Xiao v BCEG International

on Enterprises Ltd v Boughton (1991) 85 DLR 4th 129 Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161 Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99 Chan v Zacharia (1984) 154 CLR 178 at 204-205; [1984] HCA 36 Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25; [1968] HCA 50 Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312 Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 Cornerstone Property & Developments Pty Ltd v Suellen Properties Pty Ltd [2015] Qd R 75; [2014] QSC 6 Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101; [1993] HCA 54 Davies v Ford [2021] EWHC 2550 (Ch) De Vitre v Betts (1873) LR 6 HL 319 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81 FM Partners Ltd v Marino [2018] EWHC 2905 (Comm) FM Partners Ltd v Marino [2020] EWCA Civ 245 Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265 Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL (1968) 121 CLR 483; [1968] HCA 37 Hill v Rose (1990) VR 129 Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154 Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 Jacobus Marler Estates Ltd v Marler (1913) 114 LT 640 Jameson v Central Electricity Generating Board [1998] QB 323 King of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 Mahesan S/O Thambiah v Malaysia Government Officers' Co-operative Housing Society Limited [1979] AC 374 Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315 Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48 National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd [1998] FCA 564 Neilson v Betts (1871) LR 5 HL 1 Nocton v Lord Ashburton [1914] AC 932 Novoship (UK) Limited v Yuri Nikitin [2014] EWCA Civ 908 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 Prest v Petrodel Resources Ltd [2013] 2 AC 415; [2013] UKSC 34 Stead v State Government Insurance Commission (1986) 161 CLR 141 Tang Man Sit v Capacious Investments Limited [1996] AC 514 Target Holdings Ltd v Redferns [1996] 1 AC 421 The Electric Furnace Co v Selas Corporation of America [1987] RPC 23 The Mayor, Aldermen, and Burgesses of the Borough of Salford v Lever [1891] 1 QB 168 Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215; [1953] HCA 9 United Australia Ltd v Barclays Bank Ltd [1941] AC 1 United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; [1995] HCA 14 Walden Properties Ltd v Beaver Properties Ltd (1973) 2 NSWLR 815 Warman International Limited v Dwyer (1995) 182 CLR 544; [1995] HCA 18 Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48 Wright v Lemon (as executor of estate of Wright) [2021] WASC 159 Yarrawonga Earthmoving & Garden Supplies Pty Ltd v Clem Court Pty Ltd [2014] VSC 439 Youyang Pty Limited v Minter Elllison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 Texts Cited: Meagher, Gummow and Lehane's Equity: Doctrine and Remedies (5th Ed, 2015, Lexis Nexis Butterworths) Category: Principal judgment Parties: Yu Xiao (First appellant) Yan Ying Chen (Second appellant) Interlink Laboratory Pty Ltd (Third appellant) Interlink Wagga Central Pty Ltd (Fourth appellant) West Wyalong Marketplace Pty ltd (Fifth appellant) BCEG International (Australia) Pty Ltd (Respondent) Representation: Counsel: J C Giles SC / B Le Plastrier (Appellants) D L Williams SC / N D Riordan (Respondent)

Solicitors: HWL Ebsworth Lawyers (Appellants) Thomson Geer (Respondent) File Number(s): 2022/243445 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Civil Citation: [2022] NSWSC 972 Date of Decision: 22 July 2022 Before: Rees J File Number(s): 2019/310768

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

HEADNOTE [This headnote is not to be read as part of the judgment] The respondent (BCEG) was engaged in two property development projects: the Varsity Lakes project and the Wagga project. The first and second appellants (Mr Xiao and Ms Chen, respectively) were the Australian-based directors of BCEG, and also engaged in their own development at West Wyalong (the West Wyalong project), which was conducted through one of their companies, the fifth appellant (WWM). BCEG received US$35m in finance for the Varsity Lakes project by way of an on-lending arrangement from its foreign parent company. Without the authorisation of BCEG, Mr Xiao and Ms Chen caused $3.4m of these monies to be diverted to WWM to fund the West Wyalong project (some of these funds were later repaid to BCEG). BCEG engaged Trojjan Constructions Pty Ltd (Trojjan) to build the Wagga project on land owned by the fourth appellant (IWC), which were both companies controlled by Mr Xiao and Ms Chen. The primary judge found that Mr Xiao and Ms Chen breached their fiduciary duties owed to BCEG by diverting some of the Varsity Lakes funds to WWM and were liable for $2.52m together with compound interest as equitable compensation for these unauthorised payments. The primary judge also found that WWM was a knowing recipient of these payments and liable to account to BCEG for $2.94m in profits together with compound interest derived from the West Wyalong project, comprising rental income and capital gain. The primary judge further held that if BCEG had known that Mr Xiao and Ms Chen had diverted funding for the Varsity Lakes project to the West Wyalong project, then BCEG would not have entered into subsequent transactions in relation to the Wagga project with IWC and Trojjan. The primary judge awarded BCEG equitable compensation from Mr Xiao and Ms Chen in respect of BCEG's losses on the Wagga project and ordered an account of profits from IWC in respect of the Wagga project. The quantum of equitable compensation awarded against Mr Xiao and Ms Chen for BCEG's losses in respect of the Wagga project was assessed by reference to sums contained in financial statements of BCEG. The main issues on appeal were: whether BCEG was entitled to recover both equitable compensation from Mr Xiao and Ms Chen and an account of profits from WWM in relation to the West Wyalong project, and equitable compensation from Mr Xiao and Ms Chen and an account of profits from IWC in relation to the Wagga project; whether the appellants were denied procedural fairness because the primary judge proceeded to assess the account of profits from the WWM; whether there was a sufficient causal connection between the fiduciary defaults of Mr Xiao and Ms Chen in diverting some of BCEG's Varsity Lakes funds to the West Wyalong project and the loss suffered by BCEG in later advancing funds to IWC and Trojjan for the Wagga project; and whether the primary judge erred in relying upon BCEG's financial statements as sufficient evidence of the quantum of its loss on the Wagga project. The Court held (Gleeson JA, Mitchelmore JA and Griffiths AJA agreeing), allowing the appeal in part on the causation issue and otherwise dismissing the appeal: BCEG was entitled to make a "split election" seeking equitable compensation from the defaulting fiduciaries and an account of profits by the knowing recipients. The principle that a plaintiff cannot obtain equitable compensation and an account of profits from a single defendant has no application to multiple wrongdoers whose liabilities differ in nature and extent. A gain-based remedy against the knowing recipient (who profited from its own misconduct) is not inconsistent with a compensation remedy against the defaulting fiduciary (who made no profit from the default): [68]-[70], [84]. Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161, applied. Tang Man Sit v Capacious Investments Limited [1996] AC 514, explained. The appellants were not denied procedural fairness by the primary judge undertaking the account of profits at the trial stage. Having regard to the pleadings, evidence and conduct of the trial, the appellants were on fair notice of BCEG's quantification of the claim for profits and made a forensic choice not to deal with the quantum aspect of BCEG's claim: [102]-[105]. As to causation, disclosure by a fiduciary of a conflict of interest is not a positive obligation, but rather a defence to what would otherwise be a breach of duty. Hence, the failure by Mr Xiao and Ms Chen to obtain the informed consent from BCEG in relation to the Varsity Lakes payments diverted to the West Wyalong project did not constitute a breach of fiduciary duty. The breach of fiduciary was the dissipation by Mr Xiao and Ms Chen of BCEG's funds to the West Wyalong project in circumstances where there was a conflict between their personal interests through their interests in WWM and their duties to BCEG. The primary judge erred in finding a causative connection between the breaches of fiduciary duty by Mr Xiao and Ms Chen and the later losses suffered by BCEG on the Wagga project, based on evidence of BCEG's China-based directors that if they had known of the diversion of funds from the Varsity Lakes project they would not have entered into later transactions with BCEG and Trojjan in relation to the West Wyalong project: [144]-[145]. Maguire v Makaronis (1997) 188 CLR 449; Blackmagic Design Pty Ltd v Overliese (2011) 276 ALR 646; Gunasegaram v Blue Visions Management Pty Ltd; Blue Visions Management Pty Ltd v Chidiac [2018] NSWCA 179; [2018] 129 ACSR 265 at [153]; Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [122], applied. Although not necessary to decide, the primary judge did not err in relying upon the financial statements of BCEG as sufficient evidence of BCEG's loss on the Wagga project, if that loss had been recoverable, because it was the best evidence of the loss: [154]-[160].

Judgment

1. GLEESON JA: The primary question raised by this appeal is whether a plaintiff is entitled to make a "split election" seeking different remedies against different defendants being defaulting fiduciaries or knowing recipients of property the subject of the breach of fiduciary duty. The other issues on the appeal concern some elements of the relief granted against the appellants. These issues turn on questions of how the trial was run below, causation in equity and proof of quantum.

Nature of the case

1. The respondent, BCEG International (Australia) Pty Ltd (BCEG) is the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China). From 2010 to 2017, the business of BCEG was run by Mr Yu Xiao and his wife, Ms Yan Ying Chen. The other directors of BCEG resided in China. During that period, BCEG was engaged in two development projects in Australia, one on the Gold Coast commencing in mid-2010 referred to as the Varsity Lakes project and the other in Wagga Wagga commencing in mid-2012 (the Wagga project). Mr Xiao and Ms Chen were also engaged in their own development at West Wyalong commencing in mid-2010 (the West Wyalong project).
2. BCEG brought proceedings against Mr Xiao and Ms Chen, and their companies, Interlink Laboratory Pty Ltd (IL), Interlink Wagga Central Pty Ltd (IWC) and West Wyalong Marketplace Pty Ltd (WWM) claiming equitable compensation or an account of profits in respect of alleged breach of fiduciary duties owed by Mr Xiao and Ms Chen as directors of BCEG and knowing assistance in those breaches and knowing receipt of BCEG's property by IWC and WWM. BCEG also brought a money claim against IL.
3. The Varsity Lakes project involved the development of a private hospital on land owned by IL on the Gold Coast using US$35 million finance provided by the Export-Import Bank of China to BCEG China, pursuant to a facility dated 25 August 2010. Those monies were on-lent by BCEG China to BCEG on condition that the monies were to be used only for the purpose of the Varsity Lakes project. Between September 2010 and September 2012, BCEG received drawdowns under its facility with BCEG China. BCEG engaged Trojjan (BCEG) Pty Ltd (Trojjan) as the builder. Trojjan was controlled by Mr Xiao and Ms Chen.
4. The Wagga project involved a commercial and residential development on land owned by IWC at Wagga. On 1 July 2012, BCEG entered a contract with IWC to design and construct the Wagga project on a cost-plus basis with a budget estimate of $34 million, using bank finance from National Australia Bank (NAB). On 25 February 2013, BCEG entered a head construction contract with Trojjan (BCEG) Constructions Pty Ltd (Trojjan Constructions) by which Trojjan Constructions agreed to build the works for the Wagga project for a fixed sum of $25,454,667.50. Due to delays in the provision of finance from NAB, US$3.9 million was provided by BCEG China to BCEG in March 2013 and used by BCEG for the Wagga project. BCEG claimed that it paid a total of about $8.24 million to IWC in connection with the Wagga project.

The appeal

1. The appellants challenge the relief granted to BCEG on six grounds. Grounds 1, 2 and 5 contend that the primary judge erred in holding that BCEG is entitled to both equitable compensation from Mr Xiao and Ms Chen and an account of profits from WWM in relation to the West Wyalong project and IWC in relation to the Wagga project. The appellants say that permitting BCEG to make a "split election", seeking different remedies against different defendants, is wrong in principle.
2. Ground 3 contends that WWM was denied procedural fairness because the primary judge proceeded to assess the account of profits from WWM in circumstances where the trial was conducted on the basis that there would be an inquiry after judgment on the liability issues, if BCEG elected to claim an account of profits against any of the defendants. Importantly, other than this complaint and the split election issue, there is no ground of appeal challenging the amount of the judgment against WWM for profits relating to the West Wyalong project.
3. Ground 4 contends that there is no causal link between the breaches of fiduciary duty by Mr Xiao and Ms Chen in relation to the unauthorised dissipation of monies from the Varsity Lakes facility and the loss suffered by BCEG in advancing funds in respect of the Wagga project.
4. Ground 6 contends, in the alternative to ground 4, that BCEG failed to prove the quantum of its loss in relation to the Wagga project was $8,248,974.
5. Thus, the issues raised in the appeal fall under four general headings: (1) the issue of split election; (2) procedural fairness; (3) causation in respect of the Wagga project; and (4) quantum of loss in respect of the Wagga project. As will be apparent, some of these issues are dependent on the outcome of earlier issues.

Summary of conclusions

1. For the reasons which follow, the causation argument raised by ground 4 should be upheld and the appeal allowed in part. The relief granted against Mr Xiao and Ms Chen and IWC relating to the Wagga project should be set aside. In the view I take, ground 6 relating to quantum of loss on the Wagga project does not arise. Grounds 1, 2 and 5 relating to split election should be dismissed. Having regard to the mixed outcome on appeal, the parties should be given an opportunity to make further submissions on costs in this Court and below.

The key findings of the primary judge

1. Given the absence of challenge to the findings on liability, except for the causation finding in relation to the loss on the Wagga project, it is convenient to outline the relevant facts by reference to her Honour's unchallenged findings.
2. Mr Xiao became a director of BCEG on 11 June 2010 and ceased to be a director on 25 August 2017: PJ [298]. The China based directors of BCEG were Tieshan Ma, Qing Xing and Yan Xing. Ms Chen was a secretary of BCEG from 15 June 2011 to 25 August 2017: PJ [329]. Her Honour found that Ms Chen also acted in the position of a director of BCEG and owed duties to the company as such: PJ [344].
3. Mr Xiao and Ms Chen were the architects of the arrangement in respect of each of the West Wyalong payments in causing Trojjan to issue false invoices to BCEG, which purported to be in respect of the Varsity Lakes project but, in fact, concerned the West Wyalong project: PJ [350]-[351], [354]-[355]. Mr Xiao and Ms Chen were also active participants in the creation and dissemination of the sham subcontracts between Trojjan and the purported subcontractors in relation to the Varsity Lakes project: PJ [360]-[362].
4. To the extent that BCEG also sought relief in relation to the diversion of $1.28 million from the first drawdown of the Varsity Lakes facility and $2.05 million from the second drawdown, her Honour found that BCEG was not entitled to seek relief in respect of these additional allegations as they were not pleaded: PJ [376]. Her Honour further found at PJ [377]: Further, to the extent that BCEG already sought an account of profits in respect of the Wagga project, the findings of fact which I have made in respect of the $2.05 million continue to apply in that exercise, being that the funds were provided by BCEG and not the defendants. BCEG is not however entitled to any findings that these payments amounted to a breach of directors' duties nor specific relief in respect of these payments.

West Wyalong payments / sham sub-contracts

1. Her Honour found that the "best" evidence of the amount of the Varsity Lakes facility diverted to the West Wyalong project was recorded in BCEG's 2014 financial statements, presumably on instruction of Mr Xiao and Ms Chen, and the figure of $3,423,739 (the West Wyalong payments) provided a "starting point" for quantifying the appropriate compensation against Mr Xiao and Ms Chen, but it was not the end of the matter: PJ [401]. Given that the West Wyalong payments were added to BCEG's indebtedness to BCEG China under the Varsity Lakes facility but by the time of the trial that indebtedness had been reduced by the appellants' repayments, her Honour found that the only evidence of a balance owing under the Varsity Lakes facility was BCEG's financial statements or, more recently, the 2017 agreement between BCEG and BCEG China where "the outstanding principal of the private hospital project" was agreed to be $2,528,949.42: PJ [402].
2. Her Honour continued at PJ [407]: After the 2013 financial statements, it will be recalled that Mr Xiao and Ms Chen brought the West Wyalong project onto the balance sheet in January 2015, merged BCEG China's loans in respect of the Varsity Lakes project and the Wagga project and then apportioned BCEG China's loans across five projects including the Varsity Lakes, Wagga and West Wyalong projects. The position was now as clear as mud. But nor did BCEG China adduce evidence of the funds which it said remained owing from BCEG in respect of the Varsity Lakes facility, where one would think such a record would be readily available to BCEG China.
3. The reference by her Honour to the West Wyalong project being brought onto the balance sheet of BCEG in January 2015 is a reference to BCEG's June 2014 financial report which was signed by the directors, including Mr Xiao, on 21 January 2015.
4. Her Honour found that the amount of equitable compensation which would restore BCEG to the position it would have been in had there been no breach of Mr Xiao's and Ms Chen's equitable obligations is to require them to pay compensation sufficient to discharge BCEG's remaining indebtedness to BCEG China under the Varsity Lakes facility, which the parties had agreed, in the 2017 agreement was $2,528,949.42. To this amount was added compound interest: PJ [411].
5. Her Honour observed at PJ [412] that equitable compensation in respect of the sham subcontracts overlapped with equitable compensation in respect of the West Wyalong payments. It is common ground on appeal that the false invoices the subject of the West Wyalong payments and the sham subcontracts were two sides of the same dishonest diversion of money from BCEG to the West Wyalong project.

Wagga project

1. Addressing the claim for relief against Mr Xiao and Ms Chen in relation to monies totalling $8.249 million advanced by BCEG to IWC and the builder of the Wagga project, her Honour found at PJ [413]-[415]: If BCEG had known that Mr Xiao and Ms Chen had diverted the Varsity Lakes funding to the West Wyalong project by rendering false invoices from Trojjan to BCEG, or known of the sham sub-contracts, then BCEG would not have entered into contracts with Interlink Wagga Central and Trojjan Constructions in respect of the Wagga project; BCEG would not have been willing to commit to an ongoing commercial relationship with entities associated with the couple. This is an unremarkable proposition and it was not suggested to BCEG's witnesses that they would have proceeded otherwise. BCEG was ignorant of the fraud at the time it approved the Wagga project in November 2011 and continued to be so at the time it assumed contractual liabilities in connection with the project between July 2012 and February 2013. BCEG advanced amounts to Trojjan or Trojjan Constructions that it would not otherwise have been required to advance, but for the breaches of duty committed by Mr Xiao and Ms Chen. The best evidence of the sums advanced in connection with the Wagga project is contained in the 2014 financial statements, which record the value of the 'Working Capital The Mill Resid' as $8,249,974. (The defendants also relied on this figure.) BCEG sought equitable compensation of $8,249,974, together with compound interest or, alternatively, a taking of accounts and an account of profits in respect of the Wagga project. The defendants submitted that there was no evidence of any loss suffered by BCEG in relation to the Wagga project. While BCEG identified an amount stated in the 2014 financial statements for working capital of $8,249,974, it ignored the sum stated in the 30 June 2014 financial report of $3,241,526 as income received from that project. This, with respect, made no sense. Figures appearing in a profit and loss statement cannot be readily offset against balance sheet items. It does appear that, as at 31 December 2014, some $8.25 million had been used on the Wagga project. Further, it was said that this was a 'no transaction' case and there was no pleaded claim for relief in the form of a taking of accounts. That is incorrect. BCEG clearly sought equitable compensation or, alternatively, an order for the taking of accounts and an account of profits in respect of the Wagga project.

Grounds 1, 2 and 5: split election

1. As indicated, the appellants did not object at trial to the split election by BCEG. In this Court, the appellants submit that in principle the plaintiff must make the same election as to remedy against the knowing recipient as the defaulting fiduciary, otherwise the order for compensation ceases to be compensatory, and there is an inconsistency in claiming different relief against different defendants. The appellants say that a plaintiff "cannot on the one hand condone the wrongful conduct of the knowing recipient by taking an account of profits, and on the other hand condemn the conduct of the fiduciary which was central to the liability of the knowing recipient by asking for equitable compensation from the fiduciary".
2. Although these grounds raise a new point on appeal, other than reserving its position on costs if the new point was upheld, BCEG did not suggest that the point is one that could have been met by further evidence at the trial such that it is not open to the appellants to raise it on appeal: Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48 at [51].

The issue

1. Applied to the facts of this case, the essential question is whether BCEG can obtain cumulative remedies against different defendants: equitable compensation (including compound interest) from Mr Xiao and Ms Chen of $3,057,892.41 in relation to the dissipation of monies from the Varsity Lakes facility and an account of profits from WWM in relation to the West Wyalong project of $3,731,547.75.
2. The appellants say that an election by BCEG for equitable compensation from Ms Xiao and Ms Chen has the consequence that BCEG can only obtain the same remedy against WWM, not an account of profits from WWM in relation to the dissipation of monies from the Varsity Lakes facility. Conversely, the appellants say (subject to ground 3) that an election by BCEG for an account of profits from WWM has the consequence that BCEG can only obtain the same remedy from Mr Xiao and Ms Chen and since Mr Xiao and Ms Chen did not personally derive any profits from their breaches of duty, no profits can be recovered from them.
3. Subject to the causation and quantum issues raised by grounds 4 and 6, the same issue arises in relation to the award of equitable compensation from Mr Xiao and Ms Chen for loss in respect of the Wagga project of $8.249 million (not including compound interest), and the order for an inquiry as to the profits derived by IWC in respect of the Wagga project.
4. If correct, the appellants' submission would place a significant limitation on the available equitable remedies against different defendants who are defaulting fiduciaries or knowing recipients or assistants of the unauthorised dissipation of company assets. The appellants say that the result for which they contend is not only justified but is required as a matter of principle because the same reasoning which applies to the need for election against a single wrongdoer applies equally to claims against multiple wrongdoers. BCEG says that it is entitled to obtain cumulative remedies of equitable compensation.
5. Before considering the issues raised by these grounds, it should be noted that none of the appellants make a claim for contribution against the other. Nor do the appellants challenge the decision of this Court in Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315 concerning the limitations on contribution between knowing assistants and the defaulting fiduciary, or that such limitations also apply to knowing recipients.

Relevant principles: the contrast between inconsistent remedies and cumulative remedies

1. Equitable compensation and an account of profits are both personal remedies: Warman International Limited v Dwyer (1995) 182 CLR 544 at 557; [1995] HCA 18. As Gummow J said in Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 at 135: Where the breach of duty produces not a gain to the fiduciary but a loss to the party to whom the fiduciary duty was owed, then the judgments of Viscount Haldane LC in Nocton v Lord Ashburton ([1914] AC 932 at 935) and of Sir Owen Dixon in McKenzie v McDonald ([1927] VLR 134 at 146-148) show that there is an obligation to account for the loss by provision of equitable compensation.
2. Speaking generally, the remedy of an account looks to the gain made by the party in breach (or by the knowing recipient or knowing assistant) while the remedy of equitable compensation looks rather to the loss suffered by the plaintiff.
3. The aim of equitable compensation is to restore the plaintiff, as nearly as possible, to the position the plaintiff would be in had no equitable breach occurred: Nocton v Lord Ashburton [1914] AC 932 at 952; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-273; Hill v Rose (1990) VR 129 at 143; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 432, 439. The aim of an account of profits is to strip from the party in breach the gains made by reason of the breach (or by reason of their knowing receipt or knowing assistance): Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32 (Windeyer J); [1968] HCA 50.
4. Like all equitable remedies, an account of profits is within the discretion of the Court to be granted or withheld in accordance with settled principles: Warman at 368 referring to equitable defences such as estoppel, laches, acquiescence and delay, and approving the comments of Deane J in Chan v Zacharia (1984) 154 CLR 178 at 204-205; [1984] HCA 36, including that the liability to account would not arise where it would be "unconscientious to assert it". See also Novoship (UK) Limited v Yuri Nikitin [2014] EWCA Civ 908 at [119], where it was said that an account of profits could be refused if "disproportionate in relation to the particular form and extent of the wrongdoing".
5. An account of profits is an alternative to an award of equitable compensation: Warman at 559. The rationale for an election to receive compensation or alternatively an account of profits was stated by Lord Westbury in Neilson v Betts (1871) LR 5 HL 1 at 22, as follows: "[t]he two things are hardly reconcilable, for if you take an account of profits, you condone the infringement". This principle was reaffirmed by the House of Lords at a subsequent hearing of the same case: De Vitre v Betts (1873) LR 6 HL 319 at 321, 324-325. Neilson was a patent infringement case. The passage from the speech of Lord Westbury has been cited with approval in other intellectual property cases, including by Windeyer J in Colbeam at 32 and by Mason CJ, Deane, Dawson and Toohey JJ in their joint judgment in Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 110; [1993] HCA 54.

Warman

1. In support of split election, BCEG pointed to the statement in Warman at 569-570, that it was "arguable" that it would have been open to the plaintiff to have obtained equitable compensation against Dwyer, the fiduciary, and an account of profits against BTA and ETA, two corporate knowing assistants. However, given the way in which the parties ran the case in the Courts below, it was common ground in Warman that orders of the same nature should be made against all three defendants. Whilst these remarks in Warman are consistent with split election, they do not have the status of "seriously considered dicta" of a majority of the High Court: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [158].

Tang Man Sit v Capacious Investments Limited

1. In Tang Man Sit v Capacious Investments Limited at 522, Lord Nicholls of Birkenhead, delivering the judgment of the Privy Council, said, concerning cumulative remedies: Faced with alternative and inconsistent remedies a plaintiff must choose between them. Faced with cumulative remedies a plaintiff is not required to choose. He may have both remedies. He may pursue one remedy or the other remedy or both remedies, just as he wishes. It is a matter for him. He may obtain judgment for both remedies and enforce both judgments. When the remedies are against two different people, he may sue both persons. He may do so concurrently, and obtain judgment against both. Damages to the full value of goods which have been converted may be awarded against two persons for successive conversions of the same goods. Or the plaintiff may sue the two persons successively. He may obtain judgment against one, and take steps to enforce the judgment. This does not preclude him from then suing the other. There are limitations to this freedom. One limitation is the so called rule in Henderson v. Henderson (1843) 3 Hare 100. In the interests of fairness and finality a plaintiff is required to bring forward his whole case against a defendant in one action. Another limitation is that the court has power to ensure that, when fairness so requires, claims against more than one person shall all be tried and decided together. A third limitation is that a plaintiff cannot recover in the aggregate from one or more defendants an amount in excess of his loss. Part satisfaction of a judgment against one person does not operate as a bar to the plaintiff thereafter bringing an action against another who is also liable, but it does operate to reduce the amount recoverable in the second action. However, once a plaintiff has fully recouped his loss, of necessity he cannot thereafter pursue any other remedy he might have and which he might have pursued earlier. Having recouped the whole of his loss, any further proceedings would lack a subject matter. This principle of full satisfaction prevents double recovery.
2. This passage was cited with approval in Baxter v Obacelo Pty Limited (2001) 205 CLR 635; [2001] HCA 66 at [39] (Gleeson CJ and Callinan J), where the clients had settled their negligence claim against the solicitor and the negligence claim against an employee of a solicitor was not barred by the defence of double satisfaction. Gleeson CJ and Callinan J said at [47], concerning the principle of double satisfaction: If there has been a judicial assessment of the whole of the plaintiff's loss or damage, resulting in an award of damages by way of judgment in that amount against one tortfeasor, satisfaction of the judgment by that tortfeasor will put an end to any claim, or possible claim, against another tortfeasor, whether a joint tortfeasor or one of several concurrent tortfeasors, for two reasons. First, the damage, as assessed by judicial decision, has been fully recouped and the claim against another tortfeasor lacks a subject matter. Where, as here, damage is an essential element of the cause of action, that element will have gone. Secondly, it would be inequitable to permit additional recovery.

Cassaniti

1. Cassaniti v Ball as liquidator of RGC CBD Pty Ltd (in liq) [2022] NSWCA 161 does not assist the appellants' argument. In that case, the Court distinguished the effect in equity of a release of one of several trustees and the type of circumstance in Blackwood v Borrowes (1843) 4 Dr & War 441; (1843) 65 RR 729 where the beneficiary elected to accept an investment in securities the making of which was the breach of trust complained of. The Court (Gleeson, Leeming and Mitchelmore JJA) observed at [97]: … It is one thing for a beneficiary to release one of a number of trustees, and another thing entirely for the beneficiary to adopt, or ratify, or accept the conduct which was a breach of trust. It seems plain enough that a beneficiary who had accepted, and taken the benefit of, conduct which is in breach of fiduciary duty cannot thereafter sue an accessory for knowing assistance in the breach. That is not because of the release, but because the plaintiff would be approbating and reprobating, or adopting inconsistent stances in relation to the same wrongful conduct.
2. Contrary to the appellants' submission that the language in Cassaniti of adoption, acceptance, and ratification of the trustee's breach of duty echoes that used in Neilson when discussing the effect of electing for an account of profits, there is no analogy with the present case. BCEG has not adopted, accepted, and ratified the breaches of fiduciary duty by electing for equitable compensation from Mr Xiao and Ms Chen (who made no profit from the default). Nor has BCEG condoned the wrongful conduct of WWM by electing for an account of profits from WWM (who profited from its own misconduct). The gain-based remedy of an account of profits strips the ill-gotten gains from WWM.
3. Further, the appellants' submissions overlooked that Cassaniti accepted, by reference to Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] and Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [557], that the beneficiary may choose to require the fiduciary to account for the property misapplied and for the accessory to account for profits. The Court said at [102]-[103]: Some differences reflected the range of remedies available in equity. The clearest position is where a fiduciary and an accessory each make profits from a breach of trust. There is no reason for the profits for which the fiduciary must account to be equal to the profits for which the accessory must account. Alternatively, the beneficiary may choose to require the fiduciary to account for the property misapplied, and for the accessory to account for profits the accessory has derived. Those are examples of what the High Court contemplated when it said in Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] that: "the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ". In Grimaldi v Chameleon Mining NL (No 2) at [557] the Full Court said that: "the fiduciary and the third party will ordinarily be only severally liable for the profits each makes in consequence of the breach of fiduciary duty or breach of trust in which it participated/was a recipient" and that "Each is not responsible for the other's profits".

Michael Wilson

1. Michael Wilson involved separate actions by MWP against the fiduciary Mr Emmott, being arbitration proceedings in London, and against the alleged knowing assistants, Mr Nicholls and Mr Slater in New South Wales proceedings. The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) summarised the procedural history at [20]-[21]: MWP alleged that Mr Emmott had acted in breach of contractual and fiduciary obligations he owed to MWP. It claimed, in the London arbitration, an account of the profits Mr Emmott had made from what it characterised as clients and work he had diverted from MWP to his own benefit. MWP claimed damages for breach of contract, and compensation for the loss occasioned to it by Mr Emmott's breach of fiduciary duties. It appears likely that at some point in the London arbitration MWP also claimed that there should be a general accounting between it and Mr Emmott (in effect, an accounting as between partners) but on the basis of wilful default by Mr Emmott. That was the relief the arbitrators granted. In the New South Wales proceedings, MWP alleged that Messrs Nicholls and Slater had acted in breach of their contractual and fiduciary obligations and had knowingly assisted Mr Emmott in his breaches of his fiduciary obligations. MWP claimed (amongst other relief) damages, compensation and an account of profits.
2. In the New South Wales proceedings, Mr Nicholls and Mr Slater were each found liable as knowing assistants in Mr Emmott's breaches of fiduciary duty and held jointly and severally liable to pay to Michael Wilson various sums as compensation. In the London arbitration, an interim award held that Mr Emmott was liable to MWP in some but not all of the respects in which Einstein J had found Mr Nicholls and Mr Slater liable to MWP for knowingly assisting in Mr Emmott's breaches of his fiduciary obligations.
3. An appeal was allowed by the Court of Appeal on the ground that there had been a reasonable apprehension of bias by the trial judge. The Court stayed a new trial on the ground of abuse of process given the relationship between the claims made in the New South Wales proceedings and those made in the London arbitration. An appeal to the High Court was allowed. It is only necessary to refer to the reasoning by which the High Court rejected the abuse of process argument.
4. The joint judgment (Gummow ACJ, Hayne, Crennan and Bell JJ) considered the issue of the liability of a knowing assistant, noting the argument that the liability of the respondents to MWP for knowing assistance was no more than "ancillary or coordinate" with that of the defaulting fiduciary: at [100]. The joint judgment rejected that understanding of the relationship between the liabilities of a defaulting fiduciary and a knowing assistant of the fiduciary's breach; and, rejected as inaccurate the argument that the liability of the respondents was "necessarily confined by the extent of [the defaulting fiduciary's] liability" or that the respondents' liability to the principal was no more than accessorial to the principal wrongdoing of the defaulting fiduciary: at [105]. The joint judgment (with which Heydon J agreed on this issue at [119]), continued at [106]: As MWP rightly pointed out, this Court has held that liability to account as a constructive trustee is imposed directly upon a person who knowingly assists in a breach of fiduciary duty. The reference to the liability of a knowing assistant as an "accessorial" liability does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows, as MWP submitted, that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ. It follows that neither the nature nor the extent of any liability of the respondents to MWP for knowingly assisting Mr Emmott in a breach or breaches of his fiduciary obligations depends upon the nature or extent of the relief that MWP obtained in the arbitration against Mr Emmott. (Emphasis added.)

Possible exceptions to the several liability of knowing recipients

1. Michael Wilson establishes that the liability of a knowing assistant for loss suffered by the principal is several only: at [106]. See also Meagher, Gummow and Lehane's Equity: Doctrine and Remedies (5th Ed, 2015, LexisNexis Butterworths) at [23-555], footnote 419.
2. There seems to be no reason in principle for distinguishing the liability of a knowing assistant or knowing recipient. Recipient liability is also fault-based and gives rise to a personal liability to the claimant which is separate and distinct from that of the fiduciary: Grimaldi at [267], [557]; Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81 at [44]; Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118 at [113].
3. In the present case, the claims by BCEG against IWC and WWM founded on recipient liability were for an account of profits. As noted in Cassaniti at [103], it was accepted in Grimaldi at [557] that the third party's liability to an account of profits is generally a several liability, and only in respect of the profits derived by the third party. Grimaldi identified two exceptions to this principle: the "alter ego" exception, and the "acting in concert" exception.

"alter ego" exception

1. The "alter ego" exception, as accepted and applied in Grimaldi, was described at [556] as: … where the advantage of a fiduciary's/trustee's wrongdoing accrues to a third party (whether as a knowing recipient or an assistant) and the third party is the alter ego/'nominee' (usually corporate) of the fiduciary, its liabilities will be joint and several with the fiduciary's: Green v Bestobell at 40; see Gencor ACP Ltd v Dalby (where the action was against the fiduciary for commission payments 'diverted into his own creature company' and for which both the company and the fiduciary were held accountable).

"acting in concert" exception

1. The "acting in concert" exception as identified but not decided in Grimaldi, was described at [558] as: … if the fiduciary and the third party assistant or recipient act in concert to secure a mutual benefit, be this to misappropriate trust property for a particular mutually beneficial purpose or to participate in a breach of fiduciary duty to secure a mutual advantage (eg a business opportunity), they are jointly and severally liable to the wronged beneficiary/principal to restore the trust or to account for the profits made. In CMS Dolphin, directors were held equally liable with the corporate vehicle they formed to take unlawful advantage of business opportunities they provided to it: '[T]he reason is that they have jointly participated in the breach of trust': at [103] emphasis added; Green v Bestobell; see also the facts in Macdonald v Hauer, above; but cf the criticism in Ultraframe (UK), at [1561]-[1576]. One can readily understand why, when wrongdoers so entangle their affairs, that the law as a matter of legal policy might wish to make it their responsibility - and not a claimant's - to untangle them for accountability purposes.
2. It is not necessary to address either exception or their possible implications for a split election in this case. No case was pleaded or run at trial by the appellants that either exception applied here. Nor was it argued by the appellants on appeal that Mr Xiao and Ms Chen were jointly and severally liable with WWM for an account of profits in relation to the West Wyalong project, with the consequence that BCEG must make the same election between remedies against both Mr Xiao and Ms Chen on the one hand and WWM on the other.
3. Even if the appellants had sought to rely on the alter-ego exception in the present case, it would have been necessary for them to confront the contrary view that the liability of the fiduciary and the corporate accessory controlled by the fiduciary are distinct, and different remedies can be obtained against each of them. See, for example, Prest v Petrodel Resources Ltd [2013] 2 AC 415; [2013] UKSC 34 where Lord Sumption at [31]-[33] and Lord Neuberger at [80]-[81] preferred the view that companies associated with defaulting fiduciaries were true, separate third parties; see also the discussion by Jackson J in Cornerstone Property & Developments Pty Ltd v Suellen Properties Pty Ltd [2015] Qd R 75; [2014] QSC 65 at [97]-[103].

BCEG was entitled to make a split election

1. A plaintiff cannot obtain both equitable compensation and an account of profits from a single defendant because the liability of the defendant founding the availability of relief is the same. As against a single defendant the plaintiff must choose between compensation or an account of profits, recognising that an account of profits is a discretionary remedy.
2. The reasoning in Neilson has no application to a split election against multiple wrongdoers. As against the fiduciary, a plaintiff does not condone the fiduciary's breach of duty by seeking a gain-based remedy of an account of profits from the knowing recipient (who profited from its own misconduct by the increased value in the property received or income from such property). The liability of the knowing recipient is different in nature and extent to the liability of the fiduciary, including that the knowing recipient does not owe a duty of loyalty to the principal. A gain-based remedy against the knowing recipient is not inconsistent with a compensation remedy against the defaulting fiduciary (who made no profit from the default): Michael Wilson at [106]; Cassaniti at [102].
3. This flexibility in the award of different remedies against different defendants reflects the "cardinal principle of equity" referred to in Warman at 559 "that the remedy must be fashioned to fit the nature of the case and the particular facts". Given the authority of Michael Wilson, and the point of distinction from Neilson in cases involving multiple defendants whose liability is both personal and independent, Bergin J was correct to conclude in King Network that there was no obstacle to the plaintiff making a split election in that case. It is otherwise unnecessary to address the appellants' criticisms of the reasoning of Bergin J. The position is now settled by Michael Wilson.

English authorities

1. The conclusion that a split election between remedies is available against different defendants is consistent with the views expressed in a number of English authorities: see The Electric Furnace Co v Selas Corporation of America [1987] RPC 23 at [33] (Slade LJ; Croom-Johnson LJ and Sir John Megaw agreeing), which involved an application for leave to serve proceedings out of the jurisdiction; FM Partners Ltd v Marino [2018] EWHC 2905 (Comm) at [90]-[92], not challenged on appeal in FM Partners Ltd v Marino [2020] EWCA Civ 245 at [19]; Davies v Ford [2021] EWHC 2550 (Ch) at [229].

Double satisfaction

1. The appellants say, by reference to the rule or principle of double satisfaction (referred to at [48]f above), that the separate judgments against Mr Xiao and Ms Chen for compensation and against WWM for profits overcompensate BCEG for its loss as a result of the dissipation of monies from the Varsity Lakes facility. Although this issue does not arise on any of the grounds of appeal or the claims for relief in the amended notice of appeal, I will indicate my views why this submission should be rejected.
2. One difficulty is that no application was made by the appellants in this Court for relief by way of an injunction to prevent enforcement of a judgment against any of them where to do so would lead to double recovery: Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 608 (Gummow J). Such a claim would be for equitable relief. An injunction would not be ordered unless either Mr Xiao and/or Ms Chen or WWM had paid so much of the judgment against them which represented the liability of the other under a separate judgment for the same loss, or else if it was established that Mr Xiao and/or Ms Chen or WWM were ready, willing, and able to pay so much of the judgment against them which represented the liability of the other under a separate judgment for the same loss. There was no such evidence here.
3. Another difficulty is that the premise of this submission - that the separate judgements are in respect of the same loss - is incorrect. The cumulative remedies do not result in overcompensation to BCEG, as the appellants suggested. BCEG is entitled to cumulative remedies because there are two distinct wrongs. WWM received property of BCEG the subject of the breach of fiduciary duty, and although the liability of the knowing recipient is dependent upon there being a breach of fiduciary duty, and to that extent the two wrongs are linked, the liability of the knowing recipient is for its own wrong, not the wrong committed by the fiduciary. The remedies are cumulative, rather than in the alternative, as the account of profits against WWM represents the gain by WWM from its own misconduct, not loss to BCEG, and as indicated, the account of profits is discretionary.
4. Further, there is no ground of appeal contending that the primary judge erred by not either declining to order an account of profits from WWM or limiting its liability to account in some unspecified manner, because it was unconscientious for BCEG to assert it: Chan v Zacharia at 204-205 (Deane J).

Ground 3: Procedural fairness

1. Having found that WWM was a knowing recipient and liable to account for the benefits obtained since completion of the West Wyalong project (PJ [430]), her Honour accepted BCEG's submission that she should calculate the profit derived by WWM by reference to the capital gain on the sale of the West Wyalong property in February 2019 and the rental income received by WWM: PJ [431].
2. As to capital gain, her Honour found at PJ [432]: As to capital gain, West Wyalong Marketplace bought the land for $300,000 and sold it for $2,010,000 on 28 February 2019. That represented a capital gain of $1,710,000. As BCEG paid the whole cost of construction, it should have the full capital gain, where the defendants had not led any evidence to establish why the full value of this advantage should not be disgorged: Warman at 561-562; Ancient Order at [13] (per Kiefel CJ, Keane and Edelman JJ) and [91] (per Gageler J).
3. As to rent, her Honour found that rent totalling $1,234,632.72 was received by WWM from July 2012 until the sale of the property: PJ [433].
4. Her Honour rejected WWM's submission that the calculation of the capital gain omitted the costs of construction paid by WWM, and the claim for rent did not include evidence that the rents had been paid nor the costs of leasing, finding that the costs of construction had been paid by BCEG, and the appellants had simply omitted to put on evidence to reduce the profits WWM should be ordered to pay: PJ [434].
5. At PJ [435], after observing that BCEG's calculation of the profits "is certainly simple", her Honour found that it is a reasonable calculation of the full value of the advantage obtained by WWM as a consequence of Mr Xiao's breach of fiduciary duties; that no evidence had been adduced by the defendants to reduce either figure; and, "in the absence of such evidence, BCEG is entitled to the amount calculated, together with interest". As indicated, there is no challenge to her Honour's finding in the supplementary judgment that there was no evidence that WWM paid for the construction of the project and there should be no set-off of the repayments made to BCEG in respect of the West Wyalong payments because such repayments were made by IL, not WWM: SJ [18].

Submissions

1. The appellants say that her Honour should not have undertaken an account of profits at the trial stage for two-related reasons. First, the trial had been conducted on the basis that if an account of profits was sought then an inquiry would be ordered, and no assessment of the amount had been sought prior to the trial or in BCEG's opening.
2. Second, by reference to the operation of the onus described in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [13] and [14], there was evidence to call and submissions to be made in discharge of the appellants' onus of proving that the total amount of the profits should not be disgorged. The appellants say that the capital gain assessed by her Honour makes no allowance for holding costs, costs of acquisition, costs of sale, and the rental income assessed by her Honour makes no allowance for costs relating to owning and leasing a property.

Determination

1. The asserted denial of procedural fairness directs attention to the pleadings, the evidence, and the way the case was run at trial.
2. As to the pleadings in the further amended commercial list statement, the accessorial liability claim pleaded that WWM was liable as a knowing recipient of property of BCEG which Mr Xiao caused to be paid to WWM in breach of his fiduciary duty to BCEG, that WWM held the West Wyalong project on constructive trust for BCEG, and is further liable to account to BCEG for the benefits it has obtained by reason of its exploitation of the West Wyalong project since its completion, including any proceeds of sale of the development.
3. In the amended summons, the relief claimed against WWM was equitable compensation, or alternatively a declaration and an order that WWM account for the benefits, profits or traceable proceeds it derived or received in connection with the West Wyalong project as were occasioned by breaches of fiduciary duties admitted by Mr Xiao and Ms Chen in respect of which it was a knowing recipient.
4. By their amended commercial list response, the appellants defended the claim on the basis that Mr Xiao did not breach his fiduciary duty to BCEG because of an agreement made with Quing Wang that the funds made available to BCEG by BCEG China, whether through the Varsity Lakes facility or otherwise, were available for the pursuit of other projects, including the West Wyalong project; that BCEG China was aware of this agreement; and that the financial reports, books and records of BCEG noted the interests of BCEG in the West Wyalong project. The appellants did not plead by way of defence any claim for just allowances or expenses or other amounts which should be offset against the claim for an account of profits on the West Wyalong project.
5. As to evidence, the appellants did not serve any evidence in response to BCEG's documentary evidence served in November 2020 of the capital gain made by WWM on the sale of the West Wyalong property and the rent payable to WWM in respect of the 10-year lease of that property.
6. As to the conduct of the case, there was no order for a split trial on liability and damages. BCEG's written opening noted that the appellants had not led any evidence to establish why the full value of the advantage represented by the capital gain of $1,710,000 should not be disgorged and particularised the rental payments received by WWM totalling $1,234,632.72. BCEG also sought an inquiry into any profits or gains derived relevantly by WWM in connection with the breaches of fiduciary duties committed by Mr Xiao and Ms Chen relating to the West Wyalong project beyond the capital gain and rental income. The submissions noted, alternatively, that BCEG would seek equitable compensation, together with interest in respect of the monies that were misapplied in breach of fiduciary duties and identified, by reference to an expert report, transactions amounting to $3,033,053 as having been misapplied for the benefit of WWM at the expense of BCEG. The opening submissions continued (at par 194): BCEG recognises that it will be necessary in closing submissions to elect whether it will seek equitable compensation on account of profits. In either case, there ought to be an inquiry.

The pleaded case and the primary judge's findings

1. There are admissions by Mr Xiao on the pleadings that he owed duties to BCEG as a director not to promote his personal interests by making or pursuing a gain when in a position of conflict or a real or substantial possibility of conflict between those personal interests and the interests of BCEG (the conflict duty), not to obtain any unauthorised benefits from his as against BCEG (the profit duty), and to exercise his powers and discharge his duties in good faith in the best interests of BCEG (the good faith duty). No similar admissions were made by Ms Chen, who denied that she was a director of BCEG.
2. The pleading alleged that if BCEG had known of the conduct constituting breaches of duty by each of Mr Xiao and Ms Chen of their duties at the time in which it was engaged, BCEG would not have entered into the contract in relation to the Wagga project with IWC or the construction contract with Trojjan because it would not have been willing to commit itself to an ongoing commercial relationship with entities associated with Mr Xiao and Ms Chen.
3. No dispute arises as to her Honour's statement of the legal principles in respect of causation, including at PJ [390]-[392], which it is convenient to reproduce: … Where the fiduciary owes custodial duties, such as a trustee or a company director, the causation inquiry is a strict one: O'Halloran at 277 (per Spigelman CJ). In such a case, a sufficient connection will exist, irrespective of whether separate or concurrent causes can be identified, when the loss would not have occurred if there had been no breach of duty: O'Halloran at 276-277; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 215. In O'Halloran, Spigelman CJ reasoned that the strict standard of causation applicable to a trustee of a traditional trust with respect to the improper application of trust property applies equally to the case of a director of a company who has the power to dispose of company property and who does dispose of such property for an improper purpose: at 277. The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: Nocton v Lord Ashburton [1914] AC 932 at 952; Hill v Rose [1990] VR 129 at 144; O'Halloran at 272. Where the loss suffered by the plaintiff is the misapplication of company money or property, the obligation is on the defaulting fiduciary to restore or pay to the company either the assets which have been lost by reason of the breach or compensation for such loss: Maguire at 469, approving Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434; Re Dawson at 214. The amount of compensation is to be assessed at the time of trial, with the full benefit of hindsight and common sense, not at the date of breach: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]; O'Halloran at 273, 276. Where a defendant's actions have made the assessment of loss difficult, doubtful questions should be resolved against that party: Armory v Delamirie (1722) 1 Stra 505; (1772) 93 ER 664; Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415 at [122]. It is also open to the Court to order an assessment of equitable compensation: Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027; (2015) 107 ACSR 445 (per White J). When assessing causation for the purposes of disgorging a fiduciary of profits he or she has obtained as a result of a breach of duty, all that need be shown is that the profit would not have been made but for the wrongdoing: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [9] (per Kiefel CJ, Keane and Edelman JJ) and [88] (per Gageler J). As the policy underlying causation for breach of fiduciary duty is to vindicate the equitable obligation that has been breached, the 'but for' connection will suffice even where there are other contributing causes: Ancient Order at [84]. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the plaintiff by the gain of the defaulting fiduciary: Furs Ltd at 592.

Matters not in issue

1. An understanding of the causation argument on appeal is assisted by noting one matter which is not in issue. The High Court has stated that fiduciary obligations are proscriptive rather than prescriptive in nature: Breen v Williams (1996) 186 CLR 71 at 93-94 (Dawson and Toohey JJ), 113 (Gaudron and McHugh JJ); [1996] HCA 57; Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [74] (McHugh, Gummow, Hayne and Callinan JJ); Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [84] (French CJ, Gummow, Hayne and Bell JJ); Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [31]-[32] (French CJ and Keane J); at [56] (Hayne and Crennan JJ).
2. No occasion arises to consider the implications of these High Court cases for earlier authorities which accepted that fiduciaries have some positive obligations in particular contexts. Two types of cases, among others, should be mentioned.
3. First, it has long been accepted that those who issue a prospectus or information proposal to potential investors have an obligation of "utmost candour and honesty": Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99 at 113 (Lord Chelmsford LC). The High Court applied Kisch in United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1 at 12 (Mason, Brennan and Deane JJ), 5-6 (Gibbs CJ) in the context of the fiduciary duties owed by a person who was negotiating a joint venture.
4. Second, earlier authorities of the High Court stated that company directors owe a fiduciary duty to exercise their powers bona fide in the interests of the company as a whole: see, for example, Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL) (1968) 121 CLR 483 at 490, 492-494; [1986] HCA 37 (Barwick CJ, McTiernan and Kitto JJ). In BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597 at [598], the Full Court of the Federal Court (Allsop CJ, Moshinsky and Colvin JJ), expressed the view that the more recent High Court cases referred to at [111] above did not suggest that the earlier authorities of the High Court, such as Harlowe's Nominees, were incorrect.

Submissions

1. The parties diverged as to whether it was implicit in her Honour's reasons on causation that Mr Xiao and Ms Chen were each required to disclose to the China based directors of BCEG the existence of their breaches of fiduciary duties, and it was their failure to do so that caused the claimed loss in relation to the Wagga project.
2. The appellants submitted that her Honour erred in imposing an additional duty, of a positive nature, upon Mr Xiao and Ms Chen to disclose the existence of their breaches of fiduciary duty because: (a) such a duty was not pleaded, (b) the authorities do not support this additional positive duty, and (c) the primary judge's reasoning erroneously focused either on a different duty in relation to a different transaction, or a positive equitable duty that does not exist and not the duty that was breached. The appellants further submitted that there is no duty imposed on a fiduciary to disclose a prior wrong: Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALRJ 312 at [37] (Gleeson CJ, Gaurdron and Gummow JJ).
3. In its written submissions, BCEG did not seek to uphold her Honour's causation finding on the basis that Mr Xiao and Ms Chen had a positive duty to disclose their wrongdoing. BCEG submitted that it was the continuing deception by Mr Xiao and Ms Chen of BCEG which supplies an adequate or sufficient connection between the breaches of duty in relation to the dissipation of monies from the Varsity Lakes facility to the West Wyalong project and the loss that was suffered upon BCEG committing itself to the Wagga project. Reference was made to statements by Spigelman CJ in O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 279.
4. In oral argument, however, BCEG submitted that Mr Xiao and Ms Chen had a duty to obtain the informed consent of the other directors of BCEG to the dissipation of monies from the Varsity Lakes facility to the West Wyalong project. Reference was made to Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23. The submission continued that but for the failure of Mr Xiao and Ms Chen to disclose their conflict of interest in relation to the West Wyalong project, BCEG would not have entered into the later transactions in relation to the Wagga project with IWC in July 2012 and Trojjan in February 2013: see [5] above. Senior counsel for BCEG put this argument as follows: Thus, the lack of awareness of the BCEG directors and the consequent lack of informed consent, is a matter inherently bound up with the finding of breach because these payments were all unauthorised. Far from being a matter divorced from breach and requiring a positive duty to disclose a wrongdoing, the wrongdoing is intimately bound up with the failure to disclose. The breach occurred, in part at least, because of that failure.

Causation and breach of fiduciary duty by a director

1. The causation enquiry in relation to breaches of fiduciary duty directs attention to the relevant equitable duty: Youyang Pty Limited v Minter Elllison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [44]. In Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, Gageler J said at [88] of the liability to account for a dishonest and fraudulent breach of fiduciary duty: A causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained "but for" the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the "but for" connection will be sufficient even though other contributing causes might be in play. (Citations omitted)
2. The joint judgment of Kiefel CJ, Keane and Edelman JJ at [9], said of the test of causation for disgorgement of a benefit obtained as a result of knowing participation in a breach of fiduciary duty: Whether a benefit can be said to be obtained "as a result of" knowing participation in a breach of fiduciary duty by another contrary to the principles of equity is a question of causation or contribution that depends on "a precise examination of the particular facts" of the case, rather than upon attempts to refine the expression "as a result of", as if that phrase has some determinate operation of its own that may be discerned and applied independently of the equitable principle of which it is part. The equitable disgorgement principle with which we are concerned is a "prophylactic rather than a restitutionary principle". It is sufficient to show that the profit would not have been made but for dishonest wrongdoing. Further, whatever may be the position for wrongdoing that is not marked by dishonesty, a defendant cannot avoid liability to disgorge profits dishonestly made by showing that those profits might have been made honestly. This is not an approach to causation that is unique to dishonesty in equity. (Citations omitted).

Whether causation established by the continuing deception of Mr Xiao and Ms Chen?

1. In O'Halloran, a director breached his fiduciary duty to the company by transferring shares without payment being made and without disclosing that no payment had been received. The question was whether registration of the transfer of the shares caused the loss or whether there were other causes. Spigelman CJ (at 279) rejected a submission advanced for Mr O'Halloran that his subsequent conduct was not relevant to a case based on breach by improper registration, referring to the reasoning of McLachlin J in Canson Enterprises v Boughton Ltd (1991) 85 DLR 4th 129 at 163G: Where the trustee's breach permits the wrongful negligent acts of third parties, thus establishing a direct link between the breach and the loss, the resulting loss will be recoverable.
2. The subsequent acts by O'Halloran were his systematic obstruction of all attempts to prevent any dealing with the shares or rectification of the register "which constitutes a continuation by him of the original wrongful act" (at 279). Spigelman CJ held that the reasoning in Canson Enterprises was directly applicable save that the wrongful acts permitted by O'Halloran's original wrongful act, included further acts by himself, as well by another. It was this subsequent conduct of O'Halloran that "also constitutes a direct link between the original conduct and the loss" (at 279).
3. As the appellants correctly submit, there is no analogy between O'Halloran and the present case. In O'Halloran there was a breach of fiduciary duty and a continuation by O'Halloran of the original wrongful act, and loss arising therefrom in relation to one transaction, not like the present case of breach of fiduciary duty in relation to one transaction (the dissipation of monies from the Varsity Lakes facility) which was said to cause loss in relation to separate subsequent and otherwise unimpeached transactions between BCEG and each of IWC and Trojjan in relation to the Wagga project.

No positive duty to obtain informed consent

1. The premise of BCEG's alternative causation argument is that Mr Xiao and Ms Chen had a duty to obtain the informed consent of the other directors of BCEG to the dissipation of monies from the Varsity Lakes facility for the benefit of the West Wyalong project in which Mr Xiao and Ms Chen had a personal interest through WWM.
2. In Breen v Williams, when rejecting the extension of the doctrine of "informed consent" as it had developed in negligence claims by a patient against a medical practitioner to a claim by a patient against a medical practitioner of breach of fiduciary duty, Gummow J said at 125: To this it may be added that in fiduciary law "informed consent" is an answer to circumstances which otherwise indicate disloyalty, not a mainspring of equitable liability.
3. The same approach was taken in Maguire v Makaronis which involved a claim by clients of solicitors who had given a mortgage in favour of the solicitors to secure bridging finance in circumstances where the solicitors did not draw to the clients' attention the fact the solicitors were to be the mortgagees or tell them they should obtain independent legal advice. The clients succeeded in setting aside the mortgage for breach by the solicitors of their fiduciary duty in entering the mortgage in the absence of informed consent of the clients to the solicitors' interest in the transaction.
4. The joint judgment of Brennan CJ, Gaudron, McHugh and Gummow JJ observed (at 466) that if the solicitors were to escape an adverse finding of breach of fiduciary duty, with consequent remedies, it was for them to show, by way of defence, informed consent by the clients to the solicitors acting, in relation to the mortgage, with a divided loyalty. The joint judgment continued (at 467): … it should be noted that, contrary to what appeared to be suggested by the respondents in argument, there was no duty as such on the appellants to obtain an informed consent from the respondents. Rather, the existence of an informed consent would have gone to negate what otherwise was a breach of duty.
5. That disclosure is a defence, rather than a positive duty has been endorsed in later cases, including decisions of intermediate appellate courts. It is sufficient to refer to the following decisions.
6. In Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 276 ALR 646, Besanko J (Finkelstein and Jacobson JJ agreeing) observed that descriptions of a "duty" of disclosure are best explained as no more than a shorthand way of referring to the defence of fully informed consent by the principal: at [105]. Addressing the interplay between causation and disclosure, Besanko J noted that there were two views on this topic, one which accepts that fiduciary duties are proscriptive and not prescriptive; the breach of fiduciary duty is the conduct of the fiduciary in placing him or herself in a position of conflict, and disclosure is simply a means of avoiding a breach, not a duty. On this view, his Honour said at [105]: The loss which is recoverable by way of equitable compensation on this view is that which would have occurred if the conflict had not arisen and not the loss which would have occurred had disclosure been made.

Conclusion

1. There is no reason to doubt Maguire v Makaronis or the subsequent intermediate appellate decisions, including of this Court, that disclosure by a fiduciary of a conflict of interest (or duty) is not a positive obligation, but rather a defence to what would otherwise be a breach of duty. Her Honour's causation finding cannot be sustained in the manner contended for by BCEG.
2. The finding which should be made is that if the breach of duty by Mr Xiao and Ms Chen in relation to the dissipation of monies from the Varsity Lakes facility had not occurred, BCEG would still have entered into the Wagga project which was ultimately loss making. Accordingly, ground 4 should be upheld.

Ground 6: Quantum of loss on Wagga project

1. The findings of the primary judge in relation to quantum at PJ [414]-[415] are set out at [30] above.
2. The appellants submit that BCEG failed to prove the quantum of its loss in relation to equitable compensation awarded against Mr Xiao and Ms Chen in respect of the Wagga project. The appellants say that her Honour erred in relying upon the figure of $8,249,974 as constituting sufficient evidence of the quantum of the loss, or alternatively, by not reducing that amount by $3,241,526. The appellants point to the observation by the primary judge at PJ [407], which is set out at [23] above, that the position in relation to BCEG's China loans to BCEG as recorded in BCEG's 2014 financial statements "was now clear as mud".
3. In their reply submissions, the appellants raised a new argument by reference to the 31 December 2016 financial report of BCEG, that the correct figure is $6,954,780.
4. Given the conclusion in relation to ground 4, the quantum issue does not arise. Nevertheless, I will briefly indicate my views.
5. The appellants' submission that BCEG led no evidence of the quantum of its loss for the equitable compensation claim should be rejected. At trial, BCEG relied upon the 2014 financial statements of BCEG signed by its directors, including Mr Xiao, which recorded the apportionment of the previous BCEG China loans across five projects, including the Varsity Lakes, Wagga and West Wyalong projects. The non-current liability shown as "working capital The Mill resid" of $8,249,974 as at June 2014 represented the amount of BCEG's borrowings from BCEG China which had been advanced to the builders in connection with the Wagga project.
6. The 2014 financial statements of BCEG were business records of the company within s 69 of the Evidence Act 2005 (NSW). Moreover, by s 1305(1) of the Corporations Act, the financial statements of BCEG were prima facie evidence of any matter stated or recorded in the accounts which was a book kept by BCEG under the requirements of the Corporations Act.
7. Next, the appellants complain that her Honour's language in PJ [414] referring to the "best evidence" of the sums advanced in connection with the Wagga project is that contained in the 2014 financial statements of BCEG which record the value of the "working capital of The Mill" as $8,249,974, was not a finding on the balance of probabilities of what BCEG had proved, but involved a search to aid BCEG appropriate to "a case where a plaintiff cannot adduce precise evidence of what has been lost". That submission should be rejected.

Conclusion and Orders

1. The appeal has succeeded in part on the causation issue (ground 4). In my view, ground 6 does not arise and the other grounds have not been made out. Given the mixed outcome on appeal, the parties should be afforded an opportunity to make submissions as to the appropriate costs orders in this Court and below. The issue of costs should be decided on the papers.
2. I propose the following orders: 1. Appeal allowed on ground 4 and is otherwise dismissed. 2. Set aside orders 2, 7, 8, 9 and 15 made by the primary judge on 22 July 2022 and orders 1, 2 and 4 made by the primary judge on 17 August 2022. 3. Direct the parties to bring in short minutes of order in respect of the amount of monetary judgment in order 1 made on 22 July 2022, together with compound interest (such judgment to take effect on 17 August 2022). 4. In the absence of agreement as to costs in this Court and below, direct the appellants to file and serve short written submissions on the question of costs in this Court and below within 14 days, the respondent to file and serve its response within a further 14 days and the appellants to file and serve any reply within a further 7 days. Any such submissions are not to exceed 3 pages. 5. Note that the question of costs will be determined on the papers.
3. MITCHELMORE JA: I agree with Gleeson JA.
4. GRIFFITHS AJA: I agree with Gleeson JA.

Amendments 23 March 2023 - Typographical amendments made to decision. 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: 23 March 2023