Sovereign Point Pty Ltd v Gu

Introduction 1 On 25 October 2019, judgment in default was entered against the first and second respondents pursuant to r 5.23(2)(c) of the Federal Court Rules 2011 (Cth) (Federal Court Rules) for failing to attend case management hearings conducted in the proceeding and for failing to file and serve a defence to the amended statement of claim by 27 September 2019, pursuant to orders made on 16 August 2019: Sovereign Point Pty Ltd v Gu [2019] FCA 1753. The first respondent (Mr Gu), by application filed on 26 August 2020, has applied to have the judgment set aside pursuant to r 39.05 of the Federal Court Rules.

Background to the proceeding 2 The proceeding relates to a joint venture entered into between the applicant (Sovereign Point) and the second respondent (AXF Group) for the development and sale of an apartment complex. The development was undertaken by AXF Development (Sovereign Point) Pty Ltd (in liquidation) (development company) as trustee for the AXF Development (Sovereign Point) Unit Trust (SP Trust), a special purpose vehicle incorporated for the purpose of the project. Sovereign Point and AXF Group were the shareholders of the development company and the unitholders of the SP Trust. Mr Gu is a director of AXF group and Patrick Chan (Mr Chan) is now the sole director of Sovereign Point. Mr Gu was also a director of Sovereign Point for part of the period during the currency of the joint venture. The directors of the development company were Mr Gu and Mr Chan. The development company was placed into liquidation pursuant to an order of the Federal Court on 1 June 2018. 3 Pursuant to a shareholder agreement between Sovereign Point and AXF Group, it was agreed that AXF Group would receive 60% of the profits of the development and Sovereign Point would receive 40% after payment of a "guaranteed return". The majority of the apartments were sold in 2015. Between June 2015 and September 2017, numerous transfers were made from the development company's bank accounts to AXF Group and various other third parties, including entities related to AXF Group. The transfers totalled $16,905,805 from one account and $4,812,747.33 from another. 4 Sovereign Point instituted these proceedings alleging that Mr Gu breached his statutory and fiduciary duties as a director of Sovereign Point by procuring unauthorised transfers of funds to an amount of $16,905,805 from the development company's National Australia Bank business cheque account to AXF Group and other third parties between June 2015 to September 2017, and a further unauthorised transfer of $4,812,747.33 from another of the development company's accounts with National Australia Bank to an unknown recipient in August 2015, or failing to cause AXF Group to repay the diverted funds to the development company upon becoming aware of the unauthorised transactions. Sovereign Point also alleged that Mr Gu breached his statutory and fiduciary duties as a director of Sovereign Point by causing certificates of title for certain apartments in the complex developed under the joint venture to be given, without authority of Sovereign Point, to a third party, Jhato Pty Ltd (Jhato), as security for money borrowed by Mr Gu or AXF Group.

Procedural history 5 The proceeding was commenced on 29 March 2018. The originating process and statement of claim were served on Mr Gu on around 1 May 2018. The first case management hearing was held on 18 May 2018. Mr Gu failed to attend that case management hearing. Mr Gu, through his then solicitors, later participated in the proceeding and a defence was filed on his behalf on 3 July 2018. Mr Gu's representatives appeared at case management hearings on 8 June and 2 November 2018. On 18 February 2019 he provided discovery pursuant to orders made on 2 November 2018. Case management hearings listed for 12 April 2019 and 10 May 2019 were both adjourned by consent. The next case management hearing was 7 June 2019, which Mr Gu did not attend, his solicitors having filed a notice of ceasing to act two days prior. Nor did he attend the case management hearing on 19 July 2019 or the case management hearing on 16 August 2019. 6 On 16 August 2019 Jhato was joined as a respondent to the proceeding, Sovereign Point was given leave to file and serve an amended originating process and amended statement of claim, and the respondents were ordered to file and serve their defences to the amended statement of claim by 27 September 2019. Jhato substantially complied with the order and brought a cross-claim against Sovereign Point. Neither Mr Gu nor AXF Group filed a defence to the amended statement of claim. Application was made by Sovereign Point for default judgment against Mr Gu and AXF Group on 10 October 2019. That application was heard on 25 October 2019. Neither Mr Gu nor AXF Group attended the hearing and judgment in default was entered that day. Following default judgment against Mr Gu and AXF Group, the proceeding continued against Jhato. The dispute between Sovereign Point and Jhato settled in late 2019 or early 2020 and orders were made dismissing the claims between Sovereign Point and Jhato on 2 February 2020.

Applicable principles 7 The power of the Court to set aside a judgment under r 39.05 is discretionary but, generally, matters which will bear on the exercise of discretion to set a judgment aside are: (a) whether the evidence discloses a defence of sufficient merit to warrant setting aside the default judgment; (b) the explanation, if any, given by the party for their default; (c) whether the application to set aside the judgment was made promptly after the judgment came to the knowledge of the defendant; and (d) whether if the judgment was set aside the plaintiff would be prejudiced in any respect which could not be adequately compensated for by a suitable award of costs and the giving of security - Evans v Bartlam [1937] AC 473; Violi v Commonwealth Bank of Australia [2015] NSWCA 152; Delta Metallics Pty Ltd v King [2012] FCA 1119 (Delta Metallics); 3D Funtimes Ltd v Intellec Development Group Pty Ltd (No 2) [2011] FCA 407 at [6]. 8 In the present case, as judgment was entered in default 10 months prior to the application to set aside the judgement being made, a further consideration bearing on whether to exercise the discretion in Mr Gu's favour is whether he has provided an acceptable explanation for the delay in applying for the default judgment to be set aside. 9 Mr Gu supported his application by three affidavits which he affirmed, an affidavit of Robert Rafaniello and an affidavit of Sue Shi. A proposed defence to the amended statement of claim has now been prepared and is also relied on by Mr Gu in support of his application. 10 The application was opposed by Sovereign Point, which relied on two affidavits affirmed by Mr Chan.

Whether Mr Gu has provided explanations for his defaults and delay in bringing his application 11 In his first affidavit dated 25 August 2020, Mr Gu deposed that his lawyers filed a notice of intention to cease to act on 22 May 2019 because he owed fees which he was unable to pay. After his lawyers ceased to act, Mr Gu also ceased to participate in the proceeding. Specifically, he failed to appear at case management hearings conducted on 7 June, 19 July and 16 August 2019. When orders were made requiring him to file and serve a defence to the amended statement of claim by 27 September 2019, he also failed to comply. Mr Gu offered no explanation for his defaults other than that in May or June 2019 his lawyers in Sydney, Australian Business Lawyers & Advisors (ABLA) liaised with his former lawyers in relation to the transfer of the files relevant to the proceeding but he could not instruct new lawyers because the former lawyers asserted a lien over the documents until their outstanding fees had been paid. Mr Gu deposed that he "had other legal matters in 2019, including defending a winding-up application against AXF Group Pty Ltd" and "[d]ue to the limited funding available to [him] at the time, [he] could not afford to pay [his former lawyers]". The assertion that he could not afford to pay his former lawyers does not explain his failure to participate in the case management hearings in person, at the least. Nor does the fact that he had other legal matters on foot in 2019 excuse his non-involvement or justify a delay in participating in, or progressing his defence in, this proceeding. I do not accept that the excuses proffered by Mr Gu provide an explanation, let alone an acceptable explanation, for his defaults. 12 Mr Gu has also failed to provide an acceptable explanation for the delay in making the application to set aside the judgment, which, on any view, is inordinate. The order for default judgment was made on 25 October 2019. Yet the application to set aside the judgment was not filed until 26 August 2020. The delay cannot be put down to a lack of legal representation as ABLA filed a notice of appearance on his behalf in the proceeding on 11 November 2019. 13 Mr Gu's explanation for the delay was that he believed he would be able to resolve the proceedings with Mr Chan and endeavoured to do so. The explanation proffered does not withstand scrutiny. Even if Mr Gu had aspirations for resolving the proceeding, such aspirations were neither a sufficient nor an acceptable explanation for the delay until August 2020 for filing an application to set aside the default judgment. His evidence left wholly unexplained why he did not apply to set aside the default judgment until August 2020. In particular, whilst he deposed to attempts to settle with Mr Chan in December 2019, his evidence was wholly silent as to whether negotiations continued in the new year or when they stopped. There was no evidence as to what steps were taken in 2020, if any, to attempt to resolve the matter, nor as to what steps Mr Gu took, if any, to make application to set aside judgment at the earliest available time. The delay of 10 months from the entry of default judgment against him called for an explanation, which he did not provide. The delay was inordinate in circumstances where Mr Gu received advice from solicitors in November 2019 regarding setting aside the judgment, and there is nothing in the evidence to show that Mr Gu acted at the earliest opportunity to apply to set aside judgment once it must have become apparent to him that his attempts at resolution were not successful. Accordingly, I do not accept that the length of the delay has been explained, let alone satisfactorily. 14 In oral submissions it was submitted for Mr Gu that the delay (at least in part) was occasioned by the complexity of the underlying factual matters, the fact that Mr Gu and his new lawyers are situated in Sydney, the fact that all conferences with Melbourne counsel are by telephone necessitated by the current COVID-19 pandemic, and the fact that English is not Mr Gu's first language and his instructions were not easily heard and comprehended over the telephone. It was submitted that the preparation of affidavit material has taken some time, largely by reason of those complications. The assertion of those matters from the bar table was most unsatisfactory and should have been deposed to in an affidavit or affidavits to enable those matters properly to be evaluated in considering whether they satisfactorily explain the delay. As those submissions were put without evidentiary support by way of affidavit, I place little weight on them. 15 Further, it was put that Mr Gu was hopeful that a resolution of Sovereign Point's dispute with Jhato would lead to a resolution of the claims against him as well and it would be unnecessary for him to incur the costs of an application to set aside judgment. Whatever wishful thinking Mr Gu may have had, it is not an explanation for the delay in bringing an application to set aside judgment.

Merits of Mr Gu's defence 16 Mr Gu's proposed defence to the claim of breach of director's duties in respect of the unauthorised transfer of funds is twofold: (a) first, that in August 2015 Sovereign Point agreed to lend AXF Group Sovereign Point's share of the profits as and when they were realised from the sale of apartments in the development (described as "the loan agreement"); and (b) secondly, that Sovereign Point and AXF Group entered into an agreement (described as "the repayment agreement") in August 2017 pursuant to which they agreed the terms of repayment by AXF Group of amounts repayable under the loan agreement, as varied by a "loan agreement variation" allegedly agreed in March 2016. 17 The alleged loan agreement in August 2015 and alleged loan agreement variation in March 2016 are particularised as oral agreements between Mr Gu and Mr Chan. Mr Gu's affidavit evidence was to the same effect as that pleaded. In his affidavits in opposition, Mr Chan denied that the conversations deposed to by Mr Gu occurred. In the circumstances, the merits of that proposed defence cannot be assessed beyond accepting there is a triable issue as to whether that loan agreement (and the later variation) was made. 18 The evidence concerning the alleged repayment agreement in August 2017 is said to be contained in an email dated 28 August 2017 from Robert Rafaniello (who at the relevant time was the Chief Operating Officer of AXF Group) to Mr Chan, which is signed and dated by Mr Chan on behalf of Sovereign Point. That email read: Patrick, Given your email below I have made the following amendments: What is owed: • Profit is $15.2M (to be confirmed next year when everything is sold) • Profit is a function of revenue less expenses. • As at 1/9/15 all expenses were generally paid however we had not all apartments were settled including the 3 apartments that still are yet to settle. • Therefore from the profit we deducted $4.5M being 803 - $3.5M, G10 - $500K, and 110 - $500K. • Therefore the profit at 1/9/15 was assumed to be $15.2M less $4.5M being $10.7M. • Patrick was entitled to 40% being $4.28M as at 1/9/15. • Patrick is also entitled to $1.8M after 803, G10, and 110 settle based on a $15.2M profit. • With the $4.28M, 10% interest applies from the 1/9/17 compounded monthly. So until 1/9/17 it grows to approx. $5,223,273 plus Patrick's $1.8M totals $7,223,273. • Patrick will forgo the $50K interest on the $208K. However 10% annual rate of interest compounded monthly applies to the $100,000 objector payment which after 27 months totals $25,115 and is to be added to any profit payments. So the agreement is: • Patrick is owed in total excluding interest 40% of the projects profit, which at this stage is approximately $15.2M and is to be confirmed early next year once all apartments are sold. • Richard owed Patrick $4.28M from 1/9/15 at an interest rate of 10% annual rate compounded monthly. • The payment plan is: o $1.2M by the end on Nov 2017. o Patrick collects the residual amount of the settlement of G10 and 110 which is approximately $900K and is to occur prior to Xmas 17. This is part of the profit payment. o Patrick (via Sovereign Point) obtain a clear title to 803. o Patrick will pay the remaining balance to complete 803 of approximately $100K which is a cost to the project and Patrick is to be reimbursed the $100K from the project. o Patrick will use his best endeavours to sell 803 and he will keep the settlement proceed as part of his profit payment. The costs of selling the apartment are a project cost and the project is to reimburse Patrick the costs. o If the apartment does not sell for the right price in time for his requirement to receive funds he can borrow against it and the interest on the borrowings will be a debt Richard owes no top of Patricks profits. • After the payment of the $1.2M from Richard in Nov 17, the approximate $900K from G10 and 110, and approximate $3.5M from 803 after costs, then Richard will pay Patrick $200K every month from February 2018 until the balance of monies is paid. The balance is a function of 40% of the total profit of the project, plus the interest that accrues until all payments are made. • Richard is to pay the ATO any GST payments when they are required to be paid and indemnify Sovereign Point Pty Ltd in case any GST payments are not made. Separate to this agreement and within 7 days of this agreement Richard is to provide Patrick with the dates of payments to be made from the Gold Ridge mine and any other income sources. If this is acceptable I will then get Vu to prepare a deed of agreement which you can have your lawyer review and everyone then signs. [sic] 19 In the proposed defence it is alleged that all the rights and obligations as between Sovereign Point and AXF Group arising out of and in connection with the development, the shareholder agreement, the loan agreement and other preceding agreements "merged in and were replaced by their respective rights and obligations created under the Repayment Agreement". Mr Gu relies on the doctrine of merger and the defence of accord and satisfaction to argue that all the rights and obligations between Sovereign Point and AXF Group which had accrued prior to August 2017 under the various agreements between them, or by virtue of any breaches of such agreements or breaches of duties, merged in a new agreement reached between them on 28 August 2017 for the payment of Sovereign Point's entitlement. 20 I accept that this defence as framed is open as a matter of law and an arguable case is disclosed by the evidence. If accepted, it would defeat the claim of breaches of duty against Mr Gu with respect to the claim of unauthorised use of funds. 21 As to the other claim of breach of duties, it is admitted in the proposed defence that Mr Gu delivered certificates of title to apartments in the complex developed under the joint venture to Jhato as security for amounts owed by AXF Group to Jhato, but, aside from stating that the deposit of the loan certificates was consistent with the alleged loan agreement, Mr Gu's proposed defence to the claim of breach of director's duties in respect of giving unauthorised securities to Jhato otherwise was a bare denial and no submissions were made on the merits of the proposed defence. There was scant evidence given by Mr Gu concerning the circumstances under which he came to give the certificates of title of apartments in the complex to Jhato. He merely deposed that the security agreement he reached with Jhato was "consistent with [his] arrangement with Mr Chan as he had agreed for [him] to use the profits of the Project as long as Mr Chan would obtain his Guaranteed Amount from the Project". Mr Chan in his affidavit of 14 September 2020 denied that he agreed that Mr Gu could offer the apartments as security for the borrowings of AXF Group. At best a weak case has been demonstrated.

Interests of justice 22 The existence of arguable defences is not determinative of the application to set aside the default judgment. Ultimately, there is a balancing of the interests of justice and in this case I am not satisfied that the interests of justice favour Mr Gu. First, for the reasons already given, I do not accept that he has provided an explanation, let alone an adequate explanation, for his defaults. Secondly, I have not accepted that he has provided an explanation, let alone an acceptable explanation, for the inordinate delay in bringing his application to set aside the default judgment. The failure to provide proper explanation in respect of these two issues weighs heavily against setting aside the default judgment being set aside. 23 Further, the inordinate delay in applying to set aside the default judgment is significant in the exercise of discretion because, in the meantime, Sovereign Point has negotiated and entered into a settlement in relation to its claim against Jhato and discontinued that aspect of its claim. That settlement occurred without the benefit of Mr Gu's acknowledgment in his affidavit sworn in August 2020 in support of his application to set aside judgment that the loan was to AXF Group and not Sovereign Point. The admission is important because in its cross-claim against Sovereign Point, Jhato alleged that the certificates of title were provided to Jhato as security for a loan by Jhato to Sovereign Point. 24 In Delta Metallics, Middelton J dismissed an application to set aside default judgment on the basis that setting it aside would result in serious prejudice. In that case, the applicant had settled against the second and fourth respondents and discontinued the proceeding against the third respondent following orders for default judgment being made against the first respondent. His Honour observed at [26]-[27] that: … It is true that we cannot know - or at least, the Court does not know - the terms of those settlements, and the terms upon which there has been a discontinuance. However, it is clear that each of these events occurred after the entry of default judgment. I may properly infer that the terms of settlement and of discontinuance were entered into with a backdrop, at least, of [the applicant] knowing that it had a judgment against [the first respondent], a major party to the litigation. On that basis, it seems to me that there would be a serious prejudice to [the applicant] if the default judgment was now set aside in circumstances where those settlements have proceeded on the basis of a known and important fact, namely, judgment being entered against [the first respondent]. Senior counsel for Mr Gu argued that the Court should not apply the same reasoning here as there was no evidence that settlement was influenced by the default judgment and the Court should not attribute much, if any, weight to the assertion of substantial prejudice. I disagree. In my view, the fact that the default judgment would result in serious prejudice to Sovereign Point if now set aside, is objectively identifiable from the fact that Sovereign Point did not have the benefit of the admitted fact by Mr Gu that it was AXF Group, not Sovereign Point, that was loaned the funds when it settled with Jhato. 25 A further consideration that weighs heavily against setting aside default judgment is the potential serious prejudice to Sovereign Point occasioned by the failure of Mr Gu to prosecute his defence in a timely fashion, his unpreparedness to engage in the litigation without reasonable excuse and the inordinate length of time that has passed since judgment was entered in circumstances where it is evident that the determination of key factual issues in this case will depend on issues of credit and the reliability of the evidence given by Mr Chan and Mr Gu about conversations back in 2015-17. 26 This is not a case where the prejudice that would result to Sovereign Point if judgment was set aside could be adequately compensated for by a suitable award of costs and the giving of security.

Conclusion 27 Having regard to all the circumstances of this case, I am not persuaded that I should exercise my discretion to set aside the default judgment. Accordingly, the first respondent's application is dismissed with costs. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies.