First Plaintiff/First Defendant by Counterclaim v Second Plaintiff/Second Defendant by Counterclaim

1 VicBeef Meat Pty Ltd, formerly Tabro Meat Pty Ltd ('Tabro'),[1] owns and operates an abattoir in Lance Creek, Victoria ('the Abattoir'). Tabro is a wholly owned subsidiary of VicBeef Holdings Pty Ltd ('VicBeef').[2]

2 VicBeef and Tabro were party to security agreements with the National Australia Bank ('NAB'). On or about 3 February 2015, Tabro and NAB entered into a loan agreement ('the NAB Loan Agreement'). VicBeef guaranteed Tabro's obligations under the NAB Loan Agreement ('the NAB Guarantee'). Pursuant to the NAB Loan Agreement and the NAB Guarantee, VicBeef and Tabro provided security in favour of NAB, namely: a general security agreement granted by VicBeef (entitled 'fixed and floating charge') in favour of NAB ('the VicBeef NAB GSA'); a general security agreement granted by Tabro in favour of NAB (entitled 'fixed and floating charge') ('the Tabro NAB GSA'); and a registered mortgage granted by Tabro over the Abattoir in favour of NAB ('the Tabro NAB Mortgage') (collectively, 'the NAB Security Agreements').

(a) without NAB's consent, VicBeef may not grant further encumbrances in connection with its personal or other property,[3] other than as arising in the ordinary course of business;

(b) VicBeef would be in default if, amongst other things, it did something it agreed not to do under the VicBeef NAB GSA, or if any security interests granted by VicBeef to a third party were enforced or became enforceable; and

(c) if VicBeef was in default for more than one day, NAB could treat the amount owing as immediately due and payable, sue VicBeef for the amount owing, or appoint a receiver.

4 The Tabro NAB GSA and the NAB mortgage contained equivalent terms.

5 As of November 2017, VicBeef and Tabro were also party to an agreement with, inter alia, Harmony Agriculture and Food Company Pty Ltd ('Harmony'). In broad terms, the agreement involved the effective sale of a share in VicBeef and Tabro's business to Harmony ('the Harmony Agreement'; its intended effect 'the Harmony Restructure'). The Harmony Restructure involved the incorporation of a new entity to which the assets of Tabro would be transferred and in which shares would be issued to Harmony, VicBeef, and/or related interests of those companies. This process was to take some time and had not been effected as of June 2018, when the below events took place.

6 On or about 28 December 2017, the second defendant/plaintiff by counterclaim, Laiyin Cai, ('Mr Cai') entered into a loan agreement with Shenzhen Shangheng Guantong Investment Enterprises (Limited Partnership) ('SSIE'), a limited partnership incorporated in China ('the SSIE Loan Agreement'). Pursuant to the SSIE Loan Agreement, Mr Cai agreed to loan up to RMB 100 million to SSIE. The purpose of the loan was described as the 'turnover of working capital'.[4]

7 SSIE's obligations under the SSIE Loan Agreement were guaranteed by, among others, Sundiro Holding Co Ltd ('Sundiro'); Heilongjiang Hengyang Cattle Industry Co Ltd ('HHCIC'); Nehe New Hengyang Biochemical Products Co ('NNHBP'); Yangyou Chen ('Mr Chen') the first defendant, a shareholder and general partner/legal representative of SSIE, and a chairman of Sundiro; Mr Chen's wife Ruiyi Liu ('Ms Liu'); and Shumao Xu ('Mr Xu'), the president of Sundiro.

8 In addition to his role and relationship with SSIE and Sundiro, Mr Chen was also one of three directors of Tabro and VicBeef; the remaining two directors were the Chinese based, Lei Li ('Mr Lei Li'), and Xiaotong Yang ('Ms Tong Yang'). Ms Tong Yang[5] is based in Australia.

9 The first interest payment under the SSIE Loan Agreement was due on 14 February 2018. It was not paid. In March 2018, Mr Chen proposed revised timelines for the payment of the interest instalments and the repayment of the RMB 70 million principal. The first instalment of the principal repayment (RMB 15 million) was to be made on 4 April 2018; the second instalment of RMB 15 million on 12 April 2018; and the third instalment of RMB 20 million on 30 April 2021. They were not paid.

10 Duchen Hong ('Mr Hong') is Mr Cai's brother. The brothers own a group of companies known as the Dongzi group of companies, whose principal business is the sale of shrimp and seafood products. Mr Hong had the effective carriage of the SSIE Loan Agreement on Mr Cai's behalf. On 26 April 2018, Mr Chen told Mr Hong that further security could be provided by the Australian abattoir business with which Mr Chen was associated.[6]

11 In the result, on about 7 June 2018 VicBeef and Tabro entered into security agreements in favour of Mr Cai ('the Cai Security Agreements').

12 Those Cai Security Agreements entered into by VicBeef comprised:

(a) a guarantee and indemnity granted by VicBeef, Tabro and Mr Chen in favour of Mr Cai in respect of Mr Cai's entitlements under the SSIE Loan Agreement ('Guarantee and Indemnity');

(b) a general security charge granted by VicBeef in favour of Mr Cai ('VicBeef Charge');

(c) a share transfer form effecting a transfer of 40% of the ordinary shares held in Tabro by VicBeef to Mr Cai ('Share Transfer Form'); and

(d) an authority deed granted by VicBeef, Tabro and Mr Chen in favour of Mr Cai ('Authority Deed').

13 Those Cai Security Agreements entered into by Tabro comprised:

(a) a mortgage granted by Tabro in favour of Mr Cai in respect of the Abattoir ('Tabro Mortgage');

(b) a general security charge granted by Tabro in favour of Mr Cai ('Tabro Charge');

(c) the Guarantee and Indemnity referred to above; and

(d) The Authority Deed referred to above.

14 By the Guarantee and Indemnity, VicBeef, Tabro and Mr Chen unconditionally and irrevocably guaranteed the due and punctual payment to Mr Cai of all money which at any time was actually or contingently owing or remained unpaid, or might because of a then-existing arrangement or circumstance become actually or contingently owing in the future to Mr Cai by SSIE ('the Guaranteed Money'). The maximum liability owed by VicBeef, Tabro and Mr Chen under the Guarantee and Indemnity was AU$14,999,999.99.[7]

15 The terms of the Authority Deed conferred upon Mr Cai and his nominated legal representatives authorisation to insert information that they considered necessary into the Cai Security Agreements after they had been executed.

16 The terms of the VicBeef Charge included a definition of 'charged property' as all of VicBeef's ordinary shares present and future in Tabro, though limited to 40% of the total ordinary issued shares in Tabro. Consistently with the Harmony Agreement referred to above, special condition 1 of the VicBeef Charge provided that Mr Cai would not unreasonably withhold his consent to VicBeef assigning its shares in Tabro or permitting Tabro to issue further shares to Harmony,[8] on condition that Mr Cai was granted appropriate security in return for the secured money ('special condition 1'). 'Secured money' was defined to include all debts and liabilities of VicBeef and SSIE to Mr Cai ('secured money').

17 The terms of the Tabro Charge were relevantly similar. The definition of 'Secured Money' extended to all debts and liabilities owing by Tabro and SSIE to Mr Cai; the definition of 'charged property' included all future and present real property which necessarily included the Abattoir. Special Condition 1 provided that Mr Cai would not unreasonably withhold his consent to Tabro transferring all its assets to Lance Creek Operations Pty Ltd ('Lance Creek Operations'),[9] provided that Mr Cai received adequate security over Lance Creek Operations.

18 By the terms of the Tabro Mortgage, Tabro mortgaged the estate and/or interest in the Abattoir to Mr Cai as security for the secured money. The secured money included, among other things, all amounts that were or may have become owing to Mr Cai under any agreement between Mr Cai and Tabro, or under any deed (including any security) provided by Tabro in favour of Mr Cai.

19 VicBeef and Tabro did not seek NAB's consent to enter into the Cai Security Agreements. It is not disputed that by entering into the Cai Security Agreements, VicBeef was in default under the VicBeef NAB GSA and Tabro was in default of the Tabro NAB GSA and the Tabro NAB Mortgage; that is, entry into the Cai Security Agreements was a breach of the NAB Security Agreements.

20 In this proceeding VicBeef[10] and Tabro assert that the Cai Security Agreements were entered into in a breach by Mr Chen of obligations owed by VicBeef and Tabro to:

(a) exercise his powers and discharge his duties with the degree of care and diligence that a reasonable director would exercise in the circumstances pursuant to the general law and s 180(1) of the Corporations Act 2001 (Cth) ('Corporations Act') ('the duty of care and diligence');

(b) exercise his powers and discharge his duties in connection with each company in good faith in the best interests of each company pursuant to the general law and s 181(1)(a) of the Corporations Act ('the duty to act in good faith and in the best interests of the company');

(c) exercise his powers and discharge his duties for a proper purpose pursuant to the general law and s 181(1)(b) of the Corporations Act ('the duty to act for a proper purpose');

(d) not improperly use his position to gain an advantage for himself or someone else pursuant to the general law and s 182(1) of the Corporations Act ('the duty to not improperly use position'); and

(e) avoid conflict or a real or substantial possibility of conflict between his personal interests and the interests of each company pursuant to the general law ('the conflict rule').

21 As a result of the alleged breaches of duty by Mr Chen in procuring the Cai Security Agreements, VicBeef and Tabro seek, inter alia, orders for rescission of those agreements and related relief.

22 In order to determine whether VicBeef and Tabro are entitled to such relief, it is necessary to examine the events which led to the execution of the Cai Security Agreements in some detail.

23 Negotiations for the provision of security by VicBeef and Tabro began on 28 April 2018 and culminated in the execution of the Cai Security Agreements on 7 June 2018. In addition to Mr Chen and Mr Cai, the participants in the negotiations included the following:

• Michael Wang (aka Wang Lei) ('Mr Michael Wang') - the director/general manager of the overseas development department of HHCIC from November 2015 to September 2017. From September 2017, Mr Wang was a chairman of Sundiro (along with Mr Chen).
• Peter Wang (aka Wang Yi) ('Mr Peter Wang') - a lawyer from Dentons based in China.
• Mr Xu (aka Heng Yang) - the president of Sundiro.

• Mr Hong - the brother of Mr Cai and his business partner.
• George Sun (aka Liping Sun) ('Mr Sun') - a partner in the Chinese law firm known as Guandong United Intellectus Law Firm.
• Patrick Chong ('Mr Chong') - a partner at the Melbourne law firm Stamford Laywers ('Stamford').
• Patricia Chong ('Ms Chong') - Mr Chong's wife who assisted in communications between Mr Chong and Mr Cai's representatives.
• Ella Leung ('Ms Leung') - a former general manager of Stamford now involved in the distribution of healthcare products, who introduced Stamford to Mr Sun and who assisted in the communications between Mr Sun and Mr Chong.
• Zhang Yang ('Ms Zhang Yang') - and employee of Mr Cai.

• Ms Tong Yang - a director of VicBeef and Tabro at the time the SSIE Loan Agreement was executed along with Mr Chen and Mr Lei Li.[11]
• Minnie Yang ('Ms Minnie Yang') - the finance manager of Tabro and VicBeef.

• Andrea Lucas ('Ms Lucas') - solicitor at Nevile & Co Lawyers, a law firm in Melbourne.
• Michael Shaw ('Mr Shaw') - corporate adviser at the corporate advisory firm BlueMount Capital.

24 The negotiations are evidenced in conversations on the WeChat messaging platform[12] as well as in emails principally from Ms Leung to Mr Sun. The WeChat messaging platform allows users to create conversation groups, in which invited participants can view and respond to messages. Many of the messages evidencing the negotiations were sent in such conversation groups.

25 In addition, each of Mr Cai, Mr Hong, Mr Sun, Mr Chong, Ms Leung, Ms Tong Yang and Ms Lucas gave evidence in the proceeding. Their evidence in chief was given by witness statement. All were cross examined,[13] save for Ms Leung, whose attendance for cross examination was not required. Each of Mr Cai, Mr Hong, Mr Chong, Ms Tong Yang and Ms Lucas gave credible and honest evidence and generally sought to assist the Court. I was less impressed with Mr Sun, who was at times prone to giving long and non-responsive answers with a view to assisting the interests of Mr Cai. Little turns on this however, as the critical events are evidenced by indisputable objective facts or evidenced in emails or in the WeChat messages.

26 The WeChat messages were sent in Mandarin, and English translations both certified and uncertified were tendered and accepted by both parties as accurate. The nature of the messaging platform and the need for translations on occasions presents some difficulty in understanding exactly what transpired, but overall the events are clear enough and are shown in the documentary record.

27 One key player who did not give evidence was Mr Chen. Mr Chen was both the first defendant and a defendant to the counterclaim issued by Mr Cai to enforce the Cai Security Agreements. Mr Chen was represented in the proceeding by solicitors until April 2021. His solicitors ceased to act on 19 April 2021 and advised that Mr Chen did not intend to participate in the trial. This meant that the argument that the execution of the Cai Security Agreements as not a product of a breach of directors' duties was not advanced by Mr Chen (or indeed the other director who executed the agreement on behalf of the companies, Ms Tong Yang) but by the party who obtained benefit from their execution, Mr Cai.

28 Relevantly, on 27 April 2018 two separate WeChat conversations were established; the 'Hong WeChat' and the 'Cai WeChat'.

29 The participants in the Hong WeChat included Mr Hong, Ms Zhang Yang, Mr Michael Wang, Mr Peter Wang Mr Xu and Ms Tong Yang. The participants in the Cai WeChat included Mr Cai, Mr Hong, Mr Sun, Ms Zhang Yang (all acting in Mr Cai's interests) and Mr Michael Wang and Mr Peter Wang who were acting in Mr Chen's interest. Ms Tong Yang was invited to join the Cai WeChat on 17 May 2018.

30 In the Hong WeChat, the other participants sought information from Ms Tong Yang about VicBeef and Tabro. Ms Tong Yang uploaded various documents to the group in response. The documents were subsequently uploaded, without Ms Tong Yang's knowledge, into the Cai WeChat of which she was not a participant until 17 May 2018.

31 The principal negotiations as to the nature and the terms of the proposed security occurred in the Cai WeChat.

32 Another WeChat group was established between Ms Leung and Mr Sun on 18 May 2018 ('the Leung and Sun WeChat'). Outside of the Leung and Sun WeChat, Ms Leung and Mr Sun regularly communicated via email.

33 In November 2017, Tabro ceased operations due to cash flow issues. As a result of these financial difficulties, Tabro's assets were to be sold. BlueMount Capital was appointed to advise Tabro on the sale. Mr Shaw of BlueMount Capital was the lead advisor on the sales process. The negotiations for the Cai Security Agreements occurred against the background of these financial difficulties, and the consequent efforts to sell Tabro's assets.

34 As mentioned above, BlueMount Capital had apparently brokered a transaction with Harmony, evidenced initially in a memorandum of understanding between Tabro and Harmony entered into on or about 6 November 2017 ('the Harmony MOU') which was signed by Ms Tong Yang on Tabro's behalf. The Harmony MOU was entitled 'Collaboration Proposal - Memorandum of Understanding'. The Harmony MOU, among other things, refers to Tabro's intent to realise part of its interest in the Abattoir in a sale to or joint venture transaction with Harmony. The Harmony MOU also recorded Harmony's intent to enter into a partnership relationship with an entity which could process Harmony's expanding herd of cattle in Australia and which could enhance its direct access to Chinese export markets, Australian import markets, and other appropriate international markets.

35 The Harmony MOU referred to initial conversations between Tabro and Harmony about collaboration options for utilising the Abattoir and its extensive licences and existing supply chain channels, as well as those channels accessible in conjunction with Tabro and the Heilongjiang Hengyang group of companies ('the Hengyang Group') (formerly known as the 'Foresun' group of companies).

36 As part of the asset sale/joint venture transaction, the Harmony MOU contemplated the incorporation of a new entity, 'NewCo',[14] as a wholly owned subsidiary of VicBeef. After NewCo's incorporation, Tabro's assets would then be transferred to and held by NewCo. Subsequently, VicBeef was to sell a portion of its shares in NewCo to Harmony. Broadly, the effect of these transactions was to give Harmony an ownership interest in the Abattoir and its associated business. The Harmony MOU contemplated an initial shareholding by Harmony in NewCo of between 51% to 60% of issued shares.

37 The Harmony MOU also referred to a joint assumption that 'contemporaneously' (presumably with the acquisition of Harmony's shares in NewCo) Tabro and the Hengyang Group were to establish access to additional supply chains within China and other international markets for Harmony's products.

38 The Harmony MOU contemplated the establishment of a 'data room' and noted the parties' best efforts to complete on or before 15 December 2017.

39 The Harmony MOU proceeded on the basis of a value being ascribed to the Abattoir (and the associated land) of AU$66 million.

40 On 1 April 2018, VicBeef, Tabro, HY Cattle Holdings Limited ('HY Cattle Holdings'), HY Moe Meat Pty Ltd ('HY Moe Meat'), Harmony and Dalian Hesheng Holding Group Co Ltd ('Dalian'),[15] and its affiliates executed a document entitled 'binding term sheet - investment in Tabro Meat Pty Ltd' ('the BTS'). The BTS was a further, more developed form of the transaction contemplated by the Harmony MOU. By the BTS, the parties:

(a) agreed that VicBeef[16] would issue and Harmony would subscribe for 60% of the expanded capital to be issued in VicBeef;

(b) proposed that pursuant to a restructure plan, the remaining 40% would be held by HY Moe Meat;

(c) agreed that Harmony would, in return for its 60% shareholding in VicBeef, provide consideration including:

(i) AU$25.2 million cash for subscribed shares; and

(ii) AU$7.8 million via a loan to VicBeef, or other structure as agreed between the parties to be treated as subordinated debt of VicBeef; and

(d) agreed that Harmony would initially pay to Tabro up to AU$3 million as a down payment against its requirement to pay the AU$25.2 million for the subscribed shares.

41 The AU$3 million was paid to Tabro and deployed as working capital. The BTS made provisions for the further payment of AU$22.2 million in respect of the subscribed shares by Harmony to VicBeef.

The negotiations for the Cai Security Agreements

42 As mentioned above, the first interest repayment under the SSIE Loan Agreement due on 14 February 2018 had not been paid and a revised timeline of 4 April 2018 had been set for a principal repayment of RMB 15 million. The revised timeline of 4 April 2018 was also not met. Consequently, Mr Hong called Mr Xu to follow up the outstanding payments. Mr Xu noted that Mr Chen was working in Shanghai and proposed that Mr Chen meet with Mr Hong there. Accordingly, on 10 April 2018 Mr Hong travelled to Shanghai and met with Mr Chen.

43 Mr Hong gave evidence that during the resulting meeting, Mr Chen said, inter alia, that his group of companies was in discussions with the Zheng Da Group from Thailand to organise a restructure of both groups, and that Mr Chen was aiming to have the Zheng Da Group acquire Sundiro ('the Zheng Da restructure'). He told Mr Hong that the Abattoir in Australia was not in operation, but that the Uruguay abattoirs[17] were operating. Mr Chen also said that Tabro was about to transfer its shares to Dalian ('the Dalian share transfer').[18] According to Mr Hong, Mr Chen said that VicBeef and Tabro could meet their payment obligations under the SSIE Loan Agreement once the Dalian share transfer and the Zheng Da restructure had taken place.[19]

44 Mr Hong said that Mr Chen assured him that interest payments would be made within two weeks of that meeting; if that was not done, Mr Chen agreed to sell his house to ensure repayment.

45 Two weeks after Mr Hong's meeting with Mr Chen, the promised interest payment had not been made. Mr Hong called Mr Xu to request payment. Mr Xu arranged for Mr Hong to meet once again with Mr Chen at the offices of Mr Michael Wang. Mr Xu explained that Mr Michael Wang was the chairman of Sundiro. Mr Hong said that he understood that Mr Chen was the ultimate owner of the major shareholder in Sundiro.[20]

46 On 26 April 2018, Mr Hong met with Mr Chen and Mr Xu at Sundiro's offices in Shanghai. Mr Hong said to Mr Chen and Mr Xu that in light of the repeated failures to repay the loan, Mr Cai and Mr Hong would initiate litigation. Mr Hong gave evidence that Mr Chen then said, 'if that be so, then I will let you get the remaining 40% of shares in the Australian abattoir business as the pledging guarantor'. Mr Chen explained that he could not let Mr Hong and Mr Cai have 100% because the other 60% of shares in the Abattoir[21] had already been sold to Dalian.[22]

47 Mr Hong also gave evidence that he had heard Mr Chen instruct Mr Michael Wang to prepare security documents pledging 40% of the interest in the Abattoir as security in favour of Mr Cai. As a result, Mr Hong called Mr Sun, a lawyer, and requested that he assist in the negotiations with respect to the provision of security.

48 On 27 April 2018, a number of documents relating to VicBeef and Tabro were uploaded to the Cai WeChat by Ms Zhang Yang, who had obtained the documents from Ms Tong Yang in the Hong WeChat. The documents uploaded including a company search of Tabro and its articles of association; as well as like information for VicBeef. Also uploaded was a document titled 'Ownership Structure - Current' ('the ownership structure document'), which is inset below.

HY Australia Holdings Pty Ltd was later renamed as VicBeef, and is referred to throughout in these reasons as VicBeef.

49 One of the sibling entities of China Beef Products Holdings Limited is HHCIC,[23] which was a guarantor of the SSIE Loan Agreement.

50 There is another version of the corporate chart, which is identical save that it refers to two additional Uruguayan companies Rondatel S.A. and Lirtix S.A., which appear in the diagram above Pacific Ocean Cattle Holdings Limited (however, the chart does not suggest that these entities were the holding companies of Pacific Ocean Cattle Holdings Limited). The Uruguayan companies owned abattoirs in Uruguay which were acquired in 2016. In April 2016, entities associated with Mr Chen also acquired abattoirs and a feedlot in Argentina. The companies involved in that acquisition were Prosper Well Enterprises Ltd ('Prosper Well'), Bamboo Enterprises S.A and Chrysan Taw Enterprises S.A. The security provided to finance that acquisition included security provided by VicBeef's parent, HY Cattle Holdings, in the form of its shareholding in VicBeef.[24]

51 In 2017 Sundiro acquired the assets of Rondatel S.A. and Lirtix S.A. from HHCIC.

52 On 30 April 2018, having apparently considered the information provided to him, Mr Sun noted in the Cai WeChat that VicBeef[25] owned 100% of the shares in Tabro and that the Board members of VicBeef comprised Mr Chen, Mr Lei Li and Ms Tong Yang. Mr Sun suggested that VicBeef should provide a director and shareholders' resolution approving 40% of the shares in Tabro being pledged to Mr Cai.

53 On 13 May 2018, Mr Hong uploaded a Word document described as 'Equity Assignment Agreement' ('the Equity Assignment Agreement') onto the Cai WeChat. Unfortunately, this document was not able to be obtained and was not in evidence.

54 Mr Sun identified some problems with the Equity Assignment Agreement but noted that, based on his analysis of the ownership structure document:

(a) Tabro was wholly owned by VicBeef;

(b) VicBeef was wholly owned by HY Cattle Holdings Limited (BVI);

(c) HY Cattle Holdings Limited (BVI) was wholly owned by China Beef Holdings Limited (Cayman);

(d) China Beef Holdings Limited (Cayman) was a partly owned subsidiary of CDH Grand Cattle Holdings Limited (BVI); and

(e) CDH Grand Cattle Holdings Limited (BVI) was wholly owned by CDH Fund (Cayman) ('CDH Fund').

55 Mr Sun correctly identified CDH Fund as the ultimate controller of VicBeef. Mr Sun had apparently ascertained, or at least believed, that Mr Chen personally held shares in CDH Fund.

56 In a WeChat message, Mr Sun proposed that the most direct strategy to effect the provision of security was to pass a resolution of the 'board of shareholders' (sic) and the board of directors of VicBeef pledging 40% of the equity in Tabro to Mr Hong; alternatively, Mr Chen could pledge his shares held in CDH Fund to Mr Hong.

57 Mr Sun also advised that Mr Chen could only dispose of his own shares in the 'top Cayman company' (presumably CDH Fund) and that Mr Chen personally could not promise to pledge the shares in Tabro or otherwise use them to offset his personally guaranteed debt under the SSIE Loan Agreement. Mr Sun also said that only the 'board of shareholders (sic)' and the board of directors of VicBeef had the right to pledge the equity in Tabro.

58 Through discussions in the Leung and Sun WeChat, Mr Chong of Stamford was engaged to act as the Australian lawyer representing Mr Cai's interests.

59 Mr Sun gave evidence that on 16 May 2018, a security agreement was uploaded into the Cai WeChat by Mr Hong. The draft security agreement was between VicBeef and Mr Hong and provided for Mr Hong to receive security in the form of 40% of the ordinary shares in Tabro held by VicBeef, which security would be exercisable by Mr Hong in the event of a failure by Mr Chen (described as the borrower) to repay in full the sums due under the loan agreement with Mr Hong.[26] Mr Peter Wang posted a message in the Cai WeChat that the pledge of Tabro equity requires the consent of the NAB and that it would be difficult to obtain such consent in such a short time; his message concluded "therefore it is still uncertain whether this agreement can be finally signed according to the solution of pledging Tabro equity'.

60 Also on 17 May 2018, Ms Zhang Yang uploaded into the Cai WeChat:

(a) a NAB letter of offer that named Tabro as a guarantor dated 14 September 2010;

(b) the NAB Loan Agreement of 3 February 2015;

(c) the BTS; and

(d) screenshots of an email from BlueMount Capital's Mr Shaw to Ms Tong Yang, Mr Michael Wang and Mr Peter Wang.

61 The email from Mr Shaw noted that following the Harmony Restructure the value of the Abattoir would lie in VicBeef (that is, through its interest in NewCo); and that consequently Tabro would have no assets. In that context Mr Sun pointed to the unsuitability of the security agreement as drafted, which pledged security in the form of 40% of the ordinary shares of Tabro.

62 The security agreement also contained a covenant on the part of the secured party (that is, Mr Hong) to the effect that the secured party would release the charge over the security interest if it was notified that such act became necessary for the purpose of completing the sale of the assets to NewCo and the Harmony Restructure.

63 The difficulties in reconciling the proposed equity pledge of 40% of the shares in Tabro with the proposed Harmony Restructure vexed the negotiators. On 16 May 2018, Mr Sun asked for a meeting to be arranged with Dalian. On 17 May 2018, after Ms Tong Yang had been added to the Cai WeChat, Mr Sun posted a message to the effect that Tabro's board of directors needed to resolve that Tabro should undertake a guaranteed repayment for the balance of the total debts owed by Mr Chen to Mr Cai. Ms Tong Yang confirmed that the directors of Tabro were herself, Mr Lei Li and Mr Chen.

64 Mr Michael Wang enquired as to the need to meet with Dalian in connection with the proposed Cai Security Agreements,[27] and Mr Sun asked for contact details and later requested that he be introduced to Dalian so that he could 'go through the details'. However, Mr Michael Wang posted a message in the Cai WeChat stating that although the company was bearing Mr Chen's personal liability, Mr Michael Wang did not anticipate that would be a problem because the security was confined to 40% of the equity.[28] Mr Michael Wang acknowledged that if the Harmony Restructure was to conflict with the Cai Security Agreements, it may be impossible to complete the transaction; presumably, 'the transaction' meant completion of the Cai Security Agreements or alternatively repayment of the moneys due to Mr Cai under the SSIE Loan Agreement. On 17 May 2018, Mr Sun was provided with a copy of the BTS.

65 Mr Sun emphasised that the equity pledge was a transitional document and could be withdrawn.

66 On 17 May 2018, Mr Michael Wang, in response to Mr Sun's message that the negotiations were going around in circles, noted that 'once you meet the Dalian side, they will know what has happened. I'm worried the progress of reorganisation will be affected'. His message concluded 'I can only manipulate the assets and shares belonging to Manager Chen. I can't use others as a guarantee for Manager Chen'.

67 On 17 May 2018, Mr Peter Wang informed Mr Sun in the Cai WeChat that even a transitional pledge of Tabro ('transitional' presumably meaning pending completion of the Harmony Restructure) required the consent of NAB, and that a local financial adviser was working on obtaining this consent.[29] The next day, Mr Peter Wang informed Mr Sun that he had received an email from Mr Shaw of BlueMount Capital confirming that, pursuant to the NAB Security Agreements, Tabro's equity could not be directly pledged to a third party. He otherwise informed Mr Sun in the Cai WeChat that according to the requirements of the Harmony Restructure, Tabro was to be deregistered later, and that all its assets would then be under the control of VicBeef (that is, through VicBeef's interest in NewCo). In response to a subsequent query by Mr Sun, Mr Michael Wang confirmed that the proposed Harmony Restructure contemplated the transfer of Tabro's assets to NewCo, with VicBeef then to hold the entirety of the shares in NewCo and subsequently to transfer 60% of those shares to Dalian.

68 On 18 May 2018, Mr Sun left a voice message for Ms Leung saying that he did not want to consider the standpoint of NAB or Dalian; he just wanted documents prepared that would allow for the 40% shareholding of VicBeef in Tabro to be secured to Mr Cai, and that arrangements be made for the directors of VicBeef to sign the necessary documents.

69 On 22 May 2018 Mr Chong from Stamford received a translation of information apparently provided by Mr Sun which set out the background to what was described as an asset equity pledge. The email read as follows:

1 Shenzhen Heng Guan Tong Investment Co., Ltd. controlled by Mr. Chen Yangyou (Mr Chen) borrowed RMB100 million from Mr. CAI Laiyi (Mr Cai) on 28/12/2017. The maturity date is 27/06/2018. As the interest has not been paid and the outstanding principal is RMB70 million, Mr. Cai requires the borrower and its actual controller, Mr Chen, to provide the guarantee collateral;

2 Mr Chen holds TABRO MEAT PTY LTD through HY CATTLE HOLDINGS LTD (a company registered in BVI), and HY AUSTRALIA HOLDINGS PTY LTD;

3 TABRO MEAT PTY LTD currently owes NAB and some supplier debts of approximately A$10 million and requires debt restructuring. The debt restructuring financial adviser is BLUEMOUNT CAPITAL;

4 HY AUSTRALIA HOLDINGS PTY LTD is currently bringing in approximately A$20 million to invest IN DALIAN HESHENG HOLDING GROUP Co. Ltd,[30] an Australian related company HARMONY AGRICULTURE AND FOOD COMPANY PTY LTD, to repay TABRO's bank loans, suppliers' arrears and future working capital. Accordingly, HARMONY will hold 60% of HY AUSTRALIA HOLDINGS in the future, and the remaining 40% will be held by HY CATTLE HOLDINGS;

5 All the assets held by TABRO after the reorganisation will be transferred to LANCE CREEK OPERATION PTY LTD.[31] HY AUSTRALIA HOLDINGS will hold 100% of LANCE CREEK and HY AUSTRALIA HOLDINGS will be changed to VICBEEF PTY LTD.

6 In order to protect creditor Mr Cai's unrecovered creditor's rights, it is necessary to LODGE CAVEAT for the assets held by TABRO[32] and to set up a pledge against the 40% stake in HY AUSTRALIA HOLDINGS and LANCE GREEK; in which DUCHEN Hong will take the pledge on behalf of Mr Cai.

7 The parties will reach an agreement under the conditions of the pledge. Mr. Cai and DUCHEN Hong will try their best endeavour to transfer the assets under TABRO to LANCE CREEK.

70 On 23 May 2018, Mr Chong forwarded title searches for the Abattoir along with ASIC searches for VicBeef and Tabro to Ms Leung, who forwarded those documents to Mr Sun. In the Leung and Sun WeChat, Mr Sun stressed the urgency of concluding an agreement, noting that Mr Chen's listed company[33] might collapse at any time and that 'if it collapses the other party [Mr Chen] will not cooperate with Australia's asset and equity arrangements and my client [Mr Cai] will lose all his money'.

71 On 24 May 2018 Mr Chong sent the Cai Security Agreements to Ms Leung to forward to Mr Sun. The Tabro Charge included special conditions that the secured party would not unreasonably withhold its consent to Tabro transferring all its assets to Lance Creek Operations,[34] subject to the secured party receiving adequate security, in its discretion, over Lance Creek Operations; it further contained an acknowledgement by Tabro that the secured party was taking additional security by a charge over 40% of VicBeef's shares in Tabro. Tabro agreed that if the secured party enforced the security over the shares and submitted share transfers signed by VicBeef for the shares, Tabro would register the share transfer and issue new share certificates to the secured party equivalent to 40% of VicBeef's shares in Tabro.

72 The Cai Security Agreements required execution by Mr Cai, Mr Chen, both personally and in his capacity as a director of VicBeef and Tabro, and another director of VicBeef and Tabro. In a voice message left by Mr Sun with Ms Leung in the Leung Sun WeChat, Mr Sun suggested that Mr Lei Li could sign the Cai Security Agreements as the other director of VicBeef and Tabro.[35]

73 By 24 May 2018 however, it was apparent that Mr Lei Li had reservations about signing the Cai Security Agreements. As a result, Mr Sun sought confirmation that signatures of two out of the three directors of Tabro and VicBeef would be sufficient. Mr Sun suggested that Ms Tong Yang sign the Cai Security Agreements at Mr Chong's offices.

74 After having consulted with Mr Chong, Ms Leung said that Mr Chen should sign the documents first and that the documents should then be couriered to Stamford's offices where arrangements could then be made for Ms Tong Yang to sign them in her capacity as second director of VicBeef and Tabro. Mr Chen signed the documents on 28 May 2018, and Mr Cai shortly thereafter. Mr Sun then arranged for the documents to be sent to Mr Chong in Australia for signature by Ms Tong Yang.

75 On 4 June 2018, Ms Tong Yang received an email from Stamford attaching the Cai Security Agreements, now signed by Mr Chen and Mr Cai. The cover email read, 'as discussed I confirm you will attend our office tomorrow to sign your part of the documents'. Ms Tong Yang gave unchallenged evidence that she did not have any discussion with Stamford before receiving this email. She also gave unchallenged evidence that this was the first time that she became aware of the existence of the Cai Security Agreements. Ms Tong Yang said that she had not been previously involved in negotiating the Cai Security Agreements or preparing them, aside from her limited and passive participation from 17 May 2018, when she was added to the Cai WeChat group by Mr Michael Wang.

76 Ms Tong Yang acknowledged that at the time she received the Cai Security Agreements, she was aware that Mr Chen had interests in offshore companies in China. However, Ms Tong Yang maintained that she did not know any details of those interests. Ms Tong Yang gave evidence that until she received the Cai Security Agreements, she had never heard of SSIE nor that a loan agreement had been entered into between Mr Cai and SSIE in December 2017. Ms Tong Yang was aware that Mr Chen held shares in Sundiro, but her understanding was that Sundiro did not have any commercial or legal relationship with Tabro or VicBeef.

77 Ms Tong Yang gave evidence that she was concerned at that time about the impact of executing the Cai Security Agreements on the proposed Harmony Restructure. She sent the Cai Security Agreements to Mr Shaw, informing him that Mr Michael Wang had asked her to sign the documents. She asked Mr Shaw if he could look over the documents. Mr Shaw in turn forwarded the documents to Ms Lucas from Nevile & Co Lawyers.

78 Some 20 minutes or so afterwards, Mr Shaw telephoned Ms Lucas and explained his views on the Cai Security Agreements. Ms Lucas asked Mr Shaw to speak to Ms Tong Yang as well as Mr Michael Wang or Mr Peter Wang, both of whom Ms Lucas understood to be representing Mr Chen.

79 On 5 June 2018, during Ms Lucas' second telephone conversation with Mr Shaw, Ms Lucas said that Ms Tong Yang could not sign the Cai Security Agreements as there were a number of legal problems associated with them, and as they would affect the Harmony Restructure. Mr Shaw told Ms Tong Yang of Ms Lucas' advice and told her additionally that Tabro could not grant a mortgage over the Abattoir because, under the terms of NAB Security Agreement, NAB would not allow it. Ms Lucas's file note records her notation '[Good]; She [Ms Tong Yang] needs [to understand the position] she is in'. According to Ms Lucas, Mr Shaw said words to the effect that if Mr Chen were to pay out the debt under the SSIE Loan Agreement before the date of settlement of the Harmony Agreement,[36] the Cai Security Agreements may be unproblematic; but if not, it was an issue. Mr Shaw said that Harmony would not enter into the Harmony Agreement if Lance Creek Operations[37] or its assets were encumbered by a mortgage or security.

80 After her telephone call with Mr Shaw, Ms Lucas sent an email to Mr Shaw. The email read:

Further to our telephone conversations of even date, I write to confirm our position in relation to Tong[38] potentially signing the Mortgage and Charge documents provided to her as Director of the Grantor entities therein.

As discussed, to do so on behalf of Tabro would not only be a breach of the covenants made to NAB and the agreements currently in place with HAAFCO, but would risk being viewed as deceptive and/or fraudulent conduct.

In the circumstances, it is clear that entering such arrangements would not be in the best interests of Tabro and/or the proposed Lance Creek Operations and as such is contrary to Tong's clear duties as a Director of Tabro. At a personal level, doing so also puts Tong in an invidious position.

Given the above, we fully support the position put by you to Tong this morning in your telephone call with her.

We note that Tong will relay these concerns/issues to Michael Wang and seek clarification as to the need to involve Tabro and Lance Creek Operations at all in the arrangement.

As previously agreed, any such security arrangements are best made at the HY Australia Holdings Pty Ltd (or VicBeef Holdings Pty Ltd as it is now known) level, noting that such arrangements would still create a disclosure issue for our mutual client in relation to its sale of shares to HAAFCO.

81 Shortly afterwards, Ms Lucas sent an email to Ms Yang in substantially identical terms.

82 Some two and a half hours later, Ms Lucas received a telephone call from Ms Tong Yang. During that call Ms Tong Yang said that she had received Ms Lucas' email and that she understood the issues involved. Ms Lucas gave evidence that Ms Tong Yang said words to the effect that Mr Chen 'really needs' the money and that was why she was being pushed to sign the Cai Security Agreements. Ms Tong Yang told her that Mr Peter Wang had not reviewed the documents at that time and that to her knowledge he was not aware of the Cai Security Agreements. Ms Tong Yang said that she would talk to Mr Michael Wang and see if there was an alternative option available.

83 On 6 June 2018, Ms Lucas attended a meeting with Mr Shaw and Ms Tong Yang at the offices of Nevile & Co Lawyers. Ms Lucas gave evidence that Ms Tong Yang said words to the effect that Mr Chen had said that if Tabro could not provide security, he (Mr Chen) may go to jail. Ms Lucas said that Ms Tong Yang was frequently receiving messages from Mr Michael Wang urging her to sign the Cai Security Agreements. Ms Lucas gave evidence that Mr Shaw had passed on statements made to him by Mr Chong and Mr Michael Wang to the effect that if the Cai Security Agreements were not signed by 6:00pm that day, the lender (Mr Cai) would take legal action against Mr Chen and would not negotiate.

84 Also on 6 June 2018, at 12:30pm Mr Shaw, Ms Tong Yang and Ms Lucas called Mr Peter Wang. Ms Lucas recalls Mr Shaw saying words to the effect that 'Tabro' could not sign the Cai Security Agreements; Mr Shaw suggested that Ms Tong Yang, Ms Lucas and himself meet with Stamford to explain the issues with the proposed arrangements and propose an alternative way forward. She says that Mr Peter Wang agreed to this course but said words to the effect that they were threatening legal action if Ms Tong Yang did not sign the Cai Security Agreements by 6:00pm and that this timeframe should be borne in mind.

85 At 12:47pm Mr Shaw, Ms Tong Yang and Ms Lucas called Mr Chong of Stamford. According to Ms Lucas, she and Mr Shaw explained the reasons why Tabro could not provide the security sought in the Cai Security Agreements. Mr Shaw said that signing the Cai Security Agreements would breach covenants agreed with NAB and under the Harmony Agreement. Ms Lucas said that she also raised to Ms Yang the problems she would face personally in signing the Security Agreements as a director of Tabro. Ms Lucas also stated that it would be a breach of Ms Tong Yang's directors' duties to sign them.[39]

86 The evidence reveals that Ms Lucas kept expansive file notes of the discussions and meetings in which she participated. However, her account of the conversation with Mr Chong on 6 June 2018 as recorded in her file note is not as expansive as her version of the conversation given in her witness statement. The file note records Mr Shaw as saying 'unable to provide the [security] you are [requesting]; [would] like to meet [with] you to discuss issues - Want to give [security] but cannot do way want [sic] - Meet 3pm at [your office]'. It does not mention any statement to the effect that signing the Cai Security Agreements would be a breach of directors' duties by Ms Tong Yang.

87 Later on 6 June 2018, at 1:20pm, Mr Shaw and Ms Lucas had a further telephone conversation with Mr Chong, the details of which are recorded in a file note of Ms Lucas'. That file note records that Mr Chong advised that he had spoken with Mr Cai and that he was not willing to discuss any changes to the Cai Security Agreements. Mr Chong further advised that the Cai Security Agreements needed to be signed by 6:00pm that day. Ms Lucas's file note records Mr Shaw as saying that Ms Tong Yang could not sign the Cai Security Agreements, as to do so would be a breach of the NAB Security Agreement and the terms of the BTS. The file note also records that Mr Chong had said he would pass on this message to Mr Cai, and advised that he was not part of the dealings in China and that he was only acting as an agent. Ms Lucas's file note records Mr Chong as saying, 'why not legal?', but does not record a response from her. Mr Shaw proposed that they should still meet at 3:00pm.

88 At 3:00pm, Mr Shaw, Ms Tong Yang and Ms Lucas attended a meeting with Mr Chong and his colleague, Rebecca Leviston ('Ms Leviston'), at Stamford's offices. Mr Shaw commenced the meeting by outlining the problems posed to the Cai Security Agreements by the NAB Security Agreement and the Harmony Agreement, and said that in light of those agreements, security could not be given over Tabro. Ms Lucas gave evidence that Mr Shaw had said words to the effect that if Tabro, pursuant to the Cai Security Agreements, gave security to Mr Cai over itself or its assets, this would breach the covenants in the NAB Security Agreement as well as the Harmony Agreement. According to Ms Lucas, Mr Shaw had said words to the effect that NAB had been promised a concluded sale for some time and wanted repayment in full via completion of the Harmony Agreement as Tabro was significantly in arrears. He said that NAB would not consider other options such as delayed repayment.

89 Ms Lucas also gave evidence that she had said that it would not only be a breach of directors' duties for Ms Tong Yang to sign the Cai Security Agreements, and that there was a risk that to sign the Cai Security Agreements would be viewed as fraudulent and/or deceptive conduct.[40] She also gave evidence that 'we' (presumably meaning herself and Mr Shaw) had said that Tabro and VicBeef were not the relevant parties to provide the security.

90 According to Ms Lucas, Mr Chong then asked questions about the other assets available in Australia to secure the Cai Security Agreement, and ultimately said that the problem was one of timing. Ms Lucas said that Mr Shaw offered alternative security to be provided to Mr Cai in the form of:

(a) a negative pledge by VicBeef that it would not transfer the assets of Tabro to any entity other than Lance Creek Operations;

(b) security over 40% of VicBeef's shares in HY Moe Meat;

(c) a share transfer form signed by HY Moe Meat in favour of Mr Cai for 40% of the shares owned by VicBeef, to be held in escrow pending payment of the loan; and

(d) copies of the executed contract of sale of real estate and sale of assets agreement entered into between Tabro and Lance Creek Operations.

('the alternative security offer').

91 According to Ms Lucas, Mr Chong asked if the issues surrounding the grant and enforcement of the Cai Security Agreement had been communicated to Mr Chen and Mr Cai. Ms Lucas said that Mr Shaw said that he understood they had but he did not know who in fact was giving instructions to Mr Chong. Again according to Ms Lucas, Mr Chong said that Ms Tong Yang should speak to Mr Chen, and that although in his view the alternative security offer was unsuitable he would in any event pass on the details of the alternative security offer to Mr Cai.

92 At 5:49pm, Ms Lucas returned a telephone call made by Mr Chong.[41] Mr Chong said that he had been informed that Ms Tong Yang would not sign the Cai Security Agreements. Mr Chong asked Ms Lucas if it was true that another director would be signing them. Ms Lucas said she had no instructions about this.

93 At 6:13pm, Ms Lucas returned another call to Mr Chong. During that call Mr Chong said that Ms Tong Yang had called him directly and asked for an extension of the deadline to sign the Cai Security Agreements, to 12:00pm on 7 June 2018.

94 Mr Chong subsequently sent an email stating that Mr Cai had agreed to Ms Tong Yang's request to extend the deadline to sign the Security Agreements to 12:00pm on 7 June 2018. At 6:33pm on 6 June 2018, Ms Lucas emailed Ms Tong Yang referring to their attendance at Stamford's offices. The email confirmed the matters discussed at the meeting between Ms Lucas, Mr Shaw and Mr Chong, including the existing NAB Agreements including covenants, mortgage and general securities, the Harmony Agreement, and the Harmony Restructure. Ms Lucas confirmed that at the meeting it had been reiterated that Ms Tong Yang was unable to sign the Cai Security Agreements or otherwise to provide the securities requested by Mr Cai.

95 Ms Lucas's email then set out the details of the alternative security offer.

96 Some 12 or so minutes later, Ms Lucas emailed Ms Tong Yang advising her that she had received a call from Mr Chong to the effect that Mr Cai had agreed to the extension of the deadline to 12pm on 7 June 2018. Ms Lucas's email concluded by reiterating her earlier advice to Ms Tong Yang that the directors of Tabro would be in serious breach of the Harmony Agreement and the NAB Agreements if they proceeded with the Cai Security Agreements; that they would be in breach of their duties under the Corporations Act; as well as potentially liable for deceptive, misleading and/or fraudulent conduct. Her email concluded 'it is very important that, if you have not already done so, you send this email and our email to you of 5 June 2018 to your fellow Directors'.

97 Ms Tong Yang had meanwhile been participating in further WeChat conversations between Mr Sun, Mr Peter Wang and Mr Michael Wang. Mr Sun had set the same deadline in the Cai WeChat; saying that if Ms Tong Yang did not sign by 6:00pm, Australian time, Mr Cai would not wait any longer and would commence legal proceedings. In response, Peter Wang asked whether Tabro's equity was the subject of the pledge at present.[42] Michael Wang responded, 'let's sign the contractual arrangement, they won't disclose anyway. Within two months, the money will have to be paid back anyway'. Mr Sun responded, 'All details won't be discussed anymore!'.

98 Peter Wang posted in response that the main problem was that NAB would not agree to the Cai Security Agreements. Ms Tong Yang sought to assuage Mr Sun's anxieties by stating that what they were proposing (that is, the alternative security offer) was a 'better solution'. She explained that as VicBeef was the then-current holding company of Tabro and the future holding company of Lance Creek Operations, the best way to provide the security sought by Mr Cai would be to pledge VicBeef's shares, rather than those of Tabro.

99 Michael Wang posted in the Cai WeChat that Mr Peter Wang and Ms Tong Yang had talked to Mr Chen; Mr Chen 'and the other party' had agreed not to disclose the Cai Security Agreements to NAB. Mr Michael Wang posted in the Cai WeChat, in evident reference to the signing of the Cai Security Agreements, 'lets get it done, there's not much room for negotiation'.

100 Ms Tong Yang was also a participant in a separate WeChat group on 6 June 2018 with Mr Michael Wang and Mr Peter Wang ('the Yang, Wang and Wang WeChat'). Between 12:24pm and 6:16pm, Ms Tong Yang repeatedly expressed her concerns in that group about the proposed Cai Security Agreements including that the transaction had not been disclosed to NAB, and that 'they' (presumably Mr Cai) would not be able to take security over Tabro without the consent of NAB. Ms Tong Yang said that even though the directors of Tabro had agreed not to disclose the Cai Security Agreements to NAB, 'they' (presumably NAB) could still take action if Tabro did not repay before the deadline. Mr Michael Wang concluded the chat by posting 'basically there's no room for renegotiation. We owe them money in China. They said if you refuse to sign they will commence litigation in China on the next day'.

101 Following the meeting at Stamford's offices with Mr Chong at 3pm on 6 June 2018, Mr Chong's associate, Ms Leviston, prepared a typed note of the meeting ('the Stamford file note'). Relevantly, the Stamford file note stated:

If mortgages were to be accepted over the properties owned by Tabro Meats, this would trigger arrangements already in place with NAB (mortgage) and Harmony (purchaser of 60% of Tabro)

...

NAB mortgage (2015) - Facility originally [AU]$21.6m - down to [AU]$8m.

• NAB has a large list of securities through their mortgage against land. If a second mortgage is granted, they will likely implement a Manager to sell the properties.
• To enter a second mortgage would be a breach of this NAB mortgage.
• NAB are aware of the corporate restructure.
• They are currently in repayment plan with NAB.
• NAB will receive [AU]$4.5m from the [AU]$7m payment from Harmony.
• NAB not aware of debt owing to Mr Cai.

102 In relation to the Harmony deal, the Stamford file note stated, inter alia, that:

• The second mortgage would likely stop the Harmony agreement.

• Harmony have already paid [AU]$3m - this has already been distributed.

• [AU]$450,000 to 8 weeks of unpaid wages;

• [AU]$4.5m to NAB;

• [AU]$1m to works needed for fire insurance; and

• [AU]$800,000 to unpaid creditors;

• The full transaction should be settled end of July/start of August.

• Harmony believe they are getting a 'clean skin' company so they are not aware of debt owing to Mr Cai.

• Will be a breach of the NAB mortgage;
• Will be a breach of the Harmony agreement.

PC raised concerns for if Harmony decide to pull out of agreement. Blue Mount said if deal falls over they can re-visit discussions with us, but have already have other purchasers lined up.

PC said Cai wants security now. AL said that they won't get what they want through the mortgage anyway, because NAB will trigger mortgagee's rights of re-sale and security may not be claimed by Cai.

103 On 6 June 2018 at 4:50pm, Mr Chong sent an email addressed to Ms Chong and copied to Ms Leung, requesting that the Stamford file note be forwarded to Mr Sun. Later that night Ms Leung separately uploaded the Stamford file note into the Leung and Sun WeChat and said, 'lawyer Sun, above documents sent by lawyer Chong this afternoon'. Mr Sun replied 'Okay, I will look at it tomorrow'. Ms Leung replied, 'file note is the summary of today's meeting'. Mr Sun replied 'OK'.

104 The next day, on 7 June 2018 at 3:22pm, Ms Lucas received an email from Mr Chong forwarding signed security pages of the Cai Security Agreements that Ms Tong Yang had emailed Mr Chong at 2:54pm that day. In his email Mr Chong advised Ms Lucas that Ms Tong Yang was on her way to Stamford's office to sign the original documents of the Cai Security Agreements and that Mr Cai had been communicating with Ms Tong Yang directly. Ms Lucas said that until this time she had not been aware that Ms Tong Yang had decided to sign the Cai Security Agreements.

105 Also on 7 June 2018, Ms Lucas said that she telephoned Ms Tong Yang to ask her why she had decided to sign the Cai Security Agreements, reiterating the legal issues involved. Ms Lucas' evidence was that Ms Tong Yang seemed very stressed and upset. According to Ms Lucas, Ms Tong Yang said that she did not want to go against Ms Lucas' advice and did not want to sign the Cai Security Agreements, but she believed that she did not have any choice as Mr Chen could be imprisoned.

106 Ms Tong Yang gave evidence to substantially similar effect. At 4:02pm, Ms Lucas emailed Mr Chong, advising that she had been instructed by Ms Tong Yang that despite Ms Lucas's strong recommendation, Ms Tong Yang intended to sign the Cai Security Agreements at Stamford's office that afternoon. At 5:55pm Ms Lucas emailed Ms Tong Yang stating:

We note your instructions this afternoon that, against our advice not to do so, you and Mr Chen as Directors of Tabro Meats Pty Ltd executed security documentation providing for a further mortgage over the real property and financial charge over the shares and assets of Tabro Meats Pty Ltd.

Pursuant to the Corporations Act granting of security over the assets of the company by Directors can only occur following the passing of a resolution by the Board to do so.

Please provide us with a signed copy of the minutes of the meeting of all of the Directors of the company at which this resolution was passed.

107 On 7 June 2018, Ms Leung notified Mr Chong via WeChat that she had provided the Stamford file note to Mr Sun the previous night. Mr Chong replied, 'he already received the docs and file note yesterday evening'. Mr Sun acknowledged in evidence that he had received the Stamford file note.

108 The Cai Security Agreements were executed by Ms Tong Yang at Stamford's offices and thereby took effect.

The duty of care and diligence: Corporations Act s 180(1)

109 Section 180(1) of the Corporations Act requires directors of a corporation to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupy the office held by and had the same responsibilities within the corporation as a director or officer.

110 The relevant principles were recently summarised by Elliott J in United Petroleum Australia Pty Ltd v Herbert Smith Freehills ('United Petroleum'):[43]

(a) the standard of care required by s 180(1) is objective, but account must be taken of the circumstances of the company and of the particular director involved;[44]

(b) the Court enquires as to what an ordinary person, with the knowledge and experience of the director (or officer) could be expected to have done in the circumstances if he or she was acting on his own behalf;[45] and

(c) the corporation's circumstances include the type of company, size and nature of its business, provisions of its constitution, composition of the board and distribution of the work between the board and officers.[46]

111 In Australian Securities Investments Commission v Cassimatis & Another (No 8),[47] Edelman J held that:

(a) the question of whether a director has exercised reasonable care and diligence was to be answered by balancing the foreseeable risk of harm against the potential benefits which could be expected to accrue to the company from the conduct in question;[48]

(b) the balancing of risk against potential benefits should be carried out in a way which is similar to the negligence calculus discussed by Mason J in Wyong Shire Council v Shirt;[49]

(c) the exercise is 'forward looking' as to what a reasonable person would have done, not backward looking at what would have avoided the injury;[50] and

(d) the foreseeable risk of harm relevant to an alleged breach of s 180(1) is not confined to financial harm but includes harm to all of the interests of the company, including its reputation;[51]

112 Additionally, contravention can be established without providing damage to the corporation; the requirement is that it was reasonably foreseeable that harm to the interests of the company might be caused by the defendant's act or omission.[52] The authorities recognise that 'special vigilance' and 'scrupulous concern' are required where a director is in a position of potential conflict.[53]

The duty to act in good faith in the best interests of the company_;_ section 181(1)(a) of the Corporations Act

113 Section 181(1) of the Corporations Act comprises two duties.[54] Section 181(1)(a) requires directors to exercise their powers and discharge their duties in good faith in the best interests of the company. The common law duties and the statutory duties are of similar character.[55]

114 A director's judgment as to what is in the best interests of the corporation, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.[56]

115 The law is not settled on whether the duty to act 'in good faith' applies a subjective, objective or combined standard. In United Petroleum Australia Pty Ltd v Hudson ('Hudson'),[57] the Court of Appeal acknowledged the trial judge's discussion of whether 'in good faith' applies a subjective, objective or combined standard, but ultimately found that it was not then necessary to identify or resolve that divergent authority.

116 It is unnecessary to show actual loss to establish liability under s 181 (or s 182) of the Corporations Act.[58]

The duty to act for a proper purpose; section 181(1)(b) of the Corporations Act

117 Section 181(1)(b) of the Corporations Act requires directors to exercise their powers and discharge their duties for a proper purpose. The principles applicable to determining whether directors have acted for an improper purpose were explained in Permanent Building Society (in liq) v Wheeler.[59] Those principles as summarised by Ipp J are:[60]

(a) Fiduciary powers and duties of directors may be exercised only for the purposes for which they were conferred and not for any collateral, or improper purpose.

(b) It must be shown that the substantial purpose of the directors was improper or collateral to their duties as directors of the company. The issue is not whether a management decision was good or bad; it is whether the directors acted in breach of their fiduciary duties.

(c) Honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose. Whether acts were performed in good faith and in the interest of the company is to be objectively determined, although statements by directors about their subjective intentions or beliefs will be relevant to that inquiry.

(d) The court must determine whether but for the improper or collateral purpose the directors would have performed the act impugned.

118 In order to establish a breach, the starting point is to identify the relevant power in question. Having done that, it is necessary to determine the purpose for which the power was exercised and then assess whether that identified purpose was proper.

Duty not to improperly use position; s 182 of the Corporations Act

119 Section 182 of the Corporations Act imposes a duty on directors not to improperly use their position to gain an advantage for themselves or someone else, or cause detriment to the corporation. Conflicts of interest may give rise to an improper use of position.[61]

120 In United Petroleum, Elliott J observed that:[62]

Section 182 requires a director not to have a proscribed purpose: to gain an advantage or to cause a detriment. It is not necessary that an advantage has in fact been gained by the director or other person or the detriment has in fact been caused to the corporation. Further, in ascertaining whether a director had one or other of the proscribed purposes in mind when she or he made use of her or his position, it is relevant to consider the particular duties and responsibilities of the director and her or his appreciation of the circumstances at the relevant time.

The test is whether the conduct would breach the standards of conduct that would be expected of a person in the directors' position by a reasonable person with knowledge of the duties, powers and authority of her or his position as director and of the circumstances of the case including the commercial context. A directors' appreciation of the relevant circumstances might be relevant to analysis of the propriety of the use the director made of her or his position in acting as he or she did.

In this court, it has been held that impropriety requires 'behaviour [that] breached the norm of conduct thought necessary for the proper conduct of commercial life so that people have confidence that the running of the marketplace is in safe hands'.[63]

121 Allied to, but not subsumed by, s 182 of the Corporations Act is the equitable rule that restricts fiduciaries from exercising powers where there is a conflict of interest. It is well established that a director is a fiduciary and thus under an obligation not to place themselves in a position of conflict where there is a real or substantial possibility of conflict between the director's interests and the director's duty to the company.[64]

122 The test for whether there is a real or substantial possibility of a conflict between a director's personal interests and their duties as a director is objective,[65] and is to be determined from the standpoint of an observer with knowledge of all the material facts and circumstances.[66]

123 The conflict rule applies to an actual or possible conflict between the director's duty to the company and their personal interest. It also applies where a conflict arises between the director's duty to the company and their duty to someone else - for example, to another company of which they are a director, or to a trust of which they are a trustee.[67]

VicBeef and Tabro's case on breach of directors' duties

124 VicBeef and Tabro allege that by procuring the entering into and signing of the Cai Security Agreements, Mr Chen breached his directors' duties in three key respects. First, they submit that the SSIE Loan Agreement conferred no benefit on VicBeef or Tabro. By contrast, they contend that the benefit of the Cai Security Agreements was derived by both SSIE, as the counterparty to the SSIE Loan Agreement, and those persons who had guaranteed SSIE's obligations under that loan agreement which included Mr Chen and his wife, Ms Liu.

125 Secondly, and related to the first breach, VicBeef and Tabro contend that the entering into of the Cai Security Agreements conferred a substantial personal benefit on Mr Chen; his wife Ms Liu; and on SSIE, which was a company in which Mr Chen had a substantial interest.

126 Thirdly, VicBeef and Tabro complain that the entering into of the Cai Security Agreements gave rise to a breach by VicBeef and Tabro of the NAB Security Agreements.

127 The first two matters are alleged to give rise to breaches of the duty of care and diligence; the duty to act in good faith in the interests of the company; the duty to act for a proper purpose; the duty not to improperly use position; and the conflict rule.

128 The third matter, that the Cai Security Agreements gave rise to a breach of the NAB Security Agreements, is alleged to give rise to a breach of the duty of care and diligence and the duty to act in good faith in the interests of the company.

129 Mr Cai submits that VicBeef and Tabro's focus is artificially narrow; is based too heavily on Ms Tong Yang's incomplete understanding of the Hengyang Group; and ignores the commercial context in which VicBeef and Tabro operated as part of the Hengyang Group. He further submits that VicBeef and Tabro have placed undue focus on the personal benefit to Mr Chen as one of the guarantors of the SSIE Loan Agreement rather than considering the identical position of Mr Chen's co-guarantors, which included HHCIC which was part of the Hengyang Group, and Sundiro, which was commercially associated with that group.

130 Mr Cai submits that VicBeef and Tabro have not discharged the onus borne by them in establishing to the requisite standard of proof that the relevant purpose of entering into the Cai Security Agreements was not in part to benefit HHCIC and Sundiro, and thereby to confer advantage on the Hengyang Group of companies of which VicBeef and Tabro form part.

131 Mr Chen was a shareholder of SSIE.[68] SSIE was the largest shareholder in Sundiro, owning 9-10% of its total shareholding. Other shareholders in SSIE included the Heilongjiang Hengyang Agricultural Group Co Ltd ('Heilongjiang Hengyang Agricultural Group') which had a 42.85% interest. The Heilongjiang Hengyang Agricultural Group was, according to Mr Cai, also part of the Hengyang Group; HHCIC, a guarantor of the SSIE Loan Agreement, was also part of the Hengyang Group.

132 On 20 November 2017 the Heilongjiang Hengyang Agricultural Group entered into a memorandum of understanding ('the Hengyang-Tabro MOU') with Tabro. The Hengyang-Tabro MOU was provided by Ms Tong Yang to BlueMount Capital's Mr Shaw on 1 December 2017 by an email which described the documents as the 'signed MOU between Foresun and Tabro Meat'.[69]

133 The Hengyang-Tabro MOU records that the Heilongjiang Hengyang Agricultural Group cooperated with 'world famous investment institutions' and had acquired eight beef processing enterprises in Australia, Uruguay, Argentina and other countries. It records that the Hengyang Group possessed multiple brands such as Foresun and Tabro. The principal clause of the Hengyang-Tabro MOU provided for co-operation to promote sales of Tabro beef in China:

Hengyang Group will make full use of the resources and advantages of Tabro Meat to build an Australian beef brand in China and promote the beef produced by Tabro Meat to thousands of households. At the same time, Hengyang Group will make full use of the existing meat distribution stores, Australian beef experience halls and other online platforms to support Tabro's brand promotion and sales in China. Through complementary advantages and cooperation in their respective fields, both parties will establish a comprehensive strategic partnership to create a new chapter for Australian beef in China.

134 Separately, Mr Cai points to commercial relationships or dealings between Tabro and other entities in the Hengyang Group. The accounts of HHCIC show that as at 31 December 2015 it was owed more than RMB 82 million by Tabro and that by January 2015 Tabro was making sales of tens of millions of dollars of product to companies in the Hengyang Group.

135 In February 2016, Ferrier Hodgson reviewed Tabro in an independent business review ('the Ferrier Hodgson report'). It reported that Tabro had historically made 70-80% of its sales to its Chinese parent company (presumably HHCIC). The Ferrier Hodgson report also noted a plan by HHCIC backed by CDH Investments to list Tabro on the share market in China by way of a backdoor listing via Sundiro, which was already listed on the Shenzhen Stock Exchange ('the SZSE'). As the Ferrier Hodgson report noted, the plan contemplated HHCIC acquiring shares in Sundiro, and in turn Sundiro acquiring 100% of HHCIC.

136 Mr Cai's submissions emphasise various balance sheet entries in Tabro's trading accounts between itself and entities in the Hengyang Group; including:

(a) account balances as at 30 June 2016 of AU$8,958,680.55 owing by HHCIC; and

(b) an amount of AU$9,446,663.11 owing to Heilongjiang Northern Hengyang Food Co.

137 Likewise, Mr Cai points to various intercompany loans between entities in the Hengyang Group to Tabro and VicBeef including:

(a) a loan made in September 2015 by Rondatel S.A. to Tabro of US$1 million;

(b) a loan to Tabro of at least US$6 million by Pacific Ocean Cattle Holdings[70] Limited in September 2015;

(c) a debt of $2,601,091 owed by HHCIC to VicBeef by the end of financial year 2015 for costs associated with an 'IPO listing process for China Beef Products Holdings Co Ltd'; and

(d) a letter of support provided during financial year 2015 by China Beef Products Holdings Limited to VicBeef agreeing to provide financial assistance 'as and when it is needed'.

138 Tabro's balance sheet as at 31 March 2018 further records that it had made loans to:

(a) China Beef Holdings of AU$2,601,090.65; and

(b) Black Bamboo Enterprises, another overseas entity, of AU$3,221,107.01.

(a) Pacific Ocean Cattle Holdings Limited of AU$2,018,977.04; and

(b) AU$1,386,866.27 to Uruguay.[71]

140 Moreover, Mr Cai points to the fact that Mr Shaw, as part of his analysis of the group, recorded the outstanding balance of the Tabro finance facility with NAB as being in the amount of AU$7,302,000; but in so doing stated that working capital funding is otherwise provided by the Hengyang Group.

141 Relatedly, Mr Cai emphasised that the Harmony MOU recorded as one of its underlying assumptions that contemporaneously Tabro and Foresun (now known as the Hengyang Group) were to establish access to additional supply chains within China and other international markets for Harmony's export products in an agreed manner, and recorded the parties' mutual intention to collaborate with Foresun to expand beef supply into China.

142 The gist of Mr Cai's submissions on the question of breach is that VicBeef and Tabro bear the relevant evidentiary and legal onus in establishing breach; they have not established that it was not in the interests of VicBeef and Tabro to assist HHCIC, Mr Chen and Sundiro, which were associated in various ways with the Hengyang Group. Mr Cai emphasises that HHCIC is a company in the Hengyang Group and Mr Chen is a key figure in the Hengyang Group; both of whom would otherwise have been liable as guarantors under the SSIE Loan Agreement. Relatedly, Mr Cai submits that the plaintiffs had not established that it was not in VicBeef and Tabro's interests to take steps to preserve the position of the co-guarantor Sundiro; Sundiro being the vehicle for a proposed backdoor listing of companies in the Hengyang Group.

143 Mr Cai argues that, it not being established that it was not in VicBeef and Tabro's interests to enter into the Cai Security Agreements, then by necessary extension it has not been established that the execution of those agreements was in breach of the duties of care and diligence; the duties to act in faith and in the best interests of the company; the duty to act for a proper purpose and the duty to not improperly use position. Relatedly, he argues that because it has not been established that the Cai Security Agreements were not in Tabro and VicBeef's best interests, there was no corresponding misalignment of interests such as might give rise to a breach of the conflict rule.

144 Before examining Mr Cai's submissions in more detail, it is helpful to look more closely at the elements of the relevant duties said to have been breached, particularly in the context of one company obtaining an indirect benefit by way of the provision of a direct benefit to a separate entity forming part of the same 'group' of companies.

Group Benefits/indirect benefits to VicBeef and Tabro

145 Mr Cai's submission accepts, at least implicitly, that VicBeef and Tabro did not receive a direct benefit from the execution of the Cai Security Agreements. It could hardly contend otherwise; the Cai Security Agreements were offered by VicBeef and Tabro in the context of debts then due by SSIE to Mr Cai pursuant to the SSIE Loan Agreement, and which were the subject of existing guarantees not provided by VicBeef and Tabro. Nor was Tabro or VicBeef a shareholder in any of SSIE or the corporate guarantors. Accordingly, it could not be said that Tabro or VicBeef obtained a derivative benefit in the sense of assisting a company in which it held shares.

146 Instead, Mr Cai's submissions rely upon benefits said to accrue broadly to the Hengyang Group as a result of the forestalling of proceedings that would have otherwise been commenced by Mr Cai against Mr Chen and the guarantors (which, relevantly, included Sundiro and HHCIC). The forestalling of such legal proceedings was of direct benefit to SSIE and the guarantors, some or all of whom were part of the Hengyang Group. Such direct benefit is said to be of indirect benefit to VicBeef and Tabro, as parts of the Hengyang Group.

147 In that context, Mr Cai argues (and VicBeef and Tabro accept) that the exercise of a power by a director of a company with a view to procuring an advantage to another company may, depending on the circumstances, be a legitimate and otherwise unimpeachable exercise of power by that director, at least in circumstances where the company receives an indirect benefit.

148 In the context of the matters at issue in this case, in Northside Developments Pty Ltd v Registrar-General[72] ('Northside Developments'), Brennan J considered that 'it may be for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group'.[73] To similar effect, but with arguably different emphasis, in ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd (Receivers and Managers Appointed)[74] ('Qintex'), McPherson J (Lee and Mackenzie JJ agreeing) referred to evidence accepted by the trial judge that the proceeds of particular note issues provided by the subsidiaries in a group of companies were designed to provide 'working capital for the group'. However, McPherson J expressed doubt as to whether that would be sufficient to satisfy the test propounded by Brennan J in Northside noting that 'guaranteeing someone else's debt is not a transaction that naturally raises an inference of benefit to the guarantor'.[75]

149 There is some divergence of opinion as to whether the test for breach of the duty to act in good faith and in the best interests of the company is subjective, objective or a combination of the two, and considerable judicial ink has been spilt on the respective contentions. The subjective test posits that where a director acts bona fide in the sense of having an honest belief that the course of action is in the best interests of the company, no breach arises; the objective test, sitting at the other end of the spectrum, requires a Court to consider whether in light of the circumstances at hand a reasonable person would have acted in the manner in which the director did.

150 I see no need to add unduly to the debate, including because neither party submitted that it made any difference in this case. That said, the controversy has often arisen in the context of the alleged provision of indirect benefit in a group context. It is useful therefore to examine some of the cases in which the controversy has arisen, in order to examine Mr Cai's submissions through an appropriate lens.

151 The objective test, often referred to as the Charterbridge test, was propounded by Pennycuick J in Charterbridge Corporation Ltd v Lloyds Bank Ltd & Anor ('Charterbridge').[76] In that case, Pomeroy Developments (Castleford) Ltd ('Castleford') was one of a large group of companies headed by Pomeroy Developments Ltd ('Pomeroy'). None of the companies in the group, including Castleford, were subsidiaries of Pomeroy, but the companies had common shareholdings, directors, and officers. Pomeroy supervised the activities of the companies, provided office support, and carried out the acquisition and development of various sites. For each site acquired, a separate company was incorporated.

152 In 1956, Castleford entered a lease guaranteed by Pomeroy; the latter also, from time to time, paid the rent due by Castleford under the lease. In 1960, Pomeroy and two other companies within the group had overdrawn their bank accounts with Lloyds Bank Ltd ('the bank') by £22,091. Castleford guaranteed the payment of all moneys and liabilities owing or incurred by Pomeroy and deposited the title deeds of the leasehold property to the bank as security.

153 A year or so later, Castleford borrowed money from Askinex on security of a first mortgage over the leased property; Castleford used the proceeds of that mortgage towards repayment of Pomeroy's overdraft. When Pomeroy's overdraft increased again three months later, Castleford charged the leasehold property to the bank subject to the prior security in favour of Askinex. At that time, the officers of the group of companies and the bank did not consider the interest of Castleford separately from that of the group.

154 Castleford later agreed to sell the property to the Charterbridge Corporation Ltd ('Charterbridge') for over £30,000. Charterbridge paid £20,000 on account. Almost the full amount was used towards discharging Askinex's mortgage, leaving the bank as first mortgagee. Subsequently, Charterbridge sought a declaration that the charge created by Castleford in favour of the bank was outside the scope of Castleford's business and purposes and was therefore ultra vires and invalid.

155 Pennycuick J held that the directors who had procured Castleford to enter into the guarantee and charge looked to the interests of the group as a whole. The directors considered that it was in the interests of the group as a whole that Castleford should enter into the transactions, but the directors did not take into consideration the interests of Castleford separately from that of the group.

156 Pennycuick J rejected the argument that the transactions by Castleford were ultra vires. In obiter, however, his Honour considered the separate argument that the directors were not acting with a view to benefit Castleford (separately and in contradistinction to the group). His Honour described this as a question of fact with Charterbridge bearing the burden of proof.

157 Charterbridge argued that absent separate consideration being given to Castleford's interests, the directors, ipso facto, must be treated as not having acted with a view to the benefit of Castleford. Pennycuick J considered this was an 'unduly stringent test and would lead to absurd results'; that is, 'unless the directors of a company address their mind specifically to the interests of the company in connection with each particular transaction, that transaction would be void notwithstanding that the transaction might in fact be beneficial to the company'. Pennycuick J also rejected the competing argument advanced by the bank that it was a sufficient answer to the claim that the directors of Castleford looked to the benefit of the group as a whole.

158 In the context of the rejection of that contention, his Honour stated:[77]

Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interests of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.

(underline added)

159 His Honour concluded that in the circumstances of the present case the answer to that question was 'yes'; accordingly, there was no breach of duty by the director.

160 Walker v Wimborne & Ors ('Walker')[78] , a decision of the High Court of Australia_,_ involved directors of Asiatic Electric Co Pty Ltd ('Asiatic') which was part of a group of companies with common directors. The directors authorised the making by Asiatic of a series of payments. Asiatic subsequently went into liquidation and the payments were challenged by the liquidator as having been made in breach of duty or breach of trust.

161 The first payment was made to a company in the group of companies which was in financial difficulty. The only consideration for the payment was the implied promise of the recipient to repay the sum. Asiatic received no benefit or advantage. On the day of the payment, Asiatic had borrowed an equivalent amount from a third company in the group, with the borrowing secured by an equitable charge over Asiatic's assets. Asiatic was in fact insolvent at the time of the transaction.

162 The second payment was made to another company in the group, allegedly for consultancy work that it carried out for Asiatic. The recipient company had not been incorporated when part of the work was carried out and there were no entries in the books of either company in support of the alleged entitlement.

163 The third payment was made to employees of other companies in the group as salaries and wages, but there was no evidence that they had performed significant services for Asiatic.

164 The fourth payment was made to a former director of Asiatic in recognition of past services. The claim with respect to the fourth payment was unsuccessful and can be put aside for present purposes.

165 The Court held that the making of the third payment was a misapplication of funds; the Court held responsible both the director whose decision it was to make the payments and the governing director who stood by when they were made.

166 The Court further held by majority that the first and second payments constituted breaches of duty or breaches of trust by the director. Mason J found that the first transaction was not only a transaction which failed to present any opportunity or advantage to the payer but was one which offered the probable prospect of loss; [79] the recipient at the time being unable to pay its debts as and when they fell due. In a passage relied upon by VicBeef and Tabro in the present case, his Honour stated:[80]

To speak of the companies as being members of a group is something of a misnomer which may well have led his Honour into error. The word "group" is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company.

Here, however, the companies were not members of a group in the sense already described. There were no common or interlocking shareholdings. Asiatic did not hold shares in Australian Sound. Asiatic did not stand to lose if Australian Sound went into liquidation; nor did it derive any benefit if Australian Sound succeeded in staving off liquidation. The "group" argument therefore provides no justification for what occurred.

Indeed, the emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors.

(underline added)

167 In Howard Smith Ltd v Ampol Petroleum Ltd ('Howard Smith'),[81] the Privy Council considered an appeal against a decision of Street CJ (of the Supreme Court of NSW) declaring that an allotment of shares by a company was not made bona fide in the interests of that company as a whole and as a consequence was invalid and void. In the course of rejecting the appeal, Lord Wilberforce quoted with approval the judgment of Viscount Finlay in Hindle v John Cotton Ltd ('Hindle'),[82] where Viscount Finlay stated:

Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason.

(underline added)

168 Lord Wilberforce noted that it was necessary to start with a consideration of the power whose exercise is in question to determine the nature of that power; if the exercise of the power was challenged, to then examine the substantial purpose for which it was exercised and to reach a conclusion as to whether that purpose was proper or not. In that context, Lord Wilberforce noted that it would be necessary as part of that exercise to give credit to the bona fide opinion of the directors 'if such is found to exist'; His Honour stated:[83]

In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls ...

169 Qintex concerned an agreement by a holding company to procure subsidiaries to guarantee the indebtedness of the holding company. McPherson J, sitting in the Full Court of the Supreme Court of Queensland, stated:[84]

For a commercial or trading company confronting insolvency to make a gift of its assets in derogation of the interests of creditors is not to use powers or purposes for their corporate but to do so for a non-corporate purpose. For a subsidiary now to execute an instrument rendering it liable for an indebtedness in the order of $110 million cannot possibly be for its benefit. No doubt it may be "for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group": see Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146, at 183, per Brennan J, with whom, on this matter of a creditor taking a company's guarantee for another's debt, Mason CJ expressed his general agreement: ...

The position is, as his Honour's observations at 183 imply, different if the guarantee is not "for the purposes of a company's business nor otherwise for its benefit".

170 His Honour further observed that guaranteeing someone else's debt is not a transaction that naturally raises an inference of benefit to the guarantor.[85] In the context of the facts under consideration in that case his Honour made observations as to the natural understanding of the word 'group':[86]

The word "group" is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realise its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company.

171 The application of directors' duties to a group of companies was further considered by the New South Wales Court of Appeal in Equiticorp Finance Ltd (in liq) v Bank of New Zealand ('Equiticorp').[87] The case involved a loan by the Bank of New Zealand ('BNZ') to Uruz Pty Ltd ('Uruz'), one of the companies in the Equiticorp group of companies; the purpose of the loan was to assist in the financing of a takeover of Monier Ltd, a publically listed company. After the takeover encountered difficulties and repayment of the loan had been extended, funds held on deposit with BNZ by two other companies in the Equiticorp group, Equiticorp Tasman Ltd ('ETL') and Equiticorp Financial Services Ltd ('EFSA') were applied to reduce Uruz's debt owing to the bank. When ETL and EFSA later went into liquidation, the liquidators claimed, inter alia, that the use of the money in that way was in breach of fiduciary duties of the directors of those companies.

172 The officer who agreed to apply the money on deposit in reduction of the loan from BNZ was Mr Hawkins, who was the chairman of the Equiticorp group. Mr Hawkins gave evidence at trial that he regarded the welfare of what he perceived as the group as more important than the welfare of any individual company within the group of which he was a director, because of the effect that the welfare of the group had on the individual companies within the group.

173 In dismissing the claim at first instance, Giles J applied the Charterbridge test,[88] holding that the question of breach turned on whether an intelligent and honest person in the position of director of ETL or EFSA could, in the circumstances, have reasonably believed that the transaction was for the benefit of those companies. He referred to a number of cases concerning the conduct of directors in company groups and distinguished Walker on the basis that factually EFL and EFSA gained some 'derivative benefits' by assisting the parent company.[89]

174 Kirby P would have allowed the appeal against the decision of Giles J. Relevantly, his Honour appeared to endorse the application of the Charterbridge test (as deployed by Giles J) but took a different view as to whether an honest and intelligent director could have believed that the application of the liquidity reserve of ETL and EFSA towards payment of Uruz' debt was for the benefit of the first two companies. Whilst Kirby P accepted that ETL and EFSA may not have been insolvent, he was cognisant of the fact that they had 'serious and even chronic liquidity problems' which 'necessarily required an intelligent and honest person in the position of a director to give consideration to their separate vulnerabilities'.[90] His Honour referred to 'an unbroken line of Australian authority since Walker which emphasised that directors of companies within a group of companies analogous to those relevant to that case have a duty to consider the separate position of each respective company within the group.[91]

175 The two remaining members of the Court of Appeal, Clarke and Cripps JJA, dismissed the appeal. Their honours noted that all parties in the appeal considered that the objective test as propounded by Pennycuick J in Charterbridge was the relevant test to be applied, their Honours were content to deal with the issues in the case upon that basis.

176 However, in obiter, their Honours expressed reservations about the test proposed by Pennycuick J, emphasising that directors are bound to exercise their powers bona fide in what they consider is in the interests of the company and not for any collateral purpose.[92] Their Honours considered that whether they did so or not is a question of fact.[93] In that context, they referred to Viscount Finlay's statement in Hindle, cited in Howard Smith.[94] After referring to the Court's traditional reluctance to pronounce upon the commercial justification for business decisions, Clarke and Cripps JJA commented on the appropriateness of the application of an objective test:[95]

Accordingly there seems to us to be difficulties in substituting an objective test (How would an intelligent and honest man have acted?) for the factual question raised in the proceedings. It may be that if a director bluntly states that he or she did not consider the interests of the particular company at all and solely had regard to the interests of the group then difficulties would arise in resolving that factual question. But the position will rarely be such a black and white one and it would usually be possible to discern whether in deciding to take certain action for the benefit of the group the directors perceived, and were justified in their perception, that in so doing they were acting for the benefit of the particular company. On the other hand it may be possible to discern that the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the group. A careful analysis of the factual situation will usually reveal the answer to the factual question posed although no doubt on some occasions the problem may very well be a difficult one.

We are mindful of the fact that Pennycuick J was not substituting the objective test for the subjective one which had traditionally been applied. In his view the occasion to apply the objective test only arose when it was clear that the directors had not considered the interests of the relevant company at all. In a sense he proposed a legal test to be applied only in limited cases to avoid what he regarded as an absurd situation.

177 In Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd ('Maronis'),[96] Bryson J of the Supreme Court of New South Wales considered once again an alleged breach of directors' duties in the context of a decision by directors where there existed a group of companies. In that case, the directors caused one company to mortgage the site on which it operated to secure a loan to a separate corporate entity. The mortgagor had no business or affairs other than ownership of the site; it had no revenue and no capacity itself to service the borrowing. At the time of executing the security, the directors of the mortgagor company were aware that the other company, the proposed borrower, was experiencing serious cash flow problems and that there was a real possibility that it might not be able to discharge the proposed loan.

178 In the context of the appropriateness of the use of the Charterbridge test and whether the decision of the Court of Appeal in Equiticorp was authority for using the Charterbridge test, Bryson J stated:[97]

In my opinion the majority judgment in Equiticorp Finance is not authority for using the test in Charterbridge to establish whether directors incur liability for breach of duty where they have failed to consider the interests of the company for which they are making the decision, and have made the decision in the interest of another company, or of a group. Charterbridge relates to a different subject, and on that subject did not adopt that test. The test came under consideration in Equiticorp Finance because the plaintiffs chose to present their proofs by seeking to establish a limit situation; that the bank knew that there must have been a breach of fiduciary duty because the decision of which the bank knew could not have been reached by a decision, within power, in which the interest of the company had been regarded. Charterbridge is a useful illustration of legal reasoning applied to a decision of directors taken without addressing their minds specifically to the interest of the company. Except for its utility as an illustration from a different field it does not bear on the liability of directors for breach of fiduciary duty. The legal test which is established by authority is the judicial approach approved in Howard Smith and cited by the majority in Equiticorp Finance, in which the question is the state of mind of the directors and whether they acted honestly in the discharge of their powers in the interests of the company; if they acted for any other reason this constituted an abuse of the power conferred on them as directors. In my opinion the preferable view referred to by Clarke and Cripps JJA at 148 is the correct view, and the breach has no consequences if the transaction was, objectively viewed, in the interests of the company. In my opinion this is what principle requires. If directors take a company into a transaction in the interests of a group of which it was part, or of a parent company, or of a subsidiary company and what they did was, objectively viewed, in the interests of the company, they incurred no liability.

179 In The Bell Group Limited (in liq) & Ors v Westpac Banking Corporation & Ors (No 2) ('Bell Group (No 2)'),[98] Owen J in the Supreme Court of Western Australia conducted a detailed analysis of the content of relevant directors' duties in the context of considering a claim by the liquidators of certain companies in a group to recover from a syndicate of banks the proceeds of assets realised in the enforcement by the banks of securities given by various companies in that group now in liquidation.

180 Among the many issues in the case was whether the grant of the securities was for the benefit of the security providers as separate companies or for the benefit of the group of companies. Putting aside the absence of any reliance in Bell Group (No 2) on the duty of care and diligence and noting that in that case there was no reliance on statutory duties, the duties considered by his Honour in that case are consistent with those relied upon by VicBeef and Tabro in the present case; the duty to act in good faith and in the best interests of the company; the duty to act for a proper purpose; and the conflict rule. In an observation of obvious relevance to the present case, Owen J noted that there was overlap between the three duties.[99]

181 Given the necessity to have regard in due course to the subsequent question as to the circumstances in which the securities taken by Mr Cai should be rescinded, it is useful to note that his Honour recognised that the general law (both in common law and equity) recognised a number of duties applying to directors, the duty to act in good faith and in the best interests of the company; the duty to act for a proper purpose; the duty to avoid conflict of interest; the duty to retain discretion; and the duty to exercise care, skill and diligence.[100]

182 Owen J noted that the first four of the duties (that is to say, all those cited save for the duty to exercise care, skill and diligence) stem from the fiduciary nature of the relationship between the director and the corporation which is relevant to, but not the same as, determining whether those duties constitute fiduciary duties.[101] Owen J noted that the duty to exercise care, skill and diligence was different arising primarily from the common law of contract or tort. [102] His Honour noted that whilst there is also a duty of care recognised in equity, that duty was not fiduciary in character,[103] citing Permanent Building Society (in liq) v McGee[104] and Permanent Building Society.[105]

183 His Honour noted the close relationship between the duty to act in good faith and the best interests of the company on the one hand and the duty to act for a proper purpose on the other,[106] citing Richard Brady Franks Ltd v Price[107] ('Richard Brady Franks') and Mills v Mills.[108]

184 In the context of his Honour's consideration of the nature of the duty to act in good faith and in the best interests of the company, his Honour referred[109] to Angas Law Services Pty Ltd (in liq) v Carabelas ('Angas Law Services'),[110] decided by the High Court of Australia and appealed from the decision of the Supreme Court of South Australia (Full Court) in Carabelas v Scott ('Carabelas').[111]

185 In Angas Law Services a director had borrowed money from a bank and a company that the director controlled gave a mortgage over property it owned to secure the director's obligations. The company was solvent at the time of the transaction although it later went into liquidation. The liquidator brought an action against the director alleging that the transaction involved a breach by the director of his duties under s 229 of the Companies (South Australia) Code to exercise care and diligence and not to make improper use of his position. One of the issues in the case was the circumstances in which shareholders could ratify the conduct of directors where such conduct constituted an abuse of power.

186 The Full Court found that the transaction did not involve a breach of s 229; the Court opined that informed consent by the shareholders to the transaction would have been sufficient to prevent the company from arguing that the transaction had involved a breach of the director's duty to the company.[112] Doyle CJ noted (among other things) that the company was not insolvent at the time, no one else had claimed an interest in the property, and there were no other shareholders. [113]

187 On appeal, Gleeson CJ and Heydon J noted that 'the question whether corporate transactions of guarantee or third party mortgages involve breaches of directors' duties, or the particular kinds of breach referred to in s 229(2) or s 229(4) usually turn upon a close examination of the commercial context in which they occur.'[114]

188 Returning to Bell Group (No 2), Owen J noted the overlap between the duty to act in good faith and in the best interests of the company on the one hand, and the duty to act for a proper purpose on the other. Although his Honour noted that it may be difficult to separate the considerations that go to each of them, they were conceptually separate duties.[115] After conducting a detailed survey of many of the authorities adverted to above (including Charterbridge, Equiticorp, and Howard Smith, among others) his Honour concluded that the duty to act in good faith and the best interests of the company was largely, but not entirely, subjective.[116] His Honour emphasised that it was a factual question that focuses on the state of mind of the director and in respect of which the onus lay on the challenging party.[117]

189 His Honour made it clear that statements by the directors about their subjective intention or belief were relevant (though not necessarily conclusive) of the bona fides of the directors.[118] His Honour further held that 'in ascertaining the state of mind of the directors, the Court is entitled to look at the surrounding circumstances and other materials that shed light upon the director's state of mind so as to show whether they were honestly acting in discharge of their powers in the interests of the company and the real purpose primarily motivating their actions'.[119]

190 His Honour considered that the Court's objective inquiry was undertaken not to determine any commercial justification for the decision, but to assist the Court in deciding whether to accept or discount assertions that directors make about their subjective intentions and beliefs.[120] As his Honour noted, the nub of the plaintiff's case in Bell Group (No 2) was whether the directors 'confined their attention to the group or whether they genuinely turned their minds to the interests of the individual companies'.[121]

191 Whilst accepting that a transaction benefiting one company in a group may have derivative benefits for another company in that same group, Owen J concluded that the critical question was one of fact, namely whether the directors considered that the transaction into which an individual company was about to enter was in the interests of that company.[122]

192 The Supreme Court of Western Australia (Full Court) in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) ('Bell Group (No 3)'),[123] by majority allowed appeals from Owen J's decision in Bell Group (No 2) (collectively, 'the Bell cases') in part and cross-appeals in part. The Court as a whole held that a director's duty to act in good faith and in the best interests of the company and the duty to act for a proper purpose are fiduciary duties.[124] The majority, Lee and Drummond AJJA held that the duty to act in good faith and in the best interests of the company was a subjective one, whilst the test for determining whether a director had acted for a proper purpose was an objective one.[125]

193 In Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd ('Mernda Developments'),[126] the Victorian Supreme Court of Appeal allowed an appeal against trial orders discussing a claim that a shadow director of a company, Mernda Developments Pty Ltd ('Mernda'), had breached his duty as a director in procuring a transaction where Mernda entered into a facility agreement with Alamanda Property Investments No 2 Pty Ltd ('Alamanda). By that agreement, Mernda granted Alamanda a charge over all of its assets in favour of Alamanda.

194 The case at trial was whether the director had breached his duty to act in good faith and in the best interests of the company when causing Mernda to enter into that agreement and grant a charge over its assets; the effect of which was to make Mernda liable for and to secure the debts of other borrowers in which Mernda had no interest at all.

195 In allowing the appeal, the Court noted the debate about the application of an objective test and if it was appropriate to take into account whether in fact the directors considered the interests of the company, but accepted that it is generally accepted now that an objective test (that is to say the Charterbridge test) ought to be applied.[127]

196 In Australian Securities and Investments Commission v Flugge,[128] Robson J determined civil penalty proceedings brought by the Australian Securities Investment Commission ('ASIC') against Messrs Flugge and Geary. ASIC asserted that each of them, whilst directors and officers of AWB Limited, had breached their statutory duties under ss 180 and 181 of the Corporations Act (the duty of care and diligence; the duty to act in good faith and in the best interests of the company; and the duty to act for a proper purpose).

197 In that context, Robson J considered both Owen J's decision in Bell Group (No 2), the decision of the Court of Appeal in Bell Group (No 3), and the decision of the Court of Appeal of this Court in Mernda Developments. His Honour considered that the test in s 181(1)(a) of the Corporations Act, the duty to act in good faith and in the best interests of the company, involved both subjective and objective elements but that the test in s 181(1)(b), the duty to act for a proper purpose, was purely objective.[129] Further, his Honour found that he was bound to follow the Court of Appeal in Mernda Developments in any event.[130] His Honour concluded that the relevant test was an objective and subjective test in respect of the duty to act in good faith and in the best interests of the company, as held apposite by Owen J in Bell Group (No 2), but an objective one with respect to the duty to act for a proper purpose.[131]

198 On appeal, the Court of Appeal of this Court endorsed the objective test, but importantly stated: [132]

A director or officer of a company will be in breach of this section if they, or their involvement in certain actions, did not constitute acting in good faith, or for a proper purpose, and for the benefit of the company. Although the test is objective, based on what a reasonable person in a similar position would be expected to have done in the circumstances, the subjective beliefs and intentions of the director or officer may still be relevant.

199 In support of that statement, this Court of Appeal referred to the judgment of the Court of Appeal in Western Australia in Bell Group (No 3).

200 In many instances, the character of the test in respect of the duty to act in good faith and in the best interests of the company as subjective or objective is unlikely to make a difference to the court's ultimate determination in the case. That will almost certainly be the case where the same facts are relied upon as founding breaches of both the duty to act in good faith and in the best interests of the company, and the duty to act for a proper purpose, given that the latter test is objective. All the more so where there is overlap with the breach of the conflict rule where the question is clearly objective. This is such a case. Factual analysis is important however irrespective of the test to be applied.

201 The reason why I have traversed various instances in which the debate has emerged is not to add to the discourse, particularly where I am bound by the Court of Appeal in Mernda Developments to apply an objective test (but to do so having regard to the subjective beliefs and intentions of the relevant director) and where the test chosen makes no difference to the outcome of this case.

202 I have done so because whatever test is adopted and whatever duty is examined, the cases consistently emphasise the need to focus on the factual enquiry as to the purpose for which the directors in fact acted.

203 If the directors are found to have acted with an honest belief that their course of conduct is in the company's best interests, then this will be significant regardless of whether the test is subjective or objective or somewhere in between.[133] Similarly, if the directors have acted in the interests of a wider group rather than giving separate consideration to the specific interests of the company concerned, then this too will be an evidentiary fact of significance regardless of what test is applied or what duty is considered. Such evidence may provide inferential support for a conclusion that the interests of the individual company were in fact served by a decision to confer benefits in a direct sense on the group generally or on the entities in the group.

204 Even the application of a wholly objective such as in Charterbridge, requiring an assessment as to how a reasonable director would have acted, is carried out in light of such facts as evidence the actual conduct of the director in question.

205 In this case, Mr Cai seeks to apply the Charterbridge test in a nuanced manner. He argues that there is no evidence that Mr Chen (the director whose conduct is sought to be challenged) considered the separate interests of VicBeef and Tabro; accordingly, he argues therefore that the Charterbridge test should be deployed, and that the deployment of that test requires the Court to examine the facts at hand and determine whether a reasonable director could have concluded that the actions of Mr Chen involved a breach of duties.

206 According to Mr Cai, VicBeef and Tabro must establish that a reasonable director could not have formed the view that the relevant transactions were in the best interests of VicBeef and/or Tabro, and similarly could not have been for a proper purpose. Mr Cai argues that this has not been established to the requisite standard of proof.

207 However, in cases where the controversy has arisen in the group context,[134] there has been evidence that the directors' actuating purpose was to benefit the group. In that context, the issue at hand is whether the evidence as to the motivation to act in the group interest is sufficient to negate a conclusion of breach, notwithstanding the separate failure to give consideration to the interests of the particular company in the group.

208 However, there is no evidence in this case of Mr Chen's actuating purpose as being one to benefit the interests of the Hengyang Group. In contrast, there is evidence of another actuating purpose of a more direct and personal nature; to prevent the commencement of legal proceedings in China against himself, his wife Ms Liu and against entities with whom he was associated. There is evidence that Mr Chen saw the provision of security by VicBeef and Tabro as a basis upon which he would not have to sell his house[135] or which might otherwise prevent him from going to jail.[136]

209 It is a notable feature of Mr Cai's submission that the commercial justification he postulates as to how a reasonable director would have acted, as is clear on the evidence, was not apparently adverted to or considered by any of the three directors of VicBeef and Tabro.

210 There is no evidence that Mr Chen considered that the transaction was in the best interests of the Hengyang Group which included VicBeef and Tabro, much less that he considered it was in the best interests of VicBeef and Tabro.

211 Likewise, there is no evidence that the second director, Mr Lei Li, was cognisant of, much less supportive of such a justification. In fact, and although we do not know why, Mr Lei Li was unwilling to sign the Cai Security Agreements.[137]

212 Further, and notwithstanding her ultimate execution of the Cai Security Agreements, the third director Ms Tong Yang considered that the execution of the Cai Security Agreements was not in the best interests of VicBeef and Tabro, but felt that she had no option but to execute the same, given the pressure from Mr Chen and her perception that if she were to refuse, Mr Chen might end up in jail.

213 In that context, a conclusion that a reasonable director could have considered that execution of the Cai Security Agreements was in the best interests of VicBeef and Tabro because it was in the interests of the Hengyang Group and was otherwise for a proper purpose for the reasons submitted by Mr Cai was not a motivation shared by any of the three directors of the companies. Ms Tong Yang held the opposite view, as most likely did Mr Lei Li, and Mr Chen was open about his desire to protect his personal interests and made no overt reference to the benefits to the Hengyang Group.

214 In that respect, if the execution of the Cai Security Agreements were in the best interests of VicBeef and Tabro, this would be a mere coincidence as, based on the evidence before me, none of the directors was motivated by such a conclusion.[138]

215 In the context of the assessment which I am undertaking in this case, it is a relevant evidentiary fact that none of the directors proffered the justification now sought to be advanced by Mr Cai.

216 In the present case, the Hengyang Group, and more particularly the relationship between VicBeef and Tabro on the one hand; and the primary debtor under the SSIE Loan Agreement, SSIE, and the co-guarantors (principally Mr Chen, HHCIC and Sundiro) does not readily comport to the conventional understanding of a corporate 'group'. As stated by Mason J in Walker, 'in a corporate context, 'group' is generally applied to a number of companies which are associated by common or interlocking shareholding, allied to unified control or capacity to control'.[139]

217 The most direct relationship between the various entities in this proceeding is that between VicBeef and HHCIC. As the ownership structure document shows,[140] VicBeef's parent company was a subsidiary of China Beef Product Holdings and that entity was a sibling entity of one of the guarantors under the SSIE Loan Agreement, HHCIC.

218 The looseness of the corporate interrelationship does not of itself preclude a conclusion that VicBeef and Tabro may have gained a benefit, however indirect, from entering into the Cai Security Agreements; it may be accepted that VicBeef and Tabro were (at various times) associated with entities within the Henyang Group. There was, at some stage, a proposal that the entities within the Hengyang Group planned to merge with HHCIC and that HHCIC would then be backdoor listed on the SZSE through the already listed entity Sundiro. At least part of this plan was implemented in 2017 when Sundiro acquired the Uruguayan entities, Rondatel S.A. and Lirtix S.A., from the Hengyang Group.

219 However, the absence of any formalised group structure and the opaque nature of the alleged corporate interrelationships calls for particular scrutiny in evaluating the propriety of the exercise of powers by Mr Chen in executing the Cai Security Agreements.

220 More complicated for Mr Cai's case, however, is that there is no evidence whatsoever that the purpose (whether actuating or substantial) for which Mr Chen exercised his power to execute the Cai Security Agreements on Tabro and VicBeef's behalf was to confer indirect benefit on those two companies.

221 Mr Chen played no active role in the trial,[141] nor did he give evidence. At an earlier stage of the proceeding, however, solicitors acting on his behalf filed a defence to the plaintiffs' statement of claim.[142] In that defence, Mr Chen admits that neither VicBeef nor Tabro received any commercial or financial benefit from entering into the Cai Security Agreements.

222 Putting to the defence to one side,[143] Mr Chen's motivations are clearly established on the evidence. On 10 April 2018, when Mr Chen met with Mr Hong in Shanghai and sought revised payment terms in light of the existing default, Mr Chen referenced the impending sale of shares in Tabro to Dalian[144] and said that when he received those moneys, he would use them to repay Mr Cai, failing which he would sell his house.

223 On 26 April 2018, in his next meeting with Mr Hong in Shanghai, when confronted with Mr Hong's complaints on behalf of Mr Cai as to the repeated failures to repay the loan, the broken promises and the consequential threat to initiate litigation, Mr Chen offered the share pledge of 40% of the shares in the Abattoir[145] to forestall the threatened litigation against him and others[146] by Mr Cai. Shortly before 6 June 2018, Mr Chen informed Ms Tong Yang, who was reluctant to execute the Cai Security Agreements as a co-director of VicBeef and Tabro, that if she did not do so, Mr Chen might go to jail.[147]

224 To similar effect, Mr Michael Wang was tasked by Mr Chen with preparing the necessary documents to give effect to the share pledge. Mr Michael Wang was at the time the Chairman of Sundiro and was the former manager of the international development department of HHCIC. Mr Peter Wang of the law firm Dentons was enlisted[148] to assist on Mr Chen's behalf in the negotiations with Mr Cai and his representatives.

225 By 6 June 2018 at the latest, Mr Michael Wang and Mr Peter Wang were aware of Ms Tong Yang's reluctance to sign the Cai Security Agreements. In the Yang, Wang and Wang WeChat, Mr Michael Wang made clear the reason for the need to execute the Cai Security Agreements by informing Ms Tong Yang that there was 'no room for renegotiations' because 'we owe them money in China'; if Ms Tong Yang refused to sign, litigation would be commenced the next day.[149]

226 At no stage in that conversation (or indeed in any other) did either Mr Michael Wang, chairman of Sundiro, or Mr Peter Wang, a lawyer retained by Mr Chen, seek to assuage Ms Tong Yang's concerns on the basis that it was in VicBeef and/or Tabro's interests to ensure that entities in the Hengyang Group were not subject to litigation (as Mr Cai contends VicBeef and Tabro were part that group).

227 BlueMount Capital's Mr Shaw was also apparently in communication with Mr Michael Wang and Mr Peter Wang around that time. Mr Shaw also had substantial concerns about the propriety of Tabro and VicBeef executing the Cai Security Agreements. Ms Tong Yang gave evidence, which was unchallenged and largely verified by contemporaneous file notes, to the effect that Mr Shaw was told by Mr Michael Wang that if the Cai Security Agreements were not signed by 6:00pm on 6 June 2018 Mr Cai would take legal action against Mr Chen. Ms Lucas and Ms Tong Yang gave evidence of a similar conversation with Mr Peter Wang. It is telling that at no stage did either Mr Michael Wang or Mr Peter Wang ever seek to ameliorate the concerns of Ms Tong Yang or Mr Shaw about the appropriateness of entering into the Cai Security Agreements by emphasising the direct benefit to the Hengyang Group and any indirect benefits which might arise to VicBeef and Tabro as a consequence.

228 There is, in short, no evidence at all that Mr Chen's purpose in executing the Cai Security Agreements as a director of VicBeef and Tabro was motivated in any way by a concern to benefit the Hengyang Group, much less that in some way this benefited VicBeef and/or Tabro indirectly.

229 Had there been such evidence, it would have been necessary to consider whether a bona fide belief by Mr Chen that the execution of the Cai Security Agreements was in the best interests of VicBeef and Tabro would have had the effect of preventing a conclusion as to breach by Mr Chen.

230 The absence of any evidence of consideration by Mr Chen to this effect is explicable not merely because Mr Chen's focus was elsewhere. It is also explicable on the basis that the alleged indirect benefit to VicBeef and/or Tabro arising as a consequence of the Cai Security Agreements is largely illusory. It presents as an admirable but forlorn ex post facto justification, now formulated by Mr Cai from a hotchpotch of largely outdated information.

231 First, the membership of the Hengyang Group and its planned listing on the SZSE Sundiro had proved to be of illusory benefit to VicBeef and Tabro. It had been foreshadowed in February 2016. Since then, Tabro had ceased operations at the Abattoir in November 2017 due to cash flow issues and as a result of its financial difficulties, Tabro's assets had to be sold; this in its turn had led to the entering into of the Harmony Agreement. Tabro was operating under an agreed repayment plan with NAB. Although the Harmony MOU expressed an intention that Tabro along with the Hengyang Group would establish access to additional supply chains within China and other international markets for Harmony's products, this statement is couched in aspirational terms and in any event appears to proceed on the basis that the benefit was to principally accrue to Harmony. Harmony of course, remained in the dark about the Cai Security Agreements, until some time after their execution.

232 The proposal for a public listing of the Hengyang Group, as adverted to in the Ferrier Hodgson report, had gone nowhere. While there is evidence that in early 2016 Sundiro proposed to acquire shares in HHCIC, and the Uruguayan assets had been acquired in 2017, by February 2018 Sundiro had placed such plans on hold. That is not entirely surprising; Sundiro was a co-guarantor along with Mr Chen of SSIE's obligations under the SSIE Loan Agreement. Plainly, Sundiro was not a ready and available source of funds to enable SSIE to repay the debt arising under the SSIE Loan Agreement, hence the need for the execution of the Cai Security Agreements. The inference is clearly open, if not largely irrefutable, that Sundiro was unable to pay under the SSIE Guarantee, and that its short term commercial interest rested on VicBeef and Tabro's ability to forestall Mr Cai's threatened litigation. As of June 2018, the planned backdoor listing of the Hengyang Group through Sundiro was little more than a relic of an aspirational rosy past.

233 Further, as at June 2018 when the Cai Security Agreements were executed, the hope, and perhaps the expectation, was that Harmony would take a controlling interest in the Abattoir by way of it acquiring a 60% shareholding in NewCo, which company was to hold and operate the Abattoir. Whilst Tabro had signed the Hengyang-Tabro MOU with Heilongjiang Hengyang Agriculture Group Co Ltd on 20 November 2017, agreeing to co-operate with the Hengyang Group to promote sales of Tabro products into China, it is instructive that Harmony was not informed about the proposed execution of the Cai Security Agreements notwithstanding that, all other things being equal, it was to acquire an effective 60% interest in the Abattoir.

234 A substantial flaw with Mr Cai's case, in addition to the fact there is no evidence that any director was in fact motivated by the considerations that Mr Cai urges, is that the only way Mr Cai could be paid by Mr Chen in the time required was if the Harmony Agreement were to be completed, thus enabling the receipt by Mr Chen's interests of sufficient money to discharge the debt to Mr Cai. In that event, Harmony was to be a 60% shareholder and accordingly the Hengyang Group's purported significance to VicBeef and Tabro would diminish thereby. The plan as at June 2018 was that the future of VicBeef and Tabro was to be secured by the Harmony Agreement, not as part of the Hengyang Group, not via a backdoor listing on the SZSE via Sundiro. If there was some indirect benefit to VicBeef or Tabro, then Harmony, its putative 60% shareholder, was never informed of it.

235 Whilst HHCIC was a customer of Tabro in 2015 and 2016, it placed its last order with Tabro in November 2016, a year before Tabro ceased operations. SSIE, although apparently controlled by Mr Chen, had no commercial or legal relationship with VicBeef and Tabro and had never traded with VicBeef or Tabro. Neither had VicBeef nor Tabro ever received any funds from SSIE; and nor did they transfer any money to SSIE. From a trading perspective, therefore, the benefit to VicBeef and Tabro deriving from the survivability of HHCIC was largely if not entirely illusory. In the case of SSIE's survivability, it was non-existent.

236 The balance sheet of Tabro's trading accounts show that Tabro was owed money by China Beef Holdings as at 31 March 2018 to the sum of AU$2,601,090.65. China Beef Product Holdings was a company in the Hengyang Group and was effectively Tabro and Vic Beef's ultimate parent. It was also a sibling entity of HHCIC which was one of the guarantors of SSIE. The Cai Security Agreements benefitted HHCIC as one of the guarantors, but it is far from obvious as to why it would be in Tabro's interests to enter into the Cai Security Agreements merely to maintain the commercial viability of a related entity (HHCIC) or an entity that owed Tabro money (being China Beef Holdings). The notion that it was in Tabro's interests to gift its assets as security for the contingent debt of another entity which was in the same group as another entity that owed it money makes little sense.

237 The entities within the group to which Tabro owed money were Pacific Ocean Cattle Holdings Limited, owing a sum of AU$2,018,977.04, and AU$1,386,866.27 to Uruguay (presumably Rontadel SA and Lirtix S.A.). Again, assuming a liability under the Cai Security Agreements and thereby providing security to benefit a group whose members included Tabro's creditors makes little sense.

238 To the extent to which Tabro itself had benefited from the provision of working capital, it appears likely that that working capital had been provided by the Uruguayan entities (Rondatel S.A. and Lirtix S.A.), which were ultimately subsidiaries of HHCIC. It is far from clear how the provision of past working capital by those entities could have justified the provision of the Cai Security Agreements for the direct benefit of the parent company of the Uruguayan entities. Certainly, neither Mr Chen or any other director of VicBeef or Tabro were attuned to such benefit. The immediate working capital needs of VicBeef and Tabro were to be provided by continual support from NAB, and from future injections of working capital by Harmony, neither of whom were informed of the impending execution of the Cai Security Agreements.

239 Against this background, it is instructive to assess the plaintiff's claims with respect to the particular breaches alleged against each of the relevant duties said to have been breached by Mr Chen.

(a) the Cai Security Agreements were executed in order to forestall the threatened commencement of litigation in China against SSIE and the guarantors of the SSIE Loan Agreement which included Mr Chen, his wife Ms Liu, Sundiro and HHCIC;

(b) the Cai Security Agreements conferred no direct benefit on VicBeef or Tabro;

(c) Mr Chen did not execute the Cai Security Agreements on the basis that the conferral of benefits on himself and the guarantors conferred some sort of indirect or derivative benefit on Tabro and VicBeef; in fact, no such benefit arose because, on the one hand, the extent of the corporate relationship between VicBeef and Tabro and SSIE was non-existent; and on the other hand, the extent of the corporate relationship between VicBeef and Tabro and Sundiro and HHCIC was opaque and largely historical. It is clear that the future of VicBeef and Tabro in the strained financial circumstances in which those companies found themselves at the time the Cai Security Agreements were executed was perceived to lie with the completion of the Harmony Agreement;

(d) the execution of the Cai Security Agreements placed VicBeef and Tabro in default of the NAB Security Agreements; and

(e) there was an awareness on the part of those acting on Mr Chen's behalf in connection with the Cai Security Agreements as to the effect of the Cai Security Agreements on the Harmony Agreement, and on the existing NAB Security Agreements; nonetheless neither NAB nor Harmony were informed of the proposed execution of the Cai Security Agreements.

241 Against the background of these conclusions, the execution of the Cai Security Agreements constituted a breach by Mr Chen of his duty of care and diligence. In such circumstances an ordinary person with the knowledge and experience of Mr Chen would not have executed the Cai Security Agreements. There was an absence of benefit to VicBeef and Tabro arising from the execution of the Cai Security Agreements when balanced against the foreseeable risk of harm arising from the execution of the Cai Security Agreements.

242 Likewise, the fact that the entering into of the Cai Security Agreements gave rise to a breach of the NAB Security Agreements (specifically the NAB Loan Agreement and the NAB Guarantee, the VicBeef NAB GSA, the Tabro NAB GSA and the NAB Mortgage) is such that an ordinary person with the knowledge and experience of Mr Chen would not have caused VicBeef and Tabro to enter into those agreements. The consequence of the breach of the NAB Security Agreements entitled the lender to treat the amount owing as immediately due and payable; to sue the company for the amount owing; or appoint a receiver.

243 In the present circumstances, VicBeef and Tabro had cash flow issues; had ceased trading; and were in a repayment plan with NAB. It is clear that the Harmony Agreement had been entered into with the assent of the NAB and constituted a means by which VicBeef and Tabro could clear their existing debt under the NAB Loan Agreement.

244 Mr Cai argued that the breach of the NAB agreements occasioned by the execution of the Cai Security Agreements was de minimis because NAB, as a prior registered mortgagee, had priority over the real property assets of Tabro. In support of that submission, Mr Cai relies on the fact that first the NAB was told about the Cai Security Agreements about 2 weeks after their execution and took no action as a consequence.[150]

245 Secondly, Mr Cai relies on the fact that in August 2019 NAB produced the certificate of title at Mr Cai's request to facilitate the registration of Mr Cai's mortgage, as a second registered mortgage subordinate to that of the NAB.

246 Neither of these matters is a sufficient answer to the question of breach. Obviously , the NAB security had priority and, provided that a sale occurred (or was likely to occur) at a sufficient price to clear the NAB debt, the NAB position may well have been regarded by it as adequately protected. For as long as the Harmony Agreement remained on track, this was likely to be the case and may well have been the reason for NAB's attitude in 2018. But there was risk if the Harmony Agreement were to fall over and could not be replaced with an equivalent agreement in sufficient time.

247 It is no answer to the allegation of breach of the duty of care and diligence that NAB's security had priority, and that it did not, for whatever reason, seek to enforce its rights. That might have been the case; but if that were a sufficient answer, then one would expect that secured first mortgagees such as NAB would not take the trouble of including as a term of the relevant security a prohibition on the grant of further security without their consent. The mere fact that NAB's securities included provisions prohibiting the execution of further security and that the execution of the Cai Security Agreements would have given rise to a breach of that agreement is sufficient in my view to establish a breach of the duty to act with care and diligence. In any event, if the breach was truly de minimis, then the more appropriate course was to inform the NAB before execution of the Cai Security Agreements. This did not occur.

248 There was no benefit to VicBeef or Tabro in executing the Cai Security Agreements. Execution placed them in breach of their existing covenants with NAB and entitled NAB to treat the amount owing as immediately due and payable, sue the company for the amount owing, or appoint a receiver. The question of whether a director has exercised reasonable care and diligence is answered by balancing the foreseeable risk of harm against the potential benefits which could be expected to accrue to the company from the conduct in question. The exercise 'is forward looking'; it is not an exercise to be carried out with the benefit of hindsight. The fact that VicBeef and Tabro obtained no benefit from the execution of the Cai Security Agreements, but might have sustained substantial detriment, is enough in itself to give rise to a breach of duty.

Duty to act in good faith in the best interests of the VicBeef and Tabro

249 As noted above, there is a debate as to whether the exercise of the duty to act in good faith in the interests of the company applies a subjective, objective or combined standard. In circumstances where there is no evidence from Mr Chen to the effect that he honestly believed that the execution of the Cai Security Agreements was in the best interests of VicBeef and Tabro, the significance of any distinction between the application of a subjective, objective or mixed standard falls away. This is not a case where there is evidence that the relevant director honestly believed that the execution of the Cai Security Agreements was in the best interests of VicBeef and Tabro. Nor is there evidence from a director of a motivation to benefit a parent company and/or a group and thereby benefit indirectly the company providing security.[151] Had there been such evidence, the application of a test with objective elements either in full or part, would have required the evaluation of that motivation. However, given that there is no such evidence, and there is in fact evidence of a contrary motivation, there is no requirement for such an exercise.

250 Alternatively, and if the absence of such evidence does not of itself preclude the need to undertake such an exercise, there was in fact objectively no benefit to VicBeef or Tabro arising from the execution of the Cai Security Agreements. Therefore, even if a wholly objective test was applied, a similar conclusion as to breach follows.

251 The duty to act for a proper purpose requires firstly, consideration of the purpose for which the relevant power was exercised; and secondly, a conclusion as to whether that purpose was proper or not. In relation to the first question, a court can have regard to the surrounding circumstances which shed light upon the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or whether they were acting for some other purpose, possibly of personable advantage.[152] Whilst a court will have due regard to the judgment of the directors as to matters of management, the question of bona fides is not the sole determinant of breach, as the assessment of whether the purpose was improper is objective.[153]

252 Having regard to my findings above, the execution of the Cai Security Agreements constituted a breach of the duty to act for a proper purpose. Executing the Cai Security Agreements so as to confer an advantage on SSIE and the guarantors which included Mr Chen was an exercise of power for an improper or collateral purpose to that for which the relevant power was required to be exercise; namely, in the interests of VicBeef or Tabro. Relatedly, the execution of the Cai Security Agreements in those circumstances constituted a breach by Mr Chen of his duty not to improperly use his position to gain an advantage for himself or someone else.

253 As Elliott J observed in United Petroleum:[154]

Section 182 requires a director not to have a proscribed purpose: to gain an advantage or to cause a detriment. It is not necessary that an advantage has in fact been gained by the director or other person or that detriment has in fact been caused to the corporation. Further, in ascertaining whether a director had 1 or other of the proscribed purposes in mind when she or he made use of her or his position, it is relevant to consider the particular duties and responsibilities of the director and her or his appreciation of the circumstances at the relevant time.

The test is whether the conduct would breach the standards of conduct that would be expected of a person in the director's position by a reasonable person with knowledge of the duties, powers and authority of her or his position as director, and of the circumstances of the case, including the commercial context. A director's appreciation of the relevant circumstances might be relevant to analysis of the propriety of the use the director made of her or his position in acting as she or he did.

In this court, it has been held that impropriety requires "behaviour [that] breached the norm of conduct thought necessary for the proper conduct of commercial life so that people will have confidence that the running of the marketplace is in safe hands".

254 Having regard to the findings above, the execution of the Cai Security Agreements by Mr Chen constituted a breach of the conflict rule. There was an obvious potential for conflict between, on the one hand, Mr Chen's duty to exercise his powers as a director of VicBeef and Tabro in the interests of those companies, and the personal benefit which he and his wife Ms Liu stood to obtain as guarantors of the SSIE Loan Agreement, by avoiding the risk of legal proceedings in China against them.

Consequences of the breaches of duty and the question of knowledge or notice on the part of Mr Cai

255 The principal relief sought by VicBeef and Tabro as a consequence of the breaches by Mr Chen of his duties as a director are orders for rescission of the Cai Security Agreements.

256 VicBeef and Tabro contend that a transaction brought about by directors breaching their duties of the kind set out in ss 181 or 182 of the Corporations Act is voidable at the instance of the company if the counterparty enters into the transaction with knowledge of the breach.

257 Although not fully developed in the submissions, VicBeef and Tabro submitted that even a breach of the duty of care and diligence arising at law or pursuant to s 180 of the Corporations Act would give rise to a prima facie entitlement on the part of the relevant company to avoid the transaction.

258 Further, VicBeef and Tabro submitted that in the event that a court finds that a company has entered into an agreement in breach of directors' duties (including arguably a breach of the duty of care and diligence), a court exercising equitable jurisdiction should make an order for rescission unless the counterparty is a bona fide purchaser for value without notice.

259 In contrast, Mr Cai submitted that an entitlement to rescission would not arise except if there is a finding of a bad faith breach of fiduciary duty[155] and knowledge on the part of Mr Cai of the kind[156] set out in categories 1 to 4, but not 5, of what has become known as the Baden scale.

260 In Baden v Societe Generale pour Favoriser le Developpement du Commerce et de L'Industrie en France SA ('Baden'), Gibson J differentiated five different categories of knowledge. It is customary in Australia[157] to refer to those different degrees of knowledge, which are:

(a) actual knowledge;

(b) wilfully shutting one's eyes to the obvious;

(c) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make;

(d) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and

(e) knowledge of circumstances which would put an honest and reasonable man on enquiry.

261 Mr Cai further submitted that he is entitled to the benefit of the statutory presumptions set out in s 129 of the Corporations Act.

262 Section 128(1) of the Corporations Act provides that a person is entitled to make the assumptions in s 129 in relation to dealings with a company, and that that company is then not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. One of the presumptions in s 129(4) provides:

A person may assume that officers and agents of the company properly perform their duties to the company.

263 Section 128(4) prescribes when a person is not entitled to make an assumption in s 129:

A person is not entitled to make an assumption in s 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

264 It is clear that s 128(4) is not concerned with the constructive knowledge or constructive suspicion.[158] There must be actual knowledge or actual suspicion that the assumption was incorrect.[159] As to the meaning of 'suspect':[160]

The word 'suspect' has been taken to mean more than a mere idle wondering whether something exists or not. It is a positive feeling of actual apprehension or mistrust; of having an apprehension or mistrust amounting to a slight opinion but without sufficient evidence. Thus, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence: see Queensland Bacon Pty Ltd v Rees (citation omitted) ... in relation to the meaning of 'suspect' in the phrase 'reason to suspect' in s 95(4) of the Bankruptcy Act 1924 (Cth).

265 There is an overlap between questions of notice for the purpose of the bona fide purchaser defence; knowledge for the purposes of determining the applicability or otherwise of Baden categories 1 to 4; and Mr Cai's ability to rely upon the relevant statutory assumptions.

266 As such, it is convenient to compendiously analyse and make findings with respect to Mr Cai's state of mind, and then subsequently return to such controversy as exists between the parties as to the required state of mind.

267 VicBeef and Tabro's submissions did not develop at any length the submission that there was a material distinction between the state of mind relevant to the question of obtaining an order for rescission as a consequence of the breach of directors' duties absent the counterparty being a bona fide purchaser for value without notice on the one hand (and whether the relevant duty that would attract such a remedy extended to the duty of care and diligence); and, on the other hand, the question of knowledge for the purposes of rescission in the context of a third party recipient of 'trust' property for the purposes of Baden categories 1 to 4. That observation is not meant as a criticism; on the contrary, the submission was not fully developed because VicBeef and Tabro submitted that whatever the test, it was met in this case; put another way, they submit that Mr Cai had actual knowledge, including via the knowledge of those persons whose state of mind is imputed to him (principally Mr Chong and Mr Sun), of the essential matters giving rise to the breaches of duty by Mr Chen.

268 In support of the submission that they are entitled to orders for rescission, VicBeef and Tabro relied upon Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) ('Allco'),[161] a decision of Hammerschlag J of the Supreme Court of New South Wales. In that case his Honour made orders setting aside a deed of amendment said to have been entered into as a product of breaches of fiduciary obligations on the part of directors of Allco Funds Management Limited ('AFML'), a subsidiary of Allco Financial Group Ltd ('Allco'), and Record Funds Management Ltd ('RFML'), also a subsidiary of Allco.

269 In that proceeding, AFML[162] alleged that in committing AFML to the deed of amendment, the directors executing the deed breached their fiduciary obligations to the knowledge of RFML to avoid placing themselves in a position where their duties to AFML conflicted with their duties to RFML. Relatedly, the plaintiffs in that case contended that the directors' breached fiduciary and statutory obligations to AFML (with the knowing participation of RFML) which required those directors to exercise their powers and discharge their duties as directors in good faith in the best interests of AFML and for a proper purpose. His Honour held, inter alia, that the test for impropriety under ss 181 and 182 of the Corporations Act was objective but that s 181(1)(a) had an additional subjective element of good faith.[163]

270 In a passage relied upon by VicBeef and Tabro, Hammerschlag J stated that a transaction brought about by directors in breach of such duties will, if the counterparty entered into it with knowledge of the breach, be voidable at the instance of the company and rescission is available.[164] Allco is supportive of the claims of VicBeef and Tabro as to the availability of such a remedy in the case of breaches of ss 181 and 182 of the Corporations Act (with the statutory obligations being analogous to fiduciary obligations) to the knowledge of the counterparty RFML. It is a case of knowledge, not notice, and the entitlement to rescission arising in light of the knowledge of breaches of the duty to act in good faith and in the best interests of the company; the duty to act for a proper purpose; and the duty to not improperly use position. It is not authority for the proposition that the remedy arises for a breach of other duties, nor that notice as opposed to knowledge on the party of the counterparty is sufficient, as was hinted at in submissions in this case.

271 In Allco, Hammerschlag J referred to Robbins v Incentive Dynamics ('Robbins')[165] as authority for the proposition that a transaction brought about by directors in breach of duties will, if the counterparty entered the transaction with knowledge of the breach, be voidable at the instance of the company.

272 In Robbins, the Court of Appeal of the Supreme Court of New South Wales considered an appeal from orders of the trial judge rejecting a claim for a remedial constructive trust over properties acquired with money paid by a company to another company in breach of duties owed by the directors of the first company and used by the latter company to purchase certain property.

273 The proceeding below comprised both a personal claim from monetary sum and an alternative proprietary claim for a constructive trust over the property acquired. The proprietary claim was based upon the concept of knowing receipt stemming from the first limb of the rule in Barnes v Addy.[166] In the context of the contention that a proprietary remedy should have been granted by the trial judge, the Court of Appeal held that rescission of the loan contract was necessary before the Court could grant proprietary relief.

274 In the context of that analysis, the Court of Appeal affirmed that a loan transaction is voidable for breaches of fiduciary duty or analogous statutory duty but that a right to rescission may be lost when considering matters such as affirmation, delay, intervention of third party rights and an inability to give counter-restitution. None of those matters were raised in the present case as disentitling VicBeef and Tabro from any entitlement to relief in the form of an order for rescission.

275 Robbins is authority for the proposition that rescission is available as a remedy for a transaction entered into for breaches of fiduciary duty, but does not address whether such remedy is available for breaches of duty of a non-fiduciary nature or where the state of knowledge of the counterparty to the transaction amounts to mere notice as opposed to knowledge within the Baden categories 1 to 4.

276 In Great Investments Ltd v Warner ('Great Investments'),[167] Jagot, Edelman and Moshinsky JJ considered an appeal against the decision of the trial judge in respect of orders made by the trial judge for the delivery up and retransfer of bonds which had been transferred to the appellants by a director of a company. The transfers were made purportedly pursuant to a power of attorney to discharge that director's personal debts. The trial judge considered two alternative ways in which the appellants were said to be liable. The first was strict liability, subject to defences based on the absence of authority on the part of the director to transfer the bonds. The alternative case advanced before the trial judge was based on principles of knowing receipt of property obtained in breach of fiduciary duty. The primary judge upheld the claim based upon the absence of authority but also considered the alternative case based upon liability for knowing receipt. Had it been necessary to consider, the trial judge would have upheld the alternative case.

277 The trial had been conducted on the basis that it was appropriate to consider the question of liability on the alternative case, based upon principles of knowing receipt of property transferred in breach of fiduciary duty.

278 On appeal, however, it was conceded by the appellant that if the transfer was made without authority, questions of knowing receipt would not apply and the appellants could only succeed on the appeal if they could establish that they were bona fide purchasers for value without notice. However, the Full Court went on to state that even if the transfers were made with authority but in circumstances giving rise to breaches of duty, because the remedy sought was one of rescission and re-vesting of benefit, issues of knowing receipt did not arise.[168]

279 The Full Court considered that the position would be different if the company sought to recover consequential losses as equitable compensation or, in the alternative, to obtain an account and disgorgement of the recipient's profits. In those events, an action for knowing receipt would be needed.[169] The Court also adverted to instances where rescission of the contract was required as a step in the process to obtain a remedy by way of constructive trust over a benefit obtained as a result of the relevant contract. The Full Court held that until such time as the contract was set aside, the valid contract provided the recipient with the right to retain the benefit.[170] However, once set aside, the applicant could seek relief in the form of a trust over the benefit obtained or its traceable proceeds.[171]

280 The Full Court expressed the view (obiter) that where the company seeks only the restitution of the benefit provided under the voidable contract, the issue is one of rescission and the consequential re-vesting of the benefit provided under the voidable contract and questions of knowing receipt do not arise.[172] Nevertheless, as the Full Court observed, the issue in the case was a simpler one in that there was an absence of authority in the director to transfer the bonds to the appellants.[173] On that basis, the necessary analysis was to ask whether the recipient of the bonds was a bona fide purchaser for value without notice.[174]

281 The Full Court then went on to consider the question of whether the appellants had notice of the breach of duty. Their honours noted that while the authorities are not uniform in relation to the degree of knowledge sufficient to constitute notice for the purpose of the doctrine of bona fide purchase, all five degrees of knowledge satisfied the question of 'notice' for the purpose of the bona fide purchase defence.[175]

282 Also relevant to the issues in the present case is what the Full Court said about 'value' for the purposes of the bona fide purchaser for value criterion, noting that in the context of a two party transaction, it would be necessary to establish that value had passed to the transferor or to another at the transferor's request.[176] In the present case, VicBeef and Tabro argue that no benefit passed to them under the Cai Security Agreements.

283 Great Investments supports the proposition that where all that is sought by a company are orders for rescission and the consequential re-vesting of the benefit provided under the contract, questions of knowing receipt do not arise; the relevant question is whether the counterparty was a bona fide purchaser for value without notice (extending to Baden categories 1 to 5).[177]

284 The decision of Owen J in Bell Group (No 2) has been adverted to above at some length. In that case, his Honour conducted the analysis through the prism of claims for knowing receipt and knowing assistance based on breaches by the directors of their obligations to act in the best interests of the company to exercise their powers only for proper purposes and to avoid conflicts of interest. In the context of that analysis, his Honour concluded that the duties to act in the best interests of the company, to exercise powers properly and to avoid conflicts of interest are fiduciary obligations of a proscriptive nature,[178] but that the duty of care and diligence was not.[179]

285 On appeal, the Court of Appeal per Drummond AJA referred to long-established authority requiring the duties of company directors to act bona fide in the interests of the company and to exercise their powers for proper purposes to be accepted as fiduciary duties notwithstanding that they may require the directors to take positive action and, in that respect, arguably not be of a proscriptive nature.

286 The plaintiffs in Bell Group (No 3) were seeking to recover the proceeds of assets realised in the enforcement of securities provided to the bank in alleged breach of duty by the directors. Relevant to the issues in this case, Drummond AJA expressed the view that 'trust property' for the purposes of Barnes v Addy liability extended to choses in action and specifically the rights created and conferred on the banks by execution of the various transaction instruments.[180] In that context, his Honour held that the transaction instruments including the share mortgages, the mortgage debentures, the guarantees of indemnity and the main refinancing agreements created choses in action when they were executed and as such constituted property for the purposes of the first limb of Barnes v Addy.

287 The judges in the Bell cases all examined the question of rescission of the security agreements as part of a step in the process by which the plaintiffs could recover the proceeds of the assets realised by the banks but did so through considering Barnes v Addy recipient liability knowledge, and accordingly assessed the bank's knowledge of the directors' breaches of duty by reference to Baden categories 1 to 4 but not 5, unlike the assessment in Great Investments.

288 The difference may be explained in part by the fact that in Great Investments all that was sought to be recovered was the benefits provided pursuant to the voidable contract, whereas in the Bell cases the plaintiffs sought to recover the benefits obtained from the exploitation of those rights, doing so after they had rescinded the contract which had conferred the rights which upon exploitation led to the benefits obtained by the banks. In the latter respect, it is uncontroversial that the analysis proceeds through the knowing receipt prism requiring Baden category 1 to 4 knowledge. In that context, there may be no utility in undertaking the analysis at the anterior rescission step of the proceeds by reference to the question of notice. In any case, the distinction will only be material where the counterparty to the voidable contract has notice sufficient for Baden category 5, but not knowledge for the purposes of Baden categories 1 to 4. According to VicBeef and Tabro, this is not such a case and this was the very reason why they understandably did not fully develop this part of the submission.

289 In those circumstances, and notwithstanding that I consider the better view to be one in which notice on the part of Mr Cai would be sufficient to deny him the ability to retain the benefit of the Cai Security Agreements,[181] I am content in the first instance to consider whether VicBeef and Tabro's claim has been made out by reference to whether Mr Cai had knowledge within Baden categories 1 to 4 of those breaches of duty which amount to breaches of a fiduciary nature, namely the duty to act in the best interests of the company; the duty to act for proper purposes; and the duty to avoid conflicts of interest. It is only if his knowledge is sufficient only to fall within category 5 but not category 4, that I need to determine whether the required analysis is one of notice alone rather than knowledge.

290 I do not accept Mr Cai's submission however that VicBeef and Tabro's claim can only succeed if the breaches of fiduciary duty are bad faith breaches (in essence, dishonest breaches). Although Richard Brady Franks refers to the transaction binding the principal in favour of third parties who deal bona fide without notice of the fraud,[182] to confine the entitlement to relief in that way finds no support in more recent authorities,[183] even if one carries out the analysis through the lens of knowing receipt.

291 VicBeef and Tabro submitted that Mr Cai's knowledge extended to actual knowledge of the essential matters constituting the breaches of the duty to act in good faith in the interests of the company; the duty to act for a proper purpose; the duty to not improperly use the position; and the breach of the conflict rule. These duties are duties of a fiduciary nature, and necessarily if Mr Cai had knowledge of the essential matters which gave rise to those duties, he would have actual knowledge or actual suspicion such as to disentitle him from relying upon the relevant statutory assumptions.

292 Further, VicBeef and Tabro submitted, and Mr Cai did not dispute, that in determining Mr Cai's knowledge, Mr Cai's own knowledge can be aggregated with the knowledge of his lawyers Mr Sun and Mr Chong whose state of mind is relevantly imputed to Mr Cai.

293 VicBeef and Tabro also sought to impute the knowledge of Mr Hong (Mr Cai's brother) to Mr Cai. Mr Cai submitted that this was not permissible as the plaintiffs' pleaded case did not in terms allege that Mr Hong's knowledge is imputed to Mr Cai, unlike the case with respect to the knowledge of Mr Sun and Mr Chong.[184] Little turns on this, as most if not all of the relevant matters known to Mr Hong were also known by Mr Sun and/or Mr Hong; or were derived from the WeChat groups to which either Mr Cai or Mr Sun were also party.

294 To the extent to which anything is to be made of knowledge exclusively held by Mr Hong, then I consider that VicBeef and Tabro can rely on such knowledge. Mr Hong was called as a witness by Mr Cai and he gave evidence in chief as to his participation in the WeChat groups. Mr Cai also gave evidence and when cross examined, his evidence was to the effect that Mr Hong had full authority to handle the matter after SSIE's default and that he expected Mr Hong to take care of all the details in connection with the security to be obtained from VicBeef and Tabro.

295 Whilst the pleadings and particulars will ordinarily serve to define the issues at trial, it is still necessary to consider the manner in which the trial itself was conducted. Here, the evidence of Mr Hong's role and state of mind was given at trial without objection, and he was called as a witness by Mr Cai, whose evidence was that he entrusted Mr Hong to handle the matter on his behalf.[185] There is no injustice to Mr Cai in allowing Mr Hong's knowledge to be imputed to him.

296 Accordingly, it is appropriate to have regard to the knowledge of Messrs Cai, Hong, Sun and Chong in order to resolve the question of the enforceability of the Cai Security Agreements against Mr Cai. That assessment is to be carried out in light of my conclusions as to the entering into those agreements of having been a product of breaches by Mr Chen of his duty to act in good faith in the interests of the company, his duty to act for a proper purpose, his duty not to improperly use his position and his breach of the conflict rule, and that the key elements of such breaches were the fact that the Cai Security Agreements conferred benefits on SSIE and the guarantors including Mr Chen and his wife Ms Liu but conferred no benefit on VicBeef and Tabro and gave rise to a breach by VicBeef and Tabro of the NAB Security Agreements.

297 Mr Cai and Mr Hong were aware that SSIE had defaulted under the SSIE Loan Agreement as and from 14 February 2018. This knowledge extended to knowledge that SSIE had also failed to perform the revised payment terms nominated by Mr Chen and agreed to by Mr Hong in March 2018.[186] Necessarily, Mr Cai as a party to the SSIE Loan Agreement knew that SSIE's obligations had been guaranteed by Mr Chen, Mr Xu, Sundiro and HHCIC.[187]

298 Messrs Cai, Hong, Sun, and Chong knew that by their very terms the Cai Security Agreements conferred no direct benefit on VicBeef and Tabro; in contrast, the offer of new security over the assets of Tabro and VicBeef in the form of the Cai Security Agreements conferred a benefit on the parties to the SSIE Loan Agreement by obtaining a further indulgence from Mr Cai in relation to the enforcement action against the SSIE Loan Agreement counterparties, including Mr Chen, that Mr Cai would otherwise take as a result of the loan default.

299 Mr Sun knew that SSIE and Sundiro were in a separate corporate group from those entities that are said to form part of the Hengyang Group. He also understood that SSIE or Sundiro were not shareholders in VicBeef and Tabro.

300 Mr Sun knew that if Tabro (and by parity of reasoning VicBeef) was required to enter into the Cai Security Agreements, it would be necessary for the directors of those companies to provide the requisite authorisation and to execute the Cai Security Agreements.

301 By 24 May 2018, Messrs Sun, Hong and Cai knew that one of the three directors of VicBeef and Tabro, Mr Lei Li, had reservations in signing the Cai Security Agreements on behalf of VicBeef and Tabro.[188]

302 By 2018, Messrs Sun and Chong knew that one of the other of the directors of VicBeef and Tabro, Ms Tong Yang had reservations about signing the Cai Security Agreements; she had instead proposed the alternative security offer, which she believed did not have the problems that she perceived lay with the execution of the Cai Security Agreements.[189]

303 By at the very latest, 6 June 2018,[190] Mr Chong and Mr Sun knew that:

(a) the entering into of the Cai Security Agreements would be a breach of the NAB mortgage entered into between the NAB and Tabro;

(b) NAB were not aware of the debt owing by SSIE (and Mr Chen and the other guarantors) to Mr Cai;

(c) Ms Lucas had informed Ms Tong Yang that entering into the Cai Security Agreements in a form which included the mortgage over the Abattoir would affect the Harmony Agreement; that Harmony believed that they were getting a cleanskin company;[191] and that Harmony was not aware of any debt owing to Mr Cai;

(d) NAB was aware of the corporate restructure consequent upon completion of the Harmony Agreement and was to receive AU$4.5 million of a further payment of AU$7 million due from Harmony; that Harmony was currently providing working capital to, among other things, meet VicBeef and Tabro's existing payment needs; and

(e) the director, Ms Tong Yang, had received advice from Ms Lucas, a solicitor, that in light of the matters in (a) to (d), she should not execute the Cai Security Agreements on behalf of VicBeef and Tabro.

304 VicBeef and Tabro also submit that Mr Chong and thereby Mr Cai knew that it would be a breach by Ms Tong Yang of her directors' duties for her to sign the Cai Security Agreements. Both Ms Lucas and Ms Tong Yang gave evidence to the effect that Mr Chong was told this during the meeting at his office at 3pm on 6 June 2018.[192] Ms Lucas maintained that she had also said this to Mr Chong during two phone calls on 6 June 2018 at 12:47pm and 1:20pm in addition to at that meeting.[193]

305 Mr Chong in contrast says that he does not recall that anyone told him that signing the Cai Security Agreements would be a breach of Ms Tong Yang's directors' duty.

306 Both Ms Lucas and Ms Tong Yang were impressive witnesses. Each professed to have (and I find did have) a good recollection of the critical events. Each presented as an honest witness. Mr Chong was also an honest witness. Ms Lucas was able to produce contemporaneous handwritten file notes which were relatively comprehensive in nature. Mr Chong's file has been misplaced and he was only able to produce documents that were otherwise obtainable from other electronic records, which relevantly included the Stamford file note.

307 Notwithstanding that Mr Chong was an honest witness, his recollection of events was very limited. Mr Chong did not have any independent recollection of the telephone calls that preceded the meeting at his office on 6 June 2018 and his recollection of the meeting itself was very limited. Mr Chong's recollection of matters was not significantly assisted by his reading of Ms Lucas's witness statement and contemporaneous file note. Mr Chong had only a general recollection of the issues that were discussed at the meeting on 6 June 2018, namely that the security would breach the existing agreements with NAB, that the security may affect the Harmony Agreement, and that there was a discussion in relation to the provision of alternative security.

308 Importantly, however, and notwithstanding Ms Lucas's overall good recollection of events and the fact that she took file notes at the relevant meetings, none of her contemporaneous notes explicitly refer to her telling Mr Chong that Ms Tong Yang would be in breach of her directors' duties if she signed the Cai Security Agreements.

309 Mr Cai's submissions acknowledge that Ms Lucas (and Ms Tong Yang) were both honest witnesses. His submissions also accept that the question as to whether the execution of the Cai Security Agreements gave rise to a breach of Ms Tong Yang's directors' duties was a matter canvassed fully between Ms Lucas and Ms Tong Yang. Mr Cai submitted, however, that absent corroboration in the form of a file note, the Court could not be satisfied that Mr Chong (and thereby Mr Cai) knew that execution of the Cai Security Agreements by Ms Tong Yang could give rise to a breach by Ms Tong Yang of her directors' duties, given Mr Chong's evidence which is that he does not recall being so told (and that he believes that he would have recalled had he been told).

310 Not much turns on this. Strictly speaking, had the matter been communicated by Ms Lucas to Mr Chong, it would not have amounted to Mr Chong acquiring knowledge of the fact that execution of the Cai Security Agreements would have given rise to a breach of directors' duties. All that Mr Chong would have been told was that Ms Lucas believed that the execution of the Cai Security Agreements by Ms Tong Yang would give rise to a breach of her directors' duties.

311 Moreover, it is not disputed, including because of the Stamford file note, that Mr Chong (in addition to Mr Sun, and thereby Mr Cai) knew that:

(a) the solicitors who were advising VicBeef and Tabro believed that the execution of the Cai Security Agreements would breach the existing NAB security arrangements;

(b) the execution of the Cai Security Agreements may affect the Harmony Agreement;

(c) the debt under the SSIE Loan Agreement was not a debt of VicBeef and Tabro and was not known to NAB nor Harmony; and

(d) two of the three directors of the companies were, as at 6 June 2018, unwilling to execute the Cai Security Agreements on behalf of VicBeef and Tabro.

312 The only director who was willing to execute those documents was Mr Chen whose self-interested position was well known by Messrs Chong, Sun, Hong and Cai.

313 The fact that execution of the Cai Security Agreements in such circumstances may have also been apprehended to place the director who executes the agreements in breach of a duty that they owed to the company adds little more to the analysis.

314 On balance, to the extent that it matters and notwithstanding the absence of a direct reference in Ms Lucas's file note, I am satisfied that Ms Lucas conveyed that matter to Mr Chong and necessarily that Mr Chong and thereby Mr Cai knew that this was Ms Lucas's view, and that this was the advice that Ms Tong Yang, as the non-self-interested director called upon to execute the Cai Security Agreements, had received.

315 Ms Lucas's file note of her telephone call with Mr Chong at 1:20pm records 'MS - TY cannot as in breach of NAB loan terms and BTS; not legal'. A further statement in the note records the words 'why not legal?', reflecting an enquiry from Mr Chong.

316 Ms Lucas gave evidence that she informed Mr Chong that it would be a breach of Ms Tong Yang's directors' duties for her to sign the Cai Security Agreements when Mr Chong asked why it was not legal. I accept this evidence; it is theoretically possible that Ms Lucas's file note is inaccurate and Mr Chong never asked the question 'why not legal?'; it is also theoretically possible that Ms Lucas failed to answer. Neither of those possibilities was put, understandably because they are inherently unlikely. If those possibilities are discounted then Ms Lucas said that Ms Tong Yang could not sign the agreements because they would breach the NAB Loan terms and the BTS and signing was 'not legal'. The reference to 'not legal' could not have been a reference to the breach of the existing NAB loan terms or the agreement with Harmony (the BTS) which had earlier been disclosed to Mr Chong. The statement then prompted him to ask 'why not legal?'. It makes no sense for 'not legal' to be explicable with reference only to the fact of breach of the NAB loan terms or the BTS, because those matters had already been disclosed.

317 In my view, the reason why it was not legal, most likely reflects Ms Lucas statement to Mr Chong as to Ms Tong Yang's inability to sign the Cai Security Agreements without thereby breaching her directors' duties. Therefore, on balance, I accept Ms Lucas' evidence that she told Mr Chong that Ms Lucas could not sign because it was not legal for her to do so, given that it would place her in breach of her directors' duties.

318 I am therefore satisfied that Ms Lucas informed Mr Chong that signing the Cai Security Agreements would be a breach of Ms Tong Yang's directors' duties, at least during the telephone conversation at 1:20pm on 6 June 2018.

319 In those circumstances, the combination of the knowledge of Messrs Cai, Hong, Sun and Chong is such that Mr Cai had knowledge within Baden categories 1 and 2, and if not 1 and 2, then 3 and 4, such as to entitle VicBeef and Tabro for orders in the nature of equitable rescission with respect to the Cai Security Agreements, at least on the basis that entering into those agreements gave rise to breaches of obligations of a fiduciary nature to the effect that there was a breach of the duty to act for a proper purpose; a breach of the duty not to improperly use a position; and the execution of the Cai Security Agreements occurred in circumstances where Mr Chen had a real and substantial conflict of interests between his duties as a director of VicBeef and Tabro and his personal interests.

320 In simple terms, Mr Cai knew, principally by way of the knowledge of Mr Sun and Mr Chong, that the Cai Security Agreements were to be provided by VicBeef and Tabro for the purpose of conferring benefit on the parties to the SSIE Loan Agreement which included Mr Chen and his wife Ms Liu, by delaying the commencement of legal proceedings arising as a result of the default under the SSIE Loan Agreement. The Cai Security Agreements conferred no benefit on VicBeef and Tabro and no interlocutor ever said that they did. Mr Sun and Mr Chong both knew that the Cai Security Agreements breached the NAB Security Agreements.

321 Mr Cai gambled that the Harmony Agreement would complete, that the NAB debt would be retired and that Mr Chen would receive from the proceeds of completion sufficient to clear the debt under the SSIE Loan Agreement. Had that occurred, none of the breaches would have mattered. But the gamble did not succeed; the Harmony Agreement fell over.[194]

322 A party who seeks equitable relief in the nature of an order for rescission must do equity. In appropriate circumstances, the order for rescission may be conditioned upon the party seeking such relief making counter-restitution of the benefits provided under the contract sought to be rescinded.[195] In the present circumstances, there is no countervailing equitable requirement. VicBeef and Tabro did not receive any benefit from Mr Cai as a consequence of the entry into of the Cai Security Agreements. As such, VicBeef and Tabro are entitled to an order rescinding the Cai Security Agreements ab initio.

323 VicBeef and Tabro also seek injunctive relief under the Corporations Act against Mr Cai restraining enforcement of the Cai Security Agreements on the basis that Mr Cai was a person involved in the relevant statutory breaches by Mr Chen. My conclusions as to Mr Cai's knowledge for the purposes of the rescission analysis also mean that he was a person involved in the statutory contraventions for the purposes of the Corporations Act. I will hear the parties as to whether it is necessary or appropriate however to make any orders such as declarations or injunctions in addition to the primary orders for rescission; my tentative view is that there may be no need.

324 In the circumstances, it is not necessary for me to address two further matters raised by VicBeef and Tabro. However, given that the matters were argued, and in case I am wrong with respect to my conclusions as to breach of duty and the availability of relief to VicBeef and Tabro to the effect set out above, I will now address those matters.

325 The first concerns the question of whether there was in fact any money provided by Mr Cai to SSIE pursuant to the SSIE Loan Agreement. VicBeef and Tabro contend that there was not and, as such, there is no 'secured money' as defined in the VicBeef Charge, the Tabro Charge or the Tabro Mortgage and there is no Guaranteed Money owing under the Guarantee and Indemnity.

326 Foundational to each definition is the question of moneys owing by SSIE to Mr Cai. The SSIE Loan Agreement provided for an advance of funds by Mr Cai to SSIE. In fact, on 11 January 2018, three entities, Shenzhen Zhengtian Jiatai Trading Co Ltd, Shenzhen Shengjiahe Commercial and Trading Co Ltd and Shenzhen Baiying Trading Co Ltd, paid a total of RMB 70 million to SSIE.

327 Mr Cai and Mr Hong said that these companies were part of the 'Dongzi group' and that these entities were family companies that held funds belonging to Mr Cai and his brother, Mr Hong, but that the funds transferred to SSIE on 11 January 2018 belonged to Mr Cai personally. Mr Hong in his evidence-in-chief confirmed that Mr Cai was named as lender on the SSIE Loan Agreement because the source of funds for the loan was his. Mr Cai relied upon a document signed on 20 January 2020 headed 'statement on lending to SSIE on behalf of Mr Cai Laiyen'. The statement was signed purportedly by the legal representatives of each company (who were also shareholders of each company) which included Mr Cai's nephew, Shengle Jiang ('Mr Jiang'), who gave evidence and was cross-examined.

328 Mr Jiang also gave evidence that in about early January 2018 his uncle, Mr Cai, asked him and his cousin, Xiaohang Cai, to transfer funds from the bank accounts of the three companies into the bank account of SSIE, which they did on 11 January 2018. His evidence in that respect was corroborated by Mr Cai who gave evidence to relevantly identical effect.

329 Mr Hong's evidence-in-chief notwithstanding, in oral evidence Mr Hong referred to the money as variously 'his money' or money owned by him and his brother. In the circumstances, including the obvious self-serving nature of the statement of lending documents, VicBeef and Tabro submit that the evidence does not prove to the necessary standard of proof that the funds advanced to SSIE were in fact advanced by Mr Cai. They argue that in such circumstances the necessary elements of the proofs required to establish ownership of the funds on behalf of Mr Cai would include primary books and records of the three companies.

330 Mr Cai submits that the evidence-in-chief of Messrs Cai, Hong and Jiang, as well as the statement of lending, are sufficient in the circumstances to discharge the necessary evidentiary onus. In addition, Mr Cai relies upon the fact that courts in China have now entered judgment in favour of Mr Cai against SSIE and the guarantors presumably having been satisfied that the money loaned was Mr Cai's.

331 Mr Cai submits, in effect, that the transferor companies in effect held the money as an agent for Mr Cai and advanced the funds in that capacity. On balance, I accept Mr Cai's submissions. Although the evidence in cross-examination was somewhat vaguer than the evidence-in-chief, each of Messrs Cai, Hong and Jiang gave evidence in chief[196] that the funds were Mr Cai's and none of them were specifically challenged in terms on that evidence.

332 Moreover, it was contemplated in the SSIE Loan Agreement that the release of funds under the loan by Mr Cai to SSIE could occur either by a wire transfer from Mr Cai's personal bank account to the stipulated account of SSIE, or by authorising a third party to wire transfer to the stipulated account of SSIE.

333 Even if the funds in the accounts of the three companies were not Mr Cai's funds (which I do not accept), then Mr Cai authorised the three companies as third parties to wire funds to SSIE's account which authorisation and transfer gave rise to the making of an advance by Mr Cai to SSIE under the terms of the SSIE Loan Agreement.

The judgment in China and its effect on any enforcement by Mr Cai

334 VicBeef and Tabro argue that the Court ought not make orders as sought by Mr Cai in his counterclaim because on 20 November 2020 the Shenzhen Intermediate People's Court ('SIPC') found in favour of Mr Cai against SSIE, Mr Chen, Sundiro and the other SSIE guarantors including HHCIC, Ms Liu and Mr Xu. Sundiro has appealed against that decision, but no hearing date for the appeal has been set.

335 VicBeef and Tabro argue that if Mr Cai is successful in the appeal and recovers money from SSIE and the 2017 SSIE guarantors in China, there would be no debt or liabilities owed by SSIE to Mr Cai and therefore the definitions in the Cai Security Agreements would not be met. In addition, they argue that if Mr Cai is successful both in his appeal in the SIPC and also in these proceedings, Mr Cai would have the ability to recover twice the amount owed to him. As such, they argue that it is not appropriate for the Court to make orders sought by Mr Cai in his counterclaim.

336 In oral submissions, VicBeef and Tabro advanced a more nuanced argument arguing that the Court should stay execution of any orders obtained in the proceedings pending resolution of the appeal in China.

337 There has in fact been no recovery under the Chinese judgment. Given the absence of recovery, there is in my view no basis for either declining to make any orders at all, or otherwise staying the execution of any judgment pending resolution of the appeal in China. Whilst VicBeef and Tabro would at common law be entitled to maintain an action for contribution against the guarantors notwithstanding that their liabilities arise under a separate instrument, the action for contribution at common law cannot be maintained in advance of actual payment. Whilst equity may in an appropriate instance act quia timet where an apprehended overpayment appears sufficiently imminent, I am not persuaded in the present case that it is appropriate to grant a stay or an equitable injunction restraining the enforcement of any judgment on the counterclaim against VicBeef or Tabro, had I formed the view, which I have not, that the counterclaim should succeed.

338 In the circumstances, VicBeef and Tabro will be entitled to orders rescinding the Cai Security Agreements ab initio. The counterclaim will be dismissed. I shall hear the parties on the appropriate form of orders having regard to these reasons.

[1] Tabro is now known as 'VicBeef Meat Pty Ltd', having changed its name on 6 February 2020. In these reasons it will be referred to as 'Tabro'.

[2] VicBeef was known as 'HY Aust Holdings Pty Ltd' until 28 May 2018. In these reasons it is referred to as 'VicBeef'.

[3] Which included its shareholding in Tabro.

[4] In fact, RMB 70 million was advanced.

[5] In addition to being a director, Ms Tong Yang was an employee accountant at Tabro, where she reported to Minnie Yang who was Tabro's finance manager. Ms Tong Yang had been hired to work by Mr Chen. It seems clear that she was appointed as a director because of the need to find and Australian based director. She remains an employee and director.

[6] As later became clear, this was a reference to VicBeef and Tabro.

[7] This maximum liability was apparently set to comply with Foreign Investment Review Board ('FIRB') considerations.

[8] As discussed below, at the time of entry into the Cai Security Agreements, VicBeef and Tabro were engaged in a restructure arrangement with Harmony.

[9] Referred to from time to time below as NewCo.

[10] Subsequent to the grant of the Cai Security Agreements, there has been a change in control of VicBeef and Tabro. Of the 3 directors at the time of the entering into of the Cai Security Agreements, only Ms Tong Yang remains.

[11] Mr Lei Li was also a director of Sundiro.

[12] WeChat is a popular messaging platform in China.

[13] Mr Cai, Mr Hong and Mr Sun required the assistance of a translator.

[14] Ultimately, NewCo came to be known as Lance Creek Operations Pty Ltd ('Lance Creek Operations').

[15] Dalian is the holding company of Harmony. Throughout their negotiations, the parties often referred to Dalian and Harmony interchangeably; this is reflected in the evidence.

[16] VicBeef was to be the holding company; Tabro's assets were to be transferred to NewCo (Lance Creek Operations).

[17] The Uruguayan abattoirs were owned by Rondatel S.A. and Lirtix S.A.

[18] Clearly Mr Chen was referring to the Harmony Agreement and Harmony Restructure.

[19] Ultimately, it would appear that the Zheng Da restructure did not go ahead.

[20] SSIE was in fact the major shareholder in Sundiro (10.99%); Mr Chen was Sundiro's chairman and legal representative, and was also SSIE's founder and legal representative.

[21] In light of the impending Harmony Restructure, throughout the negotiations the parties often did not precisely distinguish between shares in Tabro, as the present owner of the Abattoir, and shares in NewCo, as the anticipated owner of the Abattoir. This ambiguity should be borne in mind for subsequent references to the abattoir or its business.

[22] As noted above, by the Harmony Agreement the 60% interest in the Abattoir (via NewCo) had in fact been sold to Harmony. As mentioned above, Dalian is the holding company of Harmony and this was likely the intended meaning of Mr Chen.

[23] HHCIC is referred to in the document as Hengyang Cattle Limited.

[24] It was the exercise of the rights conferred on the lender by that security which led to the change in control of VicBeef and Tabro which in turn led to VicBeef and Tabro bringing this proceeding in which it seeks to have the Cai Security Agreements entered into by it set aside.

[25] Then known as HY Australia Holdings.

[26] The document bears the insignia of Nevile & Co Lawyers; this is curious as there is no other reference in the evidence as to any involvement of Nevile & Co Lawyers at this stage, much less of any means by which Mr Hong obtained the document. In any event, this curiosity was not explored in the evidence.

[27] As mentioned above, Dalian was the holding company of Harmony.

[28] The remaining 60% being transferred to Harmony.

[29] It seems clear that in fact this was not the case.

[30] Clearly this was a mistranslation, or misunderstanding as Mr Chong noted. Dalian was investing the money in HY Australia/VicBeef, not the other way around.

[35] Given that Mr Chen and Mr Cai were both based in China, execution by Mr Lei Li who was also based in China had obvious practical advantages.

[36] Of course, it was the settlement of the Harmony deal which Mr Chen was planning on to provide him with the money to pay out Mr Cai.

[37] By this point in time, 'NewCo' appears to have been renamed 'Lance Creek Operations' (see n 14).

[40] That Ms Lucas said both these things is disputed by Mr Chong. Mr Chong had a generally poor recollection of events but recalls being told of an issue with the NAB and some issue with Harmony

but denies being told of the breach of directors duties or that the execution of the agreements could be viewed as fraudulent and or misleading.

[42] It will be recalled that on 17 May 2018, Mr Peter Wang had noted that the pledge of the Tabro equity required the NAB's consent; see [67] above.

[43] [2018] VSC 347; (2018) 128 ACSR 324 [609]-[19] ('United Petroleum'), cited with approval in Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693 (Connock J) ('Oliana').

[44] United Petroleum (n 43) [609].

[47] [2016] FCA 1023; (2016) 336 ALR 209.

[49] Ibid [486]; [1980] HCA 12; (1980) 146 CLR 40.

[52] Ibid [465] citing Vrisakis v Australian Securities Commission (1993) 9 WAR 395, 449-50 (Ipp J).

[53] Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (Receivers and Managers appointed) (in liq) (Controllers appointed) (No 3) [2013] FCA 1342 [600] (Murphy J); Strategic Management Australia AFL Pty Ltd v Precision Sports and Entertainment Group Pty Ltd [2016] VSC 303; (2016) 114 ACSR 1 [79] (Sifris J).

[54] United Petroleum Australia Pty Ltd v Hudson [2020] VSCA 14 [90] (Whelan, McLeish and Niall JJA) ('Hudson').

[55] Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451 [142] (Spigelman CJ).

[56] United Petroleum (n 43)[627]-[9], citing Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483, 493 (Barwick CJ, McTiernan and Kitto JJ), and Bell IXL Investments Ltd v Life Therapeutics Ltd [2008] FCA 1457; (2008) 68 ACSR 154, [32]-[7] (Middleton J).

[58] Gerard Cassegrain & Co Pty Ltd v Felicity Cassegrain [2013] NSWCA 453 [47]-[48] (Beazley P).

[59] (1994) 11 WAR 187, 218 (Ipp J) ('Permanent Building Society'); see also United Petroleum (n 43) [640]-[643] cited in Oliana (n 43) [399] (Connock J).

[60] Permanent Building Society (n 59), 218 (Ipp J).

[61] R v Byrnes [1995] HCA 1; (1995) 183 CLR 501, 517 (Brennan, Deane, Toohey and Gaudron JJ).

[62] United Petroluem (n 43) [644]-[6], cited in Oliana (n 43) [373] (Connock J).

[63] Griffiths v Beerens Pty Ltd [2008] VSC 201; (2008) 66 ACSR 472, 489 [54] (Pagone J).

[64] Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd [2016] NSWCA 347; (2016) 340 ALR 580 [3] (Bathurst CJ) ('Australian Careers Institute'); Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 [78]-[9] (McHugh, Gummow, Hayne and Callinan JJ); Howard v Commissioner of Taxation [2014] HCA 21; (2014) 253 CLR 83 [33]-[4], [59], [91], [110]-[111] (French CJ and Keane J); Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 [17] (Finn, Stone and Perram JJ) ('Grimaldi').

[65] Australian Careers Institute (n 64) [132] (Sackville AJA).

[67] Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488 (Astbury J, Lord Cozens-Hardy MR, Swinfen Eady and Pickford LJJ).

[68] As at 8 December 2017 it appears that Mr Chen had a 14.3% interest.

[69] The Hengyang Group was formerly referred to as Foresun, as mentioned at [35] above.

[70] Pacific Ocean Cattle Holdings is a Hong Kong based company; it appears in the ownership structure document at [48] above.

[71] Presumably one of the Uruguayan companies either Rondatel S.A. or Lirtix S.A..

[72] [1990] HCA 32; (1990) 170 CLR 146.

[74] [1991] 2 Qd R 360.

[76] [1970] Ch 62.

[78] [1976] HCA 7; (1976) 137 CLR 1.

[81] (1974) 1 NSWLR 68.

[82] Ibid 77; citing Hindle v John Cotton Ltd (1919) 56 SLR 625, 630-1.

[87] (1993) 32 NSWLR 50 (Kirby P, Clarke and Cripps JJA).

[88] Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Ltd (NZ) (1992) 29 NSWLR 260, 302.

[96] [2001] NSWSC 448; (2001) 38 ACSR 404.

[98] [2008] WASC 239; (2008) 225 FLR 1.

[104] (1993) 11 ACSR 260, 287-8 (Anderson J).

[105] Permanent Building Society (n 59), 237-40 (Malcolm CJ, Seaman and Ipp JJ).

[106] Bell Group (No 2) (n 98) [4376].

[107] [1937] HCA 42; (1937) 58 CLR 112, 138 (Rich J).

[108] [1938] HCA 4; (1938) 60 CLR 150, 188 (Dixon J).

[109] Bell Group (No 2) (n 98) [4431].

[110] [2005] HCA 23; (2005) 226 CLR 507 (Gleeson CJ, Gummow, Kirby, Hayne and Heydon JJ).

[111] Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334 (Doyle CJ, Prior and Vanstone JJ).

[114] Angas Law Services (n 110) [29].

[115] Bell Group (No 2) (n 98) [4456].

[123] [2012] WASCA 157; (2012) 270 FLR 1 (Lee, Drummond and Carr AJJA).

[124] Ibid [921], [932], [1956], [2733].

[126] [2011] VSCA 392; (2011) 86 ACSR 277 (Warren CJ, Mandie JA and Judd AJA).

[128] [2016] VSC 779; (2016) 342 ALR 1.

[132] Australian Securities and Investments Committee v Geary [2018] VSCA 103; (2018) 126 ACSR 310, [409] (Ferguson CJ, Weinberg JA and Sifris AJA).

[133] Excluding factually extreme situations such as where the directors' honest belief is the product of a wholly irrational mind.

[134] See, eg, Charterbridge (n 76), Qintex (n 74), Bell Group (No 2) (n 98), Bell Group (No 3) (n 123).

[138] As Edelman J observed in Netglory Pty Ltd v Caratti [2013] WASC 364, [362].

[141] Both parties hinted that Mr Chen's absence harmed their case; insofar as Mr Cai made that submission it assumes that Mr Cai had the group benefit in mind; to the extent that it matters, and noting Mr Chen's defence, it is difficult to see how Mr Chen's participation would have assisted Mr Cai.

[142] Mr Cai argued that Mr Chen was in the camp of VicBeef and Tabro as was Mr Lei Li, and a Jones v Dunkel inference was tentatively advanced. Whilst VicBeef and Tabro were in communication with Mr Chen and Mr Lei Li (or at least with those that were in contact with them), in Mr Chen's case in respect of this intention not to participate in the trial and in Mr Lei Li's case with respect to the production of a document as to the current shareholding in China Beef Products Holdings Limited, the fact that VicBeef and Tabro commenced proceedings against Mr Chen is not a factor which ordinarily suggests that the party sued is in the camp of the party suing. In any event, the suggestion that the evidence of Mr Chen should therefore be presumed not to assist VicBeef and Tabro does not withstand scrutiny either in light of the contemporaneous documentary trial or more particularly the admissions in his defence. The same applies to some extent to Mr Lei Li, in light of his unwillingness to execute the Cai Security Agreements.

[143] The admission does not bind Mr Cai and insofar as it is an out of court statement made by a person not called as a witness it is inadmissible to prove the truth of its content

[145] Clearly, a reference to the balance of the shares in the company that would own the Abattoir assuming completion of the Harmony Agreement.

[148] Either by Mr Chen or Mr Michael Wang.

[150] The circumstances by which the NAB became aware was not made clear in the evidence; there is some basis for believing that it may have become aware after Mr Cai lodged a caveat on title.

[153] Australian Securities and Investments Commission v Flugge (n 128)296 [2008] (Robson J).

[154] United Petroleum (n 43) [644]-[6].

[155] Richard Brady Franks (n 107) 135, 143-144 (Rich J).

[156] Baden v Societe Generale pour Favoriser le Developpement du Commerce et de L'Industrie en France SA [1993] 1 WLR 509 at 575-6.

[157] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, [174].

[158] Oris Funds Management Ltd v National Australia Bank [2003] VSC 315, [119] (Osborn J).

[159] Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310 [123], [159] (Gleeson JA, Barrett JA and Tobias AJA agreeing).

[161] [2014] NSWSC 1251.

[162] A company in liquidation with the suit being brought at the instance of liquidators.

[165] [2003] NSWCA 71; (2003) 45 ACSR 244 [72].

[166] [1874] UKLawRpCh 20; [1874] 9 LRCh App 244.

[167] [2016] FCAFC 85; (2016) 243 FCR 516.

[177] Grimaldi (n 64) is also supportive of this analysis; see in particular the analysis at [251] (Finn, Stone and Perram JJ).

[178] Bell Group (No 2) (n 98) [4406], [4552], [4574]-[82].

[180] Bell Group (No 3) (n 123) [2157]-[9].

[181] Nor do I consider that Mr Cai provided valuable consideration to VicBeef or Tabro or to another at their request.

[182] Richard Brady Franks (n 107) 142 (Rich J).

[183] See, eg, Bell Group (No 2) (n 98), Bell Group (No 3) (n 123), Maronis (n 96), and Equiticorp (n 88). Nor was any such constraint referred to in Farah Constructions (n 157) or adverted to in Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609 (Barrett, Gleeson and Leeming JJA), where the New South Wales Court of Appeal considered that a dishonest breach was an ingredient of second limb, ie, knowing assistance liability, in contrast to the view expressed by the Full Court in Bell Group (No 3) (n 123).

[184] Although the plaintiffs' outline of opening made it clear that they were relying on Mr Chong's knowledge, the defendants argued that it was not squarely raised in the statement of claim. Accordingly, the plaintiff filed and served an amended statement of claim after the trial had commenced.

[185] Prior to the amendment, Mr Cai did not intend to call Mr Chong or Ms Leung as witnesses but did so after the amendment.

[190] From the terms of the Stamford File Note.

[191] That is, a company whose assets were not encumbered by securities such as those proposed by the Cai Security Agreements.

[194] The reason why was not explored in the evidence.

[195] See, eg, Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 (Brennan CJ, Gaudron, McHugh, Gummow and Kirby JJ).

[196] Albeit in the form of the tender of a witness statement adopted by them in the witness box.