Firmtech Aluminium Pty Ltd v Xie; Zhang v Xu; Xie v Auschn Conveyancing & Associates Pty Ltd

Solicitors: Proceedings 2022/221710 McCabes (Plaintiffs) Amberlake Lawyers (Defendants)

Proceedings 2022/259467 Amberlake Lawyers (Plaintiffs) McCabes (Defendants)

Proceedings 2022/277905 Amberlake Lawyers (Plaintiffs) McCabes (Defendants) File Number(s): 2022/221710 2022/259467 2022/277905 Publication restriction: Nil

JUDGMENT

1. On 17 October 2024, I delivered reasons for judgment in this matter: Firmtech Aluminium Pty Ltd v Xie; Zhang v Xu; Xie v Auschn Conveyancing & Associates Pty Ltd [2024] NSWSC 1293 (Primary Judgment). In these reasons, I adopt terms defined in the Primary Judgment.
2. At the time of delivering the Primary Judgment, I directed the parties to bring in short minutes of order to give effect to my reasons for judgment. I indicated that, insofar as there was any dispute about the form of orders, the parties would have an opportunity to be heard on those matters.
3. I was provided with consent short minutes of order in respect of the Lansvale Proceeding, and two competing sets of proposed orders in respect of the Principal Proceeding and the Panania Proceeding. These reasons for judgment deal with the remaining points of dispute regarding the appropriate form of orders in each of the Principal Proceeding and the Panania Proceeding.
4. In relation to each of the three proceedings, the parties agree that any consideration of the question of costs should await the quantification of any monetary award in the Principal Proceeding. This is because each of the parties has previously served Calderbank offers in relation to the proceedings. I will accordingly make an order, in each proceeding, that costs be reserved.

Election between equitable compensation and account of profits

1. In the Primary Judgment, I determined that Mr Zhang and Ms Xie breached their statutory and fiduciary duties to Firmtech by diverting certain projects to Aluminum or Logikal prior to Firmtech ceasing its operations in around October 2021 (the Relevant Projects), and that Aluminum and Logikal knowingly participated in those breaches. I also determined that Firmtech was entitled, at its election, to either an account of profits, or to equitable compensation for the loss suffered by those breaches, and that Firmtech was entitled to make a split election as between the Defendants.
2. At trial, the Plaintiffs led expert evidence regarding the quantification of profits and compensation on a "whole of business" approach. This involved quantifying the profits earned by Aluminum and Logikal from all of the projects which were undertaken by them in the period from FY2020 onwards. The Plaintiffs did not lead evidence quantifying the profits from each individual project, or from a combination of any specific projects, undertaken by Aluminum or Logikal in that period. In the Primary Judgment, I rejected the Plaintiffs' contention that Firmtech was entitled to an account of profits or to equitable compensation on this "whole of business" approach. Instead, I held that Firmtech was entitled, at its election, to an account of profits in respect of the Relevant Projects, or to equitable compensation for the loss suffered by the diversion of those particular projects.
3. The first, and main, issue which arises regarding the form of orders in the Principal Proceeding concerns the timing of this election, and the manner in which any determination of the quantum of profits should proceed.
4. The Defendants submitted that the Plaintiffs were required to make an election at this point in time between equitable compensation or an account of profits; that, in circumstances where the Plaintiffs had not sought a split trial and had chosen not to lead any evidence of the quantum of their loss and damage in respect of each of the Relevant Projects, they should not be permitted to lead such evidence at this point in time; and that, in the absence of such evidence, the Plaintiffs would presumably elect an account of profits. The Defendants further submitted that orders should be made for Aluminum and Logikal to prepare a verified account in respect of the profits earned in respect of the Relevant Projects, with the matter coming back for directions after this account is filed and served, and that the Principal Proceeding should be dismissed as against Mr Zhang and Ms Xie.
5. The Plaintiffs submitted that the Defendants' proposed approach was contrary to the position which the Defendants had adopted at trial; that the Plaintiffs did not have, and should be permitted to obtain, the material which they required in order to make an informed election between an account of profits and equitable compensation; and that, in circumstances where the parties had briefed experts, who were familiar with the case and had already given evidence in the Primary Proceeding, the most efficient way to proceed, following the production of further documents, was by an exchange of supplementary expert reports, with the matter then returning to the Court for determination of all outstanding issues. The Plaintiffs also contended that, in circumstances where Mr Zhang and Ms Xie were found to have breached their duties, and where the Plaintiffs were entitled to make a split election, in respect of different Defendants, between an account of profits and equitable compensation, there was no basis for the Court to make orders dismissing the Primary Proceeding against Mr Zhang and Ms Xie.
6. As a starting point, it was common ground that the Plaintiffs have an election between an account of profits and equitable compensation.
7. The Defendants relied on LED Builders Pty Ltd v Eagles Homes Pty Ltd (1996) 70 FCR 436 at 450 (per Lindgren J); [1996] HCA 1658 and Hexiva Pty Ltd v Lederer [2006] NSWSC 318 at [59]-[60] (per Brereton J) for the proposition that the time for this election is now. In the relevant passage of LED Builders, Lindgren J stated that a plaintiff must elect between the two forms of relief before any hearing on the quantum of monetary relief to be ordered is embarked upon.
8. However, that approach was not followed by in Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia Pty Ltd (1997) 75 FCR 230 at 234; [1997] FCA 505. Goldberg J there applied the approach described by the Privy Council in Personal Representatives of Tang Man Sit v Capacious Investments Limited [1996] 1 AC 514 at 521, as follows: "Faced with alternative and inconsistent remedies a plaintiff must choose, or elect, between them. He cannot have both. The basic principle governing when a plaintiff must make his choice is simple and clear. He is required to choose when, but not before, judgment is given in his favour and the judge is asked to make orders against the defendant. A plaintiff is not required to make his choice when he launches his proceedings. He may claim one remedy initially, and then by amendment of his writ and his pleadings abandon that claim in favour of the other. He may claim both remedies, as alternatives. But he must make up his mind when judgment is being entered against the defendant. Court orders are intended to be obeyed. In the nature of things, therefore, the court should not make orders which would afford a plaintiff both of two alternative remedies. In the ordinary course, by the time the trial is concluded a plaintiff will know which remedy is more advantageous to him. By then, if not before, he will know enough of the facts to assess where his best interests lie. There will be nothing unfair in requiring him to elect at that stage. Occasionally this may not be so. This is more likely to happen when the judgment is a default judgment or a summary judgment than at the conclusion of a trial. A plaintiff may not know how much money the defendant has made from the wrongful use of his property. It may be unreasonable to require the plaintiff to make his choice without further information. To meet this difficulty, the court may make discovery and other orders designed to give the plaintiff the information he needs, and which in fairness he ought to have, before deciding upon his remedy. A recent instance where this was done is the decision of Lightman J. in Island Records Ltd. v. Tring International Plc. [1995] 3 All E.R. 444. The court will take care to ensure that such an order is not oppressive to a defendant."
9. This approach was subsequently endorsed in Artistic Builders Pty Limited v Elliot & Tuthill (Mortgages) Pty Limited [2002] NSWSC 16 at [159]-[161] (Campbell J), Acme Office Service Pty Limited v Ludstrom [2002] NSWSC 277 at [39] (Gzell J) and Hexiva v Lederer at [59]-[60] (Brereton J).
10. In the present case, it was not suggested that the Plaintiffs had to elect between the two forms of relief before any hearing on the quantum of monetary relief was commenced. Instead, the parties led evidence regarding the quantum of relief, which was the subject of contest at trial. As I have noted above, that evidence was presented on a particular basis, namely, a whole of business approach.
11. In those circumstances, a question arose at trial regarding what the consequences would be in the event that I rejected this approach and found (as I have done) that the Plaintiffs were entitled to an account of profits or equitable compensation in respect of specific projects which had been diverted from Firmtech. The Defendants' position was as follows (emphasis added): "[COUNSEL FOR THE DEFENDANTS]: What we say is this, that one of the avenues that may be open if your Honour takes the view that we have contravened is that the particular projects that we have engaged in would be the subject of the account of profit. That is, for example, if your Honour took the view that your Honour rejected the Campbell5 evidence. Your Honour may decide, 'I'm going to order an account in relation to the Campbell5 Project', rather than in effect the whole sale account in respect of the entire business because, in effect, that is the property or the asset of the company that has been the subject of the breach of fiduciary duty. HIS HONOUR: You accept that I could take that step even though there's not evidence before the court? [COUNSEL FOR THE DEFENDANTS]: Sorry? HIS HONOUR: You say I could take that step and I'm not prevented from that even though there's not evidence before the court of what the profits are, that would just be another stage of the proceeding because I know you took up that point with Mr Cairns at the opening, but there wasn't evidence of profits of projects. [COUNSEL FOR THE DEFENDANTS]: Those observations were directed - they apply equally to both, but that would be a way of doing it. Your Honour, there's going to have to be some sort of reformulation of the way in which the damages case is put, to use that term, because there's no doubt that the valuations prepared by the experts, certainly by Mr Cairns from what we'll say shortly, has some issues that need to be corrected and there's just significant disagreement between the parties."
12. In this passage, the Defendants acknowledged that, if (as has occurred) there was a determination that the Defendants breached their duties by diverting certain projects to Aluminum and Logikal, "a way" of dealing with this outcome would be to have "another stage of the proceeding", at which evidence could be led regarding "what the profits are", as well as "some sort of reformulation of the way in which the damages case is put" by Mr Cairns and Mr Mullins (the parties' respective experts). I do not consider that the Defendants should be permitted to resile from that position.
13. Further, as Brereton J observed in Hexiva v Lederer at [60], a party should generally not be required to make an election "unless and until it is able to make an informed choice, which involves the right to receive reasonable information as to its potential entitlement in the case of both alternative remedies". Although the Plaintiffs chose to lead expert evidence regarding the profits earned by Aluminum and Logikal from all projects undertaken by them from FY2020 onwards, rather than for each individual project undertaken by them in that period, the Plaintiffs made that choice in circumstances where there was late production, or a lack of production, of documentary material in relation to a number of the individual projects. For example, the Founders Lane Project, which is one of the largest of the Relevant Projects, was first identified as a result of a subpoena issued to a third party, JWLand, on Wednesday, 17 July 2024, shortly before the hearing commenced on the following Monday. Various other Relevant Projects were identified only from bank statements of Aluminum and Logikal, with no contracts being discovered by the Defendants in respect of those projects.
14. In those circumstances, I accept that the Plaintiffs were not in a position, as at the trial, to lead evidence of the profits earned from, or loss or damage suffered in respect of, each of the Relevant Projects that was diverted to Aluminum and Logikal, and that they remain at this time unable to make an informed choice between equitable compensation or an account of profits in respect of those projects.
15. For those reasons, I accept that the Plaintiffs should have the opportunity to obtain further documents from the Defendants and to lead supplementary expert evidence calculating the outstanding issues of quantum arising from my findings in the Primary Judgment, with there being a hearing to determine those outstanding issues. I accept that those steps should be taken in advance of the Plaintiffs making an election between equitable compensation or an account of profits, with such election occurring within a short period after the delivery of reasons on the outstanding issues and prior to the entry of judgment.
16. I accept that, as the Defendants submitted, the method "commonly" adopted for taking an account of profits is as follows: "the account is verified by affidavit, a method is determined to resolve objections and upon completion of the procedure the defaulting party is ordered to pay the amount found to be due": Henley Constructions Pty Ltd v Henley Arch Pty Ltd [2023] FCAFC 62 at [282] (Yates, Rofe and McElwaine JJ), referring to Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd [2000] NSWSC 253 at [150]-[156] (Austin J) and, on appeal, Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146 at [31]-[33]; [2002] NSWCA 22 (Giles JA, with Sheller and Beazley JJA agreeing).
17. However, as the Full Court of the Federal Court noted in Henley Constructions, the appropriate way to proceed is a matter for directions. In considering what directions should be made, the Court must seek to give effect to the overriding purpose in s 56 of the Civil Procedure Act 2005 (NSW). In the present case, the parties have already briefed experts who have considered a large volume of financial records of Aluminum and Logikal, who have previously given reports in this matter regarding the profits earned by those entities from all of the projects which were performed during the relevant period, and who have previously met in conclave, produced a joint report, and given concurrent evidence. In those circumstances, I consider that the most efficient and cost-effective method of proceeding is, as the Plaintiffs propose, for the outstanding issues of quantum arising from the Primary Judgment to be the subject of supplementary expert reports and a further joint report, followed by a hearing to resolve any outstanding matters in dispute. This course is more likely to achieve the just, quick and cheap resolution of those issues.

Discharge of September 2022 Orders

1. The second issue which arises for determination in the Principal Proceeding is whether the Court should discharge certain orders made by Robb J on 5 September 2022, which were expressed to remain in place until the determination of the proceeding or further order of the Court.
2. Those orders required Logikal and Aluminum, on and from 5 September 2022, to take various steps relating to maintenance of records.
3. The Defendants sought that these orders now be discharged, submitting as follows: "The orders of Robb J only operated from 5 September 2022 onwards, so it's well after the relevant projects were taken, and after a time when your Honour has found that we were entitled to chase new clients, as it were, and further our business in the usual way. So for those reasons, there's no good reason why Robb J's orders should be made when the Court has made the determination that it has."
4. The Defendants' submission appeared to proceed, in part, on a misapprehension that I had determined at paragraphs [594] to [598] of the Primary Judgment that Firmtech was entitled to an account of profits in respect of those projects which were diverted to Aluminum or Logikal prior to October 2021, but only insofar as such profits were earned up to and including October 2021. This misapprehension was reflected in the form of orders proposed by the Defendants, which required the preparation of an account of profits in respect of the Relevant Projects only up to October 2021, and not beyond that date. The Primary Judgment contained no such limitation. In the relevant passage of the Primary Judgment, I determined that, in respect of each of the Relevant Projects which was diverted to Aluminum or Logikal in the period up to October 2021, Firmtech was entitled to an account of the profits from the project (including profits made after October 2021).
5. The Plaintiffs submitted, and the Defendants did not dispute, that some of the Relevant Projects were continuing until late 2023 or early 2024, and that some may still be continuing. In Firmtech Aluminium Pty Ltd v Xie (No 2) [2022] NSWSC 1142 at [112], Robb J explained the rationale for the orders as, in part, being as follows: "the defendants should be ordered, pending the determination of these proceedings, to retain all the vouchers, contracts and other documents that would be necessary to facilitate an efficient accounting process between the defendants and the plaintiffs in the event that the Court orders that process to take place to enable a defendant to account to Firmtech."
6. Given that this was the rationale for the orders, and given that there is an ongoing need "to facilitate an efficient accounting process", I am satisfied that the orders should remain in place until the quantum of an account of profits has been determined.

Consequential relief in respect of oppression claim

1. In the Primary Judgment, I determined that 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 reached this conclusion based on my findings that Mr Zhang and Ms Xie, while responsible for managing and operating the Windows and Doors Business of Firmtech, had diverted to Aluminum or Logikal projects which could have been performed by Firmtech.
2. By way of consequential relief, the Plaintiffs sought an order under s 233(1)(j) of the Corporations Act 2001 (Cth) (the Act) that Mr Xu be appointed as a director of Firmtech. The basis for this order was put as follows: "Absent any further steps, the Zhang/Xie parties will be ordered to pay sums to a company of which Mr Zhang is presently the sole director, while Mr Xu and Mr Zhang remain 50% shareholders. That is plainly an unworkable result."
3. The Defendants submitted that no such order should be made. In particular, they submitted that: 1. the purpose of relief under s 233 of the Act is either to bring the identified oppressive conduct to an end or, where it is at an end, to compensate for the impact of the oppressive conduct: Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 at [121]-[122] per Giles JA (Campbell NSWCA); 2. if there is no continuing oppression, then, although the Court retains power to make orders under s 233, the fact that the relief claimed is founded on conduct which is no longer continuing is relevant to the exercise of the discretion: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [68]-[72] per French CJ and at [182] per Gummow, Hayne, Heydon and Kiefel JJ (Campbell HCA); and 3. in accordance with those principles, the Court would as a matter of discretion decline to grant the relief sought, in circumstances where the oppressive conduct (being the diversion of the Relevant Projects) has ceased and there has been a complete breakdown in the relationship between Mr Xu and Mr Zhang, such that the reappointment of Mr Xu would likely result in a deadlock.
4. As the Plaintiffs pointed out, in Campbell NSWCA at [382], Young CJ in Eq observed that "the authorities … require one to show continuing oppression at the date of hearing unless one is complaining about an act in the past of a director or other controller of the company which has a continuing effect" (emphasis added). This statement was quoted with approval by French CJ in Campbell HCA at [70]).
5. In the present case, the Plaintiffs were complaining about past conduct of Mr Zhang and Ms Xie in their capacity as, respectively, a director and the General Manager of Firmtech, which has a continuing effect. In particular, the past conduct related to the diversion of the Relevant Projects to Aluminum and Logikal, and the continuing effect is that profits from those projects have been retained by, and may continue to be earned by, Aluminum and Logikal.
6. The Plaintiffs submitted, and I accept, that there is utility in the proposed order, in circumstances where I have determined that Firmtech is entitled to a (yet to be quantified) monetary judgment against the Zhang/Xie Parties and, as matters currently stand, Mr Zhang is the sole director of Firmtech.
7. I raised with the parties whether any such order could be considered at the time that a monetary judgment is made in favour of Firmtech. The Plaintiffs submitted that Mr Zhang has not offered any undertakings to the Plaintiffs regarding the management of Firmtech (such, as for example, an undertaking not to cause Firmtech to incur any debts), and in those circumstances, there is a risk that conduct by Mr Zhang in his capacity as sole director of Firmtech could, in the period prior to the receipt of any monetary award, prejudice Firmtech's position upon receipt of such an award.
8. While I acknowledge that the appointment of Mr Xu as a director may lead to a deadlock in the management of Firmtech, this is a matter of lesser significance in circumstances where Firmtech is a dormant company which is not trading, and the only decision likely to arise for the directors of Firmtech in the near future is what should be done with moneys received by way of a judgment in these proceedings. That is plainly a matter in which Mr Xu has a real and substantial interest.
9. Accordingly, in the Principal Proceeding I will make orders substantially in the form of the orders proposed by the Plaintiffs.

Fifth to Eleventh Defendants

1. Finally, the Defendants sought an order that the Principal Proceeding be dismissed as against the Fifth to Eleventh Defendants.
2. In the Primary Judgment, I stated that the Fifth to Eleventh Defendants were no longer parties to the Principal Proceeding. That was incorrect. For reasons that were unexplained, references to the Fifth to Eleventh Defendants were struck through in the Amended Summons, but a claim of knowing receipt was pleaded against them in the Amended Statement of Claim.
3. At the hearing regarding the form of orders that should be made arising from the Primary Judgment, the Plaintiffs acknowledged that they did not press any claims against the Fifth to Eleventh Defendants in closing address at trial, and confirmed that they made no complaint regarding any failure to address such claims in the Primary Judgment. The Plaintiffs accepted that an order should be made dismissing the proceeding as against those defendants.

Panania Proceeding

1. In the Panania Proceeding, I determined that Ms Xie had failed to establish her claims against the defendants, and that those claims should be dismissed. I also determined that Mr Xu had established his cross-claim against Ms Xie, and that he was entitled to judgment in the sum of $163,256.22, plus pre-judgment interest.
2. The form of orders in the Panania Proceeding is agreed, other than as to the calculation of pre-judgment interest.
3. Mr Xu submitted that interest should be calculated from 20 April 2021, being the date of completion of the sale of the Panania Property. This was said to reflect the Court's findings that Ms Xie and Mr Xu had reached an agreement that each of the Panania Property and the Lansvale Property would be sold, with the proceeds being used to repay moneys owing to Mr Xu in respect of the parties' various joint investments (including Mr Xu's contribution to the purchase of the Panania Property by Ms Xie).
4. However, as the Defendants submitted, Mr Xu had control of the process of the distribution of funds from the sale of the Panania and the Lansvale Properties. After using the proceeds of the sale of those properties to repay in full the amount outstanding in respect of the Luna Loan, it was open to Mr Xu, consistently with the agreement which he had reached with Ms Xie and Mr Zhang and with the terms of the directions given to him by Ms Xie, to have caused Auschn to pay, in May 2021, the amount owing to him in respect of the Panania Property in advance of making any payment to himself in respect of the amount owing by Firmtech. Further, Mr Xu did not inform Ms Xie as to how he allocated any payment which was made to him or his nominee and, in particular, did not inform Ms Xie whether any payment which he caused Auschn to make for his benefit was appropriated to the amount owing to him by Firmtech or to the amount owing to him by Ms Xie.
5. In those circumstances, I accept the Defendants' submission that interest should run from the date when Mr Xu first made a demand that Ms Xie repay the amount of his contribution in respect of the Panania Property (and, therefore, the date when he first informed her that the amounts which had previously been paid to him from the sale of the Properties had not been appropriated to this debt). The date of that demand was 10 November 2022.
6. Accordingly, I accept the Defendants' calculation of the quantum of pre-judgment interest.

Orders

1. For the reasons set out above, I make the following orders.

Firmtech Aluminium Pty Ltd v Xie - proceeding numbered 2022/221710 (Principal Proceeding) 1. Pursuant to section 233(1)(j) of the Corporations Act 2001 (Cth), the Second Plaintiff, Zhaohui Xu, be appointed as director of the First Plaintiff, Firmtech Aluminium Pty Ltd. 2. In respect of any request for further disclosure: 1. the Plaintiffs make any request for further disclosure by 4pm on 18 November 2024; 2. the Defendants respond to any such request by 4pm on 22 November 2024; and 3. the Plaintiffs to make any application for further disclosure by 4pm on 26 November 2024, such application to be returnable before Nixon J on 29 November 2024 at 9am, or such other date as may be arranged with the Associate to Nixon J. 1. The Plaintiffs serve any expert evidence on which they rely to give effect to the judgment of Nixon J by 18 December 2024. 2. The Defendants serve any expert evidence in response by 5 February 2025. 3. The experts are to meet in conclave and to prepare a joint expert report by 19 February 2025. 4. List the matter before Nixon J for hearing on 18 March 2025 at 10am, or such other date as may be arranged with the Associate to Nixon J. 5. All questions of costs be reserved. 6. Subject to order (7) above, the proceeding as against the Fifth to Eleventh Defendants be otherwise dismissed.

Zhang v Xu - proceeding numbered 2022/259467 (Lansvale Proceeding) 1. The Second Defendant, Auschn Conveyancing & Associates Pty Ltd, pay to the Third Defendant, Firmtech Holdings Pty Ltd, by 20 November 2024, all moneys held by the Second Defendant, as conveyancer for the Third Defendant, in respect of the sale of the property located at 9 Knight Street, Lansvale, New South Wales. 2. Upon compliance with order 1 above, the Defendants be released from the undertakings given by them and as noted in the orders made by this Court on 8 September 2022. 3. The question of costs be reserved. 4. Subject to the orders in paragraphs 1 and 3 above, the Plaintiff's Statement of Claim is otherwise dismissed.

Xie v Auschn Conveyancing & Associates Pty Ltd - proceeding numbered 2022/277905 (Panania Proceeding) 1. The Cross-Defendant, Xiaoyan Xie, to pay the Cross-Claimant, Zhaohui Xu, the sum of $163,256.22. 2. Pursuant to section 100 of the Civil Procedure Act 2005 (NSW), the Cross-Defendant, Xiaoyan Xie, to pay the Cross-Claimant, Zhaohui Xu, interest on the sum of $163,256.22, calculated on and from 11 November 2022, in the sum of $24,880.43. 3. The question of costs be reserved. 4. Subject to the order in paragraph 3 above, the Plaintiff's Statement of Claim is otherwise dismissed.

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: 12 November 2024