Luo v Windy Hills Australian Game Meats Pty Ltd

The merits of the case

1. Mr Luo contends that he has very significant prospects of success, and that the defences raised are "weak and at times vexatious". Mr Luo contends that there is a substantial amount of evidence to show that Windy Hills did not supply the stock ordered and did not have a bona fide supplier of the stock. Mr Luo also contends there is a strong prima facie case that "the defendants paid Mr Luo's funds out in breach of trust".
2. Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1A)(a) provides that a matter to which the Court may have regard in considering a security for costs application is "the prospects of success or merits of the proceedings".
3. The Court of Appeal has recently emphasised that when looking at the merits of the proceedings it may be necessary to go further than concluding that the proceedings are not frivolous and that there are real issues to be tried.
4. Thus, in Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 Bathurst CJ, Leeming JA, Barrett AJA said, at [98]: "That constrained approach does not reflect the broad discretion conferred by the rules. UCPR r 42.21(1A)(a) entitles the court in terms to have regard to "the prospects of success or merits of the proceedings". It is true that in many cases it will not be possible to form a meaningful view as to the strength or weakness of a plaintiff's claim for the purposes of an application for security for costs. Such applications are ordinarily brought before pleadings are closed and evidence filed. But that does not mean that, for example, there may never be a case in which a court can be satisfied that an impecunious corporate plaintiff has prima facie a very strong case, such as to inform the exercise of discretion on an application for security for costs. The starting point in the exercise of discretion is the legislation conferring the power, not some gloss upon it." (Emphasis in original.)
5. For that reason I will now turn to consider the prima facie strength of Mr Luo's claims with respect to the failure to supply, misleading or deceptive conduct, and breach of trust.

The failure to supply claim

1. Mr Luo claims that he paid for nine containers of stock and received nothing. His case is that: 1. he did not receive the documentation necessary to take delivery of three containers; and 2. the remaining six containers contained only salt with only a trace of omasum.
2. In their Commercial List Response, Windy Hills and Mr Coulter assert that "all stock ordered by Mr Luo was supplied by the suppliers and delivered to [Mr Luo's] nominated consignee in Vietnam in accordance with the agreements".
3. However, between February and August 2017, Mr Coulter sent email correspondence to the putative Pakistani supplier of the goods, and also to such entities as the Australian High Commission in Pakistan and the Australian Trade and Investment Commission alleging that the goods had not been supplied and that he had been defrauded by his Pakistani suppliers.
4. For example, on 15 March 2017 Mr Coulter wrote to the High Commission of Pakistan in Australia stating: "Good day High commission office I need the embassy help as unfortunately we have been caught in a fraud situation. We purchased 8 containers of dried beef omasum from a company called Neamah Enterprise company registered business of Pakistan… We paid our deposit as requested against the PL proposal we were shown copies of the [bill of lading] plus other documents including health certificate along with pictures of the product we purchased so we paid the balance in full as per contract… … We once they received our payments in full we were told original documents had been sent to our consignee waiting in Vietnam. Once containers arrived in Haiphong Vietnam we still had not received any original documents… I then travelled to Dubai in an effort to retrieve our transferred funds from the said bank accounts plus I visited a lawyer & Topmost freight solutions for their help to either get funds withdrawn back to us or fight to get the containers released, eventually Topmost freight solutions were most successful with threatening demands to shippers Wan Hai shipping plus Neamah designated shipping agent Paklink, upon getting the release we had shipping line Wan Hai release the containers to our consignee waiting in Vietnam…upon opening they found bags of sea salt so custom have given a written report saying that goods did not match the [bill of lading]. … We have authorised Topmost freight solutions to act on our consignee behalf in Pakistan…they have come to the conclusion that this is a large organised fraud group as all are protecting each other & at the moment unless we get help from Pakistan embassy or Govt officials these organised scammers/fraudsters are laughing at the lack of Pakistan officials intervention in fact they welcome so I ask you can you afford to allow these groups to get away with avoiding any consequences…". (Emphasis added.)
5. Thus Mr Coulter was asserting that some of the containers contained only sea salt and that the purported Pakistani suppliers of the omasum were "a large organised fraud group" and were "organised scammers/fraudsters".
6. Mr Coulter wrote in similar terms to the Australian Trade and Investment Commission on 16 March 2017.
7. On 8 August 2017 Mr Coulter wrote directly to one of the Pakistani suppliers as follows: "Today I had a call from Paklink your shipper of the fraud shipments of salt shipped to Vietnam, we have been contacted by Pakistan department of trade, Australian Pakistan embassy, Pakistan police commissioner for international corruption & crime… Sohail time is getting closer for your team of fraudsters, I have so many more copies of proof even from other companies you have previously cheated so I think you & your team can look forward to a very long time in [gaol]…". (Emphasis added.)
8. On 16 March 2017 Mr Zhang sent an email to the Pakistani Ambassador in China headed "Fraud report". The email is written in Chinese characters. Mr Rayment, who appears for Mr Luo, said in his written submissions that the email alleges fraud (as its English language heading suggests).
9. There is also documentary evidence suggestive of fraud.
10. For example, on this application, Mr Luo adduced evidence from Mr Kashif Sultan, a solicitor in Pakistan, who deposes that his enquiries at the Overseas Investors Chamber of Commerce and Industry in Karachi indicated that two certificates of origin provided by Windy Hills' Pakistani supplier were falsified. Mr Sultan's evidence of enquiries made at the Ministry of National Food Security and Research, Animal Quarantine Department in Karachi suggests that two certificates of health provided by Windy Hills' supplier were also falsified.
11. I do not receive this evidence as evidence of the truth of what Mr Sultan was told. However, Mr Sultan's evidence suggests that Mr Luo has good prospects of proving the falsity of these documents at a final hearing.
12. I have referred to the fact that six containers were found to be full of salt. There is not yet direct evidence from the individuals who inspected those containers. However, Mr Coulter has made that allegation himself in correspondence. Photographs said to have been taken by inspectors are in evidence and appear to show that the containers were full of salt.

The misleading or deceptive conduct claim

1. Mr Luo alleges that each of Windy Hills, Mr Zhang and Mr Coulter made representations concerning Windy Hills' ability to supply stock from Pakistan to Vietnam.
2. The representations on which Mr Luo relies were made by Mr Zhang using a mobile phone application known as "WeChat". Mr Luo's evidence is that he had no direct dealings with Mr Coulter and that all his dealings with Mr Coulter and Windy Hills were conducted through Mr Zhang. All the representations relied upon are preserved either in recorded voice messages or text messages on the WeChat application. It thus appears there will be little dispute about what was represented. Indeed Mr Zhang has admitted in his Commercial List Response making many of the representations.
3. Many of the representations are to the effect that Windy Hills was able to and would supply the nine containers of omasum to Mr Luo.
4. This suggests that Mr Luo has good prospects of establishing the representations for which he contends.
5. There is a further matter.
6. On 23 January 2017 Mr Zhang sent Mr Luo a document called "International Money Transfer Issuance Advice" which purported to show a transfer of US$95,000 from Windy Hills' bank account to the purported supplier of the eight containers of omasum, Neamah Enterprises. BankWest has produced on subpoena a copy of the original of this document which shows that the US$95,000 was not sent to Neamah Enterprises but to "TexMart" in the United Arab Emirates. Mr Luo's evidence is that, at the time Mr Zhang sent him this document, Mr Zhang represented to Mr Luo that he and Mr Coulter had paid personal funds to their supplier in order to help Mr Luo. The documents produced by BankWest contradict this.

The trust claim

1. Mr Luo contends for two Quistclose trusts. The first relates to a payment of US$100,000 Mr Luo paid into Windy Hills' bank account on 18 November 2016. The second, which is said to supersede the first, relates to payments of US$706,331 and AU$600,000 that Mr Luo paid into Windy Hills' bank account between 6 and 24 January 2017.
2. Those payments were made following WeChat messages from Mr Zhang saying "we keep the money for you", "all the risk is with us" and "we will not touch your money".
3. Mr Luo's case is that despite those assurances Windy Hills' bank account shows that it paid out the funds shortly after receiving them. Windy Hills' bank records appear to show this is true.

Conclusion on the merits

1. The time has not yet come for Windy Hills, Mr Zhang and Mr Coulter to adduce evidence.
2. I am considering the merits of Mr Luo's claim without knowing what evidence may be available to Windy Hills, Mr Zhang and Mr Coulter in response.
3. However, as things stand, my conclusion is that Mr Luo has prima facie a very strong case against each of the defendants and that this is a factor that militates against providing security.

The 21 March 2018 undertakings - prima facie contempt

1. Mr Rayment submits that "the defendants are prima facie in contempt" and that the application for security "should not be entertained unless and until that contempt is purged" and, alternatively, that "the contempt should be a factor that informs the exercise of discretion on security".
2. Mr Rayment drew my attention to the observations of the Court of Appeal in Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241 (Emmett and Leeming JJA and Sackville AJA) at [17]: "Failure to comply with orders of the court amounts to contempt of court. There is a general principle that, until any contempt is purged, a party guilty of contempt should not be heard on any application for relief beyond an application to set aside or vary an order (or undertaking to the court) in respect of which he, she or it is in contempt or an appeal designed to set aside or vary that order or undertaking: Young v Jackman (1986) 7 NSWLR 97 at 101".
3. These principles may apply in a case of prima facie contempt. Thus in Young v Jackman, Young J (as his Honour then was) said at 101: "Accordingly, it would seem from 1820 onwards that the rule that a person will not be heard when he is guilty of contempt extended as well to the case where a party was considered to be in contempt, that is, where his contempt had prima facie been demonstrated to the court or alternatively when he had confessed the facts which were the subject of a charge of contempt."
4. At the outset of these proceedings, Mr Luo sought a freezing order against the defendants.
5. That application was settled. As part of the settlement, the defendants undertook to the Court to swear or affirm an affidavit setting out details of their assets and "the present whereabouts of and what happened to the funds transferred to [Windy Hills] referred to in prayer 7 of the Amended Summons".
6. Prayer 7 of the Amended Summons lists 14 payments, approximating $1.4 million, made by Mr Luo into Windy Hills' bank account maintained by Windy Hills with BankWest, between 21 November 2016 and 24 January 2017.
7. Mr Zhang affirmed an affidavit about his assets. He said nothing in that affidavit about the whereabouts of the funds and gave no explanation for that omission.
8. Mr Coulter made an affidavit on 29 March 2018 in which he gave what he described as a "detailed recount [sic], to the best of [my] recollection, of where the funds were transferred to from Windy Hills' bank accounts and what the funds were used on behalf of Windy Hills by me". In his affidavit Mr Coulter described some 21 transfers of funds from Windy Hills' account with BankWest.
9. In relation to two of those transfers he said: "6. On 15 October 2016, I further transferred USD$90,000.00 to Mega Gold Foods' account. It was intended and used to purchase the 56 tonnes of beef omasum claimed as the second consignment in Luo's affidavit of 13 March 2018. 7. On 24 October 2016, I transferred USD$20,000.00 to Mega Gold Foods' account. It was intended and used to purchase the 28 tonnes of beef omasum."
10. However, contrary to the first of those paragraphs, there is no debit from the Windy Hills' bank account of US$90,000 on 15 October 2016.
11. After Mr Luo's solicitors pointed this out, Mr Coulter swore a further affidavit in which he said: "In paragraph 6 of My Previous Affidavit, I referred to a transfer of USD $90,000 on 15 October 2016. I am not now sure how this reference came to be included in My Previous Affidavit, but it is an error. No transfer of USD $90,000 was made on 15 October 2016."
12. As to the 24 October 2016 transfer of US$20,000, those funds were not transferred to the account of Mega Gold Foods (one of the purported Pakistani suppliers of the omasum) but to another account of Windy Hills maintained with Westpac Banking Corporation.
13. In his second affidavit, Mr Coulter gave this explanation: "In paragraph 7 of My Previous Affidavit, I referred to a USD$20,000 transfer on 24 October 2016 to 'Mega Gold Foods'. When I was preparing My Previous Affidavit, I had regard to my bank statement which simply referred to a 'withdrawal' of USD $20,000. I assumed that this was a direct transfer to the supplier Mega Gold Foods because, to the best of my recollection, those funds were used for supplier payments. I did not have access to the detailed account and transaction documents which are referred to in the Kwok Affidavit. However, having now seen the detailed account and transaction documents which are exhibited to the Kwok Affidavit, I can see that the funds were first transferred from Windy Hills' Bankwest Account to its Westpac Account. I then recall that those funds were subsequently (although not immediately) used for supplier payments which were made from the Westpac Account. AUD$23,311.23 was transferred from the Westpac Account for supplier payments to Neamah Enterprises in respect of Mr Luo's order (not Mega Gold Foods as I had mistakenly thought) on 27 January 2017, a few days after a larger payment of approximately $600,000 was transferred into the Westpac account and then paid out by me for supplier payments to Neamah Enterprises…".
14. Thus Mr Coulter's explanation concerning the US$20,000 withdrawal on 24 October 2016 was that it had, in substance, been used to fund a payment of $23,311.23 made from Windy Hills' Westpac account to Neamah Enterprises (another of the purported Pakistani suppliers) on 27 January 2017.
15. In fact Windy Hills' operations on its Westpac account had exhausted the US$20,000 transfer (which appears in the account as the Australian dollar equivalent $26,226.07) long before 27 January 2018.
16. More importantly, the 27 January 2017 debit from Windy Hills' Westpac account (which was for $22,311.23 rather than $23,311.23) is not described as a payment to Neamah Enterprises but as "Withdrawal Cash".
17. Mr Coulter's revised "explanation" is thus not complete and, on the face of it, not correct.
18. Further, although Mr Coulter's first affidavit referred to some 21 withdrawals from Windy Hills' BankWest account, it made no reference to a withdrawal of US$50,000 on 11 January 2017. That debit had a transaction description "Withdrawal IMT WINDY HILLS AUSTRLIAN GAME MEATS P/L WBC TANUNDS SA5352". There was a corresponding credit entry in Windy Hills' Westpac account of $67,796.61.
19. In relation to that matter Mr Coulter gave this explanation in his second affidavit: "My Previous Affidavit did not refer to the USD $50,000 paid from Windy Hills Bankwest Account to its Westpac Account on 11 January 2017 because that payment did not come from funds transferred to Windy Hills by the plaintiffs. As I refer to in paragraph 9 above, some of the funds in Windy Hills' Bankwest Account had been deposited by clients other than the plaintiffs. This particular transfer fell into that category."
20. But that explanation cannot be right. An examination of Windy Hills' BankWest bank statements show that all deposits (bar one) into that bank account were from Mr Luo and the US$50,000 transferred from Windy Hills' BankWest account to its Westpac account on 11 January 2017 was, on any reading of the bank statement, from funds deposited by Mr Luo.
21. The central issue in this case, as Mr Coulter must know, is whether the funds advanced by Mr Luo to Windy Hills were used by Windy Hills to purchase omasum from its Pakistani suppliers. Mr Coulter must know that it is critical that he give an accurate account of "the present whereabouts of and what happened to the funds" that Mr Luo transferred to Windy Hills. He undertook to do so. And yet he has given an explanation which, to put the matter neutrally, cannot be correct.
22. It is not appropriate for me to express any view as to whether Mr Coulter is thereby "prima facie in contempt", as no application is on foot to have Mr Coulter dealt with for contempt.
23. But Mr Coulter's apparent failure to give precise and accurate evidence about this aspect of the matter is a factor I consider militates strongly against exercising my discretion in his favour concerning his application for security for costs.
24. As Mr Zhang has made no attempt at all to comply with his undertaking to explain where the money has gone (for example, and at least, by stating that he does not know) I do not see him being in any stronger position.

Mr Luo's financial position

1. The only evidence Mr Luo has given as to his financial position before he contracted to purchase the omasum from Windy Hills, is that he owned an apartment in Guandong (which is the family home of Mr Luo, his wife and their three children) and a car. Mr Luo estimates the apartment is worth the equivalent of approximately AU$700,000 and that the car, which is now surrendered to a creditor, was then worth something in the order of the equivalent of AU$200,000.
2. Mr Luo has not given evidence of what, if any, employment he was engaged in prior to the events with which these proceedings are concerned. In his affidavit of 6 June 2018 he stated "I have not earned any income since November 2016" suggesting that he was earning income from a source before that time.
3. Mr Luo's evidence is that he borrowed the majority, if not all of the funds he paid Windy Hills for the omasum. Mr Luo borrowed the equivalent of AU$400,000 from China Merchants Bank. That sum is secured over the Guandong apartment. Mr Luo also borrowed the balance from a number of business contacts and a friend. Mr Luo is paying interest to those individuals at a rate equivalent to approximately 36 per cent per annum.
4. Mr Luo said that since January 2017 he has "been receiving financial support for the purposes of day to day living from my immediate and extended family members, including my wife, my younger brother, my cousins and nephew. They have all loaned me money to pay for my living expenses, mortgage repayments and for my air tickets to Australia, accommodation and food in Sydney".
5. In his affidavit of 6 June 2018 Mr Luo has given details of the money lent to him by his wife, his sister-in-law and his younger brother. Mr Luo states that all the loan proceeds were used to pay interest on the loans incurred for the purpose of purchasing the omasum, and for living expenses.
6. In those circumstances Mr Luo has given evidence, which has not been challenged in cross-examination on this application (although, I am told, at one point Mr Luo was required by the legal representatives of Windy Hills and Mr Coulter to be present for cross-examination) that: 1. "I cannot afford to put up security"; 2. "I am currently dependant on the financial support from my wife, relatives and friends for assistance paying daily living expenses, legal expenses and my mortgage"; and 3. "If I am required to put up security for the defendants' costs of the proceedings, I will not be able to pay it and these proceedings will come to an end. I will then have no prospect of recovering the funds I have paid to the defendants".
7. Mr Luo's evidence is that AusChina is dependent upon him for financial support. In his affidavit he stated: "My company, [AusChina], is indebted to the third parties to whom [AusChina] agreed to supply omasum both as to repayment of the relevant deposits but also in relation to damages suffered by non-supply. If I do not cover its liabilities myself, I will never be trusted in the import/export business again".
8. The financial position of the plaintiffs, and Mr Luo in particular, is relevant to two related questions.
9. The first is whether an order that the plaintiffs provide security would stifle or stultify these proceedings: see UCPR r 42.21(1A)(f). The second is whether the inability of the plaintiffs to provide security is a consequence of the conduct of which they complained in the proceedings: see UCPR r 42.21(1A)(d).
10. It is hard to come to any conclusion as to the second of these factors. That is because there is no evidence before me as to Mr Luo's financial position before he entered into the arrangements of which he complains in these proceedings.
11. However, it does appear that Mr Luo is now in a parlous financial position and will not be able to provide security unless his family and friends provide further financial assistance. In that regard Mr Luo's evidence is that his wife has told him she is not able to borrow any further funds.
12. I do not see Mr Luo's relatives as "standing behind" or "standing to gain" from the litigation as might be said of a litigation funder. No doubt Mr Luo's family members will benefit from a successful outcome of these proceedings, in the sense that Mr Luo will have the means to repay the monies they have lent him.
13. However, I do not see those individuals as having a vested commercial interest in the proceedings of the same kind as a professional litigation funder might have.
14. The defendants have drawn attention to three deposits, totalling $145,000, paid into AusChina's bank account. Each deposit is described in AusChina's bank statement as "Transfer from WEN CHEN NetBank alex chen". The deposits are dated 10 January, 6 February and 16 March 2018. Two of the deposits (totalling $45,000) were used immediately to make a payment to the plaintiffs' solicitor.
15. At the outset of the hearing before me (which took the best part of a day) Mr Cleary, who appeared with Ms Laing for Mr Zhang, made clear that his submission would be that Mr Chen appeared to be an undisclosed funder of this litigation.
16. Mr Brigden, who appears for Windy Hills and Mr Coulter, made the same point in her submissions. It was only then, late in the afternoon of the hearing, that Mr Rayment sought leave to "put on a short affidavit regarding this Alex Chen matter". I refused to grant that leave upon the basis that the security for costs application had by then been on foot for some two months, and its hearing was almost concluded.
17. Shortly before the conclusion of the hearing (at around 4.15 pm) Mr Rayment made what I regard as being an inappropriate attempt to tell me what evidence Mr Luo could have adduced concerning Mr Chen's involvement. I do not propose to take into account what Mr Rayment said about that matter.
18. Mr Rayment did point to the fact that the amount of Mr Chen's deposits ($145,000) is approximately equal to RMB700,000 which is the total of two amounts that Mr Luo said his wife lent him in January 2018. But in his affidavit Mr Luo said that those funds had been used by him "to pay the loan interest to my lenders". Mr Luo did not suggest that the Australian dollar equivalent of those amounts was used to fund payments to AusChina (by Mr Chen or anyone else).
19. The result is that, on the evidence, the deposits from Mr Chen are unexplained.
20. However, on reflection, I do not think I can conclude that Mr Chen is a undisclosed funder of this litigation. Although Mr Luo did not mention Mr Chen in his account of his financial position, he disclosed the bank statements that reveal the deposits from Mr Chen. He also instructed his solicitor to draw the Court's attention to a number of corrections he wished to make to his initial statement of his financial position which suggests he was endeavouring to disclosure the truth about that question. And he was not cross-examined about the matter, although initially required to be available for cross-examination (see [75] above).
21. Overall, I do not see the deposits from Mr Chen as a reason to doubt Mr Luo's evidence that, in effect, an order for provision of security will bring these proceedings to an end.
22. I find that a strong factor militating against ordering security.

Conclusion

1. For these reasons, my conclusion is that the applications for security should be dismissed with costs.
2. In deference to the careful arguments advanced by counsel in relation to remaining discretionary matters raised by Mr Rayment, I will deal with them, albeit briefly.

Are the proceedings defensive in nature?

1. UCPR r 42.21(1A)(e) provides that a matter relevant to whether security should be ordered is whether the plaintiff is effectively in the position of a defendant.
2. Mr Rayment submitted that Mr Luo is, in effect, in that position because Mr Luo paid funds to Windy Hills upon the basis that I have described, that Windy Hills paid away Mr Luo's funds very shortly after they were received and despite the fact that Mr Luo had not received the stock in question that Mr Luo has been forced to commence these proceedings to compel the defendants to account for their conduct.
3. The proceedings can perhaps be described as "defensive" in the sense that they are Mr Luo's response to the conduct of which he complains.
4. But almost all legal proceedings can be so characterised.
5. In my opinion, this rule contemplates a situation where a party commences proceedings to ward off proceedings that that party reasonably anticipates will be brought against him, her or it by the parties named as defendant. I do not see these proceedings having those characteristics. Mr Luo cannot have thought that any of the defendants would commence proceedings against him.
6. I do not see this as a factor relevant to the exercise of my discretion.

The defendants' knowledge of Mr Luo's residence outside Australia

1. Mr Rayment pointed out that it has been held that it may be unfair to order security for costs where the defendants have voluntarily assumed the risk of the corporate plaintiff's financial position: Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103 at [68].
2. Mr Rayment submitted there is no reason why a voluntary assumption of risk associated with dealing with a person ordinarily resident outside Australia should not have the same consequences.
3. But UCPR r 42.21(1)(a) specifies a plaintiff's ordinary residence out of Australia as being one of the matters that, in terms, enlivens the Court's discretion to order security.
4. In those circumstances, I do not see how the fact that a defendant voluntarily enters into commercial and business relationships with such a person is a matter that could weigh against ordering security.

The public interest

1. Mr Rayment pointed to the fact that this case involves international trade between persons and entities in Australia, China, Vietnam and Pakistan and submitted that, accordingly, it is in the public interest that these proceedings be permitted to continue.
2. I do not see the public interest being affected by resolution of these proceedings. This is a dispute between people of commerce who happen to live in different countries and entered a business relationship involving delivery of goods internationally.
3. I do not see this factor as having any relevance to the question of security for costs.

Amendments 02 August 2018 - Representation details corrected DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 August 2018