Xu v Jinhong Design & Constructions Pty Limited

On each appellant undertaking to the Court that until further order or the disposal of the appeal he will not remove from Australia or in any way dispose of, deal with or diminish the value of any of his assets, whether or not the assets are in his name and whether they are solely or co-owned, and including any assets which he has the power, directly or indirectly, to dispose of or deal with as if they were his own save for:- (a) the payment of ordinary living expenses; (b) the payment of reasonable legal expenses; and (c) dealings and dispositions in the ordinary and proper course of the appellants' business affairs including paying business expenses bona fide and properly incurred, I stay the execution or enforcement of the judgment and orders entered by Justice Johnson in Supreme Court proceedings numbered 12073/07 on 10 June 2010 pending the hearing and determination of the appeal filed herein or pending further order. DECISION: 2. Order the appellants provide within 21 days the sum of $40,000 as security for the costs of this appeal by payment of the monies into court or, if the parties agree, into an interest bearing account in the joint names of the solicitors for the appellants and the respondent. 3. Order that if security is not provided in accordance with order 2, the appeal be stayed. 4. That the amount of AUD$35,000 which is currently held as security for costs in the Trust Account of Ren Zhou Lawyers Trust for the costs of the proceedings before the Supreme Court of New South Wales (file number 12073/07) be released to the respondent, Jinhong Design & Constructions Pty Limited. 5. Direct the respondent within 1 day to bring in short minutes of order embodying these orders and specifying the second mortgages and charges it seeks and the property over which those securities are sought, and that those securities are to be provided within 21 days of 8 September 2010. 6. Order the appellants to provide the securities referred to in order 5 and set out in the short minutes of order in a form satisfactory to the respondent within 21 days of the 8 September 2010. 7. Appellants to pay the costs of the stay and security for costs motions.

CATCHWORDS: APPEAL - procedure - stay pending appeal - APPEAL - procedure - costs - security for costs - special circumstances - no question of principle

Civil Procedure Act 2005 (NSW) LEGISLATION CITED: Fair Trading Act 1987 (NSW) Uniform Civil Procedure Rules 2005

Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 Goodrich Aerospace Pty Limited v Arsic [2006] NSWCA 187; (2006) 66 NSWLR 186 Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 CASES CITED: Jinhong Design & Constructions Pty Limited v Xu & Anor [2010] NSWSC 523 Kalifair Pty Ltd v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136; (2004) 60 NSWLR 143 Whitlam v Australian Securities and Investments Commission [2002] NSWCA 312; (2003) 43 ACSR 73

Yi Nuo Xu - first appellant PARTIES: Cheng En Zhu - second appellant Jinhong Design & Constructions Pty Limited - respondent

COUNSEL: BW Rayment QC with JM Baxter - for the apellants JJJ Garnsey QC - for the respondent

SOLICITORS: Pancific Legal - for the appellants Ren Zhou Lawyers - for the respondent

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 2007/260539

LOWER COURT MEDIUM NEUTRAL CITATION: [2010] NSWSC 523

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 2007/00260539

7 September 2010 Xu v Jinhong Design & Constructions Pty Limited Judgment 1 McCOLL JA: The Court is dealing with two notices of motion. The first, filed by the appellants, Yi Nuo Xu and Cheng En Zhu, on 18 June 2010, is a notice of motion to stay a judgment given by Johnson J on 10 June 2010 in which his Honour ordered the applicant to pay the respondent (a) compensatory damages in the sum of $391,255.15, (b) exemplary damages in the sum of $25,000. and (c) interest up to judgment amounting to $150,000 under s 100 Civil Procedure Act 2005 (NSW): Jinhong Design & Constructions Pty Limited v Xu and Anor [2010] NSWSC 523. The total judgment was, accordingly, $566,255.15. 2 Execution of the judgment has been stayed first by the primary judge for 21 days from 10 June, then by consent orders entered on 28 June 2010 up to and including the hearing and determination of the stay motion. 3 The respondent, Jinhong Design & Constructions Pty Limited, filed a motion on 27 August 2010 seeking an order that an amount of $35,000 held as security for its costs of the proceedings be released to it. That order is not opposed. It also seeks an order pursuant to Uniform Civil Procedure Rules 2005 51.50 that the appellants provide security for the costs of the appeal - such security to be paid into Court or, if agreed by the parties, into an interest bearing account in joint names pending determination of the appeal. . 4 It will be convenient to refer to the appellants and respondent respectively even when dealing with the security for costs motion.

Legislative framework 5 Subject to the rules of court, the court may at any time and from time to time, by order, stay any proceedings before it, either permanently or until a specified day: s 67, Civil Procedure Act. Subject to the filing of the relevant originating process, the Court of Appeal may order that the decision below or the proceedings under the decision be stayed: UCPR 51.44. 6 UCPR 51.50 sets out the powers of court on appeal to make an order for security for costs. It provides: " 51.50 Security for costs (1) In special circumstances, the Court may order that such security as the Court thinks fit be given for costs of an appeal. (2) Subject to subrules (1) and (3), no security for costs of an appeal is to be required. (3) Subrules (1) and (2) do not affect the powers of the Court under rule 42.21 (which relates to security for costs)."

The primary judgment 7 The proceedings were heard over 9 days in February and March this year. The respondent alleged that the appellants agreed in 2004 to give personal guarantees with respect to a building contract between the respondent and Ausino Arts Ceramic Development Pty Limited ("Ausino") concerning a development site at 3 Richmond Avenue, Sylvania Waters ("the Sylvania Waters project"). It sought to recover alleged shortfalls in sums owing by Ausino under the building contract. It pleaded causes of action for breach of contract, deceit and fraud, equitable estoppel and misleading and deceptive conduct under s 42, Fair Trading Act 1987 (NSW). It succeeded in all but equitable estoppel, which the primary judge concluded (at [107]) it was unnecessary to determine having regard to his findings in the respondent's favour on the other causes of action. 8 Resolution of the critical factual controversy as to the guarantees turned, as Mr Garnsey of Queens Counsel who appeared for the respondents strongly emphasised, on the credit of the individuals involved: the appellants and Mr Huang, a director and principal of the respondent. The task of credit assessment was, however rendered difficult in this case, as the primary judge acknowledged (at [10]) referring to Goodrich Aerospace Pty Limited v Arsic [2006] NSWCA 187; (2006) 66 NSWLR 186 (at [21]-[22]), by the fact that all the key witnesses were from a different cultural and ethnic background to his. Nevertheless, the effect of his Honour's findings is that he preferred Mr Huang's evidence to the appellants', a conclusion he was assisted in reaching by his examination of the documentary evidence. 9 That documentary evidence revealed that on 12 October 2004, the first appellant, Mr Xu and a Ms Li, a director of Ausino, signed a building contract for the Sylvania Waters Project under which the repondent contended they gave personal guarantees for Ausino's obligations under that document. The primary judge rejected (at [30]) Mr Xu's argument that he had not signed that document as guarantor. That finding was important to his Honour's conclusion in relation to a second building contract to which I now turn. 10 Subsequently Ms Li was removed as a director of Ausino. According to the primary judge (at [36]), it was common ground in the proceedings that Mr Huang and Mr Xu agreed that a further contract should be entered into for the purpose of the Sylvania Waters project following her departure. Mr Huang, Mr Xu and Mr Zhu executed that building contract in November 2004. There was a factual controversy as to whether Mr Huang again insisted on personal guarantees of Ausino's obligations under this contract which the primary judge resolved (at [39], [41]) in the respondent's favour. 11 The critical issue insofar as the second contract was concerned was that neither of the appellants signed as guarantors on the second contract: primary judgment (at [43]). However, the guarantee page was not struck out but was left in with the appellants initialling the bottom of the page. The primary judge found that "[t]his conduct is not consistent with an unwillingness to give personal guarantees": primary judgment (at [45]). His Honour found (at [46]) the appellants "consistently maintained to Mr Huang that personal guarantees formed part of the second contractual arrangement." 12 The respondent's case at trial appears to have been that the conversations between Mr Huang and the appellants prior to entry into the second building contract constituted an agreement by each of the appellants to provide a personal guarantee for their liability under the second building contract: see primary judgment (at [81]). The primary judge found in its favour in this respect, having rejected (at [83]) the appellants' submissions that any such conversations rose no higher than the third category in Masters v Cameron [1954] HCA 72; 91 CLR 353 at 360-362 whereby any agreement was "subject to contract" or "subject to the preparation of a formal contract". His Honour also held (at [85]) that the promises made by the appellants were supported by consideration, that there was an intention to enter into legal relations, that the respondent, through Mr Huang, relied upon the promises of the appellants in entering into the second building contract which he would not have done if personal guarantees had not been promised and that each appellant breached his promise by refusing or failing to give a personal guarantee, or denying that a personal guarantee had been promised. 13 Substantially the same findings grounded his Honour's conclusion (at [90] - [96]) that the respondent had established that the appellants' representations concerning the giving of personal guarantees supported the claim for relief under the Fair Trading Act 1987 and (at [97] - [103]) the action in deceit. 14 The respondent argued at trial that it was entitled to an award of exemplary damages because of the circumstances which ultimately led to Ausino going into liquidation in September 2006. In this respect the primary judge found (at [78]) that in April-May 2006, the directors and investors associated with Ausino took steps to purchase units and shops within the Sylvania Waters project so as to obtain funds to pay out their creditors, Hastings Capital Limited and Hastings Mezzanine Limited, under lending arrangements which included personal guarantees by the appellants, that the steps taken by the appellants involved the acquisition of the sole asset of Ausino by them, family members and associates, with the proceeds of sale of the units and shops being used to discharge indebtedness to their creditors, whilst themselves obtaining the benefit of ownership of the relevant units and shops within the Sylvania Waters project and that the appellants were aware that the inevitable consequence of this course of action was that Ausino would be put into liquidation. 15 The respondent submitted at trial that these actions in circumstances where the appellants had themselves provided personal guarantees to secure the debts, demonstrated contumelious disregard for the rights of the respondent as an unsecured creditor of Ausino: primary judgment (at [130]. The primary judge accepted that submission, holding (at [135] - [136]) that the appellants' actions in April and May 2006, in disposing of the sole asset of Ausino to themselves and other associated with Ausino placed the case in the rare category where an award of exemplary damages was warranted. Consideration 16 It is common ground that the appellants' evidence reveals that their equity in real property is such as would barely satisfy the judgment sum, let alone their liability for the costs of the trial or, if unsuccessful, the appeal. Indeed Mr Rayment of Queens Counsel who appeared for the appellants with Ms J Baxter accepted that the judgment would bankrupt them if it were not set aside on appeal. Both appellants have deposed that they have a joint liability "in the vicinity of $100,000" to pay for the preparation and hearing of the appeal. 17 Mr Rayment submitted that the critical attack on the primary judgment would be that his Honour's finding that the appellants orally agreed to give personal guarantees of Ausino's obligations under the second building contract was contrary to the principle in Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 that a collateral contract cannot be admitted as good in law if it is inconsistent with the main contract, as well as to the parol evidence rule. He also said the appellants would challenge the finding of deceit (and I infer the finding of breach of the Fair Trading Act) on the basis that the primary judge failed to distinguish between a promise to do something which is in writing in the future, and an existing representation of fact. 18 It is not apparent from the primary judgment that any of these points was advanced at trial. However Mr Garnsey did not contend that they could not be advanced on appeal. He submitted that the Hoyt's Pty Ltd v Spencer point did not arise because there were not two inconsistent contracts however did not, as I understood his submissions, contend that point was not fairly arguable. Nor did he contend that the argument concerning the deceit finding was untenable. I should not, in saying this, be understood to saying that Mr Garnsey did not maintain the primary judgment was entirely correct, rather I thought he accepted the practical reality that while an applicant for a stay must show there are serious questions for determination by the appellate court (Kalifair Pty Ltd v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 (at [18]) per Handley, Sheller and Ipp JJA), a court considering the application will not engage in a detailed consideration of the merits of the appeal: Whitlam v Australian Securities and Investments Commission [2002] NSWCA 312; (2003) 43 ACSR 73 (at [39]) per Giles JA. 19 I am satisfied that there are serious questions to be determined on appeal and, further that having regard to the appellants' relative impecuniosity, they will be unable to pursue the appeal if a stay is not granted as execution of the judgment will lead to their bankruptcy. 20 The real debate between the parties was as to the terms upon which any stay should be granted and whether security for costs should be ordered. 21 The appellants submit that the respondent's request that any security be paid into Court rather than to itself is a tacit recognition by it that in the event the appeal is successful but a stay is not granted, the appeal may prove abortive as the appellants are likely to be unable to recover the judgment sum: see Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685. They contend that the court can preserve the status quo pending appeal by accepting an undertaking they proffer not, in substance, to dispose of their assets pending appeal, subject to what I might call typical Mareva carve-outs to allow for them paying their ordinary living expenses, their reasonable legal expenses and undertaking dealings and dispositions in the ordinary and proper course of their business affairs, including paying business expenses bona fide and properly incurred. They oppose the application for security for costs and submit that there are no special circumstances to warrant such an application. 22 The respondent submits that the evidence shows that the appellants propose to spend a substantial amount on the appeal (in excess of $100,000), thereby risking depletion of their assets further, when they are, on the face of their evidence, barely able to satisfy the judgment debt. In those circumstances it argues the judgment should be secured by payment (in whole or in such part as the Court may determine) into Court or be otherwise secured (by second mortgages and charges over company assets) as determined by the Court. Those measures, it contends, will protect it from the risk of loss of the benefit of the judgment, which in this case is very real: cf Kalifair (at [28]). It criticises the undertaking the appellants proffer as unsatisfactory because of the lack of security for the judgment debt and what it contends is the unreasonable amount allocated to the legal expenses of the appeal. 23 The estimate of legal expenses is based, Mr Rayment advised, on the prospect that the appeal will last two days. Mr Garnsey contended it would last one. In my view the issues Mr Rayment has identified as critical should not engage the Court in more than a day's consideration having regard to the requirement for the preparation of comprehensive written submissions. I would agree with Mr Garnsey that $100,000 for legal expenses appears excessive. 24 I also accept Mr Garnsey's submission that the proffered undertaking is inadequate in the circumstances. In my view the respondent is entitled to have the judgment secured to some extent, having regard to the real probability that if the appeal fails it will be unable to execute it in full. 25 I am also of the view that the respondent has established that the appellants are unlikely to be able to pay its costs if the appeal fails and that there are special circumstances which would warrant an order for security for costs. 26 The question whether special circumstances exist must be judged on its own merits in each case: Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136; (2004) 60 NSWLR 143 (at [21]). One relevant factor is the appellants' relative impecuniosity: Transglobal Capital (at [36]). However I am also concerned by the primary judge's findings which grounded his award of exemplary damages, that the appellants' actions in April and May 2006, in disposing of the sole asset of Ausino to themselves and other associated with Ausino constituted contumelious disregard for the respondent's rights. While I accept that the appellants propose to challenge the underlying finding of fact, nevertheless it must for present purposes be presumed to be correct. I would be concerned that the appellants should not be able to dissipate their remaining assets at the respondent's potential expense.

Conclusion 27 In my view the respondent's position should be secured to the greatest extent possible both as a condition of the stay and by the provision of security for costs. However it would not be appropriate for the Court to order both the payment into Court of a sum to secure the stay as well as a payment for security for costs. One payment should secure the respondent's position. Mr Garnsey submitted the amount of security should be in the range of $40,000 - $50,000 based I assume on his prediction of a one day appeal. His solicitor estimated the respondent's cost of the appeal at approximately $50,000. Mr Rayment did not challenge that amount. However it is not apparent whether that assessment was based on solicitor-client or party-party costs. In my view it would not be appropriate to award that entire sum as security for costs, rather an amount of $40,000 should be provided. 28 As to the stay, the appellants should, in my view provide both the undertaking and second mortgages and charges as the respondent proposed. It may be that the first mortgagees will not consent to the registration of second mortgages but, as Mr Garnsey submitted, the respondent's position can be secured, inter alia, by caveats. The respondent's submissions invited the Court to determine the mortgages and charges which should be provided. While I am of the view they should be provided, the repondent should specify the terms of the orders it seeks as to both mortgages and charges.

1 On each appellant undertaking to the Court that until further order or the disposal of the appeal he will not remove from Australia or in any way dispose of, deal with or diminish the value of any of his assets, whether or not the assets are in his name and whether they are solely or co-owned, and including any assets which he has the power, directly or indirectly, to dispose of or deal with as if they were his own save for:- (a) the payment of ordinary living expenses; (b) the payment of reasonable legal expenses; and (c) dealings and dispositions in the ordinary and proper course of the appellants' business affairs including paying business expenses bona fide and properly incurred,

I stay the execution or enforcement of the judgment and orders entered by Justice Johnson in Supreme Court proceedings numbered 12073/07 on 10 June 2010 pending the hearing and determination of the appeal filed herein or pending further order.

Order the appellants provide within 21 days the sum of $40,000 as security for the costs of this appeal by payment of the monies into court or, if the parties agree, into an interest bearing account in the joint names of the solicitors for the appellants and the respondent.

Order that if security is not provided in accordance with order 2, the appeal be stayed.

Order that the amount of AUD$35000 which is currently held as security for costs in the Trust Account of Ren Zhou Lawyers Trust for the costs of the proceedings before the Supreme Court of New South Wales (file number 12073/07) be released to the respondent, Jinhong Design & Constructions Pty Limited.

Direct the respondent within 1 day to bring in short minutes of order embodying these orders and specifying the second mortgages and charges it seeks and the property over which those securities are sought, and that those securities are to be provided within 21 days of 8 September 2010.

Order the appellants to provide the securities referred to in order 5 and set out in the short minutes of order in a form satisfactory to the respondent within 21 days of 8 September 2010.

Appellants to pay the costs of the stay and security for costs motions. **********

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