Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment)
[2024] FCA 766
•15 July 2024
FEDERAL COURT OF AUSTRALIA
Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766
File number: NSD 32 of 2022 Judgment of: JACKMAN J Date of judgment: 15 July 2024 Catchwords: TRUSTS AND TRUSTEES – breach of trust – where plaintiffs invested in secured income mortgage fund for purpose of obtaining a significant investor visa – where fund’s constitution required loans to be secured by a mortgage – where fund issued unsecured loans – where loans procured a third party’s involvement in a project in which the defendants had a financial interest – whether loans unauthorised – whether loans imprudent – whether loans issued for an improper purpose
TRUSTS AND TRUSTEES – breach of trust – misappropriation – clear accounts rule
EQUITY – accessorial liability – where defendants involved in management or administration of fund – whether defendants knowingly induced or procured breach of trust – whether a director “acting as such” is capable of procuring or inducing a breach of trust by the director’s company – whether defendants knowingly assisted in a dishonest and fraudulent design – equitable compensation awarded
CORPORATIONS – whether fund an unregistered managed investment scheme – whether joint investment by two retail investors should be treated as an investment of the full amount by each
CORPORATIONS – misleading or deceptive conduct – whether plaintiffs had a reasonable expectation of disclosure – causation of loss
CORPORATIONS – breach of director’s duties – duty of reasonable care and diligence
CORPORATIONS – derivative action – where plaintiffs as beneficiaries already have a direct cause of action
LIMITATION OF ACTIONS – whether damage suffered when repayment became impossible or when it was ascertainable that plaintiffs had suffered an overall loss on investment
LIMITATION OF ACTIONS – application for extension of time pursuant to Corporations Act s 1322(4)(d) – whether power of extension applicable to limitation period – whether extension would cause substantial injustice
Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12DA, 12GF
Corporations Act 2001 (Cth) ss 197, 601ED, 1041H, 1317K, 1322, 1325
Limitation Act 1969 (NSW) ss 14, 47(1)(a) and (e)
Cases cited: ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1
Addenbrooke Pty Ltd v Duncan (No 2) [2017] FCAFC 76; (2017) 348 ALR 1
Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109
Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88; (2023) 111 NSWLR 304
Andar Transport Pty Ltd v Brambles [2004] HCA 28; (2004) 217 CLR 424
Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 250 CLR 640
Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) [2017] FCA 497; (2017) 348 ALR 525
Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 62 ACSR 427
Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75
Australian Securities and Investments Commission v IP Product Management Group Pty Ltd [2002] VSC 255; (2002) 42 ACSR 343
Australian Securities and Investments Commission v Letten (No 17) [2011] FCA 1420; (2011) 286 ALR 346
Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211
Australian Securities and Investments Commission v PE Capital Funds Management Ltd [2022] FCA 76; (2022) 159 ACSR 1
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561
Australian Securities and Investments Commission v Takaran Pty Ltd [2002] NSWSC 834; (2002) 43 ACSR 46
Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75
Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504
Australian Securities Commission v AS Nominees Ltd [1995] FCA 915; (1995) 62 FCR 504
Austructures Pty Ltd v Makin [2014] VSC 544
BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972
Belan v Casey [2003] NSWSC 159; (2003) 57 NSWLR 670
Binqld Finances Pty Ltd (in liq) v Binetter [2024] FCA 361
Briginshaw v Briginshaw (1938) 60 CLR 336
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Bristol and West Building Society v Mothew [1998] Ch 1
Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 82 ACSR 703
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 254 CLR 425
Chan v Cresdon (1989) 168 CLR 242
Chief Commissioner of Stamp Duties for New South Wales v Buckle [1998] HCA 4; (1998) 192 CLR 226
Cole v Tillman [2015] FCA 1512
Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75; (2017) 251 FCR 404
Daniels v Anderson (1995) 37 NSWLR 438
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Federal Commissioner of Taxation v BHP Billiton Ltd [2019] FCAFC 4; (2019) 263 FCR 334
Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285
Forder v Cemcorp Pty Ltd [2001] NSWSC 281; (2001) 51 NSWLR 486
Fouche v The Superannuation Fund Board (1952) 88 CLR 609
Gan v Xie [2023] NSWCA 163
GJB Building Pty Ltd v AI & PB Property Pty Ltd [2023] VSC 782
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296
Hagan v Waterhouse (1991) 34 NSWLR 308
Hamilton v Whitehead (1988) 166 CLR 121
Hanel v O’Neill [2003] SASC 409; (2003) 48 ACSR 378
Hashtag Burgers Pty Ltd v In-N-Out Burgers, Inc [2020] FCAFC 235; (2020) 385 ALR 514
Herrod v Johnston [2012] QCA 360; [2012] 2 Qd R 102
Hewett v Court [1983] HCA 7; (1983) 149 CLR 639
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; (2013) 247 CLR 613
International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644
Jones v Dunkel (1959) 101 CLR 298
JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; (2016) 329 ALR 625
Kane’s Hire Pty Ltd v Anderson Aviation Pty Ltd [2023] FCA 381
Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (No 2) [2013] NSWSC 110; (2013) 92 ACSR 691
Keech v Sandford (1726) 25 ER 223
Keller v LED Technologies Pty Ltd [2010] FCAFC 55; (2010) 185 FCR 449
Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413
Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361
Kuper v Keywest Constructions Pty Ltd [1990] 3 WAR 419
Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118 (2003) 355 ALR 703
Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703
Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480
Lifestyle Equities CV v Ahmed [2024] UKSC 17; [2024] 2 WLR 1297
Magman International Pty Ltd v Westpac Banking Corporation (1991) 32 FCR 1
McGaughey v Universities Superannuation Scheme [2023] EWCA Civ 873
Newtronics Pty Ltd v Gjergja [2008] VSCA 117
O’Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
Pittmore Pty Ltd v Chan [2020] NSWCA 344; (2020) 104 NSWLR 62
Queensland Nickel Sales Pty Ltd v Park [2023] FCAFC 150; (2023) 299 FCR 169
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Russell v Scott (1936) 55 CLR 440
RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385
Said v Butt [1920] 3 KB 497
Santley v Wilde [1899] 2 Ch 474
Seymour v Seymour (1996) 40 NSWLR 358
Spotlight Pty Ltd v Fatseas Investments Pty Ltd [2020] NSWCA 132
Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315
Target Holdings Ltd v Redferns [1996] AC 421
Tomasetti v Brailey [2012] NSWCA 399; (2012) 274 FLR 248
Warman International Ltd v Dwyer (1995) 182 CLR 544
West v Government Insurance Office of New South Wales (1981) 148 CLR 62
Wright v Gibbons (1949) 78 CLR 313
Wyzenbeek v Australasian Marine Imports Pty Ltd [2019] FCAFC 167; (2019) 272 FCR 373
Young v Murphy [1996] 1 VR 279
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
Zibara v Ultra Management (Sports) Pty Ltd [2021] FCAFC 4
Cohen, Jonathan, The Probable and the Provable (Oxford University Press, 1977)
Hodgson, DH, “The Scales of Justice: Probability and Proof in Legal Fact Finding” (1995) 69 ALJ 731
McHugh, Max, “Directors’ Liability for Inducing a Breach of Trust or Fiduciary Obligation” (2024) 140 LQR 223
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 312 Date of hearing: 3–7, 11–14, 17–21 June 2024 Counsel for the Plaintiffs: Mr DFC Thomas SC and Mr D Meyerowitz-Katz Solicitor for the Plaintiffs: McCabes Lawyers Counsel for the First Defendant: Mr T Bagley and Ms M Mellos Solicitor for the First Defendant: SHL & Associates Lawyers Counsel for the Second Defendant: Mr WR Chan Solicitor for the Second Defendant: MistryFallahi Lawyers & Business Advisors Counsel for the Third and Fourth Defendants: Ms I King Solicitor for the Third and Fourth Defendants: Connor & Co Lawyers Counsel for the Fifth Defendant: Mr V Bedrossian SC and Mr A Brown Solicitor for the Fifth Defendant: Kydon Segal Lawyers ORDERS
NSD 32 of 2022 IN THE MATTER OF GOLD STONE CAPITAL PTY LTD
ACN 167 931 026HONG CHU
First Plaintiff
XUEPING XU
Second Plaintiff
AND: LOUISE CAROL LIN
First Defendant
HAI ZONG CAI
Second Defendant
DAVID DARMALI (and others named in the Schedule)
Third Defendant
ORDER MADE BY:
JACKMAN J
DATE OF ORDER:
15 JULY 2024
THE COURT ORDERS THAT:
1.The plaintiffs serve (but not file) draft orders to give effect to the Court’s reasons, together with sufficiently detailed workings of their calculations of interest to enable the defendants to check and respond to those calculations by 26 July 2024.
2.The plaintiffs file and serve written submissions and any affidavits on costs by 26 July 2024.
3.The defendants serve (but not file) their response to the plaintiffs’ draft orders and calculations of interest with sufficiently detailed explanations for their positions to enable the plaintiffs to check and respond to those positions by 9 August 2024.
4.The defendants file and serve their written submissions and any affidavits on costs by 9 August 2024.
5.The parties confer with a view to reaching agreement on the draft orders and calculations of interest by 16 August 2024, and in the event that agreement is not reached each party is to file and serve written submissions as to orders and calculations of interest by 16 August 2024.
6.The plaintiffs file and serve any written submissions and affidavits in reply on costs by 16 August 2024.
7.Any oral hearing on the form of orders and on the question of costs be fixed at 9am on 23 August 2024, noting that the parties will be informed by 4pm on 21 August 2024 if such a hearing is not required.
8.The parties have liberty to apply on two days’ notice.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
JACKMAN J:
Glossary
In these reasons, I have used the following defined terms:
Term Meaning 022 Account Gold Stone’s trust account with Commonwealth Bank ending with those numbers
065 Account Gold Stone’s cash management account with Macquarie Bank ending with those numbers
889 Account Gold Stone’s account with Commonwealth Bank ending with those numbers
ACL Australian Credit Licence
Act Corporations Act 2001 (Cth)
AFSL Australian Finance Services Licence
AR Authorised Representative
ASIC Australian Securities and Investments Commission
ASIC Act Australian Securities and Investments Commission Act 2001 (Cth)
C21 Century 21 Cordeau Marshall Pty Ltd
Ergo Ergo Capital Pty Ltd
FCA Act
Federal Court of Australia Act (1976) (Cth) Fiducia Asset Fiducia Asset Management Pty Ltd
Fiducia Fund Fiducia Fund Management Pty Ltd
Fiducia Singapore Fiducia Resources Pte Ltd
First MVDA Loan Agreement
Loan agreement dated 26 May between Gold Stone as lender and MVDA as borrower for $2.7 million Fund Gold Stone Secured Income Mortgage Fund
Fund Constitution Deed poll executed by Gold Stone on 10 February 2014 setting out the terms of the Fund
G3 G3 Assets Holdings Pty Ltd
GDI Golden Destiny Investments Pty Ltd
Gold Stone Gold Stone Capital Pty Ltd
GSVC
Gold Stone Venture Capital Pty Ltd Huaxia Shanghai Huaxia Exit & Entry Service Co., Limited
IM Information Memorandum issued by Gold Stone for the Fund on 10 February 2014
Joint Unitholders Yi Xhou and Yu Sheng who invested in the Fund on 12 March 2014 and had their units redeemed on 31 December 2014
Limitation Act Limitation Act 1969 (NSW)
MVDA MV Developments (Aust) Pty Ltd
MVLC MV Developments (Lane Cove) Pty Ltd
MVLC Loan Agreement Loan Agreement dated 5 May 2014 between Gold Stone as lender and MVLC as borrower for $500,000
NGI New Galaxy Investments Pty Ltd
Regulations Corporate Regulations 2001 (Cth)
Second MVDA Loan Agreement Loan agreement dated 8 August 2014 between Gold Stone as lender and MVDA as borrower for $3.2 million
SIV Significant Investor Visa
SPV
Special purpose vehicle
XPC XPC Investments Pty Ltd
Introduction
These proceedings concern investments by each of the plaintiffs, Ms Hong (Chloe) Chu and Mr Xueping Xu, of $3.5 million in the Fund in 2014. The Fund was an unregistered managed investment scheme of which the seventh defendant, Gold Stone was the trustee.
In 2014, each of the plaintiffs was a citizen of the People’s Republic of China who wished to obtain a SIV from the Australian Government. The SIV program commenced on 24 November 2012 as a new stream within the Business Innovation and Investment (Provisional) (Subclass 188) visa and the Business Innovation and Investment (Permanent) (Subclass 888) visa. Among the requirements for SIV applicants was the making of investments of at least $5 million in complying investments, which included ASIC regulated managed funds with a mandate for investing in Australia. Regulation 1.03 of the Migration Regulations 1994 (Cth) defined “managed fund” as follows:
managed fund means an investment to which all of the following apply:
(a) the investment is a managed investment scheme (within the meaning of the Corporations Act 2001) in which members acquire interests in the scheme;
(b) the interests are not able to be traded on a financial market (within the meaning of section 767A of the Corporations Act 2001);
(c) no representation has been made to any member of the managed investment scheme that the interests will be able to be traded on a financial market;
(d) the issue of the interest is covered by an Australian financial services licence issued under section 913B of the Corporations Act 2001.
For an ASIC regulated managed fund to qualify as a complying investment, it had to be limited to categories of investments specified by the relevant Minister in a legislative instrument in writing. From 23 November 2013, the relevant legislative instrument, known as IMMI 13/092, specified the following investments in managed fund investments for the purpose of the specification by the Minister of complying investments:
(a)infrastructure projects in Australia;
(b)cash held by Australian deposit taking institutions (including negotiable certificates of deposit, bank bills and other cash-like instruments);
(c)bonds issued by the Commonwealth Government or a State or Territory government;
(d)bonds, equity, hybrids or other corporate debt in companies and trusts listed or expected to be listed within 12 months on an Australian Stock Exchange;
(e)bonds or term deposits issued by Australian financial institutions;
(f)real property in Australia;
(g)Australian Agribusiness;
(h)annuities issued by an Australian registered life company in accordance with section 9 or 12A of the Life Insurance Act 1995;
(i)derivatives used for portfolio management and non-speculative purposes which constitute no more than 20 per cent of the total value of the managed fund;
(j)loans secured by mortgages over the investments listed in subparagraphs 2(a) to 2(h) of this instrument; and
(k)other managed funds that invest in the investments listed in subparagraphs 2(a) to 2(j) of this instrument.
Each of the defendants was involved in the management or administration of the Fund, although there is a substantial dispute as to the nature and extent of that involvement. The first defendant, Ms Louise Lin, was not appointed a director of Gold Stone. Ms Lin was a licensed conveyancer and from 2007 to 2016 was a registered migration agent. The second defendant, Mr Hai Zhong (John) Cai, was Ms Lin’s husband and was registered as a director of Gold Stone. Together, Ms Lin and Mr Cai were directors and shareholders of DCK Asset Holding Pty Ltd, which held 50% of the shares in GDI, which itself held a 95% shareholding in Gold Stone.
The third defendant, Mr David Darmali, was not an appointed director of Gold Stone. He was a director of Fiducia Singapore, which owned 5% of the shares in Gold Stone. Fiducia Singapore was also the ultimate owner of all the shares in the fourth defendant, Fiducia Asset, of which Mr Darmali was the sole director. Fiducia Asset held an AFSL and an ACL, and it appointed Gold Stone as its AR for both licences. Fiducia Asset’s AFSL relevantly authorised it from 11 February 2011 to carry on a financial services business to provide financial product advice and to deal in a financial product (including by issuing the product, or applying for a financial product on behalf of another person) in respect of various classes of financial products including “interests in managed investment schemes limited to [its] own managed investment scheme only”: cll 1(a)(vi),1(i)(B) and 1(b)(ii)(F) (CB15/6695.1–2 and 15/6706–7). Fiducia Asset’s AFSL identified Mr Darmali as its key person (CB15/6695.3). Before Gold Stone was an AR of Fiducia Asset in respect of its AFSL, it was an AR of Ergo, which had appointed Mr Darmali as its key person in respect of its AFSL (CB15/6674.2). Ergo’s AFSL authorised it to deal in a financial product by (relevantly) issuing or applying for interests in managed investment schemes “limited to [its] own managed investment scheme only”: cl 1(b)(i)(C) (CB15/6674.1).
The fifth defendant, Mr Xiao Wu, was a registered director of Gold Stone and was the secretary of Wei Feng (Australia) Pty Ltd, the other 50% shareholder in GDI. Wei Feng (Australia) Pty Ltd was entirely owned by Mr Xiao Wu’s father, Mr Xufeng Wu (a non-party to the litigation). An important issue in the proceedings is the extent to which Mr Wu’s signature was forged on a number of documents, including loan documents pursuant to which monies held by the Fund were disbursed.
The sixth defendant, Ms Josephine Darmali (Mr Darmali’s daughter), was appointed a director of Gold Stone on 14 February 2014 according to an ASIC search of Gold Stone (CB15/6763). Gold Stone’s initial directors on its formation a week earlier were Mr Cai and Mr Wu. There is no contemporaneous evidence to suggest that Ms Darmali had any other involvement in Gold Stone. Ms Darmali has not appeared in the proceeding.
The seventh defendant is Gold Stone, which was incorporated on 7 February 2014. Gold Stone was deregistered on 13 May 2020, but was restored to the register by Court order on 10 August 2022.
Credibility of witnesses
Ms Chu
Ms Chu’s first affidavit purported to give evidence in direct speech of conversations which occurred about a decade ago. That conveyed the impression that she had a verbatim memory of what was said on those occasions, and that impression was not dispelled by the fact that the direct speech was prefaced by the obfuscatory expression “in words to the following effect”. The falsity of that impression was laid bare in her cross-examination, in which she conceded that she could not really remember what had happened at the meetings, except that she said that she recalled saying at the first meeting in January 2014 that her principal must be safe (T179.33–41). I accept that Ms Chu had a recollection of the gist of what she said to that effect, as I indicate below. Apart from that matter, I regard Ms Chu’s recollection as too unreliable for me to accept her affidavit evidence, except in circumstances where it is corroborated by a reliable witness or by contemporaneous documents, or where it is consistent with the objective probabilities.
In Kane’s Hire Pty Ltd v Anderson Aviation Pty Ltd [2023] FCA 381 at [127]–[129], I deprecated the longstanding practice adopted in New South Wales of drafting affidavits of conversations in direct speech in circumstances where the witness could only recall the gist of what was said, and I also deprecated the longstanding practice of prefacing the direct speech with the formula “in words to the following effect”. I regarded the practice as logically, ethically and grammatically wrong. My reasons were approved by the New South Wales Court of Appeal on 17 July 2023 in Gan v Xie [2023] NSWCA 163 at [119] (White JA, with whom Simpson and Basten AJJA agreed). In Kane’s Hire, I did not take into account the form in which evidence of conversations had been given in affidavits when assessing the credibility of witnesses, as I took the view that adequate notice had to be given to the profession of the unacceptability of the then practice before taking it into account on the question of credibility. Now that about a year has gone by since those reasons were published and approved by the New South Wales Court of Appeal (and more than three months had gone by since the Court of Appeal’s decision by the time the plaintiffs’ affidavits were filed and served), I regard it as adverse to a witness’s credibility for the witness to convey the false impression in an affidavit of a verbatim recollection of a conversation by using direct speech, when all the witness remembers is the gist of something which was said. Accordingly, I regard the form in which Ms Chu’s affidavit was drafted and approved by her as a matter which is adverse to her credibility.
Ms King, who appeared for Mr Darmali and Fiducia Asset, put a baseless submission that Ms Chu made a knowingly false and misleading statement to the Australian Government in her application for a permanent residency visa by including in her application a letter by Mr Cai dated 30 April 2018 (CB11/5369) stating that she still held $3.5 million investments in the Fund at a time when she knew that the funds had been lost: T1128.25–1135.15, 1217.38– 1219.18. The letter by Mr Cai stated relevantly:
This is to confirm that Ms … Hong Chu … had made $3.5M investment to Gold Stone Secured Income Mortgage Fund on 30th April 2014. Ms Hong Chu still holds $3.5M investment in the Fund.
The Fund is invested into Australia Real Estate Project and meets the requirement as compliance investment for SIV visa.
Ms Chu was cross-examined on whether the letter was submitted to the Australian Government, and she agreed that it had been: T190.44–47. She was also cross-examined on the declaration which she made in her SIV application that she had continuously held the complying investment for the specified holding period (CB11/5375.13 and T193.1–45). However, it was not put to Ms Chu that her declaration was false or that she knew or understood that Mr Cai’s letter was false or misleading. In my view, that is itself fatal to the submission. In any event, the argument proceeds on a misreading of the letter. Mr Cai was saying no more than that Ms Chu still held the units in the Fund which she had acquired for $3.5 million; that is, Ms Chu had neither transferred the units, nor had they been redeemed. Mr Cai’s letter cannot sensibly be read as providing an opinion as to the then current value of the units. In my view, the submission by Ms King as to Ms Chu making a knowingly false statement (a matter which would have constituted an offence) was completely without foundation, and should never have been put. The defensive tactic, whereby if one feels one is under attack then one should fight back even harder against one’s opponents in an attempt to frighten them, is probably better suited to avoiding snakes on a bush walk than it is to litigation.
Mr Xu
Mr Xu’s evidence calls for the same criticism as to the form of evidence of conversations. His first affidavit purports to give evidence in direct speech of conversations a decade ago, again prefaced by the formula “in words to the following effect”. In cross-examination, however, he readily conceded that his memory of what happened in 2014 was not very good (T213.17–20). He claimed to remember what had happened in the last two years, but did not have a good memory of matters which occurred longer than two years ago (T214.36–44). I accept that he recalled the gist of saying that he would invest in the Fund if the principal was safe, but otherwise I do not think that Mr Xu had any genuine recollection of what had been said in the meetings. Apart from that matter, I do not regard Mr Xu’s evidence as reliable, except where it is corroborated by reliable witnesses or contemporaneous documents, or where it is consistent with the objective probabilities.
Ms King also put a submission that Mr Xu was guilty of making a false and misleading statement to the Australian Government by including in his application for a permanent residency visa a letter by Mr Cai dated 27 September 2018 (CB12/5404) to the same effect as the letter submitted by Ms Chu dated 30 April 2018. Mr Xu gave evidence, which I accept, that he did not recall having seen the letter before (T249.33–250.11). He was cross-examined on his SIV application, and the declaration (at CB12/5425) that he had continuously held the complying investment for the specified holding period (T250.13–251.44), but it was not put to him that he knew that Mr Cai’s letter or anything in his application was false or misleading. For the reasons given in relation to Ms Chu, I regard the submission by Ms King as so baseless that it should never have been put.
Mr Wang
I regard Mr Wang as an impressive and credible witness, although his credibility would have been enhanced if he had avoided the use of direct speech in his first affidavit.
Mr Chen
I also regard Mr Chen as an impressive and credible witness, although he too regrettably engaged in the pretence (or self-delusion) of being able to recall conversations a decade ago in direct speech. He sensibly made concessions in cross-examination as to his difficulties in precisely remembering conversations in 2014 and 2016 (T296, 304.5–16).
Counsel for the third and fourth defendants, Ms King, sought to attack Mr Chen’s credibility on several grounds. One of the contentions advanced by Ms King was that Mr Chen was a participant in making a false and misleading statement to the Australian Government by reason of deploying Mr Cai’s letters dated 30 April 2014 and 27 September 2018 (CB11/5369 and 12/5404). I have rejected that contention as baseless on a proper reading of the letters. In addition, I accept Mr Chen’s evidence that he did not read the letters because he did not deal with the paperwork (T315.45–47). His junior colleague, Mr Wang, received Mr Cai’s letters (affidavit of 3.11.23 at paras 76–77) but was not cross-examined about them.
The other criticism by Ms King which is worthy of additional comment was Mr Chen’s reluctance to answer questions concerning his substantial economic interest in Huaxia, and his admission as to the payment of $178,000 to a wholly owned subsidiary of Huaxia as an introduction fee which had been agreed between him and Ms Lin (T308–9). Mr Chen accepted that he did not tell the plaintiffs about that commission (T290.15–25). Ms King submitted that Mr Chen acted as a migration agent for the plaintiffs, and thus owed them fiduciary obligations which required him to disclose the amount of that commission, given that he had an indirect economic interest amounting to 40% of Huaxia. However, the evidence falls well short of what that submission would require. In the first place, it is not at all clear that Mr Chen acted as an agent in the legal sense of a relationship involving authority or capacity in one person (the agent) to create or affect legal relations between another person (the principal) and third parties: International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652–3. Second, even if Mr Chen was an agent in the strict legal sense, the evidence does not extend to the terms of his engagement. Those terms may or may not contain a provision which expressly excludes a fiduciary relationship between Mr Chen and the plaintiffs, as exemplified by Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 62 ACSR 427 (Jacobson J). I am not in any position to say whether Mr Chen breached his duties to the plaintiffs by not disclosing the commission, and I am certainly not in a position to say that the moral calibre of any such breach should be regarded as adverse to Mr Chen’s credibility.
Mr Wong
Mr Wong was an impressive and credible witness. He made sensible concessions, including as to his inability to remember exactly what was said at meetings in 2013 (T334.45–46), although the concession was at odds with the direct speech deployed in his affidavit.
Ms Lily Xu
Ms Xu was a credible witness, whose evidence I accept.
Ms Meng Xu
I do not think that Ms Meng Xu had a genuine recollection of what had been said a decade ago. Her affidavit evidence claimed a recollection that Mr Xu (her uncle) said at the dinner in Shanghai in early 2014 that his investment must be safe, but in cross-examination, her evidence was that her uncle had always said that the interest must be safe and indicated a wish to obtain higher returns (T353.24–27). The latter evidence was at odds with the evidence given by all other witnesses, and I do not accept it.
Mr Fong
Mr Fong gave oral evidence on subpoena and gave clear and direct answers to questions. He was careful to distinguish between his actual recollection and non-recollection of events which had occurred about a decade ago, as illustrated by his contrasting evidence concerning the negotiations for the loan agreement made on 26 May 2014 (T370.39–372.13) and the negotiations for the loan agreement entered into on 8 August 2014 (T367.38–45). Mr Fong does not appear to have any commercial or personal interest in the litigation. Although Ms King submitted that Mr Fong showed a hostility towards Mr Darmali arising out of the circumstances which had led to Mr Fong’s bankruptcy in 2015, I accept Mr Fong’s denial of that proposition. I accept Mr Fong’s evidence that he was disappointed in Mr Darmali because of what had happened with a project in Pyrmont, which affected other projects, arising from what was said to be Mr Darmali’s failure to contribute $3 million to that project (T405.33–406.5). Mr Fong gave evidence, which I accept, that he did not blame Mr Darmali for his bankruptcy, even though he thought that Mr Darmali had contributed to it (T407.34–47). I regard Mr Fong’s position in that regard as one of magnanimity, not of personal hostility to Mr Darmali, and that conclusion is reinforced by the tone of Mr Fong’s oral evidence.
Mr Fong’s conduct, however, is not unblemished. On one occasion Mr Fong provided a cheque to Gold Stone for $500,000 which was subsequently dishonoured (a matter which is acknowledged by the plaintiffs in the Third Further Amended Statement of Claim at paras 110B–110C). Further, it appears that Mr Fong entered into inconsistent contracts relating to a unit in the development at Lane Cove, which he acknowledged to have been “an error on my part” (T394.77–395.9). However, it was not put to Mr Fong that the error was deliberate, and I do not therefore regard it as a matter of any real significance in terms of Mr Fong’s credibility as a witness. Ms King also relies upon the proposition that one of the parties to the rival contracts concerning that unit provided consideration by way of gambling chips (T394.12–16), but I do not regard that as a matter adverse to Mr Fong’s credibility without admissible evidence of all the circumstances surrounding the transaction. Nor was it put to Mr Fong that the casino chips were used by him personally rather than for the benefit of the company, and in the absence of cross-examination it is not open to Mr Darmali to put a submission to that effect (cf at T1116.8–9 and T1116.36–38). In addition, on one occasion during his cross-examination, Mr Fong responded adamantly that the proposition being put to him was a lie (T400.25), but after the relevant document was put to him he accepted the proposition (T403.44). That was an exception to the generally measured way in which Mr Fong gave his evidence. I deal in detail below with the particular controversy surrounding the plaintiffs’ allegation that Mr Fong’s company paid secret commissions to Mr Darmali.
On the whole, while I approach Mr Fong’s evidence with considerable caution, I regard his evidence as reliable and credible. In particular, I regard Mr Fong as a great deal more reliable and credible than either Mr Cai or Mr Darmali.
Mr Cai
I regard Mr Cai as an unsatisfactory and unreliable witness who was determined to say whatever he perceived to be in his forensic interests. I do not accept his testimony except where it consists of admissions against interest, or where it is corroborated by the contemporaneous documents, or where it is consistent with the objective probabilities. I discuss Mr Cai’s evidence in detail below, but for present purposes I refer to three telling instances in his evidence.
First, Mr Cai adamantly denied with great confidence in his cross-examination that he was the person who had the dealings with MVLC and MVDA in relation to the three loan agreements to which I refer below: T435.21–29. However, he was then confronted with an affidavit which he made to support Gold Stone’s statutory demand for unpaid amounts pursuant to those loan agreements on 23 June 2015 (CB9/3900) in which he said expressly that he was the person who, on behalf of Gold Stone, had the dealings with MVLC and MVDA that gave rise to the debt which was claimed. Mr Cai continued to deny the truth of that proposition, claiming that he made the affidavit because Ms Lin asked him to do so (T436.28–33). Ultimately, Mr Cai accepted that the affidavit was a true statement (T436.43–45).
Second, as I explain in detail below, after Gold Stone received the proceeds of the settlement with the liquidators of MVLC and MVDA in November 2017, Mr Cai paid a large amount of those funds to himself (T493.35–510.16). He did so having signed the settlement agreement, and being aware that the funds received were trust monies and were the only monies that were recovered from the three loans (T490.40–491.7). Mr Cai was aware that he should not have dealt with the funds without the consent of the plaintiffs (T493.16–33). Mr Cai conceded on a number of occasions that he knew that there was no proper basis for the withdrawal of those funds. He then brazenly told the plaintiffs’ representative that it was Ms Lin who had taken all the money (T510.18–511.2). Mr Cai’s conduct was dishonest.
Third, Mr Cai denied having read the Fund Constitution, but then found himself in the awkward position of being forced to accept as a result that he was wilfully blind to his obligations as trustee (T456.34–40). However, after a break in his cross-examination over the King’s Birthday long weekend, Mr Cai admitted that he had had a copy of the Fund Constitution which Ms Lin gave him after he signed it, that he read it and that Ms Lin had explained some of it to him (T469.39–471.15). He also accepted, after having thought about his evidence over the long weekend, that he read cl 20.4 dealing with the trustee’s powers of investment, and that he understood that the trustee could only invest in loans secured by mortgages (T472.12–20).
Mr Darmali
Mr Darmali was also an unsatisfactory and unreliable witness who, in my view, gave whatever evidence he thought would advance his forensic interests. I do not regard his evidence as reliable or credible, and I do not accept it except in circumstances where it contained admissions against interest, or where it is consistent with the contemporaneous documents, or with the objective probabilities. Without being exhaustive, the matters which lead me to those conclusions include the following.
Most importantly, Mr Darmali denied in his affidavit of 8 February 2024 (paras 54–5 and 79) that he was the Fund Manager of the Fund and that he was in fact managing the fund, and claimed that references in the documents to his role being “Fund Manager” were because Ms Lin said that it would be something that Chinese clients understand, as opposed to “financial planner” which they would not understand. The plaintiffs submit, and I accept, that that evidence was false and contrived. Mr Darmali referred to himself as the Fund Manager for Gold Stone and the Fund in a great many instances when communicating with people who knew precisely what that meant (T559.1–567.40), including: Macquarie Bank (CB5/2327); Mr Fong, Mr Cai, Ms Lin, and Ms Kwok (CB6/2547); the Australian Government (CB6/2647); Ms Gai and Mr Geering (CB6/2659); and Mr Fong’s solicitor, Mr Adam Huxley (CB6/2692–3). In relation to the email of 2 May 2014 (CB6/2650), he said that referring to himself as “the fund manager” was a lie which he made because he was trying to impress the recipients. However, the recipients were Mr Geering, Ms Gai and Ms Lin who knew exactly what his role was as one of their business colleagues.
Mr Darmali was in fact an experienced fund manager. The AFSL for each of Ergo and Fiducia Asset (which I discuss below), in respect of which Mr Darmali was the key person and responsible manager, authorised those companies to deal in financial products by, among other things, issuing interests in managed investment schemes limited to “own managed investment scheme only” (CB15/6674.1, 6695.1). Mr Darmali’s understanding was that this meant that those entities had to be the responsible entities for all schemes in which they issued interests (T636.1–639.35). Although Mr Darmali said that he did not understand that the description of “own managed investment scheme only” would be satisfied where he was merely the “Fund Manager” of the scheme, he said that makes sense to him now (T638.39–47). In my view, that was likely to have been his understanding in 2014. I regard Mr Darmali’s description of himself in the contemporaneous documents as Fund Manager as reflecting a consciousness on his part that he needed to occupy and perform a key role in terms of making investment decisions for the Fund in order to satisfy the AFSL conditions. I note in this regard that Mr Darmali claimed to have relied on legal advice by Mr Geering to the effect that the Fund could fall within the concept of Fiducia Asset’s “own managed investment scheme” even if Mr Darmali was not involved in managing the Fund, but accepted that the advice does not make sense to him now (T638.18–37). I do not accept that Mr Geering gave that advice, and I find that Mr Darmali did hold the belief in 2014 that the Fund could only be Ergo’s or Fiducia Asset’s “own managed investment scheme” if Mr Darmali was actively managing the Fund, in the sense of guiding and participating in its investment decisions and overall operations.
Mr Darmali held himself and Fiducia Asset out as having more than $500 million in funds under management (affidavit of 11.6.24, ExDD–3, p 123), although he gave implausible evidence that he was there referring to business associates in Indonesia and Singapore (T598.7–599.37). Further, the agreement between Mr Darmali’s companies and Gold Stone provided for a scale of remuneration to his entities based on Gold Stone’s funds under management (CB5/2098–9, 6/2796). Mr Darmali denied that he paid attention to what funds Gold Stone had under management (T553.29–554.10), but I do not regard that evidence as being at all credible. As I will explain below, Mr Darmali took a keen interest in the fees and other remuneration earned by him and his entities.
It is clear that in 2014 Mr Darmali was familiar with ASIC Regulatory Guide 105 (CB7/2898), although he denied that in cross-examination (T601.27–35, 604.1–10). That regulatory guide provided that key person licence conditions were imposed where the licensee was heavily dependant on the competence of one or two responsible managers, and responsible managers were required to have direct responsibility for significant day-to-day decisions about the licensee’s financial services (T602.22–605.39). As the responsible manager and key person under the AFSLs of both Ergo and Fiducia Asset, as well as Fiducia Asset’s ACL (CB5/2104), I find that Mr Darmali regarded that as an appropriate description of the role which he played in relation to the Fund.
In addition to his work as Fund Manager, Mr Darmali gave evidence that he also worked as a financial planner and a mortgage broker, and that his mortgage broking business included “financing for small developments” (affidavit of 8.2.24 at para 11). He resiled from that evidence in cross-examination and said that he referred clients who sought finance for developments to another person (T542.18–543.14). The contemporaneous documents show that Mr Darmali held himself out as someone with the ability to arrange development finance, including for large developments (CB5/1965.1; affidavit of 11.6.24, Ex DD–3, p 123). Further, Mr Darmali’s own evidence was that Mr Fong had been introduced to Mr Darmali “as a potential client for Fiducia’s mortgage broking business as Victor [Fong] needed to borrow money for his property developments” (affidavit of 8.2.24 at para 62). That was consistent with Mr Fong’s evidence on the subject (T363.18–32). I note at this point that, as a mortgage broker, Mr Darmali must have had a sophisticated understanding of such matters as loan security (as he acknowledged at T543.16–24), and as is reflected in his email of 10 April 2014, in which he referred to the Fund as being “second in line as creditor after the senior debt” (CB6/2547).
Mr Darmali agreed that he was aware that the intention of Ms Lin in acquiring Ergo was to use it to take advantage of the SIV policy (T606.11–25). He agreed that he was aware from at least about December 2013 that Ms Lin was proposing to establish a mortgage fund for that purpose (T606.27–40). I accept that evidence.
The plaintiffs submit, and I accept, that Mr Darmali was well aware of the restrictions on investments in cl 20.4 of the Fund Constitution. Mr Darmali accepted that he was given a copy of the Fund Constitution and IM for the Fund (T555.1–6). He said that he could not recall reading them, but accepted that it would have been his ordinary practice to do so (T555.16–42). He later denied having read cl 20.4 of the Fund Constitution (T609.40–610.43). That evidence was implausible. In any event, Mr Darmali knew by 30 April 2014 that the Fund was restricted to specific investment types, given the terms of the Form 1413 declaration that he signed for Ms Chu (CB6/2647), which he eventually accepted he probably read (T610.45–612.41). Moreover, Mr Darmali was clearly aware of the importance of documents such as the Fund Constitution and IM, and I find that he would have read them carefully. That is supported by the evidence as to his approach in relation to the Gold Stone Future Investments Property Fund (of which NGI was the trustee), in relation to which Mr Darmali retained and reviewed the Fund Constitution and IM and checked whether that fund had been managed consistently with those documents (CB6/2702–4). He denied that in cross-examination, but that denial was obviously false given the contents of the document on which he was being questioned (T545.20–547.16). In a transcribed meeting on 21 May 2014 (CB6/2713–2729), Mr Darmali spoke knowledgeably about the trust deed constituting the Gold Stone Future Investments Property Fund, cl 20.4 of which is exactly the same as cl 20.4 the Fund Constitution (CB5/2057–8). Accordingly, I find that Mr Darmali read and understood the terms of the Fund Constitution and IM and was familiar with cl 20.4. In addition, I note that on 22 May 2014, Mr Darmali wrote that “the main role of the trustee is being the steward of client’s fund and need to consider risk that it might take by placing fund without proper security or risk management” (CB6/2730). Mr Darmali was thus well aware of Gold Stone’s obligations with respect to security and risk management.
Ms King placed great reliance on Mr Darmali’s resignation in June 2014 as the key person for Ergo’s AFSL, on the basis that it demonstrated strict adherence to proper compliance with the reporting of breaches to ASIC (CB7/2847). However, the first (and I find the principal) reason given by Mr Darmali in that document for his resignation was that “I was keep in the dark with significant decision in providing the financial service and products”, being a matter which he re-iterated in an email of 11 July 2014, saying “To date, I was keeping in the dark and all the major decisions that were made, were done behind my back” (CB7/2898). No such problem arose in relation to the Fund, in relation to which he occupied centre stage in the Fund’s decision-making along with Ms Lin and Mr Cai.
A curious feature of Mr Darmali’s evidence concerned the appointment of Ms Josephine Darmali as a director of Gold Stone. Josephine Darmali is his daughter, and he gave evidence that he had had a strained relationship with her since she was a teenager (affidavit of 8.2.24 at para 14). He said that in early 2014, Josephine had dropped out of her university course and was looking for a job and wanted to learn about business, so Ms Lin offered to make her a director of Gold Stone, and Mr Darmali thought that would be a good idea (affidavit of 8.2.24 at paras 53, 59–60). He then said that Josephine resigned in March 2015 because she had not been doing much and had not been paid (affidavit of 8.2.24 at para 134). Mr Darmali also said that he had been appointed a director of many companies and he had a business understanding of directors’ duties, and said that he had never been a director of an insolvent company (affidavit of 8.2.24 at para 43). In cross-examination, he accepted that he knew Gold Stone was incorporated to manage funds for Chinese investors seeking SIVs, and he expected it would be managing significant amounts of money, potentially in excess of $20 million (T613.27–35).
In those circumstances, it strikes me as extremely unlikely that Mr Darmali thought it would be a good idea for a 21-year old university drop-out to “gain experience and learn about business” by becoming a director of a funds management company in charge of millions of dollars of other people’s money. Further, Mr Darmali’s evidence on the point is not corroborated anywhere, and there is not otherwise any evidence that Josephine was ever involved in Gold Stone, save for her name appearing on the ASIC records. The plaintiffs submit, and I accept, that the most plausible explanation is that Mr Darmali caused his daughter (rather than himself) to be appointed as a director on the ASIC records in an attempt to avoid personal liability in the event that anything went wrong, and to preserve his record of never having been a director of an insolvent company.
As to the three loan agreements at the heart of this case, which I discuss below, Mr Darmali’s affidavit evidence was that he was not involved in the drafting or negotiation of those loan agreements (affidavit of 8.2.24 at para 94; affidavit of 3.5.24 at para 32). In cross-examination, Mr Darmali continued to deny having had anything to do with the negotiation of the three loan agreements (T590.40–45, 593.27–30, 594.32–595.1, 619.15–18, 623.22–27, 627.27–35, and 629.1–15). That evidence was demonstrably false.
At the outset, it is worth noting that on 10 April 2014, Mr Darmali sent an email to Mr Fong, Mr Cai, Ms Lin and Ms Kwok attaching a draft joint venture agreement (CB6/2547). His affidavit evidence was that he could not recall who drafted it (affidavit of 8.2.24 at para 74), although he accepted that he had been involved in discussions regarding it (T615.45–616.42). It was obvious on the face of the email that Mr Darmali drafted the agreement, because he wrote “Please review the draft agreement between the Fund and Victor [Fong] and get back to me with any queries, I am not a lawyer and this might need to be tidy up by the legal”. That draft joint venture agreement was clearly based on the same precedent as the earlier joint venture agreement which Mr Darmali (on behalf of Fiducia Singapore) had entered into with Mr Fong on behalf of MVLC (CB5/1965.1–6). Mr Fong said that Mr Darmali had drafted both documents and I accept that evidence (T364.12–15, 381.30–39). Both joint venture agreements included a set of boilerplate clauses which were almost identical to the ones included in the AR Agreement which Fiducia Asset entered into with Gold Stone (CB6/2799–800, T551.6–552.14). The only common participant in relation to those documents was Mr Darmali.
Similarly, the loan agreements which Gold Stone executed (CB6/2665–80, 6/2746–61, 7/3090–106) were in identical form to the ones signed by Mr Darmali’s mother, Mrs Darmawati (CB6/2402–16). Mr Fong’s evidence, which I accept, was that Mr Darmali prepared the loan agreement for Mrs Darmawati (T379.20–23).
Turning to the loan agreements themselves, it was Mr Darmali who introduced Mr Fong to Ms Lin (T614.36–39). Mr Darmali had a relationship with Mr Fong from at least about December 2013 or January 2014, pursuant to which Mr Darmali was to assist Mr Fong in obtaining funding for Mr Fong’s projects (CB5/1965.1). As I discuss below, Mr Fong’s evidence, which I accept, is that Mr Darmali was paid a commission of about 10% of the amounts of loans which he sourced.
Mr Darmali’s mother’s loan (CB6/2402–16) was entered into on the same day as Gold Stone’s first loan to MVLC, namely 18 March 2014. Mr Darmali appeared to have been concerned to ensure that Gold Stone advanced the funds on that day (CB6/2423–5). The coincidence in timing and Mr Darmali’s concern in that respect suggests that the funds were required for some urgent purpose, of which Mr Darmali was well aware, and that Mr Darmali had been responsible for negotiating both loans.
Mr Darmali was clearly aware that Ms Lin’s motive for engaging Mr Fong in the Turramurra project was to protect the funds which GDI had invested. He was aware from at least about 17 March 2014 that Ms Lin was seeking to extricate herself from the Turramurra project (CB6/2401). On 2 May 2014, he received an email from Ms Lin in which she said that he had put her personal money into GDI and she was concerned about the safety of her capital, which was why she wanted Mr Fong’s involvement in Turramurra (CB6/2658). On 15 May 2014, he received an email from Ms Lin in which she made it clear that a condition of Mr Fong’s involvement in the Turramurra project had to be that GDI’s $2 million would be refunded (CB6/2692–3). It was obvious that Ms Lin wanted Mr Fong to be involved in order to protect the funds which she (through GDI) had invested in the project.
Mr Darmali was also aware that the loans to MVLC and MVDA were made in exchange for Mr Fong’s involvement in the Turramurra project. Mr Fong expressly told Mr Darmali that he was concerned about the feasibility of the project by email dated 29 April 2014 (CB6/2645). Further, Mr Darmali said in his affidavit evidence that “Victor [Fong] wanted investment in his Lane Cove project in exchange for his investment in the Turramurra project” (affidavit of 8.2.24 at para 66), which was consistent with Mr Darmali’s 17 April 2014 email, in which he said “To help improve the return of the project, the fund will invest $1m into Lane Cove Aurora development with security as previous placement” (CB6/2586). In cross-examination, Mr Darmali denied any recollection of those matters (T616.44–618.30), but that evidence is simply implausible and I reject it.
Mr Darmali accepted that by the middle of 2014 he had visited the Lane Cove project and received some information about it (T558.26–32). He said that he had given some information to his mother before she entered into her loan with MVLC on 18 March 2014 (T575.18–24). Mr Darmali said that he was satisfied that the “security” for his mother’s loan was satisfactory, and demonstrated a sophisticated (but not necessarily correct) understanding of that matter (T577.6–578.10, 591.35–47, and 592.38–48).
Mr Darmali accepted that he knew that the payment from Gold Stone in respect of the MVLC Loan Agreement was for a loan, because he wrote that on the withdrawal form, but he said he had no idea what the security was (CB6/2684; T619.40–620.19). That evidence is highly implausible and I reject it. Mr Darmali otherwise disclaimed responsibility for the Macquarie Bank withdrawal forms that he signed as authorised signatory of the 645 Account, and those he completed but which were signed by Ms Lin and Mr Cai (T593.26–594.17, 595.8–32, 620.28–622.36). However, Mr Darmali did accept that he knew he was causing trust money to be disbursed to MVLC and MVDA (T620.1–9, 623.29–38, 624.36–625.1, and 628.10–36).
Mr Darmali also accepted that his signature appeared on the two MVDA Loan Agreements as the witness to Mr Fong’s signature, but he denied any knowledge of what the loan agreements said (T623.9–23, 624.19–31). That evidence was also implausible. I do not regard it as coincidental that Mr Darmali was in the room when those documents were signed by Mr Fong. In my view, the fact that Mr Darmali witnessed Mr Fong’s signature is further evidence that he had been actively involved in negotiating the loan agreements.
Mr Darmali was also directly involved in negotiating with Mr Fong for amendments to be made to the Second MVDA Loan Agreement after it had been signed on 8 August 2014. As I discuss below, on 11 and 12 August 2014 it was Mr Darmali who altered the Schedule to the Second MVDA Loan Agreement after it had been signed in order to change the description of the Mortgaged Property referred to in Item 6 and the unit which was the subject of the so-called Collateral Document. Mr Darmali’s patently false denials of involvement in the substitution of the Schedule reinforce his absence of credibility.
As I discuss below, I find that Mr Darmali was heavily involved both in the operation of the Fund and in the negotiation of each of the three loan agreements. He was aware of the terms of the Fund Constitution, IM, and the three loan agreements. He was financially sophisticated and knew that the “security” offered by MVLC and MVDA for the loans was non-existent and inadequate, but nevertheless procured Gold Stone to enter into the loan agreements because he wanted to earn the commissions from Mr Fong, the fees charged by Fiducia Asset as the holder of the AFSL and ACL used by Gold Stone as AR, and the profits that Fiducia Asset stood to receive as a shareholder of Gold Stone in the event that the loans were repaid with interest. He had appointed his estranged daughter as a director of Gold Stone in order to avoid having personal exposure in the event that Gold Stone were wound up. He was a signatory on the Macquarie Bank trust account and had general authority to operate that account for any purpose.
Further inconsistencies and oddities arise in relation to Mr Darmali’s evidence as to his knowledge of the Fund’s financial difficulties in relation to the three loans. From February 2015, Gold Stone ceased paying Fiducia Asset’s invoices, and Fiducia Asset then terminated the AR agreements in August 2015 (affidavit of 8.2.24 at paras 133 and 140). Mr Darmali said that at the time that that occurred, he was not aware of any issues with the Fund (affidavit of 8.2.24 at paras 140 and 163). In that regard, Ms King, counsel for Mr Darmali, referred to Mr Darmali’s knowledge of a payment direction by Mr Fong on behalf of MV Fiducia Pty Ltd to Gold Stone as trustee for the Fund of $678,493 on 29 December 2014 (CB8/3519), but that was well before the non-payment by Gold Stone of Fiducia Asset’s invoices and the ultimate termination of the AR agreements in August 2015.
In fact, Mr Darmali was copied into the emails from Ms Kwok in February 2015, in which Ms Kwok was chasing Mr Fong for repayment of the MVLC Loan and the Second MVDA Loan (CB8/3558 and 3566–7). Mr Darmali was in a personal relationship with Ms Kwok at the time (T556.31, 629.29–30). He denied reading the emails (T629.27–630.30), but that is implausible given that he was clearly concerned that his invoices had not been paid and thus had a substantial commercial interest in the recoverability of Gold Stone’s loans. Mr Darmali was also copied into Ms Lin’s email of 18 March 2015, in which she called an urgent meeting to discuss protecting fund assets and cash flow difficulties (CB8/3754). Mr Darmali accepted that when he received the email he understood that Mr Fong was in default on the loans, and this concerned him, but he took no steps to inform the Fund’s investors about those problems (T631.16–27). Mr Darmali was also copied into Ms Lin’s email of 12 August 2015, which gave as the subject line “MV Developments (Lane Cove) Pty Limited (Administrators Appointed) and MV Developments (Aust) Pty Ltd (Administrators Appointed) (the Companies)”, in which Ms Lin submitted a proof of debt on behalf of Gold Stone in the administrations of MVLC and MVDA in the amount of about $8.1 million (CB9/4011–2). He denied reading that email, because he said that his relationship with Ms Lin had “gone pretty bad” at the time (T631.37–47). That denial is implausible given that the email was sent at around the time that Mr Darmali says he terminated the AR agreements with Gold Stone for non-payment. It is fanciful to think that Mr Darmali would have ignored emails from Ms Lin that were clearly related to Gold Stone’s loans, and clearly identified that the borrowers were in administration. Accordingly, I find that Mr Darmali’s evidence that he understood the Fund to be in good financial order when he terminated the AR agreements with Gold Stone in August 2015 was false.
Mr Darmali submits that his purported signature on three documents is not his genuine signature. The three documents in question are the Fund’s letter to Mr Xu on 24 July 2014 (CB7/3047–8), the Form 1413 dated 11 August 2014 on behalf of Mr Xu (CB7/3136), and an application form dated 14 August 2014 on behalf of Mr Xu for an investment of $1.5 million in government bonds (CB7/3144). There is no expert handwriting evidence adduced in support of the submission, and the signatures on those documents purporting to be that of Mr Darmali do not seem to me to be sufficiently different from signatures which Mr Darmali accepts were genuine for me to conclude that the signatures were forgeries. As counsel for Mr Darmali points out, Mr Darmali’s name is misspelt on the 24 July 2014 letter as “Darmili”, and Mr Darmali’s date of birth on the document of 14 August 2014 had the year crossed out and was replaced by someone who put a horizontal line through the figure “7” (and the evidence demonstrates that Mr Darmali did not cross his “7”). Those matters, however, merely demonstrate that the letter and the form were drafted and filled out respectively by someone other than Mr Darmali, and they were then presented to Mr Darmali for his signature, which I regard as a relatively common practice. I do not regard those matters as establishing that the signature of Mr Darmali was not genuine. In light of the fact that I do not regard Mr Darmali as a credible witness, I do not accept his evidence that the signatures on those documents were not genuine.
Mr Wu
I regard Mr Wu as a reliable and credible witness, who gave clear and direct answers to the best of his ability to the questions put to him in cross-examination.
The principal question concerning Mr Wu’s credibility relates to the genuineness or otherwise of his signatures purportedly appearing on a number of the contemporaneous documents. In relation to the two loan agreements with MVDA which purportedly bear Mr Wu’s signature, Mr Wu’s denials of the genuineness of that signature are supported by the expert handwriting analysis of Ms Holt in her report of 23 August 2023, which I accept. In relation to the MVLC Loan Agreement, there are two versions of the agreement in evidence. One version bears the signature of Mr Cai on behalf of Gold Stone, and no second signature (CB6/2680). The other version bears the signature of Mr Cai and what purports to be Mr Wu’s signature (CB9/4065), but the relevant page is an exact duplicate of the signature page taken from the Second MVDA Loan Agreement of 8 August 2014 (CB7/3106), which Ms Holt’s evidence establishes was not genuine. Accordingly, I conclude that none of the three loan agreements bears Mr Wu’s genuine signature.
As to the other documents which purport to bear Mr Wu’s signature, Mr Wu accepts that two of them were signed by him, namely the Commonwealth Bank authority document of 10 February 2014 (CB5/2010–11), and the Authorised Corporate Representative agreement dated 11 February 2014 (CB5/2095–2106). Both were signed by Mr Wu using Chinese characters. I accept Mr Wu’s evidence in relation to all the documents which he says were not signed by him, namely the Fund Constitution dated 10 February 2014 (CB5/2067–93), the Commonwealth Bank authority document dated 11 and 19 February 2014 (CB5/2133–4), the Short Form Deed for the Turramurra development dated 24 February 2014 (CB5/2138–45 and 2297–2304), the Macquarie Cash Management Account Application document for the 645 Account dated 5 March 2014 (CB5/2306–13 and 2318–25), the Macquarie Bank Cash Solutions Third Party Authority document dated 5 March 2014 (CB5/2326–30 and 2314–7), the Macquarie Bank withdrawal form for $500,000 dated 18 March 2014 (CB6/2417–8), the Commonwealth Bank authority document dated 27 March (or 27 May) 2014 (CB5/2444–5), the Authorised Corporate Representative Agreement dated 29 May 2014 (CB6/2791–2801), and the Commonwealth Bank authority document dated 21 August 2015 (CB9/4116–7).
Expert witnesses
Mr Wengel was a reliable and credible accounting expert who gave balanced and careful evidence. I accept the expert evidence given by Ms Holt as a handwriting expert without qualification.
Salient facts
On 2 October 2012, GSVC was registered, with Ms Katherine Gai and Ms Zhu as its directors (CB15/6770). Ms Zhu was Ms Lin’s mother and nominee, and at all times acted at Ms Lin’s direction (affidavit of Ms Lin of 17.10.14 in the Supreme Court of NSW, paras 22–24: CB8/3333–4). In early 2013, GSVC purchased the shares in Ergo (3/1150–73) for the purpose of attracting investors who were looking to acquire a SIV (CB5/1905 and 3/1134–9). In mid-2013, the Gold Stone Future Investments Property Fund was established and issued an IM (CB4/1408–27), although its constitution is oddly dated 10 February 2014 (CB5/2038–66). The trustee of that fund was NGI, which had been appointed as AR of Ergo’s AFSL, and was wholly owned by GSVC (CB15/6893, 6895). The directors of both Ergo and NGI were Ms Gai and Ms Zhu (CB15/6679). Ms Gai was married to Mr Kristjan Geering. Mr Geering and Ms Lin were the two directors of Austleg Lawyers Pty Ltd (CB15/6770). There was also a fund called the Gold Stone Income Fund (CB4/1435–6, 6/2702–4, 14/6438–53).
On 15 August 2013, a letter was sent by NGI as trustee for the Gold Stone Income Fund to Ms Chu, setting out an investment proposal for an investment of $3.5 million in the Gold Stone Income Fund for a period of 12 months (CB4/1435–6). A document was attached entitled “Significant Investor Visa Investment Plan” which referred to Ms Chu proposing to invest $1.5 million in Waratah Bonds and $3.5 million in the Gold Stone Managed Investment Scheme in conjunction with her SIV application (CB4/1437-8).
On 14 November 2013, Ms Chu submitted an application for a visa under the SIV application stream. The application form called for Ms Chu to give details of the complying investments which she planned to make in Australia, to which she responded: “invest 3.5 million AUD through Gold Stone’s MIS, invest 1.5 million AUD in NSW Waratah Bonds” (CB4/1538 at 1548).
On 5 December 2013, Mr Xu made a SIV application, in which he stated in relation to the complying investments which he planned to make in Australia: “I want to invest AUD 5 million into a private company, Paragon Business Group” (CB4/1807 at 1815).
On 12 December 2013, Mr Darmali wrote an email to Ms Lin, Ms Gai and Mr Geering (a solicitor at Austleg Lawyers Pty Ltd) (CB5/1905) thanking them for their time the previous day and stating:
It has been almost a year now since we started Ergo Capital and it has been a challenging year for all of us to make the business successful. As they said, Rome was not built in a day. Well, I feel confident that we have the right people as well as resources to make Goldstone [sic] successful.
…
Next year is coming soon and I assumed that you have a big plan for Goldstone.
Ms Lin replied on 14 December 2013 (CB5/1905), thanking Mr Darmali for the email and for “your faith on us” and stated:
Truly appreciate your supports and professional inputs in the past 10 months. And personally I enjoyed the time spent with all of you.
Ergo Capital was acquired for the purpose of taking advantage of the SIV visa policy released by the Department of Immigration in Nov 2012. So far there are about 20 of SIV has been granted, despite the budget for business migration for year 2013/2014 is 7000. The good news is 700 SIV sponsorships have been approved by the States, and the Minister last week has clearly state that the Department shall speed up the process of SIV applications. So as we are expecting more business migrant invest to Australia, we are in a better position to take Gold Stone up.
We have been experienced the challenge to tailor our products to suite the clients appetite. Especially our target audience is to the high net worth individual and every one of them have their own unique needs, purpose and concern. To complicate further their investment decision is largely affected by their migration application outcome and family residence arrangement. At the moment we are trying to package a product provide the flexibility in terms of size and length of the investment can be made to attract wider range of audiences. The Gold Stone Mortgage Fund under the discussion is one of them.
The commercial application to the Mortgage Fund in my view will only be certain after we tested it and obviously the market will tell. There are risks involving large sum of money for conducting such trial. Maybe it is only sensible and logical to have something similar in nature for us to try before we commit largely to it. I think we should always to have alternative and contingency plan there to insure the execution of our big plan.
On 17 December 2013, GDI entered into a contract with C21, which referred by way of “Background” to C21 having arranged for the sale to GDI of six properties at 1444B–1452 Pacific Highway, Turramurra, and GDI having signed contracts for the purchase of those properties for $13,558,389 with a deposit of $1,510,000 (CB5/1956). The contract referred also to the total costs and expenses incurred by or on behalf of C21 in respect of the development application and ancillary matters being an amount of $1,541,611, which GDI had agreed to pay to C21 on completion of the contracts to purchase the Turramurra properties. GDI’s obligations under the contract were guaranteed by Mr Cai and Mr Xufeng Wu (the latter being the father of the fifth defendant).
On either 19 December 2013 or 28 January 2914 (the document bears both dates), Fiducia Singapore and MVLC entered into a Joint Venture Agreement in relation to future property development projects: CB5/1965.1–6. The agreement was executed by Mr Darmali and Mr Fong respectively.
In January 2014 Mr Xu met with Ms Lin and others over dinner in Shanghai. Mr Xu affirmed an affidavit in which he gave evidence in direct speech (prefaced by the obfuscatory language “words to the following effect”) as to what he and Ms Lin said at the dinner, but in his cross-examination all he could actually remember saying to Ms Lin was that if Ms Lin could guarantee the principal invested then he would invest in the fund which was under discussion: T232.40–234.42. Mr Chen recalled Mr Xu saying that his main goal was to guarantee that the principal was safe and that he did not really care about the return: T304.44–305.2. Mr Wang’s evidence was to the same effect: affidavit of 3.11.23 at para 53. Ms Meng Xu (Mr Xu’s niece) claimed to recall Mr Xu saying the opposite, namely “I put the investment with Louise and the interest is very safety and we can get higher returns. It is enough for you guys to live in Australia”: T353.24–27. I do not accept Ms Meng Xu’s evidence. I accept Mr Chen’s and Mr Wang’s evidence, and I accept Mr Xu’s evidence to the extent that it is corroborated by Mr Chen and Mr Wang.
In January 2014, Ms Chu and Mr Chen met with Ms Lin in Sydney. Ms Chu gave evidence in direct speech in her affidavit as to what she and Ms Lin said, but in cross-examination Ms Chu accepted that she could not recall precisely what she said or what happened at the meeting: T179.18–26. However, Ms Chu did claim to recall saying that she needed to get her principal back: T179.33–41. Ms Chu claimed to have asked questions at the meeting about how the money was going to be invested, but then accepted (after being taken to her affidavit) that she did not ask such questions: T179.43–180.47. Mr Chen gave evidence (commendably in indirect speech) that Ms Chu said that she was not too concerned about interest or dividends, but she was concerned about the safety of her funds (affidavit of 26.4.24 at para 10). I accept Mr Chen’s evidence, and I accept Ms Chu’s evidence to the extent that it was corroborated by Mr Chen.
The notes of a meeting held on 27 January 2014 between Ms Lin, Ms Gai and Mr Geering refer to the funding and progress of the purchase of the Turramurra properties and the proposed development and on-sale of those properties as completed apartments (CB4/2002). The notes of the meeting then refer to the ultimate goal being for “the property fund to be registered proprietor” and refer to a mortgage fund offering a fixed return to the investor of 8% with a new trust company, namely Gold Stone with “Mr. Wu jnr. as director”. Under the heading “David’s [ie Mr Darmali’s] Deal – credit lic./AFSL” the following appears (CB4/2003):
$50k or 100K plus share of the net profit – 5% < $20m, 10% + $20m, exclusive, actively manage the fund, report to the Investors, excluded from the AFSL deal, he is going to pick it anyway AFSL fee because of “funds under management”, set up a board to make the investment decisions.
Role – manager excluding the investment decisions he make recommendations,
First three months $50kpa rate then $100kpa rate.
By early 2014, Ms Lin had lost confidence that GDI could undertake the development project at Turramurra on its own, and that for GDI to continue with the Turramurra development on its own would lead to a financial disaster and could adversely impact on GDI’s important financial relationship with Mr Xufeng Wu, being a shareholder in GDI: affidavit of Ms Lin of 31.12.14 at [100] (tendered by the plaintiffs and admitted against Ms Lin only). Ms Lin gave evidence to the same effect in her affidavit of 17 October 2014 (paras 61–2) in the NSW Supreme Court case of Thomson v Golden Destiny Investments Pty Ltd (CB8/3346), and that evidence was admitted against all defendants (T700.20–25).
On 4 February 2014, Ms Lin sought vendor finance for the purchase of the Turramurra properties: CB5/2009. However, that proposal did not succeed.
On 7 February 2014, Gold Stone was incorporated, with Mr Cai and Mr Wu as its directors. A week later, on 14 February 2014, Ms Darmali also became a director (CB15/6762–3). The registered office and the address of the principal place of business of Gold Stone was given as level 6, Suite 606, 451 Pitt Street, Sydney which was also the office of Austleg Lawyers Pty Ltd where Ms Lin practised as a licensed conveyancer and was a director and shareholder. It was also the address of Mr Cai’s real estate agency, Australian Sydney Realty Pty Ltd.
On 10 February 2014, Mr Cai and Mr Wu filled out and signed a Commonwealth Bank form nominating themselves as the authorised signatories for the 889 Account in the name of Gold Stone: CB4/2010. Mr Wu accepts that his signature on the form is genuine.
Also on 10 February 2014, the Fund Constitution was formed by way of a deed poll which was executed by Gold Stone (CB4/2067–93) setting out the terms of the unit trust known as the Gold Stone Secured Income Mortgage Fund, being the Fund at the heart of these proceedings. The deed was signed by Mr Cai and also purports to bear the signature of Mr Wu, who disputes that it is his signature and I accept that Mr Wu’s signature is a forgery. Mr Cai gave evidence that Ms Lin gave him the trust deed and asked him to sign it (T452.15), and that he observed in 2014 that Ms Lin had a copy of the trust deed in her possession (T457.32–35). I accept that evidence despite my adverse view of Mr Cai’s credibility. The evidence is consistent with the objective probabilities, as well as with the references by Ms Lin to Gold Stone as “my company” and to the Fund as “my mortgage fund” in her affidavit of 17 October 2014 in the NSW Supreme Court proceedings Thomson v Golden Destiny Investments Pty Ltd (CB8/3327): see paras 74, 119, 124 and 223 of that affidavit. Ms Lin accepted in her cross-examination in that case that Gold Stone as trustee of the Fund was controlled by her (CB8/3600 lines 40–45).
Gold Stone is referred to in the Fund Constitution as “RE” and the following appears as a “Notation” after the definitions:
Responsible Entity (RE) under the Act means the entity responsible for a registered managed investment scheme, (please refer to section 9 of the Act). Notwithstanding the use of Responsible Entity in this Deed it is the intention at the time of settling the Fund that it will not be required to be registered.
Clause 3 states that: “The RE has agreed to act as responsible entity and trustee of the Trust.”
Clause 16 provides for reimbursement of expenses. Clause 16.1 provides relevantly:
Subject to clause 16.3, all the costs and expenses relating to the Trust are payable out of the Assets [being the Property, Investments, rights and income of the Trust].
Clause 16.3 provides as follows:
So long as and to the extent that it is required by the Act [ie Corporations Act 2001 (Cth)], the rights of reimbursement and indemnity granted under this clause 16 are only available to the extent the RE has properly performed its duties. However, to the extent permitted by the Act, nothing in this clause 16.3 limits any rights of reimbursement or indemnity conferred on a trustee or the RE by law or statute.
Clause 17 of the Fund Constitution deals with the RE’s remuneration, and provides for an initial service fee of up to 1% of application money, a management fee equal to 1% per annum of the gross asset value and a performance fee calculated by reference to the extent to which the Fund outperforms a benchmark of an internal rate of return of 8% per annum. Clause 18.1 entitles the RE (together with its related bodies corporate and associates or officers and employees) to be interested in any contract or transaction with the RE as trustee of the Trust or in another capacity or with an associate of the RE or any unitholder. Clause 19 contains limitations on the RE’s right of indemnity and clause 19.7 limits its indemnity to the extent that the RE “has properly performed its duties having regard to the powers and discretion conferred on the RE”. In that regard, I note that the plaintiffs do not make any claim pursuant to s 197 of the Act.
Clause 20.4 of the Fund Constitution sets out the authorised investments of the Fund in the following terms, which are directly modelled on the legislative instrument referred to above, known as IMMI 13/092 which commenced on 23 November 2013:
On behalf of the Trust the RE is permitted only to invest in the following:
(a)infrastructure projects in Australia;
(b)cash held by Australian deposit taking institutions (including negotiable certificates of deposit, bank bills and other cash-like instruments);
(c)bonds issued by the Commonwealth Government or a State or Territory Government;
(d)bonds, equity, hybrids or other corporate debt in companies and trusts listed or expected to be listed 12 months on an Australian Stock Exchange;
(e)bonds or term deposits issued by Australian financial institutions;
(f)real property in Australia;
(g)Australian Agribusiness;
(h)annuities issued by an Australian registered life company in accordance with section 9 or 12A of the Life Insurance Act 1995;
(i)derivatives used for portfolio management and non-speculative purposes which constitute no more than 20 percent of the total value of the Net Asset Value;
(j)loans secured by mortgages over the investments listed in paragraphs (a) to (h) above;
(k)other managed funds that invest in the investments listed in (a) to (j) above;
(h)[bis] and other investment categories contained in the list of “Eligible Investments” as gazetted by the Minister from time to time for the purposes of Regulatiion 5.19B of the Migration Regulations 1994 (Cth) or the said regulation’s successor.
Paragraph (j) is of central importance in relation to the issue as to whether the Fund’s investments were authorised or not.
On 10 February 2014, Gold Stone issued the IM as the Trustee and Manager of the Fund. The first page of the IM expressly stated that it was provided only to Eligible Investors (CB5/2016), defined as wholesale clients as defined by the Act (CB5/2028). That page also stated that an investment in the Fund is “subject to risk” and that “The value of your investment can fluctuate up or down with the value of the assets of the Fund.” The IM stated that Gold Stone is a corporate AR of Ergo in relation to the latter’s AFSL, and is a credit representative of Fiducia Asset in relation to its ACL (CB5/2018). The “Key Features of the Fund” (CB5/2019) included a statement of the investment strategy of the fund being “To invest directly or indirectly in Australian real estate mortgages, property mezzanine finance, term deposits and interest deposits (within Australian financial institution)”. The investment objective of the Fund was stated to be 8% p.a. return on its invested capital net of all fees and charges. The minimum initial subscription was stated as AUD500,000 with a minimum holding of AUD250,000. The return to investors was stated to be 8% per annum fixed simple interest paid quarterly. However, the IM also stated that: “Where possible and in the absolute discretion of the Trustee and Manager, the Fund will make distributions to the unit holder quarterly, in the months of July, October, January and April”: CB5/2021.The IM set out further details concerning the investment strategy and investment objective of the Fund (CB5/2020). The IM stated that “The fund manager will manage the investment in the most professional and competent way to achieve the target return”: CB5/2020. I find that that was a reference to Mr Darmali who was the Fund Manager. It also referred to the entitlement of Gold Stone to use related bodies corporate and associates to provide services relating to the activities of the Fund, including providing mortgages and other loans to related entities and through joint venture agreements, but stated that “All related parties dealing will be at arms length and will not be breaching the conflict of interest as well as duty of care to our investors” (CB5/2022).
As to the first matter, for the reasons already given in relation to Ms Chu, I do not regard that as a wrongful non-disclosure. As to the second, third and sixth matters, I regard it as misleading of Ms Lin, Mr Darmali and Fiducia Asset not to have disclosed those matters to Mr Xu when he made his investment in the first half of August 2014. Matters had now progressed beyond the stage they had reached when Ms Chu made her investments in the last week of April 2014. The MVLC Loan Agreement had been entered into on 5 May 2014, and the First MVDA Loan Agreement had been entered into on 26 May 2014. They were both deserving of the description of risky, short term, high interest loans on doubtful or non-existent security, as is given to them in the plaintiffs’ allegation of non-disclosures. The Second MVDA Loan Agreement was entered into on 8 August 2014, which coincided with the period when Mr Xu was advancing money to Gold Stone for the purpose of his investment in the Fund. As I have said above in relation to Ms Chu, those investments were contrary to the IM and the Fund Constitution, and the generalised statements concerning risk in the IM were not sufficient to disclose the particular and concrete risks associated with these loan agreements.
In relation to the fourth and fifth matters, I do not regard those matters as being the subject of a reasonable expectation of disclosure. As to the fourth matter, whether the fact that the Fund’s current and proposed investments for loans were to entities associated with Mr Fong is neither here nor there, unless one builds into that the risk profile of the loans which is the subject of the second, third and sixth matters of non-disclosure. As to the fifth matter, the Fund was in the relatively early stages of implementation in August 2014, and the number of investors in the Fund at that time does not strike me as a matter requiring disclosure. In fact Ms Chu was not the only other substantial investor in the Fund at that time, because the Joint Unitholders had invested $500,000, and their units had not yet been redeemed.
As to the seventh matter of alleged non-disclosure, for the reasons given above in relation to Ms Chu, I regard that as a wrongful non-disclosure.
As I have indicated in relation to Ms Chu, there was every opportunity for Ms Lin and Mr Darmali to convey the non-disclosed matters to Mr Xu by the time he made his investments in the first half of August 2014. While I do not regard it as a matter of particular significance, I note that Mr Darmali had been a participant in the Skype meeting in July 2014 with Mr Xu. As with Ms Chu, I have accepted Mr Xu’s evidence that he conveyed at the meetings held in January 2014 and July 2014 that it was fundamentally important to him that the amount of principal which he invested was safe and guaranteed. While the IM (which I infer, if it be relevant, Mr Xu did not read) made it clear that his capital was not guaranteed, the IM did convey the impression that the capital invested in the Fund would be relatively safe by reason of the conservative lending policy and diligent management of the Fund which the IM conveyed. Further, it cannot be said that the non-disclosures in relation to Ms Chu and Mr Xu were actionable only against Gold Stone. Ms Lin, Mr Darmali and Fiducia Asset personally failed to disclose those matters in circumstances where it was reasonable to expect that they personally would disclose them. Their role was more than merely ministerial and their inaction by way of non-disclosure was not merely as an organ of Gold Stone: see Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211 at [96] and [98] (Jacobson and Gordon JJ); Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88; (2023) 111 NSWLR 304 at [360]–[362] (Ward P, Brereton JA and Griffiths AJA).
Causation, Loss and Damage, and Limitation Period
I infer that if the non-disclosed matters which I have found ought to have been disclosed were conveyed by Ms Lin, Mr Darmali and Fiducia Asset, then the plaintiffs would not have made their investments. It is not incumbent on the plaintiffs to demonstrate how, if at all, they would have invested that money in Australia in order to satisfy the requirements under the SIV scheme, or whether any such alternative investments would have been more successful than the Fund: ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1 at [786]–[790] (Jacobson, Gilmour and Gordon JJ); Wyzenbeek v Australasian Marine Imports Pty Ltd [2019] FCAFC 167; (2019) 272 FCR 373 at [90], [93] and [118] (Rares, Burley and Anastassiou JJ). Accordingly, putting to one side the application of the limitation period, the plaintiffs would be entitled to damages pursuant to s 12GF(1) of the ASIC Act or s 1041I(1) of the Act in the amount of their investments, namely $3.5 million each.
However, s 12GF(2) of the ASIC Act provides that an action under subsection (1) may be commenced within 6 years after the day on which the cause of action that relates to the conduct accrued. Similarly, subsection 1041I(2) provides that an action under subsection (1) may be begun at any time within 6 years after the day on which the cause of action arose. The cause of action under each of those provisions arose or accrued on the date when the three loan agreements were made, in that what the plaintiffs were actually investing in by then was substantially less valuable than what they were told (and what they understood) they were investing in, as I have indicated at [273] above in relation to the cause of action concerning s 601ED(5) and s 1325(2) of the Act. Further, by October 2015, the risks inherent in the plaintiffs’ investment in the Fund had fallen in to the point where it was practically almost certain that their investments in the Fund were worth very substantially less than the amount of $3.5 million which each of them had invested: see [274]–[275] above. Accordingly, the limitation period expired well before the commencement of these proceedings on 18 January 2022. It is not necessary to consider the date from which subsequent amendments to the pleadings should be treated as being effective for the purpose of the limitation period.
Breach of Directors’ Duties and Other Equitable Duties
The plaintiffs, as unitholders and beneficiaries of the Fund, seek to bring claims against Ms Lin, Mr Cai, Mr Darmali and Mr Wu for breach of the equitable and statutory duties they owed to Gold Stone in its capacity as trustee. It is well-established that a beneficiary who can establish “special circumstances” may sue in his or her own name on a cause of action against a third party which belongs to a trustee, if the trustee fails to sue to protect the trust property: Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109 at [55]–[56] (Gleeson CJ, Gummow and Hayne JJ), [163]–[164] (Callinan J); Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75; (2017) 251 FCR 404 at [102]–[105] (Rares, Murphy and Davies JJ). The requirement of special circumstances is typically met by demonstrating that there is a proper case for proceedings to be taken, and the trustee has either refused to sue, or its position makes it unlikely that it will do so. The plaintiffs contend that Gold Stone has claims against the individual defendants which ought to have been brought, but Gold Stone failed to bring them.
Ms Lin and Mr Cai owed duties to Gold Stone as directors of the company, both under the Act and as fiduciaries, and Mr Darmali owed duties as an “officer” under the Act and as a fiduciary in his capacity as Fund Manager of the Fund (but not as a director). For the reasons given above in relation to the liability of those three defendants for the breaches of trust committed by Gold Stone, there is a compelling case that Ms Lin, Mr Cai and Mr Darmali breached those statutory and equitable duties, thereby causing loss to Gold Stone, which had an obligation to restore the Fund to the position it would have been in if Gold Stone’s breaches of trust (procured by them) had not been committed.
However, in the present case, I have held that the plaintiffs as beneficiaries of the Fund have a direct cause of action against Ms Lin, Mr Cai and Mr Darmali as parties who knowingly procured or induced the breaches of trust by Gold Stone, and who knowingly participated in Gold Stone’s dishonest and fraudulent design. In light of the fact that the plaintiffs have a direct cause of action against those parties, which yields substantially the same remedial outcome as the proposed derivative suit on their part to sue in Gold Stone’s name as trustee, the requirement of special circumstances is not satisfied. There is thus no need to consider the application of limitation periods, whether directly or by way of analogy, in relation to the proposed derivative action against them.
I note for completeness that, while s 197 of the Act might appear on its face also to confer a direct right of action on the plaintiffs against the directors of Gold Stone, that contention would have been met by the current state of the authorities which is to the effect that the provision does not extend to a claim by a beneficiary against the trustee: Young v Murphy [1996] 1 VR 279 at 313 (JD Phillips J, with whom Brooking J and Batt J agreed), a case dealing with s 229A of the Companies Code 1981. The reasoning in that case has been held to be applicable to s 197 of the Act: Cole v Tillman [2015] FCA 1512 (Dowsett J). I note that the current form of s 197 was introduced by the Corporations Amendment Act (No1) 2005 (Cth), following the decision in Hanel v O’Neill [2003] SASC 409; (2003) 48 ACSR 378, which found that s 197 made directors liable merely because the trust assets were not sufficient to indemnify a trust creditor, even where this was not because of a breach of trust or an act which was ultra vires the trust. The second reading speech for the Corporations Amendment Bill (No 1) 2005 made it clear that the purpose of the amendment was to “address concerns that have arisen in the light of the recent decision in Hanel v O’Neill” and to “restore the longstanding interpretation of section 197”. The Explanatory Memorandum for the 2005 Bill was to the same effect, and explained the difficulties with the Hanel v O’Neill interpretation, principally that it effectively turned directors into guarantors of trustee companies for any transaction the trustee entered into: see [1.9]–[1.13]. Accordingly, the plaintiffs have justifiably not pursued a claim under s 197.
That leaves for consideration the derivative claim sought to be made by the plaintiffs against Mr Wu. The plaintiffs seek to bring an action in the name of Gold Stone as trustee against Mr Wu for having breached his duty to exercise care and diligence in the performance of his functions as a director of Gold Stone (including in its capacity as trustee of the Fund).
Mr Wu gave evidence that he was appointed as a director of Gold Stone to represent his parents’ interests, but he could not recall discussing Gold Stone with them (T644.25–645.4). Mr Wu said that he did not consider emails from Ms Lin concerning Gold Stone to be important enough to read (T645.26–646.9, 661.24–33). He said that he never saw Gold Stone’s financial records, he never asked to see them, and they were of no concern to him at all (T663.24–33). He said that he had assisted in opening bank accounts for the company, but he never looked at a bank statement or even asked to do so (T674.42–675.2). Mr Wu never went to a directors’ meeting (T661.44–47). He knew that Mr Cai was also a director, but he never discussed the affairs of the company with Mr Cai (T662.1–10). He did not consider it to be a problem that he was left out of important discussions in relation to Gold Stone’s affairs (T677.5–38). Mr Wu said that he did not know what the purpose of Gold Stone was, and he did not feel any obligation to find out despite being appointed as a director (T662.16–32). He said that he had heard his parents mention that Gold Stone was an investment company (affidavit of 31.10.23 at para 12) but he did not know what that meant and he had no interest in finding out (T665.10–40). Mr Wu said that he had gone in to see Ms Lin or Mr Cai on a number of occasions to sign documents in relation to Gold Stone, but he could not recall how many times and he could not recall the details of any particular occasion or any of the documents he signed (T657.18–658.6). His evidence was that his practice was to sign documents without reading them or making any effort to ascertain their purpose, and he often signed signature pages without seeing or asking to see the full document, or otherwise making any inquiry as to what he was signing (T666.15–44). I accept all of that evidence as truthful, albeit lamentable.
Mr Wu recalled going with Mr Cai to a Commonwealth Bank branch on at least one occasion to sign forms and open bank accounts, and he accepted that he signed the Commonwealth Bank form dated 10 February 2014 (CB5/2010, T647.36–648.25). He accepted that he may have signed other documents in relation to Gold Stone on that day (T648.37–649.6). He accepted that he may have signed Commonwealth Bank documents on another day at Ms Lin’s or Mr Cai’s offices (T666.8–13). He accepted that the Commonwealth Bank document headed Authority for Business Accounts dated 11 and 19 February 2014 (CB5/2133) appeared to have been signed by him, although he could not recall signing it (T667.1–10). The purpose of that form was to add authorised signatories to the 889 Account, and it was headed “Gold Stone Secured Income Mortgage Fund Applications on Trust”. Mr Wu accepted that he may have signed forms to open an “applications on trust” account, but he did not know what that meant and he had no interest in finding out (T667.12–34). Mr Wu accepted that he signed the Corporate Authorised Representative Agreement of 11 February 2014 (CB5/2095–2106) on every page, including signing the page at CB5/2096 in two places, but he said that he did not read a word of it and he did not ask what the document was (T669.33–41). When his attention was drawn in particular to the recital stating that Gold Stone would act as the trustee and manager of the “Gold Stone Secured Mortgage Fund [sic]” and as such required an ACL, he denied having read that or having ever discussed a mortgage fund (T667.36–668.2, 668.37–669.8). I accept that evidence.
Mr Wu admitted to receiving the email dated 25 February 2014 (CB5/2146, translated at CB5/2171.1), but said that he could not recall it (T650.24–651.23). The email attached a copy of the IM in Chinese and a copy of the English application form (CB5/2146–71, 2172–83 and the translation at CB5/2171.1–26). The subject heading of the email was “Mortgage Fund”, and in the email Ms Lin asked Mr Wu to make a copy and distribute the IM and the application form to those who were interested. The IM was clearly identified as having been issued by Gold Stone as the trustee and manager of the Fund (CB5/2171.3). Mr Wu denied having read the email and the attachment, and he said that the information in it would have been of no interest to him whatsoever (T670.37–673.7). He also denied that Ms Lin ever asked him to find investors for the Fund, despite the fact that she was doing just that in the email (T673.9–674.4). I accept Mr Wu’s evidence of not having read that email and that, as far as he could recall, Ms Lin never asked him to find investors for the Fund. Mr Wu ignored Ms Lin’s requests. Mr Wu also gave evidence, which I accept, that he never asked Ms Lin whether she had found any investors, or what investments the Fund or Gold Stone had made, or otherwise what the company did or did not do (T674.4–17).
Mr Wu gave evidence that in 2014 or 2015 he observed his parents’ relationship with Ms Lin and Mr Cai becoming strained because of some problematic investments (affidavit of 31.10.23 at paras 29–30). He said that he did not know whether any of those investments were related to Gold Stone and he had no interest in finding out (T675.18–676.7).
Mr Wu accepted that he received Ms Lin’s email of 18 March 2015 (CB8/3754; T676.11–14), but he again said that, because it was from Ms Lin and it concerned Gold Stone, he would not have read it (T676.16–45). He said that he would not have had the slightest interest in the fact that the subject of the email identified that Gold Stone, as trustee of the Fund had made loans to MVLC and MVDA (T677.40–678.20). He would not have had any interest in the fact that a letter of demand had been sent to Mr Fong (T678.22–30). He did not think that it was important that Gold Stone had cashflow problems or that there was a need to protect fund assets (T679.4–17). He would have felt no obligation to go to the urgent board meeting that Ms Lin was calling in order to discuss the company’s cashflow problems or how to protect the Fund assets (T679.23–33). Mr Wu said that his disinterest in Gold Stone’s affairs continued through to February 2018 when he receive the email dated 23 February 2018 from Ms Lin with the subject “Gold Stone Capital and Gold Stone SIV Mortgage Fund” (CB11/5178–9), which he again denied reading, even though he was aware he remained a director of Gold Stone (T680.34–682.30). He did not recall knowing that Mr Xu and Ms Chu had suffered losses which Ms Lin was trying to help them recover (which appeared on the face of the email) (T682.32–34)). He denied that this had anything to do with his resignation a few weeks later (T682.36–46, and CB11/5321–2). I accept that evidence.
Mr Wu’s evidence was that he had no idea that Gold Stone was a trustee that people had invested money with, or that investors had lost money with Gold Stone, until he was joined as a defendant to this proceeding (T680.19–32). He did say that if he had discovered those matters he would have sought legal advice about them (T683.12–25). I accept that evidence.
As a director of Gold Stone, Mr Wu owed a duty of reasonable care and diligence both pursuant to s 180(1) of the Act and under the general law. As to the latter, a director owes the company an equitable duty (which is not specifically a fiduciary duty), and a common law duty, to exercise reasonable care and skill: Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 at 157–8 (Ipp J, with whom Malcolm CJ and Seaman J agreed); Bristol and West Building Society v Mothew [1998] Ch 1 at 16–17 (Millett LJ); Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 at [274]–[276] (Edelman J). As Gold Stone was a “one trust, no asset company, created solely for the purpose of administering the trust in question”, the duties of its directors and officers were owed to it in its capacity as trustee: McGaughey v Universities Superannuation Scheme [2023] EWCA Civ 873 at [86]–[90] (Asplin LJ, with whom Snowden LJ and Sir Julian Flaux agreed), distinguishing Young v Murphy [1996] 1 VR 279 as a case where the corporate trustee did not meet that description. Gold Stone thus holds the causes of action against its directors and officers on trust for the benefit of the Fund.
In my view, the standard required is not materially different between the statutory, common law and equitable obligations. The relevant principles concerning a director’s duty to exercise care and diligence were helpfully summarised by Nichols J in GJB Building Pty Ltd v AI & PB Property Pty Ltd [2023] VSC 782 at [2025]–[2037], relevantly as follows (omitting citations):
(a)the standard to be applied is objective, rather than subjective, to be measured in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation’s circumstances, the particular office occupied by the director, and their responsibilities within the company: at [2026];
(b)non-executive directors are permitted to rely on management and other officers to an extent, but they are not excused from making their own inquiries where appropriate (that is, where a reasonable director would have made inquiries): at [2029];
(c)all directors and officers have core, non-derogable duties to bring reasonable competency to their role and to take reasonable steps to place themselves in a position to guide and monitor the company’s management: at [2030];
(d)the minimum standard of diligence imposed on each director or officer requires that they become familiar with the fundamentals of the business or businesses of the company, keep informed about the company’s activities, monitor generally the company’s affairs, maintain familiarity with the financial status of the company by appropriate means, including the company’s financial statements and board papers and make further inquiries into matters revealed by those documents where it is appropriate to do so, and generally maintain a reasonably informed opinion of the company’s financial capacity: at [2030];
(e)in determining whether a director has breached his or her duty under s 180(1), the Court must balance the foreseeable risk of harm to the company (including the nature and magnitude of the risk of harm and the degree of probability of its occurrence) against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, along with the expense and difficulty of taking alleviating action: at [2031];
(f)failing to ensure that a company makes loans only in accordance with its authorised practices and failing to ensure that the company has a proper system of controls and audit in its business to avoid any defalcation by officers and employees may amount to a breach of the statutory duty of care and diligence: at [2032]; and
(g)the director does not have to take a positive step to breach the duty, as the obligation is positively to exercise care and diligence and thus a failure to act at all where action is called for may breach the duty: at [2033]–[2034].
Further, as a corollary of the principle that a corporate trustee is held to a higher standard than an ordinary trading company, so too are the directors of a corporate trustee: Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) [2017] FCA 497; (2017) 348 ALR 525 at [213] (Beach J).
In my view, Mr Wu’s conduct comprised clear breaches of his duty of care and diligence in the performance of his functions as a director of Gold Stone. Mr Wu signed documents without reading them, ignored emails providing important information about the company and the Fund, and demonstrated a complete disinterest in the affairs of Gold Stone and in his obligations as a director of it. He even ignored emails from Ms Lin telling him that Gold Stone was facing financial difficulties, and he felt no obligation to be involved in discussions about those matters. I do not regard Mr Wu’s youth and inexperience, as assisting him. The responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company: Daniels v Anderson (1995) 37 NSWLR 438 at 501 (Clarke and Sheller JJA). In the context of Gold Stone’s business, that duty required Mr Wu to ensure that Gold Stone invested in a manner authorised by the Fund Constitution, consistently with what had been conveyed in the IM, and that Gold Stone conducted appropriate due diligence before it made investments or at least that it had adequate systems in place to ensure that this occurred.
The plaintiffs submit, and I accept, that if Mr Wu had performed his duty, Gold Stone would not have made the unauthorised, high risk and imprudent loans which it did make to MVLC and MVDA. I regard Mr Wu as sufficiently honest and effective that, if he had exercised due care and diligence, he would not have permitted those loans to be made. Accordingly, Mr Wu’s breaches of the duty of care and diligence caused loss to Gold Stone in the same amount as the loss caused to the plaintiffs by Gold Stone’s breaches of trust in making those loans.
However, the statutory action for loss or damage for a contravention of s 180(1) is subject to the limitation period imposed by s 1317K of the Act, namely that the action may be begun at any time within six years after the date of the contravention, not six years after the day on which the cause of action arose or when loss or damage was suffered. A cause of action founded on tort must generally be brought within 6 years running from the date on which the cause of action first accrues to the plaintiff: s 14 of the Limitation Act. In relation to the cause of action for breach of a director’s equitable duty of care and diligence, that claim is subject to the application of either or both of those provisions by way of analogy: see Belan v Casey [2003] NSWSC 159; (2003) 57 NSWLR 670 at [149] (Campbell J); Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118 (2003) 355 ALR 703 at [35] (Leeming JA, with whom Sackville and Emmett AJJA agreed). The plaintiffs do not submit that Mr Wu’s breaches were fraudulent, or that he engaged in fraudulent concealment of his wrongs, so as to engage either s 47 or s 55 of the Limitation Act, either directly or by way of analogy. Consistently with the reasoning which I have expressed above in relation to limitation periods, I regard the cause of action against Mr Wu for loss or damage arising from his breaches of duty as having arisen in 2014 when the loans were made to MVLC and MVDA. In any event, it had certainly arisen by October 2015 when Gold Stone’s prospects of recovering the full amount advanced on those loans were so remote as to be almost impossible. Accordingly, the commencement of these proceedings on 18 January 2022 was well outside the applicable limitation periods. As Kennett J held in Binqld Finance Pty Ltd v Binetter, the limitation period under s 1317K cannot be extended pursuant to s 1322(4)(d). I therefore dismiss the plaintiffs’ claim which it brings in the name of Gold Stone against Mr Wu.
Conclusion
The plaintiffs have therefore achieved substantial success in the proceedings. I will set a timetable for the exchange of draft orders and submissions to give effect to my reasons. The parties have expressed a desire to deal with the question of costs after the delivery of these reasons, and the timetable which I will set also deals with that question. I anticipate that I will deal with the making of final orders and the question of costs on the papers, but in the event that an oral hearing is required I will also appoint a date on which that will occur.
I certify that the preceding three hundred and twelve (312) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman. Associate:
Dated: 15 July 2024
SCHEDULE OF PARTIES
NSD 32 of 2022 Defendants
Fourth Defendant:
FIDUCIA ASSET MANAGEMENT PTY LTD
Fifth Defendant:
XIAO WU
Sixth Defendant:
JOSEPHINE DARMALI
Seventh Defendant:
GOLD STONE CAPITAL PTY LTD
19
21
3