Plaintiff v Defendant

AGENCY - Whether the director of ANB acted as the agent of FLC in the sale by FLC of its shares in U&D in providing fraudulent report to Yima and the valuer.

AGENCY - Director of ANB acknowledged receipt of outstanding purchase price due to FLC - Whether director acting as agent for FLC - Whether FLC bound by actions of director of ANB.

RECEIPT AS A VOLUNTEER - Moneys transferred by KQ to U&D to be paid by U&D to FLC - Director of ANB, that provided fraudulent report, misappropriated moneys paid by KQ for the purchase of the shares from FLC - Director paid the misappropriated moneys to his former wife and former intimate friend - Proceedings by U&D to recover moneys misappropriated from former wife and former intimate friend.

CORPORATIONS - Alleged breach of director's duties.

For Australia Kunqian International Energy Co Pty Ltd

1 This case concerns the purchase by a Chinese company of shares in an Australian company (U&D) that owns a coal tenement in Queensland. In the first proceeding (the 'share-sale proceeding'), the vendor of the shares claims that it has not been paid the full purchase price. The purchaser claims that the vendor procured the sale through a fraudulent report on the coal tenement. The purchaser raises other defences to the vendor's claim. In addition, moneys transferred to U&D by its parent company were misappropriated. The second proceeding (the 'tracing proceeding') involves an attempt to recover those moneys from the recipients of the misappropriated moneys.

2 EPC 818 is a coal-mining tenement in the Bowen Basin in Queensland. The tenement extends for some 44 square kilometres. In 2011, Mr Yinan Zhang devised a plan to buy the tenement and to sell it, or a part of it, immediately to Yima Coal Industry Group Co Ltd ('Yima') at a significant profit. Yima is a Chinese, government-owned, coal-mining company. The first step in Mr Zhang's plan was to interest Yima in purchasing an interest in the EPC 818 tenement, which he did. As a result, in about June 2011, Yima sent a delegation to Australia to assess the tenement. Subsequently, Mr Zhang incorporated a company, U&D Mining Industry (Australia) Pty Ltd ('U&D'), to buy the tenement. U&D issued 40 per cent of its shares to Flash Lighting Company Ltd ('FLC') (the plaintiff) and 60 per cent to Daton Group Australia Ltd ('Daton Australia'). Mr Xiao and Madam Cui controlled FLC. Mr Zhang controlled Daton Australia. The name of Daton Australia was later changed to ANB.

3 Mr Zhang arranged for ANB to sell 11 per cent of the shares in U&D to Australian Kunqian International Energy Co Pty Ltd ('KQ') (the defendant in the share-sale proceeding), a wholly owned subsidiary of Yima, that was incorporated specially to buy the shares in U&D. FLC agreed to sell its entire 40-per-cent holding in U&D to KQ. The agreement between FLC, ANB, and KQ for the sale and purchase of the shares in U&D was called the equity transfer agreement ('ETA'). The price of the shares in U&D was to be fixed by a valuer appointed by Yima's parent company, State-owned Assets Supervision and Administration Commission of Henan Province ('Henan SASAC'). Henan SASAC is a Chinese regulator of Chinese state-owned enterprises.

4 FLC alleges that under the ETA, KQ agreed to purchase FLC's 40-per-cent shareholding in U&D at the price of $51.6 million ('FLC purchase price'). FLC alleges that KQ also agreed to acquire ANB's 11-per-cent shareholding in U&D at the price of $14.19 million ('ANB purchase price').

5 FLC alleges that after KQ, ANB, and FLC signed a co-operation funding agreement, KQ paid a deposit of $5 million to U&D. After the signing of the ETA, the $5 million deposit would convert into the equity transfer payment.[1]

6 FLC alleges that under the ETA, KQ was to pay the remaining $60.79 million of the equity transfer price to ANB and FLC within 20 days of the time that the ETA enters into force.[2] The $60.79 million just referred to comprises the FLC purchase price (ie the $51.6 million) and the ANB purchase price (ie the $14.19 million) less the deposit of $5 million. FLC alleges that on or about 8 May 2012, in accordance with the ETA, FLC transferred its shares in U&D to KQ.

7 FLC alleges that, pursuant to the terms of the ETA, KQ was required to make payment to FLC of the FLC purchase price by no later than 8 May 2012. FLC alleges that on or about 17 September 2012, FLC received payment of $5.4 million from U&D as part-payment of the FLC purchase price. Subsequently, on or about 18 September 2012, FLC received the further payment of $17 million from U&D as part-payment of the FLC purchase price.

8 The balance of the purchase price is $29.2 million. FLC alleges that KQ has not paid the balance of the purchase price to FLC, and that the failure to pay is wrongful and in breach of the ETA. FLC makes no allowance in its claim for the conversion of the $5 million deposit into the share transfer payment.

9 KQ raises several defences and set offs to the claim of FLC. KQ also counterclaims against FLC, Mr Hao Liu (a director of KQ), Mr Jun Xiao (the part-owner of FLC), and Mr Zhang.

10 KQ denies that it has not paid the balance of the moneys due to FLC. KQ alleges that, on or about 18 September 2012, Mr Xiao signed a receipt confirming that FLC had received $51.6 million from KQ for the transfer of 40 per cent of the shares in U&D.

11 KQ claims the geological report contained false information, including making false estimates of deep reserves of coal of 1.3 billion tonnes.

12 KQ alleges that the valuer who was to fix the price under the ETA was misled and deceived by a false geological report that Mr Zhang prepared and provided to the valuer.[3] KQ alleges that the Yima board relied on the valuation in authorising and directing KQ to purchase the U&D shares at the price determined by the valuer. KQ also alleges that Henan SASAC relied on it when they approved KQ's acquisition of 51 per cent of the shares in U&D.

13 KQ alleges that it has suffered loss and damage because of FLC's alleged misleading or deceptive conduct. The conduct alleged to be false or misleading is the provision of a false geological report. KQ alleges that its loss and damage is the amount it paid for the shares, as the shares were worthless.

14 FLC denies providing the false geological report. It further denies that KQ, Yima, and Henan SASAC were misled or deceived. It further denies that KQ, Yima, and Henan SASAC relied on the geological report, whether it was false or not.

15 KQ also alleges that ANB and FLC breached the ETA and the co-operation funding agreement by providing the false geological report. FLC denies the breach and says that if there was a breach then no damage was suffered by KQ.

16 There is no dispute that Mr Zhang misappropriated from U&D $29.2 million of the moneys that KQ transferred to U&D. U&D was to have used these moneys to pay FLC for the balance of the purchase price that KQ owed to FLC. The misappropriated moneys have been traced to Wei Kun Pty Ltd ('Wei Kun') and Yi Kun Pty Ltd ('Yi Kun'). These companies are trustees of family trusts that were established for the benefit of Mr Zhang's former wife, Ms Beibei Zhu, and their children. The moneys have also been traced to Australia Wales Financial Management Pty Ltd ('Australia Wales'). Ms Lidan Wang controls Australia Wales. She is a former intimate friend of Mr Zhang. Since the hearing concluded, Australia Wales has gone into liquidation.

17 KQ has counterclaimed against FLC, Mr Hao Liu, Mr Jun Xiao and Mr Yinan Zhang. Mr Hao Liu was a director of KQ. Mr Jun Xiao is one of the two directors and shareholders of FLC.

18 In its counterclaim against Mr Liu, KQ alleges that Mr Liu, on behalf of KQ, signed an instruction addressed to the Bank of China requiring the bank to transfer $70 million from KQ's bank account to U&D for purposes including the discharge of the FLC purchase price, and that amount was paid to U&D.[4] KQ alleges that Mr Liu contravened his duties as a director of KQ. The case against Mr Liu was not pressed before me.

19 Subsequently, FLC issued separate proceedings against Mr Zhang and U&D.[5] In the tracing proceeding, FLC alleges that $29.2 million of the $70 million, transferred from KQ's account with the Bank of China to U&D on Mr Liu's instructions, was held on trust for FLC.

20 After the tracing proceeding was issued, KQ amended its defence and counterclaim to the share-sale proceeding to allege that by reason of the trust alleged by FLC, FLC has been paid the balance of the purchase price for the shares in U&D.[6]

21 At the trial, FLC submitted that the claims it makes in the tracing proceeding are alternative claims to the claims made by FLC in the share-sale proceeding. FLC said that it did not seek to recover both. FLC said that it either sought to recover $29.2 million from KQ, or FLC sought to recover the claims made in the tracing proceeding.[7]

22 In the tracing proceeding, FLC makes claims against U&D and the recipients of the misappropriated moneys. U&D in the tracing proceeding also makes claims against the recipients of the misappropriated moneys.

23 For the reasons given below, I have found that the moneys were not held on trust for FLC as alleged in the tracing proceeding, and FLC's claims in the tracing proceeding therefore fall away. Nevertheless, the tracing claim of U&D remains on foot.

24 Although the Court heard the proceedings together, I will divide the judgment into two, dealing first with the share-sale proceeding and then with the tracing proceeding.

25 Mr Songying Li is a senior geologist whom Yima employed. As will be discussed below, Mr Songying Li was provided with the geological report when he visited Australia to assess the tenement in about June 2011. When Mr Songying Li returned to China, he reported to Yima that he had received a geological report and that it was unreliable. He also prepared a written report and a summary report.

26 The geological report on the tenement EPC 818, given to Mr Songying Li, has been referred to differently by KQ and FLC. The report was headed as a Coal Assessment Report (the 'CRA Report'). There were two versions of the CRA Report. The first version is the report given to Mr Songying Li in July 2011 and subsequently to the valuer in 2012. The second version was one given to the valuer in 2012 that had an extra page attaching the signature of Richard Smith as the purported author of the report.

27 FLC refers to the first version of the report as the 'Report' and the second version as the Smith Report. KQ refers to both versions of the report as the 'Smith Report.' To avoid confusion, I consider that it is appropriate to reserve the appellation of the Smith Report only for the version which bears the purported signature of Richard Smith. Otherwise, the Coal Resource Assessment Report shall be referred to as the 'CRA Report.'

28 I propose to address the relevant oral evidence given on behalf of both FLC and KQ. To understand the oral evidence, it is first necessary to outline the relevant events. This is best done by addressing the documentary trail of the relevant events and the relevant agreed facts.

The relevant train of events leading to the purchase of shares in U&D

29 In discussing the relevant train of events and resolving the claims made by KQ, I often find that a reasonable and plausible inference of a fact arises from the evidence and make the observation comment that KQ has not dispelled the inference.

30 By so finding, I should not be taken to be finding that the fact inferred has been established on the balance of probabilities. Rather, I am identifying reasonable and plausible inferences that arise from the evidence, as they ultimately bear on whether or not I am satisfied with the case pleaded by KQ, and in particular, whether I am satisfied that the board of Yima, Henan SASAC and the valuer were misled as alleged.

31 The parties have agreed upon many of the relevant events, and I will cite these as 'agreed events', and number them according to the document of agreed events marked for identification during the trial. I turn to the relevant train of events.

32 Mr Yulu Wu was the chairman of Yima. In April or May 2011, Mr Zhang raised with Mr Yulu Wu the possibility of Yima purchasing the EPC 818 tenement. Mr Zhang was introduced to the chairman by Mr Wei Liu, a former director of Yima. Mr Wei Liu plays an important part in the purchase of the tenement, but why he was involved and what he was up to remains a mystery, like so many aspects of the purchase.

33 I infer from Yima's later conduct that Yima was interested in the proposition. Consequently, in about June 2011, Yima sent a delegation to Queensland to prepare a report about the EPC 818 tenement. The delegation comprised Mr Songying Li, Mr Yuantao Zhai, Mr Yu Li, and Mr Dongsheng Wu of Yima. Mr Wei Liu was also present at the tenement inspection. Only Mr Songying Li gave evidence on behalf of KQ.

34 Mr Songying Li was a senior and experienced geologist engineer employed by Yima. Mr Zhai was at that time chief executive officer of Yima and a director of Yima.[8] Mr Dongsheng Wu was both the chief financial officer and a director of Yima.

35 It is not clear who hosted the delegation. It was probably Mr Zhang or someone he nominated.

36 A representative of the vendors provided Mr Songying Li with information about the EPC 818 tenement, which included a copy of a document headed 'Coal Resource Assessment Report' (ie the CRA Report). The CRA Report bore the heading of 'U & k Resources (Australia) Pty Ltd.' It was dated 20 August 2010. At that stage, U&D had not been incorporated. It was incorporated later in 2011.

37 The CRA Report was said to be authored by the 'Project Team for the Coal Resource Assessment in the Bowen Basin, Australia.' The CRA Report was on a USB drive given to Mr Songying Li while he was in Australia. Mr Songying Li could not recall who gave him the USB drive.[9]

38 After inspecting the tenement in Australia, Mr Songying Li prepared a written report for Yima. In this report he detailed the significant inadequacies of the CRA Report's assessment of the coal reserves in the EPC 818 tenement. In this report Mr Songying Li also advised Yima that the CRA Report could not be relied on to assess the coal reserves of the tenement. Mr Songying Li described his report as a 'due diligence report.' Mr Songying Li also produced for Yima what he called a summary of his due diligence report, which I will discuss later.

39 In about July 2011, Mr Songying Li presented to a meeting of the Yima management committee an oral report on the CRA Report, and he read to the meeting from his due diligence report. Those present at the meeting included Mr Yulu Wu (the chairman of Yima), Mr Yuantao Zhai (the chief executive officer of Yima, and companion of Mr Songying Li to Australia), Mr Fujun Tian (the deputy chief executive officer), and Mr Li Yong Jiu (the Deputy Chief Executive Officer of Yima and a director of Yima).[10]

40 The evidence about who else was present at the management meeting is not clear. Of the six directors whom Mr Li Yong Jiu (the only director of Yima to give evidence) spoke to before preparing his witness statement, only Mr Yuangui Fan was not a member of the management committee.[11] The other five directors were members of the management committee as well as being directors. Mr Li Yong Jiu could not remember whether the five directors were present at the management committee meeting when Mr Songying Li gave his presentation.[12]

41 Mr Songying Li's due diligence report plays a significant part in FLC's claim that Yima did not rely on the CRA Report nor the valuer's report in authorising and instructing KQ to purchase shares in U&D. Despite Mr Songying Li's due diligence report being a critical piece of evidence, KQ did not discover Mr Songying Li's due diligence report before the trial began. Mr Li Yong Jiu, who was responsible for obtaining documents to be discovered on behalf of KQ, discovered the due diligence report during the trial.[13] Mr Li Yong Jiu agreed in his evidence that minutes of the management committee meeting at which Mr Songying Li presented his report should exist. However, KQ failed to discover these minutes.

42 During Mr Li Yong Jiu's evidence (which I address below), he repeatedly referred to the due diligence report as a 'preliminary report'. FLC says that the report has been characterised as a preliminary work by KQ in order to downplay its significance.[14] Mr Li Yong Jiu's oral evidence was inconsistent with the evidence he gave in his witness statement, where he referred to the report under the heading 'preliminary due diligence.'[15] FLC says that the description 'preliminary' was only added during the trial when the significance of the due diligence report was challenged by KQ.[16]

43 In the due diligence report, Mr Songying Li starts his introduction on coal measures (coal seams) stating, 'According to the material provided by the U&D Mining Industry (Australia) Pty Ltd EPC 818 exploration area consists of four coal measures all formed during the Permian period.' The 'materials provided' by U&D, which go to the quantity and quality of the coal, or the measurement of the coal, referred to by Mr Songying Li, is the CRA Report.

Details of Mr Songying Li's criticisms of the CRA Report

44 In the due diligence report, Mr Songying Li refers several times to the unreliability of the information in the report he received in Australia. There are 10 instances of his mentioning the unreliability of the information.

45 There is no dispute that when Mr Songying Li inspected the tenement, only one exploratory borehole had been carried out in the tenement. The borehole drilling ascertains the content of the bore at the different levels of the bore. As discussed below, the evidence established that whether a seam of coal as shown in the borehole sample continued throughout the tenement would require 100-200 boreholes to be drilled over the whole tenement.

46 First, Mr Songying Li says, 'With data of only one borehole and in the absence of coal seam structure information. It is unattainable to comprehensively evaluate the feasibility of mining and resource quantity of coal seams in the coal measures.'[17]

47 Secondly, Mr Li said: 'In the absence of more detailed information, including the thickness and variation of each coal seam, parting band conditions, coal quality etc., proper evaluation cannot be made.'[18]

48 One can infer from this component of the report that the management committee was informed that the information that Mr Li was using in his due diligence report came from only one borehole. As experienced miners, I have inferred from the evidence discussed below, that the committee would have realised themselves that the forecasts based on only one borehole, were not a reliable basis to make an estimate of the coal resources of the tenement. As mentioned above, and discussed further below, to properly assess the deep-coal resources at the tenement, some 100-200 boreholes would have been required, and this was well known to anybody involved in coal mining.

49 As discussed below, the evidence establishes that the board of Yima was aware that no further boreholes had been drilled at the tenement when the board of Yima decided to proceed with the purchase of shares in U&D. A reasonable and plausible inference arises that the board of Yima therefore knew that any estimate of the deep-coal reserves of the tenement was entirely speculative, that the CRA Report did not provide a reliable estimate of the deep-coal reserves at the tenement, and that the CRA Report or the valuer's report could not be relied upon by the board.

50 Thirdly, in a table titled 'General Information of Coal Seams' in the tenement, Mr Songying Li said that the information in respect of the Moranbah seam lacked detail. Mr Songying Li said, 'Based on this data and accumulated coal seam thickness of single borehole and whole region, method improper.' Besides that, he observed that it had 'no exploration value.'

51 Fourthly, Mr Songying Li said, 'Analysis of the English and Chinese materials provided has indicated that the calculation of resource quantity is obviously inappropriate, mainly reflected in the following aspects.'[19] Further Mr Songying Li says that 'the estimated quantity of 100 Mt for the deep-seated resources is obviously defective.'[20]

52 Fifthly, Mr Li said, after referring to the fact that there is only one government borehole in the area: 'Therefore, it is obviously unconvincing to include the total exploration area of 44.5 km square into the calculation.'

53 Sixthly, Mr Li said, 'Coal resources in the two, deeper coal measures were calculated using data of just only one borehole or data area outside the region, which is inappropriate.'[21]

54 Seventh, Mr Li said, 'Some thickness figures were borrowed from regional data (or data of single borehole) with low reliability, there is a lack of information on the thickness, variation of coal seams, such as maximum thickness, minimum thickness, average thickness, recoverable index and other coefficients, all of which are very important in mining.'[22]

55 Eighthly, Mr Li said in his due diligence report that:

The calculation method, process and parameter selection for the reserves calculation are not provided, and there are some errors in the calculation. Based on the back-calculation, the total area of EPC 818 is 44.5 square kilometres, was used when calculating coal resources in the Fort Cooper Coal Measures, in spite of the fact that there are extensive outcrop denudation areas and areas intruded and ravage by volcanic activities. With regard to the resources of the Rangai Coal Measures, simple analogy calculation would be inappropriate in the absence of necessary information such as the area of precisely surveyed region.'[23]

56 The ninth and tenth criticisms are in Mr Li's concluding observations:

1. According to the existing data provided and the open-pit mining conditions in several surrounding coal mines overlooked from a helicopter, the occurrence situation and mining conditions of coal seams in this section are not very good, even in China the resource conditions would only rank medium level. In addition, with regard to open-pit mining, the degree of exploration still appears insufficient, further hole arrangement and exploration are still needed. Since there are multiple layers of coal which are mainly thin coal seams, and that a considerable number of coal seams have splitting and folds developed, the mining conditions are complex. Therefore, for the moment the deep part of this area is not suitable for underground mining.

2. There is a lack of details regarding the resource conditions, so further relative information is still needed. The exploration degree in deep-seated coal seams and deep areas is relatively low, and the resources are difficult to estimate at present. Only after further exploration can the resources, mining conditions and development prospects be evaluated.

57 I am satisfied that the oral report that Mr Songying Li gave to the management committee of Yima would have covered the substance of these criticisms of the CRA Report. Mr Songying Li struck me as a careful and methodical man who would have ensured that the management committee fully understood that the information supplied by U&D on the coal resources at the tenement was unreliable and the reasons why it was unreliable.

58 One would have expected that the chief executive officer and board director, Mr Yuantao Zhai, who accompanied Mr Songying Li to Australia, to have also given a report, either oral or in writing, to his fellow board members or some of them on his observations on the tenement. KQ did not call Mr Zhai. KQ did not call any evidence, either oral or written, to establish whether or not Mr Zhai was given the CRA Report, saw the CRA Report, or read the CRA Report. KQ led no evidence as to whether or not Mr Zhai had any and what discussions with his fellow board members on this inspection of the tenement and his assessment of the proposed investment. I find it is a reasonable and plausible inference, however, that Mr Zhai was given the CRA Report when he was in Australia. KQ did not dispel that inference.

59 The parties agree that Mr Songying Li also provided to the Yima management committee what is called a summary document. The summary document does not summarise Mr Songying Li's due diligence report. Rather, it is a calculation of coal reserves based on two assumptions, which assumptions, his due diligence report made clear, had not been established by the material given to him in Australia. As discussed above, the main criticism of the material provided to Yima in Australia was that it relied on only one borehole and the information from that one borehole itself was not verified.

60 The assumptions in Mr Songying Li's summary calculation were that information from the one borehole was reliable and secondly that seams disclosed by the results of the one borehole extended evenly over the whole of the 42-square-kilometre tenement. On these non-established assumptions, the summary calculated deep-coal reserves of 700 million tonnes.[24] Mr Li gave considerable oral evidence on the summary which is discussed below.

Calculation of Resources

According to report that the stripping ratio of less than 15:1, there are 30 million tons of resources available for open-pit mining; we believe that: open-cut coal seams are in poor conditions, the value of mining is not good. According to the report, the resources of all the coal beds 800m shall be 1.5-2.0 billion tons. We think: According to the data provided in both English and Chinese, the amount of resources is obviously over calculated [sic]. The Moranbah coal measures three layers thick Coal seam (2.62m; 5.33m; 3.50m). However, only one borehole revealed that if the information provided is reliable, the coal seam is stable and has the potential of well production. The estimated resources of the 3-layer coal are respectively 160 million ton, 330 million ton, 210 million ton; a total of about 700 million ton.

62 Mr Songying Li's summary is an important document. It confirmed to the management committee of Yima that Mr Songying Li was taking the information he used in the summary from a 'report' that he had received.[25] This is relevant to the issue that the reasonable and plausible inference that arises from the evidence, is that the board of Yima was aware that the only source of information on coal reserves of the tenement was from the information that had been provided to Mr Songying Li and which he had found to be unreliable. KQ did not dispel that inference.

63 After receiving Mr Songying Li's report, the management committee appointed Mr Hao Liu to investigate the tenement investment opportunity, head the due diligence into the tenement and to establish, and operate, a company in Australia that could be used as the investment vehicle.[26] In that role, Mr Hao Liu was to report his findings to Yima and keep Yima updated about the tenement and the feasibility of the investment opportunity.[27] Mr Hao Liu arranged for the incorporation of KQ in Australia. He was appointed a director of KQ. The other directors were Mr Dongmin Wang and Ms Beibei Zhu (the wife of Mr Zhang). KQ was incorporated on 20 October 2011. Yima was the sole shareholder in KQ.

64 FLC asks the Court to find that Mr Hao Liu was given the due diligence report. The evidence suggests that when Mr Hao Liu was appointed the only geological information that Yima had on the tenement was that provided by Mr Songying Li. I find that it is a reasonable and plausible inference that Mr Hao Liu was provided with a copy of Mr Songying Li's due diligence report in view of the task he was given of assessing the feasibility of Yima acquiring an interest in the tenement. I also find that it is reasonable and plausible to infer that Mr Hao Liu was given the material that had been supplied to the Mr Songying Li in Australia. I also find that it is reasonable and plausible to infer that that Mr Hao Liu therefore knew that Mr Songying Li had been given a report in Australia and Mr Songying Li had found that report to be unreliable and that it could not be used to assess the coal reserves at the tenement. KQ did not call Mr Hao Liu or anybody else to rebut those inferences.

65 As discussed below, Mr Hao Liu did provide a further report on the tenement in January 2012.

66 Ms Beibei Zhu said that she was appointed to provide an Australian resident director. I thus infer that Mr Wang and Mr Liu were still residing in China. Ms Beibei Zhu claims that she was not aware of the business activities of KQ.

67 Mr Li Yong Jiu gave evidence that it was the practice at Yima - and at other Chinese state-owned corporations - for an independent body to carry out a valuation if there was a proposal to acquire another business.

68 On 9 November 2011, Henan SASAC selected Jinshi to value the EPC 818 tenement.[28] On 9 November 2012, Henan SASAC in a document addressed to Yima, confirmed that Henan Jinshi Mineral Rights Appraisal would undertake the assessment of the Australian coal project.[29]

69 I comment later on the significance of this appointment when Yima, to its knowledge, had not received any reliable report on the deep-coal resources at the tenement (which it never did).

70 On 16 November 2011, Mr Zhang Xin emailed Mr Bo Li of ANB.[30] The email informed Mr Bo Li that the appraisal company in China had sent him a list of supplementary information required for the assessment. The information requested included:[31]

The geological reserves report of general of detailed coal mine investigation (signed by a registered geologist) or staged summary report of geological work, including exploration engineering layout, detailed information or exploration engineering workload, resource, reserves estimation drawings, etc which can be used to determine the degree of geological exploration and resource reserves.

71 As discussed below, KQ sent the CRA Report to the valuer. This was in spite of Mr Songying Li's report that it was unreliable and could not be used to estimate the deep-coal resources at the tenement. Also as discussed below, Yima sent to the valuer a report prepared by Mr Hao Liu dated 10 January 2012, that was not based on any geological research. According to the evidence, these were the only documents that Yima provided to the valuer. KQ did not tender any evidence to disclose what information, if any, Mr Dongmin Wang gave to the valuer when he travelled with the valuer to Australia, in April 2012.

72 On 21 November 2011, U&D entered into an agreement (sale and purchase agreement) to acquire Arch's 80-per-cent interest in the EPC 818 tenement; and, the shares in RPP, which held a 20-per-cent interest in the EPC 818 tenement, from Houghton Investments Pty Ltd, for $25.25 million.[32]

73 Mr Dongmin Wang was a senior executive within Yima. He was in charge of the securities department. Mr Dongmin Wang was also appointed a director of KQ.

74 On 21 December 2011, Mr Hao Liu's personal assistant, Mr Kevin Zhang, sent to Mr Dongmin Wang what was described as the fifth draft of the equity transfer agreement between FLC, ANB, and KQ (the ETA). Under the draft, the price to be paid for acquiring FLC's 40 per cent shareholding in FLC was $80 million. On that basis, 51 per cent would be valued at $102 million. The copy of the draft agreement tendered had amendments in red that suggested that the price for FLC's shares must, at least, have appeared in the fourth draft. KQ failed to discover the four earlier drafts nor provide any explanation for not doing so.

75 The draft of the Mine Project Agreement[33] included a term that '[KQ] agrees to invest AUD$ 124.9 million to acquiring and increasing capital for the equity investment in the new joint venture company.' Included in red (which I assume was a recent amendment) was a clause reading as follows: 'Party A and Party B affirm that the value of the U&D Mining Industry (Australia) Pty Ltd's EPC 818 resources is AUD 200 million.'

76 Clause 5 of the draft agreement further provided:

(2) Among Party B's investment of 124.9 million AUD$80 million is used for acquiring the 40% of U&D Mining Australia Pty Ltd's equity held by Flash Lighting Company Limited and the remaining AUD $44.9 million is used for increasing capital for the equity investment in the new joint venture company.

(3) Party A invest equity in the new joint venture company - U&D Mining Industry (Australia) Pty Ltd based on the existing assets of the mining right, accounting for 49% of the equity.

77 The insertion of a clause in red and the underlining of the sums of $80 million and $124.9 million suggest that these items were being negotiated. As discussed below, a few weeks later, on 31 January 2012, Mr Wang and Mr Zhiwei Zhang, the Yima general manager, gave a special report to the chairman of Yima on 'the negotiations over the Australian EPC 818 project.'

78 Accordingly, I find that it is a reasonable and plausible to infer that the terms of the ETA agreement, including the price, were being negotiated between Yima and U&D despite the valuation being carried out.

79 KQ did not dispel that inference. KQ failed to explain the existence of the draft ETA agreements or the reason for which Yima and U&D were negotiating the price of the sale of the interest in U&D while at the same time Yima was purporting to arrange for a valuation of the shares in U&D.

80 As the following evidence discloses, in the period from Tuesday 10 January 2012 to Monday 16 January 2012, there were a chain of events bearing on the information provided to the valuer, that give rise to reasonable and plausible inferences, and unanswered questions, that KQ did not dispel or resolve, as discussed below.

81 On 11 January 2012, Mr Bo Li of ANB sent a research report titled 'Investigation and Research Report on the EPC 818 Mining Right Project in Australia' to Mr Zhang.[34] On this research report there appears the date 10 January 2012. It appears to come from KQ. I will refer to the report as the 'January research report'. Mr Li Yong Jiu said a copy was found in the Yima archives.[35] Mr Li Yong Jiu said in his oral evidence that the January research report was the report of Mr Hao Liu.[36] In his witness statement, he deals with the report under the heading 'Report by Hao Liu.'[37]

82 The copy of the January research report tendered into evidence has a heading that reads 'Investigation Report approved in the meeting of the leading group, sent by Mr Hao Liu on 29 January 2012.'[38] As mentioned above, Mr Hao Liu is the CEO of KQ and the employee of Yima charged by the management committee with investigating and reporting on the tenement.

83 The January research report discussed the desire and need to internationalise Yima:[39]

2. Necessity

(1) At the Macro Level

After the exchange rate system reform of Renminbi (RMB) in 1994, it took 12 years for China's foreign exchange reserves to increase from 51.62 billion US dollars in 1994 to over one trillion US dollars. By the end of March 2011, China's foreign exchange reserves had exceeded 3 trillion US dollars. Excessive foreign exchange reserves have brought a variety of pressures and hidden dangers to the sustained high growth of the economy. Therefore, in recent years, various ministries and commissions have introduced policies to promote enterprises to go abroad and invest overseas. For instance, in September 2011, the Minister of Commerce Chen Deming announced in a speech that the Ministry of Commerce would take five measures to increase its support to overseas investment during the '12th Five-Year Plan' period. For those competent Chinese enterprises, seizing this opportunity to take the road of internationalization would be the only correct strategic decision for development.

(2) At the Micro Level

After a round of rapid resource reorganization and annexation of small coal mines in recent years, a new pattern of coal resources has basically taken shape in the domestic coal industry. As an enterprise focusing on resources development, going abroad to seek more resources has become a necessary strategic choice for Yima Coal Group to realize a long-term development. Moreover, internationalization plays an important facilitating role in promoting the brand appeal, improving the management level and enhancing the enterprise strength.

For instance, Yanzhou Coal Mining Company has made significant improvement in its enterprise strength since it entered the Australian market in 2004.

3. Overview of the EPC 818 Mining Right

....

According to the Australian JORC Code, the Proven Reserves in EPC 818 were calculated to be 16.5Mt, Controlled Reserves 18.5Mt and inferred Resources 15Mt, and the inferred resource reserves in the deep part were calculated to be 1.35 billion tons. All of these coal resources above are coking coal.

85 Under the heading of 'Existing Problems of the EPC 818 Project' was another heading: 'Relatively Small Amount of Coal Resource Reserves.' The Investigation and Research Report stated, inter alia, that the 1350 metres of 'inferred Resources in the deep part are of uncertainty. Since the Proven Reserves are relatively small, the production capacity of the open-pit coalmine might be restricted to some extent at the earlier stage.'[41]

86 The Investigation and Research Report further said:[42]

6. Perceptions of the Cooperative Development of EPC 818 Project

The cooperative development of EPC 818 project is the first step for Yima Coal Group to go abroad, enter Australian market and realize its international operations. Taking the first step steadily and maintaining a stable development afterwards will strongly support the Group to realize its '12th Five-Year' plan, that is, to achieve an output of 70 Mt, an operating revenue and an asset amount exceeding 100 billion respectively [translator's note: the name of currency is not mentioned in the Chinese text); meanwhile, it will significantly help establish Yima Coal Group's brand and increase its capital.

In recent years, there has been a rapid increase in the number of foreign companies coming to Australia to invest in the mining industry, and the competition for coal resources in Australia is extremely intense. A number of Chinese mining enterprises have made their investments in Australia, including Shenhua Group, China Coal Group, Sinosteel Group, Chinalco Group, Yancoal Group and Henan Shenhuo Group. There are also many examples involving setbacks in the investment. Yancoal Group is the only one that outperforms all others. In order to move to internationalization successfully, the first thing Yima Coal Group needs to do is to gain a firm foothold in Australia. Through the cooperative and win-win development method, Yima Coal Group could get familiarized with the investment process in Australia and accumulate experiences in project operation, which would provide a solid foundation for the Group to grow bigger and stronger.

87 At the end of this section, the Investigation and Research Report concluded:[43]

As Yima Coal Group's first step into the Australia coal industry and a breakthrough for internationalization, EPC 818 project will be both a tough challenge and rare opportunity.

88 FLC says that there is real doubt about the origin of this document. FLC argues that it cannot be the report prepared by Mr Hao Liu on the instructions of the chairman of Yima on 31 January 2012, as it predates the instructions. KQ in its final submissions submitted that the document came from Mr Yinan Zhang.[44] KQ led no evidence as to its provenance.

89 FLC says that if the document came from Mr Zhang as KQ contends, then there is only one document that has been put into evidence to show that Yima obtained any assessment on the geological reserves at the tenement. That one document is Mr Songying Li's due diligence report, which made clear that the information on the geological reserves of the tenement obtained from the vendors was unreliable.[45]

90 Importantly, for this case, the January research report is the second and only other report received by Yima on the coal resources at the tenement (the first being Mr Songying Li's due diligence report). The January research report does not rely on any geological investigations such as boreholes to justify its estimates of the coal resources at the tenement. I find that it is reasonable and plausible to infer that Yima and its officers would have known that the January research report did not provide any reliable assessment of the deep-coal resources at the tenement.

91 As will be discussed below, that was certainly the view of the chairman of Yima at the meeting he chaired of 31 January 2012.

The January research report is sent to Mr Dongmin Wang

92 In January 2012, Mr Bo Li, of ANB, sent the January research report to Mr Yinan Zhang.

93 On Friday 13 January 2012 at 9:14 am, Mr Zhang sent a copy of the January research report to Mr Wei Liu via email.

94 On Sunday 15 January 2012 at 1:24 pm, Mr Wei Liu forwarded to the valuer the January research report.[46]

95 Previously, on Friday 13 January 2012, Mr Songying Li sent by email to Mr Dongmin Wang a copy of the summary report that Mr Songying Li had given the management committee in about July 2011.[47] The note under the heading of 'Calculation of Resources' is set out above.[48] Relevantly, the summary stated limitations in the calculation that 'only one borehole revealed that if the information is reliable, the coal seam is stable and has the potential of well production.'

96 The copy sent to Mr Dongmin Wang contained a table headed 'Table 2.1 General Information of Coal Seams of EPC 818 in the Bowen Basin Australia.' The table had a column for 'Resources (100 Mt).' The table advised under the heading of 'Existing Problems' that data was from only one borehole. It also advised in relation to the Rangal Coal Measure: 'Lacking calculation process and calculation method for parameter selection.' For the Fort Cooper Measure, the table advised: 'Coal thickness of 6.5 m from regional data, whole mining right area calculated, and conclusion obviously defective.'

97 I find that it is reasonable and plausible to infer that Mr Dongmin Wang understood from this document that Yima had not received a reliable estimate of the coal resources in the EPC 818 tenement. Another reasonable and plausible inference is that Mr Dongmin Wang was expressly informed that the data in the summary was based only on one borehole, and that the figures were based on the assumption that the information from that one borehole was reliable. KQ fail to dispel either inference.

98 On Sunday 15 January 2012,[49] under the subject heading of '818', Mr Zhang emailed the CRA Report to Mr Wei Liu. On the same day, at 1:24 pm (that is the same time that Mr Wei Liu sent the valuer the January research report) Mr Wei Liu forwarded the email with the CRA Report attached to the valuer, under the heading '818' and with no further observations. On the next day, Monday 16 January 2012 at 2:42 pm, the valuer forwarded the email with 'Attachments: EPC 818_resource-cn.doc' to Mr Dongmin Wang.[50] Also on Monday 16 January 2012, at 2:41 pm, the valuer forwarded to Mr Dongmin Wang the January research report, described as attachments 'EPC 818 Investigation Report.docx.'

99 According to Mr Li Yong Jiu, Mr Wei Liu was an executive of China Huarong and a former director of Yima. Mr Li said that it was Mr Wei Liu who introduced the chairman Mr Wu to Yinan Zhang in early 2011. Apart from the evidence that Mr Wei Liu was a former director of Yima, KQ led no evidence as to what role if any Mr Wei Liu played in Yima's affairs. Under cross-examination, Mr Li said that Mr Liu was not an employee. When asked whether Mr Liu was a consultant to Yima, Mr Li said, 'Mr Liu Wei was a director of Yima.'[51]

100 It will be recalled that Mr Dongmin Wang, who was a senior executive of Yima and a director of KQ, had been sent a draft of the ETA on 21 December 2011,[52] that included a price, and, had on Friday 13 January 2012, asked Mr Songying Li for a copy of his summary report to the management committee.[53]

101 KQ led no evidence as to whom within Yima was responsible for dealing with the valuer, or what role Mr Dongmin Wang played with the valuer. As will be seen below, when I consider the written agreements with the valuer, it was Yima's responsibility to provide information on the tenement to the valuer.

102 A reasonable and plausible inference can be drawn as follows. When Mr Dongmin Wang asked Mr Songying Li for a copy of the summary of his report, Mr Dongmin Wang was aware of Mr Songying Li's due diligence report and its conclusion (ie that the report given to him in Australia was unreliable and could not be used to assess properly the coal resources at the tenement). KQ failed to dispel that inference.

103 A further reasonable and plausible inference can be drawn that when Mr Dongmin Wang received the CRA Report, he realised that it was the report that Mr Songying Li had received in Australia and referred to when he prepared his due diligence report and that CRA Report could not be used to estimate the coal resources at the tenement. KQ failed to dispel that inference.

104 It is also a reasonable and plausible inference that when Mr Dongmin Wang received the January research report, he realised that the coal resource figures it used had come from the CRA Report, and were the subject of Mr Songying Li's due diligence report. KQ failed to dispel that inference.

105 It is a reasonable and plausible inference to draw that Mr Dongmin Wang knew that the information given to the valuer in both reports was unreliable and could not be used to value the tenement. KQ failed to dispel that inference.

106 If that was the case, then several questions arise. Did Mr Dongmin Wang inform the valuer of Mr Songying Li's assessment of the CRA Report? Did Mr Dongmin Wang inform the valuer that the January research report relied on unreliable resource estimates from the CRA Report? Did Mr Dongmin Wang inform any and what other executives of Yima that the valuer had been given unreliable information? If not, why not? Why would Mr Dongmin Wang, a senior executive of Yima, provide useless reports to the valuer? As will be discussed below in detail, KQ failed to answer any of these questions or lead any satisfactory evidence as to why it was unable to do so.

107 KQ led no evidence to explain whether or not Mr Wei Liu was acting on behalf of Yima when he forwarded the reports to the valuer or what if any role he was authorised to play.

108 KQ led no evidence as to whether or not Mr Wei Liu informed the valuer that the reports (which Mr Wei Liu had forwarded to him) were unreliable and could not be used accurately to value the tenement.

109 Mr Wei Liu was not called by KQ to give evidence to explain why he would provide useless reports to the valuer or otherwise explain his actions.

The meeting with the chairman 31 January 2012

110 On 31 January 2012, the Group Company's General Legal Counsel, Mr Zhang Zhiwei, and the head of the Department of Securities of Yima, Mr Dongmin Wang, made a special report to the chairman of the Board, Mr Yulu Wu, and Deputy General Manager, Mr Li Yong Jiu. This happened at a meeting regarding the negotiation over the Australian EPC 818 coalmine project and existing problems. The minutes of the meeting record that after listening to the report 'the Chairman of the Board gave important instructions regarding how to standardise the operation of the Australian coal project and the Group Company's next step for capital operation.'[54]

111 In relation to the Australian project, the minutes go on to state:

1. Regarding the Australian project

Making every effort to 'Go outside' is the Group Company's strategic goal. Australia Kunqian International Energy Co Pty Ltd, who serves as the Group Company's 'bridgehead' in Australia and the platform for resource development and capital operation, should firstly gain a firm foothold so that it could achieve great development in the future. In order to guarantee a smooth advancement of the Australian project and to avoid investment risks that might emerge in the future, with regard to the problems emerged during the negotiation over the EPC818 project, currently the following six aspects of work must be well-accomplished:

(1) With respect to economic feasibility, we should collect further information, carry out an analysis on the feasibility of economic benefits of the EPC818 project, as well as check and verify the parameters adopted in the economic analysis at the same time.

(2) With respect to technical feasibility, relevant functional departments should carry out further in-depth analysis, conduct research and make judgement on the technical information in terms of geological conditions, coal mining, coal quality, etc.

(3) With respect to commerce and trade, we should clearly work out the feasibility of the Australia's EPC818 project in terms of coal mine resources and reserves, service out-sourcing (mining and intermediary services), railways, ports, power supply, land, water supply, coal sales, export and various types of permits as well as the information related to the economic parameters.

(4) With respect to the ownership of the EPC818 mining right, we should clarify the ownership of the EPC818 mining right through investigation.

(5) With respect to various prerequisite conditions before signing the formal agreement, in order to guarantee formal production and operation after the project commences, efforts should be made to clearly check in advance various kinds of policies, laws and permits involved in the Australian cooperation project, such as the relevant policies and product exporting permits which are required by the Australian Government in relation to the investment in coal mining by China's state-owned companies.

(6) The due diligence should be well performed. Relevant departments are required to further understand the conditions of the EPC818 project. A detailed due diligence checklist should be developed, based on which the Australian project team should be responsible for the initial information collection while the Group Company should send well-trained staff to Australia to assist with the due diligence work. Professional consulting companies can be appointed to participate in performing the due diligence if necessary.

Regarding the cooperation issue of the EPC818 project, the Chairman of the Board finally pointed out that before the matters which may affect investment decisions are clearly identified, a cooperation framework agreement may firstly be signed with the other party. After further and detailed due diligence as well as the economic and technical feasibility studies are completed, we could then consider signing a formal equity transfer agreement with the cooperation party.

2. Regarding the guidelines of the Group Company's assets management and capital operation

Regarding the Group Company's assets management and capital operation, the Chairman of the Board put forward the following guidelines:

(1) We should adopt an industry and finance integrated development model, in which assets management and capital operation are combined; enhance the development of the key business of mining and dressing while make every effort to achieve excellence in capital operation according to the requirements of capitalisation and internationalisation.

(2) The notion of cooperation and mutual benefits should be employed. We should cooperate rather than doing everything on one's own; cooperate with those who share the same operation ideas and philosophy and a similar enterprise culture, as well as those who have knowledge, thoughts and courage; base on the principle of the state-owned first and the private-owned second, share both risks and interests and apply a harmonious and integrated approach.

(3) With respect to the Australian project, plan in advance the assets management and capital operation, follow a socialisation approach for production and operation, and outsource tasks when necessary. The construction of the project should be competitive and efficient. Members of the project team should update their thinking.

(4) Vigorously advance the capital operation. Firstly, the Group Company's three modules, i.e. mining and dressing (including rare metals), coal chemical industry and aluminium industry should be well-prepared in advance for raising capital to enter the capital market. Secondly, with regard to the Australian project, the Group Company is only responsible for the project investment capital for the early stage. The follow-up investment should be raised from the capital market. Once the construction of project is completed, it should start the process of listing in Hong Kong or Australia immediately. Thirdly, the preliminary work for Kaixiang Chemical to be listed in Hong Kong should commence as soon as possible. In summary, each of the modules should seek to be listed and raise development funds.

Wu Yulu asked further investigations to be conducted including the quantity of resource as well as other technical issues. There are also other issues that were discussed but I couldn't remember it clearly. But things related to the price were not reported on or discussed.

113 As discussed below, Mr Li Yong Jiu said that at the meeting Mr Wu got angry and said that former work and investigation had not been properly done.

114 As discussed below, it was put to Mr Li that the reason Mr Yulu Wu got angry was that Mr Hao Liu's report ignored the opinions expressed by the geologist Mr Songying Li in his presentation to the management committee. Mr Li said that the reason was that Mr Hao Liu's report was not comprehensive enough.[56]

115 I find that it is reasonable and plausible to infer that Mr Yulu Wu had read Mr Hao Liu's January research report. I also find that it is also reasonable and plausible to infer that Mr Yulu Wu knew that Mr Hao Liu's report did not address the criticism's Mr Songying Li made of the information given to him when in Australia about the coal resources at the tenement. As discussed below in the evidence of Mr Li Yong Jiu, Mr Yulu Wu was upset, because proper technological or geological investigations had not been carried out.

116 I also find that it is reasonable and plausible to infer that Mr Li Yong Jiu also knew that Mr Hao Liu's January research report did not satisfy the further research and investigations that Mr Songying Li had told the management committee (at which Mr Yulu Wu and Mr Li Yong Jiu were present) needed to be carried out.

117 Mr Dongmin Wang was one of the two people delivering the special report to Mr Wu and Mr Li Yong Jiu. The evidence suggests that Mr Dongmin Wang did not draw the CRA Report (which he had received about two weeks previously) to Mr Yulu Wu's attention at the meeting. I find that it is reasonable and plausible to infer that he did not do so, as he knew that the CRA Report was the report that Mr Songying Li found unreliable and that the chairman was so aware.

118 KQ failed to dispel any of these inferences, or to provide another explanation for the events that took place. Nor did KQ call any satisfactory evidence to explain why it was unable to do so.

Mr Hao Liu given the task of making further investigations

119 Mr Li Yong Jiu was asked whether Yima conducted any further investigations after the meeting with the chairman.[57]

Counsel: After that meeting on 31 January 2012, did Yima and its associated departments conduct any further study on geology, mining and coal quality of the project, of the mining tenement EPC 818?

Mr Li: Yes.

Counsel: It did? What did it do?

Mr Li: Yima sent Liu Hao to Australia specifically to investigate and assess this project comprehensively. At the same time, we request SASAC to follow the rules regarding investment of state owned assets.[58]

120 Mr Hao Liu was a director of KQ and its chief executive officer of KQ. Nevertheless, KQ did not discover or give any evidence of the work, if any, that Mr Hao Liu did on investigating the project.

121 I am not satisfied that Mr Hao Liu did any further work and, as stated, KQ called no evidence to establish that any was done.

122 Mr Li also said that Mr Hao Liu advised the management committee of an amount of reserves of the tenement. He said that he could not remember clearly 'but he might have said something about 1.3 billion tonnes.'[59]

123 The figure of 1.3 billion tonnes was in Mr Hao Liu's January research report, which was prepared before Mr Yulu Wu directed that further research be carried out as he was not satisfied with the work done by Mr Hao Liu.

124 Despite Yima not having any proper assessment of the coal reserves at the tenement (as evidenced by the minutes of the meeting with the chairman on 31 January 2012), on 6 February 2012, KQ, ANB, and FLC entered into an agreement ('co-operation funding agreement').[60] KQ led no evidence, whether oral or written, as to why Yima would enter into such an agreement when it lacked any proper assessment of the coal resources of the tenement.

125 The fact that the co-operation agreement was entered into before Yima had any reliable estimate of the coal resources in the tenement supports the view, discussed below, that Yima was driven primarily by its desire to invest in an Australian coalmine, rather than by any financial benefits to be derived by purchasing the interest in the tenement.

126 On 7 February 2012, Mr Xiao signed a letter which granted Mr Zhang 'full authority to deal with all the documentation affairs regarding the EPC 818 tenement of U&D.'[61]

127 On 8 February 2012, Mr Hao Liu caused KQ to pay U&D $3 million under the co-operation funding agreement.[62]

128 On 10 February 2012, ANB announced to the ASX that it had paid $25.25 million as the purchase price under the sale and purchase agreement and completed the purchase of the EPC 818 tenement.[63]

129 On 28 February 2012, Mr Hao Liu caused KQ to pay U&D $2 million, making a total payment of $5 million.[64]

130 On 10 March 2012, Yima sent to Jinshi an engagement letter commissioning Jinshi to assess the value of the exploration right in EPC 818 exploration area. Yima said, 'Our company is responsible for providing relevant information needed for the assessment and ensuring the authenticity of the information.' It will be recalled that in November 2011, Jinshi was initially retained to carry out the valuation.[65]

131 Also on 10 March 2012, Yima sent to Jinshi a commitment letter under which Yima said:[66]

As the commissioning party, we have the responsibility and obligation to provide facilitation and provide all kinds of information required, therefore, our company hereby promise we will:

1. Be willing to provide transportation, accommodation and meals to personnels [sic] of your company who are conducting on site survey on relevant mineral rights;

2. Actively cooperate with your company in the investigation and verification of conditions of the mineral right, and provide various kinds of information as required by the assessment company;

3. Ensure the authenticity and reliability of all the necessary certificates, documents and materials, financial data and material list provided to the assessment company, and assume any legal responsibilities thereof;

4. No interfere with the assessment work.

132 On 14 March 2012, ANB announced the proposal for KQ to acquire 51 per cent of the shares in U&D.[67]

Australian Resources Report Problem of 10 April 2012

133 On 10 April 2012, from Mr Yuanlin Chang sent an email to Mr Dongmin Wang, subject 'Australian Resources Report Problem.'[68] (There appears to have been two emails as there is a reference to email B.) There was no evidence as to whom Yuanlin Chang was. The email read:

How are you!

Songying Li wrote in the email on 10 April 2012.

'Australian Resource Report'

Besides the previous problems, here are some more to add.

1. In total 15 layers of coal reserves have been calculated, and the files regarding coal thickness of each layer are absent, no process of reserves calculation, procedure, methods, parameters, steps and so on:
2. Stripping ratio is 15:1, is too large?
3. Weathering and oxidation zones exist, and there are no descriptions on this kind of zones.

134 In the email, Mr Yuanlin Chang informed Mr Wang that Yima had been given the CRA Report. Mr Wang already knew this, because he had received a copy in January 2012. Mr Yuanlin Chang informed Mr Wang that Mr Songying Li, the Yima engineer geologist who had been to Australia, had received the 'Australian Resources Report.' Mr Yuanlin Chang informed Mr Wang that Mr Songying Li: had reported on the problems with the Australian Resources Report; believed that Mr Wang knew of the problems that Mr Songying Li had found with the Australian Resources Report; and was now identifying, in an email he sent on 10 April 2012, further problems that he had found in the report. Two days later, Mr Wang travelled to Australia with the valuer.

135 As discussed above, Mr Dongmin Wang, a senior executive of Yima and a director of KQ, had been sent the CRA Report on 16 January 2012. The email further supports the reasonable and plausible inference discussed in paras [104]-[106] above about Mr Wang's knowledge of Mr Songying Li's report, and the fact that Yima, and the valuer, did not have a reliable estimate of the coal resources at the tenement.

Onsite inspection by valuer and Wang on 12 April 2012

136 At section 8.2 of the valuation, the following appears:

8.2 Stage of On-site Investigation and Data Collection

On the date of 11 April 2012, accompanied by Wang Dongmin who is the director of the Securities Investment Department of Yima Coal Industry (Group) Co., Ltd, Li Mingli, an assessor from the Company who is a mineral rights appraiser and a geological and mineral engineer, conducted on-site survey within the assessment scope, during which the following work was carried out:

(1) Listening to the briefing given by the Australia-based staff of Yima Coal Industry (Group) Co., Ltd, and collecting relevant information needed for the assessment.

(2) Verifying the resource conditions within the bounds of the exploration area, investigating the regional topography, landforms and the difficulty degree of mining in the exploration area.

(3) Collecting information on the objective conditions of transportation, electricity and hydrology as well as social and economic conditions in the exploration area thus improving the materials for the assessment.

137 Mr Li Yong Jiu said that, during the first few weeks of April 2012, Mr Hao Liu was in China and Yima had no other employees in Australia. Mr Yulu Wu therefore decided to send Mr Dongmin Wang to Australia to accompany the valuer in April 2012.

138 As discussed above, Mr Dongmin Wang had received in mid-January 2012 a copy of both the CRA Report and the January research report.

139 As at end of January 2012, the chairman of Yima had expressly told Mr Dongmin Wang that Yima did not have a proper assessment of the coal reserves at the tenement and gave instructions to obtain the same. As mentioned above, there is no suggestion from the minutes of the meeting on 31 January 2012 or the evidence of Mr Li Yong Jiu (who was at the meeting) that Mr Dongmin Wang sought to suggest that the CRA Report or the January research report provided any proper assessment of the coal resources at the tenement. As mentioned above, Mr Dongmin Wang was in possession of both the CRA Report and the January research report.

140 As discussed above,[69] I have found that a reasonable and plausible inference arises that Mr Wang knew that the CRA Report and the January research report could not be used to estimate the coal resources at the tenement and that the chairman of Yima was of the view that Yima did not have reliable estimates of the coal resources.

141 As discussed below, I am not satisfied that the valuer relied on the accuracy of the estimates of the coal reserves contained in the CRA Report, or was misled or deceived by the CRA Report. I find that a reasonable and plausible inference arises that the expert valuer knew that such estimates could not have been made from a single borehole and that the CRA Report and the January research report he was sent did not provide any reliable estimate of the coal resources at the tenement. KQ did not dispel this inference.

142 Thus, we have two men travelling to Australia together, to inspect the tenement, who it is reasonable and plausible to infer knew that no report was available that properly estimated the coal resources at the tenement.

143 KQ did not lead any evidence as to whether or not Mr Dongmin Wang and the valuer discussed the CRA Report and the January research report on their trip to Australia, or at all. Did they discuss Mr Songying Li's due diligence report? Did Mr Wang report to Yima on his trip? If so what did he report? KQ led no evidence on these issues and the answer to these questions remains a mystery.

144 On 15 April 2012, Mr Hao Liu signed a resolution for KQ that authorised KQ to enter into the ETA to purchase the shares in U&D.[70]

145 On or about 27 April 2012, FLC, KQ, and ANB entered into the ETA.[71] Under the ETA, KQ agreed with FLC and ANB to purchase a 51-per-cent holding in U&D for $65.79 million. FLC was to sell its 40-per-cent interest in U&D for $51.6 million, and ANB agreed to sell an 11-per-cent interest in U&D for $14.19 million. After the agreement was signed, KQ paid a $5 million deposit to U&D. KQ was to pay the balance of the purchase price, being $60.79 million, to ANB and FLC 20 days after the agreement had entered into force.

146 At the time of the agreement, the shareholders in U&D were FLC, which held 40 per cent of the shares, and ANB, which held 60 per cent. As mentioned above, ANB was formerly known as the Daton Group Australia Ltd. ANB is now in liquidation. ANB is not a party to the proceedings.

147 Under the ETA, ANB was bound to provide to KQ all information in relation to the tenement as well as all information of U&D to enable KQ to carry out due diligence.[72] KQ led no evidence that after 27 April 2012 it requested ANB to provide any information in relation to the tenement.

148 Under the ETA, upon the signing of the agreement, KQ had the following obligations to complete:

10.1 Carry out relevant applications and approval formalities with Chinese government departments;

10.2 Secure the approval of the board (general meeting) of Yima Coal Group;

10.3 Provide the relevant legal documents to Daton and Flashlighting.

149 Although it is unnecessary for me to construe the ETA, it appears that it was subject to Yima board approval.

150 On 8 May 2012, Mr Xiao ceased to be a director of U&D. Mr Hao Liu and Ms Beibei Zhu were appointed as directors of U&D.[73]

151 According to Mr Li Yong Jiu, on 11 May 2012, Mr Mingli Li, the valuer, emailed Mr Dongmin Wang, attaching what appears to be a preliminary valuation of the tenement.[74] The attached document gave the sum of $135,129,000 as the value of the exploration rights to EPC 818, noting that this was four days before the valuation was issued.

152 KQ submits that it is consistent with the evidence and with a conclusion that Mr Dongmin Wang was directing, instructing, or misdirecting the valuer. I find, however, that it is a reasonable and plausible inference that the valuer was seeking Dongmin Wang's approval of the draft. KQ did not lead any evidence to explain why the draft valuation was sent to Mr Dongmin Wang nor seek to dispel this inference.

153 In mid-May 2012, a proposal dated 11 May 2012, was put to the directors of Yima to approve the acquisition by KQ of 51 per cent of the shares in U&D at a price based upon the valuation.[75] The proposal made no mention of a purchase price.[76]

154 The proposal identifies a desire to expand Yima internationally:[77]

Yima Coal Industry (Group) Co., Ltd, Materials for the sixth interim meeting of the Board of Directors in 2012

Proposal on the Acquirement of 51% Shares of U & D Mining Industry (Australia) Pty. Ltd by Australia Kunqian International Energy Pty Ltd, a Wholly-owned Subsidiary of Yima Coal Group

Directors of Yima Coal Group:

In order to accelerate the implementation of Yima Coal Industry (Group) Co., Ltd's (hereinafter referred to as Yima Coal Group) development strategy of 'strong starting, scientific leapfrog development and taking off on the momentum', so as to race to take over more coal resources and realize the sustainable development of the enterprise, Yima Coal Group has responded actively to the national 'going-out' strategy. In accordance with the development ideas of 'capitalization, internationalization, industrialization and high-end oriented', Yima Coal Group established its solely-funded subsidiary Australia Kunqian International Energy Pty Ltd (hereinafter referred to as Kunqian Energy) in September 2011 in Australia.

Upon the establishment of Kunqian Energy, Yima Coal Group intends to use the company as an investment platform for the cooperation with Datong Group Australia Pty. Ltd, so as to jointly develop the coal resources in the EPC 818 coal project in Australia, which is owned by Datong. The specific cooperation approach is as follows: Kunqian Energy acquires 51% of the shares of U & D Mining Industry (Australia) Pty Ltd., which is a subsidiary of Datong Group Australia Pty. Ltd. According to the 'Interim Measures on the Supervision and Administration of Overseas Investment Made by Central Enterprises' (SASAC Order No. 28) and relevant provisions on overseas investment, relevant situation is hereby reported as follows:

155 The evidence of Mr Li Yong Jiu also confirms this statement of intent. As discussed below, he agreed that Yima's strategy was to develop internationally as well as in China. Mr Li Yong Jiu agreed that the chairman Mr Wu was trying to promote Yima development as an international coal-mining company.[78] Mr Wu's intentions were also made clear in the minutes of the meeting of 31 January 2012.[79]

156 The proposal also said of the EPC 818 that 'proved reserves amount to 30Mt tonnes and total estimated reserves of 700Mt.' The proposal stated:[80]

The proved reserves of EPC 818 area possesses superior conditions of railway, highway and ports, and conditions in the open-pit mining area are already ripe for the application of mining license. Opencast coal mines with an annual production of 2 Mt are planned to be constructed. In the second stage, investment will be made to explore the deep resources of the EPC 818 coal mine project, and the development plan for deep resources will be developed after the exploitable areas are ascertained.

157 The proposal does not rely on the CRA Report. Rather the figures for the deep resources are taken from Mr Songying Li's summary report, based on the two assumptions which still had not been established, and provided to the management committee in about July 2011 and provided to Mr Dongmin Wang in mid-December 2011. Those assumptions being, that the seams of coal shown by the single bore hole extended over the whole tenement and the results of the single bore itself were verified.

158 On 11 May 2012, FLC transferred its 40-per-cent share in U&D to KQ, and ANB transferred its 11-per-cent shareholding in U&D to KQ.[81]

159 A proposal, dated 14 May 2012, was put to Henan SASAC, Yima's majority shareholder, to approve the acquisition by KQ of 51 per cent of the shares in U&D at a price based upon the valuation.[82] The proposal to Henan SASAC provided that the purchase price for the tenement would be based on the valuation recognised by Henan SASAC.

In order to accelerate the implementation of the development strategy of 'starting up strongly, leaping scientifically and seizing opportunities to soar' set by Yima Coal industry Group Ltd (hereinafter referred to as 'Yi Coal Group'), to acquire more coal resources, and to achieve the sustainable development of the enterprise; and at the same time, as an active response of Yi Coal Group to national strategy of 'going out', and in line with the development of ideas of 'capitalisation, industrialisation and high-end orientation', it has established the solely-owned Australia Kunqian International Energy Co, Ltd.

161 Under the heading of basic information about the target company, the report said:[84]

The basic information about EPC 818 is as follows:

...

The development of the EPC 818 coal mine project plans to proceed in two phases. Phase one: mining the open cut ascertained coal mine of 30 million tonnes. EPC 818 has superior development conditions such as railways, highways and ports. Its open cut coal mine has met the conditions of applying for a mining licence and plans to construct an open cut coal mine of 2 million tonnes per year. Phase two: investing in the exploration of deep resources of the EPC 818 coal mine project; after ascertain the recoverable resources, preparing deep resource development plan.

162 The proposal to Henan SASAC made no mention of the 700 million tonnes calculation taken from the summary report.

The value of the assessment. According to the intentional agreement signed by all parties, all parties will entrust Henan Jinshi Mining Appraisal Co Ltd to conduct value assessment on EPC 818 mining rights.

The transfer price. The result of the mining rights appraisal will be based on the mining rights appraisal report value reviewed and confirmed by the State-owned Assets Supervision and Administration Commission of Henan Province. A specific share price will be determined on the principle of fairness.

164 On about 15 May 2012, Yima received the valuation of the valuer dated 15 May 2012.[86] Mr Li Yong Jiu said that he did not review any draft of the valuation. He said that no draft was presented to any meeting of the management committee or directors.

165 Mr Li Yong Jiu said that the valuation contained, as an annexure, the CRA Report, signed purportedly by Richard Smith. It is clear from Mr Li Yong Jiu's evidence discussed below, that he did not see the attached CRA Report at the time.

166 As mentioned, attached to the valuation was the CRA Report. It was purportedly signed by Richard Smith in two forms. There is no evidence as to when and by whom these pages were added to the valuation. There is no evidence as to who provided the signed pages to the valuer. The valuer's file may have disclosed that information; however, KQ did not produce the file. KQ gave no explanation as to why it could not have produced the valuer's file.

167 The persons responsible for the valuation report were listed as legal representative, project leader, report reviewer, and registered mining rights appraiser, all of whom signed the documents.[87] The assessors were listed as Li Mingli (mineral rights appraiser, certified public valuer, geological and mineral engineer), Cao Yupin (mineral rights engineer, senior geological and mineral engineer), and Liu Yuxia (mineral rights appraiser). Of the persons who had some input into the valuation, KQ called none. KQ did not explain its failure to call any of these save with respect to Mr Li Mingli, who is said to have disappeared.

168 In the summary of the valuation report, the valuer stated:[88]

The deep resource potential of the EPC 818 exploration area in Australia's Bowen Basin amounts to 1.688 billion tons, among which a resource quantity of 968 Mt is taken for the assessment, as of the base date of assessment, the assessed value of the deep resource exploration right is: 55,134,800 Australian dollars ...

To sum up, as of the base date of assessment, the assessed value of the exploration right in EPC 818 exploration area in Australia's Bowen Basin is: 129, 392, 400 Australian dollars.

169 As discussed below, Mr Li Yong Jiu gave evidence that the executive directors of Yima held a meeting before they voted on approving the acquisition, but that the voting process occurred by correspondence.[89] Mr Li Yong Jiu said that those who met beforehand were Mr Yulu Wu, Mr Tian Fujun, Mr Zhai Yuantao, Mr Jianhua Song, and himself, as well as other members whom he could not remember clearly.[90] Mr Li said that all the people just mentioned attended the meeting personally.[91] Mr Li did not identify those non-executive directors who voted by correspondence and who had not met previously as executive directors. Mr Li identifies the directors of Yima in his amended witness statement.[92]

170 Directors of Yima signed a resolution dated 26 May 2012, to approve KQ acquiring 51 per cent of the shares in U&D.[93] The resolution stated that the meeting of the directors was held by correspondence. The resolution stated that there were a total of 11 concurring votes.

171 The 11 concurring were: Mr Yulu Wu; Mr Tian Fujun; Mr Li Jianxin, Mr Li Youngliu, Mr Le Baocheng, Mr Xin Shidong, Mr Pen Guanglin, Mr Zhai Yuantao, Mr Song Jianshua, Mr Zhai Eran, and Mr Fan Yuangui. Mr Luo Gangyin and Mr Nie Ping were noted in the records but do not appear to have signed the resolution.[94]

173 As discussed below, Mr Li Yong Jiu said that the valuation (without annexures) was provided to the directors before the resolution was passed. He says that he read the executive summary at the beginning of the valuation and noted the resources quantity before the directors voted on the resolution.

174 Mr Li Yong Jiu said that, at the time, he believed the valuation and the documents upon which it was based were genuine.[95]

175 Mr Li Yong Jiu said that, on or about 15 June 2012, the valuation was lodged with Henan SASAC. He said that a document (form for state-owned assets assessment project) was lodged with the valuation. He exhibited the sealed form.[96]

176 Mr Li Yong Jiu said that, it was usual for the valuation (without exhibits) to be lodged electronically with the form, and then for a complete copy with exhibits to be provided in hardcopy to Henan SASAC within a few weeks.

177 Mr Li Yong Jiu said that, on 6 September 2012, Henan SASAC returned the sealed form for state-owned assets assessment project to Yima to finalise the assessment project. He exhibited the form.[97]

178 Mr Li Yong Jiu said that this meant that the valuation had been recognised. He said that once a valuation is recognised, in his experience, approval for the transaction follows as a matter of course. In this case, he said, Henan SASAC provided written approval. Henan SASAC approved the proposal and provided that Yima should 'use the documented assessed value as the basis for the acquisition' and that 'the acquisition agreement should be signed.'

179 Mr Li Yong Jiu said that, before KQ could purchase 51 per cent of the shares in U&D, it needed approvals from other government departments, including the Henan Province Commerce Department. He said that all the required approvals were received.

180 On 4 June 2012, ANB announced to the ASX that Mr Xiao had been appointed executive chairman of ANB effective from 31 May 2012.[98]

181 On 15 June 2012, Yima lodged the valuation with Henan SASAC.[99]

182 On 25 June 2012, ANB sought approval from the FIRB for KQ's purchase of shares in U&D.[100]

183 On 28 June 2012, Yang Yi of ANB emailed to Mr Zhang the CRA Report (now called the Smith Report), and asked that it be stamped.[101]

184 On 28 June 2012, Mr Xin Zhang emailed to Yang Yi and Mingli Li, the valuer, the stamped signature page of the Smith Report.[102]

185 On 29 June 2012, Mr Hao Liu caused KQ to pay to ANB US$14.19 million.[103]

186 On 13 August 2012, the directors of U&D resolved that U&D should make a tender offer to acquire Endocoal Ltd.[104]

187 On 14 August 2012, Mr Hao Liu caused KQ to request permission from Yima to pay $70 million to U&D. Of this $70 million, $51.6 million was to be paid to FLC under the ETA, and $18.4 million was to be used for the development and business operations of U&D.[105]

188 On 16 August 2012, U&D acquired from Arch the 80-per-cent direct interest in the tenement.[106]

189 On 16 August 2012, Mr Hao Liu caused KQ to submit to Yima an 'Approval Form for Large Value Funds' in respect of the $70 million payment to U&D.[107]

190 On 17 August 2012, Mr Hao Liu caused KQ to pay $70 million to U&D. Accompanying the payment was an instruction that $51.6 million was to be paid to FLC under the ETA, and that $18.4 million was to be used for the development of the EPC 818 tenement, as follows.[108]

191 On 20 August 2012, Endocoal sought from U&D evidence that U&D's takeover offer was bona fide.[109]

192 On 21 August 2012, Macquarie, on behalf of Endocoal, sent a letter to Mr Zhang seeking confirmation that the shareholders of U&D had sufficient capital to execute the transaction.[110]

193 On 23 August 2012, Yima approved KQ's payment of $70 million to U&D.[111]

194 On 23 August 2012, a meeting was held between representatives of U&D, including Mr Zhang, Macquarie, and Endocoal. At this meeting, U&D tabled a copy of its bank statement, which showed that it had $70 million in its bank account.[112]

195 On 27 August 2012, Mr Zhang signed an instruction for U&D to pay CJI $10 million.[113]

196 On 6 September 2012, Henan SASAC recognised the valuation and approved the transaction.[114]

197 On 17 September 2012, Mr Zhang signed an instruction for U&D to pay to FLC $5.4 million.[115]

198 On 18 September 2012, Mr Zhang signed an instruction for U&D to pay CJI $19.2 million.[116]

1. On 18 September 2012, Mr Zhang signed an instruction for U&D to pay FLC $17 million.[117]

200 On 18 September 2012, ANB and FLC provided KQ with receipts confirming payment under the ETA.[118]

201 On 21 September 2012, the Foreign Investment Review Board approved KQ's acquisition of the shares in U&D.[119]

202 On 8 February 2014, Yima commenced legal proceedings in China against Mr Hao Liu regarding alleged breaches of duty to KQ. The proceedings have been discontinued.[120]

203 On 20 April 2016, ANB was placed into voluntary administration.[121]

204 On 19 May 2016, FLC demanded payment from KQ of the purchase price.[122]

205 On 27 June 2016, FLC commenced proceedings against KQ.[123]

206 On 23 August 2016, ANB was placed into liquidation.[124]

207 The witnesses for FLC included Mr Xiao and Madam Cui, the directors and shareholders of FLC.

208 Mr Jun Xiao is a director of FLC. He and his wife, Yan Cui, own all the shares in FLC. Mr Xiao prepared two witness statements, the second of which was quite detailed. KQ objected to the tender of the second witness statement and Mr Xiao gave his evidence orally. I will only set out the relevant aspects of his evidence as follows.

209 Mr Xiao graduated from university in 1992 with a degree in computer science. From 1992 to 1997, Mr Xiao worked at the Chinese Institute of Electronics. In 1997, he started his own electronics, public relations, marketing, and communications company, called Genedigi.[125] By 2011, the company was one of the largest Chinese independent public relations and marketing companies in China. Mr Xiao is still the CEO of the company. It has 700 employees and an annual profit of about $30 million.

210 The company was purchased by a French company, Publis, in 2011 for approximately $300 million. In 2011, Mr Xiao was generally working seven days a week. The company had many clients from the top 500 companies in the world.

211 Mr Xiao explained how he first met Mr Yinan Zhang sometime between 1996 and 1997. Mr Xiao's wife is Madam Cui. Madam Cui's brother was married to Mr Zhang's sister. Mr Xiao explained how he first became involved in investing with Mr Zhang. He said that he was first approached by Mr Zhang in 2007 regarding a fertilizer business located in Henan. Mr Xiao said that the price of fertilizer had been on the rise for 10 years and he made a small investment of CN¥2.5 million into the business, Henan Daton.

212 In 2007, Mr Xiao set up FLC to invest overseas. Mr Xiao was encouraged by the Chinese Government and he had a good cash flow from his business to invest.

213 Mr Xiao said that he was next approached by Mr Zhang in 2011 to invest in a company in Australia, Daton Group Australia Limited ('Daton Australia'). Mr Zhang told him that company was also in the fertilizer business and that it had purchased Daton China.

214 Mr Xiao said that Mr Zhang was residing in Australia and they discussed establishing a fertilizer business and a vertically integrated business model. He said that the upstream business would include raw materials required for manufacturing fertilizer including coal and other minerals.[126] Mr Xiao said that Daton Australia was to be used to produce coal, that could be used by Henan Daton to manufacture fertiliser back in China.

215 Mr Xiao said that he invested $15 million in convertible notes, that could be converted into shares, in Daton Australia. He said he had a lot of cash on hand, because he had just sold his business to the French company Publis. The investment in Daton Australia was FLC's first major investment in Australia.

216 Subsequently, in about November 2012, Mr Xiao converted $8.5 million of the convertible notes into shares in Daton Australia. On or about 31 May 2012, Mr Xiao also became a non-executive director of Daton Australia. At some stage, Daton Australia changed its name to Australia New Agribusiness & Chemical Group Ltd (ANB).

217 Mr Xiao first heard about the mining tenement EPC 818 in July 2011. Mr Xiao said that coal was the main material required to manufacture fertiliser. Mr Xiao said the price of fertiliser was determined by the price of coal. Mr Xiao said that he and Mr Zhang wanted to have their own coalmine to manufacture fertiliser with their own material to optimise cost.

218 Mr Xiao said that around October 2011, he and Mr Zhang made the decision to buy the tenement. Mr Xiao said that they decided to set up U&D for the purpose of purchasing the mine. U&D was incorporated on 26 August 2011. FLC was to contribute $12 million to U&D, that amount being 40 per cent of the $30 million required to acquire the tenement. Daton Australia was to contribute the remaining $18 million.[127] Madam Cui was in charge of transferring the money into U&D.

219 Mr Xiao said that at the same time, Apollo Fertiliser Queensland Pty Ltd was established for the purpose of setting up a fertiliser plant. Mr Xiao said that he believed in Mr Zhang's expertise in fertiliser and coal. He believed that there was no issue with the choice of the mine. Mr Xiao was aware that on 21 November 2011, U&D agreed to buy the coal tenement for $25.5 million. Mr Xiao said that he believed that the purchase was settled on or about 10 February 2012. Mr Xiao said that he understood that U&D required $30 million for the purchase, as there were other costs such as legal costs involved.

220 Later, Mr Xiao discovered that the entire capital for the purchase of the tenement was from his company, as the $15 million he invested in convertible notes in ANB was used by U&D to buy the tenement. Thus, all the $25.5 million came from his companies (being the $12 million subscribed to U&D and the $15 million subscribed for convertible notes in Daton Australia.)

221 On 10 February 2012, the completion of the purchase by U&D was announced on the ASX.[128]

222 Mr Xiao said that he and Mr Zhang agreed that they would seek to sell the mine but maintain a minority interest to ensure that it would provide them with the raw material for the manufacture of fertiliser.[129] Mr Xiao said that he approached a number of potential buyers in China, including Shenhua. He said that Chinese state-owned companies were required to invest abroad. He used friends of his in China to negotiate with state-owned companies on his behalf.

223 Mr Xiao said that Mr Zhang called him and asked him to put the meetings with Shenhua on hold because he had made contacts with Yima Mining, as he had a very close relationship with the CEO of Yima. Mr Xiao said that Yima at the time had the intention to invest abroad and they showed great enthusiasm for this venture.[130]

224 According to Mr Xiao, Mr Zhang mentioned Mr Yulu Wu and said that he had a great relationship with him. Mr Zhang informed Mr Xiao that Mr Wu showed great enthusiasm, indicating that Yima intended to purchase 51 per cent of the shares. Mr Zhang asked Mr Xiao whether he was willing to sell his 40-per-cent share in U&D. Mr Xiao agreed to sell.

225 Mr Xiao said that he was told to put the negotiation with Shenhua and other potential buyers on hold and that Mr Zhang would be in charge of the negotiation with Yulu Wu and Yima.

226 Mr Xiao said that he and Mr Zhang assigned themselves different tasks in relation to the sale. Mr Zhang would be in charge of negotiation and preparation of relevant documents. Because Mr Xiao was selling the majority of the shares, he agreed with Mr Zhang that Mr Xiao should be involved with the negotiation of the price and how the deal would go ahead 'and that needs to be done with my consent.'[131]

227 Mr Xiao said that during that time, Mr Zhang made frequent trips back to China in order for Mr Xiao to sign documents relating to the sale. Mr Xiao said that caused inconvenience, and Mr Zhang asked him whether he could authorise Mr Zhang to sign documents on Mr Xiao's behalf. Mr Xiao said that he gave him his written authorisation on or about 7 February 2012 during the preparation phase of the negotiations.

228 Mr Xiao said that it was agreed at the time that Mr Zhang could only sign some preliminary documents. Mr Xiao said: 'But any documents involving key information such as the price, and how the sale would be conducted, except for would - must be made aware to me and can only go ahead with my consent.'[132] Mr Xiao identified the letter.[133]

229 Mr Xiao said that he never had direct contact with either Yima of KQ. Mr Xiao said that Mr Zhang would keep him up to date with a number of phone calls each month.

230 Mr Xiao was asked whether he was told that 'there had to be a valuation performed of the tenement for the price to be ...'[134] He said that he was not. Mr Xiao said that he had his own understanding and expectation of the price, based on inquiries he made in China. He said that he was told by friends in China that based on the quality of the mine, it would be valued at least CN¥200 million based on the low cost of extraction; the coal being of great quality and the site location close to transport.

231 Mr Xiao was asked when he first became aware that for Yima to purchase his shares or FLC's shares in U&D Mining that there needed to be a government appointed value process. Mr Xiao said that he was not aware of this.[135] Mr Xiao said:[136]

I was under the impression that the figure was negotiated between the parties. I was told by Zhang Yinan that a valuer appointed by the government was involved, and I was under the impression that their involvement was to do with the procedure and it's part of the requirement for approval. I was not aware that it's - that would form the basis for the purchase price.

232 Mr Xiao said that he first became aware of KQ just before completion and after the sale. He said he thought it was a shelf company incorporated for the sole purpose of the payment for the sale.[137]

233 Mr Xiao was asked whether he was aware of an announcement by Daton Australia in relation to the joint venture with KQ in relation to EPC 818. He said that:[138]

I was aware of this, but I did not have a very close read of the document due to my limited English. I had a very brief meeting - I had a very brief meeting which lasted for about one to two minutes with Liu Hao, the manager of Daton Australia and I was made aware that that would be the company that would make payment of the sale, and we didn't have any further contact with him after that.

234 Mr Xiao said that he believed the meeting took place in his office in Beijing as he was about to meet with Mr Wu together with Mr Zhang.

235 Mr Xiao was asked when he became aware that KQ was prepared to buy his shares in U&D. Mr Xiao said:[139]

It was sometime between February and April 2012, they were in the process of negotiating with Yima and the preliminary proposal was to purchase 40 per cent of shares from me and 11 per cent from Daton because Yima wanted to have the majority of shares and Daton wanted to continue its involvement in the mining business. From my point of view this is an investment and it didn't make, um, any difference the proportion to sell.

Counsel: And how did you first become aware of that? Yima was prepared to buy your shares, how did you first become aware of it?

Mr Xiao: Sometime between March and April; I don't recall the exact time - date. I think it was in or around April, end of March and beginning of April.

Counsel: When did you first become aware of the price for the shareholding?

Mr Xiao: Same period of time.

237 Mr Xiao was asked how he became aware of that price and how much was it. Mr Xiao said:[141]

Well the total price will be 129 million, um, and my share would be 51.6 million. And to me that was towards the lower end but still acceptable.

238 Mr Xiao was shown the equity transfer agreement in Chinese[142] and asked about the signing of the equity transfer agreement between FLC, Daton Australia, and KQ:[143]

Counsel: And do you recall signing a version of this document?

Mr Xiao: Yes, I have read, and ah, ah, I have read the content of this agreement and um, I have signed the Chinese version because it was a very urgent matter to get the document signed and I was in China at the time. Zhang, signed the English, um, version on my behalf.

Counsel: Do you recall in the Chinese version you signed, there was a price in it?

Mr Xiao: Yes, it was there.

Counsel: And are you certain about that?

Mr Xiao: Yes, I am.

239 The Chinese version of the ETA has the date of 27 April 2014 below the common seal of each of KQ, Daton, and FLC.[144] Clause 7 of the English translation of the equity transfer agreement provided for the price of $65,790,000 with 'AUD 51,600,000 with be used to purchase 40% of the shares in the Target Company held by Party C and AUD 14,190,000 will be used to purchase the 11% of the shares in the Target Company held by Party B.'[145]

240 Mr Xiao was taken to the CRA Report in Chinese and in English. He said he had never seen them before.

241 Mr Xiao said that he first received payment under the ETA on or about 17 September 2012 of $5.4 million and a second payment on 18 September of $17 million.[146] Mr Xiao said that he has not received any further payments.

242 Mr Xiao gave evidence of the inquiries he made of Mr Zhang over the next two years as to the balance that he was owed. Mr Xiao said that he became aware that his 40-per-cent holding in U&D was transferred to KQ in February or March 2014.[147] Mr Xiao said that he also became aware then, that U&D had been listed on the ASX. He realised then that FLC no longer had any shareholding in U&D when he read the prospectus.[148]

243 Mr Xiao said that he then asked Mr Zhang why were the FLC shares transferred without his knowledge or consent and asked about the balance of the payment. Mr Zhang told him that he was still negotiating with Mr Qian Yu for the payment for the payment, who was then in charge of KQ.

244 Mr Xiao said that up until February 2014, he lent further moneys of $12 million to Mr Zhang or companies he was associated with. Mr Xiao said that on 26 August 2014, he met Mr Zhang at the Shangri-La hotel in Hong Kong and Mr Zhang confirmed in writing the debt of $12 million. On that occasion, Mr Zhang also said that the delay in paying FLC for its shares in U&D was due to certain processes that had to be followed in China. Mr Xiao said he accepted this explanation because it was not uncommon for a state-owned company to make payments during a prolonged period. He said that there usually was no issue with payment in the end.[149]

245 Mr Xiao said that in March 2016, he last discussed with Mr Zhang recovery of the moneys owed by KQ. Mr Zhang said that he was no longer in a position to recover the payment for Mr Xiao. Mr Xiao said that his wife Madam Cui then contacted KQ but KQ refused to respond. Mr Xiao said that gave him the impression that they were no longer able to recover the debt through personal communication and they would have to go to court.

246 Mr Xiao said that he was not aware that he had been removed as a director of U&D in about May 2012, nor was he aware that his shares had been transferred on or about 8 May 2012, prior to the proceedings.

247 Dr Moore, senior counsel for KQ, put to Mr Xiao that he attended certain meetings of Daton Group Australia. Mr Xiao denied attending meetings by telephone despite what the minutes stated. Mr Xiao said that from his recollection he only attended one board meeting in 2011.[150]

248 Dr Moore showed Mr Xiao minutes of a board meeting of Daton Group Australia Ltd held on 28 March 2013. The consolidated financial statements for the year ended 31 December 2012 were attached to the minutes.[151] Mr Xiao denied attending the meeting.[152]

249 Mr Xiao was asked whether he read the profit and loss statements for Daton Australia Ltd attached to the minutes of the board meeting dated 28 March 2013. Mr Xiao said he had not read them in detail because they were in English.

250 Dr Moore said that the minutes stated that the sale of the shares in U&D was settled on 3 December 2012. Mr Xiao denied seeing the document. Mr Xiao said that he believed that the transaction was completed once the document was signed.

251 Mr Xiao was also shown the minutes of a meeting of the board of Daton Australia on 23 April 2013 with the Daton Group Annual Report for 2012.[153] The annual report had Mr Xiao's signature. Mr Xiao said that he did not sign it and his signature must have been copied and pasted into the annual report.[154]

252 The annual report of Daton recorded that Mr Xiao had attended various meetings of directors and of the audit committee. Mr Xiao denied attending those meetings.[155]

253 Mr Xiao was shown a form of transfer of shares in U&D bearing what appeared to be his signature.[156] Mr Xiao denied signing the transfer.

254 Mr Xiao denied signing a document headed 'Agreement of intention of investment co-operation for Australia EPC 818 coal mine project', dated 19 September 2014.[157]

255 Mr Xiao was shown the co-operation agreement made with KQ on 6 February 2012.[158] He was shown what purported to be his signature on a page of the agreement.[159] Mr Xiao at first said it was not his signature. He had a closer look and said that he could not quite tell whether that was his signature.[160] He then added that he was familiar with the agreement and was content with it.

Counsel: You were advised of the content of the agreement in 2012 when it was signed?-

Mr Xiao: Prior to the signing of the documents because it was agreed that - um, I have to be aware of the agreement and agreeable to it before it can be signed.

Counsel: You said before that Mr Zhang sometimes signed documents on your behalf?

Mr Xiao: Yes, but it's limited to what I have authorised him to do.

Counsel: When Mr Zhang signed documents on your behalf did he sign his name or did he try to copy your signature?

Mr Xiao: He would sign in my name.

Counsel: When you authorised him to sign a document it was okay by you that he sign your name?

Mr Xiao: With my authorisation he is allowed to sign on my behalf.

257 Mr Xiao was taken to cl 2(2)(3) of the agreement, and was asked whether he understood that the clause obliged both FLC and Daton Australia to provide KQ with 'all kinds of materials and information related to the co-operation of this project.' Mr Xiao denied that he understood that the clause obliged both FLC and Daton to provide information to KQ.

258 At this stage of his evidence, Mr Xiao said that he now believed, on further consideration, that he did not sign the document. He said, 'I think I do not believe this was my signature.'[162] Mr Xiao agreed that he left it up to Mr Zhang to provide documents on FLC's behalf.

259 Mr Xiao was taken to the authorisation to Mr Zhang to sign on behalf of FLC.[163] Mr Xiao agreed that it was signed the day after the co-operation agreement: 7 February 2012.[164]

260 Mr Xiao was asked about the authorisation letter:[165]

Counsel: This authorisation was not just to sign documents, but to deal with all the documentation affairs regarding EPC 818 of U&D Mining?

Mr Xiao: The authorisation is limited to the preparation of - preparation and signing of some documents. This authorisation is limited to the signing of certain documents because at the time I was in China and Yima was located in Henan. Some of the documents were time sensitive and that's why we had the authorisation for him to sign certain documents on my behalf. But at the time we had [an] additional agreement, that agreement stating that anything that concerns the price and - the Interpreter seeks clarification - and payment method, anything to do with price and payment method, that has to be discussed with me prior. That's not a part of the authorisation. That's why this here it explicitly stated the authorisation is to do with documentation, not with everything.

261 It was put to Mr Xiao that the authorisation was not limited to just signing documents. Mr Xiao responded: 'No, that's not the idea.'[166]

262 Mr Xiao was questioned about when he signed the ETA and when he was informed of the price to be paid. He said that Mr Zhang signed the ETA in Australia on his behalf. Mr Xiao said he was no present when KQ and Daton Australia signed the ETA. He agreed that he was in China. Mr Xiao agreed that he had been told by Mr Zhang that it was signed in Australia by the other parties.[167]

263 Mr Xiao said that he signed the agreement sometime in April.[168] Mr Xiao said that he was given the agreement before it was signed, and he said that he would not be able to attend the signing. Mr Xiao recalled signing a copy of the document. It was put to Mr Xiao that he could not remember what month he signed the document. He agreed that he could have been wrong in his recollection that it was in April.[169]

264 Mr Xiao agreed that a valuation of the mine was to be carried out under the ETA. He said that he thought the valuation was for the purpose of gaining the approval of the State Asset Committee. Mr Xiao was taken to cl 6.2 of the ETA that provided the parties would engage Henan Goldstone Mining Tenement Valuation Company Limited to carry out the valuation of EPC 818. The evidence continued:[170]

Counsel: So you understood, didn't you, that the parties were saying in this agreement that a valuation will be obtained and the price is agreed on the basis of that valuation?

Mr Xiao: Well, here it says it will form the basis for the - ah, sale price. However, it is also subject to - um, further negotiation between parties. It does not require us to sell the - um, tenement based on the valuation.

Counsel: But it says - but is it your evidence that the - is it your understanding of the agreement was that there'd be a valuation obtained and then there would be further negotiation of the price?

Mr Xiao: Yes, yes.

265 Mr Xiao agreed that when he signed the agreement with the price in it, the valuation might already have been obtained, but he did not know. Mr Xiao said:[171]

There is no doubt the valuation had already been carried out by that point because otherwise we - Yima would not - ah, have - Yima would not have been in a position to sign the agreement with us.

266 Mr Xiao was asked about his knowledge of the coal in the tenement. He said that friends of his in the mining industry told him the mine was worth between $150 million to $200 million. He agreed that he believed that he was acquiring a mine worth between $150 million to $200 million for $25 million.[172]

267 Mr Xiao said that he was aware of the information that was made available publicly on the mine. He could not remember the quantities. He was asked if he could remember two figures: 30 million tonnes and 1 billion tonnes. Mr Xiao said he could vaguely remember 30 million tonnes.[173]

268 Mr Xiao was asked many questions relating to his role as a director of Daton Australia. He freely admitted that he neglected his role as a director as he was busy in China.

269 Mr Xiao was asked about the $70 million transferred to U&D. Mr Xiao denied knowing that it was to be used by U&D to enable it to show it had moneys to finance the purchase of Endocoal.[174] It was put to Mr Xiao that FLC did not demand payment from KQ for four years until 2016, as U&D was required to keep the moneys as part of the Endocoal transaction.[175] Mr Xiao said that he did not understand the question.

270 Mr Xiao was taken to the letter of Baker McKenzie dated 19 May 2016 demanding payment of $51.6 million. Mr Xiao said that his wife communicated with the legal representatives in relation to documents. Mr Xiao said that before this litigation they went through their bank records. The $22.4 million was paid to them by U&D. They believed that the $51.6 million was payable by KQ and that led them to believe that KQ should be the party to make the payment.[176]

271 After discussion with their lawyers, Mr Xiao said that they concluded that the $22.4 million already paid should be taken into account and be taken out of the $51.6 million. He said that is why the litigation demand is for $29.2 million. It was put to Mr Xiao that he had not told his lawyers that he had received the $22.4 million prior to the letter of demand. He said that he believed he did.[177]

272 It was put to Mr Xiao that he signed a receipt for the full amount of $51.6 million. He said, 'No, I never signed such a receipt.'[178]

273 Mr Xiao was shown a receipt under the name of FLC. It was put to him that the signature appearing on the page was his.[179]

Mr Xiao: That's forged. Including the letterhead. And it's showing incorrect address.

Counsel: So is it your evidence that it could be your signature taken from another document?

Mr Xiao: Correct. It's not in my own hand.

Counsel: It's not in your hand?

Mr Xiao: It's not. And we don't have stationery with such letterhead.

Counsel: So could it be Mr Zhang signing on your behalf?

Mr Xiao: No.

Counsel: Why do you say that?

Mr Xiao: Because it appears to be my signature. It appears to be my handwriting.

Counsel: When did you first see this document?

Mr Xiao: After we, um, after we filed this matter with the court.

Counsel: The topic of this document was not addressed in either of your witness statements?

Mr Xiao: I believe those details were included in Cui Yang's statement.

Counsel: Mr Xiao, no reference was made to this receipt in either your witness statements or your wife's witness statement. Do you know why?

Mr Xiao: No, I don't. But I'm absolutely certain that I did not sign the document. If you have the original you need to show it to me.

274 It was put to Mr Xiao that he had failed to address the receipt in his witness statements even though it was pleaded in KQ's counterclaim. Mr Xiao said that he was not aware of that. Mr Xiao said:[180]

Because this is fabricated, I'm telling now. And I have suspicion that this was only made after the commencement of this litigation.

275 Dr Moore read to Mr Xiao several paragraphs from an affidavit of Peter Lucarelli of Baker & McKenzie, the solicitors for FLC.[181] Mr Xiao agreed that what Mr Lucarelli said was correct where he said that Mr Xiao 'has relied on Mr Zhang to manage FLC's investments in Australia, and to keep him and Madam Cui informed of developments in Australia regarding those investments.'[182]

277 Questions were put to Mr Xiao on the accounts of FLC and its tax liabilities in Australia resulting from the sale of the shares in U&D. Mr Xiao said that his wife was responsible for that side of the business and said that he was not able to answer the questions being put to him. These questions were said to be going to Mr Xiao's credit.

278 Dr Moore challenged Mr Xiao's credibility in relation to two issues. The first issue was whether the letter authorising Mr Zhang to act as agent for FLC was limited in its scope by Mr Xiao in a conversation with Mr Zhang. The second was whether the price for the sale of the U&D shares was inserted in the ETA before the valuation was carried out. As it was, Mr Xiao conceded that the valuation was carried out before the price was inserted.

279 As to the second, Dr Moore did not put to Mr Xiao that he was lying about the conversation with Mr Zhang which limited the extent of his agency authority.

280 Nevertheless, Dr Moore sought to challenge Mr Xiao's credibility on the basis that FLC had not lodged a tax return even though it had made a significant profit on the sale of its shares in U&D. In my discretion, I disallowed further questions on FLC's failure to lodge a tax return.

281 Mr Xiao was also cross-examined on matters relating to the tracing proceeding. I will defer consideration of that evidence until I consider the tracing proceeding.

282 Madam Cui gave evidence on behalf of FLC. Madam Cui is a director of FLC and the wife of Mr Xiao. Madam Cui described herself as an entrepreneur. Madam Cui studied at the Beijing University of Technology and completed a degree in computer sciences. Madam Cui established Genedigi with her husband.

283 Her witness statement was tendered.[183] Madam Cui owns 49 per cent of the shares in FLC. In her witness statement, Madam Cui gave evidence of certain payments she caused to be made. Madam Cui gave evidence of FLC's investment in shares in U&D. Madam Cui said that between 20 October 2011 and 6 December 2011, she caused the payment of the total amount of $12 million to be paid to U&D on behalf of FLC. Madam Cui said that she received emails from Ms Beibei Zhu during this period which specified bank accounts for the purpose of transferring those funds. Madam Cui exhibited emails.

284 On 20 October 2011, Madam Cui caused the total amount of CN¥10 million to be transferred to bank accounts specified by Ms Zhu on behalf of FLC. She exhibited the bank remittance confirmation for this transfer. As discussed below, this payment was treated in the books of FLC as an investment in U&D.

285 On 21 October 2011, Madam Cui sent an email to Ms Zhu which attached bank records showing the transfer of CN¥10 million on 20 October 2011.[184]

286 On 2 November 2011, Madam Cui received an email from Ms Zhu regarding FLC's investment in U&D. She exhibited the email.

287 On 2 November 2011, Madam Cui caused a further payment of CN¥5 million to be made to the accounts specified in Ms Zhu's email, on behalf of FLC. Madam Cui exhibited a copy of the bank remittance confirmation. As discussed below, this payment was treated in the books of FLC as an investment in U&D.

288 On 7 November 2011, Madam Cui received an email from Ms Zhu regarding details of FLC's investment in U&D. Madam Cui exhibited the email.

289 On 9 November 2011, Madam Cui caused $9 million to be transferred from FLC to U&D. Madam Cui exhibited a copy of the bank remittance for this transfer which shows the payee was U&D.[185] As discussed below, this payment was treated in the books of FLC as an investment in U&D.

290 On 1 December 2011, Madam Chui received an email from Ms Zhu that contained an attachment that according to Ms Zhu attached the bank statement of 'your remittances to U&D's account some time ago.'

291 On 6 December 2011, Madam Cui caused CN¥4.75million to be transferred to bank accounts specified by Ms Zhu on behalf of FLC. As discussed below, this payment was treated in the books of FLC as an investment in U&D.

292 As to the receipt of funds for the sale of FLC's shares in U&D, Madam Cui said that in September 2012, Mr Xiao said to her that FLC should have received part of the amount due to be paid for the sale of its shares in U&D. Madam Cui said that Mr Xiao asked her to check whether the funds had been received. Madam Cui checked FLC's bank account through the Bank of China's online portal. She saw that two payments had been received: a payment of $5.4 million on 17 September 2012 and a second payment of $17 million on 18 September 2012.

293 Madam Cui said that the bank records did not show the name of the payer. Madam Cui said that in July 2014, she requested a statement from the Brisbane branch of the Bank of China which records the receipt by FLC of the payments on 17 and 18 September 2012. Madam Cui says that she was informed by the bank that the payer was U&D and subsequently obtained documents from the bank showing the payer was U&D.

294 Madam Cui said that FLC had not received any further payments for the sale of its shares in U&D. The relevant documents showing the payments to FLC's account were tendered during Madam Cui's oral evidence.[186]

295 Under cross-examination, Madam Cui said that she managed the accounting department of FLC. It was put to Madam Cui that an extract from FLC's accounts recorded a receipt of $5.4 million and $17 million from U&D, recorded who paid the money and that it was entered in the accounts in September 2012.[187] Madam Cui said that that was not the truth.[188]

296 Madam Cui said that 2012 she thought the $22.4 million came from KQ.[189] She said she first learnt it came from U&D in 2014. Dr Moore put to her that this answer was not true and that she knew in 2012 that the money had come from U&D. Madam Cui said she was telling the truth.

Counsel: What caused you in July 2014 to go to the Bank of China to ask for more documents?

Madam Cui: In 2014, when I went to Bank of China, I initially just wanted to get the bank statements of that account. However, I didn't notice that there were some payments - big payments, without the payer's name on it. So I asked the bank staff to tell me who paid those big amounts.

Counsel: But according to your evidence, you believed - since 2012 - that the payments had been made by KQ. Isn't that right?

Madam Cui: That's correct.

Counsel: And you had no reason to doubt that, did you?

Madam Cui: Yeah - KQ is the one who should be paying for the money, so I thought it should be KQ who paid the money, in the transaction agreement.

Counsel: And you had no reason to believe that the payment had been made by anyone other than KQ, according to your evidence?

Madam Cui: Yes, correct.[190]

297 Madam Cui was taken to an extract from FLC's accounts[191] and an entry that recorded 'Amounts transferred to U&D mining (via accounts specified by Ms Beibei Zhu and Mr Zhang Yinan)' that referred to money CN¥15 million transferred from FLC to U&D Mining on 20 October 2011 (CN¥10 million) and 2 November 2011 (CN¥5 million). Madam Cui agreed that the accounts were specified by Ms Zhu and Mr Zhang.

298 Dr Moore asked Madam Cui her to explain the account. Madam Cui said:[192]

This document is - um, our payment of RMB including the payments from - including the payments to U&D Mining. It also includes the two payments from U&D. One is 17 million. Another is 5.4 million.

As Madam Cui explained, the document also recorded the receipts from U&D.

299 The FLC account recorded that the CN¥15 million equalled $2,235,738.90. The account further recorded that the transfer was debited to 'long term investment' and credited to 'cash & bank.' The accompanying note stated, 'Injected on behalf of FLIC to U&D via Lion Glass.'

300 The FLC account also recorded that the on 9 November 2011, FLC transferred to U&D $9 million. The account recorded that the transfer was debited to 'long term investment' and credited to 'cash & bank.' The accompanying note said, 'Invested in U&D directly.'

301 The account also recorded that on 6 December 2011, FLC transferred to U&D CN¥4.75 million ($764,261.10). The account recorded that the transfer was debited to 'long term investment' and credited to 'cash & bank.' The accompanying note recorded, 'Injected on behalf of FLC to U&D via Lion Glass.'

302 The sum of those three sums transferred to U&D totalled $12 million. Thus, the accounts of FLC showed that in total $12 million was transferred from FLC to U&D and treated in the accounts as a long-term investment of FLC in U&D.

303 Dr Moore tendered the accounting document. I am satisfied that by this accounting document FLC had treated the $12 million in payments, transferred pursuant to the email instructions from Ms Zhu, as an investment in U&D. The payments were not recorded in the accounts of FLC as a loan to Mr Zhang or anybody else.

304 Dr Moore put to Madam Cui a balance sheet for FLC as at December 2011 and 2012.[193] The balance sheet for December 2011 recorded a long-term investment of $12 million. For December 2012, the long-term investment had increased to $20.5 million. I infer that the long-term investment of $12 million was the money invested in U&D shares.

305 It was put to Madam Cui that the balance sheet (for December 2012) did not show that KQ owed a debt of $29.2 million to FLC. The balance sheet for December 2012 showed as a liability, $22.4 million as 'received in advance.' Madam Cui was asked why. Madam Cui said that at that stage they did not know who had paid FLC $22.4 million (that FLC received in September 2012). The balance sheet for December 2012 shows that the $22.4 million that had been received was credited to an account entitled 'received in advance.'

306 From an accounting point of view, the receipt was treated as a liability until the purpose of the payment was identified. When its purpose as payment for the shares was confirmed, it could have been credited against the asset cost and the surplus taken to shareholders' funds as a profit on the sale. I found Madam Cui's explanation of the accounting treatment as satisfactory and quite consistent with her evidence of that the moneys were paid by U&D rather than KQ.

307 Dr Moore put it to Madam Cui, that in that case, (that as the $22.4 million had not been recorded as payment for the sale of FLC's shares in U&D) the balance sheet should have shown that FLC was owed $51.6 million (for the sale of the shares in U&D). Madam Cui said that she was not familiar with the balance sheet, and that the accounting department manager 'will be knowing more about the - um, accounting record.'[194]

308 Madam Cui was asked to explain why the sum of either $51.6 million or $29.2 million did not appear in FLC's balance sheet as at 31 December 2012:[195]

Madam Cui: I'm not quite sure about that.

Counsel: I suggest to you that the reason why no debt owed by KQ, whether in the amount of 29.2 or 51.6, doesn't appear in the balance sheet is that FLC did not regard KQ as its debtor? What do you say about that?

INTERPRETER: I'm sorry, can you repeat the last part?

Counsel: I suggest to you that the reason why the balance sheet does not show KQ as a debtor as at 31 December 2012, for either $29.2 million or $51.6 million, is because FLC did not regard KQ as owing it any money? What do you say about that?

Madam Cui: I don't agree.

309 Dr Moore put to Madam Cui the receipt purportedly signed by Mr Xiao and Madam Cui for $51.6 million.[196] Madam Cui said that she only saw this document when documents were exchanged after the start of the proceedings.[197] Dr Moore asked Madam Cui if it was her signature on the document. Madam Cui said, 'From the style and character it should be mine but I didn't sign on this piece of paper.'[198]

310 Dr Moore put it to Madam Cui that Mr Xiao on occasions authorised Mr Zhang to sign documents on behalf of her husband.

Madam Cui: To my knowledge my husband sometimes for some small things he would authorise Mr Zhang to sign on behalf of him. However, for anything regards to - um, money transaction, especially for this kind of important things, he definitely will have a look by himself. I want to add one more thing about the money transaction. He has never authorised at all.

Counsel: You, yourself, also authorised Mr Zhang on occasion to sign documents on your behalf?

Madam Cui: I have never authorised Mr Zhang to sign any documents on behalf of me.

Counsel: Any document at all?

Madam Cui: Not at all.[199]

311 It was put to Madam Cui that at that time Mr Zhang was managing FLC's investments. Madam Cui denied the suggestion. Dr Moore put to Madam Cui:[200]

Counsel: Mr Xiao gave evidence that Mr Zhang was managing FLC's investments in Australia. Do you disagree with that?

Madam Cui: I don't know how did he put it. What I know is for the investments in Australia, Mr Zhang was looking for the business opportunities. However, for the company management, we were doing it by ourselves.

Counsel: He was negotiating on behalf of FLC, wasn't he?

Madam Cui: On behalf of FLC, I don't quite understand your word choosing. What I know is for the investment opportunities in Australia, he was doing that.

312 Madam Cui was pressed on why FLC had not put in a tax return for the profit on the sale of the shares. Madam Cui said that they needed to finish the deal first.[201]

313 Madam Cui's evidence completed the witnesses for FLC.

314 KQ led the evidence of Richard John Smith by a witness statement.[202] He gave evidence that he was not the author of the CRA Report nor did it bear his signature. He said that he met Mr Yinan Zhang in 2012 to discuss environmental issues relating to the tenement.

315 KQ called Mr Houghton as a witness. Mr Houghton gave his evidence in chief by two witness statements.[203] Mr Houghton carries on business in the mining industry. He said since 2001, he has been involved in valuing coal assets. Mr Houghton said it was an area of his expertise. Mr Houghton said that as an employee of both Rio Tinto and Rio Tinto PLC he was responsible for, or involved in, the valuation of approximately 65 projects. He said that each project had numerous coalmines and that, in some instances, there were more than 30 coalmines associated with one project. He said that the projects that he had valued had been across all the major coal basins, including in South Africa, the USA, Poland, Czech Republic, Vietnam, Mongolia, Queensland in the Bowen Basin, and in Columbia.

316 Through his company, Houghton Investments Pty Ltd, he owned 20 per cent of EPC 818 and Arch Coal Australia Holdings Pty Ltd. Mr Houghton said that in in early 2011 he started negotiating with Daton Group Australia Ltd to sell both his and Arch Coal's interest in the tenement to Daton. Mr Houghton said he was introduced to a Mr Xu of Daton. Mr Houghton said that on 12 May 2011, Mr Xu emailed him seeking information. Mr Houghton said that on 17 May 20122, he sent a CD of information to Mr Xu.[204] On 5 July 2011, Mr Xu forwarded a translated email from Mr Zhang. The email said that the buyer wanted to buy the whole tenement and not just the lease of the top 200 metres. Mr Houghton was informed Mr Zhang was sending his email from China. The email suggested that Mr Zhang or the interests he represented in China 'think the deposit in deep is worthy mining as well.'[205]

317 In July 2011, the price was agreed in principle as $25 million plus GST. In November 2011, a formal agreement for the sale was entered into that settled in February 2002. Under the agreement, U&D acquired the 80 per cent in the tenement held by Arch Coal for $20 million. Mr Houghton said he provided information to Daton Australia that included a document entitled Broughton Coal Joint Venture.

318 Mr Houghton addressed the CRA Report. Mr Houghton referred to the reference in the CRA Report to potential resources 800 metres below ground level. Mr Houghton said that coal mining to that depth had never occurred in the Bowen Basin. He said that due to structural characteristics and stresses, with current technology and mining practices, it was not economically viable to mine for coal to a depth of 500 metres in the Bowen Basin in Queensland. He said that no value could properly be placed upon the 'potential resources.' Further, he said that nor was it possible to measure the 'potential resources' because to his knowledge, there had never been drilling to the depth of 500 metres below ground level (let alone 800 metres below ground level) in the Bowen Basin.

319 Mr Houghton was taken to emails where Mr Zhang on 5 July 2011 referred to interest in the deep deposits. It was put to Mr Houghton it was after he provided the information to Mr Xu that the email arrived expressing interest in the deep resources.

320 Mr Houghton was asked to comment on Mr Songying Li's due diligence report. He was taken to the table that said in respect of Moranbah (that is the deep deposit) 'with no exploitation value.'[206] He said he could not comment. Mr Houghton added, however, that 'there's no way known to any geologist that I know would, would be putting in figures one, two, nine, six, whatever, on one borehole.'[207]

321 Mr Houghton agreed that if there were only one borehole (in the tenement), then 'no geologist or coal assessor would give it any value.'[208]

322 Mr Houghton was asked whether his conclusion about the deep resources having no value was consistent with Mr Songying Li's report of having 'no exploitation value.' Mr Houghton said 'I think if you asked any person with mining experience and backgrounds - um, I think they would all come to the same conclusion.'[209]

323 Mr Margetts asked Mr Houghton:[210]

But as I understand the tenor of your witness statement, and your conclusion being an experienced valuer, your conclusion is that anyone with experience and proficient in valuing and assessing coal reserves could not rely upon an assertion of a deep-seated resource of 1.5 billion tonnes in coming up with a figure; a value?

Mr Houghton: That's correct.

324 Mr Houghton was asked about the current value of the tenement. He said the top value would be $30 million to $50 million.

325 The evidence of Mr Houghton was significant in establishing that any experienced coalminer would know that the results of one borehole in a tenement could not produce a reliable estimate of the coal resources of the tenement.

326 Mr Yu is the executive director of U&D and KQ. Mr Yu gave his evidence in chief by way of a written witness statement.[211] KQ sought to tender through Mr Yu most of the documents that are referred to in Mr Li Yong Jiu's witness statement, which I come to below.

327 Dr Moore only had one question to ask Mr Yu outside the tendering of his witness statement. Dr Moore asked him to what depth, in his experience, it was possible to mine for coal in China. Mr Yu replied that it was possible to mine for coal in China to a depth of up to 800 to 1000 metres.[212]

328 In his witness statement, Mr Yu gave the following evidence. Mr Yu is one of the two directors of KQ. Since 31 July 2014, he has been the sole director of U&D.

329 Mr Yu is responsible for this proceeding on behalf of KQ, including KQ's obligations to make discovery of relevant documents. Each of the documents discovered by KQ has come from Yima, KQ, and the liquidators of ANB, Macquarie Capital (Australia) Ltd, U&D, and Bo Li. Bo Li was a former employee of ANB whom Mr Yu met with in February 2018 as part of his ongoing attempts to discover relevant documents relating to 'the fraud committed on KQ.'

330 Mr Yu said that in 2011 and 2012, Yima did not have a central server.[213] Similarly in 2011 and 2012, KQ did not have a central server. Mr Yu said that, based on his investigations, he believes that many of the relevant documents are on the computers of Mr Hao Li and Mr Yinan Zhang.

331 My Yu said that between 2009 and 2014 he worked in various capacities for Gulong Investment Co Ltd, a wholly owned subsidiary of another state-owned enterprise ('SOE') in the Henan province, which was called Henan Energy and Chemical Industry Group Ltd ('HNEC'). Since September 2013, HNEC has been the majority shareholder of Yima, holding 65.79 per cent of the shares in Yima. Yima is the sole shareholder of KQ. Yima was an SOE in 2011 and 2012 and remains an SOE today.

332 Mr Yu said that no SOE in Henan ever fixed the price to purchase an asset until it obtained approval from Henan SASAC. The approval must include a recognition of the valuation, where Henan SASAC requires one. Mr Yu said that a valuation was required whenever an SOE intended to purchase an asset or shares in a company, unless the buyer and seller were already 100-per-cent owned by the government. He said that the valuation was always prepared by a valuer nominated by Henan SASAC.

333 Mr Yu said that an SOE used a document to lodge the valuation with Henan SASAC and that same document was provided when SASAC approved the valuation. He said that the two approvals usually happened at about the same time. He exhibited the Chinese and official English translation of the document by which the valuation in this case was lodged and recognised. He also exhibited a copy of the Chinese and official translation of the approval given by Henan SASAC.

334 According to Mr Yu, when an SOE sought from Henan SASAC approval to acquire an asset which purportedly had certain significant characteristics, Henan SASAC may have asked the SOE for documentary evidence that showed that the asset had those characteristics. Mr Yu said Henan SASAC asked for such evidence when a proposal's supporting valuation notes the absence of evidence of that significant characteristic of the asset. Mr Yu said that if the SOE did not produce the documentary evidence of the asset's relevant characteristic, then Henan SASAC would not approve the proposal to acquire the asset.

335 As discussed below, many officers of Yima were aware that there was no reliable estimate of the deep-coal reserves of the EPC 818 tenement available to the valuer and that any estimate of the deep-coal reserves used by the valuer would be unreliable. Nevertheless, Henan SASAC did not request any documentary evidence of the reserves of the EPC 818 tenement from Yima, and KQ did not call anyone from Henan SASAC to explain why Henan SASAC did not do so.

336 Mr Yu said that he has dealings with the directors of Yima. He said that none of the directors who approved KQ's entry into the transaction (to acquire shares in U&D) is currently a director of Yima.

337 Mr Yu said that in 2011 and 2012, the directors of KQ were Ms Beibei Zhu, Mr Hao Liu, and Mr Dongmin Wang. Mr Yu said that Hao Liu was no longer a director of KQ. In this proceeding KQ sues Mr Hao Liu. Mr Yu said Yima also commenced proceedings in China against Mr Hao Liu. Mr Yu said that he was involved in giving instructions on behalf of Yima in China. Mr Yu said for that reason, he had not asked Mr Hao Liu to give evidence for KQ in this proceeding.

338 Mr Yu gave evidence about several relevant witnesses who were not called to give evidence by KQ. Mr Yu said that Mr Dongmin Wang was no longer a director of KQ. Mr Yu said that in about July last year, he flew to China to ask Mr Dongmin Wang to give evidence in this proceeding for KQ. He said that Dongmin Wang told him he would not. He said that there was no way KQ or Yima could compel Mr Dongmin Wang to give evidence in this proceeding. Mr Yu said that Mr Dongmin Wang was now working at a private educational institution in China.

339 Mr Yu said that in 2011 and 2012, Mr Xin Zhang was Mr Hao Liu's translator in Australia. Mr Yu said that Mr Wei Liu was a former Yima director (before 2010) and a former executive of Yima's shareholders China Huarong Asset Management Co Ltd (before 2013). As discussed above, Mr Wei Liu introduced Mr Yinan Zhang to Mr Yulu Wu and played a central role in providing the CRA Report to the valuer.

340 Mr Yu says that Mr Yulu Wu, the Chairman of Yima in 2011 and 2012, was found guilty of bribery, corruption, insider dealing, and illegal possession of firearms. Mr Yu said that Mr Wu appealed his conviction to the People's Court of Henan Province. Mr Yu said that Mr Wu's appeal was upheld and a retrial has been ordered. Mr Yu said that Mr Wu remains in jail pending the outcome of his re-trial.

341 In his second witness statement, Mr Yu said that he recently learnt that Yima backed up its email system in 2013. Mr Yu said that he recently requested that backup drives be searched for the email accounts of Mr Hao Liu, Mr Li Yong Jiu, Mr Dongmin Wang, and Mr Dongsheng Wu. He said that some of the emails recovered from the backup drives were corrupted. He said that he arranged for the emails to be recovered. He said that he received the extracted emails from the backup drives late in the evening on 27 February 2018.

342 Mr Yu said that he arranged for the documents recovered from the backup drives to be unofficially translated so that they could be read by his lawyers. He said that those translations were completed on the morning of 1 March 2018. Mr Yu exhibited a paginated copy of some of the relevant emails that were retrieved from the backup.

343 Mr Yu said that Mr Songying Li, the Yima geologist sent to Australia, sent an email to Mr Dongmin Wang on 13 January 2012 which attached two documents:

• A document (being an executive summary of the findings) stating that if the information provided to Mr Zhang was reliable, then there would be 700 million tonnes of deep resources. He says the metadata shows that this document was created on 28 July 2011.
• A table which, according to the metadata, was prepared on 15 June 2011. Mr Yu said that the figure of 700 million tonnes is the same figure that appears in the proposal of Yima and the proposal to Henan SASAC. He said that upon reviewing the email from Mr Songying Li to Mr Dongmin Wang on 13 January 2012, Mr Songying Li's personal computer was searched. He said that Yima does not have a central server containing electronic documents. He said that a search was completed on 3 March 2018. One of the documents located in the personal computer of Mr Songying Li was a document referred to by other parties as the Smith Report in Chinese.

344 Mr Yu said that in China, coal miners are capable of mining coal to 800-1000 metres deep.[214]

345 Mr Yu said that in this proceeding, he was responsible for giving instructions for the conduct of the proceedings for both KQ and U&D, but used different solicitors for each company.

346 Mr Yu said that KQ effectively controlled 51 per cent of U&D. Another major shareholder owning 23.99 per cent of U&D is Worldwide Energy Hong Kong Ltd ('WWE'); a company controlled by Ms Lidan Wang.[215] Ms Lidan Wang controls Australia Wales Financial Management Pty Ltd the sixth defendant and a party to the tracing proceeding.

347 Mr Yu said that the third-largest shareholder was Golden Globe Energy, which he had been informed was also controlled by Ms Lidan Wang.

348 Mr Yu said that he met Mr Mingli Li in Eight Mile Plains in Queensland where Mr Mingli Li told Mr Yu he was not prepared to give evidence in the case.[216] Subsequently, shortly before the trial commenced, Mr Yu was informed by Mr Mingli Li that he did not want to talk with KQ. Mr Yu said that based on the Chinese registration Mr Mingli Li was the owner of the valuation company, but he does not know where Mr Mingli Li is now.[217]

349 Mr Yu said that Mr Dongmin Wang has not worked for Yima since September 2017.

350 Mr Yu was taken to the document headed 'Investigation Report approved in the meeting of leading group, sent by Mr Hao Liu on 29 January 2012' over the heading 'Investigation and Research Report on the EPC 818 Mining Right Project of Australia'.[218] Mr Yu was asked to compare that document to another version which was merely headed 'Investigation and Research Report on the EPC 818 Mining Right Project of Australia.'[219] Mr Yu, after looking at the versions in Chinese, agreed that the substance of the reports was the same and that the only difference was the headings.[220]

351 Mr Yu said he did not know who the author of the document was. He could not say for sure whether the document was prepared for Yima.

352 Mr Yu said that the charges against Mr Yulu Wu did not relate to the Australian project.[221]

353 Mr Vincent is a chartered accountant and provided an expert's report on the liabilities and assets of U&D, as at 27 April 2012, (other than U&D's interest in the EPC 818 tenement).[222] His evidence was intended to establish that U&D had significant liabilities when KQ acquired its shares in U&D.

354 Mr Vincent concluded in his report that the assets were $53,396 and that the liabilities were $25,398,104.[223] Mr Vincent said that the main documents that he had regard to were the company's general ledger and the audited financial statements for 2012 and 2013.

355 Mr Vincent agreed that he had noted in his report that, according to the audit file of U&D, the related-party loans (which constituted the liabilities of $25,398,104) were reduced to nil in the year ending 30 June 2013.

356 Mr Vincent said, however, that in his opinion the loans were not forgiven, as stated in the audit file, but that they were reclassified in the capital accounts of the company. Mr Vincent said that if the loans had been forgiven, the loans would have shown up in the profit and loss account and in retained earnings. But the forgiven loans were not recorded in the profit-and-loss account and thus in retained earnings.

357 By this I understood Mr Vincent to be saying that the transactions of forgiving of the loans should have been recorded in the calculation of the profit or loss and thus be reflected through this adjustment to the profit or loss, in shareholders' funds. What had happened in this case was that the transactions of forgiving the loans were recorded directly in shareholders' funds without first going through the profit and loss account and then to shareholder's funds.

358 Mr Vincent went to page 32 of the annual report for the year ending 30 June 2013, and to note 18.[224] The note records that 'other capital investment from shareholders' amounted to $47,728,833. Mr Vincent said that the loans were not forgiven: 'They're still recorded as amounts owing to shareholders, but they've been put into the equity section.'

359 Mr Vincent said that if the company were liquidated, then the amount would be paid ahead of shareholders.

360 I put some questions to Mr Vincent. Mr Vincent agreed that the accounting entries were an historical record of previous transactions. Mr Vincent agreed that if a loan were forgiven, then it would increase the capital account. Mr Vincent agreed that the transactions of writing off the related-party loans may in fact have happened but that the transactions were not been recorded through the profit and loss account. Mr Vincent said, 'Well, that's a possibility too. I mean, accountants aren't infallible.'[225]

361 Mr Vincent was taken to note 18(b), which read, 'The amount shown for other contributed equity relates to additional capital injected by the shareholders.'[226] Mr Vincent said he was happy for it to be there but insisted it was still a liability.

362 I deal with Mr Vincent's evidence below, at [862] and following, when considering the defence of KQ that U&D failed to repay the related-party loans of $25,398,104. In substance, I reject Mr Vincent's evidence.

363 Mr Li is a geologist employed by Yima. He works in the Geology Research Institution of the Yima Group. Mr Li gave evidence in chief by way of a witness statement with four attached documents and orally.[227]

364 Mr Li said that he is a qualified geologist and an employee of Yima. Mr Li said that he was a member of the Yima delegation that came to Australia in 2011 to investigate the EPC 818 tenement. According to Mr Li, while he was in Australia he was provided with a bundle of documents, which he thinks were on a USB drive. He said that he does not remember who provided him with the documents. He said that he found a copy of the documents on his computer in early March 2018. Mr Li said that the documents he was provided with included:

(a) a geological report entitled 'Coal Resource Assessment Report (Geological Report);[228] and

(b) a slideshow presentation entitled 'Daton Group Australia Ltd Coal Resource Introduction.'[229]

365 Mr Li said that he prepared a resource assessment report on the EPC 818 tenement dated June 2011.[230] Mr Li said that to the best of his recollection, the figures in table 2.1 of that report were obtained by him from the Geological Report. Mr Li said that in preparing the report, he read the documents provided to him in the Geological Report.

366 Mr Li said that in or about July 2011, he also prepared what he called a summary document. He obtained the date of the document from the meta-data on his computer. He exhibited a copy of the summary document.[231] Mr Li said that, the summary document said that if the information provided to him was reliable and the coal distribution was continuous and stable, there was probably 700 million tonnes in the EPC 818 tenement.[232] The summary document was not a summary of his resource assessment report.

367 Mr Li said that he calculated the 700 million tonnes referred to in his summary report as follows. The Geological Report identified the purported thickness of each seam in the Moranbah coal measure. He selected the three coal seams in the Moranbah coal measure of appropriate thickness for mining (each measuring 2.62 metres, 5.33 metres, and 3.50 metres). Mr Li multiplied each of those seams by the effective area (44.5 square kilometres) and then by 1.38 (being the standard coal density) to reach the 700 million tonnes.

368 Mr Li said that on 13 January 2012, he emailed Mr Dongmin Wang his summary document[233] and a table which formed part of his report of June 2011.[234] He sent an email on 13 January 2012 to Mr Dongmin Wang and believes he sent some further emails regarding the tenement. He cannot recall details of those matters.

369 Mr Li said that, to the best of his recollection, from about July 2011 he had no further involvement in the EPC 818 tenement.

370 Mr Li said that he had not retained a copy of his emails from 2011 and 2012.

371 Mr Li said that the Geology Research Institute is a subsidiary research institution of the Yima Group. Their main responsibilities include providing technological services to the coalmines of their companies, and conducting scientific research.

372 Mr Li said he had a bachelor's degree and master's degree in geology. Since he started his career in 1990, he has always worked in geology.[235] Mr Li agreed that by 2011 he was both a very experienced and very competent geologist of Yima. Mr Li agreed he was one of the more senior geologists that work for Yima. He said there were several dozen or more geologists working for Yima.

373 Mr Li said that when he prepared his resource assessment report on EPC 818 he did not know that the report was made for the purpose of assessing whether or not to buy the tenement.

374 Mr Li was asked why he was sent to Australia. He said that he was sent mainly to investigate the resource condition and mining conditions of the coalmine, as well as other geological issues.

375 Mr Li explained that he was asked if he retained the investigation report of Australia in early March 2018. He said he had found a folder. He also said that he looked for emails, but that these had all been deleted.[236]

376 Mr Li confirmed that Mr Yuantao Zhai, Li Yu, and Mr Dongsheng Wu accompanied him to Australia. Mr Yuantao Zhai was the CEO of Yima Coal. Mr Li Yu and Mr Dongsheng Wu were responsible for investment issues.

377 Mr Li said that his job was to analyse the resources and the project's feasibility, and to 'read their materials to see if they were right.'[237] Mr Li agreed that he was also to provide his opinion of the estimation of coal reserves at EPC 818. Mr Li was to report to the management committee of Yima. The management committee included Mr Yulu Wu, the chairman; Mr Yuantao Zhai, the chief executive officer; and Mr Fujun Tian, the deputy chief executive officer.[238]

378 Mr Li said they stayed in Australia for a week or more.[239] They looked at the field and took a helicopter to fly around the EPC 818 tenement, to look at the open cut area. They also heard the Australian company Daton introduce the situation of their company in Australia through a slideshow presentation. They also visited a Queensland government department.

379 Mr Li said that he requested more materials from Mr Zhang and made a list of the materials he needed. He asked them to provide him with the drill-hole and the drill-hole column scheme or diagram, and an integrated geological column, the coal quality record, the drill-hole or borehole record as well as other documents. Mr Li said that Mr Liu Wei was also present (during the inspection). As mentioned above, Mr Liu Wei was a former director of Yima who introduced Mr Zhang to Mr Yulu Wu and forwarded the CRA Report from Mr Zhang to the valuer.

380 Mr Li said that only with the materials on the list could he provide a relatively comprehensive investigation report and provide a relatively comprehensive opinion. Mr Li said that he did not receive those materials he required.[240] Mr Li said that in his report to the management committee he mentioned that they did not provide him with the materials that he required.

381 Mr Li was asked to read a paragraph of the amended witness statement of Mr Li Yong Jiu,[241] where Mr Li Yong Jiu refers to the report of the first delegation, which he described as the due diligence report and exhibits.[242] This is the report that Mr Li referred to in his witness statement as his report on EPC 818. Mr Li agreed that his due diligence report was provided to his senior management at Yima. On the next day, he said that if there was a copy in the archives (of Yima) it must have been written by him.[243]

382 It was put to Mr Li that Mr Qian Yu said that he obtained the due diligence report from Yima archives. Mr Li agreed that the due diligence report must have come from him and he must have provided a written copy to his senior management.[244]

383 Mr Li could not remember whether the other members of the delegation were given the documents which he had received. Mr Li agreed that the other members were relying on him to provide the geological opinions.[245]

384 Mr Li was asked about giving his report to the management committee. He recalled reporting to three members of the management committee. He said two of them were Mr Yuantao Zhai and Mr Fujun Tian. He was asked whether Mr Jianhua Song, Mr Jianxin Li, Mr Er'an Zhai, and Mr Yuangui Fan were members of the committee he reported to. He said they might have been, he could not remember.[246] He agreed that Mr Yulu Wu was part of the management committee he reported to.[247]

385 Mr Li said that, because the materials provided to him were missing something that he needed, it was not enough for him to finish a comprehensive and complete report. He said that is why his report was just a preliminary opinion.

386 Mr Li was asked why he reported in para [7.1] of his report, 'Therefore, for the moment the deep part of this area is not suitable for underground mining.' Mr Li replied:[248]

The first reason is there are mainly thin coal seams in this area and only a small number of thick coal seams. Secondly, they only provided one borehole and I haven't seen the materials or records of the borehole. Thirdly, the materials provided by them were incomprehensive and incomplete. And, from the perspective of my profession, based on my experience, in China, if a mining of this area is about to be developed, we need at least 100 to 200 boreholes so that we can get more information about the geological conditions. One may even need to apply other approaches, such as seismic test, to get a clear understanding of the distribution conditions of the resource, so that we can make decisions whether or not to develop a coalmine. Before mining, we in most cases need an exploration report. Based on my professional knowledge, the materials provided by them are far from enough.

387 Mr Margetts put to Mr Li that he would have explained that to the members of the management committee. Mr Li said that he did not explain to them, but that he just read the main part of his due diligence report to 'our leaders.'

388 Mr Li was taken to para [7.2] of his report where he said:

There is a lack of details regarding the resource conditions, so further relative information is still needed. The exploration degree in deep-seated coal seams and deep areas is relatively low, and the resources difficult to estimate at present. Only after further exploration can the resources, mining conditions and development prospects be evaluated.

There were two or three perspectives of my report at that time. First, the materials provided were too -- not comprehensive and too small; we need further information. Second, there were not enough exploration of the deep area or deep seams, so it would be very hard to estimate the resource at that time. Third, only after further work had been done can we provide a comprehensive evaluation of the resource, its mining condition and its prospective development.

390 Mr Li agreed that he told the leaders that 'the resources are difficult to estimate at present.'[250]

391 Mr Li was referred to his report where he said , when addressing the Moranbah Coal Measures, that '[w]ith only one borehole and in the absences of coal seam structure information, it is unattainable to comprehensively evaluate the feasibility of mining and resource quantity of coal seams in the coal measures.' Mr Li replied:[251]

Because this whole area is 44.5 square kilometres, with only one borehole with coal in it, it doesn't mean there exists coal resource in other area. And also, with coal resource in this borehole, it doesn't mean that the resources distribution are continuous in this whole area. So, with only one borehole, it's not enough for us to evaluate the resource quantity.

392 Mr Li agreed that he identified the one borehole as the Wodehouse NS1 borehole.

393 Mr Li was taken to para [2.4] of his report which dealt with the Collinsville Coal Measures which are at the bottom. After describing the seams, he says, 'In the absence of more detailed information, including the thickness and its variation of each coal seam, parting band conditions, coal quality etc, proper evaluation cannot be made.'[252] Mr Li said his report explained it clearly.[253]

394 As to coal quality, Mr Li said that he copied the content of their report, but that the information was not comprehensive. So, he reached his conclusion that the information regarding coal quality was incomprehensive and that they needed further information in this regard.

395 Mr Li was taken to section 5 of the report, 'Calculation of Resources.' Mr Li said that the calculation was clearly inappropriate. He said he could neither accept nor reject the figure. Mr Li said that the data provided was not enough for 'us to reach a conclusion.'

396 Mr Li also criticised the calculations including the whole area of the tenement of 44.5 square kilometres. He said that it was not possible to apply a calculation by reference to the figure of 44.5 square kilometres. Mr Li said that:[254]

This part is too technical. The upper layers are considered as outcrop area. The Rangal coal measure and Cooper coal measure, located in the middle and west part of this area, are outcrop area. Some coal seams didn't exist because of the weathering effect.

397 Mr Li was asked about para [6] of his witness statement, where he made a calculation of 700 million tonnes.[255] He was asked why he made the calculation when he said in his due diligence report that it was unconvincing to include the total area of 44.5 square kilometres.

398 Mr Li said that he had assumed two conditions in his calculation. The first was that the materials for the one borehole were reliable. Mr Li said he had not seen the section diagram for this borehole. By this I understood that he was not able to form a view on the reliability of the materials purportedly obtained from the one borehole. The second condition was that the distribution of the coal measures was continuous and stable, which meant that the thickness of the coal seam extended evenly over the whole area. He said that if these two conditions were satisfied, then he could reach this conclusion.

399 Mr Li said that the two reports - the due diligence report and the summary - were the same. He said at the time he could not reach the conclusion, because they needed the two aforementioned conditions: 'If the two conditions were met, then we could reach the conclusion of 700 million tonnes.'[256] I understood Mr Li to be saying that the information he received was not enough to establish either of the two conditions, but that if the conditions were satisfied, then the calculation would be correct.

400 Mr Li elaborated on the first condition. He said:[257]

No. The first condition is the materials of the one borehole is reliable. I mean the first condition is the materials provided by them regarding the borehole is reliable, because I didn't see the borehole myself.

401 Mr Li said that if the borehole result was forged or untrue, or if the distribution of the coal seems was not stable, then his conclusion could not be reached.[258]

402 Mr Li was asked about his statement in section 6 of his report that 'Some thickness figures were borrowed from regional data (or data of single borehole), with low reliability ...' It was put to Mr Li that he reported that the thickness figure of the coal seams identified in the geologist report were of low reliability. He said that he did not evaluate the reliability of that report.

Counsel: So the coal seam thicknesses that you've identified in paragraph [6.3] you said were of low reliability. Do you agree with that?

Mr Li: There are two kinds of evaluation of the seam thickness. The first one is the coal seam thickness of this borehole, and the other one is the estimation of the thickness of the whole coalmine. Now, I'm not clear about the variation of the thickness of this whole area. I didn't evaluate the thickness of that one borehole.

Also, I didn't have any materials related to this borehole, so I cannot assess this borehole, and I hadn't seen that borehole but only materials provided to me and materials outside this area. It's not reliable or sufficient to evaluate the stableness of the thickness of coal seam in this area.[259]

403 I understood Mr Li to be saying that he did not assess whether or not the material on the borehole was reliable or not. Further, he could not evaluate the thickness of the seams over the whole area, and thus he was not able to give a proper and meaningful calculation of the coal reserves of the tenement.

404 Mr Li agreed that before a proper and meaningful calculation of coal reserves could be undertaken one would need coal seam thickness from 100 or 200 boreholes from the tenement, or even more.[260]

Counsel: So it would be unreliable, when calculating mining coal reserves, to use the data only from one borehole; do you agree with that?

Mr Li: It's far from enough if only information of one borehole is provided without any other geological materials.

405 Mr Li agreed that his report at 6.4 was criticising the calculations in the CRA Report at 4.3 under the heading of 'Estimation of Potential Reserves.'[261] Mr Li said that the calculation of the resources in the Moranbah coal measures of 968 million tonnes was:[262]

Mr Li: I would say it's incomprehensive because of lacking of calculation method, calculation process, and the parameter selection. So it's deficient in these aspects and lacking some of the important information.

Counsel: And it's a figure, therefore, that you could not rely upon when you undertook your due diligence report?

Mr Li: The data in its report is not supported with more or enough information, so its reliability is very low.

406 Mr Margetts put to Mr Li that he would have reported on the unreliability of the calculation to the management committee. Mr Li said he just read his report to the leaders without further explanation because time was limited.[263] Mr Li said that his presentation took about 20 minutes.

407 Mr Li said that he was not aware that Yima purchased the EPC 818 tenement until he was contacted recently by Mr Yu Qian. Mr Li was asked, if no further exploration work was done as he suggested at EPC 818, would he be surprised that Yima Coal bought EPC 818 on the basis of his due diligence report. Mr Li said, 'If no further investigation has been conducted since the year 2011, then I would be surprised.'[264]

408 Mr Li was asked about his email of 13 January 2012 sent to Mr Dongmin Wang.[265] Mr Li said that the conclusion of total resources of 700 million tonnes was based on the two conditions Mr Li had earlier said were involved in his calculations based on the use of the results of one borehole.

Counsel: Just tell His Honour again what those two conditions are.

Mr Li: Firstly, the materials need to be reliable, with only one borehole, and the materials provided by them. I hadn't seen the borehole myself, so I need to see if the materials are reliable. And second, the distribution of coal seams needs to be stable and continuous. The thickness of the coal seam must be stable.[266]

409 Both of these assumptions are referred to in the summary in s 5 of Mr Li's report, which is titled 'Calculation of Resources'.

410 Mr Li said that he had stated in his report his opinion that if the EPC 818 tenement was to be purchased, then they needed to undertake further exploration provide more materials. According to Mr Li, the report clearly started that as things stood, the purchasing conditions were not met.[267]

411 Mr Li was asked why he prepared the figure of 700 million tonnes. He said he did so as the purpose of the trip to Australia was to assess the resource. Secondly, to indicate the preliminary assessment was not satisfying. Thirdly, 'I need to bring hope to other people.'[268] Mr Li said that he 'found the resources were not satisfying but without further materials he could not completely reject this project.' Mr Li continued:[269]

Mr Li: So, thirdly, if we are to develop this project, I need to give people some hope. So it is possible to continue to explore this area, but we need to do further exploration works. This is the basic attitude I should have had, as my profession.

Counsel: Who were the people you had to bring hope to?

Mr Li: To my company.

Counsel: Is that to the management committee?

Mr Li: Yes.

Counsel: So did the management committee put pressure on you to come up with the 700 million tonne figure?

Mr Li: No. After the morning of that day I gave the presentation to the management committee, I almost had no further involvement in this regard.

412 Mr Li was shown Mr Li Yong Jiu's amended witness statement and the list of members of the management committee. After reading the list, Mr Li could not add to those he identified as being at the meeting which heard his report on the tenement in June-July 2011.

413 Mr Li said that if seismic tests were used to analyse coal seams, that needed to be combined with the boreholes.

414 Mr Li confirmed that his statement in the due diligence report at para [5.2] related to Fort Cooper and not to Moranbah coal measures.[270] Mr Li also confirmed that s 6.4 relates to Fort Cooper and Rangal but not Moranbah measures.

415 Mr Li was taken to his summary document.[271] He confirmed that his calculation of 700 million tonnes related only to the deeper reserves the Moranbah coal measures. Mr Li said:[272]

According to my analysis, the most part of the Rangal coal measure are weathered. And for the coal measure below it, which is the Fort Cooper coal measure, some section of that measure were also subject to the weathering effect and they are also not exist. I also believe the quality of these coal measures are relatively low. I didn't calculate for these two coal measures. The Moranbah coal measure is in the deeper part. I think it might exist completely, comprehensively, for the full part, although I was only provided with limited information and materials.

According to my professional judgment, I think it occurs in the whole area or for a large area. So I only calculate the reserves of the Moranbah coal measure. And because of a lack of materials, I provided the two conditions. If these two conditions are satisfied, then we can reach the figure 700 million tonnes of reserves. This is my opinion.

416 In Mr Li's summary document, Mr Li referred in para [5] to three coal seams of the Moranbah coal measures. He confirmed that he took those figures from the CRA Report.[273]

417 Mr Li was referred to para [2.1] of the geological report (the CRA Report) and the reference to 'four thick coal seams with desirable continuity'[274] and asked whether that was one of his assumptions in calculating 700 million tonnes, continuous coal seams. Mr Li said:[275]

Yes. But the seismic test is just an approach. It is indirect, so it must be combined with enough number of boreholes so that we can come to an accurate explanation. So this is just a little hope for us, but the information provided to us are far from enough.

418 Mr Li Yong Jiu gave evidence by way of an amended witness statement in Chinese.[276] An agreed interpretation of the amended witness statement was included in the Court Book.[277] Mr Li gave oral evidence in Hong Kong.[278]

419 At the time of giving evidence, Mr Li was the Deputy Chief Executive Officer of Henan Energy and Chemical Industry Group Co Ltd (HNEC). In 1983, Mr Li obtained his first job with Yima. In 2002 Mr Li was appointed director and company secretary of Yima. He became a member of Yima's management committee. He ceased to be a director of Yima in 2013.

420 In 2007, Mr Li was appointed to the position of Deputy Chief Executive Officer of Yima. Between then and 2013, he was a director of Yima and sat on its management committee.

421 On 8 May 2012, he was appointed as a non-executive director of U&D. He held that position until 13 November 2013. In September 2013, he was appointed to his current position, namely Director Chief Executive Officer of HNEC and as a member of the management committee. Mr Li does not speak or write English.

422 Mr Li said that during the time of the transactions before the Court, Yima was a State Owned Enterprise. He gave evidence of its shareholders. Mr Li said that throughout 2011 and 2012, Yima's main business activities were coal mining, coal sales, and coal-chemical industrial production. All Yima's operations were in China. It did not have overseas investments save for its investment in KQ and therefore indirectly in U&D.

423 By the end of 2012, Yima's total assets were about CN¥53.35 billion, it had annual revenue of about CN¥33.5 billion, and it generated an annual profit of about CN¥100.9 million.

424 Mr Li said that in 2011 and 2012, major decisions of Yima were made by the directors of Yima. In 2011 and 2012, there were 13 directors, namely:

(a) Mr Yulu Wu (the Chairman);

(b) Mr Yuantao Zhai;

(c) Mr Fujun Tian;

(d) Mr Jianhua Song;

(e) Mr Jianxin Li;

(f) Mr Er'an Zhai;

(g) Mr Yuangui Fan;

(h) Mr Baocheng Li;

(i) Mr Ping Nie;

(j) Mr Shidong Xun;

(k) Mr Guanglin Peng;

(l) Gangyin Luo; and

(m) Mr Li Yong Jiu.

425 Mr Li said that, before September 2013, meetings of directors took place about four times a year. Meetings were not convened at the same location each time. Instead, meetings took place in different locations across China. The location varied because the shareholders and their representative board members were located in different locations in China. Mr Li said that Yima has records of resolutions that directors approved in 2011 and 2012.

426 Mr Li said that the management committee made the less important decisions. Mr Li said some directors sat on the management committee. In 2011 and 2014, there were 14 members of the management committee, namely:

(a) Yulu Wu;

(b) Yuantao Zhai;

(c) Guohou Qiao;

(d) Wenliang Wang;

(e) Jianhua Song;

(f) Jianxin Li;

(g) Xingzhi Dai;

(h) Er'an Zhai;

(i) Jianwei Huang;

(j) Xinwei Zhang;

(k) Lusheng Song;

(l) Zengliang Wei;

(m) Fujun Tian; and

(n) Mr Li Yong Jiu.

427 Mr Li said that in 2011 and 2012, management committee meetings were usually convened once a week. However, depending on the nature of the business to be discussed and the urgency of the matters under consideration, the management committee sometimes met several times in the same week.

428 Mr Li said that the chairman of Yima, Mr Wu, also had a broad power to made decisions relating to the operations of the organisation.

429 In about September 2013, Henan SASAC transferred its shares in Yima to HNEC. Henan SASAC owns all the shares in HNEC.

430 Mr Li was the only director and member of the management committee of Yima to give evidence.

431 Mr Li relayed something that Mr Yulu Wu, the chairman of Yima, had told him and the other members of the management committee during a meeting in April or May 2011. According to Mr Li, Mr Wu, said that he was being encouraged by the Chinese government and the provincial government of Henan Province to have Yima explore overseas investment opportunities. At the time, Yima did not own any overseas assets.

432 During that meeting, Mr Wu told the members of the management committee that:

(a) Wei Liu (who was an executive of China Huarong and a former director of Yima) had introduced Mr Wu to a person called Mr Yinan Zhang;

(b) Mr Zhang spoke to Mr Yulu Wu about the possibility of Yima investing in the exploration permit EPC 818 tenement in Australia which Mr Zhang owned;

(c) the management committee should consider the EPC 818 tenement investment opportunity; and

(d) they could direct any questions to Mr Zhang.

433 Mr Li said that it was in that management committee meeting that he first became aware of the EPC 818 tenement. It was also the first time he had heard of Mr Yinan Zhang.

434 Mr Li said that in about the middle of 2011, the management committee approved the appointment of Mr Hao Liu for certain tasks. Mr Liu was to investigate the EPC 818 tenement investment opportunity, head the due diligence into the tenement, and establish and operate a company in Australia that would act as an investment vehicle. Mr Li said that Mr Hao Liu had been a senior executive of Yima's only open-cut mines; the EPC 818 tenement was also to be an open-cut mine.

435 Mr Li said that after Mr Hao Liu was appointed, Mr Liu went to Australia to establish an investment vehicle and to investigate the EPC 818 tenement opportunity. Mr Xin Zhang, an assistant and translator, accompanied Mr Liu.

436 Mr Li said that Mr Hao Liu was authorised to operate KQ's bank account. The other directors appointed were Ms Beibei Zhu and Mr Dongmin Wang. At the time of Mr Dongmin Wang's appointment, he held the position of Deputy General Manager of the Securities and Investment Department of Yima. Mr Li said that he was Mr Dongmin Wang's supervisor and had daily contact with him in 2011 and 2012.

437 Mr Li said that in relation to the acquisition of the tenement, Mr Hao Liu reported directly to Mr Wu.

438 Mr Li said that in January 2012, Mr Bo Li (of ANB) sent a research report dated 10 January 2012 to Mr Zhang. Mr Li said that on 13 January 2012, Mr Yinan Zhang emailed the January research report to Mr Wei Liu. Mr Li said that Mr Wei Liu then emailed the January research report to Mr Mingli Li (the valuer).

439 Mr Li said that a copy of the January research report (but with a cover page) was found in Yima's archive. Mr Li said that the first page of the version of the January research report found in Yima's archives suggests that it was provided by Mr Hao Liu. The research report bears the date 12 January 2012.[279] Mr Li said that the research report concluded that a disadvantage of the EPC 818 tenement was that it had low resources in the open-cut mine and that 'it is uncertain about the inferred 15 million tonnes and 1.35 billion tonnes in the deep part.' It also said that co-developing the tenement was the first step in Yima's ambition to go overseas, and would contribute to its long-term plans.

440 Mr Li said that on 15 January 2012, Mr Zhang emailed Mr Wei Liu the CRA Report. The same day, Mr Wei Liu forwarded the CRA Report to the valuer.

441 Mr Li gave evidence about the selection of the valuer of the tenement.

442 Mr Li said that Henan SASAC is a provincial government department located in the Henan Province. In 2012, Henan SASAC was Yima's major shareholder and set the strategic direction for Yima. Mr Li said that Henan SASAC also appointed some directors and controlled the appointment of members of the senior executive positions of Yima.

443 Mr Li said that Henan SASAC was the majority shareholder of Yima and that, by reason of local laws and regulations, Henan SASAC accordingly needed to approve the proposed purchase of any Australian assets by Yima or its subsidiaries (including KQ). Mr Li said that Yima was not able to complete the purchase of 51 per cent of U&D without the approval from Henan SASAC.

444 Mr Li said that there are different State-owned Assets Supervision and Administration Commissions in each province in China. He said each has different rules and regulations. The Henan SASAC approval process applied in 2012 for the purchase by KQ of 51 per cent of the shares in U&D. Mr Li said that the approval process was designed to ensure that the SOE fulfilled a proper decision procedure. Mr Li said that the approval process was also designed to ensure that the purchase price conformed to the market value, which was why Henan SASAC was accustomed to appointing valuers.

445 Mr Li said that in 2012 Henan SASAC was not rejecting proposals if they were made according to the required decision procedure and valuation procedure.

446 Mr Li said that on 19 September 2011, Yima and ANB signed an agreement of intention, which provided that the purchase price for EPC 818 would be based on a valuation.[280]

447 Mr Li said that at some point prior to November 2011, he believed that Yima notified Henan SASAC in writing that it was considering the purchase of 51 per cent of the shares in U&D and requested Henan SASAC to appoint a valuer.

448 Mr Li said that on 9 November 2011, Henan SASAC randomly selected Jinshi as valuer. Mr Li explained further that Henan SASAC had a panel of valuers or assessment companies from which it randomly selected a valuer whenever it needed to value an asset. He said that the valuer must represent the best interests of Henan SASAC, not the SOE. Mr Li said that Henan SASAC asked the valuer to report the value and condition of the target asset truly and completely. This was to prevent the SOE from indulging in malpractices for the benefit of itself or relatives.

449 Yima was responsible for paying the fees and expenses associated with the assessment.

450 Mr Li believed that Jinshi requested certain documents before 16 November 2011. He said he held that belief because on 16 November 2011 Mr Xin Zhang of KQ emailed Mr Bo Li of ANB a checklist of documents for the valuer.[281] Mr Xin Zhang was Mr Hao Liu's assistant and translator in Australia.

451 On 10 March 2012, Yima executed an engagement letter and a commitment letter with Jinshi. On 15 April 2012, Yima and Jinshi executed a tenement evaluation agreement. Mr Li said that, by those documents, Jinshi was engaged to value the EPC 818 tenement. The valuer, Mr Mingli Li, was the natural person who in fact undertook the valuation. Yima, through KQ and Mr Hao Liu, was to provide relevant background information documents to the valuer.[282]

452 Mr Li said that during the first few weeks of April 2012, Mr Hao Liu was in China, and that Yima had no other employees in Australia. Mr Yulu Wu therefore decided to send Mr Dongmin Wang to Australia to accompany the valuer. Mr Li said he knew that to be the case because the management committee (of which he was a member) was informed of Mr Yulu Wu's decision.

453 Mr Li said that in late April 2012, a number of other Yima representatives, including him, Mr Yulu Wu, Mr Xingzhi Dai, and some other members of the management committee went to Queensland to consider the purchase of the EPC 818 tenement. By that stage, Mr Hao Liu was back in Australia.

454 Mr Li said that, at a signing ceremony on 27 April 2012, ANB and KQ signed an agreement that did not contain a purchase price for 51 per cent of the shares in U&D. Mr Li attended the signing ceremony. Mr Li said that there was no purchase price in the agreement because, at that time, the valuation had not been obtained and Henan SASAC had not approved the transaction or recognised the valuation.

455 Mr Li said that it was Yima's usual practice not to include a purchase price in an agreement before Henan SASAC gives its approval and recognises the valuation. Mr Li said that, in his experience, when Yima purchased an asset, the purchase price usually reflected the valuation recognised by Henan SASAC.[283]

456 At the signing ceremony, Mr Li did not speak to Mr Zhang about the purchase price. Mr Li did not meet Mr Jun Xiao when he was in Australia. Mr Li said that Mr Jun Xiao was not present at the signing ceremony on 27 April 2012 and that he had never had any dealings with Mr Jun Xiao regarding the transaction.

457 Mr Li said that he returned to China after the signing of the agreement. He did not recall the precise date, but he believed it was sometime in about early May 2012.

458 On 11 May 2012, the valuer sent an email to Mr Dongmin Wang attaching what Mr Li said appeared to be a preliminary valuation of the EPC 818 tenement.[284]

459 In mid-May 2012, when Mr Li was back in China, a formal proposal was put to the directors of Yima regarding the acquisition of 51 per cent of the shares in U&D. Mr Li said that all the directors received the proposal, and Mr Li received it in his capacity as director. The proposal made no mention of a purchase price. The proposal said that the EPC 818 tenement had '30 million tonnes and total estimated reserves of 700 million tonnes.' It also said that the purchase price would be based on the valuation as recognised by Henan SASAC.[285]

460 Mr Li said that on 14 May 2012, Yima submitted to Henan SASAC a proposal for KQ to acquire 51 per cent of the shares in U&D ('Henan SASAC Proposal'). The Henan SASAC Proposal provided that the purchase price for the acquisition would be based on the valuation recognised by Henan SASAC.[286]

461 Mr Li said that on 15 May 2012, the valuation prepared by the valuer was completed.[287] Mr Li did not review any draft of the valuation. He said that no draft was presented to any meeting of the management committee or directors. Mr Li said that the valuation contained as an annexure, and was based upon, the Smith report. That version was purportedly signed by Richard Smith.

462 Mr Li said that in late May 2012, the directors considered the proposal to acquire 51 per cent of the shares in U&D. They passed a resolution, which he [Mr Li] signed, approving the purchase of 51 per cent of the shares in U&D. The valuation (without the annexures) was provided to the directors before the resolution was passed. Mr Li said he read the executive summary at the beginning of the valuation and noted the resources quantity before voting on the resolution. The resolution was passed by a circular motion.[288]

463 Mr Li said that, at the time, he believed that the valuation and the documents upon which it was based were genuine.

464 Mr Li said that on or about 15 June 2012, the valuation was lodged with Henan SASAC. A form was lodged with the valuation.[289] That form was a document which he referred to below. Mr Li said that ordinarily the valuation (without exhibits) was lodged electronically with the form (referred to below), and then a complete copy with exhibits was provided in hard copy to Henan SASAC within a few weeks.

465 Mr Li said that on 6 September 2012, Henan SASAC returned the sealed form for State-Owned Assets Assessment Project to Yima to finalise the assessment project.[290]

466 Mr Li said that meant that the valuation had been recognised. Once the valuation was recognised, in Mr Li's experience, approval for the transaction followed as a matter of course. In this case, Henan SASAC provided its approval after.[291] It approved the Henan SASAC proposal and provided that Yima should 'use the documented assessed value as the basis for the acquisition' and that the 'acquisition agreement should be signed.' Consistent with the proposal explained above, Mr Li said the valuation, once recognised, formed the basis of the purchase price under the agreement.

467 Mr Li said that before KQ could purchase the 51 per cent of shares in U&D, it needed approvals from other government departments, including the Henan Province Commerce Department. KQ received all the required approvals.

468 Mr Li said that if he had known that U&D had purchased the EPC 818 tenement for $25.25 million immediately before KQ purchased 51 per cent of the shares of U&D for $65.79 million he would not have voted in favour of the transaction.

469 Mr Li said that if he had known that the valuation was based on a document that was not genuine (the Smith Report), or that the resources quantity of the EPC 818 tenement was significantly less than as stated in the valuation, then he would not have voted in favour of KQ's acquisition of U&D, nor of KQ's payment of the price for acquisition.

470 Mr Li said that he was confident that no other director would have voted in favour of KQ's acquisition of U&D (or the payment by KQ of the price for the acquisition) if they had known of the above facts.

471 Mr Li said that before preparing his witness statement, he spoke to the following people who voted on the resolution who confirmed that to be so:

(a) Yuantao Zhai (whom he spoke to by telephone on 12 July 2017);

(b) Fujun Tian (whom he spoke to by telephone on 6 July 2017);

(c) Jianhua Song (whom he spoke to by telephone on 6 July 2017);

(d) Jianxin Li (whom he spoke to by telephone on 6 July 2017);

(e) Er'an Zhai (whom he spoke to by telephone on 12 July 2017); and

(f) Yuangui Fan (whom he spoke to by telephone on 12 July 2017).

472 According to Mr Li, the valuation said that the EPC 818 tenement was transferred to U&D on 20 February 2012.

473 Mr Li said that he did not recall being told of the transfer when he voted on the proposal in May 2012. Mr Li said, however, because Mr Yulu Wu had told the management committee that Mr Zhang owned the EPC 818 tenement, such a transfer would not have been surprising. Transferring the tenement into a new company to facilitate the acquisition by KQ was consistent with Yima's general practice to buy assets directly or shares in a new company that has a clean slate.

474 Mr Li said that he and his fellow directors and management committee members, relied upon the vendors, and Mr Hao Liu, to ensure that all relevant information was provided to them and the valuer in order to prepare the valuation.

475 Mr Li said that in the first part of 2017, Mr Dongmin Wang said to him that he wanted to take personal leave and made a proposal to Yima for his resignation. On 6 September 2017, Mr Dongmin Wang's resignation was approved. Mr Li said that Yima did not have power to compel him to give evidence in this proceeding.

476 Mr Li said that on 3 July 2017, in his office at the headquarters of Henan Group in China, he asked Mr Dongmin Wang if he would travel to Australia to give evidence in this proceeding. Mr Li informed Mr Wang that Yima or the Henan Group would finance the trip. Mr Dongmin Wang told Mr Li he was unwilling to do so.

477 Mr Li said that on 6 July 2017 in his office at the headquarters of Henan Group in China, he asked Mr Dongmin Wang if he was prepared to give evidence by video link and he told Mr Li that he was unwilling to do so.

478 Mr Li addressed the failure of Mr Hao Liu and Mr Yulu Wu to give evidence. Mr Li said that Mr Hao Liu was sued for embezzling from KQ. Mr Li said that on 8 February 2014, Yima commenced proceedings in China against Mr Hao Liu for embezzling $65 million from KQ.

479 Mr Li said that it was that proceeding which resulted in Yima removing Mr Hao Liu as a director of KQ and U&D. In August 2014, the proceeding was discontinued after the funds were returned to KQ.[292]

480 Mr Li said that Mr Yulu Wu stood trial in the Nanyang Magistrate People's Court, for bribery, corruption, insider-dealing and illegal possession of firearms. On 27 December 2015, the court found him guilty and sentenced him to 20 years in jail.

481 Mr Yulu Wu appealed his conviction to the People's Court of Henan Province. On 27 October 2016, the Criminal Division of Henan Province Supreme People Court published reasons in which it upheld the appeal on the basis that 'part of the truth in the decision of the first trial was not clear.' A retrial was ordered. Mr Yulu Wu remains in jail pending the outcome of his re-trial. Mr Li said that he did not know when the re-trial would be heard.

482 Under cross-examination, Mr Li gave the following evidence. Mr Li said that he ceased employment with Yima in September 2013.

483 Mr Li said that the only overseas assets Yima has are in Australia. Mr Li said that in September 2013, Henan SASAC transferred its shares in Yima to HNEC and became a subsidiary of HNEC and Yima lost its decision-making power.[293]

484 Mr Li said that on occasions Mr Yulu Wu would update the management committee about the purchase of EPC 818. Mr Li agreed that the Group's development strategy was to internationalise the company.[294] Mr Li agreed that Mr Yulu Wu promoted the strategy of Yima becoming an international coal-mining company.[295]

485 Mr Li agreed that the proposal of 11 May 2012 was the proposal the board of Yima voted on.[296] Mr Li agreed that the first two paragraphs of the proposal of 11 May 2012, was the thought and strategy behind the internationalised strategy.[297]

486 Mr Li agreed that it was for this purpose that KQ was set up in Australia. Mr Li agreed that in or about 2011 or 2012 the board of Yima Coal was very determined to buy overseas coal assets.[298]

487 Mr Li agreed that minutes were kept for most of the management committee meetings. He agreed that these would be kept in the Yima archives. Mr Li agreed that the management committee normally met once a week and that normally minutes of each meeting were kept.

488 Mr Li agreed that he was at the management committee meeting in June or July 2011 when Mr Songying Li made the presentation to the committee in relation to EPC 818.[299] Mr Li agreed that minutes of that meeting would have been taken and kept by Yima. The minutes were not produced by KQ.

489 Mr Li agreed that on 31 January 2012 he was the vice-general manager.[300] Mr Li was asked whether, at that time, price had been discussed. He said no.

490 It was put to Mr Li that price negotiations had been going on, and that by late 2011 an agreed price had been fixed. Mr Li said no.[301]

491 It was put to Mr Li that in this case the agreed price led to the valuation rather than the valuation figure leading to the agreed price. Mr Li said that that was definitely not true.

492 Mr Li was taken to an email dated 21 December 2011 from Mr Kevin Zhang at KQ to Mr Dongmin Wang, director of securities at Yima, which attached the fifth draft of the Australian EPC 818 coalmine project. Mr Li said he had not seen the document before.

493 Mr Li gave evidence on the meeting at which the chairman Mr Yulu Wu instructed Mr Dongmin Wang to carry out further investigations as to the quantity of resources in the tenement. Mr Li said that at that time, the economic and technical feasibility of mining of the tenement for the resources were not available.[302]

494 Mr Li said that Mr Yulu Wu fiercely criticised Mr Zhang Zhiwei and Mr Dongmin Wang. 'He thought the former work and investigation were not properly done.'[303] Mr Li said that after that meeting Yima sent Mr Hao Liu to Australia to investigate and assess the project comprehensively.[304]

495 Mr Li was asked whether the board of Yima relied on the assessment of Mr Hao Liu. He said the board did not; rather it relied on the valuation report provided by the valuer. Mr Li said that Mr Hao Liu advised the committee of management about the amount of coal reserves at the EPC 818 tenement. He said he may have said something about 1.3 billion tonnes.[305]

496 Mr Li was referred to para [33] of his amended witness statement that said:

Hao Liu was appointed to, and responsible for, conducting Yima's due diligence on the EPC 818 tenement. Because Liu reported directly to Yulu Wu and gave information to Dongmin Wang, I do not have knowledge of everything that occurred as part of the due diligence process.

497 He agreed that Mr Hao Liu was appointed to be responsible for and conduct the due diligence on EPC 818.[306]

498 Mr Li agreed that in his witness statement he produced two documents that go to make up the due diligence process undertaken by Yima.[307] Mr Li agreed that the first was Mr Songying Li's report and that to the best of his knowledge it was the only report completed by the Geological Institute of Yima. Mr Li agreed that Mr Songying Li was a senior geology engineer and that his opinions were respected by the committee of management responsible for EPC 818. Mr Li agreed that he was present at Mr Songying Li's presentation to the management committee in about June or July 2011.[308] Mr Li agreed that Mr Songying Li mainly said that further investigation was needed.

499 Mr Li was asked to read para [2] of Mr Songying Li's report that said:[309]

There is a lack of details regarding the resource conditions, so further relative information is still needed. The exploration degree in deep-seated coal seams and deep areas is relatively low, and the resources are difficult to estimate at present. Only after further exploration can the resources, mining conditions and development prospects be evaluated.

Do you recall, therefore, that it was Mr Li's, Songying Li's position, that it's only after further exploration works are undertaken that the mining and conditions and development prospects could be evaluated by Yima?

I couldn't remember his exact words. But the general idea of that meeting was to carry out further investigation.

501 Mr Li was then asked what further investigation or exploration words Yima carried out for the rest of 2011. Mr Li said that later, Mr Hao Liu was sent to Australia specifically responsible for further investigation.[310]

502 Mr Li agreed that in his witness statement he produced the report prepared by Mr Hao Liu (referring to the research report dated 10 January 2012).[311] Mr Li agreed that this constituted the second report on EPC 818 prepared by Yima as part of the due diligence process. Mr Li was then taken to the email chain to which the January research report was attached. Mr Li initially denied ever seeing the email before but corrected himself after it was pointed out it was exhibited to his witness statement.

503 Mr Li agreed that it was his evidence that the January research report was sent by Mr Zhang to Mr Wei Liu.[312] Mr Li said that Mr Wei Liu was not an employee of Yima but that 'Liu Wei was a director of Yima.'[313] Mr Li agreed that Mr Wei Liu then emailed the January research report to the valuer.[314]

504 Mr Li was taken to the page attached to the January research report that stated:

Investigation Report approved in the meeting of leading group, sent by Liu Hao on 29 January 2012

Investigation and Research Report on the EPC 818 Mining Right Project of Australia

505 Mr Li was asked did that provide or state that the investigation report, which is Mr Hao Liu's report, was approved in the management meeting or leading group sent by Mr Hao Liu on 28 January 2012. Mr Li said:[315]

It was not like approve this report. The management committee approved further investigation or further work to be done based on this report, namely request the valuer to assess or value the content of this report in a professional way.

506 Mr Li was taken to the minutes of the meeting held on 31 January 2012. At this meeting, 'the Group Company's General Legal Counsel Zhang Zhiwei and the head of the department of securities Mr Dongmin Wang made a special report to the chairman of the board, Mr Yulu Wu and deputy general manager Li Yong Jiu regarding the negotiation over the Australian EPC 818 coalmine project and existing problems.'[316]

507 Mr Li was taken to his evidence the previous day, where he said that Mr Yulu Wu got angry and said that 'the former work and investigation were not properly done.' Mr Li had agreed that Mr Yulu Wu, the chairman, got very upset because Mr Dongmin Wang had not undertaken a proper technological or geological investigation.[317]

508 It was put to Mr Li that Mr Yulu Wu became angry because the Mr Hao Liu's report ignored the opinions that the geologist Mr Songying Li expressed in his presentation to the management committee. Mr Li said that Mr Yulu Wu became angry because Mr Hao Liu's report was not comprehensive enough.[318]

509 Mr Li was taken to para [3.2] of the January research report where it said:[319]

According to the Australian JORC Code, the Proven Reserves in EPC 818 were calculated to be 16.5Mt, Controlled Reserves 18.5 Mt and Inferred Reserves 15Mt, and the inferred resource reserves in the deep part were calculated to be 1.35 billion tons. All these coal resources above are coking coal.

510 It was put to Mr Li that that comment in the January research report was inconsistent and contrary to the opinions of Mr Songying Li. Mr Li said they were not contradictory, 'It's just further investigation based on Li Songying's report. And it found the quantity of resource which Li Songying was not sure, and that quantity of the resources was 1.35 billion tonnes.'

511 Mr Li was challenged on the suggestion that there had been further investigation.[320]

Counsel: Mr Hao Liu didn't do any further exploration work, did he?

Mr Li: I don't know. He was in other countries and I was in China.

Counsel: Well, he doesn't produce any borehole analysis, does he?

Mr Li: I was not in charge of these professional things.

Counsel: Well, you don't produce any geological test results in this hearing, do you, from the date of the completion of the first due diligence report in June or July of 2011, until the signing of the ETA agreement in April 2012, is that correct -- equity transfer agreement, in 2012?

INTERPRETER: Sorry, can you repeat your question?

Counsel: You don't produce in this hearing, on behalf of KQ or Yima, any further geological research work or data from the completion of the due diligence report in June-July 2011 until the signing of the equity transfer agreement in April 2012; is that correct?

Mr Li: (Chinese spoken).

INTERPRETER: The witness wants me to repeat.

Counsel: Yes, please.

Mr Li: You mean I didn't provide to the court?

Counsel: Yes.

Mr Li: It's not my business, for the things related to geology. That's not my responsibility. I was in charge of the general decision-making, things like the resolutions of the board as well as valuation reports. These materials may contain geological data in them, but those are not professional geological materials.

Counsel: You see, I suggest to you -- and I'm going to submit in due course to His Honour -- that Yima --

INTERPRETER: Sorry, can you repeat?

Counsel: I suggest to you, and in due course I'm going to tell His Honour, that Yima Coal and KQ just ignored the recommendations made by their own engineering geologist, Mr Songying Li.

Mr Li: No.

Counsel: Do you agree with that?

Mr Li: Yes, I don't agree.

Counsel: Tell me why you don't agree with that.

Mr Li: The report prepared by Li Songying was just a preliminary report, and based on this report Liu Hao was sent to Australia for further investigation, and finally the valuer prepared the final report or valuation report based on Liu Hao's report.

So Li Songying's report is preliminary. Liu Hao conducted further investigation, and the valuer provided the final report. And these three reports are related to each other.

Counsel: Yes, but the valuer is not providing a report that deals with or assesses the volume of coal reserves, is he?

Mr Li: Without the quantity of the reserve, the valuer cannot conduct their valuation, so they must have the reserve quantity.

Counsel: And the reserve quantity was meant to come from Yima?

Mr Li: Yes.

512 I do not accept this evidence of Mr Li. He was the only witness put forward by KQ who was involved in the transaction. Mr Li was the deputy general manager of Yima, a director and a member of the board of management. No evidence has been produced by KQ that any investigation or further geological work was carried out by Yima (or anybody else) between the time when Mr Songying Li gave his report in June or July 2011 and entering into the ETA in April 2012. What evidence was produced suggested the opposite as no reference is made to any investigation or such work in the evidence tendered.

513 Mr Li was present when Mr Songying Li gave his report in June or July 2011. He was present at the meeting of 31 January 2011. I do not believe that he did not know, or that he would not have turned his mind to whether or not Mr Hao Liu had conducted an investigation or further geological work to meet the issues raised by Mr Songying Li on the inadequacies of the geological work used in the estimates of the coal reserves.

514 I found Mr Li's answers to the questions about Mr Hao Liu's report to be evasive and lacking credibility. Mr Li refused to accept that Mr Hao Liu's estimate of the resource quantity of 1.3 billion tonnes was inconsistent with the report of Mr Songying Li. Mr Li had agreed that Mr Hao Liu's report was not comprehensive enough.[321]

515 I do not accept that Mr Li was telling the truth when he said that Mr Hao Liu carried out further investigations that in effect confirmed the estimates of coal reserves that Mr Songying Li said were unreliable due to the inadequate geological work that had been done.

The uncertainty existed in Li Songying's report, but for Liu Hao's report, there's not much uncertainty, and also it said there were about 1.5 billion tonnes of coking coal. We were specifically looking for coking coal.

517 I do not accept that Mr Li believed that Mr Hao Liu's report was based on the further geological investigations that Mr Songying Li said had to be carried out. [323] It was obvious from Mr Songying Li's report that many further boreholes would have to be drilled. I do not accept that Mr Li believed that such work had been carried out, nor that Mr Hao Liu had used any such work in his report to improve the accuracy of Mr Li's estimate of the coking coal. The drilling of further boreholes in the EPC 818 tenement would have been a major undertaking, that would not have escaped the attention of Mr Li, the deputy general manager of Yima.

518 It was put to Mr Li, that Mr Hao Liu did not produce any further borehole analysis. Mr Li said 'I was not in charge of these professional things.' Again, Mr Li evaded the question by purporting to deny knowledge of what he must have known. Mr Li's attempt to distance himself from the issue of what investigation or further geological work was done was telling. Mr Li's reference to it not being his responsibility to ascertain whether or not further geological work had been carried out to ascertain the reserves at the tenement was not credible. Mr Li was the deputy general manager and Yima was about to undertake its first investment outside China. He was personally present at meetings that were held to further the purchase, such as hearing Mr Songying Li's report on the reserves at the tenement and the meeting with the chairman on 31 January 2012.

519 Mr Li was personally aware that the information given to Yima about the reserves in the tenement was unreliable. He was also aware that that information should not be used in deciding whether or not to proceed, because Mr Songying Li had had expressly told him so. It defies belief that Mr Li, as the deputy general manager and an executive director of Yima, would not be concerned to ensure that proper investigations of the coal resources at the tenement were carried out.

520 Mr Li sought to suggest that Mr Hao Liu's report was the result of further investigation based on Mr Songying Li's report. Mr Li said that Mr Hao Liu's report found the quantity of the resource, which Mr Songying Li was not sure, was in fact 1.35 billion tonnes.[324]

521 It was put to Mr Li that Mr Hao Liu did not do any further exploration work to support his report. Mr Li said he did not know. He said that Mr Hao Liu was in other countries and he was in China.[325] I do not accept that was a truthful answer. Mr Li would have known that exploration work involving further boreholes was extremely expensive and that Mr Hao Liu did not have any such work done. To fob off the question by saying he was in a different country to Mr Hao Liu, lacked credibility.

522 Having considered and witnessed this telling cross-examination of Mr Li, I do not accept that Mr Li was a truthful witness. I am not prepared to accept his evidence unless supported or corroborated by other independent evidence.

523 It was put to Mr Li that the valuer was not providing a report that dealt with or assessed the volume of coal reserves. Mr Li said that without the quantity of the reserves, the valuer could not conduct their valuation, so they must have the reserves quantity.[326] Mr Li admitted that the quantity of the reserves of the tenement was meant to come from Yima.

524 Mr Li claimed he did not know that Yima did not provide the due diligence report prepared by Mr Songying Li to the valuer.[327]

525 Mr Li agreed that Mr Hao Liu stated in his report, and that it was the attitude of the directors of Yima Coal, that 'As Yima Coal Group's first step in the Australian coal industry and a breakthrough for internationalisation, EPC 818 project will be both a tough challenge and a rare opportunity.'

526 Mr Li agreed that the reason why it was viewed to be a 'tough challenge' was because there was uncertainty as to the amount of the underground coal reserves, but added, it was also about other matters.

I suggest to you that you were aware and the board was aware that there was great uncertainty as to the volume of underground coal reserves at EPC 818. Do you agree with that?

The uncertainty existed in Li Songying's report, but for Liu Hao's report, there's not much uncertainty, and also it said there were about 1.5 billion tonnes of coking coal. We were specifically looking for coking coal.

528 I do not accept Mr Li's evidence that he considered there was 'not much uncertainty' in Mr Hao Liu's report. Unless Mr Hao Liu's report was based on extensive further boreholes being drilled at the tenement (Mr Songying Li said 100-200 were required), there must have been much uncertainty as to the reserves at the tenement. This is further evidence of why I do not accept Mr Li as a credible witness.

529 It was suggested to Mr Li, that Mr Hao Liu also expressed the position of uncertainty. Mr Li was referred to the passage where Mr Hao Liu said, '1350 Mt of coking coal in the deep part are of uncertainty.' Conveniently, Mr Li said that he did not remember.[329]

530 Mr Li was asked why Yima Coal was so determined to buy this asset when there was such uncertainty as to the extent of the coal reserves. Mr Li replied:

Uncertainty did not mean there were no coal. This report ensures that there were 1.35 billion tonnes of coal resource, and there were coking coal. It's a scarce type of coal in China. We were very interested in it. So we decided to continue this project based partially on this report. More importantly, during the decision procedure, we considered not only this report, but mainly we relied on the valuation report. We would consider this in a comprehensive way.

531 Again I do not accept this evidence of Mr Li. I do not accept that he believed Mr Hao Liu's report ensured that there were 1.35 billion tonnes of coking coal. I also do not believe he relied on the valuer's report. I find that Mr Li knew that the only geological based report on the EPC 818 tenement, was that of Mr Songying Li's and that Mr Li knew that Mr Hao Liu's report was not based on any further geological work and added nothing of substance to what had been reported by Mr Songying Li.

532 I find that Mr Li knew that the valuer carried out no further geological work, and that the valuer relied totally on the information provided to him by Yima. I further find that, insofar as the valuer sought to rely on there being more reliably verified reserves in the tenement, than Mr Songying Li indicated in his report, Mr Li knew that the valuation could not be relied on for any decision relating to the purchase of an interest in the tenement.

533 Mr Margetts then moved to cross-examining Mr Li on the sixth interim meeting of the board of directors of Yima.[330]

534 Mr Li agreed that the document headed 'Proposal on the Acquirement of 51 per cent of shares in U&D Mining Industry (Australia) Pty Ltd by Australian Kunqian International Energy Pty Ltd a wholly-owned subsidiary of Yima Coal Group' was in the materials put before the board for the sixth interim meeting in 2012. Mr Li explained that the meeting was held by correspondence but that the executive directors held a meeting beforehand. These included Mr Yulu Wu, Mr Fujun Tian, Mr Yuantao Zhai, Mr Jianshua Song, Mr Jianxin Li, Mr Er'an Zhai, Mr Yuangui Fan, and Mr Li.[331]

535 Mr Li agreed that he was the only one of the eight executive directors who were prepared to give evidence. He agreed that of the eight only Mr Yuangui Fan was not a member of the management committee. Mr Li said that he could not remember whether all the eight - other than Mr Fan - were present at the presentation given by Mr Songying Li.[332] Mr Li agreed that they had been members of the management committee in June-July 2011.

536 Mr Li agreed that there were two stages proposed for the project. The first to conduct an open-pit coal mining with the proven reserves of 30 million tonnes. Mr Li agreed that the second stage specified in the proposal was to explore the deep resources of EPC 818 and then prepare a development plan after the exploitable deposits were ascertained.[333]

537 Mr Li agreed that the proposal specified that the inferred resource reserves in the deep part amounted to 700 million tonnes. Mr Li did not know where the figure of 700 million tonnes came from save the staff of the board provided this material. Mr Li agreed there was no attachment to the proposal that explained the 700 million tonnes.

538 Mr Li agreed that the board had Mr Hao Liu's report that said there was 1.35 billion tonnes of inferred reserves, prior to voting on the proposal. Mr Li was asked did anybody raise the question as to what happened to the 1.35 billion tonnes. Mr Li said that a relatively cautious figure had been chosen.

539 Mr Li said that he did not know that in or about July 2011, Mr Songying Li had calculated a figure of 700 million tonnes of coal for EPC 818 but became aware during the proceeding. Mr Margetts asked:[334]

Well, you were aware at all times from June 2011 that Mr Songying Li, the engineering geologist, could not provide an estimate of the inferred coal reserves because there hadn't been done - there hadn't been appropriate testing?

He did provide his estimation based on the materials provided during the first delegation in Australia. But the conditions were not met. So, based on their investigation, we sent Liu Hao for further investigation.

540 It was suggested that Mr Hao Liu did not do any further geological testing. Mr Li said he did not know this. Mr Li denied the suggestion that even prior to this proposal being voted on, Yima Coal, and the chairman, Yulu Wu, were going to buy EPC 818 no matter what happened. It was put to Mr Li that this was in fact the case. Mr Li was taken to the agreement of intention to invest in EPC 818 entered into on 19 September 2011. It was put to Mr Li that a month later KQ was incorporated in Australia to hold the 51 per cent in the mine. It was put to Mr Li that in February 2012, before the proposal was voted on by the board, Yima entered into the co-operation funding agreement and under that agreement $5 million was paid to U&D. Mr Li said that the $5 million was earnest money or a deposit.[335]

541 Mr Li was taken to his witness statement where he said that he read the executive summary at the beginning of the valuation and noted the resources quantity before voting on the resolution (for KQ to buy the shares).[336] The executive summary gave the deep reserve potential of the tenement of 968 million tonnes whereas the proposal to the board gave the inferred resource of 700 million tonnes.

542 Mr Li was asked did any director at the meeting ask why they were paying $55 million for a resource quantity of 968 million tonnes when the proposal put the figure at 700 million tonnes. Mr Li said no. Mr Li said they relied on the material provided by valuer.[337]

543 Mr Li was asked what the purpose of Yima was in carrying out six months of due diligence research and reports, if they were not going to be provided to the valuer. Mr Li said to satisfy the needs of their preliminary decision-making, but not for the final decision. Mr Li agreed that the agreement with the valuer was for Yima to co-operate with the valuer in the investigation and verification of the conditions of the mineral rights. Mr Li denied that Yima deliberately withheld information from the valuer because it was absolutely determined to buy EPC 818 irrespective of what happened.[338]

544 Mr Li was taken to the valuation and the list of documents that Yima provided to the valuer set out in the appendix.[339] Mr Li said that Yima did not provide the due diligence report of Mr Songying Li or the report of Mr Hao Liu to the valuer, as the material must be provided by professional geological company in Australia. Mr Li said that Yima's investigation report regarding the resources would not be used by the valuer.[340]

545 Mr Li was taken to the email of 11 May 2012, that the valuer sent to Mr Dongmin Wang attaching, what Mr Li said, appeared to be a preliminary valuation of the EPC 818 tenement.[341] The valuer estimated the value of the tenement as $135,129,000.

546 Mr Li was asked why the valuer would be putting forward a figure to a director of KQ for what appeared to be his approval. Mr Li said that he was not asking for Mr Dongmin Wang's approval. He said that it was a common practice, when the general figure of the valuation came out, that the figure would be sent to the party who employed the valuer, as a reference.

547 Mr Li was asked did he have any reason why the figure was dropped $6 million when the final valuation came out four days later. Mr Li did not know. It was suggested to him that it showed that Mr Dongmin Wang or some others at KQ or Yima were directing the valuation process to come down to the agreed price of $129 million which had been fixed between the parties some time earlier.[342] Dr Moore objected to the question. Mr Margetts rephrased the question. He asked Mr Li did he have any explanation as to why the valuer changed his valuation, in four days, between this and the final valuation. Mr Li did not know why the draft was changed but said that this was common practice.

548 Mr Li was asked whether he was aware that Mr Dongmin Wang and the valuer communicated in numerous emails from early 2012 to when the valuation was completed in the middle of May 2012.[343] Mr Li was taken to the email chain attaching Mr Hao Liu's January research report and asked did know of any reason why the valuer would be sending it to Mr Dongmin Wang. Mr Li said he did not know.[344]

549 Mr Li was taken to the email chain where Mr Zhang sent to Mr Wei Liu the CRA Report, and Wei Liu forwarded the CRA Report to the valuer and the valuer the next day forwarded the CRA Report to Mr Dongmin Wang.[345] Mr Li was not able to provide any reason why the valuer would be sending the CRA Report back to Mr Dongmin Wang.

550 Mr Li was taken to his witness statement where he said, at the signing ceremony on 27 April 2012, that an agreement was signed by ANB and KQ, which did not contain a purchase price for 51 per cent of the shares in U&D. Mr Li said that there was no price because, at that time, Henan SASAC had not approved the transaction or recognised the valuation.[346] Mr Li was asked whether he produced to the Court a copy of the signed agreement without the prices in it. Mr Li said he did not. He said it would be kept by the relevant departments.

551 On re-examination Mr Li confirmed that the top line of Mr Hao Liu's report stated 'the research report sent by Hao Liu to the management committee in January 29, 2012.'[347]

552 Mr Li was taken to para [2] of the commitment letter with the valuer that said:[348]

Actively cooperated with your company in the investigation and verification of conditions of the mineral right, and provide various kinds of information as required by the assessment company.

553 Mr Li confirmed that he had said in his evidence, that the valuer asked Yima to provide the report of an Australian professional coal resource exploration company. Mr Li was taken to an email from Mr Zhang Xin to Mr Li Bo of Daton Australia enclosing a list of supplementary information required by the valuer and asking Daton Australia to prepare all the information as soon as possible. Mr Li agreed that the list included the geological reserves report of general or detailed coalmine investigation signed by a registered geologist. Mr Li said that he understood that the report signed by a registered geologist had to be an independent report.[349]

554 Mr Li said that none of the directors listed in para [101] of his statement was still a director of Yima, an employee of HNEC or Yima, or a director or officer of HNEC.

555 Mr Li confirmed that he relied on the figure of 968 million tonnes taken for assessment in the summary of the valuation when voting.[350]

556 KQ called Mr Walker. Mr Walker gave evidence that he was a qualified geologist employed by U&D. He gave evidence in chief by a witness statement.[351]

557 Mr Walker gave evidence on certain assertions made in the CRA Report. Mr Walker said that the CRA Report states that the Moranbah Coal Measures are in the strata over 800 metres deep throughout the whole area, with an inclination of about 10 degrees; as a result, the flat area can be directly used for resource calculation. Mr Walker said that this was incorrect. He said that the Moranbah Coal Measures were not flat. Instead, they undulate considerably and vary in thickness. He referred to a Queensland Government Geological Survey surface geology map (which was publicly available), and to a magnified version of the relevant part of that map.

558 Mr Walker said that the map showed strata dips measured in the field within the EPC 818 tenement of up to 45 degrees, and geological folding of the strata in the coal measures. Mr Walker said that the 'estimation formula' in part 4.3 of the CRA Report was therefore not appropriate.

559 Mr Walker also said that the CRA Report stated in ch 5 that the coal in the EPC 818 tenement was coking coal. Mr Walker referred to a Queensland Government Geological Survey and said that the coal seams in the Moranbah Coal Measures in the EPC 818 tenement were Semi Anthracite to Anthracite coal, and did not contain any coking coal.

560 Mr Walker also said that the CRA Report asserted that 'in the Wodehouse NS1 borehole of this area, up to seven coal seams have been included in official statistics with the thicknesses variously of 1.52 metres, 2.62 metres, 2.01 metres, 1.48 metres, 5.33 metres, and 3.5 metres. Mr Walker said that these figures were incorrect. He said that the correct date was contained in Ex QY 22, which was a geological log of the Wodehouse NS1 drill-hole.[352] Mr Walker also referred to a Diamond Drill Geological Log of Wodehouse 1.[353] Those documents showed the coal seam thickness in the Moranbah Coal Measures. He said the data shown in the Ex QY 22 was the most accurate data. He said that that data was reflected in the Queensland Government Geological Survey referred to above.

561 Under cross-examination, Mr Walker said that, as far as he knew, and according to publicly available information, the only deep borehole that existed (for EPC 818 tenement) was known as the Wodehouse No 1 borehole.[354]

562 Mr Walker agreed that it was inappropriate to form any conclusion as to the extent of coal reserves on the basis of this one borehole.[355] Mr Walker said it was necessary to consider a number of factors, such as the extent of the coal seams, the thickness of the coal seams, and the density of the coal seams. It would also be necessary to consider the continuity of the coal seams, ie whether the thickness stayed the same throughout the area. It would also be necessary and to determine the geological structure of the area, which has a significant impact on any calculations of coal reserves.

563 He said the accepted practice was drilling many holes and then being able to construct a model, whether by hand or computer, by making inferences of the information you have to hand and the information from the boreholes about thickness and so forth through the area. Mr Walker accepted that 100-200 boreholes for this tenement would be reasonable.[356]

564 Mr Walker agreed that any coalminer would be aware of this (that is, that the need to drill 100-200 boreholes in the tenement to properly assess the resources). Mr Walker was asked whether the same could be said of experienced geologists. Mr Walker replied, 'Yes, certainly. Yes, in Australia.'[357]

565 Mr Walker was also questioned about the presence of coking coal in the tenement. He was critical of Mr Songying Li's due diligence report where it said that the deep part coal could be ranked as mainly coking coal.[358]

566 KQ called Mr Campbell Tuan Jaski to give evidence. Mr Jaski is a partner in PPB Advisory, and holds a Bachelor of Science (Honours) in geology from La Trobe University, a MBA from New York University and Melbourne Business School and a Diploma in International Arbitration from the University of NSW. He is a Fellow of the Australasian Institute of Mining and Metallurgy, and a Chartered Professional in the fields of geology and management. He is a Fellow of the Financial Services Instituted of Australasia, and Affiliate of Chartered Accountants Australia and New Zealand, and a Fellow of the Chartered Institute of Arbitrators.

567 Mr Jaski said he had 20 years' experience in the mining sector. Before joining PPB Advisory, he spent 12 years working for Rio Tinto Ltd and a number of subsidiaries across a range of areas in Australia and overseas, including project generation, exploration and evaluation, project feasibility studies, open cut and underground mining, and operations management (mine, port and rail). Mr Jaski provided a written expert report.[359]

568 Mr Jaski gave his opinion on whether the valuation of the EPC 818 tenement by the Chinese valuer of 129 million was a fair market value as at 30 March 2012.

569 Mr Jaski opined that the valuation materially overstated the value of the tenement because it used the discounted cash-flow method. Mr Jaski said that this method was generally considered an unsuitable method for valuing a predevelopment project such as the tenement. Mr Jaski opined that the valuation ignored relevant market information. Such information included the fact that U&D had entered into an agreement to acquire the tenement for $25.5 million on 21 November 2011, with the transaction being finalised in February 2012.

570 He said that this was at odds with the value determined by the discounted cash-flow method. Mr Jaski said the valuation attached significant value to 'potential resources' which had not been discovered or defined. He said that the valuation utilised a number of inputs into the discounted cash-flow calculation, which were inappropriate having regard to the project status of the tenement. He said that the valuation failed to utilise any cross-check or sense-check to ensure that the value calculated was reasonable. Mr Jaski opined that the valuation was not undertaken in accordance with generally accepted valuation principles.

571 Mr Jaski opined that it was generally accepted that the viability of a project could not be determined unless ore reserves had been identified. He said this was because ore reserves represent that portion of the mineral resources, which can be economically extracted. He noted that no ore reserves had been identified on the tenement. In other words, he said, no coal had been identified on the tenement that was economical to extract.

572 Mr Jaski referred to the independent sale of the tenement. Mr Jaski said that the valuer ought to have considered the $25.25 million sale which, in his opinion, provided very strong evidence as to the potential fair market value of the tenement at the valuation date. Mr Jaski said that was because the sale involved the acquisition of a controlling interest in the tenement, at arm's length, and was completed close to the valuation date, and therefore the development status of the tenement (a key value-driver) had not materially changed from the transaction announcement date, to the valuation date.

573 Mr Jaski addressed the 968 million tonnes of potential resources (the 'deep resources'). Mr Jaski said that these resources did not appear to have been assessed or delineated using 'any technical rigour.' Mr Jaski opined that 'these "potential resources" would not be capable of being reported as "resources" of any form under internationally recognised reporting codes such as the JORC code.'[360]

574 Mr Jaski opined that the valuation should not have included the 'potential resources' in its fair market value assessment, because there was significant uncertainty as to whether any resources would be identified in the future. In Mr Jaski's opinion, the valuation materially over-stated the value of the project.

575 Mr Jaski opined that the fair market value was between $18.8 million and $23 million.[361] Accepting Mr Vincent's report of the liabilities of $25.4 million, Mr Jaski opined that the shares had a nil value, because the liabilities exceeded the assets.

576 Mr Jaski agreed that the first major fault of the valuer was not to take into account the last sale price. The second major fault was the valuer's use of a discounted cash flow at such an early stage of the project. The third major fault was the valuer's reliance on underground resources in the tenement.

577 Mr Jaski agreed that the valuer, if acting properly, would have ascertained the sale price from the publicly disclosed ASX announcement on 21 November 2011.

578 Mr Jaski explained the weakness of using a discounted cash-flow model. He said that at an early stage there was insufficient information properly to forecast the cash flows. The method was very sensitive, so that a slight decrease in the discount rate may suddenly add or take away millions or even billions of dollars.[362]

579 Mr Jaski said that the valuer wrongly took into account resources. The valuer was wrong to take them into account because the work to assess them properly had not been done. This meant that 'you can't actually call these resources.' He said what had been referred to as 'resources' were not actually resources, but what he would call 'potential resources'. He said that they have no value until they are discovered, and that they were undiscovered when the valuation was done. Mr Jaski agreed that the estimate of resources was no better than guesswork.

Witnesses not called and documents not produced

580 KQ did not call many of the officers of Henan SASAC, Yima, and itself. If the facts had unfolded as KQ alleged they did, then many of these officers would have been in a position to support KQ's case. Further, and most importantly, the evidence led raised many reasonable and plausible inferences that did not support KQ's case. Many witnesses could have been called by KQ to dispel those inferences, if those inferences were in fact not open to be drawn. KQ called only two witnesses from Yima: Mr Songying Li and Mr Li Yong Jiu. KQ called no witnesses from the valuer's office, Henan Jinshi Appraisal Co Ltd, Henan SASAC, or from itself. There was no explanation for the failure to call any witness from these companies

581 In particular, the following witnesses were not called by KQ:

(a) the directors of Yima identified by Mr Li Yong Liu, including the chairman Mr Yulu Wu. These witnesses include the executive directors who met personally and resolved to instruct KQ to enter into the ETA;

(b) members of the management committee who received Mr Songying Li's report;

(c) the members of the delegation that went to Australia in about May 2011 to assess the tenement (other than Mr Songying Li), Mr Yuantao Zhai, Mr Yu Li, and Mr Dongsheng Wu;

(d) Mr Wei Liu a former director of Yima, who introduced Mr Zhang to Mr Yulu Wu, who was present in Australia at the inspection of the tenement by Mr Songying Li, who received the CRA Report from Mr Zhang and who then provided the CRA Report and the January report to the valuer;

(e) Mr Hao Liu;

(f) Mr Hao Liu's assistant Mr Kevin Zhang;

(g) Mr Dongmin Wang.

582 Further, the evidence disclosed a great many relevant documents that were not produced by KQ. The documents not produced by KQ included:

(a) minutes of management committee meetings, including that when the executive directors resolved to instruct KQ to enter into the ETA; and the minutes of the meeting where Mr Songying Li presented his report;

(b) the valuer's file;

(c) the papers supporting the 15 January report prepared by Mr Hao Liu;

(d) any records relating to Mr Dongmin Wang's visit to Australia with the valuer;

(e) the drafts of the ETA other than draft number 5;

(f) all documents relating to the negotiations leading to the various drafts of the ETA.

583 I consider below, the consequences of KQ's failure to produce this evidence.

584 In its written submissions,[363] KQ relies on the fact that FLC admitted that there was no geological basis for the suggestions made in the CRA Report. KQ contends that Mr Zhang was the agent of FLC, and acted as such, when he provided the CRA Report to Yima and Mr Wei Liu.

585 KQ makes the following submissions about the CRA Report.

(1) Mr Zhang provided the CRA Report to Yima with, and without, the signature of Richard Smith, and directly, or indirectly, to the valuer with the signature of Richard Smith.

(2) The purchase price was not in the ETA when it was signed on 27 April 2012.

(3) The valuer relied on the CRA Report.

(4) Mr Songying Li relied upon the CRA Report when he prepared his reports.

(5) The Yima directors believed that EPC 818 had significant deep resources.

(6) The Yima directors believed the CRA Report was a genuine document.

(7) The Yima board was misled.

(8) Henan SASAC relied upon the Smith Report.

586 KQ submits that Mr Songying Li did not identify that the information he described as being unreliable in his report, was information from the CRA Report.[364] KQ submits that it was not put to Mr Songying Li, that when he gave his presentation to the management committee, that he identified the CRA Report in any way.[365] KQ says that Mr Songying Li said nothing more to the management committee than that he had been given some information that asserted the existence of 1.5-2 billion tonnes of deep-coal resources. KQ says that that information does not support the conclusion that Mr Songying Li identified the source of his information as the CRA Report.

587 KQ did not call any members of the management committee to make out this submission. The persons who could have given evidence of what was understood by the management committee are witnesses that one would expect KQ to call.

588 The managing director of Yima, Mr Yuantao Zhai, was on the management committee that heard Mr Songying Li's report. Mr Yuantao Zhai was with Mr Songying Li in Australia. A reasonable and plausible inference arises that Mr Yuantao Zhai knew that Mr Songying Li was referring to the CRA Report. KQ called no evidence dispel this inference.

589 I find that there is a reasonable and plausible inference that Mr Songying Li did identify to the management committee that the information he found to be unreliable was contained in a written report that purported to be a geological report, which he was given by or on behalf of U&D in Australia.

590 I find that there is a reasonable and plausible inference that any member of the management committee, on hearing Mr Songying Li's report, and on subsequently seeing the CRA Report, would have formed the view or belief that it was the report that Mr Songying Li was referring to.

591 The CRA Report carried a date from before Mr Songying Li's visit to Australia. It was identified as coming from 'U&k' (rather than U&D). It relied on the results of only one borehole, as Mr Songying Li had told the management committee, and was otherwise the only geological report in existence that sought to describe the coal reserves at the tenement. KQ failed to call any evidence to dispel this inference, save that of Mr Li Yong Jiu, whose evidence I do not accept unless it is corroborated by some other evidence.

592 As indicated, Mr Songying Li's report identified particular features of the CRA Report, such as that it only relied on one borehole.

593 KQ relied on a third-party reliance case. KQ submitted that it has several ways of putting its causation case. The pleading alleged that the CRA Report was relied upon by:

(a) the valuer when he prepared the valuation;

(b) Mr Songying Li when he prepared a summary document which, in part, was recorded in the proposals to Yima and Henan SASAC; and or

(c) Yima and SASAC when they prepared the acquisition of 51 per cent of the shares in U&D on the basis of the proposals to them and the valuation (which incorporated and relied upon the report).

594 The critical issue is, however, whether KQ has suffered loss and damage by reason of the misleading nature of the CRA Report and the CRA Report being relied upon as alleged.

595 KQ submitted that if the valuer was misled, as alleged, and that the necessary consequence of the valuer producing a valuation induced by being misled, is that Yima approved the transaction on the basis of the valuation, then that establishes that KQ suffered loss and damage 'by reason of' the misleading or deceptive conduct constituted by the CRA Report.[366] Under the third-party reliance case, KQ contended that it is not necessary for KQ to prove that Yima was misled by the CRA Report.

596 KQ contended that it is sufficient for KQ to prove that the valuer was misled, and that by reason of the valuer's report, Yima approved the contract with the price determined by the valuer, and thus KQ suffered loss and damage.

597 KQ submitted, however, that if FLC wishes to contend that Yima was aware that the CRA Report was unreliable, and that the valuation was based on an unreliable report, but that nevertheless Yima proceeded with the transaction, then FLC bears the onus of doing so.

598 KQ submitted that where it alleges that Yima relied on the misrepresentations, then KQ bears the onus of proof. But where KQ relies, as it does, on third-party reliance (by the valuer), then FLC bore the onus of establishing that Yima and KQ knew of the true situation, if it wishes to maintain such a defence.[367]

599 KQ submitted that for FLC's defence to succeed, FLC had to show four things, at least three of which they could not do.[368] KQ said that two of these things, concerned Mr Songying Li's presentation to the management committee. And the other two of these things, concerned the Yima board's consideration of the transaction, when they voted on it, having received Mr Songying Li's presentation to the management committee.[369]

600 First, KQ submitted that FLC had to persuade the Court that Mr Songying Li told the management committee, that the information provided to him by Mr Zhang was wholly unreliable. KQ submitted that the evidence did not establish that, particularly given the summary document prepared by Mr Songying Li.[370]

601 KQ submitted that there was no evidence at all, that in Mr Songying Li's presentation to the management committee, or in any report that Mr Songying Li gave to the management committee, that the CRA Report was referred to by name, read from, or provided to the management committee or the directors.

602 KQ said it was not put to Mr Songying Li that he informed the management committee that the CRA Report was the source of the information which he found unreliable, and which criticised in his due diligence report.[371] KQ contended that there was no evidence that the CRA Report was given to the directors at any time.[372]

603 KQ submitted that this was the first hurdle that FLC needed to overcome: establishing what Mr Songying Li said to the management committee, and in particular establishing that he informed the committee that the CRA Report was unreliable.[373]

604 Secondly, KQ submitted that FLC must establish that the Yima directors knew, when they were considering the valuation, that the document relied upon by the valuer was the CRA Report and that the CRA Report was the report that Mr Songying Li had informed the management committee, was unreliable.[374]

605 KQ said that FLC made two relevant concessions in this respect. KQ submitted that FLC conceded, that the directors never received a signed copy of the CRA Report, and, when the directors voted on the valuation, the valuation did not have the CRA Report attached to the valuation.[375]

606 KQ contended that FLC further conceded that the directors did not have the CRA Report. KQ relies on FLC's written submissions that:[376]

no one had knowledge of the existence of the Smith Report [the CRA Report] up to and including the time of the passing of the resolution to approve KQ acquiring 51% of the shares in U&D on 26 May 2012.

607 Further, FLC submitted that there was:[377]

no evidentiary basis to suggest that the Smith Report was relied upon by Yima (on behalf of KQ) in passing the aforesaid resolution [to approve KQ's acquisition]. Quite simply the Report was the only version/document sighted and read by Yima and/or directors prior to the vote by Yima's directors on 26 May 2012. There is no evidence that any KQ director and or Yima director decision maker ever saw a copy of the Report in the form of the Smith Report.

608 According to KQ, FLC accepted that when the directors voted on the valuation, they had the valuation without its annexures. KQ argued that, given that concession, it was impossible to conclude that the directors knew that the valuer had relied on the CRA Report.[378] KQ also submitted that FLC did not put it to Mr Li Yong Jiu that when he voted on the transaction, after having received the valuation, he knew that the valuer had relied on the CRA Report.[379]

609 KQ submitted, as its third point, that it was theoretically possible that a director could have believed that the figures the valuer was relying on were perhaps from the CRA Report and that the directors may have investigated along those lines. This would be possible if the directors knew that Mr Songying Li had been talking about the CRA Report nine months earlier. KQ argued that this was not put to Mr Li Yong Jiu.

610 KQ submitted that, at most, an inference might be open that, an investigation by the directors is something that the directors could have done, and worked out, if Mr Songying Li had told them that he had been relying on the CRA Report, and, that the valuer was doing the same thing.

611 KQ said, however, that that is a case of constructive knowledge. KQ submitted that constructive knowledge, or negligence, would not break the chain of causation. KQ said that only actual knowledge will do so.[380]

612 KQ said, as its fourth point, that the Court would need to conclude that what the directors were doing was paying no regard to the valuation whatsoever, knowing that the valuation so heavily relied upon the CRA Report, and knowing that the CRA Report was utterly unreliable. For these reasons, the Court would, on FLC's case, find that the Yima directors knew that the very basis of this valuation of $129 million was completely non-existent. FLC's case is that the Yima directors proceeded nonetheless, because they wanted to buy this asset no matter what.[381]

613 KQ argued that, on this case, FLC would need to establish that no matter what the tenement is worth, the directors knew that the valuer was being misled. KQ said that FLC would have to show that the directors knew that everything that the valuer said that came from the Report was utterly useless, and they proceeded nonetheless.[382]

614 KQ said that there were two ways of characterising that sort of conduct. One is fraud. KQ submitted that it would be fraud to commit the company to a transaction that must be supported by valuation, knowing that the entire basis of the valuation was non-existent. KQ said that would be fraud by the directors, and if it was fraud by the directors, as a matter of law, their knowledge could not be attributed to Yima or KQ.[383]

615 KQ submitted that, the other way that the Court might be invited to characterise the conduct of the directors, was that they were negligent. But, KQ submitted, negligent conduct by the directors did not break the chain of causation. KQ said that at most, it might give rise to apportionment, but that had not been pleaded by FLC, in relation to the directors.[384]

616 KQ concluded that the contention that the valuation played absolutely no part in the Yima board's consideration would require the Court to believe that every director who voted to approve the transaction on the basis of a valuation was acting fraudulently.[385] KQ submitted that even if the Court did reach that conclusion, their knowledge could not be attributed to Yima. KQ submitted that, for these reasons, FLC's defence must fail both as a matter of fact and as a matter of law.

617 As mentioned above, KQ alleged that FLC bore the onus of proof in establishing that Yima did not rely on the valuation of the valuer. KQ contended that the onus lay on FLC to break 'the chain of causation.'

618 I do not accept that FLC bears the onus of establishing the chain of causation was broken. Rather, I find that KQ bears the onus of proof, of establishing the chain of causation. I find that KQ must establish that the Yima directors relied on the valuer's valuation, in authorising and instructing KQ to purchase the shares in U&D. If I am not satisfied that the Yima directors relied on the valuation, but nevertheless assuming that the valuer had been misled and deceived by the CRA Report, then KQ cannot claim it suffered any loss or damage by reason of the valuer being misled or deceived by the CRA Report. Any loss or damage it suffered would have been caused by the board's decision to instruct KQ to purchase a majority interest in U&D without regard to the value determined by the valuer in the valuation.

619 As the above reasoning demonstrates, the onus rests on KQ to establish that the Yima directors relied on the valuation. In my opinion, the fact that FLC also pleads that KQ knew that the valuation was unreliable does not relieve KQ of the onus of establishing the causal link that it relies on.

620 As discussed above, there are many reasonable and plausible inferences open on the evidence that have not dispelled by KQ. The existence of these reasonable and plausible inferences tends to undermine KQ's case if they are not dispelled.

621 At all times the onus remained on KQ to address these inferences. At no stage does the onus of proof move to FLC. Although, if FLC wishes to establish some matter which it says should be taken into account by the Court when considering whether KQ has satisfied the Court on the balance of probabilities of the alleged 'by reason of,' then FLC bears the evidentiary onus, but no more.

622 In other words, KQ bears the onus of establishing the causal chain, and FLC does not bear the onus of establishing the causal chain was broken. Rather, FLC by its defence may lead the Court to find, after considering all the evidence, that it is not satisfied that the causal chain relied upon by KQ has been made out by KQ.

Damages under s 236 of the Australian Consumer Law

623 To recover damages under s 236 of the Australian Consumer Law, a person must prove that they suffered loss or damage 'because of' the misleading or deceptive conduct of another.

624 Although it is causation and not reliance that lies at the core of the statutory test, reliance has often been a material fact within the context of individual cases. In the New South Wales Supreme Court's decision in Re HIH Insurance Ltd (in liq),[386] Brereton J stated:[387]

The ultimate issue posed by TPA, s 82 (and its equivalents) is one of causation, not one of reliance, and reliance is not a substitute for the fundamental question of causation. The word 'by' signifies no more than that the loss or damage has to have been brought about by virtue (or reason) of the contravening conduct. As a matter of principle, if causation - 'by conduct of' - can otherwise be established, it cannot matter that reliance is not established. Thus, the statutory cause of action does not, per se, include reliance as a necessary material fact (although that is not to say that it will not be one, as a matter of fact, in the context of many, if not most, individual cases).

625 A third party's reliance on misleading conduct is capable of supporting a causal chain that leads to a plaintiff's loss.[388] Third-party reliance or 'indirect reliance' is illustrated in the case of Chowder Bay.[389] This case involved investors who brought proceedings over an allegedly misleading and deceptive valuation of commercial property. The investors agreed to put money into an investment scheme whereby a former caravan park would be redeveloped into a resort. A bank provided to the promoters of the investment scheme an indicative finance proposal for a loan. The loan would be used to finance the construction and development of the resort. The bank would only approve the loan if it found that the project had an acceptable loan-to-value ratio, which would be calculated by reference to a valuation of the development property. The investors alleged that the promoters of the scheme provided misleading information to the valuers, which caused the valuers substantially to overvalue the project. After receiving the valuation, the bank approved the loan, drawdowns took place, and the resort was constructed. However, the development was not a success, and the investors sued the scheme's promoters.

626 Put simply, the investors' case against the valuers was as follows. The valuers had engaged in contravening conduct by providing a misleading valuation. The bank relied upon the misleading valuation in providing the loan. The provision of the loan allowed the resort development to proceed. Because of the resort development's proceeding, the investors suffered loss and damage.[390] The Court had the following to say about the alleged 'causal pathway':[391]

Hence the causal pathway for the [investors] is dependent upon the reliance of the Bank on conduct properly characterised and then found to be misleading. This 'indirect' reliance (that is, through a third party) is the way the essential question of causation is addressed. The causation case is none the worse for this. It is well established that s 82 of the TPA provides a statutory cause of action for compensation to a person who suffers loss or damage by contravening conduct and does not stipulate any particular manner in which the loss or damage must be suffered.

627 The Court went on to cite, with approval, the decision of Janssen-Cilag Pty Ltd v Pfizer Pty Ltd,[392] in which Lockhart J held that the recoverability of damages is not limited to cases where the plaintiff has relied directly upon the contravening conduct. The Court in Chowder Bay also cited, with approval, the case of Australian Breeders Co-operative Society Ltd v Jones.[393] In this case the Full Court found that causation was established where a 'but for' causation test was satisfied: 'but for a misleading valuation, a third party would not have completed a transaction, with the consequence that the applicant investors would not have made the investments which occasioned their claimed loss.'[394]

628 In relation to who bears the onus of proving or disproving causation, KQ makes the following submission:[395]

If the defendant suggests that, notwithstanding the third party's reliance on the misrepresentation, no loss was suffered by the plaintiff because the plaintiff knew that the representation was false, the defendant bears the evidentiary onus of establishing that fact.

629 In support of its submission, KQ cites a footnote in the decision of Re HIH Insurance.[396] The plaintiffs in those proceedings were shareholders in a company called HIH, who had bought their shares following the release of certain financial statements. The plaintiffs claimed that the financial statements contained false information, the publication of which had caused the market to overvalue HIH shares. Brereton J described the circumstances of the case as follows:[397]

The plaintiffs bought their shares on the ASX, to which HIH released information, including the FY1999 results, the FY2000 interim results and the FY2000 final results, which formed part of the matrix of information that influenced the trading price of the shares from day to day. If the contravening conduct deceived the market to produce a market price which reflected a misapprehension of HIH's financial position (which is a factual question to be resolved in conjunction with the quantification of damages), then it had the effect of setting the market at a higher level - and the price the plaintiffs paid greater - than would otherwise have been the case. In such circumstances, plaintiffs who decided - entirely oblivious to the contravening conduct - to acquire shares in HIH, were inevitably exposed to loss. Moreover, they were members of the class who would obviously be affected by the contravening conduct. Upon the assumption that the effect of the misleading conduct was, as the plaintiffs allege, that HIH shares traded on the market at a higher price than would otherwise have been the case, it was inevitable that any purchaser of HIH shares would, upon acquiring such shares, incur loss.

630 Brereton J went on to describe the case as analogous to the first category of circumstances described by McHugh J in Henville v Walker.[398] McHugh J described the first category as including situations in which 'the legal framework may require a finding that, despite a causal connection in a physical sense between the breach and damage, no causal connection exists for legal purposes.'[399] This was in contrast to those situations in which 'the legal framework may require a finding that a causal connection exists even though no more appears than that the damage followed after breach of a legal norm.'[400] Brereton J thought that the circumstances of Re HIH Insurance fell into the first category, with the difference, that in the facts before his Honour it was 'the laws of the market rather than those of nature which dictated that the inevitable consequence of the contravening conduct would be that share purchasers would pay an inflated price.'

631 However, Brereton J added a qualification to this:[401]

[A] n investor who was shown to have acquired shares knowing that the results were overstated, or indifferent to it, could not be said to have incurred the loss 'by' the contravening conduct - a decision to do so with such knowledge or indifference would break the causal chain.

632 In the footnote to that paragraph, his Honour added, 'On proof of such a novus actus, the defendants would bear at least an evidentiary onus.' It is this comment that KQ seizes upon in support of its submission.

633 In Re HIH Insurance,[402] Brereton J considered a market-based causation claim. It was alleged that HIH Insurance had released financial reports that overstated the true financial results and position of the company. The shares in HIH were publicly traded. The plaintiffs were shareholders who had purchased their shares during the period the market was misinformed.

634 The shareholders sought to lodge a proof of debt in the liquidation of the companies for damages which were rejected. They appealed. The shareholders relied on s 82 of the Trade Practices Act, which gave a cause of action to 'a person who suffers loss or damage by the conduct of another person' that was done in contravention of s 52 and certain other provisions of the Act.

635 The defendants contended that for the plaintiffs to succeed they needed to establish reliance in the sense that he, she or it relied upon the overstated financial results when making a decision to acquire those shares or would have acted differently but for those overstated results.

636 Brereton J rejected that contention. His Honour said that '[t]he word "by" signifies no more than that the loss or damage has to have been brought about by virtue (or reason) of the contravening conduct.'[403]

637 His Honour said that if a shareholder was shown to have acquired the shares in the misled market, knowing that the results that had misled the market were overstated, or was indifferent to the market being misled, then that shareholder could not be said to have incurred a loss 'by' the contravening conduct. In those circumstances, Brereton J said that the defendant in that case would bear at least the evidentiary onus, on proof of such novus actus.

638 In my opinion, those observations do not support any contention that KQ does not bear the onus of proof of establishing that the misleading conduct caused the damage which KQ alleges it suffered. To discharge this onus of proof, KQ must establish that Yima relied on the false information in the valuation in instructing KQ to buy the U&D shares at the price nominated by the valuer.

639 Here KQ alleges that it suffered loss not because it was misled, but because Yima directed it to buy the shares and Yima had been misled. KQ alleges that it was directed to buy the shares at a price that Yima had directed it to pay, and that this price was greater than the actual value of the shares. KQ says that Yima was misled in making that direction, in that it believed that the valuation was reliable.

640 As Brereton J held, it was the contravening conduct that meant that the HIH shares were traded at a higher price than they would have been if the market had not been misled by the contravening conduct. The onus rested on the plaintiffs to establish that the contravening conduct had misled the market.

641 Insofar as KQ pleads that certain persons relied on the CRA Report, KQ bears the onus of proving they relied on it (unless those persons have admitted relying on it). KQ pleads that the CRA Report was relied on by:

(a) the valuer when he prepared the valuation;

(b) Mr Songying Li when he prepared the summary document; and

(c) Yima and SASAC, when they approved KQ's acquisition of 51 per cent of the shares in U&D.

642 Unless the Court is satisfied on the balance of probabilities that those allegations are true, they are not made out. No onus of proof shifts to FLC.

643 FLC does allege, however, that Yima was aware at all time that the CRA Report materially over calculated the volume of coal resources present in the EPC 818 tenement and could not reasonably be relied upon as a proper assessment of these resources.[404] Insofar as FLC seeks such a finding of fact, I accept that FLC would bear the evidentiary onus of proof. This plea is akin to the example, given by Brereton J, where he says that the defendant would bear the evidentiary onus of proof of the novus actus. FLC makes other affirmative pleas in response to the allegations of KQ, on which it also bears the evidentiary onus of proof.[405]

644 The evidence establishes that Yima's mining geologist, Mr Songying Li, on the instructions of Yima, visited the EPC 818 tenement and prepared a due diligence report on the proposed purchase of the tenement and that Mr Li was provided with a copy of the CRA Report by representatives of the vendors. Mr Li identified the flaw in the estimates of the non-surface coal reserves in the CRA Report. He found that the estimates were based on the unverified results of one borehole in the 44-square-kilometre tenement. His written due diligence report is replete with observations that the estimates of the reserves were unreliable as they were based on the results of this one borehole, the results of which itself were not verified. The evidence of Mr Songying Li, Mr Walker, and Mr Houghton also established that a reliable estimate of the non-surface coal reserves would require 100 or more boreholes to be carried out. Their evidence also established that this requirement, for a reliable estimate of the coal reserves, would be well understood by any person involved in coal mining.

645 Mr Li reported his findings to the management committee of Yima that included many directors of Yima including the chairman. A reasonable and plausible inference is that the management committee were left in no doubt that Yima did not have available a reliable estimate of the deep resources of the tenement and that the estimates in the report that the vendors provided to Mr Songying Li were unreliable. The management committee was advised that a proper evaluation of the resources ought to be carried out. This would have involved many further boreholes to be carried out sufficient to be able to estimate properly the deep-coal resources.

646 The management committee was comprised of experienced coalminers. A major part of Yima's business was coal mining. Mr Li Yong Jiu gave evidence of the massive size of Yima's operations. Mr Walker's evidence confirmed that coalminers readily understood that proper estimates of deep-coal resources required many geological boreholes to be dug. Similar evidence was given by Mr Houghton. Further, it struck me that, absent some other method of determining deep-coal resources, boreholes seemed a rational method of determining the extent of the coal resources. KQ did not lead any evidence to establish otherwise.

647 As such it is a reasonable and plausible inference that the members of the management committee understood that the provision of data from one unverified borehole did not provide a reliable estimate of the deep-coal resources. It is a reasonable and plausible inference that the members of the management committee understood that many boreholes would have been required to assess properly the deep-coal resources in the 44-square-kilometre area of the EPC 818 tenement. There was no suggestion by KQ that the members of the management committee were not experienced coalminers or that they would not have understood the importance of boreholes in estimating deep-coal resources. As mentioned, these inferences were strongly supported by the evidence of Mr Songying Li, Mr Walker, and Mr Houghton.

648 Mr Songying Li had expressly informed the management committee that the figures in his summary were based on a single borehole and two assumptions. The assumptions were first, that the results of the one borehole test were reliable; and secondly, that the coal seams shown by the borehole extended over the whole tenement. Finally, Mr Songying Li informed the management committee that the two assumptions had not been verified.

649 Mr Yuantao Zhai was the chief executive officer of Yima. Mr Yuantao Zhai was a member of the delegation that travelled to Australia with Mr Songying Li. The reasonable and plausible inference is open that whatever material was provided in Australia on a USB stick to Mr Songying Li was also provided to Mr Zhai and that accordingly, Mr Zhai when he listened to Mr Songying Li's report, knew that Mr Songying Li was reporting on the CRA Report. The reasonable and plausible inference is also open that, as the CEO of Yima, Mr Yuantao Zhai shared his knowledge with other board members of Yima. KQ led no evidence to dispel those inferences. Mr Yu Li also accompanied the delegation.

650 At least four members of the board of Yima received the report of Songying Li on the information provided by U&D to the delegation, including the chairman and the chief executive officer of Yima.

651 I find that it is a reasonable and plausible inference to draw that the directors who received Mr Songying Li's report, informed the other board members of Yima about the unreliable nature of the information provided to the Yima delegation who went to Australia to inspect the EPC 818 tenement, about the coal reserves in the tenement. It is difficult to conceive of any reason why the directors on the management committee would not have shared their knowledge about the tenement with the other directors of Yima. KQ called no evidence to dispel that inference, save for Mr Li Yong Jiu, whose evidence I did not accept, for the reasons given above.

652 In spite of the report by Yima's engineering geologist Mr Songying Li to the management committee, according to the evidence produced by KQ, Yima received no further written geologically based reports or analysis on whether or not to acquire the tenement. I do not accept that the January report purportedly by Mr Hao Liu was such a report.

653 After Mr Songying Li gave his report to the management committee, the committee appointed Mr Hao Liu to investigate the tenement investment opportunity, head the due diligence into the tenement and to establish, and operate KQ. The observations by the chairman of Yima, Mr Yulu Wu on 31 January 2012, establishes that Mr Hao Liu failed to provide any further relevant information on the deep-coal reserves in the tenement by 31 January 2012.

654 Further, the 'Investigation and Research Report' dated 10 January 2012, said by Mr Li Yong Jiu to be from Mr Hao Liu, also confirmed that no further meaningful estimates of the deep-coal reserves had been obtained and supports the finding that Mr Hao Liu failed to provide any further relevant information on the deep-coal reserves of the tenement.

655 In mid-January 2012, the valuer was provided with the CRA Report and the January research report. There is no evidence that any other estimate of the coal resources in the tenement were sent to the valuer. This further supports, my finding that no further assessment of the deep-coal resources in the tenement were carried out.

656 In January 2012, Mr Dongmin Wang the head of the Securities Department at Yima was provided by the valuer with a copy of the CRA Report and the January research report. There is no evidence to suggest that he was provided with any other report on the coal resources of the tenement.

657 On 31 January 2012, the chairman Mr Wu gave instructions for investigations to be conducted into the quantity of the resources at the tenement. Mr Hao Liu was given the task of to investigate and assess the project. It is reasonable and plausible inference that the relevant officers of Yima were aware that he carried on no further geological investigations. KQ called no evidence to dispel this inference.

658 I find that it is a reasonable and plausible inference to infer that Yima decided to purchase the tenement knowing that it did not have any reliable information on the coal reserves it was acquiring. KQ called no evidence to dispel this inference, save Mr Li, whose evidence I have rejected unless corroborated.

Dongmin Wang's knowledge that Yima did not have reliable coal estimates

659 Prior to the meeting held with the chairman on 31 January 2012, Mr Dongmin Wang had been sent a summary of Mr Songying Li's report that identified the deficiencies in the information supplied by U&D to the Mr Songying Li when he visited Australia to assess the tenement in June 2011. Mr Songying Li said that Mr Dongmin Wang had asked him for the document that contained the 700 million tonnes calculation of coal resources.[406]

660 As Mr Dongmin Wang, asked Mr Songying Li for the document, then it is a reasonable and plausible inference that Mr Dongmin Wang knew that Mr Songying Li had written the document. This evidence also gives rise to the reasonable and plausible inference that Mr Dongmin Wang knew of the presentation by Mr Songying Li to the management committee. The evidence further gives rise to the reasonable and plausible inference that Mr Songying Li had reported to the committee that the information which U&D supplied to Yima was unreliable and could not be used to estimate the coal resources at the tenement.

661 The reasonable and plausible inference arises that Mr Dongmin Wang knew that the CRA Report was the report that Mr Songying Li had found was unreliable and could not be used to estimate the coal reserves at the tenement.

662 The reasonable and plausible inference arises that Mr Dongmin Wang knew that Mr Hao Liu did not obtain any further material geological information on the reserves consequent upon his visit to Australia in 2012.

663 The reasonable and plausible inference arises that when Mr Dongmin Wang accompanied the valuer to Australia that he knew that there was not available to the valuer, or the members of the board of Yima, any geological report on the tenement that provided a reliable estimate of the coal reserves at the tenement.

664 Mr Hao Liu also received a copy of the CRA Report. The reasonable and plausible inference arises that he realised that this was the report that Mr Songying Li had obtained in Australia and upon which he reported to the management committee.

665 The reasonable and plausible inference arises that Mr Hao Liu informed other executive directors of the existence of the CRA Report (especially as it was the only report that was produced on the coal resources of the tenement) and that those directors themselves became aware that the CRA Report had been provided to the valuer and that it was unreliable.

666 KQ failed to call evidence to dispel these inferences.

667 There are many unexplained aspects of Mr Dongmin Wang's role in the transaction. Why did Mr Dongmin Wang receive the fifth draft of the ETA, which included the price, in December 2011? Did he receive the earlier four drafts? Did he receive any subsequent drafts? What role, if any, did Mr Dongmin Wang have in negotiating the price of the U&D shares? Why did Mr Dongmin Wang ask Mr Songying Li for a copy of his summary report to the management committee in January 2012? Why did the valuer send Mr Dongmin Wang a copy of the CRA Report and the January research report? Why did the valuer send a draft of the valuation of the tenement to Mr Dongmin Wang? Why on 11 May 2012 did the valuer provide Mr Dongmin Wang with a preliminary valuation of the tenement? Why was Mr Dongmin Wang sent with the valuer to Australia? Why was Mr Dongmin Wang dealing with the valuer? Why did Mr Dongmin Wang attend the meeting with the chairman on 31 December 2012? What information on the transaction did Mr Dongmin Wang provide to other Yima executives and members of the board of Yima?

668 These unanswered questions are just some of the aspects of the transaction that remain a mystery. KQ may have an explanation for the failure to explain some of these questions, but any explanation that KQ is able to give, does not relieve KQ of the onus of proof that it retains.

669 The minutes of the meeting with the chairman on 31 January 2018, disclosed the intention of Yima to 'internationalise' the operations of Yima by investing in Australia. Mr Li Yong Jiu conceded that it was the desire of Yima to internationalise by investing in Australia.

670 On 27 April 2012, the ETA was entered into. The board of Yima met on 11 May 2012, to approve the acquisition by KQ of shares in U&D. The board papers disclosed the desire of Yima to internationalise its operations by investing in Australia. On that occasion, the estimated resources were taken from Mr Songying Li's calculation based on the assumptions that the one borehole test was reliable and that coal seems extended over the whole tenement.

671 I find that it is a reasonable and plausible inference that the board of Yima knew that no such assumptions could be made and the estimates were unreliable and entirely speculative.

672 The proposal put to Henan SASAC on 14 May 2012, again emphasises the strong motive of Yima to internationalise its operations in accordance with Chinese government policy.

673 FLC said that the Court has not been informed on whether there was pressure on Yima to internationalise the company from Henan SASAC or the entities that own it. KQ did not lead any evidence to explain how important the desire to internationalise was and what if any pressure was being applied to Yima. FLC said that there must be some explanation in view of the lack of information Yima had about the coal resources at the tenement.[407]

674 In essence, FLC submitted that KQ had failed to produce evidence of the factors at work in causing Yima to pursue the purchase.

675 A reasonable and plausible inference arises that a major corporation such as Yima with some 70,000 employees would have carried out a detailed analysis of both the geological and economic aspects of the proposed investment in the tenement called for. KQ did not discover any such analysis. Why none exists remains a mystery.

676 As already indicated, FLC contended that Yima was motivated by considerations other than financial, in deciding to take a majority interest in U&D. Normally, when a business considers investing in a major investment, such as the one involved here, where the investment was some $50 million, the business would carry out a financial analysis where returns would be calculated against the cost of the investment and a cash-flow analysis carried out. Normally, a business the size of Yima would have criteria against which potential investments would be measured. One would expect the returns would have to meet some benchmark related to the cost of capital.

677 It is obvious from the size of Yima and its range of investments that it would have been constantly considering investment opportunities and such analysis would be carried out.

678 FLC contended that the lack of any such financial analysis suggested that Yima was driven by long-term strategic considerations rather than by immediate profit. The long-term strategic consideration which, FLC said, mattered most to Yima was the goal of establishing a platform in Australia for further investment. This was more important than making a profitable investment that met investment criteria. In those circumstances, the cost of the investment would play a much smaller part in the board's consideration of the investment. In addition, FLC submitted that Chinese government policy was encouraging, if not directing, that firms such as Yima invest overseas and internationalise their operations.

679 As discussed above, evidence was tendered of internal Yima documents that supported FLC's contention about Yima's desire to internationalise. On the other hand, KQ did not tender a single document to dispel the inference that FLC sought to draw, ie that the decision to take a majority interest in U&D was driven by strategic considerations rather than financial considerations. If Yima were driven by financial considerations, then one would expect Yima to have carried out detailed financial analysis, or at least some financial analysis. KQ did not produce a single sheet of paper of financial analysis.

680 Under the contract between KQ and U&D, U&D was to provide all information in relation to the tenement to enable KQ to carry out due diligence. KQ did not provide any evidence that it or Yima carried out any due diligence. On the evidence before me, neither KQ nor Yima carried out any analysis.

681 The absence of any documents that suggest that financial considerations were taken into account gives rise to the reasonable and plausible interference that financial considerations played little or no role in Yima's decision to invest in Australia by buying shares in U&D. KQ called no evidence to dispel that inference, nor to suggest that financial analysis was carried out, nor to explain why KQ and Yima did not carry out any financial analysis.

Decision made to buy despite Mr Songying Li's report

682 FLC submitted that the decision to buy the tenement had been made by Yima before the 31 January 2012 meeting with Mr Yulu Wu. FLC said that the strategy to internationalise Yima was also consistent with the occasion when the report was given to the chairman on 31 January 2012. Mr Li Yong Jiu said that:[408]

At that time, they reported to us that this project would go further. But the economic and technical feasibility of mining in this area for resources are not available.

683 This evidence supports the reasonable and plausible inference that Yima was intent on proceeding with the purchase despite knowing that the quantity of resources at the tenement was unknown. This evidence also gives rise to the reasonable and plausible inference that the chairman was aware that reliance could not be placed on the resource assessment that was in the information that U&D supplied to Mr Songying Li in about June 2011. As mentioned previously, the evidence also confirms that by 31 January 2012, no further information on the resources at the tenement had been forthcoming. KQ did not dispel these inferences.

684 None of the directors other than Mr Li Yong Jiu gave evidence as to why they approved the purchase of the shares in U&D at the value fixed by the valuer. I do not accept the evidence of Mr Li Yong Jiu that he relied on the valuer's report. I have given reasons above for not accepting his evidence.

685 I am satisfied that Mr Li Yong Jiu was an experienced coalminer and knew that the estimates of the deep reserves used by the valuer were unreliable. Mr Li's attempts to justify reliance on the valuer's estimates of the deep-coal reserves were not credible. I closely observed Mr Li in giving his evidence. Despite the difficulties imposed by his evidence being given in Chinese, I gained the distinct impression that he merely gave evidence to suit Yima's case and was not a credible witness. As discussed above, I am not prepared to accept his evidence on contentious issues unless corroborated.

686 As for the other directors, in respect of whom a hearsay notice was given, KQ relies on a telephone call between Mr Li Yong Jiu and several directors of Yima. I am not prepared to accept their hearsay evidence. The evidence of the phone calls does not state what the individual directors actually said. The evidence does not recite all that they were told in the telephone conversations. They were not asked to address the issues I have raised above, such as: the desire of Yima to internationalise; the pressure from the Chinese government to do so; the knowledge of Mr Songying Li's due diligence report; the knowledge that on 31 January 2012, that Yima did not have any reliable information on the resources at the tenement; the lack of financial analysis carried out by Yima; the negotiations over the price between Yima and ANB; the valuer's reliance on information that Mr Songying Li had informed Yima was unreliable; and the roles played by Mr Hao Liu, Mr Wei Liu, and Mr Dongmin Wang. Apart from their reluctance to give evidence, no reason was given why these last three could not give evidence, particularly as evidence was taken in Hong Kong, in part, to suit the convenience of KQ.

687 FLC relied on the fifth draft agreement dated 11 December 2011. The fifth draft included a price for FLC's shares in U&D. FLC relied on it as evidence to establish that Yima and KQ had decided to buy EPC 818 well and truly before the board voted on the acquisition on 26 May 2012. FLC submitted that the fifth draft agreement was evidence that Henan SASAC, Yima, and KQ were not relying on the valuation.[409]

688 The fifth draft agreement established that as at 11 December 2011, KQ and ANB were negotiating to enter into a joint venture to mine the tenement. Yima was to contribute $129.4 million, of which $80 million was to go to FLC for its 40-per-cent shareholding in U&D. That left $44.9 million to increase the capital in the new joint-venture company, U&D. The evidence does not disclose what was intended under the joint venture.

689 FLC sought to make something of the fact that $5 million had already been paid under the co-operation funding agreement. Thus, FLC said a total of $129.5 million was spent by Yima for its 51-per-cent interest in U&D. In fact the contract ultimately agreed provided for the $5 million to be treated as part of the purchase price.

690 The valuation valued the tenement at $129 million. Thus KQ was to pay $51.6 million to FLC and $14.9 million to ANB for 51 per cent of U&D's shares. Thus it is difficult to reconcile the figures in the fifth draft which was to pay FLC $80 million for its 40-per-cent share in U&D. I do not believe FLC can draw much from the amount that was in the draft as opposed to the fact that the parties were negotiating a price.

691 The draft contract is inconsistent with the case put by KQ and Yima that there was no price fixed until the valuation was determined in May 2012. More importantly, KQ led no evidence to explain the exchange of draft contracts with a price included or to dispel the inferences that arise from the evidence.[410]

692 The minutes of the meeting on 31 January 2012 with the chairman, Mr Yulu Wu, refer to Mr Dongmin Wang and Mr Zhiwei Zhang giving a report on 'the negotiations over the Australian EPC 818 project.' Mr Zhiwei Zhang was the Yima Group General Manager. Neither Mr Dongmin Wang nor Mr Zhiwei Zhang was called to give evidence of the report they gave on the negotiations. KQ led no evidence to explain the negotiations that were taking place over the Australian EPC 818 project. The negotiations and the role they played in the decision of Yima to proceed with the purchase of the tenement remains a complete mystery.

693 KQ failed to produce the four earlier drafts of the ETA that were negotiated with Yima. KQ failed to produce any correspondence or documents that related to the negotiations.

694 The existence of the fifth draft of the ETA that included a price and the failure of KQ to offer any evidence in relation to the drafts gives rise the reasonable and plausible inference that the price for the U&D shares was fixed by negotiation between the vendors and Yima. KQ did not seek to call any evidence to dispel the inference or as mentioned to throw any light at all on the negotiations and the role they played in Yima's decision to proceed with the purchase. Mr Li Yong Jiu was unable to give any evidence about the drafts.

695 Inferences have played a large part in KQ's defence and counterclaim. In the absence of the evidence of the directors, KQ submitted that I should draw the inference that the directors of Yima relied on the valuation in instructing KQ to buy shares in U&D.

696 Dr Moore made it clear that KQ's case relied, to a large extent, on inferences. Dr Moore said (speaking of the valuation):[411]

We rely on the document to establish that KQ was deceived. It's an irresistible inference that KQ relied on the Smith Report and the valuation.

697 Dr Moore informed me that KQ was not calling any witnesses from KQ. I put to Dr Moore that KQ's claim is that it was deceived, and I asked him who was going to give evidence as to KQ's having been deceived. Again I was told that the proof would be established by inference. As it is, KQ does not rely on being deceived. But the relevance of the discussion I had with Dr Moore is that KQ's case on the directors of Yima and others' being deceived relied on inference.

698 KQ relies on the inference that, as the board of Yima instructed KQ to buy the U&D shares at the value fixed by the valuer, the board relied on the valuation.

699 The reasonable and plausible inferences that I have referred to above suggest that the board of Yima did not rely on the CRA Report as KQ alleges. The reasonable and plausible inferences suggest that the board knew that no reliable estimate of the coal resources in the tenement existed, that financial considerations were immaterial in making the decision to purchase, and that Yima's decision was based on a desire to internationalise its operations in line with Chinese government policy.

700 KQ did not dispel these competing inferences. KQ failed to call the relevant directors or produce other evidence to do so. Accordingly, when I come to KQ's submission that I should infer that the directors of Yima relied on the valuation in the sense discussed above, I am faced with other reasonable and plausible inferences that, if found, would lead to the contrary conclusion. This highlights the difficulty in simply relying on inferences, as KQ submitted I should, to establish that the directors relied on the valuation in authorising and instructing KQ to purchase the shares in U&D.

701 The failure of the directors to give evidence might be said to give rise to a Jones v Dunkel inference, which would enable me more readily to draw inferences of fact adverse to KQ. As it is, I have not found it necessary to rely on Jones v Dunkel. As discussed above, I have not found it necessary to find as a fact the inferences of facts that I have said are reasonably and plausibly open, that have not been dispelled by KQ, and thus have not called in aid Jones v Dunkel to do so.

702 I have relied, however, on the existence of the reasonable and plausible inferences of facts that have not been dispelled by KQ, when considering whether I am satisfied on the balance of probabilities of the reliance matters pleaded by KQ.

703 Nevertheless, as I now discuss, the failure of the directors to give evidence is a relevant matter in considering whether or not KQ has established its case of there being a causal link between information in the CRA Report and Yima's decision to accept the valuer's valuation of the tenement.

704 In AusNet Electricity Services,[412] I considered the failure of a party to call certain evidence, including relevant witnesses, in considering whether they had proved their case, and set out some relevant principles as follows:[413]

1. The principles were recently examined by the High Court in Australian Securities and Investments Commission v Hellicar. ASIC brought civil penalty proceedings against several directors of the parent company of the James Hardie group of companies. The company had established a foundation purportedly to meet the asbestos claims of former employees and customers of its products. The directors sent an announcement to the ASX that contained misleading statements about the sufficiency of the foundation to meet the payments on the asbestos claims against the group.
2. ASIC alleged that the directors had approved a draft statement to the ASX in a board meeting that was not materially different to the one sent to the ASX. ASIC alleged that several directors had breached their duties to the company by not advising the board that the announcement was misleading. ASIC tendered the minutes of the meeting as part of their case to establish that the board approved of the announcement. The directors claimed that the minutes recording the approval of the announcement were false. The trial judge found that the board had approved the announcement. The Court of Appeal allowed an appeal on the basis that ASIC owed a duty of fairness to the defendants and breached that duty by not calling the solicitor who prepared the board minutes. The Court of Appeal had found that by failing to do so, the cogency of ASIC's case was diminished and was not to have been proven.
3. The High Court allowed the appeal, finding that the failure to call the solicitor raised no inference that he would have given evidence adverse to ASIC's case. The plurality, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ, said:

The Court of Appeal concluded that ASIC's failure to call Mr Robb had 'consequences for the cogency of ASIC's case'. By this the Court of Appeal meant that the cogency of ASIC's proof was diminished.

Disputed questions of fact must be decided by a court according to the evidence that the parties adduce, not according to some speculation about what other evidence might possibly have been led. Principles governing the onus and standard of proof must faithfully be applied. And there are cases where demonstration that other evidence could have been, but was not, called may properly be taken to account in determining whether a party has proved its case to the requisite standard. But both the circumstances in which that may be done and the way in which the absence of evidence may be taken to account are confined by known and accepted principles which do not permit the course taken by the Court of Appeal of discounting the cogency of the evidence tendered by ASIC.

Lord Mansfield's dictum in Blatch v Archer that '[i]t is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted' is not to be understood as countenancing any departure from any of these rules. Indeed, in Blatch v Archer itself, Lord Mansfield concluded that the maxim was not engaged for 'it would have been very improper to have called' the person whose account of events was not available to the court.

This Court's decision in Jones v Dunkel is a particular and vivid example of the principles that govern how the demonstration that other evidence could have been called, but was not, may be used ... [T]he Court held 'that any inference favourable to the plaintiff for which there was ground in the evidence might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by the defendant and the evidence provides no sufficient explanation of his absence'.

The Court of Appeal concluded that ASIC's not calling Mr Robb founded an inference that his evidence 'would not have assisted the ASIC case'. There was no basis for drawing any inference that Mr Robb would have given evidence adverse to ASIC's case ...

...

125 In G v H, Brennan and McHugh JJ stated:

When a court is deciding whether a party on whom rests the burden of proving an issue on the balance of probabilities has discharged that burden, regard must be had to that party's ability to adduce evidence relevant to the issue and any failure on the part of the other party to adduce available evidence in response.

In deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision.

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so.

127 In Shalhoub v Buchanan, Campbell J stated:

Failure of a party who bears an onus of proof to call an available witness who could cast light on some matter in dispute can be taken into account in deciding whether that onus is discharged, in circumstances where such evidence as has been called does not itself clearly discharge the onus. This is an application of Lord Mansfield's maxim.

1. In Whitlam v Australian Securities and Investments Commission, Hodgson, Ipp and Tobias JJA stated:

The principle in Briginshaw calls attention to the requirement that a party seeking a finding of serious misconduct produce adequate material to enable a court to reach a comfortable satisfaction on such a serious matter. Although this is not the same as the obligation of the Crown to call available evidence in a criminal prosecution, we think it is fair to say that a person seeking such a finding does need to be diligent in calling available evidence, so that the court is not left to rely on uncertain inferences.

1. In Cook's Construction Pty Ltd v Brown, Hodgson JA stated, in an ex tempore judgment:

Where a party has to prove something and prima facie has available evidence that would directly deal with the question, a court will be very hesitant in drawing an inference in that party's favour from indirect and second-hand evidence, when the party doesn't call the direct evidence that prima facie it could have called, at least unless some explanation is given, or the circumstances themselves provide an explanation.

1. This last statement has particular relevance in this case, where the appellant relied on hearsay evidence, failed to call the Chair and two other identified members of the sub-committee to give evidence, and failed to lead evidence from Mr Drew on the purpose of the sub-committee for the Chair's request.

705 In the seminal case of Blatch v Archer,[414] Lord Mansfield said that 'all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.' In the High Court decision of Swain v Waverly Municipal Council,[415] Gleeson CJ endorsed this proposition, describing it not only as a 'basic principle of adversarial litigation,' but also as one that 'accords with common sense and ordinary human experience.'[416]

706 In Swain v Waverly Municipal Council, Mr Swain sustained a serious injury while he was swimming at a beach in New South Wales controlled by the Waverley Municipal Council. Mr Swain had entered the water between flags that the council had erected on the beach. He waded some distance into the water, and attempted to dive through a wave. In doing so, he struck his head on a sandbar. Mr Swain sued the council in tort, alleging that the council was negligent in that it had induced him to swim between the flags, but had failed to take reasonable care in positioning them.

707 At trial, a jury of four found in favour of Mr Swain. The council appealed, and the New South Wales Court of Appeal allowed the appeal on the grounds that there was no evidence to support the jury's verdict. Mr Swain appealed to the High Court of Australia, which allowed the appeal by a majority.

708 In its defence, the council submitted that the sandbar was not a real danger, or at least not a danger so great as to influence a decision about where to place the flags. Gleeson CJ said that the council's argument was 'a strong line to take in the absence of any evidence to show that moving the flags would not have made a material difference, or improved overall safety.'[417] Gleeson CJ recognised the effect that a failure to call evidence may have in the fact-finding process, noting that the jurors may have considered that 'it was up to the respondent [council], rather than the appellant [Mr Swain] ... to explain why nothing would have been gained by putting the flags in a different location.'[418]

709 The case of Ho v Powell involved a claim for damages for injuries suffered in a car accident.[419] A cyclist was riding his bike at night along a well-lit street when he was involved in a collision with a car, which left him seriously injured. The driver admitted a breach of duty of care, but alleged contributory negligence since there had been no front light on the cyclist's bicycle. The driver was present at the trial, but was not called to give evidence.

710 On the question of contributory negligence, the trial judge found in favour of the cyclist. The trial judge was not satisfied that the cyclist's negligence in failing to have a front light on his bike caused, or contributed to the causation of, the accident. Noting that the driver did not testify, her Honour made the inference 'that there was nothing that he could say that would have assisted his case (in respect of the allegation of contributory negligence).' Her Honour observed that the failure of the driver to give evidence left open a wide range of possibilities as to what had caused the accident: the driver might have seen the cyclist but misjudged his distance between them; there may have been a mechanical failure with the car; the driver may have been driving recklessly; and so on. Her Honour held that the driver failed in his allegation of contributory negligence because:

the evidence is neutral in that there is no evidence which is not equally consistent with the existence and with the non-existence of a fact that is essential to his allegation: namely that the accident was caused by a problem of visibility.

711 The driver appealed the trial judge's finding. In relation to the inference drawn by the trial judge that there was nothing the driver could have said that would have helped his case, Hodgson JA (with whom Beazley JA agreed) said that the inference was 'proper, indeed almost inevitable.'[420] The inference relied in part upon the obvious availability of the driver: 'plainly a deliberate decision was made not to call the appellant [driver], who was in court available to give evidence.'[421]

712 Hodgson JA held that, when determining the relative probabilities of competing factual submissions, a court must have regard to more than just the material before it. The court must also consider the ability of the parties, particularly the party bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have done so.[422] In this case, the Court of Appeal held that the trial judge was right to take into account that the driver was not called to give evidence.

713 My remarks on this issue in my decision in AusNet Electricity Services[423] have been picked up, with approval, by other judges of this Court.[424] Since that decision, the Federal Court of Australia has handed down several decisions that touch upon the issues relating to failures to call evidence. In BCI Finances Pty Ltd (in liq) v Binetter (No 4),[425] Gleeson J stated that:[426]

A failure by respondents to deny or explain facts when it was in the respondents' exclusive power to do so allows increased strength or weight to be given to primary facts favourable to the applicants and allows inferences favourable to the applicants to be more confidently drawn. The silence of a party may serve to resolve a doubt or an ambiguity regarding the existence of a fact, especially where the facts are peculiarly within the knowledge of the silent party.

714 In Bauer Consumer Media Ltd v Evergreen Television Pty Ltd,[427] the Federal Court of Australia held that the appellant's failure to call witnesses whom it would have been natural for it to call, who would have had personal knowledge of highly relevant facts in issue, and who were not otherwise unavailable, had the consequence that it was proper to draw an adverse inference against the appellant.[428] The appellant submitted that either party could have called the relevant persons as witnesses, and that its lack of control over those persons meant that there was no basis for drawing any adverse inference against it. In rejecting the appellant's submission, Perry J said made the following observations.

First, the test is not whether the potential witness is a present employee or someone over whom a party had 'control'. The question is whether it would have been natural for [the appellant] or [the respondent] to produce the witness.

...

Secondly, the evidence did not demonstrate that these persons were unavailable.

...

Thirdly, [the appellant] did not dispute that these people could have given relevant evidence. To the contrary it is apparent from the evidence that they would have had personal knowledge of highly relevant facts in issue.

Finally, there is no evidence explaining why these persons were not called by [the appellant].

In those circumstances, as I later explain there are a number of issues in relation to which I consider that an adverse inference ought properly to be drawn against [the appellant] in line with Blatch v Archer and Jones v Dunkel by reason of [the appellant's] failure to call these individuals.

715 In Australian Securities and Investments Commission v Hellicar ('ASIC v Hellicar'),[429] the High Court of Australia considered the onus and standard of proof that must be applied in deciding questions of fact. The majority stated that in some cases a court may properly take into account, when deciding whether a party has proved its case to the requisite standard, the ability of that party to have called other evidence, and its failure to do so.[430] However, such cases are 'confined by known and accepted principles.'[431]

[B]oth the circumstances in which that may be done and the way in which the absence of evidence may be taken to account are confined by known and accepted principles ...

716 The High Court went on to describe four situations in which inferences may be properly drawn from evidence.[432] The High Court cited with approval three cases as authorities for the four situations: Whitlam v Australian Securities and Investments Commission ('Whitlam v ASIC');[433] Ho v Powell;[434] and Payne v Parker.[435] According to this passage in ASIC v Hellicar, the situations in which inferences may be drawn from a party's failure to call evidence are as follows:

(a) where the plaintiff's case depends on inference;[436]

(b) where there is a question about whether limited material is an appropriate basis on which to reach a reasonable decision;[437]

(c) where the missing witness would be expected to be called by one party rather than the other;[438]

(d) where it is known that a person's evidence would elucidate a particular matter.[439]

717 In passing, it should be noted that KQ's case relies, in part, on inference.

718 The case of Payne v Parker in the New South Wales Court of Appeal involved a widow suing in negligence the doctor who had operated on her late husband. Her husband had been operated on by the defendant doctor, and he subsequently underwent three emergency operations performed by a specialist surgeon. Her husband died. Neither the plaintiff widow nor the defendant doctor called the specialist surgeon as a witness. At trial, counsel for each party asked the Court to make an inference favourable to his own client through the application of the principle in Jones v Dunkel.[440]

719 Glass JA laid down the conditions of operation of the principle in Jones v Dunkel:[441]

These conditions are three in number: (a) the missing witness would be expected to be called by one party rather than the other, (b) his evidence would elucidate a particular matter, (c) his absence is unexplained.

720 This concise explanation of the conditions precedent to the operation of the Jones v Dunkel principle has been quoted and applied many times since.[442]

721 In Re Premier Bay Pty Ltd,[443] I took into account the failure of the plaintiff to call witnesses that could have supported its case. I said:[444]

The failure of Mr Montalto to call evidence that could have supported his case, in the absence of any explanation for such absences, cannot be overlooked. In my opinion, in those circumstances, when viewing his evidence, I am entitled to give less weight to evidence that could have been supported by witnesses whom he failed to call. To repeat the words of Lord Mansfield in Blatch v Archer, as cited in the High Court case of ASIC v Hellicar:

It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.

722 What general principles can be drawn from these authorities?

(a) It is not permissible to infer from a party's failure to call a witness, available to that party, what the evidence that witness would or would not have given.[445]

(b) The failure of a party to call evidence available to it may, in an appropriate case, have a bearing on whether or not that party has established its case.[446]

(c) On the other hand, the failure of a party to call available evidence on a particular issue need not detract from the Court finding in favour of that party from other evidence.

(d) Where a party has to prove something and prima facie has available evidence that would directly deal with the question, a court will be very hesitant in drawing an inference in that party's favour from indirect and second-hand evidence, when the party does not call the direct evidence that prima facie it could have called, at least unless some explanation is given, or the circumstances themselves provide an explanation.

(e) The principle in Jones v Dunkel is an aspect of Blatch v Archer.

723 KQ has asked the Court to infer that the Yima directors relied on the valuation in deciding to agree to the ultimate price of $129 million. The inference is to be based on the fact that the same figure appears in both the valuation and the contract. However, there is other evidence that suggests that Yima did not place reliance on the valuation. In such circumstances, where there is evidence telling against the claimant's asserted inferences, one would expect the claimant to call evidence to put to rest the contrary evidence, and to strengthen the inferences which the claimant seeks to have the Court draw.

724 In this case, I find that I am entitled to give the inferences sought to be drawn by KQ, about the reliance by the directors on the valuation, less weight than I otherwise might, where, the directors of Yima were available to be called, and their absence was not explained.

725 In my opinion, the principle given in (d) may have application in this case. KQ would seek to have the Court infer that the Board of Yima relied on the valuation of the valuer in approving KQ to enter into the contract with FLC. In this case, KQ has available the evidence of the Board members but only called one.

726 The failure of KQ to call witnesses and to present other evidence to dispel inferences that reasonably and plausibly arise from the evidence, that are inconsistent with or detract from the inferences of fact that KQ seek me to find, are relevant factors that I am entitled to take into account, in deciding whether or not I am satisfied on the balance of probabilities to draw the inferences of fact that KQ seeks me to find.

727 I accept that KQ has faced real problems in calling some of these witnesses or finding the relevant documents. But there is no authority for the proposition that difficulties in calling evidence in any way alleviates the burden of proof that a party bears in pursuing a certain case.

(a) I am satisfied that Yima was motivated to purchase the majority interest in U&D, through its wholly owned subsidiary KQ, by its desire to internationalise its operations and to establish a platform in Australia to expand its international operations;

(b) I am satisfied that Yima was not motivated by financial considerations in purchasing the majority in U&D, through its wholly owned subsidiary;

(c) I am not satisfied that Yima relied on the valuation in instructing KQ to purchase the shares in U&D; and

(d) I am not satisfied that the CRA Report was relied on by Yima when it approved the acquisition by KQ of 51 per cent of the shares in U&D on the basis of the proposals to them and the valuation (which incorporated and relied upon the CRA Report).[447]

Claim that Henan SASAC was misled or deceived

729 KQ contends that Henan SASAC relied upon the CRA Report when it approved KQ's acquisition of 51 per cent of the shares in U&D. KQ contends that Henan SASAC approved the acquisition on the basis of the proposals before it and of the valuation (which incorporated and relied on the CRA Report.)[448] KQ submits that the relevant facts are as follows.

730 On 14 May 2012, Yima sent a proposal to Henan SASAC.[449] According to the proposal, Yima established KQ for certain specific purposes. The proposal states:

In order to accelerate the implementation of the development strategy of 'starting up strongly, leaping scientifically and seizing opportunities to soar' set by [Yima] to acquire coal resources, and to achieve the sustainable development of the enterprise; and at the same time, as an active response of [Yima] to the national strategy of 'going out', and in line with the development ideas of 'capitalisation, industrialisation and high-end orientation', it has established the solely-owned [KQ].

731 The proposal sets out the ownership structure of U&D and the proposed acquisition by KQ of shares in U&D. The proposal said that the EPC tenement had ascertained reserves of 30 million tonnes, and estimated deep reserves of 700 million tonnes. It referred to the proposal to develop the project in two stages. Phase 1 was to mine the open cut ascertained coalmine of 30 million tonnes. Phase 2 was to invest in exploration of the deep resources of the EPC 818 coalmine project, after ascertaining the recoverable resources, and preparing a deep resource development plan.

732 The proposal stated that the transfer price for the shares in U&D was to be determined by a valuation by Henan Jinshi Mining Rights Appraisal Co Ltd.

733 Mr Li Jong Jiu said that on 15 June 2012, the valuation was lodged with Henan SASAC. He said that a document (form for state-owned assets assessment project) was lodged with the valuation. He said that the form is the document he referred to in para [75] of his witness statement.[450]

734 Mr Li Yong Jiu said that ordinarily the valuation (without exhibits) was lodged electronically with the form referred to in para [75] and then a complete copy with exhibits was provided in hard copy to Henan SASAC within a few weeks.

735 Mr Yu's witness statement also addressed Henan SASAC approval. He said that a state-owned entity used a document to lodge the valuation with Henan SASAC and that same document was used by Henan SASAC to recognise the valuation. He said that the valuation was recognised after Henan SASAC undertook an administrative review of the valuation. He said that a separate document was provided when Henan SASAC approved the valuation. He said the two approvals happened at the same time. Mr Yu stated that exhibit QY-4[451] was a copy of the English translation of the document by which the valuation in this case was lodged and recognised. He said exhibit QY 5 was a copy of the Chinese and official English translation of the approval given by Henan SASAC. Exhibit QY 5 referred to Ex LTJ 26 exhibited to Mr Li Jong Jiu's witness statement.

736 Exhibited to the witness statement of Mr Qian Yu was a document headed 'Filing Form for Accepting Non-state-owned Assets Appraisal Project.'[452] The form was dated 15 June 2012. It referred to the valuer and the valuation method being a discounted cash-flow method. There was no indication that the valuation was attached to the form. As mentioned Mr Yu said however that this was the document by which the valuation was lodged with Henan SASAC.

737 This is the extent of the evidence led by KQ to establish that a complete copy with exhibits in hard copy were provided to SASAC within a few weeks or at all.

738 KQ in its submissions stated that '[o]n 6 September 2012, Henan SASAC recognised the valuation and approved the proposal. KQ referred to Ex QY 4 and Ex QY 5, which were exhibits to the witness statement of Mr Qian Yu.

739 Mr Li Yong Jiu said that on 6 September 2012, Henan SASAC returned the form for state-owned assets. Mr Li Yong Jiu exhibited the form.[453]

The 'Request for Instruction on the Acquisition of 51% of Shares of U&D Mining Industry (Australia) Pty Ltd by the Wholly-owned Subsidiary Kunqian Energy' [Yi Mei Wen [2012] 97] submitted by the company has been received. In accordance with instruction from the provincial government, the reply is hereby given as follows.'

741 The Court was informed that the reference to '[2012] 97' was a reference to the proposal filed by Yima dated 15 May 2012.

742 The approval form stated that the proposal was approved in principle. The form for state-owned assets was headed 'Approval on the Acquisition of 51% Shares of U&ED Mining Industry (Australia) Pty Ltd by Kunqian Energy of Yima Coal Group.'

743 The approval stated that Yima should conduct further feasibility study on this acquisition project, evaluate the assets of U&D in accordance with the relevant policies of China and use the documented assessed value as the basis of the acquisition. The approval continued:

[a]t the same time, on the premise of comprehensive risk prevention measures and contingency plans, the acquisition agreement should be signed according to law, and the implementation of the project be carried forward in an orderly manner, so as to ensure the safety of state-owned assets and the return on enterprise investment.

744 There was no reference in the document to the deep reserves. On the contrary, the approval was premised on the basis that further feasibility study was to be done. Further, there was no specific reference to the valuation document but only an instruction to use 'the documented assessed value.'

745 Mr Li Yong Jiu said that the return of the form meant that the valuation had been recognised.

746 KQ called no witnesses from Henan SASAC to support its submission that Henan SASAC relied on the CRA Report. The proposal was only approved in principle and Yima was instructed to carry out further feasibility study. There is no reference to any coal resource in the approval. I am not satisfied that Henan SASAC was provided with the CRA Report.

747 KQ seeks me to infer that the person or persons who gave the approval were misled by the reference in the proposal to 700 million tonnes of deep resources. No explanation was provided for the failure to call that person or persons.

748 KQ has not satisfied me that Henan SASAC relied on the CRA Report as alleged by KQ.

Claim that the valuer relied on the CRA Report

749 The valuer did not give evidence. KQ relied on inference to establish that the valuer relied upon the CRA Report when he prepared his valuation.

750 The valuer was purportedly an expert in valuing coalmines. The reasonable and plausible inference is open that he would have understood, as Mr Songying Li did, that the CRA Report relied on one borehole so that it was an unreliable source of information for estimating the coal resources of the tenement.

751 KQ failed to call any of the several persons that worked on the valuation. KQ contended that the valuer had gone missing. Perhaps a possible inference could be drawn from his fact, but I suggest none. KQ did not produce the valuer's file. KQ did not call Mr Dongmin Wang, who communicated with the valuer and received the CRA Report from the valuer.

752 In view of the other reasonable and plausible inferences that are open in this case, and that have not been dispelled by KQ, including that the price of the shares was agreed before the valuation was completed, and the other evidence referred to above, that are inconsistent with or detract from the inferences of fact that KQ seek me to find in relation to the valuer, I am not satisfied on the balance of probabilities that the valuer did rely on the CRA Report.

The claim that Songying Li relied on the CRA Report

753 The evidence of Mr Songying Li clearly established that he considered the CRA Report to be unreliable and that it should not be relied on by Yima in ascertaining the coal resources of the tenement. Mr Songying Li did not rely on the CRA Report in preparing his summary document. On the contrary, he made it clear that the representations in the CRA Report were unreliable.

754 If Mr Songying Li did rely on the CRA Report, contrary to my finding, then I am not satisfied that his reliance played any part in the board's decision to instruct KQ to buy the shares in U&D. I accept that the proposal put to the board refers to 700Mt which figure appeared in Mr Songying Li's summary. But the reasonable and plausible inferences of the board's knowledge and intentions, discussed above, which have not be dispelled by KQ, that are inconsistent with or detract from the case KQ seek me to find, lead me to conclude that I am not satisfied that the figure of 700Mt referred to in the proposal played any part in the board's decision to instruct KQ to buy the U&D shares.

(a) the ETA, that ANB had provided KQ, all information in relation to the tenement and U&D, to enable KQ to carry out due diligence and that the information was genuine;

(b) the co-operation funding agreement, that FLC was to provide genuine documents and information in relation to the tenement for the purposes of due diligence to be completed by KQ.[454]

756 The allegations relating to this issue are extensive. Regrettably, it is necessary to set out the substance of the relevant pleadings.

757 FLC does not admit these allegations.[455]

758 KQ alleges that in breach of these terms, Mr Yinan Zhang provided a fraudulent document in relation to the tenement, being the CRA Report.[456] KQ alleges that Mr Zhang first provided the CRA Report in early- to mid-2011. KQ says that Mr Zhang also provided it to Mr Wei Liu on 15 January 2012.[457]

759 KQ says that the CRA Report was also provided via an email that Ms Yi Yang sent on 28 June 2012.[458] It is alleged that Ms Yi Yang was acting on behalf of Mr Zhang. KQ says that, on instructions from Mr Zhang, the CRA Report was attached to a version of the report purportedly authored and signed by Mr Richard Smith. KQ says that Mr Smith neither signed nor authorised the report. KQ says that Mr Smith never received instructions to prepare, and never prepared a report about the matters set out in the report.[459]

760 FLC denies the allegation, and says further that at all material times, KQ and Yima knew that the CRA Report was not signed or authored by Mr Smith and was therefore not a genuine document.[460]

761 FLC alleges that Mr Dongmin Wang, who was a director of KQ, received a copy of the CRA Report by email on 16 January 2012, which was not signed and did not purport to be authored by Mr Smith.[461]

762 FLC alleges that in or about June 2011, Yima possessed a copy of the same document, prior to the time at which the version of the report, which appeared to be signed and authored by Mr Smith, was provided to KQ as alleged.[462]

763 KQ alleges that the conduct of Mr Zhang referred to in paras [752]-[753] above was:

(a) undertaken within the scope of Mr Zhang's actual authority as agent of FLC pursuant to the agency previously referred to;

(b) alternatively to (a), ratified by FLC.[463]

764 KQ alleges (particulars to [38GA]) the previous plea that Zhang acted as agent of FLC in all matters relating directly or indirectly to the tenement. As to the alleged ratification by FLC, KQ alleges that by receiving payments made under the ETA and by commencing (and continuing) litigation seeking to enforce the ETA, FLC has taken the benefit of the CRA Report upon which the valuation and therefore the ETA, were based.[464]

765 FLC denies the allegations.[465] Further, FLC refers to the limited nature of Mr Zhang's authority, as provided in the letter of authority that Mr Xiao wrote to Mr Zhang on 7 February 2012.

766 FLC says that Mr Zhang provided the CRA Report before Mr Xiao signed the letter of authority dated 7 February 2012.

767 FLC says that it has no knowledge of the circumstances in which the CRA Report was produced nor of the circumstances in which the CRA Report came to be provided to KQ.

768 Alternatively to FLC's denials in relation to Mr Zhang's alleged agency, FLC alleges that if Mr Zhang provided the CRA to KQ as alleged, then Mr Zhang did so in six alternate circumstances.

769 First, FLC alleges that Mr Zhang did so outside the scope of his authority.[466]

770 Secondly, FLC alleges that Mr Zhang did so without the knowledge of the directors of FLC.

771 Thirdly, FLC alleges that Mr Zhang did so with KQ knowing that Mr Zhang was exceeding the scope of his authority to organise and manage matters relating to the tenement and the ETA.

772 Fourthly, FLC alleges that Mr Zhang did so, with KQ and Yima knowing that the CRA Report was non-genuine. FLC alleges that the knowledge of KQ and Yima is to be inferred from Mr Dongmin Wang receiving a copy of the report by email in January 2012 and from Yima possessing a copy of the report in about June 2011.

773 Fifthly, FLC alleges that Mr Zhang did so before Mr Xiao's letter was signed on 7 February 2012 granting Mr Zhang authority to act as its agent.

774 In particulars, FLC refers to the witness statement of Li Yong Jiu filed by KQ which stated that Mr Zhang emailed the CRA Report to Wei Liu of KQ on 15 January 2012, and to Exhibit LTJ 18 thereto.

775 Sixthly, FLC alleges that while Mr Zhang provided KQ with the CRA Report, KQ and Yima knew that it materially over calculated the volume of coal resources present in the tenement.

776 In particulars, FLC pleads that the knowledge of KQ and Yima is to be inferred from the fact that Yima undertook its own due diligence into the tenement, which included undertaking a detailed geological assessment of the resource potential of the tenement in or about June 2011.[467]

777 Further, FLC pleads that Yima's senior geologist, Mr Songying Li, presented his findings and opinions to the management committee and directors of Yima.[468]

778 As discussed above, this plea involves a central feature of the dispute between KQ and FLC.

779 KQ alleges that it has suffered loss and damage by reason of the breach referred to in paras [752]-[753] above, and the allegations set out in paras [757]-[[469]] above.469

780 FLC denies the allegations.[470] Further, FLC refers to and repeats its pleadings as set out above at paras [759]-[771].

781 Further, FLC alleges that if KQ has suffered loss and damage (which it denies), such loss and damage was not caused by any conduct for which FLC is or may be liable.[471] This is because:

(i) at all material times, KQ and Yima knew that the CRA Report was not signed or authorised by Mr Richard Smith and therefore was not a genuine document;

(ii) Yima undertook its own due diligence into the EPC 818 tenement before approving the acquisition of U&D by KQ, including undertaking a detailed geological assessment of the resources potential of the tenement in or about June 2011;

(iii) Yima received draft copies of the valuation from the valuer and exchanged opinions with the valuer in relation to those drafts, following which the valuer made amendments to the valuation in response to those opinions;

(iv) Yima did not rely upon the valuation in deciding to approve the acquisition of U&D by KQ and the payment by KQ of the price for the acquisition; and

(v) Yima provided information concerning the resource quantities in the tenement to Henan SASAC which differed in material respects from the resource quantities described in the valuation and the CRA Report.

782 Alternatively, KQ alleges that it was a term of the ETA that the purchase price payable by KQ for the shares in U&D was to be fixed (alternatively, confirmed) by reference to a genuine valuation. FLC does not admit this allegation.[472]

783 KQ alleges that this term was a condition precedent which was not satisfied.[473] FLC does not admit this allegation.[474]

784 KQ alleges that KQ paid the FLC Purchase Price believing that the condition subsequent had been satisfied and thus by mistake.[475] FLC denies the allegation and says further that KQ at all material times knew that the CRA Report upon which the valuation was based materially over calculated the volume of coal reserves present in the tenement and could not reasonably be relied upon as a proper assessment of those resources; and was not a genuine document, and therefore did not make any payment operating under a mistake. FLC alleges the same particulars that it gave in response to KQ's allegations above.[476]

785 KQ alleges that it is willing and able to make counter-restitution. It says that if restitution is ordered, the tenement will be transferred from U&D to a new company and 40 per cent of the shares in that company will be given to FLC.[477] FLC denies the allegation and says further that KQ is not able to make counter-restitution. FLC denies the allegation and says further, that KQ is not able to make counter-restitution for three reasons. First, because the tenement is not presently owned by KQ but is owned by U&D such that the transfer of a 40-per-cent interest in the tenement to FLC by way of counter-restitution would require the approval of the board of directors of U&D and, such a transfer would not be in the best interest of U&D, because U&D would receive no consideration for the transfer. Secondly, the value of the tenement has changed since the receipt by FLC of part of the FLC purchase price, such that a transfer of a 40-per-cent interest in the tenement to FLC would not achieve counter-restitution, and thirdly, FLC has changed its position, by acting on the faith of the receipt of part of the FLC purchase price, and would suffer detriment if required to repay the amount received.[478]

786 It is important to emphasise that this claim for restitution rests on the premise that KQ believed the condition had been satisfied. As will be discussed later, none of the directors of KQ gave evidence, and KQ has failed to establish this plea.

787 Although the breach of contract claims are extensive they fail for one fundamental reason that if there were any breaches of the ETA agreement as alleged the breaches did not cause any loss or damage to KQ.

788 KQ was established by Yima to purchase and hold the shares in U&D. KQ had no involvement in the decision whether or not to buy the shares in U&D. That decision was solely in the province of its parent Yima. The directors of KQ did not give evidence. There is no evidence to suggest that they did other than follow the instructions of Yima.

789 Assuming that in breach of the ETA, Zhang did provide a fraudulent document in relation to the tenement, and assuming that it was done on behalf of FLC, KQ has not established that by reason of this conduct, KQ has suffered loss and damage for the reasons given.

790 The cause of any loss suffered by KQ, that is by paying more for the shares than they were worth, was solely due to Yima resolving to instruct KQ to enter into the ETA. For reasons discussed earlier, KQ has not satisfied me that Yima relied on the valuer's estimates of the coal reserves of the tenement based themselves on the CRA Report, in resolving to authorise and instruct KQ to purchase the shares under the ETA agreement.

791 The pleas based on KQ's alleged beliefs have not been made out. No-one from KQ gave evidence of any belief. In the circumstances of the evidence in this case, KQ has not established that it had any beliefs as alleged.

The amount owing to FLC under the ETA has been paid

792 FLC claims that it has not been paid the balance of the FLC Purchase Price of $29.2 million. KQ denies the allegation and contends that the amount owing to FLC under the ETA has been paid to FLC.

793 In essence, KQ alleges that the transfer of moneys from KQ to U&D constituted payment to FLC of the moneys owed to it, as:

(a) FLC signed a receipt admitting that it had received the moneys by the moneys being transferred to U&D;

(b) Mr Zhang was acting as agent for FLC in agreeing that the money transferred from KQ to U&D satisfied the debt owed by KQ to FLC;

(c) moneys that KQ transferred to U&D were held on trust for FLC, and as such satisfied KQ's obligation to pay FLC $29.2 million.

794 For the following reasons, I reject these contentions and find that KQ has not paid FLC the $29.2 million that it owes FLC.

The detail of the claims and relevant evidence

795 KQ alleges that by instruction in writing dated 17 August 2012 from KQ to the Bank of China ('letter of instruction'), KQ instructed the Bank of China to transfer $70 million from KQ's bank account to the bank account of U&D.[479] On or about that date, U&D received the sum of $70 million into its general bank account.[480] The background facts are as follows.

796 In August 2012, U&D was negotiating to buy all the issued shares in Endocoal. Endocoal asked and U&D agreed to confirm that it had the moneys available to effect the acquisition. U&D obtained $70 million from KQ and deposited it in a U&D bank account.

797 In Mr Li Yong Jiu's amended witness statement, he said that on 14 August 2012, Mr Hao Liu, on behalf of KQ, submitted a 'payment proposal' to Yima titled 'Use of Funds,' in which KQ sought approval:[481]

(a) to pay $70 million from KQ to U&D to obtain a bank letter of credit;

(b) to use $51.6 million to pay FLC under the ETA, but only once the conditions precedent were satisfied; and

(c) to use the remaining $18.4 million as an investment in U&D (for development and operations).

798 Mr Li Yong Jiu said that, in about August 2012, Mr Hao Liu met with him in person in his office at Yima's headquarters in China and reported to him details of the proposed $70 million payment.[482] Mr Li Yong Jiu says that he was told by Mr Hao Liu that 'the payment was mainly to be used by KQ to satisfy Endocoal that U&D could pay for the Endocoal shares that U&D sought to acquire, and that Yinan Zhang was supportive of that process.'[483]

799 Mr Li Yong Jiu said that, after that meeting with Mr Hao Liu, he made a handwritten note at the bottom of the payment proposal.[484] According to Mr Li Yong Jiu, the handwritten note said that, before the payment was made, Mr Hao Liu needed to 'communicate with ANB to ensure that funding of U&D was joint,' that was that 'the acquisition of the shares in Endocoal must be jointly funded in accordance with the shareholdings of KQ and ANB in U&D.'[485] Exhibited to Mr Li Yong Jiu's witness statement was a copy of the payment proposal, which showed a handwritten note. According to the translation provided to the Court, the note read: 'Communicate with Datong Company at the same time to seek co-financing by the two parties.' The note was dated 15 August 2012.[486]

800 By instruction in writing dated 17 August 2012 from KQ to the Bank of China ('letter of instruction'), KQ instructed the Bank of China to transfer $70 million from KQ's bank account to the bank account of U&D.[487] On or about that date, U&D received the sum of $70 million into its general bank account.[488] The $51.6 million to be paid by KQ to FLC under the ETA was included in that amount. As mentioned above, KQ submitted that the Court should find that FLC knew and approved of the discharge of KQ's debt to FLC under the ETA through the payment by KQ to U&D.

801 The letter of instruction appeared to bear the signature of Mr Hao Liu, and relevantly stated as follows:[489]

Australia Kunqian International Energy Pty Ltd hereby require to withdraw the Company's one-month time deposit of 23,800,000.00 Australian dollars in your bank (Value date: 20 July 2012, Deposit Certificate Number: BR12000041, time deposit account number: 800056-1226-000), please transfer the principal balance of 23,800,000,00 Australian dollars and corresponding interests into the following account of our company: 800056-1224-000. Meanwhile, we company authorize the Bank of China, Brisbane Branch to transfer from our company's current account 800056-1244-000 into the account of U&D Mining Industry (Australia) Pty Ltd an amount of 70,000,000.00 Australian dollars, in which 51,600,000.00 Australian dollars shall be the contracted payment that [KQ] ought to pay the Flash Lighting Company according to the equity acquirement agreement signed between [KQ], Datong Company and the Flash Lighting Company, and the remaining 18,400,000.00 Australian dollars shall be [KQ's] payment to U&D Mining for the development and operation of EPC 818 tenement project.

802 On or about 26 August 2012, FLC was allotted 40 per cent of the issued share capital of U&D.[490] The ETA contained a term to the effect that KQ agreed to acquire 40 per cent of the shares of U&D from FLC at the price of $51.6 million.[491]

803 On 27 August 2012, Mr Zhang misappropriated $10 million from U&D by causing U&D to transfer $10 million to CJI, a company controlled by Mr Zhang.

804 On or about 17 September 2012, U&D paid $5.4 million to FLC, and on or about 18 September 2012, U&D paid $17 million to FLC_,_[492] making a total payment to FLC of $22.4 million.

805 Also on 18 September 2018, Mr Zhang misappropriated a further sum of $19.2 million from U&D by causing U&D to pay $19.2 million to CJI, a company controlled by Mr Zhang. In total Mr Zhang misappropriated $29.2 million, the exact amount that was to be paid to FLC.

806 The moneys transferred to CJI by Mr Zhang were disbursed by him on personal expenditure, payments to or for the benefit of his wife and former girlfriend and other payments.

807 In its defence to the claim by FLC, KQ says that no demand was made on KQ between May 2012 and 19 May 2016.[493]

808 KQ submitted that the Court should find that Mr Zhang directed KQ (Mr Hao Liu) to pay $70 million via U&D. KQ said that Mr Zhang was responsible for U&D's acquisition of Endocoal. KQ submitted that Mr Zhang was supportive of the proposal to pay the funds to U&D. And Mr Zhang was the architect of the fraudulent conduct.

809 KQ said that in those circumstances, the only rational inference available was that Mr Zhang directed the payment via U&D. KQ said that was how he maximised his recovery from his own fraud. KQ said that Mr Zhang was the sole signatory for U&D's bank account, and he dissipated a large portion of the funds paid to U&D to himself, his wife and his former girlfriend.

810 KQ submitted that FLC was bound by Mr Zhang's direction to KQ to pay U&D. KQ submitted that Mr Zhang was FLC's agent in relation to its investment in Australia, including its indirect interest in the Endocoal transaction through ANB's substantial (49 per cent) shareholding in U&D.

811 KQ also relied on a letter addressed to the Bank of China purportedly signed by Mr Xiao and Madam Cui, the directors of FLC purportedly admitting that FLC had received $51.6 million under the ETA.[494] It was translated as follows:[495]