Luo v Zhai

REASONS FOR JUDGMENT 1 Ms Zhai now applies to me that I should disqualify myself from delivering judgment on the substantive matter which I tried last year in October and on which I became reserved on 26 November 2014 after the close of submissions. The essential basis for the application is that a fair-minded lay observer might reasonably apprehend that I may not bring an impartial mind to the resolution of the issues which I am required to decide: cf. Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344 [6]. It is submitted that an observer of that kind would have such an apprehension because of what occurred during an application made after the trial was concluded by Mr Luo, the applicant, to restrain the first respondent, Ms Zhai, the second respondent, her company Jantom Furniture Pty Ltd ('Jantom'), and various third parties from dissipating Ms Zhai's assets to avoid the consequence of any adverse judgment I might deliver. 2 Before dealing precisely with how this apprehension is said to arise it is useful to understand the nature of both the trial upon which I am presently reserved and of Mr Luo's various attempts to have this Court freeze alleged assets of Ms Zhai's pending delivery of judgment. 3 Mr Luo contracted to buy a share of Ms Zhai's furniture importation business. The furniture was imported from China. Mr Luo and Ms Zhai were acquainted because Mr Luo acted as her agent in Australia. The business was conducted by Ms Zhai through her company Jantom and the sale which was to occur was a sale of Ms Zhai's shares in Jantom to Mr Luo. There was, naturally enough, a share sale agreement which provided, inter alia, for Ms Zhai to provide Mr Luo with Jantom's financial statements and, more importantly, to transfer a number of shares in return for Mr Luo providing Ms Zhai with approximately $1,100,000, or $800,000 as the 'minimum purchase amount'. 4 In the events which transpired, Ms Zhai provided the financial statements to Mr Luo and he gave her $800,000 but she has not given, and now refuses to give, Mr Luo either the shares in Jantom or the return of his $800,000. Mr Luo has therefore sued both Ms Zhai and Jantom for the $800,000 on the basis that Ms Zhai cannot have both the possession and consumption of her cake. This claim was put a number of ways, including that there had been a total failure of consideration: cf. Roxborough v Rothmans of Pall Mall Australia (2001) 208 CLR 516 at 524-526 [14]-[17], 555-558 [101]-[109], 577-578 [165]-[166] and 586-587 [195]-[196]. The defence to that claim was that the failure could not be said to be total because Mr Luo had received the benefit of his receipt of Jantom's financial statements from Ms Zhai and that the $800,000 consideration was not severable as between the shares and the financial statements: cf. Roxborough at 557 [105]. 5 The evidence at trial was taken on 14 and 15 October 2014 but there was insufficient time to hear the submissions which were instead filed in writing by 26 November 2014. After the taking of the evidence was completed but before all of the written submissions were filed, Mr Luo applied for freezing orders against Ms Zhai and a number of other persons because he became concerned that she was attempting to render herself 'judgment proof' by divesting herself of assets. The application was not a happy one and limped from one procedural calamity to the next over three hearing days on 19, 21 and 27 November 2014. Ultimately, I declined on 27 November 2014 to make freezing orders against the third parties Mr Luo had nominated but was persuaded to make them against Ms Zhai and Jantom. The circumstances are set out in my ex tempore reasons on that occasion: Luo v Zhai (No 1) [2014] FCA 1296. 6 On 11 December 2014 I declined a further application by Mr Luo for orders against some of the same third parties, one of whom was resident in Bristol in England: Luo v Zhai (No 2) [2014] FCA 1367. Thereafter, Mr Luo began to explore obtaining injunctive relief in the United Kingdom against the same person and his wife. As part of the undertaking proffered to this Court by Mr Luo to obtain the freezing order against Ms Zhai on 27 November 2014, however, he had promised not to commence foreign proceedings in respect of Ms Zhai's assets. In order to commence his proposed English proceedings Mr Luo, therefore, needed to be released from this undertaking. Following an urgent contested hearing on 9 January 2015, I released him from that undertaking sufficiently to allow the commencement of the English proceedings: Luo v Zhai (No 3) [2015] FCA 5. As I understand it the English High Court has since then restrained the third parties in question from dealing with the contents of a bank account in Bristol with Barclays Bank into which some of what is alleged to be Ms Zhai's money has found its way. 7 Mr McGrath SC who, with Mr Norrie of Junior Counsel, appeared for Ms Zhai put the disqualification application on three bases: (a) during the course of the initial application for freezing orders on 19 November 2014 I had expressed the view that Mr Luo's application had merit and had assisted his counsel in formulating the claim as one based on a fraudulent conveyance under s 37A of the Conveyancing Act 1919 (NSW); (b) in the ensuing reasons for judgment in Luo v Zhai (No 1) I had said that I had seen both Mr Luo and Ms Zhai give evidence at trial and that her solicitor had formed the suspicion that she was seeking to emigrate her assets to the United Kingdom. It was said that from this one might reasonably infer that I had formed an adverse view as to her credit; and (c) in the reasons in Luo v Zhai (No 1) I had also expressed the view that Mr Luo's application had merit and I had rejected Ms Zhai's affidavit evidence that one of the dispositions of money was the repayment of a loan. 8 Applications of the present kind are to be considered in two steps: first, Ms Zhai must identify what it is that might lead me to decide the trial other than on its factual or legal merits; secondly, she must articulate the logical connection between that matter and the feared deviation by me from the course of deciding the case on its merits: see Ebner at 345 [8]. 9 The first step Ms Zhai addresses in (a)-(c) above and is met. She does not, however, satisfy the second step in relation to those matters. Dealing with each in turn: 10 As to (a): the relevant part of the transcript of the hearing on 19 November 2014 is as follows: 'HIS HONOUR: Ordinarily, we have a third party procedure under the rules. You normally join a bank. It's usually the person who gets joined. They get named as a party. Outside the sort of context where you have a stakeholder who's involved and they're just being frozen, as it were, what you really have here, I think, is a prospective case under the Conveyancing Act under section 37 to set aside a voidable transaction because it has been done with the intention of defrauding creditors, which is what that requires. There's a couple of things which seem to follow if that's right: first, although the third party procedure provides for an application to be made against a third party, one view might be that, in fact, you need to proceed substantively against these third parties because what's actually involved is a foreshadowed claim under section 37A of the Conveyancing Act --- MR NORRIE: Yes, your Honour. HIS HONOUR: --- or a foreshadowed bankruptcy of your client with then an application under the provision of the Bankruptcy Act by the trustee for setting aside what would otherwise be a voidable preference under the bankruptcy legislation. So I suppose if that's the correct analysis, then the issue I have to ask myself is whether there's a prima facie case for either of those routes. That's one question. The second question is, is the claim under section 37A within the jurisdiction of this court. I think the answer to that is probably yes, but there are a few twists and turns there. Then in relation to Mr Li, there's the question of whether service has to happen under the Hague Convention and whether I need to be satisfied that the matter is in the Hague Convention before I make orders against him. …' 11 What is being discussed in this passage is just what the mechanics of Mr Luo's claim were. I did not say that Mr Luo had a claim under s 37A. What I said was that it was necessary for me to identify what the ultimate claim against the third parties was and the legal wrong which I was being asked to restrain. I thought there were two potential claims - fraudulent conveyances under the Conveyancing Act and equivalent bankruptcy remedies. On the assumption these were the underlying claims I identified the need for a prima facie case to be shown. I then flagged potential jurisdictional problems with the Conveyancing Act relating to the potential absence of a federal matter together with certain difficulties relating to service out of the jurisdiction. A fair reading of this passage does not reveal that I had determined that Mr Luo's claim had merit. All that this passage reveals is an attempt on my part to put some procedural clarity on what Mr Luo was applying for. 12 There is no logical link between these matters - none of which involve any fact finding - and the issues which arise in the main suit. I reject the ground. 13 As to (b): In Luo v Zhai (No 1) I said this at [7]: 'I had, during the course of the trial, the benefit of seeing both Ms Zhai and Mr Luo in the witness box. The solicitor for Mr Luo is Mr Peng. He has been involved in the dispute with Ms Zhai for some time now. His dealings with Ms Zhai have made him suspicious of her. Consequently, he has taken to monitoring her property holdings by performing periodic title searches.' 14 I do not accept, as was submitted, that the first sentence of [7] can give rise to an apprehension of bias. I have seen both individuals in the witness box - this is an historical fact - and I cannot see that that fact can be a disqualifying matter. Indeed, it was not suggested that it was. I struggle to see how my saying what is plainly the case can be any different. In his oral address, Mr McGrath submitted that [7] might be read by a layperson as suggesting that I shared the suspicions of Mr Peng set out in the fourth sentence. I do not think that it can be reasonably read that way. The paragraph says nothing about my views of the credit of Ms Zhai. 15 As to (c): in Luo v Zhai (No 1) I said this at [19]-[21]: '19 Combined with the distinctly ad hoc appearance of the deed of loan, which I should note the applicant wishes to have forensically examined, and the total absence of evidence of bank records for the loan drawdowns, or any evidence about the nature of Yuan Han or Xiaohua Zou, I think there is more than a good chance that what is involved here is not a loan at all, but an attempt on Ms Zhai's part to remove her assets away from the potential of Mr Luo's judgment, and to do so in a disguised fashion. 20 In the case of Mr Dongsheng Li, the situation is worse. Ms Zhai said that she borrowed 3 million Renminbi on 15 May 2000. A handwritten document, which may be in Cantonese or Mandarin, dated 15 May 2000, was produced together with what was said to be a translation of it. Assuming this is a real document, it records a loan for the amount alleged, but one which is repayable in three years at an interest rate of 10%. 21 Since the loan document is dated 15 May 2000, this suggests a repayment date earlier this century. I do not accept that the amount transferred to Mr Dongsheng Li in October 2014 is plausibly likely to be a repayment of a loan which was repayable over 11 years ago. I draw the conclusion, at least for interlocutory purposes, that there is a respectable case that in truth this transaction is an attempt by Ms Zhai to disburse her assets ahead of judgment.' 16 Again it is important to stress the context of these paragraphs, explicitly stated in the last sentence of [21], that I was concerned with an interlocutory determination of the merits of the proposition that Mr Dongsheng Li was dispersing Ms Zhai's assets to the four winds. I was not determining as a fact that he was: I was determining that the evidence appeared to be strong enough to grant relief pending a substantive application. A fair reading of these paragraphs needs to take into account: (i) their expressly interlocutory nature; (ii) the fact that the only issue before the Court was interlocutory; and (iii) the ex tempore nature of the reasons. 17 Read in that light I see no rational connection between [19]-[21] and the idea that I might determine the issue of whether Ms Zhai had to pay Mr Luo $800,000 for the shares other than on its merits. 18 A variant of the submission relied on the combined effect of (a)-(c) together with the uncertain procedural future of the case. This observation related to the fact that at some stage, unless Mr Dongsheng Li voluntarily surrenders the contents of the Bristol account, Mr Luo will need to sue him. I do not see how the potential existence of such a final proceeding has any impact on my ability to resolve the first case. It is not even entirely clear that it would be in this Court. It may be - depending on what happens with the first case - that I would be unable to hear the second (assuming it was in this Court). But the time when that will be known is not yet at hand. It says nothing about my ability to hear the present case. Ms Zhai's argument leads to the surprising outcome that I cannot hear either case. Whilst I find that proposition personally attractive it is my duty to hear the cases which are assigned to me unless the principles in Ebner are otherwise satisfied. 19 Quite apart from the failure to satisfy the second step in Ebner I would have rejected Ms Zhai's application for another reason. I have tried this case and I have received the parties' submissions. There are real difficulties with the concept of pre-judgment in that context. Although I did not in fact do so, I could have permissibly suggested to Ms Zhai's counsel in argument that I found aspects of either Mr Luo or Ms Zhai's evidence difficult to accept and this certainly would not have created an apprehension of bias. It cannot be different after the trial has been concluded. By that time a reasonable observer would expect the judge to have views. 20 It was for these reasons that I dismissed Ms Zhai's recusal application with costs on 22 January 2015. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.