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[2025] NSWSC 1014
General information, not legal advice.
Supreme Court of NSW
2025-09-05
Richmond J
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Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Lu v Fu [2025] NSWSC 1014
Hearing dates: 15 May 2025
Date of orders: 05 September 2025
Decision date: 05 September 2025
Jurisdiction: Equity
Before: Richmond J
Decision: His Honour, Richmond J, makes the following order:
1. Order the parties to bring in short minutes of order to give effect to this judgment, including as to costs, within 14 days by email to the Associate of Richmond J, or if the parties are unable to reach agreement on the form of orders, each party is to send their respective draft short minutes of order and short submissions as to the differences between them.
Catchwords: CORPORATIONS — Statutory derivative action — Application to bring proceedings on behalf of company — Where leave sought by member or former member of company — General principles to be applied under ss 236 and 237 Corporations Act 2001 (Cth)
CORPORATIONS — Statutory derivative action — Application to bring proceedings on behalf of company — Where leave sought by member or former member of company — Reflective loss —Whether loss claimed was reflective of a loss that could have been claimed by company
CORPORATIONS — Directors and officers — Fiduciary duties — To whom duties owed — Whether director owed a fiduciary duty to shareholders — Relevance of special circumstances
CIVIL PROCEDURE — Originating process — Amendment — Principles to be applied
Legislation Cited: Corporations Act 2001 (Cth)
Civil Procedure Act 2005 (NSW)
Cases Cited: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27
Aurizon Holdings Ltd v Commissioner of Taxation [2022] FCA 368
Barnes v Addy (1874) LR 9 Ch App 244
Blakeney v Blakeney [2016] WASCA 76; (2016) 113 ACSR 398
Botanical Water Technologies IP Ltd v Driver [2025] NSWCA 162
Bowman v Secular Society Ltd [1917] AC 406
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 1159
Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780
Crawley v Short [2009] NSWCA 410
Eastone Mining Pty Ltd v Eastone Holding Pty Ltd [2019] NSWSC 1850; (2019) 142 ACSR 38
Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 732; (2005) 53 ACSR 732
Gillespie v Gillespie [2025] NSWCA 24; (2025) 422 ALR 224
Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75
Harris v Milfull [2002] FCAFC 442; (2002) 43 ACSR 542
Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252
Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586
K&J Acquisitions Pty Ltd v Manauzzi [2009] NSWSC 279
Karpik v Carnival plc (Ruby Princess) (Amendment Application) [2022] FCA 1232
Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31
Macaura v Northern Assurance Co Ltd [1925] AC 619
Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859
Metyor Inc v Queensland Electronic Switching Pty Ltd (2003) 1 Qd R 186; [2002] QCA 269
MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367
Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 2) [2021] WASCA 105
Mount Gilead Pty Ltd & Hobhouse v L Macarthur-Onslow [2021] NSWSC 948; (2021) 398 ALR 629
Mount Gilead Pty Ltd v Macarthur-Stanham (as executor of Estate of late Lee Macarthur-Onslow) [2023] NSWCA 37; (2023) 168 ACSR 32
Power v Ekstein [2009] NSWSC 130
Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260
Re Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432
Re Imperium Projects Pty Ltd [2015] NSWSC 16
Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532
Re Zoe Corp Pty Ltd [2020] NSWSC 1431
Salomon v A Salomon & Co Ltd [1897] AC 22
South Johnstone Mill Ltd v Dennis and Scales (2007) 163 FCR 343; [2007] FCA 1448
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
VPlus Holdings Pty Ltd v Bank of Western Australia Ltd [2012] NSWSC 1327
Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) (2022) 275 CLR 308; [2022] HCA 3
Texts Cited: N/A
Category: Procedural rulings
Parties: Jinan Lu (Plaintiff)
Youxin Fu (First Defendant)
Three Brothers Properties Pty Ltd (Second Defendant)
Tao Wu (Third Defendant)
Olumn Property No. 1 Pty Ltd (Fourth Defendant)
Olumn Pty Ltd (Fifth Defendant)
Fu Holdings No. 1 Pty Ltd (Sixth Defendant)
Olumn Development Pty Ltd (Seventh Defendant)
Representation: Counsel:
A Munro SC / T Bagley (Plaintiff)
D Pritchard SC / AJ Macauley (Defendants)
Solicitors:
Du & Associates (Plaintiff)
Bartier Perry Lawyers (Defendants)
File Number(s): 2023/349772
Publication restriction: Nil
The plaintiff, Jinan Lu (Mr Lu), seeks leave to file a second amended statement of claim (2ASOC) in the form annexed to his notice of motion filed on 11 March 2025 and an order under s 237 of the Corporations Act 2001 (Cth) giving him leave to bring proceedings under s 236 in the name of the second defendant, 3 Brothers Properties Pty Ltd (the Company) against the first defendant, Youxin Fu (Mr Fu) and the third defendant, Tao Wu (Ms Wu).
The proceedings were commenced by Mr Lu on 3 November 2023 when he obtained leave from the Equity Duty Judge to file in court a summons and supporting affidavit seeking various relief against Mr Fu, Ms Wu and a number of companies associated with them. The dispute relates to the alleged misapplication by Mr Fu and/or Ms Wu, his wife, who were at relevant times the directors of the Company, of funds contributed by Mr Lu to that company for the purposes of property development.
Under Mr Lu’s current pleading, the first amended statement of claim filed on 26 March 2024 pursuant to leave granted by Parker J on 12 March 2024, seeks an order setting aside the Investment Co-operation Agreement dated 23 July 2018 referred to below (ICA), an order that Mr Fu pay damages or alternatively equitable compensation in the sum of $18.6 million and relief of various kinds against the other defendants relating to disbursement by the Company to them of funds originally contributed by Mr Lu to the Company. Mr Lu alleges that in causing the Company to engage in various transactions including various payments made by the Company to the other defendants, Mr Fu has breached his contractual obligations to Mr Lu under the ICA, the fiduciary duties he owed to Mr Lu and acted dishonestly and fraudulently. Mr Lu brings claims against the other defendants on the basis of their knowing receipt and knowing assistance in Mr Fu’s breach of fiduciary duty.
The 2ASOC will recast the claims as personal claims by Mr Lu and the ‘section 236 claims’ made on behalf of the Company in the manner referred to below.
On 23 May 2018, the Company was incorporated with each of Mr Lu, Mr Fu and Mr Chen (the proposed eighth defendant) as shareholders with 100 shares each and Mr Fu as the sole director. Mr Fu has continued to be a director until the present time. Ms Wu was also a director from 1 July 2018 to 1 July 2023.
On 23 July 2018, the ICA was entered into by Mr Lu, Mr Fu and Mr Chen (referred to as the ‘co-investors’). It is an agreement in the Chinese language which, according to article 1, sets out the terms of their agreement ‘on investment co-operation via friendly consultation and in accordance with the Australian laws and regulations’ with respect to establishing the Company ‘to jointly invest in the business of developing, operating and managing real estate property in Sydney’.
Under article 2 they each agreed to invest $20 million, and to use the total investment of $60 million ‘as capital to participate in the establishment of [the Company], and each of the investors shall hold 33.33% of the equity in the corporation’. In the case of Mr Lu, his contribution was required to be made by two instalments in 2018 and 2019 and in the case of Mr Fu and Mr Chen, they were required to make a contribution of $5 million each in 2018 and the balance of their contribution after the development and sale of two identified projects had been completed. It is suggested by article 2(4) that each co-investor’s contribution to the Company was to be treated as equity in the Company.
Article 3 provides that the co-investors shall share the profit from, and loss arising out of, the joint investment in accordance with their proportionate shareholdings in the Company.
Article 4(1) provides relevantly:
‘[Mr Fu] is entrusted by the Co-investors to execute the daily business in relation to the joint investment on behalf of all Co-investors, including but not limited to:
…
(2) After the [Company] has been established, exercise its rights as shareholders of the Corporation and fulfil its obligations accordingly;
(3) Collect the returns arising out of the joint investment, and distribution of such in accordance with the provisions in this agreement.’
There are some difficulties with the drafting of this provision. Read literally the chapeau (like many of the other provisions of the ICA) fails to recognise the separate legal personality of a company from its shareholders (who in this case are the co-investors each of whom is to have a one third share of the equity in the Company as a result of the payments referred to in article 2): cf Salomon v A Salomon & Co Ltd [1897] AC 22. In addition, the conferral on Mr Fu in paragraph (2) of authority to ‘exercise its rights as shareholders’ is difficult to understand as it is not clear what ‘its’ refers to.
Article 4(2) provides that Mr Fu has the obligation of reporting to Mr Lu and Mr Chen regarding the operation and financial performance of the joint investment; article 4(3) provides that earnings generated from the joint investment executed by Mr Fu shall be owned by all co-investors, and losses generated or civil liability shall be borne by the co-investors; and article 4(4) provides that Mr Fu will be liable for damages if he ‘has caused loss on the part of the co-investors during the process of executing business due to his personal negligence or non-compliance with the agreement’.
Article 7 provides that if a party has caused losses on the part of the co-investors due to its breach of contract, that party shall bear liability for such breach of contract to the other co-investors. Article 8 provides that matters not covered by the agreement shall be dealt with by the co-investors via consultation and a supplementary agreement shall be signed separately
The precise status of the ICA was not explored by the parties in their submissions, but where (as may be the case here) a company does not have a constitution an agreement of this kind between all the shareholders may take effect as the company’s constitution: Eastone Mining Pty Ltd v Eastone Holding Pty Ltd [2019] NSWSC 1850; (2019) 142 ACSR 38 at [53].
The 2ASOC pleads the following key facts relating to the dispute:
Between 25 June 2018 on 2 July 2020, Mr Lu made payments totalling $19.6 million to the Company’s bank account, but neither Mr Fu nor Mr Chen made their required contributions of $5 million each.
On around 8 June 2018, Mr Fu caused the Company to enter into a management services agreement with Olumn Property No. 1 Pty Ltd (Olumn Property) and Olumn Pty Ltd, both companies associated with him, which included a requirement for the Company to pay a fee of $500,000 per annum plus GST to Olumn Pty Ltd and for the Company to fund the purchase of the Kingsford properties referred to below, but did not provide for the payments by the Company to be treated as a loan or for the Company to have any rights in relation to the Kingsford properties.
In the 2ASOC Mr Lu pleads what are described as his ‘personal claims’ and also ‘section 236 claims’ made on behalf of the Company.
The ‘personal claims’ comprise:
The breach by Mr Fu of articles 2, 4(1), 4(2), 4(4) and 8 of the ICA as a result of the failure Mr Fu to make the capital contribution referred to in [14(1)] above and the various transactions and payments referred to in [14(2)-14(8)], and pleads that the loss and damage resulting from those breaches ‘includes’ the various payments made out of the bank account of the Company referred to above (although it may be noted that while the word ‘includes’ is used, no other loss or damage is particularised): 2ASOC at [18], [49]-[50].
The breach by Mr Fu of fiduciary duties said to be owed by him personally to Mr Lu (because Mr Fu was the person entrusted with the daily business in relation to Mr Lu’s investment in the Company under article 4(1) of the ICA), as a result of Mr Lu causing the Company to make the payments referred to in [14] above for no consideration, applying the funds received from Mr Lu to complete the purchase of the Kingsford properties in the name Olumn Property and the Meadowbank property in the name of Olumn Development, and pleads that the loss and damage resulting from those breaches of fiduciary duty ‘includes’ the various payments made out of the bank account of the Company (but again no other loss or damage is particularised): 2ASOC at [51]-[53].
The ‘section 236 claims’ on behalf of the Company comprise:
The breach by Mr Fu and Ms Wu of their fiduciary duties and their statutory duties arising under ss 180(1), 181 and 182 of the Corporations Act to the Company, relying on the same facts as those relied on for the personal claims against Mr Fu, and the loss or damage resulting from those breaches of fiduciary and statutory duties owed to the Company is said to ‘include’ the total amount of the payments made by the Company referred to above (but again, as in the case of the personal claims, no other loss or damage is particularised): 2ASOC, [58]-[59].
Claims against Ms Wu, Olumn Property, Olumn Pty Ltd, Fu Holdings, Olumn Development and TTBW Holding Pty Ltd under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 (2ASOC at [66]-[69]) or the second limb of Barnes v Addy, (2ASOC at [70], [72]) or alternatively for procuring the breach of fiduciary duty by each of Mr Fu and Ms Wu (2ASOC at [71]-[75]).
In addition, there is a claim in the alternative against Olumn Property and Olumn Development in the event that they are found to be innocent volunteers, which is that they hold the Kingsford properties and the Meadowbank property, respectively, on trust for the Company or Mr Lu on the principles stated in Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252: 2ASOC at [62]-[65].
The principles regarding the granting of leave to amend a pleading and to obtain leave to bring a derivative claim on behalf of a company were not in dispute.
By s 64(1) of the Civil Procedure Act 2005 (NSW) (CPA) at any stage of proceedings, the court may order that leave be granted to a party to amend its statement of claim. Under s 64(2), subject to s 58, all necessary amendments are to be made for the purpose of, relevantly, determining the real questions raised by or otherwise depending on the proceedings. By section 58 of the CPA, the power must be exercised in accordance with the dictates of justice, which in turn requires the court to have regard to ss 56 and 57 of the CPA and the matters set out in s 58(2) of the CPA.
The plaintiff bears the onus of persuading the Court that leave should be granted: Dye v Commonwealth Services (No 2) [2010] FCAFC 118 at [17]. Matters relevant to the court’s decision whether to grant leave were identified by the High Court in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 and summarised in Karpik v Carnival plc (Ruby Princess) (Amendment Application) [2022] FCA 1232 at [2].
The explanation for the application for leave to file the 2ASOC to introduce the derivative claim given by Mr Ningfeng Li, the solicitor for the plaintiff, indicates that it is related to the change of the counsel team retained by the plaintiff in early February 2025, although the proposal to seek leave to bring a derivative claim on behalf of the Company was first raised in September 2024. While it is apparent that the reformulation of the plaintiff’s case to introduce a new derivative claim on behalf the Company was attended by some delay, I am satisfied that the application is brought to ensure that the statement of claim raises all issues necessary in order to determine the real questions raised by the proceedings.
The hearing proceeded on the basis that the question whether leave should be granted is intimately entwined with the question of whether derivative leave should be granted to permit Mr Lu to bring claims against Mr Fu and Ms Wu on behalf of the Company, since the 2ASOC is pleaded on the premise that leave will be granted.
There is no dispute that Mr Lu is a person falling within s 236(1)(a) of the Corporations Act and hence has standing to bring an application for derivative leave under s 237 of the Corporations Act.
Relevantly, s 237 provides:
(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
The applicant for leave under s 237 bears the onus of establishing each of the five matters in s 237(2) on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [26]. Leave must be granted if the court is satisfied as to those five matters, and if any one of them is not satisfied, leave must be refused: Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586 at [57], [58] and [78]. Leave to bring a derivative action must not be given lightly: Swansson at [24]; Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976; (2008) 68 ACSR 132 at [99], cited with apparent approval in Huang at [57]; Mount Gilead Pty Ltd & Hobhouse v L Macarthur-Onslow [2021] NSWSC 948; (2021) 398 ALR 629 at [50] (affirmed in Mount Gilead Pty Ltd v Macarthur-Stanham (as executor of Estate of late Lee Macarthur-Onslow) [2023] NSWCA 37; (2023) 168 ACSR 32).
There is no dispute regarding ss 237(2)(a) or (e); rather, the defendants contend that the plaintiff has failed to discharge his onus of showing that he is acting in good faith (para (b)), that it is in the best interests of the company that he be granted leave (para (c)) and that there is a serious question to be tried (para (d)).
In relation to s 237(2)(b), the requirement of good faith applies both to the application for leave and to the desire to bring the underlying action, and is concerned with whether the right to bring the derivative claim is exercised for a purpose for which the right is conferred or for some other purpose: Gillespie v Gillespie [2025] NSWCA 24; (2025) 422 ALR 224 at [28]-[29]. The court must have regard to at least two interrelated factors in determining whether the good faith requirement is met: first, whether the applicant honestly believes that the company has a good claim with reasonable prospects of success; and second, whether the claim is brought for some collateral purpose as would amount to an abuse of process: Swansson at [36]. However, the issue of good faith is not confined to those two matters: Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 245 ALR 780 at [82]; Gillespie at [29]-[33].
If an applicant is in truth seeking to further their own personal interests (other than as a current or former shareholder of the company), rather than the interests of the company as a whole, the onus of establishing good faith will not have been discharged: Chahwan at [83]. In Gillespie, the Court (Gleeson, Mitchelmore and Ball JJA) said at [31]:
‘It seems plain from the language of ss 236 and 237 and the legislative history that the purpose of the right is to permit an applicant to seek to vindicate a right of the company that those in control of the company are not prepared to pursue themselves. It follows that if the application has some other purpose and that is the sole or principal purpose of the application, the applicant will not be acting in good faith.’
The fact that that the applicant is willing, as a condition of leave, to indemnify the company for costs and any adverse costs order may demonstrate good faith: South Johnstone Mill Ltd v Dennis and Scales (2007) 163 FCR 343; [2007] FCA 1448 at [69]; Re Zoe Corp Pty Ltd [2020] NSWSC 1431 at [27].
In relation to s 237(2)(c), the court must be satisfied that it is in the best interests of the company for leave to be granted, not merely that it may be, appears to be or is likely to be in the interests of the company: Blakeney v Blakeney [2016] WASCA 76; (2016) 113 ACSR 398 at [52]. This is a reference to best interests in the sense of the company’s separate and independent welfare: Chahwan at [88]; Huang at [59]. Where a company is solvent, this will ‘predominantly reflect the interests of shareholders in that capacity’: Huang at [59].
It is necessary to consider whether it is in the best interests of the company both that the action be brought and, also whether it is in the best interests of the company that it be brought by the applicant: Re Gladstone Pacific Nickel Pty Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [57].
Generally, it is reasonable to expect that the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer’s breach of duty is in the best interests of the company: MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367 at [60].
In Blakeney at [63], the Court said:
‘It is not or is most likely not in the best interests of the company for an applicant to be granted leave in circumstances where, because of the applicant’s relationship with other companies involved in the proposed litigation, the applicant would have a conflict of duties if the litigation proceeded.’
‘…the question of an adequate indemnity to be given by [the applicant] and those standing behind it in favour of the companies in respect of the costs which they would incur in conducting the proceedings and the costs to which they would be exposed if the proceedings were unsuccessful, and in respect of any amount which they may be ordered to pay by way of security for costs, is significant. The case law emphasises the importance of such an indemnity as a means of addressing the risk of prejudice to the companies from the commencement of the proceedings, should they ultimately prove to be unsuccessful, and the risk of exposure to costs and expenses of litigation including costs orders.’
A further relevant matter is whether there are other means of obtaining the same redress so that the company does not have to have to be brought into litigation against its will. This includes the import of simultaneously bringing oppression proceedings, which can ‘short circuit’ any application for derivative leave, including because remedies for oppressive conduct can include an order that money be returned to the company: Power v Ekstein [2009] NSWSC 130 at [77]; Re JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [14]; Re Imperium Projects Pty Ltd [2015] NSWSC 16 at [15]. However, the mere existence of oppression proceedings does not preclude derivative leave being granted.
In relation to s 237(2)(d), whether there is a serious question to be tried does not require the court to enter into the merits of the proposed derivative action to any great degree; rather, the applicant has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Swansson at [25].
The defendants submitted that the plaintiff has not satisfied the criteria in ss 237(1)(b), (c) or (d) of the Corporations Act and accordingly should not be granted leave to file the 2ASOC.
The defendants’ main complaint is that the personal claims brought by Mr Lu are impermissible claims for reflective loss. In summary, the defendants’ argument is as follows:
The pleading particularises the loss suffered by Mr Lu as a result of both Mr Fu’s breaches of the ICA and his breaches of the personal fiduciary duties he owed to Mr Lu in the same terms, being ‘the various payments made out of the bank account of [the Company] that were made by Fu and/or Wu with the knowledge of Fu without the knowledge or approval of Lu’: 2ASOC at [50]-[53].
The pleading particularises the loss suffered by the Company as a result of the breach of the fiduciary and statutory duties owed by Mr Fu and Ms Wu to the Company in substantially the same terms, being ‘the total amount of the payments made by [the Company] to the second, fourth to seventh and tenth defendants for no consideration’: 2ASOC at [58]-[59].
The relief claimed by Mr Lu against Mr Fu in respect of the loss referred to in (1) is equitable compensation and an account of profits, which is the same as the relief claimed by Mr Lu on behalf of the Company for the loss referred to in (2): prayers 5, 6, 10 and 11 of the final relief sought in the 2ASOC.
The Barnes v Addy claims against the second, fourth to seventh and tenth defendants relating to the breaches of Mr Fu’s fiduciary duties to Mr Lu are put in the same way as the same claims relating to the breaches of the fiduciary duties of Mr Fu and Ms Wu to the Company, and the relief claimed is the same: 2ASOC at [74] and [75], and prayers 7, 8, 12 and 13 of the final relief claimed.
The only way it can be said that Mr Lu suffers a loss from the various payments out of the bank account of the Company is through a diminution in the value of his shares in the Company, as the money paid out was not his money but rather belonged to the Company. If all the dissipated monies and property are returned to the Company, then Mr Lu has no actionable loss. It follows that the personal claims brought by Mr Lu infringe the reflective loss principle and cannot be brought by him.
This gives rise to a related problem which is that the personal claims will undermine or undercut the derivative claim sought to be brought on behalf of the Company because success on Mr Lu’s claims would see him recover compensation for the moneys he invested in the Company (and which he says have been misappropriated) to the prejudice of the Company (and its creditors and other shareholders). Accordingly, it cannot be said that Mr Lu is acting in good faith. Similarly, it would not be in the best interests of the Company that the proposed derivative claims be brought, or that they be brought by Mr Lu, given the conflict between his personal claims and those of the Company.
‘The principles emerging from the authorities may be summarised as follows:
1. Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder to make good a diminution of the value of the shareholder’s shareholding where that loss merely reflects the loss suffered by the company.
2. This will be so even if the company has declined or failed to take action to recover the loss.
3. If the company suffers loss, but has no cause of action to sue to recover that loss, a shareholder with a cause of action who suffers loss to the value of his shares may sue in respect of it.
4. The reflective loss principle does not prevent a shareholder suing for a loss suffered from a breach of duty owed to him or her where the loss is separate and distinct from the loss suffered by the company.
5. The principle extends to the case where both the company and the shareholder have a claim for breach of duty or breach of contract which caused the loss.’
‘The reflective loss principle provides that where loss is suffered by a company as a result of wrongdoing in respect of which each of the company and the shareholder has a cause of action, a shareholder cannot sue to recover the diminution in the value of his or her shares (or loss of benefits associated with his or her shareholding) resulting from loss suffered by the company: Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; [2021] NSWCA 75 at [103] (Bathurst CJ, Macfarlan and Gleeson JJA agreeing); see also Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd; CCA Estates Pty Ltd; Davjul Holdings Pty Ltd; Armmam Pty Ltd [2022] NSWCA 146.
The principle has its origins in the application in Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204 of the rule in Foss v Harbottle (1843) 2 Hare 461 that only the company itself can seek relief for an injury done to the company, where the company has a cause of action. As the Court of Appeal stated in Prudential at p 224, “[the shareholder] accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting”.
In Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31, a majority of the UK Supreme Court held that the rule concerning reflective loss “is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way”: at [89] citing Johnson v Gore Wood & Co [2002] 2 AC 1. In Marex, the minority held that the rule should be abandoned.’
Mr Lu does not contend that the Company was acting as trustee for each of the three co-investors. Rather, the case pleaded in the 2ASOC is that the legal structure adopted by them under the ICA was that they are shareholders in the Company to which each was to make payments as contributions required by article 2 of the ICA. There is a question as to the proper characterisation of those contributions given that they were not made in connection with an issue of shares. There are at least two possible alternative characterisations of the contributions (which totalled around $19.6 million in the case of Mr Lu):
That they are contributions to shareholders’ equity, although not necessarily part of the share capital: Aurizon Holdings Ltd v Commissioner of Taxation [2022] FCA 368 at [90]-[91]. Nevertheless, the transfers of approximately $19.6 million made by Mr Lu to the Company without any apparent restriction would have rendered those amounts the property of the Company, in respect of which he no longer has any legal or equitable interest: Bowman v Secular Society Ltd [1917] AC 406 at 440-441; Macaura v Northern Assurance Co Ltd [1925] AC 619 at 630, 633.
Alternatively, that they are properly characterised as loans by the shareholders to the Company which is the way in which the financial statements for the Company referred to earlier treat them. On this alternative, the contributions still became the property of the Company, but if they are properly characterised as loans this may be relevant to the ultimate question whether the reflective loss principle applies as noted below.
Mr Fu and Ms Wu, as directors of the Company at relevant times, owed fiduciary and statutory duties to the Company and in so far as either of them has breached any of those duties in relation to the manner in which they dealt with the property of the Company, the Company has a claim against them for the loss it has suffered.
It is possible that Mr Fu owes a separate fiduciary duty to Mr Lu by reason of the special position he holds in relation to the other shareholders under article 4(1) of the ICA, as pleaded in the 2ASOC. The basis on which this separate fiduciary relationship could arise was not explored in submissions, but it finds support in Crawley v Short [2009] NSWCA 410 at [121]-[122] and Botanical Water at [46]-[49]. It is this separate fiduciary relationship which is the basis for the personal claims referred to at [21(2)] above.
Nevertheless, in so far as the loss suffered by Mr Lu as a result of the breach of this separate fiduciary duty owed to him by Mr Fu reflects the loss or diminution of the Company’s property due to the manner in which Mr Fu dealt with the Company’s property, it will be reflective of the loss suffered by the Company and he cannot sue to recover that loss, even if the duties are concurrently owed to Mr Lu and the Company: at [268(1)]; at [91]. As Stevenson J put it in [2012] NSWSC 1327 at [32]: ‘The question is not whether the duties owed to the company and the shareholder are the same, but rather whether the loss claimed is truly reflective of the company’s loss; that is a question of substance, not form.’
The defendants raised two pleading issues with the claims for knowing assistance and procuring breaches of fiduciary duty in the 2ASOC at [70]-[73]. These are:
that those paragraphs deal compendiously with a number of defendants, without pleading what were each individual defendant’s acts of assistance or procurement;
2ASOC at [71] pleads, relevantly, that various companies (the fourth to seventh and tenth defendants) procured the breaches of fiduciary duty by Mr Fu and Ms Wu without specifying what were the acts of procurement, which is particularly significant given that Mr Fu and Ms Wu control the fourth to seventh defendants which makes it difficult to regard those entities as having procured their breaches of duty.
I agree that these are defects in the pleading which need to be corrected before the 2ASOC is filed.
I am satisfied that Mr Lu has established that the requirements of s 237(2) are met in relation to the proposed derivative claim to be brought by Mr Lu on behalf of the Company against Mr Fu and Ms Wu, subject to the amendment of the 2ASOC to address the matters raised at [59] and [67] above.
The parties did not make submissions at the hearing regarding the costs of the application. My preliminary view is that the appropriate order is that the plaintiff’s costs of the application be the plaintiff’s costs in the cause: Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 1159 at [19]. However, I will give the parties the opportunity to make submissions on costs if they wish.
The parties should bring in short minutes of order to give effect to this judgment, including as to costs, within 14 days or, if they are unable to reach agreement, their respective draft short minutes of order and short submissions as to the differences between them.
**********
[49(1)]: Changed "400-1" to "440-441" [52]: Changed "owed to Mr Fu" to "owed to Mr Lu"
Lu
Fu [2025] NSWSC 1014
(2009) 239 CLR 175
(2008) 245 ALR 780
(2025) 422 ALR 224
(1985) 157 CLR 215
(2009) 76 NSWLR 230
(2003) 1 Qd R 186
(2021) 398 ALR 629
(2007) 163 FCR 343
(2022) 275 CLR 308
(2021) 391 ALR 157
Mr Fu and his wife, Ms Wu, caused the Company to pay sums totalling $3,931,500 to Olumn Pty Ltd in the period between 28 June 2019 and 3 July 2023, which were then paid by it to Olumn Property.
Ms Wu and/or Mr Fu caused Olumn Pty Ltd to pay $469,333.34 to TTBW Holdings Pty Ltd (the tenth defendant), a company associated with them, sourced from the payments made by the Company referred to above.
Between 8 June 2018 and 5 June 2019, Mr Fu and/or Ms Wu caused the Company to pay the total amount of $11,960,760.97 towards the purchase of 3 properties at Kingsford (Kingsford properties) by Olumn Property, for which the Company received no consideration.
Between 14 and 21 June 2019, Mr Fu and/or Ms Wu caused the Company to pay $1,017,708 to Fu Holdings No. 1 Pty Ltd (Fu Holdings) (the sixth defendant), also a company associated with Mr Fu, for which it received no consideration.
Between 1 March 2021 and 9 April 2021, Ms Wu or alternatively Mr Fu caused the Company to pay $7,650,000 to a Westpac bank account in the name of Ms Wu which was used to complete the purchase of a property at Meadowbank (Meadowbank property) by Olumn Development Pty Ltd (the seventh defendant) for a purchase price of $9 million, for which the Company received no consideration.
Between 23 and 28 December 2022, Ms Wu or alternatively Mr Fu caused the Company to pay $1,462,588 into a Commonwealth Bank account in the name of Ms Wu, for which the Company received no consideration.
There is a dispute as to whether Mr Fu failed to make the required payments to the Company referred to in [14(1)] above. I note that the financial statements for the Company for the year ended 30 June 2022 record that Mr Fu had as at that date made loans to the Company totalling $6,672,791, Mr Lu had made loans to the Company totalling $18.6 million, and the Company’s contributed capital was $300.
There appears to be no real dispute that the various payments from the Company’s bank account referred to in [14] above were made. Rather, there is a dispute regarding their proper characterisation, which the defendants say were loans by the Company. The financial statements for the Company for the year ended 30 June 2022 record that it had loan receivables of $15,863,969 owing by ‘Olumn Property No. 1 Trust’ and $7,600,000 owing by Olumn Development Pty Ltd. It is not suggested that there is a written loan agreement, and the evidence suggests that if the payments were by way of loan, the loans were unsecured and interest-free. For example, the financial statements for the Olumn Property No. 1 Trust (of which Olumn Property is trustee) for the year ended 30 June 2023 record an unsecured loan owing to the Company of $15,863,969, and there is no expense item for interest paid on the loan. Similarly, the financial statements for Olumn Development Pty Ltd for the year ended 30 June 2023 record an unsecured loan owing the Company of $7,600,000, and again there is no interest expense for that year.
The 2ASOC will also join three new parties as defendants in the proceedings: Mr Chen (the other co-investor under the ICA), Mr Tony Tao (the first defendant’s accountant) and TTBW Holding Pty Ltd (a company associated with Mr Tao) as the eighth, ninth and tenth defendants.
On 23 November 2023, Olumn Property and Olumn Development Pty Ltd gave undertakings to the Court (which on 27 November 2023 were extended until further order) not to sell, dispose of or further encumber the Kingsford properties (in the case of Olumn Property) or the Meadowbank property (in the case of Olumn Development Pty Ltd).
Mr Lu in his affidavit of 9 May 2025 provided an undertaking to the Court (a) to fund the proceedings brought on behalf of the Company in the first instance (preserving his position to seek appropriate recoupment of such funds including through costs orders) and (b) to indemnify the Company for costs incurred by the solicitors conducting the proceedings on behalf of the Company on his instructions and for any adverse costs orders against the Company in these proceedings. Mr Lu provided a copy of a bank statement issued by Westpac stating the balance of his account with Westpac to be $4.64m and the form of the undertaking he offered to the Court in respect of the costs of the proceedings includes an undertaking not to deplete the funds in the Westpac account below $1 million or any other amount the Court deems necessary. Mr Lu also indicated through his senior counsel that he accepted that the undertaking could provide that the relevant amount stand charged to secure the indemnity provided.
The relief claimed for the personal claims and the s 236 claims is substantially the same.
There is also a claim that the affairs of the Company are being conducted in a manner which is oppressive or contrary to the interests of the members as a whole, under ss 232(d) or (e) of the Corporations Act. The relief sought is an order for the winding up of the Company pursuant to ss 233(1)(a) or 461(e), (f) or (k) of the Corporations Act, and an order pursuant to s 233(1)(j) of the Corporations Act requiring the Company to distribute its assets among the three co-investors in accordance with article 3 of the ICA.
In order to address this argument, it is necessary to identify the scope of the reflective loss principle. In Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 2) [2021] WASCA 105, the Court (Buss P, Murphy and Beech JJA), after a comprehensive survey of the authorities on the reflective loss principle, summarised the current position as follows (at [268], internal footnotes omitted):
The reflective loss principle does not affect Mr Lu’s separate claim against Mr Fu and Mr Chen for their failure to make the capital contributions required by article 2 of the ICA, as this falls within the exception to the reflective loss principle noted in Mineralogy at [268(3) or (4)]. The Company is not a party to the ICA and therefore cannot sue in respect of its breach. Further, if the proper characterisation of the contributions made by Mr Lu to the Company of some $19.6 million is that they are a loan by him to the Company, then the reflective loss principle may not apply where his claim is for loss suffered by him personally due to a failure to repay the loan: Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75 at 219-220; Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31 at [84]-[89]; Mineralogy at [268(4)].
What then are the implications for the application for leave under s 237 to bring the derivative claim on behalf of the Company arising from the effect of the reflective loss principle on the personal claims brought by Mr Lu against Mr Fu? First, the reflective loss principle will likely result in the conduct of Mr Fu (and Ms Wu) in dealing with some $19.6 million comprising property of the Company contributed by Mr Lu, on the assumption they are equity contributions, going unchallenged unless leave is granted to him to bring the derivative claim, given that Mr Lu is a minority shareholder and is unable to vindicate the Company’s right absent a grant of leave under s 237. That is just the sort of situation to which s 236 and s 237 are directed: Gillespie at [31]; Metyor Inc v Queensland Electronic Switching Pty Ltd (2003) 1 Qd R 186; [2002] QCA 269 at [19].
Put another way, if the derivative claim is not brought and it is found that there has been a misappropriation of the Company’s property in the various ways alleged, Mr Lu will be precluded from recovery because the Company has a cause of action and has chosen not to bring it: Mineralogy [268(1)-(2)]. While the effect of the reflective loss principle may be that the personal claims (except for that referred to in [53]) would be at risk of being struck out for failure to disclose a reasonable cause of action, as illustrated by VPlus Holdings, there is no application before the Court to strike out the personal claims. Further, given that the question whether the reflective loss principle applies will depend on the determination of disputed questions of fact arising out of a series of fairly complex commercial transactions involving multiple parties, it would normally be appropriate to leave the question of whether the reflective loss principle applies to the shareholder’s personal claims to final hearing: Harris v Milfull [2002] FCAFC 442; (2002) 43 ACSR 542 at [40]; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 732; (2005) 53 ACSR 732 at [37]. In particular, in the present case there is a disputed question of fact as to the proper characterisation of the contributions of $19.6 million made by Mr Lu to the Company which will be relevant to the potential application of the reflective loss principle and is best left to final hearing.
Secondly, the reflective loss principle will serve to protect the Company from any attempt by Mr Lu to advance his personal claims in preference to the derivative claim he brings (if leave is granted) on behalf of the Company for the same loss, particularly as those personal claims are brought at the same time as the derivative claim on behalf of the Company. Further, the fact that all the shareholders are parties to the proceedings will provide a safeguard against any attempt by Mr Lu to prefer his personal claim over the derivative claim on behalf of the Company: Metyor Inc at [18].
Thirdly, it might be suggested that in recognition of the reflective loss principle the bringing of the derivative claim should only be permitted if the personal claims for the same loss are withdrawn. But that course of action can only be justified if the bringing of the personal claims at the same time as the derivative claim would result in the applicant failing to satisfy, relevantly, ss 237(2)(b) and/or (c). However, for the reasons given below, I am satisfied that those requirements would be satisfied if the personal claims are brought as an alternative in the event that the derivative claim fails.
There is authority in support of the view that a personal claim by a shareholder in these circumstances is not precluded by the reflective loss principle if it is brought in the alternative to, and as a fallback, in the event that the company has no cause of action: see K&J Acquisitions Pty Ltd v Manauzzi [2009] NSWSC 279 at [17]-[20]. A personal claim brought in that way falls within the exception recognised in Mineralogy at [268(3)]. K&J Acquisitions was referred to without apparent disapproval in Mineralogy at [267]. For the same reason, there is no real conflict of interest in permitting Mr Lu to bring the derivative claim while making, in the alternative, his personal claims because the bringing of the latter will only be possible if the Company has no cause of action, and if it has a cause of action then any relevant relief obtained for the loss it suffered will result in the personal claims failing under the reflective loss principle.
In my view, if the 2ASOC is amended to state clearly that the relief sought by Mr Lu in respect of his personal claims brought in respect of the manner in which Mr Fu, as director, applied the property of the Company, are relied on only if the s 236 derivative claims brought by him on behalf of the Company in respect of the same loss fail, then it will be clear that there is no infringement of the reflective loss principle or potential conflict between his personal claims brought by him for loss arising from that conduct and the s 236 derivative claims: see also Blakeney at [16].
If this amendment is made to the 2ASOC then my view ss 237(2)(b), (c) and (d) will be satisfied for the following reasons. As to the requirement that Mr Lu is acting in good faith (s 237(2)(b)), the two factors identified in Swansson at [36] are satisfied. As to the first factor, Mr Lu has given evidence, which is not contested, that he honestly believes that the Company has a good claim with reasonable prospects of success.
As to the second factor (ie whether the application is made for a collateral purpose amounting to abuse of process), Edelman and Steward JJ in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) (2022) 275 CLR 308; [2022] HCA 3 observed that a distinction needs to be drawn in the context of abuse of process between a litigant’s ‘immediate purpose’ (in the sense of the end to be achieved) and the litigant’s ‘ultimate purpose’ (in the sense of their motive), and that an action would only be an abuse of process if its immediate purpose, falls outside the scope of the statute, even if its ultimate purpose does (at [132]-[137]). Thus, while it may be said that Mr Lu’s ultimate purpose is to further his personal interests, that would not be an abuse of process because his immediate purpose, being the initiation of proceedings on behalf of the Company against defaulting fiduciaries, is clearly consistent with the purpose of s 236 and s 237.
In so far as a consideration of the ‘good faith’ requirement is not confined to these two factors (Chahwan at [82]) and it would be necessary to consider the connection between the capacity in which Mr Lu seeks to bring the derivative claim and the relevant loss (see eg Gillespie at [32]-[33]), the connection here is close. Mr Lu seeks to bring the derivative as the shareholder who contributed the bulk of the assets of the company (some $19.6 million). In these circumstances, the Company’s interests and his personal interests are closely aligned. Given the reflective loss principle, it is a necessary claim for Mr Lu to bring on behalf of the Company and the 2ASOC accepts that whatever is recovered will be an asset of the Company to be distributed on a winding up taking into account the terms of the ICA.
As to the requirement that the proposed derivative action is in the best interests of the company (s 237(2)(c)), this is satisfied because the factual substratum of the derivative claim is substantially the same as the personal claims of Mr Lu which are to be litigated in any event, and the proposed derivative claim if successful will augment the assets of the Company for the benefit all shareholders (and creditors): Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [51]-[52]. The Company is not currently trading and almost all of its assets have been transferred to the other defendants, two of which are subject to undertakings to the court which effectively preserve the material assets.
Mr Lu has provided an undertaking to the court referred to earlier. The defendants submitted that the undertaking was inadequate because (a) there is no guarantee or undertaking that the funds in Mr Lu’s Westpac bank account will still be present or available at the end of the proceedings; (b) he does not give adequate evidence as to his overall asset and liability position to make good the proposition that such monies are free and available to meet costs; and (c) merely undertaking to keep $1 million available in the Westpac account provides no security for the indemnity offered. The defendants did not dispute that $1 million was an appropriate sum by way of security for the indemnity.
The court has a broad discretion under s 242 of the Corporations Act to make any orders it considers appropriate about costs in relation to derivative proceedings brought with leave under s 237: see Ehsman v Nutectime International Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705 at [62]. In my view, in the circumstances of the present case it is appropriate to require the plaintiff, as a condition of the grant of leave under s 237, to provide security for the undertaking in the amount of $1 million by way of payment into court or unconditional bank guarantee in a form acceptable to the second defendant or otherwise as ordered by the court.
As to whether the derivative claim raises a serious question to be tried (s 237(2)(d)), the evidence on this application indicates that very large sums of money comprising substantially all the assets of the Company were paid out by the directors to related parties of the directors by way of undocumented loans which were interest-free and unsecured. That comfortably satisfies the ‘serious question to be tried’ hurdle.