Gemi 193 Pty Ltd v Zhu

Background to the Gosford Project and Fucrez

1. The G193 loan transaction came at the end of a series of advances made by Gemi Investments subsidiaries to fund the Mann Street project by The Gosford Pty Ltd ("The Gosford"), a developer on the Central Coast of New South Wales. Ms Zhu had no direct involvement in any of these advances which commenced in April 2019. She only became involved in July 2020, not long after she commenced work at NPH. In April 2019, Gemi Investments arranged an advance of $15.5 million to The Gosford for it to fund The Gosford's acquisition of the Mann Street project land.
2. Mr Peter Walker was a director and principal of The Gosford and instigator of the Mann Street project, among many property development projects in which he was involved. Mrs Zhu's husband, Mr Peter Zhu was also commercially associated with the project. Mr Zhu had begun discussing the Mann Street project with Mr Walker in mid-2018. Mr Walker set up The Gosford to acquire the Mann Street project site from its then registered proprietor, G3 Assets Holdings Pty Ltd ("G3"). Mr Zhu incorporated NPH to undertake the construction work for the Mann Street project. Some evidence estimates the gross value of the building contract proposed to be offered to NPH for the Mann Street project was as high as $185 million.
3. Mr Zhu was neither a party to nor guarantor of the original loan from Gemi to The Gosford in April 2019. But Mr Walker and one of his companies, Macarthur Seniors Living Pty Ltd, and various other individuals became guarantors of the April 2019 loan.
4. Mr Zhu had been made bankrupt in 2011. His bankruptcy was annulled by Court order in October 2022. Mr Zhu's business practices had a measure of calculated opacity that attracted notice. He often used the alias 'Thomas Cardinal' in financial dealings.
5. Mr Zhu also had held an interest in the vendor of the Mann Street property, G3, through an intermediate corporate entity. On 28 November 2018, The Gosford entered a put option with G3 in relation to the Mann Street property, granting The Gosford, or its nominee, the right for a period of 140 days to purchase the Mann Street property for $26.5 million.
6. Mr Keith Snell was Mr Walker's co-principal and a director of The Gosford. He was involved in the decision-making in relation to The Gosford in the transactions regarded here prior to his death in July 2020.
7. It is now necessary to survey the accumulating transactions between Gemi Investments and its various subsidiaries and The Gosford and Mr Walker's interests over the 15 month period between April 2019 and August 2020 before Mrs Zhu was approached and she and her Wahroonga property became involved. This 15-month period shows much about the accumulating knowledge of Gemi Investments and its various subsidiaries about the refinancing of the Mann Street project before Mrs Zhu became involved.

The First Gosford Loan - April 2019

1. Time was tight for The Gosford in early April 2019 to fund the acquisition of the Mann Street property. The 140-day expiry of The Gosford's option with G3 on 28 November 2018 meant that funding to facilitate the purchase needed to be found no later than 17 April 2019.
2. Gemi Investments advanced the April 2019 loan to The Gosford as the borrower. The guarantors were Mr Walker, Mr Snell, and companies associated with them, L & M Property Pty Ltd, BSC Professional Services Pty Ltd, The Shed Group Pty Ltd, Forest Apartments Pty Ltd, Macarthur Seniors Living Pty Ltd and MPG Property Holdings Pty Ltd. The lenders named under the April 2019 agreement were a series of individuals of the syndicate from whom Gemi Investments sourced the funding.
3. The purpose of the first Gosford loan agreement expressed in the loan documents was that the principal sum borrowed of $15.9 million would enable payment of the initial tranche of the purchase price for the Mann Street property. The advance was for six months with repayment required by 16 October 2019.
4. Soon after the April 2019 loan agreement was made The Gosford exercised its option and acquired the Mann Street property. On 1 May 2019 The Gosford settled the purchase of the site. But the development of the Mann Street site would take much longer and there was no prospect of a return on The Gosford's investment in the short term. Therefore, a refinance was required by October 2019.
5. A term of the April 2019 loan agreement was that Gemi Investments would be granted a mortgage over several properties Mr Snell owned or controlled to secure his guarantee of The Gosford's obligations. It was also a term of the April 2019 loan agreement that a caveat over the title of the Mann Street property be removed within 14 days.
6. The April 2019 loan went into default as soon as the loan documents were signed due to The Gosford's failure to pay interest that was due on the date of the agreement. The project site was undeveloped and had no cash flow. The Gosford did not make interest payments on the first loan and its indebtedness began to grow.

The First Refinance - April to October 2019

1. After The Gosford acquired the Mann Street project site, it remained undeveloped. The Gosford had only raised some of the initial funds for its acquisition not for its later development. The Gosford set about raising funds during the life of the April 2019 loan.
2. Mr Walker was active as The Gosford's principal in seeking further advances from lenders. He repeatedly approached Gemi Investments between April and October 2019 seeking further funding. Mr Walker represented to Mr Epstein and the other Gemi Investments principals, Mr Fleming, and Mr Cooper, that he could obtain refinancing with other lenders but that in the meantime he needed further advances from Gemi Investments. Mr Fleming soon became cynical about the promises that Mr Walker was making to him and Mr Epstein about refinancing Gemi's loan to The Gosford.
3. In September 2019, Mr Walker began looking towards Integrated Securities Funds Management Ltd ("Integrated Securities") to assist him in procuring a refinancing of the April 2019 loan. Mr Walker represented to the principals of Gemi Investments that he could obtain finance from Integrated Securities through to October 2019 and beyond. But as the expiry of the April 2019 loan loomed Mr Walker made a more concrete approach. On 1 October 2019, he emailed one of the co-principals of Gemi Investments, Mr Cooper, referring to his attempts to obtain finance with another entity, Credit Solutions Ltd ("Credit Solutions"), but indicated there was difficulty with the prospective financing as follows: "To further complicate matters [Credit Solutions] may not have all the funds required to settle the land being circa $26 million until mid-November but are working towards the end of October."
4. Mr Walker concluded this email by requesting Gemi Investments to provide a further $7 million and to extend the April 2019 loan facility for a further two months. Mr Cooper responded to Mr Walker's 1 October 2019 email. Mr Epstein became aware of this request. The Gosford did not ultimately source further funding from Credit Solutions.
5. The Gosford defaulted on repayment of the principal of $15.9 million that was due on 16 October 2019 under the April 2019 loan agreement, and remained in default whilst further refinancing was negotiated.
6. In early November 2019, Mr Walker promised Mr Cooper that The Gosford was close to finalising a refinance "within 10 days" but Mr Walker was not able to arrange this new funding. On 14 November 2019, Mr Walker asked Mr Cooper and Mr Fleming for Gemi Investments to advance $28 million to it, including the refinance of the existing April 2019 loan. This additional amount was said to be needed to cover the existing debt refinancing and to provide a further tranche of the purchase price of $7 million that was due from The Gosford to the vendor of the Mann Street property and to provide short-term working capital. Gemi Investments began to look at this proposal but was not initially contemplating advancing as much as $28 million.

The December 2019 Loan Agreements

1. In December 2019 Gemi Investments decided to advance $22.3 million to The Gosford in short-term funding repayable by 15 March 2020. The loan was preceded by Gemi Investments following its usual commercial course of issuing an investment memorandum to potential loan investors. The investment memorandum gave a profile of the proposed lending to potential investors without mentioning The Gosford's default on the April 2019 loan agreement.
2. Further funds were forthcoming. On 11 December 2019, Gemi Investments created a special purpose vehicle, Gemi 143 Pty Ltd ("G143"), to advance $22.3 million to The Gosford. This amount of funds was calculated to cover the repayment of the capital due on the April 2019 loan. But even excluding accrued default interest the advance of $22.3 million only provided a further $6.4 million ($22.3 million minus $15.9 million) towards repayment of the balance of the purchase price on the acquisition of the Mann Street property. Contractual default to G3 therefore looked likely.
3. The structure of the December 2019 loan agreement from G143 was like the April 2019 loan agreement. G143 was the lender and The Gosford the borrower. But individual investors funded G143, which in turn advanced the funds to The Gosford. The same group of guarantors that guaranteed The Gosford's obligations under the April 2019 loan also guaranteed The Gosford's obligations under the December 2019 loan from G143.
4. But despite this funding through G143 there was still a shortfall in the balance of the purchase price payable by The Gosford to G3 for the title to the Mann Street property. So Mr Walker negotiated an additional advance, which was agreed in parallel with the December 2019 loan agreement.
5. On 11 December 2019 Gemi Investments formed another special-purpose subsidiary, Gemi 144 Pty Ltd ("G144") to enter this parallel loan agreement with The Gosford and the same guarantors to record terms for the advancing of an additional sum of $6.2 million to The Gosford, with repayment required by 16 March 2020, the day after repayment was due on the $22.3 million December loan agreement with G143.
6. Although the combined $22.3 million and $6.2 million December 2019 loan agreements exceeded the initial request of $28 million, they were still insufficient to do more than meet the purchase price for the acquisition of the Mann Street property and provide some working capital. They did not fund developing the site.

The January 2020 Loan Agreement

1. Mr Walker's renewed December 2019 approaches to Gemi Investments for further funds were successful. On 13 January 2020, The Gosford borrowed an additional sum of $3,818,302 from another special purpose vehicle, Gemi 149 Pty Ltd ("G149"). The same guarantors stood behind The Gosford, guaranteeing its repayment obligations to G149 on this advance. Repayment was required at the same time as the $6.2 million December 2019 loan agreement, namely 16 March 2020.

The February 2020 Loan Variation

1. Not long after finalisation of the January 2020 loan agreement, Mr Walker requested more near-term funding for The Gosford. Mr Walker communicated with the principals of Gemi Investments, Mr Epstein, Mr Fleming, and Mr Cooper on 28 January 2020, seeking additional funding and taking issue with the fees and charges that were being applied to the existing advances from the various Gemi entities.
2. The principals of Gemi Investments responded positively. Gemi set up yet another special purpose vehicle, Gemi 158 Pty Ltd ("G158") to make a further advance of principal to The Gosford by varying the January 2020 loan agreement. The new advances were formalised on 5 February 2020 with the Deed of Variation of Loan Agreement made on the one side by G149 (the original January 2020 lender) and G158 (the new lender), with The Gosford as borrower and the same guarantors as before. The February 2020 loan variation extended the January 2020 loan agreement by lending an additional $356,860.27 to The Gosford but retained the same repayment date of 16 March 2020 that was provided for in the January 2020 loan agreement.
3. After the deduction of fees and charges, G158 advanced $320,000 under the February 2020 loan variation on 7 February 2028, with the balance being applied to prepaid interest and to Gemi Investments' fees and charges. This brought the total additional amount advanced in January and February 2022 to $4,175,162.27 (being $3,818,302 plus $356,860.27).
4. By this time, in addition to the original April 2019 advance by Gemi Investments, another four special-purpose vehicles, G143, G144, G149 and G158, had been involved in making advances to The Gosford.

Default - 16 March 2020

1. The Gosford had now accumulated substantial repayment obligations which were all due on 16 March 2020. It faced combined repayment obligations of $32,675,162.30, being the sum of the amounts due: on each of the two December 2019 loan agreements ($22 .3 million and $6.2 million); the January loan agreement (of $3,818,302); and the February 2020 loan variation ($356,860.27). The Gosford was unable to meet these obligations. This is not surprising. As the Covid-19 pandemic was starting to impact Australia, economic activity went into freefall and The Gosford did not have development finance.
2. Between 11 and 13 March 2020, Mr Walker sought an extension of all the existing loan facilities. Mr Epstein was the principal dealing with Mr Walker on behalf of all the Gemi entities on this request. Through Mr Epstein Gemi indicated that another extension of the facilities would be granted to The Gosford up to 11 May 2020. But Mr Epstein stipulated that the extension to 11 May 2020 would be on terms that The Gosford would pay interest, fees and charges totalling $1,383,956.73 well before that date, namely by the earlier date 20 March 2020.
3. This loan structure is itself a significant indicator of Gemi's diminished regard for the reliability of Mr Walker's promises and its doubts about the prospects of The Gosford avoiding future default as the pandemic unfolded. Gemi was stipulating in the second week of March 2020 for a loan extension to the second week of May 2020 but only on the basis that hefty fees were paid upfront in the third week of March 2020.

The March 2020 Loan Variation on 19 March 2020 the G143, G149, G158 and G144

1. Formal variation to the existing loan arrangements was made on 19 March 2020, with the same borrowers and guarantors, and the existing special-purpose lending vehicles. The variation extended each of these loan agreements to a new due date of 11 May 2020, with a requirement to pay additional fees and charges, legal costs and expenses, as follows: 1. G143 - $1,023,203.42 plus lender's legal costs and expenses; 2. G149 and G158 - $218,618.75 plus lender's legal costs and expenses; and, 3. G144 - $321,827.95 plus lender's legal costs and expenses.
2. Each of the March 2020 loan variations required these additional fees and charges to be paid by the following day, 20 March 2020. Once again, The Gosford failed to make that payment and the loans fell back into default.
3. An attempt was made on 24 March 2020 to rectify part of the default. On that date, Macarthur Projects Pty Ltd ("Macarthur Projects"), the corporate vehicle associated with Mr Walker, paid $600,000 to Gemi Investments, apparently in satisfaction of The Gosford's obligations under the March 2020 loan variation. But The Gosford continued in default in relation to the balance of $783,956.73 (being $1,383,956.73 - $600,000).
4. By this time the extent of The Gosford's default and Mr Walker's unfulfilled promises of refinance, were causing increasing tension within Gemi. This was revealed from email correspondence between Mr Fleming and Mr Walker on 24 March 2020. Mr Fleming indicated that he expected Mr Walker to pay $697,000, not the $600,000 lump sum that he had paid. To appease his Gemi partners, Mr Fleming personally underwrote the $97,000 shortfall from The Gosford.
5. But Mr Fleming was not happy with Mr Walker. He communicated back to Mr Walker that he had accepted the $600,000 "much to the anger of my partners" and was concerned that "I am now liable for 97K if you do not pay the balance of $697,000 and 97,000K by the 20th of April". Mr Fleming concluded, "can you please ensure that this will be paid by this date to avoid the penalties being backdated and me having to pay the 90K".
6. Mr Walker's promises about potential refinancing continued. On 31 March 2020 he informed Mr Fleming in an email that the potential refinancer Integrated Securities "are keen to fund the project". This email was copied to Mr Epstein, Mr Cooper, and others at Gemi. By this time, internal email evidence shows that the principals at Gemi were losing faith in Mr Walker's promises of refinancing, in the face of the continuing default by The Gosford.

Gemi's Risk Containment Strategy

1. The stand-off between Mr Epstein and Mr Cooper seemed to produce an internal compromise of sorts. Until the end of March 2020, all the advances to The Gosford had added to Gemi's financial exposure to The Gosford and to Mr Walker's various entities. Late in March 2020 Gemi had reached an inflection point and began to limit its risk. This appeared to be partly driven by a reluctance on the part of Mr Epstein and Mr Cooper to pursue the seven guarantors who had continued to assume risk as sureties for The Gosford. Whether those guarantors had associations with any of the co-principals is unclear. But Gemi's internal correspondence indicates a reluctance to triggered default action and call upon these sureties.
2. In April 2020, with further default appearing likely as 11 May approached in the absence of major project financing, Mr Epstein began to cast about for new security to buttress The Gosford's mounting obligations to Gemi. Mr Epstein approached Mr Zhu for security, aware of his interest as a proposed construction contractor to the development of the Mann Street property.
3. Mr Epstein's approach to Mr Zhu was well targeted. Mr Zhu was committed to the Mann Street development in several ways. He had already guaranteed a loan to Mr Walker of $1 million. He had also paid $1.1 million in commission to Mr Walker as an earnest of Mr Walker's commitment to appoint NPH, Mr Zhu's company, to construct the Mann Street project. Thus, Mr Zhu had two financial incentives to keep Mr Walker solvent one negative and one positive.
4. Two people emerged as potential security providers, both related to Mr Zhu. The first was his 21-year-old daughter, Ms Jia Yi (Chloe) Zhu and the second was his wife Mrs Juliana Zhu, the defendant. Ms Chloe Zhu owned a property in Rocky Point in North Queensland and Mrs Juliana Zhu, the defendant, owned her residence in Wahroonga. Although the extended loans fell due on 11 May, further instalments of interest and fees were due on 20 April 2020. But these were not paid. After that default the request for more security became more urgent.
5. Urgent negotiations between Mr Walker, Mr Zhu, and the principals of Gemi to take new security commenced. On 23 April 2020, Mr Fleming emailed his co-principals, Mr Epstein and Mr Cooper, together with a Mr Tweedy, identifying that Mr Zhu was a new source of security and stating: "Peter Zhu has a property in Cairns…[Mr Zhu] has agreed to put it up as security and he and Greg Walker will personally guarantee. According to Greg, Peter does not borrow money and has only agreed to this on the basis that IS [Integrated Securities] have negotiated an exit not only for this loan but our loan on Gosford. According to Greg, Elizabeth from IS has secured a lender that will take us out by the 11th of May and term sheet will be provide[d] by tomorrow."

Chloe Zhu and Her Rocky Point Property

1. Mr Fleming pushed the idea of a further loan secured over Ms Chloe Zhu's property and sought to persuade his co-principals of the merits of such a loan on what was curiously described as a "standalone" basis. But far from being standalone the context for Ms Zhu's Rocky Point property being offered as security was all that had gone before.
2. Mr Fleming's proposal was premised on the Rocky Point property being valued at $4 million and Gemi lending at a loan to valuation ratio of 60%, allowing an advance of $2.4 million. According to Mr Fleming this advance could then be disbursed as follows: 1. interest at 16.5% to 2 months ($66,000); 2. loan fees of $52,000; 3. payment to Mr Greg Walker of $400,000; 4. two interest payments to Gemi Investments for the month of April totalling $650,000; and, 5. a further $135,000 payable to one of the Gemi entities, leaving a balance of $1,096,000 which would then be applied in reduction of the loan to The Gosford.
3. Mr Walker's proposal was to use the Rocky Point property as security to reduce the amount owing by The Gosford to Gemi Investments and the other Gemi entities and to pay a substantial sum to Mr Walker. It is difficult to understand why Mr Walker would be favoured in this way, but it was not the only transaction sweetener he was to receive in the course of these dealings. Such remuneration to Mr Walker was one signpost that Gemi was taking a favourable view of a man whose threatening conduct reasonable deserved nothing more than commercial sceptism.
4. Mr Fleming's email seemed to persuade his co-investors. On the same day, 5 May 2020, Gemi Investments issued a term sheet to Mr Walker and Mr Zhu for a new advance of $2.25 million, this time to Macarthur Projects, secured over the Rocky Point property. The term sheet provided that $1.85 million of the advance would be allocated to interest payments and satisfaction of the various loans to The Gosford and that $401,460 would be advanced back to Macarthur Projects, as the vehicle to deliver it to Mr Walker.
5. The term sheet was entered into on 12 May 2020. The new loan (the Rocky Point loan) was based upon the security of the Rocky Point property and was advanced by Gemi 184 Pty Ltd ("G184") with Macarthur Projects as borrower and Mr Walker and Ms Chloe Zhu as the guarantors. The loan of $2.52 million was payable on or before 4 July 2020. The paperwork prior to execution of the 12 May 2020 Rocky Point loan agreement shows no evidence that anyone at Gemi was aware that Ms Chloe Zhu, and not Mr Zhu, was the registered proprietor of the Rocky Point property.

Mr Walker Fails to Secure a Refinance - May to July 2020

1. Whatever Mr Walker was doing to secure a refinance of The Gosford's obligations to the Gemi entities, it continued to be unsuccessful. If Mr Walker's emails to be co-principals are be believed, he was continuing to seek a refinance through Integrated Securities on behalf of The Gosford. He updated Mr Epstein and Gemi from time to time between May and July 2020.
2. But Mr Epstein was a realist: he understood that The Gosford had failed to refinance its indebtedness by mid-July 2020. Despite his oral evidence to the contrary the Court infers he regarded a refinancing as unlikely. Mr Epstein says he had some contact with the potential refinancers. But such oral evidence is unsupported by the kind of detailed documentary evidence that would be likely to exist if Mr Epstein's evidence on this issue were true.
3. Unsurprisingly, the May 2020 Rocky Point loan went into default on its new due date of 4 July 2020. Once again, Gemi had the option of issuing default notices but, once again, Mr Epstein withdrew from the precipice and began to look around for more security.

Mrs Zhu and the Fucrez Loan

1. The Wahroonga property owned by Mrs Zhu now came into focus. Mr Zhu did not approach Mrs Zhu about offering the Wahroonga property as security for a Gemi advance until late July 2020. But leading up to that approach Mr Zhu had been involved in intensive discussions about the possibility of using Mrs Zhu's property as security to surmount the funding impasse which had been reached by July 2020.
2. On 15 July 2010, Mr Fleming emailed Mr Cooper and Mr Epstein proposing that they meet with Mr Walker and Mr Zhu to confirm "that Peter [Mr Zhu] is prepared to lend a further $1.3m to cover interest". Mr Fleming also reminded his correspondents that they needed to get an update from Mr Walker and Mr Zhu about the refinancing. Mr Fleming reflected upon Mr Zhu's probable commitment to the development by The Gosford, stating: "I would also like to understand Peter's involvement and commitment to The Gosford project. He has invested $2.5m and if invests another $1.3m it would appear that he is committed. He is obviously very shrewd and has probably worked Greg out and must be thinking that there is a better way forward. We should also alert them to the fact that there will be a rollover fee and penalty interest."
3. Mr Fleming's judgment about Mr Zhu being "shrewd" would have been shared by all the Gemi co-principals who dealt with him. Though a bankrupt, Mr Zhu was managing indirectly some very substantial businesses.
4. At the same time Mr Walker was corresponding with Mr Epstein about the position of one of the guarantors of the various Gemi loans, Mr Snell. Gemi had placed caveats on several properties in support of Mr Snell's personal guarantees. Mr Walker was now applying pressure to Mr Epstein to remove Gemi's caveats over Mr Snell's properties. A curious feature of this case is that Gemi has not yet sought to call on the late Mr Snell's guarantee, or to realise the securities supporting Mr Snell's guarantees.
5. The principals at Gemi were now clearly focused on whether refinance would be available to The Gosford for the Mann Street project. One of the potential financiers mentioned was PAG. Gemi was starting to become aware of alarming misinformation from Mr Walker about the refinancing from PAG. On 20 July 2020, Mr Fleming emailed Mr Epstein and Mr Cooper referencing their discussions about PAG and stated: "Andrew spoke to PAG and they indicated they never made an offer on this deal…Justin your prediction that they [Elizabeth and Simon] never intended to settle this was probably correct."

Mr Zhu Raises the Issue with Mrs Zhu - Late July 2020

1. Mrs Zhu's evidence is accepted that it was only in late July 2020 that Mr Zhu first introduced her to the possibility of committing her Wahroonga property to assist the financing of the Mann Street project. Taking advantage of her presence at the offices of NPH, Mr Zhu had the following conversation with her. Mr Zhu: "The Gosford company is behind on its interest payments to its funding company. Greg is a very good friend with Justin from the funding company, and he will arrange a refinance very soon, but they need to pay overdue interest of about $1 million before they can refinance. I was thinking of asking your help. Can your property be used as a guarantor for the overdue interest? It will help in Gemi paying the $1 million overdue interest. They would put a caveat on your property, but it will only be for a couple of months, and after that they are getting another refinance and they will remove the caveat. Mrs Zhu: Why do you need to use my property? What about Greg? I can't pay that back. Mr Zhu: Greg's property has another caveat and needs more documents and time to refinance his property. You don't need to pay anything; Greg will arrange for the refinance straight away. Mrs Zhu: My house is for our son's US university studies, for the next 10 years through to his doctorate. You must make sure they will refinance and remove the caveat in three months. Mr Zhu: Of course, you can talk to Greg when he comes to the office. Mrs Zhu: Okay. I will also want to speak to the lender.
2. There is much to support this conversation occurring. Ms Zhu followed up what she said. She insisted upon meetings with both Mr Walker and "the lender", which ended up being a meeting with Mr Epstein. Prior to July 2020 Mrs Zhu had no dealings either with Gemi and had never met Mr Epstein. She had not involved in any property development with Mr Zhu or Mr Walker. It was logical therefore that she would seek to meet Mr Walker and the lender about what she perceived as a request essentially for a no risk favour.
3. What Mr Zhu said to his former wife was misleading. Its more deceptive elements were the representation that a refinance would be happening "very soon". There was no basis for him saying this. The statement that there was "$1 million overdue interest" was a substantial oversimplification, giving the wrong impression of a simple overdue interest payment when in fact there had been multiple defaults and the security was to cover the latest instalment of accumulating default interest. The statement that "Greg's property has another caveat and needs more documents and time to refinance his property", suggests that Mr Walker had the equity to support the current interest payments and future refinancing but cannot do so because of a timing issue with the documentation, a suggestion that has no basis in the evidence. And "you don't need to pay anything" implies there was no risk, which was incorrect given history of default on these related loans and the documents that she was to be induced to sign.

Mr Walker Discusses the Proposal with Mrs Zhu - late July 2020

1. The meeting Mrs Zhu requested was arranged between Mrs Zhu and Mr Walker at the offices of NPH only a few days after she had spoken to Mr Zhu. Mr Walker compounded Mr Zhu's misrepresentations to Mrs Zhu at this meeting, which led to her signing the term sheet Gemi had prepared which he then presented to her. Mrs Zhu's version of this conversation which is substantially supported by Mr Zhu was in the following terms. Mrs Zhu: Greg, my house is my only asset for my son's US studies. I am unable to pay anything. I am happy to help, but I have no ability to pay anything back and I can't lose the property. You must promise they will refinance and remove the caveat. Mr Walker: I have been doing all my business with Gemi for many years and I am a very close friend with Justin. They are very reliable, we can refinance the Gosford site in three months, but the titles of my properties are already too complicated. After we pay GEMI about $1 million worth of overdue interest, they will refinance to us and remove your caveat; you won't have to pay anything. Mrs Zhu: Okay fine. I have to meet the lender though before I sign. Mr Walker: They need to prepare the documents. They will do that if you signed the first term sheet with the details of the loan. This is not a legal binding document.
2. Something is missing from both this conversation, and the previous conversation with Mr Zhu, that is important. In neither conversation did Mrs Zhu ask either Mr Zhu or Mr Walker for any concrete or direct financial benefit in exchange for mortgaging the Wahroonga property. Gemi sought to make a case that she did receive financial benefits from this transaction. Mrs Zhu was moderately commercially astute. When Mr Zhu first approached her with this proposal, she asked questions about the risk involved in what was being requested of her. She was also astute enough, to have bargained for a financial benefit, had that been part of the scheme of offering the Wahroonga property as security for Gemi's advances. But the absence of any conversation about financial benefits to Mrs Zhu at the outset strongly supports a case that she saw her involvement as doing a personal favour for her ex-husband in a general family context which did not expose her to financial risk.
3. Another notable feature of this conversation was that Ms Walker repeated Mr Zhu's statements that this transaction in substance involved no risk to her because the Mann Street project would be refinanced within three months. Mrs Zhu said she relied upon these statements made by Mr Zhu and Mr Walker and the Court accepts that she did. She signed the term sheet shortly after the statements were made. The statements contained assurances that overcame some initial hesitation on her part. And the statements gave plausible reasons for her to commit.

Mr Walker has Mrs Zhu Sign the Term Sheet - late July 2020

1. Mr Epstein prepared the term sheet and emailed it to Mr Walker, not to Mrs Zhu. He was prepared to entrust Mr Walker and whoever Mr Walker then appointed, to place the document in Mrs Zhu's hands and obtain her signature. It is clear from Mr Epstein's 4:44pm email on 27 July that he assumed that Mr Walker would arrange Mrs Zhu to sign the document, either directly or indirectly.
2. Approximately 20 hours later Mr Epstein received the signed term sheet back from Mr Walker. The return email at 12:03pm on 28 July 2020 from Mr Walker did not explain to Mr Epstein how he had procured Mrs Zhu's signature on the term sheet. But to anyone in Mr Epstein's position, the likely course of events was obvious and could readily be inferred: Mr Walker took the term sheet to Mrs Zhu to have it signed. This clearly put Mr Epstein and Gemi on notice that Mr Walker (and possibly also Mr Zhu) would be the conduits through whom the term sheet would be signed. Mr Epstein put the term sheet in Mr Walker's hands and was apparently content - subject to whatever legal advice she might receive - for him to characterise the transaction to Mrs Zhu on Gemi's behalf. But Mr Epstein also had reason to believe from the way that the Wahroonga property had been introduced into the mix of security, that Mr Zhu would also be involved in informing Mrs Zhu about the reasons for and risks of this borrowing and utilising his background knowledge about the Mann Street project. He also knew Mr Walker and Mr Zhu were both very committed to the Mann Street project, and this proposed advance proceeding.
3. Given what Mr Epstein knew of Mr Walker's and Mr Zhu's characters he had reason to believe it was unlikely that Mr Walker would tell Mrs Zhu much about the financial history of The Gosford, or about its multiple defaults to various Gemi entities, its multiple failed attempts at refinancing and the apparent probability of further default in the absence of a clearly identifiable refinancing exit strategy. Mr Epstein was never told that she knew about these things.
4. In fact, Mrs Zhu had only rudimentary knowledge about The Gosford and the Mann Street project. She worked for a period in July 2020 at NPH and overheard her husband speaking about the project. She met Mr Walker at NPH's offices when he was there for meetings with Mr Zhu. But her contact with Mr Walker was no more than the exchange of superficial pleasantries.

The Investor Memorandum - 28 July 2020

1. Mrs Zhu seeks to support her case about her dealings with Gemi by drawing upon Gemi's dealings with its own investors about this loan. She argues that not only did Gemi withhold information from her, but the Court could be more confident that it did because Gemi withheld information from its own investors.
2. On 28 July 2020, Gemi issued an Investor Memorandum to potential investors in relation to what as about to become the Fucrez loan. The Investor Memorandum was misleading in several ways. It described the borrower as Macarthur projects, and the purpose of the loan as "for working capital". The real purpose of the loan was to cover the interest for the Rocky Point loan and bolster the Rocky Point security.
3. The Investor Memorandum also did not set out the prior defaults of The Gosford in relation to the various Gemi loans back to April 2019, the growing disquiet of the Gemi principals about Mr Walker's statements and, their general loss of confidence in the probability of refinancing, or the debate that had occurred within Gemi about issuing default notices. There is considerable force in Mrs Zhu's contention that if Gemi was prepared to keep its own investors in the dark, it would hardly have hesitated to assume that Mrs Zhu was left ignorant about the same matters.

The Plan for Fucrez to become the Borrower - 31 July to 3 August 2020

1. Mr Epstein's iPhone text messages with Mr Walker were downloaded and made available in evidence. They reveal a remarkable joint plan between Mr Walker and Mr Epstein to substitute Fucrez for Macarthur Projects as the borrower on the advance from G193 to overcome Mrs Zhu's objections to signing documents associated with a mortgage of the Wahroonga property that said she had been independently advised. Contrary to Mr Epstein's plausible denial of a close relationship with Mr Walker, the text messages show a relaxed and close informal relationship between the two, who commenced their discussions about this loan over a joint lunch at a restaurant on Friday 31 July 2020.
2. On the afternoon of Saturday, 1 August 2020, their text message exchanges show that Mr Walker was conscious of the commercial pressure upon him about The Gosford, and that he is facing deadlines and is looking for Mr Walker's help.
3. On Sunday, 2 August 2020 at 4:39pm, Mr Walker reports to Mr Epstein about a problem with settling the translation in accordance with the term sheet that had just been signed by Mrs Zhu. He writes to Mr Epstein: "Xhi zhu [a misspelling of Xian Zhu] doesn't want to have to get the independent legal docs signed. These people are quite weird about some shit. She will sign the mortgage/caveat docs though and Peter and I will guarantee the loan. Wahrongah [meaning Wahroonga]. Can we live with this?"
4. Mr Walker's dismissive assessment to Mr Epstein that "these people are quite weird" about "some shit" - like obtaining independent legal advice - did not appear to alert Mr Epstein to the need to look at this transaction a little more closely to see whether "these people" might need independent legal advice to achieve an enforceable transaction for G193.
5. Mrs Zhu had declared she is not prepared to certify that she has received independent legal advice in relation to a loan to Macarthur Projects. She did not apparently remember this part of the history in her evidence, but it seems clear this is what must have happened. She was reluctant to sign part of the transaction documents being discussed with her that declared she had been independently advised in relation to a loan to Macarthur Projects. This attitude is consistent with the enquiring attitude that she had showed in her dealings with Mr Walker and she would show about a week later in her direct dealings with Mr Epstein.

Mrs Zhu Becomes a Director of Fucrez - 3 August 2020

1. Mrs Zhu became a director of Fucrez on 3 August 2020. She was unaware of Mr Epstein is and Mr Walker's text message exchanges on the morning of 3 August 2020 and never had a clear understanding of why she was being asked to become a director of this new company about which she knew nothing.
2. She says and the Court accepts that soon after she signed the term sheet, she says Mr Walker (in Mr Zhu's presence) raised with her that she needed to become a director of Fucrez in the following conversation. Mr Walker: Juliana, you need to become a director of the company that is getting the money. It will just be for a few weeks. Mrs Zhu: Why do I have to do this? Mr Walker: Because you are going to be a guarantor and for the money to be paid to the company.
3. This conversation occurred shortly after the text message exchanges about Fucrez between Mr Walker and Mr Epstein on the morning of 3 August 2020. Mr Walker's statement was a bland explanation of why Mrs Zhu needed to become a director of Fucrez. It did not explain why a standalone company such as Fucrez needed to be substituted for Macarthur projects as the named borrower in the term sheet, nor why she needed to become a director of this new borrowing entity. It said nothing about Mr Walker's and Mr Epstein's text message agreement. But Mrs Zhu accepted all this without further enquiry, indicating that her level of trust in Mr Walker and Mr Zhu displaced any need for her to inquire further about this matter.
4. Mrs Zhu never understood why she became a director of Fucrez, other than that it would facilitate the borrowing that Mr Zhu and Mr Walker desired to take place. Indeed, she never really appreciated that she had signed a term sheet, naming Macarthur projects as the borrower, and that the borrowing entity was being charged. Mrs Zhu was never a shareholder of Fucrez. She was not aware of ever having made any business decision for Fucrez, as a director of Fucrez. She was a mere temporary passenger in the board and financial affairs of Fucrez. And only three weeks later, on 24 August 2020, for reasons which were no more transparent to her than the reasons why she was invited to join the board, she was asked to resign her directorship, which she did without hesitation.

Signing the Fucrez Loan Documents - 5 August 2020

1. The parties arranged for Mrs Zhu to sign the final Fucrez loan transaction documents on 5 August 2020 at the offices of NPH, where she was working. Mr Zhu's solicitor, Mr Stephen Hedges, appears to have brought the documents to NPH for Mrs Zhu's signature. Mrs Zhu had known Mr Hedges for many years. She had met him through Mr Zhu. Mr Zhu asked her to attend a meeting with Mr Hedges, who previously prepared a power of attorney for Alex. Mrs Zhu thought that given Mr Hedges' prior relationship with Mr Zhu that he was there to protect her interests in this transaction.
2. According to Mrs Zhu's recollection, which the Court accepts, the following conversation occurred between Mr Zhu, Mrs Zhu, and Mr Hedges, before Mrs Zhu signed the documents. Mr Zhu: These are the documents you need to sign for the loan so that the refinance in the guarantee can be processed. Stephen is here to witness your signature on the documents. These have to be signed otherwise the loan can't be processed." Mrs Zhu: I want to make sure they remove the caveat and the maximum amount of the loan is $1.09 million. Mr Hedges: Yes, there is no need to pay interest. The loan amount of $1.09 million includes interest. It is only for three months and after that they will refinance and remove the caveat.
3. She then signed the documents at the places Mr Hedges directed her to sign. Mr Hedges witnessed her signature. She did not receive a copy of the documents that she had signed. She says, and the Court accepts, that the meeting took about 10 minutes. She says and the Court accepts that there was no discussion with her of the detail of the documents that she had signed. In a 10-minute meeting such discussion was not feasible.
4. Mrs Zhu had a good memory of this occasion. Mr Hedges was not called as a witness in the proceedings.

The Transaction Documents - 5 August 2020

1. Under the transaction documents Mrs Zhu executed G193 as the lender and the term sheet was varied so Fucrez became the borrower. The loan was for the previously agreed term sheet principal sum of $1,095,315.90 and was repayable on 1 November 2020. The guarantors of the advance were Mr Walker, Mrs Zhu and Mrs Chloe Zhu.
2. The following loan documents were executed. Only a few of them need to be mentioned here. All the documents Mrs Zhu signed that day are dated 5 August 2020 and one consistent with the term sheet apart from the identity of the borrower.
3. Mrs Zhu signed a statutory declaration entitled "Declaration by Third Party Mortgagor, Guarantor, Surety Mortgage or Indemnifier for the Borrower/Grantor of a Security Interest" in which she stated she was the guarantor named in the loan security documents with Fucrez. For convenience this will be described in these reasons as the "third-party declaration". She declared that she had "received independent legal advice" regarding the loan security documents referred to and that after receiving that advice I have freely and voluntarily signed the following documents", namely, the Loan Agreement, the Certificate of No Independent Financial Advice and the Guarantee and Indemnity.
4. To the extent that the certificate describes Mr Hedges' advice as "independent" in the third-party declaration, in the sense of being advice for Mrs Zhu herself, it is not accurate. Mr Hedges was retained by Mr Zhu and the borrower Fucrez, not Mrs Zhu. His advice was not independent of the borrower. It was, however, independent of the lender.
5. Mrs Zhu also signed a statutory declaration entitled "Declaration by Borrower/Grantor of a Security Interest (Corporation)". For convenience this is described as the "borrower declaration" in these reasons. The borrower declaration also declared that both directors of Fucrez, Mr Walker and Mrs Zhu had "received independent legal advice regarding the same loan and security documents as the third-party declaration. In fact, she was given no legal advice by Mr Hedges as Mrs Zhu says. The short time of the conference made that impossible.
6. Mr Hedges witnessed all these documents, including these declarations. Mrs Zhu says that is all he did. There is no certificate or statutory declaration signed by him or given to G193, indicating that he gave any legal advice in relation to this transaction to Mrs Zhu. The documentation is consistent with Mr Hedges being involved to organise the documents and witness the signature of the parties on the basis that he assumed that the parties were receiving legal advice elsewhere. Indeed, the letter that he sent back on 4 August 2020 to Mr Garth Andrews of Tolz Lawyers acting G193 reporting on his progress in relation to the signing, talked about persons "signing" the documents. At no stage does he indicate in this correspondence that he gave any advice to the signatories and he was not asked to certify that he had given advice to any of the signatories. This will

A Snapshot of Mr Epstein's and G193's Outlook on 5 August 2020

1. Pausing in the chronology, Mr Epstein's knowledge about Mrs Zhu's role this transaction should be examined. Quite apart from his text messages with Mr Walker on 3 August 2020 stood above, Mr Epstein could infer much about her role from the course of events up to this point, from things that had not happened and from the structures that were created to give effect to this transaction.
2. Mr Epstein must either have known or strongly suspected Mrs Zhu was not a principal and had no financial stake in the Gosford or the Mann Street property. If she did have a financial stake, she was latecomer. Mrs Zhu had not previously been involved in any negotiations with Mr Epstein from April 2019 concerning the refinancing of the Mann Street project. Mrs Zhu had not been represented to Mr Epstein by Mr Walker or Mr Zhu as having a financial stake in The Gosford or the Mann Street project. He had strong reason to believe from this history that she did not have any such financial interest. He could only have thought otherwise, if her sudden late arrival, how she had bought in, and what her interest was, were all adequately explained to him.
3. Mr Epstein also had reason to believe Mr Zhu had personal influence over Mrs Zhu. He knew little about their marriage, their property settlement on divorce, or her personality. But Mr Epstein is likely to have known Mrs Zhu was working for Mr Zhu's company, NPH, and that she still had a relationship of financial dependence upon him notwithstanding their divorce.
4. Mr Epstein also knew that the Wahroonga property was Mrs Zhu's residence and was not a core asset owned by The Gosford or was integral to the development of the site of the Mann Street project. If Mrs Zhu did not have demonstrable financial interest in The Gosford, or the Mann Street project, Mr Epstein had reason to believe that the Wahroonga property was being offered as a third-party security as result of Mr Zhu's influence over Mrs Zhu.
5. This was reinforced by several matters. In his email of 27 July when Mr Walker had revealed, as indicated above, that the Wahroonga property was in the name of Mrs Zhu, he had also informed Mr Epstein that "[t]he property is in the name of Xian Zhu however Peter has full control". Mr Epstein had direct information from Mr Walker that Mr Zhu had controlling influence over Mrs Zhu in relation to the Wahroonga property in her name. Also, Mr Zhu had only first mentioned Mrs Zhu to Mr Epstein very late, when other sources of security available to Mr Walker and Mr Zhu had been exhausted and when another property owned by a person over whom Mr Zhu is likely to have influence, Ms Chloe Zhu his daughter, was offered as additional security for the Rocky Point loan.

A Conversation with Mr Epstein - 11 August 2020

1. A little time after signing these documents, Mrs Zhu said to Mr Walker and Mr Zhu that she wanted confirmation from Gemi before they could proceed. Mr Walker offered to arrange for her to meet Mr Epstein from Gemi. The meeting coincided with something that Gemi needed anyway - confirmation of the then outstanding balance of the first mortgage over the Wahroonga property to CBA. Mrs Zhu had provided only a screenshot from her mobile phone of the balance of the CBA mortgage, but this was not acceptable to Gemi. For the settlement of the Fucrez loan transaction Mr Epstein needed a precise figure for the amount outstanding on the CBA first mortgage over the Wahroonga property.
2. Mrs Zhu wanted to meet Mr Epstein rather than simply provide a copy of the CBA documentation to Gemi. She had said to Mr Walker and Mr Zhu previously that it was important for her to meet the lender directly to receive an assurance about the removal of the caveat. That purpose was on her mind when she met Mr Epstein at the CBA Martin Place branch.
3. She says that she wanted to meet the lender because although she wanted to assist Mr Zhu, she was concerned about agreeing to the loan because she believed the Wahroonga property was her only asset. She did not want to risk losing it, because she saw it as the principal resource available to her to fund her son's university studies in the United States. The Court accepts that she had long harboured the ambition for Alex to study the United States and to become an academic there and that the Wahroonga property was the only asset she had which would allow her to fund this career choice for her son.
4. But the Court does not accept that Mrs Zhu was the principal instigator of this meeting, or that it unfolded entirely the way that she says. The contemporaneous text messages (Exhibit 4) between Mr Epstein and Mr Walker imply that this meeting was organised spontaneously because Mr Epstein needed urgently to solve an obstacle at the CBA, which was declining to give a document to Mrs Zhu confirming the then current balance of her mortgage. And Mr Epstein needed this to settle the Fucrez loan transaction later that day.
5. They met at the Commonwealth Bank Australia branch at 48 Martin Place in Sydney. What was said in this conversation and where it took place is strongly contested between Mr Epstein on the one side and Mrs Zhu and Mr Zhu on the other. Three locations for the disputed conversation were in contest: an alleged meeting outside before going into the CBA branch; alleged conversation while they were waiting at the teller in the banking chamber; and an alleged discussion outside afterwards. There is little in common between the competing versions as to what happened at any of these locations.

Settlement of the Transaction and Making the Advance - 11 - 14 August 2020

1. Mr Epstein could not finalise the Fucrez loan transaction until he had Mrs Zhu's CBA statement, which he only obtained in the morning of Tuesday, 11 August 2020. The text message evidence suggests that settlement of the transaction occurred that same afternoon.
2. But the approved funds were not advanced and received on behalf of Fucrez until Friday, 14 August 2020. At one point Mrs Zhu put in issue whether the advance exactly been made and received. In response G193 tended the bank statements that showed that Gemi (Gemi Nominees Pty Limited) advanced the funds in several tranches that conformed with the Fucrez loan agreement that were received on behalf the borrower on 14 August 2020.
3. Thus, although the Fucrez loan transaction documents were signed before the 11 August conversation at the CBA in Martin Place, G193 only committed to the advance after that conversation. The conversation made clearer to Mr Epstein that the advance might well create a transaction in which Mrs Zhu's third-party security interest might be avoidable. G193 was obligated to proceed with the advance given that the document had been signed. But the CBA conversation 11 August led to no communication or enquiry by Mr Epstein. It can be inferred from this that nothing that Mr Epstein later that day was new information to him. Had it been new information might be expected that he would have sought to clarify Mrs Zhu's position before the advance was made to ensure that she was independently advised.

Mrs Zhu Resigns from Fucrez - 24 August 2020

1. Mr Zhu asked Mrs Zhu to resign as a director of Fucrez on or about 24 August 2020. Mr Zhu initiated what was a quite simple conversation about her resignation. She offered no resistance to leaving a role that had never been explained to her and that she had never understood. Mr Zhu: The loan has been paid to Fucrez for the overdue interest, and you do not need to be a director of Fucrez anymore. Mrs Zhu: OK Mr Zhu: You will need to sign documents resigning [from Fucrez].
2. Soon afterwards Mrs Zhu signed the necessary forms effecting her resignation as a director, which were lodged with ASIC. Neither in this conversation nor any subsequent conversation did Mr Zhu explain to her why she had been a director, what her role was to be at Fucrez, or why she had to resign.
3. But her easy resignation upon request shows how uncommitted she was to Fucrez, her high level of trust in her husband, and her lack of understanding of the whole transaction. Her outlook upon being made a director as she said had always been, "I'm happy to help them if they're not cheating me."

Expiry of the Facility and Default - after 1 November 2020

1. The facility expired on 1 November 2020 and the principal was not repaid. Mr Walker and Mr Zhu did not arrange refinancing. All the facilities went into default. But Mrs Zhu was largely kept not uninformed of this. From November 2020 she had regular conversations with Mr Zhu and Mr Walker asking them, "when will the caveat be removed? I need it to be removed. I do not have the ability to pay anything, and I need to sell the property to fund Alex's US university studies."
2. Mrs Zhu received regular reassurances from Mr Zhu and Mr Walker that "it will be removed soon". But none of Mr Zhu's and Mr Walker's promises came to pass and the issue of the sale of the Wahroonga property was eventually overtaken by events. Facing a further cancer diagnosis, in March 2021 Mrs Zhu decided to sell the Wahroonga property. This fitted with her overall plan to sell the property after Alex finished school to support his move overseas to study. Her cancer diagnosis pressed the decision upon her more urgently.
3. Mrs Zhu advertised the property for sale seeking reassurances from Mr Zhu that the caveat could be removed, and he said it could be "anytime". She received a buyer for the Wahroonga property but could not settle because of the caveat. These proceedings were commenced as a result, to see if that sale could be completed. A compromise was reached allowing completion of the sale of the basis that $1.8 million was paid into a solicitor's trust account to await the outcome of these proceedings.

Mrs Zhu's Character and Business Acumen

1. In social circumstances and within her family, the Court assesses Mrs Zhu as generally passive, not inviting or demanding an explanation from people such as her former husband. Rather she is trusting of people who she believes are acting in interests. If someone such as her husband does not explain a financial transaction to her, she accepts that without question. She was asked why she did not ask questions of him about the Mann Street project and the transaction documents she was signing and at times she seemed mystified by the questions. Questioning her husband does not come easily to her.
2. Mrs Zhu decides who she trusts as her guide in life. If she is dealing with people who she thinks are acting in her or her son's interests she is content to proceed without necessarily understanding financial transactions in which she is involved. She is content to be told what she needs to know by people who she believes have her best interests at heart. She trusted her husband to explain to her details of a transaction and to emphasise if there is any risk associated with her providing her signature.
3. Despite her divorce from Mr Zhu, Mrs Zhu still trusted him. Mrs Zhu had a surprisingly generous attitude towards Mr Zhu, a man who had left her after they had had a child together. She often said in evidence to explain her lack of sophistication, "I'm a single mother", which was both a strong and genuine self-assessment and signal to others and lack of resources of her protective nature.
4. Mrs Zhu was the first generation of her Chinese family in Australia. She had no senior family member from Shanghai in Australia to consult about financial transactions apart from her husband and his family. After her divorce she continued to trust Mr Zhu's mother, her former mother-in-law. For example, she said that she did not read the loan document, the subject of these proceedings because she had been told that Mr Zhu's mother had done so, and she believed she would not cheat her. She had a view, passed down to her from her family, so it seems, that a promise from family is "the gold of the gods".
5. With confidence and directness, among many far less direct answers, Mr Zhu denied that Mrs Zhu was involved in any management activity on behalf of Fucrez. His evidence was compelling and was supported by Mrs Zhu's apparent incomprehension about Fucrez's business. Mrs Zhu's evidence showed that the relationship between Mr and Mrs Zhu was unequal and that he was able to manipulate her devotion to her son simply by threatening to control cash flows that might be applied for their son's benefit. She would do anything that would keep her in favour with her former husband who was a source of funds for his son. The $1.5 million loan agreement in their divorce property settlement exemplifies perspective of their post marriage relationship. It only seems to work to Mr Zhu's advantage perpetuating Mrs Zhu's financial dependence upon him.

Mrs Zhu's Outlook on The Gosford project and on Fucrez

1. Mrs Zhu was firmly challenged in a lengthy cross-examination based on her financial transactions and financial relationships with Mr Zhu and other persons. But upon closer analysis none of these are transactions demonstrate that she had either the financial sophistication or financial interests that would undermine the story that she advanced to the Court.
2. Mrs Zhu had provided financial assistance to Mr Zhu in previous years using the Wahroonga property. In 2019 she had allowed the caveat to be placed on the Wahroonga Property to secure a loan of approximately $400,000. But she derived no financial benefit from this and had agreed to allow the caveat to be lodged because she had received an assurance from Mr Zhu's mother, Mrs Zhu's former mother-in-law, and Alex's grandmother, that Mrs Zhu would be looked after if she proceeded to allow the Wahroonga property to be used for lodging a caveat. And after a few months the caveat was removed and that was the end of the transaction with no adverse consequences for Mrs Zhu. This does not demonstrate that Mr Zhu would always have allowed the Wahroonga property to be admitted as a caveat. But she was always cautious and received no financial benefit from this transaction.
3. Mrs Zhu was cross-examined about whether her divorce occurred and whether property settlement in which Mr Zhu agreed to pay her $1.5 million was real but none of this challenge succeeded. She demonstrated under cross-examination that she was receiving wages working for IGA in a suburban supermarket.
4. She was further cross-examined about an investment property in Shanghai, a home loan application to the CBA, and her affidavit sworn on the application to annul Mr Zhu's bankruptcy. None of this damaged her credibility or showed she had undisclosed financial interests.
5. Mrs Zhu was cross-examined about lending $150,000 to Menangle Pty Ltd for which she was repaid $160,000 but her evidence is accepted that this was simple assistance she gave Mr Zhu to give him some temporary help with his business cash flow.
6. Mrs Zhu was cross examined at some length about the $1.5 million property settlement by way of a loan to her. The Deed of Loan dated 26 February 2007 was a genuine document creating a debt due to her from her former husband. She said Mr Zhu commenced to repay the $1.5m and completed repayment by about 2021. The Deed of Loan genuine and accounted for the substantial payments Mr Zhu made to her from 2014 which he purchased the Wahroonga property (about $500,000) through until about 2019, and then other smaller payments through until 2021. None of these payments showed that Mrs Zhu was receiving any more from her former husband than her just legal entitlements under her family law settlement.

Legal Principles, Submissions and Analysis

1. Mrs Zhu's Amended Statement of Cross Claim pleads relief under various different heads. These are the following: 1. Unconscionable conduct is pleaded at general law and in contravention of the Australian Consumer Law, s 20 and/or the Australian Securities and Investments Commission Act 2001 (Cth), s 12CB (ASIC Act) being unconscionable conduct in connection with the supply of financial services; 2. Relief under the Contracts Review Act 1980 (CRA) on the grounds that the contract constituted by the Fucrez loan and Mrs Zhu's secured guarantee of that obligation was unfair or unjust and liable to be avoided within the meaning of the CRA together with a claim for cognate relief for unfairness under ASIC Act, s 12BF; and 3. relief for misleading deceptive conduct for various alleged positive representations and other alleged misrepresentation by silence or for nondisclosure under ASIC Act, s 12DA and Australian Consumer Law, s 18.
2. If these remedies are established, Mrs Zhu claims in her Amended Statement of Cross Claim a range of consequential remedies including removal of the caveat from the Wahroonga property, damages, and declarations that the Fucrez loan agreement and related documents are void insofar as they concern Mrs Zhu. These remedies are not established Mrs Zhu raises an argument that G193 is charging a sufficiently high rate of interest to be a penalty which can be voided.
3. There is a degree of overlap between these claimed remedies. But for efficiency of analysis, it is convenient to deal with the remedies in this order. Mrs Zhu's claim is successful against G193 in relation to the first two claims for relief and aspects of the third claim. Mrs Zhu's success on both of the first two claims for relief means that it is not necessary for the Court to consider the success or failure of the cross-claim on all of the alternative ways that Mr Zhu's third claim is put, namely in misleading deceptive conduct. Some aspects of this claim are considered to the extent that they are related to the first two claims for relief.

Unconscionable Conduct - Legal Principles

1. The applicable legal principles in relation to Mrs Zhu's claim of unconscionable conduct may be shortly stated. The elements required for a court to conclude that unconscionable conduct has occurred were extracted in summary form from Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461-462 and other cases decided in the High Court and restated in Thorne v Kennedy (2017) 263 CLR 85; [2017] HCA 49, at [38] (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ) as follows (omitting case references): "A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage "which seriously affects the ability of the innocent party to make a judgment as to [the innocent party's] own best interests". The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring "victimisation", "unconscientious conduct", or "exploitation". Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage."
2. More recently the necessary elements of unconscionable conduct were summarised in Nitopi v Nitopi (2022) 109 NSWLR 390; [2022] NSWCA 162 at [147] (per Ward P, with whom Bell CJ and White JA agreed): "What is clear is that, once the requisite elements of a special disadvantage, knowledge of that special disadvantage and improvidence of the transaction are established, there is at least an evidentiary onus on the stronger party to show that the transaction was fair, just and reasonable or it may more readily be concluded that the improvident transaction was procured by the unconscientious taking of advantage of that special disadvantage."
3. Other general statements of legal principle should be noted. Unconscionability is a concept that is applied with considerable restraint, going beyond what is 'fair' or 'just' to circumstances which are highly unethical: Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261, at [120] - [121] per Spigelman CJ.
4. There are many statements to similar effect. One such comprehensive statement is that of Allsop P (with whom Bathurst CJ and Campbell JA agreed) in Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell (2011) 15 BPR 29,699; [2011] NSWCA 389 at [291], which also discusses how the concept of unfairness and unconscionability under the CRA may be differentiated from unconscionability at general law: "Aspects of the content of the word "unconscionable" include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557 at 583 [121]; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR 132 at 140 [30]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; 117 FCR 301 at 316-317 [44]; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; factors similar to those that are relevant to the [Contracts Review Act] are relevant: Spina v Permanent Custodians Ltd [2009] NSWCA 206 at [124]; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity: National Exchange at 140 [30]; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at 143 [44]. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure, and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery, or misleading conduct. A finding requires an examination of all the circumstances."

Gemi's Overarching Submission on The Unconscionable Conduct Claim

1. Gemi submits that this is not a case of a vulnerable guarantor deceived by an imperious lender. Rather Gemi submits that Mrs Zhu voluntarily signed the guarantee, without any duress or undue influence in play with the simple objective of helping her ex-husband, as she had done on many previous occasions. Gemi submits she well understood the effect of the transaction. And it submits that she benefited from the transaction: as the financial affairs of Mr and Mrs Zhu were intermingled long after their divorce, with very substantial funds passing between their bank accounts over the relevant period. Gemi submits that the Court should conclude that it was to Mrs Zhu's advantage for The Gosford Project to succeed, and by implication that she was aware of that advantage to her and she was in not in a position of special disadvantage in relation to G193.
2. On this claim for relief, these reasons adopt the structure set out in Nitopi v Nitopi, analysing the issues in relation to Mrs Zhu's claim to be in a position of special disadvantage, G193's knowledge of that special disadvantage, or put another way, G193's conscience, and the improvidence of the transaction.

Was Mrs Zhu in a position of special disadvantage?

1. Mrs Zhu's case that she was in a position of special disadvantage when she executed the guarantee and indemnity and mortgage for the Fucrez loan, and Gemi's contest over that issue centred upon four broad areas of claimed disadvantage: (a) her financial acumen and business experience, (b) the effect of any legal advice upon her, (c) whether she was truly a third-party guarantor and whether she benefited financially from the transaction and (d) the effect upon her of the various matters said to have been positively represented to her or not disclosed to her.
2. (a) Mrs Zhu's financial acumen and business experience. Gemi's case is that Mrs Zhu has considerable financial knowledge and sophistication and that she has downplayed these qualities. Gemi submits she is well educated including through qualifications she attained by learning and studying in English. Gemi's submission refers to Mrs Zhu's advanced diploma in accounting, her studies in migration law, her bookkeeping qualifications, including a recent MYOB course, and her experience in share trading and/or stockbroking. Gemi also submits that Mrs Zhu has gained extensive experience in financial matters not only through her vocational experience in a car dealership in the PRC and in a stockbroking office in Australia but through her interaction with Mr Zhu and his various business enterprises over two decades.
3. The practical effect of some of Mrs Zhu's qualifications are overstated in Gemi's case. Mrs Zhu does have accounting qualifications and has worked in a stockbroking firm and does have some facility with share investments. A sales position in a car dealership, accounting and migration law qualifications and a junior position in a stockbroking firm are not necessarily a sound basis to infer any more than moderate financial sophistication.
4. She did not speak in evidence in a manner which even indirectly conveyed significant financial sophistication. The Court was not of the view that she was suppressing her financial sophistication in the way she gave evidence during an extensive penetrating and well-resourced cross examination by experienced counsel. Rather what came across was a person with a moderate level of financial sophistication in certain areas. A curious feature of this case is that if she has substantial financial sophistication and can deploy to her advantage the qualifications that Gemi has identified, her current supermarket employment clearly underutilises such skills and clashes with the picture Gemi is painting. Mrs Zhu has been in this supermarket job for some time and did not show signs of having taken the job to conceal her deeper financial capability.

Unconscionable Conduct - Gemi's Conscience

1. Gemi says that Gemi did not take advantage of Mrs Zhu's position by acting in the transaction in the knowledge that she was in a position of special disadvantage. This requires examination of the transaction from Gemi's perspective. This has already mostly been done above under the heading "A Snapshot of Mr Epstein's and G193's Outlook on 5 August 2020".
2. Perhaps the clearest evidence that Mr Epstein (and consequently G193) was aware of Mrs Zhu's position of special disadvantage was his participation with Mr Walker in a scheme to restructure the loan by substituting Fucrez for Macarthur Projects in the manner described earlier in these reasons under the heading "The Plan for Fucrez to become the Borrower - 31 July to 3 August 2020".
3. On this subject Gemi first submits that the Court would be comfortably satisfied that Mr Epstein (personally and on behalf of Gemi) genuinely believed that a refinance of the Gemi loans to The Gosford was real and was likely to come about within a reasonable time.
4. This submission is not persuasive. Mr Epstein's evidence does not satisfy the Court that he thought in July 2020 that there was any realistic prospect of refinancing the Mann Street project. The timing is important. Mr Epstein's state of mind should be assessed at the time shortly before Mrs Zhu guarantees the Fucrez loan. By that time there had been a mounting accumulation of unfulfilled promises of refinancing from Mr Walker at each of the multiple extensions of time or variations after the first failure to repay the principal loan in October 2019. Mr Epstein's statements that he had a belief in a refinancing are not compelling and are undermined by the debates between the Gemi co-principals about putting Mr Walker's and Mr Zhu's Mann Street project into default.
5. Secondly, Gemi submits that Mr Epstein and Gemi acted responsibly by engaging their own legal representatives to manage this transaction including by providing a suite of documents for execution by Mrs Zhu and the other parties to the transaction. Gemi submits that it was entitled to rely upon the statutory declarations within this suite of documents that its legal representatives had drafted for Mrs Zhu to execute. Gemi submits these statutory declarations provided assurance to Gemi that Mrs Zhu had taken appropriate legal and financial advice to protect her own interests.

Unconscionable Conduct - the Improvidence of the Transaction

1. On the established facts, this transaction was wholly improvident for Mrs Zhu. She derived no direct or indirect benefit from the transaction. Such inchoate benefit as she might derive by staying in Mr Zhu's favour by transaction was illusory, because he could change his mind about that at any time. She placed at risk the single substantial asset that she had won for herself after considerable effort in the property settlement following her divorce. She had limited employment prospects at her age and had several cancer treatments which made her future employment and income prospects uncertain. Moreover, the transaction was at a high rate of interest because of the risk associated with it but she bore the risk of the cost of that high interest without any prospect of a return.

Unconscionable Conduct - Relief

1. Mrs Zhu qualifies for relief at general law on the grounds of G193's unconscionable conduct to set aside the Fucrez loan. The Court invites submissions of the parties about the precise form of relief. It is not necessary to consider statutory forms of unconscionable conduct as it is already available at general law.

The Contracts Review Act 1980 and ASIC Act s 12BF Claims

1. Mrs Zhu seeks under Contracts Review Act 1980 ("CRA), s 7(1)(a)-(d) on the basis that the transaction documents, and specifically the mortgage she executed over the Wahroonga property are "a contract or a provision of a contract" which were "unjust in the circumstances relating to the contract at the time it was made". Such that, for the purpose of avoiding "as far as practicable an unjust consequence or result" the Court ought to refuse to enforce all or any of its provisions, declaring it void or varying it in whole or in part." The expression "unjust" is defined in CRA to include "unconscionable, harsh or oppressive and injustice shall be construed and corresponding matter."
2. In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court "shall have regard to the public interest and to all the circumstances of the case" including consequences or results arising in the event of compliance or non-compliance with provisions of the contract: CRA, s 9(1).
3. The applicable law may be shortly stated. In Provident Capital Ltd v Papa (2013) 84 NSWLR 231, at 234; [2013] NSWCA 36 at [7], (Provident Capital), in a passage part of which was cited by Gemi in support of its case, per Allsop P gave a useful overview of the approach to be taken in applying CRA, ss 4, 7 and 9: "The broad evaluation of unjustness under the Contracts Review Act 1980 s 4, s 7 and s 9 involves the normative evaluation of the totality of relevant circumstances. Inevitably mines may differ as to the conclusions about such questions. Also, it is often not fruitful to compare other cases with the particular circumstances at hand, lest one be deflected from an appropriate overall assessment by focus on particular aspects relevant to any such comparison. Central to the normative evaluation is the recognition that there is a need for the protection of some people in some circumstances, who are not able fully to protect their own interests against factors that may cause injustice. That vulnerability may come from one or more of many circumstances, such as lack of education or of intelligence, from gullibility, from the predation of fraud and greed, and also sometimes from loyalty and love. The characterisation of a contract as unjust and the sheeting home to the other contracting party of the consequences of its unjustness may be a difficult evaluative exercise. At its heart, however, is the recognition of the inadequacy of one party to protect her or his interests in the circumstances. Here, there was no predation. There was no behaviour in which Provident Capital Ltd sought to take advantage of Mrs Papa. Her son may have sought to do so, but his exchanges with his mother can be seen as blandishments born of his own optimism. Mrs Papa had a solicitor whose advice was inadequate. It would, in my view, be unjust to visit the blandishments of the son and the inadequacy of fulfilment of retainer by the solicitor on the lender. That conclusion involves a consideration of all the matters referred to by Macfarlan JA, including the fact that Mrs Papa was a capable and intelligent woman, who was in no way misled by the lender in entering into the transaction…

Unfair Contracts - ASIC Act s 12BF(1),

1. Mrs Zhu also seeks relief under ASIC Act, s 12BF(1) which allows the Court to avoid a "term that is unfair" in "a consumer contract or small-business contract" which is a standard form contract or a contract for a financial product or the supply of financial services.
2. Mrs Zhu has difficulty in propounding this claim. Her circumstances and those of the transaction do not qualify under either of the gateway definitions of a "small-business contract" or a "consumer contract". ASIC Act, s 12BF(3) defines "consumer contract" as a contract "at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption". None of the transaction documents signed by Mrs Zhu for the Fucrez loan qualify as an acquisition for any of those purposes.
3. And ASIC Act, s 12BF(4) defines "small-business contract" is one of which at least one party to the contract "is a business that employs fewer than 20 persons" and the upfront price payable under the contract does not exceed $300,000 or where the upfront price does not exceed $1 million and the contract is the duration of more than 12 months. This is not obviously applicable to the circumstances of this case.

Misleading and Deceptive Conduct - the Positive and Negative Claims

1. Mrs Zhu's positive misleading and deceptive conduct case based on Mr Epstein's statements on 11 August 2020 is not made out because the Court does not accept that he made the positive statements attributed to him.
2. But Mrs Zhu's representation by silence case faces another obstacle. Mrs Zhu does not have much difficulty in showing that there are many things that Mr Epstein knew that Mrs Zhu did not know immediately before entry into the Fucrez loan transaction. Some of these he readily admitted and others are not controversial for example: that The Gosford had defaulted multiple times in respect of its obligations to pay interest under The Gosford loans; that The Gosford was indebted to various Gemi companies for an amount in excess of $30 million; that The Gosford and Mr Walker had been unable or unwilling to make payments sufficient to meet the arrears then owing under the various The Gosford loans; that The Rocky Point loan was already in default, that an amount of at least $2.52 million was owing and that, having regard to the value of the Rocky Point Property, the principal security was probably not sufficient to repay that loan; and the personal guarantees given by Ms Chloe Zhu and Mr Walker were probably of little real value; that Mr Zhu had a personal interest in further time being provided by Gemi to extend the loan facilities to The Gosford loan facilities; and, that both Mr Zhu and Mr Walker wanted the Fucrez loan to go ahead and they both would benefit financially if the loan proceeded. Several other undisclosed factors pleaded and relied upon in Ms Zhu's case.
3. And G193 also knew or probably knew other relevant matters such as the following. Mr Zhu was an undischarged bankrupt. Ms Chloe Zhu was a young woman with no or substantially no income. Fucrez had a share capital of $2 and no substantial assets.
4. But the question is whether Mr Epstein or G193 were required by the circumstances to disclose these and other matters to Mrs Zhu. Unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it will be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; (1992) 110 ALR 608. There is well-established authority in relation to the relationship of debtor, creditor and guarantor that generally absolves creditors from having any duty to disclose a range of matters to a guarantor. These matters include any unusual transactions and the level of existing borrower's indebtedness (O'Brien v ANZ Bank (1871) 5 SASR 347), borrower default (Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339), whether notices of demand have been served (Westpac Banking Corporation v Robinson (1990) ASC 56-002, at 59,035.), whether criminal activity is suspected (North Shore Ventures Ltd v Ansteod Holdings Inc (2011) EWCA Civ 230; [2012] Ch 31. ) and the credit worthiness of the borrower (Radin v Commonwealth Bank of Australia (1998) FCA 1361).

Other Issues - Apportionment, Penalties and Costs

1. Gemi submits in its written submission that were the Court to find that either Mr Epstein or G193 engaged in unconscionable or misleading or deceptive conduct, the concurrent wrongdoer provisions are invoked: ASIC Act, s 12GR.
2. Gemi further submits in its written submission that in considering the degree of apportionment, the relative culpability of the Cross-Defendants and those other persons identified as concurrent wrongdoers must be analysed. This is an impressionistic task which calls for a broad exercise of discretion.
3. Gemi has identified the potential concurrent wrongdoers as Mr Hedges, Mr Zhu and Mr Walker. Gemi acknowledged in its written submissions that given the multitude of unresolved factual controversies, which include matters traversing the conduct of each of the alleged concurrent wrongdoers, it is difficult to provide a meaningful attribution of culpability.
4. Gemi submits that if the Court finds that Mr Hedges failed to provide adequate legal advice, it is likely that a substantial portion of damages would be apportioned to his alleged conduct. But the Court has not made detailed findings about Mr Hedges' conduct in part because of difficulty in ascertaining what assumptions he may have made about whether Mrs Zhu had a business interest in Fucrez whether he assumed he was acting both for Mrs Zhu and Fucrez
5. Gemi also submits that if Mrs Zhu makes out her case, then the Court might take the view that she was primarily misled by Mr Zhu and Mr Walker and the culpability of G193, and Mr Epstein was minimal. But the misleading and deceptive conduct case against Mr Epstein has now failed and the roles of Mr Zhu and Mr Walker are now the subject of findings.
6. There is the potential for the parties being denied procedural fairness if they do not each have an opportunity to put submissions about any questions of apportionment once these reasons have been published to the parties and they have had the opportunity to examine the Court's factual findings about the conduct and liability of the parties and the conduct of various witnesses.
7. If the parties still wish to put submissions in relation to apportionment issues, then they will be directed to consult and agree upon and appropriate timetable for that purpose when the matter is listed again for directions in accordance with the orders made today.

Amendments 03 September 2024 - Amendment made to record of counsel's appearance at [5] and on the coversheet. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 September 2024