Wang v Zong

District Court of NSW|2021-05-07

Solicitors: Prudentia Legal Pty Ltd (Plaintiff) Dixon Holmes (Defendants) File Number(s): 2020/159292

The Pleadings

By a Statement of Claim filed on 28 May 2020 the plaintiff alleges that between late 2017 and April 2018 Mr Zong represented as follows: 1. It is, and will continue to be, very easy to rent yachts to Chinese tourists ("Tourist Representation"). 2. He would find sponsors for the business of renting a vessel out ("Sponsorship Representation"). 3. He knew how to, and would, promote the business ("Promotion Representation"). 4. He would operate the business in compliance with relevant laws and regulations ("Operation Representation"). 5. It was a good business opportunity, and would be a good business ("Business Success Representation"). 6. If the plaintiff and Mr Demin Lyu each contributed the funds he needed, he guaranteed they would receive a return of at least 40% annually ("Return Representation").
The Statement of Claim alleges that on 13 April 2018 Mr Wang paid $60,000 to Mr Zong, or in the alternative to AYC (which had been incorporated on 6 April 2018). The Statement of Claim alleged that Mr Wang made this first payment induced by and in reliance upon the six pleaded representations.
The Statement of Claim alleges that on 18 May 2018 Mr Wang paid a further $255,000 to Mr Zong or alternatively to AYC, and that he made this second payment induced by and in reliance upon the six representations.
The Statement of Claim pleads that the six representations were made in trade or commerce. Insofar as the representations were with respect to any future matter, it is alleged that Mr Zong did not have reasonable grounds for making them. Thus it is said Mr Zong contravened s 18 of the ACL and in consequence of such contravention Mr Wang has suffered loss and damage. The particulars of loss are "Loss of $315,000 paid to the First Defendant and/or AYC".
As previously recited, there are two alternative claims pleaded in the Statement of Claim, being a claim in relation to a Loan Agreement, and a claim in relation to an Investment Agreement. The pleadings in relation to these matters will be considered below.
By a Defence filed on 14 August 2020 Mr Zong admits making the Tourist Representation, the Promotion Representation, the Operation Representation and the Business Success Representation. Mr Zong denies making the Sponsorship Representation and the Return Representation.
The plaintiff alleges that all or part of each representation was a misleading representation with respect to a future matter. Section 4 of the ACL provides as follows: "(1) If: (a) a person makes a representation with respect to any future matter (including the doing of, or the refusing do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation is taken, for the purpose of this Schedule, to be misleading. (2) For the purpose of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by: (a) a party to the proceeding; or (b) any other person; the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary."
Senior counsel for the defendant correctly conceded (Tcpt 132-133) that: 1. Part of the Tourist Representation, to the effect that it will "continue to be" very easy to rent yachts to Chinese tourists, was a representation with respect to a future matter. 2. The Sponsorship Representation was a representation with respect to a future matter. (It is noted that Mr Zong denies making the Sponsorship Representation). 3. The Promotion Representation that Mr Zong "would" promote the business was a representation with respect to a future matter. 4. The Operation Representation was a representation with respect to a future matter. 5. That part of the Business Success Representation by which Mr Zong said that it "would be a good business" was a representation with respect to a future matter. 6. The Return Representation was a representation with respect to a future matter. (It is noted that Mr Zong denies making this representation).
Senior counsel also conceded that no evidence had been adduced to show that Mr Zong had reasonable grounds for making any of those representations with respect to future matters. Thus by operation of s 4(1) of the ACL, the representations with respect to future matters are taken to be misleading.

The Issues

The parties set out the issues for determination in MFI 2 and MFI 3.
The plaintiff called no evidence to prove that the Sponsorship Representation was ever made. Nor was any submission made in support of the case based upon the Sponsorship Representation. That aspect of the plaintiff's claim fails for lack of evidence.

Evidence of Mr Wang

Mr Wang gave his evidence-in-chief by two affidavits, the first affirmed on 18 September 2020 (PX 1, Tab 4) and the second affirmed on 4 December 2020 (PX 1, Tab 6).
Mr Wang said that he had operated his own business in the energy sector in China. In late 2017 he relocated to Sydney. He had had an interest in yachts and boating for several years. In late 2017 he commenced an English language course at Meadowbank TAFE. There he met Mr Qi Zhang and Mr Demin Lyu who were both taking the same course. They became friends.
Mr Zhang told Mr Wang that he had a friend with his own yachting business and he offered to introduce Mr Wang. In February 2018 Mr Wang went with Mr Zhang and Mr Lyu to a marina in Woolwich, NSW. He was introduced to Mr Zong. Mr Zong showed them his office from which he operated a yachting business. He showed them a boat which he said he owned. This was a small yacht with a capacity of 7-8 people. Mr Zong said that he wanted to buy a second yacht to expand the business. He raised the idea of all of the men going into business together. Mr Wang said that he was attracted to the idea of investing in a yacht hire business and was interested to hear more about Mr Zong's proposal.
There were several other meetings between the four men during March and April 2018. They socialised together and sometimes went out on Mr Zong's yacht. They ate meals together.
In par 29 of his first affidavit Mr Wang said: "I recall Mr Zong making statements to the following effect to me during conversations we had in March and April 2018: 'Chinese people see yachting as a luxurious activity.' 'Yachting is very popular with Chinese people in Sydney, especially Chinese tourists, and it will be easy to rent yachts for them.' 'There are no Chinese people running yacht businesses in Sydney.' 'It is a great opportunity.' 'We do not need to worry about a lack of customers. I used to work in the tourism industry and I still have a lot of contacts. They will refer customers to me.' 'I have been in Sydney for more than 20 years.' 'I have worked as a property agent, a swimming coach, and a tour guide.' 'I know many people from the upper classes.' 'I know how to do business. I know about business promotion and business sponsorship.'"
Mr Zong did not deny making these statements, save that he denied saying that he had been a swimming coach.
In par 32 of his first affidavit Mr Wang said: "Mr Zong was always spoke very positively about his yacht business. I recall him making many statements to the effect of: 'The investment prospects of the yacht business in Australia are very good.' 'The yacht business is booming, and it is a good business to invest in.' 'Each time we launch out the yacht, thousands of dollars will be in our pockets!'"
Mr Zong did not deny making these statements.
In par 34 of his first affidavit Mr Wang said: "I wanted to know what return I would make on my money if I decided to invest, and I discussed this with Mr Zong. Mr Zong told me words to the effect of: 'Your investment will be paid back in two years. You will get around 50% return each year. But I guarantee you will get at least 40%.'"
Mr Wang said that he believed all of these statements by Mr Zong. He formed the view that Mr Zong must have had some success in his yacht business and must be good at this business. Mr Wang thought that he would make money if he invested in the yacht business.
The problem with presenting evidence in the fashion set out in pars 29, 32 and 34 of the first affidavit of Mr Wang, is that it does not provide evidence about the context in which those words were allegedly said. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191, Gibbs CJ said: "It would be wrong to select some words or acts which, alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading."
In the later decision of Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60, the majority judgment said: "It is important that the… conduct be viewed as a whole. It is not right to characterise the problem as one of analysing the effect of its 'conduct' divorced from… circumstances which might qualify its character. Everything relevant… must be taken into account."
In that same case, Justice McHugh said: "It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct."
Mr Wang gave evidence that he relied upon the statements made by Mr Zong. In par 40 of his first affidavit he said: "The statements by Mr Zong that I have referred to above, especially the Investment Guarantee, convinced me to invest some money in his yacht business and that I would make a good return on my money. To the best of my recollection, I made this decision by about late March or early April 2018."
Mr Wang gave evidence that Mr Zong said that the company AYC would need $900,000. A new yacht would cost $800,000 and $100,000 would be working capital. Mr Zong proposed that Mr Wang would put in $315,000 and have 35% of the shares in the company, Mr Lyu would put in $315,000 and have 35% of the shares, and Mr Zong would put in $270,000 and have 30% of the shares. Both Mr Wang and Mr Lyu agreed to this proposal. The men also agreed that Mr Zong would be the director and Mr Zong and his wife would run the business.
Mr Wang says that Mr Zong showed him the boat he was intending to purchase and asked Mr Wang to pay $60,000 towards the deposit. At this point Mr Zong again said words to the effect of: "I already told you we will make money from this investment. I guarantee you will make 40% return every year."
On 13 April 2018 Mr Wang transferred $60,000 from his personal account into the bank account of AYC.
The yacht was then purchased. On 18 May 2018 Mr Wang paid $255,000 from his personal bank account to the account of AYC. In par 70 of his first affidavit he said: "Once again, I did this because I trusted Mr Zong and I believed the statements he made to me that I have referred to above, especially the Investment Guarantee."
In his first affidavit Mr Wang said that he kept asking Mr Zong for appropriate paperwork in relation to the yacht and the company. He asked for financial records for the business but Mr Zong did not provide them. Mr Zong starting making statements to the effect that there were "fewer customers than expected" and "the market is falling now".
By August 2018 the parties had fallen out. In September 2018 Mr Wang had an accountant prepare financial statements for AYC for the period ended 13 September 2018. After that time, Mr Zong did not provide any more information about AYC to Mr Wang and refused to speak to him. By late 2018 Mr Wang and Mr Lyu had engaged a solicitor.
In his second affidavit Mr Wang said that in addition to orally guaranteeing that Mr Wang would receive at least a 40% return per annum, Mr Zong said words to the effect of: "We can do the calculation. We will charge around several husbands [sic: hundreds] for one hour hiring. Each trip will at least takes three hours. That means each time we launch out the yacht, at least $2,000 Australian dollars will be earned. Even in the low seasons, every three days, we will at least have one trip appointment, and in high season, sometimes we will have two trips for one day. So that, each year, we can get around 50% return and at least can be guarantee to be 40%."
In cross-examination Mr Wang said that prior to coming to Australia in late 2017 his business had been in the energy sector in China. He had bought and sold coal and was in the business of shipping coal. He had operated his own business in that field for 10 years. He was the departmental manager and was mainly involved with transportation and shipping. There were 100 employees in the business. Mr Wang confirmed that in his affidavit he had described his occupation as "businessman".
Mr Wang said that he formed the view that Mr Lyu was a very honest businessman who had also been involved in the coal industry in China.
Mr Wang was cross-examined about returns on investment in China. He knew that considerable returns were available in business in China and that the Chinese economy had a much higher growth rate than the Australian economy. The rates of return available in China were higher than rates of return available in Australia. He agreed that the coal shipping business in China was not earning returns of 40% a year.
It was put to Mr Wang that the discussion about the yachting business occurred during social occasions. Mr Wang agreed that this was so, but said it was Mr Zong who first mentioned the idea of investment in the yachting business. It was suggested in cross-examination that the chance of a new yachting start-up business earning a 40% return in its first year of operation was ridiculous. Mr Wang disagreed.
Mr Wang said that Mr Zong had shown the men some calculations. Each time the yacht went out it would be for three hours and "the earnings would be more than $1,000". Mr Zong had said that on a weekly basis, the yacht could go out three to five times. Mr Wang said that all of the men did their own calculations based on these figures provided by Mr Zong. Mr Wang said that on these numbers he was convinced that there would be a 40% return per annum.
Mr Wang was cross-examined about his assertion that Mr Zong had said that he would operate the business in compliance with the relevant laws and regulations. He said that before that representation was made, Mr Wang thought that Mr Zong would not comply with the relevant laws and regulations.
There was cross-examination relevant to the allegation that there was a loan agreement (Tcpt 54). Mr Wang agreed that he invested $315,000 into AYC. He agreed that no-one had ever said that he could demand his money back at any time. He knew that it would be unworkable in a business where $800,000 out of $900,000 was being invested into a boat, if one of the contributors could immediately demand their money back. He knew that when he put in his $315,000 "that was put in for the long term". Mr Wang also agreed (Tcpt 55/20) that the reason he did not ask for any interest prior to 1 May 2019 (when his solicitor wrote a letter of demand) was "because you knew that there had never been any promise to give you interest".

Evidence of Mr Zhang

Mr Zhang affirmed an affidavit on 18 September 2020 (PX 1 , Tab 3). Mr Wang came from China to Australia in 2014. Mr Zhang worked in the real estate industry until 2017. He met Mr Zong in August 2014. He became aware that Mr Zong had worked in tourism for several years and was an Australian citizen.
Mr Zhang met Mr Wang and Mr Lyu in English classes in late 2017. Mr Wang said that he was interested in boats and was looking for business opportunities and new friends. Mr Zhang knew that Mr Zong had his own boat and a yachting business so he decided to introduce Mr Wang to Mr Zong.
The four men met in early 2018 and socialised. Mr Zong said that he wanted them to invest with him because he needed more funds to buy a bigger yacht.
In par 22 of his affidavit, Mr Zhang said that Mr Zong had said to them: "'Yachting was originally a hobby for Westerners.' 'Yachting represents a high-class lifestyle.' 'I want to develop the Chinese demand for yachting.' 'There will be lots of Chinese tourists visiting Australia in 2018. It will be a good opportunity.' 'Chinese people mostly live inland in China, while Sydney is a city on the coast. The views on the sea are different from the views from the land. Yachting will be very attractive to them.' 'The Chinese community in Sydney is small, but I know the prominent figures in the community.' 'I'm going to set up a company providing yacht hire.' 'You should all consider investing.' 'I will run the business and this business will be successful. 'I can offer you at least 40% return on your investment.'"
Mr Zong did not deny making these statements, save that he denied making the last statement concerning a 40% return.
Once again, presenting evidence of statements in this disembodied fashion does not give the court a picture of the context in which things were said.
Mr Zhang was called to give oral evidence. He was asked to say what Mr Zong had said about the 40% return. His evidence was (Tcpt 22, line 39): "So, Jason said that the yacht business was a very good business, and if we can buy a yacht then it could have a return on your investment of 40%."
Mr Zhang said that that statement was made three to five times. The statement about the 40% return was made in the presence not only of Mr Zhang but of Mr Wang and Mr Lyu.
In cross-examination senior counsel for the defendant had Mr Zhang reiterate his version of this conversation. He confirmed several times that Mr Zong had said that the yacht "could" have a return on investment of 40%.
Mr Zhang said that before 2014, he had worked in the tourism industry in China. He formed the view that Mr Lyu "was a person of some reasonable economic means" (Tcpt 26/39). Mr Zhang understood that everyone in the group had business experience (Tcpt 29/30).
It was initially proposed that Mr Zhang would have 10% of the shares in the company and contribute $90,000 to AYC. He was not able to raise the $90,000 so he did not become an investor.
Mr Zhang was cross-examined about the response of Mr Wang and Mr Lyu to the 40% figure said to have been mentioned by Mr Zong. He said (Tcpt 32/35): "They were fundamentally not focused or not interested in this - in this profit - in this - sorry, in this return. What mattered to them was the prospect of development of this business. It has a promising - sorry, it had a promising prospect."

Evidence of Mr Zong

Mr Zong affirmed an affidavit on 7 November 2020 (PX 1, Tab 5). Mr Zong said that he accepted the evidence of Mr Wang, set out in pars 15-27 of his first affidavit, as to the circumstances in which they met. It is noted that this evidence, accepted by Mr Zong, included par 21 in the following terms: "Mr Zong asked if we were interested in 'putting some money into' his business. He said we could 'all do this business together'."
Mr Zong said that Mr Wang expressed an interest in joining him in the yacht business and Mr Zong spoke of Mr Wang joining in "the investment in this business together". Mr Zong denied guaranteeing a 40% return from the business, as alleged by Mr Wang. His version of the conversation with Mr Wang and Mr Lyu is set out in par 7 of his affidavit as follows: "Wang said to me: I heard that you know the tourist cruising business in Sydney quite well. I like this kind of business myself. I hope the three of us can put our money together into a company running this kind of business, using your knowledge and experience in this area, sharing risks and profits together. Mr Lyu: Yeah. I'm very interested too. I: Sure. Sydney has a very promising market for Chinese tourists and we can join together to take up the opportunities offered in the Chinese tourism market in Sydney's cruising business. We can all put money into the company, sharing risks and profits."
In relation to Mr Wang's allegation that Mr Zong said that he would always operate the business legally, Mr Zong said that he agreed that the company must operate legally, making reference to the fact that companies normally have shareholders meetings annually with annual financial reports.
In cross-examination Mr Zong confirmed that shortly after the incorporation of AYC the company purchased a boat called "Dream Time". It was purchased for $805,000. In September 2020 the company purchased another boat. It paid $50,000 for the boat which did not have an engine or electrics. The engine, the electrics and the accessories of the boat were installed in Sydney. Mr Zong estimated that with all of those expenses, the boat had cost between $75,000 and $80,000. He described it as a "working boat". The company was now involved in teaching basic training regarding boats, and the working boat was used for that purpose.
In February 2021 AYC sold Dream Time. Mr Zong intended to transform the operation of the business to one involving the purchase and sale of boats.
Dream Time had annual running expenses of: $30,000 for marina fees; $30,000 for lease of the office; $9,000 for insurance and $60,000-$70,000 per year for the maintenance, service and repair of the boat. There was also a one-off cost of $10,000 to obtain a commercial licence for the boat. Mr Zong said that the main reason for selling Dream Time was to obtain capital to transform the operation of the company. The boat was sold for $670,000.
Mr Zong said that AYC had 90% of its capital invested in one asset and that it was very hard to make profits in the first one or two years of such a business.
Mr Zong was cross-examined about company financial statements. The statements for the years ended 30 June 2018 (PX 2, Tab 30) and 30 June 2019 (PX 2, Tab 35) showed that the company had borrowings in those years of $845,000 and $872,000 respectively. Mr Zong said that the company had no borrowings and that the figure recorded as a shareholder loan was the money invested by Mr Wang, Mr Lyu and Mr Zong. This was the money used to purchase Dream Time.
Those financial statements showed that in the 2018 financial year AYC had an income of $14,540 and made a loss of $17,070. In 2019 the income was $7,466 and AYC made a loss of $117,481.
Mr Zong said that he gave all of the information to the accountant, and the accountant decided herself how to categorise various funds (Tcpt 94/42).
Mr Zong agreed that after the sale proceeds of Dream Time were received, there were two payments of $25,000 each to his father-in-law. Mr Zong said that AYC had borrowed capital from his father-in-law because the company was short of funds, and that after he sold Dream Time he repaid those funds to his father-in-law. There was no documentation of those loans, but he said that they were recorded in the bank statement.
Mr Zong was cross-examined about payments to a person with the name "Qi Qi". He said that this person was associated with the purchase of a new boat from China. There were three payments of $20,000, $25,000 and $20,000, a total of $65,000. The money was a half payment for the body of the boat (Tcpt 103/30). There was no contract for the acquisition of that boat, just an expression of interest document. It appeared that the money was being held by AYC's agent in China, and payment would be made when the designs of the new boat were finalised.
Mr Zong was cross-examined about whether Mr Wang and Mr Lyu asked what sort of return or what sort of payments they might hope to receive from the business. He said that they did not formally ask about that. It was raised once when the men were fishing. Mr Zong said that the two men were focused more on the future development of the business. Mr Zong said he told them that a business of this kind could be profitable after two years. He also said this was common sense (Tcpt 106/19-50).
Mr Zong said that he never spoke about a detailed return and it was unrealistic for him to give figures for a return. He said that every time the boat was hired out AYC would charge $1,000. Mr Zong said that he didn't do any detailed calculations because he could not make a proper estimate of income in the early or middle stages of the operation (Tcpt 107).
Mr Zong denied that he ever said that he guaranteed that there would be a 40% return on investment.
There was much cross-examination of Mr Zong about his holding of shares in AYC. After only a few months, he transferred his shares to a company called "ATA Investments". Members of Mr Zong's family were members of that company. He described it as a "family funds company". He said that this was done on the recommendation of his accountant.

Trade or Commerce

In Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594, the High Court said: "What the section is concerned with is… conduct… towards persons, be they consumers or not, with whom it (or those whose interest it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character."
In Williams v Pisano [2015] NSWCA 177, the Court of Appeal said at [36]: "The terms 'trade' and 'commerce' are ordinary terms that describe the mutual communications, negotiations, verbal and written, bargains and performance that constitute commercial arrangements."
Senior counsel for the defendant pointed to the fact that most of the conversations, including those in which representations were made, occurred on social occasions. Be that as it may, Mr Zong accepted that he said to Mr Wang that Mr Wang might be interested in putting money into Mr Zong's business, and that they could "all do this business together". The business was that of yacht hire for profit. These were not conversations about buying a boat to use just for recreational purposes. The boat bought was a large commercial vessel, and all the discussions concerned hiring it out to make a profit. I find that any representations which were made, were made in trade or commerce, as required under s 18 of the ACL.

What Representations Were Made?

Four of the six representations alleged are admitted. One which is disputed (the Sponsorship Representation) was not established by any evidence. The Return Representation is disputed and was the subject of evidence from Mr Wang, Mr Zhang and Mr Zong. Mr Wang said that the Return Representation was particularly important in convincing him to invest in the boat hire business.
The Return Representation is alleged to have been oral. In fact, none of the dealings which led to the formation of AYC and the purchase of Dream Time were documented. It is particularly difficult to make a finding as to whether or not Mr Zong made the Return Representation. All three witnesses spoke Mandarin but little or no English. Their affidavits were translated to them in Mandarin before being sworn. They gave their oral evidence through interpreters. In spite of the court having the assistance of two conscientious Mandarin interpreters, there were times when questions asked were misunderstood, and answers given did not make complete sense. To add to the difficulties, Mr Zong tended to launch into speeches to get his points across, even if the answer was not responsive to the question. It goes without saying that I could make no assessment of demeanour in the circumstances.
Mr Wang said that the Return Representation was made orally and Mr Zong denied saying it. I therefore place weight upon the only other evidence, which was that given by Mr Zhang. He was a friend of Mr Zong and had introduced Mr Wang to Mr Zong. He was part of the discussions concerning entry into the boat hire business, as he initially intended to purchase a 10% share. He was present when the four men (including Mr Lyu) went out on Mr Zong's small yacht and socialised together. Thus he would have been interested in what Mr Zong had to say about the business. He was not just a bystander.
While Mr Wang said that Mr Zong guaranteed a 40% return, Mr Zhang's oral evidence was that Mr Zong said that the business "could" earn a 40% return. This is a not a guarantee. Further, Mr Zhang said that both Mr Wang and Mr Lyu seemed more interested in the development potential of the business than in a particular return. Because Mr Zhang is the only independent witness, I prefer his evidence to that of both Mr Wang and Mr Zong, and find that Mr Zong did not make the pleaded Return Representation.
There is other evidence which fortifies that finding. Mr Wang said Mr Zong provided figures for how many hires there would be and what would be earned each time the boat went out. If his affidavit he said that the income would be $2,000 per trip but in his oral evidence he said $1,000 per trip. Mr Wang said that he did his own calculations using these figures and satisfied himself that he would earn the 40% return allegedly guaranteed by Mr Zong. However, once the considerable expenses involved in running a large commercial vessel are taken into account, even $2,000 per trip would not earn a 40% return on investment. It is noted that the expenses about which Mr Zong gave evidence were really the standing costs of Dream Time, without it even leaving the marina. Presumably there would be the costs of a skipper, a deckhand and fuel if the boat was constantly used to take tourists out.
Further, the notion that Mr Wang would be guaranteed a 40% return in a new and unproven business is fanciful. Mr Wang had experience in business matters and must have known from his own experience that a 40% return was unlikely.
I find the following facts in relation to the pleaded representations: 1. Mr Zong did say that it is, and will continue to be, very easy to rent yachts to Chinese tourists. 2. The representation that it will continue to be very easy to rent yachts to Chinese tourists, was a representation as to a future matter. 3. Mr Zong had no reasonable grounds for such representation and thus it is taken to be misleading - s 4 ACL. 4. There was no evidence that it was or would continue to be very easy to rent yachts to Chinese tourists 5. Mr Zong did not say that he would find sponsors for the business of renting a vessel out. 6. Mr Zong did say that he knew how to, and would, promote the business. 7. The representation that he would promote the business was a representation as to a future matter. 8. Mr Zong had no reasonable grounds for such representation and thus it is taken to be misleading - s 4 ACL. 9. There was no evidence that Mr Zong did promote the business. 10. Mr Zong did say that he would operate the business in compliance with relevant laws and regulations. 11. The representation that he would operate the business in compliance with relevant laws and regulations was a representation as to a future matter. 12. Mr Zong had no reasonable grounds for such representation and thus it is taken to be misleading - s 4 ACL. 13. There was evidence that Mr Zong did not operate the business in compliance with the corporations law, in that he did not conduct annual meetings or observe the rights of Mr Wang as a shareholder in AYC. Mr Zong has operated AYC as his own fiefdom, and has deliberately shut Mr Wang out of the company and the business. 14. Mr Zong did say that it was a good business opportunity, and would be a good business (Business Success Representation). 15. The representation that it would be a good business was a representation as to a future matter. 16. Mr Zong had no reasonable grounds for such representation and thus it is taken to be misleading - s 4 ACL. 17. There was no evidence that it was a good business after Mr Wang invested. The financial statements of AYC show only modest income, losses each year and the sale of the major asset at a significant loss. 18. Mr Zong did not say that if the plaintiff and Mr Demin Lyu each contributed the funds he needed, he guaranteed they would receive a return of at least 40% annually (Return Representation).

Were the Representations Misleading or Deceptive?

I make the following findings in relation to the context in which the representations were made: 1. Mr Wang was introduced to Mr Zong by their mutual friend Mr Zhang. 2. The men met at the Woolwich marina where Mr Zong showed Mr Wang his office and explained that he had a small yacht which he rented out to tourists on a commercial basis. 3. Mr Wang, Mr Zong, Mr Zhang and Mr Lyu commenced discussions about going into business together to buy a much larger boat to rent out to Chinese tourists for commercial gain. 4. Mr Zong made the admitted statements set out in pars 20-23 and 47-48 above. 5. Mr Zong made the statement set out in par 50 above. 6. Nothing was documented. 7. The four men went out on Mr Zong's yacht, went fishing, went to restaurants and had drinks together.
In that context, the statements which I have found Mr Zong did make (see par 81 above) were misleading within the meaning of s 18 of the ACL.

Reliance

Section 236 of the ACL provides a remedy in damages if a person suffers loss or damage "because of" the conduct of another person. This means that the common law practical or common sense concepts of causation and remoteness apply: March v Stramare E & MH Pty Ltd [1991] HCA 12; (1991) 171 CLR 506; Henville v Walker [2001] HCA 52; (2001) 206 CLR 459.
Mr Wang consistently said that he relied upon the representations and that they caused him to pay $315,000 to AYC at the request of Mr Zong. There is no reason to doubt this. While Mr Wang had an interest in boats, he knew nothing about them or about the boating business. He developed trust in Mr Zong, both as a successful man in a boating industry and also as a businessman generally, as a result of what Mr Zong said to him and the context in which things were said. This trust was engendered not just by the four pleaded representations which I found were made, but also by the admitted "background" statements referred to in pars 20, 21, 22, 23, 47, 48 and 50 above.
I find that Mr Wang relied upon the truth and accuracy of what Mr Zong told him and that the misleading conduct of Mr Zong caused Mr Wang to suffer loss. To put the matter in terms of s 236 of the ACL, I find that Mr Wang suffered loss or damage because of the misleading conduct of Mr Zong.

Damages

Counsel for Mr Wang submitted that Mr Wang had lost his entire $315,000 once it was paid over, or at least within a short period of time. I reject that submission. Mr Wang was not getting what he expected as a result of the proven misleading representations of Mr Zong. However, he did receive 35% of the shares in AYC. In its early days AYC purchased and owned Dream Time which had a value of $805,000. There was a further $95,000 in working capital available when the business started.
Mr Wang still owns those shares and AYC is still operating, even though his rights as a shareholder have been ignored. Towards the end of the hearing I urged the parties to consider going to mediation, since even if I made an award of damages, the affairs of the parties would still be entangled through this shareholding. I indicated that I could foresee that even after these District Court proceedings concluded the parties might become embroiled in further litigation to sort out their interests in the company.
Counsel for the plaintiff submitted that if the court was disposed to award damages to his client, it could impose a condition upon the receipt or enforcement of such damages to the effect that until Mr Wang transferred his shares in AYC to Mr Zong, he could not receive his damages. I cannot see that I have a power to do this. Even if I did, why would that put an end to possible disputes about the way in which Mr Zong has carried out his duties as the sole director of AYC?
In several cases in the High Court, including Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 and Gates v City Mutual Life Assurance Society Ltd 1986 [HCA] 3; (1986) 160 CLR 1 it has been said that in quantifying the amount of damages, a comparison must be made between the position which the person who suffered loss or damage is in and the position the person would have been in had there been no contravention. However this is not an exclusive test. General principles of the assessment of damages must give way, in particular cases, to solutions best adapted to give the injured plaintiff that amount in damages which will provide fair compensation: Johnson v Perez 1988 [HCA] 64; (1988) 166 CLR 351.
The position Mr Wang would have been in, had there been no contravention of the ACL, is that his shares would have still been worth the $315,000 he paid into the venture. The position of Mr Wang now is that he still owns 35% of the shares in AYC. The evidence about the value of those shares is scanty. I could send the question of the valuation of those shares to a referee under Part 20 Division 3 of the Uniform Civil Procedure Rules 2005 (NSW), but the parties have already incurred a considerable amount of costs in this litigation (and I fear have more to come elsewhere). I will therefore do as best I can with the evidence presented.
At the end of April 2021 the company had approximately $248,000 in two bank accounts (PX 3, pp 707 and 709). It still has a workboat, for which it paid about $80,000 in total. There is no evidence about the present value of the workboat. I will estimate $40,000 as its value. The company has paid $65,000 towards the purchase of a boat from China. The evidence about this is very opaque. I will estimate $32,000 for the value of that potential asset, being 50% of the amount paid to date, rounded down to the nearest $1,000. The total of these figures results in a finding that AYC still has $320,000 in assets. It has no debts, as Mr Zong said that AYC had paid back all of the money borrowed from his father-in-law.
On this approach Mr Zong was misled into paying $315,000 for shares in AYC which have a present asset backing of $112,000, being 35% of $320,000. Thus his loss is $315,000 - $112,000 = $203,000.
In addition he has lost the use of his money since it was paid away a bit over three years ago. The calculation of interest is set out in the following table: Start Date End Date Days Rate Per Day Total 18/May/2018 30/Jun/2018 44 5.5% $30.5890 $1,345.92 01/Jul/2018 31/Dec/2018 184 5.5% $30.5890 $5,628.38 01/Jan/2019 30/Jun/2019 181 5.5% $30.5890 $5,536.62 01/Jul/2019 31/Dec/2019 184 5.25% $29.1986 $5,372.55 01/Jan/2020 30/Jun/2020 182 4.75% $26.3456 $4,794.90 01/Jul/2020 31/Dec/2020 184 4.25% $23.5724 $4,337.32 01/Jan/2021 19/May/2021 139 4.1% $22.8027 $3,169.58 Total $30,185.27

There will be judgment for the plaintiff for $203,000 + $30,185.27 = $233,185.27.

Loan Agreement

In his Statement of Claim Mr Wang pleaded in the alternative that he advanced $315,000 by way of a loan to Mr Zong and/or AYC for the purposes of the business. He pleaded that he would receive interest on the loan at the rate of 40% per annum and that the loan was repayable on demand after a reasonable time.
This claim fails outright. Mr Wang was cross-examined about whether there was a loan and he made it plain that he regarded the payments as being an investment in the business from which he would receive a profit. There was never a word said about the monies he paid being a loan, accruing interest at the extraordinary rate of 40% per annum, or being repayable on demand. He accepted that a start-up business could not operate if a demand for repayment was made a short time after the business commenced.
Counsel for the plaintiff relied in final submissions upon the AYC financial statements recording the funds as a shareholder loan. Mr Zong explained that he had no knowledge of a loan, and the accountant did what she saw fit to create the financial statements. I regard the funds listed as a shareholder loan in the financial statements as an entry created by the accountant, not on instructions from Mr Zong. All of the evidence in the case points to those funds being an investment in the company by people who expected to become shareholders and to receive dividends from profits. In any event, the accountant recorded these funds as a "non-current asset". If that is so then in accordance with accounting practice such loans were not repayable within 12 months of the date of the financial statement. The demand for repayment on 1 May 2019 was made when the funds were recorded as a non-current asset in the financial statements. Thus the demand was made at a time when, if the financial statements were the sole determinant of the characterisation of the money, there was no right to demand repayment.
Finally, the transfer instructions which Mr Wang gave to his bank to pay $60,000 to AYC (PX2, Tab 12) state that the purpose of the payment was "Investment". The transfer instructions which Mr Wang gave to his bank to pay $255,000 to AYC (PX2, Tab 17) state that the purpose of the payment was "Shareholder Investment". This is consistent with what Mr Wang has said all along.
This claim made by the plaintiff fails for lack of evidence.

Investment Agreement

In the Statement of Claim Mr Wang pleaded that by about 6 May 2018 Mr Wang, Mr Lyu, Mr Zong and/or AYC agreed that in consideration of Mr Wang and Mr Lyu each making a capital contribution of $315,000 for the purposes of the business the plaintiff would own 35% of the AYC shares, Mr Lyu would own $35% and Mr Zong would hold 30% of the AYC shares himself.
As it turned out, Mr Zong did have 30% of the AYC shares allocated to himself personally, but within a few months, on the advice of his accountant, he transferred them to a family company. There was no evidence from Mr Wang that Mr Zong promised that he would hold 30% of the AYC shares only in his name. Further, it is impossible to see that there could have been any loss through transfer of Mr Zong's shares to the Zong family company. Counsel for the plaintiff faintly suggested in final submissions that others in the family might try to influence Mr Zong, but there was no evidence of that whatsoever. In short, there was no evidence of an investment agreement in those terms and there was no evidence that even if there was, there was any loss flowing from such agreement.
A further part of the pleading concerning the investment agreement was that Mr Wang and Mr Lyu would each receive an annual return on their investment of 40%. While Mr Wang gave evidence about a guarantee of a return of 40%, his evidence was that this was said in the context of Mr Zong suggesting that Mr Wang invest in the business, obtain shares in AYC, and get a return on the profits to be made by that company from renting the yacht.
There was no evidence given by Mr Wang that there was ever an agreement formed of type pleaded in par 20 of the Statement of Claim. Once again, the cross-examination of Mr Wang made it plain that he saw the payment of $315,000 as a purchase of a share in the business, rather than monies paid under an investment agreement.
In any event, I have found above that there was no "guarantee" of a 40% return, as I have accepted the evidence of Mr Zhang that all Mr Zong said was that such a return "could" be made in future. This part of the claim made by Mr Wang fails for lack of evidence.

Conclusion and Orders

For reasons set out above there will be judgment for the plaintiff against the first defendant for $233,185.27. Costs will follow that event.
The claims made by the plaintiff against the second defendant AYC have failed. They took up very little time at the hearing. I will order AYC to pay its own costs.
The orders are: 1. Judgment for the plaintiff against the first defendant for $233,185.27. 2. Order the first defendant to pay the costs of the plaintiff. 3. Judgment for the second defendant against the plaintiff. 4. Order the second defendant to pay its own costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 May 2021

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