BCEG International (Australia) Pty Ltd v Xiao

Case •

[2022] NSWSC 972

•

22 July 2022

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972
Hearing dates: 4 – 22 April 2022
Date of orders: 22 July 2022
Decision date: 22 July 2022
Jurisdiction:Equity - Commercial List
Before: Rees J
Decision:

Judgment for the plaintiff, see orders at [446].

Catchwords:

CORPORATIONS – directors and officers – company sues director and de facto director for breach of duty – company borrows US$35m to fund Gold Coast development – development costs over-stated – directors raise false invoices to divert $3.4m to personal project in West Wyalong – sham sub-contracts created to substantiate $23m drawn down on Gold Coast facility – multiple payments to directors’ company – unaware of fraud, company enters into contracts for further development in Wagga – $2.05m of Gold Coast facility used to buy Wagga land but by directors’ company– negotiations – partial repayment.

CIVIL PROCEDURE – pleadings in Commercial List – further questionable transactions emerge during trial – whether plaintiff entitled to additional relief – where evidence establishes matters beyond pleadings – principles at [368]-[376] – given serious nature of allegations, held to pleaded case.

DIRECTORS – de facto director – principles at [329]-[333] – not necessary for de facto director to make decisions independently of other directors – directors’ duties – whether fiduciary duties modified by inherent conflict of interest in corporate structure – not modified in absence of disclosure of wrongdoing.

Legislation Cited:

Civil Procedure Act 2005 (NSW)

Corporations Act 2001 (Cth)

Evidence Act 1995 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

A v New South Wales (2007) 230 CLR 500; [2007] HCA 10

Alati v Kruger (1955) 94 CLR 216

AlemiteLubrequip Pty Ltd v Adams (1997) 41 NSWLR 45

Armory v Delamirie (1722) 1 Stra 505; (1772) 93 ER 664

Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662

Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151

Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17

Bamford v Bamford [1970] Ch 212; [1968] 2 All ER 655

Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279

Barnes v Addy (1874) LR 9 Ch App 244

Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2008] NSWCA 243

BCEG (Australia) v Xiao (No 2) [2020] NSWSC 1403

BCEG International (Australia) Pty Ltd v Xiao [2020] NSWSC 1234

BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027

BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102

BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227

BCI Finances Pty Ltd (in liq) v Binetter [2018] FCAFC 189; (2018) 362 ALR 597

Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384

Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969

Boardman v Phipps [1967] 2 AC 46

Breen v Williams (1996) 186 CLR 71

Briginshaw v Briginshaw (1938) 60 CLR 336

Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17

Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26

Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184

Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129; (2010) 28 ACLC 10-073

Chan v Zacharia (1984) 154 CLR 178

Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601

Clay v Clay (2001) 202 CLR 410; [2001] HCA 9

Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574

Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR (NSW) 397

Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226

Cubillo v Commonwealth of Australia (No 2) (2000) 103 FCR 1; [2000] FCA 1084

Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371

Dare v Pulham (1982) 148 CLR 658

Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565

Devaynes v Noble (Clayton’s Case) (1816) 1 Mer 572; (1816) 35 ER 781

El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

Forkserve Pty Ltd v Jack [2000] NSWSC 1064; (2001) 19 ACLC 299

Furs Ltd v Tomkies (1936) 54 CLR 583

GC NSW Pty Ltd v Galati [2020] NSWCA 326

Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453

GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113

Gould & Birbeck & Bacon v Mount Oxide Mines (1916) 22 CLR 490

Gray v National Crime Authority [2003] NSWSC 111

Grimaldi v Chameleon Mining NL (No 2) (2012) [2012] FCAFC 6; (2012) 87 ACSR 260

Halford v Halford [2022] WASCA 1

Hagan v Waterhouse (1991) 34 NSWLR 308

Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29

Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10

Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307; (2016) 339 ALR 659

Hogg v Cramphorn Ltd [1967] Ch 254

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41

Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619

Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21

In the matter of ACN 092 745 330 [2017] NSWSC 241

In the matter of Anna Bay Resort Pty Ltd [2022] NSWSC 331

In the matter of French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008

In the matter of Swan Services Pty Ltd (in liq) [2016] NSWSC 1724

John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19

Jones v Dunkel (1959) 101 CLR 298

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563

Legione v Hateley (1983) 152 CLR 406

Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437

Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480

Lewis v Wilson (1997) 42 NSWLR 228

Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2014] HKC 368

Lockyer v Macready (1965) 66 SR (NSW) 369

Magill v Magill (2006) 226 CLR 551; [2006] HCA 51

Maguire vMakaronis (1997) 188 CLR 449

Masters v Cameron (1954) 91 CLR 353

McKenzie v McDonald [1927] VLR 134

Mills v Mills (1938) 60 CLR 150

Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173

Moratic Pty Ltd v Gordon [2007] NSWSC 5

Mualim v Dzelme [2021] NSWCA 199; (2021) 157 ACSR 367

Mudgee v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12; (2022) 398 ALR 658

Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114

Nocton v Lord Ashburton [1914] AC 932

North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589

Nowlan v Marson Transport Pty Limited (2001) 53 NSWLR 116; [2001] NSWCA 346

O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262

Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166; (2011) 285 ALR 93

Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Orr v Ford (1989) 167 CLR 316

Parker v McKenna (1874) LR 10 Ch App 96

Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25

Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31

Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415

Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378

Ripani v Century Legend Pty Ltd [2022] FCA 242

Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [2003] NSWCA 71

Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39

Ronchi v Portland Smelter Services Ltd [2005] VSCA 83

Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29

Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818

Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405; (2014) 17 BPR 33,717

Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98

Skilled Group Ltd v CSR Viridian Pty Ltd [2012] VSC 290

Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 WLR 189

Swiss Re International SE v Simpson [2018] NSWSC 233; (2018) 354 ALR 607

Taouk v Assure (NSW) Pty Ltd [2017] NSWSC 534

Target Holdings Ltd v Redferns [1996] 1 AC 421

Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211

Thomas v Arthur Hughes Pty Ltd [2015] NSWSC 1027; (2015) 107 ACSR 445

United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1

Wallersteiner v Moir (No 2) [1975] QB 373

Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18

Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666

Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Texts Cited:

Wigmore, JH, Wigmore on Evidence (3rd ed., 1940, Little, Brown and Co.)

Ritchie’s Uniform Civil Procedure NSW (LexisNexis, looseleaf)

Heydon, JD and Leeming, MJ, Jacobs’ Law of Trusts in Australia (8th ed, 2016, LexisNexis)

Category:Principal judgment
Parties: BCEG International (Australia) Pty Ltd (Plaintiff)
Yu Xiao (First Defendant)
Yanying Chen (Second Defendant)
Interlink Laboratory Pty Ltd (Third Defendant)
Interlink Wagga Central Pty Ltd (Fourth Defendant)
West Wyalong Marketplace Pty Ltd (Fifth Defendant)
Representation:

Counsel:
Mr DL Williams SC / Mr ND Riordan (Plaintiff)
Mr FP Hicks SC / Mr B Le Plastrier (Defendants)

Solicitors:
Thomson Geer (Plaintiff)
HWL Ebsworth (Defendants)
File Number(s): 2019/310768

TABLE OF CONTENTS

WITNESSES

DOCUMENTS

ONUS AND STANDARD OF PROOF

FACTS

A corporate predecessor: BCEG (Australia)

West Wyalong project and Trojjan

Varsity Lakes project

Inflation of design and construction price

Funding West Wyalong expenses

Pre-BCEG funding

Incorporation of BCEG

Varsity Lakes project contracts

Company management

BCEG China’s accountant

Varsity Lakes facility

Drawdown requests

First drawdown

Diversion of first drawdown

Using Varsity Lakes facility to pay for West Wyalong

Second drawdown

Diversion of second drawdown

Sham sub-contracts

Third drawdown

Beijing Dragon payments

More West Wyalong payments

Fourth drawdown

Completion of West Wyalong project

More Beijing Dragon payments

Fifth drawdown

Wagga project contracts and facility

Final Beijing Dragon payments

2014 agreement

An audit

Change of accounting treatment

2017 agreement

Piercy and Xiao part ways

These proceedings

CONTRACT CLAIM AGAINST INTERLINK LABORATORY

Claim based on BCEG invoices

Claim based on 2014 and 2017 agreements

BREACH OF DIRECTORS’ DUTIES

De facto director

Directors’ duties

Claim in respect of West Wyalong payments

Claim in respect of sham sub-contracts

Claim in respect of Beijing Dragon

Diversion of first and second drawdowns

DEFENCES

CAUSATION AND REMEDIES

Relief against directors: West Wyalong payments

Relief against directors: sham sub-contracts

Relief against directors: Wagga project

Relief in respect of Beijing Dragon payments

ACCESSORIAL LIABILITY

Relief against West Wyalong Marketplace

Relief against Interlink Wagga Central

Alternate relief against Ms Chen

ORDERS

Judgment

  1. HER HONOUR: This is a fraud case. The plaintiff, BCEG International (Australia) Pty Ltd (BCEG), is the Australian subsidiary of BCEG International Investment Co Ltd (BCEG China) and part of the Beijing Construction Engineering Group. From 2010 to 2017, BCEG was run by the first and second defendants, Yu Xiao and wife Yanying Chen. BCEG was then engaged in developing a private hospital on the Gold Coast (the Varsity Lakes project) using US$35 million finance provided by the Export-Import Bank of China (Exim Bank) to BCEG China and on-lent to BCEG. BCEG was also engaged in a commercial and residential development in Wagga Wagga (the Wagga project), using US$3.9 million finance provided in the same manner. In a corporate arrangement that was vulnerable to exploitation, the development land in Varsity Lakes and Wagga was owned by Mr Xiao and Ms Chen’s companies (the third and fourth defendants respectively, Interlink Laboratory Pty Ltd and Interlink Wagga Central Pty Ltd). In addition, BCEG engaged a builder on both projects, Trojjan (BCEG) Pty Ltd (Trojjan), which was also controlled by Mr Xiao and Ms Chen.

  2. At the same time, Mr Xiao and Ms Chen were developing a shopping centre and medical centre in West Wyalong (the West Wyalong project) through their company, the fifth defendant, West Wyalong Marketplace Pty Ltd. Mr Xiao and Ms Chen paid the construction costs for the West Wyalong project by diverting some $3.4 million of the Varsity Lakes loan facility. They did so by causing the builder, Trojjan, to render false invoices – ostensibly for the Varsity Lakes project but in fact for the West Wyalong project – which Ms Chen approved and paid using the Varsity Lakes facility.

  3. Mr Xiao and Ms Chen also used $1.28 million from the first drawdown of the Varsity Lakes loan facility to pay a deposit on an apartment for themselves in the Rocks, Sydney and also reimburse themselves for the costs of a corporate predecessor, BCEG (Australia) Pty Ltd, albeit any amount so reimbursed was likely a small portion of the amount asserted by Mr Xiao. From the second drawdown, Mr Xiao and Ms Chen used $2.05 million to pay for the Wagga land. When applying for subsequent drawdowns of the Varsity Lakes loan facility, Mr Xiao and Ms Chen justified upcoming construction costs by reference to sham sub-contracts between Trojjan and sub-contractors. The genuine sub-contracts were for fixed prices totalling some $1.7 million but, when altered, totalled some $29.7 million. By these means, some $23 million was advanced by BCEG China which would not otherwise have been forthcoming. Some $1.7 million was also transferred from BCEG to Beijing Dragon International Design & Construction Co Ltd, a company associated with Mr Xiao, for no apparent, legitimate purpose.

  4. BCEG sought equitable compensation in respect of breaches of fiduciary duty committed by former director, Mr Xiao, and Ms Chen, who BCEG says was a de facto director. BCEG pursued accessorial claims against Interlink Wagga Central and West Wyalong Marketplace for knowing involvement in these breaches and knowing receipt of the proceeds of these breaches in accordance with the two limbs in Barnes v Addy (1874) LR 9 Ch App 244. These claims were defended on several bases: the other directors of BCEG were said to have approved the diversion of funds from the Varsity Lakes facility to the West Wyalong project and the payments to Beijing Dragon; Mr Xiao and Ms Chen denied preparing the false Trojjan invoices and claimed to be unaware of the sham sub-contracts.

  5. BCEG sued Interlink Laboratory in contract for monies owed in connection with construction of the Varsity Lakes project. Quantification of this claim was problematic given the unreliability of the invoices rendered by BCEG at the time. BCEG relied instead on settlement agreements reached in 2014 and 2017, either as admissions of indebtedness or accounts stated in respect of the amounts owed by Interlink Laboratory. In particular, in 2017, Interlink Laboratory agreed to pay BCEG $5,695,475.13 but paid only $50,000. The defendants contended that Interlink Laboratory had repaid BCEG in full. For the reasons which follow, BCEG is entitled to succeed.

WITNESSES

  1. BCEG relied on the evidence of Wenjing Dong, an accountant and director of BCEG, and Xuchen (Eunson or Ethan) Yang, now general manager and company secretary of BCEG. Ms Dong was professional and pleasant, listened carefully and gave straightforward answers. Ms Dong made reasonable concessions. No issues of credit arose. I accept her evidence. Mr Yang was straightforward, made reasonable concessions and gave clear answers. I accept his evidence.

  2. BCEG relied on the evidence of former BCEG directors, Qing Yang (the father of Eunson Yang) and Tieshan Ma. Both gentlemen are now retired. Mr Yang was calm and comfortable and gave fulsome answers. He appeared straightforward and made reasonable concessions. I have no reason to doubt his evidence. Mr Ma was an impressive senior executive who gave evidence in a straightforward, dignified and authoritative manner. He was a credible witness, whose evidence I accept. Another former BCEG director, Yan Xing, was unable to be located, having left BCEG China since his affidavit had been served earlier in the proceedings. Mr Xing’s affidavit was read under section 63 of the Evidence Act 1995 (NSW).

  3. BCEG also called Jing Zhang, a BCEG China employee who was seconded to BCEG at the time of these events. Ms Zhang was a quiet, demure witness who was clearly distressed by events in Australia, in particular, her dealings with Ms Chen. Ms Zhang frankly accepted her shortcomings in performing her role. Ms Zhang appeared honest and I accept her evidence. The defendants sought a Jones v Dunkel inference in respect of BCEG’s failure to call the BCEG China accountants who replaced Ms Zhang. Ms Dong gave evidence that these accountants no longer worked for BCEG China, but there was no evidence of any steps taken to locate these gentlemen. In an abundance of caution, I infer that the evidence of these witnesses would not have assisted BCEG. This inference does not assist the defendants greatly: see [98].

  4. BCEG subpoenaed Paul Piercy, a former BCEG employee and director of Trojjan, who gave evidence and was cross-examined over two days. Mr Piercy is a likeable fellow who was keen to describe what had gone on. Mr Piercy was at ease and gave evidence in a clear and emphatic manner. He answered readily and simply. He made reasonable concessions. However, the fact that Mr Piercy was involved in business with Mr Xiao over several years when the suggested frauds occurred begs the question whether Mr Piercy was aware of what was going on at the time or assisted Mr Xiao; Mr Piercy’s original signature appeared on one of the drawdown requests sent to BCEG China. Against this, overall, I had the impression that Mr Piercy was focussed on building; paperwork does not appear to have been his strong suit. He and Mr Xiao had clearly fallen out. Having regard to these matters, I have approached Mr Piercy’s evidence with caution.

  5. BCEG also relied on the evidence of Trojjan’s former external accountant, David Hodge, and expert accountant, Jennifer Exner of Deloitte Risk Advisory Pty Ltd. Neither were required for cross examination. In addition, sub-contractors named in the sham sub-contracts gave evidence: James Williams of AJA Electrical Pty Ltd, David Foster of Fosters Joinery Pty Ltd, Alexandra Dalglish of Somewhere Landscape Architects, Jason Bonney of Concrete Systems Pty Ltd, Scott Wood of Action Formwork (Australia) Pty Ltd, Earl Reid of Reid Plumbing Pty Ltd, Andrew Priest of Primat Glass, Craig Przibella of C&C Fire Protection and Nadine Gunning of Riverina Terrazzo. None were required for cross-examination. I accept their evidence.

  6. The defendants called former BCEG accountant, Anthony Smith, and expert accountant, Tony Samuel of Sapere Research Group Ltd. No issues of credit arose. The defendants also relied on an affidavit by former employee, Tristan Kell, who was not required for cross examination. I accept their evidence.

  7. Mr Xiao gave evidence and was cross-examined. He was a most unsatisfactory witness. Mr Xiao was evasive and prone to non-responsive answers and unsolicited self-serving speeches. His evidence was riddled with inconsistencies, both with his affidavits and other evidence given in cross-examination. Mr Xiao readily supplemented what he had said in his affidavits, including in respect of important matters and key conversations which one would expect to see recorded in his affidavits. Mr Xiao’s most common responses were “I deny!” or “I do not have knowledge, first time I see this paper.” He denied having seen documents which were attached to emails to him and were likely to have been of keen interest to him at the time. Mr Xiao was, however, able to readily explain the documents and schedules in question. Mr Xiao denied having seen bank statements before, being documents exhibited to his affidavit. Mr Xiao blamed everything on others, especially Mr Piercy, for whom Mr Xiao exhibited some hostility, “I have no interest in this guy … I don’t want to see this guy”. I was left with considerable disquiet and unease in relying on anything Mr Xiao said without corroborative evidence.

  1. Ms Chen did not give evidence. There was no suggestion that she was unable to do so; when Mr Xiao was being cross-examined, he said that his wife was at their home in the Rocks. I infer that Ms Chen’s evidence would have not assisted the defendants: Jones v Dunkel (1959) 101 CLR 298 at 320-321 (per Windeyer J).

DOCUMENTS

  1. In an ordinary case, the surest guide to the resolution of factual disputes is by reference to the contemporaneous business records. Here, the reliability of many of the business records was in question. The plaintiff suggested that some of the business records were able to be relied upon – usually when the subject of an email – while many of the accounting records should be treated with caution, particularly those purportedly signed by representatives of BCEG China. Having now spent many hours reviewing the documents, four features are noteworthy.

  2. First, there are few emails involving Mr Xiao and, indeed, few emails at all. Eunson Yang said Mr Xiao’s practice was rarely to write emails or prepare documents himself but to ask someone else to send a communication once he had approved its contents.

  3. Second, a significant portion of the documents did not appear to bear the correct date. Documents apparently sent by, sent to, or executed by BCEG could not have come into existence on the date these documents bore as the company had yet to be incorporated: see [70]. Documents contained address details which could not be correct on the date of the document, as BCEG did not move into the premises for months or years later: see [156]-[157]. This problem was endemic, such that I have generally referred to documents at a time when it seems likely that the document was brought into existence, rather than according to its date.

  4. Third, documents apparently signed by BCEG directors and officers other than Mr Xiao, in particular, by Qing Yang, are unlikely to have been signed on that date or at all: see [119]. Generally, the signatory was not in Australia on the date they were said to have signed a document, apparently whilst in Australia.

  5. Fourth, the transactions in question occurred long ago. The bulk of the alleged fraudulent activity occurred from 2010 until 2013, that is, up to 12 years earlier. Business records were incomplete, in particular, BCEG China no longer retained complete records from the initial loan drawdowns. There was also some evidence that, once the Varsity Lakes project was complete, Mr Xiao arranged for documents and emails to be wiped from Mr Piercy’s laptop.

  6. Given the incompleteness of BCEG China’s records, the defendants contended that there was no evidence that fraudulent documents were provided to BCEG China or Exim Bank. In this regard, an important piece of evidence was a black folder labelled “Documents to China Exim – Bank”, obtained by Mr Piercy from the Wagga site office in 2017 and kept until BCEG began investigating Mr Xiao, when Mr Piercy handed the folder to BCEG’s solicitors. Fairly obviously, the black folder was not Mr Piercy’s: it contains handwriting, mostly in Chinese and some English, none of which belongs to him. The black folder contains documents filed behind dividers, with a handwritten table of contents at the front. According to the table of contents, the documents behind the dividers were provided to Exim Bank on various dates or comprised the documents in respect of particular drawdowns.

  7. Another important piece of evidence in this regard was the MYOB records for Trojjan. Mr Hodge was Mr Piercy’s accountant and also the external accountant and tax agent for Trojjan from 2008 to 30 September 2015. After Trojjan changed accountants, Mr Hodge retained copies of the MYOB accounts, financial statements and tax returns, storing the data on his firm’s computer server. After BCEG began investigating Mr Xiao, Mr Hodge was able to provide the MYOB data, which proved illuminating in respect of the West Wyalong payments.

  8. It should not be thought, however, that there was a paucity of documents. Rather, there was a large volume of documents and bank statements, including drafts, duplicates and similar versions of the same document. Multiple bank accounts were maintained for each of the corporate entities, as well as for Mr Xiao and Ms Chen; some 3,500 pages of bank statements are in evidence, albeit incomplete. Indeed, determining the ultimate source of funds for any particular payment was no easy matter as funds were transferred backwards and forwards between multiple bank accounts. As BCEG’s senior counsel put it, “there is money flying around everywhere”. Not infrequently, funds paid by the defendants to BCEG were immediately repaid to themselves. Sprinkled amongst this voluminous material were invoices, sub-contracts, spreadsheet items, accounting entries and transfers said to be of a fraudulent nature. There remained significant gaps in documents, not only in BCEG China’s archives but also to support propositions sought to be advanced by the defendants.

  9. A party’s failure to produce documentary evidence to corroborate their account, where they might be expected to be in possession of such documents, may give rise to an inference that such documents as they may be expected to have would not support their account: Jones v Dunkel at 320 (per Windeyer J), citing with approval Wigmore on Evidence (3rd ed., 1940, Little, Brown and Co.), (“the failure to bring before the tribunal some circumstance, document or witness…”); Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (per Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (per Eames JA, with whom Buchanan JA agreed, noting that “the Jones v Dunkel principle can equally apply to missing documents as to missing witnesses”); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132]; Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112]. I have drawn this inference, generally adversely to the defendants where, particularly, documents concerning their personal finances or their other corporate entities may have been expected to be brought forward to corroborate their defence, but were not.

ONUS AND STANDARD OF PROOF

  1. Drawing on my judgment in In the matter of Anna Bay Resort Pty Ltd [2022] NSWSC 331 at [11]-[17], the burden of proof rests on the plaintiff. The standard of proof is the civil standard, being proof on the balance of probabilities but qualified having regard to the gravity of the questions to be determined: section 140(2), Evidence Act; Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 (per Dixon J). Further, at 361: “The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found.”

  2. Here, BCEG contends that a large number of payments were unauthorised. As to whether BCEG has discharged its onus, it has been said that the “difficulty of proving a negative is well known”: A v New South Wales (2007) 230 CLR 500; [2007] HCA 10 at [60] (per Gleeson CJ, Gummow, Kirby, Hayne, Heydon and Crennan JJ). As Campbell JA (with whom McColl JA and Handley AJA agreed) explained in Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78]:

If a plaintiff has the onus of proving a negative proposition, the fact that the defendant has greater means to produce evidence which contradicts that negative proposition, does not mean that the plaintiff ceases to have the onus of proof of that negative proposition. However, once the plaintiff establishes sufficient evidence from which, if that evidence is accepted, the negative proposition may be inferred, an evidential onus shifts to the defendant to adduce evidence that tends to show that the negative proposition is incorrect. If a defendant adduces such evidence, the plaintiff must then, as part of its overall burden of proof, deal with that evidence either by submission or argument. …

  1. Whilst the plaintiff bore the onus in proving that payments were unauthorised, “where material evidence is peculiarly within a party's knowledge, it may be sufficient for the opposing party to adduce slight evidence of a matter in issue”: Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453 at [26] (per Beazley P), citing Lord Mansfield CJ’s maxim in Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 at 970. As Gleeson J likewise summarised in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227 at [125]:

All evidence “is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”: Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …

  1. Of course, the principle from Blatch v Archer does not alter the onus of proof, nor the position that “the circumstances in which … the absence of evidence may be taken to account are confined by known and accepted principles …”: Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [165] (per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The Court may draw inferences to choose between competing versions of events. As Buchanan J explained in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151 at [31]: (citations omitted)

Inference does not mean conjecture, even in a civil case. In civil proceedings the inferential process “may fall short of certainty, [but] must be more than an inference of equal degree of probability with other inferences, so as to avoid guess or conjecture” … A court is not authorised to choose between guesses, even on the ground that one guess seems more likely than another or others.

See also Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 at [84]-[88] (per Spigelman CJ).

  1. In this case, it is a matter of some significance that, during the years in which these fraudulent transactions were said to have occurred, BCEG was under the control of Mr Xiao and Ms Chen. They were responsible for the company’s records and accounts. Other directors of BCEG were based in Beijing and reliant on information provided by, in particular, Mr Xiao. BCEG China was in the same position. In these circumstances, whilst BCEG bears the onus of proof, it had limited means to prove what had happened from 2010 to 2013, where Mr Xiao and Ms Chen were not removed from their positions until August 2017 and the company’s business records were then secured: see [298]. The defendants had greater means to contradict BCEG’s contentions, having created and been responsible for records at the time of these events. In these circumstances, it may be sufficient for BCEG to adduce slight evidence if that is all it has the ability to advance, such that the evidential onus may shift to the defendants to adduce evidence to show what they say really happened.

FACTS

  1. Mr Xiao and Ms Chen hail from Beijing, China. Mr Xiao came to Australia in 1988 and trained in architecture before returning to Beijing in 1994. There, he worked with various Beijing real estate development companies. Mr Xiao also had a long association with Beijing Dragon, being executive director and part owner of the company.

  2. In 2000, Ms Chen brought the couple’s children back to Australia to attend school. Mr Xiao and Ms Chen settled in Sydney. In 2002, Mr Xiao and Ms Chen established CX & DN Holdings Pty Ltd, of which Mr Xiao and Ms Chen are directors and equal shareholders and through which they hold interests in property and other corporate entities. In 2006, ACX Project Management Pty Ltd was incorporated: Mr Xiao was a director and CX & DN Holdings was the sole shareholder.

  3. Mr Xiao continued to move back and forwards between Sydney and Beijing. While in Beijing, Mr Xiao met from time to time with senior executives of the International Department of Beijing Construction Engineering Group, including Mr Ma and Qing Yang. (Beijing Construction Engineering Group included a large number of companies which changed over time. Broadly, the parties referred indiscriminately to these different corporate entities as “BCEG China”. Generally nothing turns on the precise identity of the company in question and I have adopted the same approach unless it is necessary to specifically identify the company.)

A corporate predecessor: BCEG (Australia)

  1. In 2008, according to Mr Ma, Mr Xiao initiated a discussion about projects in Australia. Mr Xiao said he had potential projects in Australia and asked whether BCEG had any interest in participating in such projects.

  2. According to Mr Xiao, Qing Yang also attended a meeting at which this was discussed, including the possibility of BCEG China borrowing funds from Exim Bank and lending the money to an Australian subsidiary to undertake projects. Either Mr Ma or Mr Yang said there were government restrictions on funding an offshore company with foreign currency before the company was set up and before there was a project that they could invest in. Mr Xiao said: (emphasis added)

“I have set up a company in Australia. We could use this company to start looking for opportunities in Australia, in the interim. I would be happy to put in my own money initially as well as funding from [Beijing] Dragon, and once BCEG gets the bank funding we can be reimbursed.”

Mr Ma and Mr Yang are said to have agreed, and offered Ms Dong’s assistance to register a company in Australia.

  1. Mr Ma denied such a conversation, noting that the arrangement suggested by Mr Xiao would be “in violation of our company protocol”. Qing Yang does not recall the meeting but denied accepting any suggestion that Mr Xiao would use his own money or funds from Beijing Dragon, to be reimbursed later: “There were no such words”. Nor did Mr Yang have authority to approve such an arrangement. Ms Dong does not recall Mr Ma or Mr Yang reporting to her at the time on such a discussion, but does not deny that she may have communicated with Mr Xiao in relation to the incorporation of BCEG (Australia) Pty Ltd. (I will refer to this company as BCEG (Australia), not to be confused with BCEG.)

  2. On 24 September 2008, Ms Chen applied for the registration of BCEG (Australia). Ms Chen was appointed as director and secretary of the company. The sole shareholder was Beijing Construction Engineering Group Co Ltd. BCEG (Australia) opened a bank account with the Commonwealth Bank of Australia. The company’s offices were in Bathurst Street, Sydney, sharing premises with ACX Project Management. In October 2008, Mr Ma, Mr Xing and Mr Yang were also appointed directors of BCEG (Australia). Given the composition of the board and its shareholding, it is reasonable to conclude that BCEG (Australia) was established to identify development projects in Australia to be undertaken for the benefit of BCEG China.

West Wyalong project and Trojjan

  1. Mr Piercy is a construction project manager from Wagga Wagga. Mr Piercy was a director and shareholder in Trojjan Pty Ltd and Trojjan Constructions Pty Ltd, each of which had contractor licences. The West Wyalong project was originally Mr Piercy’s project and West Wyalong Marketplace was his company. West Wyalong Marketplace purchased a development site for $300,000. The site was considered suitable for a shopping centre anchored by a major supermarket together with speciality shops and a petrol station. Work began to develop the site; a traffic impact assessment was obtained in November 2007. But Mr Piercy did not have funds to advance the project.

  2. In 2009, Mr Xiao continued to visit Australia with reasonable frequency and look for possible projects and opportunities for BCEG China. Mr Xiao said that, although BCEG (Australia) ran a campaign for over a year, it was difficult to get into the design and construction market as the company did not have a builder’s licence and had no local experience; the BCEG brand was not known in Australia. Mr Xiao decided that BCEG (Australia) needed a project manager to manage the projects which he was trying to secure. During a trip to Wagga to look at a potential project, Mr Xiao met Mr Piercy and offered him the position of project manager, which Mr Piercy accepted.

  3. Mr Piercy told Mr Xiao about the West Wyalong project. According to Mr Piercy, Mr Xiao reviewed the plans and said, “I'll buy it off you and I'll fund it. You build it. And that can be the first one to kick off." In September 2009, CX & DN Holdings purchased all of the shares in West Wyalong Marketplace. Mr Piercy ceased to be a director and secretary of West Wyalong Marketplace, replaced by Mr Xiao. As such, Mr Xiao and Ms Chen now owned and controlled the West Wyalong project.

  4. In October 2009, Mr Xiao was appointed a director of BCEG (Australia) and Mr Piercy signed a contractor agreement with the company. In February 2010, Ms Chen became a director of Trojjan. BCEG (Australia) acquired a 40% shareholding in Trojjan and CX & DN Holdings acquired a 30% shareholding. (Over time, CX & DN Holdings became the majority shareholder of Trojjan.) As such, Mr Xiao and Ms Chen now controlled Trojjan, either through directorships or shareholdings. The name of the company was changed from Trojjan Pty Ltd to Trojjan (BCEG) Pty Ltd. Trojjan now also conducted its business from BCEG’s office in Bathurst Street.

  5. In March 2010, a Project Co-ordinator at BCEG (Australia), Henri Mariasson, provided CAD drawings for the West Wyalong project to Mr Piercy, with some suggested changes to the plans. That is, BCEG (Australia) employees were working on the West Wyalong project, where the company had no apparent interest in the development. Small expenses related to the West Wyalong project were also paid from BCEG (Australia)’s bank account. In February and March 2010, West Wyalong Marketplace opened its own bank accounts, from which such expenses were then paid. It may be that BCEG (Australia) was investigating the West Wyalong project with a view to involving BCEG China in due course. It may also suggest a lack of delineation between Mr Xiao and Ms Chen’s personal interests and those of BCEG (Australia).

  6. However, the other directors of BCEG (Australia) were unaware of the West Wyalong project. Qing Yang only became aware of the West Wyalong project after the Varsity Lakes project had been completed and BCEG was asked to repay the finance provided by BCEG China for the project. Mr Xiao then mentioned the project as a mechanism of repayment, “once the sales of this project is finished, then he can actually make repayments.” Mr Ma only became aware of the West Wyalong project during the course of these proceedings. (Mr Xing did not address this subject, having sworn his affidavit before Mr Xiao went into evidence.)

  7. Consistent with the fact that BCEG China was unaware of the West Wyalong project, numerous letters of invitation from BCEG to BCEG China and Exim Bank are in evidence, inviting representatives to visit Australia and inspect various projects. An early example, being a letter of invitation sent by BCEG in October 2010 to Mr Ma, stated:

While you are in Australia we would also like you to attend a number of meetings regarding two other developments that currently we are in negotiation with. These are as follows.

1.   High Street Maitland Mall re-development

2.   Provision of Man Camps to Western Australia

The objective of your attendance to these meetings is to meet the principal managers and decision makers of these developments and have a better understanding of the project themselves.

You would also visit our head office in Sydney and visit out ream that we have put together to carry out these exciting new projects. Also you can see firsthand BCEG International (Australia) Pty Ltd strategic plans for growth in 2011.

  1. Neither the letter nor the attached itinerary suggested a visit to West Wyalong. Further letters of invitation were sent on 11 and 17 January 2011, 22 February 2011, 25 March 2011, 15 June 2011, 2 August 2011, 12 September 2011, 8 and 16 November 2011, 6 July 2012, 9 and 12 September 2014, 14 October 2014 and 15 December 2014 in like terms. The fact that none of these letters ever invited a representative of BCEG China or Exim Bank to see the West Wyalong project, notwithstanding repeated invitations to inspect the Varsity Lakes and Wagga projects, suggests that the West Wyalong project was not a BCEG (Australia) project or, later, a BCEG project. Ms Dong said she never visited West Wyalong as she had no reason to do so as there was no project there which was authorised or financed by BCEG. Mr Xiao agreed that BCEG China delegates never visited the West Wyalong project.

  2. There is also no evidence that BCEG China was formally involved in the West Wyalong project. Ms Dong said that, before BCEG China would make a decision to pursue a project, detailed project information and a feasibility analysis was required. A board meeting of BCEG China’s directors would need to be called, at which proposed contracts, loan agreements, guarantees and project feasibility analyses would need to be presented to the board. Ms Dong is not aware of any of these steps having been taken in relation to the West Wyalong project: see also [100].

  3. There is evidence that some staff were aware of the West Wyalong project, but the evidence largely relates to when the project was being completed in 2012 and 2013: see [244]. The staff were not, however, aware which corporate entity was undertaking the project or the funding arrangements. In particular, Mr Kell worked for BCEG as a project coordinator from June 2012 until March 2013, and was aware of the West Wyalong project through his regular discussions with other members of the projects team and attendance at team meetings, where the West Wyalong project was an agenda item. Mr Kell understood that BCEG was carrying out this project, although he was not aware of BCEG’s contractual position in this regard. Against this, Eunson Yang worked for Trojjan from April 2011 but denied participating in any meeting relating to the West Wyalong project and was not aware how the West Wyalong project was financed. Their differing evidence may reflect their different roles in the various companies.

  4. Whatever staff may have known, BCEG’s Beijing-based directors were unaware of the West Wyalong project until after it was completed and BCEG was in default of its obligation to repay BCEG China for the Varsity Lakes facility: see [272]-[276]. The West Wyalong project was clearly a private venture of Mr Xiao and Ms Chen.

Varsity Lakes project

  1. In 2009, Mr Xiao and Ms Chen incorporated the third defendant, Interlink Laboratory. Both became directors. The sole shareholder was CX & DN Holdings. On 19 February 2010, Interlink Laboratory acquired land in Varsity Lakes on the Gold Coast, Queensland. The land had the benefit of development consent for the construction of a three-storey hospital and medical centre and basement car parking. As such, Mr Xiao and Ms Chen effectively owned and controlled the development site.

  2. On 24 February 2010, Interlink Laboratory issued a Letter of Acceptance to BCEG (Australia), accepting BCEG (Australia)’s tender for design and construction of Varsity Lakes Private Hospital for a Contract Sum of $48,152,669 plus GST. The letter itemised seven components of the Contract Sum, comprising design fees, council charges, site clearing/infrastructure upgrade, construction, construction management fee, project management fee and BCEG administration fee. The letter stated the contract sum was the “‘Guaranteed Maximum Lump Sum’ price submitted by BCEG (Australia) … This sum will not be subject to re-measurement and is not subject to price fluctuation, currency exchange fluctuations, labour processes or any other reasons unless expressly provided in the Contract Conditions.”

  3. On 4 March 2010, Interlink Laboratory entered into heads of agreement with Platinum Blue Healthcare Pty Ltd, proposing to lease the Varsity Lakes private hospital development to Platinum Blue. Under the heads of agreement, Platinum Blue was to procure a private hospital licence from Queensland Health while Interlink Laboratory was to construct the works and some fit-out. Rent was to be a percentage of “Gross Development Costs”, then estimated to be $42 million, with such costs to be quantified by an independent Quantity Surveyor.

Inflation of design and construction price

  1. On 9 March 2010, Mr Mariasson sent an email to Mr Piercy, advising that he had been asked by Richard Ziff to revise the Varsity Lake costs by increasing architect and consultants’ fees to around 12% of construction costs. (Mr Ziff was an employee or consultant of BCEG (Australia)). Mr Mariasson asked “if this is ok as the costs provided are already high for worst case scenario.” Mr Piercy forwarded Mr Mariasson’s email to Mr Xiao and Mr Ziff, adding: (emphasis added)

Please explain why you need us to change our quoted figures from our Architects and consultants

I will make clear now that myself or anyone working with me will not exaggerate figures, due to once the independent Quantity Surveyor goes through the costings at the start it will look like we are trying to rip people off. Not a good business strategy in the construction industry.

The figures that you have been supplied by Henri [Mariasson] at this point are actually higher than what they should be.

I am happy to authorize any of the staff to supply you with the exact figures of what this construction is going to be.

Richard, remember that at the end of the day it doesn’t matter what you put the figures at the independent QS officer will tell you how much the rent will come in at.

  1. Two things are apparent from this exchange. First, there was an attempt to increase the rent under the heads of agreement with Platinum Blue by inflating the Gross Development Costs (which Mr Xiao denied), and Mr Piercy was having none of it. Second, the estimated construction costs, also reflected in the Letter of Acceptance referred to at [47], were inflated. Whilst Mr Mariasson described the costs as “already high for worst case scenario”, Mr Piercy was more emphatic, stating that the figures were “actually higher than what they should be” and offered to supply “the exact figures of what this construction is going be”. That is, there was a difference between the expected cost of construction and the figures being cited to Platinum Blue.

  2. The degree of inflation is not known but was likely significant having regard to two matters. First, when the contract was re-executed on the incorporation of BCEG, the price was $11.7 million less, being $36.458 million: see [70]. Second, Mr Piercy said that, on completion of the Varsity Lakes project, only $12 million had been spent on construction to lock-up stage, to which 5% was to be added.

  3. BCEG (Australia) began to enter into sub-contracts in relation to the Varsity Lakes project, starting with a contract with an architect on 15 March 2010 signed by Ms Chen. Interlink Laboratory began paying invoices rendered by BCEG (Australia), presumably in connection with the Varsity Lakes project: invoices BA00001 and BA00002 in January 2010 (totalling $14,716.92) and BA00003 to BA00007 in April 2010 (totalling $208,592.40).

  4. On 7 April 2010, Qing Yang arrived in Australia. On 12 April 2010, Mr Yang replaced Ms Chen as a director of Trojjan. Mr Yang said he was not aware that he became a director of Trojjan. Mr Yang can’t read English and said he had not seen the ASIC document, “The signature looks like it’s mine, but … those things shouldn’t be there. Can I add … my birthday was incorrect.” Mr Yang departed Australia on 13 April 2010. He had no involvement in the management of Trojjan, nor did he attend any director’s meetings.

Funding West Wyalong expenses

  1. On 29 April 2010, West Wyalong Marketplace engaged Trojjan to construct the shopping centre in West Wyalong for $4.2 million in two stages. Work was to commence on 3 May 2010.

  2. West Wyalong Marketplace’s bank account then had a balance of some $17,000. On 11 May 2010, $200,000 was transferred from BCEG (Australia)’s bank account to West Wyalong Marketplace’s bank account. On 27 May 2010, Trojjan issued its first invoice (TR0001) to West Wyalong Marketplace for $115,151.33. The invoice was paid on 1 June 2010 from West Wyalong Marketplace’s bank account, which contained the funds recently provided by BCEG (Australia).

  3. In evidence is a detailed spreadsheet dating from 2 July 2010 – which appears to be a contemporaneous business record – stating that BCEG (presumably a reference to BCEG (Australia)) had paid $127,038.18 in 2009 for West Wyalong Marketplace and itemising further expenses paid in 2010. Total expenses for the West Wyalong project up to 2 July 2010 were stated to be $465,060, of which “BCEG AUSTRALIA” had paid $232,480. Given that BCEG (Australia) had deposited $200,000 into West Wyalong Marketplace’s account in May 2010 (see [55]), it is unremarkable that, two months later, the total expenses were $232,480.

  4. Mr Xiao said that he had authority as a director of BCEG (Australia) to use its funds on the West Wyalong project. Further, the funds were money which he had put into BCEG (Australia). As to Mr Xiao’s first explanation, it is not entirely clear why his authority as a director of BCEG (Australia) extended to using the company’s funds on a project in which BCEG (Australia) had no interest other than, perhaps, by way of its shareholding in Trojjan. Mr Xiao’s second explanation is more likely to provide a valid basis for the payments, to which I now turn.

Pre-BCEG funding

  1. An important part of the defence was that funds transferred by BCEG to the defendants were said to be the repayment of funds earlier advanced by the defendants to BCEG (Australia) and BCEG in its early days.

  2. Mr Xiao said that, from October 2008 to June 2009, BCEG (Australia) was provided with $819,589.35 by entities associated with Mr Xiao, being CX Partners Engineering Consultants Pty Ltd (CX Partners), Beijing Dragon, China National Aero-Technology Import & Export Corporation and Interlink (Asia) Investment Pty Ltd, to cover BCEG (Australia)’s operating costs. Mr Xiao identified these deposits on a BCEG (Australia) bank statement. Certainly, some of the deposits appear, according to the bank statement, to have been deposited by Beijing Dragon (totalling $85,574.27) or “China National Aero”, while others are simply described as “deposit”. There are no bank statements for the entities said to have provided the funds.

  3. From October 2009 to September 2010, Mr Xiao said that he and his wife, Interlink Laboratory and China National Aero-Technology Import & Export Corporation provided a further $1,990,155.06 to BCEG (Australia) to cover its operating costs. Again, Mr Xiao identified these deposits on a BCEG (Australia) bank statement.

  4. Ms Dong said she was not aware that these monies were transferred into the account of BCEG (Australia). Nor was Ms Dong aware that the company had opened a bank account or incurred significant expenses. Nor was the accounting department of BCEG China provided with the bank statements exhibited to Mr Xiao’s affidavit. Ms Dong was not aware of Mr Xiao having provided BCEG China with copies of any contracts entered into on behalf of BCEG (Australia), nor BCEG (Australia)’s accounting and financial reports from 2008 to 2010. Ms Dong expected that, if Mr Xiao or his entities had provided funds to BCEG (Australia), such transactions would have been documented by a loan agreement. If Ms Dong had been informed that significant sums were paid into BCEG (Australia) before June 2010, she would have been concerned as the company had not been engaged in any projects during that period.

  5. Mr Samuel did not consider whether the defendants had provided funds to BCEG (Australia). BCEG (Australia)’s bank statements for the first period described by Mr Xiao (October 2008 to June 2009) indicate that travel, office and employee expenses were paid from this account, totalling some $17,400. A large number of cheques were also presented, but the payee’s details are not recorded on the bank statements. The descriptions on the bank statement suggest that preliminary steps were being taken to set up an office, leasing an item of office equipment and paying some employees. That is, for this period, only a small portion of the funds deposited to BCEG (Australia)’s account were obviously used to pay travel, office and employee expenses. There is no evidence – beyond Mr Xiao – that the additional $800,000 was used to cover BCEG (Australia)’s operating costs.

  6. For the second period described by Mr Xiao (October 2009 to September 2010), bank statements for some of the payees are in evidence from January 2010, from which four features may be observed. First, no further funds were deposited by Beijing Dragon during this period, such that its entire suggested contribution to BCEG (Australia)’s operating costs was $85,574.27.

  7. Second, a comparison between BCEG (Australia)’s bank statements and the available bank statements of Mr Xiao and Ms Chen, Interlink Laboratory, Trojjan and West Wyalong Marketplace, indicates that BCEG (Australia)’s bank account was the account used to pay office and staff expenses, this being the office from which, it will be seen, all of these businesses were conducted: see [34], [38], [86], [88]. That is, to the extent that the funds were deposited to BCEG (Australia)’s account to fund operating costs, it is unclear what portion of those costs related to BCEG (Australia) as opposed to the couple’s other businesses.

  8. Third, some of the deposits identified by Mr Xiao were in fact payments of invoices rendered by BCEG (Australia) to Interlink Laboratory (totalling $223,309.32) and Trojjan (totalling $19,490.64). Obviously, the payment of invoices is not the same thing as providing funding for operating costs; these funds represented BCEG (Australia)’s revenue. If the payment of invoices is deducted from the $314,174.36 which Mr Xiao says Interlink Laboratory provided to the company to fund operating costs, only $71,374.40 remains.

  9. Fourth, a comparison of BCEG (Australia)’s bank statements with those of Mr Xiao and Ms Chen’s bank account reveals that regular, small transfers were made from the former to the latter to reimburse expenses incurred for BCEG (Australia) totalling, by my count, $11,953.59. This suggests that Mr Xiao and Ms Chen ensured that any funds outlaid for the company were promptly reimbursed. Further, one of the payments identified by Mr Xiao ($9,443.94 on 13 May 2010) was only received into their account two days earlier, described as “FCA Adjustment”, and transferred to BCEG (Australia), from which I infer that the funds likely belonged to BCEG (Australia). In addition, on 11 May 2010 and 9 August 2010, $270,450 and $250,000 respectively was transferred from BCEG (Australia)’s bank statements to Mr Xiao and Ms Chen’s bank account and, according to the descriptions on the bank statements, was in repayment of their loan to the company. Ignoring the reimbursement of expenses, if the loan repayments and $9,443.94 are deducted from the amount which Mr Xiao says he and his wife provided to the company to fund operating costs, being $1,112,311.76, $582,417.82 remains. If one is trying to gauge how much Mr Xiao and Ms Chen may have provided to fund BCEG (Australia)’s operating costs, one should also deduct BCEG (Australia)’s funds used on their own project in West Wyalong as at 2 July 2010 (see [56]), leaving some $350,000.

  10. There is no doubt that, prior to the incorporation of BCEG, BCEG (Australia) engaged a number of consultants from March 2010 on, who provided services in connection with the design development and development approval of the Varsity Lakes Project during the early stages of the project: see [52]. There is no evidence that BCEG China provided funds to BCEG (Australia) at the time. Some initial working capital was likely needed and it is likely that Mr Xiao and Ms Chen provided these funds, albeit BCEG (Australia) was also generating income by rendering invoices to Interlink Laboratory and Trojjan. But I am not satisfied that funding was provided in the amounts suggested by Mr Xiao, nor it is clear what amounts of funding were provided, nor is it clear whether any funding remained unpaid when BCEG was incorporated.

Incorporation of BCEG

  1. In about 2010, there was a restructure of Beijing Construction Engineering Group’s arrangements in respect of international projects. Qing Yang said that a decision was made to establish new subsidiaries for international operations, with BCEG China as the parent company. In Mr Yang’s experience, the Exim Bank would not lend directly to an overseas entity. Under the new structure, BCEG China would become the borrowing entity and Beijing Construction Engineering Group could be the guarantor. Ms Dong said that it was the preference of Beijing Construction Engineering Group that contracts entered into from 2010 involve the new subsidiary companies.

  2. As a consequence, on 11 June 2010, BCEG was incorporated. Mr Xiao, Mr Ma, Qing Yang and Mr Xing were appointed directors. The sole shareholder was BCEG China. BCEG’s principal place of business was in Bathurst Street, Sydney, being the same office as BCEG (Australia). Noteworthy, whilst Ms Chen had been a director of BCEG (Australia), she was not a director of BCEG. An issue in these proceedings is whether Ms Chen was, however, a de facto director: see [329].

Varsity Lakes project contracts

  1. Likely at about this time, various documents were issued concerning BCEG, albeit the documents ostensibly pre-dated the incorporation of the company. Presumably, these documents were executed in order to effect the re-structure and, effectively, transfer the Varsity Lakes project from BCEG (Australia) to BCEG. In short, Interlink Laboratory engaged BCEG as head contractor to project manage the construction works on a costs plus basis; BCEG entered a building contract with Trojjan to carry out the construction works; Trojjan later engaged third party sub-contractors as necessary to undertake components of its contracted works.

  2. More specifically, Interlink Laboratory and BCEG entered into an (undated) “Main Contract” in respect of the design, material supply and construction of the Varsity Lakes project. Special conditions noted that Interlink Laboratory had established a budget estimate for the project of $36,458,000: special condition 2.1. Although described as a “budget estimate”, special condition 9.1 provided that the Contract Value was a fixed firm price, not to be varied due to changes in the cost of labour or materials for the duration of the project. As already observed, the budget estimate was some $11.7 million less than the Contract Sum in the Letter of Acceptance dated 24 February 2010.

  3. As to the funding arrangements for construction, BCEG was obliged to self-fund 80% of the contract value using a drawdown facility: special condition 6.3. Each month, BCEG was to provide a progress claim to Interlink Laboratory, to be assessed by a quantity surveyor, “Upon the signed-off agreement of the Quantity Surveyors assessment by [BCEG, Interlink Laboratory] and the Chinese bank (who facilitates the funding through the contractor) the money will be drawn-down to [BCEG] to facilitate payment to the sub-contractors and suppliers that make up the claim. The monthly values will be total[l]ed at the end of the project to form the final contract value”: special condition 6.4. Interlink Laboratory was to refinance the project no later than September 2013: special conditions 6.5 and 7.1.

Relief against Interlink Wagga Central

  1. As Mr Xiao and Ms Chen were directors of Interlink Wagga Central, their knowledge was also the knowledge of the company. Interlink Wagga Central, as the owner of the site, benefitted from BCEG’s advances to the Wagga project, which funded the construction of Buildings 1, 2 and 3. While Interlink Wagga Central received the benefit of these improvements to its land, the company had actual or constructive knowledge of Mr Xiao and Ms Chen’s breaches of their fiduciary duties owed to BCEG. As such, Interlink Wagga Central is liable as a knowing recipient of property in breach of financial duty; the profits derived by the company as a result of the improvements to the Wagga land constituted traceable proceeds of its knowing receipt.

  2. A profit or a benefit made or obtained in breach of fiduciary duty may be held by the defaulting fiduciary on constructive trust: Furs Ltd at 592 (per Rich, Dixon and Evatt JJ); Hospital Products at 107-110 (per Mason J). The remedy especially will be appropriate where the gain takes the form of an identifiable asset: Grimaldi at [583]; Hospital Products at 107-108; Furs Ltd at 592 (per Rich, Dixon and Evatt JJ). A constructive trust ought not to be ordered if a less drastic form of relief is capable of doing full justice or if such an order will go beyond the necessities of the case: John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [128]-[129]. It will not be appropriate where it will affect the rights of innocent third parties: Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ). The personal remedy (compensation) as opposed to the constructive trust remedy is usually needed where the recipient has not retained the property: Grimaldi at [254].

  3. BCEG is entitled to a constructive trust over the profits derived from the proceeds of sale of the residential apartments, the construction of which was funded by BCEG. Interlink Wagga Central holds the profits of the Wagga project on constructive trust for BCEG and is liable to account to BCEG for these profits. BCEG sought an order that Interlink Wagga Central account to it for these profits. BCEG also sought an order that compound interest be paid on these profits. In either case, an inquiry was necessary to ascertain the profits that Interlink Wagga Central in fact derived in connection with its liability as a knowing recipient.

  4. As the plaintiff submitted, rescission is another remedy available to a plaintiff to answer a breach of fiduciary duty: McKenzie v McDonald [1927] VLR 134 at 146; Maguire at 467; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387-390 (per Brennan J). Its object is to restore the plaintiff to its former position before the breach of duty occurred. Unlike in common law, recission in equity is not constrained by the strict requirement of restitutio in integrum. Instead, equity retains its flexibility through the exercise of its powers to make such adjustments as may be necessary upon setting aside the transaction to achieve practical justice, with a view to the parties being restored substantially to their former position, even though perfect restitution may no longer be possible: Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [29]-[30]; Alati v Kruger (1955) 94 CLR 216 at 223-224. In equity, unlike at law, rescission is achieved by the decree of the court. In this case, the debate does not matter because even if the former view were to prevail, the act of claiming rescission in a pleading is sufficient notice: Ripani v Century Legend Pty Ltd [2022] FCA 242 at [246], citing Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 570 (per Brennan J).

  5. Rescission will not be awarded where the order will adversely affect the rights of third parties who took their interest without notice, or where the party claiming rescission has, with full knowledge of the circumstances giving rise to the right to rescind, affirmed the transaction: Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [2003] NSWCA 71 at [73]-[74] (per Mason P, with whom Stein JA and Giles JA agreed); Giumelli at [10] (per Gleeson CJ, McHugh, Gummow and Callinan JJ); Grimaldi (2012) 200 FCR 296 at [277]; Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29 at [193]-[194].

  6. BCEG is entitled to rescission of its contract with Interlink Wagga Central in respect of the Wagga project. BCEG would not have entered into the contract if it had known of Mr Xiao and Ms Chen’s breaches of fiduciary duty, of which Interlink Wagga Central had constructive knowledge. BCEG should be restored to the position it would have been in if the breaches of fiduciary duty had not occurred. The company should be released from any obligations under this contract where Interlink Wagga Central had full knowledge of the circumstances in which the contract was entered into.

Alternate relief against Ms Chen

  1. If I am wrong about the fact that Ms Chen was a de facto director of BCEG, I am comfortably satisfied that Ms Chen was an accessory to the misconduct of Mr Xiao. Ms Chen was intimately involved in the financial operations of the company, including its invoicing, payments, transactions on its bank accounts and the accounting treatment given to these transactions. Ms Chen worked closely with her husband in running the company. Ms Chen either prepared, or supervised the preparation of, false invoices for the West Wyalong payments. Ms Chen approved the West Wyalong payments and must have known that the Varsity Lakes facility was being used for an impermissible purpose. The funds so obtained benefited her and her company, CX & DN Holdings. Most likely, Ms Chen had actual knowledge but, at the very least, knew of circumstances which would indicate these facts to an honest and reasonable person. Ms Chen was knowingly involved in Mr Xiao’s breach of fiduciary duties which he owed to BCEG and a knowing recipient of the proceeds of these breaches.

  2. Mr Xiao’s actions in respect of the sham subcontracts transgressed ordinary standards of honest behaviour amounting to dishonest and fraudulent breaches of his fiduciary duties. Ms Chen knew that Mr Xiao was a director owing fiduciary duties to BCEG but assisted Mr Xiao to give effect to his fraudulent design: Ms Chen was one of only three people at BCEG to whom access to a folder containing the sham sub-contracts was restricted. Ms Chen also certified BCEG invoices for payment by Interlink Laboratory and provided certifications to BCEG China from a ‘second’ set of books containing higher figures, apparently to corroborate the inflated figures sought in the drawdown requests supported by sham sub-contracts.

  3. Likewise in respect to the Beijing Dragon payments, Ms Chen had actual knowledge that Mr Xiao’s conduct in respect of the Beijing Dragon payments amounted to dishonest and fraudulent breaches of his fiduciary duties owed to BCEG. Ms Chen assisted Mr Xiao to give effect to this dishonest and fraudulent design as she controlled BCEG’s bank accounts and effected the payments. Ms Chen had knowledge of circumstances which would indicate Mr Xiao’s dishonesty to an honest and reasonable person. As a result, I would have made orders for equitable compensation against Ms Chen as an accessory.

ORDERS

  1. For these reasons I make the following orders, directions and notations:

Claims against directors

  1. Award equitable compensation against the first and second defendants in the amount of $2,528,949.42 (sham sub-contracts) together with $23,600, US$600,000 and $10,000 (Beijing Dragon payments) together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests.

  2. NOTE that the plaintiff has yet to elect between equitable compensation and an account of profits against the first and second defendants in respect of the Wagga project, as that term is described in the judgment of Rees J.

  3. Direct the plaintiff to provide a copy of this judgment to the liquidators of Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd within 14 days, together with a request that the liquidators provide their consent or advise their opposition to an order rescinding any contract between the plaintiff and the company in respect of the Wagga project within 14 days thereafter.

  4. Grant liberty to apply in respect of the rescission of any contracts between the plaintiff and Trojjan (BCEG) Pty Ltd and Trojjan (BCEG) Constructions Pty Ltd.

Claim against Interlink Laboratory

  1. Judgment against the third defendant in the sum of $5,695,475.13 plus interest under section 100(1) of the Civil Procedure Act 2005 (NSW) at 4% per annum on $2,528,949.42 from 8 November 2017 to 30 June 2018 and 5% per annum on $5,695,475.13 thereafter, calculated on the basis of simple interest.

Claim against Interlink Wagga Central

  1. Rescind the contract between the plaintiff and the fourth defendant dated 1 July 2012.

  2. Order the taking of accounts and an account of profits in respect of the Wagga project.

  3. Declare that any benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project are held on constructive trust for the plaintiff.

  4. Order the fourth defendant to account for the benefits, profits or traceable proceeds derived or received by the fourth defendant in connection with the Wagga project.

Claim against West Wyalong Marketplace

  1. Declare that any benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project are held on constructive trust for the plaintiff.

  2. Order the fifth defendant to account to the plaintiff for the benefits, profits or traceable proceeds derived or received by the fifth defendant in connection with the West Wyalong project, if any, in the sum of $1,710,000 for capital gain and $1,234,632.72 rental income less the West Wyalong payments, as described in the judgment of Rees J, together with interest as specified in the Supreme Court Practice Note at the applicable time, such interest to be compounded on yearly rests.

  3. Direct the plaintiff to provide a calculation of equitable compensation or profits in Australian dollars, together with interest calculations within 14 days, such that Orders 1, 5, 11 may be varied accordingly.

  4. Order the defendants to pay the plaintiff’s costs of these proceedings.

  5. In the event that either party seeks to vary Order 13, direct:

  1. the party seeking a variation to provide any affidavits and submissions (limited to three pages) within 28 days;

  2. the other party to provide any affidavits and submissions in reply (limited to three pages) within 14 days of receipt of the material in Order 14(a);

  3. such application to be determined on the papers.

  1. Grant liberty to the plaintiff to re-list the matter for further directions in respect of the taking of accounts in respect of the Wagga project.

  2. Direct the parties within 14 days to notify any errors or omissions.

  3. The exhibits are to be returned forthwith.

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POSTSCRIPT

On 5 August 2022, the plaintiff filed a notice of motion seeking variation of Order 11 of this judgment pursuant to rule 36.16(3A) of the Uniform Civil Procedure Rules 2005 (NSW). Order 11 was originally cast in terms ordering West Wyalong Marketplace to account to the plaintiff for the benefits, profits or traceable proceeds it derived in respect of the West Wyalong project in sums less the West Wyalong payments. The variation sought was to delete the emphasised words from this order, such that no deduction should be made from the payments for which the account was sought. BCEG contended that, at [436] of this judgment, I should not have conflated the defendants and instead only limited the deduction of payments to be disgorged to payments actually made by West Wyalong Marketplace. On 17 August 2022 I heard that application and, for the reasons in that judgment, granted the application and made the variation sought: BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102.

Amendments

23 August 2022 - Postscript explanation regarding [436] and variation of Order 11 of the judgment.

Decision last updated: 23 August 2022

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Cases Citing This Decision

14

Xiao v BCEG International (Australia) Pty Ltd (No 2) [2023] NSWCA 87
Xiao v BCEG International (Australia) Pty Ltd [2023] NSWCA 48
Yu Xiao v BCEG International (Australia) Pty Ltd [2022] NSWCA 223
Cases Cited

110

Statutory Material Cited

4

A v New South Wales [2007] HCA 10
A v New South Wales [2007] HCA 10
A v New South Wales [2007] HCA 10