Yi Li v Australian Securities and Investments Commission

INTRODUCTION

1. The plaintiff, Mr Yi Li, makes this application for the reinstatement of Ruize Development Pty Ltd pursuant to s 601AH(2) of the Corporations Act 2001 (Cth).
2. The defendant is the Australian Securities and Investments Commission (ASIC). ASIC has indicated that it consents to the application.
3. In addition to seeking the reinstatement of Ruize Development, Yi Li also seeks a declaration that he is the beneficial owner of all the shares in Ruize Development, an order that Jeng Lek Fong be expunged from the ASIC record as sole director, secretary and shareholder of Ruize Development and an order that Yi Li be recorded on the ASIC record as sole director, secretary and shareholder of Ruize Development.

RELEVANT FACTS

1. I will refer to all persons involved in the events by their full name without intending any disrespect.
2. Yi Li and his father, Mr Shengjie Li, and his mother, Ms Qin Yin, are from Harbin in China. Yi Li has only limited English.
3. In early 2019, Yi Li and his parents decided to do business in Australia. Shengjie Li knew Mr Wenjun Lu, an Australian businessman with ties in China. In November 2019, Wenjun Lu informed Yi Li and his parents that Mr Xian Feng Lin was a highly regarded businessman and took Yi Li and his parents on a tour of the businesses and properties of Xian Feng Lin in Sydney.
4. In late 2019, Mr Wenjun Lu told Yi Li and his parents that Xian Feng Lin was facing temporary cashflow difficulties and needed a loan of A$2 million.
5. In late 2019, Yi Li and his parents then lent A$2 million to Xian Feng Lin.
6. Around the same time, Wenjun Lu introduced Mr Jeng Lek Fong to Yi Li and his parents. Jeng Lek Fong was said to be a solicitor. Jeng Lek Fong proposed the creation of two companies for the purposes of the A$2 million loan and for him to look after those two companies on behalf of Yi Li and his family.
7. On 25 November 2019, Ruize Development was incorporated with Jeng Lek Fong as the sole director, secretary and shareholder. The ASIC search for Ruize Development records that Jeng Lek Fong beneficially owned 100 ordinary shares in Ruize Development.
8. On 25 November 2019, Ruize Wealth Pty Ltd was incorporated with Jeng Lek Fong as sole director and secretary. The ASIC search for Ruize Wealth records that Jeng Lek Fong beneficially owned 1,000 ordinary shares in Ruize Wealth and Wenjun Lu beneficially owned 600 ordinary shares in Ruize Wealth.
9. On 25 November 2019, Ruize Development agreed to lend A$2 million to Lin Betty Building Group Pty Ltd pursuant to a Deed of Loan. Lin Betty Building is a company of which Xian Feng Lin was the sole director, secretary and shareholder.
10. On 25 November 2019, Ruize Development and Xian Feng Lin and Ms Yang Xing (the wife of Xian Feng Lin) entered into a Deed of Guarantee and Indemnity in relation to the loan from Ruize Development to Lin Betty Building. Each of Xian Feng Lin and Yang Xing as guarantors promised to pay all money payable by Lin Betty Building to Ruize Development under the Deed of Loan. Each of Xian Feng Lin and Yang Xing also agreed to grant mortgages over properties held by them as security for the performance of the Deed of Loan.
11. On 26 November 2019, Yi Li and his parents entered into a Corporate Service Agreement with Mr Jeng Lek Fong.
12. The Corporate Service Agreement relevantly provided: 1. Jeng Lek Fong held the shares in Ruize Development and Ruize Wealth on trust for Yi Li and his parents. 2. Jeng Lek Fong was engaged by Yi Li and his parents to manage each of Ruize Development and Ruize Wealth. 3. In carrying out those management services, Jeng Lek Fong was to make all decisions in the best interests of Yi Li and his parents, keep account of all money coming in and going out of the accounts of Ruize Development and Ruize Wealth, provide accurate financial and operation reports to Yi Li and his parents and promptly carry out all reasonable directions of Yi Li and his parents. 4. Jeng Lek Fong was to charge Yi Li and his parents $200 per hour, invoiced monthly, for providing services and be reimbursed for all reasonable and necessary expenses. 5. The governing law was that of New South Wales.
13. Also on 26 November 2019, Ruize Wealth lent A$2 million to Ruize Development pursuant to a Deed of Loan. The source of those funds was Yi Li's family including his father, cousin and uncle.
14. In about May 2020, the A$2 million loan from Ruize Development to Lin Betty Building was six months from repayment. At that time, Xian Feng Lin told Yi Li and his family that Lin Betty Building would not be able to repay the loan on that date.
15. Due to COVID-19 restrictions, Yi Li and his family were unable to travel to Australia to resolve the issues which had arisen.
16. On 22 April 2022, Ruize Development was deregistered by ASIC due to the non-payment of annual registration fees to ASIC. It appears that Ruize Development did not have any outstanding creditors when it was deregistered.
17. Despite extensive attempts made on behalf of Yi Li, Jeng Lek Fong cannot be found. He ceased to hold a practising certificate as a solicitor in 2021 and the Law Society of New South Wales does not provide contact details due to privacy constraints. Numerous searches using internet search engines and social media sites did not reveal any useful information about the current whereabouts, current physical address or current email address of Jeng Lek Fong or his former firm, Just in Case Legal. Although a process server has located an address for a person thought to be the mother of Jeng Lek Fong, there is no material in any form which demonstrates his current whereabouts.
18. The application made by Yi Li for the reinstatement of Ruize Development and for orders removing Jeng Lek Fong as director, secretary and shareholder of Ruize Development and replacing him with Yi Li and his parents are to enable Ruize Development to pursue Lin Betty Building under the Deed of Loan and to pursue Xian Feng Lin and Yang Xing under the Deed of Guarantee.
19. On 4 April 2024, due to the demonstrated inability to locate Jeng Lek Fong, I made an order for substituted service which permitted the service of the summons filed 14 March 2024, the amended summons filed 20 March 2024 and the orders made that day at the address of the person believed to be the mother of Jeng Lek Fong.
20. On 5 April 2024, the summons filed 14 March 2024, the amended summons filed 20 March 2024, and the orders made on 4 April 2024 were served at the address of the person believed to be the mother of Jeng Lek Fong.

Reinstatement

1. Section 601AH(2), (3) and (5) of the Corporations Act relevantly provide: (2) The Court may make an order that ASIC reinstate the registration of a company if: (a) an application for reinstatement is made to the Court by: (i) a person aggrieved by the deregistration; or (ii) a former liquidator of the company; and (b) the Court is satisfied that it is just that the company's registration be reinstated. (3) If: (a) … (b) the Court makes an order under subsection (2); the Court may: (c) validate anything done during the period: (i) beginning when the company was deregistered; and (ii) ending when the company's registration was reinstated; and (d) make any other order it considers appropriate. … (5) If a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered. A person who was a director of the company immediately before deregistration becomes a director again as from the time when ASIC or the Court reinstates the company. Any property of the company that is still vested in the Commonwealth or ASIC revests in the company. If the company held particular property subject to a security or other interest or claim, the company takes the property subject to that interest or claim.
2. The legal principles concerning a reinstatement application are well established, being as follows: 1. The question whether an applicant under s 601AH(2) is a "person aggrieved by the deregistration" is considered by reference to legal rights and legal interests: Arnold World Trading Pty Ltd v ACN 133 427 335 Pty Ltd [2010] NSWSC 1369; (2010) 80 ACSR 670, Barrett J at [43], approved in Re LCW Property Holdings Limited (deregistered) [2020] NSWSC 71, Gleeson J at [17]. 2. The concept of a "person aggrieved by the deregistration" includes a person who has a genuine grievance because a company's dissolution has extinguished a right of some value or potential value, including a right to bring proceedings against the company or to bring a claim by the company against a third party: Re Likehart Pty Ltd (deregistered) [2017] NSWSC 884, Black J at [18]; LCW Property at [21]; In the matter of Human Group Pty Ltd; In the matter of A.C.N. 137 384 662 Pty Ltd [2023] NSWSC 28, Black J at [7]. 3. The question of whether it is just that the company's registration be reinstated involves a broad discretionary judgment of the court, the relevant considerations for which include the circumstances in which it was deregistered, the purpose of the person aggrieved in seeking its reinstatement, whether any person is likely to be prejudiced by its reinstatement and the public interest generally: Re ERB International Pty Ltd (deregistered) (2014) 283 FLR 223; [2014] NSWSC 200, Brereton J at [5]; LCW Property at [16] and [22]-[28]; Human Group at [9]. 4. On an application for reinstatement, the court is concerned with the justice of reinstating the company, not the justice of any proceedings which it is proposed that the reinstated company might institute or resume: ERB International at [10] citing the Victorian Court of Appeal in AMP General Insurance Ltd v Victorian WorkCover Authority [2006] VSCA 236 at [35]; applied in LCW Property at [22]. 5. It is often not appropriate in an application for reinstatement to go into factual matters which may be the subject of dispute: Pilarinos v Australian Securities and Investments Commission [2006] VSC 301; (2006) 24 ACLC 775, Gillard J at [22]; Deputy Commissioner of Taxation v Australian Securities and Investments Commission; Re Civic Finance Pty Ltd (deregistered) [2010] FCA 1411; (2010) 81 ATR 456, Jagot J at [14], applied in LCW Property at [20]. 6. The effect of reinstatement is that the former directors and secretary automatically resume office as directors and secretary of the company by reason of the operation of s 601AH(5) of the Corporations Act: LCW Property at [27], citing Mitzev v Foxman [2007] NSWCA 273, Basten JA (Tobias and McColl JJA agreeing) at [25]. 7. The power of the court in s 601AH(3)(d) of the Corporations Act to "make any other order it considers appropriate" must be exercised having regard to all of the circumstances of the particular case and the broader context of the operation of the Corporations Act: Federal Commissioner of Taxation v Iannuzzi (No 3) [2024] FCA 45, Markovic J at [215].

Declarations concerning beneficial ownership of shares

1. The modern statement of the rule in Saunders v Vautier (1841) 4 Beav 115; 49 ER 282 is that in CPT Custodian Pty Limited v Commissioner of State Revenue (2005) 224 CLR 98; [2005] HCA 53, where the High Court (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ) quoted Thomas on Powers (1st ed, 1998) at [47], saying (citations omitted): Under the rule in Saunders v Vautier, an adult beneficiary (or a number of adult beneficiaries acting together) who has (or between them have) an absolute, vested and indefeasible interest in the capital and income of property may at any time require the transfer of the property to him (or them) and may terminate any accumulation.
2. The beneficial ownership of shares and the right of a beneficial owner of those shares to exercise a right to require the transfer of those shares may be the subject of declaratory relief in accordance with orthodox principles. The jurisdiction for doing so is both statutory (s 75 of the Supreme Court Act 1970 (NSW)) and inherent.
3. In Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421; [1972] HCA 61, Gibbs J at 435-437 said (citations omitted): The jurisdiction to make a declaration is a very wide one. Indeed, it has been said that, "under OXXV, r 5, the power of the Court to make a declaration, where it is a question of defining the rights of two parties, is almost unlimited; I might say only limited by its own discretion"… However, the jurisdiction may be ousted by statute, although the right of a subject to apply to the court for a determination of his rights will not be held to be excluded except by clear words… … It is neither possible nor desirable to fetter the broad discretion given by s 10 [of the Equity Act 1901 (NSW)] by laying down rules as to the manner of its exercise. It does, however, seem to me that the Scottish rules summarized by Lord Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd (1921) 2 AC 438, at p 448, should in general be satisfied before the discretion is exercised in favour of making a declaration: "The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, some one presently existing who has a true interest to oppose the declaration sought."
4. A declaration may be made as to the rights flowing from future conduct without being hypothetical where the answer to the question will clearly produce consequences for the parties: Oil Basins Ltd v Commonwealth (1993) 178 CLR 643; [1993] HCA 60, Dawson J at 649.

Legal principles - removal of directors

1. Section 601AH(5) of the Corporations Act provides that a person who was a director of the company immediately before deregistration becomes a director again as from the time when the court reinstates the company. I do not consider that the court may summarily remove that director upon the company's reinstatement without there being some specific power to do so, because it runs contrary to the express statutory provision. In Re ORUgo Pty Ltd [2012] NSWSC 788, Brereton J expressed the same view, saying at [11]-[13]: [11] So far as concerns the application that Mr Neville Paul Theobald be the director of Old ORUgo upon reinstatement, and that Mr Mervyn Peter Theobald be removed, s 601AH(5) provides that, if a company is reinstated, a person who was a Director of the company immediately before deregistration becomes a Director again as from the time when ASIC or the Court reinstates the company. Accordingly, as both Neville Paul Theobald and Mervyn Peter Theobald were Directors immediately before deregistration, both of them become a Director again upon its reinstatement. [12] It was suggested that by reason of Mervyn Peter Theobald not having been involved in the administration of the company for, allegedly, a period from 1995 until about 2004, he ought not be a Director. However, the plaintiff was unable to identify any legal basis upon which the Court could make such an order, particularly in the light of the provisions of s 601AH(5). [13] Moreover, the evidence indicates that whatever the position might have been before about 2005, there have been ongoing relations between the brothers since 2005, although they appear subsequently to have deteriorated and broken down. If it turns out that the affairs of the company are dead-locked or intractable, then there are various remedies available, but the summary removal of a Director as is sought in the application is not one of them.
2. Yi Li did not identify any statutory power or provide me with any authority pursuant to which the court has the power to summarily dismiss a director. Even in the case of an oppression suit seeking orders under s 233 of the Corporations Act, while the court has the power to remove a director, such an order is rarely made: Re John Farragher Pty Ltd (2019) 142 ACSR 11; [2019] NSWSC 1847, Black J at [90] (citing Re Spargos Mining NL (1990) 3 WAR 166; 3 ACSR 1; 8 ACLC 1218), applied in Re Bio Health Pharmaceuticals Pty Ltd [2020] NSWSC 1790, Leeming JA at [42].

Reinstatement

1. It is clear that Yi Li is a "person aggrieved by the deregistration" of Ruize Development in the sense that shares in it were held by Jeng Lek Fong in trust for his benefit, as well as for the benefit of his parents, Shengjie Li and Qin Yin. The deregistration of Ruize Development has caused the value of the interest of Yi Li in the shares of Ruize Development to be extinguished.
2. At the time of the deregistration, Ruize Development had an asset worth $2 million (in the form of the outstanding loan to Lin Betty Building which it could seek to recover) and also had no outstanding creditors. As a result, Yi Li has a genuine grievance because the dissolution of Ruize Development has extinguished a right of some value or potential value, being the right of Ruize Development to bring a claim against Lin Betty Building to seek repayment of the loan and to proceed against the guarantors of that loan, Xian Feng Lin and Yang Xing.
3. My consideration is the justice of the reinstatement of Ruize Development, not the justice of any prospective claims that Ruize Development might make or proceedings it might bring against Lin Betty Building, Xian Feng Lin and/or Yang Xing. With that in mind, while Lin Betty Building, Xian Feng Lin and Yang Xing are likely to be prejudiced by any claims brought against them by Ruize Development, I do not regard them as likely to be prejudiced by its reinstatement, which is a matter separate from those claims. In any event, the justice of the prospective claims is not a matter to which I need to have regard.
4. There does not appear to be any public interest against the reinstatement of Ruize Development.
5. Taking all of these matters into account, I propose to order that ASIC reinstate the registration of Ruize Development.

Beneficial ownership and removal of director and secretary

1. The application seeks a declaration as to the beneficial ownership of the shares in Ruize Development. I am satisfied that on the terms of the Corporate Service Agreement, Jeng Lek Fong held the shares in Ruize Development on trust for Yi Li and his parents, Shengjie Li and Qin Yin. The evidence does not establish that the beneficial ownership in those shares is held by Yi Li alone, so a declaration to that effect as sought is not warranted. In the circumstances, I consider it is appropriate to make declarations with respect to the beneficial ownership such that upon the reinstatement of Ruize Development, Yi Li and his parents can act to have the shares to which they are beneficially entitled transferred into their respective names in accordance with the rule in Saunders v Vautier.
2. I have no evidence from Shengjie Li and Qin Yin demonstrating that they wish to take that course and therefore can make no order to that effect. However, I consider it is appropriate that declarations are made in favour of them as well as Yi Li so that it will resolve any controversy that may arise should they take the step to do so.
3. Yi Li did not direct me to any authority or statutory provision pursuant to which I might exercise power to remove Jeng Lek Fong as the sole director and secretary of Ruize Development upon its reinstatement. The presence of s 601AH(5) of the Corporations Act means that Jeng Lek Fong as the director of Ruize Development immediately before deregistration becomes the director again as from the time when the court reinstates Ruize Development. The presence of that provision suggests that the statutory scheme is not one consistently with which I can remove Jeng Lek Fong as the director and company secretary. Applying the position expressed in ORUgo, I do not have the power to summarily dismiss a director or secretary, especially in light of s 601AH(5).
4. If Yi Li and his parents exercise their rights to become the shareholders of Ruize Development, then it will be a matter for them to determine who will be the directors and the company secretary of Ruize Development in accordance with the constitution of Ruize Development and any powers they may have and exercise under the Corporations Act.

ORDERS

1. For the reasons expressed above, I propose to: 1. Order pursuant to s 601AH(2) of the Corporations Act 2001 (Cth) that the Australian Securities and Investments Commission reinstate the registration of Ruize Development Pty Ltd (ACN 637 658 390) (Ruize Development). 2. Declare that Yi Li, Shengjie Li and Qin Yin are the beneficial owners of all the shares in Ruize Development held in the name of Jeng Lek Fong. 3. Declare that Yi Li, Shengjie Li and Qin Yin are entitled to terminate the trust pursuant to which Jeng Lek Fong holds all of the shares in Ruize Development in their favour and require the transfer to them of all of the shares in Ruize Development. 4. Make no order as to costs, with the intent that each party bear their own costs.

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