KEVIN AUSTRALIA PTY LTD (IN LIQ) -v- ZHANG [2017] WASC 76 (22 March 2017)

Supreme Court of WA|2017-03-22

1 MASTER SANDERSON: This was the return of two chamber summons. The first in time was the plaintiff by counterclaim's (Zhang) summons seeking directions for assessment of damages. The third defendant by counterclaim (Shen) had applied to set aside a default judgment entered against him on 2 March 2016. At the conclusion of the hearing, I indicated I would set aside the default judgment. That meant the chamber summons for the assessment of damages fell away. These are my reasons for setting aside the default judgment.

2 In support of his application to set aside default judgment, Shen relied upon two affidavits, the first sworn 14 July 2016 and the second 21 February 2017. They are in identical terms. The reason for the two affidavits is the attestation clause on the first was defective. That was rectified by the second affidavit. No issue was made by Zhang on this issue.

3 The facts can be briefly stated. Shen was, at all material times, a director and shareholder of the first defendant by counterclaim (Kevin Australia). Kevin Australia was registered on or about 19 April 2004. Between that date and 1 December 2008, Zhang was the sole director and shareholder of Kevin Australia. On or about 10 July 2007, Zhang became the registered proprietor of premises situated at 8 Dollier Street, Jandakot. Kevin Australia moved its principal place of business to Dollier Street in or about 28 July 2008.

4 Shen and the other defendants by counterclaim met Zhang in or about October 2008. The parties discussed the possibility of the defendants by counterclaim investing in Kevin Australia. In the course of discussions certain representations were made by Zhang to the other defendants by counterclaim. Without going into detail, Zhang maintained he had a thriving business, the defendants by counterclaim would become directors of Kevin Australia, Zhang wished to retire from the business and investment in the business would assist all of the defendants by counterclaim in obtaining a business migration visa into Australia. All of the defendants to a greater or lesser extent invested significant amounts of money into Kevin Australia and were issued shares.

5 Zhang continued to run the business and although the other defendants by counterclaim were directors, they took no active part in the management of the business. By 2012, the defendants by counterclaim were concerned about the way the business was being run and the lack of information being provided by Zhang. A meeting of directors was held to which Zhang may or may not have been invited. Either way, PB Investigations was appointed as external independent investigator charged with analysing the affairs of Kevin Australia. The report was unfavourable and recommended Kevin Australia be placed in administration. That was done on 5 March 2013. The late Glenn D Trinick of DCS Advisory was appointed administrator. The company's position was hopeless. On 11 April 2013, Kevin Australia went into liquidation.

6 On 11 July 2014, Mr Trinick released a liquidator's report. In that report, the liquidator found the actions of Zhang may have amounted to breaches of his fiduciary duties. Mr Trinick also found other possible causes of action against Zhang including the possibility of insolvent trading and unfair preference payments. Proceedings were issued in the name of the company.

7 On 1 October 2014, Zhang filed a defence and counterclaim. It was at this point the present second to fifth defendants by counterclaim became involved. Zhang alleged against the second to fifth defendants by counterclaim a conspiracy. He sought a range of relief against the defendants by counterclaim including reinstatement of the assets of the company that were sold or otherwise disposed of through liquidation of the company and repayment of all of the fees incurred and paid by the company to PB Investigations. Although an appearance was entered by Shen, he never filed a defence. That led to the entry of a default judgment on 2 March 2016.

8 During the course of the hearing a question was raised as to whether or not the present action is properly on foot. What might be called the primary action between the company and Zhang has been settled. No leave was ever obtained by Zhang to sue the company in liquidation. That being so, the counterclaim was not properly on foot and the present defendants by counterclaim could not properly have been joined. This issue was raised by counsel for Shen in his submissions and went to the question of whether the default judgment was regularly entered. Clearly now the judgment has been set aside that issue requires further attention with perhaps an order to regularise the proceedings. However, I determined the matter could be resolved on the assumption the judgment was regular.

9 Shen says he was never aware of his obligation to file a defence. He instructed his solicitors on 23 October 2014 to write to Zhang's solicitors pointing out what were alleged to be significant deficiencies both procedurally and with respect to the merits. A copy of that letter appears as attachment SWK2 to Shen's affidavit. The letter is comprehensive, was clearly written after the solicitors had taken advice from counsel and required a response. None was ever received. It would appear thereafter the matter was simply left to rest until almost 18 months later default judgment was entered.

10 Shen makes two points. First, he returned to China on a regular basis and did not keep up to date with his solicitors as to what was happening with this action. Second, he says with the passage of time he did not anticipate default judgment would be entered without further notice to him.

11 It must be acknowledged there are gaps in Shen's explanation as to why no steps were taken in the proceedings. The letter to which I have referred threatened to strike out the counterclaim if there was no response by 31 October 2014. Yet it seemed nothing was done. There is no real explanation as to why that was the case. Nonetheless, in circumstances where Shen had alerted Zhang's solicitors of the deficiencies in the action, it was reasonable to expect notice to be given before default judgment was entered. On balance, I am satisfied with the explanation offered by Shen.

12 As to the merits of the defence to counterclaim they are, with respect, obvious. The plea of conspiracy is found in [46] [59] of the counterclaim. In effect, it is alleged the defendants by counterclaim conspired together to cause PB Investigations to examine the affairs of the company, thereby somehow injuring both Zhang and the company. It is difficult to see how this plea could be maintained. Surely there can be nothing amiss in concerned directors appointing properly qualified financial analysts to examine the affairs of the company. There is no suggestion PB Investigations acted other than in good faith and in accordance with their instructions. Their conclusion was the company was in poor financial health and administrators should be appointed. It is difficult to imagine a more appropriate course of action. It may be Zhang was excluded from directors' meetings and therefore, in some way, prejudiced in his position as both a director and shareholder. But it is difficult to see how this prejudice was the result of a conspiracy, let alone a conspiracy that would sound in damages.

13 In my view, it is clear Shen has a defence on the merits. That being so, the criteria for setting aside a default judgment was satisfied and I made orders accordingly.

14 I will hear the parties as to the form of orders and as to costs.

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Judgment (14 paragraphs)