Bass Hill Investments Pty Ltd v JSJW Real Estate Pty Ltd

Case •

[2022] NSWSC 1453

•

25 October 2022

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: Bass Hill Investments Pty Ltd v JSJW Real Estate Pty Ltd [2022] NSWSC 1453
Hearing dates: 14-17, 21-23 February, 18-19 July and 29 August 2022
Date of orders: 25 October 2022
Decision date: 25 October 2022
Jurisdiction:Equity
Before: Darke J
Decision:

See [132]-[134]

Catchwords:

CONTRACTS – contract for sale of land – payment of deposit – contract provides for payment of a deposit of $520,000 to vendor’s agent – no payment made to vendor’s agent – payments totalling $652,999 made in discharge of vendor’s bank loan – whether payments should be characterised as payment of deposit – whether payments should instead be characterised as loans to vendor by shareholders – held that the parties intended the $652,999 to be paid instead of the $520,000 as provided under the contract – held that the payments discharged the purchaser’s obligation to pay the deposit – vendor not entitled to terminate contract due to a failure to pay deposit

CORPORATIONS – director’s duties – duty to act in good faith and in the best interests of the company – duty to exercise powers for a proper purpose – director causes company to enter into lease of its land – lease said to be “manifestly disadvantageous” – not shown that director did not honestly believe he was acting in the best interests of the company – objective circumstances do not show that director was acting contrary to the best interests of the company – no improper purpose identified or established – no loss proven in any event

CORPORATIONS – director’s duties – duty to act in good faith and in the best interests of the company – duty to exercise powers for a proper purpose – director causes company to enter into contract for sale of its land – sale said to be to a purchaser in which director had an interest – sale not alleged to be at an undervalue – interest of director in purchaser an indirect security interest not an equity interest – not shown that director was acting otherwise than in good faith and in the best interests of the company as he perceived them – objective circumstances do not show that director was acting contrary to the best interests of the company – no improper purpose identified or established – no loss proven in any event

Legislation Cited:

Corporations Act 2001 (Cth), s 181(1), s 182

Cases Cited:

Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260

Downer EDI Ltd v Gillies (2012) 92 ACSR 373; [2012] NSWCA 333

Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6

Hart Security Australia Ltd v Boucousis (2016) 117 ACSR 408; [2016] NSWCA 307

Mehmet v Benson (1965) 113 CLR 295

Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789

Re IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40

Re Smith & Fawcett Ltd [1942] Ch 304

Ruthol Pty Ltd v Tricon (Australia) Pty Ltd (2005) 12 BPR 23,923; [2005] NSWCA 443

Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157

Category:Principal judgment
Parties: Bass Hill Investments Pty Ltd (Plaintiff/First Cross-Defendant)
JSJW Real Estate Pty Ltd (Defendant/Cross-Claimant)
Ling Hua Zhu (Second Cross-Defendant)
Representation:

Counsel:
Mr J Foley (Plaintiff/First Cross-Defendant)
Mr T J Morahan (Defendant/Cross-Claimant)
Mr P Lonergan (Second Cross-Defendant)

Solicitors:
Yingke Law Firm (Plaintiff/First Cross-Defendant)
Chen Shan Lawyers (Defendant/Cross-Claimant)
Tahota Law Firm (Second Cross-Defendant)
File Number(s): 2019/122357
Publication restriction: None

Judgment

Introduction

  1. These proceedings concern a property at 821-835 Hume Highway, Bass Hill. The property is known as Lot 1 in Deposited Plan 1203967 (“Lot 1”). Lot 1 was created in 2015 as a consolidation of three lots, namely, Lots 100 and 101 in Deposited Plan 711837, and Lot 2 in Deposited Plan 505662. The first defendant (“JSJW”) is the registered proprietor of Lot 1. It had acquired Lots 100 and 101 in about March 2013, and Lot 2 in November 2014.

  2. By its Amended Statement of Claim, the plaintiff (“Bass Hill”) seeks a declaration that a contract it entered into on about 3 May 2016 to purchase Lot 1 is valid and enforceable against JSJW. It seeks orders in the nature of specific performance in respect of the contract. The contract provided for a purchase price of $5,200,000, with a deposit of $520,000. The contractual date for completion was 30 April 2018.

  3. JSJW seems to accept that a valid and binding contract came into existence on about 3 May 2016. However, by its Cross-Claim, it seeks a declaration to the effect that it terminated the contract following a failure by Bass Hill to pay the deposit in accordance with its terms. Solicitors acting for JSJW served a Notice of Termination upon Bass Hill on about 29 November 2019. It is clear that a failure to pay the deposit on the making of the contract would be a breach of the contract in an essential respect that would give the vendor the right to terminate the contract by notice (see cll 2 and 9 of the contract).

  4. The question whether the deposit was paid in accordance with the contract is the central issue in dispute between Bass Hill and JSJW.

  5. In brief, Bass Hill contends that the deposit of $520,000 was paid as part of a total amount of $652,299 that was paid into JSJW’s Better Business Loan account with the Commonwealth Bank of Australia (“CBA”) on 11 May 2016. That amount, which consisted of two payments, of $330,000 and $322,299, was sufficient to discharge that loan, which was secured by a mortgage over Lot 1. Bass Hill contends that the $652,299 so paid had been advanced to it pursuant to a Deed of Loan dated 4 May 2016 between it as Borrower and Australia Zhung Zup International Pty Ltd (“AZZI”) as Lender. Bass Hill further contends that payment of the deposit in that fashion was in accordance with resolutions made on 3 May 2016 by a director (Ling Hua Zhu) and a secretary (Hong Zhu) of JSJW. Ling Hua Zhu and Hong Zhu were the signatories on the contract for sale on behalf of JSJW.

  6. JSJW contends that the $652,299 that was paid into the loan account did not constitute the payment of the deposit under the contract. JSJW contends that the payments were rather in the nature of loans to it by shareholders, namely, AZZI (a company associated with Ling Hua Zhu, which held 11.66% of the shares) and Luna Jasmin Pty Ltd (a company associated with Hong Zhu, which held 5% of the shares).

  7. Two further issues arise if the Court concludes that a valid and binding contract continues to exist. These are, first, whether interest is payable on the purchase price in respect of the period from 1 May 2021 and, second, whether orders for specific performance should be withheld on discretionary grounds because Bass Hill is not ready, willing and able to perform its obligations under the contract.

  8. By its Cross-Claim, JSJW also brings claims against a former director, Ling Hua Zhu. Various claims are pleaded, including claims under the Australian Consumer Law for engaging in misleading or deceptive conduct. Ultimately, the only claims pressed in closing submissions were certain claims for breach of fiduciary duty. In particular, two claims were pressed for breach of the duties owed to JSJW to act in good faith in the best interests of the company, and for a proper purpose. It is alleged that Ling Hua Zhu breached those duties in respect of the entry into the contract to sell Lot 1 to Bass Hill, and also in respect of the entry into a lease of Lot 1 to Masters Civil (Aust) Pty Ltd (“Masters Civil”) in 2015.

  9. Ling Hua Zhu denies the allegations that he breached his fiduciary duties to JSJW.

Background facts

  1. JSJW was incorporated on 13 November 2012. A company search records that at that time Ai Hua Hong was the sole director of the company and Ying Xiao An was the secretary. Ying Xiao An became a director on 1 May 2014.

  2. Ai Hua Hong is the wife of Jiang An, and Ying Xiao An is the daughter of Jiang An. Those three members of the An family appear to have held all the ordinary shares in the company. The letters “JSJW” are an acronym for the name of the property development company operated by Jiang An in China.

  3. As already mentioned, JSJW acquired Lots 100 and 101 in Deposited Plan 711837 in about March 2013. The acquisition was funded by a loan from CBA, who took a mortgage over the property. It seems that the property had been brought to the attention of JSJW by Ling Hua Zhu. He had earlier been introduced to the An family members by Hong Zhu. Hong Zhu told them that he had known Ling Hua Zhu (also known as “Lao Lin”) for a long time, and that he was a builder who had done property developments.

  4. In 2014, Ling Hua Zhu introduced JSJW to Lot 2 in Deposited Plan 505662. That property is adjacent to Lots 100 and 101, but fronts onto Johnston Road, unlike Lots 100 and 101 which front onto the Hume Highway. Ling Hua Zhu suggested that Lot 2 could be amalgamated with Lots 100 and 101 to form a consolidated site suitable for high density residential development.

  5. The An family was interested in having JSJW acquire Lot 2, but wanted to introduce new investors into the company for that purpose. By October 2014, arrangements had been made for Yan Xia, Ling Hua Zhu and Hong Zhu to invest in JSJW by means of provision of funds for the acquisition of Lot 2 in return for an allocation of shares.

  6. The arrangements are reflected in the English translation of a document headed “Shareholding Restructure Agreement” dated 28 October 2014. In summary, the document records that:

  1. the directors of JSJW had decided to grant the right to purchase Lot 2 (3,064m2) to new shareholders who would purchase the property for $1.59 million;

  2. once the purchase was completed “the new shareholders will convert the land on a per square metre basis into equity interest” in JSJW, so the original shareholders would hold 66.678% of the shares and the new shareholders would hold 33.322% of the shares;

  3. the new shareholders would be Yan Xia (16.661%), AZZI (11.661%) and Hong Zhu (5%); and

  4. Lot 2 would be “merged into” Lots 100 and 101 (6131m2) to form a lot with an area of 9,195m2.

  1. A contract to purchase Lot 2 was entered into by JSJW in November 2014. The purchase settled in early 2015. I infer that the funds for the purchase were provided by the new shareholders, as contemplated by the Shareholding Restructure Agreement. New ordinary shares in JSJW were ultimately issued. It seems that the intended Yan Xia shareholding was put into the name of Australia Xia Pty Ltd, and the intended Hong Zhu shareholding was put into the name of Luna Jasmin Pty Ltd.

  2. A meeting of shareholders, or representatives of the shareholders took place on 3 January 2015. The English translation of a document, headed “Resolutions of the Shareholders”, records that the meeting was attended by Ying Xiao An, Ke Yang Xia (the son of Yan Xia), Ling Hua Zhu and Hong Zhu. A number of resolutions are stated to have been passed unanimously, including resolutions to the following effect:

…

2)   In order to increase work efficiency, as per the consensus of the shareholders, Keyan [sic] XIA (Yan XIA) is elected to manage the project, and to actively coordinate with all parties to see to the progression of the project. Linhua ZHU is elected to handle and carry out all tasks associated with the project. Hong ZHU is elected to be responsible for the management of the accounts of the project. The people mentioned above must all report to Yingxiao AN. The shareholders propose that henceforth the authority to sign for the company will be conferred to Yingxiao AN and Keyang XIA, signing jointly for such signing to be valid.

3)   In view of the fact that the proportions of shareholding by the shareholders are 66.678% \ 16.661% \ 11.661% and 5%, the shareholders based on the principles of openness, fairness, transparency, and equality, contribute capital in proportion to their percentage of shareholding, enjoy profits and assume risks, and unanimously agree that:

1.   Each shareholder will, proportional to their percentage of shareholding, pay Linhua ZHU as reimbursement for the total amount of 221-thousand Australian dollars, which amount has been incurred in relation to the project planning and approval of the approved 120 apartment units, specifically: Yingxiao AN 147318.60 Australian dollars (50000 dollars paid already), Keyang XIA 36820.81 Australian dollars, Linhua ZHU 25770.81 Australian dollars, Hong ZHU 11050.00 Australian dollars.

…

4.   All parties confirm: Yingxiao AN’s pre-existing bank loan of 1.3 million Australian dollars and its interests will continue to be the responsibility of Yingxiao AN, and it is hoped that the loan may be repaid in full within 180 days, so as to facilitate the smooth development of the project.

5.   All parties confirm: This company is a company formed by shares, as the project develops, all shareholders are to provide capital proportional to their percentage of shareholding in the appointed time to benefit from profits and assume risks, any shareholder who hereafter does not provide capital at the appointed time will have their percentage of shareholding increased or decreased on a pro rata basis with their actual capital contribution. Any increase or decrease or transfer of any shareholding requires the unanimous agreement of the shareholders for it to be valid.

6.   In relation to the costs of the design (72-thousand Australian dollars), of the meeting(s) held in discussing the preliminary project planning, of the master development drawing, of noise report, and of the report on traffic volume (31335 Australian dollars), all shareholders are required to contribute their proportions of all such costs to Hong ZHU for payment to the relevant authorities, specifically: 68901 Australian dollars for Yingxiao AN, 17215.60 Australian dollars for Keyang XIA, 12050.00 Australian dollars for Lin ZHU, 5116.80 Australian dollars for Hong ZHU.

The references in the document to “Linhua Zhu” and “Lin Zhu” may be taken to be references to Ling Hua Zhu.

  1. There are several references in the document to “the project”. The documentary evidence establishes that, by the time of the meeting, Ling Hua Zhu had been authorised by JSJW to sign a town planning application to Bankstown City Council, and he had engaged Chapman Planning Pty Ltd to make a submission to the Council to the effect that the present Residential 2(a) zoning of the 821-835 Hume Highway site should be amended to a Business or High Density Residential zoning. It appears that the matter was considered at a Council meeting on 26 August 2014, where it was resolved to proceed with a 1:1 FSR [Floor Space Ratio]/4 storey building envelope. Thereafter, Ling Hua Zhu continued to liaise with the Council concerning various issues that were raised. He arranged for a number of consultants to be engaged to assist the process. It seems that it was intended to proceed at some point to lodge a development application with the Council.

  2. According to a company search, on 26 February 2015, Ke Yang Xia was appointed as a director of JSJW, and Ling Hua Zhu was appointed as a secretary of the company. The search further reveals that on 18 August 2015, Ling Hua Zhu was appointed as a director. The circumstances in which Ling Hua Zhu was appointed as a director of JSJW are contentious.

  3. In about early September 2015, Ling Hua Zhu made arrangements with a director of Masters Civil for that company to take a lease of the property. According to Ling Hua Zhu, the lease was for a term of four years, and whilst the rent payable under the lease was a nominal $1.00 per year, and there was no obligation on the part of the tenant to pay outgoings, the tenant was obliged to demolish all buildings and structures on the land and clear it, and install fencing and a gate to the then unfenced site. Ling Hua Zhu further says that the tenant was obliged to vacate the land on one month’s notice of JSJW obtaining a development approval from the Council. This lease agreement is the subject of one of JSJW’s claims against Ling Hua Zhu for breach of fiduciary duty.

  4. The Resolutions of Shareholders document of 3 January 2015 referred to a hope that Ying Xiao An’s bank loan would be repaid in full within 180 days. I infer that that is a reference to the CBA loan that had been taken by JSJW to acquire Lots 100 and 101. Unfortunately, that hope was not realised.

  5. It appears that, by late 2015, the An family had fallen into serious financial difficulty. It became apparent to those interested in JSJW that the family was not in a position to repay the CBA loan. Various conversations amongst the shareholders of JSJW followed, in which the problems of the An family, and the consequential impact of those problems upon the project, were discussed. The content of these conversations is a matter of contention between, on the one hand, the numerous witnesses called by JSJW (being members of the An family, members of the Xia family and Hong Zhu) and, on the other hand, Ling Hua Zhu. It is not necessary to refer here to the details of those disputed conversations. It is sufficient for the moment to note that the conversations form the backdrop to the events in 2016 that culminated in the contract for sale of the land to Bass Hill and the payments made to discharge the CBA loan. It is clear that the discussions were, to a significant degree, concerned with the question of how to deal with the problem of the CBA loan. Broadly, it is contended by Ling Hua Zhu that the contract for sale, and in particular the deposit payable thereunder, was the chosen means of dealing with that problem, while on the other hand it is contended by JSJW that the chosen means of dealing with the problem was the raising of loans from shareholders.

  6. In early 2016, in light of the An family problems, consideration was given to a transfer of the land to a company that had no association with the An family. Consideration of such a proposal was given by at least members of the Xia family. On 8 February 2016 a new company, X2Z Pty Ltd, was established, apparently for such a purpose. The company was effectively set up by Ke Yang Xia. He became a director, as did Ling Hua Zhu. However, no transfer to the company was ever made, and the company remained unused. It was de-registered in July 2018.

  7. A transfer of that nature appears to have still been in contemplation around 19 March 2016, when Jing Ying Zhang (the wife of Yan Xia) sent a WeChat message to Ling Hua Zhu and Yan Xia that refers to a need to ensure that the “price set for the transfer” was not too low.

  8. At around the same time, there was discussion amongst the shareholders about lending money to the An family so that they could repay the CBA mortgage. Apparently in connection with that proposal, the An family members provided a signed “IOU” on about 22 March 2016 in the following terms:

Due to that [sic] we need to pay bank loans, land taxes and other fees for our company JSJW REAL EST PTY LTD in Australia, we are borrowing from you some Seven hundred thousand Australian dollars (Final settlement equals to amount occurred actually [sic]) and we take our shares of above mentioned company as the guarantee

Thank you!

The document was apparently signed by the three An family members. Again, however, the proposal did not proceed.

  1. I turn now to the critical events of April and May 2016.

The events of April and May 2016

  1. On 12 April 2016, Ling Hua Zhu sent an email to Ms Wenjing (also known as Winnie) Yang of the CBA concerning the 821-835 Hume Highway property. The email was in the following terms:

I write regarding the above property and to clarify some issues.

The two directors that are currently in China are: Mr An Xiao Xiao, and Mr [sic] Hong Ai Hua

They own the chinese company JSJW realestate compay [sic] of china.

This company has been bankrupted in China and both these directors are waiting for a court decision to determine their sentence. They cannot come to Australia anymore and they owe too much money in China.

I am also a director of the Australian company JSJW Realestate [sic]. I am able and would like to pay the money owing to the bank in the next few days.

I do not want any debt owed to the bank and do not want this company to be liquidated.

I have a good reputation and would like to keep it that way.

Could you please instruct on the best way to have this matter resolved quickly and please provide the correct bank details and amount owing so I can settle the debt immediately.

Thank you and I look forward to hearing from you soon.

  1. Ms Yang responded by email later that day in the following terms:

Thank you for your email.

Please find the information for current business loan under JSJW REAL ESTATE PTY LTD below,

- Outstanding balance: - $652,299.00

- Loan maturity date: 14/05/2016

- BSB XXXXX X Account Number XXXXX XXX

If you no longer require the loan facility, please credit outstanding loan balance prior to the loan maturity date.

Please do not hesitate to contact me should you have further query.

  1. On 14 April 2016, Ling Hua Zhu sent a further email to Ms Yang. This email was in the following terms:

I have spoken with my bank and I have no problem to pay the outstanding amount by the loan maturity date in one [month?].

I need your assistance with closing this account once the amount is paid.

I have been advised that once I pay the amount owing, the original borrower might be able to redraw on the amount.

Can you please help me to resolve this matter.

  1. Ms Yang responded to that email on 15 April 2016 in the following terms:

Thank you for your email.

I will close your business loan account as long as I have all directors’ authorisations/signatures once it is paid out.

Please do not hesitate to contact me should you have further query.

  1. By 22 April 2016, Ling Hua Zhu had taken steps to enter into an Agency Agreement on behalf of JSJW with Treasure Property Group Pty Ltd in respect of a sale of the property. The Agency Agreement stated that the property would be offered for sale at a price of $5.2 million. The agent’s opinion as to current estimated selling price range was stated to be $4.8 million to $5.3 million. Ling Hua Zhu deposed that, as the CBA loan was due for repayment in May 2016, he urged the agent to find a purchaser as soon as possible.

  2. However, Ling Hua Zhu seems to have taken matters into his own hands. He deposed that on about 23 April 2016 he spoke to Da Shi Hong, a land developer he had known for some years, about purchasing the property. Ling Hua Zhu deposed that he had a conversation with Mr Da Shi Hong to the following effect:

Ling Hua Zhu:   There is a 9,000 square meters land in Bass Hill purchased by JSJW, a company I am a shareholder and director last year, a bank loan in a sum of $650,000 secured against the land is due in May this year, the company would like to sell the land for $5,200,000. While the deposit payable by the buyer must be the sum of $652,299 and allow JSJW to use the deposit money to discharge the bank loan. I have spent time and money on the land during the past years on subdivision, development application and I find a tenant who has installed fence and gate on the land, the tenant will occupy the land during the course of the development application, although the land is zoned as low density residential, I believe the Council will allow high density residential development on the land for 120 units. I really don’t want to see it to be sold by fire sale by the bank, would you be interested in buying it?

Da Shi Hong:   It will depend on further negotiation on the sale price and when will the vendor want to settlement, I need time to gathering funds.

Ling Hua Zhu:   The sale price is not negotiable, $5,200,000, regarding the term of settlement, it can take place within 2 years with no interest and 2.5% interest per year for another 3 years. Further, the deposit payable by the buyer will be 10% on the Contract price to avoid the Contract to be found unlawful, but you can lodge a caveat on the title.

Da Shi Hong:   If you can send me the registered plan for the land, I need think about it.

  1. Ling Hua Zhu further deposed that, within a few days, Da Shi Hong had informed him that he accepted the offer and would purchase the property through Bass Hill.

  2. Bass Hill was incorporated on 27 April 2016. Da Shi Hong was appointed as the sole director and secretary of the company. He was also the holder of all the shares in the company.

  3. Also on 27 April 2016, Hong Zhu was appointed as a secretary of JSJW. The circumstances in which the appointment was made were not explained in the evidence.

  4. On 28 April 2016, Ling Hua Zhu and Hong Zhu signed, on behalf of JSJW, a costs agreement with a conveyancer, Wiston Partner, to act in relation to the sale of the property. It seems that Wiston Partner had already attended to the drafting of a form of contract for sale. Ling Hua Zhu instructed Mr Michael Li of Wiston Partner to send a copy of the contract to a solicitor acting for Da Shi Hong.

  5. The form of contract, which employed the Law Society/Real Estate Institute standard form (2005 Edition) supplemented by a number of Additional Conditions, provided for a deposit of $520,000 to be paid. At some stage in late April or early May 2016, and prior to the exchange of contracts, Ling Hua Zhu and Hong Zhu together attended the office of Mr Li. On that occasion, Mr Li provided an explanation of the contract.

  6. A cheque in the sum of $520,000, dated 2 May 2016, was drawn by Ostar International Trading Pty Ltd in favour of JSJW. Ostar International Trading Pty Ltd is a company associated with Da Shi Hong. Ling Hua Zhu deposed that the cheque was provided to him by Da Shi Hong on 3 May 2016. Ling Hua Zhu deposed that on that occasion they had a conversation to the following effect:

Da Shi Hong:   This is the Contract for Sale I signed in my lawyer’s office along with a cheque I drew in favour of JSJW for a sum of $520,000, I would like you to instructed [sic] your lawyer to have the contract exchanged but hold on to the cheque for a week, I don’t have enough fund in the account at the moment.

Ling Hua Zhu:   It is not enough, we need $652,299 to discharge the bank loan.

Da Shi Hong:   I don’t have that much.

Ling Hua Zhu:   I probably can lend it to you with an interest of 3% per year, but we have to sign a Deed, and the money I lend to you will transfer to the loan account of JSJW to discharge the bank loan, how many shareholder in Bass Hill Investments Pty Ltd?

Da Shi Hong:   I would like to enter into a Deed with you as you said, and I am the only shareholder and director of the company.

Ling Hua Zhu:   If you transfer all shares of Bass Hill Investments Pty Ltd to Yu Rong Zhou, my ex-wife, I can talk to other shareholders to lend money to you for exchange the Contract for Sale. I will let Yu Rong Zhou to transfer the shares back to you whenever you pay back the $652,299 with an interest of 3% per year, are you accept that?

Da Shi Hong:   I accept that and I can transfer all my shares to Yu Rong Zhou if you let me have her personal details. What is the latest date you can allow me to pay back?

Ling Hua Zhu:   Before you settle the land with JSJW.

Da Shi Hong:   I accept that as well, we need enter in to a Deed.

Ling Hua Zhu:   I don’t have $652,299 at the moment to lend to you, I have to talk to Hong Zhu, another shareholder of JSJW before I can make it.

  1. An important document in the case is a Minutes of Meeting dated 3 May 2016 that was signed by Ling Hua Zhu and Hong Zhu. The document records that a meeting of the two men took place on that date in Bankstown. The document includes the following:

Matter to Discuss

1]   JSJW not to bank the cheque from Bass Hill Investment P/L as deposit for sale of 821 Hume Highway Bass Hill 2197;

2]   Any possible way to raise fund to clear commonwealth bank debts urgently on or before 14 May 2016 to avoid bankrupt of JSJW Real Estate Pty Limited;

3]   Because the monies owed to the Commonwealth bank by JSJW are more than the deposit, Bass Hill Investment P/L pay $520,000 AUD deposit as per contract of sale plus pay additional monies owed by JSJW to commonwealth bank being a total combined amount of $652,299.00 AUD on or before 14 May 2016 directly released to the commonwealth bank.

4]   Ensure that at settlement an amendment is made to reflect the total amount paid by Bass Hill Investment P/L and change the amount owing to JSJW accordingly.

Resolved

1]   It was resolved that JSJW will not bank the cheque from Bass Hill Investment P/L as deposit for sale of 821 Hume Highway Bass Hill 2197;

2]   It was resolved that Bass Hill Investment P/L pay $520,000 AUD deposit as per contract of sale plus pay additional monies owed by JSJW to commonwealth bank, being a total combined amount of $652,299.00 AUD on or before 14 May 2016 directly released to the commonwealth bank.

3]   It was resolved that at settlement an amendment will be made to reflect the total amount paid by Bass Hill Investment P/L and change the amount owing to JSJW accordingly.

  1. Ling Hua Zhu deposed that the above document was “settled and signed” by Hong Zhu and himself after they had a conversation in which he told Hong Zhu about his discussion earlier that day with Da Shi Hong. Ling Hua Zhu deposed that his earlier conversation with Hong Zhu was to the following effect:

Ling Hua Zhu:   Whilst the contract for sale has been signed by Mr. Hong on behalf of Bass Hill Investments Pty Ltd and he has provided me with a cheque in a sum of $520,000, Mr. Hong told me to hold on to the cheque for a week as he doesn’t have enough money in the account. I told him that we can exchange the Contract with him by lend [sic] him $652,299 for 3% per year interest, and we can use the money I lend to him to discharge the bank loan. At the moment I have $330,000 approximately, I would be grateful if you can lend me the balance, a sum of $322,299 for me to lend to Bass Hill Investments together with my $330,000 to pay off the loan.

Hong Zhu:   I can take $322,299 from my offset account, but are you sure the purchaser will have money to repay $652,299 to us? How long that will take?

Ling Hua Zhu:   That will be my problem, I am liable for your $322,299, not the purchaser, I will repay $100,000 to you within two years, and the rest, a sum of $222,299 within 5 years or on the date of the purchaser settle the land with JSJW.

Hong Zhu:   Ok, I can do it.

Ling Hua Zhu:   I think we should put it in writing by a Minutes of Meeting.

Hong Zhu:   We have to.

  1. Ling Hua Zhu deposed that he provided a handwritten Acknowledgement of Debt to Hong Zhu that referred to the terms of a loan of $322,299 from Hong Zhu to AZZI. He deposed that he does not have a copy of the document.

  2. Ling Hua Zhu further deposed that he then “delivered the Contract for Sale” to Mr Li for him to complete the exchange of contracts.

  3. The contract for sale bears the date 3 May 2016. That appears to be the date that contracts were exchanged. A letter dated 3 May 2016 from Mr Li of Wiston Partner to NSW Solicitor (the purchaser’s solicitor named on the form of contract) is in the following terms:

We refer to the above matter and acknowledge receipt of the contract signed by the purchaser, and confirmed by our client to receive your client paid in the sum of $520,000.00 [sic] representing the 10% deposit according to the contract special condition clause 34.

Now you are authorized to insert today’s date to the vendor signed counterpart of the contract, to complete the exchange. Both counterparts have been dated 3/05/2016.

Enclosed is purchaser signed and dated contract page as for your record.

  1. Ling Hua Zhu signed a receipt dated 4 May 2016 in respect of the deposit in the following terms:

I, Linghua Zhu am a director of JSJW Real Estate Pty Ltd and received a deposit totalling $520,000 AUD from Bass Hill Investment Pty Ltd on behalf of JSJW Real Estate Pty Ltd.

  1. Also on 4 May 2016, a Deed of Loan was entered into between Bass Hill as the Borrower and AZZI as the Lender. The Deed provided for an advance of a Principal Sum of $652,299. It was recited in the Deed that the Lender had advanced that sum to the Borrower for it to purchase the property. It was also recited that the Borrower acknowledged that the Lender or its nominee “may become sole shareholder of Bass Hill Investments Pty Ltd on or after this agreement” (see Recital C).

  2. At about that time, Da Shi Hong took steps to have the shares in Bass Hill transferred to Yu Rong Zhou. Yu Rong Zhou is the ex-wife of Ling Hua Zhu.

  3. By 11 May 2016, Bass Hill had lodged a caveat (AK407296) against the title to the property claiming an interest pursuant to the contract for sale of land dated 3 May 2016. The statutory declaration for the caveat had been signed by Da Shi Hong on 5 May 2016.

  4. On 11 May 2016, JSJW received the two payments of $330,000 and $322,299 into its Better Business Loan account with CBA. The $330,000 was transferred into the account from an account in the name of AZZI. The $322,299 was transferred into the account from an account in the names of Hong Zhu and his wife Min Jia. The amount owing on the loan account was thereby discharged.

  5. At around that time, steps were taken by Ying Xiao An, Ai Hua Hong and Ke Yang Xia to have Ling Hua Zhu removed from his positions as a director and a secretary of JSJW. Steps were also taken by those parties to have the shares in the company that were held by An family members transferred to Jing Ying Zhang and Australia Xia Pty Ltd. Jing Ying Zhang is the wife of Yan Xia. She later became a director of JSJW (on 9 September 2016).

  6. It should be noted at this point that the account of events advanced by Ling Hua Zhu in respect of the contract for sale and the payments totalling $652,299 are contested by Hong Zhu. It is not necessary to set out here the details of the conflicting testimony. It is sufficient, for the present, to note that whilst Hong Zhu accepts that he signed the contract for sale, he says that he understood, based upon what Ling Hua Zhu said to him, that the purpose of the contract was to transfer the land “from JSJW to a new company name” that would have no connection with Jiang An’s company in China. Further, Hong Zhu disputes that the $322,299 was lent to Ling Hua Zhu or AZZI for the purpose of being on-lent to Bass Hill. Hong Zhu claims that the $322,299 was advanced as a shareholder loan to JSJW.

Was the deposit paid by Bass Hill?

  1. The first issue to consider is whether Bass Hill paid the deposit in accordance with the terms of the contract for sale that was exchanged on 3 May 2016. By cl 2 of the contract, the stipulated deposit of $520,000 was required to be paid to the depositholder (that is, the vendor’s agent) on the making of the contract.

  2. Bass Hill does not claim to have made any payment to the vendor’s agent. It says that it paid the deposit by causing the payments of $330,000 and $322,299 to be paid into JSJW’s Better Business Loan account with the CBA. It says that those payments were made, at the request of JSJW, to be applied towards the purchase price under the contract. The relevant question is whether, in the circumstances, payment in that fashion was sufficient to discharge Bass Hill’s obligations in respect of the deposit. It was put in submissions that the question was one of characterisation of the payments. That is a fair way of putting it, but the question is really one of the intention of the parties to the contract.

  3. The determination of the question requires an assessment of the available documentary evidence, in conjunction with the testimony of the witnesses directly involved, namely, Ling Hua Zhu, Da Shi Hong and Hong Zhu.

  4. Bass Hill submitted that the evidence was overwhelming that the payments made on 11 May 2016 constituted the deposit under the contract. Bass Hill pointed to the documentary evidence, including the 3 May 2016 Minutes of Meeting, the 4 May 2016 Deed of Loan, and the business records showing the amounts paid on 11 May 2016 and the sources of the payments. It was submitted that the suggestion that the payments were loans to JSJW from two of its shareholders was inconsistent with the documentary evidence, and not otherwise supported by any documentary evidence. To the extent that the suggestion rested upon the evidence of Hong Zhu, it was submitted that he was not a credible witness and his evidence should be rejected. It was submitted that the evidence of Ling Hua Zhu about Hong Zhu agreeing to lend $322,299 to be on-lent to Bass Hill, which was not directly challenged in cross-examination, should be accepted.

  5. JSJW submitted that, for various reasons, the witnesses called by Bass Hill in relation to the deposit (including Danying Liu – who has been the sole director and secretary of Bass Hill since Da Shi Hong relinquished his positions on 14 March 2019) lacked credibility. It was submitted that the 3 May 2016 Minutes of Meeting document was not a valid company document and was “unreliable”, such that it should not be accepted. Similarly, it was put that the Deed of Loan was “unreliable” and of an “unsatisfactory nature”, such that it should not be accepted. It was submitted that JSJW had never agreed to any variation of the contract in relation to payment of the deposit, and had never agreed to accept the payments as being made towards the deposit payable under the contract. It was put that any such notion was merely the invention of Ling Hua Zhu. Finally, it was submitted that the payments (or at very least the $322,299 payment made by Hong Zhu) should instead be characterised as shareholder loans.

  6. I have already set out the terms of the relevant conversations as deposed to by Ling Hua Zhu (see at [32], [38] and [40] above). On his account, he told Da Shi Hong on about 23 April 2016 that the deposit would have to be $652,299 and that JSJW would have to be allowed to use the money to discharge its bank loan.

  7. The account given by Da Shi Hong refers to a conversation with Ling Hua Zhu around the end of April 2016 in which Ling Hua Zhu said that JSJW needed to sell its land to raise funds to meet the bank’s demands. He refers to a further conversation a day or so later in which he agreed to Ling Hua Zhu’s suggested price of $5.2 million. However, Da Shi Hong makes no reference to any discussion in those conversations about the deposit. According to Da Shi Hong, Ling Hua Zhu did not speak to him about a need for $652,299 to be paid until after the Ostar International Trading Pty Ltd cheque (for $520,000) had been delivered. Da Shi Hong says that at that point there was a discussion in which he accepted Ling Hua Zhu’s offer to have his company (AZZI) lend the money. Da Shi Hong maintained that position in the witness box.

  8. This discrepancy is of little moment. On either version there was a discussion (probably on 3 May 2016) after the cheque had been provided, during which Ling Hua Zhu said that the amount of the cheque was “not enough”, followed by discussion about the making of a loan of $652,299. Further, on either view, the discussion occurred prior to the entry into the Deed of Loan on 4 May 2016. There is good reason to think that the discussion between Ling Hua Zhu and Da Shi Hong on 3 May 2016 was broadly consistent with the content of the later Deed of Loan.

  9. I think it is likely that Ling Hua Zhu would then have spoken to Hong Zhu about the payment of the deposit and the making of a loan of $652,299. The Minutes of Meeting dated 3 May 2016, which was signed by both men, suggests that discussion occurred to the effect of that which is recorded in the document. I note that Ling Hua Zhu’s evidence about the document being “settled and signed” was not challenged in cross-examination.

  10. I am also prepared to accept Ling Hua Zhu’s evidence that he and Hong Zhu spoke about Hong Zhu lending $322,299 to Ling Hua Zhu for him to on-lend to Bass Hill. It is telling that, in about August 2017, when Hong Zhu was in need of funds, he approached Ling Hua Zhu and sought a payment of $100,000, and that Ling Hua Zhu made such a payment at that time. Those events are consistent with Ling Hua Zhu’s account of the discussion concerning the lending of the $322,299. I note further that Hong Zhu deposed that on that occasion he said to Ling Hua Zhu:

You promised to transfer the money to me when I need it.

There is no suggestion that, when the need arose, Hong Zhu sought any payment from JSJW.

  1. I will add that I am not prepared to accept the evidence of Hong Zhu unless it is corroborated by clearly reliable evidence, or was given against his own interest. As set out in the submissions of Bass Hill, Hong Zhu was forced to concede in cross-examination that he had forged the signature of a director of JSJW (Ke Yang Xia) on a document relating to the appointment of Ling Hua Zhu as a director. He further accepted that his failure to refer to that in his first two affidavits, and the inclusion of a false statement about the matter in his second affidavit, occurred because he believed it to be helpful to JSJW’s case. Hong Zhu also agreed that on occasions he had lied to directors of JSJW, including in relation to the circumstances in which Ling Hua Zhu became a director, and in relation to the repayment of the CBA loan. Despite having some misgivings about the accuracy and reliability of the testimony of Ling Hua Zhu, I generally accept his evidence over that of Hong Zhu where there is a conflict between them.

  2. In addition, I am unable to accept Hong Zhu’s evidence that the payment of $322,299 was intended to be a loan by him (or by Luna Jasmin Pty Ltd) to JSJW. To the extent that the unsigned financial reports (which appear to have been prepared for JSJW after the commencement of the litigation) suggest otherwise, they are in my view erroneous.

  3. I am not persuaded by JSJW’s submissions concerning the credibility of the witnesses called by Bass Hill. Danying Liu was not involved with Bass Hill before March 2019. It is true that her first affidavit (17 April 2019) contained an incorrect statement about a release to the vendor of the 10% deposit monies. However, that error was corrected in her second affidavit (1 August 2019). That correction occurred at a relatively early stage of the proceedings, when pleadings were about to go on, and before the defendant had filed affidavits. I did not get the impression during her cross-examination that her error was anything other than an honest one.

  4. Some of the criticisms of the evidence of Da Shi Hong were valid. As highlighted in the submissions, there were a number of inconsistencies in his evidence. Nevertheless, those inconsistencies did not undermine the central thread of his evidence on this issue, which was that discussions were held with Ling Hua Zhu about $520,000 not being enough, and an agreement was then entered into that provided for $652,299 to be borrowed to enable Bass Hill to purchase the property.

  5. Similarly, whilst I have some misgivings about the evidence of Ling Hua Zhu, I think that the thrust of his evidence on this issue should generally be accepted. The evidence is supported by the existence of the Minutes of Meeting and the Deed of Loan, each of which was signed by the relevant parties. Whilst the documents were prepared and executed in the course of a transaction that can fairly be described as unorthodox, and the language in the documents is not well expressed, I do not accept that the documents themselves can be dismissed as “unreliable” or “unsatisfactory”. I consider that they are a reflection of discussions that actually occurred and agreements that were actually reached. I reject the contention that Ling Hua Zhu has simply invented the notion that the deposit was effectively paid through the means provided for in those documents.

  6. Prior to the exchange of contracts, Ling Hua Zhu (a director of JSJW) made it known to Da Shi Hong (a director of Bass Hill) that instead of $520,000, a sum of $652,299 would need to be paid. The stated reason was that that was the amount required to discharge the CBA loan. There followed a discussion about Ling Hua Zhu’s company (AZZI) lending the money to Bass Hill to facilitate the payment. Following the exchange of contracts, AZZI and Bass Hill entered into a Deed of Loan that provided for an advance of $652,299 for the purpose of enabling Bass Hill to purchase the property the subject of the contract for sale. JSJW, through Ling Hua Zhu, may be taken to have been aware of the Deed of Loan. In addition, Hong Zhu (a secretary of JSJW who, I find, was aware of the proposed sale to Bass Hill and the main terms of the contract) was informed by Ling Hua Zhu that, instead of $520,000, Bass Hill would pay $652,299, being the amount owed by JSJW to the CBA, with such amount to be paid directly to the CBA on or before 14 May 2016. Hong Zhu was further informed that the $652,299 was to be lent to Bass Hill. Hong Zhu agreed that he would lend $322,299 to Ling Hua Zhu for him to on-lend to Bass Hill.

  7. In these circumstances, on 11 May 2016, when Ling Hua Zhu (on behalf of AZZI) and Hong Zhu effected the transfers of $330,000 and $322,299 to JSJW’s loan account with the CBA, they must have understood that those funds were the funds being borrowed by Bass Hill for the purpose of making the contemplated payment to JSJW of $652,299. Ling Hua Zhu and Hong Zhu went to the bank together to make those transfers. Moreover, it would have been apparent (to at least Ling Hua Zhu) that the transfers were consistent with the Deed of Loan, which provided for an advance for the purpose of the acquisition of the property the subject of the contract for sale.

  8. Viewed objectively, the circumstances are consistent with the parties to the contract for sale having the intention that the payments totalling $652,299 that were transferred into the loan account were monies paid instead of the payment of $520,000 as provided for under the contract. Accordingly, the payments should be regarded as sufficient to discharge the obligations of Bass Hill in respect of the payment of the deposit. Even though there was no formal variation of the terms of the contract for sale, it cannot have been the intention of the parties in those circumstances that, notwithstanding the making of the payments (which conferred an immediate benefit upon JSJW), Bass Hill remained bound to pay a sum of $520,000 by way of deposit.

  9. Or, adopting the language of some of the submissions, the payments totalling $652,299 ought be characterised as payments made towards the purchase price of the property and in discharge of the obligation to pay the deposit.

  10. It follows from the above that it was not open to JSJW to terminate the contract by notice on about 29 November 2019 on the grounds that Bass Hill had failed to pay the deposit under the contract. In my opinion, the contract for sale remains on foot. A declaration will be made, as sought by Bass Hill, to the effect that the contract is valid and enforceable. The declaratory relief sought by JSJW in respect of the contract will not be made.

Interest on the purchase price

  1. The next issue to consider is whether interest is payable on the purchase price in respect of the period from 1 May 2021.

  2. The issue arises from the terms of Additional Conditions 31 and 38 of the contract. Additional Condition 31.1 provides:

If completion does not occur on or before the Completion Date, the Purchaser shall pay as agreed liquidated damages to the Vendor on completion, by cash or settlement cheque, interest calculated:

daily at the rate of 8% per annum; and

on the unpaid balance of the Price;

In respect of the period (“Interest Period”) commencing on the day following the Completion Date and ending on the day on which completion actually takes place.

  1. The completion date is stated in the contract to be 30 April 2018. However, Additional Condition 38 provides:

The Vendor agreed to extend completion date no later than 30 April 2021 if purchaser cannot complete on completion date by paying 2.5% interest for the balance of purchase price.

  1. Da Shi Hong gave evidence, which was not challenged, that as at 30 April 2018 Bass Hill did not have the means to complete the contract. Additional Condition 38 is awkwardly expressed, but it seems to operate in those circumstances to extend the completion date to “no later than 30 April 2021” on the basis that Bass Hill pays “2.5% interest for the balance of the purchase price”. As the contract was not completed prior to 30 April 2021, that date may be taken to be the completion date, as extended. Without the benefit of argument on the point, I tend to think that the reference to “2.5% interest” was probably intended to mean 2.5% interest per annum. On that basis, Bass Hill would be obliged to pay interest on the balance of the purchase price at the rate of 2.5% per annum for 3 years. However, for present purposes, the importance of Additional Condition 38 is that its supplies the Completion Date for the purposes of Additional Condition 31.1.

  2. Additional Condition 31.1 is in the nature of a liquidated damages clause. Bass Hill does not contend that it is unenforceable as a penalty. The clause operates if completion does not occur by 30 April 2021. Bass Hill contends, however, that it does not operate to impose the obligation to pay interest in circumstances where JSJW has, at all material times, denied that the contract is valid and enforceable, and has resisted Bass Hill’s claim for specific performance. It is submitted that to enforce the clause against Bass Hill in those circumstances would be to allow JSJW to take advantage of its own wrong (see, for example, Ruthol Pty Ltd v Tricon (Australia) Pty Ltd (2005) 12 BPR 23,923; [2005] NSWCA 443 at [19]-[24] per Giles JA, with whom Santow JA and Hunt AJA agreed).

  3. This issue was not addressed in the submissions made by JSJW.

  4. The submissions made by Bass Hill should be accepted. The fact that completion did not occur by 30 April 2021 cannot be attributed to a breach of the contract by Bass Hill. By these proceedings, commenced in 2019, Bass Hill sought to uphold the validity and enforceability of the contract in the face of opposition from JSJW. The Court has upheld Bass Hill’s claim. It follows that JSJW’s position, that the contract was terminated and thus no longer on foot, has been found to have been wrongful.

  5. That wrongful conduct has caused or materially contributed to the fact that completion did not occur by 30 April 2021. Completion by that date was not possible in light of JSJW’s position. The situation that engaged Additional Condition 31.1 can thus be seen to have arisen as a result of JSJW’s wrongful conduct.

  6. In these circumstances, I think that to allow JSJW to claim an entitlement to interest under Additional Condition 31.1 would be to allow it to enforce a right that arises from its own wrongful conduct. I therefore conclude that JSJW is not entitled to claim interest under Additional Condition 31.1 in respect of the period from 1 May 2021. A further declaration will be made to that effect.

Is Bass Hill ready, willing and able to perform?

  1. The next issue to consider is whether orders for specific performance should be withheld on the ground that Bass Hill is not ready, willing and able to perform its obligations under the contract (cf Mehmet v Benson (1965) 113 CLR 295 at 314 per Windeyer J).

  2. JSJW submitted that Bass Hill has no assets (other than its claimed interest under the contract for sale), and thus has to rely on finance to settle the conveyance. It was submitted that Bass Hill’s ability to obtain finance was restricted because cl 8 of the Deed of Loan with AZZI precluded the grant of a mortgage over the land to any third party unless AZZI gave its consent. It was further submitted that offers of finance that have been made to Bass Hill are conditional, and that such conditions have not been met.

  3. Bass Hill points to a Loan Agreement it entered into as Borrower with Ostar International Trading Pty Ltd as Lender on 9 February 2022 as evidence of its ability to complete the contract. Under that agreement, the Lender agreed to lend Bass Hill, upon request, an amount of $7.5 million for the purpose of purchasing the property. The Lender is entitled to register a mortgage against the property to secure the loan. Bass Hill submitted that the funds available to it under the Loan Agreement are more than sufficient to enable it to complete the contract for sale. It was submitted that there was no reason to think that AZZI would not consent to a mortgage, as there would be ample funds to repay AZZI the $652,299 it advanced, together with interest on that amount. Bass Hill further submitted that JSJW had failed to identify any condition of the Loan Agreement that would present any obstacle to the loan being advanced.

  4. In my view, it has not been shown that Bass Hill is not ready, willing or able to complete the contract. There is evidence that sufficient finance is presently available to enable Bass Hill to both repay the AZZI loan and complete the purchase of the property. There is no reason to think that AZZI would not give its consent to a mortgage in favour of Ostar International Trading Pty Ltd, if such mortgage were to be given as part of a transaction that included payment of the amount owed to AZZI. Indeed, it is doubtful that AZZI would be entitled to withhold consent in such circumstances. Further, I agree that JSJW did not identify any conditions upon the obtaining of finance that were unlikely to be able to be satisfied. There is no doubt about Bass Hill’s willingness to proceed to completion of the contract.

  5. Accordingly, I am not persuaded that orders for specific performance should be withheld on discretionary grounds because Bass Hill is not ready, willing and able to perform its obligations under the contract. It seems to me that it is an appropriate case to make orders in the nature of specific performance in respect of the contract for sale.

Claims of breach of fiduciary duty against Ling Hua Zhu

  1. As noted earlier, by its Cross-Claim, JSJW brings various claims against Ling Hua Zhu, but ultimately only two claims were pressed. These are the claims that, in two respects, Ling Hua Zhu breached his duties to act in good faith in the best interests of the company, and for a proper purpose. The claims are based on both the general law duties to that effect, and the duties referred to in s 181(1) of the Corporations Act 2001 (Cth).

  2. The duties are said to arise as a result of Ling Hua Zhu “assuming the role of a director of JSJW” (cf Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [62]-[65] per Finn, Stone and Perram JJ).

  3. I note that a considerable amount of evidence was adduced concerning the circumstances in which Ling Hua Zhu came to be recorded as a director of the company on 18 August 2015. JSJW alleged that Ling Hua Zhu “appointed himself as a director” and that his appointment was invalid in that it was not approved, known of, or ratified by the Board of JSJW. Those allegations are denied by Ling Hua Zhu. However, it is not necessary to determine those issues. In circumstances where JSJW did not seek any relief in respect of the validity of the appointment and accepted that Ling Hua Zhu was “for all intents and purposes a director”, the claims of breach of fiduciary duty may be determined on the assumption that Ling Hua Zhu was a director of JSJW at all relevant times (i.e., in the period from 18 August 2015 to 10 May 2016, as shown in the ASIC records). I propose to proceed on that basis.

  4. The first claim of breach of fiduciary duty concerns entry into the lease with Masters Civil on about 1 September 2015. The allegation of breach of duty is particularised in the Cross-Claim (at paragraphs 15 and 20) as:

  1. the rent of $1.00 per annum was below the market value for rental of the property;

  2. the property was not zoned for the use by Masters Civil as a truck depot;

  3. JSJW did not have Council approval for the use of the land as a truck depot; and

  4. to the knowledge of Ling Hua Zhu, the terms of the lease were manifestly disadvantageous to JSJW.

  1. The second claim for breach of fiduciary duty concerns entry into the contract for sale with Bass Hill on 3 May 2016. The allegation of breach of duty is particularised in the Cross-Claim (at paragraph 20) to the following effect:

  1. purporting to bind JSJW to a contract for the sale of its major asset, being the property; and

  2. purporting to sell the property to an entity, namely, Bass Hill, in which Ling Hua Zhu had an interest.

  1. The remedy claimed in respect of the alleged breaches of fiduciary duty is stated to be damages. The loss and damage said to have been suffered as a result of the breaches is particularised in the Cross-Claim (at paragraph 27) as:

  1. JSJW was bound into a contract of sale without the knowledge of its directors and lost the opportunity to deal in the Property as and when JSJW saw fit;

  2. JSJW was deprived of market rent on the Property because of the disadvantageous lease with Masters Civil; and

  3. JSJW was drawn into litigation with Bass Hill in relation to the removal of the caveat placed on the title of the Property by Bass Hill and the proceedings by Bass Hill to enforce the terms of the contract of sale of the Property.

  1. However, in closing submissions, counsel for JSJW clarified that the only damages claim made was for rent lost by reason of the entry into the Masters Civil lease. A Schedule provided to the Court indicates that the claim is based upon the difference between the amount of rent under the earlier lease and the (nominal) rent under the Masters Civil lease for the period from September 2015 to date.

  2. As far as the entry into the contract for sale with Bass Hill is concerned, counsel for JSJW stated that the claim was for an indemnity in respect of any costs ordered against JSJW. This claim was said to be based on the fact that the entire proceedings were brought about by the actions of Ling Hua Zhu, which were undertaken without the knowledge of the Board of JSJW.

  3. Accordingly, I have proceeded on the basis that the loss and damage claim is confined to damage of the types described in paragraphs (b) and (c) of the particulars set out at [90] above.

  4. I will deal first with the Masters Civil lease claim.

  5. Ling Hua Zhu deposed that, in about July 2015, he found that some illegal dumping had occurred on the property. He says that the property at that time lacked a fence or gate on its frontage to the Hume Highway. There is evidence that on 31 July 2015, a Councillor of the Bankstown Council wrote a letter to Ling Hua Zhu about the illegal dumping. It seems that the property had recently been vacated by the previous tenant, Syesun Pty Ltd, trading as “Flower Power”. There is documentary evidence that, in May 2015, the tenant had stated that it planned to “exit the site by 30 June 2015”. I infer that Syesun Pty Ltd in fact vacated the property at about that time. It had previously conducted a plant nursery business on the site.

  6. Ling Hua Zhu deposed that at about that time he had a conversation with Jiang An, who requested him to find a tenant who could arrange for the site to be cleared and fenced, and that if he couldn’t find a tenant he should clear and fence the site himself. Ling Hua Zhu says that Jiang An also told him that he wanted him to become a director of JSJW.

  7. Ling Hua Zhu deposed that he spoke to Ai Hua Hong, Hong Zhu and Yan Xia about clearing and fencing the site. Ling Hua Zhu deposed that he (through his construction company), undertook some clearing work, but stopped the work in about early September due to concerns about contaminated materials, including asbestos. On about 31 August 2015, Ling Hua Zhu received a quotation of $145,000 to $155,000 plus GST from Emilia Civil Pty Ltd for the removal of contaminated material from the site.

  8. It appears that Ling Hua Zhu then negotiated the terms of a lease with Mr Geagea of Masters Civil (see at [20] above). A lease (which contained most, but not all, of the agreed terms) was signed on about 15 September 2015 by Ling Hua Zhu (as director and secretary of JSJW) and by Mr Geagea (as sole director of Masters Civil). According to the records of ASIC, Ling Hua Zhu had recently been appointed as a director of JSJW.

  1. Ling Hua Zhu deposed that he spoke to Jiang An, Hong Zhu and Jing Ying Zhang about the terms and conditions of the lease.

  2. In cross-examination, Ling Hua Zhu conceded that he could not produce any written document recording any authorisation to enter into a lease with Masters Civil. However, Ling Hua Zhu maintained that he had authorisation from Jiang An.

  3. Hong Zhu denies that Ling Hua Zhu spoke to him about cleaning up the site. Ai Hua Hong and Yan Xia made similar denials. However, it appears from Hong Zhu’s account that there was a discussion between Jiang An, Ling Hua Zhu and himself about renting the property. Hong Zhu denies that Ling Hua Zhu spoke to him about the terms and conditions of the lease.

  4. Jing Ying Zhang denies that she knew anything about Masters Civil occupying the land. She deposed that she found out about it in about June 2016. She also denied that Ling Hua Zhu spoke to her about the terms and conditions of any lease to Masters Civil.

  5. Jiang An, who is incarcerated in China, was not called to give evidence. In circumstances where it was not possible to make him available for cross-examination on his affidavit, I ruled that his affidavit could not be used.

  6. It is difficult to discern, with any precision, how this claim of breach of fiduciary duty is put. The pleading itself does not identify the improper purpose or purposes for which Ling Hua Zhu is said to have exercised his power in causing JSJW to enter into the Masters Civil lease. The pleading focuses upon the terms of the lease. It is alleged that they were “manifestly disadvantageous” to JSJW. The submissions made in support of the claim were brief, even perfunctory. Moreover, the cross-examination of Ling Hua Zhu on the matter was essentially confined to the question of authorisation to enter into the lease with Masters Civil. It was not put to Ling Hua Zhu that he did not honestly believe he was acting in the best interests of the company.

  7. Counsel for Ling Hua Zhu submitted that at all relevant times the property was zoned R2 Low Density Residential, which allowed only limited non-residential uses. It was submitted that the property was in a largely undeveloped state, where the only substantial structure was a shed that had been used by Flower Power for its nursery business. It was submitted that there was no evidence of what uses might have been achievable once Flower Power departed, and no evidence of the fair market rental value of the property. It was submitted that although the rent under the Masters Civil lease was nominal, the lease provided substantial benefits to JSJW in that it required Masters Civil to clear the land and demolish all structures. It was put that in any event it was not enough for JSJW to say that entry into the lease was a bad management decision.

  8. I am not satisfied that the breaches of fiduciary duty alleged against Ling Hua Zhu in relation to the Masters Civil lease have been established. I generally accept the evidence of Ling Hua Zhu to the effect that, in taking the steps that ultimately culminated in entry into the lease, he considered that he had the approval of Jiang An. Such approval could not amount to an authorisation of the Board. However, the extensive evidence adduced suggests that the affairs of the company were not conducted through a formal functioning Board, but rather reflected decisions made amongst the shareholders from time to time. The majority of the shares were at that time held within the An family, in which Jiang An held a prominent, if not pre-eminent, position. I further accept that Ling Hua Zhu at least discussed the terms of the proposed lease with Hong Zhu.

  9. In his verified Defence to the Cross-Claim, Ling Hua Zhu stated that entry into the lease “was for the best interest of JSJW”. As already mentioned, it was not put to him in cross-examination that he did not honestly believe that to be the case.

  10. Ordinarily, both at general law and under s 181(1)(a) of the Corporations Act, the duty of a director to act bona fide in the best interests of the company is not taken to have been breached where the director honestly believes that their actions were in the best interests of the company (see, e.g., Westpac Banking Corporation v The Bell Group Ltd (in liq.) (No 3) (2012) 44 WAR 1; [2012] WASCA 157 at [1988]-[1989] per Drummond AJA; see also Re Smith & Fawcett Ltd [1942] Ch 304 at 306-8 per Lord Greene MR, with whom Luxmoore LJ and Asquith J agreed; Hart Security Australia Ltd v Boucousis (2016) 117 ACSR 408; [2016] NSWCA 307 at [75] per Meagher JA, with whom Bathurst CJ and Beazley P agreed). Statements made by directors about their subjective beliefs are, of course, not conclusive (see, e.g., Darvall v North Sydney Brick & Tile Co. Ltd (1989) 16 NSWLR 260 at 282 per Kirby P and at 338 per Clarke JA) and it may be said that the law is somewhat unsettled as to whether the duty expressed in s 181(1)(a) contains an objective element (see Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789 at [420] per Black J; Re IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40 at [32] per Gleeson J). On one view, a breach of s 181(1)(a) can be established if the law objectively considers the actions of the director to be contrary to the best interests of the company (see, eg, Downer EDI Ltd v Gillies (2012) 92 ACSR 373; [2012] NSWCA 333 at [75]-[76] per Allsop P, with whom Macfarlan and Meagher JJA agreed; compare Hart Security Australia Ltd v Boucousis (supra) at [73]-[75] per Meagher JA).

  11. The present case is no occasion to engage in that debate. On either view, I am not satisfied that a breach has been established. Having regard to the circumstances that existed once Flower Power vacated the site, I am prepared to accept that Ling Hua Zhu honestly believed that he was acting in the best interests of JSJW when he negotiated, and then caused the company to enter, the Masters Civil lease. Moreover, the circumstances, viewed objectively, do not in my view show that Ling Hua Zhu was acting contrary to the best interests of the company. I accept the submissions of Ling Hua Zhu concerning the limited uses to which the site could be put, and the absence of evidence of the fair market rental. Further, having regard to the fact that the lease required Masters Civil to carry out works that would be beneficial for preparing the site for future residential development, it is simply not possible to be satisfied objectively that Ling Hua Zhu was acting contrary to the best interests of the company. For completeness, I should add that I am also not satisfied that the terms of the lease were “manifestly disadvantageous” as alleged.

  12. Nor has any breach been established of the duty to act for a proper purpose. The alleged improper purpose has not been identified, whether in the pleading or in submissions. No alleged improper purpose was put to Ling Hua Zhu in cross-examination. The Court should not have to speculate as to what JSJW’s case is in this regard.

  13. Even if a breach of duty had been made out, JSJW would have failed to prove that it has sustained loss in the manner or in the amount alleged. The Schedule provided to the Court includes a claim of about $1.65 million for loss of rent during the period from September 2015 to date. The amount claimed is based on a figure of $19,662 per month. That figure is said to be the amount of rent that had been paid by Flower Power. Evidence was given by Jing Ying Zhang to the effect that once Lots 100 and 101, and Lot 2, had been consolidated into Lot 1, the monthly rent paid by Flower Power increased from $12,375 to $19,662.50. That evidence may be accepted. However, the calculation of loss proceeds on the assumption that had the lease to Masters Civil not been entered into, JSJW could have leased the land to another tenant (from September 2015 to the present) at a rent of $19,662 per month. That amount is treated as the market rental for the site. I do not think that the assumption can be made where no valuation evidence was adduced to show that such an amount reflected the prevailing market rental. That is important in circumstances where the state of the property, and its zoning, suggests that the range of tenants likely to be interested in leasing the site may be quite limited.

  14. Before leaving this topic, I should state that, insofar as the Schedule included amounts for land tax and Council rates, it went beyond the pleaded case and thus need not be considered.

  15. I turn now to the claim of breach of fiduciary duty that concerns entry into the contract for sale with Bass Hill. Again, it is difficult to discern precisely how the claim is put. The alleged breach, as pleaded, is based upon contentions that the contract concerned the major asset of the company, and that the sale was to an entity (Bass Hill) in which Ling Hua Zhu held an interest. The nature and extent of the interest is not identified. Nor, again, does the pleading identify the improper purpose or purposes for which Ling Hua Zhu is said to have exercised his power in causing JSJW to enter into the contract for sale, although it might be inferred that the improper purpose is related to furthering his alleged interest in Bass Hill.

  16. The submissions made in support of the claim accepted that Da Shi Hong was the sole director and shareholder of Bass Hill when it and JSJW entered into the contract. However, the submissions went on to emphasise the transfer of his shares, shortly thereafter, to Yu Rong Zhou, the ex-wife of Ling Hua Zhu. It was submitted that the transfer of shares, the 2019 appointment of Danying Liu (the niece of Ling Hua Zhu) as a director of Bass Hill, and evidence of involvement by Ling Hua Zhu in the affairs of Bass Hill (such as in relation to the payment of stamp duty on the contract, and in seeking finance to complete the purchase), indicated that Ling Hua Zhu had de facto control over Bass Hill.

  17. Nevertheless, no claim is made against Bass Hill that it was knowingly involved in, or a participant in, the breaches of fiduciary duty alleged against Ling Hua Zhu. Nor is the claim maintained that JSJW suffered a loss of opportunity to deal with the property as a result of the alleged breaches. Finally, no case was advanced to the effect that the sale to Bass Hill was for a price that was below the true market value.

  18. I referred earlier (at [22]-[25]) to the financial difficulties of the An family and some of the responses considered amongst the shareholders of JSJW in early 2016. Proposals for the property to be transferred to a new company not associated with the An family, and for money to be lent to the An family to enable them to repay the CBA mortgage, did not ultimately proceed.

  19. The evidence given by some of the shareholders reveals that serious concerns were held about the situation facing JSJW. For example, Jing Ying Zhang gave evidence of a conversation she had with Ke Yang Xia in early 2016 in which there was discussion about the prospect of Jiang An becoming bankrupt and JSJW’s land being seized. Ke Yang Xia gave evidence to a similar effect, and Hong Zhu gave evidence that all the remaining shareholders (that is, those other than the An family) were worried that the land “might be taken by the Judicial Department in China to pay back Jiang An’s debts”. Concerns of that nature seem to have given rise to the proposal to transfer the land to a new company that was not connected with Jiang An. In addition, it seems to have been accepted by all concerned that steps needed to be taken to have the CBA loan repaid.

  20. Ling Hua Zhu deposed that in about March or April 2016, he had a discussion with Jiang An (and Ai Hua Hong) in which Jiang An requested Ling Hua Zhu to help him to sell the land and discharge the CBA loan. He deposed that Jiang An told him that the sale price had to be no less than $5.2 million and that the deposit had to be the amount of the loan, and released to enable the loan to be discharged. He says that Jiang An told him that a delayed settlement for two or even up to five years would be acceptable. Ling Hua Zhu deposed that after this conversation he made contact with Ms Yang of the CBA (see [27]-[30] above).

  21. Ling Hua Zhu deposed that he then proceeded to have discussions with each of Hong Zhu, Jing Ying Zhang and Yan Xia about either “gathering our money to discharge the loan” or selling the land and using the deposit to discharge the loan. There is some documentary evidence that shows that the former option was under consideration, including by members of the Xia family (see, eg, the evidence concerning the IOU signed by the An family, and some WeChat messages that seem to be relate to that proposal). There is no documentary evidence that shows that the latter option was considered by any members of the Xia family. Of course, Hong Zhu’s knowledge of the latter option is plainly shown by his active participation in the entry into the contract for sale and the associated repayment of the CBA loan.

  22. As already noted, Jiang An was not called as a witness. However, Ying Xiao An gave evidence to the effect that, as at 9 May 2016, it remained the An family’s intention to have the CBA loan repaid as soon as possible. She deposed that on that date she spoke to Ms Yang of the CBA about extending the term of the loan by two months, during which time it would be repaid. Ying Xiao An sent an email to Ms Yang to that effect later on 9 May 2016. These communications tend to suggest that Ying Xiao An had no knowledge of the entry into the contract for sale and the proposal to use the deposit to repay the loan. I note also that Ai Hua Hong denied that there had been any discussion with Ling Hua Zhu about such a proposal. She was not cross-examined, but that occurred specifically on the basis that no Browne v Dunn points would be taken in relation to her evidence.

  23. Ling Hua Zhu accepted in cross-examination that the sale of the land was not the subject of any authorisation from the Board of JSJW. However, no specific challenge was made to his evidence of the discussion with Jiang An about a sale with the deposit being used to repay the CBA loan. I am prepared to accept Ling Hua Zhu’s evidence that he had a discussion with Jiang An about that matter. I also think that, having regard to the substantial majority of shares held by the An family, and Jiang An’s position within that family, it is unlikely that Ling Hua Zhu would have acted as he did unless he had the agreement or consent of Jiang An. However, the lack of documentary evidence of communications with other interested parties (even after the contract for sale was entered into) leaves me unable to accept that Ling Hua Zhu discussed the proposed sale and associated repayment of the CBA loan with any of the others apart from Hong Zhu. Ling Hua Zhu thus appears to have acted in a less than open fashion. That circumstance gives rise to suspicion about the motivation for his actions and, relevantly, the bona fides of his conduct.

  24. In that regard, a central element of the breach alleged against Ling Hua Zhu is that the sale of the property was to an entity in which he had an interest. When contracts were exchanged, Ling Hua Zhu had no interest as a shareholder in Bass Hill, but discussions had taken place between Ling Hua Zhu and Da Shi Hong (the sole director and shareholder of Bass Hill) about the provision of finance to Bass Hill by Ling Hua Zhu, or by a company associated with him. The proposed finance, which was intended to provide the $652,299 required to discharge the CBA loan, was contemplated to be provided on certain terms, including that the shares in Bass Hill be transferred to Yu Rong Zhou to be held by her pending repayment of the loan with interest. Not long after the exchange of contracts, the Deed of Loan was entered into between Bass Hill and AZZI. The Deed of Loan contained a recital by which Bass Hill acknowledged that AZZI or its nominee “may become sole shareholder” of Bass Hill. The Deed of Loan also provided an agreement on the part of Bass Hill to execute a mortgage over the property if required by AZZI. The transfer of the shares from Da Shi Hong to Yu Rong Zhou should be regarded as having been preformed in conformity with the said recital concerning the shares. Even though the recital does not in terms provide for the re-transfer of the shares upon repayment to AZZI (as had been discussed by Ling Hua Zhu and Da Shi Hong), that seems to be implied from the nature of the transaction and from the further recital that Bass Hill entered into the covenants and agreements in the Deed of Loan for the purposes of securing and guaranteeing the repayment of the Principal Sum and interest and the performance by Bass Hill of its obligations under the agreement (see Recital B). In short, the shares were to be held by AZZI or its nominee as security only. Yu Rong Zhou can be regarded as AZZI’s nominee for that purpose.

  25. The interest which Ling Hua Zhu was to obtain in Bass Hill, through AZZI, was thus in the nature of a shareholding to be held as security, rather than a shareholding that could be enjoyed as a traditional equity interest. Any control AZZI obtained over Bass Hill was that of a security holder for the time being, not that of a controlling proprietor. In these circumstances, to describe Bass Hill as “the creature of Ling Hua Zhu”, as counsel for JSJW did, seems to me to be inaccurate. It has not been shown that AZZI, or Ling Hua Zhu, would have any interest in Bass Hill once Bass Hill discharged its obligations under the Deed of Loan.

  26. It is necessary to consider the whole of the evidence concerning entry into the contract for sale in determining whether, in that regard, Ling Hua Zhu failed to act in good faith in the interests of JSJW. Having done so, I am not persuaded that Ling Hua Zhu acted in breach of that duty. It seems clear that all of the shareholders of the company wanted to have the CBA loan discharged. Amongst the shareholders of the company, the An family was considered to have responsibility for repayment of the loan, but they were no longer in a position to do so. There was also a concern amongst the other shareholders that the troubles of the An family placed the assets of the company in jeopardy.

  27. Various courses of action intended to ameliorate the situation were proposed in the early months of 2016, but not proceeded with. The CBA loan was due to be repaid by 14 May 2016. The evidence is clear that insofar as the Xia family were prepared to raise the money to have the loan repaid, they were not in a position to raise all of the required funds by that date. A two month extension of the loan term was sought accordingly.

  28. I am satisfied that the notion that the property be sold, with the deposit used to discharge the CBA loan, was discussed by Jiang An and Ling Hua Zhu in about early April 2016. I am prepared to accept that Ling Hua Zhu pursued that course, with the imprimatur of Jiang An, in circumstances where it seemed that repayment of the CBA loan would not otherwise occur by 14 May 2016. Ling Hua Zhu evidently pursued that course with some urgency from about 12 April 2016 and, apart from Hong Zhu, does not seem to have involved any of the other shareholders. That gives rise to suspicion about his motives, but I think the likelihood is that his principal concern was simply getting the transaction completed as quickly as possible.

  29. There is no evidence that the sale to Bass Hill was at an undervalue and, as I have sought to explain, the interest which Ling Hua Zhu would indirectly obtain in Bass Hill was a security interest only. Whilst actual or potential conflicts seem to have existed, no case of breach of fiduciary duty is brought against Ling Hua Zhu for acting in a position of conflict, or for improperly using his position to gain an advantage for himself or cause detriment to the company (see Corporations Act, s 182).

  1. In his verified Defence to the Cross-Claim, Ling Hua Zhu denied that he breached his duty to act in good faith in the interests of the company. It was not put to him in cross-examination that, in causing JSJW to enter into the contract for sale, he did not honestly believe he was acting in the best interests of the company. However, even assuming that it was not necessary to so put the allegation, I am not satisfied on the evidence that Ling Hua Zhu was acting otherwise than in good faith in an attempt to further the interests of the company as he perceived them. Moreover, the circumstances, viewed objectively, do not in my view establish that Ling Hua Zhu was acting contrary to the best interests of the company.

  2. Nor am I satisfied that Ling Hua Zhu breached his duty to act for a proper purpose. Again, the alleged improper purpose has not been identified, whether in the pleading or in submissions, and no alleged improper purpose was put to Ling Hua Zhu in cross-examination.

  3. It is not strictly necessary to consider the question of any loss arising from the alleged breaches. However, I will make the following observations. In the absence of the loss of opportunity claim, the only loss claimed concerns the costs of these proceedings. It seems to me that unless a crude “but for” test were employed, it could not be said that any such breach would have caused JSJW to incur the costs of these proceedings. Adopting a common sense approach to causation, as would be appropriate, those costs should be seen to be the result of JSJW’s decisions to challenge Bass Hill’s caveat, defend the proceedings brought against it by Bass Hill, and prosecute its Cross-Claim against both Bass Hill and Ling Hua Zhu.

  4. The claims of breach of fiduciary duty on the part of Ling Hua Zhu have not been established.

Conclusion

  1. A declaration will be made to the effect that the contract for sale between Bass Hill as purchaser and JSJW as vendor in respect of Lot 1 is valid and enforceable. A further declaration will be made to the effect that JSJW is not entitled to claim interest under Additional Condition 31.1 of the contract in respect of the period from 1 May 2021. Orders will also be made for the contract for sale to be specifically performed and carried into effect.

  2. The Cross-Claim brought by JSJW against both Bass Hill and Ling Hua Zhu will be dismissed.

  3. There is no reason why costs should not follow the event. Accordingly, orders will be made that JSJW pay Bass Hill’s, and Ling Hua Zhu’s, costs of the proceedings.

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Amendments

25 October 2022 - Coversheet Amended - Representation (Solicitors)

Decision last updated: 25 October 2022

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Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17
Downer EDI Ltd v Gillies [2012] NSWCA 333
Concut Pty Ltd v Worrell [2000] HCA 64