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[2010] NSWSC 228
mixed. The second amended statement of claim was dismissed, and the plaintiffs were ordered to pay the defendants' costs. The judge proposed a declaration that Hua Cheng International held the land on trust...
Lu and Huang put substantial funds into a Hurstville development joint venture with Xu. The intended joint venture company did not acquire the land. Instead, Xu arranged for another company, Hua Cheng International, to buy it. The plaintiffs sought to have the land declared held for them and other contributors personally. The judge did not grant that remedy. He considered the land should be held for Hua Cheng Property, the company intended to carry out the joint venture, because the project had been funded by the joint venturers and a bank loan and it would be unconscionable for the land to remain for the benefit of a different group of shareholders. The proposed orders also addressed the bank loan, prevented a separate claim for the purchase price, and provided for company directors and a binding referee to manage disputes. The plaintiffs' statement of claim was dismissed and they were ordered to pay costs.
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This was a dispute arising from a proposed property development in Hurstville. On 29 November 2006, Yaying Lu, Leiping Huang and Lawrence Xu entered a tripartite agreement to develop land. The project was estimated to cost AUD30 million. Lu and Huang were each to contribute AUD4 million, Xu was to contribute AUD2 million, and Xu was to raise the remaining AUD20 million [2]-[3].
Hua Cheng Property Pty Ltd was incorporated in January 2007 as the intended joint venture company. At first, Lu and Huang each held 40 shares and Xu held 20 [4]. However, Hua Cheng Property did not buy the land. Xu caused Hua Cheng International Holdings Pty Ltd to acquire it instead [5]. Xu held 85 shares in Hua Cheng International, his wife Hong Xia Xia held 15, and Lu held the remaining 35 [5].
The contracts for the land were exchanged on 3 October 2007 and settled on 20 December 2007 [6]. After Xu estimated that construction costs would be substantially higher than first anticipated, Lu and Huang each transferred 20 shares in Hua Cheng Property to Xu. They retained 20 shares each and Xu held 60 shares [6].
On 5 February 2008, Xu signed a further agreement on behalf of Hua Cheng International and Hua Cheng Property. It said that Hua Cheng International would contribute the property to the project, while Hua Cheng Property would bear all project costs, including the defined cost of the property [7], [55]. The judge described that agreement as an imperfect attempt to regularise the companies' relationship [8].
Lu and Huang alleged that Xu's conduct had deprived them of the intended benefit of their contributions. They sought a declaration that Hua Cheng International held the land on trust for them and the defendants in proportion to their contributions, an inquiry into contributions, and the winding up of Hua Cheng Property [10]-[12]. Their case relied on fiduciary duty and the first limb of Barnes v Addy, associated in the judgment with knowing receipt [60]-[63].
The judgment did not grant the declaration in the form they sought. Gzell J instead considered that Hua Cheng International should hold the land on trust for Hua Cheng Property. He proposed related adjustments for the Westpac loan and purchase-price claim, as well as governance orders intended to address the directors' lack of trust and confidence [79], [90]-[100]. The second amended statement of claim was dismissed, and the plaintiffs were ordered to pay the defendants' costs [101].
The court found that the tripartite agreement made the parties partners, or at least joint venturers owing fiduciary duties of the same kind [48]. It described the basis of fiduciary accountability as preventing a fiduciary from being swayed by personal interests or misusing the position for personal advantage, quoting Deane J in Chan v Zacharia [47].
The judge rejected Xu's explanation that Hua Cheng International was used because Westpac would not lend to the newly formed Hua Cheng Property. The judgment reasons that Hua Cheng International was no better positioned in the relevant respects, and that the bank was influenced by a supposed connection between Xu and Zhongnan, a business associated with Lu [17]-[32]. The court also rejected Xu's denial that he had represented himself to Westpac as a Zhongnan executive director [25]-[29]. This evidence informed the factual context, but it did not by itself determine the form of remedy.
The court then examined what benefit or gain had been obtained. The judge accepted evidence that total project expenditure was about AUD16.51 million, including land costs, development-related expenditure, interest and office costs [50]-[52]. After crediting the plaintiffs' approximate AUD8 million contributions and the AUD4.2 million Westpac loan, the judge calculated Xu's contribution as about AUD4.31 million [53]. That figure exceeded the amount he had initially agreed to contribute, and Xu and Xia had also provided security for the bank facility [53]. The judge therefore did not consider it obvious that Xu had gained from the acquisition of the land itself [54].
The plaintiffs' more specific allegation concerned the later agreement making Hua Cheng Property liable for project costs, including the land cost [55]-[59]. They argued that this gave Xu, through his shareholding in Hua Cheng International, priority access to the land purchase price before profits were distributed through Hua Cheng Property [56]-[59]. The judge noted that this was the only benefit identified after the trial [57]. He observed that Hua Cheng International had paid a market price and that the alleged benefit was to its shareholders, rather than to the company as purchaser [69]. He also considered that the purchase-price obligation arose under the later agreement, after the land had been acquired, and did not justify a declaration that the land was held for the individual contributors [70].
The remedy chosen followed the judge's stated minimum-equity approach. He referred to the principle that relief should do no more than was necessary to reverse the detriment, while recognising that Australian authority did not invariably confine relief to a narrow formulation [73]-[77]. His conclusion was that it would be unconscionable for Hua Cheng International to retain the land for shareholders whose identities and proportions differed from those of the joint venturers and their joint venture company [78]. The intended route for the project was through Hua Cheng Property; the funding came from the joint venturers and Westpac [78]. The court therefore proposed a trust for Hua Cheng Property, rather than an individual beneficial interest for Lu and Huang [79].
The court also considered the practical consequences. The financial forecast showed a likely profit [82]-[83]. The development application concerned a 17-storey building, and off-the-plan contracts had been exchanged for residential and commercial units, with deposits received [84]-[85]. The judge considered that stopping the project would prejudice third-party interests [85]. He also noted that Xu had a greater future funding obligation after his shareholding in Hua Cheng Property increased to 60 per cent [86]. These matters supported preserving the project while adjusting the parties' legal and financial arrangements.
The judgment's account of the relevant law begins with fiduciary duties between partners. It says those duties arise because a partner may exercise powers or discretion affecting another partner, who is vulnerable to abuse of that position [45]. The court treated the parties' joint venture as giving rise to duties of the same kind [48]. It described the familiar fiduciary-accountability concerns as conflicts between personal interest and duty, and use of fiduciary position or opportunity for personal advantage [47].
The judgment also discusses the first limb of Barnes v Addy. Gzell J noted that the traditional formulation concerns a third party receiving trust property, while the High Court in Farah Constructions had noted the assumption that the principle might extend to dealings with at least some other types of fiduciary [60]-[63]. The judge referred to DPC Estates, where different members of the Court of Appeal discussed the relevance of Barnes v Addy to a third party obtaining advantages through information or assistance [64]-[69]. The judgment does not decide a broad question about the full reach of knowing receipt for all fiduciaries. It explains why the plaintiffs' proposed remedy did not fit the benefit and transaction established in this case.
As to remedy, the judgment describes a minimum-equity approach and refers to Muschinski v Dodds and Nichols v Nichols [73]-[77]. Gzell J considered that the appropriate relief here was one that prevented Hua Cheng International's shareholders from retaining the benefit of the land, while preserving the joint venture project through Hua Cheng Property [78]-[79]. The judgment also says that broader equitable relief may be available in an appropriate case, referring to Giumelli and Verwayen [74]. It does not establish that the minimum-equity formulation is an inflexible limit in every case.
Procedurally, the court relied on rules and statutory provisions allowing it to make an order suited to the case even where that exact form of relief was not claimed [88]-[90]. The judgment's significance on this point is confined to the power it identified and its use in these proceedings. It is not an account of later developments in the law.
At [48], the judge says the tripartite agreement made Lu, Huang and Xu partners, or at least joint venturers with fiduciary duties of the same kind. In plain English, the relationship carried duties beyond ordinary contractual performance because each participant could affect the interests of the others.
At [53], the judge accepts that Xu's contribution, after the stated credits, was about AUD4.31 million. That finding mattered because it made the case less straightforward than a situation where one participant had contributed nothing while acquiring the land or project benefit.
At [70], the judge distinguishes the land acquisition from the later purchase-price obligation. The alleged benefit arose after Hua Cheng International had bought the land, through the February 2008 agreement. In plain English, the court did not treat the later cost-allocation clause as automatically proving that the earlier acquisition itself should be undone or held for the plaintiffs personally.
At [73], the judge states that the court should give the minimum equity necessary to do justice, while the later discussion recognises that appropriate relief may sometimes be broader [74]-[77]. The practical point is that the remedy was tailored to the parties' project and the alleged detriment, rather than simply mirroring the plaintiffs' requested declaration.
At [78]-[79], the judge identifies the key equitable concern and the proposed remedy: it would be unconscionable for Hua Cheng International to retain the land for its shareholders, and the prima facie appropriate relief was a trust for Hua Cheng Property. In plain English, the court directed the benefit to the company through which the joint venture was meant to operate, not directly to the individuals.
At [88]-[90], the judgment explains that the court could grant a declaration even though the plaintiffs did not seek that precise outcome. The order was treated as a way to resolve the real dispute, rather than as unavailable merely because it was not the plaintiffs' chosen remedy.
The judgment is most relevant to a fact pattern involving a contractual joint venture, substantial contributions by more than one participant, and an asset acquired by a different company from the vehicle intended to conduct the project. The reasoning at [48] and [78]-[79] links the fiduciary relationship and the destination of equitable relief to those features.
It may also be relevant where the alleged benefit does not arise at the same time as the challenged acquisition. Here, the land was acquired in 2007, while the agreement allocating the land cost to Hua Cheng Property was made in February 2008 [6]-[7]. The court treated that sequence as important when assessing the plaintiffs' theory of gain [69]-[70].
The judgment is also pertinent where the requested remedy would give personal beneficial interests, but the commercial arrangement contemplated that a company would hold or develop the asset. Gzell J rejected a trust in favour of the individual contributors and preferred a trust for the joint venture company [70], [78]-[79]. The reasons for that outcome included the intended structure, source of funds, project profitability, future funding obligations, and third-party interests [78], [82]-[87].
Finally, the decision addresses cases where a proposed remedy could disrupt a live development involving purchasers or other commercial interests. The judgment considered the off-the-plan sales and potential prejudice to those interests when declining to bring the project to an end [84]-[87]. It does not establish a universal rule that a development must be preserved whenever third parties are involved; the conclusion was tied to the evidence before the court.
The supplied judgment contains no discussion of later cases applying, distinguishing, or departing from Lu v Hua Cheng International. It was delivered on 31 March 2010, and the provided text ends with the trial judge's reasons and directions for short minutes of order [101]. No claim about later judicial treatment can therefore be established from this source alone.
For present purposes, the grounded account is limited to the authorities Gzell J himself discussed. These include Chan v Zacharia on fiduciary accountability [47], Barnes v Addy and Farah Constructions on the first limb and its possible scope [60]-[63], DPC Estates on third-party advantages [64]-[69], and the equitable remedial authorities Giumelli, Verwayen, Muschinski and Nichols [73]-[77]. The judgment also cites Fexuto in declining winding up as a first resort [93], and Ghabrial as an example of an order requiring directors to appoint a specialist to assess a matter [98].
The judgment did not decide the general limits of applying the first limb of Barnes v Addy to persons dealing with fiduciaries other than trustees. It records the High Court's observation in Farah Constructions that the extension had been assumed in some cases but was rarely decided [63]. Gzell J did not need to resolve that wider question because the relief sought did not correspond with the benefit he identified.
The judgment also did not decide whether an individual contributor could ever hold a beneficial interest in land acquired for a joint venture. The judge rejected the proposed individual declaration on the facts and stated that the land was intended to be acquired by Hua Cheng Property [70], [78]-[79]. The separate argument about whether the beneficial interests belonged to the plaintiffs' companies was said not to arise, although the judge added that he would have rejected it in any event [71]-[72].
The scope of the minimum-equity principle remains fact-sensitive in the judgment. Gzell J considered a narrow, detriment-focused approach appropriate but acknowledged authority supporting broader relief in suitable circumstances [73]-[77]. The reasons do not define an exhaustive test for when a broader remedy would be warranted.
Finally, the judgment sets out proposed orders and directs the parties to prepare short minutes, rather than reproducing final settled orders [101]. The text therefore does not show the final wording of the referee's appointment, the precise mechanics of the loan reimbursement, or any later implementation of the orders. Those matters cannot be inferred from the reasons alone.
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CITATION : Lu v Hua Cheng International [2010] NSWSC 228
DECISION : Statement of claim dismissed. Declaration that land holding company holds land on trust for joint venture company. Order joint venture company to reimburse land holding company's loan costs. Order land holding company prevented from seeking purchase price from joint venture company. Order directors of joint venture company to appoint a referee whose decisions are binding under the Corporations Act 2001 (Cth), s 233(1)(j).
CATCHWORDS : EQUITY - Fiduciary Obligations - two joint venturers provide contributions to third joint venturer for purchase of land by their joint venture company - third joint venturer causes another company that he controls to purchase the land - whether under first limb of Barnes v Addy two joint venturers entitled to declaration that land held on trust for them and any defendant who contributed in proportion to such contributions and order for an inquiry as to contributions
Conveyancing Act 1919 LEGISLATION CITED : Uniform Civil Procedure Rules 2005 Civil Procedure Act 2005 Corporations Act 2001 (Cth)
Chan v Zacharia (1983-1984) 154 CLR 178 Barnes v Addy (1874) LR 9 Ch App 244 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 DPC Estates Pty Ltd v Grey [1974] 1 NSWLR 443 CASES CITED : Giumelli v Giumelli [1999] HCA 10; (1998-1999) 196 CLR 101 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Muschinski v Dodds (1984-1985) 160 CLR 583 Nichols v Nichols (1986) 4 BPR 97262 Fexuto v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 Ghabrial v Romolly Pty Ltd (1990-1991) 5 ACSR 611
Yaying Lu (First Plaintiff) Leiping Huang (Second Plaintiff) PARTIES : Hua Cheng International Holdings Pty Ltd (First Defendant) Lawrence Xu (Second Defendant) Hong Xia Xia (Third Defendant) Hua Cheng Property Pty Ltd (Fourth Defendant)
COUNSEL : D Murr SC with J Trebeck (Plaintiffs) M Pesman with J Arnott (Defendants)
IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION
05209/2008 YAYING LU & ANOR v HUA CHENG INTERNATIONAL HOLDINGS PTY LIMITED & ORS JUDGMENT Synopsis 1 As counsel for Yaying Lu, the first plaintiff, and Leiping Huang, the second plaintiff, said, the general factual background to these proceedings was ultimately not in dispute. 2 On 29 November 2006 Mrs Lu and Mrs Huang executed a tripartite agreement with Lawrence Xu, the second defendant, to develop land in Hurstville. 3 To carry out this joint venture, which was estimated to cost AUD30m, Mrs Lu and Mrs Huang were each to contribute AUD4m and Mr Xu was to contribute AUD2m and raise the remaining AUD20m. 4 In January 2007, Hua Cheng Property Pty Limited, the fourth defendant, was incorporated. 40 shares were issued to each of Mrs Lu and Mrs Huang and the remaining 20 shares were issued to Mr Xu. 5 The Hurstville land was not acquired by Hua Cheng Property. Instead, Mr Xu caused it to be acquired by Hua Cheng International Holdings Pty Limited, the first defendant. It was a company in which Mr Xu held 85 shares, his wife, Hong Xia Xia, the third defendant, held 15 shares and Mrs Lu held the remaining 35 shares. 6 Contracts for the sale of the Hurstville land were exchanged on 3 October 2007 and the purchase was settled on 20 December 2007. Mr Xu considered that the existing development application would not permit the most profitable exploitation of the land. His estimate of the likely construction costs was about AUD60m. On being informed of this figure, Mrs Lu and Mrs Huang requested Mr Xu to assume a larger share of the project and in January 2008 they each transferred 20 shares in Hua Cheng Property to Mr Xu, retaining 20 shares each, while Mr Xu then held 60 shares. 7 On 5 February 2008, Mr Xu executed an agreement on behalf of Hua Cheng International and on behalf of Hua Cheng Property. It recited that Hua Cheng International intended to develop the Hurstville land and Hua Property had agreed to be the developer. Its material provisions were as follows: " Joint Venture Formation 2(1) The parties shall form and agree to engage in an unincorporated joint venture, the name of which shall be the "Hua Cheng Property Development" for the purpose of carrying out the Project. (2) HC International shall lodge to the Council an amended Development Application for approval of construction of commercial and residential units. (3) HC International shall contribute the Property towards the Project. (4) HC Development shall bear all the Project Costs. (5) Each party hereby commits its interest in the Joint Venture and agrees to do all things necessary to enable the Project to be carried out." 8 This joint venture agreement was drawn by Mr Xu after having spoken with his accountant, his solicitor and his law student sons. It was not well drafted. It was his attempt to regularise the relationship between Hua Cheng International and Hua Cheng Property. 9 On 15 October 2008 Mrs Lu and Mrs Huang commenced these proceedings. On 24 December 2008 they purported to terminate the tripartite agreement to develop the Hurstville land. On 30 March 2009 the defendants purported to terminate it. The relief sought 10 While the relief sought in the second amended statement of claim is broader, counsel for Mrs Lu and Mrs Huang identified the relief sought by them in his closing address. 11 They seek a declaration that Hua Cheng International holds the Hurstville land in trust for them and the four defendants in proportion to the parties' respective contributions to the money used to purchase the Hurstville land. To that end they seek an inquiry to determine the amounts contributed by the parties and they seek the winding up of Hua Cheng Property. 12 The Conveyancing Act 1919, s 66G provides that where property is held in co-ownership, the court may appoint trustees of the property and vest the same in such trustees to be held by them on the statutory trust for sale. If it is determined that equitable interests as co-owners exist in the Hurstville land, Mrs Lu and Mrs Huang will seek an order under s 66G.
The Purchase by Hua Cheng International 13 Much time at trial was spent on why Mr Xu caused the Hurstville land to be purchased by Hua Cheng International. 14 Mr Xu said that he approached Westpac for a loan to assist in the purchase of the property. He said Westpac regarded the scope of his existing businesses in China as important to their consideration. A team from Westpac went to China in June 2007 to inspect his businesses. 15 Mr Xu said he had been advised by Helen He of Westpac in Sydney of the bank's criteria for approval of a loan to a property development company. First, the company had to have a good track record and good reputation. Secondly, the bank required an assessment of the company directors' assets and personal reputation. Thirdly, the bank required a good understanding of the project's location and its pre-sale risks including a site visit. And fourthly, the bank required detailed historical information about the company's operation and that the company directors had never breached any law. 16 Hua Cheng Property was a newly established company with no assets and no track record. Mr Xu said Westpac informed him that they would not lend to Hua Cheng Property but would only lend to Hua Cheng International. 17 But Hua Cheng International satisfied the bank's criteria no better than Hua Cheng Property did. 18 Hua Cheng International was also a relatively new company. It was incorporated on 29 March 2006. It had not carried out any property development and had no track record in that respect. Its reputation was no better than that of Hua Cheng Property. 19 The directors of Hua Cheng International at the time the loan was negotiated with Westpac were Mr Xu and Mrs Xia. Mrs Lu ceased to be a director on 5 February 2007. As Mr Xu was the only director of Hua Cheng Property, an assessment of company directors' assets in relation to Hua Cheng International was no better than that of Hua Cheng Property. The same applies to their personal reputation. 20 An understanding of the project would be no different in the hands of Hua Cheng International than it would have been in the hands of Hua Cheng Property. 21 The detailed historical information about Hua Cheng International with respect to property development would be no different from that with respect to Hua Cheng Property. 22 Mrs Lu and her husband held most of the shares in Zhongnan Holdings Pty Limited. Mr and Mrs Lu conduct all their businesses through that company and its subsidiaries. The principal business of Zhongnan was property development in China. It has carried out projects over 20 years valued in the Australian equivalent of hundreds of millions of dollars. 23 Westpac was interested in fostering a relationship with Zhongnan. It would have been more attractive to Westpac, therefore, if the loan application had been made on behalf of Hua Cheng Property. 24 Mr Xu had a business card of Zhongnan naming him as executive director. His appointment was as liaison representative. 25 Mr Xu denied that he had informed Westpac in the course of its assessment of the loan application of Hua Cheng International that he was an executive director of Zhongnan. I reject that denial. Westpac's appraisal documents of the loan application record him as executive director of Zhongnan. 26 An appraisal of Zhongnan followed this statement. It included reference to its net assets in excess of AUD100m and an annual capacity for property development of over 800,000sqm. A company profile was attached. 27 Hua Cheng International was noted to be new to Westpac and Australia but with a strong property development background in China with skills and experience in residential property development of larger sized projects overseas. 28 There is no doubt that Westpac was influenced by Mr Xu's and Hua Cheng International's supposed connection to Zhongnan and its considerable experience in property development. 29 There was no relationship between Hua Cheng International and Zhongnan. Its experience would have been more readily appropriate for Westpac to take into account had the applicant for the loan been Hua Cheng Property because of Mrs Lu's shareholding in that company. 30 The Westpac appraisal considered as important the good asset location, considerable "hurt" money to be contributed upfront ie the borrower's own money in excess of AUD5m and interest secured in advance covering 15 months when the facility was for 12 months. These features would equally have been available had Hua Cheng Property been the applicant for the loan. 31 Mr Xu volunteered for the first time during cross-examination that he put both Hua Cheng Property and Hua Cheng International to Westpac and Westpac chose Hua Cheng International. It is highly unlikely that a bank would assume the role of adjudicating upon potential borrowers. 32 Furthermore, there is no mention of Hua Cheng Property in the Westpac documentation. Nor would Westpac have made a choice in favour of Hua Cheng International because it was in no better a position than Hua Cheng Property. 33 It was submitted that Mr Xu's evidence should be accepted in the light of a number of circumstances. First, it was put that at the time the application by Hua Cheng International was made to Westpac a very large part of the capital contributions required for the joint venture had not been paid by the other parties. I reject that submission. Considerable payments were made by Mrs Lu between 30 March 2006 and 20 November 2007. Mrs Huang paid all but RMB4.3m between December 2006 and October or November 2007. 34 Secondly, it was submitted that when the application to Westpac was made Mrs Lu and Mrs Huang had made no contribution under their contractual obligations to the business and had spent virtually no time in Australia. 35 The tripartite agreement provided that a proprietary limited company would be set up and the three parties would be appointed as directors. Hua Cheng Property was incorporated but Mr Xu remained the only director. The agreement further provided that Mrs Huang would be appointed general manager, Mrs Lu would be appointed or would recommend a candidate for the role of deputy general manager and Mr Xu would be appointed as contact person of the project taking charge of miscellaneous matters and coordination. 36 It is true that Mrs Lu and Mrs Huang failed to assume those offices and manage the company. They were too busy with their affairs in China. It is also true that they spent little time in Australia. Mr Xu assumed the role of managing the project. 37 But their failure to comply with their contractual obligations and the paucity of their visits to Australia does not affect the analysis of the evidence of Mr Xu set out above. 38 Thirdly, it was submitted that Mr Xu had travelled to China for a meeting of 15 November 2007 with representatives from Westpac and he told Mrs Lu and Mrs Huang that a loan was to be obtained. 39 That is so, but Mr Xu did not tell Mrs Lu or Mrs Huang that he was making an application in the name of a company different from the joint venture company. 40 Fourthly, it was put that since the series of meetings with the Westpac executives on 15 November 2007 occupied the entire day, it was inconceivable that Mr Xu should have brought the executives to China had Mrs Lu not known about the proposed role of Hua Cheng International. 41 I reject that submission. Mr Xu agreed in cross-examination with the proposition: "You certainly didn't ever tell Mrs Lu and Mrs Huang that you were making the application in the name of a company different from the joint venture company, did you?" 42 I reject Mr Xu's evidence that Hua Cheng International was the applicant for the loan because Westpac would not have lent to Hua Cheng Property. 43 A loan of AUD4.2m to Hua Cheng International was approved by Westpac on 20 November 2007. Mr Xu had been successful in having purchase price of the Hurstville land reduced to AUD8.5m. The final figure including such GST as was payable on some of the lots totalled AUD8.655975m. 44 It was ultimately not in dispute that Mrs Lu and Mrs Huang contributed the equivalent of at least AUD4m each to the project. Those moneys were deposited to accounts nominated by Mr Xu in China. Mr Xu accepted that it was his obligation to find the equivalent of those moneys in AUD. Breach of fiduciary duty? 45 There is no doubt that a partner owes a fiduciary duty to co-partners. Because a partner may act on behalf of or in the interests of another partner in exercise of power of discretion, their relationship is one that gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of other partners who are accordingly vulnerable to abuse by the fiduciary of the position. 46 In such circumstances relief is available by way of appropriation to the person to whom the fiduciary duty was owed of any benefit or gain obtained by the fiduciary and the requirement that the fiduciary account for any benefit or gain obtained. 47 In Chan v Zacharia (1983-1984) 154 CLR 178 at 198-199 Deane J explained these two themes thus: "The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage." 48 The tripartite agreement constituted Mrs Lu, Mrs Huang and Mr Xu partners or, at the least, their relationship as joint venturers under the tripartite agreement gave rise to fiduciary duties of the same kind. 49 What benefit or gain did Mr Xu obtain at the expense of Mrs Lu and Mrs Huang? 50 Mr Xu gave precise evidence in cross-examination of the approximate AUD amounts he had contributed to the project and the nature of the services obtained in answer to the proposition that his evidence that the cost of the project exceeded AUD12m was fanciful and incorrect. 51 It was an impressive display of his memory for detail. The evidence was given without the benefit of any document and unhesitatingly without pause. The evidence was not challenged. 52 Notwithstanding that I have rejected some of Mr Xu's evidence, I found this part of his testimony convincing. And it related to tasks that had been performed. I accept his evidence in this regard. A summary of it is set out in the table below.
Expenditure Approximate cost Purchase of the land including taxes and initial expenditure $10,000,000 Architect for design 500,000 Reports to Hurstville Council for development application and other reports 350,000 Preparation of a development control plan 150,000 Development application assessment fee and costs associated with amending design during the assessment process 350,000 Building process and selection of builder 30,000 - 50,000 Lodgement of restructure of car park 200,000 Sales agents (residential and retail) 400,000 Showroom with sample apartment 80,000 Applications for finance 100,000 Interest on the Westpac facility 900,000 Partial repayment of the Westpac facility 1,200,000 Costs of applying for development finance after Westpac withdrew 250,000 Office expenditures and employee remuneration 2,000,000 TOTAL $16,510,000
53 From the AUD16.51m total, credit must be given for the approximately AUD8m contributed by Mrs Lu and Mrs Huang. Credit needs also to be given to the AUD4.2m Westpac loan. Those credits have the effect of reducing Mr Xu's contribution to the project to AUD4.31m. But that is more than double the amount he was to expend under the tripartite agreement and is about the same contribution made by each of Mrs Lu and Mrs Huang. Furthermore, Mr Xu and Mrs Xia gave security over their assets in favour of Westpac. 54 If Mr Xu was in breach of his fiduciary duty to Mrs Lu and Mrs Huang when Hua Cheng International acquired the Hurstville land, it is not obvious that he obtained any benefit or gain thereby. And Mrs Lu and Mrs Huang point to a different event as giving Mr Xu a benefit or gain. 55 The joint venture agreement of 5 February 2008 provided that Hua Cheng Property should bear all the project costs. That term was defined to include the cost of the property. 56 It was submitted that Mr Xu, in breach of fiduciary duty, caused the joint venture agreement to be executed to gain him, through his shareholding, the substantial share of the benefit of paying Hua Cheng International the purchase price of the Hurstville land before any division of profits was made for the benefit of Mrs Lu and Mrs Huang through their shareholding in Hua Cheng Property. 57 That was the only benefit that could be identified by counsel for Mrs Lu and Mrs Huang after a five-day trial. 58 It was submitted that it should be inferred that the purchase in the name of Hua Cheng International was not bona fide and was made to secure benefits for Mr Xu in the form of the priority payment of the purchase price of the land and others that Mr Xu might obtain by exploiting his position as de facto owner of the land. 59 No additional benefits were identified and I limit myself to Hua Cheng Property's obligation to pay Hua Cheng International the purchase price of the Hurstville land before division of profits. What remedy? 60 Counsel for Mrs Lu and Mrs Huang submitted that they were entitled to the declaration sought on the basis of the first limb of Barnes v Addy (1874) LR 9 Ch App 244. At 251-252 Lord Selborne LC said: "Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees." 61 The first part of the last sentence is referred to as the first limb of Barnes v Addy described as involving knowing receipt. 62 Here there was no trust. Money was provided to Mr Xu in China on the basis that he would match those funds and deposit them to the credit of Hua Cheng Property to enable it to purchase the Hurstville land. Instead of doing that Mr Xu paid the moneys for the benefit of Hua Cheng International. 63 But in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at 141 [113] the High Court pointed out that in recent times it has been assumed, although rarely decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary. 64 Reference was made to DPC Estates Pty Ltd v Grey [1974] 1 NSWLR 443. That was a case in which the first defendant was the manager of the plaintiff. It engaged in buying, managing and selling real estate. The second defendant was a family company engaged in buying and selling land. Its managing director and the first defendant entered into an agreement whereby the first defendant gave real estate information to the managing director who caused the second defendant to purchase properties utilising that knowledge. The profits were to be divided equally between the first and second defendants. 65 The plaintiff sued for a declaration that the properties were held on trust for the plaintiff and for an account of profits. The Court of Appeal held that the plaintiff was entitled to relief against the second defendant for different reasons. 66 Jacobs P at 457-458 said the principle in Barnes v Addy was applicable: "Upon the principle of that case a distinction must be drawn between a person who receives trust property for his own benefit, as a volunteer or otherwise, and others who deal with a fiduciary, but do not actually receive trust property. In the latter case a person is not to be held responsible as a constructive trustee unless, even though no trust property passes into his hands, he is cognisant of a dishonest design on the part of the trustee." 67 Hardie JA at 463 was of the view that the second defendant through its managing director became a participant in the course of conduct designed to enrich itself and the first defendant under circumstances precluding it from retaining the proceeds of such enrichment. 68 Hutley JA at 470 said the position of a third party obtaining advantages from a fiduciary in the form of information and assistance should be analogous to that of a third party obtaining property from a fiduciary. 69 But this is not a case of benefit flowing to Hua Cheng International from its acquisition of the Hurstville land. It paid a market price. The benefit was obtained by the shareholders of Hua Cheng International who would gain profit from the contributions of Mrs Lu and Mrs Huang to the purchase price. 70 Further, the benefit upon which Mrs Lu and Mrs Huang rely was created well after the acquisition of the Hurstville land when the joint venture agreement was executed. Any breach of fiduciary duty by Mr Xu in executing that agreement would not, in my view, justify relief in the form of a declaration that the Hurstville land was held by Hua Cheng International in trust for Mrs Lu and Mrs Huang and such of the defendants who contributed to its purchase price. It never was the intention of the parties that Mrs Lu, Mrs Huang and Mr Xu would hold interests in the Hurstville land personally. The land was to be acquired by Hua Cheng Property. Any reversal of benefit received by Mr Xu should be for the benefit of Hua Cheng Property. 71 Mrs Lu and Mrs Huang were reliant on their respective companies to make their contributions to the project. It was submitted that any beneficial interest alleged to be held in trust were those of their companies and they were not parties to the proceedings. 72 I have rejected the notion of a declaration of trust in favour of the persons or entities that contributed to the purchase price of the Hurstville land. The issue does not arise for decision. I would have rejected the submission in any event. Whatever arrangement was made between Mrs Lu and Mrs Huang and their respective companies they acted as principals and not agents of their companies when they entered into the tripartite agreement. 73 The traditional rule of minimum equity was that the court should make an order to give the minimum equity necessary to do justice between the parties. The relief granted should do no more than reverse the detriment. 74 In Giumelli v Giumelli [1999] HCA 10; (1998-1999) 196 CLR 101 at 120 [33] the High Court rejected a submission that the Court of Appeal had made an order that went beyond any reversal of the detriment. The court said that consistently with the course of Australian authority since The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, that decision was not authority for any such curtailment of the relief available in the case before the court. Their Honours said, to the contrary, that there was much support in the judgment for a broader view. 75 In Muschinski v Dodds (1984-1985) 160 CLR 583 at 620 Deane J dealt with the situation where property remained in the hands of a party to a joint venture when the substratum of the relationship came to an end without blame: "Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do." 76 Needham J followed this passage in Nichols v Nichols (1986) 4 BPR 97262. The defendant as a resident of Lord Howe Island held an in perpetuity lease of land upon which the plaintiff had constructed a house. The couple subsequently separated. His Honour held that as the original intention of the plaintiff was to provide a house for the defendant and her children, it would not be unconscionable for the defendant to retain from the proceeds of sale a sum sufficient to provide for her and the children a house adequate to meet their needs according to the ordinary standards of living on the island. By addressing the detriment suffered by the plaintiff, the court provided minimum equity. 77 Notwithstanding that in appropriate circumstances a broader approach may be taken, I am of the view that an approach similar to that in Nichols should be taken in this case and the court should give the minimum equity necessary to do justice between the parties. 78 It would be unconscionable for Hua Cheng International to retain the Hurstville land for the benefit of its shareholders. They are different in identity and proportion from the joint venturers and their joint venture vehicle, Hua Cheng Property. It was from the joint venturers and Westpac that Hua Cheng International obtained the money to purchase the Hurstville land and it is they who should benefit from the project through their joint venture company. 79 Prima facie, the appropriate relief is a declaration that Hua Cheng International holds the Hurstville land on trust for Hua Cheng Property. 80 When this form of relief was suggested on the first day of the trial it was adopted by the defendants but opposed by Mrs Lu and Mrs Huang. 81 They submitted that because the tripartite agreement had been terminated it was inappropriate to make such a declaration because it would, in effect, be an order for specific performance of that agreement. They argued that the declaration was a form of relief that Mrs Lu and Mrs Huang had not sought. They submitted that the declaration would give Mr Xu an indirect interest in the Hurstville land out of proportion to his contribution to its acquisition. It was said that Mr Xu's shareholding in Hua Cheng Property was increased from 20% to 60% based on anticipated future contributions that, it was submitted, never materialised. 82 A forecast statement of financial performance of Hua Cheng Property dated 8 October 2008 calculated a profit from ordinary activities before tax of AUD11.185392m. The Hurstville land was entered in the forecast at the approximate figure of AUD8.5m. The profit was calculated after payment of this amount to Hua Cheng International. 83 There was no challenge to the forecast. It shows that the project is likely to be profitable. 84 There are also third party interests to be considered. A development approval application has been issued for a 17-storey building containing 42 two-bedroom apartments, 9 three-bedroom apartments, 35 commercial tenancies and 35 retail tenancies. 85 The project has been successfully marketed off the plan. Contracts have been exchanged for 50 residential units and 5 commercial units. Deposits of AUD3.5m have been received representing prospective purchases in excess of AUD33m. These interests would be prejudiced if the project were to cease. 86 Mr Xu has an increased obligation to fund the future development of the land. His share of cost has increased from 20% to 60%. He will not obtain an advantage disproportionate to his shareholding in Hua Cheng International. 87 Mrs Lu and Mrs Huang come to equity and must do equity. They must pay due regard to the prejudice that would follow a termination of the project. Their opposition to a declaration that Hua Cheng International holds the land in trust for Hua Cheng Property must be disregarded. 88 The Uniform Civil Procedure Rules 2005, Pt 36 r 36.1 enables the court at any stage of the proceedings to give such judgment or make such order as the nature of the case requires whether or not a claim for relief extending to that judgment or order is included in any originating process or notice of motion. The rule complements the Civil Procedure Act 2005, s 90. It provides that the court is, at or after trial or otherwise as the nature of the case requires, to give such judgment or make such order as the nature of the case requires. It also complements s 56 which provides that the overriding purpose of the Act and of rules of court in their application to civil proceedings is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. 89 Thus, in proceedings for a declaration, it may happen that a court in resolving the proceedings in favour of a defendant makes a declaration contrary to that sought by the unsuccessful plaintiff even though the defendant made no formal claim for such a declaration. 90 I propose to make the declaration. 91 But there are adjustments that also need to be made. The first adjustment will require Hua Cheng Property to reimburse Hua Cheng International for any payments it makes to Westpac under the loan facility that now stands at AUD3m together with accrued interest as at 12 March 2010 of AUD37,934.21. If Hua Cheng Property is to get the benefit of the land, it should assume the liability to the bank from which portion of the funds for its acquisition were obtained. 92 The second adjustment will restrain Hua Cheng International from claiming from Hua Cheng Property any amount defined as the cost of the property in the joint venture agreement. Since the funding of the purchase of the Hurstville land came from Westpac and the joint venturers, once provision is made for the discharge of the liability to Westpac by someone other than Hua Cheng International, it will have suffered no detriment with respect to its acquisition of the Hurstville land and it would be unconscionable for it to claim to be paid the purchase price under the joint venture agreement. 93 I will not make an order for the winding up of Hua Cheng Property. It is through it that the development will continue and winding up is the last resort of an otherwise solvent company. (Fexuto v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 742). 94 The Corporations Act 2001 (Cth), s 233(1) contains a series of orders that a court may make including the appointment of a receiver or a receiver and manager of any or all of a company's property. 95 What clearly emerges in this case is that Mrs Lu and Mrs Huang have lost confidence and trust in Mr Xu and the appointment of a receiver and manager would obviate a need for the three individuals to meet to further the project. 96 I accept the submission of counsel for the defendants, however, that such a course would have serious commercial consequences as it would suggest that interests in the development were being sold at fire sale prices. 97 The Corporations Act, s 233(1)(j) provides that the court can make an order that it considers appropriate in relation to a company including an order requiring a person to do a specified act. 98 In Ghabrial v Romolly Pty Ltd (1990-1991) 5 ACSR 611 Cohen J ordered that the directors appoint a quantity surveyor to assess how much of the cost of construction was attributable to each part of the construction. 99 The third adjustment is for Mr Xu to be ordered to cause Hua Cheng Property to appoint Mrs Lu and Mrs Huang as directors as was provided in the tripartite agreement. 100 There is a fourth adjustment I think should be made to ameliorate the lack of confidence and trust Mrs Lu and Mrs Huang have in Mr Xu. I propose to order the directors to appoint a suitable person who consents to the role of acting as a referee should any dispute arise between the directors as to any course to be taken by Hua Cheng Property in developing the Hurstville land and an order that each of the directors will be bound by any decision of the referee. 101 I will dismiss the second amended statement of claim. Mrs Lu and Mrs Huang must pay the defendants' costs. I will hear the parties on the appropriate terms of the orders. I direct the parties to bring in short minutes of order reflecting these reasons.
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Lu
Hua Cheng International
The second amended statement of claim was dismissed, and the plaintiffs were ordered to pay the defendants' costs. The judge proposed a declaration that Hua Cheng International held the land on trust for Hua Cheng Property; reimbursement by Hua Cheng Property of relevant Westpac payments; restraint on Hua Cheng International claiming the land purchase price from Hua Cheng Property; and orders concerning appointment of the plaintiffs as directors and a binding referee. The parties were directed to bring in short minutes of order. The judgment records these as proposed orders and directions for settling the appropriate terms.