Australia Kunqian International Energy Co Pty Ltd v Flash Lighting Company Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2019 0034

AUSTRALIA KUNQIAN INTERNATIONAL ENERGY CO PTY LTD (ACN 153 835 440)	Applicant
v
FLASH LIGHTING COMPANY LTD	First Respondent
and
HAO LIU	Second Respondent
and
JUN XIAO	Third Respondent
and
YINAN ZHANG	Fourth Respondent

---

JUDGES:	KYROU, NIALL and HARGRAVE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	6 and 7 August 2020
DATE OF JUDGMENT:	17 September 2020
MEDIUM NEUTRAL CITATION:	[2020] VSCA 239
JUDGMENT APPEALED FROM:	[2018] VSC 711 (Robson J); [2019] VSC 42 (Costs) (Robson J)

---

CONTRACT – Sale of shares in target company whose principal asset was a coalmining tenement – Purchase price payable by applicant to first respondent to be fixed by valuation of tenement – Applicant paid part of purchase price – First respondent sought payment of balance – Valuation fraudulent – Whether obligation to pay purchase price did not arise due to fraud – Fraud pleaded and argued – Judge erred in not deciding question of fraud – Appeal allowed.

MISTAKE – Whether applicant paid part of purchase price for shares in mistaken belief that fraudulent valuation was a valuation for purpose of contract and payment was required – Whether applicant entitled to repayment of purchase price – Judge erred in finding applicant did not have mistaken belief – Appeal allowed.

MISREPRESENTATION – Fraudulent report on coal reserves in tenement – Whether applicant and parent company relied on fraudulent report in paying part of purchase price for shares – No director of applicant with knowledge of transaction gave evidence – Only one director of applicant’s parent company gave evidence – Judge found that director not a truthful witness – Judge found no reliance by applicant or parent company – No error by judge.

AGENCY – Judge found first respondent did not authorise fourth respondent to direct moneys payable by applicant to first respondent be paid to target company – No error by judge.

CONTRACT – First respondent obliged to pay debts of target company not disclosed at time share sale agreement executed – Judge erroneously found that all such debts had been forgiven by creditors – Appeal allowed.

---

APPEARANCES:	Counsel	Solicitors
For the Applicant	Dr J P Moore QC with Mr G Kozminsky	Clayton Utz
For First and Third Respondents	Mr T Margetts QC with Mr W Thomas	Baker McKenzie
For Second Respondent	No appearance
For Fourth Respondent	No appearance

KYROU JA
NIALL JA
HARGRAVE JA:

Introduction and summary

The genesis of this proceeding is an equity transfer agreement dated 27 April 2012 (‘ETA’) between the applicant, Australia Kunqian International Energy Co Pty Ltd (‘KQ’), the first respondent, Flash Lighting Company Ltd (‘FLC’), and Australia New Agribusiness and Chemical Group Ltd (‘ANB’).

At the time the ETA was executed, FLC owned 40 per cent of the shares in U&D Mining Industry (Australia) Pty Ltd (‘U&D’) and ANB owned the other 60 per cent. Pursuant to the ETA, KQ purchased a 51 per cent controlling interest in U&D, comprising FLC’s 40 per cent shareholding and a further 11 per cent shareholding held by ANB. This left ANB as a 49 per cent shareholder in U&D.

The ETA provided that the purchase price for the 51 per cent controlling interest in U&D would be determined by a valuation of U&D’s principal asset, a 44.5 km² coalmining tenement in the Bowen Basin in Queensland known as ‘EPC 818’ (‘Tenement’). KQ was incorporated, and entered into the ETA, for the purpose of acquiring control of the Tenement.

KQ is a wholly owned Australian subsidiary of a very large and financially strong Chinese state-owned coalmining company, Yima Coal Industry Group Co Ltd (‘Yima’). In 2012, KQ’s directors were the second respondent, Hao Liu, Dongmin Wang and Beibei Zhu. Hao Liu and Dongmin Wang were senior executives of Yima and resided in China. Ms Zhu was the wife of the fourth respondent, Yinan Zhang.

FLC was incorporated in the British Virgin Islands. Its directors and shareholders were the third respondent, Jun Xiao, and his wife Yan Cui, both of whom were Chinese citizens and resided in Beijing.

ANB was an Australian public company that was listed on the Australian Securities Exchange (‘ASX’). Yinan Zhang was a director of ANB and exercised control over the company. ANB was placed into liquidation on 23 August 2016.

On 15 May 2012, a Chinese valuation company valued the Tenement at $129,392,400 as at 31 March 2012. The parties to the ETA adopted a value of $129,000,000, resulting in FLC’s 40 per cent interest in U&D being valued at $51,600,000 and the additional 11 per cent interest KQ acquired from ANB being valued at $14,190,000.

The valuation adopted coal reserve estimates for the Tenement contained in a report dated 20 August 2010 titled ‘Coal Resource Assessment Report’ (‘CRA report’). Ultimately, it became common ground between the parties that the CRA report’s estimates of coal reserves in the Tenement were unreliable and that the valuation of $129,392,400 did not reflect the fair market value of the Tenement.

On 27 June 2016, FLC instituted a proceeding against KQ in the Trial Division alleging that KQ had paid only $22,400,000 of the purchase price of $51,600,000 for FLC’s 40 per cent shareholding in U&D. FLC sought judgment for the outstanding balance of $29,200,000.

KQ relied upon a number of defences, including that the valuation of $129,392,400 was vitiated by fraud and therefore KQ was not obliged to make any further payments to FLC. It also filed a counterclaim against FLC, Hao Liu and Yinan Zhang in which it made various allegations, including that:

(a)FLC, through its agent Yinan Zhang, had provided a fraudulent document (the CRA report), upon which Yima had relied in approving KQ’s acquisition of FLC’s shares in U&D for $51,600,000;
(b)in providing the CRA report, FLC had engaged in misleading or deceptive conduct contrary to s 18 of the Australian Consumer Law (‘ACL’)[1] by representing that the Tenement had significant potential deep coal resources and that the information in the CRA report was genuine;
(c)KQ had made payments to FLC for its shares in U&D under the mistaken belief that the valuation was a valuation for the purpose of the ETA, that the ETA required that the payments be made and that the mistake entitled KQ to recover the payments from FLC;

(d) Hao Liu had breached his duties as a director of KQ;
(e)Mr Xiao had engaged in misleading or deceptive conduct contrary to s 18 of the ACL by making the representations referred to in (b) above by virtue of signing the ETA and the funding agreement referred to at [59] below; and
(f)Yinan Zhang had engaged in misleading or deceptive conduct contrary to s 18 of the ACL by providing the CRA report and making the representations referred to in (b) above.

[1]See sch 2 to the Competition and Consumer Act 2010 (Cth).

Neither Hao Liu nor Yinan Zhang appeared at trial. The judge said that Yinan Zhang’s ‘whereabouts are currently unknown’.[2]
[2]Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd [No 3] [2018] VSC 711, [907] (‘Reasons’).

On 22 November 2018, the judge relevantly decided that:

(a)KQ was liable to pay FLC the balance of the purchase price for its 40 per cent shareholding interest in U&D;
(b)KQ’s counterclaims against FLC and Mr Xiao be dismissed;
(c)KQ’s counterclaims against Hao Liu and Yinan Zhang be adjourned sine die; and
(d)KQ pay interest to FLC.

The judge did not decide the question whether the valuation was vitiated by fraud. However, he held that KQ had not made payments to FLC under a mistaken belief about the valuation.

On 12 February 2019, the judge decided that KQ must pay FLC’s costs of KQ’s claim, and FLC’s and Mr Xiao’s costs of KQ’s counterclaims against them.[3]
[3]Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd [No 5] [2019] VSC 42, [43].

On 9 April 2019, the judge made an order which reflected the above decisions (‘judge’s order’). The judge’s order is set out at [116] below.

KQ applied for leave to appeal against the judge’s order other than the decision summarised at [12(c)] above. The grounds of appeal are set out at [117] below. One of the grounds — which was the main focus of KQ’s oral submissions — was that the judge erred in failing to find that the valuation was vitiated by fraud.

Only FLC and Mr Xiao appeared to oppose the application for leave to appeal. In the course of the hearing of the application, KQ informed the Court that it did not press its claims against Mr Xiao. In the light of this, and the fact that FLC and Mr Xiao were jointly represented, all references to FLC’s submissions below are to the joint submissions of FLC and Mr Xiao.

As KQ’s counterclaims against Hao Liu and Yinan Zhang are not in issue in the application, we will not make any further reference to them.

For the reasons that follow, the application for leave to appeal will be granted and the appeal allowed.

Key facts and documents

The discussion of the key facts and documents that follows is based on the parties’ agreed summary of events and findings made by the judge which are not challenged. The evidence that is relevant to factual matters in dispute will be considered in detail in the context of the grounds of appeal to which they relate.

All quotations from the key documents in the proceeding are from the English translations of those documents. Regrettably, those translations are sometimes somewhat clumsy.

Initial discussions between the parties relating to the Tenement

Yinan Zhang was a Chinese resident with business interests in China and Australia, particularly in Queensland. Until July 2013, he was married to Ms Zhu, who was an Australian resident with business interests in China and Australia.

According to the judge, ‘[i]n 2011, Mr Yinan Zhang devised a plan to buy the [Tenement] and sell it, or a part of it, immediately to Yima … at a significant profit’.[4]
[4]Reasons [2].

During 2011 and 2012, the directors of Yima were Yulu Wu (chairman), Yuantao Zhai (CEO), Fujun Tian (deputy CEO), Li Yong Jiu (deputy CEO), Jianhua Song, Jianxin Li, Er’an Zhai, Yuangui Fan, Baocheng Li, Ping Nie, Shidong Xun, Guanglin Peng and Gangyin Luo. During the same period, many of Yima’s directors were also members of its management committee. That committee comprised Yulu Wu, Yuantao Zhai, Fujun Tian, Li Yong Jiu, Jianhua Song, Jianxin Li, Er’an Zhai, Guohou Qiao, Wenliang Wang, Xingzhi Dai, Jianwei Huang, Xinwei Zhang, Lusheng Song and Zengliang Wei.

In April or May 2011, Yinan Zhang had a discussion with Yulu Wu about the possibility of Yima purchasing the Tenement. Yinan Zhang was introduced to Yulu Wu by a former director of Yima, Wei Liu. At that time, Yima’s business was confined to China and it was very keen to internationalise it, particularly by investing in an Australian coalmine. The then current policy of the Chinese government was to encourage state-owned enterprises such as Yima to internationalise their businesses.

In June 2011, Yima sent a delegation to Queensland to inspect the Tenement. The delegation included Yuantao Zhai and a senior geologist, Songying Li. The delegation was provided with information about the Tenement — including a copy of the CRA report which was then unsigned — and toured the Tenement area and some neighbouring mines by helicopter.

The CRA report

The CRA report purported to assess the coal reserves in the Tenement. However, its provenance is unclear. The preface stated that it was ‘requested by Mr James Zhang from the U&D Resources (Australia) Pty Ltd’ and that ‘[a] comprehensive assessment of the [Tenement] in the Bowen Basin has been conducted’. Although the final page contained the words ‘Project Team for the Coal Resource Assessment in Bowen Basin, Australia’ above the date 20 August 2010, there was no evidence that such a project team existed. It appears that the report was originally prepared in Chinese and was translated into English after the commencement of the proceeding.

As discussed at [84] below, on 28 June 2012, a second version of the CRA report came to light, the final page of which purported to bear the signature of a Richard Smith as the author of the report. However, it was common ground that the signature was not genuine.[5]
[5]See [106] below for a summary of the evidence of Richard John Smith.

The CRA report contained false or misleading statements about the type, density and quality of coal located in the Tenement, the thickness of the coal seams, and the quantity of the coal reserves.

In relation to the type of coal, the Moranbah Coal Measures (‘Moranbah CM’) in the Tenement contained semi anthracite to anthracite coal. However, the CRA report falsely stated that those measures predominantly comprised the more valuable coking coal:

[A]part from some coking coal/coked lean coal in the deep part, coal in [the Moranbah CM] could mainly be ranked as main coking coal, which is high-quality coking coal characterized by medium/medium-to-high ash contents, low sulfur contents and extremely low phosphorus levels.

In relation to the thickness of the coal seams and the density, quality and quantity of the coal reserves, the CRA report gave separate consideration to the reserves in the shallow part of the Tenement, which were suitable for open cut mining, and the reserves in the deep part, which required underground mining.

For the purpose of assessing the shallow reserves, the CRA report relied upon a report that had been prepared for the Broughton Coal Joint Venture in 2005 (‘Broughton JV report’). The CRA report adopted the Broughton JV report’s estimate of 30 million tonnes (‘Mt’) of shallow coal reserves as follows:

A total of 130 boreholes have been drilled successively, basically in the depth of 100 m or so and mostly concentrated in the intensive open-pit exploitation area in the east. … Broughton Coal Joint Venture has calculated out a total resource amount of 30 Mt, including 16.5 Mt of Proved Reserves, 8.5 Mt of Controlled Reserves and 5 Mt of Inferred Resources.

For the purpose of assessing the deep reserves, the CRA report considered the main coal seams in the Tenement, namely the Rangal Coal Measures (‘Rangal CM’), the Fort Cooper Coal Measures (‘Fort Cooper CM’) and, in particular, the Moranbah CM.

The CRA report relied upon a single borehole to assess the potential deep reserves, namely the Wodehouse NS1 borehole. The report also assumed that, based on data from coalmines operated by other mining companies in the northern part of the Bowen Basin, ‘there are abundant and stable coal resources concentrating in this area’.

The CRA report estimated the reserves in the Moranbah CM at 968 Mt. The methodology used was as follows:

4.3 Estimation of Potential Resources
Estimation formula:
Amount of resources = flat area X coal thickness X apparent density of coal
(1) Resources in the Moranbah [CM]
Calculation principle: Coal seams of Moranbah [CM] are in the strata over 800 m deep throughout the whole area, with an inclination of about 10°, as a result, the flat area can be directly used for resource calculation. … In the surrounding mining areas and exploration areas, the total thickness of coal seams in the Moranbah [CM] mostly exceeds 20 m. Based on researches on the coal seams in the northern Bowen Basin … the location of [the Tenement] … [indicates] a coal seam thickness of 21 m. This is consistent with the surrounding conditions, but for more insurance, a thickness of 15 m has been taken provisionally. An average value of 1.45 has been adopted for the apparent density. In this way, the calculation result should be 968 Mt.

Using a similar estimation formula, the CRA report estimated the reserves in the Fort Cooper CM at 420 Mt and in the deep part of the Rangal CM at 100 Mt. It also estimated that there were approximately 200 Mt in an ‘unnamed coal measures’, which it stated ‘appears to be the Collinsville Coal Measures [(‘Collinsville CM’)]’. It assigned the number (1) to the Moranbah CM, the number (2) to the Fort Cooper CM and the number (3) to the deep part of the Rangal CM and the ‘unnamed coal measures’. It concluded that the combined reserves in these measures exceeded 1,500 Mt (or 1.5 billion tonnes), as follows:

The estimated resources in the Moranbah [CM] (1) and Fort Cooper [CM] (2) … add up to 1388 Mt, plus the estimated 100 to 200 Mt of resources in (3) which are currently not easy to quantify specifically, a total amount of more than 1500 Mt would be obtained even by the most conservative calculation.

As to the formula used to calculate the quantity of coal in the Moranbah CM, there were false statements in the CRA report that the coal seams were flat, stable and of constant thickness. The report stated:

The Moranbah [CM] are 290-500 m in thickness. … In the seismic profile, four thick coal seams with desirable continuity are shown, which should be the main targets for further exploration.
…
In this area, coal seams of the Moranbah [CM] exceed coal seams of other coal measures in terms of number, thickness and stability. There are eight coal seams within the aforementioned Broad Meadows region, while in the Wodehouse NS1 borehole of this area, up to seven coal seams have been included into official statistics, with the thickness of 1.52 m, 2.62 m, 2.01 m, 1.48 m, 1.57 m, 5.33 m and 3.50 m respectively and an accumulated thickness of about 18.03 m. Apart from this, there are six or seven coal seams which are less than 1 m thick and have been ignored. We have reasons to believe that the actual situation should be better. Four coal seams are interpreted as having good continuity in the seismic section.

The CRA report concluded as follows in relation to the deep reserves:

Given that coal resources within the bounds of [the Tenement] are ranked as main coking coal with some as lean coking coal or coking lean coal, apart from the small amount of resources in the shallow part that are available for open-pit mining, large quantities of coking coal is also expected to occur in the deep part for underground mining. We have conducted an in-depth study in this regard and delivered this Coal Resource Assessment Report. The more conservative estimation would be that, in addition to the 30 Mt of resources submitted by Broughton Joint Venture, there still is at least 1500 Mt of coking coal in [the Tenement] exploration area available for underground mining.
…
[T]here are massive reserves available for exploration in this coal project. If investment could be made in the future to ascertain the estimated reserves, this mine is likely to become the main producing mine for coking coal in Queensland.

Songying Li’s reports and presentation to Yima’s management committee

In June 2011, following his inspection of the Tenement earlier that month during which he was provided with a copy of the CRA report, Songying Li prepared a due diligence report on the Tenement (‘Due Diligence Report’).

The Due Diligence Report concluded that the CRA report was unreliable. The key reason for this conclusion was that the assessment of deep coal reserves in the CRA report was based on deficient and unverified data obtained from a single borehole.

The Due Diligence Report included the following statements as to the unreliability of the CRA report:

With data of only one borehole and in the absence of coal seam structure information, it is unattainable to comprehensively evaluate the feasibility of mining and resource quantity of coal seams in the coal measures.
…
In the absence of more detailed information, including the thickness and variation of each coal seam, parting band conditions, coal quality etc., proper evaluation cannot be made.

…
Analysis of the English and Chinese materials provided has indicated that the calculation of resource quantity is obviously inappropriate, mainly reflected in the following aspects:
1As for the 30 Mt of Resources available for open-pit mining, there are neither calculation parameters, calculated region and area, nor calculation method and process provided. … Because the Rangal [CM] only occur in a small part of the mine field, and most of the mining area is located outside the outcrops of Rangal [CM], the estimated quantity of 100 Mt for deep-seated resources is obviously defective.
2Coal resources in the Fort Cooper [CM] have been calculated using data from outside the area, … In addition, in the … outcrop areas … there are either no coal resources or only poor quality resources with no economic value. Therefore, it is obviously unconvincing to include the total exploration area of 44.5 km²into the calculation.
3Coal resources in the two deeper coal measures [the Moranbah CM and the Collinsville CM] were calculated using data of just one borehole or data of areas outside the region, which is inappropriate.

…
The exploration is deficient, and details regarding the geological structure conditions are lacking …
…
Overall, the coal thickness in this area is not ideal and the occurrence of coal seams is not stable, with a lot of splitting and poor quality coal. Some thickness figures were borrowed from regional data (or data of single borehole), with low reliability; there is a lack of information on the thickness variation of coal seams, such as maximum thickness, minimum thickness, average thickness, recoverable index and other coefficients, all of which are very important for the mining.
…
[T]he coal seams (at least some of the coal seams) within the exploration area are not continuously distributed.
…
According to the existing data provided and the open-pit mining conditions in several surrounding coal mines overlooked from a helicopter, the occurrence situation and mining conditions of coal seams in this section are not very good, even in China the resource conditions would only rank medium level. In addition, with regard to open-pit mining, the degree of exploration still appears insufficient, further hole arrangement and exploration are still needed. Since there are multiple layers of coal which are mainly thin coal seams, and that a considerable number of coal seams have splitting and folds developed, the mining conditions are complex. Therefore, for the moment the deep part of this area is not suitable for underground mining.
… There is a lack of details regarding the resource conditions, so further relative information is still needed. The exploration degree in deep-seated coal seams and deep areas is relatively low, and the resources are difficult to estimate at present. Only after further exploration can the resources, mining conditions and development prospects be evaluated.

The Due Diligence Report contained a table titled ‘General information of Coal Seams of [the Tenement]’. Under a column headed ‘Structure’, the report stated that nearly all of the coal seams were ‘lacking details’. Under a column headed ‘Existing Problems’, the report criticized the use of data from only one borehole and stated that part of the Moranbah CM had ‘no exploitation value’. Under a column headed ‘Resources’, the report stated:

(a)‘Coal thickness of 6.5 m from regional data, whole mining right area calculated, and conclusion obviously defective’ in relation to the Fort Cooper CM estimate of 420 Mt; and
(b)‘Based on data and accumulated coal seam thickness of single borehole and whole region, method improper’ in relation to the Moranbah CM estimate of 968 Mt.

In July 2011, Songying Li prepared a summary report (‘Summary Report’). The Summary Report was not a summary of the Due Diligence Report. Rather, it calculated the coal reserves in the Tenement at 700 Mt based on two non-established assumptions about the information in the CRA report. Those assumptions were that the data from the one borehole set out in the CRA report was reliable and the thickness of the coal seams was continuous and stable over the entire Tenement. Paragraph 5 of the Summary Report stated:

According to the data provided in both English and Chinese, the amount of resources is obviously over calculated. The Moranbah [CM] three layers thick Coal seam (2.62m; 5.33m; 3.50m). However, only one borehole revealed that if the information provided is reliable, the coal seam is stable and has the potential of well production. The estimated resources of the 3-layer coal are respectively 160 [Mt], 330 [Mt], 210 [Mt]; a total of about 700 [Mt].

In July 2011, Songying Li gave a presentation to a meeting of Yima’s management committee. At the meeting, he read the main part of the Due Diligence Report and gave a copy of the Summary Report to the committee. The members of the management committee that were present at the meeting included Yulu Wu, Yuantao Zhai, Fujun Tian and Li Yong Jiu. On 13 January 2012, Songying Li emailed a copy of the Summary Report to Dongmin Wang.

Incorporation of U&D on 26 August 2011

On 26 August 2011, Yinan Zhang incorporated U&D for the purpose of purchasing the Tenement. As we have already stated, his company, ANB, owned 60 per cent of the shares in U&D and the remaining 40 per cent shareholding was owned by FLC. FLC’s controllers, Mr Xiao and Ms Cui, were acquaintances of Yinan Zhang. At the time of incorporation, Yinan Zhang and Mr Xiao were directors of U&D. Yinan Zhang was the sole signatory of U&D’s bank account.

The investment intention agreement of 19 September 2011 and incorporation of KQ

On 19 September 2011, Yima and ANB signed a non-binding ‘Agreement of Intention of Investment Cooperation for Australia EPC818 Coal Mine Project’ (‘Investment Intention Agreement’). The agreement stated that the Tenement had ‘ascertained reserves of 50 million tonnes, and estimated deep resource reserves of 1.35 billion tonnes’. The agreement referred to U&D’s ownership of the Tenement, even though U&D did not then own it. The Tenement was then owned by Arch Coal Australia Holdings Pty Ltd (‘Arch Coal’) and a subsidiary of Houghton Investments Pty Ltd (‘Houghton Investments’). The agreement stated that Yima, or a wholly owned subsidiary of Yima, would acquire 51 per cent of the shares in U&D, inclusive of FLC’s 40 per cent shareholding.

Clauses 3 and 4 of the Investment Intention Agreement relevantly provided:

3 Form of shareholding and value assessment
(1)Both parties will entrust a third party with qualification for assessment to conduct value assessment on the EPC818 mining rights.
(2)[Yima] will carry out equity acquisition and capital increase of [U&D] based on the assessment report value.
…

4 Methods of transaction and payment
…
(2)After the signing of the formal agreement, an intermediary institution approved by both parties will be entrusted to conduct value assessment on the EPC818 mining rights. The assessment report shall be completed within 30 days.

KQ was incorporated on 20 October 2011 for the specific purpose of purchasing a 51 per cent controlling interest in U&D.

Selection of the valuation company

On 9 November 2011, Yima’s then parent, the State-owned Assets Supervision and Administration Commission of Henan Province (‘Henan SASAC’), selected Henan Jinshi Mineral Rights Appraisal Company Ltd (‘valuation company’) to value the Tenement. The valuation company tasked its senior valuer, Mingli Li (‘valuer’), to value the Tenement. On 16 November 2011, the valuation company requested ‘[t]he geological reserves report of general or detailed coal mine investigation (signed by a registered geologist) … which can be used to determine the degree of geological exploration and resource reserves’ and other materials for the valuation.

U&D’s purchase of the Tenement

On 21 November 2011, U&D entered into an agreement with Arch Coal and Houghton Investments to acquire the Tenement for $25,250,000. The transaction was finalised on 10 February 2012. The purchase price was notified to the ASX by ANB on 21 November 2011 and 10 February 2012, and was publicly available from 21 November 2011.

Preparation of drafts of the ETA

It appears that Yima or KQ began to prepare drafts of the ETA in late 2011. On 21 December 2011, Xin Zhang (Hao Liu’s interpreter and personal assistant) sent to Dongmin Wang draft 5 of the ETA. That draft stated that the value of the Tenement was $200,000,000, that KQ agreed to invest $124,900,000 ‘in acquiring and increasing capital for the equity investment in [U&D]’ and that $80,000,000 of that amount would be used to purchase FLC’s 40 per cent shareholding.

The Hao Liu report dated 10 January 2012

On 10 January 2012, Hao Liu prepared a report titled ‘Investigation and Research Report on the [Tenement]’ (‘Hao Liu report’). Hao Liu was a geologist who had experience in coal mining in China. On 10 January 2012, he was a director of KQ and the sole signatory of its bank account.

The Hao Liu report stated that the ‘Proven Reserves in [the Tenement] were calculated to be 16.5 Mt, Controlled Reserves 18.5 Mt and Inferred Resources 15 Mt, and the inferred resource reserves in the deep part were calculated to be 1.35 billion tons’. These figures coincide with those stated in the Investment Intention Agreement.[6] The report stated that all the coal resources were coking coal. It concluded that a disadvantage of the Tenement was that ‘the Proven Reserves [were] relatively small’ and that the ‘15 Mt of Inferred Resources in the shallow part and 1350 Mt of Inferred Resources in the deep part are [uncertain]’.
[6]See [46] above.

The estimates of coal reserves in the Hao Liu report were not based on any stated geological research.

A copy of the Hao Liu report was provided to Yinan Zhang, who emailed it to Wei Liu (a former director of Yima) on 13 January 2012. Wei Liu emailed the report to the valuer on 15 January 2012. The Hao Liu report was considered by Yima’s management committee at its meeting on 29 January 2012.

Provision of the CRA report to the valuer on 15 January 2012

On 15 January 2012, Yinan Zhang emailed a copy of the CRA report to Wei Liu. Wei Liu forwarded the email with the CRA report to the valuer. On 16 January 2012, the valuer forwarded the email with the CRA report to Dongmin Wang.

Yulu Wu’s direction of 31 January 2012 for further investigation of the Tenement

On 31 January 2012, Dongmin Wang and Zhiwei Zhang (Yima’s general counsel) reported on ‘the negotiation process and other key issues of [the Tenement]’ to Yulu Wu and Li Yong Jiu. Yulu Wu was not happy with the adequacy of the work that had been performed and directed that additional due diligence work be conducted on the Tenement. The additional work included further investigations on ‘resources reserve’, further ‘study on geology, mining and coal quality’ and ‘[c]ollecting more information to analyse the [economic] feasibility of [the Tenement] project’.

Hao Liu was tasked to perform this further work. However, KQ did not adduce evidence of what, if any, further due diligence was conducted by Yima. No further due diligence report was referred to or tendered. The judge stated that the evidence suggested that no further investigation or geological work was carried out by Yima prior to the signing of the ETA.[7]
[7]Reasons [512].

The funding agreement dated 6 February 2012

On 6 February 2012, KQ, FLC and ANB entered into a co-operation funding agreement in relation to KQ’s proposed acquisition of shares in U&D from FLC and ANB (‘Funding Agreement’). Pursuant to the Funding Agreement, KQ paid a total of $5,000,000 to U&D during February 2012.

Mr Xiao’s letter of authorisation dated 7 February 2012 in favour of Yinan Zhang

On 7 February 2012, Mr Xiao signed a letter which granted Yinan Zhang ‘full authority to deal with all the documentation affairs regarding the EPC 818 tenement of U&D’ (‘Letter of Authorisation’).

The ETA dated 27 April 2012

As we have already stated, the ETA was signed on 27 April 2012.

The preamble to the ETA stated:

After friendly negotiation, the parties … have reached the following binding agreement in regards to the transfer of shares based on the following terms and conditions in the spirit of collaboration and mutual benefit …

Pursuant to cl 3.1 of the ETA (read with cls 2.7 and 2.8): FLC agreed to transfer to KQ its 40 per cent shareholding in U&D; ANB agreed to transfer to KQ a further 11 per cent of the shares in U&D; and KQ agreed to pay the ‘Transfer Price Sum’ to FLC and ANB (‘Tenement transaction’).

Clause 3.3 of the ETA provided that the ‘Transfer Price Sum’ must be paid to ANB and FLC ‘within twenty working days after the transfer of the shares, pending the valuation of the shares transferred by a qualified asset valuation body jointly appointed by the three parties and this agreement coming into effect’.

Clause 5 of the ETA set out certain approvals — including by Henan SASAC and the Foreign Investment Review Board — as conditions for the ETA to come into effect.

Clauses 6 and 8 of the ETA relevantly provided as follows:

Format of Transfer & Valuation
6.1According to the [Investment Intention Agreement], the parties will engage [the valuation company] to carry out the valuation of EPC818.
6.2[The parties] agree to the specific price of this share transfer on the basis of the value in the Tenement Valuation Report reviewed and confirmed by [Henan SASAC] and the principle of fairness.
6.3[The parties] confirm the share value of [U&D’s] EPC818 is AUD 129,000,000.
…

Implementing Share Ownership Change in [U&D’s] EPC818 Mining Project
…
8.2According to the [Investment Intention Agreement], [KQ and ANB] have engaged [the valuation company] to carry out the valuation of EPC818, and all three parties will accept the valuation report on the EPC818 Tenement by [the valuation company]
8.3… Upon this agreement coming into effect, the AUD 5,000,000 paid by [KQ] previously will be converted into the share transfer payment.
…
8.5[KQ] will transfer the balance of the share transfer payment … to [ANB and FLC] within twenty days of this agreement coming into effect and confirmation that 51% of [U&D’s] shares have been transferred to [KQ].[8]

[8]Underlining in original.

Li Yong Jiu gave evidence that he attended the signing ceremony for the ETA in Australia on 27 April 2012 and that, when the ETA was signed, it did not contain a price. Mr Xiao gave evidence that he signed the Chinese version of the ETA in China, but he was not sure about when he did so. He said that, when he signed the ETA, it contained a price and that the price had been agreed by negotiation. He conceded that a valuation might have already been obtained when he signed the Chinese version of the ETA. The judge considered that the evidence gave rise to a reasonable and plausible inference that the price for the U&D shares was fixed by negotiation but he did not make a finding of fact on this issue on the balance of probabilities.[9]
[9]Reasons [29]–[30], [694], [701]–[702].

The parties proceeded on the basis that the ETA came into force on 8 May 2012. On that day, Mr Xiao ceased to be a director of U&D and Li Yong Jiu and Hao Liu became KQ’s nominee directors on the board of U&D.

On 11 May 2012, KQ received a transfer of 40 per cent of the shares in U&D from FLC and 11 per cent of the shares in U&D from ANB.

The valuation of the Tenement dated 15 May 2012

On 10 March 2012, Yima formally commissioned the valuation company to value the Tenement. As we have already stated, the valuer was provided with the CRA report and the Hao Liu report. However, he was not given the Due Diligence Report.

The valuer travelled to Australia on 11 April 2012 to assess the Tenement. He was accompanied by Dongmin Wang.

On 11 May 2012, the valuer emailed to Dongmin Wang what appeared to be a preliminary valuation of the Tenement. It contained a valuation amount of $135,129,000.

On 15 May 2012, the valuer issued his valuation which valued the Tenement at $129,392,400 as at 31 March 2012 (‘Valuation’).

Although the valuer was a ‘mineral rights appraiser, certified public valuer [and] geological and mineral engineer’, he did not conduct an independent geological analysis of the coal reserves in the Tenement. Instead, he adopted the reserve estimates in the CRA report. In para 11.1, the Valuation expressly stated that its ‘[a]ssessment parameters and indicators have been selected and determined mainly based on: (1) The [CRA report]; (2) The [Broughton JV report]; (3) [another report for the Broughton Joint Venture]; and [(4)] relevant material collected by assessors’. Likewise, para 7.4 stated that the ‘[b]asis for Geological and Mineral Information and Price Determination’ was the same four sources. The CRA report was appendix 6 to the Valuation and the Broughton JV report — upon which the CRA report relied in relation to the shallow reserves — was appendix 7. The CRA report featured prominently in the text of the Valuation.

Consistent with the CRA report, the Valuation stated that the total coal reserves ‘within the open-pit mining area of [the Tenement] is estimated at 30 [Mt], comprising 16.5 Mt of Proved Resources, 8.5 Mt of Controlled Resources and 5 Mt of Inferred Resources’. The valuer adopted 29 Mt as the shallow resource reserves for valuation purposes. Applying the discounted cash flow method of valuation, the Valuation assessed the value of these reserves at $74,257,600.

Also consistent with the CRA report, the Valuation stated that ‘[t]he deep resource potential of the [Tenement] amounts to 1.688 billion tons’. That figure is the sum of the CRA report’s estimates of 968 Mt for the Moranbah CM, 420 Mt for the Fort Cooper CM, 100 Mt for the Rangal CM and 200 Mt for the Collinsville CM. However, the Valuation adopted only the estimate of 968 Mt for the Moranbah CM. That was because, based on the CRA report, the valuer believed that ‘with regard to future underground mining, only the potential resources in the Moranbah [CM] possess economic value for development’. It appears that this belief was based on considerations relating to the thickness of the coal seams in each of the coal measures. Applying the discounted cash flow method to the estimated reserves of 968 Mt, the Valuation assessed the value of the deep reserves at $55,134,800. That amount and the amount of $74,257,600 for the shallow reserves made up the valuation figure of $129,392,400.

It is apparent from a comparison of the Valuation and the CRA report that material parts of the Valuation are taken directly from, or substantially reflect, the CRA report.

We have already mentioned that the Valuation adopted the estimates of coal reserves in the Tenement as set out in the CRA report. The 30 Mt figure used by the Valuation as the quantum of the shallow coal resources in the Tenement was reflected in the CRA report as set out at [32] above. The 968 Mt figure used by the Valuation as the quantum of deep coal resources in the Moranbah CM was reflected in the CRA report, as set out at [35] above.

The Valuation set out specific information in relation to the Moranbah CM. It stated that the Moranbah CM were 290–500 metres in thickness and that the coal seams of the Moranbah CM exceeded other coal seams in terms of number, thickness and stability. The total accumulated thickness of seven of the coal seams in the Moranbah CM was stated to be 18.03 metres. These figures and statements were reflected in the CRA report, as set out at [37] above.

The Valuation also referred to seismic data in relation to the Moranbah CM. It stated that there were four coal seams that were interpreted as having ‘good continuity in the seismic section’ and that ‘[i]n the seismic profile, four thick coal seams with desirable continuity are shown, which should be the main targets for further exploration’. The latter statement was reflected in the CRA report as set out at [37] above.

As to the assessment of coal quality, the Valuation stated that coal in the Moranbah CM area could ‘mainly be ranked as main coking coal, which is high quality coking coal characterized by medium/medium-to-high ash contents, low sulphur contents and extremely low phosphorus levels’. The assessment of coal quality was stated in the same terms in the CRA report, as set out at [30] above.

Yima and Henan SASAC’s approval of the Tenement transaction

On 26 May 2012, Yima approved KQ acquiring 51 per cent of the shares in U&D at a price based upon the Valuation. Eleven of Yima’s 13 directors signed the approval resolution. The two directors who did not sign it were Ping Nie and Gangyin Luo. The formal proposal for the Tenement transaction that was submitted to the directors stated that ‘[t]he proved reserves of [the Tenement] amount to 30 Mt, and the inferred resource reserves in the deep part amount to 700 Mt’. The deep reserve figure was the same as that stated in the Summary Report.[10]
[10]See [43] above.

On 6 September 2012, Henan SASAC ‘recognised’ the Valuation and approved the Tenement transaction.

The version of the CRA report with the false signature of Richard Smith

On 28 June 2012, Yang Yi of ANB emailed Xin Zhang a copy of the CRA report whose final page purported to bear the signature of a Richard Smith as the author of the report. The following appeared below the signature: ‘Richard Smith, Project Manager (Mining License), Environment and Mining License Profession Company Ltd, Project Team for the Coal Resource Assessment in Bowen Basin, Australia’. Yang Yi asked that the final page be stamped. On the same day, Xin Zhang emailed Yang Yi and the valuer the stamped signature page. That page was included with the CRA report in a hard copy of the Valuation that was provided to Yima and Henan SASAC.

Payments for shares in U&D

On 29 June 2012, KQ paid $14,190,000 to ANB.

It appears that Yinan Zhang directed KQ that its obligation to pay the purchase price for FLC’s 40 per cent shareholding in U&D under the ETA would be satisfied by paying the amount to U&D.[11]
[11]This is implicit in the judge’s statement that he was ‘not satisfied that [Yinan] Zhang informing KQ that the payment of moneys due to FLC would be satisfied by transferring those moneys to U&D, rather than FLC, constituted the exercise of the limited power of agency [conferred on Yinan Zhang]’. See Reasons [850].

On 17 August 2012, Hao Liu, in his capacity as a director of KQ, instructed the Bank of China to transfer $70,000,000 to U&D. The instruction stated that $51,600,000 was to be paid to FLC under the ETA and the balance of $18,400,000 was to be used for ‘the development and operation of the [Tenement] project’.

Of the amount of $70,000,000 that U&D received from KQ, Yinan Zhang arranged for U&D to pay $5,400,000 to FLC on 17 September 2012 and a further $17,000,000 on 18 September 2012, bringing the total to $22,400,000. The balance of $29,200,000 due to FLC under the ETA ($51,600,000) was not paid to it but was misappropriated by Yinan Zhang. The misappropriation was effected by Yinan Zhang arranging for $10,000,000 to be paid by U&D to his company, China Joint Investment Holdings Ltd (‘CJI’), on 27 August 2012 and for a further $19,200,000 to be paid by U&D to CJI on 18 September 2012.

Between March 2014 and March 2016, Mr Xiao made several enquiries of Yinan Zhang as to the balance of the purchase money that KQ owed FLC.

On 19 May 2016, FLC demanded payment of the balance of the purchase price from KQ.

Trial Division proceeding

As we have already stated, FLC commenced its proceeding against KQ on 27 June 2016.[12]
[12]FLC also commenced a separate proceeding against U&D and other parties seeking to trace the amounts misappropriated by Yinan Zhang. That proceeding was heard together with FLC’s proceeding seeking recovery of the sum of $29,200,000 under the ETA. The judge’s reasons deal with both proceedings. However, the tracing proceeding is not presently relevant.

Pleadings

In its statement of claim, FLC claimed the sum of $29,200,000 from KQ under the ETA as the unpaid balance of the purchase price for its shares in U&D.

In its defence, KQ alleged that it had discharged its obligation under the ETA to pay the purchase price by making the payment of $70,000,000 to U&D. At trial, KQ contended that Yinan Zhang acted as FLC’s agent in directing KQ that its obligation to pay FLC for its shares in U&D would be satisfied by making the payment to U&D.

As we have stated at [10(b)] above, KQ alleged that, in providing the CRA report to KQ, FLC had engaged in misleading or deceptive conduct contrary to s 18 of the ACL. KQ alleged that FLC had represented that the Tenement had significant potential deep resources and that the information in the CRA report was genuine.

After the close of evidence, KQ applied for leave to amend its defence. FLC opposed the granting of leave in respect of proposed paras 38HA to 38HD, but not the other paragraphs, including paras 38JA and 38L which alleged reliance on the CRA report by the valuer or, in the alternative, fraud on the part of the valuer. The paragraphs to which we have referred are set out below. The judge granted leave. Pursuant to that leave, in its seventh further amended defence and counterclaim dated 26 March 2018 (‘final defence and counterclaim’), KQ added paras 38HA–38HD, 38JA and 38L–38O as part of its defence to FLC’s claim. Those paragraphs were also incorporated by reference in KQ’s counterclaim. Those paragraphs and other existing paragraphs which are relevant to them stated the following:

30The Valuation of $129 million as at 30 March 2012 was not a fair market valuation.
PARTICULARS

The Valuation made no mention of the EPC 818 Purchase Price [of $25,250,000 paid by U&D] or any fact, matter or circumstance that would have justified the increase in value in the [Tenement] from $25.25 million as at 21 November 2011 and February 2012 (when the EPC 818 Purchase was completed) to $129 million as at 30 March 2012. Further, the Valuation was calculated on the basis of overstated volumes of resources (including unverified potential deep resources). Paragraph 38G is repeated.

…
38GIn breach of the [information provision] terms [of the ETA and the Funding Agreement] …, Yinan Zhang provided a fraudulent document in relation to the [Tenement].
PARTICULARS

The document purported to be a Coal Resource Evaluation Report (Report). The Report was first provided by or on behalf of Yinan Zhang in early to mid-2011. It was also provided by Yinan Zhang by email sent on 15 January 2012 to Wei Liu. The Report was also provided by email sent by Yi Yang, acting on behalf of Yinan Zhang on 28 June 2012, attached a version of the Report purportedly authored and signed by Mr Richard Smith on instructions from Yinan Zhang. The Report was not in fact signed or authored by Mr Smith. Mr Smith never received instructions to prepare, and never prepared, a report about the matters set out in the Report.
38GAThe conduct of [Yinan] Zhang referred to in paragraph 38G above was … within the scope of [Yinan] Zhang’s actual authority as agent of FLC …
38HBy reason of the breach referred to in paragraph 38G above, the matters alleged in paragraph 38GA, KQ has suffered loss and damage.
PARTICULARS
But for the breaches, Yima and the [Henan] SASAC would not have approved the acquisition of U&D by KQ and the payment by KQ of the price for the acquisition. Alternatively, but for the breaches, the value of the [Tenement] in the Valuation, and the purchase price under the [ETA], would have been lower. The value of the loss and damage is the overpayment (including, which is denied, any liability to make further payments under the [ETA]) for the shares in U&D under the [ETA] and the loss of the opportunity to use that money.
38HAAlternatively, it was a term of the [ETA] that the purchase price payable by KQ for the shares in U&D was to be fixed (alternatively confirmed) by reference to a genuine valuation.

PARTICULARS
The term was in writing, alternatively implied. Insofar as it was in writing, it was contained in or evidenced by clauses 3.1, 6.1, 6.2 and 8.2 of the [ETA]. Alternatively, the term was implied to give business efficacy to the [ETA].
38HBThe term alleged in paragraph 38HA was a condition subsequent, which was not satisfied.

PARTICULARS
KQ repeats paragraph 38L.
38HCKQ paid the FLC Purchase Price believing that the condition subsequent had been satisfied, and thus by mistake.
38HDKQ is willing and able to make counter restitution.
PARTICULARS
If restitution is ordered, the [Tenement] will be transferred from U&D to a new company, and 40% of the shares in that company will be given to FLC.

…
38JA The [CRA report] was relied upon by:
(a) the valuer when he prepared the Valuation;
(b)Songying Li when he prepared [the Summary Report] which, in part, was recorded in the proposals to Yima and [Henan] SASAC; and/or
(c)Yima and SASAC when they approved the acquisition by KQ of 51% of the shares in U&D on the basis of the proposals to them and the Valuation (which incorporated and relied upon the [CRA report]).

…

38L Alternatively to paragraph 38JA(a), the valuer:
(a)did not rely upon the [CRA report] when he prepared the Valuation; and
(b)engaged in a fraud (alternatively fraudulently misleading conduct contrary to s 18 of the ACL), in conjunction with the conduct of [Yinan] Zhang referred to in paragraph 38G above, in that:
(i)at all material times, the valuer knew that the [CRA report] was not a genuine document;
(ii)the valuer purported to justify the Valuation on the basis of the [CRA report] and provided the Valuation to Yima and KQ.

38MYima and [Henan] SASAC relied upon the Valuation when they approved the acquisition by KQ of 51% of the shares in U&D.
…
38OFLC is liable for the conduct alleged in paragraph 38L.
PARTICULARS
Paragraphs 38G and 38GA are repeated.

The relief KQ sought in its counterclaim against FLC included damages and restitution of the amounts it had paid to FLC for its shares in U&D.

In its seventh further amended reply and defence to counterclaim dated 23 April 2018 (‘final reply and defence to counterclaim’), FLC responded to the above allegations as follows: it admitted the allegation in para 30; denied the allegations in paras 38G, 38GA, 38H, 38HC, 38HD, 38L, 38M and 38O; it did not admit the allegations in paras 38HA and 38HB; and it partly denied and partly did not admit the allegations in para 38JA. FLC elaborated on the denials in relation to paras 38HC, 38HD and 38L. In relation to paras 38HC and 38HD, it stated:

38HCIt denies the allegations in paragraph 38HC and says further that KQ at all material times knew that the [CRA report] upon which the valuation was purportedly based:
(a)materially overcalculated the volume of coal resources present in the [Tenement] and could not reasonably be relied upon as a proper assessment of those resources; and
(b)was not a genuine document, and therefore did not make any payment operating under a mistake.
PARTICULARS

As to subparagraph 38HC(a), KQ’s knowledge is to be inferred from the fact that Yima undertook its own due diligence into the [Tenement] before approving the acquisition of U&D by KQ, including undertaking a detailed geological assessment of the resource potential of the tenement in or about June 2011. …
Further, the findings and opinions of Yima’s senior geologist, Songying Li, were presented to the management committee and directors of Yima. …
38HDIt denies the allegations in paragraph 38HD and says further that KQ is not able to make counter-restitution as alleged because:
(a)the [Tenement] is not presently owned by KQ but is owned by U&D, such that:
(i)the transfer of a 40% interest in the tenement to FLC by way of counter-restitution would require the approval of the board of directors of U&D; and
(ii)such a transfer would not be in the best interests of U&D, because U&D would receive no consideration for the transfer;

(b)the value of the [Tenement] has changed since the receipt by FLC of part of the FLC Purchase Price, such that the transfer of a 40% interest in the tenement to FLC would not achieve counter-restitution; and
(c)FLC has changed its position by acting on the faith of the receipt of part of the FLC Purchase Price and will suffer detriment if required to repay the amount received.

Overview of the evidence given at trial and the judge’s credit findings

At trial, evidence was given on behalf of FLC by Mr Xiao and Ms Cui. Mr Xiao’s evidence is discussed below, under ground 1.

Evidence was given on behalf of KQ by Songying Li, Li Yong Jiu, Qian Yu, Gavin Houghton, Richard John Smith and three experts, Darren Walker, Campbell Jaski and Paul Vincent.

Mr Xiao, Ms Cui, Songying Li, Li Yong Jiu and Qian Yu gave evidence through an interpreter.

Li Yong Jiu was the only director of Yima who gave evidence. As we have already stated, he was also a member of Yima’s management committee in 2011 and 2012. His evidence is discussed below in the context of particular grounds.

The judge did not accept that Li Yong Jiu was a truthful witness. He stated:

I do not accept that Mr Li was a truthful witness. I am not prepared to accept his evidence unless supported or corroborated by other independent evidence.
…
I closely observed Mr Li in giving his evidence. Despite the difficulties imposed by his evidence being given in Chinese, I gained the distinct impression that he merely gave evidence to suit Yima’s case and was not a credible witness. As discussed above, I am not prepared to accept his evidence on contentious issues unless corroborated.[13]

[13]Reasons [522], [685]. See also Reasons [512]–[521], [528]–[532], [591], [651], [658].

The judge described Songying Li as ‘a careful and methodical man’[14] and did not make adverse credit findings against him. Songying Li’s evidence is discussed below in the context of particular grounds.
[14]Reasons [57].

Qian Yu was a director of KQ at the time of the trial. He gave evidence that, in China, it is possible to mine for coal to a depth of 800 to 1,000 metres.

Mr Houghton gave the following evidence. He had worked for BHP Billiton Ltd and Rio Tinto Ltd and had been involved in the valuation of approximately 65 projects involving numerous coalmines, including some in the Bowen Basin. He controlled Houghton Investments, which sold its interest in the Tenement to U&D.[15] As owners of the Tenement from 17 August 2010, Houghton Investments and Arch Coal had not commissioned the CRA report dated 20 August 2010 and had never received a copy of it. Coal mining to a depth of 500 metres — let alone 800 metres — below ground level had never occurred in the Bowen Basin and was not economically viable. The estimate of 1.5 billion tonnes of ‘potential resources’ in the CRA report had no basis in geology and no value could properly be placed on the ‘potential resources’. In July 2011, when Mr Houghton was negotiating to sell the Tenement to U&D, he considered its value to be between $22,000,000 and $28,000,000. In cross-examination, he agreed that if there were only one borehole in the Tenement, then no geologist or coal assessor would give it any value. He also agreed that ‘anyone with experience and proficient in valuing and assessing coal reserves could not rely upon an assertion of a deep-seated resource of 1.5 billion tonnes in coming up with a value’. He said that, at the time that he gave evidence, the ‘top value’ of the Tenement was $30,000,000 to $50,000,000.
[15]See [46], [50] above.

Mr Smith gave the following unchallenged evidence. Between 2009 and 2015, he was employed as the Group Manager (Licensing) at Greencap Ltd, which was previously known as Environmental and Licensing Professionals Pty Ltd. His areas of expertise included assisting tenement holders with the regulatory management of existing tenements. He was not a geologist. He did not sign or author the version of the CRA report which purports to contain his signature and he had never prepared a report about the matters set out in the report. He was not aware of a project team called ‘Project Team for the Coal Resource Assessment in Bowen Basin, Australia’ and, while he worked at Environmental and Licensing Professionals Pty Ltd, that company was not a member of such a project team. He met Yinan Zhang several times in 2012 to discuss environmental issues relating to the Tenement.

Mr Walker gave the following evidence. He was a geologist employed by U&D. The CRA report was incorrect in three important respects. First, the Moranbah CM were not flat but ‘undulate considerably, and vary in thickness’ and therefore the estimation formula, as set out at [35] above, was not appropriate. Secondly, the coal seams in the Moranbah CM were ‘Semi Anthracite to Anthracite coal and do not contain any coking coal’. Thirdly, the thickness of the coal seams in the Moranbah CM based on the Wodehouse NS1 borehole, as set out at [37] above, were incorrect. Given the size of the Tenement, it would be reasonable to drill 100 to 200 boreholes in order to obtain reliable data about the thickness, density and lateral continuity of the coal seams for use in calculating the coal resources. Any coal miner and experienced geologist in Australia would be aware of this.

Mr Jaski, an expert in the fields of geology and management, gave the following evidence. As at 30 March 2012, the value of the Tenement was between $18,800,000 and $23,000,000. The Valuation materially overstated the value of the Tenement because the discounted cash-flow method that it used was generally considered unsuitable for valuing predevelopment projects such as the Tenement. The Valuation ignored relevant market information, including the acquisition price of $25,250,000 that U&D had paid for the Tenement. That price provided very strong evidence as to the potential fair market value of the Tenement as at 30 March 2012. The Valuation did not appear to assess or delineate the deep resources using any technical rigour. The Valuation attached significant value to potential resources which had not been discovered or defined. The potential resources would not be capable of being reported as resources under any internationally recognised reporting codes. FLC did not cross-examine Mr Jaski on his valuation of $18,800,000 to $23,000,000.

KQ explained the absence of other potential witnesses as follows:

(a)Yulu Wu had been convicted on charges of bribery, corruption, insider dealing and illegal possession of firearms and was in prison awaiting re-trial.
(b)Yuantao Zhai, Fujun Tian, Jianhua Song, Jianxin Li, Er’an Zhai and Yuangui Fan had ceased to be directors of Yima and had declined to give evidence.
(c)Dongmin Wang had resigned as a senior executive of Yima and was unwilling to give evidence.
(d)The whereabouts of Hao Liu were unknown.
(e)Jianzhuang Li, a director of Henan SASAC, had declined to give evidence.

Although Li Yong Jiu gave evidence that, normally, Yima’s management committee met weekly and minutes of each meeting were kept, only the minutes of its meeting of 31 January 2012[16] were adduced into evidence. Also, no minutes of Yima’s board meetings were adduced and the only resolution of Yima’s board that was adduced was that of the meeting held on 26 May 2012.[17]
[16]See [57] above.
[17]See [82] above.

Mr Vincent’s evidence is discussed below, under ground 8.

At trial, FLC acknowledged that there was no proper geological basis for the conclusion that the Tenement contained significant potential deep reserves of coal.

Overview of the judge’s decision

Paragraph 40 of the agreed summary which the parties filed for the purposes of the application for leave to appeal (‘Agreed Summary’) set out the key issues at trial and the judge’s conclusions, relevantly as follows:

(a)Was the purchase price stated in the ETA at the time it was signed on 27 April 2012?
KQ contended that the price was left [out] when the ETA was signed. FLC contended that there was evidence inconsistent with KQ’s position.
(b)Whether [Yinan] Zhang’s provision of the CRA report was done within the scope of his agency, or was otherwise ratified by FLC.
KQ contends that the trial judge found [Yinan] Zhang provided the CRA report. FLC contends the trial judge did not make such a finding.
(c)Whether the valuer relied on the CRA report in preparing the Valuation.
The trial judge was not satisfied that the valuer had relied on the CRA report: Reasons [752].
(d)Whether the valuation was procured by fraud, including whether the valuer acted fraudulently, such that there was no genuine valuation, and no price fixed under the ETA.
The trial judge did not address these questions. The trial judge considered that the evidence gave rise to a reasonable and plausible inference that the price under the ETA was fixed by the negotiation between the vendors and Yima, which did not constitute a finding of fact on the balance of probabilities.
(e)Whether the board of Yima: (a) relied upon the CRA report; (b) knew the Valuation was based on the CRA report; and (c) knew the CRA report was false in certain respects and a non-genuine document, when it resolved to approve KQ acquiring shares in U&D.
The trial judge found the board of Yima knew that the CRA report, and the estimate of the [Tenement’s] resources, was not reliable and had not properly been investigated, and that the board did not rely on the Valuation when it approved KQ’s acquisition of the U&D shares: Reasons [644]–[658], [728].
(f)Whether the board of Yima made a decision to approve KQ’s investment in the [Tenement], and made payments under the ETA, in reliance upon the Valuation, or whether the board’s decision was made to advance a strategy to expand Yima’s operations internationally, without regard to financial considerations or the quantity of the resources at [the Tenement].
The trial judge found that: (a) Yima was driven primarily by its desire to invest in an Australian coalmine, rather than by any financial benefits to be derived by purchasing the interest in the [Tenement]; and (b) Yima was not motivated by financial considerations.

(g) Whether the alleged breaches of contract caused KQ loss.
The trial judge found that, if there were any breaches, they did not cause loss or damage to KQ, because the decision to purchase the shares was made by KQ’s parent, Yima, and Yima did not rely upon the CRA report or the Valuation: Reasons [787]–[790].

(h) Whether KQ paid the purchase price to FLC, and whether:
…
(ii)[Yinan] Zhang had instructed KQ that its obligation to pay FLC under the ETA would be satisfied by paying U&D and was authorised by FLC to do so.
The trial judge found that FLC did not authorise or consent to KQ paying the purchase price to U&D, that … [Yinan] Zhang was not authorised to instruct KQ to pay U&D and that he was acting outside the scope of his agency: Reasons [813]–[816], [848]–[852].

(i)Whether the $5 million paid by KQ to U&D in February 2012 was to be deducted from the purchase price payable by KQ to FLC and ANB.
The trial judge accepted that the $5 million paid by KQ to U&D partly satisfied KQ’s obligation to pay the purchase price, and that FLC’s claim was to be adjusted accordingly (deducting $3,921,568.63, being FLC’s pro rata entitlement to the deposit): Reasons [858]–[861].
(j)Whether FLC’s failure to pay undisclosed liabilities of U&D at the date of the ETA caused KQ loss or damage.
The trial judge found that all the liabilities of U&D existing at the time of the ETA were forgiven and that KQ therefore suffered no loss or damage: paragraphs [876]–[886].[18]

[18]Citations omitted.

It follows from the Agreed Summary that the judge did not deal with KQ’s defence based on fraud on the part of the valuer. He rejected all of KQ’s other defences and dismissed KQ’s counterclaims against FLC and Mr Xiao.

The judge held that KQ was indebted to FLC under the ETA in the amount of $25,278,431.37 in respect of the balance of the purchase price for FLC’s shares in U&D. That sum was arrived at by deducting from the unpaid amount of $29,200,000 the amount of $3,921,568.63 representing FLC’s pro rata entitlement to the deposit of $5,000,000 KQ had paid to U&D under the Funding Agreement.[19]
[19]Reasons [861]. See also [59] above and cl 8.3 of the ETA set out at [66] above. FLC sold to KQ 78.431 per cent of the 51 per cent shareholding interest in U&D (40 per cent divided by 51 per cent). As FLC was entitled to 78.431 per cent of the amount of $65,790,000 for the controlling interest KQ was acquiring in U&D (representing 51 per cent of $129,000,000), it was entitled to 78.431 per cent of the deposit of $5,000,000 ($3,921,568.63).

The judge’s order dated 9 April 2019

The judge’s order dated 9 April 2019 relevantly provided as follows:

1There be judgment for [FLC] against [KQ] in the sum of $25,278,431.37.
2KQ pay FLC interest on the said sum from 28 May 2012 until the date of this order, fixed in an amount to be agreed in accordance with s 58 of the Supreme Court Act 1986 (Vic).
3KQ’s counterclaim against [FLC] and [Mr Xiao] be dismissed.
4In default of agreement, KQ pay FLC’s taxed costs (including any reserved costs) of FLC’s claim against KQ and FLC’s and [Mr Xiao’s] taxed costs (including any reserved costs) of KQ’s counterclaim against FLC and [Mr Xiao].
5KQ’s claim against [Hao Liu] and [Yinan Zhang] be adjourned sine die.

KQ’s grounds of appeal

KQ’s grounds of appeal are in the following terms:

1The trial judge erred in finding that the purchase price for the shares in U&D remained unpaid (Reasons [794], [848]–[852]).
2The trial judge erred in finding that neither Yima …, Songying Li nor the valuer was misled by the fact that the CRA report was a forgery and by the false information in the CRA report (Reasons [728], [752], [753], [754]).
3If the trial judge did not err in holding that the valuer had not been [misled] by the CRA report, he erred in failing to find that the valuation was vitiated by fraud (see [24] of the Written Case).[20]
4The trial judge erred in finding that the loss suffered by KQ was due to Yima instructing KQ to enter the ETA (Reasons [618] and [790]).
5In the course of arriving at the conclusions identified in Ground 2 the trial judge erroneously made [a finding] of fact [that there was no evidence that KQ believed the Valuation was genuine].[21]
6The trial judge erred in rejecting the hearsay evidence of Mr Li [Yong Jiu] regarding his conversations with several Yima directors, both because the judge lacked power to do so and because he did so without providing [KQ] with procedural fairness (Reasons [686]).
7The trial judge erred in (i) allowing FLC to amend its pleadings after the close of evidence to withdraw the concession that the valuer had at all times acted appropriately; and (ii) refusing KQ’s application for an adjournment to allow it to re-open its case to consider and deal with that withdrawal …
8The trial judge erred in finding that FLC was not responsible under cl 3.5 of the ETA for the debts of U&D (totalling $3,375,000) that were undisclosed when the ETA was entered into and which U&D subsequently paid (Reasons [862]–[887]).[22]

[20]Paragraph 24 of KQ’s written case is set out at [128] below.

[21]Ground 5 originally alleged that the judge had made multiple errors of fact. At the hearing of the application for leave to appeal, KQ relied on ground 5 as a separate ground only in respect of a single finding of fact which was said to be erroneous. We have modified ground 5 to refer to that finding of fact.

[22]A ninth ground relating to interest was abandoned.

KQ relied principally upon grounds 2–4, which were argued together, and informed the Court that if it succeeded on those grounds, ground 7 need not be considered.

We will first discuss grounds 2–4. Ground 5 will be subsumed within that discussion. We will then consider grounds 1, 6 and 8. As will become apparent, we have upheld grounds 3, 4, 5 and 8 and have rejected grounds 1, 2 and 6. We have not considered ground 7.

As most of the grounds of appeal seek to impugn factual findings made by the judge, it is convenient first to summarise the principles relevant to an intermediate appellate court overturning factual findings of a primary judge.

Principles relating to overturning a primary judge’s factual findings

An appellate court conducting an appeal by way of rehearing is bound to conduct a ‘real review’ of the evidence before the trial judge and the trial judge’s reasons for judgment to determine whether the trial judge erred in fact or law.[23]
[23]Fox v Percy (2003) 214 CLR 118, 126–7 [25]; [2003] HCA 22; Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550, 558 [43]; [2016] HCA 22 (‘Robinson Helicopter’).

In Robinson Helicopter Company Inc v McDermott, the High Court held that ‘[i]f the court of appeal concludes that the judge has erred in fact, it is required to make its own findings of fact and to formulate its own reasoning based on those findings’.[24] The Court went on to state that ‘a court of appeal should not interfere with a judge’s findings of fact unless they are demonstrated to be wrong by “incontrovertible facts or uncontested testimony”, or they are “glaringly improbable” or “contrary to compelling inferences”’.[25]
[24](2016) 331 ALR 550, 558 [43]; [2016] HCA 22 (citations omitted).
[25]Robinson Helicopter (2016) 331 ALR 550, 558–9 [43]; [2016] HCA 22 (citations omitted).

In Lee v Lee, Bell, Gageler, Nettle and Edelman JJ said that ‘[a]ppellate restraint with respect to interference with a trial judge’s findings unless they are “glaringly improbable” or “contrary to compelling inferences” is as to factual findings which are likely to have been affected by impressions about the credibility and reliability of witnesses formed by the trial judge as a result of seeing and hearing them give their evidence’.[26] This includes findings of secondary facts which are based on a combination of such impressions and other inferences from primary facts.[27] Thereafter, in general, an appellate court is in as good a position as the trial judge to decide on the proper inferences to be drawn from facts which are either undisputed or which, having been disputed, are established by the findings of the trial judge.[28]
[26](2019) 266 CLR 129, 148 [55]; [2019] HCA 28 (citations omitted) (‘Lee’).
[27]Lee (2019) 266 CLR 129, 148–9 [55]; [2019] HCA 28.
[28]Lee (2019) 266 CLR 129, 149 [55]; [2019] HCA 28. See also Braham Investments Pty Ltd v Wantrup [2018] VSCA 291, [11]; Australian Securities and Investments Commission v Geary (2018) 332 FLR 201, 233–4 [223]; [2018] VSCA 103; Southern Colour (Vic) Pty Ltd v Parr [2017] VSCA 301, [78] (‘Southern Colour’); Jams 2 Pty Ltd v Stubbings [2020] VSCA 200, [127].

This Court has stated that the phrase ‘contrary to compelling inferences’ should not be understood as suggesting that an intermediate court of appeal may only set aside an inference if the inference itself is contrary to compelling inferences.[29]
[29]Bauer Media Pty Ltd v Wilson [No 2] (2018) 56 VR 674, 737 [273]; [2018] VSCA 154.

In deciding the proper inference to be drawn, the appellate court should give respect and weight to the conclusion of the trial judge, but, having reached its own conclusion, it must give effect to it.[30]
[30]Southern Colour [2017] VSCA 301, [78]; Fox v Percy (2003) 214 CLR 118, 126–8 [25]–[27]; [2003] HCA 22.

An appellate court must also make ‘due allowance’ for the fact that it has neither seen nor heard the witnesses.[31] The advantages that the trial judge enjoys in making findings of fact, which an appellate court does not have in proceeding wholly or substantially on the record, include those in respect of the evaluation of witnesses’ credibility, the ‘feeling’ of a case, and hearing and considering the entirety of the evidence and drawing conclusions from it, viewed as a whole.[32] However, the limitations that exist in an appeal setting and the comparative advantages of the trial judge in the evaluation of the credibility of a witness do not extend to inferences drawn by the trial judge.[33]
[31]Dearman v Dearman (1908) 7 CLR 549, 564; [1908] HCA 84 citing The Glannibanta (1876) 1 PD 283, 287.
[32]Fox v Percy (2003) 214 CLR 118, 125–6 [23]; [2003] HCA 22.
[33]Braham v ACN 101 482 580 Pty Ltd [2020] VSCA 108, [112].

Grounds 2–5: Issues relating to the CRA report and the Valuation

It will be recalled that grounds 2–5 are in the following terms:

2The trial judge erred in finding that neither Yima …, Songying Li nor the valuer was misled by the fact that the CRA report was a forgery and by the false information in the CRA report (Reasons [728], [752], [753], [754]).
3If the trial judge did not err in holding that the valuer had not been [misled] by the CRA report, he erred in failing to find that the valuation was vitiated by fraud (see [24] of the Written Case).
4The trial judge erred in finding that the loss suffered by KQ was due to Yima instructing KQ to enter the ETA (Reasons [618] and [790]).
5In the course of arriving at the conclusions identified in Ground 2 the trial judge erroneously made [a finding] of fact [that there was no evidence that KQ believed the Valuation was genuine].

Ground 3 refers to para 24 of KQ’s written case. That paragraph, in turn, refers to para 23 of the written case. The two paragraphs state the following:

23If the valuation was procured [by Yinan] Zhang’s fraud there has been no valuation under cl 6.2 of the ETA and no price fixed for the shares. The appropriate remedy is restitution of all amounts paid toward the purchase price as no price is yet payable. No party sought an order that the shares be valued.
24If the valuer was not misled, he must have been acting fraudulently such that there was no valuation for [the] purposes of cl 6.2 of the ETA. No purchase price having been fixed, no money was due under the ETA. Any money paid is recoverable (see [23] above).[34]

[34]Citations omitted.

The issues that KQ argued on the application for leave to appeal under grounds 2–5 were as follows:

(a) Was the CRA report fraudulent?
(b) Did the valuer act fraudulently in preparing the Valuation?
(c)If the valuer did not act fraudulently in preparing the Valuation, was the Valuation infected by fraud because it was based on the CRA report?
(d)Was Songying Li misled by the CRA report?
(e)Was Yima misled by the CRA report?
(f)Did the judge err in deciding that KQ failed to establish that it made payments to FLC under the ETA in the mistaken belief that the Valuation was a valuation for the purpose of the ETA and that the ETA required the making of the payments?
(g)Did the judge err in finding that KQ did not suffer any loss in entering the ETA?

We will consider these issues in turn.

(a) Was the CRA report fraudulent?

As we have already discussed, there were two versions of the CRA report, one with a false signature of Richard Smith and one without that signature.

It was common ground that, in the light of the evidence of Richard John Smith set out at [106] above, the version of the CRA report with the signature of Richard Smith was fraudulent. However, that version did not emerge until 28 June 2012. This was well after the ETA was signed, the Valuation was issued and KQ had acquired 51 per cent of the shares in U&D. Accordingly, we will focus on whether the CRA report without Richard Smith’s signature was fraudulent. Unless expressly stated otherwise, all references to the CRA report below are to the version without Richard Smith’s signature.

At trial, FLC conceded that there was no basis in geology for suggesting in the CRA report that there were inferred resources of 1.3 billion tonnes of coal in the Tenement. FLC did not concede that the CRA report was fraudulent.

The evidence relevant to whether the CRA report was fraudulent includes the following:

(a) The description of the CRA report set out at [27]–[38] above.
(b)The criticisms of the CRA report in the Due Diligence Report set out at [40]–[42] above.
(c)The evidence of Mr Houghton, Mr Smith, Mr Walker and Mr Jaski set out at [105]–[108] above.
(d)The evidence of Songying Li set out at [206] below.

The judge did not make an express finding that the CRA report was fraudulent or non-genuine. However, he made observations from which it can be inferred that he regarded it as such. First, he stated that the ‘critical issue’ was whether KQ suffered loss by reason of the ‘misleading nature of the CRA report’.[35] Secondly, he found that even if ‘[Yinan] Zhang did provide a fraudulent document in relation to the [Tenement (the CRA report)], and assuming that this was done on behalf of FLC, KQ has not established that … [it] suffered loss and damage’.[36] Thirdly, he stated that an inference arose that the board of Yima knew that any estimate of deep reserves in the Tenement was entirely speculative, that the CRA report did not provide a reliable estimate and that the report could not be relied upon by the board.[37]
[35]Reasons [594].
[36]Reasons [789].
[37]Reasons [49].

KQ submitted that the CRA report was fraudulent and had caused it to pay an inflated price for the shares in U&D. KQ relied upon the following evidence and admission in support of its submission:

(a)The CRA report was not written either by Richard Smith or the ‘Project Team for the Coal Resource Assessment in the Bowen Basin’.
(b)Based on the evidence of Songying Li, Mr Houghton, Mr Walker and Mr Jaski,[38] any geologist would have known that there was no geological basis for the estimates of the deep resources in the Moranbah CM as set out in the CRA report.
(c)The CRA report incorrectly stated that there were 968 Mt of coking coal in the Moranbah CM. The evidence from Mr Houghton was that references to potential resources in this amount had no geological basis and it was not possible to mine for coal at the depths of the Moranbah CM.
(d)Drilling data from the Wodehouse NS1 borehole showed that the figures in the CRA report as to the thickness of the coal seams in the Moranbah CM were false and that the two largest coal seams identified in the CRA report did not exist.
(e)The statements in the CRA report that coal seams in the Moranbah CM comprised coking coal and were flat and continuous were shown by the uncontested geological evidence to be incorrect.[39]
(f)FLC admitted that the estimates of deep resources in the CRA report had no geological basis.

[38]See [134(c) and (d)] above.

[39]See the evidence of Mr Walker at [107] above.

In our opinion, the evidence referred to at [134] above overwhelmingly points to the CRA report being fraudulent. Our reasons for this conclusion may be briefly summarised as follows.

First, the owners of the Tenement at the time the CRA report was purportedly prepared (20 August 2010) knew nothing about it.[40]
[40]See the evidence of Mr Houghton at [105] above.

…
What it says is [Yinan] Zhang had full authority to deal with all the documentation?---Correct.
…
In its terms it was not limited to just signing documents?---There are agreements in addition to what appears in writing in this authorisation. The authorisation — the condition of the authorisation is that he obtains my consent prior to the signing, and this is only for the purpose that he’s — that I was not — that he signs when I was not physically present in certain locations. But he needs to run things over with me.
My question was, Mr Xiao, in its terms this document is not limited to just signing, is it?---No, that’s not the idea.[121]

[121]Transcript of Proceedings (20 February 2018) 267.14–267.16, 268.23–268.26, 270.28–271.12, 271.24–271.25, 271.27–272.7.

Mr Xiao gave the following evidence in chief as to Yinan Zhang’s role in negotiating the terms of the ETA:

And [Yinan Zhang] would be in charge of the negotiation [of the ETA] with … Yima. And we assigned ourselves with different tasks. He would be in charge of negotiation and preparation of relevant documents. And because … I was the one selling the majority of the shares, it was agreed that I should be involved with the negotiation of price, and how the deal will go ahead. And that needs to be done with my consent. And during that period of time, he made frequent trips back to China in order for me to sign documents. Which caused inconvenience, and he asked whether I could authorise him to sign documents on my behalf. I gave him my authorisation.
…
It was agreed at the time that he could only sign some preliminary documents. But any documents involving key information such as the price, and how the sale would be conducted, … must be made aware to me and can only go ahead with my consent.[122]

[122]Transcript of Proceedings (19 February 2018) 222.13–222.25, 222.30–223.4.

Peter Lucarelli, solicitor for FLC, swore an affidavit in which he stated that the transaction ‘was organised and implemented by [Yinan] Zhang, and Mr Xiao and Madam Cui relied upon [Yinan] Zhang to organise and implement the transaction on behalf of FLC’.[123] He further stated that Mr Xiao ‘relied on [Yinan] Zhang to manage FLC’s investments in Australia, and to keep him and Madam Cui informed of developments in Australia regarding those investments’.[124] In cross-examination, Mr Xiao agreed that the above statements in Mr Lucarelli’s affidavit were correct.[125]
[123]Transcript of Proceedings (20 February 2018) 314.17–314.20.
[124]Transcript of Proceedings (20 February 2018) 314.29–315.1.
[125]Transcript of Proceedings (20 February 2018) 314.17–315.2.

As to the negotiation of the terms of the Funding Agreement, Mr Xiao gave evidence in cross-examination that Yinan Zhang was negotiating with KQ on behalf of FLC.[126]
[126]Transcript of Proceedings (20 February 2018) 268.4–268.7, 268.22–268.23.

The judge rejected KQ’s contention that Mr Zhang acted as agent of FLC in representing that the purchase price for FLC’s shares in U&D could be paid to U&D for the following reasons:

First, in my opinion, the written agency agreement between FLC and [Yinan] Zhang did not authorise [Yinan] Zhang to sign documentation related to the [Tenement] as part of a scheme by [Yinan] Zhang to defraud FLC.
Secondly, I am not satisfied that [Yinan] Zhang informing KQ that the payment of moneys due to FLC would be satisfied by transferring those moneys to U&D, rather than to FLC, constituted the exercise of the limited power of agency that [Yinan] Zhang had to manage all documentation related to the [Tenement], as specified in the letter of authority.
Rather [Yinan] Zhang was purporting to agree as agent on behalf of FLC that payment of moneys owed by KQ to FLC under the ETA would be satisfied by the transfer of those moneys from KQ to U&D. There was no documentation involved in that purported act of agency. In particular, there was no documentation being managed relating to the [Tenement]. The instruction by [Yinan] Zhang was merely as to the identity of the person to whom the debt owing to FLC could be paid in satisfaction of the debt. [Yinan] Zhang had no authority to give such an instruction on behalf of FLC.
Thirdly, I accept Mr Xiao’s evidence that the agency did not extend to price and payment to FLC and thus if instructions for payment for FLC’s shares in U&D did fall within the words of the written authority, contrary to my finding, the actual authority did not extend to giving directions about payment of the price of the shares.[127]

[127]Reasons [849]–[852].

KQ submitted that the judge’s finding that Yinan Zhang did not have authority to direct KQ to pay to U&D the money due to FLC was not supported by the evidence. KQ argued that the following demonstrated that Yinan Zhang did have authority to make the impugned direction:

(a)FLC had no officers in Australia and carried on all of its Australian activities through Yinan Zhang.
(b)Yinan Zhang was authorised to, and carried out, the following:
(i)he arranged for the incorporation of U&D;
(ii)he organised and implemented the acquisition of the Tenement by U&D;

(iii)     he advised FLC regarding the investment of funds in Australia;
(iv)     he provided documents on behalf of FLC to KQ and Yima;
(v)      he negotiated the terms of the Funding Agreement;
(vi)he negotiated the terms of the ETA, including the term that the price would be fixed by valuation; and

(vii) with Mr Xiao’s permission, he signed documents in his name.
(c)Mr Lucarelli’s evidence set out at [275] above.
(d)The ‘price and payment’ restriction on Yinan Zhang’s authority was first raised by Mr Xiao in cross-examination and was not pleaded or opened by FLC in its submissions. Mr Xiao ultimately conceded that there was no ‘price and payment’ restriction in the Letter of Authorisation.
(e)A payment restriction could only refer to the mode of payment and was unlikely to place a limit on Yinan Zhang’s authority.
(f)The restriction on Yinan Zhang’s authority in relation to price was not relevant as the price under the ETA was to be fixed by valuation.

FLC submitted that there was no evidence to support a finding that Yinan Zhang had authority to direct KQ to pay the purchase price to U&D rather than to FLC such that this payment would discharge KQ’s indebtedness to FLC.

FLC argued that the terms of the Letter of Authorisation did not grant Yinan Zhang authority to give such a direction and the affidavit of Mr Lucarelli said nothing as to any authority by Yinan Zhang to give such a direction. FLC submitted, accordingly, that an inference that Yinan Zhang had such authority could not be drawn from these two documents.

According to FLC, the fact that Yinan Zhang was authorised to manage FLC’s investments in Australia did not mean that he had authority to give the direction as to the payment of money. FLC contended that KQ’s argument ignored the limited authority of Yinan Zhang. It also contended that KQ’s position is inconsistent with Mr Xiao’s oral evidence, which the judge accepted and preferred, including that he had made numerous attempts to follow up payment of the purchase price with Yinan Zhang over several years. FLC also stated that it was not put to Mr Xiao that Yinan Zhang had authority to direct that the purchase price be paid to U&D to discharge KQ’s debt to FLC.

In our opinion, ground 1 is not made out.

The Letter of Authorisation is expressly limited to dealing ‘with all the documentation affairs regarding the [Tenement]’. Objectively construed, the words ‘documentation affairs’ do not encompass a direction that payments due by KQ to FLC be made to U&D rather than FLC. Accordingly, the Letter of Authorisation did not confer actual authority on Yinan Zhang to give such a direction. KQ did not rely upon any other document as constituting actual authority to give such a direction.

The evidence as to whether FLC had orally conferred actual authority upon Yinan Zhang to give such a direction overwhelmingly supported FLC’s position. Mr Xiao gave evidence that he had not conferred such authority. The evidence of Mr Lucarelli was insufficient to contradict the evidence of Mr Xiao. Mr Lucarelli’s evidence demonstrated that FLC relied on Yinan Zhang to manage aspects of its business affairs in Australia. However, it did not go so far as to establish that Yinan Zhang was authorised to direct that millions of dollars payable to FLC be paid to an entity (U&D) which FLC never controlled and in which it no longer had any shareholding.

The only person who could have contradicted the evidence of Mr Xiao was Yinan Zhang. However, his whereabouts were unknown[128] and he did not give evidence.
[128]See [11] above.

The evidence relating to Yinan Zhang’s authority to act on behalf of FLC went nowhere near establishing that he had FLC’s authority to provide a fraudulent document to KQ or Yima.

As KQ did not rely on the principle of ostensible authority, the judge’s conclusions on actual authority — which we have upheld — mean that no part of the amounts paid by KQ to U&D can be treated as payments to FLC for the purchase price of its 40 per cent shareholding in U&D.

Ground 6: Hearsay evidence and procedural fairness

It will be recalled that ground 6 is in the following terms:

The trial judge erred in rejecting the hearsay evidence of Mr Li [Yong Jiu] regarding his conversations with several Yima directors, both because the judge lacked power to do so and because he did so without providing [KQ] with procedural fairness (Reasons [686]).

Prior to trial, KQ filed a notice under s 67 of the Evidence Act stating that it intended to adduce hearsay evidence of telephone conversations that Li Yong Jiu had with six directors of Yima at the time of the Tenement transaction, namely Yuantao Zhai, Fujun Tian, Jianhua Song, Jianxin Li, Er’an Zhai and Yuangui Fan. The hearsay evidence was as follows:

I am confident that no other director would have voted in favour of the acquisition of U&D by KQ (or the payment by KQ of the price for the acquisition) if they had known of the above facts. Before preparing this statement, I spoke to the [above named directors] who voted on the resolution who confirmed that to be so …

The ‘above facts’ to which the hearsay notice referred were that the Valuation was based on a non-genuine document (the CRA report) and that the resources quantity of the Tenement was significantly less than was stated in the Valuation.

The hearsay notice stated that it was not reasonably practicable for KQ to call the six directors because they were no longer directors of Yima and they had declined to give evidence.

FLC did not object to the admissibility of the above evidence in the hearsay notice (‘hearsay evidence’).

The judge rejected the hearsay evidence for the following reasons:

As for the other directors, in respect of whom a hearsay notice was given, KQ relies on a telephone call between Mr Li Yong Jiu and several directors of Yima. I am not prepared to accept their hearsay evidence. The evidence of the phone calls does not state what the individual directors actually said. The evidence does not recite all that they were told in the telephone conversations. They were not asked to address the issues I have raised above, such as: the desire of Yima to internationalise; the pressure from the Chinese government to do so; the knowledge of [the Due Diligence Report]; the knowledge that on 31 January 2012, that Yima did not have any reliable information on the resources at the tenement; the lack of financial analysis carried out by Yima; the negotiations over the price between Yima and ANB; the valuer’s reliance on information that Mr Songying Li had informed Yima was unreliable; and the roles played by Mr Hao Liu, Mr Wei Liu, and Mr Dongmin Wang. Apart from their reluctance to give evidence, no reason was given why these last three could not give evidence, particularly as evidence was taken in Hong Kong, in part, to suit the convenience of KQ.[129]

[129]Reasons [686].

KQ submitted that the judge erred in rejecting the hearsay evidence as each of the criteria in s 63 of the Evidence Act was satisfied. Further, KQ argued that FLC did not object to and agreed to the tender of the hearsay evidence. In those circumstances, so it was said, the judge did not have the power to reject the hearsay evidence, which was relevant and probative. In the alternative, KQ contended that the judge’s discretion miscarried when he rejected the hearsay evidence without giving KQ any prior warning that this would occur and in circumstances where he criticised KQ for failing to call evidence of the very nature that he had excluded without notice.

FLC submitted that the judge did not rule that the hearsay evidence was inadmissible. Rather, so it was said, the hearsay evidence was admitted without objection but the judge was not prepared to accept it. According to FLC, the judge rejected the hearsay evidence because he did not accept that Li Yong Jiu was a truthful witness and the hearsay evidence had little probative value. FLC argued that it was within the judge’s discretion to reject the hearsay evidence on those bases. Further, FLC contended that the fact that none of Yima’s directors gave evidence was an additional reason why the judge was entitled not to give any weight to the hearsay evidence.

In our opinion, there is no substance to ground 6.

Contrary to KQ’s submission, the judge did not find that the hearsay evidence was inadmissible notwithstanding that FLC had not objected to KQ’s hearsay notice. Rather, the judge rejected the hearsay evidence for two reasons. First, the evidence was unreliable because insufficient information had been provided about the contents of Li Yong Jiu’s telephone conversations with the other directors. Secondly, the judge found that Li Yong Jiu was an untruthful witness whose evidence would not be accepted unless it was corroborated.

We reject KQ’s contention that the judge’s discretion miscarried because he rejected the hearsay evidence without giving KQ prior warning that he intended to do so. The fact that the hearsay evidence was admitted without objection did not mean that the judge was obliged to accept it or that he was required to give notice of his proposal not to do so. The risk of a judge not accepting admissible evidence is well known and, ordinarily, in the absence of any prior indication that the evidence would be accepted, there is no requirement on a judge to warn a party that the evidence may be rejected. In the present case, there was nothing in the judge’s conduct which gave rise to an obligation to warn KQ that the hearsay evidence may not be accepted.

In our opinion, the judge was correct to reject the hearsay evidence.

Ground 8: Was FLC responsible under the ETA for U&D’s undisclosed debts?

It will be recalled that ground 8 is in the following terms:

The trial judge erred in finding that FLC was not responsible under cl 3.5 of the ETA for the debts of U&D (totalling $3,375,000) that were undisclosed when the ETA was entered into and which U&D subsequently paid (Reasons [862]–[887]).

Clause 3.4 of the ETA provided that the 51 per cent shareholding interest in U&D that KQ was acquiring by paying the ‘Transfer Price Sum’ to ANB and FLC included all the rights and interests in the acquired shares except for two items. One of those items was ‘[a]ny debts/liabilities and other accounts payable of [U&D] not listed in [U&D’s] Asset Valuation Report (Undisclosed Debts/Liabilities in short hereafter)’. Clause 3.5 provided that ANB and FLC ‘should be responsible for all Undisclosed Debts/Liabilities (if exist)’.

It is common ground that no ‘Asset Valuation Report’ of U&D was in existence.

In para 28 of its final defence and counterclaim, KQ alleged that on the date of execution of the ETA (27 April 2012), U&D had liabilities of $25,398,104, which KQ defined as the ‘Liabilities Claimed’. Those liabilities were said to include debts totalling $3,377,785 which U&D had repaid to Apollo Fertiliser ($140,000), Lion Glass ($390,000), Yinan Zhang ($2,845,000) and other creditors ($2,785) after 27 April 2012 (‘repaid debts’). In paras 38A–38E, KQ alleged: that the Liabilities Claimed were ‘Undisclosed Debts/Liabilities’ within the meaning of cl 3.5 of the ETA; that FLC was obliged to repay them to U&D; that FLC failed to repay them; and that KQ suffered loss, being 51 per cent of the Liabilities Claimed (corresponding to KQ’s 51 per cent shareholding in U&D) and the use of that money. In para 43, KQ sought specific performance of FLC’s obligation to repay the Liabilities Claimed to U&D.

At trial, KQ tendered various financial records to establish that U&D was indebted in the amount of $25,398,104 as at 27 April 2012 and that it had subsequently repaid debts totalling $3,377,785. FLC contended that the debts had been forgiven and therefore they were not ‘Undisclosed Debts/Liabilities’ in respect of which it was under an obligation to make payments pursuant to cl 3.5 of the ETA.

KQ relied on the expert evidence of a forensic accountant, Paul Vincent, that the Liabilities Claimed were still owing. He was of that opinion because the accounting entries that were made to give effect to the forgiveness of the debts did not comply with proper accounting principles and therefore did not result in the debts being discharged.

The judge rejected Mr Vincent’s evidence. He concluded that the accounting entries relating to the Liabilities Claimed had been effective in discharging the debts and therefore there were no Undisclosed Debts/Liabilities to which cl 3.5 of the ETA applied.[130] The judge did not deal with KQ’s evidence that debts totalling $3,377,785 had not been forgiven but had been repaid by U&D to the relevant creditors.
[130]Reasons [879]–[887].

Before this Court, KQ did not challenge the judge’s rejection of Mr Vincent’s evidence and accepted that the debts that had been forgiven by U&D’s creditors did not constitute ‘Undisclosed Debts/Liabilities’ for the purpose of cl 3.5 of the ETA. However, KQ contended that the judge erred in overlooking the evidence of U&D’s repayment of debts totalling $3,375,000[131] and treating the entire indebtedness of $25,398,104 as having been forgiven. KQ sought an order from this Court that FLC pay to KQ 51 per cent of $3,375,000 (namely, $1,721,250) or, alternatively, an order for specific performance of FLC’s obligation to pay the amount of $3,375,000 to U&D.
[131]KQ did not refer to the additional amount of $2,785 set out at [303] above. This amount explains the difference between the sum of $3,377,785 referred to at [304] and [306] above and the sum of $3,375,000.

FLC submitted that the judge did not err in overlooking the evidence of repayment of debts totalling $3,375,000 by U&D because KQ had failed to draw this evidence to the judge’s attention. According to FLC, KQ merely tendered a bundle of financial records without providing any assistance to the judge by way of submissions as to what the documents were and how they were relevant to KQ’s case. FLC contended that the judge was not obliged to ‘trawl through pages and pages of financial statements in trying to identify the evidence that [KQ relied] upon’.[132] FLC also submitted that the meaning and effect of cl 3.5 of the ETA were not clear and were not the subject of argument at trial.
[132]Transcript of Proceedings (7 August 2020) 225.19–225.21.

In our opinion, ground 8 is made out.

Although the English translation of cl 3.5 is somewhat clumsy, its meaning and effect were clear: to the extent that U&D had any debts and liabilities which were not disclosed in an ‘Asset Valuation Report’, FLC and ANB were responsible for paying for them.

The evidence before the judge clearly established that U&D had repaid debts totalling $3,375,000. Contrary to FLC’s submissions, KQ did provide assistance to the judge in relation to that evidence. The relevant debts were itemised in Mr Vincent’s report and the judge referred to them on three occasions.[133] In paras 87–88 of its written closing submissions, KQ referred to the evidence it had adduced, and Mr Vincent’s report, and stated the following:

Consistently with the uncontested evidence, comprising bank statements and U&D’s ledgers, the Court should find that U&D repaid $3,375,000 in reduction of [its undisclosed] debts. U&D paid: (a) $140,000 to discharge the debt owing to Apollo Fertilizer; (b) $390,000 to discharge the debt owing to Lion Glass; and (c) $2,845,000 to partially discharge the debt owing to [Yinan] Zhang.

[133]Reasons [863], [868], [871].

It follows that the judge erred in overlooking the evidence of repayment of debts totalling $3,375,000 and concluding that the entire indebtedness of $25,398,104 had been forgiven by the relevant creditors.

As we have already stated, in its final defence and counterclaim, KQ sought specific performance of FLC’s obligation under cl 3.5 of the ETA. It did not seek an alternative order that FLC pay to it 51 per cent of the ‘Undisclosed Debts/Liabilities’. Accordingly, we will make an order that FLC specifically perform its obligation under cl 3.5 to pay to U&D the amount of $3,375,000.[134]
[134]The fact that U&D is not a party to the ETA and is not a party to the application for leave to appeal does not preclude KQ from obtaining an order for specific performance of FLC’s obligation to make a payment to U&D. See Coulls v Bagot’s Executor and Trustee Company Ltd (1967) 119 CLR 460, 478; [1967] HCA 3.

Conclusions and relief to be granted

Our key conclusions may be summarised as follows:

(a)The judge erred in failing to deal with KQ’s defence that the valuer acted fraudulently and that the fraud meant that the Valuation did not fix the purchase price for FLC’s 40 per cent shareholding in U&D under the ETA. The judge should have upheld this defence and found that KQ did not have a contractual obligation under the ETA to make any further payments to FLC in respect of the purchase price. Accordingly, the judge erred in giving judgment in favour of FLC in the amount of $25,278,431.37 together with interest on that amount under s 58 of the Supreme Court Act.
(b)The judge did not err in finding that Songying Li, Yima and KQ did not rely upon the CRA report.
(c)The judge did not err in deciding that Yima (and thus KQ) did not rely on the valuer’s estimates of the coal reserves of the Tenement.
(d)The judge erred in rejecting KQ’s claim that it made payments to FLC for its shares in U&D in the mistaken belief that the Valuation had fixed or confirmed the purchase price for FLC’s shares in U&D and that the ETA required the making of the payments. Whether the judge was correct in dismissing KQ’s counterclaim against FLC will depend on whether FLC is able to establish its defences to KQ’s counterclaim based on mistake.
(e)The judge was correct to find that Yinan Zhang did not have authority from FLC to direct KQ to pay the amount of $51,600,000 to U&D in discharge of KQ’s obligation to FLC to pay the purchase price for its shareholding in U&D.
(f)The judge erred in failing to find that FLC was obliged to pay the amount of $3,375,000 to U&D pursuant to cl 3.5 of the ETA.

We will provide the parties with an opportunity to review these reasons and engage in discussions to resolve the litigation. We strongly encourage the parties to do so and are prepared to make an order for judicial mediation before an associate judge of the Court if the parties consent to such an order. If the litigation is not resolved by agreement, we will make orders to the following effect:

(a) The application for leave to appeal is granted.
(b) The appeal is allowed.
(c)The judge’s orders giving judgment in favour of FLC and requiring KQ to pay interest and costs be set aside and be replaced by orders dismissing FLC’s claim and requiring FLC to pay to U&D the amount of $3,375,000 together with interest.
(d)The proceeding be remitted to the Trial Division for determination of FLC’s pleaded defences to KQ’s counterclaim based on mistake.

We will give the parties an opportunity to make submissions in relation to the costs of the trial and of the appeal.

- - -

[2020] VSCA 239

17 September 2020