City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Meng Dai

[2023] NSWSC 1498

Supreme Court

New South Wales

Medium Neutral Citation:

City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Meng Dai [2023] NSWSC 1498

Hearing dates:

31 July, 1, 2, 3, 4, 7, 8, 9, 23, 24 August 2023

Date of orders:

5 December 2023

Decision date:

05 December 2023

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Declare secretary not validly appointed; directions made to enable Court to specify amount in a compensation order against director under s1317H(1), Corporations Act 2001 (Cth) and judgment against solicitor for equitable compensation; summons and cross claims otherwise dismissed.

Catchwords:

CORPORATIONS — plaintiff undertakes property development with related company as builder — plaintiff has two directors, one of which is also director of builder — common director appoints wife as secretary of plaintiff, without other director’s knowledge — common director obtains three loans for builder in the name of, or guaranteed by, plaintiff and secured over plaintiff’s property — substantial purpose of loans was for builder’s other property developments — finance documents executed by common director and wife.

SECRETARY — constitution required directors to appoint secretary — meeting did not take place — whether directors passed informal resolution through ‘meeting of the minds’ — second defendant unaware of appointment until after first transaction — whether second director ratified appointment by inaction — no ratification in absence of full knowledge of material facts.

DIRECTORS AND OFFICERS — authority —constitution and trust deed required resolution to borrow money — no written resolution — whether directors passed informal resolution through a ‘meeting of the minds’ — whether common director conferred with authority to borrow money without conferring with second director — no actual authority.

STATUTORY ASSUMPTIONS – s129 Corporations Act — “dealings with a company” — whether lenders entitled to rely on assumptions — common director negotiating loans with lenders to the knowledge of second director, who took no steps —inaction conferred ostensible authority on common director — lenders entitled to rely on statutory assumptions that wife validly appointed — lenders did not actually know or suspect that assumptions were incorrect — knowledge of lenders’ solicitor could not be imputed for purpose of s 128(4), Corporations Act — plaintiff not entitled to have transactions set aside.

DIRECTORS’ DUTIES — statutory and fiduciary duties — common director breached duties in obtaining — loans obtained without knowledge of second director — compensation order to follow under section 1317H of Corporations Act.

LEGAL PROFESSION — fiduciary duties — plaintiff’s solicitor proceeded to act for lenders — whether solicitor retained by plaintiff in respect of finance — whether solicitor in breach of duty to avoid conflicts between interests of clients — for first loan, solicitor had broad retainer including in respect of finance and was actively assisting the plaintiff to obtain finance — solicitor in a position of conflict by acting for lender on first loan — solicitor failed to obtain fully informed consent of plaintiff before acting for lender, where solicitor acting for corporation has a duty to ensure that their instructions are truly the instructions of the client — in breach of fiduciary duty to avoid conflicts with respect to first loan — solicitor aware of disconformity between borrower and recipient of the loan funds — solicitor made no enquiry of second director — breach of fiduciary duty.

EQUITABLE COMPENSATION — causation — assessing compensation where ‘conflict of duty and duty’ — purpose of duty to avoid conflicts is to ensure that solicitor does not prefer one client’s interests over the other — by acting in breach, solicitor disregarded plaintiff’s best interests and focussed instead on lender’s interests — had solicitor had regard for plaintiff’s interests, solicitor would have taken steps to ascertain where plaintiff’s interests lay — second director would have been notified of unauthorised loans, which would not have gone ahead — relevance of independent solicitor — solicitor liable to compensate plaintiff for indebtedness incurred as a result of entering and refinancing first loan.

CIVIL LIABILITY ACT — equitable obligations —whether claim against solicitor apportionable under Part 4 of the Civil Liability Act 2002 (NSW) — s 34(1) of Civil Liability Act requires failure to take reasonable care to be an element of the plaintiff’s cause of action — claim against solicitor was a claim for breach of ‘no conflicts’ duty — failure to take reasonable care not an element of claim — claim not apportionable.

PROFESSIONAL STANDARDS SCHEME — whether solicitor’s liability limited — scheme not in force when act or omission giving rise to cause of action occurred.

Legislation Cited:

Evidence Act 1995 (NSW), s 140(2)t

Corporations Act 2001 (Cth), ss 126, 127, 128, 129, 180, 181, 182, 183, 198A, 204D, 204F, 1317H(1)

Home Building Act 1989 (NSW), s 92(1)

Civil Procedure Act 2005 (NSW), s 100

Civil Liability Act 2002 (NSW), ss 5A, 5O 34(1)

Professional Standards Act 1994 (NSW), ss 4(1), 28

Cases Cited:

183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd [2023] NSWCA 72

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

ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2015) 224 FCR 1

Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1; [2014] WASC 102

Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474

Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201

Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd (2013) 282 FLR 351; [2013] NSWCA 459

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

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

Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC1229

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

Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1

Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30

Birtchnellv Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384

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

Breen v Williams (1996) 186 CLR 71; [1996] HCA 57

Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362

Bristol & West Building Society v Mothew [1998] Ch 1

Canson Enterprises Ltd V Boughton & Co (1991) 85 DLR (4th) 129

Caratti v Mammoth Investments Pty Ltd (2016) 50 WAR 84; 113 ACSR 31; [2016] WASCA 84

CEO of Customs v Liang [2004] NSWSC 1240 (conviction); CEO of Customs v Liang [2005] NSWSC 591

Chan v Zacharia (1984) 154 CLR 178

Chappell v Hart (1998) 195 CLR 232; [1998] HCA 55

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

CLGC Pty Ltd v Zhang [2021] NSWSC 946

Correa v Whittingham [2013] NSWCA 263

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72

Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd [2022] NSWSC 910

Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd [1988] 14 NSWLR 523

Errichetti Holdings Pty Ltd v Western Plaza Hotel Corporation Pty Ltd [2006] WASC 113; (2006) 201 FLR 192

Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375

Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480

Furs Ltd v Tomkies (1936) 54 CLR 583

Gales Holdings Pty Ltd v Tweedy Shire Council [2011] NSWSC 1128

Gallop Reserve Pty Ltd v Matton Developments Pty Ltd [2019] QSC 113

George v Webb [2011] NSWSC 1608

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

Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336

Hill v Rose [1990] VR 129

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

Hudson Investments Group Ltd v Atanaskovic [2010] NSWSC 1055

In Perpetual Trustee Co Ltd v CTC Group Ltd (No 2) [2013] NSWCA 58

In the matter of Hot Frog Pty Ltd [2022] NSWSC 6

In the matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332

Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) [2007] NSWSC 124; (2007) 63 ACSR 1

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34

Law Society of New South Wales v Harvey [1976] 2 NSWLR 154

Maguire and Another v Makaronis and Another [1997] HCA 23; (1997) 188 CLR 449

Minkin v Landsberg [2016] 1 WLR 1489

Motor Yacht Sales Australia Pty Ltd v Cheng [2021] NSWSC 1141

Neville v Lam (No 3) [2014] NSWSC 607

Nocton v Lord Ashburton [1914] AC 932

Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146

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

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451

Parker v McKenna (1874) LR 10 Ch App 96

Paul v Cooke (2013) 85 NSWLR 167; [2013] NSWCA 311

Payne v Parker [1976] 1 NSWLR 191

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

Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1996) 115 CLR 266

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

Rahme v Benjamin Khoury Pty Ltd [2019] NSWCA 211; (2019) 100 NSWLR 550

Rama v Millar [1996] 1 NZLR 257

Re Earth Civil Australia Pty Ltd (in liq) [2021] NSWSC 966

Re Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602

Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187

Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948

Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308

Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWSC 438

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

Roden v International Gas Applications (1995) 18 ACSR 454

Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18

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

Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068

Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722

Swindle v Harrison (1997) 4 All ER 705

Target Holdings Ltd v Redferns [1996] AC 421

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

Yee v Robert [1997] 3 LRC 138

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

Texts Cited:

A Abadee et al., Professional Liability in Australia (Thomson Reuters, 4th ed, 2023)

Matthew Conaglen, Fiduciary Loyalty (Hary Publishing, 1st ed, 2010)

Patrick Parkinson, The Principles of Equity (Thomson Lawbook Co, 2nd ed 2003)

Paul Finn, Fiduciary Obligations (Federation Press, 2nd ed, 2016)

PW Young QC, Declaratory Orders (Butterworths, Second Edition, 1984)

Solicitors Manual (LexisNexis Butterworths, last updated November 2023)

Category:

Principal judgment

Parties:

City Garden Australia Pty Ltd (Plaintiff)
Meng Dai (First Defendant)
Gerrard Toltz Pty Ltd (Second Defendant)
Gemi 130 Pty Ltd (Third Defendant)
Bridge Street Capital No 2 Pty Ltd (Fourth Defendant)
Wallis Island Pty Ltd (Sixth Defendant)
Maxmara Trinity Pty Ltd (Seventh Defendant)
Lin Zhu (Eighth Defendant)
Gemi Investments Pty Ltd (Ninth Defendant)
Weriton Finance No 2 Pty Ltd (Tenth Defendant)
Saddleback Mountain Estates No 2 Pty Ltd (Eleventh Defendant)
Maxmara and JA International Pty Ltd (Fifteenth Defendant)

Representation:

Counsel:
Mr P A Clarke (Plaintiff)
Mr M Dai (First Defendant self-represented, Sixth, Seventh, Fifteenth Defendants)
Ms M Hall (Second Defendant)
Mr H Somerville/Mr J McEnaney (Third, Ninth Defendants)
Mr MW Young SC (Fourth, Tenth, Eleventh Defendants)
Ms L Zhu (Eighth Defendant self-represented)

Solicitors:
Francis Lim Barristers & Solicitors (Plaintiff)
Sparke Helmore (Second Defendant)
Summer Lawyers (Third, Ninth Defendants)
VMV Lawyers (Fourth, Tenth, Eleventh Defendants)

File Number(s):

2020/128125

Judgment

WITNESSES

DOCUMENTS

ONUS AND INFERENCES

INITIAL DEALINGS

Mr Liang and related entities

City Garden and related entities

The development

The solicitor

Liang becomes an investor

Mischaracterising Liang’s investment

City Garden acquires the site

Acquisition finance – February 2017 – two mortgages – $10.93 million

Solicitor instructed to keep Liang informed

Solicitor’s ongoing roles

Liang becomes a director

Actual authority

Liang meets private lender

Liang becomes majority shareholder

Refinance – August 2017 – two mortgages – $9.21 million

Construction finance - $25 million

Paying out acquisition finance

Shortfall in construction funding

Zhu appointed as secretary

FIRST DISPUTED TRANSACTION – NOVEMBER 2018

Did Liang know about the first disputed transaction?

CLAIM IN RESPECT OF THE SECRETARY

Consideration

CLAIM AGAINST DIRECTOR: FIRST TRANSACTION

Principles

Consideration

CLAIM AGAINST FIRST ROUND LENDER

Ostensible authority

“information provided by the company”

“knew or suspected”

CLAIM AGAINST SOLICITOR: FIRST TRANSACTION

Scope of retainer

Conflict of interest

Fully informed consent

Breach of fiduciary duty

SECOND DISPUTED TRANSACTION – MAY 2019

Liang learns of caveat

Advice over dinner

Misdirecting funds

Forged consent

Did Liang know about the second disputed transaction?

Claim in respect of the secretary

Claim against director

Claim against second round lenders

Claim against solicitor

More misdirected funds

Nearing completion

THIRD DISPUTED TRANSACTION – OCTOBER 2019

Did Liang know about the third disputed transaction?

Claim in respect of the secretary

Claim against director

Claim against third round lenders

Claim against solicitor

Dai resigns

Removal of secretary

These proceedings

DECLARATORY RELIEF

COMPENSATION FROM DIRECTOR

EQUITABLE COMPENSATION FROM SOLICITOR

Causation

Compensation

Apportionable claim

Section 5O

Statutory scheme

ORDERS

Judgment

1. HER HONOUR: The plaintiff developer, City Garden Australia Pty Ltd, undertook a property development in North Rocks with related company, Ming Tian Real Property Pty Ltd (the builder). The first defendant Meng (Adam) Dai and Jian Wei (Victor) Liang were directors of the plaintiff. Mr Dai was also the sole director of the builder.

2. Mr Dai obtained three loans for the builder, but in the name of, or guaranteed by, the plaintiff and secured against the North Rocks property. The transaction documents were executed on behalf of the plaintiff by Mr Dai and his wife, the eighth defendant Lin (Julianne) Zhu, who was appointed as secretary of the company shortly before the first transaction. The plaintiff contends that Mr Dai had no authority to enter into these transactions without the agreement of fellow director, Mr Liang, who was unaware of either the transactions or Ms Zhu’s appointment as secretary. The plaintiff seeks a declaration that Ms Zhu was not validly appointed. The plaintiff seeks damages from Mr Dai for breach of his duties as a director.

3. The lender on the first transaction, ninth defendant Gemi Investments Pty Ltd, lent $2 million to the plaintiff in November 2018 secured inter alia by a mortgage over the North Rocks site. Notionally, $1.1 million of the loan funds were provided to the builder to enable it to provide a bank guarantee in support of home warranty insurance, likely in respect of a development in Baulkham Hills. Some of the funds were probably used to pay the builder’s subcontractors and suppliers in respect of the North Rocks development.

4. The lenders on the second transaction, tenth defendant Weriton Finance No 2 Pty Ltd and eleventh defendant Saddleback Mountain Estates No 2 Pty Ltd, lent $3.7 million to the builder in May 2019 secured inter alia by a mortgage over the North Rocks site. Initially at least, the loan was sought to provide a bank guarantee for the Baulkham Hills development, to provide cashflow for a development in Rouse Hill, to pay out the first loan and $900,000 for the North Rocks development. On drawdown, the lender on the first transaction was paid out, $390,000 was used to pay the plaintiff’s land tax and $746,000 was paid to the builder, at least some of which was probably used to pay the builder’s subcontractors and suppliers in respect of the North Rocks development.

5. The lenders on the third transaction, third defendant Gemi 130 Pty Ltd and fourth defendant Bridge Street Capital No 2 Pty Ltd, advanced $5.3 million to the plaintiff in October 2019, with which the lenders on the second transaction were paid out. The lenders on the third transaction have yet to be repaid, with interest continuing to accrue at 27% per annum.

6. The plaintiff seeks declarations that the three ‘rounds’ of finance documents are void and unenforceable as against it. The plaintiff also sues its solicitor, law firm Gerrard Toltz Pty Ltd trading as “Toltz Lawyers,” for breach of fiduciary duty where the solicitor proceeded to act for the lenders on the transactions. In turn, the lenders have filed cross claims against the solicitor in the event that the finance documents are set aside.

7. Resolving the plaintiff’s claims is no easy matter. The series of transactions are, on any view, complex. Mr Dai, Mr Liang and Ms Zhu proved to be unreliable witnesses. The informality of the arrangements between the parties led to what could fairly be described as a mess. The solicitor did not bring clarity to these arrangements, where its role in acting for the plaintiff, the lenders, or both, was fluid and not clearly defined at the time. I have endeavoured to try and work out what happened and what, if anything, should be done about it having regard to the pleaded claims and defences.

WITNESSES

8. The plaintiff relied on the evidence of Mr Liang and the builder’s former human resources manager, Jing Yuan. The plaintiff also relied on the expert evidence of forensic document examiner, Stephen Dubedat, who was cross-examined by Mr Dai. I accept Mr Dubedat’s evidence and the views expressed in his report.

9. Mr Liang speaks English but gave evidence through an interpreter. This fact occupied a substantial amount of cross-examination, which was perhaps not the best use of the Court’s time where Mr Liang accepted that he spoke English but not sufficiently well to be cross-examined without an interpreter. Although Mr Liang studied some English subjects at university in China as part of his engineering degree – which I would venture to say was some years ago – his teacher’s ability to teach English was low and Mr Liang’s English proficiency was then poor. Mr Liang has lived and worked in Australia for many years and his English has improved as a consequence. But Mr Liang said that reading legal documents was difficult; he could understand about 70% of his affidavits in the English language. Although he affirmed his early affidavits without an interpreter, everyone in the solicitor’s office was bilingual and explained the affidavits to him where necessary.

10. A number of emails and WeChat messages authored by Mr Liang are in evidence. He writes variously in English and Chinese. Having read every document authored by Mr Liang which is in evidence, I consider that Mr Liang’s decision to use an interpreter was wise; his grasp of English is imperfect and it would have been unfair for him to withstand extensive cross-examination in English, this being a language over which he may not have the necessary mastery.

11. It must be said that Mr Liang presented poorly as a witness. Although he began well enough, Mr Liang was suspicious of documents to which he was taken and, on occasion, disclaimed documents that were annexed to his affidavit or, on their face, were obviously his documents. This was perhaps understandable, where his signature had been forged on two significant documents and the bulk of correspondence was not copied to him at the time. Once reassured that the source of the document was reliable, Mr Liang was more willing to accept the contents of the document.

12. Mr Liang was clearly unhappy with how his business dealings with Mr Dai had unfolded and took opportunities to make unkind remarks. As will be seen, such remarks were warranted. Some of Mr Liang’s evidence as to the business arrangements he had with Mr Dai was likely aspirational, that is, what the arrangements should have been. For example, in Mr Liang’s first affidavit, he said it was agreed that Mr Dai would manage the North Rocks project but, in cross-examination, did not agree that he left this to Mr Dai, “Of course not. I am a businessman, so I would set up a team to look after the project. I would not just rely on him; I would set up a project. That’s just common sense for a businessperson. I wouldn’t just let him.” As to why this was not mentioned in his first affidavit, Mr Liang said “That’s just for politeness. How could I be so stupid.” Mr Liang did not agree that Mr Dai would be managing the project by himself, “No. Would not.” In fact, Mr Liang initially left it to Mr Dai to manage the North Rocks development but, over time, became more involved as his concerns about Mr Dai’s financial management of the project deepened.

8. Some of Mr Liang’s evidence was unlikely, for example, that a meeting with lenders was “social” and there was no discussion about a loan: see [113]. Mr Liang distanced himself from documents at odds with his version of events, suggesting that he had not opened an email or read its attachment. I have approached his evidence with caution. That said, the contemporaneous documents do provide considerable support for his version of events. Further, Mr Dai largely does not dispute Mr Liang’s evidence: see [17].

9. Ms Yuan was a forthright person who was most indignant that her Justice of the Peace (JP) stamp had been misused and her signature had been forged. Ms Yuan obviously did not much like Mr Dai, who owed her money. Ms Yuan’s credit was challenged by a lender’s senior counsel where, in her affidavit affirmed in March 2023, Ms Yuan said that she suspected that Mr Dai or someone else may have taken her JP stamp and stamped the document without her knowledge or consent. In chief, Ms Yuan said that she called Mr Dai a few days after becoming aware that her signature had been forged and he said, “I’m sorry. I did. I’m sorry.”

10. The fact that Mr Dai’s confession did not appear in her affidavit is obviously problematic and her explanation for this was not clear. Ultimately, Ms Yuan said, “I don’t know if I – I’m not police. I can’t say something – it might be later on changed. At that time, I still thought I – it’s not my signature, that’s it, full stop. … I wasn’t sure what background that behind for him to do that. And that’s why from beginning, I thought it might be someone else took – copied my signature. Okay, now, that conversation between me and him, very privately. Until then, I don’t want to explore this conversation. … But he did. I did say to him. And he’s here, okay. And I don’t lie. Someone forged my signature. Only I don’t know the background, the reason why he does that. But for my signature, this is forged. I just want to prove that. I come to the court. If I’m lying, I wouldn’t able to come to the court.”

11. Ms Yuan was cross-examined at length by Mr Dai. It is telling that Mr Dai never put to Ms Yuan that her evidence as to his confession was false. Whilst Mr Dai was self-represented, it remained stark that he asked her many questions but not this critical question. I am inclined to accept her evidence, subject to what the contemporaneous documents reveal. As will be seen, this material also points to Mr Dai as responsible for the misuse of Ms Yuan’s JP stamp and signature: see [332]-[337].

12. Mr Dai was self-represented and, with leave, also appeared on behalf of his family companies, the sixth defendant Wallis Island Pty Ltd, the seventh defendant Maxmara Trinity Pty Ltd and the fifteenth defendant Maxmara and JA International Pty Ltd. He was a pleasant fellow who gave evidence calmly and appeared to be familiar in doing so.

13. Mr Dai had sworn a substantive affidavit at a time when he was legally represented. By then, Mr Liang had affirmed three substantive affidavits totalling 50 pages of detailed material. Mr Dai’s affidavit in response to this material was only four pages long and did not address Mr Liang’s first or second affidavits at all. Most of the conversations described by Mr Liang were not addressed. I take it from the brevity of Mr Dai’s affidavit that he largely does not demur from Mr Liang’s version of events.

14. Regrettably, the cross-examination of Mr Dai was ineffective. It did not much matter. As will be seen, Mr Dai is associated with the forgery of Mr Liang’s signature on two key documents, being Mr Liang’s consent to the second transaction (see [328]-[332]) and his consent to the transfer of part of Mr Dai’s interest in the property development (see [465]-[466]). In addition, Mr Dai obtained Mr Liang’s approval for the payment of $876,000 to a subcontractor but, in fact, transferred the funds to his own company, Maxmara Trinity.

15. Of perhaps more concern to me as a trial judge is that, during the course of the hearing, Mr Dai prepared and tendered a table which suggested that the payments to Maxmara Trinity were, in fact, reimbursement of payments to another contractor: at [383]-[387]. His effort to mislead the Court is duly noted. In these circumstances, I can attach no weight to his evidence unless it is inherently likely, corroborated by a reliable source or against interest.

16. Ms Zhu was also self-represented. No issues of credit arose during the briefest of cross-examinations. I have not, however, accepted Ms Zhu’s evidence on the primary subject covered by her affidavits, being whether she was appointed as secretary at a meeting attended by herself, Mr Liang and Mr Dai. The contemporaneous documents point strongly the other way: see [162]-[167].

17. Gerrard Toltz gave evidence for the second defendant. Mr Toltz was a pleasant, older solicitor who professed to have limited recall beyond his file. As will be seen, his retainer for the plaintiff was sometimes performed in unusual ways: for example, see [96], [126], [314]-[316]. The cross-examination of this witness did not explore some of these matters adequately or at all. I am limited to what was explored and, essentially, what is revealed by the documents.

18. The third defendant, Gemi 130, and the ninth defendant, Gemi Investments, relied on the evidence of directors George Fleming and Michael Cooper and the Head of Credit, Hamish Tweedy. The fourth defendant, Bridge Street Capital, tenth defendant, Weriton, and eleventh defendant, Saddleback Mountain Estates, relied on the evidence of director Graham Werry. No issues of credit arose.

DOCUMENTS

24. The facts are largely revealed by the considerable amount of contemporaneous documents tendered in this case, being some 9,000 pages of material. I was not able to make sense of some of these documents, for example, at [64], [136]. There remained gaps in documents, for example, at [145].

25. The defendants criticised the plaintiff for the lateness of some of its allegations. To some extent, this may be explained by the plaintiff’s difficulties in obtaining access to the documents which indicated what had happened. Mr Liang and his accountant did not take charge of the plaintiff’s accounting until September 2019, at which time the accounts for the two proceeding financial years had yet to be finalised: see [391]. Mr Liang said his accountant took charge but “things were very messy. A lot of information was missing.” It was not until four months after these proceedings had commenced that the plaintiff’s solicitor asked the former registered agent, SSA Tax Services Pty Ltd trading as “Smart Wealth Advisors” (SWA), to deliver up its files, in particular, any documents in respect of the appointment of Ms Zhu as secretary. The plaintiff’s efforts to obtain files from the solicitor were protracted indeed: see [456]-[467].

26. In short, it does appear to have taken the plaintiff and its solicitors some time and a considerable amount of effort to reconstruct what, in fact, happened. Of course, these problems may have been avoided if Mr Liang had paid more attention at the time. Presumably, no one regrets this more than Mr Liang, who accepted that he was not alert at the time and was not careful enough, “I just did not have this type of experience.”

ONUS AND INFERENCES

27. In a case such as this, where the Court has little reliable evidence, inferences, where available, may prove important; onus may prove decisive. The burden of proof rests on the plaintiff. The standard of proof is the civil standard, being proof on the balance of probabilities but qualified having regard to the gravity of the questions to be determined: Evidence Act 1995 (NSW), section 140(2)t; Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362 (per Dixon J). Further, at 361: “The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found.”

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

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

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

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

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

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

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

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

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

31. If the Court is unable to choose between competing versions, the party on whom the onus lies will not succeed. As Beech-Jones J (as his Honour then was) explained in Neville v Lam (No 3) [2014] NSWSC 607 at [99]: (citations omitted)

[I]n some circumstances a Court may find itself unable to choose between competing versions. In such a case, the party upon whom the burden of proof lies will have failed to discharge it.

See likewise Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34 at [60], citing Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 at 955.

32. The parties submitted that Jones v Dunkel inferences should be drawn in respect of the failure to call various witnesses. I have dealt with these submissions where that witness becomes relevant to a finding of fact: at [114] (Steve Ju), [160] and [196] (Yan (Monica) Su), [167] (SWA) and [338] (Robert Riddell).

33. In respect of missing documents, a party’s failure to produce documentary evidence to corroborate their account, where they might be expected to be in possession of such documents, may give rise to an inference that such documents would not support their account: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 320 (per Windeyer J). The lenders submitted that a Jones v Dunkel inference should also be drawn from the plaintiff’s failure to produce financial statements which recorded the existence of the disputed loans, such that Mr Liang may be taken to have been aware of them. A problem with this submission is that the plaintiff’s books and records were under the control of Mr Dai at the relevant time and incomplete. In these circumstances, whilst the plaintiff bears the onus of proof, its means to prove what happened in the years in which Mr Dai ran the company was somewhat limited.

INITIAL DEALINGS

34. The evidentiary ‘run-up’ to the first transaction is long, comprising three years’ of the plaintiff’s operations. This material was relevant to three things, first, the management and decision-making in the plaintiff company, in particular, the extent of Mr Dai’s authority to enter into the transactions without the knowledge or agreement of fellow director, Mr Liang. Second, Mr Liang’s knowledge and involvement in the plaintiff’s business, in particular, raising finance. Third, the scope of the solicitor’s retainer. Otherwise, the first transaction is considered at [169].

Mr Liang and related entities

35. Mr Liang is a businessman who hails from China but has lived in Australia for many years. Mr Liang made his money importing clothing from China. His first company, New Century Clothing Co Pty Ltd, was incorporated in 1998, followed by a series of related companies with “NCC” or “NCC Fashion” in the company name. This is relevant where email addresses with “NCC” or “nccfashions” indicate that Mr Liang or his employee were copied in, and thus aware of, particular communications: see, for example, at [72].

36. Mr Liang’s business activities were not without incident. In 2003, Mr Liang was successfully prosecuted for, essentially, evading customs duty by understating the price paid for imported clothing. Substantial fines were imposed: CEO of Customs v Liang [2004] NSWSC 1240 (conviction); CEO of Customs v Liang [2005] NSWSC 591 (sentence). Of this, Mr Liang said he “had some issues with the custom because my bookkeeping at that time was not properly done … my record was no good.” That would appear to be an understatement. Mr Liang said he did not appeal the conviction as he did not have money. That may have been an overstatement. The lenders pointed to this as one of many reasons I should attach no weight to Mr Liang’s evidence. I have approached his evidence with caution for the reasons earlier stated. Where the evidence before James J is not before me, and the facts of this case are ‘a world away,’ I have otherwise taken Mr Liang as I have found him in this case and on the evidence before me.

37. In 2013, Mr Liang began to dabble in property development. He incorporated a series of companies to be deployed in this endeavour, the first of which was Ronghai Property Pty Ltd. A director and shareholder in this company was Libing Lin, who I infer was Jack Lin: see [72]. Mr Lin was Mr Liang’s employee, albeit Mr Liang is no longer on speaking terms with him. Mr Lin later liaised with Mr Dai and the solicitor on behalf of Mr Liang.

38. In 2015, Mr Liang incorporated Rose Ives Pty Ltd. Mr Liang is the director and secretary of this company, which is wholly owned by himself and his wife’s company, LV.Esb Pty Ltd. Rose Ives later held Mr Liang’s interests in the North Rocks project.

39. Mr Liang is an experienced businessman familiar with corporations and the lodgement of documents with the Australian Securities & Investments Commission (ASIC). That said, having regard to Mr Liang’s contemporaneous emails, his familiarity with complex finance documents and property transactions does not appear to be well developed.

City Garden and related entities

40. In 2013, the builder was incorporated and traded as “Ming Tian Construction.” Mr Dai was the sole director of the builder. The largest shareholder in the company was the seventh defendant, Maxmara Trinity; Mr Dai and Ms Zhu were equal shareholders of that company. The builder was formerly the fifth defendant but is now in liquidation.

41. In 2015, the plaintiff was incorporated. Mr Dai and Ms Zhu were appointed as directors and became equal shareholders. Mr Dai was also appointed as secretary. The plaintiff was appointed as trustee of The Ming Tian City Garden Unit Trust (the Trust). The units in the Trust were then held by Maxmara Trinity as trustee for the J&A Family Trust, where the initials stand for Julianne and Adam.

42. Other companies associated with Mr Dai were also incorporated in 2015, being Wallis Island, Maxmara and JA International and Crows Nest Property Development Pty Ltd. These companies became involved in finance transactions, generally to provide additional security.

The development

43. North Rocks St Pty Ltd (the owner) owned a development site in North Rocks. The land had the benefit of a development consent to demolish the existing buildings and construct 50 townhouses. The owner had a short-term loan from NWC Finance Ltd of $9.15 million but was in default, with interest running at 66% per annum.

44. In July 2016, Mr Liang was approached by Mr Dai to invest in the North Rocks project. Mr Liang and Mr Dai had met the year before, when Mr Dai was the builder for Mr Liang on a development in Carlingford. Mr Liang was now undertaking a property development in Epping. Mr Dai told Mr Liang that they could buy the North Rocks project at a cheap price, as the owner did not have the capacity to develop the land. Mr Dai said the land would be about $11 million and they needed to purchase the land in cash first. They could then get a construction loan from a bank to cover all of the construction costs. Mr Dai said that he had about $7 million on hand and would allocate 40% of the shares to Mr Liang, so Mr Liang would need to invest about $5 million including stamp duty and other acquisition costs.

45. Mr Liang was amenable to Mr Dai’s proposal but said, “I won’t have much time to look after this project though as I am also busy with other matters. (Mr Liang was referring to his fashion business and the Epping development.) You will need to look after this project and make sure it is a profitable one like the one in Carlingford.” Mr Dai agreed to manage the project, “You just need to invest and we can make good profits together. You will need to invest part of your capital first and I will get my accountant to transfer 40% of my shares in the unit trust to you.”

The solicitor

46. Mr Toltz mainly practices in conveyancing and private lending. He acts for property developers seeking finance to acquire a development site or seeking construction finance to carry out building works. His firm also acts on pre-sales and completion of contracts for sale on the issue of an occupancy certificate and registration of a strata plan. Mr Toltz also acts for financiers in the property development sector, who either lend individually or as part of a syndicate, providing financial accommodation to developers.

46. Amongst the private lenders for whom Mr Toltz has acted over the years is the Gemi group of companies associated with George Fleming. Mr Fleming said that Mr Toltz “acted for, at that time, all our lending. He was … the [solicitor] for every single loan that we did at that point in time.” The Gemi companies involved in these transactions were Gemi Investments (on the first transaction) and Gemi 130 (on the third transaction). The other lenders, being Weriton and Saddleback Mountain (on the second transaction) and Bridge Street Capital (on the third transaction) used different solicitors, albeit Bridge Street Capital also retained Toltz Lawyers on the third transaction in the interests of time.

47. On 11 July 2016, Mr Toltz received a call from finance broker, Andrew Margi, who said he had a client, Mr Dai, who may be interested in buying out NWC Finance’s loan over the North Rocks site. Within a few days, Mr Toltz met Mr Dai. Whatever Mr Dai may have told Mr Liang about the funds he had on hand to buy the North Rocks site, Mr Dai told Mr Toltz “Has $2m to put in … ano[ther] $2m in reserve …”. That is, the only ‘equity’ available appeared to be the funds which Mr Dai had asked Mr Liang to contribute.

48. Mr Toltz said the North Rocks project was unusual in that capital was raised periodically as the project progressed rather than at the time of purchase. I take this to mean that Mr Dai did not have funding in place when embarking on the purchase or development of the site. Mr Toltz’ file notes indicate that, from the outset, he contacted Mr Fleming and Mr Werry in respect of potential finance for the transaction.

49. On 18 July 2016, NWC Finance appointed receivers and managers to the North Rocks property. On 19 July 2016, Mr Liang assembled details of his bank account balances, which Mr Dai provided to the broker, “I got the income proof.” (I note that the income referred to was that of Mr Liang). Mr Dai emailed Mr Toltz, copied to Mr Liang and the broker, authorising Mr Toltz to act on his behalf “for the JV agreement [with the owner] and negotiation of the present deal at North Rocks, Documentation … will be issued from Piper Alderman or similar category firm.” As will be seen, in addition to using the services of Mr Toltz, from time to time Mr Dai also engaged other solicitors, including Piper Alderman and King & Wood Mallesons.

50. On 20 July 2016, Mr Dai provided Mr Liang with Toltz Lawyers’ trust account details, advising “We are using [Mr] Toltz as Lawyer to represent us on the JV deal. Please when you are ready we could put our contribution money towards his trust account and it is only under our instruction the money where it goes.” Mr Dai’s email was copied to Mr Toltz, who presumably then understood that Mr Liang was providing funds for the proposed transaction.

51. On 28 July 2016, Mr Toltz circulated a draft heads of agreement to the owner, copied to Mr Dai and Mr Werry, proposing to pay out NWC Finance in full with finance of $10 million. Presumably, Mr Werry was then considering providing this finance. Mr Dai informed Mr Toltz that the plaintiff would be the company which would act as the developer of the land and be obliged to meet financial obligations for the benefit of the owner under the agreement.

52. On 4 August 2016, Mr Toltz sent Mr Dai a costs disclosure and costs agreement for his firm to act for the plaintiff on the North Rocks project. The client referred to in the document was the builder. Mr Toltz said that he initially thought that Mr Dai would use the builder for the development project but, as matters progressed, Mr Dai chose to use the plaintiff instead. Mr Toltz therefore considered himself to be retained by the plaintiff. The scope of works referred to in the costs disclosure and costs agreement was “to assist in financing, acquisition of development rights, sale of units and incidental matters relating to the [North Rocks development].” The terms of the retainer were wide. Toltz Lawyers opened a file for the plaintiff in relation to the North Rocks development. Mr Toltz had the conduct of the file, assisted by employed solicitor, Garth Andrews.

53. After his initial retainer by the plaintiff in 2016, Mr Toltz also acted for Mr Dai in a variety of capacities: for him personally, for him as a director of companies, for various companies with which he is associated and for various trusts with which he is associated. Mr Dai also had dinner with Mr Toltz every couple of months.

Liang becomes an investor

55. According to a Deed of Agreement executed sometime later (see [128]), on 1 August 2016, Rose Ives entered into a contractual agreement with Maxmara Trinity to invest $4 million in the North Rocks project. In return, Rose Ives was allotted 40 units in the Trust. On 3 August 2016, Maxmara Trinity transferred 40 units in the Trust to Rose Ives. Ms Zhu ceased to be a director of the plaintiff, leaving Mr Dai as sole director and secretary.

56. Mr Liang was not allocated any shares in the plaintiff and did not become an officeholder “because I was supposed [to be] a silent partner only and Adam was supposed to be managing the project by himself." Mr Dai agreed that Mr Liang was not then actively involved in the project; Mr Dai provided regular updates by WeChat about the progress of the development and any issues that the project was facing.

57. On 8 August 2016, Mr Liang transferred $3 million to the solicitor’s trust account. Fairly obviously, Mr Liang was the source of the funds, both in light of Mr Dai’s email to the solicitor of 20 July 2016 (at [51]) and given that the deposit was recorded in the solicitor’s trust account bank statement as “From Victor Liang.”

58. On 10 August 2016, Mr Dai emailed Mr Toltz, “I will be the builder and my construction contract with [the owner] will be $22 million ex GST.” The email was copied to Richard Winter of King & Wood Mallesons, who was acting for the builder in the review and settlement of documentation. Mr Dai later instructed Mr Toltz that Mr Winter was to handle all negotiations and communications with NWC Finance and the owner’s solicitor on behalf of the plaintiff, whilst Mr Toltz was to “still represent me in a way of preparing all the relevant legal documents for 2^nd mortgage, deed of development agreement etc.” Toltz Lawyers’ wide retainer (referred to at [53]) was thereby curtailed.

59. On 10 August 2016, Mr Toltz obtained a company search for the plaintiff: Mr Dai was the sole director; the company was equally owned by Mr Dai and his wife. That is, consistently with Mr Liang’s role as a “silent partner,” his interest in the North Rocks development was not revealed by the company search, where Rose Ives held units in the Trust only.

60. Later that evening on 10 August 2016, Mr Dai sent Mr Liang a draft development agreement between the plaintiff and the owner, for review. Mr Dai set out the current terms of the deal. The owner now wanted $10.6 million, given additional interest now owing to NWC. When taking into account other elements of the deal, Mr Dai advised that they were paying an extra $400,000 “to get the deal done … And because you trust me in this deal, I am happy to wear this extra $400,000 on my side and making sure you are not paying more than $4,000,000.” Mr Dai also advised Mr Liang:

In order to meet the 10.6 million payout, I have been able to persuade the current NWC borrower (sic?) for additional … term … on the $1,600,00[0] with [the builder] as the borrower and guarantees put North Rocks site as still the first mortgagees.

So we are contributing $9 million (my $6million and plus $3million from yours in lawyers trust account) to reduce the loan from NWC, with no application fee only the interest capitalised on the loan, which I will be liable to pay the interest.

The extra $1 million you got, we could be using as cash-flow for the development project.

I will cover the $800,000 in 3 months plus the repayment of the loan for NWC.

So in 3 months we could refinance to CBA, or I could use my money from selling Wallis Island to cover that, Please do not worry.

I think it is a really good deal for us and the construction cost I could fix at $22 million so with no risk for you.

61. The development deed attached to Mr Dai’s email proposed inter alia that the plaintiff would arrange a “Second Mortgage Loan” to reduce the amount owing to NWC to $7.7 million. That is, the Second Mortgage Loan was some $3 million, which appears to have been the funds in Mr Toltz’s trust account provided by Mr Liang. On 15 August 2016, Mr Liang emailed Mr Dai with “some points for consideration,” setting out his review of the development agreement.

Mischaracterising Liang’s investment

62. On 11 August 2016, Mr Winter enquired of Mr Toltz as to who the borrower of the Second Mortgage Loan should be. Whilst the documents provided by Mr Toltz proposed that the borrower would be the plaintiff, Mr Winter suggested that the borrower should be the owner, “if the payment is being made on behalf of North Rocks [St], then North Rocks [St] has to provide the guarantee to Crows Nest Property (lender) secured against its North Rocks property”. Mr Toltz agreed, “as Adam is lending the funds, I have take up your response and amended the Loan Agreement … removing any requirement for guarantees. This simplifies the independent advice aspect.” On 15 August 2016, Mr Toltz emailed Mr Winter, confirming “Adam is providing the $3m by the Second mortgage.” On 16 August 2016, Mr Toltz asked Mr Dai “let me know if you require the funds from Graham Werry ($2.6m net) to release part of your $3m (+ some expenses) … Graham has another place to put the funds and needs to know.”

63. A curious feature of these emails is that the $3 million was provided by Mr Liang, not by Mr Dai or his company, Crows Nest Property Development. Further, it appears to have been contemplated that Mr Dai would obtain finance from Mr Werry in order to release the $3 million for use himself.

64. On 18 August 2016, Mr Liang transferred a further $1.6 million to Mr Dai. The transfer was referred to in a Deed of Loan dated 15 August 2016, but likely prepared in August 2017 by Mr Dai’s solicitor. The Deed of Loan was between Rose Ives (as lender), the builder (as borrower) and Mr Dai as guarantor. According to the recitals, Rose Ives lent the funds to the builder for 3 months, to be used for the purpose of partaking in the North Rocks development. The Deed of Loan was executed by Mr Dai for the builder, but not by Rose Ives. As I read it, Mr Liang was lending the builder the additional $1.6 million payable to the owner. The commerciality of this arrangement is not apparent. Against this, Mr Liang said the funds were simply part of his 40% of the purchase price of the North Rocks site, being $11.3 million under the contract attached to the Development Deed; Mr Dai was to cover the remaining 60%.

65. On 19 August 2016, the plaintiff and the owner executed the Development Deed. The owner granted a call option to the plaintiff to purchase the North Rocks site. The plaintiff agreed to reduce the owner’s debt owed to NWC Finance by $7.7 million by the Second Mortgage Loan: clause 4.1(a). Toltz Lawyers used the $3 million in its trust account to purchase a bank cheque payable to NWC Finance, which Mr Toltz handed over on settlement. The Second Mortgage Loan was provided by Crows Nest Property Developments. The owner granted a mortgage over the North Rocks property to Crows Nest Property Development, second in priority to NWC Finance. Mr Toltz acted for Crows Nest Property Development in relation to the mortgage.

66. Mr Liang was not aware that the $3 million which he transferred to Toltz Lawyers’ trust account was used by Crows Nest Development as a loan to the owner, nor that Crows Nest Development was granted a second mortgage by the owner. Although Mr Liang had reviewed the development deed, including the clause in respect of the Second Mortgage Loan (see [61]), the identity of the lender was not referred to in the deed. (The Second Mortgagee was defined as Crows Nest Development in the amended Development Deed dated 1 December 2016, but not in the initial deed.)

67. It is unclear why Mr Toltz proceeded on the basis that the $3 million was provided by Mr Dai or Crows Nest Development. Presumably, the solicitor was instructed to do so by Mr Dai. While there is a hint in the contemporaneous documents that Mr Liang did not then wish his identity to be known (see [72]), the manner in which the $3 million advanced by Mr Liang was provided to the owner is a little unusual.

68. On 21 August 2016, Mr Toltz invoiced the plaintiff for acting in “protracted negotiations over many weeks” in respect of the development agreement “and associated loan.” Mr Dai forwarded Mr Liang “some legal documents” (I do not know which documents) together with Mr Toltz’ invoice “for City Garden to pay.” Mr Dai thanked Mr Liang for his support and trust, adding:

Please deposit the $1 million dollar next week because we need to do more presales and starting to do the construction certificate from now on.

69. Mr Liang transferred $1 million to the plaintiff’s bank account, bringing the total funds advanced in August 2016 to $5.6 million.

70. The plaintiff seeks no relief in respect of this transaction. As I understand it, the mischaracterisation of Mr Liang’s investment in the North Rocks project goes to two matters. First, notwithstanding that the $3 million was fairly obviously from Mr Liang, the solicitor readily proceeded on the basis that the funds came from Mr Dai and documented a loan from Mr Dai’s company. Second, and perhaps more relevant for my purposes, Mr Dai provided Mr Liang with the transaction documents, both in draft and, it would appear, after the transaction had completed.

City Garden acquires the site

71. In October 2016, Mr Dai decided not to exercise the call option in respect of the North Rocks property. Mr Toltz informed the owner’s solicitor that the property needed to be sold at auction. Mr Dai appointed CBRE as agents for sale. On 2 November 2016, the solicitor rendered an invoice to the plaintiff for advice in relation to “the finance and direction of the North Rocks project.” The solicitor’s retainer had broadened again, from the more confined remit of advising the plaintiff in respect of the development agreement alone: see [58].

72. In late November 2016, the plaintiff and the owner entered a settlement agreement, withdrawing the North Rocks property from market and agreeing to split CBRE’s fee. Mr Toltz prepared an amended Development Deed.

73. On 1 December 2016, at the request of Mr Lin, Mr Toltz answered a series of questions in relation to the amended Development Deed, copied to an email address beginning “nnccfash.” Mr Toltz did not then appear to know whose email this was, noting “no name supplied.” For reasons earlier stated, I take it to be Mr Liang’s email. It is curious that the plaintiff’s solicitor was not told who the recipient of these (confidential and privileged) communications was. Perhaps, Mr Liang did not want his identity revealed. Presumably Mr Dai gave instructions to the solicitor to provide the information and documents sought. The focus of the questions was on six townhouses to be provided to the owner under the amended Development Deed; Mr Liang was likely provided with a copy of the document.

74. On 1 December 2016, the amended Development Deed was executed and a contract of sale was exchanged. In short, the owner agreed to sell the North Rocks property to the plaintiff for $10 million plus six townhouses. Completion of the purchase was to take place on 24 January 2017. As a deposit of only $1,000 had been paid, the balance of $9,999,000 was then due.

75. On 14 December 2016, Mr Toltz rendered his invoice to the plaintiff in respect of the development agreement. Mr Lin continued to ask various questions of Mr Toltz in relation to the transaction and, on 19 December 2016, forwarded various documents to Mr Liang. On 20 December 2016, Mr Lin emailed Mr Toltz with further questions in respect of the purchase, adding: “Any north rocks issues, please CC nnccfash …”

Acquisition finance – February 2017 – two mortgages – $10.93 million

76. On 19 January 2017, five days before completion, the plaintiff received a letter of offer for a six-month loan of $8.25 million, to assist in purchasing the North Rocks property. The loan – ultimately provided by Kenxue Pty Ltd – was to be secured by guarantees from Mr Dai and his wife, the builder, Maxmara and JA International, Maxmara Trinity, Wallis Island and Crows Nest Property Development. The plaintiff also signed a term sheet with Weriton in respect of a second mortgage facility of $2.68 million to supplement this funding, pending the plaintiff’s “satisfaction of requirements for a construction facility from one of the major banks.” This loan was to be guarantee by Mr Dai and the builder.

77. That is, rather than Mr Liang and Mr Dai contributing 40% and 60% respectively of the purchase price of the North Rocks site, the purchase price would be wholly funded by debt. This was notwithstanding that Mr Liang had already provided $5.6 million. Mr Liang understood that Mr Dai was taking a loan for himself, for his companies and his wife “because he did not have the money. … He used the company name to borrow money.” Mr Liang spoke to Mr Dai about this, “I told him off. … I said to him, ‘you were hurting the company.’”. Mr Dai said he was sorry but he was a bit short of cash and had been trying to sell his property at Wallis Island “but the price is not right.” Mr Dai said he would put his cash back into the property once his cashflow got better. Mr Liang said “OK.”

78. Perhaps consistent with Mr Liang’s disquiet, on 23 January 2017, he emailed Mr Dai:

Could you add me as one of the DIRECTOR of City Garden …

I like to understand the situation related to North Rocks project such as removal of Caveat, add caveat, or ANY refinance or mortgages.

And Please also let solicitor email me as well, any emails related with this project.

Because so many news around, it made me confusion.

79. Mr Dai responded the next day, 24 January 2017, “There is no problem with add you as of the director” but he needed to check whether the Commonwealth Bank was agreeable. Mr Dai explained in his email:

In worse case, I will add you after the refinance of first mortgage to CBA for construction loan.

Right Now, we need to take first mortgage and second mortgage on north rocks project due to my wallis island has not been sold in due time and we need to settle north rocks. Although, I’ve put my wallis island and home as security to get the loan from financier, and all that fees and interest will be on myself and nothing to do with City Garden…

Let me get everything settle down with CBA construction loan and sell the wallis island in 6 months time.

80. Mr Dai also provided Mr Liang with a letter from Weriton’s solicitor in respect of the proposed second mortgage and the proposed mortgages over the North Rocks and Wallis Island properties. Mr Liang let the matter of his directorship drop, “because at that time, I still trusted him a lot.”

81. On 30 January 2017, Mr Toltz received an enquiry from the first mortgagee’s solicitor; they discussed Rose Ives’ interest in the Trust. Mr Toltz contacted Mr Dai in respect of the units held by Rose Ives. Mr Toltz’ file note records, “adv[ised Rose Ives] is a passive investor.” That is, although Mr Toltz had already received information which indicated that Mr Liang had provided $3 million in relation to the acquisition of the North Rocks site, the solicitor was now also aware that Rose Ives held units in the Trust. Presumably, the solicitor worked out that Mr Liang and Rose Ives were connected.

82. According to Mr Toltz, Mr Dai also said that Rose Ives was not prepared to give a guarantee. Mr Toltz said he passed this information onto the solicitor acting for the first mortgagee. Mr Toltz’ file notes do not record being told that Rose Ives was not prepared to give a guarantee, nor did Mr Toltz appear to have good recall of anything not in his file notes. But I accept Mr Toltz’ evidence, where Rose Ives was initially proposed to be a guarantor in the transaction documents but was struck-out in the execution copies.

80. Less clear, however, is whether Mr Liang was asked to give a guarantee at the time. As I read Mr Dai’s email to Mr Liang of 24 January 2017, Mr Dai reassured Mr Laing that the obligations and expenses associated with the two loans “will be on myself and nothing to do with City Garden”. More likely, Mr Dai did not ask Mr Liang to guarantee the two loans at the time.

81. Mr Toltz said that, because of his conversation with Mr Dai, he wanted to make sure that Mr Dai still had proper authority to instruct him. On 31 January 2017, Mr Toltz obtained a company search for the plaintiff, which confirmed that Mr Dai was the sole director and secretary. Mr Toltz was satisfied that Mr Dai had authority to instruct him on behalf of the company. Mr Toltz also rendered an invoice to the plaintiff in respect of services rendered in acting on the purchase of the North Rocks property.

82. On 1 February 2017, Mr Dai executed transaction documents in respect of a loan from Kenxue to the plaintiff of $8.25 million “to assist with the purchasing of the [North Rocks] property.” The loan was guaranteed by Mr Dai, Ms Zhu, the builder, Maxmara and JA International, Maxmara Trinity, Wallis Island and Crows Nest Property Development. Mr Toltz rendered a further invoice to the plaintiff in respect of “advising you on funding for this project.” The description of the services provided by the solicitor in its invoice suggests that the advice was not strictly legal.

83. On 6 February 2017, the plaintiff completed the purchase of the North Rocks property. The mortgages granted to NWC Finance and Crows Nest Property Development were discharged. The plaintiff granted a mortgage to Kenxue and a second mortgage to Weriton. Wallis Island and Mr Dai granted mortgages to Weriton over three additional properties. The loans from Kenxue and Weriton were both due to expire on 2 August 2017.

84. The plaintiff does not seek any relief in respect of these two loans. That is, although the funding of the acquisition of the North Rocks site was now proceeding on a basis other than what Mr Liang and Mr Dai had initially discussed, Mr Liang was appraised of the means by which Mr Dai sought to finance the purchase of the land and was amenable to this change. This may explain, however, why these two loans were to be secured by Mr Dai and his companies rather than by Mr Liang.

Solicitor instructed to keep Liang informed

88. Mr Liang engaged a lawyer to do a title search on the North Rocks property. Perhaps a further indication of Mr Liang’s disquiet, on 8 February 2017, Mr Dai sent an email to Mr Toltz and Mr Andrews, copied to Mr Liang and Mr Lin: (emphasis added)

Please cc all the email correspondence with regarding city garden Australia pty ltd to Jack Lin and Victor as they are important shareholders of the trust.

89. Both Mr Toltz and Mr Andrews immediately and separately responded, “Noted.” Also on 8 February 2017, Mr Lin sent a more specific request to Mr Andrews, including “Please email me first mortgage and second mortgage documentary to us.” Mr Andrews promptly replied, copied to Mr Liang, noting that his office had already forwarded copies of all loan documents that morning. That is, as for Mr Liang’s initial advance of $3 million, he was provided with details of the transaction, both before and after completion. The solicitor did not, however, thereafter comply with Mr Dai’s instruction to copy emails regarding the plaintiff to Mr Lin and Mr Liang.

90. Ms Zhu was then doing a marketing campaign for the North Rocks development, including arranging a display kiosk in a shopping centre, obtaining the necessary insurance for the kiosk, and providing logos and the architect’s details to prepare computer generated images. On 22 and 23 February 2019, Mr Dai and others exchanged emails in respect of the details of a 3D model of the project. These emails were copied to Mr Liang and Mr Lin. It would appear that Mr Liang was then interested to be involved in all communications in respect of the project. Mr Dai said that Mr Lin also attended the North Rocks site and provided Mr Liang with updates.

91. On 24 February 2017, Rose Ives lodged a caveat over the North Rocks property, claiming an equitable interest in the property on the basis that Rose Ives “contributed 100% of the money in relation to the purchase of the land.” Certainly, it would appear that Mr Liang had contributed the only equity to the acquisition of the property. Mr Liang’s disquiet with the change of funding arrangements is, again, apparent.

92. Consistently with this, on 9 May 2017, Mr Liang’s employee, Weili Xu, was appointed as a director of the plaintiff. According to a later email from Mr Dai, on 13 June 2017, NCC Fashion Group Pty Ltd agreed to lend a further $1 million to the plaintiff. Mr Xu’s appointment was short lived; he left Mr Liang’s employee, ceasing to be a director of the plaintiff on 19 June 2017. Notwithstanding this, Mr Liang transferred $1 million to the plaintiff on 1 August 2017.

Solicitor’s ongoing roles

93. The plaintiff embarked on the development of fifty townhouse on the North Rocks site. Toltz Lawyers continued to act for the plaintiff in three roles. First, Toltz Lawyers acted for the plaintiff on all contracts for sale of lots in the development. Second, the plaintiff became embroiled in litigation with Kenxue; Toltz Lawyers was retained by the plaintiff in relation to the proceedings. Mr Toltz said that Kenxue alleged that the plaintiff was required to pay significant additional costs if the loan was not repaid by the due date of 2 August 2017. This created an urgent need for the plaintiff to find another financier to refinance the loan.

94. Third, and relatedly, Mr Toltz’ file notes records communications with Mr Dai from 28 June 2017 on in respect of refinancing the first and second mortgages. It would appear that the solicitor was again giving advice in relation to finance, as he had earlier done. The notes include communications with Mr Fleming (“explained the position”) and references to Mr Werry (“Graham as a fall back for bal[ance] of [first mortgagee’s] debt if Adam’s source not adequately verified/verifiable”). On 29 June 2017, Mr Toltz “Reviewed Werry Term Sheet.” Various suggestions were noted, including the plaintiff borrowing funds with “The Guarantors of the initial loan to be the Guarantors (Adams connection).” As I read these notes, Mr Toltz apprehended that Mr Dai had a “source” or “connection” who may be able to provide “additional equity” or a guarantee. I take this to be a reference to Mr Liang, albeit Mr Toltz does not appear to have been clear on his name.

95. Mr Toltz recalls that Mr Dai told him in July 2017 that he needed to borrow more funds and asked whether Mr Toltz knew anyone who might be interested to lending to him, such as Mr Fleming. Mr Toltz said he would see if Mr Fleming was interested and prepare a finance submission, but also said that Mr Toltz would be acting for Mr Fleming and his companies for any loan obtained, “He has been a client of mine for years so I will act for him and not you. Is that okay?” Mr Dai said that was fine.

96. It is not clear precisely when this conversation took place. Mr Toltz’ file notes continued to record his communications with Mr Dai in respect of finance, including finance from Mr Fleming. Over time, the focus of Mr Toltz’ files notes shifted from the plaintiff to Mr Fleming. The solicitor continued to maintain the same set of files notes notwithstanding that he began the files notes in his capacity as the solicitor for the plaintiff but at some point was now acting for Gemi. The files notes are consistent with the solicitor acting for both the plaintiff and Gemi. It was not until 28 July 2017 that Toltz Lawyers opened a file for Gemi in respect of the proposed loan, being a few days before completion of the refinance: see [121]. The fluidity of the solicitor’s role in acting variously for the borrower and the lender continued in some of the transactions which are the subject of the claim against that firm.

Liang becomes a director

97. In July 2017, Mr Liang said Mr Dai told him that the repayment date for the loans from private lenders was approaching. Mr Dai could not sell his Wallis Island property and asked whether Mr Liang could lend Mr Dai some money to repay the loans. Mr Liang said he could lend about $3 million but that was all. However, Mr Liang also said that Mr Dai needed to add Mr Liang as a director and shareholder of the plaintiff. In addition, Mr Liang said “I need to approve any decision you make for City Garden in the future.” Mr Dai is said to have agreed, adding that it would help the application for a construction loan if Mr Liang became a director of the plaintiff, as it would be easier for the bank to accept their financial situation.

98. This conversation was described in Mr Liang’s third affidavit, sworn a year after these proceedings had commenced. Mr Liang said that he made no notes of the conversation and gave his evidence relying on memory. Further, he only remembered the approximate details of the conversation, “It’s impossible I will remember everything.” These matters reduce the weight that I am prepared to attach to Mr Liang’s evidence of this conversation. Against this, Mr Dai did not dispute (or even address) this conversation in his substantive affidavit.

99. Mr Liang said he felt that he needed to have more control of the plaintiff as he had been putting more and more cash into the company in order to keep it going. Mr Liang said that one of the reasons that he became a director was that he had put in so much money, “This is a must.” Mr Liang agreed that he did not describe, in his affidavits, a conversation in which he said that they needed to change the arrangement as he did not want to be a silent partner anymore, “I did not need to say that because once I put in the money, then of course, I would look after my own fund there. That’s common sense.”

100. On 8 July 2017, Mr Dai pressed Mr Liang to complete the forms to become a director, “Please signed the forms and scanned back to me ASAP as our CBA formal loan offer will be issue[d] really quickly.” On 12 July 2017, Form 484s were lodged with ASIC in respect of Mr Xu’s resignation and Mr Liang’s appointment as a director, Mr Liang has remained a director of the plaintiff ever since.

Actual authority

101. It is timely to consider any limits imposed on the authority of the plaintiff’s directors, either by the constitution or the trust deed, where the plaintiff contends that Mr Dai was not permitted to execute finance documents absent a resolution of the board. The plaintiff’s constitution provided:

directors – powers

11.1   The business of the company is to be managed by or under the direction of the directors.

11.2 The directors may exercise all the powers of the company except any powers that the Corporations Act or this constitution (if any) requires the company to exercise in general meeting.

102. The constitution did not require the company to exercise any powers in general meeting, for the purposes of clause 11.2. As to the requirements for a meeting of directors, the constitution provided that a director could call a meeting of directors by giving reasonable notice to other directors: clause 22.1. The quorum for a meeting of directors was 51% of the directors: clause 24.1; Schedule 4. A resolution of the directors was passed if the majority of the votes cast by directors was in favour of the resolution: clause 25.1.

103. It will be recalled that the plaintiff was trustee of the Trust. Clause 19(e) of the Unit Trust Deed provided: (emphasis added)

19   TRUSTEE OBLIGATIONS

The Trustee: -

…

(b)   Shall keep or cause to be kept proper Minutes of its decisions relating to the Trust Fund.

…

(e)   In exercising any of the powers or discretions of the Trustee hereunder, the Trustee, where it is a company shall act on the resolution of the Board of Directors made in accordance with the Constitution … All such resolutions shall be evidenced in writing and held with the records of the Trust.

As will be seen, the obligation for the directors to act on resolutions recorded in writing was observed in the breach.

104. Clause 27(s) of the Unit Trust Deed also provided:

27   POWERS OF TRUSTEE GENERALLY

… the Trustee in its absolute discretion shall have and may exercise the following powers in respect of the Trust Fund:

…

(k)   The Trustee may borrow or raise money from time to time for the purposes of the Trust Fund without limitation … The Trustee shall further have power to give security over the Trust Fund or any part of it for any such raising or borrowing. …

105. As such, when Mr Dai was the sole director of the plaintiff, he had authority to make decisions on behalf of the company in respect to raising finance. The constitution of the plaintiff company did not require resolutions on this subject to be passed at a general meeting. The plaintiff did not observe the requirements of the Trust Deed, that is, keeping a proper minute of Mr Dai’s decisions as the sole director of the company when exercising the power as trustee to borrow or raise money under clause 26(k) of the Unit Trust Deed.

106. It does appear that Mr Liang was initially content to be a silent investor and to leave the North Rocks project to Mr Dai’s management, where Mr Liang had previously had a profitable experience working with Mr Dai on the Carlingford development. Mr Liang was, however, watchful of Mr Dai’s activities and tasked staff, being Mr Lin and Mr Xu, to variously obtain information about the project from Mr Toltz or to become a director of the plaintiff. However, the funding arrangements for the project strayed from those initially discussed. Mr Liang provided more funding than had been discussed. He was now being asked to provide further funds. Mr Dai had been unable to provide his portion of funding, other than by obtaining loans secured inter alia over the plaintiff’s property. I infer that Mr Liang was initially reluctant to become a director himself. As his investment in the North Rocks project increased, Mr Liang overcame that hesitation. He was no longer content to be a silent investor. This was hardly surprising in the circumstances.

107. Clause 11 of the constitution is in the same terms as section 198A of the Corporations Act 2001 (Cth). As I observed in In the matter of Hot Frog Pty Ltd [2022] NSWSC 6 at [82], while section 198A of the Corporations Act does not confer authority on a single director, directors may nevertheless make ‘informal decisions’ by a “meeting of the minds” which have the effect of a resolution passed in a duly convened meeting. Whether there was any such decision is a question of fact in each case: Roden v International Gas Applications (1995) 18 ACSR 454 at 456 (per McClelland CJ in Eq); In the matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332 at [122] (per Black J).

108. Where the plaintiff now had two directors, the question is whether the directors agreed – notwithstanding the absence of any formal resolution – that Mr Dai had authority to enter into the finance transactions without consulting Mr Liang. The very matters which prompted Mr Liang to become a director suggest that he was no longer content to leave financing decisions to Mr Dai alone. I accept that Mr Liang discussed the matter with Mr Dai. Mr Dai was likely aware, as a result of that discussion, that he could no longer make such decisions without conferring with his fellow director; indeed, Mr Dai had conferred with Mr Liang on this subject even before he became a director.

109. I do not accept the solicitor’s submission that Mr Dai’s email instruction to the solicitor on 8 February 2017 – to copy all email correspondence regarding the plaintiff to Mr Liang as an important unitholder – meant that Mr Dai had authority to act on the company’s behalf and only tell Mr Liang afterwards what he had done. The email was sent before Mr Liang became a director. The suggested authority does not arise from the text of the email. Further, if Mr Toltz had complied with Mr Dai’s instruction, Mr Liang would have been copied on communications from the inception of instructions on any particular issue to its conclusion, giving Mr Liang ample opportunity to intervene if he were not agreeable with what was then unfolding.

110. As to whether Mr Dai agreed that Mr Liang had to approve any decision Mr Dai made for the plaintiff, I consider it likely that Mr Dai understood and agreed that he was not at liberty to embark upon finance transactions without discussing the matter with Mr Liang and making a decision together and I so find. The Unit Trust Deed required such decisions to be documented in a resolution. Even if this formal requirement was not observed, the directors did need to make a decision by a ‘meeting of the minds’ on the subject That is, Mr Dai did not have actual authority to make such decisions alone, without consultation with his fellow director.

Liang meets private lender

111. On 16 July 2017, Mr Toltz emailed Mr Dai seeking an update on the application to the Commonwealth Bank, as Mr Toltz wanted to finish a submission to Mr Fleming. Mr Dai replied that approval was imminent. Mr Toltz asked Mr Dai, “How much should we ask for from George? … 8.25m + his interest and fees, legals, brokerage + ???” Although Mr Toltz was going to be acting for Gemi on the proposed loan, he continued to communicate with Mr Dai as if he was also acting for the plaintiff. Mr Toltz arranged a meeting with Mr Dai and Mr Fleming on 21 July 2017.

112. On 20 July 2017, Mr Liang was asked by Mr Dai to attend a meeting with Mr Fleming. Mr Dai said he needed to get some loans from Mr Fleming, who was a private lender. Mr Liang queried whether he needed to be present, “I do not like to deal [with] these private lenders as they charge very high interest rates.” Mr Dai assured Mr Liang that Mr Dai would be borrowing the funds and the loans would have nothing to do with Mr Liang, but Mr Fleming would have more confidence to lend money after meeting with Mr Liang as Mr Dai had told him that Mr Liang had strong financial backing. I note that the contemporaneous documents contain several examples of Mr Dai (or his broker) telling prospective lenders of Mr Liang’s wealth, apparently as a way of giving comfort and enhancing Mr Dai’s prospects of obtaining a loan: see, for example, at [307], [311]. Mr Liang agreed to attend.

113. On 21 July 2017, Mr Toltz’ file note records a meeting with Mr Dai, Ms Zhu, Mr Liang, “Steve” and Mr Fleming. Mr Toltz said the meeting was to talk about refinancing. This was the first time that he or Mr Fleming had met Mr Liang. Mr Toltz was not then aware that Mr Liang had become a director of the plaintiff but knew that he was involved as a unitholder in the Trust.

114. Mr Liang brought his friend and business partner, Steve Ju. The lenders submitted that a Jones v Dunkel inference should be drawn from the plaintiff’s failure to call Mr Ju. It is not necessary for a party to call an unnecessary witness: Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474 at 490 (per Lockhart, Gummow and Lee JJ). The plaintiff seeks no relief in respect of this transaction. Given the factual complexity of this case, the number of transactions and potential witnesses who could have been called, I do not consider that Mr Ju was sufficiently significant overall to be regarded as a necessary witness. I decline to draw the inference.

115. According to Mr Liang, the meeting lasted for about 15 minutes. Mr Liang did not recall exactly what was discussed, and recalled nothing being mentioned regarding any loan or proposed loan. Mr Liang said the meeting was “a social thing. Nothing was signed. No promise whatsoever. … we did not discuss a loan. … So, the conversation, nothing much. Was just a social conversation about business and something like that and left quite quickly.” Mr Liang said that the word “loan” was not mentioned.

453. On 27 April 2020, Piper Alderman replied, now acting for Toltz Lawyers, which acted for Gemi 130 and Bridge Street Capital. As the plaintiff had failed to repay the loan on 15 April 2020, the borrower had irrevocably appointed the lenders as its attorney. In that capacity, the lenders had appointed Toltz Lawyers as the plaintiff’s solicitor to act in relation to the pending sales of a number of properties owned by the plaintiff at North Rocks. Toltz Lawyers required its files in order to fulfill those instructions and thus was unable to deliver them up. As such, Ma & Co ought disregard any instructions given by Mr Liang with regard to the sales. This was also said to have the effect that instructions previously given to Ma & Co by the plaintiff were terminated.

These proceedings

462. On 29 April 2020, these proceedings were commenced. The defendants were then Mr Dai, Toltz Lawyers, Gemi 130, Bridge Street Capital, the builder, Wallis Island and Maxmara Trinity. Interlocutory relief was sought to restrain Mr Toltz from acting on behalf of the plaintiff and for delivery up of the solicitor’s files. Orders were also sought to restrain Gemi 130 and Bridge Street Capital from acting on the third transaction documents of 15 October 2019; their caveat was also sought to be removed on the condition that the plaintiff paid the moneys sought to be secured into Court. As final relief, a declaration was sought that the third transaction documents were void, together with damages.

463. On 1 May 2020, the first of many lot sales were completed, with the proceeds of sale deployed to pay down the Westpac loan. Toltz Lawyers continued to act on the sale of the lots in the North Rocks development. The plaintiff’s solicitors proceeded to request files and documents in respect of the various transactions now the subject of these proceedings, including from the solicitors who had given independent advice to Mr Dai and Ms Zhu, being Ms Yang and Mr Holt.

464. In July 2020, the plaintiff filed a statement of claim adding further defendants: Ms Zhu, Gemi Investments, Weriton, Saddleback Mountain Estates, Alice Yang & Associates, Piper Alderman, Mr Holt and Maxmara and JA International. Additional declaratory relief was now sought in respect of the first and second transactions, in particular, that the transaction documents were void ab initio insofar as they related to the plaintiff. Further, a declaration was sought that Ms Zhu was not validly appointed as a secretary of the plaintiff.

465. Since July 2020, Mr Dai had been seeking to transfer 20 units in the Trust from Maxmara Trinity to AUX Real Estate. Mr Liang was not amenable to the transfer. The plaintiff’s solicitors communicated repeatedly with Mr Dai, setting out the relevant procedure to transfer units under the Trust Deed and requesting a transfer notice. On 28 July 2020, Mr Dai provided a unit transfer form, executed by Maxmara Trinity and AUX Real Estate. The plaintiff’s solicitor advised that the transfer was not valid as it did not comply with the procedure in the Trust Deed; a written transfer notice must first be served on the plaintiff, specifying the units and the price. Mr Dai took issue with this, suggesting that the procedure did not apply where AUX Real Estate was an existing unitholder, to which the plaintiff’s solicitors responded that it was not. There the matter lay.

466. On 11 September 2020, the plaintiff’s solicitors wrote directly to AUX Real Estate, enquiring whether the transfer had been completed. AUX Real Estate advised that the transfer had been completed on 22 July 2020 and provided the executed transfer form, bearing the signature of Mr Liang certified by Ms Yuan JP on 28 July 2020. Mr Liang did not execute these forms. The plaintiff’s solicitor promptly informed AUX Real Estate that the signature of Mr Liang had been forged and the matter had been reported to NSW Police. The units were cancelled accordingly.

467. It was not until 12 October 2020 that Toltz Lawyers provided the plaintiff with access to its files; this was not for want of effort on the part of the plaintiff’s solicitors. In June 2021, Maxmara and JA International went into external administration. In July 2021, the builder went into liquidation. In September 2021, receivers and managers were appointed to Maxmara Trinity. In December 2021, Westpac was paid out and its mortgages discharged.

468. In May 2022, the proceedings against Mr Holt were resolved by consent. In June 2022, the proceedings against Ms Yang were also resolved. The proceedings were transferred to the Commercial List. In December 2022, the proceedings against Piper Alderman were resolved.

DECLARATORY RELIEF

469. The plaintiff seeks a declaration that Ms Zhu was not validly appointed as the secretary of the company. While the plaintiff has established that Ms Zhu’s appointment as secretary on 8 November 2018 was not authorised, it does not necessary follow that a declaration should be made to this effect. The Court may exercise its discretion to refuse relief if the result on the proceedings will be of little practical value: PW Young QC, Declaratory Orders (Butterworths, Second Edition, 1984) at 703; The Dairy Farmers Co-Operative Milk Company Ltd v Commonwealth (1946) 73 CLR 381.

470. Within three weeks of Ms Zhu’s appointment, Mr Liang was made aware of the fact. I have found that Mr Liang he did not have full knowledge of the material facts which led to Ms Zhu’s appointment, such that it cannot be said that he, as a director of the company, ratified his co-director’s appointment. Mr Liang finally removed Ms Zhu in February 2020, when it became apparent that Mr Toltz proposed to have further loan documents executed by Mr Dai and Ms Zhu, even though Mr Liang had made plain that he did not agree to the loan. Overall, I consider that it remains appropriate to make the declaration sought, to record the true position.

COMPENSATION FROM DIRECTOR

471. Sections 180 to 182 of the Corporations Act are civil penalty provisions. Section 1317H(1) of the Corporations Act provides:

(1)   A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if:

(a)   the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and

(b)   the damage resulted from the contravention.

The order must specify the amount of the compensation.

472. Only damage that has “resulted from” the contravention of a civil penalty provision may be compensated under section 1317H. To satisfy this test, it must be shown that the defendant’s acts or omissions were so connected with the company’s losses that, as a matter of “ordinary common sense and experience” they should be regarded as the cause of those losses: Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC1229 at [7311]-[7312] (per Austin J). Courts have also applied a ‘but-for’ test to causation: Re Earth Civil Australia Pty Ltd (in liq) [2021] NSWSC 966 at [2248] (per Ward CJ in Eq, as the President then was); Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1; [2014] WASC 102 at [451] (per Edelman J). However, common law principles as to the duty to mitigate are not directly applicable to claims under section 1317H: Re Earth Civil at [2249].

473. But for Mr Dai’s breach of his statutory duties as a director, the plaintiff would not have entered into the first disputed transaction, nor the second, nor the third. As a consequence of these transactions, the plaintiff variously became liable to repay the loans, either as the named borrower, a guarantor, or having granted a mortgage over the North Rocks property or executed a general security deed.

474. Relevant to the amount of any compensation order is whether the plaintiff benefitted from the loans. The lenders submitted that the plaintiff failed to adduce financial records to demonstrate that it did not require additional funds beyond a Westpac construction facility or to demonstrate the absence of benefit from the disputed loans, and suggested that a Jones v Dunkel inference ought be drawn. However, the plaintiff’s books and records were under the control of Mr Dai at the relevant time and were incomplete. In these circumstances, whilst the plaintiff bears the onus of proof, its means to prove what happened in the years in which Mr Dai ran the company was somewhat limited. Mr Dai had greater means to contradict the plaintiff’s contentions, having created and been responsible for records at the time. In these circumstances, it may be sufficient for the plaintiff to adduce slight evidence if that is all it has the ability to advance, such that the evidential onus may shift to Mr Dai to adduce evidence to show what he says really happened.

475. Nor do I agree that the onus of proving that the funds were not used for the benefit of the plaintiff necessarily fell on the plaintiff. The fact that the loan funds were provided to the builder and not the plaintiff prima facie indicates that the plaintiff did not receive the benefit of the funds. It was the defendants who contended that, notwithstanding that the funds were provided to the builder, the funds were used for the benefit of the plaintiff. I decline to draw the suggested inference.

476. The funds from the first loan were promptly disbursed by the builder for a variety of purposes, some of which were clearly unrelated to the North Rocks development, while others were probably related to the North Rocks development. The precise portion which benefited the plaintiff is difficult to quantify given the mixing of the loan funds with funds already in the builder’s bank account: see [178]-[180].

477. Whilst it can be said, in a broad sense, that the plaintiff received a benefit from a portion of the first loan, the builder was effectively using a loan advanced to the plaintiff to discharge the builder’s contractual obligation to meet building expenses itself, at least in the first instance: see [130]. To the extent that the loan funds were deployed for the North Rocks development, the builder may have issued a progress claim in respect of those amounts and been reimbursed. Whether the builder did so is unknown, given the paucity of detail in the progress claims.

478. For the second loan, the builder received $746,164.02 and disbursed these funds promptly to Arc Steel, Selective Labour, Bingo-March, Yisheng Construction and the builder ($50,000). Presumably, some or most of these expenses related to the North Rocks site. It should not be forgotten, however, that the builder was obliged to pay these expenses under the construction contract. These were not the plaintiff’s liabilities. The lender also paid some $391,000 to NSW Revenue for land tax. To this extent, it can be said that the plaintiff received a benefit, although not one which it necessarily asked for. The plaintiff received no benefit from the third loan, which was wholly used to pay out the second loan to the builder.

479. As the first loan was paid out by the second loan, which was paid out by the third loan, a convenient measure of the damage suffered by the plaintiff as a result of Mr Dai’s contravention of the civil penalty provisions is the amount now owing to the third round lenders, Gemi 130 and Bridge Street Capital. Section 1317H(1) of the Corporations Act requires that an order for compensation must specify the amount of the compensation. Where the lenders did not adduce evidence as to the amount owing by the plaintiff under these facilities and, in any event, that figure would now be out of date, it is necessary for these lenders to provide this figure in order that an order may be made. The $391,000 paid to NSW Revenue for land tax ought be deducted from this figure, together with interest on the $391,000 from 16 July 2019 on.

480. The first round lender and second round lenders have also incurred costs in defending these proceedings. Whether these lenders intend to seek these costs from the plaintiff under the terms of their respective loan agreements, including on a solicitor and client basis, is not known. If that be the case, then these sums should also be captured in a further compensation order made when the amount of the lenders’ costs is known. I have not made orders in this regard, however, as I suspect that Mr Dai will be in no position to pay the first compensation order, let alone a second compensation order.

481. I have also found that Mr Dai breached his fiduciary duties to the plaintiff. Where compensation under section 1317H will provide a remedy, it is not necessary to also consider the plaintiff’s claim for equitable compensation.

EQUITABLE COMPENSATION FROM SOLICITOR

482. The plaintiff contended that, but for the solicitor’s breaches of fiduciary duty, the plaintiff would not have entered into the first transaction, nor the second or third transactions required to refinance the first transaction, nor incurred any resulting indebtedness to the lenders. Further, although the solicitor had been asked on 8 February 2017 to copy all emails regarding the plaintiff to Mr Liang, he did not do so. If the solicitor had complied with this instruction, Mr Liang would have told the solicitor that he would not approve the plaintiff obtaining high interest loans.

483. The solicitor submitted that causation had not been established: Maguire and Another v Makaronis and Another [1997] HCA 23; (1997) 188 CLR 449 at 467 (per Brennan CJ, Gaudron, McHugh and Gummow J); CLGC Pty Limited v Zhang [2021] NSWSC 946 at [196]. The plaintiff would still have proceeded with the transactions but for the alleged conflict because it received independent legal advice from Ms Yang, Piper Alderman and Mr Holt and no complaint was made about the advice so provided. But for the asserted conflict, it was said that Mr Dai’s decision to cause the plaintiff to enter into the transactions would not have changed. (This is no doubt true; the problem is that Mr Dai’s decision was without authority and in breach of his duties as a director). The plaintiff needed the transactions to occur; it was said to be for the plaintiff to establish otherwise.

484. The solicitor submitted that the Court would not be satisfied that Mr Liang could or would have come to the plaintiff’s aid with the required funds. The Court would treat any such hindsight evidence with caution: Chappell v Hart (1998) 195 CLR 232; [1998] HCA 55 at [32] (per McHugh J); Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 at [24]-[25] (per McHugh J). It was submitted that the Court would be satisfied that Mr Liang had cashflow issues at the time. (There is no evidence of this, beyond Mr Dai’s assertion, on which I attach no weight). The plaintiff would have been required to still proceed with the first transaction (and subsequent second and third transactions) even but for the alleged conflict, as there would have been no other way for the plaintiff to obtain the funds it needed. (This submission is based on the premise that the plaintiff received the benefit of the loan funds which, by and large, it did not).

485. Even if Mr Liang had provided the necessary funds, the solicitor submitted that the plaintiff would be in no better position where Mr Liang provided funds by way of loans. The interest rate proposed to be charged on the Tempe Development loan was between 15-17%. (I note that the proposed Tempe Developments loan agreement was put forward by Mr Toltz on information provided by Mr Dai; whether the interest rate in the proposed agreement was one which Mr Liang had requested is unknown but seems unlikely). There was said to be no evidence that Mr Liang would have provided the funds to the plaintiff at a lower rate than Gemi Investment and at what rate. (Again, this submission is based on the premise that the plaintiff had the benefit of the loan funds when, by and large, it did not).

486. In the alternative, the solicitor submitted that any loss should be limited so as not to include the default interest rate amounts that had accrued over the years of litigation. The plaintiff was said to have failed to mitigate its loss by paying the lenders what they were owed. Otherwise, the interest bill was said to be too remote such that there is no causal link between the solicitor’s alleged breach and the loss complained of.

Causation

487. The principles of causation in relation to a claim for equitable compensation for breach of fiduciary duty were summarised in ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2015) 224 FCR 1 at [1090]:

… the principles are distinct. The court must identify “criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty“: Maguire v Makaronis (1997) 188 CLR 449 at 473 and O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 276–277. What constitutes an adequate or sufficient connection is not predetermined or formulaic. Each case requires a precise focus on both the nature of the obligations and the nature of the breach: Beach Petroleum at 90 [431] and Maguire at 472–473. Any question of “direct“ or “immediate cause“ is a red herring. The required focus is the nature of the obligations and the nature of the breach because different obligations and breaches may raise different criteria that supply the necessary connection. So, for example, “several matters appropriately will be taken into account when there falls for consideration, in an action against the fiduciary arising other than out of breach of trust, the criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty“ which may not be relevant in breach of trust cases (emphasis added): Maguire at 473.

488. That is, questions of causation of loss said to arise from breach of fiduciary obligations are to be determined in a different way from breach of common law obligations. Where a defendant breaches an equitable duty and the plaintiff claims to have suffered loss, the criteria for a sufficient connection, or causation, between breach of duty and the loss is not susceptible to the formulation of a single test but instead depends on a variety of matters, including the nature of the equitable duty breached, the remedies sought, the identity of the fiduciary and the purpose of the particular rule underlying the equitable duty: A Abadee et al., Professional Liability in Australia (Thomson Reuters, 4^th ed, 2023) at [1.1785]. Each case requires a precise focus on both the nature of the equitable obligations and the nature of the breach: Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 at [430]-[431].

489. ABN Amro v Bathurst Regional Council is a useful illustration of the application of these principles where a fiduciary acted in a position of conflict, in that case, being a conflict between the fiduciary’s duty to the beneficiary and the fiduciary’s own interest (a ‘conflict of duty and interest’). An investment advisor purchased financial instruments, which it sold to its clients. The investment advisor held some $45 million of the instruments and was concerned that it may end up holding inventory with no available purchaser. The investment advisor’s concerns as to its own financial position gave rise to a conflict of interest. Whilst the clients knew that the investment advisor would profit from the sale of the instruments, the clients were not told of the commercial pressures faced by the investment advisor, which made the sale of the instruments commercially imperative. The investment advisor did not disclose this conflict so as to permit the clients to make a free and fully informed decision on whether to proceed: at [1078]. The investment advisor’s duty was not to be in a position of conflict of duty and interest and it breached that fiduciary duty: at [1080].

490. The investment advisor made a gain from its dealings in the financial instruments, while the clients lost a substantial part of their investment: at [1089]. The adequate or sufficient connection between the breach of fiduciary duty and equitable compensation was the non-disclosure of the material facts which the clients were entitled to know in connection with their purchase of the instruments and, in breach of which, the investment advisor sold the instruments to the clients: at [1093]. Given the nature of the fiduciary obligation and the nature of the breach, it was not relevant to enquire whether the clients would have given informed consent; the consequences of non-disclosure of material facts are not discoverable, where justice and policy are against their investigation: at [1096] citing Furs Ltd v Tomkies (1936) 54 CLR 583 at 592. Further, the Court was entitled, with the full benefit of hindsight, not to speculate against the interests of the clients in respect of whom there was a breach of fiduciary duty. The clients were only obliged to establish an adequate or sufficient connection between the equitable compensation claim and the breach of fiduciary duty. Having discharged that obligation, it was for the investment advisor to establish that, as a matter of fact, the clients would have purchased the instruments even if the relevant disclosure had been made: at [1097].

488. Elsewhere, it has been said that in claims for compensation for loss caused by breach of a fiduciary obligation, the plaintiff will have to establish that they would have acted differently had the fiduciary complied with its obligations: Jackson & Powell Professional Liability (Thomson Reuters, 9^th ed, 2022) at 3-019 to 3-020 citing Rama v Millar [1996] 1 NZLR 257 at 260 (per Lord Nicholls). For example, in CLGC Pty Limited v Zhang [2021] NSWSC 946, the plaintiffs sued their solicitor to whom they had also provided loans. The claim failed where their case failed to identify the information which the solicitor should have disclosed and failed to prove that the disclosure of such information would have made a difference in the decision to proceed with the loan: at [196] (per Parker J).

489. It is not necessary to reconcile these authorities here, where it may readily be seen that the plaintiff would have acted differently had the fiduciary complied with its obligations. Had Mr Toltz contacted Mr Liang – either in the course of obtaining fully informed consent to act for Gemi Investments or, failing that, in discharging the solicitor’s obligation to act in the plaintiff’s best interests in the first transaction – then Mr Liang would have become aware of the proposed transaction. That would have been the end of the matter. I am satisfied that Mr Liang would not have agreed to the first transaction going ahead, as the purpose for which the loan was sought was predominantly the builder’s Baulkham Hills development. (Ultimately, of course, Mr Dai did not use the loan funds for that purpose but for the builder’s working capital.) There was no reason why Mr Liang would, or should, have agreed that the plaintiff should obtain a loan, secured over the North Rocks property, for this purpose. To the extent that the North Rocks development – as opposed to Mr Dai and his business – needed further funds, Mr Liang had been a steady source of such funds. It was in Mr Liang’s interests to get the development to completion so that the townhouses could be sold and he could see any return on his significant investment.

490. Assessing compensation where there was a conflict of ‘duty and duty’ may be difficult, as Professor Finn observed in Fiduciary Obligations at [591]:

The very obvious difficulty which can arise in claims for damages or compensation is that the fiduciary’s breach of duty will often be simply a technical one with the consequence that the aggrieved beneficiary will not be able to show that he has suffered more than nominal damage. In many cases, and particularly where the conflict lies only in an undisclosed double employment, the aggrieved beneficiary’s position would often not be one bit different had he in fact had the advantage of a fiduciary with undivided loyalties.

494. There is no such difficulty here. Because of the solicitor’s breach of duty to avoid conflicting interests, the solicitor failed to ascertain and act in the plaintiff’s best interests with respect to the first transaction. Had the solicitor discharged its obligation to avoid conflicts, it would have taken the steps necessary to ascertain that where the plaintiff’s interests lay, in particular, given that there was a disconformity between the borrower and the recipient of the loan funds. The solicitor failed to ensure that the plaintiff, as opposed to Mr Dai, wished to enter into the transaction.

495. It is necessary to consider the implications of the independent solicitor on the issue of causation, noting that there is no translation into this field of discourse of the doctrine of novus actus interveniens: Maguire v Makaronis at 470.

496. On the first transaction, Mr Dai and Ms Zhu declared that they had each received independent legal advice from Ms Yang. It is not entirely clear who Ms Yang’s client was. Mr Dai and Ms Zhu declared that they had received independent legal advice from Ms Yang in respect of their personal guarantees given in support of the loan. Mr Dai and Ms Zhu also signed a “Declaration by Borrower,” which noted their offices of director and secretary of the plaintiff and that they had received independent legal advice regarding the loan and security documents. Whether the advice was to them as director and secretary and their obligations as such, or whether the advice was given to the plaintiff, is not clear.

497. Beyond the transaction documents and certificates, there is no evidence as to how Ms Yang went about her job, what she was told, or the advice she gave. Where Ms Yang appears to have been brought in at short notice and rendered no fees, it seems unlikely that any substantive advice was given in respect of the proposed transaction beyond the import of documents to be executed. If Ms Yang’s client included the plaintiff, then it is unlikely that Ms Yang received comprehensive or accurate instructions as to Mr Dai and Ms Zhu’s authority to execute the transaction documents on behalf of the plaintiff, where those instructions came from the couple. Nor did Ms Yang seek to clarify any instructions in respect of the plaintiff by contacting the other director, Mr Liang.

498. Independent advice must be “meaningful” advice enabling the person advised to make an independent, intelligent choice concerning the transaction: Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 at 36 (per Street J); Rahme at [106]. While an independent solicitor may explain the effect of the documents to be signed, the advice needed may be whether the transaction should be entered into at all: Bester at 33–5. The problem here was that the persons to whom Ms Yang was giving the advice were unauthorised. It did not really matter how comprehensive her advice was; Mr Dai and Ms Zhu were going to execute the documents come what may in order to obtain working capital for the builder.

499. And why was the plaintiff being ‘signed up’ with Ms Yang to a loan that was not in its best interests? Because its longstanding solicitor, who was reasonably knowledgeable about the plaintiff’s officeholders and corporate history, had decided to act for the lender on the transaction instead. This was why the plaintiff – if it was the plaintiff being advised by Ms Yang – was receiving advice shortly before completion of the transaction from a solicitor, who probably knew very little about the company or the transaction. I do not see the independent solicitor as ‘breaking the chain of causation’ between the solicitor’s breach of fiduciary duty and the consequences which followed for the plaintiff.

Compensation

500. The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: Nocton v Lord Ashburton [1914] AC 932 at 952 (per Viscount Haldane LC); Hill v Rose [1990] VR 129 at 144 (per Tadgell J); O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 (per Spigelman CJ); Target Holdings Ltd v Redferns [1996] AC 421 at 432 (per Lord Browne-Wilkinson).

501. While common law considerations of remoteness and foreseeability are generally irrelevant to remedies for breach of fiduciary duty, in assessing compensation, the courts apply common sense views as to what loss resulted from the breach and so falls to be compensated: Canson Enterprises Ltd V Boughton & Co (1991) 85 DLR (4th) 129 at 163, followed in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]; Jackson & Powell Professional Liability at 3-019 to 3-020 citing Rama v Millar [1996] 1 NZLR 257 at 260 (per Lord Nicholls); Swindle v Harrison (1997) 4 All ER 705 at 733 (per Mummery LJ); Target Holdings Ltd v Redferns [1996] AC 421 at 439.

502. The amount of compensation is to be assessed at the time of trial, with the full benefit of hindsight and common sense, not at the date of breach: O’Halloran at 273, 276. A duty to mitigate is not relevant to equitable compensation: Re Earth Civil at [2246]; following Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [86]-[87] (per McHugh, Gummow, Hayne and Callinan JJ), at [171]-[173] (per Kirby J).

503. I accept that, but for the solicitor’s breach of fiduciary duty, the plaintiff would not have entered into the first transaction: see [494]. The loss which resulted from the breach was the plaintiff’s indebtedness to the lender, which was paid out and became an indebtedness to the second round lenders, which was paid out and became an indebtedness to the third round lenders.

504. While a duty to mitigate is not relevant to equitable compensation, I do not accept that the plaintiff failed to act reasonably when it did not repay the loans. It is not entirely clear how the plaintiff was supposed to do this, and with what funds. I do not think, however, that the amount of compensation is the whole of the plaintiff’s indebtedness to the third round lenders. This is because the loan advanced by the second round lenders not only paid out the first round lender but advanced additional funds. The plaintiff did not press its claim for breach of fiduciary duty against the solicitor in respect of the second transaction. I do not consider that the ‘uplift’ in the second loan, beyond paying out the first loan, resulted from the solicitor’s breach of fiduciary duty on the first transaction and does not fall to be compensated.

505. Although Weriton placed its solicitor in funds of $4.2 million to complete the second transaction, not all of these funds were ultimately advanced. Surplus funds of $536,757.82 were returned to the lender, such that $3,663,242.22 was advanced. Of this, the first lender was paid out in the amount of $2,355,086.66. Some $391,000 was paid to NSW Revenue for land tax, which benefitted the plaintiff. The remaining $917,155.60 represents an increase in the plaintiff’s indebtedness from the first transaction. This accounts for 25% of the loans advanced in the second transaction. Where the third transaction simply refinanced the second transaction, I consider that an appropriate measure of compensation is 75% of the current indebtedness of the plaintiff to the third round lenders.

Apportionable claim

506. The solicitor contended that the plaintiff’s claim was apportionable for the purposes of Part 4 of the Civil Liability Act 2002 (NSW) and that Mr Dai, Ms Zhu, Piper Alderman, Alice Yang & Associates, Ms Yang and Mr Holt were concurrent wrongdoers. Each of Ms Yang, Piper Alderman and Mr Holt were retained by the plaintiff to act in relation to the first, second and third transactions respectively, and to provide advice with reasonable care and skill. Each failed to provide appropriate advice or obtain proper authority from the plaintiff to act. The plaintiff relied on their advice and entered into the transactions in question, suffering loss.

507. An apportionable claim is “a claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care”: section 34(1), Civil Liability Act. Although an action for common law damages is conceptually distinct from equitable compensation, ‘damages’ in the Civil Liability Act includes any form of monetary compensation: George v Webb [2011] NSWSC 1608 at [312] (per Ward CJ in Eq). It follows that an action for equitable compensation arising from a breach of fiduciary duties may be treated as an action for damages for the purposes of section 34(1).

508. What is more difficult is whether the claim against the solicitor in this case can be regarded as a claim ‘arising from a failure to take reasonable care.’ In Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187, Barrett J expressed the view that the requirement for an action to be ‘arising from a failure to take reasonable care’ would be made out where if, at the end of the trial, the evidence warrants a finding to that effect and regardless of the absence of any plea of negligence or a failure to take reasonable care: at [30]. In Perpetual Trustee Co Ltd v CTC Group Ltd (No 2) [2013] NSWCA 58, Macfarlan JA disagreed with Barrett J’s reasoning in Reinhold, suggesting that section 34(1)(a) required the failure to exercise reasonable care to be an element of the cause of action brought against the defendant: at [22]-[23]. However, Macfarlan JA’s views did not form the ratio of that case, as Barrett JA disagreed (at [37]-[38]) and Meagher JA chose not to express a view on the matter (at [36]). In Rahme v Benjamin Khoury Pty Ltd [2019] NSWCA 211; (2019) 100 NSWLR 550, however, the Court of Appeal adopted Macfarlan JA’s approach: at [135] (per Macfarlan JA, Bathurst CJ and McCallum JA agreeing).

509. It follows from Rahme that, for section 34(1) of the Civil Liability Act to be engaged, the failure to exercise reasonable care must be an element of the cause of action pleaded against the defendant. In the present case, the claim brought against the solicitor is for breach of fiduciary duty by acting in a position of conflict. The failure to exercise reasonable care is not an element of that cause of action. Thus, notwithstanding any factual findings of carelessness made against the solicitor, it cannot be said that the cause of action against it is one that arises from a failure to exercise reasonable care for the purpose of section 34(1) of the Civil Liability Act. Accordingly, the proportionate liability regime under Part 4 of the Civil Liability Act does not apply to the claim brought against the solicitor.

Section 5O

510. The solicitor contended that it had acted in a manner widely accepted in Australia by peer professional opinion as competent practice and thus was not liable for any loss: section 5O, Civil Liability Act. Section 5O provides a defence to ‘liability in negligence,’ where ‘negligence’ is defined as ‘failure to exercise reasonable care’: section 5.

511. Section 5O falls within Part 1A of the Civil Liability Act. Section 5A of the Civil Liability Act provides that Part 1A will apply to ‘any claim for damages for harm resulting from negligence, regardless of whether the claim is brought in tort, in contract, under statute or otherwise’ (emphasis added). Accordingly, a similar question arises as to whether Part 1A of the Civil Liability Act applies to a cause of action for breach of a fiduciary duty to avoid conflicts, in which a failure to exercise reasonable care is not an element.

512. Different approaches have been taken to this question: Gales Holdings Pty Ltd v Tweedy Shire Council [2011] NSWSC 1128 (per Bergin CJ in Eq) at [346] cf Paul v Cooke (2013) 85 NSWLR 167; [2013] NSWCA 311 (per Leeming JA) at [40]. It is unnecessary to decide this as there is no evidence to suggest that the solicitor acted in a manner widely accepted in Australia as competent practice. Nor do I accept that it did. As the lenders put it, “it may be said that some aspects of Mr Toltz’s conduct did not bespeak optimal practice.”

Statutory scheme

513. The solicitor participated in the Law Society of New South Wales professional standards scheme for the 2018/19 year (from 22 November 2018 to 21 November 2019) and the 2019/20 year. As such, any liability to the plaintiff was said to be limited to $1.5 million. A discretionary higher liability limit of $15 million applied for “Class of case: Property related matters/Transaction Type: All property related matters.”

514. Section 28 of the Professional Standards Act 1994 (NSW) provides:

28   Limit of occupational liability by schemes

(1)     To the extent provided by this Act and the provisions of the scheme, a scheme limits the occupational liability, in respect of a cause of action founded on an act or omission occurring during the period when the scheme is in force, of any person to whom the scheme applied at the time when the act or omission occurred.

(2)     The applicable limitation of liability is the limitation specified by the scheme as in force at the time at which the act or omission giving rise to the cause of action concerned occurred.

515. The Law Society of New South Wales Professional Standards Scheme commenced on 22 November 2018. The solicitor, being Gerrard Toltz Pty Ltd, was a member of that scheme. Mr Toltz was also a member of an earlier professional standards scheme, but he is not the defendant in these proceedings.

516. The Scheme limits the civil liability (arising in tort, contract or otherwise) of a participating member for damages arising from a single cause of action founded on an act or omission in relation to the provision of legal services to the extent that those damages exceed a monetary ceiling specified in clause 4.4: clause 4.1, The Law Society of New South Wales Professional Standard Scheme; section 4(1), Professional Standards Act 1994. If a member of the scheme is able to satisfy the Court that they have the benefit of an insurance policy insuring them against the liability to which the cause of action relates, and the amount payable under that policy is not less than the amount of the monetary ceiling, then the member is “not liable for damages in relation to that cause of action above the amount of that monetary ceiling”: clause 4.2.

517. Clause 4.4 provides that the monetary ceiling applicable “under the Scheme at the Relevant Time” is to be determined according to a table. Relevantly, Class 1, where members “were at the Relevant Time in a Law Practice consisting of up to and including 20 Principals and where the Law Practice generates total annual fee income for the financial year at the Relevant Time up to and including $10m,” a monetary ceiling of $1.5 million applies. “Relevant Time” means, when referring to a cause of action founded on an act or omission, the time of that act or omission occurring: clause 1.2.

518. Here, the act or omission was the solicitor’s breach of fiduciary duty in acting for the lenders on the first transaction. Where the first transaction completed on 14 November 2018, the breach of fiduciary duty occurred before the commencement of the Scheme. As such, the monetary ceiling does not apply to the cause of action brought against the member founded on that act or omission.

ORDERS

519. The plaintiff's claims against the lenders have failed. Thus, it is not necessary to consider the lenders’ cross claims. For these reasons, I make the following orders:

1. DECLARE that the eighth defendant was not validly appointed as the secretary of the plaintiff.

2. NOTE that Court intends to make a compensation order against the first defendant under section 1317H(1) of the Corporations Act 2001 (Cth) for any amount owing by the plaintiff to the third and fourth defendants.

3. NOTE that Court intends to enter judgment against the second defendant for equitable compensation in an amount being 75% of the amount owing by the plaintiff to the third and fourth defendants.

4. DIRECT the third and fourth defendants, within 7 days, to file and serve an affidavit or Dobbs’ certificate setting out the balance owing by the plaintiff to the defendants.

5. DIRECT the first and second defendants, within 14 days, to file and serve any affidavit or submissions in respect of the affidavit or Dobbs’ certificate served in accordance with Order 4.

6. DIRECT the parties to confer in respect of costs orders and, within 7 days, provide the Court with short minutes of order and, to the extent such orders are not agreed, submissions (limited to 3 pages) in support of the costs order sought by that party.

7. NOTE that the Court will make a compensation order, enter judgment for equitable compensation and make costs orders on the papers, unless any party seeks a further hearing in respect of these matters.

8. Otherwise dismiss the Summons and Cross Claims.

9. DIRECT the parties to notify any errors or omissions within 7 days.

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Decision last updated: 05 December 2023