Chen v Zhang & Ors - [2008] NSWSC 1203

No judgment structure available for this case.

CITATION: Chen v Zhang & Ors [2008] NSWSC 1203

HEARING DATE(S): 23,24,27,28,29 October 2008

JUDGMENT DATE :
12 November 2008

JUDGMENT OF: Rein J

DECISION: Plaintiff's Summons dismissed for reasons set out in the judgment of Rein J.
Copy of the judgment to be provided to: the Australian Federal Police, the Australian Crime Commission, the Australian Taxation Office, the Registrar of the Liquor Licensing Court, the Office of State Revenue.

CATCHWORDS: Whether there existed an agreement to transfer interest in a business - Effect of absence of clean hands if entitlement otherwise established

LEGISLATION CITED: Financial Transaction Reports Act 1992
Conveyancing Act 1919

CATEGORY: Principal judgment

CASES CITED: R v Zhen Chi Chen [2008] NSWDC 60
Manly Council v Byrne [2004] NSWCA 123
Payne v Parker [1976] 1 NSWLR 191
Kettle and Gas Appliances Ltd v Anthony Hordern and Sons Ltd (1934) 35 SR (NSW) 108, 51 WN (NSW) 190
Keech v Sandford (1726) Sel Cas. Ch.61; 25 ER 223; [1558-1774] All ER Rep 230
Prebble and Reeves [1910] VLR 88
Jones v Dunkel [1959] 101 CLR 368

TEXTS CITED: Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (4th edn)

PARTIES: Zhen Chi Chen (Plaintiff)
Shun Xuan (William) Zhang (First defendant)
Wei (Vincent) Zhang (Second defendant)
Global Goldstar Pty Ltd (Third defendant)
Luke and Douglas Hor (Fourth defendant)
Cam Phoong Tai (Fifth defendant)
Christopher Papaioannou (Sixth defendant)

FILE NUMBER(S): SC 4409/08

COUNSEL: Mr M. Gracie (Plaintiff)
Mr G. George (with Mr K. Ginges) (First-Third defendants)

SOLICITORS: Beazley Singleton (Plaintiff)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Rein J

Hearing: 23, 24, 27, 28, 29 October 2008
Judgment: 12 November 2008

4409/08 Zhen Chi Chen v Shun Xuan Zhang & Ors

JUDGMENT

1 Rein J: These proceedings concern a business known as “Heaven on Earth”, a Chinese Karaoke restaurant and “hostess” lounge, as it was described, at Crows Nest (“the business”).

2 It appears that initially six parties were interested in the venture, being Mr Yu Fu Poon, Mr Lei Wei Sheng and Shenon Pty Ltd, who are referred to in a document described as a Deed of Settlement and Release, as the “Poon Group” and the plaintiff, known as “Peter”, Mr Cam Phoung Tai, known as “Mark”, and Mr Christopher Papaionnou, known as “Taki”. These latter three individuals are referred to in the document as the “Chen Group”. These first names were used by Counsel as a matter of convenience, and I shall adopt the same course, both viz a viz the members of the Chen Group, and the first and second defendants. Mr Gracie of Counsel appears for Peter, the plaintiff in these proceedings.

3 A restaurant, known as Chopsticks, had been located at the premises but as at October 2006 it had not been trading for some time. The Poon and Chen Groups had discussions with a view to establishing a new restaurant. A lease was entered into by Mr Poon on behalf of the Poon Group, with the owners of the premises (then Mr Douglas Hor and Mr Luke Hor). Plans for renovation were put in place, and there were discussions between the Poon Group and the Chen Group, leading to an agreement as to shareholding and subsequently followed by the Deed of Settlement and Release, which was entered into on 2 February 2007.

4 That deed recited a history of negotiations and recorded an agreement by which “the Chen Group shall pay the Poon Group the sum of $130,000”. The accuracy of the recitals is called into question by the contents of a document forming part of Exhibit L, to which I shall return.

5 By Clause 3(b) the deed provided:

“each of the Poon Group shall do all things, execute all documents and take all steps necessary to effect a transfer of the lease from Poon to a person nominated by the Chen Group”.

“each of the Poon Group shall do all things, execute all documents and take all steps necessary to effect a transfer of the liquor licence to a person nominated by the Chen Group”.

6 A copy of the lease between Mr Douglas Hor and Mr Poon dated 27 October 2006 is in evidence. A copy of a Deed of Consent to Assignment of Lease is in evidence (it is undated), and it provides that Mr Poon, with the landlord’s agreement, assigns the lease of the premises to Global Gold Star Pty Ltd (“Global”) and that Mr Shun Xuan Zheng (Mr William Zheng, “William”) would guarantee the obligations of Global under the lease. William did in fact enter into a guarantee: see Annexure “A” to William’s affidavit of 5 September 2008.

7 Given that the Deed of Settlement contemplated the nomination of someone from the Chen Group, it can be inferred that Global was nominated by the Chen Group. Peter gave no evidence of how that nomination had occurred, but given that his wife was, on his case, involved with Global on a basis other than an employee and that a letter from his solicitors asserts that Global was nominated (see Exhibit N, tab 9), he, I infer, must have arranged for the nomination.

8 There is no dispute that it was intended that Global would take over the lease, nor that Global in fact took over the lease and operated the business at the premises from late January 2007. It continues to operate the business.

9 From January 2007 until early July 2008, Ms Carol Liu (“Carol”), the plaintiff’s wife, worked managing the business. In July 2008, she was precluded from continuing in her role as manager, and she has had no role in the business since then.

10 Mr G. George with Mr Ginges of Counsel appear for William, his brother Vincent and Global. There was no appearance for Taki, who was served, and Mark, who was not served: see the affidavit of Mr Anthony Bradley of 2 September 2008 regarding Taki. To understand the defendants’ case, it is necessary to say more about circumstances in which the plaintiff found himself in early 2007. He was charged in 2005 with offences of a type described as “money laundering”. By order of this Court on 18 October 2006 in proceedings brought by the Director of Public Prosecutions (“DPP”) (13518 of 2006), he was ordered to “provide” a statement, sworn on oath, setting out the particulars of and dealings with his property “as specified in the schedule hereto”. The schedule had three parts:

(a) a description of the property, including the nature of your interest in it and, where possible, the estimated value, or in the case of bank accounts or deposits – the estimated balance of that interest;

(c) the name of the person or institution in whose custody title documents in respect of the property are believed to be;

(a) a description of the property disposed of or dealt with, including the nature of the disposition or dealing and any proceeds received as a result of the disposition or dealing;

11 The plaintiff did not provide any affidavit in the DPP Supreme Court proceedings until 27 February 2007. The affidavit he did provide is part of Exhibit 4, and it lists assets and liabilities. It makes no reference to any interest in the business. It does not make any reference to the date 18 October 2006. The plaintiff says that he intended by his affidavit to deal with his assets and liabilities only as at 18 October 2006. He says that his solicitor advised him that that was the appropriate way to read the order. I shall return to that issue below.

12 The plaintiff was in fact convicted of the money laundering offences in March of this year, and was sentenced to a gaol term of 16 and a half years: see R v Zhen Chi Chen [2008] NSWDC 60. He has, I was informed, appealed from that decision, but the appeal has not yet been heard.

13 The first, second and third defendants assert that the plaintiff, fearing that he would be incarcerated and unable to continue operating the business, sought to transfer ownership of the business in consideration of the payment of debts owed him by Taki and Mark, and upon the basis that his wife Carol could be employed in the business by the Zhang interests. William Zhang is the sole shareholder and director in Global (see Exhibit N, Tab 5) and he says Global took over the lease (it being assigned to Global) and that Global commenced operating the business at the premises.

14 William and Peter, as at February 2007, barely knew each other, but William’s brother Vincent, who is sometimes referred to as “Wilson”, was a good friend of Peter’s.

15 The Zhangs claim that Vincent was involved in operating the business on behalf of Global and that Global did, as had been promised, employ Carol as manager of the business. This continued, say the Zhangs, until it was discovered that Carol was taking from the business more than the (allegedly) agreed $1000 a week wages.

16 From October 2006 until February 2007, the restaurant was opened only briefly. Mr Chen said that it opened on or around 30 December for trial trading and a few days in early February. Ms Liu said that it opened for one day on 30 December and then from 25 January to 13 February. The restaurant, everyone is agreed, opened officially on 14 February or at least in that week. Carol was given a power of attorney dated 22 January 2007, see Exhibit D. William claims that he signed that document in late February 2007.

17 I referred earlier to Shenon Pty Ltd (“Shenon”) as part of the Poon Group. Shenon is a company, the shares in which are owned by Mark (15%), Taki (15%), “Joey” (50%) and Mr Poon (20%): see Exhibit 3. Joey had some catering experience, whilst Peter, Mark, Taki and the plaintiff had no catering background. According to the plaintiff, Mark and Taki owned 30% of the business, Joey and Poon 50%, and he 20%: he is not recorded as a shareholder, see Exhibit 3 and Exhibit L, and [54](5) below.

18 The plaintiff, in his affidavit of 23 October 2008, describes a conversation that he had with Vincent in or after January 2007:

“

“I am going to set up a company to run the business. Also someone else will have to hold the lease as my solicitor says I have to own some land to guarantee the lease”.

“That’s ok, my brother has land. He also has a company you can use to run the business.”

“Please ask him for me”.

19 Mr Chen says that Vincent told him that “my brother has agreed to be the lease holder and to use his company, but he wants to know what is in it for him”, and that the plaintiff replied that he would speak to his partners. He says that he spoke with Mark and Taki and then had a conversation with Vincent as follows:

“I have had a meeting with Tai and Chris [Mark and Taki]. We have agreed that if your brother holds the lease we will pay him $200.00 per week and once the business marks [sic.] a profit and has repaid the amount we have invested, we will pay your brother 5% of any profit the business then makes”.

20 The plaintiff says (see para 14) that he subsequently said to Vincent:

“You should have received from Junn some documents for your brother to sign making his company the tenant for the lease of the restaurant”.

21 It will be observed that the plaintiff asserts that Vincent raised the prospect that his brother could use his company “to run the business”. Peter, after speaking with Taki and Mark, speaks only of the lease aspect. There was, on the basis of Mr Chen’s affidavit, no express agreement that a company owned by William would operate the business, and no express acceptance of the remuneration offered but it is possible to infer agreement to that effect as Peter had raised the use of Global to operate the business as part of the arrangement and had offered the profit element. The assignment of the lease to Global is not dated. It is unclear when exactly it was effected, but it seems to have been in or around April 2007. The “Junn” referred to is Mr Donald Junn, solicitor of the firm of Dixon Holmes Du Pont.

22 Mr Chen explained in his affidavit (at para 11) that the reason he needed someone else to hold the lease was that his solicitor had told him he had to “own some land to guarantee the lease”.

23 Peter asserted in his oral evidence (T106.15) that he had been told by his solicitor that “the same person who signed the lease should also operate the business. That is why I carelessly used this company”.

24 I have referred to the fact that the plaintiff did have a motive for wishing to avoid appearing to hold any interest in the business namely that he was facing charges of money laundering and aware that the AFP and or the ACC were seeking to obtain details of his assets. He also had reason to fear incarceration for crimes with which he was charged and which it was subsequently found that he had committed in or before 2004: see T102 and his affidavit of 23 October 2008, para 26. The plaintiff however, did not put this forward as an explanation for dealing with Global and William and he denied that his entry into arrangements with Global and William had any connection with the charges that had been laid: T132.5-10.

25 The plaintiff did not assert in his affidavits that he owned Global or had an agreement for ownership of Global. He seemed to reiterate this position at T103.26.

26 In his oral evidence (given through an interpreter) however, Mr Chen asserted that Global was in fact his company: see T104.1-50, T145.35-45. Carol said the same thing: T229.35. No corroborative evidence was tendered in support of that assertion. Peter asserted that there was an agreement between himself, Mark and Taki, and Global: T138.15, but no such agreement was produced. Global was established in October 2006, well before, on Peter’s case (and on the case of the Zhangs), he had raised the question of assistance with Vincent. Peter also said that there was an agreement relating to his acquisition of the 20%in Shenon which agreement he said was held by Mr Fung, solicitor, but no such agreement was tendered: see T138.40. Exhibit L, which is relied on in support of the 20% claim - see para 4 of the plaintiff’s submissions of 31 October 2008 - points to there never having been any such written agreement.

27 It seems that Carol worked in the business in a managerial capacity. The defendants say that she was paid $1000 per week wages. Carol denies that she received any money. Carol was, until July 2008, when she was told to leave by Global clearly acting on behalf of Global in employing staff, paying staff, ordering and paying for supplies.

28 There is evidence that Carol drew amounts of cash and many times $1000, but her evidence was that she was simply using that money to buy provisions such as liquor, or to pay wages to the hostesses.

29 There is no dispute that Peter and William never spoke to each other about the arrangements for the business. Only Vincent and Peter spoke (although Carol in her later affidavit says she heard part of the conversation). Vincent’s version of events is that:

“including my shares in the new business. I cannot go ahead with the Crows Nest restaurant business anymore. Do you want to take over my share?”

“I don’t really care how much they pay for it. No matter what, I must be out of it. I don’t want to pay any more money to [sic] something I cannot own”

“if I go it alone and I get you help to manage it”

“[Vincent]: My brother will take over the whole business. No partners. No upfront payment. You will not get your $130,000. Are you sure that’s okay with you?

Peter: That’s fine. Everything I own will be taken away from me by the ACCC anyway. Don’t worry. I’ll talk to Mark and Taki. They’ll listen to me. But you need to make sure that they get their money back.

[Vincent]: Of course.

Peter: I only want one thing: my wife has got no job and no income. I’m going to lose everything to the government soon. I want you and your brother to look after my wife and let her have the job to manage the restaurant. Pay her $1000 a week or something. She’ll be happy. There is a lot of cash in this business. We are all friends and she can be trusted and relied on.

[Vincent]: Sure. I already trust her and work well with her”.

30 There is no evidence from Vincent that he was told how much Taki and Mark had paid or that he told William the amount, or from William that Vincent told him the amount. Peter gave evidence that the amount was $30,000 paid by each of Mark and Taki: T99-100.

31 The plaintiff’s case was summarised by Mr Gracie at T262.30 – T263.34:

32 In short then, the Zhang’s case is that Peter agreed to transfer the business to Global in return for employment of Carol at $1000 per week, and repayment to Mark and Taki of “their money”. Peter’s case is that in return for William permitting Global to be lessee, Peter would pay $200 per week to William. Global would be used as a vehicle to run the business for Peter, Mark and Taki and although not articulated by Mr Gracie, Peter’s evidence is to the effect that on behalf of himself, Mark and Taki agreed to pay William 5% of the profits of the business (net or gross was not specified), after the investors had received their money back.

33 There is evidence which supports the finding that Peter did pay $130,000 to the Poon Group for the transfer of the Poon Group’s interest in the business, namely:

34 The Zhang submissions assert that the Court cannot be satisfied that $130,000 was really paid for the Poon interest in the business, since the business had barely been trading as at January 2007, many of the fixtures and fittings included in the lease were the subject of uncertain title, and Peter had extensive involvement in money laundering. The fact that the consideration said to be paid, $130,000, is identical to the amount found in Mr Au’s car, and which had been seized by the AFP, invites suspicion too. Interestingly, Vincent is reported by William as having told him: “the fit-out is great and worth a lot of money”: para 6 of William’s affidavit of 5 September 2008, which is inconsistent with the proposition advanced by the Zhang submissions that there was nothing worth $260,000 like of “business”.

35 No connection between Mr Au and the Poon Group has been established or even suggested, and I am persuaded, on the balance of probabilities, that $130,000 was paid by Peter to the Poon Group to enable Peter, Taki and Mark to purchase the Poon Group’s interest in the business known as Heaven on Earth. There is no corroboration of Peter’s assertion that Taki and Mark each paid $30,000. Peter claims that prior to 2 February, he had a 20% interest in the business, and that by the Deed, he acquired a further 50% interest, making his share 70% and Taki and Mark 15% each, but no document evidencing an agreement between Peter, Taki and Mark has been put in evidence, and see T139. Peter says he paid $40,000 to obtain his 30% interest before the Poon Group departed, but that assertion is not corroborated and is inconsistent with the recitals in the Deed of Release.

36 In the context of the competing versions, a number of factual disputes arose:

37 There were a number of aspects of the evidence of each of Peter, Carol, Ms Kuen, William and Vincent which make it difficult to accept their credibility. I was left with the impression that they have each endeavoured to present a version of events that avoids the truth, because, for differing reasons, the truth is uncomfortable for them. I shall deal with these topics separately but my subsequent comments as to the witnesses’ credibility and my conclusions on these matters are interconnected.

The $46,000

38 One factual matter which assumed importance was the source of the funds of $46,000 which found their way into Global’s bank account. There can be no doubt that the $46,000 was used by the National Australian Bank (“NAB”) as its security for the issue of a $45,000 bank guarantee that the landlord required be provided as part of the assignment of the lease to Global.

39 Peter’s evidence was that he obtained $46,000 from his sister, that he gave Vincent that money to enable Vincent to provide a ‘lease bond’. Peter’s evidence was based on the understanding that the $46,000 had to be paid for a bond, which was not the case. Peter’s sister gave evidence that she had handed $46,000 in cash to Peter. She had made no mention of such a loan in her affidavit of 17 June 2008, and the assertion in Peter’s affidavit of 14 July 2008 (it was later deleted and then subsequently reinstated, which itself undermined its credibility) points to the issue being a live one as at 17 July. His sister, who gave evidence through an interpreter, said she had the $46,000 in cash at her house, and that it was the result of sale of a grocery business some time before. There is no document therefore which points to the $46,000 having been withdrawn from an account. Peter said he gave the $46,000 to Vincent. When asked why he had not handed the money over to Carol, who was managing Global’s business, he said he took the view that Vincent had to do something to justify the $200 a week that Global was being paid. That does not seem to me to be a credible explanation since, on Peter’s case, the $200 was a fee to William for allowing Global to be lessee, not for the employment of, or management of the business, by Vincent, William or Global. Carol said she saw Peter hand over to Vincent an amount of $45,000 saying “this is $45,000 for the bond” (T249), so quite apart from the discrepancy in amount, her evidence suffers from the same problem. There was no evidence from Peter as to how he came to learn in April that the $46,000 was required to be provided by way of bond.

40 The Zhang’s evidence also garnered no support from any documentation tendered by them and depended on cash being kept at home, and some other sources, and was at least as doubtful as the evidence of Peter and his sister. The $46,000 paid into Global’s NAB account was paid on 30 April 2007, but it was paid in five separate deposits of $9,500 and $9,000, at five different branches of the NAB, four in the city, and one at St Leonards. Vincent and William gave evidence about this process, and it was most unconvincing, except at the point where Vincent acknowledged that the payments were all below $10,000 in order to avoid the need to provide details to the bank of the source of the funds.

41 I do not accept Vincent’s evidence that the deposit in different banks had anything to do with the need for him to obtain the funds from four different sources at different times of the day. The reason this procedure was used was, I find on the balance of probabilities, solely to evade what Vincent thought were the consequences of the Financial Transaction Reports Act 1992 (it being possible that an exemption applies). I do not think that William or Vincent are credible witnesses for this and other reasons which I shall detail.

42 I am not persuaded that Peter did receive $46,000 from his sister and paid it to Vincent to enable the bank guarantee on behalf of Global to be issued or for a rental bond.

Peter’s involvement in the business

43 Given that Global was the lessee, William the guarantor under the lease and Global the operator of the business, prima facie, it appears that any interest of Peter, Mark and Taki in this business was transferred to Global, with Carol as the only remaining connection to the business. On Peter’s case, the Zhangs had no interest in the business other than receiving $200 per week for allowing Global to act as tenant and William guaranteeing its obligations under the lease, and 5% of the profit (however that was to be determined). On the Zhang’s case, Peter had no continuing involvement in the business, save that his wife was to manage the business and receive a wage of $1000 per week.

44 There are, apart from the issue of the $46,000, indications that Peter’s interest in the business had not ceased:

45 On the other hand:

(1) Carol also had a card printed with the name “Vincent Chang” “director”. She says she got the spelling from Vincent, and she had that printed because he had asked her for it. Vincent was not a director of Global. Vincent denied having seen the cards there until his departure, even one with his name on it. If the Zhangs had no interest in the business, it seems odd that Carol had a card printed for Vincent, describing him as a director;

Was Peter aware that his assets might be seized: the affidavit of 27 February 2007

46 On 14 September 2006, the Director of Public Prosecutions brought the proceedings against Peter to which I referred earlier. It appears that the catalyst for the application was the claim by Mr Au that the sum of $130,000 found by Australian Federal Police in a vehicle driven by Mr Au and in which Peter was a passenger and seized by them, should be returned to him, but also relevant was the fact that Peter had been charged with the offences which were later to be heard by a jury in 2007.

47 The summons sought orders against Peter relating to the $130,000 but it was not limited to that topic.

48 Orders were made on 18 September 2006 and the only express limitation in time is found in para 3 of the orders. Clause 2 of the orders refers to ‘current’ liabilities. It could be argued that current meant as at the date the order was made, but I do not think that would be a sensible reading of it.

49 The affidavit contains the statement that Peter holds “the following assets” and at para 4 that he has “the following liabilities”. There is no qualification to the statement of assets and liabilities such as “as at 18 October 2006 I had the following assets”.

50 Mr Gracie argued that the order had to be read in the context of the seizure of the $130,000 in Mr Au’s car, and that it was reasonable for Peter to treat the order as requiring disclosure of his assets only as at 18 October 2006. I accept that the AFP and ACC were interested in the $130,000, but in my view it is clear that was not their only interest. In my view, the affidavit must be taken to be a statement of Peter’s assets and liabilities as at 27 February 2007. It is an admission that he did not hold any interest in the business, contrary to his assertion of having put $170,000 into the business i.e. $130,000 and $40,000. If, contrary to his affidavit, he did hold an interest (as he claims), then he has sworn a false affidavit.

51 Mr Gracie argued that there would be no value in him swearing a false affidavit as to his assets, because had he referred to his interest in the business, he would have also referred to his liability to his sister, and they even themselves out. I do not accept that submission. There is no evidence that the amount which Peter claims he borrowed from his sister in connection with the purchase is equivalent to the interest he had in the business. On the contrary, what he says he paid for the business was $170,000 (as at February 2007). The submissions on behalf of the plaintiff claim that it can be inferred that the business was worth $260,000, as at February 2007, as the plaintiff paid half. Secondly, the $40,000 he claims he paid for a share in Shenon he says he obtained out of the $200,000 borrowed from his sister described as a loan for legal fees in the affidavit. Thirdly, I think it is reasonable to assume that had the plaintiff held an interest in the business as at 27 February 2007 and declared that interest, the ACC and AFP would have been interested to know with what funds the money had been acquired and if Peter’s sister claimed (as she does) that her husband provided the money, from where he obtained those funds. I think it is probable that Peter contemplated that if he disclosed an interest, it would be pursued by the ACC.

52 I think that the failure to disclose the claimed interest in his affidavit is compatible with only two possibilities:

53 If I accept the former possibility, it supports the Zhang’s case that the plaintiff had disposed on any interest in the business by that date. If I accept the latter possibility it bespeaks a deliberate attempt to hide from relevant authorities an interest in the business, which is relevant to his credibility, and has wider ramifications.

54 I have considerable doubt as to Peter’s reliability as a witness for the following reasons:

“6. It should be noted that, by then, it was revealed by Ms. Sheng that one Peter Chan (sic.) was also a shareholder behind the scene (sic). We were advised that Peter Chan was not willing to disclose his financial position publicly and he paid for 20% of the value of the share to Ms. Sheng without a Declaration of Trust on her part and there was no documentary evidence either.

7. The executed lease specifically provides that the lessor would permit the lessee to operate as a restaurant with liquor licence first and the application for an entertainment licence will follow suit after the premises were properly decorated and renovated in accordance with the advice from clients’ consultant.

8. The lease also provides, inter alia, that the lessor will not object to the transfer of lease from Mr Poon to the company, Shenon Pty Ltd, to continue the operation.

9. The execution of the lease led our clients to think of the immediate need to apply for liquor licence. It was then discovered that the only appropriate person to apply for such a liquor licence is that of Mr Poon with Ms Sheng having convicted on drunk-driving and the fact that Mr Peter Chan himself also had criminal records. Furthermore, Ms Sheng had been operating in China, Hong Kong and Australia over the last 10 years, it would become necessary for her to obtain Certificate of Clearance from the relevant authority of all these countries thus causing difficulties and delay in the application.

10. Subsequently, they appointed Mr Bi Hui Yin to hold the l licence as manager for the partnership.

11. As far as the partnership is concerned, it was in existence in reality but there was no written partnership agreement. It was only on the 21 December 2006 that Mr Chris Fung of this office strongly advised Mr Poon to have the agreement prepared and executed by the parties concerned. The agreement was prepared however it has never been executed”.

$200 a week

55 The plaintiff’s case is that William agreed to allow Global to be used as lessee and to provide a personal guarantee in return for $200 per week and 5% of the profit once the business “makes a profit and has repaid the amount we have invested”. The defendants point out that Global and William on such a basis would be exposing themselves to a total liability over a three-year period of $324,000 or $10,810 a month – for a business that had hardly traded (and on Carol’s evidence, subsequently traded at a loss in the first year), without any information or details of the proposed earnings and costs. A fee of $200 a week over 3 years equates to $31,200, with no promise by the Chen Group to indemnify Global or William should the rent not be paid and Global and William be required to meet liabilities to the landlord. Even on Peter’s case, there is no evidence of any payment of $200 per week prior to July 2007 yet the $200 was not dependent on earnings of the business. In his affidavit of 23 October 2008, Peter asserted that he had directed Carol to pay $8000 (for 40 weeks) in July to William. Neither Carol nor Peter had mentioned this in their earlier affidavits. It was not mentioned in the letter from the plaintiff’s lawyers of 10 July 2008. The payment of $8000 was referred to in Carol’s affidavit of 21 October 2008 at para 8, in which she said she drew a cheque for $8000. The cheque was written by her, but in fact not signed by her. William claims that the $8000 was to reimburse him for expenses paid for the business: see T343-4.

56 Carol’s evidence is that she paid $8000 to William by cheque on 5 July 2007, $2000 to William by cheque on 12 November 2007 and $2000 to William on 8 January 2008. A copy of the butts said to establish payment are Annexures B, C and D to Carol’s affidavit of 21 October 2008, and a copy of the first cheque (Exhibit 5) is in evidence. Carol says that Exhibit E is a record of payments made to William for the $200 per week owing for the agreement Peter claims he made. Exhibit E refers to weeks and sets out dates starting from 14 February to 2 July, and if genuine, it supports the contention that calculation of weeks was performed. On the other hand, the document does not record dollar payments made at any time. It does state “10 weeks paid” alongside the week “1/5-4/6/08” and “5/6-2/7/08” but there is no dollar amount and nowhere on the document does she record payment of earlier amounts. The cheque butt does not record that the amount was paid for the lease arrangement. Carol says she paid Vincent other amounts in cash for the lease, but does not say how much. The defendants assert that the note is a fabrication. I am not positively persuaded that the note is a fabrication but I think its authenticity as a record of payments is in doubt. Taken into account with the matters to which I have referred, I am not persuaded that $12,000 was paid for the “$200 rental”.

Bills from Mr Junn

57 Mr Junn, from Dixon Holmes Du Pont, sent a tax invoice dated 21 February 2007 addressed to Peter, and a further invoice dated 31 July 2007, also addressed to Peter: see Exhibit P. There is a third invoice dated 5 March 2007 addressed to Peter, see Exhibit 6. It appears that Mr Junn reissued the invoice of 31 July 2007 and the invoice of 21 February 2007 to Global, explaining that the pre-existing template had been used to prepare it: see Annexure A to the affidavit of Vincent of 10 October 2008. All of these invoices were, in fact, paid out of Global’s account by means of cheques prepared by Carol.

58 The submissions on behalf of the plaintiff draw attention to the fact that the invoices not only point to transfer of the Poon Group interests, but also to steps taken on behalf of Peter after the 2 February. The defendants annexed the copies of correspondence from Mr Junn: see Annexure A to Vincent’s affidavit of 10 October 2008. A call was made for the originals of the Dixon Holmes Du Pont invoices, and these were not produced. Since Global paid the invoices (and Carol wrote the cheques) I do not think that there is anything sinister in the invoices having been reissued by Mr Junn – it is not Peter’s case that he paid the bills out of his own monies. Carol has some of the records of Global and I do not think it is clear that Global or the Zhangs would have possession of the originals.

59 I thought that Carol, who gave her evidence without the aid of an interpreter, and whose English was of a high standard, was remarkably composed for a person in her circumstances (a young lady whose husband has been sentenced to a long period of imprisonment) and she appeared to be an obviously intelligent lady with a strong will, but I have considerable doubts as to her reliability for the following reasons:

“The shares belonged to me. Why the money is not hers? Why couldn't she touch the money?

Q. Because the shares did not belong to you, sir?

A. INTERPRETER: The company was set up by me and I purchased this business. 70 per cent of shares belong to me. I am a majority shareholder and I have the majority say. I authorised [my] wife and she could do whatever she wanted under my dedication.

Q. How did you authorise your wife?

A. INTERPRETER: I, orally, authorised her, because I am the majority stakeholder”

Ms Kuen’s Credibility

60 Ms Kuen gave her evidence through an interpreter. I have already referred to her failure to mention the $46,000 in her first affidavit. In her oral evidence, she initially said she could not recall any conversation with Peter about the business after December 2006, and then said she had not had any such conversation: T112-T114. It was only leading questions that prompted answers helpful to the plaintiff’s case. Given all of the circumstances, and her close relationship with her brother whereby it appears she had lent him $200,000 for legal fees, and the absence of any documentary corroboration in relation to the $46,000 it is difficult to have any confidence as to the reliability of her evidence.

61 William, who gave his evidence without the assistance of an interpreter, and whose English is of a high standard, was a careful witness, and his demeanour and presentation of itself did not lead me to doubt his veracity. Interestingly, Mr Gracie put to William that he was not aware of the arrangement made by Vincent with Peter and as to matters relevant to the conduct of the business: T303. Mr George took up this point in submissions saying that if William (and hence Global) had been misled as to the nature of the arrangements, no constructive trust could be declared against them. There were however several areas of William’s evidence that bear negatively upon his credibility:

62 Vincent gave his evidence principally in English but with some assistance from an interpreter, needed not so much in translating questions to Vincent, but in understanding his responses. I also have doubts concerning the credibility of Vincent for the following reasons:

(5) Vincent claimed that Peter owed him money and that he agreed to give Vincent a 20% interest in the business. Vincent’s evidence about this was unconvincing, and he did not establish that he had lent any money to Peter, or that he had become a part of the Chen Group. He made no mention of having such an interest in the conversation that he says he had with William in his affidavits.

The Liquor Licence

63 It is clear that Peter believed that he could not hold a liquor license (for good reason if he had a criminal record it would seem), and could not be associated with any business or company that was seeking such a license: see Exhibit L. Peter said in his oral evidence that he could not hold a license because he could not be at the business on a daily basis: T133. Global and William represented to the Licensing Court that nobody other than Global or William had any interest in the business “of the said licensed premises”. On the Zhangs’ case, that was correct, but on Peter’s case, it was false. In the plaintiff’s submissions, it is asserted that Mr Junn was acting for Peter in arranging the transfer of the liquor license. I draw the inference from the evidence, including Exhibit L, that if Peter did have an interest in the business as he contends after February 2007, he was aware that he could not or would not be able to have an interest in the business if the liquor license was to be retained, and did not want his involvement revealed to the Licensing Court, and that he was aware that no such interest had been declared since he had no hand in obtaining the transfer, but left that to Global. That was a second reason why he would want to use a company with which, to outward appearance, he had no involvement.

Mr Junn’s Absence

64 My Junn was not called as a witness by either party. Peter was critical of Mr Junn in his evidence, blaming him for having given him misleading advice about he requirements of the landlord, and it appeared, not having ensured that he had obtained shareholding in Global. Since William claimed that he had given instructions to Mr Junn in relation to the assignment to Global, there is a sense in which Mr Junn’s evidence could clear up some of the mysteries created by the evidence put forward by both parties. Mr Gracie argued that there remained a connection between the Zhangs and Mr Junn, as Vincent admitted that Mr Junn was acting for him in connection with money laundering charges laid against him, whereas there ceased to be any connection between Peter and Mr Junn. He also argued that Mr Junn had not produced documents in answer to a subpoena, and tendered documents in relation to that aspect: see Exhibit Q. Since Peter asserts that Mr Junn was acting for him on the transaction involving Global, then it might be expected that he would call Mr Junn to corroborate his assertions and fill in some of the gaps as to what transpired. Mr Gracie made it clear that he had considered calling Mr Junn but he said he had worked towards avoiding that need: see T62.41-49.

65 Mr Gracie sought to rely on a Jones v Dunkel point. The law relating to Jones v Dunkel was reviewed in a decision of the Court of Appeal by Campbell J, with whom Beazley JA and Pearlman AJA agreed, in Manly Council v Byrne [2004] NSWCA 123. There are two inferences that can (but not must) be drawn when a witness is not called by a party and the conditions for application of the principle exist (I shall return to these conditions below).

66 The conditions for the operation of the principle are those laid down in Payne v Parker [1976] 1 NSWLR 191 by Glass JA (and approved in Byrne):

‘(a) the missing witness would be expected to be called by one party rather than the other, (b) his evidence would elucidate a particular matter, (c) his absence is unexplained’: p 201.

67 I do not think that the principle is available against the Zhangs, because Mr Junn is not obviously in the defendants’ camp rather than that of the plaintiffs, and it is not the defendants’ case that they instructed Mr Junn to document the agreement they say Vincent reached with Peter. So far as their case is concerned, it is the absence of such instructions to do so that is surprising. Even if the principle could be relied on, failure by the Zhangs to call Mr Junn would not in any event cure deficiencies in Peter’s evidence.

68 So far as the failure of Mr Junn to produce documents in response to the subpoena, the correspondence shows that Mr Junn, although claiming that service had not been valid, did agree to provide documents if he received the amount of $350 conduct money. There is a copy of a letter dated 29 August 2008 from Beazley Singleton to Mr Junn, which Mr Junn says he never received. Then he asked for a copy of that letter, he was given a copy of another letter of the same date. The plaintiff’s solicitors threatened to take, but took no steps to enforce the subpoena on or after August.

69 If the plaintiff, facing and fearing the reach of the ACC or an equivalent relevant authority, sought the assistance of William and Vincent to enable the business to be operated by a seemingly unconnected third party, with profits being paid to Carol in an untraceable or difficult to trace form, and with, in effect, a secret trust in place, what occurred would be comprehensible. If that were the rationale behind what has occurred it would lead on to the question of whether what was done was illegal and or dishonest, and whether in such circumstances this Court should be willing to grant any equitable relief.

70 It is not, however, Peter’s case that the arrangements he made with William, Vincent and Global were connected with the prospect of a confiscation of assets by the authorities or because of the prospect of incarceration of which he was aware, or recognition that his involvement would lead to refusal or cancellation of a liquor license, led him to enter into that arrangement. Vincent asserts that Peter told him of his concerns in respect of incarceration and confiscation, but assert that rather than William agreeing to allow Global to run the business for Peter, Peter gave away the business (or his interest in it) for William’s agreement of payment out to Taki and Mark, and paying Carol $1000 per week out of the business.

Conclusion

71 Given that neither Peter, on the one hand, or the Zhangs on the other, assert that what was done was part of a scheme to permit Peter to retain his interest but to avoid the business falling under the scrutiny of or within the grasp of authorities, or to preclude rejection or termination of the liquor license, I am left with two competing versions of events as to what occurred, neither of which, in my view, is supported by credible evidence. The plaintiff bears the onus of proof and has failed to establish the agreement asserted. In my view, the plaintiff’s summons should be dismissed.

72 If I had been persuaded that an agreement was reached between Peter and William in the terms alleged by Peter, then, in my view the obvious inference and the one which I would draw, is that it was made in an endeavour to hide Peter’s involvement in the business in order to avoid the prospect of scrutiny and possible seizure of assets by the AFP/ACC and to enable the business to obtain and retain a liquor license that would not have been able to be obtained or retained, had his involvement been disclosed. In my view, the Court should not grant equitable relief in such circumstances: see the discussion in Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (4th edn) 3:110-135 and Kettle and Gas Appliances Ltd v Anthony Hordern and Sons Ltd (1934) 35 SR (NSW) 108, 51 WN (NSW) 190 per Long Innes J, p 93, which although dealing with a different type of case, provides an example of misconduct or deception that will suffice to enliven the operation of the maxim. This lack of “clean hands” or illegality argument was not advanced by the defendant (it is inconsistent with their version of what occurred) but I raised the point during the hearing and in my view it is not dependent on the position taken by the defendant for their own forensic reasons. Mr Gracie argued that to preclude relief would leave the business in the hands of a wrongdoer and that referral of the matters to the relevant authorities would suffice. I do not accept that the Court, exercising its equitable jurisdiction, should grant relief where a party has entered upon a scheme of deliberate deception of public authorities.

73 The Zhangs raised a number of other defences including s 23C and s54 of the Conveyancing Act. The only disposition of land or interest in land with which the proceedings are concerned is the lease of the premises. The claim against the owners of the premises is ancillary to the claim against the Zhangs and Global. As against the Zhangs and Global, Peter asserts a constructive trust which by s 23C(2) is not affected by s 23C(1). It is the Zhangs who rely on the disposition of an interest in land to Global, which is not the subject of any writing signed by Peter, Taki or Mark. This is not a case in which it is asserted that Global, having entered into a tenancy, subsequently agreed to transfer the lease to Peter, rather, Peter asserts that he (and Taki and Mark) were the successors to Mr Poon, and that Global has always held the lease on constructive trust for them. If the elements of a constructive trust were made out and there was no impediment to the Court declaring there to be such a trust, I do not think that s 23C or s 54 of the Conveyancing Act would assist the Zhangs and Global.

74 A lease can be held on constructive trust: see Keech v Sandford (1726) Sel Cas. Ch.61; 25 ER 223; [1558-1774] All ER Rep 230 and Prebble and Reeves [1910] VLR 88 and profits of a business can be held on constructive trust: see Meagher Gummow and Lehane (supra) para 5-250. The practical difficulties raised by the defendants, if otherwise relevant, might be able to be overcome, for example, by holding that William holds shares in Global for Peter, Taki and Mark, although since Peter claims he agreed to pay 5% of the profits, that would require additional orders.

75 It seems clear on the balance of probabilities that Peter has not provided full details of his assets and liabilities to this Court, and to the AFP or ACC even on his evidence, because he says he owed his sister a further $117,0000 as at 27 February 2007. From the copy of the taxation return of Global in evidence, and Exhibits including H, 9 and 10, it appears that Global may not have declared all of its earnings to the Australian Taxation Office and it is possible on Carol’s evidence that insufficient payroll tax has been paid by Global in respect of wages. I think that the evidence of William and Vincent concerning the deposit of $46,000 in five separate payments raises issues as to possible breaches of the Financial Reporting legislation. I direct the Registrar to provide a copy of this judgment to:

(1) the Australian Federal Police

(5) the Office of State Revenue (in relation to possible payroll tax issues)

76 I direct that Exhibits be held by the Court for a period of six months to allow any of the above authorities to make applications to the Court for access to the documents.

77 I will hear the parties on the issue of costs.

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Citations

Chen v Zhang [2008] NSWSC 1203

Most Recent Citation

Chen v Zhang [2009] NSWCA 202

Cases Citing This Decision

1

Chen v Zhang [2009] NSWCA 202

Cases Cited

2

Statutory Material Cited

2

R v Zhen Chi CHEN [2008] NSWDC 60

Manly Council v Byrne [2004] NSWCA 123

CITATION:	Chen v Zhang & Ors [2008] NSWSC 1203
HEARING DATE(S):	23,24,27,28,29 October 2008
JUDGMENT DATE :	12 November 2008
JUDGMENT OF:	Rein J
DECISION:	Plaintiff's Summons dismissed for reasons set out in the judgment of Rein J. Copy of the judgment to be provided to: the Australian Federal Police, the Australian Crime Commission, the Australian Taxation Office, the Registrar of the Liquor Licensing Court, the Office of State Revenue.
CATCHWORDS:	Whether there existed an agreement to transfer interest in a business - Effect of absence of clean hands if entitlement otherwise established
LEGISLATION CITED:	Financial Transaction Reports Act 1992 Conveyancing Act 1919
CATEGORY:	Principal judgment
CASES CITED:	R v Zhen Chi Chen [2008] NSWDC 60 Manly Council v Byrne [2004] NSWCA 123 Payne v Parker [1976] 1 NSWLR 191 Kettle and Gas Appliances Ltd v Anthony Hordern and Sons Ltd (1934) 35 SR (NSW) 108, 51 WN (NSW) 190 Keech v Sandford (1726) Sel Cas. Ch.61; 25 ER 223; [1558-1774] All ER Rep 230 Prebble and Reeves [1910] VLR 88 Jones v Dunkel [1959] 101 CLR 368
TEXTS CITED:	Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (4th edn)
PARTIES:	Zhen Chi Chen (Plaintiff) Shun Xuan (William) Zhang (First defendant) Wei (Vincent) Zhang (Second defendant) Global Goldstar Pty Ltd (Third defendant) Luke and Douglas Hor (Fourth defendant) Cam Phoong Tai (Fifth defendant) Christopher Papaioannou (Sixth defendant)
FILE NUMBER(S):	SC 4409/08
COUNSEL:	Mr M. Gracie (Plaintiff) Mr G. George (with Mr K. Ginges) (First-Third defendants)
SOLICITORS:	Beazley Singleton (Plaintiff)