Zong v Wang

Judgment

1. By notice of motion filed on 14 July 2021, the respondent, Mr Zhengshun Wang, seeks an order that the appellants, Mr Jason Zong and Australian Yacht Club Pty Ltd (AYC), provide security for Mr Wang's costs of the appeal. The appeal was brought by notice of appeal filed on 8 June 2021 from orders made by a judge of the District Court (the primary judge) on 19 May 2021 in proceedings brought by Mr Wang against Mr Zong and AYC. By the orders of 19 May 2021, the primary judge directed entry of judgment for Mr Wang against Mr Zong in the sum of $233,185.27 and ordered Mr Zong to pay Mr Wang's costs of the proceedings. His Honour directed the entry of judgment for AYC but directed AYC to pay its own costs.
2. Mr Wang seeks security in the sum of $68,456. The claim for security is said to be based on r 50.50 or r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) or the Court's inherent jurisdiction. Clearly, the reference to UCPR r 50.50 was intended to refer to UCPR r 51.50.
3. UCPR r 42.21 relevantly provides that if, in any proceedings, it appears to the Court, on the application of a defendant, that any of the circumstances set out in UCPR r 42.21(1) exists, the Court may order the plaintiff to give such security as the Court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. No specific reliance was placed on any of the circumstances in UCPR r 42.21(1).
4. UCPR r 51.50(1) relevantly provides that, subject to UCPR r 51.50(1) and r 51.50(3), no security for costs of an appeal is to be required. Under UCPR r 51.50(1), the Court may, in special circumstances, order that such security as the Court thinks fit be given for the costs of an appeal. UCPR r 51.50 (3) relevantly provides that UCPR r 51.50(1) does not affect the powers of the Court under UCPR r 42.21.
5. Thus, Mr Wang accepts that he must satisfy the Court that there are special circumstances that warrant the making of an order for the provision of security. Before addressing the matters relied on by Mr Wang, it is desirable to say something about the reasons of the primary judge.

Reasons of the Primary Judge

1. The pleadings in the District Court are not before the Court. However, the primary judge adverted to the pleadings in his reasons. Thus, the dispute between Mr Wang and Mr Zong arose out of discussions between them concerning a proposed boating business venture that took place in April and May 2018. AYC was subsequently incorporated to carry out the venture. Following its incorporation, Mr Wang paid to AYC sums totalling $315,000 for which he acquired 35% of the issued share capital of AYC. AYC then bought a large motor cruiser (the Vessel) with the intention that it would be hired out to tourists thereby earning a profit for AYC. Mr Wang alleged, relevantly, that he was induced to pay the sums totalling $315,000 by conduct on the part of Mr Zong that Mr Wang alleged constituted misleading and deceptive conduct in contravention of s 18 of Sch 2 - Australian Consumer Law to the Competition and Consumer Act 2010 (Cth) (the Consumer Law). He alleged that he suffered loss and damage as a consequence of the alleged conduct.
2. Section 18 of the Consumer Law provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or that is likely to mislead or deceive. Section 236 of the Consumer Law relevantly provides that, if a person suffers loss or damage because of conduct of another person in contravention of the Consumer Law, the first person is entitled to recover compensation from the second person. Thus, it is necessary to demonstrate a causal connection between the alleged loss or damage and the alleged conduct in contravention of the Consumer Law. Section 4 of the Consumer Law relevantly provides that, if a person makes a representation with respect to any future matter and the person does not have reasonable grounds for making the representation, the representation is taken, for the purposes of the Consumer Law, to be misleading. A party to the proceeding is taken not to have had reasonable grounds for making the representation unless evidence is adduced to the contrary.
3. The conduct on the part of Mr Zong alleged to have contravened s 18 was the making of six representations by Mr Zong to Mr Wang between late 2017 and April 2018. The evidence in chief was given by affidavit and there was cross-examination on the affidavits. Neither the affidavits nor the full cross-examination is presently before this Court.
4. Mr Wang's statement of claim, which was filed on 28 May 2020, alleged that Mr Zong made the following representations to Mr Wang in trade or commerce: 1. It is, and will continue to be, very easy to rent yachts to Chinese tourists (the Tourist Representation); 2. Mr Zong would find sponsors for the business of renting out a vessel (the Sponsorship Representation); 3. Mr Zong knew how to, and would, promote the business (the Promotion Representation); 4. Mr Zong would operate the business in compliance with relevant laws and regulations (the Operation Representation); 5. The proposal was a good business opportunity and would be a good business (the Business Success Representation); and 6. If Mr Wang and Mr Demin Lyu each contributed the funds needed by Mr Zong, Mr Zong guaranteed that they would receive a return of at least 40% annually (the Return Representation).
5. The statement of claim alleged that, induced by and in reliance upon each of those six representations, Mr Wang made payments to AYC of $60,000 on 13 April 2018 and $255,000 on 18 May 2018. The statement of claim alleged that, in so far as the representations were made with respect to future matters, Mr Zong did not have reasonable grounds for making the representations. Mr Wang claimed damages in the sum of $315,000, being the amounts paid to acquire his shares in AYC.
6. There were alternative claims pleaded in the statement of claim. However, the primary judge rejected those claims and there is no notice of contention in relation to those claims.
7. Mr Zong denied making the Sponsorship Representation and denied making the Return Representation. However, he admitted making each of the Tourist Representation, the Promotion Representation, the Operation Representation and the Business Success Representation and Senior Counsel for Mr Zong made the following concessions in relation to the representations: 1. That part of the Tourist Representation to the effect that it "will continue to be" very easy to rent yachts to Chinese tourists was a representation with respect to a future matter; 2. The Sponsorship Representation was a representation with respect to a future matter; 3. That part of the Promotion Representation to the effect that Mr Zong "would" promote the business was a representation with respect to a future matter; 4. The Operation Representation was a representation with respect to a future matter; 5. That part of the Business Success Representation whereby Mr Zong said that "it would be a good business" was a representation with respect to a future matter; and 6. The Return Representation was a representation with respect to a future matter. Senior counsel for Mr Zong also conceded that no evidence had been adduced to show that Mr Zong had reasonable grounds for making any of those representations with respect to future matters. Accordingly, the primary judge found that those representations were taken to be misleading.
8. The primary judge found that Mr Wang and Mr Zong met at the Woolwich Marina where Mr Zong showed Mr Wang his office and explained that he had a small yacht that he rented out to tourists on a commercial basis. Mr Wang and Mr Zong commenced discussions about going into business together to buy a much larger vessel to rent out to Chinese tourists for commercial gain. In the course of those discussions, Mr Zong made various statements, none of which was recorded in any document or otherwise. From time to time, Mr Wang and others went out on Mr Zong's yacht, went fishing, went to restaurants and had drinks together. In that context, the primary judge found that Mr Zong made the Tourist Representation, the Promotion Representation, the Operation Representation and the Business Success Representation and that they were misleading within the meaning of s 18 of the Consumer Law. His Honour found that Mr Zong did not say that he guaranteed, if Mr Wang contributed funds, he would receive a return of at least 40% annually. Rather, his Honour found, Mr Zong said that if they could buy a yacht "then it could have a return on your investment of 40%".
9. The primary judge observed that, had there been no contravention of the Consumer Law, Mr Wang's shares would have been worth $315,000 at the time that he paid that sum. AYC continues to operate and Mr Wang still owns 35% of the issued share capital of AYC. However, his Honour said, the evidence about the current value of those shares was "scanty". Rather than refer the question of the value of the shares to a referee, his Honour did the best he could "with the evidence presented".
10. His Honour found that, at the end of April 2021, AYC had cash at bank of approximately $248,000 and owned a workboat for which it had paid about $80,000. In the absence of evidence as to the present value of the workboat, his Honour estimated its value at $40,000. His Honour noted that AYC had paid $65,000 towards the purchase of a boat from China and estimated that its present value was $32,000, being 50% of the amount paid to date. The total of those figures resulted in the finding that AYC had assets of some $320,000 and no liabilities. On that basis, his Honour concluded that the present value of Mr Wang's shares in AYC was $112,000, being 35% of $320,000. Thus, his Honour concluded, Mr Wang's loss was $203,000, being $315,000 less $112,000. His Honour then calculated interest representing the lost use of that money and arrived at a figure of $30,185.27, resulting in a verdict for Mr Wang against Mr Zong in the sum of $233,185.27.

Position of AYC

1. AYC is an appellant. However, its position is somewhat unclear. AYC was successful in the District Court in that the proceedings against it failed. However, the primary judge declined to order Mr Wang to pay its costs. None of the grounds in the notice of appeal concerns the exercise of the discretion by the primary judge as to the costs of AYC. On one view, therefore, AYC should not be an appellant. Alternatively, if the failure to order its costs is a ground, that should be specified and leave to appeal is necessary. Senior counsel for the appellants accepts that, if AYC's only ground of appeal relates to costs, leave to appeal is required. In the circumstances, it is appropriate to ignore AYC for the purposes of this application.

Special Circumstances

1. Mr Wang accepts that impecuniosity, without more, is normally insufficient to satisfy the requirement for special circumstances. Further, the question of what constitutes special circumstances should not be fettered by any general rule of practice. [1] Mr Wang relied on several matters in support of his contention that special circumstances warranted the making of an order for the provision of security. I shall deal with them separately.

Weakness of the Appeal

1. There are eight grounds of appeal specified in the notice of appeal. They can be categorised into three issues as follows: 1. Whether the conduct of Mr Zong was in trade or commerce. 2. Whether the primary judge adequately addressed the question of reliance, in circumstances where six representations were alleged, only four were found to have been made, only part of the four that were found to have been made were as to future matters, and there was no evidence as to the falsity of the representations in so far as they related to present matters. 3. Whether the primary judge erred in concluding that Mr Wang suffered loss or damage in circumstances where, at the time when he paid the sums totalling $315,000 and acquired 35% of the issued share capital of AYC, the shares had a value of no less than $315,000, albeit that events that occurred after the payment contributed to the detriment in the value of the shares.

Trade or Commerce

1. Most of the conversations upon which Mr Wang relied, in which the representations were made, occurred on social occasions. His Honour accepted that, even if that were so, Mr Zong accepted that he said to Mr Wang that Mr Wang might be interested in putting money into Mr Zong's business and that they could "all do this business together" and that the "business" was that of yacht hire for profit. Thus, his Honour said, the conversations were not about buying a vessel to use just for recreational purposes. The Vessel was a large commercial vessel and all of the discussions concerned hiring it out to make a profit.
2. His Honour observed that the requirement that conduct be in trade or commerce is concerned with conduct towards persons with whom the alleged wrongdoer has or may have dealings in the course of activities or transactions that, of their nature, bear a trading or commercial character. [2] His Honour also observed that the terms "trade" and "commerce" are ordinary terms that describe the mutual communications, negotiations, verbal and written, bargains and performance that constitute commercial arrangements. [3]
3. Mr Zong asserts that the notion that the representations were not made in trade or commerce is "hopeless". As I have said, the evidence concerning the discussions in which the representations were made is not before the Court. In the circumstances, while the ground may not be a strong one, I would not be prepared to conclude, simply on the basis of the summary given by the primary judge, that a contention that the representations were not made in trade or commerce is hopeless.

Reliance and Causation

1. The primary judge dealt with causation and reliance in the following terms: "85 Mr Wang consistently said that he relied upon the representations and that they caused him to pay $315,000 to AYC at the request of Mr Zong. There is no reason to doubt this. While Mr Wang had an interest in boats, he knew nothing about them or about the boating business. He developed trust in Mr Zong, both as a successful man in a boating industry and also as a businessman generally, as a result of what Mr Zong said to him and the context in which things were said. This trust was engendered not just by the four pleaded representations which I found were made, but also by the admitted "background" statements referred to in pars 20, 21, 22, 23, 47, 48 and 50 above. 86 I find that Mr Wang relied upon the truth and accuracy of what Mr Zong told him and that the misleading conduct of Mr Zong caused Mr Wang to suffer loss. To put the matter in terms of s 236 of the ACL, I find that Mr Wang suffered loss or damage because of the misleading conduct of Mr Zong."
2. The thrust of Mr Zong's complaint, as I apprehend it, is that Mr Wang's case was that he relied upon six representations, two of which were not established and some of the balance of which related to present matters the falsity of which was not established. While the falsity of the representations as to future matters was established by the operation of s 4 of the Consumer Law, there was no evidence of the falsity of the representations as to present matters. Mr Zong's complaint appears to be that there was no analysis by the primary judge of the extent to which Mr Wang was induced by the representations as to future matters that were established, as distinct from the representations as to present matters the falsity of which was not proved and the representations that were not proved to have been made.
3. In particular, Mr Zong complains that a substantial part of Mr Wang's case before the primary judge was that he was induced to make the payments in question by the Return Representation, that he would receive a return of at least 40% annually on his investment. There was no analysis by his Honour as to whether, and to what extent if at all, Mr Wang was induced to make the payments simply on the basis of the falsity of the four representations as to future matters that were established.
4. Questions of reliance are of the essence of a claim based on contravention of s 236 in demonstrating a causal connection between alleged loss or damage, on the one hand, and the alleged contravention, on the other. Once again, in the absence of the evidence as to reliance, I would not conclude that the grounds are unarguable. They may well have some substance. One of the difficulties is that evidence of state of mind has been allowed to be given in chief by means of affidavit, which is an unsatisfactory means of getting to the heart of such questions.

Quantification of Loss

1. The principal complaint by Mr Zong is that the primary judge had regard to the apparent financial position of AYC at the date of the hearing and failed to have regard to the fact that that financial position may well have been the result of events that occurred after the payments made by Mr Wang, in particular, the highly significant change of circumstances that resulted from the COVID-19 pandemic, which was not foreseeable in April and May 2018, when Mr Wang made the payments in question. Thus, Mr Wang complained about the conduct of the affairs of AYC by Mr Zong, who was the only director of AYC. He complained that monies were improperly paid away and that he was excluded from the affairs of AYC.
2. However, on one reasonable view, that has nothing to do with the assessment of any loss or damage suffered by Mr Wang. Mr Wang has his remedies as a shareholder. There is no evidence that he has sought to enforce such remedies. Be that as it may, the fact that, after he parted with his funds, the affairs of the company were mismanaged is not necessarily the result of the conduct of Mr Zong in contravention of s 18. I would regard the complaint about the assessment of quantum as being at least reasonably arguable.

Non-Compliance with Orders

1. Mr Wang complains that there has been significant non-compliance by Mr Zong and AYC, both in the District Court, and in this Court with subpoenas and notices to produce addressed to them. He contends that such delinquent conduct is a matter relevant to the Court's discretion as to whether or not to order security for costs. [4]
2. On 9 August 2021, at the behest of Mr Wang, a notice to produce was served on Mr Zong and a subpoena was served on AYC seeking various financial records for the purposes of Mr Wang's notice of motion for security. Both were returnable on 18 August 2021. At 9.31 pm on 17 August 2021, Mr Zong's solicitors wrote to Mr Wang's solicitors asking for conduct money of $500 and seeking an explanation as to the relevance of the documents sought by the notice to produce and the subpoena. In the circumstances, Mr Wang's solicitors did not appear on the return of the subpoena and the notice to produce. No documents were produced on the return date.
3. On 8 March 2021, Mr Wang issued a notice to produce to AYC and Mr Zong in connection with the proceedings in the District Court. Both were returnable on 22 March 2021. Neither AYC nor Mr Zong complied with the notice to produce. An application to set aside the notices to produce was made belatedly on 9 April 2021.
4. On 14 April 2021, a subpoena to AYC and a notice to produce to Mr Zong were served at the behest of Mr Wang. Both were returnable on 21 April 2021. Neither was complied with. An application to set each aside was made belatedly on 23 April 2021.
5. The District Court declined to set aside the subpoena and notice to produce and stood them over to 28 April 2021. There was only partial compliance on that day. However, large volumes of documents were produced for the first time on the morning of 5 May 2021, the first day of the trial before the primary judge.
6. The evidence suggests a disinclination on the part of Mr Zong and, through him, AYC, to attend to the obligations of a litigant. The failure to comply with orders of the Court, in the form of subpoenas and notices to produce, is indicative of a likelihood of failure to comply with other procedural requirements in the conduct of the appeal. In circumstances where it is accepted that both Mr Zong and AYC are impecunious and would be unlikely to be in a position to meet any order for costs if the appeal were dismissed, that is a significant factor in considering whether to order the provision of security for costs.

Failure to Pay the Judgment Debt

1. Under the orders made on 19 May 2021, the amount of the judgment against Mr Zong was due to be paid on 16 June 2021. On 4 June 2021, the primary judge heard oral submissions in relation to the costs of the trial. At the conclusion of that hearing, senior counsel for Mr Zong made an oral application for a stay of the orders made on 19 May 2021. The primary judge made an order that, on condition that Mr Zong pay into court the sum of $200,000, the judgment against him be stayed up to and including 16 June 2021.
2. On 18 June 2021, Mr Wang's solicitors wrote to the solicitors for Mr Zong, noting that the judgment debt had not been paid and requesting payment. On 29 June 2021, Mr Wang's solicitors wrote again to Mr Zong's solicitors noting that no response had been received to their letter of 18 June 2021 and requesting payment of the judgment debt. No payment was made into Court by Mr Zong and the judgment debt has not been paid.
3. Mr Wang also points to the fact that another judgment entered against Mr Zong in the Supreme Court remains unsatisfied. Those proceedings have nothing to do with the dispute between Mr Zong and Mr Wang.

AYC's Failures to Comply with the Corporations Act

1. The primary judge observed that there was evidence that Mr Zong did not operate the business of AYC in compliance with the Corporations Act 2001 (Cth), in that he failed to convene annual meetings or observe the rights of Mr Wang as a shareholder. Rather, his Honour said, Mr Zong has operated AYC "as his own fiefdom and has deliberately shut Mr Wang out of [AYC] and the business". Mr Wang asserts that an inference should be drawn that Mr Zong will not comply with any Court order that he or AYC pay money to Mr Wang.

Disposition of Assets by AYC

1. Mr Wang asserts that there was substantial evidence before the primary judge that Mr Zong had disposed of assets of AYC in the months leading up to the trial. Thus, the Vessel was sold in circumstances where some 90 per cent of AYC's capital was invested in the Vessel and it was the only income-generating asset of AYC's business. There was also evidence of very substantial withdrawals from the bank accounts of AYC in late 2020 and early 2021, which Mr Zong asserted in cross-examination were repayment of loans allegedly made to AYC by his family members.
2. Those matters do not appear to have a direct bearing on the question of Mr Zong's appeal from the orders made by the primary judge. If there has been conduct in relation to the affairs of AYC in contravention of the Corporations Act, there are remedies available to Mr Wang as a shareholder. In so far as the evidence indicates that Mr Zong would not be in a position to meet an order for costs made in the appeal proceedings, that is a matter about which there is no dispute.

Impecuniosity

1. As I have said, it is not in dispute that Mr Zong would not have the capacity to meet an order for costs in the appeal proceedings. In that regard, it appears that Mr Zong owns no assets of any moment. Further, Mr Wang has incurred substantial costs in the District Court proceedings, amounting to more than $117,000 and the evidence as to the conduct of Mr Zong indicates that there is no prospect of those costs ever being paid. Similarly, there is little prospect that the judgment debt will be paid, assuming it remains on foot following the disposition of the appeal. Mr Wang asserts that he will suffer a further, significant, injustice if he is required to defend the appeal with no prospect of ever recovering the further costs of doing so. [5]
2. Mr Zong's appeal is clearly being funded by someone. Thus, there is evidence of substantial funds having been being paid into an account of AYC and then immediately paid out again to Mr Zong's solicitors. The source of those funds has not been disclosed. Further, Mr Zong, through his senior counsel, eschews any contention that the ordering of the provision of security would stultify the appeal. That is to say, it appears to be accepted that, even if security were to be ordered, that would not prevent Mr Zong from prosecuting the appeal.

Quantum of Security

1. Mr Wang's solicitor, Mr Fei Wang, in an affidavit dated 14 July 2021, gave evidence of the legal practitioners who would provide services for Mr Wang in the appeal. He set out the work that, based on his experience, he considered will need to be undertaken on behalf of Mr Wang to prepare the appeal for hearing, which the appellants have told the Court is expected to take one day. Mr Wang estimated that the professional fees would amount to the sum of $79,320 and that there would be disbursements of approximately $5,000, giving a total cost estimated at $84,320 exclusive of GST. On the basis of his experience that solicitor and client costs are likely to be reduced by approximately 20% on taxation, Mr Fei Wang expressed the opinion that Mr Wang's party and party costs would be approximately $68,456 exclusive of GST. Mr Zong's solicitor, Mr Donald Junn, in an affidavit sworn on 13 August 2021 carried out a similar exercise to that carried out by Mr Fei Wang. In Mr Junn's opinion, Mr Wang's likely party/party costs would be approximately $37,720.
2. Neither solicitor was cross-examined on his opinion. There is no reason to doubt that the opinions were expressed in good faith based on the respective experience of the two solicitors.
3. An order for security for costs is not designed to afford an indemnity to the party for whose benefit is made either as to lawyer/client costs or party/party costs. In the circumstances, I consider that an appropriate figure for security, if security is to be ordered, would be $50,000. There is no suggestion that security in that order would stultify the appeal in that it appears to be accepted on behalf of Mr Zong that, while he himself may be impecunious, there are others who will fund the appeal on his behalf.

Conclusion

1. There are no fixed rules for determining what will amount to special circumstances in a particular case for the purposes of UCPR r 51.51(1). I consider that, in circumstances where Mr Wang has obtained a judgment against Mr Zong that is unlikely to be recovered and has incurred substantial costs in excess of $100,000 in obtaining that judgment, which also is unlikely to be recovered from Mr Zong, it is relevant that Mr Wang will be put to the further cost of responding to Mr Zong's appeal, with no prospect of recovering his costs if the appeal is dismissed.
2. On the other hand, Mr Zong is receiving assistance from an undisclosed source in the form of funding of his legal costs for the appeal. While I do not accept Mr Wang's contention that the appeal has no prospects of success, it is relevant that Mr Zong has not been diligent in complying with orders of the Court in the form of subpoenas and notices to produce. It is significant also that AYC has been joined as an appellant yet seeks no relief, although Mr Zong seeks an order that the orders made by the District Court be set aside. It appears that AYC seeks an order for costs in the District Court, without seeking leave to appeal and without asserting any error on the part of the primary judge in the exercise of its discretion as to AYC's costs.
3. I consider that special circumstances have been made out. Accordingly, I consider that it is appropriate to order that Mr Zong provide security for costs in the sum of $50,000 in a form acceptable to the Registrar. The appeal should be stayed until such security is provided. If the security is not provided within 28 days, the appeal should be permanently stayed. The costs of the application for security should be the parties' costs of the appeal.

Endnotes

1. See Preston v Harbour Pacific Underwriting Management Pty Ltd [2007] NSWCA 247 at [18].
2. See Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 604; [1990] HCA 17.
3. See Williams v Pisano [2015] NSWCA 177 at [36].
4. See Merrag Pty Ltd v Khoury [2008] NSWSC 1286.
5. See Piras v Egan [2007] NSWCA 26 at [20]-[30. 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: 14 September 2021