Zhao v Ausin Group

First Issue 7 Ausin put a number of submissions in support of its contention that no consideration for the alleged 2018 agreement moved from Mr Zhao, but for the purposes of its summary dismissal application, it is only necessary to address the correctness of the assertion by Ausin that the "only possible consideration" moving from Mr Zhao was either (1) an antecedent debt, which is past consideration and therefore no consideration, (2) the acceptance of a lesser sum in payment of a debt, which, on the well settled principle in Foakes v Beer (1884) 9 App Cas 605 (Foakes v Beer), is nudum pactum as without consideration, or (3) a promise to forbear from taking action to enforce a pre-existing debt that was not a debt that Mr Jin owed, and thereby illusory. Cast in that way, the contention that Mr Zhao has no reasonable prospects of showing that consideration was given has considerable force. 8 It was put on behalf of Mr Zhao, however, that when viewing the question of consideration, the analysis should not be confined in the way presented by Ausin which, it was submitted, misconstrues the transaction. It was also submitted that the rigid and mechanical manner in which Ausin applied the relevant principles to the facts of this case should be rejected, as such a technical approach is wrong in principle because contract law, particularly in the context of commercial arrangements, "in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration", citing New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 at 167 per Lord Wilberforce. Also citing G H Treitel, The Law of Contract (Stevens & Sons/Sweet & Maxwell, 8th ed, 1991) at 67-8, it was submitted that commentators have remarked about the law's tendency to "invent" consideration in the context of commercial contracts, which is a function of the reasonable presumption that, where the relationship between the parties is a commercial one driven by financial considerations (as, it was submitted, it was in this case), "to describe one set of promises… as gratuitous, or nudum pactum, seems paradoxical and is prima facie implausible". It was submitted that "any sensible analysis of the circumstances surrounding the 2018 Agreement puts paid to the notion that it was a gratuitous promise by [Mr] Jin". Reference was made to Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (Williams v Roffey Bros) as authority that the obtaining of a "practical benefit" or the avoidance of a detriment can amount to consideration. 9 Whether Ausin's "rigid and mechanical" approach to the question of consideration is wrong in principle or a misapplication of the law is not a matter that needs to be analysed in order to decide the summary judgment application, save to comment that it does appear on the current state of the law that the well settled principle in Foakes v Beer would foreclose any triable issue as to the enforceability of the alleged 2018 agreement on the basis that the practical benefits test of consideration for which Williams v Roffey Bros is authority is confined to executory contracts for the provision of work or the supply of goods and services, as distinct from debt agreements or loan agreements: Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 at 740-1, 747; Hill v Forteng Pty Ltd [2019] FCAFC 105; 288 IR 342 at 349 [19]-[21], 354-5 [41]-[42]. In my view, there is, however, a triable issue on the facts as to whether Ausin's characterisation of the alleged 2018 agreement is to be confined in the way that Ausin argued, thus giving rise to the question as to what constitutes the consideration in this case. 10 The basic background facts which emerged from Mr Zhao's affidavit in opposition to the summary judgment application and from Ausin's affidavits in support of the application may be summarised as follows: (a) prior to about 12 February 2018 Mr Jin held shares in and was a director of Ausin. He was also a director of Ausin China, which provided marketing services to Ausin; (b) in December 2012, Mr Zhao and Ausin China (through Mr Jin and another executive of Ausin China) entered into a joint venture in relation to a property development project in Australia. Mr Zhao invested approximately AUD$531,520 in that project. The joint venture agreement provided for the income of the enterprise to be allocated in a particular way and if there was a delay in the project of a year, Mr Zhao would be entitled to his investment back, together with a guaranteed return of 10% on the investment; (c) in January 2013, Mr Zhao entered into the share transfer agreement with Mr Jin, by which Mr Zhao acquired 40% of the shares in a company called Ausin Homes (Melbourne) Pty Ltd from Mr Jin for the sum of AUD$300,000; (d) Mr Zhao's evidence was that he entered into the 2016 agreement with Ausin China as the joint venture agreement by that time had "matured" and he called Mr Jin seeking an explanation for why his capital had not been returned. The response was that Ausin China did not have sufficient cash flow to pay the amounts outstanding and Mr Jin and another executive of Ausin China proposed that the outstanding moneys be converted into a loan. Mr Zhao agreed and the 2016 agreement was drawn up, pursuant to which it was agreed that the outstanding balance was AUD$550,000 to be repaid within a year together with interest; (e) on about 12 February 2018, Mr Jin resigned as a director of Ausin; (f) in February 2018, Mr Zhao entered into the share sale agreement with Mr Jin to sell his shares in a company called Fresh Elements Blinds Pty Ltd (Fresh Elements) for the sum of AUD$120,000. The purchase price was payable within three months of the signing of the agreement with interest at the rate of 7% accruing in the event of late payment. The shares were transferred in April 2018 but Mr Jin did not pay Mr Zhao the AUD$120,000 that fell due in July 2018; (g) Mr Zhao deposed that after that time he regularly contacted Mr Jin to demand payment of the moneys owed to him. He also deposed that by May or June 2018 he had become concerned that Ausin China and Mr Jin might have difficulties in repaying the amounts that were outstanding. During a telephone call with Mr Jin, a deal was struck and later put into writing in the terms of the alleged 2018 agreement. That deal was as follows: (i) the parties agreed that in total the sum of AUD$780,000 was outstanding to Mr Zhao, consisting of AUD$550,000 owed by Ausin under the 2016 agreement, AUD$120,000 owed by Mr Jin for the shares in Fresh Elements, and accrued interest on both sums; (ii) the outstanding sum would be compromised to AUD$750,000; (iii) Mr Jin would assume sole responsibility for paying that amount; (iv) interest would accrue on that sum at 10% per annum; (v) the amount was payable within a year; and (vi) Mr Jin was to charge all his Australian property to Mr Zhao as security for the loan. (h) in about late July 2018, allegations of misappropriation of funds improperly held by Ausin China and/or improperly paid directly to Mr Jin were confirmed. On about 3 August 2018, Mr Jin entered into a settlement deed with Ausin, which included terms requiring him to surrender his shares in Ausin; (i) on 9 August 2018, Ausin notified ASIC of a proposed reduction in share capital enclosing notices for a shareholder meeting to approve the buy-back of Mr Jin's shares; (j) on 30 August 2018, special resolutions were passed by the members of Ausin that Mr Jin's shares be cancelled and the company's share capital be reduced by the payment of AUD$100 to Mr Jin; (k) on about 3 September 2018, Ausin notified ASIC of the special resolutions regarding shares; and (l) Mr Jin has not paid the debt to Mr Zhao and, as a consequence of the share reduction, Mr Jin's shareholding in Ausin is not available as security for the amounts owed. 11 The alleged 2018 agreement recorded the fact of four earlier agreements - the joint venture agreement, the share transfer agreement, the 2016 agreement and the share sale agreement - and the fact that monies owed to Mr Zhao pursuant to those agreements remained unpaid. The English translation of the alleged 2018 agreement (the original of which was in Chinese) stated: 1. On the 29th December 2012 Song ZHAO originally made an investment of AU$531,520 with Ausin for a business project in Australia 2. On the 30th January 2013 Song ZHAO assigned Ausin Company to assist in the handling of his Australian immigration and submitted a AU$300,000 security deposit to Tianyou JIN. As the two above-mentioned agreements have long since expired, from April 2016 Ausin Company Tianyou JIN has made successive payments to Song ZHAO totalling AU$450,000, as of the 25th July 2016 the repayment amount which has yet to be paid for the principle plus interest is AU$550,000, this loan is in actuality the personal loan of Ausin Tianyou JIN. In February 2018, Ausin Company Tianyou JIN acquired Song ZHAO's curtain company in Melbourne with a total amount of AU$120,000 to be paid. Adding up the previously mentioned loan of AU$550,000 plus two years loan interest accrued from July 2016 with AU$120,000 results in a total of AU$780,000. It is hereby declared that of this amount it has been agreed through consultation that AU$750,000 is confirmed as the personal loan of Ausin Company Tianyou JIN, and that the interest of properties in Australia belonging to him will be provided as a security guarantee. Loan amount: AU$750,000 Loan interest: 10% annually Repayment schedule: Within a year through separate payments or to be repaid in full with one lump sum payment, or the interest in Australian properties belonging to Tianyou JIN to be used as compensation. Dispute management; If during the implementation of this agreement a dispute arises, both parties shall amicably come to a resolution through consultation. If they are not able to come to a resolution through consultation, legal proceedings can be commenced in an Australian court of law, with the defaulting party taking responsibility to bear relevant costs that are incurred as a result of such action (including but not limited to lawyers fees and legal costs). Lender: [Signature and fingerprint]. Borrower: [Signature and fingerprint]. 29th August 2018. [sic] 12 Based on the terms of the agreement itself it is open to argument, in my view, that the parties intended to make a new agreement with new obligations in substitution for the prior agreements. First, the debt obligations under the prior agreements are the very subject matter of the alleged 2018 agreement. Secondly, pursuant to the terms of the alleged 2018 agreement, the debt obligations of Ausin China to Mr Zhao under those prior agreements were assumed by Mr Jin, who also granted security over his Australian assets in respect of those debt obligations. Thirdly, the parties re-characterised the extant debt obligations as a loan of AUD$750,000 from Mr Zhao to Mr Jin. Fourthly, the parties agreed to compromise on the amount owing and for Mr Jin to pay the sum of AUD$750,000 in complete satisfaction of the extant debt amounts due and payable by Ausin China as well as Mr Jin. Although the 2018 agreement does not in express terms provide for a release and discharge of Ausin China, it is arguable that was the intention of the parties in view of Mr Jin's assumption of responsibility to pay the compromised amount. Alternatively, there is an arguable basis for implying a forbearance by Mr Zhao of his right to enforce the prior agreements against Ausin China and of Mr Jin's assent to the forbearance. The implication of either term would constitute consideration moving from Mr Zhao for the promises he received from Mr Jin under the agreement: ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6; 245 CLR 338 at 349-51 [27]-[32] per French CJ, Crennan, Kiefel and Bell JJ. Additionally, it would be open to the Court to find that the grant of further time to Mr Jin to pay the amount he owed Mr Zhao constituted good consideration moving from Mr Zhao. 13 Contrary to Ausin's submissions, the facts as presented by the evidence before the Court do not have "significant commonalities" with the facts in Netglory Pty Ltd v Caratti [2013] WASC 364. In that case, Edelman J held that no consideration had moved from Netglory Pty Ltd (Netglory) in exchange for entry into a loan agreement with a third party. Netglory had submitted that the consideration given was Netglory's promise to forbear from taking action to enforce a pre-existing debt, but Edelman J found that Netglory was not the lender and accordingly it was not owed any debt that it could forbear from enforcing. That is not the case in this case and, in my view, on the facts as presented, there is a real, not fanciful, question of fact and law as to the proper characterisation of the alleged 2018 agreement and whether consideration did move from Mr Zhao. It cannot be said that there is no reasonable prospect of Mr Zhao successfully establishing the enforceability of the alleged 2018 agreement and thus establishing that he is a creditor for the purposes of the relief sought under s 37A of the Conveyancing Act.

Second issue 14 However, I accept the submission that Mr Zhao has no reasonable prospects of obtaining the relief sought under s 1324 of the Corporations Act because the challenge to the capital reduction must fail by force of s 256D(2)(a) of the Corporations Act. Winpar Holdings Pty Ltd v Goldfields Kalgoorlie Ltd [2001] NSWCA 427; 166 FLR 144 (Winpar) is authority that once completed, a capital reduction is valid notwithstanding non-compliance with s 256B(1) of the Corporations Act and an injunction cannot then lie to undo the reduction. The authority of that case was not contested by senior counsel for Mr Zhao but the submission was put that it was arguable that Winpar was wrongly decided and Mr Zhao seeks to argue at trial that it was. Be that as it may, I would have to be persuaded that the decision was plainly wrong if I was to depart from it (Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; 177 CLR 485 at 492) and the mere fact that Mr Zhao wishes the opportunity to seek to argue at trial that the decision is plainly wrong does not afford a proper basis for opposing an application for summary judgment. Having regard to the present state of the law, Mr Zhao has no reasonable prospects of establishing entitlement to relief under s 1324 of the Corporations Act. 15 It was further submitted that the Court in the exercise of its discretion should nonetheless allow the s 1324 claim to proceed and allow Mr Zhao to fully argue his case at trial. I disagree. In my view, there is no warrant not to dismiss this part of the claim which has no reasonable prospects, even though the case is to proceed on the s 37A of the Conveyancing Act claim for relief.

Conclusion 16 Accordingly, there will be summary judgment for Ausin in relation to the claim for relief under s 1324 of the Corporations Act. The application for summary judgment is otherwise dismissed. 17 It follows that Mr Zhao should have leave to amend his originating process and statement of claim in substantially the form proposed, save to the extent that the amendments go to the claim for relief under s 1324 of the Corporations Act. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies.