Zhao v Ausin Group

1. The applicant's application for relief under s 1324 of the Corporations Act 2001 (Cth) (Corporations Act) be dismissed.
2. The first respondent's interlocutory application for summary judgment filed on 12 June 2020 otherwise be dismissed.
3. The applicant has leave to amend his originating application and statement of claim in substantially the form annexed to the affidavit of Ms Ailin Liu dated 16 September 2020, save to the extent that the proposed amendments relate to any claim for relief under s 1324 of the Corporations Act.
4. The proceeding be listed for case management as to the further conduct of the proceeding on 11 December 2020 at 9.30am.
5. The costs of the interlocutory applications be costs in the cause. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

DAVIES J: 1 There are two applications for determination: (a) an application by the applicant (Mr Zhao) for leave to file and serve an amended originating application and an amended statement of claim; and (b) an application by the first respondent (Ausin) for summary judgment against Mr Zhao pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) (the Act) and sub-rr 26.01(1)(a) and (c) of the Federal Court Rules 2011 (Cth) (the Rules). 2 As Mr Zhao's application for leave to amend is opposed by Ausin for the same reasons that it seeks summary judgment, whether leave to amend should be granted will follow the outcome of the summary judgment application. 3 Section 31A of the Act and sub-rr 26.01(1)(a) and (c) of the Rules relevantly provide as follows: 31A Summary judgment … (2) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if: (a) the first party is defending the proceeding or that part of the proceeding; and (b) the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding. (3) For the purposes of this section, … a proceeding or part of a proceeding need not be: (a) hopeless; or (b) bound to fail; for it to have no reasonable prospect of success. (4) This section does not limit any powers that the Court has apart from this section. (5) This section does not apply to criminal proceedings. 26.01 Summary judgment (1) A party may apply to the Court for an order that judgment be given against another party because: (a) the applicant has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding; or … (c) no reasonable cause of action is disclosed; or … 4 The applicable principles in determining an application for summary dismissal are set out in Spencer v Commonwealth [2010] HCA 28; 241 CLR 118 (Spencer). French CJ and Gummow J stated at 131-2 [24]-[25]: The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action or on the basis that the action is frivolous or vexatious or an abuse of process. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd [[1983] HCA 25; 154 CLR 87] said: "The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried." More recently, in Batistatos v Roads and Traffic Authority (NSW) [[2006] HCA 27; 226 CLR 256] Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde [[2000] HCA 41; 201 CLR 552] which included the following: "Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way." There would seem to be little distinction between those approaches and the requirement of a "real" as distinct from "fanciful" prospect of success contemplated by s 31A. That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions. Section 31A(2) requires a practical judgment by the Federal Court as to whether the applicant has more than a "fanciful" prospect of success. That may be a judgment of law or of fact, or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success. (footnotes omitted) Thus, an assessment of whether the proceeding has no reasonable prospects of success requires consideration as to whether there are any real, as opposed to fanciful, issues of fact or law that require proper determination at trial. As French CJ and Gummow J explained, what is required is a practical judgment of the case and the Court should be cautious to dismiss the proceeding summarily when questions of fact or law arise. Ausin, as the moving party, bears the onus of persuading the Court that the application has no reasonable prospects of succeeding: Australian Securities and Investments Commission v Cassimatis [2013] FCA 641; 220 FCR 256 at 271 [45]. 5 The pleaded case in the proposed amended statement of claim (proposed ASOC) is that: (a) as at about 29 August 2018, the second respondent (Mr Jin) and a company called Shenzhen Ausin Investment Consulting Co Ltd (Ausin China) owed monies to Mr Zhao as a result of various transactions between 2012 and 2018, collectively referred to as the "prior liabilities", particularised at [3] of the proposed ASOC as follows: (i) pursuant to a joint venture agreement dated 13 December 2012, Ausin China owed Mr Zhao approximately AUD$531,520 (converted from RMB¥3.5 million) together with interest of about AUD$50,000 per annum (joint venture agreement); (ii) pursuant to a transfer of shares agreement dated 27 January 2013, Mr Jin owed Mr Zhao AUD$300,000 plus interest (share transfer agreement); (iii) by a loan agreement dated 25 July 2016 (2016 agreement) Ausin China and Mr Zhao agreed that Ausin China was liable to repay the amounts owing under the joint venture agreement and the transfer of shares agreement less AUD$450,000 that had already been paid, being the sum of AUD$550,000, together with interest; and (iv) pursuant to a property rights transfer agreement dated 27 February 2018, Mr Jin owed Mr Zhao AUD$120,000 together with interest (share sale agreement); (b) by an agreement entered into between Mr Zhao and Mr Jin on 28 August 2018 (alleged 2018 agreement): (i) Mr Jin agreed to pay Mr Zhao the sum of AUD$750,000 together with interest accruing at the rate of 10% per annum by 29 August 2019 (the debt): [4]-[5] of the proposed ASOC; (ii) Mr Zhao agreed to accept that sum in full and final satisfaction of the "prior liabilities": [4] of the proposed ASOC; and (iii) Mr Jin granted Mr Zhao an interest in his property in Australia by way of security for his liability pursuant to the alleged 2018 agreement: [5(c)] of the proposed ASOC; (c) despite demand, Mr Jin has failed to pay the debt: [6] of the proposed ASOC; (d) until 30 August 2018 Mr Jin held shares in Ausin: [2] of the proposed ASOC; (e) on 30 August 2018, Ausin passed special resolutions to cancel Mr Jin's shares in Ausin and reduce Ausin's share capital: [7] of the proposed ASOC; (f) the capital reduction was not fair and reasonable to Ausin's shareholders as a whole and thus in contravention of s 256B(1) of the Corporations Act 2001 (Cth) (Corporations Act): [8] of the proposed ASOC; (g) that contravention has affected Mr Zhao's interest as security holder: [9] of the proposed ASOC; (h) by reason of the foregoing, the Court should make an order pursuant to s 1324 of the Corporations Act requiring Ausin and Mr Jin, if necessary, to do all things necessary to reverse the reduction in Ausin's share capital: [10] of the proposed ASOC; (i) the reduction in Ausin's share capital was an alienation of property and took place with an intent on the part of Mr Jin to defraud his creditors within the meaning of s 37A of the Conveyancing Act 1919 (NSW) (Conveyancing Act): [11]-[12] of the proposed ASOC; and (j) Mr Zhao is prejudiced by the reduction in Ausin's share capital, and the reduction is voidable under s 37A of the Conveyancing Act at Mr Zhao's instance: [13]-[14] of the proposed ASOC. 6 Ausin claims that Mr Zhao has no reasonable prospects of obtaining either form of relief for two primary reasons: (a) the alleged 2018 agreement giving rise to Mr Zhao's security over the Ausin shares is unenforceable for lack of consideration and, if so, Mr Zhao is not a creditor for the purposes of the relief sought under s 37A of the Conveyancing Act (first issue); and (b) relief under s 1324 of the Corporations Act is not available because the reduction in Ausin's share capital has already taken place (second issue).