Cheung v Hu
[2022] VCC 291
•16 March 2022
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
General List
Case No. CI-21-01119
| ANDREW WEIYANG CHEUNG | Plaintiff |
| v | |
| XIAOYONG HU | Defendant |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 22-25 and 28 February, 1 March 2022 | |
DATE OF JUDGMENT: | 16 March 2022 | |
CASE MAY BE CITED AS: | Cheung v Hu | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 291 | |
REASONS FOR JUDGMENT
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Subject:Claim in restitution
Catchwords: Injection of capital into proprietary company – defendant injecting capital in excess of his percentage shareholding – director/shareholders agreeing excess contribution by defendant to be deemed loan to company subsequently recast as loan to other director/shareholders – capital injection by defendant made for the purposes of securing permanent residency visa under Migration Act 1958 (Cth) – arrangement reconstituted and backdated as subscription for shares in capital of the proprietary company – whether director/shareholders may effectively “rewrite history” so as to be binding upon them – reconstitution effective retrospectively – plaintiff seeks recovery of amounts paid by him to defendant as “interest” under superseded loan agreement on basis of total failure of consideration – whether consideration totally failed – whether payments recoverable – counterclaim by defendant for repayment of principal and unpaid interest under loan arrangements – backdated reconstitution binding between the parties – consideration for payment of interest totally failed – “interest” recoverable – counterclaim dismissed.
Legislation Cited: Migration Act 1958; Corporations Act 2001; Trade Practices Act 1974
Cases Cited:Whincup v Hughes (1871) LR 6 CP 78; Gilsan (International) Ltd v Optus Network Pty Ltd [No 2] [2005] NSWSC 38; Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd (2017) 106 ATR 151; [2017] NSWCA 184; Dong v Monkiro [2005] NSWSC 749; Trollope & Colls v Atomic Power Constructions [1962] 3 All ER 1035; Shell Energy Holdings Australia Ltd v Commissioner of Taxation [2021] FCA 496; South Sydney District Rugby League Football Club Ltd v News Limited (2000) 177 ALR 611; [2000] FCA 1541; Bunt v Nati [2012] FCA 1089; James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; Rover International Limited v Cannon Film Sales Limited (No 2) [1989] 1 WLR 912; Steven v Bromley [1919] 2 KB 722; Steele v Tardiani (1946) 72 CLR 386; Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR 635; Moses v Macferlan (1760) 2 Burr 1005; 97 ER 676; Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; McDonald v Dennys Lascelles Ltd [1933] HCA 25; Rowland v Divall [1923] 2 KB 500.
Judgment: (1) Within 14 days of this day the parties must bring in short Minutes to give effect to these reasons.
(2)Costs reserved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T. R. Messer | KCL Law |
| For the Defendant | Mr T. Clarke | Bell Legal |
HIS HONOUR:
Background
1Mr Cheung, the plaintiff in this proceeding, was born in the People’s Republic of China, migrating to Australia in 1988 at the age of twenty-four. He had obtained a degree in China in electronic engineering with particular reference to radio. In Australia he obtained a Diploma of Business Accounting from Swinburne University in 1996. He also took out a graduate Diploma of Administration from Monash University in 2001 and obtained qualifications to teach a building licensing course at Holmesglen College. He describes his occupation as “business manager – businessman for property development”. (Transcript (“T”) 108)
2He worked for the telephone and electronics manufacturer Ericsson from 1996 to 2004 as business manager for the Asia-Pacific area. In 2004 Mr Cheung turned his attention to property development, undertaking his first apartment development in Richmond in that year. (T109, Line (“L”) 30 - T110, L16)
3The company Aust Landing Group Pty Ltd (“ALG”) was incorporated in Victoria on 30 May 2011. Mr Cheung was one of its founding directors. (Court Book (“CB”) 1322) There were two directors and two shareholders: Mr Cheung and Liu Xiangmao (Mr Liu) (T110, L27−29) The company’s issued share capital was 10,000 $1 shares, 5,000 of which were owned by Mr Cheung and 5,000 by Mr Liu. (T111, L28−T112, L5)
4Mr Cheung met Mr Hu, the defendant in this proceeding, at a golf course in Kew, Victoria, in 2013 or 2014. They were introduced by a mutual friend, Mr Yang Waiyong. (T112, L16−28) The discussion turned to Mr Hu’s application for a permanent residency visa in Australia. Mr Hu expressed disappointment and frustration at the process, and Mr Cheung offered to help him. (T112, L30−T113, L8)
5Mr Hu said that he sought permanent residency in Australia because of “the living environment, the education environment, and also the weather are all very good. And my children can also enjoy a good education environment here. As I growing older I think it will be a nice environment for me to retire here.” (T268, L6−10) Mr Hu had appointed KPMG to manage his visa application. Mr Cheung told him that he (Mr Cheung) could “be the direct contact person representing [Mr Hu] when [he] went back to Hong Kong.” (T269, L7−10) Mr Hu is a director of two public corporations listed in Hong Kong. (T322) Mr Hu signed a letter of authorisation empowering Mr Cheung to act on his behalf “in all manners relating to [his] Significant Investor ... visa application with KPMG ...” (CB 88)
6Moreover, according to Mr Hu, “when I played golf with him, Mr Cheung, he emphasised a lot of times to me that he has the extensive experience in real estate market in Australia and ... he’s capable ... of investing in this market.” (T270, L27−31)
7According to a “Form 484” lodged under the Corporations Act 2001 by Gerald Lau & Associates Pty Ltd (Mr Cheung’s accountants) in early 2014 Mr Cheung’s shares in ALG decreased by 3,000, and Mr Hu acquired 4,000 shares in the company. Mr Liu’s shareholding was adjusted by a decrease of 3,000 shares, leaving him with 2,000, and a Mr Yin acquired 2,000 shares. The effect was that Mr Cheung held 2,000 of the 10,000 shares, Mr Hu held 4,000, and Mr Liu and Mr Cheung each had 2,000 shares. (CB 85−87)
8Mr Yin was a mutual friend of Mr Cheung and Mr Liu. (T113, L25−26) A document prepared by KPMG in support of Mr Hu’s visa application shows that on 4 July 2014 he invested AUD $5,000,000 in Government Bonds of Victoria. (CB 1167; T115, L6−7) A further Form 484 relative to ALG lodged by Mr Cheung’s accountants, Gerald Lau & Associates, dated 19 February 2016, shows that the shareholding in ALG was readjusted in February 2016 so as to leave Mr Cheung with 2,900 of the 10,000 issued shares, Mr Hu with 4,200, and Mr Liu with 2,900. (CB 95−97) Mr Yin seems to have disappeared from the scene.
9On 1 April 2016, Mr Cheung signed an auction contract of sale for the property at 137−157 Adderley Street, West Melbourne, for a price of $9,400,000. The vendor was Prime Construction Pty Ltd. A deposit of $940,000 was payable, with the balance payable at settlement 90 days thereafter. Gilbert Boffa acted as solicitor for the purchaser, ALG. (CB 186−249)
10Mr Hu wrote a letter dated 27 April 2016 to “The Manager, Business Migration, Department of State Development Business and Innovation” of the State of Victoria. The letter opened with the following paragraph:
“Please find attached business plan prepared for Aust Landing Group (ABN 82 151193092) of which I am Chairman and Managing Director. It outlines the company’s plans for the acquisition and development of commercial office and residential property, the first project being the re‑development of 137-157 Adderley Street, West Melbourne VIC 3003.”
11The letter then stated:
“Regarding my potential investment into that company for the purpose of my Significant Investor (188C) visa, my in-principle decision is to invest AUD 5m in the above mentioned company. My decision is based on the information in the business plan.
In line with the requirements of the immigration department, the investment will result in my increased shareholding in the company. I am also aware that for my investment in Aust Landing Group to be a complying investment for the Significant Investor visa it must not be operated for the purpose of speculative or passive investment, but rather for the purpose of making a profit through the provision of goods and/or services other than the provision of rental property.
I confirm that I intend to pursue this investment.”
12The letter was signed by Mr Hu. The Migration Regulations 1994 of the Commonwealth of Australia, made under the Migration Act 1958, provide, with respect to what is referred to as the “Significant Investor” stream of visa applications, that an applicant must have held a subclass 188 (Business Innovation and Investment) (Provisional) visa in the Significant Investor stream for a continuous period of four years. The relevant regulation also requires that the applicant hold a “complying investment” as defined. Such an investment might be made in an Australian proprietary company [such as ALG]: Regulation 5.19B(2). Such an investment must be “an ownership interest in the company”. Mr Hu transferred his investment from Victorian Government Bonds to ALG. (T118, L27−T119, L1)
13On 25 May 2016, Mr Cheung and Mr Liu signed a document in Chinese characters which was also sealed with the common seal of ALG and according to its English translation was headed “Aust Landing Group Pty Limited Decisions on Shareholders Fund Raising”. (CB 265−6) The English translation at CB 266 expresses the document to have been signed by Mr Hu, but this must be in error, because on the relevant day Mr Hu was not in Australia and therefore he could not sign the document. (T119, L19−22) Mr Cheung believed that Mr Hu may have been involved in the discussions via telephone. (Ibid, L18−19) The document recited the relative shareholdings of the parties as being 42 per cent for Mr Hu and 29 per cent each for Messrs Cheung and Liu. The document continued:
“2/ In accordance with the requirements of the board of directors in 2015, Mr. LIU Xiangmao and Mr. Andrew CHEUNG have respectively completed the initial capital injection of AUD $800,000 into the company. Mr. HU Xiaoyong still owes the company the initial capital injection of AUD $1,158,600.
3/ Given that Mr. HU Xiaoyong’s investment of approximately AUD $5,100,000 into the company this time is required to be a one-time investment, the company’s board of directors unanimously agree that the capital injection of AUD $1,158,600 to the company shall be deducted from Mr. HU Xiaoyong’s investment of approximately AUD $5,100,000 into the company this time, and the rest AUD $3,950,000 shall be used as the company’s temporary loan to Mr. HU Xiaoyong. Meanwhile, the company shall pay the above-mentioned temporary loan interest to Mr. HU Xiaoyong at an annual interest rate of 7%.”
14Since the moneys were being made available by Mr Hu, the reference to a loan to him by the company would appear to be in error. (Whether this error was made in the Chinese original or in the English translation need not detain us.) Mr Hu did not sign the Chinese original. He did not accept it as reflecting any agreement which he had made. He said the reference to the company’s lending money to him was obviously incorrect. Mr Hu said:
“I never seen this document before. And, second, the content of this document is inconsistent with the discussion we had in May over the phone.” (T278, L17−19)
15According to Mr Hu, the telephone discussion entailed an explanation to him that the project would cost $10m, about half of which, namely $5m, could be borrowed from a bank, with the rest to be “shared by the shareholders of the company according to their shareholding percentage”. He said that Mr Cheung told him that he had contacted KPMG, who had “confirmed that my fund can be withdrawn from the migration application and also invest into this project and part of it be a loan to them and part of it be my own investment in the project ...” (T278, L25−T279, L5) According to Mr Hu, each of Mr Cheung and Mr Liu “borrowed $1,198,000 from me with 70 [sic, scil 7] per cent interest rate per year.” (T297, L17−18)
16Mr Hu said that he signed a document in Chinese characters at CB 290 (whose English translation appears at CB 291). According to Mr Hu, “after we [he and Mr Cheung] reached agreement we each signed this loan agreement.” (T280, L5−6) The “loan agreement” contains no operative clauses and states no obligations. It refers, however, to a loan amount of AUD $1,198,000 and an annual interest rate of 7 per cent payable quarterly. The “beginning date” of the loan was said to be 30 June 2016, and that date was written in manuscript on the original.
17Mr Hu’s children came to Australia in 2017 to study. Mr Hu continued, “The only opportunity that I need to use Australian dollars is to pay the tuition fees for my children.” (T280, L24−27) Mr Hu said his “wife notified Mr Cheung to pay the interest directly to the school.” (Ibid, L30−31) These school fees were payable to Scotch College. (T283, L2−4) Mr Hu explained, “Each time we notify him [viz, Mr Cheung] to pay the tuition fees he will put a note on the receipt saying it is for the interest, interest payment.” (Ibid, L7−9)
18As part of the visa application process, Mr Hu was required to spend at least 40 days in Australia each year. He said, “So that’s why I normally came during spring festival season to catch up with them [viz, Messrs Cheung and Liu]. So when I caught up with them I asked the progress of the project, and also asked them whether the project can be sold within one year. And Mr Cheung assured me that the payment can be paid and we can get 30 per cent profit.” (T281, L14−19) Mr Hu referred to a “spring festival”. The “catch up” led to the preparation of a document which was dated in February 2017, which is late summer or perhaps the eve of autumn in Australia. Perhaps he was thinking of the seasons in his native China in the northern hemisphere.
19The document in question appears in its Chinese original at CB 497, and its English translation at CB 499−500. This document appears to be signed by the three directors, Messrs Cheung, Liu and Hu. It is of central significance in this proceeding, and so the English translation is appended to these reasons as “Appendix A”.
20This document in paragraph 1 recited that Mr Liu and Mr Zhang [Mr Cheung] had made “capital contributions” as shareholders of AUD $600,000 each, with some $5,000,000 by way of contributions from Mr Hu. The document continued:
“Based on the shareholding ratio of the company (42% by Mr Hu Xiaoyong, 29% by Mr Zhang Weiyang [viz, Mr Cheung], 29% by Mr Liu Xiangmao), the capital contribution by Mr Hu Xiaoyong should have been AU$6.2m x 42% = AU$2.604m.”
21The second paragraph, though still part of numbered paragraph 1 in the document, continued:
“The extra AU$2.396m contributed by Mr Hu Xiaoyong was treated as private lending between shareholders, divided equally to Mr Zhang Weiyang [viz, Mr Cheung] and Mr Liu Xiangmao, i.e. Mr Hu Xiaoyong lent AU$1.198m to Mr Zhang Weiyang, and AU$1.198m to Mr Liu Xiangmao. The start date of the above-mentioned lending was 30 June 2016. The interest rate of the lending was 7% per annum, to be repaid quarterly.”
22The final part of numbered paragraph 1 of the minute required Mr Cheung and Mr Liu as shareholders to “make additional equity contribution by 31 August 2017” to match Mr Hu’s investment of $5,000,000 “and their respective shareholding ratios, i.e., Mr Zhang Weiyang and Mr Liu Xiangmao would each make an additional equity contribution of AU$2.8523m.”
23These additional equity contributions were never made.
24The arrangement whereby the loans were made by Mr Hu to his fellow directors rather than to the company was regarded by Mr Hu as more equitable. If the company accepted responsibility for the principal and interest, he, as a 42 per cent shareholder, would be bearing the burden of paying a debt to himself, which he felt was inequitable. (T126, L27−31) As a result, according to Mr Cheung, “Mr Hu strongly requested that it be a personal loan not a company loan”. (T127, L14−15) Mr Cheung said that the documents were signed on 18 February 2017, despite bearing the date 30 June 2016. (T127, L25−28)
25Meanwhile, settlement of the purchase from Prime Construction Pty Ltd of the property at 137−157 Adderley Street, West Melbourne, occurred on 8 July 2016. (CB 297) There was a balance to settle of $9,400,000 which, following adjustments, became $9,457,546.18 inclusive of Goods and Services Tax. Westpac Banking Corporation lent a total of $4,700,000, with deductions for stamp duty, registration fees and so forth leaving a net available of $4,127,359.20. ALG provided $5,330,186.98. (CB 299−300)
26Mr Cheung made payments of school fees in accordance with requests and directions provided to him by Mr Hu’s wife, known in English as “Emily”. (T129, L5−6, L24−29)
27Mr Hu and Mr Cheung travelled to Sydney for New Year’s Eve 2017 to view the fireworks in Sydney for the New Year of 2018. (T134, L25−31). Whilst in Sydney, they played golf with a Mr John Zhuang, who was a mutual friend and carries on practice under the name “Johninfo”. Mr Zhuang is a lawyer specialising in migration. (T135, L3−5) Mr Zhuang, according to Mr Cheung, when apprised of the manner of Mr Hu’s investment in ALG, said, “You will ... not [be] getting the visa at all. Will cancel your visa.” (T135, L15−16)
28On the morning of 2 January 2018, Mr Cheung sent an email to Mr Michael Wall of KPMG enquiring as to the validity of the ALG investment for visa purposes. (CB 1977−8) Mr Wall responded by adding text to the email in response to the queries raised, in particular quoting the requirement of the Migration Regulations that to be a complying investment in a proprietary company “the investment is an ownership interest in the company”. A loan simpliciter to a proprietary company would not constitute a proprietary interest, nor would a loan from one director of a proprietary company to another director constitute a proprietary interest in the assets of the company. Mr Wall responded, indicating that this additional text constituted his answer to the question, but suggested further discussions when he returned to the office later in January. (Ibid)
29In an email of 16 January 2019, Mr Wall told Mr Cheung, inter alia:
“I have spoken to our accountants for some initial high level advice and they advise that given Aust Landing Group has received $5m cash from Mr Hu, it would have been necessary for the allotted/$5m additional shares to be issued to Mr Hu. In this regard, the normal process would be that the company would need to:
a.notify ASIC of the changes in share capital structure and shareholder details within 28 days; and
b.record an increase in the share capital in its balance sheet.”
30Mr Wall requested the signature of an engagement letter to undertake the work to effect these things. (CB 1976) That engagement letter was eventually sent by Mr Wall on 13 February 2018. (T136, L19−20) A revised letter was provided on 20 February 2018, responding to one of Mr Hu’s concerns. (Ibid, L24−25)
31In the event, the work identified by Mr Wall was undertaken by Mr Cheung’s personal accountant, Mr Gerald Lau. Mr Lau sent an email on 5 March 2018 to Mr Cheung advising:
“Thank you for your phone call this morning. As requested over the phone, we have attached herewith all the prepared documents relating to the new shares allotment for your review and signatures.” (CB 723)
32The various draft documents are constituted by the following pages in the Court Book to 756. Mr Lau also included his memorandum of professional fees inclusive of GST: $1,056.00. (CB 757) The documents as signed and filed in ALG’s records, or lodged with ASIC as the case may be, appear at CB 758 and following. The first document at that page, signed and dated 7 March 2018 and subscribed to by each of the three directors, was a directors’ declaration relative to revised financial statements, followed by a directors’ report and so forth. There was also a letter dated 6 March 2018 which seems to have been prepared by Mr Lau’s firm and addressed to him. This included the statement:
“Due to our additional Shares allotment should have happened in May 2016, we hereby request the ASIC form “484” and Company minutes of meeting of Directors to be update and date around that time, i.e. 1 June 2016.”
33The letter continued, stating that Gerald Lau & Associates “only act on our request and have no responsibility regarding this matter.” The letter acknowledged that Mr Lau had warned Mr Cheung about penalty lodgement fees at ASIC and the possibility of a “heavy fine”. (CB 761) The Form 484 recording the revised shareholding arrangements was signed and dated 1 June 2016, and Minutes of a Meeting of Directors providing for the necessary allotment of new shares, to provide Mr Cheung with 600,000 shares, Mr Hu with 5,000,000, and Mr Liu with 600,000, whilst signed on 7 March 2018, is dated 1 June 2016 over the signature. A dating in the heading referring to a meeting on “1 June 2018” would appear to have been intended to read “1 June 2016”. (CB 767)
34There were share certificates for Mr Hu, Mr Cheung and Mr Liu in accordance with the revised share arrangements. (CB 768−770) These were signed by Mr Hu and Mr Cheung in each case, with the notation: “Signed in accordance with the constitution of the Company on 26/05/2016”. A notice of allotment (CB 771) was dated 26 May 2016, constituted by a request for allotment of 4,995,800 ordinary shares by Mr Liu (CB 771), an application for 597,100 ordinary shares by Mr Cheung (CB 772), and a similar request for allotment from Mr Liu (CB 773). The relevant Form 484 was dated 1 June 2016 (CB 774), and provided for shareholding for Mr Hu of 6,200,000 shares, and 600,000 shares respectively for Messrs Cheung and Liu. (CB 775−778)
35Meanwhile, planning permits for the Adderley Street site were obtained. The first permit was for a six-storey development above ground, together with a three-level basement car park. (T141, L15−17) A second planning permit for 90 or 91 apartments was obtained (ibid, L17−21), but the development did not proceed, according to Mr Cheung:
“Because market have changing. Also part of the – is, you know, Mr Hu and we’re fighting each other. I think there are one or two things. One is the market changing, we didn’t ready to start, and then we are naturally looking for selling the whole property.” (T141, L25−29)
36He said the arrival of the COVID pandemic in early 2020 was also a factor. (T142, L2−4)
37Mr Hu obtained his permanent residence in Australia in mid-2019. (T366, L20-25)
38When ALG required funds for incidental expenses or “working capital”, as these matters are sometimes described, the directors made contributions in accordance with their shareholding percentages viz, 29 per cent each for Messrs Cheung and Liu, and 42 per cent for Mr Hu. (T247-8)
39The parties established a company known as Kingston Lend Group Pty Ltd, which despatched a letter constituting a tender or expression of interest in acquiring the assets of an entity known as Aitken Hill Conference and Events Venue. (CB 2533-2537)
40Had the tender or expression of interest been successful, Kingston would have been required to lodge a deposit of $2 million. Mr Cheung and Mr Hu signed a short note styled “Loan Agreement” dated 4 April 2019, which provided for Mr Hu to pay the $2 million with Mr Cheung acknowledging liability to pay him $800,000 after two months. (CB 2531-32) The tender apparently proved unsuccessful.
41Meanwhile, with the Adderley Street development not proceeding, by late 2020 Westpac was pressing for repayment of its loan. The bank’s account manager sent an email to Mr Cheung requiring ALG to “make a bulk reduction of $2.5m by 31/12/20, no exceptions … with further reductions thereafter”. The then current interest rate of 3.25 per cent per annum was to be increased to “4.25% p.a. variable and subject to change”. (CB 2540)
42The following afternoon, that is on 23 December 2020, Mr Cheung sent a WeChat text to Messrs Hu and Liu addressed “Chairman/brother Mao”, stating:
“Good afternoon! Time flies. We’ve been together for seven years. I think we can go further together in the future. I want to clarify the following things: 1) GM Hu’s shares are five million (80.64%), and brother Mao and I are six hundred thousand (9.67%) respectively. President Hu has invested in the company’s shares. I paid $377370 for the tuition of my two children and $144289 for interest on behalf of GM Hu for four years, totaling (sic) $521659. 2) On behalf of GM Hu, I watch two children and provide weekend accommodation. My time and expenses are $1000 per week, four years, a total of $208000, interest of $64171, a total of $272171. 3) During the five years of GM Hu’s immigration application, I played an intermediary role, from application to temporary residence to permanent residence. At the same time, I spent $75000 to accompany him for 160 days to ensure the shortest time for immigration success. GM Hu owes me a total of $868830 (Based on the company’s equity, I lent the company $477000. Based on the company’s annual loss of $550000 and four and a half years, a total of $247500. My share is $239332. The excess is $237667. The bank loan due on December 31 is $2500000. My share is $241750. The difference is $4083. In this part, Mao Ge and I are basically the same. President Hu should pay $2491834 to the bank before 31/12/20. President Hu should pay me $868830 before 31/12/20. The above calculation is reasonable and legal.” (CB 1278)
43The “bottom line” as far as Mr Hu was concerned was a demand for the payment of $868,830 “before 31/12/20”, that is within a couple of business days.
44Mr Cheung also said that Mr Hu should pay Westpac almost $250,000 within the same timeframe.
45It is reasonable to infer that Mr Cheung’s demands were prompted by the demands from the bank.
46The evidence left me uncertain as to whether what might be thought of as the usual situation with a borrowing by a proprietary company obtained viz, that each of the directors would be required to give personal guarantees obtained here. As I understood Mr Hu’s evidence, he had in fact given a guarantee and he had paid out the Westpac loan. Whether Mr Cheung had given a guarantee remained unclear. It seemed to be suggested that he had and that there were separate contribution proceedings on foot, though no particulars were given. (T206-7)
47By a letter dated 25 January 2021, Gadens Lawyers announced that they acted for Mr Cheung. They referred to the “Loan Agreement” between Mr Cheung and Mr Liu dated 30 June 2016. They continued:
“We are instructed that by way of a fundamental breach of the Agreement you did not advance our client any monies and your accepted payment of the interest by our client in the total of $383,314.67.”
48The letter stated that Mr Cheung regarded the loan agreement to be “at an end” and demanded repayment of $383,314.67. (CB 1317)
49AGC Lawyers of Southport, Queensland sent a letter to Mr Cheung dated 21 February 2021. This letter also referred to the loan agreement, stating that in the absence of any specific term for the loan it was repayable on demand. The letter demanded payment by Mr Cheung of the principal of $1.198 million and interest of $53,646.80.
50By Writ dated 22 March 2021 issued by solicitors on behalf of Mr Cheung, this proceeding was commenced seeking “restitution in the sum of $381,281.67”, damages pursuant to s236 of the Australian Consumer Law, together with interest, costs and consequential relief.
51The shareholding structure adopted in March 2018, whereby Mr Hu holds 6.2 million ordinary $1 shares in the capital of ALG, remains as at the date of the trial – see exhibit A.
This proceeding
Statement of Claim
52By his Statement of Claim endorsed on the Writ, Mr Cheung set out the shareholding history of ALG. Next, it referred to the Minutes of ALG’s Board of Directors dated 18 February 2017, which was said to constitute an “equity maintenance contract”, and a loan agreement between the plaintiff and the defendant said to have been “backdated” to 30 June 2016.
53These agreements, it was said, were varied so as to substitute an obligation to pay school fees on behalf of Mr Hu’s sons at Scotch College, which Mr Cheung was said to have paid in a total amount of $381,281.67.
54According to the Statement of Claim “on or about 1 March 2018” the shareholders of ALG agreed to a backdated issue of shares of $1 reflective of Mr Hu having contributed $4,995,800 in capital, and Mr Liu and Mr Cheung having provided $597,100 each.
55The Statement of Claim next said that despite the backdated share issue, Mr Cheung continued to make fee payments to Scotch College. In light of the rearrangement, it was said that there had been a total failure of consideration relative to those payments and the defendant, Mr Hu, was obliged to make restitution of that sum.
56There was a further claim based on alleged misleading or deceptive conduct whereby it was said that Mr Hu represented to Mr Cheung that in consideration of Mr Cheung paying various of Mr Hu’s expenses “from time to time as directed by” Mr Hu, Mr Hu would provide Mr Cheung with future business opportunities in the property sector. It was said Mr Cheung had made the payments in reliance on the representation which had been made in trade or commerce but that no business opportunities were identified and, hence, the making of the representations constituted misleading or deceptive conduct whereby Mr Cheung had suffered loss and damage.
57At the commencement of trial, counsel for Mr Cheung, Mr Messer, announced that the claim for damages for misleading or deceptive conduct would not be pursued. (T2, L1-5)
Defence and Counterclaim
58As to the shareholding and loan arrangements between the parties, Mr Hu’s Defence did not greatly differ from the narrative given in the Statement of Claim save that the matters alleged to have been agreed and minuted by ALG on 18 February 2017 were said to have been agreed “on or about 26 May 2016, via telephone conference …”. The loan agreement, it was said, was not backdated “and was signed by [Mr Cheung] and [Mr Hu] on or around 30 June 2016”.
59Mr Hu agreed that arrangements had been made for Mr Cheung to pay interest under the loan agreement in the form of payment of fees to Scotch College relative to Mr Hu’s sons. He denied that this constituted a variation or replacement of obligations under the loan agreement.
60Mr Hu admitted the payment of school fees in the total sum of $284,644.64. The modification to ALG’s share capital, according to Mr Hu, took place “on or around 1 March 2018”.
61Mr Hu denied that there had been any total failure of consideration “as alleged or at all”.
62By way of counterclaim, Mr Hu sought payment of the principal sum under the loan agreement between the parties plus interest at 7 per cent per annum minus the $284,644.64 which he admitted had been paid by way of school fees.
Conclusions
Rewriting history
63The essence of the plaintiff’s claim of a total failure of consideration is that, at all material times, the money upon which Mr Cheung paid interest to Mr Hu in the form of school fees was calculated by reference to a principal sum which could not, as a matter of law, be outstanding and payable because it had been used as the consideration to acquire a parcel of shares in the capital of ALG. Mr Clarke referred me to a number of provisions of the Corporations Act dealing with the effect of matters or states of affairs recorded in registers kept by the Australian Securities and Investments Commission on the one hand, and by the subject company (in this case, ALG) on the other hand.
64As to the effect of registers kept by the company, he relied on s176 of the Act which states: “In the absence of evidence to the contrary, a register kept under this Chapter is proof of the matters shown in the register in this Chapter.” The relevant Chapter in the statute dealt inter alia with the register or registers kept by a company recording the shareholders. As to the effect of the registers in that regard kept by ASIC, he referred to s1274B(2) which states:
“In a proceeding in a court, a writing that purports to have been prepared by ASIC is admissible as prima facie evidence of the matters stated in so much of the writing as sets out what purports to be information obtained by ASIC, by using a data processor from the national database. In other words, the writing is proof of such a matter in the absence of evidence to the contrary.”
65The effect in both cases, said Mr Clarke, was that registers showing the present shareholding structure as dating from 2017 or 2016, cannot, in light of the evidence adduced at trial, be accepted as establishing that the share structure is of that antiquity. Rather, he said, the evidence before the Court showed that it commenced in March 2018. It followed therefore that, even if one regarded what took place in March 2018 as extinguishing the loan, the extinguishment was prospective only and therefore, since the loan had been outstanding for a period of time, there was, as regards Mr Cheung as borrower, no total failure of consideration, even if there might be thought to have been a partial failure of consideration. He referred to Whincup v Hughes (1871) LR 6 CP 78.
66In contrast, Mr Messer, on behalf of Mr Cheung, said that it was competent for parties to agree upon the backdating of documents insofar as this does not entail a rewriting of history, absent vitiating factors between the relevant parties. Their agreement to “rewrite history” would be regarded as binding upon them, whether it was binding on third parties such as the Commissioner of Taxation or the Minister of Immigration or not. He referred to Gilsan (International) Ltd v Optus Network Pty Ltd [No 2] [2005] NSWSC 38 [6]; Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd (2017) 106 ATR 151; [2017] NSWCA 184 [7]; along with Dong v Monkiro [2005] NSWSC 749 [63]; approving Trollope & Colls v Atomic Power Constructions [1962] 3 All ER 1035, 140 per Megaw J, as he then was; Shell Energy Holdings Australia Ltd v Commissioner of Taxation [2021] FCA 496 [22]; and South Sydney District Rugby League Football Club Ltd v News Limited (2000) 177 ALR 611; [2000] FCA 1541 [72]. Mr Messer continued (closing submissions, paragraph 31):
“In the present case, the shareholders of ALG agreed, on 7 March 2018, that their holdings were deemed to have been 5,000,000, in the case of Mr Hu, and 600,000, in the case of each of Mr Cheung and Mr Liu, as and from 26 May 2016. That agreement was binding on the shareholders’ inter se.”
67Mr Clarke, however, contended that an unreported decision of Emmett J (then of the Federal Court of Australia) in Bunt v Nati [2012] FCA 1089 established the opposite proposition, namely that it is not competent for parties to “rewrite history”. I turn, first, to the decision in Bunt v Nati. That proceeding concerned a claim by Mr Bunt relative to a shareholding in a company, Rowa Australia Pty Ltd (“Rowa”), in which he sought relief against the company and its shareholders, Mr Nati and Mr Dai. Mr Bunt had made an outlay of $750,000, for which he sought 20 per cent of the shareholding in Rowa. Mr Nati sought relief for misleading or deceptive conduct contrary to the then s52 of the Trade Practices Act 1974 or, alternatively, recovery for $750,000 on the basis of a total failure of consideration. Mr Nati and Mr Dai alleged in their defence that Mr Bunt did indeed receive a 20 per cent shareholding in Rowa. They relied on records lodged with ASIC of evidence of that assertion. [46] Emmett J considered that had there in fact been an allotment of shares along those lines – “there may well have been a good basis for the conclusion that there was not a total failure of consideration.” [47] As to the documents lodged with the Commission, his Honour said “somebody has been prepared to prepare minutes that tell a lie.” [48] The meetings of directors recorded, his Honour concluded, had not in fact occurred, and whilst the alleged meetings were said to have occurred in 2004, minutes were not prepared, on his Honour’s findings, until 2008. [48] The documents in question, minutes and those documents lodged with ASIC, on his Honour’s findings, were in some cases signed by Messrs Nati and Dai [79], and in other cases prepared by a person or persons unknown. [77] His Honour referred to s1274B(2), which is relied upon here by Mr Clarke, as establishing that documents from ASIC registers constituted only prima facie evidence and therefore could be rebutted by the production of contrary evidence. [84] His Honour considered that there was ample contrary evidence to reject the documents from the ASIC lodgings as being a true record of events. [85] His Honour entered judgment against Messrs Nati and Dai in favour of Mr Bunt. In my view, this judgment does not make good the proposition that it is impossible for parties to a contract inter se to rewrite history. His Honour did not find, on the evidence before him, that Mr Bunt had joined in an agreement to rewrite history. The documents which his Honour rejected as an ineffective attempt to rewrite history he attributed either to the defendants, Nati and Dai, against whom he entered judgment, or to a person or persons unknown.
68In the present case, I accept Mr Clarke’s contention that the evidence establishes that the present shareholding regime of ALG dates from March 2018 and not from May 2016.
69I turn, now, to the authorities relied on by Mr Messer in support of the view that this evidence-based reality can, as a matter of contract, be rewritten as between these parties. The first of the authorities relied on is Gilsan v Optus [No 2] [2005] NSWSC 38, a decision of McDougall J. His Honour had published a primary judgment and the parties determined that there were further issues requiring determination. At [2] his Honour set out some six further issues for determination. The first of those issues, which seems to be the one raising the issue pertinent to the present dispute, referred to an agreement between Optus and AT&T Express to operate from 1 January in the calendar year in which they were made. The issue was whether those contracts “could affect adversely accrued rights as between Gilsan and Optus when in fact each of those agreements was actually made well after the commencement of the calendar year.” His Honour identified and described this issue as raising an issue of “retrospectivity”. The matter before his Honour was one of some complexity. As I understand his approach, however, he concluded in that particular case that the relevant clause, which his Honour determined created accrued rights as a matter of construction, ought not to be regarded as overridden by the provision giving what were described as “confidential agreements” retrospective effect. It would seem to follow that his Honour accepted that clear drafting could have permitted a retrospective disturbance of the accrued rights.
70Dong v Monkiro [2005] NSWSC 749 was a decision of Hall J in the Supreme Court of New South Wales. This dealt with the operation of a Loan Deed providing finance for a development. The plaintiff contended that he could rely on the terms of a Loan Deed made on 11 February 2000. It could be regarded as governing advances made in 1999, and that such advances should be regarded as having been made under the terms of the 2000 Loan Deed. His Honour accepted that:
“…it should be open to the parties to a contract to agree upon the date (including a date in the past) from which their legal relations commenced to have effect and that it should be open to the courts to enforce that agreement.” [61], referring to Gilsan’s case
His Honour concluded that the parties did intend the 2000 Loan Deed to govern and be regarded as covering the 1999 advance or advances. [62] Hall J referred to a statement by Megaw J in Trollope & Colls v Atomic Power Constructions Ltd [1962] 3 All ER 1035, 1040. [63] The defendants in Dong’s case had contended that the earlier advances were made by different parties. [58] His Honour, accepting the case put by the plaintiff in this regard, said:
“As a practical matter, Ms Lee and Mr Tang were in a position to control and determine which interim or antecedent arrangements attended for loan advances would be the subject of the Loan Deed and to subsequently agree between themselves who, with respect to the loan, would have the rights and obligations as lender/borrower respectively.” [67]
71In Trollope & Colls v Atomic Power Constructions Ltd [1962] 3 All ER 1035, Megaw J (as he then was), considered an argument that work done by a contractor in June 1959 should be regarded as governed by the terms of a contract entered into between it and the principal in April 1960. Accepting that the 1960 contract governed the work done in 1959, his Lordship said:
“… so far as I am aware, there is no principle of English law which provides that a contract cannot in any circumstances have retrospective effect, or that, if it purports to have, in fact, retrospective effect, it is in law a nullity. If, indeed, there were such a principle, there would be many important mercantile contracts which would, no doubt to the consternation of the parties, be nullities. Frequently, in large transactions a written contract is expressed to have retrospective effect, sometimes lengthy retrospective effect; and this in cases where the negotiations on some of the terms have continued up to almost, if not quite, the date of the signature of the contract. The parties have meanwhile been conducting their transactions with one another, it may be for many months, on the assumption that a contract would ultimately be agreed on lines known to both the parties, though with the final form of various constituent terms of the proposed contract still under discussion. The parties have assumed that when the contract is made – when all the terms have been agreed in their final form – the contract will apply retrospectively to the preceding transactions.” [1962] 3 All ER 1035, 1039-40
72Ultimately, in the absence of some statutory override or some consideration of public policy which might be relevant to the situation of a taxation authority or a regulatory authority, it is a matter of freedom of contract for the parties whether they seek to rewrite history or not. Perhaps the most striking example of the rewriting of history is to be found in the decision of Hall J in Dong v Monkiro, where his Honour accepted that it was competent for parties to treat as lent to one of them monies that were in fact advanced to somebody else. Whether these authorities truly represent “retrospectivity” might be open to doubt. In Dong v Monkiro, the true construction was not that the monies were never advanced to the person that actually received them, but rather that as and from the date of the later Loan Deed, they were deemed to have been lent to somebody else.
73Again, when work is undertaken in anticipation of a contract’s being entered into, if the contract is in due course entered into and, as a matter of construction, should be regarded as governing the earlier work, the matter is dealt with by contract. If, as a matter of construction, the earlier work is not regarded as governed by the contract, recovery by the contractor depends upon the law of restitution.
74Assuming, however, that as a matter of contract, as between the contracting parties it is possible to rewrite history in the sense of making it as if the true events never occurred at all, it must be a matter of construction as to whether the contract in question, here, had, and was intended to have, that effect.
75In his closing submissions, Mr Clarke, on behalf of Mr Hu, placed heavy reliance upon the fact that after the reconstitution of the shareholding of ALG in March 2018, Mr Cheung continued to pay interest on the relevant loan until August 2020. (Closing submissions, paragraphs 26-35) He noted, for instance, that the last payment made in August 2020 was expressed as referable to “June interest”. (CB 1316) This descriptor appears on the “screenshot” of the receipt for the electronic transfer. These payments of school fees post March 2018 were not undertaken “officiously” by Mr Cheung. He made payments of school fees in 2020 at the request of Emily Yang, Mr Hu’s wife. (CB 2542 (Chinese language) 2543 translation) There was no suggestion that Ms Yang was speaking other than with the authority of, and on behalf of, her husband, Mr Hu. It is tempting to regard these considerations as rebutting any contention that, on the true construction of these arrangements, the parties intended to rewrite history and make it as if the loan by Mr Hu to Messrs Cheung and Liu never occurred. To do so, however, would be inconsistent with the rule that “it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made.” (James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582 [35] per Gummow, Hayne and Kiefel JJ). There is nothing in the text of the minute subscribed to by Messrs Cheung, Hu and Liu which would shed light on this point. Toward the end of his cross-examination, Mr Hu said, relative to him being shown as continuing to hold 5 million shares in the capital of ALG:
“This is because in 2018 just to avoid the potential impact on my visa application, it is changed to 5 million by Mr Cheung. But this is only on the paper.” (T370, L6-9)
I asked if he meant that the $5 million shareholding was just a sham. Mr Hu replied:
“This was arranged by Mr Cheung to avoid the effect on my visa application, but the actual shareholding still remain the same as before.” (Ibid, L11-13)
76In the event, neither counsel contended that the transactions described, or any of them should be treated as, a sham. On the contrary, they were to be regarded as creating real legal obligations.
77The factual matrix in which these transactions were undertaken (which, in accordance with standard authority, is available to resolve ambiguity) was as described by Mr Hu; that is, it was all done to facilitate his visa application. The requirements for the visa were and were known to be that the complying investment must be held continuously or, at any rate, with no significant break such as a year. The logic of the 2018 arrangement, therefore, would have it that the primary purpose of the contractual arrangement between the parties for the allotment of the shares to Mr Hu was that such allotment should be retrospective in the fullest sense and should operate as a rewriting of history. Unless the rewritten history were placed before the minister, the visa application would have failed.
Voluntary payments
78In cross-examining Mr Cheung and in closing argument, Mr Clarke, for the defendant, Mr Hu, stressed the voluntary nature of the tuition payments made by Mr Cheung post-March 2018. There was no suggestion, and there could have been none, that Mr Cheung was not aware of the reconstruction of the shareholding in ALG which occurred in March 2018. Nor could it be thought that he, as an experienced businessman, was unaware of the difference between debt and equity.
79In many types of restitutionary claim, the making of voluntary payments with full knowledge of the matters is said to give rise to a right of restitution and would be regarded as a bar to success. The learned editors of the third edition of Mason & Carter’s Restitution Law in Australia observed:
“In areas where the law is patently doubtful, the person who pays on a prediction which turns out to be wrong does not labour under a mistake. Similarly, a person who pays knowing that the validity of the statute giving rise to the obligation is under challenge in pending proceedings will have difficulty proving a causative mistake. Likewise a payer ‘with a knowledge of all relevant facts, and either being indifferent to whether or not he be liable in law, or knowing or having reason to think, himself not liable, yet intending finally to close the transaction’.” (Mason Carter & Tolhurst, Mason & Carter’s Restitution Law in Australia, 3rd edition, 157‑8 [415])
80The learned authors in this passage are speaking of the cause of action for monies had and received as being paid under a mistake. I inquired of counsel whether the concept of the voluntary payment as a defence to this cause of action and others, such as monies paid under duress, colore officii, could be applicable to the present claim for monies paid upon a consideration that had totally failed. The stress which Mr Clarke laid on a large percentage of these payments being made voluntarily, in the sense of with full knowledge of the facts which might give rise to a restitutionary claim, suggested that this was a defence which applied to the cause of action for monies had and received upon a consideration that had totally failed. To the extent that Mr Clarke stressed the voluntary nature of many of the payments, implicitly he contended that the defence was available. No authority supporting its application was identified, and I am aware of none.
81Mr Messer contended that for this cause of action matters should be objectively analysed in the same way in which the exercise of contractual powers is. If the law grants a right of recovery for total failure of consideration, the fact that at the material time, the person with that right was unaware of it and did not act with it in contemplation, did not prevent that person from thereafter relying upon the right. This broad principle, he said, was exemplified by the decision of the High Court in Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359. An employer, who had discharged an employee, was held entitled to rely in defence of its action upon considerations unknown to it and not in its contemplation at the time it effected the discharge. This represents the law relative to the exercise of contractual rights. The present claim is one in restitution. Nevertheless, there seems no reason why the same principles should not apply.
82Mr Messer said that Mr Cheung changed his approach and demanded refund of the interest/tuition fees “when the relationship soured and he took legal advice”. (T451, L22‑23) I observed that Mr Cheung said nothing about having obtained and acted upon legal advice on that subject; Mr Messer said that the taking of legal advice could be inferred. Mr Clarke said that, had Mr Cheung referred to making a decision based on legal advice, he would have sought its production on the basis that the stated reliance on legal advice would have constituted a waiver of the privilege. (T452) Finally, Mr Clarke observed that Mr Cheung’s first demand for repayment was made on 23 December 2020, the day after Westpac demanded a $2.5 million principal reduction on its facility. Correspondence from solicitors acting for Mr Cheung did not appear until late January in the following year. Mr Clarke invited me to conclude that Mr Cheung’s change of mind was not on the basis of legal advice which he had received. (T463‑4)
83It seems counterintuitive to think that a person making a payment with full knowledge of all the facts which might be relied upon to recover the payment under the law of restitution could, in that knowledge, proceed to make the payment and thereafter bring a successful proceeding for recovery. This seems offensive to the common law’s abhorrence of circuity. With hesitation and in the absence of authority to the contrary, I conclude that these considerations do not stand in the way of success for Mr Cheung’s claim and that no defence of voluntary payment is available.
Total failure of consideration
84Mr Clarke contended that there had been no total failure of consideration and, in the absence of such, Mr Cheung’s claim must fail. According to Mr Clarke, the purpose of the loan arrangements of February 2017 was clearly set out, and explained in the Minutes of Meeting of Directors (Appendix “A”). Until March 2018, Mr Cheung and Mr Liu enjoyed a disproportionate shareholding, and therefore joint majority control of ALG, despite the relative size of Mr Hu’s capital injection to the funds of ALG.
85Mr Clarke said that the share allotment did not, in fact, operate retrospectively to 26 May 2016 “despite the parties’ expectations”. (Closing submissions, paragraph 46) I have already explained why I do not accept this last proposition. Mr Clarke said that Mr Cheung’s continued making of tuition payments after March 2018 showed that “there had been no variation of the loan agreement (either expressly or by conduct) when the allotment of shares was made.” (Ibid) The loan agreement could not be treated as abandoned in those circumstances. In any event, he said, there was no total failure of consideration “ab initio of the bargained-for consideration. To reach that conclusion would require the Court to disregard the clear sequence of objective facts …” Mr Clarke said that restitutionary remedies “do not displace contractual rights and obligations – except in the case of a total failure of performance that has been paid for in advance.” (Closing submissions, paragraph 48) He referred to Rover International Limited v Cannon Film Sales Limited (No 2) [1989] 1 WLR 912. Restitutionary remedies cannot be relied on “until the express contract is displaced”. (Ibid) He referred to Steven v Bromley [1919] 2 KB 722, 727 per Scrutton LJ; Steele v Tardiani (1946) 72 CLR 386, 402 (Dixon J as he then was). He referred to the High Court’s most recent utterance on this subject in Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR 635 [79] and [127].
86Mr Clarke said there was no dispute that the loan agreement was made and was initially valid. He referred to the plaintiff’s Statement of Claim at paragraphs 4-7. (Closing submissions, paragraph 50) He said the continued payments by Mr Hu show that there is no agreement to discharge the loan ab initio and there was no explanation as to how this might have occurred. (Closing submissions, paragraph 51)
87Mr Clarke said that the concept of failure of consideration was referred to as a ground for recovering outlays as monies had and received in Lord Mansfield’s judgment in Moses v Macferlan (1760) 2 Burr 1005; 97 ER 676. Mr Clarke quoted the judgment of Gummow J in Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516 at [101]-[102], where his Honour explained that “accident” as a basis for equitable intervention in contract was concerned with unforeseen events, misfortunes and so forth which are not the result of negligence or misconduct by any party.
88The failure of consideration alleged here, according to Mr Clarke, was not the result of an accident, an unforeseen determination on a constitutional point by the High Court as in Roxborough’s case, but rather the result of action taken deliberately by both parties and indeed orchestrated by the plaintiff, Mr Cheung, himself. (Closing submissions, paragraph 55)
89Finally, Mr Clarke referred to the High Court’s warning in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 “about the dangers of applying free-floating motions of ‘unjust’ enrichment to legal questions that are governed by established legal and equitable doctrines”. (closing arguments [57]) He concluded (at [58]) by saying: “There is no scope to shoehorn this case into ‘total failure of consideration’ or some other recognised ‘unjust factor’ justifying restitution, merely on account of the asserted general merits of a case”.
90Given that I have accepted the capacity of the parties between themselves to “rewrite history”, the effect of what they did in March 2018 was to make the loan arrangements as if they had never been. The same monies cannot simultaneously be a loan to one or more of the directors and the consideration for the allotment of shares by the company. An agreed application of Mr Hu’s capital injection to the price of shares necessarily negates the continued existence of any debt, either between him and the company or between him and the director. For reasons already explained, given that this was intended by the parties to be done retrospectively, the effect was to make as if the loan or loans had never existed.
91There is no requirement that for a total failure of consideration to be available to be relied on for restitutionary purposes it must have come about by accident. No doubt, where the common law governs the consequences of frustration, the total failure of consideration resulting from frustration comes about without default on the part of either party. Other circumstances where the claim for recovery of monies paid upon a consideration that has totally failed are not of this character. As Mason & Carter observe, “If the contract has been discharged, it is no objection to a claim for restitution of money paid under the contract that the plaintiff–payer breached the contract. The payee is obliged to make restitution for an unjust enrichment unless the failure of the agreed return is merely partial or there is a contrary provision in the contract. Thus, in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, it was said that a purchaser is entitled to restitution of a payment made towards the price of the land under a contract of sale even though discharge occurs by reason of the purchaser’s default.” (Op cit, 439 [1125]) It follows that the plaintiff’s claim to recover the “interest” paid should succeed.
92Mr Clarke said that good consideration was furnished for the loan transaction by Mr Hu, in that Mr Lui and Mr Cheung were permitted to maintain a “blocking majority” of 58 per cent despite their not having made a proportionate contribution to ALG’s capital, whether by share subscription under a money lending transaction or by the advance of the funds. In the present case, by reason of the retrospective “rewriting of history”, any advance of funds was retrospectively divested. The transaction was retrospectively characterised as one by way of loan subscription to ALG, not an advance or advances of money to Mr Cheung and Mr Lui. There was no evidence suggesting that Messrs Lui and Cheung derived any benefit from their control of 58 per cent of the share capital in ALG from 2016 to 2018. The effect of Mr Hu’s evidence was that he was willing to be guided by Mr Cheung as to the affairs of ALG because Mr Cheung was permanently based in Australia and had a track record in the completion of property development projects in Australia which Mr Hu did not. There were no disagreements at the relevant time between the director/shareholders which required resolution by resort to majority shareholding power.
93Further, as the learned editors of Mason & Carter say, to make good a defence against a claim for monies had and received upon a consideration which has totally failed:
“…it is not sufficient for a defendant to point to the receipt of a benefit of some sort. There is a total failure [of consideration] if the benefit was not an element of the agreed return for the payment.” (Op cit, 435 [1121])
94The editors refer to the famous case of Rowland v Divall [1923] 2 KB 500. In that case, Rowland, who was a car dealer, purchased an “Albert” motor vehicle from the defendant, Divall. Unknown to the parties, the car was stolen. Rowland had the car resprayed and, a couple of months later, sold it on to a customer at a profit. Two months later, the police took possession of the car from the purchaser and Rowland was required to repay the price which he had received. He then sued Divall, seeking to recover from him what he had paid for his initial purchase. The trial judge dismissed the claim on the basis, according to the report, “that as the plaintiff and his purchaser had had the use of the car from May to September there had not been a total failure of consideration …”. ([1923] 2 KB 500)
95The English of Court of Appeal, Bankes Scrutton and Atkin LJJ, reversed the trial judge and gave judgment for the plaintiff. Atkin LJ said:
“It seems to me that in this case there has been a total failure of consideration, that is to say that the buyer has not got any part of that for which he paid the purchase money. He paid the money in order that he might get the property, and he has not got it. It is true that the seller delivered to him a de facto possession, but the seller had not the right to possession and consequently could not give it to the buyer. Therefore the buyer, during the time that he had the car in his actual possession had no right to it, and was at all times liable to the true owner for its conversion.” ([1923] 2 KB 500, 506)
96Possession of the motor vehicle was an incident of ownership of the general property, but where the subject matter of the contract, viz the general property in the vehicle was not made over, the consideration had totally failed despite Rowland’s having derived an incidental benefit by way of possession of the car.
97Here, the retrospective recharacterization of the capital injection to a share subscription in favour of the company meant that Mr Cheung received no part of the consideration for a loan of money viz, the money itself. The existence of some incidental benefit relative to shareholding percentages, assuming, contrary to what I have already said, that that really was a benefit, cannot change this.
Quantum of recovery
98As noted above, the parties’ pleaded cases are at odds as to the amount paid and therefore recoverable by Mr Cheung. The disagreements between the parties were narrowed in the course of the trial. So, for instance, the amount that was paid to a private English tutor rather than to Scotch College was accepted as properly falling within the plaintiff’s claim. Ultimately, the only matter of substance which remained in dispute between the parties was a payment on 16 September 2019 from the funds of ALG. (CB 1328)
99Mr Clarke observed that Mr Cheung’s claim to recover this amount was based upon two contentions which, according to Mr Clarke, were “mutually contradictory”. (Closing submissions, paragraph 61) Mr Cheung said (T132, L4-11) that he had made a transfer of the $20,000 to ALG. Mr Clarke noted that Mr Cheung also said (T134, L3-22) that the $20,000 was part of a $90,000 reduction in his shareholder loan balance in amended financial statements for the year ending 30 June 2020. Mr Clarke said that those were prepared by Mr Lau and signed by Mr Cheung alone, and there was no documentary evidence of any $90,000 deduction. He also observed, as I had commented at trial, that no director’s loan ledger or computer equivalent was put into evidence. In the circumstances, I do not believe that the burden of proof to establish that this payment has been made has been made.
100Mr Clarke also said that, insofar as the payments to Scotch College included payment of credit card surcharges, the fact that these surcharges were incurred, according to Mr Clarke, was the result of Mr Cheung’s decision to pay by credit card. It was one thing to say that via Mrs Hu, Mr Hu asked that the alleged liability for interest should be discharged by payment of fees to Scotch College, there was no request for a payment of a credit card fee surcharge. The amounts claimed, therefore, should be reduced by the amount of the surcharge viz, $3,461.61. (Closing submissions, paragraphs 63 - 66)
Counterclaim
101Acceptance of the proposition that the steps taken in March 2018 made the loan agreement between company directors as if it had never happened necessarily entails the dismissal of the counterclaim by Mr Hu.
102Even if I had not reached the conclusions that I have relative to Mr Cheung’s claim, the success of Mr Hu’s counterclaim would have been embarrassed by the fact that, as Exhibit A shows, Mr Hu is still the owner of some five million shares in the capital of ALG. Given that ALG’s property development project in Adderley Street, West Melbourne seems, at least initially, to have been a failure, it would be tempting to regard ALG as simply a worthless shell. Nevertheless, there was no evidence as to what the fate of the Adderley Street site and its present valuation might be. Mr Cheung said that the COVID-19 pandemic was a material factor in the project’s failure.
103As I now dictate this judgment, the pandemic seems to be on the wane. The property market has returned to a state of buoyancy. Mr Hu, as I understood him, said that he had paid off Westpac. I must consider, therefore, that the five million shares in ALG may have some substantial value. Whilst the matter was not fully gone into, there might be an unjust enrichment of Mr Hu where he held entitlement to recover the amount of the loan and yet retain the five million shares in ALG. There was no suggestion that these should be relinquished as a condition of the success of his counterclaim.
Disposition
104I will order the parties within 14 days to bring in short Minutes to give effect to these reasons.
Costs
105I have heard no submissions on the question of costs and so I will reserve them.
Appendix A
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