount of "cash refunds" to him from Firmtech's account, was around $1.22m.
In his affidavit of 17 April 2023 which was filed in the Lansvale Proceeding, Mr Zhang gave evidence that, in the course of a meeting with Mr Xu and Ms Xie at the Revesby Factory in "around December 2020 or January 2021" (which is likely a reference to the 30 January meeting, this being the only meeting with Mr Xu which took place at those premises in that period), words to the following effect were said:
"[Mr Xu]: You need to pay my loans and Luna's loan.
[Mr Zhang]: There is no money to pay that. Let's sell Lansvale.
[Mr Xu]: Ok.
[Mr Zhang]: Can you draft the contract and act as the conveyancer again?
[Mr Xu]: Yes I can"
Mr Xu deposed that in early February 2021, he had a conversation with Ms Xie in which she said words to the effect that: "We will have to sell Panania and Lansvale and use the sales to pay back the $1.22 million owed to you and the Luna Loan". In her evidence in reply, Ms Xie did not dispute that there was a conversation to that effect. I accept Mr Xu's evidence, as it is consistent with Mr Zhang's evidence of the matters discussed by the parties at the 30 January meeting. It is also consistent with various WeChat messages which were subsequently exchanged between the parties (as set out below).
On 22 February 2021, the following WeChat messages were posted by Mr Xu and Ms Xie on the Group Chat:
"[Mr Xu]: I invested 1.3 million for almost three years
Still haven't paid it back to me
…
[Ms Xie]: I also know how much you invested. We calculated it very clearly last time. I'll try to return it to you as soon as possible.
I just want to pay off your debt of gratitude, otherwise I would have fallen down long ago. The debt has supported me till now
…
I have thought about it. After I sell these two factories and houses, I will pay back your money and Luna's, and then leave some living expenses for me. If there is anything left, I will lend it to you for investment free of charge."
There was a competing translation in evidence, but it was to substantially the same effect.
Mr Xu's reference to the "1.3 million" which he had "invested … for almost three years" was a reference to the amount of money which he had advanced to Firmtech since its establishment in May 2018. In this exchange, Ms Xie did not dispute the amount which Mr Xu claimed to be owing to him. The figure cited by Mr Xu is broadly consistent with the figure of $1.22m recorded in the revised "Closing Down Calculations" following the 30 January meeting. It is likely that Ms Xie was referring to this meeting and to the revised calculations when she stated that: "We calculated it [the amount Mr Xu had invested] very clearly last time".
In the WeChat messages set out above, Ms Xie indicated that she was committed to repaying Mr Xu the total amount of his investment in Firmtech "as soon as possible", particularly because of the "gratitude" she felt for Mr Xu having "supported" her up to this point in time.
Ms Xie also indicated in these messages that she planned to obtain the funds to repay the amount which Mr Xu had advanced to Firmtech from selling "these two factories and houses". Ms Xie confirmed in cross-examination that, in this message, she was referring to the sale of the Lansvale Property and the Panania Property. Similarly, Mr Zhang confirmed that he understood that the reference to "two factories and houses", which appears in the above translation, was a reference to the "two" properties at issue in these proceedings, namely, the Lansvale Property (which was a factory) and the Panania Property (which was a house). Mr Zhang also agreed that, when he read this message on the Group Chat, he understood that it was the intention that when those two properties were sold, each of Mr Xu and Ms Gu would be repaid. Mr Zhang did not disagree with this proposal.
Having regard to the evidence set out above, I find that the parties agreed that each of the Lansvale Property and the Panania Property would be sold; that, from the proceeds of sale, Mr Xu would be repaid the amount of around $1.22m which he had advanced to Firmtech; and that Ms Gu would be repaid the moneys which she had advanced under the Luna Loan Agreement.
[19]
Sale of Properties and Directions in relation to sale proceeds
[20]
Steps to sell the Panania Property
Ms Xie engaged Auschn to act as conveyancer on the sale of the Panania Property. Auschn did not charge a fee for this service.
On 15 February 2021, Ms Xie sent a WeChat message to Mr Xu on the Group Chat, asking: "Can you help prepare the sales contract for panania?"
On 22 February 2021, Ms Xie sent a further WeChat message to Mr Xu on the Group Chat, stating: "Tell Luna once we sold Panania we will repay more money immediately". That is consistent with the longer WeChat exchange of the same day (set out at [753] above) in which Ms Xie had stated her intention to use the proceeds of the sale of the Panania Property to repay amounts owing under the Luna Loan Agreement.
On the same date, further WeChat messages were exchanged between Ms Xie and Mr Xu on the Group Chat, regarding the need for Ms Gu's caveat over the Panania Property to be removed before the settlement date:
"[Ms Xie]: @kevin Have you asked? Can you modify the contract and give it to me?
[Mr Xu]: She did not agree
It will take a day or two to remove
Legally
[Ms Xie]: So, does that mean their deposit will be lost?
[Mr Xu]: I'll tell them that it will be removed before the settlement.
…
[Ms Xie]: If you can't get it removed by the settlement date, does that mean their deposit will be lost? Who would consider buying it like this?
Is there any document saying that it will be removed before settlement?
@kevin
Tell Luna that we will pay back a little more as soon as panania is sold
[Mr Xu]: It will be removed before the settlement, because there will be money to repay only after the settlement"
These messages disclose that Ms Xie contemplated that Mr Xu would contact Ms Gu to inform her that she would be repaid money from the settlement proceeds of the Panania Property, and would ask her to assist with the sale by removing her caveat in advance of settlement.
On 23 February 2021, contracts were exchanged for the sale of the Panania Property for an amount of $1,185,000. A deposit of $118,500 was paid.
[21]
Steps to sell the Lansvale Property
Holdings engaged Auschn to act as conveyancer on the sale of the Lansvale Property.
On 12 March 2021, Ms Xie sent a WeChat message to Mr Xu on the Group Chat, asking "When will the Contract Lansvale be ready?" On 16 March 2021, Ms Xie repeated that request, and Mr Xu responded "by this week".
These messages indicate that, from the start of the sale process, Ms Xie was communicating with Mr Xu about the sale of the Lansvale Property. Mr Zhang was aware of these communications, since he was a party to the Group Chat.
On 31 March 2021, Holdings as trustee of the Holdings Trust entered into a contract for the sale of the Lansvale Property for an amount of $6,050,000. The purchasers paid a deposit of $605,000.
[22]
Direction from Ms Gu regarding repayment of Luna Loan
On around 26 February 2021, Auschn entered into a costs agreement with Ms Gu, to act for her in relation to the removal of the caveat over the Panania Property, which stated as follows:
"Auschn … is appointed to act in remove caveat over the [Panania Property] and do such things as are proper and necessary for the conduct and settlement of the sale of the property and Building Contract".
On 15 March 2021, Ms Gu gave a direction to Auschn, headed "Repayment of Loan for Liping Gu". This document referred to the Luna Loan Agreement, and the upcoming sale of the Panania Property and Lansvale Property. It stated as follows:
"On the condition that I remove the caveat over [the Panania Property] prior to settlement, please forward all the settlement vendor fund around $400,000 to [a nominated bank account in the name of Global].
After sell of [Lansvale Property], please forward the balance of my loan around $600,000 to [a nominated bank account in the name of Ms Gao]."
The direction contemplated that, in return for Ms Gu removing the caveat over the Panania Property prior to settlement, the $1m principal advanced by Ms Gu pursuant to the Luna Loan Agreement would be repaid, and that this would be effected by two payments made from, respectively, the settlement proceeds of the Panania Property (as to $400,000) and the settlement proceeds of the Lansvale Property (as to $600,000).
The Zhang/Xie Parties raised, in opening submissions, an issue regarding the authenticity of this document. However, Mr Xu gave unchallenged evidence that he was provided with this direction by Ms Gu, and it was not put to Mr Xu in cross-examination that the document was not authentic. Instead, the cross-examination proceeded on the basis that this direction was given, but that Mr Xu failed to disclose this direction to Ms Xie (which Mr Xu acknowledged was probably the case). In closing address, the Zhang/Xie Parties summarised the position as follows: "Now, there was a direction that was held by Mr Xu on behalf of Ms Gu … And it provided for the payment of $400,000 to the Auschn Global account … Mr Xu accepts that he didn't tell Ms Xie about the direction".
On 18 March 2021, Ms Gu withdrew her caveat over the Panania Property. The withdrawal was signed by Mr Xu and lodged by Auschn.
The fact that Ms Gu took this step on 18 March 2021 provides further support for the authenticity of the document dated 15 March 2021. It is unlikely that Ms Gu would have removed the caveat over the Panania Property without some agreement having been reached that she would be repaid, from the sale of the Panania Property and the Lansvale Property, the balance of her loan, and without some arrangements being put in place to ensure that this occurred.
[23]
Panania - Settlement Proceeds and Directions
On 8 April 2021, Ms Xie and Mr Xu exchanged the following WeChat messages on the Group Chat in relation to the sale of the Panania Property, and the use of the proceeds:
"[Ms Xie]: When will Panania settle?
[Mr Xu]: On the 19th
[Ms Xie referred to the need for a supplier of Firmtech's to be paid]
[Mr Xu]: You can't use that money.
[Ms Xie]: Even after settling, we can't use it?
Is there a time limitation or something?
[Mr Xu]: It needs to be returned to Luna
otherwise, they won't remove the caveat
…
[Ms Xie]: Can we ask for a few more days? Wait until the end of the month to repay.
Otherwise, suppliers won't pay, and we won't receive the materials we need.
…
[Mr Xu]: We no longer have any credibility with her.
[Ms Xie]: How much money have we paid to Luna now?
[Mr Xu]: At the end of December
80,000
…
[Mr Xu]: The factory still hasn't paid me back
Last time, the calculation was around 1.2 million
[Ms Xie]: The result of our previous discussion was to repay Luna first, then you.
…
[Ms Xie]: When will Lansvale settle?
…
[Mr Xu]: Mid-May"
A number of points are notable about this exchange.
First, Mr Xu was informing Ms Xie, before the settlement moneys from the sale of the Panania Property were received, that those moneys would need to be used, immediately upon receipt, to repay Ms Gu. (It should be noted that this exchange records that there had been a payment of $80,000 made to Ms Gu, thereby reducing the outstanding principal to $920,000).
Secondly, Mr Xu indicated to Ms Xie that they had promised to repay Ms Gu from the settlement proceeds in order to obtain Ms Gu's consent to remove the caveat over the Panania Property. There was some suggestion in cross-examination that Mr Xu's message about the caveat was misleading, because he stated that it was necessary to make a payment from the Panania settlement in order for the caveat to be withdrawn, when, in fact, by this date the caveat had already been withdrawn. However, Ms Xie did not give evidence that she was misled by this message, and the WeChat messages of February 2021 which are set out at paragraphs [753] and [761]-[762] above make plain that Ms Xie understood that the caveat had to be removed before the settlement of the Panania Property (and therefore had to be removed before any payment was made to Ms Gu from the sale proceeds, which could only occur after settlement).
Thirdly, the exchange again confirms that Mr Xu and Ms Xie had agreed that an amount of "around $1.2m" was owing to Mr Xu (being the amount set out in the revised "Closing Down Calculations" which were sent by Ms Xie to Mr Xu after the 30 January meeting).
Fourthly, and most importantly, Ms Xie acknowledged that she and Mr Xu had already reached an agreement regarding what would be done with the proceeds of the sale of the Panania Property and the Lansvale Property: "The result of our previous discussion was to repay Luna first, then you." That is, it was agreed that the settlement proceeds from the sale of the two properties would be used first to discharge the full amount due under the Luna Loan Agreement and then to repay Mr Xu the moneys which he had contributed to Firmtech.
On 20 April 2021, the sale of the Panania Property completed. After paying off the NAB Loan and various other expenses, the net amount of the moneys received on settlement was $304,613.47.
On the same day, Auschn paid the whole of that amount to Global.
On 22 April 2021, Auschn received a further sum of $94,800, which was the balance receivable from the deposit paid in respect of the Panania Property. This amount was also paid to Global on the day of receipt.
It follows that Global received a total amount of $399,413.47.
Mr Xu and Auschn did not issue a statement of account to Ms Xie upon completion of the sale of the Panania Property.
On 21 April 2021, Mr Xu and Ms Xie exchanged the following WeChat messages on the Group Chat:
"[Mr Xu]: Settled yesterday, got $399,383.47 in total
The money from the agent is not in the account yet
[Ms Xie]: So much money
[Mr Xu]: Not enough to repay luna yet
[Ms Xie]: When will it be in the account
Pay part of it first. And pay the other part after getting the money from lansvale"
These messages were sent before the amount of $94,800 referrable to the deposit had been received (explaining why Mr Xu said that "the money from the agent is not in the account yet"). Ms Xie by these messages confirmed her instruction to Mr Xu to use the settlement proceeds of the Panania Property to repay part of the balance of the Luna Loan ("Pay part of it first"), with the remaining balance of that loan being paid from the sale proceeds of the Lansvale Property ("pay the other part after getting the money from lansvale").
As identified above, Ms Gu had directed that $400,000 from the sale of the Panania Property was to be paid in reduction of the balance of the Luna Loan, and had directed that this payment should be made by means of a payment to a nominated bank account in the name of Global.
The payment of $399,413.47 by Auschn to Global was therefore in accordance both with Ms Xie's instruction to Mr Xu that the money from the settlement of the Panania Property should be used in part repayment of Ms Gu's loan, and with Ms Gu's direction to Auschn as to how that repayment should be effected.
On 21 April 2021, Global transferred an amount of $300,000 to Ms Gu's bank account.
[24]
Lansvale - Settlement Proceeds and Directions
At paragraphs [753], [761]-[762], [775] and [786311] above, I have set out various WeChat messages which were exchanged on the Group Chat on 22 February 2021, 8 April 2021 and 21 April 2021. In particular:
1. on 22 February 2021, Ms Xie stated that the Lansvale Property and the Panania Property would be sold, and the proceeds would be applied to repay both the Luna Loan and the amount of Mr Xu's investment in Firmtech;
2. on 8 April 2021, Ms Xie acknowledged that an agreement had been reached in previous discussions with Mr Xu "to repay Luna first, then you [Mr Xu]" from the proceeds of the sale of the Lansvale Property and the Panania Property; and
3. on 21 April 2021, Ms Xie directed Mr Xu to "Pay part of [the Luna Loan] first [from the Panania settlement proceeds]. And pay the other part [of the Luna Loan] after getting the money from Lansvale."
In cross-examination, Mr Zhang confirmed that by these messages (which he received and read on the Group Chat), he understood that the Panania settlement moneys would be used to repay part of the Luna Loan "and that the other part of the Luna loan should be paid or could be paid after getting the money from Lansvale". Mr Zhang did not disagree with this proposal.
On 21 April 2021, Ms Xie and Mr Xu exchanged the following further WeChat messages on the Group Chat regarding the amount owing to Mr Xu and his brother, and the sale of the Lansvale Property:
"[Ms Xie]: Your money will be repaid.
And part of the 1.2 million seems to have been repaid already.
[Mr Xu]: Not yet
Only got some recently
The 100,000 before was deducted
Last August
[Ms Xie]: Your brother seems to have borrowed about 400,000 from the construction, but paid back more, so that can be treated as having paid you back
[Mr Xu]: Counted already at the time
[Ms Xie]: Will pay back your money first when collection is made from lansvale"
Again, these messages acknowledged that an amount of $1.2m was to be repaid to Mr Xu. This was the amount specified on the revised "Closing Down Calculations".
In these messages, Mr Xu also confirmed that he had received a payment of $100,000 in August 2020. This appears to be a reference to the withdrawal of $200,000 from the Firmtech bank account in August 2020, half of which was used to pay the interest due on the Luna Loan, and half of which was retained by Mr Xu (see paragraphs [730]-[731] above).
In cross-examination, Ms Xie confirmed that in sending the last of these messages ("Will pay back your money first when collection is made from lansvale"), it was her intention to convey that Mr Xu was to be repaid, from the settlement proceeds of the Lansvale Property, the money that was agreed to be owing to him.
On 13 May 2021, the sale of the Lansvale Property completed.
On that day, Mr Xu caused Auschn to make the following payments from the settlement proceeds:
1. $731,500 was paid to Firmtech (the Firmtech Payment);
2. $535,000 was paid to FAWD (the FAWD Payment);
3. $615,500 was paid to Ms Gao (the Gao Payment); and
4. $905,861.20 was paid into Auschn's trust account for Holdings. Subsequently, after the payment of further expenses, this amount was reduced to $810,722.24 (Holdings Trust Balance).
Mr Xu and Auschn did not issue a statement of account to Holdings upon completion of the sale of the Lansvale Property.
Mr Xu gave evidence that in May 2021, prior to settlement, he had a conversation with Ms Xie to the following effect:
"[Mr Xu]: There will be about $2,055,000 net proceeds on settlement of Lansvale. $615,000 is owed to Luna and my brother. The project management fee of $731,500 to Firmtech will come out. After that, Holdings still needs to pay back $535,000 that Firmtech and I put into buying Lansvale. Firmtech's share can be used to pay some of the money owed to me.
[Ms Xie]: Yes, ok. So the project management monies will be paid to Firmtech on settlement.
[Mr Xu]: Yes, that's right. In the end that would leave a balance of about $900,000."
Ms Xie did not put on any evidence specifically denying any such conversation occurred, although she did depose that: "I was not involved with the settlement of the purchase of the Lansvale Property". That assertion can be given little weight, having regard to the extensive WeChat messages on the Group Chat from Ms Xie dealing with the sale of the Lansvale Property. The terms of the conversation are, so far as concerns the repayments to Ms Gu and Mr Xu, consistent with the WeChat messages which are set out above. It is likely that there was a discussion between Mr Xu and Ms Gu in which, as recorded in the WeChat messages, they agreed that the proceeds of the sale of the Lansvale Property would be used to discharge the balance of the Luna Loan, and to reduce the amount which was agreed to be owing by Firmtech to Mr Xu.
[25]
Firmtech Payment
The Firmtech Payment was made in respect of an invoice dated 12 May 2021 for the amount of $731,500 (including GST) which Firmtech issued to Holdings. This invoice specified the "Job Site" as the Lansvale Property and was stated to be for Firmtech acting as "Project manager for 19 months and marketing service".
Mr Xu was cross-examined regarding the basis on which this invoice was issued, whether the services referred to in the invoice had actually been provided, and whether Ms Xie and Mr Zhang were aware of the payment. It is unnecessary to resolve those matters. There is no pleaded issue regarding the Firmtech Payment. It can therefore be put to one side.
[26]
Gao Payment
Mr Xu deposed that the payment of $615,500 into Ms Gao's account comprised two separate amounts: first, a payment of $565,500 in respect of the Luna Loan, and secondly, a payment of $50,000 in respect of interest owing to Mr Xu's brother.
As regards the payment in respect of the Luna Loan, I have referred above to evidence that Ms Xie directed Mr Xu in a number of WeChat messages on the Group Chat to pay the balance of the Luna Loan from the sale of the Lansvale Property, and that Mr Zhang was aware that this direction was given and did not disagree with it.
In turn, Ms Gu had given a direction to Auschn that the amount of some $600,000 which was to be paid to her from the settlement proceeds of the Lansvale Property should be paid into a nominated bank account in the name of Ms Gao. There was, as noted above, no challenge in the cross-examination of Mr Xu to the authenticity of that direction.
Mr Xu deposed that, shortly prior to the sale of the Lansvale Property, he calculated the balance of the moneys owing to Ms Gu. In doing so, he took into account a payment of $80,000 which had already been made to Ms Gu (reducing the principal to $920,000), and the amount of $390,000 which (in accordance with her direction) had been paid from the Panania settlement proceeds to Global's bank account, and he applied interest to the date of those payments. He explained that he incorrectly calculated the balance of the Luna Loan, after those repayments, to be $500,000 rather than $530,000, and that he calculated interest on the amount of $500,000 in reaching the figure of $565,463.01 as the amount due to Ms Gu. Mr Xu gave unchallenged evidence that he later personally paid the remaining $30,000 of the balance of the Luna Loan to Ms Gu.
As regards the payment in respect of interest owing to Mr Xu's brother, I have referred above to the evidence regarding the loan of $400,000 which he had advanced to Holdings. This amount was advanced in circumstances where the construction project at Carlingford was being undertaken for Mr Xu's brother by Firmtech, but prior to any such amount being due and payable in respect of that construction. The existence of this loan was acknowledged by Ms Xie in the WeChat messages exchanged on the Group Chat on 21 April 2021, which are set out in paragraph [793] above: "Your brother seems to have borrowed about 400,000 from the construction"
Ms Xie gave evidence that, at the 30 January 2021 meeting, Mr Xu had said: "We need to pay interest to my brother." Similarly, Mr Zhang deposed that Mr Xu stated that: "my brother's loan has 10% interest rate". In their respective accounts of these discussions, neither Ms Xie nor Mr Zhang disputed that a loan was made by Mr Xu's brother, or that interest was payable to him, either at all or at the rate specified.
Mr Xu gave evidence, which was not challenged in cross-examination, that he had a conversation with Ms Xie to the following effect in February 2021, in which they agreed that interest in the amount of $50,000 would be paid to Mr Xu's brother when moneys were received from the sale of the Panania and Lansvale Properties:
"[Ms Xie]: We will have to sell Panania and Lansvale and use the sales to pay back the $1.22 million owed to you and the Luna Loan. Your brother is being paid back with the duplex in Carlingford.
[Mr Xu]: We still have not finished my brother's construction, even though he paid back in 2019. We owe him interest on his loan.
[Ms Xie]: What about we pay him $50,000 out of the sales [of the Panania and Lansvale Properties] to settle his loan
[Mr Xu]: Ok. I will ask him"
In opening address, counsel for the Zhang/Xie Parties acknowledged that:
"To be fair, there is in the WeChat correspondence a notation to the effect that my client [Ms Xie] said - she says in the context of trying to wrap things up that she would agree to pay $50,000 for interest to [Steven Xu]. Now, Ms Xie says that, and of course, she's not a director of Holdings, and your Honour won't see any evidence or any authorisation to make that payment in any event, but there is some evidence to support this idea that there had been some agreement to pay interest. What we say about this is there couldn't possibly be any obligation to pay interest because it was never a loan; it was just a payment of some construction costs which were undertaken by Firmtech."
I have already addressed above the issue as to whether Mr Xu's brother made a loan to Holdings. I deal below with the issue of Ms Xie's authority to give instructions on behalf of Mr Zhang.
[27]
FAWD Payment
An amount of $535,000 was paid to FAWD from the settlement proceeds of the Lansvale Property. Holdings did not have any liability to FAWD at the time this payment was made.
Mr Xu gave evidence that the substance of the transaction was that Holdings repaid $535,000 of the amount which it owed to Firmtech (in respect of the moneys which Firmtech had contributed to the purchase of the Lansvale Property), and Firmtech repaid $535,000 of the amount which it owed to Mr Xu (in respect of the moneys which he had contributed to Firmtech), and that the means by which this was achieved was by a payment from the Lansvale settlement proceeds directly to FAWD, which was wholly owned by Mr Xu.
As set out in paragraphs [707], [710] and [718(1)] above, Firmtech had provided a total amount of $869,860 to Holdings, in order to fund the purchase of the Lansvale Property, comprising the deposit of $377,000 and a further amount of $492,860 at the time of settlement.
Mr Zhang and Holdings did not dispute that those moneys were owing by Holdings to Firmtech. Instead, they submitted that any moneys owing by Holdings to Firmtech "should have been paid to Firmtech, not to FAWD", adding: "It was then a matter for the directors of Firmtech [namely, Mr Zhang and Mr Xu] to decide whether those monies should then be paid to or at Mr Xu's direction".
However, as outlined above, there were numerous WeChat messages exchanged on the Group Chat to the effect that the funds from the settlement of the Panania Property and the Lansvale Property would, after repaying the Luna Loan, be used to repay the amount which Mr Xu had invested in Firmtech (which was agreed to be around $1.22m): see paragraphs [753], [775], and [793] above.
On 24 May 2021, there was the following further exchange of WeChat messages on the Group Chat:
"[Ms Xie]: You transferred 615,000 from the account last week. I remember that when we calculated together last time, we only owed you over 600,000. So, it should have been repaid in full.
[Mr Xu]: Owed 1.22 million
There is still 20,000 to be confirmed
[Ms Xie]: Now if all your money has been transferred out, then where did our money go? You invested in capital at the time. We invested in technology. Now you have taken all the money of the factory and the building. So, we ended up with nothing for the past three years?
Don't remember. I will calculate it as soon as I come back from the hospital
[Mr Xu]: Owed 1.22 million"
In this exchange, Ms Xie appears to have been expressing some doubt about how much was owed by Firmtech to Mr Xu ("Don't remember"). However, as set out above, there had been agreement since 30 January 2021 regarding the amount which was owing to Mr Xu in respect of his investment in Firmtech. The amount recorded as being owed to Mr Xu in the revised "Closing Down Calculations" which were prepared by Ms Xie on that date is the same as the amount which Mr Xu claimed twice, in this exchange, to be owing to him (namely, $1.22m).
Ms Xie's query whether Mr Xu had been repaid in full depended both on an incorrect assumption as to how much was to be repaid to Mr Xu ("we only owed you over $600,000"), and an incorrect assumption that the Gao Payment represented a repayment to Mr Xu ("You transferred 615,000 from the account last week"). In fact, the Gao Payment was, for the main part, a payment made in accordance with a direction of Ms Gu so as to repay the balance of the Luna Loan.
Finally, Ms Xie's statement that she and Mr Zhang had "ended up with nothing" from their investment in Firmtech over the past three years must be read in the context where, as at the date of these messages, Aluminum had around $1.3m in its bank account as a result of projects being diverted from Firmtech to Aluminum and being performed using Firmtech's premises, employees and equipment.
[28]
Holdings Trust Balance
As noted above, following settlement of the sale of the Lansvale Property, the Holdings Trust Balance of $879,155.26 was held by Auschn in its trust account for Holdings.
On 23 March 2022, there was a telephone conference call involving Mr Xu, Ms Xie and two representatives of Alcentre Group Pty Ltd, regarding a debt of $156,731.27 which Firmtech owed to Alcentre. Minutes of this meeting, which were prepared by Alcentre and were sent by email to Mr Xu, Ms Xie and Mr Zhang on the following day, recorded the following "Conclusions":
"1. Both Kevin [Xu] and Yan Xie confirmed that Firmtech is owing $156,731.27 Australian dollar to Alcentre group.
2. Alcentre is willing to offer support to solve this issue if they could resell some items from Firmtech.
3. If not, Both Kevin [Xu] and Yan Xie agreed to solve this issue by making full amount payment within a week by 31st March 2022."
As at 31 March 2022, Firmtech had around $54 in its bank account and Holdings had around $3,676 in its bank account. However, as outlined above, the amount which Firmtech had advanced to Holdings for the purchase of the Lansvale Property had not been repaid in full (of $869,860, an amount of $535,000 had been repaid via the FAWD Payment), and a substantial amount continued to be held on trust for Holdings by Auschn. The only means that Firmtech had, as at this date, to pay the amount due to Alcentre was to request repayment from Holdings (out of the funds held by Auschn on trust for Holdings) of the funds which Holdings owed to Firmtech.
On 28 July 2022, Alcentre served a statutory demand on Firmtech, claiming the principal amount of $156,731.27 together with interest in an amount of $79,800.60.
On 15 August 2022, Alcentre agreed with Mr Xu to settle its claim for an amount of $188,000.
On 26 August 2022 at around 10.00am, Mr Xu attended the Revesby Factory and purported to hold, without notice, a meeting of the directors of Firmtech, which Mr Zhang did not attend. Mr Xu left behind at the factory a document headed "Urgent Company Meeting Minutes", recording various resolutions alongside which Mr Xu wrote the word "Agreed".
Later that day, Mr Zhang's solicitors sent a letter to Mr Xu's solicitors, stating that no notice had been given to Mr Zhang about the meeting or the proposed resolutions; that Mr Zhang had not been present at the Revesby Factory when the meeting was said to have taken place; that there had been no quorum; and that no resolutions had been passed or could have been passed. Mr Zhang's solicitors sought that Mr Xu provide an undertaking that he would not take any steps to implement the purported resolutions.
At 2.06pm on the same day, Mr Xu sent an email to Mr Zhang, requesting "an urgent company meeting [of Firmtech] in one hour", and attaching draft resolutions. Mr Xu stated: "There is urgent need to address Alcentre Group Statutory Demand will be dued [sic] on 28th Aug 2022".
Mr Zhang responded at 2.23pm, stating that he had not been given proper notice of the meeting, that he was not able to attend, and that Mr Xu could not pass any resolutions of Firmtech. Mr Xu replied at 2.40pm, stating as follows:
"Thank you for your email, due to current situation, and we do have the company policy, when it is a production issue, you will make the final decision for the company, but when come to financial issue, when we have disputes, I can make the final decision for the company.
Refer to the statutory demand from Alcentre Group, both of us are directors of the company, we need an urgent meeting of the company to address this issue, you now is fully aware of the need, the proper notice has offered to you now.
The issue now is a company financial re[l]ated issue rather than production issue. I will act accordingly for the company."
As noted at paragraph [51(8)] above, it was common ground between the parties that it was an express term of the pre-incorporation agreement between Mr Xu, Mr Zhang and Ms Xie that if a dispute arose about the manufacturing, production or the technical side of the business, Mr Xu would defer to Mr Zhang and that if a dispute arose about finances, Mr Zhang would defer to Mr Xu.
Mr Zhang did not attend the meeting and Mr Xu purported to pass the draft resolutions which had been attached to his email in Mr Zhang's absence. Those resolutions included, relevantly, resolutions that Firmtech would demand that Holdings "fully refund the seed fund of $810,722.24 paid in 2019 for purchasing lansvale factory"; that Mr Xu was authorised to request Auschn to refund the moneys held by Holdings on behalf of Firmtech; and that Mr Xu should, from those moneys, immediately "pay $188,000 to Alcentre Group Pty Ltd's statutory demand".
Following this, Mr Xu caused the whole of the Holdings Trust Balance to be paid into his personal account. He used those funds to pay $188,000 to Alcentre and an amount of $9,604.03 to Commercial Property Group, which was the landlord of the Revesby Factory.
On 31 August 2022, Mr Zhang commenced the Lansvale Proceeding and obtained orders restraining Mr Xu from dealing with the balance of the moneys held by him. Mr Xu subsequently returned the remaining balance of those moneys (being $613,118.21) to Auschn's trust account. That amount remains held on trust for Holdings.
[29]
Ms Xie's Claims
Ms Xie submitted, and the Xu Parties did not dispute, that, pursuant to the terms of its retainer, Auschn was obliged, inter alia, to act in accordance with Ms Xie's instructions; to ensure that oral instructions were confirmed in writing; to pay or deal with the settlement proceeds of the Panania Property only in accordance with Ms Xie's instructions; and to provide a statement of account to Ms Xie in respect of the receipt and payment of the settlement proceeds.
In addition, it was common ground that, as Ms Xie's conveyancer, Auschn owed her fiduciary duties not to obtain any authorised benefit from its position and to avoid a position where its duties to Ms Xie were in conflict with its duties to another person or with Auschn's personal interests.
In the Panania Proceeding, Ms Xie's claims against Auschn, Mr Xu and Global were pleaded in a variety of ways, but essentially depended on the following factual premises:
1. that Auschn made payments from the settlement proceeds for the Panania Property to a related entity, Global;
2. that Ms Xie did not have any liability to Global, and Global was not entitled to receive any payment from the settlement proceeds;
3. that there was no authority or instruction from Ms Xie to make any payment from the settlement proceeds to Global; and
4. that therefore there was no proper basis for Auschn and Mr Xu to pay Global the amount of $399,413.47.
Based on those matters, Ms Xie claimed that, by making the payments to Global, Auschn had breached its retainer with Ms Xie and its fiduciary obligations to Ms Xie; that Mr Xu had knowingly assisted in Auschn's breach of its fiduciary obligations in furtherance of a dishonest and fraudulent design and that Global had knowingly received the payments made as a result of that breach (such that each was liable under, respectively, the second and first limbs of Barnes v Addy); and that Global was liable for moneys had and received.
In light of the findings I have made, the factual premises for these claims have not been established.
First, by oral instructions, which were confirmed in WeChat messages posted on the Group Chat, Ms Xie expressly authorised and instructed Mr Xu (and therefore Auschn) to use the settlement proceeds from the Panania Property to make a repayment in respect of the Luna Loan. Ms Xie also instructed Mr Xu to seek Ms Gu's agreement to remove the caveat over the Panania Property, so as to allow settlement of the sale of that property to occur, in return for the settlement proceeds being used to make a repayment in respect of the Luna Loan (see paragraphs [752]-[764] and [775]-[786] above).
Secondly, Mr Xu obtained a written direction from Ms Gu that the repayment of $400,000 from the settlement proceeds of the Panania Property should be effected by paying the funds into a nominated bank account in the name of Global (see paragraphs [770]-[771] above).
Thirdly, after giving that direction, Ms Gu withdrew the caveat over the Panania Property prior to settlement, so as to allow settlement to occur (see paragraphs [773]-[774] above).
Fourthly, upon settlement, Mr Xu effected two payments totalling $399,413.47 to the bank account of Global which had been nominated by Ms Gu (see paragraphs [781]-[784] above).
In short, Ms Xie directed Mr Xu that the settlement proceeds of the Panania Property be used to discharge, in part, the debt to Ms Gu for which she was jointly and severally liable, and which was secured over that property. Mr Xu complied with this direction by making payment from those settlement proceeds to Ms Gu's nominee. The payment to Global had the effect of reducing Ms Xie's debt to Ms Gu by the full amount of that payment, that is, by the sum of $399,413.47.
In closing submissions, Ms Xie contended that Auschn and Mr Xu failed to disclose various matters to her. In particular, she submitted that Auschn and Mr Xu did not disclose how the funds advanced by Ms Gu under the Luna Loan had been disbursed; did not disclose that Auschn had been retained to act for Ms Gu in relation to the removal of the caveat over the Panania Property; and did not disclose that Ms Gu had directed that the moneys from the settlement proceeds for the Panania Property which were to be paid in partial repayment of the Luna Loan be paid into a nominated bank account held by Global.
There was no pleaded issue in the Panania Proceeding regarding the manner in which the funds advanced by Ms Gu were disbursed. Similarly, there was no pleaded issue regarding Auschn's retainer by Ms Gu in respect of the Panania Property, or regarding the direction given by Ms Gu concerning the repayment of the Luna Loan from the settlement proceeds.
Ms Xie's pleading regarding non-disclosure is to the effect that Auschn "sought a benefit for Mr Xu and/or Global" and that each of Auschn and Mr Xu, in breach of their duties, "failed to fully disclose to Ms Xie the potential conflict that arose between her position and the position of Mr Xu and/or Global".
The payment made to Global was a payment made to Ms Gu's nominee, in accordance with a direction given by Ms Gu, in order to reduce a debt to Ms Gu for which Ms Xie, Mr Xu, Mr Zhang and Holdings were jointly and severally liable. Further, that payment was made in circumstances where Ms Xie had instructed Mr Xu, as confirmed in a number of WeChat messages on the Group Chat, that the settlement proceeds from the sale of the Panania Property should be paid in reduction of their debt to Ms Gu. Such payment was necessary in order that the caveat be removed by Ms Gu and the sale could proceed, as Ms Xie had requested. Those steps were taken in order that the investment in the Panania Property could be realised and Ms Gu could be repaid from the proceeds of the property sale, as had been agreed by Mr Xu and Ms Xie at the 30 January meeting. This was an essential step in order for the parties to achieve the agreed outcome of "closing down" their various investments together. The interests of Mr Xu were not in conflict with the interests of Ms Xie so far as those matters were concerned.
There was evidence that Global transferred the sum of $300,000 to Ms Gu immediately upon receipt. There were no submissions made by Ms Xie about the difference between this sum and the amount received by Global, and no cross-examination of Mr Xu in relation to this difference.
Even if a breach of fiduciary duty had been established in relation to the payments to Global, it would be inequitable for any orders to be made requiring Global, Auschn or Mr Xu to pay any or all of the amounts received by Global to Ms Xie. That is because, by those payments being made to Ms Gu's nominee, in accordance with Ms Gu's direction, the Luna Loan (for which Ms Xie was liable) was discharged to the full extent of the amount of those payments.
It would be inequitable for Ms Xie both to receive the full benefit of the payments made to Global, which discharged Ms Xie's liability to Ms Gu by a commensurate amount (consistently with Ms Xie's direction to Auschn/Mr Xu that the proceeds of the Panania settlement should be used for this purpose), and at the same time to claim back all or part of the payment from Global, Auschn and Mr Xu.
Similarly, the claim against Global for money had and received fails. It does not matter that Ms Xie did not have any liability to Global. She had a liability to Ms Gu, and Ms Gu directed that any payment made from the Panania settlement proceeds in reduction of that liability be made to Global's account. It follows that Ms Xie received consideration for the making of the payments to Global, namely, a reduction in her liability to Ms Gu in an amount equal to the amount of those payments.
Finally, while Auschn did not provide any settlement statement to Ms Xie, and ought to have done so, the only damage identified by Ms Xie was the damage flowing from the payments to Global allegedly being made without her authority (which has been addressed above). Ms Xie did not identify any separate damage flowing from Auschn's failure to provide her with a settlement statement.
[30]
Mr Xu's Cross-claim
Mr Xu's cross-claim can be addressed briefly.
By this claim, Mr Xu sought the repayment of the amount which he had provided to Ms Xie to fund the purchase of the Panania Property. Mr Xu claimed this amount pursuant to the terms of the Joint Venture Agreement. I do not need to determine the issue whether or not the Joint Venture Agreement was binding on Ms Xie. That is because, irrespective of whether it was binding, Ms Xie accepted in opening submissions that: "Mr Xu has an entitlement to be repaid the monies paid to him to allow completion of the Panania Purchase Settlement".
There was a dispute regarding the precise amount that Mr Xu paid towards the purchase of the Panania Property. Ms Xie deposed that Mr Xu had paid the amount of $163,256.22, and Mr Xu deposed that he had paid the amount of $163,353.02. It is unnecessary to resolve this dispute, as Mr Xu's closing written submissions on the cross-claim proceeded on the basis of the figure which Ms Xie acknowledged having received and having been obliged to pay.
[31]
Conclusion - Panania Proceeding
For the reasons set out above, in the Panania Proceeding, Ms Xie's claims against Mr Xu will be dismissed, and Mr Xu is entitled to judgment in respect of his cross-claim in the sum of $163,256.22.
[32]
Claims in Lansvale Proceeding
The observations made at paragraphs [835]-[836] above regarding the contractual and fiduciary obligations of Auschn apply, mutatis mutandis, to its engagement by Holdings to act as conveyancer in respect of the sale of the Lansvale Property.
The claims made by Holdings and Mr Zhang in the Lansvale Proceeding fell into three main groups:
1. first, claims made in relation to the payment in October 2019 of $300,000 to Mr Xu's wife, Ms Gao, following the receipt of a refund of stamp duty in the amount of $377,047.71;
2. secondly, claims made in relation to payments made in May 2021 from the settlement proceeds of the Lansvale Property to Ms Gao and FAWD; and
3. thirdly, claims made in relation to payments made to creditors of Firmtech in August 2022 from the Holdings Trust Balance.
[33]
Claims in respect of GST Refund
In the Lansvale Proceeding, Mr Zhang and Holdings pleaded that the $300,000 payment to Ms Gao by Holdings was not authorised by the directors of Holdings (being Mr Zhang and Mr Xu); was made without Mr Zhang's knowledge; and was made in circumstances where Ms Gao had no entitlement to receive any payment from Holdings. Mr Zhang and Holdings claimed that, by causing Holdings to make this payment, Mr Xu breached his duties as a director of Holdings and caused Holdings to suffer loss and damage. In addition, a claim for money had and received was advanced against Ms Gao in respect of the $300,000 payment.
For reasons given above, I am satisfied that the payment to Ms Gao was authorised. Mr Zhang and Mr Xu agreed to split $300,000 of the GST refund equally between their respective families (who each held, through corporate vehicles, 50% of the units in the Holdings Trust). This was achieved by transferring the full amount into Ms Gao's account, and then transferring a total of $150,000 into the accounts of Mr Zhang and Ms Xie (see paragraphs [736]-[743] above).
There is a further difficulty with this claim. Mr Zhang and Holdings sought equitable compensation. In order to obtain such relief, it was necessary for Mr Zhang to do equity, by offering to account to Holdings for the sum that he and his wife received. However, he did not, in evidence or submissions, offer to do so.
[34]
Claims in respect of payments made from Lansvale settlement proceeds
[35]
Gao Payment: $615,500
Mr Zhang and Holdings pleaded that no instructions had been given to pay the amount of $615,500 to Ms Gao from the settlement proceeds of the Lansvale Property; that Holdings was not liable to Ms Gao or otherwise obliged to make a payment to her; that Holdings did not receive any benefit or other consideration from Ms Gao, which would justify the payment to her; that Ms Gao had no entitlement to the payment; that Ms Gao received the payment, without paying any consideration or compensation, or proper consideration or compensation, to Holdings; and that there was a conflict between Mr Xu's interests and those of Holdings, because the payment was made at Mr Xu's direction to his wife.
These factual premises for the claims relating to the Gao Payment have not been established.
Some $565,500 of the amount paid into Ms Gao's account represented a repayment of the balance of the Luna Loan, and the remaining $50,000 represented a payment of interest to Mr Xu's brother in respect of the moneys which he had advanced to Holdings. Mr Xu had authority to make each of those payments.
As regards the payment in respect of the Luna Loan, the directors of Holdings, Mr Xu and Mr Zhang, had agreed that the settlement proceeds of the Lansvale Property would be used to pay the amount owing to Ms Gu.
Mr Zhang gave evidence that he proposed to Mr Xu, at the 30 January meeting, that the Lansvale Property be sold to repay the Luna Loan and that Mr Xu agreed with this proposal. This agreement was confirmed in various WeChat messages which were posted on the Group Chat (see paragraphs [753], [775] and [786] above).
A number of the relevant WeChat messages were posted by Ms Xie. Mr Zhang and Holdings submitted that any instruction given by Ms Xie to Mr Xu regarding the settlement proceeds of the Lansvale Property could not be an instruction from Holdings, because she was not a director of Holdings.
The submission does not take account of the fact that, as outlined above, Mr Zhang's own evidence is that he was the person who proposed the sale of the Lansvale Property in order that the proceeds of sale could be used to repay Ms Gu.
In any case, I am satisfied that Ms Xie had actual or ostensible authority to give directions on behalf of Mr Zhang in relation to the sale of the Lansvale Property.
Just as agreement can occur by express words or by implication from conduct, actual authority can be conferred by express words or by implication from the conduct of the principal: Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295 at [144]. In that case, Edelman J referred to the following passage from the decision of Clarke and Cripps JJA in Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 132:
"Actual authority arises where a principal grants, and an agent accepts, authority for the agent to perform specific tasks on behalf of the principal - in short there must be a consensual agreement between the principal and agent. Notwithstanding the absence of an express agreement, the parties, that is, the principal and agent, may conduct themselves in such a way that it is proper to infer that the relevant authority has been conferred on the agent.
Accordingly, where the question is whether the agent has implied authority to act in a particular way the court directs its attention to the conduct of the parties in order to decide whether the inference of authority should be drawn."
Ms Xie was the primary person dealing with Mr Xu in respect of the sale of the Lansvale Property. Mr Zhang knew that this was the case, as he was a member of the Group Chat on which Ms Xie posted a number of WeChat messages giving directions to Mr Xu regarding the sale of the Lansvale Property and the application of the moneys received upon settlement (see paragraphs [753], [775] and [786] above). He did not raise any issue about the fact that Ms Xie was giving these directions, or about the content of any such direction.
In addition, there is evidence that Ms Xie was using Mr Zhang's email address to communicate with the agent who was dealing with the sale of the Lansvale Property. On 4 March 2021, an email was sent from Mr Zhang's email to the agent at LJ Hooker, which was signed by "Yan" (Ms Xie), asking for advice on whether it was a good time to put it on the market, and stating: "If yes I would like to sold in quick" (emphasis added). Ms Xie gave her mobile number at the bottom of this email. The agent replied to Mr Zhang's email address, immediately after a telephone discussion with Ms Xie, stating: "Hi Yan, Thanks for call just now." He asked Ms Xie to send back the agency agreement "with the proposed changes from your solicitor" (emphasis added). In a further email to Mr Zhang's email address, which was addressed to Ms Xie, the agent provided an updated agency agreement and stated: "If you are happy to proceed, please sign both the agency agreement and marketing quote attached and send back to me" (emphasis added).
In light of the evidence referred to above, it can be inferred that Ms Xie had actual authority from Mr Zhang to give instructions regarding the sale of the Lansvale Property.
Even if Ms Xie did not have actual authority to give instructions on behalf of Mr Zhang in relation to the Lansvale Property, she had ostensible authority to do so.
In Oliveri Legal Pty Ltd t/as Oliveri Lawyers v Cassegrain Tea Tree Oil Pty Ltd [2024] NSWCA 74 at [46], Mitchelmore JA (with whom Gleeson JA and Basten AJA agreed) observed that:
"As Diplock LJ described it in Freeman and Lockyer at 503, ostensible authority is 'a legal relationship between the principal and the contractor created by a representation, made by a principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority'. As the High Court noted in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 ('Pacific Carriers') at [36], Diplock LJ's statement of the general principles in Freeman and Lockyer was approved in Crabtree-Vickers and in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; [1990] HCA 32."
Her Honour referred with approval (at [63]) to the decision of Newnes JA in Auxil Pty Ltd v Terranova (2009) 260 ALR 164; [2009] WASCA 163 at [176], where his Honour observed as follows:
"A representation creating an apparent authority of an agent may be made in a number of ways but the most common form of representation by a principal is by conduct, that is, by permitting the agent to act in the management or conduct of the principal's business. By permitting the agent to act in the management or conduct of the business, the principal thereby represents to anyone dealing with the agent that he or she has authority to do those acts on behalf of the company which an agent authorised to do acts of the kind which he or she is in fact permitted to do normally does in the ordinary course of such business."
Having regard to that the posting of messages by Ms Xie on the Group Chat (to which Mr Zhang was a party) providing instructions to Mr Xu regarding the sale of the Lansvale Property, and the absence of any response by Mr Zhang expressing any concern either about the fact that Ms Xie was giving such instructions or about the content of any of those instructions, I find that Mr Zhang permitted Ms Xie to act in the management or conduct of Holdings' business (and, in particular, Holdings' sale of the Lansvale Property) and thereby represented to Mr Xu that Ms Xie had authority to do those acts on behalf of Holdings.
For those reasons, I am satisfied that Mr Xu had authority from his fellow director of Holdings, Mr Zhang, both as a result of instructions given by Mr Zhang and as a result of instructions given by Ms Xie with Mr Zhang's actual or ostensible authority, to use the settlement proceeds of the Lansvale Property to repay the balance of the Luna Loan and to repay the moneys agreed to be owing to Mr Xu himself.
As set out at paragraphs [770]-[771] above, Mr Xu obtained a written direction from Ms Gu that some $600,000 of the moneys from the settlement of the Lansvale Property be repaid to her in respect of the Luna Loan, by means of a payment into a nominated bank account held by Ms Gao.
In accordance with Ms Gu's direction, an amount of $565,500 was paid from the Lansvale settlement proceeds to the nominated account. Mr Xu had calculated this amount as representing the balance of the Luna Loan as at the date of the payment, including interest (see paragraph [807] above).
In short, the payment into Ms Gao's account was a payment to Ms Gu's nominee, in respect of a liability which Holdings had to Ms Gu pursuant to the Luna Loan Agreement, and was made in accordance with instructions from Mr Zhang that the settlement proceeds from the sale of the Lansvale Property be used for this purpose.
Within several days of this payment being made into Ms Gao's account, an amount of $120,000 was transferred from Ms Gao's account to Ms Gu's account. There were no submissions made by Mr Zhang and Holdings about the difference between this sum and the amount received by Ms Gao, and no cross-examination of Mr Xu in relation to this difference. Irrespective of whether the full amount which was received by Ms Gao as nominee of Ms Gu was paid to Ms Gu, the payment of $565,500 to Ms Gu's nominee was a payment to Ms Gu which reduced the Luna Loan by that amount. Ms Gu had accepted, by her written direction to Auschn, that the payment made to the nominated account of Ms Gao had the effect of discharging the Luna Loan to the extent of that payment.
In closing submissions, the claim advanced by Holdings and Mr Zhang in respect of the payment to Ms Gao was based primarily on the basis that there was "no approval that's given or no authorisation that's given" for this payment to be made, and that "Mr Xu had on any view, a conflict of interest", with the situation said to one "which mirrors the position in relation to Panania":
"there are all those, in effect, non-disclosures that we identified in the Panania proceeding, that operate equally in relation to the Lansvale proceeding that would have had to have been made before there could have been any authorisation. But of course, there was no authorisation at all, and certainly no authorisation from Mr Zhang."
I have addressed above the authorisation for this payment. As regards the non-disclosure issue, similar comments apply to those made in respect of the Panania Proceeding (see paragraphs [845]-[846] above). In particular, there was no pleaded issue in the Lansvale Proceeding regarding the manner in which the funds advanced by Ms Gu under the Luna Loan had been disbursed, or regarding Ms Gu's retainer of Auschn, or regarding the direction which Ms Gu gave Mr Xu.
The interests of Mr Xu were not in conflict with the interests of Holdings or Mr Zhang so far as the payment to Ms Gu was concerned. The directors of Holdings (Mr Zhang and Mr Xu) had agreed, as outlined above, that the Lansvale Property would be sold and that the settlement proceeds would be used to repay moneys owing by Holdings (and Mr Xu and Mr Zhang) to Ms Gu. The sale of that property, and the application of its proceeds in that way, was a necessary part of the agreed process to separate the parties' financial affairs. It was in the interests of Holdings, Mr Zhang and Mr Xu that those steps be undertaken.
The remainder of the payment made to Ms Gao's account - being an amount of $50,000 - represented the amount of interest which was agreed to be payable by Holdings to Mr Xu's brother (see paragraphs [809]-[811] above). Mr Xu gave unchallenged evidence that he received authorisation from his brother that the amount due to him by way of interest should be paid into Ms Gao's account.
Mr Zhang and Holdings submitted that "there was no entitlement of [Mr Xu's] brother to $50,000 worth of interest", because there was no loan made by his brother to Holdings. I do not accept this submission. For reasons set out at paragraphs [715]-[716] above, I have determined that Mr Xu's brother had advanced the sum of $400,000 to Holdings to enable the purchase of the Lansvale Property.
Mr Zhang and Holdings also submitted that while "there was some discussion with Ms Xie in which there was some notional agreement that $50,000 would be paid to Mr Xu", this "couldn't possibly constitute an authorisation on the part of Holdings to make such a payment", since Ms Xie was not a director of Holdings. I also do not accept this submission. For reasons set out above, I have determined that Ms Xie had actual or ostensible authority from Mr Zhang to give directions to Mr Xu and Auschn in relation to the sale of the Lansvale Property.
Even if a breach of fiduciary duty had been established in respect of the Gao Payment, it would be inequitable for any orders to be made requiring Auschn, Mr Xu or Ms Gao to repay the amount of $615,500 to Holdings. That is because:
1. by the payment of $565,500 being made into the account nominated by Ms Gu, in accordance with her direction, Holdings' liability in respect of the Luna Loan was reduced by that amount; and
2. by the payment of $50,000 being made into the account nominated by Mr Xu's brother, Holdings' obligation to pay interest to Mr Xu's brother in respect of his $400,000 loan was discharged.
Accordingly, Holdings received a benefit from the Gao Payment which was equal to the amount of that payment.
It would be inequitable for Holdings both to receive the full benefit of the payment of $615,500 into Ms Gao's account, which discharged those obligations of Holdings, and at the same time claim back all or part of that amount from Ms Gao, Auschn or Mr Xu.
Similarly, the claim against Ms Gao for money had and received fails. It does not matter that Holdings did not have any liability to Ms Gao. Holdings had, at the time of the Gao Payment, a liability to each of Ms Gu and Mr Steven Xu, and each directed that any payment made by Holdings in reduction of such liability be made to Ms Gao. It follows that Holdings received consideration for the making of the Gao Payment, namely, a reduction in its liabilities to Ms Gu and Mr Xu's brother in a total amount that was equal to the amount of that payment.
[36]
FAWD Payment: $535,000
The payment of $535,000 to FAWD from the settlement proceeds of the Lansvale Property represented a payment made in order to reimburse Mr Xu for moneys which he had invested in Firmtech.
In closing address, Mr Zhang and Holdings submitted that: "[Mr Xu] was acting for … Holdings and was meant to represent the interest of Holdings, which was a trustee of a trust, and the fact that Holdings may have owed monies to Firmtech did not justify Mr Xu at his own whim to simply pay those monies to FAWD to satisfy a liability that Firmtech had to him". The position was put as follows in their written submissions: "If monies were owed by Holdings to Firmtech, then they should have been paid to Firmtech, not to FAWD. It was then a matter for the directors of Firmtech to decide whether those monies should then be paid to or at Mr Xu's direction".
I am satisfied that, in making this payment from the settlement proceeds of the Lansvale Property, Mr Xu was not acting "at his own whim", but was acting in accordance with, and implementing, an agreement reached by the directors of Firmtech and Holdings (that is, an agreement reached between himself and Mr Zhang).
Mr Zhang had proposed to Mr Xu that their financial affairs should be separated, including their investment in Firmtech and their investment in the Lansvale Property which Holdings owned. It was recognised in the "Closing Down Calculations" sent by Mr Zhang to Mr Xu, in the discussions between Mr Zhang and Mr Xu at the 30 January meeting, and in the WeChat messages which were posted on the Group Chat to which Mr Zhang and Mr Xu were parties, that the Lansvale Property (which was owned by Holdings and which had been purchased, in part, using funds advanced by Firmtech) had to be sold in order for Mr Xu to be repaid the amount of $1.22m which he had invested in Firmtech.
I accept that Mr Xu did not inform Mr Zhang that he was effecting the agreed repayment to himself by making a payment directly to FAWD, rather than by making a payment to Firmtech, in respect of the funds advanced by Firmtech to Holdings for the purchase of the Lansvale Property (calculated in the "Closing Down" spreadsheets as totalling $927,015), and then making a payment from Firmtech to Mr Xu in respect of the funds which he had advanced to Firmtech (calculated in the "Closing Down" spreadsheets as totalling $1.22m). However, the WeChat messages that were posted on the Group Chat recorded an agreement that funds would flow from the sale of the Lansvale Property to Mr Xu, in order to repay the moneys which he had advanced to Firmtech. The payment made from Auschn's trust account to FAWD (which was wholly owned by Mr Xu) gave effect to this agreement.
In circumstances where Mr Zhang had agreed with Mr Xu that moneys from the Lansvale Property would be paid to Mr Xu in reduction of the amount owed by Firmtech to him, the absence of a disclosure by Mr Xu to Mr Zhang of the identity of his nominee for the purpose of receiving this payment does not establish an absence of informed consent.
Given those matters, I am satisfied that this payment was made in accordance with the authority of Holdings.
For the same reasons, the claim against FAWD for money had and received fails. As a result of the amount of $535,000 being paid to Mr Xu's nominee (FAWD) from the moneys held on trust for Holdings, Firmtech's debt to Mr Xu was reduced by the amount of that payment, and Holdings' debt to Firmtech was reduced by the same amount. It therefore does not matter that Holdings did not have any liability to FAWD. Holdings did receive a benefit by making the payment, namely, a commensurate reduction in the amount of its liability to Firmtech. It also follows that Holdings did not suffer any loss by reason of the payment being made.
[37]
Conclusion - Payments at time of settlement
Auschn did not provide any settlement statement to Holdings. This was a breach of its obligations under its retainer. However, Holdings did not identify any damage flowing from any such breach. Instead, its claims were all directed to the loss alleged to have flowed from the making of unauthorised payments from the settlement proceeds to Ms Gao and FAWD.
For reasons set out above, I have found that those payments were authorised, and that Holdings did not suffer any loss by the making of those payments.
It follows that the claims in relation to those payments not been established.
[38]
Claims in respect of payments from Holdings Trust Balance
As regards the payments made in August 2022 from the Holdings Trust Balance to two creditors of Firmtech, I accept that Mr Xu was motivated by a concern to ensure that Firmtech complied with a statutory demand issued by Alcentre by the stipulated deadline. At the time, Firmtech did not have cash to pay the amount of the statutory demand, but Firmtech was (on Mr Xu's understanding) owed an amount by Holdings which exceeded the amount of the statutory demand. Mr Xu sought to arrange a meeting of the directors of Holdings and Firmtech on short notice, but Mr Zhang was unavailable. In those circumstances, Mr Xu went ahead and caused Auschn to pay moneys from the Holdings Trust Balance to him, which he then used to pay Alcentre and to make a payment to the lessor of the Revesby Factory.
In the absence of a provision specifying the period required for the convening of a directors' meeting (and I was not referred to any such provision), the general principle is that directors should come together whenever called on notice of reasonable length and without any expectation of being told why they are being summoned to a meeting: Dhami v Martin [2010] NSWSC 770 at [47] (Barrett J). In determining what is reasonable, the practice usually adopted by the board is a relevant consideration, and the issue may ultimately need to be resolved by reference to the nature of the business to be dealt with at a particular meeting: Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675 at [38] (Banks-Smith J). This will include the urgency of the need for the directors to take particular action: see Re Keneally (as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd)) [2015] NSWSC 937 at [57] (Black J) and the cases there cited.
Whether or not there was an urgent need for a meeting of Firmtech's directors (given the approaching deadline for payment of Alcentre's statutory demand) and whether or not the notice given to Mr Zhang of the meeting was reasonable in that context, the difficulty for Mr Xu is that, prior to the payments being made from the Holdings Trust Balance, he had received a letter from Mr Zhang's solicitors stating that Mr Zhang did not agree to the proposed resolutions and seeking an undertaking that Mr Xu would not take any steps to implement the purported resolutions.
Accordingly, when making the payments, Mr Xu was aware that he did not have the agreement of Mr Zhang, who was his fellow director of Holdings and of Firmtech, to those payments being made.
Mr Xu referred to evidence that there had been an agreement between himself and Mr Zhang regarding what would happen in the event of a deadlock between them as directors of Firmtech. Specifically, as noted above, Mr Zhang accepted, in the Principal Proceeding, that it was a term of his pre-incorporation agreement with Mr Xu that if a dispute arose about the manufacturing, production or technical side of Firmtech's business, Mr Xu would defer to Mr Zhang and if a dispute arose about Firmtech's finances, Mr Zhang would defer to Mr Xu (see paragraph [51(8)] above).
However, this was an agreement in respect of the management of Firmtech. It may be accepted, on the basis of the terms of this agreement, that Mr Xu had express authority to make decisions for Firmtech in the event that there was a dispute between him and Mr Zhang regarding a financial matter (such as whether available cash should be used to pay a particular debt). However, Mr Xu did not have any authority, whether pursuant to this agreement or otherwise, to make decisions on behalf of Holdings in circumstances where there was a dispute between himself and Mr Zhang about a financial matter affecting Holdings (such as whether Holdings should make a payment from its funds to Firmtech).
It follows that Auschn made the payment from the Holdings Trust Balance to Mr Xu, and Mr Xu received those funds and used them to make the payments to Alcentre and to the lessor of the Revesby Factory, in circumstances where Auschn and Mr Xu did not have, and knew that they did not have, authority from Holdings to make those payments. Auschn thereby breached its duties to Holdings under its retainer, and Mr Xu breached his duty under s 180 as a director of Holdings.
However, Mr Xu did not make any profit or receive any benefit as a result of these payments being made, since the sum of $197,604.03 was paid out to Firmtech's creditors in reduction of debts which were due and payable, and no part of the funds were retained by Mr Xu (with the balance of the moneys being returned to be held on trust for Holdings).
Further, I am not satisfied that Holdings suffered any loss as a result of the payment being made.
It is common ground that Firmtech had advanced funds to Holdings to purchase the Lansvale Property. In the "Closing Down Calculations", Mr Zhang calculated the amount advanced as being $927,015; in the resolutions which he prepared for Firmtech in August 2022, Mr Xu recorded that Firmtech had providing funding of $810,772.24 to purchase the Lansvale Property; and in these proceedings, Mr Zhang and Holdings submitted, and Mr Xu did not dispute, that an amount of $869,860.00 from Firmtech's account was paid to Holdings for the purchase of this property.
Leaving aside the FAWD Payment of $535,000, there was no evidence of any payment being made by Holdings which effected a reduction in its debt to Firmtech. Whichever of the figures outlined above is used, there remained, after the FAWD Payment, a balance owing by Holdings to Firmtech which was greater than the amount that was subsequently paid from the Holdings Trust Balance to discharge debts of Firmtech in August 2022 (namely, $197,604.43).
When, on 26 August 2022, the money which was held by Auschn on trust for Holdings was transferred to the director of Firmtech who was responsible for managing its finances (Mr Xu), and used by him to pay creditors of Firmtech, Holdings received a benefit which was precisely equal to the amount that was paid, namely, a commensurate reduction in the debt which it owed to Firmtech.
The only basis on which Mr Zhang and Holdings cast doubt on the existence of a liability of Holdings to Firmtech as at the relevant date was as follows:
"The reason I hesitate in relation to the liability as between Firmtech Holdings and Firmtech is this, your Honour may recall in the course of the evidence, there was a payment of $731,500 pursuant to an invoice for marketing services, and that was issued by Firmtech to Firmtech Holdings. There would be a question mark as to whether or not that was legitimate and if it wasn't legitimate, that would have an impact upon, in effect, the debtor/creditor position between the two entities."
However, as I have noted at paragraphs [802]-[803] above, there was no pleaded issue regarding the invoice of $731,500 which was issued by Firmtech on 12 May 2021 for project management fees in respect of the Lansvale Property and was paid by Holdings.
Insofar as Holdings claimed damages or equitable compensation in respect of the payments made by Auschn and Mr Xu from the Holdings Trust Balance on 26 August 2022, it was for Holdings to prove its loss. Holdings pleaded in its Amended Statement of Claim that, as at 26 August 2022, it "was not liable to … Firmtech". The matters which I have outlined above indicate that Holdings did have a liability to Firmtech as at that date, which exceeded the amount of the payments made from the Holdings Trust Balance on that date. If Holdings wanted to contend that it did not have any liability to Firmtech as at August 2022 because the payment of $731,500 which was made by Holdings to Firmtech in May 2021 was not a genuine payment for services, and should therefore be brought to account so as to extinguish Holdings' debt to Firmtech in respect of the moneys advanced for the Lansvale Property, it was necessary for Holdings to plead, and to lead evidence to establish, those matters. Holdings did not do so, and accepted in closing oral address that such an issue was "not raised in these proceedings".
It follows that, for the reasons I have set out above, Holdings has not established that it suffered any loss as a result of the payment of $197,604.43 which was made from the Holdings Trust Balance in August 2022.
[39]
Conclusion - Lansvale Proceeding
For the reasons set out above, none of the claims advanced by Mr Zhang or Holdings in the Lansvale Proceeding has been established, and those claims will be dismissed.
[40]
CONCLUSION AND ORDERS
In the Principal Proceeding, I have determined that each of Mr Zhang and Ms Xie breached their fiduciary and statutory duties to Firmtech, by diverting various business opportunities to Aluminum and Logikal during the period when they were responsible for operating Firmtech's Windows and Doors Business. I have also determined that, by reason of this conduct, the affairs of Firmtech were conducted in a manner which was contrary to the interests of the members as a whole, and which was oppressive to, unfairly prejudicial to, and unfairly discriminatory against Mr Xu.
I have determined that Firmtech is entitled, at its election, to an account of profits or equitable compensation in respect of the breaches of fiduciary duty. I have determined that the profits to which it is entitled are those from the particular projects which were diverted to Aluminum or Logikal prior to Firmtech ceasing operations (and not those from other projects which were sought and obtained by Aluminum and Logikal after Firmtech ceased operations). The relevant projects are identified at paragraph [598] above. Similarly, the compensation to which Firmtech is entitled for the breaches of fiduciary and statutory duties which have been established is compensation flowing from the loss of those particular projects which were diverted prior to Firmtech ceasing operations. The parties will have an opportunity to address on the appropriate orders for the resolution of the outstanding issues of relief, including any consequential relief.
Ms Xie has failed to establish her claims in the Panania Proceeding, and Mr Zhang and Holdings have failed to establish their claims in the Lansvale Proceeding. Those claims will be dismissed.
Mr Xu has established his cross-claim in the Panania Proceeding, and is entitled to judgment in the sum of $163,256.22, plus pre-judgment interest.
It is my preliminary view that, in each proceeding, costs should follow the event, such that Mr Xu and Firmtech are entitled to an award of costs in the Principal Proceeding, and the defendants in each of the Panania Proceeding and the Lansvale Proceeding are entitled to an award of costs.
I will direct the parties to bring in short minutes of order to give effect to these reasons. If there is any dispute about the form of those orders, or if any party seeks a different costs order, or a costs order other than on the ordinary basis, the parties will have an opportunity to be heard on these matters.
Accordingly, I make the following orders. The Court:
1. Directs the parties to bring in short minutes of order, by 5pm on 31 October 2024, to give effect to these reasons for judgment.
2. Directs that, insofar as any aspect of the orders to give effect to the reasons for judgment cannot be agreed:
1. the parties exchange, by 5pm on 31 October 2024, the orders which each party proposes and submissions (limited to 5 pages) on those orders; and
2. the matter be listed for hearing at 9.15 am on 6 November 2024, or such other date as may be arranged with the Associate to Nixon J.
[41]
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: 17 October 2024
(Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Bentley Capital Limited v Keybridge Capital Limited [2019] FCA 1675
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57
Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34
Brisbane South Regional Authority v Taylor (1996) 186 CLR 541; [1996] HCA 25
Brunningshausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199
Butt v McDonald (1896) 7 QLJ 68
Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55
Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36
Charlton v Baber [2003] NSWSC 745
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8
Cook v Deeks [1916] 1 AC 554
Coote v Kelly [2016] NSWSC 1447
Crawley v Short [2009] NSWCA 410
Dhami v Martin [2010] NSWSC 770
Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 8) [2022] FCA 1404
DVO16 v Minister for Immigration and Border Protection (2021) 273 CLR 177; [2021] HCA 12
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50
ET-China.com International Holdings Ltd v Cheung (2021) 150 ASCSR 461; [2021] NSWCA 24
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
Fox v Percy (2003) 214 CLR 118; [2003] HCA 22
Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21
Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3
Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6
Gunasegaram v Blue Visions Management Pty Ltd [2018] NSWCA 179
Herron v McGregor (1986) 6 NSWLR 246
Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64
Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21
Huang v Wei (No 2) [2022] NSWSC 473
In the matter of Cheal Industries Pty Ltd - Fitzpatrick v Cheal [2012] NSWSC 261
In the matter of ICB Medical Distributors Pty Ltd and The International College of Biomechanics Pty Ltd; ICB Gait and Posture Clinic Pty Ltd; Foot Steps Orthotics Pty Limited [2018] NSWSC 1315
In the matter of Sunnya Pty Ltd [2024] NSWSC 403
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68
Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd [2008] NSWSC 144
Law Society of New South Wales v Harvey [1976] 2 NSWLR 154
Ling v Pang [2023] NSWCA 112
Longman v The Queen (1989) 168 CLR 79; [1989] HCA 60
Mackay v Dick (1881) 6 App Cas 251
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Moubarak by his tutor Coorey v Holt (2019) 100 NSWLR 218; [2019] NSWCA 102
Mualim v Dzelme [2021] NSWCA 199
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449; [1992] HCA 66
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Oliveri Legal Pty Ltd t/as Oliveri Lawyers v Cassegrain Tea Tree Oil Pty Ltd [2024] NSWCA 74
Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd (2011) 285 ALR 63; [2011] FCAFC 166
Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31
Re Keneally (as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd)) [2015] NSWSC 937
Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547
Sangha v Baxter [2009] NSWCA 78
Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18
Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1; [2003] SASC 318
Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166
Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18
Warner Capital Pty Ltd v Shazbot [2020] NSWCA 121
Watson v Foxman (1995) 49 NSWLR 315
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 6
Wild v Meduri [2024] NSWCA 230
Xiao v BCEG International (Australia) Pty Ltd (2023) 111 NSWLR 132; [2023] NSWCA 48
Category: Principal judgment
Parties: Proceedings 2022/221710
Firmtech Aluminium Pty Ltd (First Plaintiff)
Zhaohui Xu (Second Plaintiff)
Xiaoyan Xie (First Defendant)
Jiamin Zhang (Second Defendant)
Firmtech Aluminum Pty Ltd (Third Defendant)
Logikal Façade Solutions Pty Ltd (Fourth Defendant)
Issues regarding fact-finding
Many of the critical issues in the three proceedings turn on issues of knowledge and consent.
In the Principal Proceeding, it is common ground that, from around 2020, Aluminum and Logikal were performing work of the type performed by Firmtech's Windows and Doors Business. The key disputes are whether Mr Xu had knowledge of, and consented to, this work being performed by Ms Xie's companies, and whether the parties reached an agreement (and if so, when) that Firmtech would close down and that they would be free to pursue separate businesses in competition with each other.
In the Panania Proceeding and the Lansvale Proceeding, it is common ground that payments were made from the settlement proceeds to persons and companies associated with Mr Xu. The key dispute in each of those proceedings is whether those payments were made in accordance with authority or instructions given by Ms Xie and Mr Zhang.
In respect of those key disputes of knowledge and consent, the principal participants - Mr Xu, Mr Zhang and Ms Xie - gave competing accounts of conversations between themselves which occurred several or more years ago. Each of them was extensively cross-examined about these events. Each party advanced submissions that the Court should make adverse credit findings in relation to, and disregard the evidence of, the other party's witnesses.
The Court is to reason to its conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [31] per Gleeson CJ, Gummow and Kirby JJ. This does not eliminate the established principles about witness credibility, but it tends to reduce the occasions where those principles are seen as critical: ibid.
In an often-quoted observation in Watson v Foxman (1995) 49 NSWLR 315 at 319, McLelland CJ in Eq made the following observations regarding the fallibility of human memory, particularly when disputes intervene:
"human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience."
In Moubarak by his tutor Coorey v Holt (2019) 100 NSWLR 218; [2019] NSWCA 102, Bell P referred to those comments of McLelland CJ in Eq (at [77]), and also a number of observations by McHugh JA (at [78]-[83]), as highlighting the "corrosive effect of the passage of time and its consequences for the quality and integrity of the trial process": see Herron v McGregor (1986) 6 NSWLR 246 at 253-255; Longman v The Queen (1989) 168 CLR 79 at 107-108; [1989] HCA 60; and Brisbane South Regional Authority v Taylor (1996) 186 CLR 541 at 551; [1996] HCA 25.
Claim for breach of contract
Mr Xu contended that it was an express term of his pre-incorporation contract with Mr Zhang and Ms Xie that Ms Xie take all steps necessary to ensure that Aluminum did not operate a business in competition with Firmtech, and that this term was breached. For the reasons set out at paragraphs [54]-[73] above, I have determined that there was no such express term.
In addition, Mr Xu contended that Ms Xie and Mr Zhang breached implied terms of their pre-incorporation contract. Those implied terms were pleaded as follows (ASC [30]):
"(a) that the parties to the contract would do all that was necessary to be done in order for the parties to perform the contract; further or alternatively;
(b) that the parties would do all such things as were necessary to enable the other parties to have the benefit of the contract; further or alternatively
(c) that the parties would not do anything nor act in any manner which would deprive the other parties of the benefit of the contract; further or alternatively
(d) that the parties would not act to undermine the bargain entered or the substance of the contractual benefits bargained for; further or alternatively
(e) that the parties would act reasonably having regard to the contractual benefits bargained for; further or alternatively
(f) that the parties would act in good faith and fairly in their dealings with each other."
Ms Xie and Mr Zhang denied that their agreement with Mr Xu included any of those implied terms. In particular, they contended that the criteria for the implication of contractual terms were not satisfied, referring to BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 and Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 345-347; [1982] HCA 24.
In response, Mr Xu submitted that the implied terms are entirely orthodox, referring to the following passage from the decision of Whelan JA and Riordan AJA in Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 at [106], [116]-[117]:
"In Mackay v Dick, Lord Blackburn said that there is a general rule that where parties have contracted for a thing to be done each agrees to do all that is necessary on its part for the carrying out of that thing though there may be no express words to that effect. In Butt v McDonald, Griffith CJ said there is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary to enable the other party to have the benefit of the contract. In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd, the High Court quoted and adopted these statements of general principle.
… it seems that the relevant principles are best analysed as terms implied by law. 'Necessity' is the rationale for their existence and the circumstance which must be 'demonstrated' for them to be operative. The requisite necessity is so demonstrated where, absent the implication, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, seriously undermined; or the contract would be deprived of its substance, seriously undermined or drastically devalued.
On this basis, the law will imply, in appropriate circumstances, a positive obligation to take action (to co-operate and to do all such things as are necessary to enable the other party to have the benefit of the contract), and a negative covenant not to hinder or prevent the fulfilment of the purpose of the express promises made in the contract."
Fiduciary duties
Mr Zhang and Ms Xie accepted in opening submissions that they owed fiduciary duties to Firmtech in their capacities as, respectively, a director and an employee of Firmtech.
The nature of fiduciary obligations is "proscriptive … - not to obtain any authorised benefit from the relationship and not to be in a position of conflict": Breen v Williams (1996) 186 CLR 71 at 113; [1996] HCA 57.
In Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31, McHugh, Gummow, Hayne and Callinan JJ quoted (at [74]) the above statement from Breen v Williams at 113, and commented as follows (at [78]):
"In particular, the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is 'a conflict or a real or substantial possibility of a conflict' between personal interests of the fiduciary and those to whom the duty is owed."
While every employee owes fiduciary obligations to his or her employer, the scope of the fiduciary obligations owed by any particular employee depends upon the role, functions and responsibilities of that employee.
As the Court of Appeal explained in Anderson v Canaccord Genuity Financial Ltd [2023] NSWCA 294 at [152], the "scope" of fiduciary obligations refers to the scope, or subject matter, of the area within which the fiduciary is not free to act self-interestedly (citing Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 407 per Dixon J; [1929] HCA 24). The Court of Appeal referred with approval (at [158]) to the following passage in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [143] (Finn, Stone and Perram JJ):
"The concept of 'duty' in the 'conflict of duty and interest' formula of the first of these is convenient shorthand. It refers simply to the function, the responsibility, the fiduciary has assumed or undertaken to perform for, or on behalf of, his or her beneficiary. What that function or responsibility is, is a question of fact. It may be narrow and circumscribed, as is often the case with specific agencies; it may be broad and general, as is characteristically the case with the functions of company directors; its scope may have been antecedently defined or determined; it may have been ordained by past practice; it may be left to the fiduciary's discretion to determine; and it may evolve over time as is commonly the case with partnerships."
In the present case, Ms Xie was Firmtech's General Manager and was responsible for running its Windows and Doors Business. In particular, she was responsible for tendering for work, putting together and issuing quotations, and negotiating the terms of contracts for new projects. It follows that she was, when performing those roles, under an obligation, without informed consent, not to promote her personal interests by making or pursuing a gain, in circumstances where there was a conflict or real or substantial possibility of a conflict between her personal interests and Firmtech's interests.
Statutory duties
Mr Zhang and Ms Xie acknowledged that:
1. as a director, Mr Zhang owed Firmtech the duties provided for in ss 180, 181 and 182 of the Act; and
2. as an employee, Ms Xie owed Firmtech the duties provided for in s 182 of the Act.
In addition, Mr Xu and Firmtech pleaded that Ms Xie was an officer of Firmtech within the meaning of that term as defined in s 9 of the Act (and, in particular, within paragraph (b) of that definition) and, as such, owed duties under ss 180, 181 and 182 of the Act.
At all material times, s 9 of the Act defined an "officer" of a corporation as meaning, relevantly:
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation's financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); …
In Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ made a number of observations regarding the definition of "officer" in s 9, including that:
1. those persons identified in paragraph (b) of the definition are identified by what they do (subparagraph (i)), what capacity they have (subparagraph (ii)) or what influence on the directors they have had and continue to have (subparagraph (iii)) (at [25]);
2. there being these differences between paragraph (b) of the definition and the other paragraphs (especially paragraph (a)), it is not to be supposed that persons falling within subparagraph (b)(i) must be in substantially the same position as directors (at [25]);
3. subparagraph (b)(i) distinguishes between making decisions of a particular character and participating in making those decisions. The notion of "participation" directs attention to the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons. The notion of participation in making decisions presents a question of fact and degree in which the significance to be given to the role played by the person in question must be assessed (at [26]); and
4. participation in any decision of a corporation does not make a person an "officer". Rather, the decisions in which the person participates must have the significance for the business of the corporation that the statute prescribes (that is, "decisions that affect the whole, or a substantial part, of the business of the corporation"). Whether a person participates in making decisions of a particular character requires examination of what contribution that person makes to the making of a decision (at [27]).
Relevant principles
In Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [67] to [70], Gageler J explained that the duty of loyalty is imposed, in equity, on fiduciaries "by means of two overlapping 'proscriptive obligations'", observing as follows (footnotes omitted):
"'The first', often referred to as the 'conflict rule', 'is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest.' The unconscionability which attracts equitable remedies in circumstances where the conflict rule alone is invoked lies not so much in receipt by the fiduciary of the benefit or gain (over which the fiduciary need not have control) as in retention by the fiduciary of the benefit or gain which in conscience ought to be disgorged to the principal.
'The second', often referred to as the 'profit rule', 'is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of [the] fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing [the fiduciary's] position for [the fiduciary's] personal advantage.' The unconscionability which attracts equitable remedies in such circumstances lies in pursuit by the fiduciary of self-interest, or, more precisely, in pursuit of an interest other than the exclusive interest of the principal.
Consistently with the objective of imposing each obligation, in neither case does the benefit or gain to the fiduciary need to be at the expense of the principal, though it may be. And in neither case does the fiduciary need to act dishonestly or fraudulently, or otherwise than in good faith, though again the fiduciary may do so..."
One well-established application of the "conflict rule" and the "profit rule" is that a director or senior employee of a company is precluded from obtaining for themselves or another person any property or business advantage belonging to the company, including commercial opportunities that the company is actively pursuing, or opportunities in which the company might reasonably be expected to be interested given its current line of business.
In Cook v Deeks [1916] 1 AC 554, the plaintiff and the three defendants together owned and operated a railway company. The three defendants came to the view, apparently with some justification, that the plaintiff was an unsatisfactory business associate. The Privy Council observed that "the entire management of the company, so far as obtaining and executing contracts in the east was concerned, was in [the defendants'] hands, and, indeed, it was in part this fact which was one of the causes of their disagreement with the plaintiff". The Privy Council held that, while the defendants had good reason to want to end their relationship with the plaintiff, the defendants breached their duties to the company by using their position to divert opportunities from the company to another company which they had established (at 562, emphasis added):
"Their Lordships think that the statement of the trial judge upon this point is well founded when he said that 'it is hard to resist the inference that Mr. Hinds was careful to avoid anything which would waken Mr. Cook from his fancied security,' and again, that 'the sole and only object on the part of the defendants was to get rid of a business associate whom they deemed, and I think rightly deemed, unsatisfactory from a business standpoint.' In other words, they intentionally concealed all circumstances relating to their negotiations until a point had been reached when the whole arrangement had been concluded in their own favour and there was no longer any real chance that there could be any interference with their plans. This means that while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect."
Establishment of Logikal
Logikal was incorporated in December 2019. The Plaintiffs submitted that the Court should find that Logikal was set up by Ms Xie and Mr Zhang for the primary purpose of taking over Firmtech's business.
Such conduct, if established, could amount to a breach of duty. In Gunasegaram v Blue Visions Management Pty Ltd [2018] NSWCA 179, a senior employee of Blue Visions, who had responsibility for managing a major contract between Blue Visions and the West Australian Department of Treasury and Finance, set up a corporate vehicle through which he could undertake work after his resignation from Blue Visions. Basten JA held (at [40]) that the establishment of that corporate vehicle was not itself a breach of the officer's fiduciary duty. His Honour said that:
"Whatever work he had in mind at that stage, his preparation for his resignation was a neutral activity. That activity could only have involved a breach of duty if the sole (or perhaps, primary) purpose for setting up the new vehicle was to take over Blue Visions' contract; the evidence did not establish that purpose."
I am not satisfied that the purpose for setting up Logikal was to take over Firmtech's Windows and Doors Business. This company appears not to have been used to conduct business until around the end of 2020, some twelve months after it was established. I do not consider that there is a sufficient basis to infer, based on the nature of the steps taken by Logikal from late 2020 onwards, that the company was incorporated in December 2019 for the purpose of taking such steps.
In any case, even if Logikal had been set up for that purpose, there is no consequence for Firmtech flowing from the establishment of Logikal which is separate from, or additional to, those consequences flowing from the use of Logikal to compete with Firmtech (which are addressed below).
Diversion of opportunities following 30 January 2021
Mr Zhang and Ms Xie contended that the extent of the duty owed by them must be determined having regard to all the relevant circumstances, including the "agreement reached between Ms Xie, Mr Zhang and Mr Xu on or between 20 September 2020 and 30 January 2021, that Firmtech would be closed down and the parties would go their own separate ways". They submitted that:
1. in these circumstances, whatever duties were owed by them, the scope of those duties did not prevent them from conducting the businesses owned by Aluminum and Logikal; and
2. alternatively, the effect of the agreement was to relieve Ms Xie and Mr Zhang from any breach of duty arising from their conducting the businesses operated by Aluminum and Logikal.
I have determined that the parties agreed, on 30 January 2021, to take steps to separate their financial affairs, which included Mr Xu being repaid his capital contributions to Firmtech, and Mr Zhang and Ms Xie remaining at Firmtech to complete existing projects, following which Firmtech would cease operations and the parties would be free to conduct separate businesses on their own account. I have also found that Mr Xu intended that, following the departure of Mr Zhang and Ms Xie, he would continue the Windows and Doors Business under a new manager, with new projects being performed by a company (FAWD) which was wholly owned and controlled by him.
Mr Zhang and Ms Xie contended as follows in their closing written submissions:
"If, as here, shareholders resolve that the operations of their company are to be wound down in an orderly fashion, the directors must give effect to that resolution. Indeed, in those circumstances, it would probably constitute a breach of duty for a director to allow the company to then take on new work.
In this case, Mr Zhang only remained as a director in order to allow Firmtech to finish up its existing unfinished projects because Mr Xu was not capable of doing so. Further, whilst he remained as a director, it was clearly on the basis that he was free to engage in other commercial activities, which could not possibly be against the interest of Firmtech as a whole, because it was being wound down pursuant to its shareholders agreement."
I do not consider that it could be said that, following the 30 January 2021 meeting, it would have been a breach of duty for Mr Zhang to cause Firmtech to take on new work. There was no agreement between Firmtech's shareholders at this meeting that no new jobs would be undertaken. Further, Mr Zhang and Ms Xie knew that Mr Xu intended to continue the Windows and Doors Business after Mr Zhang's departure, and was seeking a new manager for this purpose. Any new jobs obtained by Mr Zhang and Ms Xie for Firmtech prior to their departure, and subsequently completed by FAWD on Firmtech's behalf, would have been for the benefit of both of Firmtech's shareholders (Mr Zhang and Mr Xu).
Were duties owed to Mr Xu?
Mr Xu contended that, in performing their roles at Firmtech, each of Mr Zhang and Ms Xie owed fiduciary obligations not only to Firmtech, but to Mr Xu himself. In particular, Mr Xu submitted that his arrangement with Mr Zhang and Ms Xie was a quasi-partnership or joint venture which was conducted through the mechanism of a corporation, of a kind which gave rise to fiduciary obligations as between the participants.
In response, Mr Zhang and Ms Xie relied on the decision in Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21. In that case, Mr Brooker had sued Mr Friend alleging that there was a partnership or agreement between them to carry on jointly the conduct of a building and construction business, and that the second defendant, Friend & Brooker Pty Ltd, had been the "corporate vehicle" for the conduct of the partnership or joint venture agreement (at [4]). Mr Brooker contended that Mr Friend owed him a fiduciary obligation "not to prefer his own interests to those of Mr Brooker in managing the disbursement of the funds of the Company to repay loans to the Company made possible by Mr Brooker's personal borrowing from third parties", which Mr Friend was said to have breached by "preventing the funds of the Company from being used to reduce the burden of the borrowing by Mr Brooker" (at [85]).
French CJ, Gummow, Hayne and Bell JJ accepted Mr Friend's submission that any such duty was incompatible with the corporate structure which Mr Friend and Mr Brooker had adopted in order to conduct their business. Their Honours held as follows (at [86]):
"The appellant also submits that equity does not impose fiduciary duties between the parties to a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation and as directors. Why, it is asked, should equity intervene in such a fashion when the Company, by which Mr Brooker and Mr Friend carried on the business, failed and, in the result, their personal losses will not be in equal amounts? That submission is to be accepted."
Their Honours concluded (at [89]-[90]) that Mr Friend and Mr Brooker "were not, after the formation of the Company in 1977, in a relationship of partnership", nor were "their business dealings pursued pursuant to any agreement in the nature of a joint venture". Instead, the parties' "endeavour … [was] to derive equal profit for their respective family shareholdings by the conduct of the business of the Company".
It was common ground that Mr Xu, Mr Zhang and Ms Xie formed an agreement which included express terms that Firmtech would be incorporated to operate a business in the aluminium windows and doors industry; that Mr Xu and Mr Zhang would be directors and equal shareholders of Firmtech; that Mr Zhang would run the factory and oversee the manufacturing and installation of products; and that Ms Xie would be the General Manager and would handle quotations and sales. That agreement was implemented by the establishment of Firmtech, which adopted the agreed structure, for the purpose of operating the Windows and Doors Business.
Accessorial Liability Claims
The Plaintiffs submitted that, if the Court found that Mr Zhang and Ms Xie, in breach of their fiduciary duties, wrongfully diverted business opportunities to Aluminum and Logikal, then the Court should find that Aluminum and Logikal are liable as accessories for the conduct of Mr Zhang and Ms Xie. This submission was put on the basis either that Aluminum and Logikal were the corporate alter egos of Ms Xie and Mr Zhang (referring to the observations in Grimaldi at [243]), or on the basis that they knowingly assisted in the breaches of Ms Xie and Mr Zhang.
The nature of a claim for accessorial liability based on a company being the "alter ego" of the principal was recently considered by Williams J in Sunnya at [500]-[511]. Her Honour there stated that the observations in Grimaldi were obiter and that, while they have been referred to in many cases, there is "a contrary view that the liability of the fiduciary and the corporate accessory controlled by the fiduciary are distinct" (at [502], with reference to the cases there cited).
I do not need to resolve this issue. Counsel for the Zhang/Xie Parties acknowledged in closing address that the dispute about the "alter ego" principle "doesn't much matter because … Ms Xie is the director of the two companies with which we are concerned, the sole director of those companies". It follows that the knowledge of Ms Xie will be attributed to Aluminum and Logikal: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 582 per Brennan, Deane, Gaudron and McHugh JJ; [1995] HCA 68.
Ms Xie was the person who took steps, on behalf of each of Firmtech, Aluminum and Logikal, to quote for and engage in negotiations concerning potential new projects. She was aware (and therefore Aluminum and Logikal were aware) that each of the relevant projects was work which Firmtech was able to perform, and which was diverted from Firmtech to Aluminum or Logikal.
Liability will arise under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 where the conduct which constitutes the breach transgresses ordinary standards of honest behaviour, and the participant has knowledge of circumstances which would indicate the fact of the dishonesty on behalf of the fiduciary to an honest and reasonable person: Ancient Order of Foresters at [71] per Gageler J.
The requirement of dishonesty, in the requisite sense, is satisfied by the fact that Ms Xie and Mr Zhang concealed the diversion of work to Aluminum and Logikal from Mr Xu.
It follows that Aluminum and Logikal are liable under the second limb of Barnes v Addy for having knowingly assisted in Ms Xie's and Mr Zhang's breach of their fiduciary obligations to Firmtech.
Oppression Claim
The Plaintiffs pleaded that, by reason of, inter alia, the diversion by Mr Zhang and Ms Xie of valuable business opportunities from Firmtech to Aluminum and Logikal, the conduct of Firmtech's affairs was contrary to the interests of the members as a whole and was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Mr Xu within the meaning of s 232 of the Act.
Section 232 extends to conduct involving "commercial unfairness" or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 at 472-473; [1985] HCA 68.
In Morgan v 45 Flers at 704, Young J noted that whether oppression was established was to be determined by reference to the nature of the business carried on by the company and the nature of the relations between its participants and "whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair."
Oppression may be established by a director's diversion of business opportunities to another company which he or she controls, and in which other shareholders in the company have no interest: Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [19] (Siopis, Rares and Davies JJ); and In the matter of ICB Medical Distributors Pty Ltd and The International College of Biomechanics Pty Ltd; ICB Gait and Posture Clinic Pty Ltd; Foot Steps Orthotics Pty Limited [2018] NSWSC 1315 at [186] (Black J).
In In the matter of Cheal Industries Pty Ltd - Fitzpatrick v Cheal [2012] NSWSC 261 at [175], Ward J said that:
"Not only may conduct by a director in taking a benefit at the expense of the company may constitute oppression (Fexuto Pty Limited v Bosnjak Holdings [2001] NSWCA 97; (2001) 37 ACSR 672; (2001) 19 ACLC 856), so also can an improper diversion of business away from the company to companies in which the 'oppressor' has an interest, but the applicant does not (see the authorities cited at para 11.460 of Ford's Principles of Corporations Law (13th Edition), eds RP Austin, IM Ramsay, namely, Re Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324; [1958] 3 All ER 66; Re Bright Pine Mills Pty Limited ; Webb v Stanfield [1991] 1 Qd R 594; Re a Company (No 002612) (1986) 2 BCC 99,453; Dwyer v Lippiatt; Dwyer v Backpackers R Us.Com Pty Ltd (2004) 50 ACSR 333, at 355; [2004] QSC 281; Re Baumler (UK) Ltd [2005] 1 BCLC 92; [2004] All ER (D) 139; [2005] BCC 181 (Ch D); Sanford v Sanford Courier Service Pty Ltd ; Re Hollen Australia Pty Ltd; Holt v Burnside [ 2009] VSC 95, at [69].)"
Similar observations were made by Black J in Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 at [7]:
"It is important in this context to have regard to the fallibility of human memory which increases with the passage of time, particularly where disputes or litigation intervene: Watson v Foxman (1995) 49 NSWLR 315 at 318-319 per McLelland CJ in Eq; Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 at [41] per Rares J; Varma v Varma [2010] NSWSC 786 at [424]-[425] per Ward J. To the extent that credit issues need to be determined in respect of particular conversations, I have also had regard to the fact that objective evidence is likely to be the most reliable basis for determining them. I summarised the relevant principles in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [10], where I noted that the credibility of a witness and his or her veracity may be tested by reference to the objective facts proved independently of the testimony given, in particular by reference to the documents in the case, by paying particular regard to the witness's motives and the overall probabilities: Armagas Ltd v Mundogas SA [1985] 1 Ll R 1 at 57; Camden v McKenzie [2007] QCA 136; [2008] 1 Qd R 39 at [34]; Craig v Silverbrook [2013] NSWSC 1687 at [141]; State of New South Wales v Hunt [2014] NSWCA 47 at [56]."
While oral testimony should be assessed in the light of the objective contemporaneous evidence, such testimony can provide important context for understanding particular documents and their significance. In ET-China.com International Holdings Ltd v Cheung (2021) 150 ASCSR 461; [2021] NSWCA 24 at [27]-[28], Bell P (with whom Bathurst CJ and Leeming JA agreed) observed as follows:
"Whilst the quality and accuracy of oral recollection of actual conversations should be treated with care and caution given the fallibility of human memory (of which there has been a growing appreciation within the judiciary in recent decades), oral testimony may still be of value and importance, as was recognised in the nuanced observations of Leggatt J (as his Lordship then was) in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560 at [22] (Gestmin):
'the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose - though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth. (emphasis added)'
Documents and events have to be understood in their context, and evidence of context will often be furnished by witnesses in their oral evidence. Documents, moreover, will not always present a complete picture of events. Indeed it would be rare that they do. Nor do contemporaneous documents necessarily or invariably convey or record the background or context in which events took place. That background or context will be familiar to the actors at the time of those events but may not always emerge from documents."
In the present case, a complicating factor is that each of the relevant conversations was in Mandarin. However, none of the witnesses gave, in their affidavits, an account of what was said in Mandarin. Instead, each gave evidence, in English, of the substance of what was communicated, with their accounts of each conversation preceded by statements that words "to the effect" of those set out (in English) were used.
In his first affidavit filed in the Principal Proceeding, Mr Xu gave the following evidence (under the heading "Translation"):
"I was born in China and the Mandarin dialect of the Chinese language is my first language. I have lived in Australia since 2002 and can speak and read English; however, as this affidavit was prepared with the assistance of a lawyer who speaks Mandarin, I have had this affidavit translated and read to me in the Mandarin dialect of the Chinese language to assist me to make sure its contents are true and correct."
An affidavit of an interpreter was attached, stating that the entire affidavit was translated to Mr Xu, who confirmed that he understood the interpretation and agreed with the entire contents of the affidavit, before he affirmed the affidavit in the interpreter's presence.
Mr Xu did not give any similar evidence regarding the preparation of his remaining seven affidavits in the proceedings. Given that Mr Xu had required "the assistance of a lawyer who speaks Mandarin" to prepare his first affidavit, it is likely that he needed some assistance for the preparation of his subsequent seven affidavits. However, given the lack of any accredited interpreter's affidavit accompanying those remaining affidavits, it appears that no such interpreter was used in their preparation. Accordingly, the identity of any person who assisted Mr Xu in preparing those affidavits, and the qualifications of any such person, are unknown.
Ms Xie and Mr Zhang were both asked questions in cross-examination regarding how they had come to give evidence, in English, of conversations which occurred in Mandarin (given that each of them required the assistance of an interpreter in Court). Each explained that they had used other resources, such as Google Translate or the assistance of an unidentified employee.
Each of Mr Xu, Mr Zhang and Ms Xie was cross-examined over several days. Each demonstrated, under cross-examination, a command of English to varying degrees. Mr Xu gave his evidence in English, without the assistance of an interpreter. Mr Zhang required the assistance of an interpreter in giving his evidence, but was content for the main part for his cross-examination to proceed in English, choosing only occasionally to have questions translated into Mandarin or to give answers in Mandarin. Ms Xie relied on an interpreter to a greater degree, although the extent to which she did so lessened later in her cross-examination, such that on her third day in the witness box she gave evidence predominantly in English.
The fact that (with the exception of the first of Mr Xu's eight affidavits) none of the key witnesses used an accredited interpreter in the preparation of their affidavits increases doubt about the reliability of the conversations recorded in their affidavits. As McLelland CJ in Eq observed in Watson, there is a risk that a person's recollection of conversations is affected by not only the passage of time, but also the intervention of litigation. This risk is compounded where a witness, with some degree of fluency in English, has been involved in the task of translating the recollected substance of a conversation into English. The act of translation necessarily involves choices regarding vocabulary, syntax and tone, and those choices may, consciously or unconsciously, take into account the witness's interests in the litigation.
These matters have not led me to conclude that the evidence of conversations given by any or all of the principal witnesses is so unreliable that it should simply be rejected in its entirety. I do not consider that the key disputes in this case can be resolved either by ignoring the witnesses' competing accounts of the relevant conversations, on the basis that the witnesses have not recorded the precise words used and the method of translation is unclear, or by treating any of these accounts as a text which able to be parsed and analysed in order to resolve any issue of knowledge or consent. The former approach would involve putting aside evidence that is of central relevance to the key issues in dispute, while the latter approach would involve assuming a level of accuracy in the recollections and translations which is unwarranted. Instead, in considering and determining the main issues in dispute, I have taken account of the affidavit evidence given by each of the principal witnesses (in English) of "the effect of" the relevant conversations (in Mandarin), and have treated this as representing the witness's best effort to capture the gist of the relevant conversations (see Wild v Meduri [2024] NSWCA 230 at [245] per Bell CJ). I have sought to assess the witnesses' competing accounts of the gist of what was said in the light of their cross-examination about these events, the contemporaneous documentary evidence and the overall probabilities.
One of the main sources of contemporaneous documentary evidence is a group chat between Mr Xu, Ms Xie and Mr Zhang on the WeChat platform (the Group Chat). There were numerous messages posted on the Group Chat in evidence, extending over the course of three years. This appears to have been the principal means by which the parties communicated about their business affairs (with there being, by comparison, far fewer emails exchanged between them). Each of Mr Xu, Ms Xie and Mr Zhang posted messages on the Group Chat, and each read the messages posted by others on the Group Chat, throughout the period of their dealings in relation to Firmtech.
These WeChat messages provide their own difficulties. All of the messages exchanged by the parties were in Mandarin. In some instances, there were competing translations in evidence, each of which was a certified translation. I have proceeded on the basis that, where alternative translations are in evidence, each is an open and available translation, and any choice between them is to be determined having regard to the surrounding context and objective circumstances. In any case, many of these messages require interpretation in the light of other contemporaneous evidence, since the WeChat messages often comprise incomplete sentences, which assume a familiarity with the relevant subject matter or with prior discussions.
Each side made submissions about the credit of the other side's witnesses, including by reference to the manner in which the witnesses gave their evidence. For example, there were submissions that Mr Xu "was prone to avoiding answering important questions by launching into lengthy responses which were, in substance, passionate submissions in support of his case"; that Mr Zhang "frequently sought to volunteer non-responsive information which he thought might be helpful to his case"; and that Ms Xie "also performed poorly in terms of non-responsiveness and a failure to give concise and responsive answers to many of the questions she was asked", and that she "frequently required clear questions to be repeated, notwithstanding that they had been interpreted for her".
Each of the key witnesses, at times, gave answers which were non-responsive. In particular, each had a tendency, to various degrees, to interpolate, and repeat, matters which were not germane to the question being asked, but which the witness probably considered to be material which supported his or her case. Each came across, at times and to varying degrees, as defensive and unwilling to give a direct answer to questions which were perceived to be harmful to their interests.
I do not consider that those matters provide any sound basis for determining the credibility of the testimony of the main witnesses in these proceedings. The well-known limitations on making credit assessments based on a person's demeanour are amplified where cultural issues may impact the manner in which a person responds to questions, and where evidence is given in a second language, of which the witness has a limited command, or through an interpreter. In DVO16 v Minister for Immigration and Border Protection (2021) 273 CLR 177; [2021] HCA 12, Edelman J observed at [54] (footnotes omitted):
"The errors that can arise from interpretation are not limited to the consequences of incorrect interpretation. They extend also to the pernicious effect of adverse credibility assessments based upon matters of demeanour and impression. A former member of the Refugee Review Tribunal has correctly described how '[t]he utilisation of demeanour, without more, to substantiate adverse credibility findings is 'fraught with dangers'. Empirical studies have also suggested that the medium of an interpreter can affect assessment of demeanour, and therefore credibility, 'by the interpreter's voice, dress, mannerisms, linguistic competence, age, race and gender'. As Professor Groves has observed, decision-makers 'may struggle to distinguish between the words and demeanour of an interpreter and those of the person being interpreted'. Further, the unspoken relationship between the interviewee and the interpreter, especially if there is not complete trust between them, can sometimes present a distorted impression of, or distorted context for, the interpreted words. These problems for credibility assessments based, in part, upon impression and demeanour are compounded by cultural issues that may not be known to the decision-maker such as the impoliteness in some cultures of direct responses to questions or the extreme discomfort involved in discussion of some topics in particular cultures. All of these considerations compound the usual problems of assessment of demeanour, particularly in the context of evidence in an atmosphere that is very commonly one of high pressure and which also can commonly concern highly distressing matters…"
In Huang v Wei (No 2) [2022] NSWSC 473 at [18], Kunc J made the following observations which are of relevance to the present case:
"Added to these factors, it is relevant that most of the witnesses were Chinese nationals who gave evidence in Mandarin. As I previously observed in passing in an interlocutory judgment in these proceedings (Guojin Huang v Jinghong Wei [2022] NSWSC 222 (Huang v Wei (No 1)) at [50]), the Court will exercise great caution, and generally resist, making findings based on the demeanour of witnesses in such cases because the Court is not equipped to make such assessments when the language and culture of the witnesses is so far outside the experience of the Court."
Some of the credit submissions were made on the basis that certain evidence that was confidently given by a witness was shown to be demonstrably incorrect. I am, however, mindful that, as Basten JA said in Sangha v Baxter [2009] NSWCA 78 at [155] (Handley AJA agreeing), there "are risks in making global findings about credibility of any particular witness". His Honour observed (at [155]-[156]) that:
"Because a witness has not told the truth with respect to a particular matter does not mean that other parts of his or her evidence are untruthful. Where possible, an assessment should be made of the reasons for the untruthfulness in order to see if other aspects of the evidence are likely to be infected by the same concern. Further, evidence may be rejected because it is apparently unreliable, possibly mistaken or deliberately untruthful or capable of being categorised in a variety of ways which are unlikely to be capable of clear delineation in some cases.
Further, findings of credibility are not usually findings with respect to factual issues in the case, but are rather subsidiary findings on the way to determination of issues. Like many aspects of the evidence in a trial, the evidence of a witness who is believed to have lied in a particular respect, will nevertheless be able to bear some weight and should be placed into a balance, with other material evidence, before a conclusion is reached in relation to a critical fact. The rejection of a witness in total, absent corroboration is likely to mean that, even where corroborated, little attention will be paid to the evidence of the witness and less to the possible consequences which might flow from the fact that particular evidence is shown to be truthful: see generally, King v Collins [2007] NSWCA 122 at [44]."
For those reasons, I have not made any global assessment of the credibility of the three main witnesses. Instead, in respect of the key disputed conversations and events, I have evaluated each witness's evidence regarding those matters not only in the light of their responses in the course of their extensive cross-examination, but also in light of the contemporaneous documents, the objectively established facts, the apparent logic of events, the existence and nature of corroborative evidence, and the effect of the evidence as a whole.
Finally, in deciding whether I am satisfied that the case against the Zhang/Xie Parties has been proved on the balance of probabilities, I have taken into account the nature of the cause of action, the nature of the subject-matter of the proceeding, and the gravity of the matters alleged: Evidence Act 1995 (NSW), s 140(2); Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 per Dixon J; [1938] HCA 34; and Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450 per Mason CJ, Brennan, Deane and Gaudron JJ; [1992] HCA 66.
There is an element of repetition and overlap in the implied terms as pleaded by Mr Xu. I accept that the agreement between Mr Xu, Ms Xie and Mr Zhang included an implied term, consistently with Mackay v Dick (1881) 6 App Cas 251 at 263-264 and Butt v McDonald (1896) 7 QLJ 68 at 70-71, that the parties would co-operate and do all such things as were necessary to enable the other party to have the benefit of the contract, and an implied term not to hinder or prevent the fulfilment of the express promises in the contract.
Accordingly, in considering whether the implied terms were breached, it is necessary to have regard to the express promises in the contract. The express terms of the contract were as follows (see paragraph [51] above):
1. Firmtech was to be established to pursue an aluminium windows and doors business;
2. Mr Xu would contribute at least $500,000 in capital to establish the aluminium and window business that was to be conducted by Firmtech;
3. Mr Xu would advance up to $1,000,000 (or, on the Zhang/Xie Parties' case, $1,500,000) in further funds to Firmtech if required, though such amounts would be by way of a loan to be repaid;
4. Firmtech would have a 50/50 share structure, with Mr Xu holding 50% of the shares and Mr Zhang holding 50% of the shares;
5. Mr Xu and Mr Zhang would be the directors of Firmtech;
6. Ms Xie would be the General Manager and would handle quotations and sales;
7. Mr Zhang would run the factory and would handle manufacturing and installation of aluminium and glass products on site; and
8. if a dispute arose about the manufacturing, production or the technical side of the business, Mr Xu would defer to Mr Zhang and if a dispute arose about finances, Mr Zhang would defer to Mr Xu.
The express promises in paragraphs (2)-(3) were obligations imposed on Mr Xu. The express promises in paragraphs (1) and (4)-(8) related to the establishment of Firmtech and the structure to be adopted upon its establishment for the conduct of its Windows and Doors Business. Firmtech was established in May 2018 and the agreed structure was put in place at that time. There was no explanation by Mr Xu as to how any conduct by Mr Zhang or Ms Xie from 2019 onwards prevented or hindered the fulfilment of those express promises.
Instead, the claim that there was a breach of the implied terms was largely dependent on the contention that there was an additional, express term to the effect that Ms Xie would ensure that Aluminum would not compete with Firmtech (which I have found not to be established).
For those reasons, I find that Mr Xu's claim for breach of contract has not been established.
As for subparagraph (b)(ii) of the definition of "officer", the Full Court in Grimaldi at [73] observed that:
"the subpara (b)(ii) requirement that a person has the capacity to affect significantly the corporation's financial standing refers to the character properly to be attributed to that person's capacity in the circumstances. It may arise from the extent of that person's participation in investment decisions or financial commitments made, from the dimensions of a decision or decisions, from the nature of that person's participation in the control and direction of the affairs of the corporation, etc: cf Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [74] (ASIC v Adler). The question again is one of fact."
In Australian Securities and Investments Commission v King (2020) 270 CLR 1; [2020] HCA 4 at [53]-[59], Kiefel CJ, Gageler and Keane JJ referred with evident approval to this passage from Grimaldi. Their Honours said at [58] that:
"The reasons in Grimaldi, when read as a whole, recognise that para (b) of the definition of 'officer' expands the coverage of the duties of officers of a corporation to include individuals who would not be officers of a corporation within the ordinary meaning of the term. Grimaldi is distinctly not supportive of the view that, as a matter of law, a person who satisfies either of the requirements of para (b)(i) or para (b)(ii) of the definition does so only if that person is acting in a recognised office within the corporation."
In ASIC v King at [88], Nettle and Gordon JJ commented that:
"Paragraph (b) is thus 'essentially functional in character, its concern being with the stipulated quality of a person's actions or capacity and their effects'. Sub-paragraphs (i) and (ii) are 'concerned with identifying persons who are involved in management of the corporation' - that is, people 'involved in policy making and decisions that affect the whole or a substantial part of the business of the corporation'. And, of course, a person may, by their conduct, satisfy more than one of the categories of officer in para (b)(i)-(iii)."
Their Honours continued (at [91]) that:
"determination of whether a person falls under para (b)(ii) of the definition of 'officer of a corporation' requires consideration of the role the person played in the management of the corporation. The inquiry is not limited to any particular issue or act which the person was involved in, and which is said to constitute a breach of duty. The text of para (b)(ii) is directed to those who have the capacity to affect significantly a corporation's financial standing: not just any capacity will suffice. Determining whether a person has such a capacity depends on identifying their role in relation to the corporation, what they did or did not do (whether on a particular occasion or over time) and the relationship between their actions or inaction and the financial standing of the corporation."
On 15 May 2018, several days before Firmtech was registered, the following WeChat messages were exchanged on the Group Chat:
"[Mr Xu]: I am thinking of adding you as a director
Making it easier for you to sign
I'm thinking of putting my wife as shareholders
I will only be a director
[Ms Xie]: I put Jiamin [Mr Zhang] for all of them
[Mr Xu]: Ok
[Ms Xie]: It is more convenient that way. Many matters can be authorised.
[Mr Xu]: Will register it tomorrow
[Ms Xie]: Externally, putting jiamin there is more persuasive
…
Still discrimination against women in the building industry"
As this exchange reveals, each of Mr Xu and Ms Xie understood that Ms Xie would be making decisions for Firmtech. Mr Xu proposed making Ms Xie a director in order to facilitate this ("Making it easier for you to sign"). She instead suggested that Mr Zhang be appointed director. This was not because he, rather than she, would be making decisions. Instead, it was because of perceived discrimination against women in the building industry. It was a move which, in Ms Xie's own words, was only being taken "externally". It would not affect the internal operations of Firmtech. Her statement that "Many matters can be authorised" is, when read in context, a statement that she, although not a director, could be given authority within Firmtech to perform most managerial functions.
In his affidavit, Mr Zhang described himself and Ms Xie as sharing responsibility for the management of Firmtech's business:
"Yan and I were responsible for the day-to-day operations of Firmtech. As part of that role, Yan and I were responsible for overseeing the tendering of jobs to Firmtech existing and proposed customers. Kevin was not involved in this process."
In her role as General Manager, Ms Xie participated with Mr Xu and Mr Zhang in the making of decisions regarding the business of the corporation. For example, she participated in the meeting of 30 January 2021 and in the decisions made at that meeting regarding the closing down of Firmtech, and the steps and timeline required to achieve this result.
Further, by her role as General Manager, and in particular, by reason of her responsibility for tendering for new projects, determining pricing for new projects, and negotiating contracts for new projects, as well as by her role in dealing with suppliers and managing cash flow, Ms Xie had the capacity to significantly affect Firmtech's financial standing.
For those reasons, I am satisfied that Ms Xie was an officer of Firmtech, and therefore, like Mr Zhang, owed duties to Firmtech pursuant to ss 180, 181 and 182 of the Act.
The principles applicable to those provisions were recently summarised by Black J in Alora Davies Developments 104 Pty Ltd (in liq) v Raphael [2024] NSWSC 547 at [139]-[142]. I do not repeat that summary here.
Generally, when a senior officer or employee of a company diverts an opportunity obtained by reason or by use of his fiduciary position, the benefits of taking that opportunity belong in equity to the company, irrespective of whether the company could have availed itself of the opportunity: Warman International Ltd v Dwyer (1995) 182 CLR 544 at 558; [1995] HCA 18.
In Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; [1936] HCA 3, Rich, Dixon and Evatt JJ observed that:
"It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation..."
In Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 8) [2022] FCA 1404 at [232] and [242]-[243], Beach J summarised the relevant principles as follows:
"Directors and senior employees are precluded from obtaining for themselves or another any property or business advantage belonging to their employer, or for which it has been negotiating. They are not entitled to appropriate for themselves or divert to another with whom they are or may be associated a maturing business opportunity which the employer is actively pursuing. This is particularly so where the director or senior employee has been a participant in the negotiations on behalf of the employer (Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 381 and 382 per Laskin J).
…
Generally, a fiduciary is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances where there is an actual conflict, or a real or substantial possibility of a conflict, between his personal interests and those of the persons whom he is bound to protect. Senior employees are precluded from obtaining for themselves or another any property or business advantage belonging to their employer. They are not entitled to appropriate for themselves or divert to another with whom they are or may be associated a maturing business opportunity, particularly one which the employer is actively pursuing.
A fiduciary's position inhibits him not only in respect of business opportunities that the company is actively pursuing, but also opportunities in which the company might reasonably be expected to be interested, given its current line of business. It is not necessary to show that the opportunity taken by the fiduciary is one that could have been exploited by the company. That is, the pursuit of the opportunity by the fiduciary gives rise to a possible conflict between the fiduciary's personal interest and ongoing duty, which is unacceptable."
It is always necessary, when determining the scope of fiduciary obligations in a particular case, to have regard the specific circumstances of that case. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 102; [1984] HCA 64, Mason J observed that the "scope of fiduciary duty must be moulded according to the nature of the particular relationship and the facts of the case". This principle has been described as "fundamental": Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd (2011) 285 ALR 63; [2011] FCAFC 166 at [206] per Jacobson J (Rares and Besanko JJ agreeing).
In Birtchnell v Equity Trustees, Executors and Agency Co Ltd at 408, Dixon J observed that the subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the relationship exists, and that this is to be ascertained not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the entity to whom the duties are owed.
Accordingly, as French CJ and Keane J observed in Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [34], the limits of fiduciary obligations are "to be determined by the character of the venture for which the [relationship] existed, the express agreement of the parties and the course of dealings actually pursued". Their Honours said that:
"The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship."
Fiduciary duties generally terminate upon the termination of the relevant underlying undertaking: In the matter of Sunnya Pty Ltd [2024] NSWSC 403 at [473].
However, it does not follow that fiduciary duties terminate at the point in time where the parties agree to terminate the relevant undertaking, and commence taking steps in order to bring about that result. For example, in Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36, fiduciary obligations were held to continue after the dissolution of a partnership but before the completion of the winding up of its affairs. Notwithstanding the dissolution of the partnership, "the good faith and honourable conduct due" from each partner to the other persisted for the purposes of winding up the affairs of the partnership and each partner remained under a fiduciary obligation to co-operate in and act consistently with the agreed procedure for the realization, application and distribution of partnership property: Chan v Zacharia at 197 per Deane J.
In Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd [2008] NSWSC 144, Brereton J held that the director of an incorporated joint venture (Ms Ward) breached her fiduciary obligations by her conduct leading up to the termination of the enterprise, which included using her position to divert business to her own company. His Honour said (at [84]):
"While equitable obligations arise in an incorporated joint venture additional to the duties imposed in any event by company law, they do not supplant the statutory duties of a director, although they may to some extent inform the content of those duties. The circumstance that, upon termination of a partnership, the partners may at least in some circumstances be at liberty to set up in business and even exploit existing clients of the joint venture, does not relieve a partner/director from his or her obligation as a director to act honestly in the interests of the company as a whole. In the circumstances of this case, Ms Ward may well not have breached her duties as a director had she after termination simply set up, for her own benefit, a competing business, using her own capital and clientele. But it cannot have been bona fide in the interests of Lawfund Leasing as a whole for Ms Ward to cause it to cease trading, and its business to be taken over by A-Ward, for no consideration. Such a transfer was in Ms Ward's interests, but contrary to those of the company as a whole. By causing Lawfund Leasing to cease operating and in effect to transfer its business undertaking to her own company A-Ward, Ms Ward made use of her position as an officer of Lawfund Leasing for an improper purpose and other than in good faith and in the best interests of Lawfund Leasing, in contravention of s 181(1), and made improper use of her position as a director of Lawfund Leasing to gain an advantage for herself and her company A-Ward and to cause detriment to Lawfund Leasing in contravention of s 182(1)."
Informed consent is a defence. There is no duty on a fiduciary to obtain informed consent, but rather the existence of informed consent will go to negate what was otherwise a breach of duty: Atanaskovic Hartnell v Birketu Pty Ltd (2021) 105 NSWLR 542; [2021] NSWCA 201 at [46].
It is for the fiduciary to plead and prove informed consent. The consent must be "fully informed", and what is required is a question of fact in all the circumstances of each case: Atanaskovic Hartnell v Birketu at [47]-[48]. There is no precise formula which will determine in all cases if fully informed consent has been given: Maguire v Makaronis (1997) 188 CLR 449 at 466; [1997] HCA 23 per Brennan CJ, Gaudron, McHugh and Gummow JJ.
In Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 170, Street CJ said that there must be "a conscientious disclosure of all material circumstances, and everything known to [the solicitor] relating to the proposed transaction which might influence the conduct of the client or anybody from whom he might seek advice".
In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [107], the plurality observed that consent can be established "at different times and in different ways", and that what is required will depend on the sophistication and intelligence of the persons to whom disclosure was made.
If a person occupying a fiduciary position wishes to enter into a transaction which would otherwise amount to a breach of duty, the fiduciary must, if liability is to be avoided, make full disclosure to the person to whom the duty is owed of all of the material facts and circumstances of the case known to the fiduciary, and that person must consent to the fiduciary's proposal: Mualim v Dzelme [2021] NSWCA 199 at [114]-[115]; quoting and approving Meagher, Gummow and Lehane's Equity: Doctrine and Remedies (5th ed, 2015, LexisNexis Butterworths) at [5-130].
In Furs v Tomkies at 592, Rich, Dixon and Evatt JJ referred to "the inflexible rule" that:
"except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. "
On Mr Zhang's and Ms Xie's own version of events, neither of them made any statement to Mr Xu at the 30 January 2021 meeting to the effect that if a new opportunity arose with an existing client of Firmtech, or in respect of an existing project being performed by Firmtech, they intended to divert any such opportunity to Aluminum or Logikal. Nor, on their own evidence, was there any consent by Mr Xu (and therefore by Firmtech) to such a course.
Mr Zhang and Ms Xie plainly had an intention, at the time of the meeting, to divert work to Aluminum and Logikal. For example, they had the contract for Aluminum to perform the Elara Shopping Centre Project "ready to go" before the meeting, and Ms Xie executed it shortly afterwards.
It was a breach of Mr Zhang's and Ms Xie's duty, as officers of Firmtech, to act in good faith and in the best interests of Firmtech, for them not to disclose to their fellow officer, Mr Xu, at the 30 January meeting that they had already been diverting business opportunities to Aluminum and Logikal; that they intended to continue to do so; and that they intended to continue to operate those companies in competition with Firmtech, while they remained responsible for running Firmtech's Windows and Doors Business: Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1; [2003] SASC 318 at [29] per Debelle J (Nyland and Lander JJ agreeing).
Mr Zhang and Ms Xie would have been aware, from Mr Xu's stated intention to continue the Windows and Doors Business, that he would not have consented to such a course. Further, such a course would have been inconsistent with the position which Mr Zhang and Ms Xie conveyed to Mr Xu, namely, that they were tired of working on Firmtech's projects and only wanted to do smaller jobs in the future.
In addition, Mr Xu asked Mr Zhang and Ms Xie, on a number of occasions, for information about the status of quotations which had been issued by Firmtech, but not yet accepted, and they answered his queries about those quotations (albeit in a misleading way). Such conduct was inconsistent with the suggestion that an agreement had been reached between the shareholders that Firmtech had no interest in, and should refuse to take on, any further work.
So long as Mr Zhang and Ms Xie remained as officers of Firmtech, and were responsible for running its Windows and Doors Business, they were not free to promote their own interests by diverting valuable commercial opportunities from that business to Aluminum or Logikal, unless they obtained Firmtech's informed consent, which would have required obtaining Mr Xu's informed consent. No such consent was sought, or obtained, at the 30 January meeting, or at any time thereafter, either generally or in respect of any particular project.
In the period from February 2021 through to July 2021, Ms Xie and Mr Zhang caused a number of further valuable opportunities to be diverted from Firmtech to Logikal or Aluminum (which are in addition to those listed above when dealing with the period prior to 30 January meeting).
First, work on the Aire Project, which was an existing project of Firmtech, was diverted from Firmtech to Logikal. The Aire Project had been identified as a "current project" and included in the list of assets of Firmtech that was discussed at the 30 January meeting. At that meeting, Mr Zhang had told Mr Xu that he would stay at Firmtech to see this project through to handover to the builder. Despite those matters, Ms Xie engaged in correspondence with Modco, which was copied to Mr Zhang, in which she proposed that Logikal perform, and receive payment for, the balance of the outstanding work on the Aire Project. Logikal also quoted for, and entered a contract for, some additional work on the same project in July 2021 (see paragraphs [326]-[353] above).
Mr Xu was not told about, and did not agree to, this diversion of work on the Aire Project from Firmtech to Logikal. When he asked for information about the status of the Aire Project in August and October 2021, Ms Xie responded to him in terms which suggested that this project was being performed by Firmtech, and did not disclose the matters outlined above (see paragraphs [347]-[349] above).
Even if there had been an agreement by the shareholders of Firmtech not to take on new projects after 30 January 2021 (which I have found was not the case), Ms Xie and Mr Zhang would not have been free to divert work on the existing projects of Firmtech, which they had promised to complete for Firmtech's benefit, to Logikal.
Secondly, the St Dominic's College Project was diverted from Firmtech to Aluminum. In September 2020, Novati Constructions sent an email to Ms Xie inviting Firmtech to tender for this project. Novati Constructions was an existing client, for whom Firmtech had worked on various projects between 2018 and 2020. In October 2020 and January 2021, Mr Zhang had issued, on behalf of Firmtech, a number of quotations to Novati Constructions for this project. However, in March 2021, Ms Xie issued, on behalf of Alumnium, a revised quotation for the same work. In April 2021, Ms Xie and Mr Zhang communicated with Novati Constructions in relation to this project from a Logikal email address. In July 2021, an updated quotation was issued by Logikal for the same project, and a contract was entered between Novati Constructions and Logikal which was signed by Ms Xie and witnessed by Mr Zhang (see paragraphs [354]-[365] above).
Mr Zhang and Ms Xie did not inform Mr Xu that this opportunity was being diverted from Firmtech, or seek his (and thereby Firmtech's) consent to this opportunity being performed by Ms Xie's companies.
Thirdly, Ms Xie took steps to divert the opportunity for the Spring Square Project from Firmtech to Aluminum. Firmtech had tendered for this project in late 2019. However, from April 2021, Ms Xie was involved in discussions with the developer on behalf of Aluminum, which was awarded the contract for the project in July 2021. Mr Zhang was aware that this project was diverted to Aluminum (see paragraphs [366]-[389] above).
Significantly, Ms Xie and Mr Zhang were aware, when taking steps to divert the Spring Square Project to Aluminum, that Mr Xu was concerned to know the status of Firmtech's tender for this project. If they had been of the view that it was inconsistent with the agreement reached on 30 January meeting for Firmtech to take on any new project (including the Spring Square Project), they would have likely expressed this view to Mr Xu, in response to his questions about the project. However, they did not do so. Instead, they responded in terms which suggested that Firmtech's tender had low prospects of success (see paragraphs [368]-[382] above). Ms Xie and Mr Zhang did not inform Mr Xu that they were taking steps, while still officers of Firmtech, to divert this project to Aluminum, and did not seek his (and therefore Firmtech's) consent to their doing so.
If this project had been obtained for Firmtech in July 2021 (when the contract between the developer and Aluminum was entered), this would not have been an obstacle to achieving the outcomes which had been agreed at the meeting on 30 January 2021. At that meeting, Mr Zhang and Ms Xie had agreed to stay on until the conclusion of those projects which were current as at January 2021. They did not agree to stay on until the conclusion of any further projects as might be obtained between 30 January 2021 and the date of the conclusion of the existing projects. Mr Xu intended to, and did, recruit a new manager to run the Windows and Doors Business through FAWD following the departure of Mr Zhang and Ms Xie. Accordingly, if the Spring Square Project had been obtained by Firmtech prior to their departure, this project would not have delayed their departure. FAWD would have been able to perform this project, in Firmtech's name, with the profits being shared equally by Firmtech's shareholders (including Mr Zhang). In contrast, the diversion of the opportunity for the Spring Square Project from Firmtech to Aluminum, while Mr Zhang and Ms Xie remained officers of Firmtech, meant that Firmtech's shareholders (including Mr Xu) were excluded from sharing in the profits of that project, which were instead solely for the benefit of Ms Xie. Mr Xu, and therefore Firmtech, did not consent to that course.
Fourthly, Logikal quoted for, and entered contracts for, a number of other projects prior to July 2021, while Mr Zhang and Ms Xie remained working at Firmtech and managing its aluminium windows and doors business. These included the Koko Molongo Project, for which Firmtech had previously quoted (see paragraphs [390]-[397] above). Mr Xu was not informed that Logikal was tendering for any of these projects, and Ms Xie and Mr Zhang did not seek his (or therefore Firmtech's) consent to these projects being performed by Logikal rather than Firmtech.
It is unnecessary to consider the question regarding the point of time when a former director may begin to compete with the company: see Sunnya at [473]-[486], and the authorities there cited. The breaches identified above occurred after Mr Zhang and Ms Xie had announced their intention to leave Firmtech, but at a time when each of Mr Zhang and Ms Xie remained as officers of Firmtech and remained responsible for running its Windows and Doors Business.
By diverting these projects to Aluminum or Logikal, Mr Zhang and Ms Xie promoted their personal interests, without informed consent, by pursuing and making a gain for Ms Xie's companies in circumstances in which there was a conflict between their personal interests and the interests of Firmtech.
It follows that, by this conduct, each of Mr Zhang and Ms Xie breached their fiduciary and statutory obligations to Firmtech.
From the incorporation of Firmtech in May 2018, Mr Xu, Mr Zhang and Ms Xie were not operating the Windows and Doors Business pursuant to a partnership agreement or a joint venture agreement. Instead, they were pursuing the endeavour of deriving equal profit for their respective families by the conduct of that business through the agreed upon corporate structure.
A director does not, generally, owe a fiduciary duty to a shareholder. In Brunningshausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 at [57]-[58], Handley JA (with whom Priestley and Stein JJA agreed) observed that:
"The general principle that a director's fiduciary duties are owed to the company and not to shareholders is undoubtedly correct, and its validity is undiminished. …
Where a director's fiduciary duties are owed to the company this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter. However this should not preclude the recognition of a fiduciary duty to shareholders in relation to dealings in their shares where this would not compete with any duty owed to the company."
However, there can be circumstances where such a duty does arise. In particular, Handley JA (at [106]-[107]) recognised that, where there are negotiations for a take-over or an acquisition of the company's undertaking, the directors might owe a fiduciary duty to loyally promote the interests of all shareholders and not to prefer their personal interest to the joint interest.
In Charlton v Baber [2003] NSWSC 745 at [17], Barrett J summarised the effect of the decision in Brunningshausen as follows:
"The situation was one in which there was, on the facts, a particular relationship between the parties. That, it was said, did not create 'a comprehensive fiduciary duty'. It did, however, create a fiduciary duty that was 'limited' to actions by the defendant necessary to negate the effect, in the particular circumstances, of his taking advantage in an unconscionable way of the superior position occupied by him as against the plaintiff. The Court of Appeal emphasised that fiduciary duties having identical content cannot be owed both to the company and to one or more of its shareholders in relation to the same subject matter; and that, to the extent that they exist at all, fiduciary duties owed by directors to shareholders can be recognised only where they 'would not compete with' any duty owed to the company. In short, the company remains the beneficiary of the comprehensive fiduciary duties to which directors are subject by virtue of their office; and parallel duties in corresponding form are not owed to any shareholder, although particular circumstances may give rise to a particular duty owed by a particular director to a particular shareholder or particular shareholders."
Similarly, in Warner Capital Pty Ltd v Shazbot [2020] NSWCA 121, Gleeson JA (with Macfarlan and Meagher JJA agreeing) referred to the decision in Brunningshausen and said (at [99]):
"While noting that it is true generally that a director's fiduciary duties are owed to the company, Handley JA rejected as an absolute statement the defendant's proposition, relying on Percival v Wright [1902] 2 Ch 421, that a director's fiduciary duties are owed only to the company. He said that the particular nature of the transaction may give rise to a fiduciary duty owed by directors to the shareholders: at [107]."
Mr Xu did not, in his written submissions, refer to the decisions in Friend v Brooker or Brunningshausen. Instead, he focussed on the decision of the Court of Appeal in Crawley v Short [2009] NSWCA 410. In that case, Young JA (with whom Allsop P and Macfarlan JA agreed) observed that there could be "no quarrel" with the primary judge's statement that "as a general proposition, a director owes fiduciary duties to the company and not to each shareholder" (at [100]). However, his Honour said, based on the decision in Brunningshausen, that "particular factual circumstances may give rise to a fiduciary relationship between a director and an individual shareholder" (at [101]). Young JA noted that the primary judge "acknowledged that there were cases where a director who was also a shareholder could owe a duty to another shareholder, but considered that Brunningshausen told against it when the same acts constituted a breach of the fiduciary duty to the company" (at [119]). His Honour said that the primary judge's view in that respect involved "too narrow a reading of Brunningshausen and is out of line with other authorities" (at [120]), and continued (at [121]‑[122]):
"There will be a variety of situations where a shareholder or director/shareholder holds a special position where he or she may owe duties to another shareholder.
Without being an exhaustive list, this will occur where: one shareholder undertakes to act on behalf of another shareholder; where one shareholder is in a position to have special knowledge and knows that another shareholder is relying on her to use that knowledge for the advantage of another shareholder as well as herself; and where the company is in reality a partnership in corporate guise, nowadays termed a quasi partnership."
I do not consider that Crawley v Short stands for the proposition that, whenever two or more people engage in business through a corporate vehicle, which can be described as a quasi-partnership, a director of that company will owe fiduciary duties to each of its members which are concurrent and identical to those owed to the company.
In each case, it is necessary to consider, as Young JA put it (at [108(c)]), whether there are "special circumstances arising on the facts of [the] particular case", which lead to the conclusion that the director owes a fiduciary duty to a member. The critical issue is whether "in all the circumstances, there was a special opportunity for [the director] to act to the detriment of the other shareholders so that he owed a duty to them" (at [118]). Where such circumstances arise, it would also be necessary to determine the scope, or subject matter, of the area within which the fiduciary is not free to act self-interestedly. As Barrett J put it in Charlton v Baber, "particular circumstances may give rise to a particular duty owed by a particular director to a particular shareholder". Accordingly, to find that a fiduciary duty is owed by a particular director to a particular shareholder, it is necessary to identify the "particular circumstances" which give rise to that duty, and the "particular duty" that is owed.
Mr Xu submitted that Ms Xie and Mr Zhang were "the principal interfaces between Firmtech and its customers" and this gave them "practical control over the corporate opportunities of Firmtech". He further submitted that, as a matter of practical and commercial reality, Mr Zhang and Ms Xie had the "special opportunity" to act to the detriment of Mr Xu, and that he was vulnerable to the particular harm which eventuated, namely, that Mr Zhang and Ms Xie "would use their exclusive access to Firmtech's customers to divert the Firmtech business to different corporate vehicles from which Firmtech was excluded".
I am not satisfied that there were "special circumstances" so as to give rise to a fiduciary duty which was owed by Mr Zhang or Ms Xie to Mr Xu in the period while Mr Zhang and Ms Xie remained at Firmtech and were responsible for operating its Windows and Doors Business. In that period, Mr Zhang and Ms Xie owed, as officers of Firmtech, fiduciary and statutory duties to Firmtech, and Mr Xu had, as a shareholder, an interest in their performance of those duties, given his entitlement to a 50% share of the profit from the operation of Firmtech's business. In those circumstances, I do not consider that equity would impose, on Mr Zhang or Ms Xie, fiduciary obligations to Mr Xu which were concurrent with, and identical in substance to, the fiduciary obligations which they owed Firmtech.
The position may have been different if I had concluded that the effect of the agreement reached on 30 January 2021 was that, as the Zhang/Xie Parties contended, no new work should be undertaken by Firmtech from that point onwards. If that were the case, the interests of Firmtech and Mr Xu would have remained aligned so far as the completion of existing projects was concerned. However, the interests of Firmtech and Mr Xu would have diverged so far as new projects were concerned. In those circumstances, it might be said that Mr Xu, by agreeing to Mr Zhang and Ms Xie remaining at Firmtech to complete the existing jobs, placed trust and confidence in them that they would not promote their personal interests, to his detriment, by diverting any opportunities for new work to their own companies. However, this is not a matter which I need determine, in light of the findings I have made.
For the reasons given above, Mr Xu's claims for breach of fiduciary obligations owed to him personally have not been established. If (contrary to the views I have reached) any such obligations were owed to Mr Xu personally, it would follow that these duties were breached by the same conduct of Mr Zhang and Ms Xie which I have determined to have amounted to a breach of their fiduciary obligations to Firmtech.
Similarly, by reason of the attribution of Ms Xie's knowledge to Aluminum and Logikal, those companies were involved in the contraventions by Ms Xie and Mr Zhang of their statutory duties, within the meaning of s 79 of the Act. The relevant principles are set out in Sunnya at [532]-[534]. Aluminum and Logikal had (through Ms Xie) actual knowledge of the essential acts constituting the contraventions, namely, the steps taken by Ms Xie to divert each of the relevant projects from Firmtech to Aluminum or Logikal.
Having regard to the findings I have made regarding the diversion by Mr Zhang and Ms Xie of business opportunities from Firmtech to Aluminum or Logikal, I find that the affairs of Firmtech were conducted in a manner that was contrary to the interests of the members as a whole and was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Mr Xu within the meaning of s 232 of the Act.
In support of his oppression claim, Mr Xu relied on various other matters said to amount to an exclusion from the management of Firmtech's business from around May 2021 onwards, such as the removal of his access to the "accounts@firmtechaluminium.com.au" email address and to Firmtech's MYOB accounting system. There was a factual dispute regarding a number of these matters including, for example, whether certain steps were taken before, or after and in response to, the commencement of FAWD's operations. Given that I have found that the diversion of business opportunities amounted to oppression, and no relief is sought in respect of these further alleged acts of oppression separate from that which is sought in respect of the diversion of business, I do not consider it necessary to resolve these factual disputes.