I delivered my principal judgment in this matter in August last year: Mao v Bao [2021] NSWSC 1096. In order to give effect to my conclusions, accounting calculations had to be undertaken. Those have been completed and this judgment now deals with the remaining issues of quantification. This judgment assumes familiarity with my judgment of August last year, the paragraphs of which are referred to as "J1".
I set out the background to the proceedings at J1 [1]-[19] and the chronology of key events at J1 [36]-[87]. For the purposes of the present judgment, the relevant background and events may be summarised as follows.
Both of the parties are businessmen of Chinese origin. The plaintiff, Mao Duoxiang, has been an Australian citizen since 1998 and lives in Sydney. The defendant, Bao Linchun, obtained Australian permanent residency in 2009 and later lived for a time in Australia. Since April 2011, he appears to have been living back in China.
Mr Mao's claim as plaintiff arose out of a payment of ¥11 million which he made to Mr Bao in China in April 2011. Mr Mao claimed that the payment was a loan and sought judgment for the unpaid amount (it is agreed that a sum of $800,000 was paid off the loan in November 2011), together with interest.
Mr Bao made a cross-claim against Mr Mao. The cross-claim concerned a property at Vaucluse that Mr Mao bought in 2004 with money which had been provided by Mr Bao. The purchase was organised through Mr Mao's ex-wife, Zhang Xiaomei. The property was purchased with mortgage finance of $2.275 million from National Australia Bank ("NAB"). Ms Zhang's mother also lent $200,000 to enable the purchase to be completed.
The property, the loan, and the mortgage were all in Mr Mao's name. Following the purchase, the property was kept available for Mr Bao to use as a home in Sydney (although he seems not to have done so). Mr Bao made regular payments to Mr Mao toward the loan repayments and other costs associated with holding the property, such as Council rates.
In 2007 and 2008, Mr Mao drew sums totalling about $1.59 million down on the mortgage. He used $200,000 to repay Ms Zhang's mother, but applied the rest of the moneys largely for his own purposes. He did not tell Mr Bao about them. He did, however, undertake some calculations, to which I refer in more detail below, splitting the loan principal and interest between his share and Mr Bao's. A full calculation was undertaken up to January 2010, with some partial calculations extending to July 2011.
After November 2011, Mr Bao ceased to make his regular payments. After Mr Mao complained, Mr Bao lodged a caveat over the Vaucluse property claiming that Mr Mao held it on trust for him. But Mr Bao took no further action.
Mr Mao had let the property out, but the rent was insufficient to cover the whole of the loan repayments required by NAB. After a while, Mr Mao stopped making up the shortfall and the property was eventually sold by NAB in May 2014. NAB applied the proceeds of sale ($3.26 million) toward the loan, which then stood at approximately $3.6 million. So far, at least, NAB appears not to have pursued Mr Mao for the balance.
The contention for Mr Bao on his cross-claim (and this was not disputed) was that Mr Mao held the Vaucluse property as trustee for Mr Bao. Although no updated calculation had been done, on any view, the sale proceeds exceeded Mr Bao's share of the loan. To the extent that they did, moneys belonging to Mr Bao had gone to discharge personal liabilities of Mr Mao. Mr Bao sought an account, or equitable compensation, or restitution.
I found that the ¥11 million payment made in April 2011 was indeed, as Mr Mao claimed, a loan. As a result, Mr Bao was liable to Mr Mao for the unpaid principal, together with interest. The interest rate had been agreed at 2% per month.
In Mr Bao's cross-claim, it was alleged that some of the moneys provided in 2004 had been misappropriated. I rejected this claim, but I did conclude that Mr Bao was entitled to have Mr Mao account for the benefit he received from the discharge of the NAB mortgage in May 2014. The calculation of that benefit was to begin from February 2010.
The parties now agree that the amount calculated in accordance with the approach set out in my judgment results in Mr Mao having received a benefit of $2,050,084. Mr Bao, however, contends that he is entitled to judgment in a larger amount, about $3.3 million, said to be the loss suffered by him as a result of the forced sale of the property.
The outcome is that both Mr Mao's claim and Mr Bao's cross-claim have succeeded. The parties agree that there should be a single judgment in Australian Dollars, and, accordingly, that Mr Bao's liability under the loan agreement should be converted from Chinese Yuan to Australian Dollars and set off against Mr Mao's liability to Mr Bao under the mortgage. They are, however, at issue about when the currency conversion, and the set-off, should take place. There are also disputes about the calculation of interest.
[2]
Mr Mao's liability under the Vaucluse mortgage
The payments made by Mr Bao between March and May 2004 for the purpose of the initial acquisition of the Vaucluse property were made through Ms Zhang and are not relevant for this judgment. The financial evidence at trial about the subsequent remittances by Mr Bao; expenditure by Mr Mao on the loan payments and other property expenses; and rental receipts, is summarised at J1 [157]-[173].
It seems that, from time to time (as one would expect), Mr Mao reported to Mr Bao about the state of the account between them. But the only documentary evidence before me at trial consisted of a statement for the twelve months from 1 February 2009 to 31 January 2010 (sent to Mr Bao in February 2010) and two later documents containing partial accounting details provided in June 2010 and July 2011. Those documents are summarised at J1 [175]-[185]. The July 2011 document indicated that a further statement, or statements, in the form of the 2009-2010 statement would be provided, but that never happened.
There was very little witness testimony about the accounting and reporting process. That testimony, such as it was, is summarised at J1 [202]-[209]. After Mr Bao ceased making his payments, Mr Mao complained in several text messages to him. Mr Mao also wrote a letter of complaint to Mr Bao's Sydney solicitor after the caveat had been lodged on the property and Mr Bao had continued not to pay. Those complaints are quoted at J1 [104]-[105].
At J1 [220]-[231] I set out my conclusions from the evidence, which included:
1. Mr Mao's evidence that he made the additional draw downs in 2007 and 2008 (apart from the $200,000 repaid to Ms Zhang's mother which had been borrowed from her in 2004) as security against the possibility of Mr Bao being unable to repay some future loan was difficult to accept, and it was more likely that Mr Mao had simply drawn down those additional funds for his own convenience, so as to use the monies for his own purposes;
2. the evidence did not establish that Mr Mao had expressly disclosed the additional borrowings to Mr Bao;
3. the calculations undertaken so as to prepare the 2009-2010 account (and, inferentially, similar accounts for previous years) undertook a notional division of the NAB loan principal and interest between Mr Bao and Mr Mao;
4. the account did not directly reveal the existence of the additional borrowings, but it would have been possible to deduce from it that the figure shown for Mr Bao's liability to NAB was notional; it was, however, unclear what, if anything, Mr Bao had actually made about that;
5. the evidence did not reveal why Mr Mao decided to let the property out in March 2011, but apparently Mr Bao had been aware of it; and
6. Mr Bao continued to make remittances as requested, up to and including the month of November 2011, but thereafter simply ceased to do so and merely stood by while the NAB took enforcement action.
As already mentioned, I considered that the calculation undertaken by Mr Mao up to 31 January 2010 should be carried forward to May 2014, and the result of this calculation is that Mr Bao's share of the NAB loan liability on that date has been fixed at $2,050,084. Counsel for Mr Bao submitted, however, that there should be judgment against Mr Mao for $3,288,776. That figure represented the total amount which Mr Bao had sent to Australia for the property (that is, the initial purchase contributions and subsequent remittances up to November 2011).
Counsel's starting point was that Mr Mao held the Vaucluse property as trustee for Mr Bao. Counsel submitted that Mr Mao's conduct in borrowing further money for his own purposes under the mortgage was a breach of trust. This had, so the submission ran, resulted in Mr Bao "losing the property" as a consequence of the forced sale by NAB.
Counsel's argument covered some of the same ground as an argument he presented at trial which I rejected at J1 [265]-[268] and [275]. Counsel for Mr Mao submitted that I should not permit that argument to be, in effect, reopened. But I have not given final judgment and I prefer not to shut Mr Bao out if there is a possibility that I can save time in the event of an appeal. I have, therefore, reconsidered the question.
As already mentioned, the parties agreed that Mr Mao had been the trustee of the property for Mr Bao. But, if the arrangement involved a trust, it also had additional features. Mr Bao had his own obligation to cover the holding costs of the property. And he had no right to a transfer of the property without first paying off the funds borrowed on his account from NAB. Otherwise, all he could have done would have been to require Mr Mao to sell the property and account to him for the proceeds. That was how I analysed the situation in last year's judgment (see J1 [263]-[264]) and I did not understand it to be in dispute for present purposes.
Mr Bao was, thus, not in the position of being merely a passive beneficiary. Indeed, it might be more accurate to characterise Mr Mao as a fiduciary agent, rather than a trustee in the strict sense. It must be remembered that Mr Mao was the legal owner of the property, the legal borrower, and the legal mortgagor. I think that there is a question as to whether it was of itself wrongful for Mr Mao to draw further money down on his own account under the mortgage.
The effect of the calculation which has now been undertaken is that Mr Mao will bear his own share of the NAB borrowings and interest. Mr Bao will suffer no direct loss from Mr Mao's additional borrowings. If those borrowings were wrongful, the question is whether he has suffered some form of indirect loss.
As noted at J1 [208], there was no evidence about what Mr Bao made of the accounting documents provided to him. What is clear is that Mr Mao explicitly warned Mr Bao in December 2011 that continued failure to make remittances would result in a forced sale, which would, given the state of the property market, result in a "huge loss" (J1 [104]).
In March 2012, Mr Mao asked Mr Bao, through his solicitor, to pay off "my bank loan of $2 million" (J1 [105]). At the time, the actual loan balance was over $3 million (see J1 [78]), so that all Mr Mao appears to have been asking was that Mr Bao pay his share of the loan. Assuming that Mr Bao was unaware of the additional borrowings by Mr Mao, that would have been how it appeared to him also, but he took no action. And at the same time, Mr Bao's caveat blocked any dealing with the property, including its sale.
It was for these reasons that I said in last year's judgment that Mr Bao could not complain that, in those circumstances, Mr Mao effectively threw up his hands and allowed NAB to sell the property. But counsel for Mr Bao submitted, by reference to the calculations undertaken by the parties to partition the mortgage debt, that the rent Mr Mao was receiving would have been enough to discharge Mr Bao's share of the liability under the mortgage. The suggestion, as I understood it, was that the continuation of the arrangement would have been viable but for Mr Mao's additional borrowings.
This argument did not take into account any tax which would have been payable if Mr Mao's borrowings had been paid off and the rent exceeded the interest on Mr Bao's residual share of the debt. Nor did it take into account any requirement NAB might have had for repayments of capital. Nor was there any evidence from Mr Bao that he was interested in the arrangement continuing on such a basis.
I also think that the argument is unsound for a broader reason. Mr Bao had refused to pay off his share of the loan. He had also, in effect, blocked the sale of the property. What other choice was there? I do not think that Mr Bao was entitled effectively to require Mr Mao to take active steps to manage the property, indefinitely, for Mr Bao's benefit.
Furthermore, the figure claimed by Mr Bao is, on any view, incorrect. The remittances by Mr Bao represent not only the capital cost of purchasing the property, but also interest and other holding costs on revenue account. And even if they were limited to payments on capital account, the true measure of damages has nothing to do with what Mr Bao paid for the property.
The loss instead represents the difference between what the property fetched at market and what it was actually worth. If there was any difference between what the property fetched and what it was worth, the evidence did not reveal it. Alternatively, it might have been possible for Mr Bao to mount the case that he would have retained the property and benefited from a later improvement in its market value, but there was no evidence whatsoever to support any such claim.
For these reasons, I reject counsel's contention. Mr Mao's liability under the Vaucluse mortgage is limited to the $2.05 million calculated by the parties as his share of the mortgage debt.
Counsel for Mr Bao also argued that if, contrary to his principal submission, the mortgage liability was to be set off as at the date of judgment, then Mr Bao had incurred further loss attributable to Mr Mao's default under the mortgage, in the form of the interest differential between the loan liability and the mortgage liability from May 2014 onwards (see [48] below). On the view which I have taken on the set-off issue, this question does not arise for consideration, and I need say no more about it.
[3]
Money of account
As I have mentioned, the April 2011 loan was made in Yuan. A question arises as to whether the money of account under the loan was Yuan (as Mr Mao contends) or Dollars (as Mr Bao contends).
The loan agreement was an oral one. On the evidence before me, agreement in principle was reached at a conversation which took place between Mr Mao and Mr Bao on 30 March 2011 at the office of Mr Bao's solicitor. The amount to be lent was settled in the course of a telephone conversation between Mr Mao and Mr Bao on the following day.
In July 2011, Mr Mao prepared a formal agreement recording the terms of the April loan. This was never signed, but it is some evidence of what the original oral agreement was. The subject was also referred to in several texts sent by Mr Mao to Mr Bao later in the year. This documentary evidence is summarised at J1 [98]-[105]. Mr Mao's versions of the conversations on 30 and 31 March are quoted at J1 [106]-[110].
Counsel for Mr Bao identified a number of factors which, he submitted, pointed toward the Dollar as the currency of account. The lender, Mr Mao, was ordinarily resident in Australia. The loan agreement was made in Australia. And it came about as a result of a request by Mr Bao for funds to complete a property development at Harris Park in Sydney.
But there are countervailing considerations. Although the loan agreement was made in Australia, the money was actually advanced in Yuan from a bank account of Mr Mao's in China to Mr Bao's bank account. Both men appear to have been in China at the time of the advance.
Furthermore, in August, when Mr Mao was chasing repayment, he suggested that Mr Bao make a repayment of ¥7 million (presumably in China) for use in a Chinese business venture of Mr Mao's (J1 [102]). All of this suggests that the loan was, from Mr Mao's point of view, a Chinese venture. And the draft agreement prepared by Mr Mao expressly stated that Mr Bao had promised to repay the loan in renminbi (yuan) (J1 [100]).
At the time of the loan agreement, Mr Bao was actually involved with two property developments in Sydney. The evidence was not entirely clear as to whether the money was requested for the Harris Park development or the other one (J1 [109]-[110]). The Harris Park development was being conducted by Mr Bao through a company, ("GTIG"). At trial, it was argued that the loan agreement was between Mr Mao and GTIG, but I rejected that argument, noting that GTIG was not referred to at any point during the negotiation (J1 [239]-[241]). There was no term of the loan agreement which required the moneys to be applied to the Harris Park development (or the other development). If Mr Bao did in fact apply the moneys in that way, that was entirely his own decision.
Counsel for Mr Bao pointed out that the dealings concerning the Vaucluse property, which counsel characterised as involving breaches of trust by Mr Mao, took place in Australia. Counsel also submitted that, given the movement in the exchange rate and the high interest rate on the loan, if the money of account were Yuan, then that would increase the loss suffered by Mr Bao from Mr Mao's misappropriations. I have already indicated that this possibility does not arise. But I consider that it is anyway irrelevant to the present issue. The determination, as a matter of construction, of the money of account on the loan cannot depend upon the rights and wrongs of other transactions between the parties.
In my view, the fact that the loan agreement was made in Australia by an Australian resident is outweighed by the other factors I have mentioned. I conclude that, on the proper interpretation of the loan agreement, the money of account was Yuan.
[4]
Interest for April 2011
The next issue between the parties concerns the calculation of interest. The calculations undertaken on Mr Bao's behalf calculated interest as accruing on the eleventh of each month, representing the date on which the initial payment was made. The first monthly interest was, thus, due on 11 May. For Mr Mao, interest was calculated to the first day of the month, and the first interest payment was, thus, due on 1 May. Under Mr Mao's calculation, a full month's interest was charged for April 2011, even though the loan was not made until 11 April.
None of the written evidence bears directly on the issue. Mr Mao's version of the conversations of 30 and 31 March records that interest was to be paid "per month" and repayment was required "on or before" 1 August 2011. The likely explanation for the problem is that the loan agreement was finalised on 31 March, but, for some reason, the actual advance was delayed to 11 April. That delay is not explained, and was presumably the subject of some discussion between the parties which was not the subject of any evidence.
Be that as it may, it is clear on the evidence that Mr Mao stipulated for monthly interest, payable on the first day of the following month. This means that the first payment was due on 1 May, which is almost a month after the loan agreement was made. But it does not follow that it was part of their agreement that Mr Bao would be required to pay interest for every month "or part thereof" as is claimed in Mr Mao's Statement of Claim.
The apportionment of rent and other income is addressed in s 144(1) of the Conveyancing Act 1919. That section provides:
All rents, annuities, dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly.
This enactment does not directly apply to interest, but acknowledges the existence of a pre-existing rule for the accrual of interest on a day-to-day basis. No doubt, that is subject to any contrary agreement by the parties, but, in the present case, there is no such agreement in the evidence. In my view, interest only began to accrue when the loan was made on 11 April and the first interest period was therefore only 20 days.
[5]
Date of set-off
Counsel for Mr Mao contend that the set-off between Mr Bao's liability under the loan and Mr Mao's liability to account to Mr Bao under the mortgage should take place as at the date of judgment. For his part, counsel for Mr Bao contended that it should take place as at the date on which the Vaucluse property had been sold (the NAB account was not closed off until 27 May but counsel for Mr Bao proceeded on the basis that 5 May was the relevant date and no point was taken about this). The significance of this was, of course, that the interest rate under the loan (2% per month) was much higher than the Court interest rate which (so the argument for Mr Mao assumed) would be applicable to Mr Mao's mortgage account liability. Mr Mao would also be benefited by the depreciation of the Dollar since May 2014.
There is a statutory right of set-off under s 21 of the Civil Procedure Act 2005. But it appears to be common ground between the parties that this right of set-off arose as at the date of judgment. Rather, counsel for Mr Bao relied upon an equitable right of set-off.
The Court's power to award pre-judgment interest under s 100 of the Civil Procedure Act involves discretion both as to the rate of interest and the date from which it accrues. But counsel for Mr Mao emphasised that Mr Mao was enforcing a contractual entitlement to interest. This falls entirely outside s 100: see s 100(3)(b).
Seen in this way, the claim for interest might have attracted further questions. If interest is compensation for the agreed time value of money, could Mr Mao really maintain the claim when he had Mr Bao's money in his possession? And even if some sort of formal appropriation were required, then had Mr Mao failed to mitigate his loss? But these points were not debated, and, having regard to my decision on the equitable set-off point, it is not necessary to go into them.
It was common ground between the parties that an equitable set-off depends on whether Mr Mao's obligation under the mortgage account impeached his entitlement to claim payment (and interest) under the loan. I was not referred to any authorities specifically in point, and have therefore approached the question as one of principle.
As already noted, the arrangement about the Vaucluse mortgage imposed obligations on both parties. Having failed to cover the costs, or give Mr Mao any instructions, Mr Bao could not complain about Mr Mao throwing up his hands and allowing the bank to sell the property. But, once the property was sold, Mr Bao's obligations came to an end. Mr Mao had received Mr Bao's money and was a fiduciary in respect of that money. The amount due to Mr Bao was capable of precise calculation in accordance with the method Mr Mao had already used.
In those circumstances, Mr Mao had an obligation immediately upon sale of the property to account to Mr Bao for his share of the proceeds, or at least to apply the moneys to Mr Bao's best advantage. That was an affirmative obligation which did not depend upon a request by Mr Bao. Mr Mao did not comply with it, and appropriated Mr Bao's money to himself. In my view, he cannot be heard to say that the money he appropriated should bear interest at court rates while he maintains a claim for interest on moneys owing to him by Mr Bao at a far higher commercial rate.
In my view the requirements of an equitable set-off are met. The set-off (and the currency conversion) should be undertaken as at 5 May 2014.
[6]
Conclusions and orders
I have concluded that:
1. Mr Mao's liability under the Vaucluse mortgage was $2,050,084 as at 5 May 2014;
2. the set-off between Mr Mao's liability to Mr Bao under the mortgage and Mr Bao's liability to Mr Mao under the loan agreement is to be undertaken as at that date;
3. for this purpose, Mr Bao's liability under the loan agreement is to be calculated on the basis that the money of account was Chinese Yuan;
4. the interest payable for the first month of the loan is twenty days' interest only.
I will adjourn these proceedings for a short time to allow the parties to bring in a minute of order providing for judgment in accordance with these reasons.
The orders of the Court are:
1. Adjourn the proceedings to 9:30 am on 16 December 2022 or such other time as may be arranged with my Associate.
2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.
[7]
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Decision last updated: 12 December 2022