Zhang v Whyte Management Company Limited

District Court of NSW|2014-04-15

Judgment 1Three investors, the three plaintiffs known as Mr Zhang, Mr Bi and Mr Wang, separately advanced substantial sums to the first defendant, Whyte Management Company Limited ("Whyte Management"). The advances were made on the basis that Whyte Management was proposed to be listed on the Australian Securities Exchange ("ASX") and if the listing did not occur those funds would be returned. No listing occurred but not all of the funds were returned. 2The investors sue Whyte Management in contract for the residue of the funds not returned plus interest, and sue the second defendant Timothy Alford for misleading representations.

THE CASE AGAINST THE FIRST DEFENDANT 3There was no appearance for the first defendant, Whyte Management. Its previous solicitor filed a notice of ceasing to act on 7 April 2014. A verified defence was served on the plaintiffs' solicitor during the period the first defendant was represented. 4The investors each entered an agreement contained in the deed with Whyte Management. The relevant provisions of the deed, which refers to Whyte Management as "The Company" are as follows: "2.1 Commitment The Investor agrees to make available to the Company cash advances in a maximum amount not exceeding the Facility Limit, subject to this terms and conditions set out in this document. ... 2.4 Interest No interest is payable by the Company to the Investor on the Advance Balance. ... 3.2 Pre-Completion Obligation 3.2.1 The Company must use its reasonable endeavours to achieve a Listing within 3 months of the First Draw Down Date. 3.2.2 - the parties agree and acknowledge that, except for fulfilling its obligation under clause 3.3, the Company is not liable to any Investor if a Listing does not occur within the time specified in clause 3.2.1 or at all. 3.3 Return of Advance If a Listing does not occur within the time period specified in clause 3.2.1, the Company will repay to each investor the amount paid by the investor under clause 2.3 within a further 20 Business Days." 5In accordance with the respective deeds, the investors advanced sums as follows: Date Investor Amount 21 September 2011 Mr Zhang $500,000 22 September 2011 Mr Bi $100,000 28 September 2011 Mr Wang $100,000

6Whyte Management's defence admits that each investor advanced the specific sum. It follows that the investors are entitled to repayment of the advances in accordance with clause 3.3 "[i]f a Listing does not occur". The defence admits that no listing occurred. Accordingly, there can be no dispute that Whyte Management is obligated to repay the advances. 7The sum of $600,000 has been repaid but not so as to distinguish between the investors. The investors contend, and I accept, that this amount should be apportioned five-sevenths to Mr Zhang, one-seventh to Mr Bi and one-seventh to Mr Wang. 8The principal amount of $100,000 remains owing. When it is divided as proposed the following sums are owing to the respective plaintiffs: (a) $71,428.58 to Mr Zhang; (b) $14,285.71 to Mr Bi; and (c) $14,285.71 to Mr Wang. 9A calculation of the interest was provided, commencing on 16 January 2012. The basis of this commencement date is that it is three months (see clause 3.2.1) and 20 business days (see clause 3.3) after 16 September 2011. The total sum of interest is $54,943. This sum must, like the principal amount, be apportioned in the ratio of 5:1:1, namely, $39,245, $7,849 and $7,849 between Mr Zhang, Mr Bi and Mr Wang. 10However, the interest proposed in that calculation is accepted to be a little earlier than appropriate as 16 September 2011 is from 5 to 12 days earlier than the advances of the funds. The daily rate of interest for the investors was $160.62, appropriately apportioned between the investors in the sums of $114.72, $22.95 and $22.95. To accord with the dates of the first advance, there should be a reduction against this calculation of interest of $573.65 for Mr Zhang (for five days), $137.70 for Mr Bi (for six days) and $275.40 for Mr Wang (for twelve days), leaving interest amounts for Mr Zhang of $38,556.68, Mr Bi of $7,734.25 and Mr Wang of $7,550.65. 11Thus, the amount to be awarded against Whyte Management in favour of the investors, including principal and interest, is as follows: (a) $110,099.93 to Mr Zhang; (b) $21,997.01 to Mr Bi; and (c) $21,859.31 to Mr Wang. 12I should note that in the defence of Whyte Management a deed of release was pleaded as an aspect of that defence but that deed was not tendered, so I could have no regard to it.

THE CLAIM AGAINST THE SECOND DEFENDANT, MR ALFORD 13The investors allege that Mr Alford represented that if no ASX listing occurred, the amounts advanced would be returned to the investors. After $700,000 was advanced more than half of it was immediately disbursed to Mr Alford and interests associated with him. There was no evidence that any steps were taken to obtain an ASX listing. The documents produced indicated that none were taken. 14The representation alleged is supported by evidence of the plaintiffs' investment advisor, Feng Ji Wang Zuo, who conversed with Mr Alford in the following terms: "Alford: Felix I expect to have Whyte listed within 45 days. [Felix Wang Zuo] If the company does not list will the money be returned to my investors? Alford: Yes Felix." 15Mr Wang Zuo also gave evidence "I proceeded and advised the investors to proceed on the clear understanding from Alford that if there was no listing then all funds would be returned". Mr Wang Zuo was not cross-examined and Mr Alford, although represented and although an affidavit had been filed but not read, gave no evidence. In these circumstances, I accept the evidence of Mr Wang Zuo. 16It would be unsurprising if the terms in the agreement concerning the repayment of funds were weightier in influencing the decision of the investors to advance the funds than was the representation of Mr Alford. It might also be thought that Mr Alford's representation was as much about the obligations Whyte Management would undertake as it was about the events that might occur in the future. However, I do not think, in circumstances where Mr Wang Zuo was not challenged on his evidence and no contrary evidence was led, that I ought to construe the unchallenged evidence narrowly. 17In my view, representing that funds will be returned carries with it more than merely that funds would be repaid. In addition, it is a representation that the funds will be held separately so that they, not some other funds in lieu, will be able to be returned in the event that the listing does not proceed. 18This is not what occurred. The funds were immediately disbursed, largely to Mr Alford. That Whyte Management was obliged to repay the funds is not an answer to the representation that the funds would be returned. Further, had the representation not been made it seems likely that no agreement would have been entered into and no funds advanced. 19The plaintiffs allege that the representations were with respect to a future matter, namely, what would happen in the future if the listing did not occur. I agree. This enlivens s 12BB of the Australian Securities and Investment Commission Act 2001 which provides: "12BB Misleading representations with respect to future matters (1) If: (a) a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation is taken, for the purposes of Subdivision D (sections 12DA to 12DN), to be misleading. (2) For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by: (a) a party to the proceeding; or (b) any other person; the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary. (3) To avoid doubt, subsection (2) does not: (a) have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or (b) have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation. ..." 20There has been debate about whether provisions similar to this one in other statutory contexts reverse the onus of proof, see De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54 at [193]. However, s 12BB(3) clearly provides that a reversal of onus does not occur. 21This is of no significance in the present matter. No evidence has been adduced that Mr Alford had reasonable grounds for making the representation. Thus, s 12BB(2) provides that Mr Alford is taken to not have had reasonable grounds. It follows from s 12BB(1) that the representation by Mr Alford is taken to be misleading. 22Additionally, the plaintiffs also rely on each of the failures of Mr Alford or Whyte Management to apply and to obtain an ASX listing, the immediate disbursement of the funds after they were provided and the failure to return those funds, as further evidence of a lack of reasonable grounds. All these matters in my view support this conclusion, which in any event follows from the statutory deeming provision in s 12BB(2). 23Another argument raised by Mr Alford was whether he was merely making representations "in his personal capacity" and that Whyte Management should indemnify him. Of course, whether Mr Alford is entitled to an indemnity from Whyte Management says nothing of his liability to the investors. Further, that his representations might also have been the representations of Whyte Management does not preclude either that they were also his representations or that he may be liable for them. 24It follows that there has been a misleading representation by Mr Alford that has caused Mr Wang Zuo to proceed and advise the investors to proceed with the advances. 25It might also be said that there is no evidence that the three investors were told of or relied upon the representation by Mr Alford since it was provided to their agent or representative, Mr Wang Zuo. However, reliance by the injured party is not an essential element of an action for misleading conduct: see Janssen Cilag Pty Ltd v Pfizer Pty Ltd (1992) 109 ALR 638 at 643. It is sufficient if the misleading representation causes the damage. In the present case the evidence, which is uncontested, is to the effect that the representation caused Mr Wang Zuo to advise the investors to proceed. I can readily infer that the investors acted on the advice of their investment advisor, Mr Wang Zuo, (see Gould v Vaggelas (1984) 157 CLR 215 at 236 per Wilson J). This is sufficient to establish causation.

INTEREST 26The principal amount of damages suffered by the plaintiffs by reason of Mr Alford's representation is the same as that for which Whyte Management is liable in contract, namely the sum of $100,000. The plaintiffs initially claimed the same amount of interest from Mr Alford as was claimed from Whyte Management. However, if it is the position that the investment would not have been undertaken at all had the misleading conduct not occurred, there is an argument that the initial rent-free period which applies to the claim against Whyte Management by reason of the provisions in the deed, might not apply to the claim against Mr Alford. Consequently, during closing submissions the plaintiffs sought interest for that initial period comprising three months and 20 business days. 27I accept that the plaintiffs' argument for the additional interest period has some force. However, it is apparent that the plaintiffs were content to engage in an investment that required no interest and no return on the funds for that initial three to four month period. Had this investment not been undertaken, it seems likely that some other investment may have been undertaken on similar terms in which case that period of interest would have been foregone. There is no evidence one way or the other as to precisely what would have happened to the investment funds had they not been provided to Whyte Management. 28In the circumstances, I think that the amount of interest payable on the misleading conduct claim should be the same as the contractual claim against the first defendant.

ORDERS 29Accordingly the orders of the court are: (1)Judgment against the defendants in favour of the first plaintiff for the sum of $110,099.93. (2)Judgment against the defendants in favour of the second plaintiff for the sum of $21,997.01. (3)Judgment against the defendants in favour of the third plaintiff in the sum for $21,859.31. (4)The defendants pay the plaintiffs' costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 September 2014

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