CLGC Pty Ltd v Zhang (No 2)

[2024] NSWSC 610

Supreme Court

New South Wales

Medium Neutral Citation:

CLGC Pty Ltd v Zhang (No 2) [2024] NSWSC 610

Hearing dates:

17 May 2023, 6 July 2023, 13 July 2023

Date of orders:

22 May 2024

Decision date:

22 May 2024

Jurisdiction:

Equity

Before:

Richmond J

Decision:

(1) Declare that Mr Zhang is guilty of criminal contempt by authorising payments of $900,000 from the SEPAM Account on 9, 11 and 13 November 2020.

(2) Declare that Mr Zhang is guilty of criminal contempt by using the proceeds of sale of the Northbridge property otherwise than in accordance with the Undertaking.

(3) The amended notice of motion filed by Mr Zhang on 17 May 2023 is dismissed with costs, to be payable on the indemnity basis as agreed or assessed.

Catchwords:

JUDGMENTS AND ORDERS — amending, varying and setting aside — for irregularity

CONTEMPT — criminal contempt — contumacious breach of orders and undertaking given to the Court — reasonable belief in excuse

Legislation Cited:

Banking Act 1959 (Cth)

Bankruptcy Act 1966 (Cth)

Civil Procedure Act 2005 (NSW)

Corporations Act 2001 (Cth)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Attorney-General for Tuvalu v Philatelic Distribution Corporation Ltd [1990] 1 WLR 926

Attorney-General of Ontario v Attorney-General for the Dominion of Canada [1894] AC 189

Attorney-General v Punch Ltd [2003] 1 AC 1046; [2002] UKHL 50

Australian Competition and Consumer Commission v Goldstar Corporation Pty Ltd [1999] FCA 585

BCEG International Australia Pty Ltd v Xiao [2023] NSWSC 57

Bhagat v Global Custodians Ltd [2002] FCA 223

CLGC Pty Limited v Zhang [2021] NSWSC 946

Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 801

Cummings v Claremont Petroleum NL (1996) 185 CLR 124; [1996] HCA 19

DC Rd DC Pty Ltd v Zhang (No 3) [2024] FCA 221

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397

Heath v Tang [1993] 1 WLR 1421

Hedwan v Hannouf (1997) 140 FLR 229

Huang v Liao [2022] NSWSC 347

Hurd v Zomojo Pty Ltd [2015] FCAFC 148

Investmentsource v Knox Street Apartments [2007] NSWSC 1128

Jorgensen v Fair Work Ombudsman (2019) 271 FCR 461; [2019] FCAFC 113

Kazal v Thunder Studios Inc (California) (2017) 256 FCR 90; [2017] FCAFC 111

Lade & Co Pty Ltd v Black [2006] 2 Qd R 531; [2006] QCA 294

Le Mesurier v Connor (1929) 42 CLR 481; [1929] HCA 41

Mahaffy v Mahaffy (2018) 97 NSWLR 119; [2018] NSWCA 42

Metcash Trading Ltd v Bunn (No 5) [2009] FCA 16

National Australia Bank Ltd v Juric [2001] VSC 375

Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331; [2005] HCA 54

Noza Holdings Pty Ltd v Commissioner of Taxation (2010) 273 ALR 621; [2010] FCA 990

Pang v Bydand Holdings Pty Ltd [2011] NSWCA 69

R v Davison (1954) 90 CLR 353; [1954] HCA 46

Re Intex Consultants Pty Ltd [1986] 2 Qd R 99

Re. Group Pty Ltd v Kazal (No 4) [2017] FCA 1084

Storey v Lane (1981) 147 CLR 549; [1981] HCA 47

Witham v Holloway (1995) 183 CLR 525

Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 571; [2004] HCA 56

Texts Cited:

D Rolph, Contempt (Federation Press, 2023)

Category:

Procedural rulings

Parties:

CLGC Pty Ltd (First Plaintiff)
CLGC Australia Pty Ltd (Second Plaintiff)
CLGC Investment Pty Ltd (Third Plaintiff)
CLGC Investment Holdings Pty Ltd (Fourth Plaintiff)
Ronglai (Martin) Zhang (First Defendant/Respondent)

Representation:

Counsel:
Mr T Cleary (Plaintiffs)
Mr Ronglai (Martin) Zhang (First Defendant/Respondent – Self Represented)

Solicitors:
Luminous Legal (Plaintiffs)

File Number(s):

2018/00110428

Publication restriction:

Nil

JUDGMENT

1. This judgment deals with two notices of motion. The first is an amended notice of motion filed in court on 17 May 2023 by the first defendant, Mr Ronglai (Martin) Zhang (Mr Zhang), seeking orders to set aside all orders made against the defendants in these proceedings on 17 August 2021 together with costs (the Motion). The second motion is brought by the third plaintiff, CLGC Investment Pty Ltd (CLGC), bringing a charge of contempt against the first defendant on the basis of the statement of charge filed with the motion (Contempt Motion). These reasons deal with each in turn.

2. The plaintiffs were successful at the final hearing before Parker J: CLGC Pty Limited v Zhang [2021] NSWSC 946 (Judgment). On 17 August 2021 Parker J made final orders to give effect to that decision which were as follows:

1. Judgment in favour of the Fourth Plaintiff against the First Defendant in the sum of $3,000,000 in inclusive of interest.

2. Judgment in favour of the Fourth Plaintiff against the Second Defendant in the sum of $136,981.34, being

a. $110,000 by way of equitable compensation;

b. $26,981.34 by way of interest to judgment.

3. Each of the Defendants pay the costs of each of the Plaintiffs’ claims against that Defendant.

3. The fourth plaintiff is CLGC Investment Holdings Pty Limited.

4. Up until April 2021, Mr Zhang was a practising solicitor having been admitted to practice in New South Wales from 2011. He held an unrestricted practising certificate until 9 April 2021 and between about 2013 to 2021 he was the sole director of an incorporated legal practice, WH Lawyers Australia Pty Ltd, the second defendant.

5. All of the defendants in the proceedings, including Mr Zhang, are now in some form of insolvency administration. Mr Zhang was made bankrupt on 10 March 2022 on the petition of CLGC. SEP Asset Management Pty Ltd (SEPAM) went into liquidation on 6 December 2021. From 27 September 2017, Mr Zhang was the sole director and shareholder of SEPAM. At the hearing of the motions, CLGC was represented by counsel and Mr Zhang was self-represented.

The Motion

6. The claims dealt with in the Judgment arose out of the business and professional dealings between the first defendant and Mr Peiliang Zhang and his wife, Ms Weiping Lu, each of whom was a sole director of one or more of the plaintiffs at the time of the hearing. Mr Peiliang Zhang and Ms Weiping Lu are referred to in the Judgment as Chairman Zhang and Ms Lu respectively and for convenience I will adopt those abbreviations in these reasons.

7. By the Motion, the first defendant seeks to set aside the Orders under rule 36.15(1) of the Uniform Civil Procedure Rules 2005 (UCPR) on the basis that each of Chairman Zhang and Ms Lu were disqualified from being a director of an Australian company under s 206B(3) of the Corporations Act 2001 (Cth) (the Act) from 2019.

8. Under r 36.15(1) of the UCPR, “a judgment or order of the court in any proceedings may, on sufficient cause being shown, be set0020aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith”.

9. Section 206B(3) of the Act provides:

A person is disqualified from managing corporations if the person is an undischarged bankrupt under the law of Australia, its external territories or another country.

10. Under s 206A(1) a person who is disqualified from managing corporations under s 206B(3) commits an offence if:

(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporations; or

(b) they exercise the capacity to affect significantly the corporation’s financial standing; or

(c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationships with the directors or the corporation) to the directors of the corporation;

(i) knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or

(ii) intending that the directors will act in accordance with those instructions or wishes.

11. Further, under s 206A(2) a person who is disqualified from managing corporations under s 206B(3) ceases to be a director, alternate director or a secretary of a company, unless they are given permission to manage the corporation under ss 206GAB or 206G.

12. The first defendant contends that Chairman Zhang and Ms Lu were subject to restriction on consumption orders in China from around 2019 and as a result each was from that time an undischarged bankrupt in China. He also contends that as leave was not given for them to act as a director of the plaintiffs under ss 206GAB or 206G, the Orders were obtained illegally and therefore should be set aside under r 36.15(1) of the UCPR.

Evidence

13. The evidence relied on by Mr Zhang in support of the Motion comprised an affidavit of Mr Wei Wang, a lawyer admitted to practice in the People’s Republic of China. Annexed to his affidavit were two tables which set out the result of searches for judgments in a Chinese court against each of Chairman Zhang and Ms Lu, which also identified that each of them were subject to a number of ‘restriction on consumption orders’ arising out of those judgments. In addition, Mr Zhang sought to rely upon appendix 3 to Mr Wang’s affidavit (Report) which purported to be an expert report addressing “the applicability of section 206B(3) of the Corporations Act 2001 (Cth) in Australia to individuals subject to restriction on consumption orders in China due to failure to pay significant amounts of judgment debts” and was said to be “based on the comparison of the legal consequences of financial irresponsibility in both jurisdictions”. In the report, Mr Wang stated in essence three propositions:

1. There is no bankruptcy law applicable to individuals (ie. natural persons) in China;

2. China has a concept called a “restriction on consumption order” designed to limit certain high consumption behaviours of an imposed credit punishments on individuals who failed to repay their debts; and

3. Article 146 of the Company Law of the People’s Republic of China prevents certain persons including those with a relatively large amount of overdue debts, from being a director of a Chinese company.

14. Mr Wang identified the legal source of the power to make ‘restriction on consumption orders’ as the ‘Memorandum of Co-Operation on Establishing a Credit System and Punishing Dishonesty’ issued by a number of bodies including the Supreme People’s Court of the People’s Republic of China on 20 March 2014 (Ex 4). This states, as translated into English, relevantly:

To implement the work deployment of the Third Plenum of the 18^th CPC Central Committee on commending honesty and punishing dishonesty, promote honesty and trustworthiness of social entities, uphold the authority of the law, and foster a culture of honesty, the Central Civilization Office, the Supreme People’s Court, the Ministry of Public Security, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the Civil Aviation Administration of China, and China Railway Corporation have reached the following opinions on restricting high-consumption behaviours of persons subject to enforcement for dishonesty and taking other credit disciplinary measures.

I. Targets of Credit Disciplinary Measures

The target of credit punishment is all the individuals and entities included in the list of dishonest persons subject to enforcement in the Supreme People’s Court’s database, as well as other persons subject to enforcement who have been issued with a court order restricting high consumption (collectively referred to as dishonest persons subject to enforcement).

When the dishonest person subject to enforcement is a natural person, it refers to the person subject to the enforcement himself/herself; when the dishonest person subject to enforcement is an entity, it also includes its legal representative, main person in charge, and direct responsible person who affects the fulfillment of debts.

II. Contents of Credit Disciplinary Measures

According to the “Several Provisions of the Supreme People’s Court on Restricting High-Consumption of Executed persons” and the “Several Provisions of the Supreme People’s Court on the Publication of Information on the List of Dishonest Persons Subject to Enforcement,” the Supreme People’s Court issues a unified “Restriction on High-Consumption Order” to dishonest persons subject to enforcement on the “National Court List of Dishonest Persons Subject to Enforcement Information Publication and Query Platform.” Together with relevant organs, they will restrict high-consumption of dishonest persons subject to enforcement and adopt other credit punishment measures.

III. Scope of Credit Disciplinary Measures

1. Prohibiting certain high-consumption behaviours, including taking flights or sleeping in soft berth on trains; 2. Implementing other credit punishment measures, such as restricting access to loans or credit card applications from financial institutions; (The legal basis for the above two aspects is the judicial interpretations of the Supreme People’s Court) 3. If the person subject to the credit punishment is a natural person, they are not allowed to serve as the legal representative, director, supervisor, or senior management of an enterprise. (The legal basis for this measure is Article 146 of the Company Law of the People’s Republic of China and Article 4 of the State Council’s Regulation on the Registration and Administration of Enterprise Legal Persons’ Legal Representatives.)

IV. Implementation of Credit Disciplinary Measures

The Supreme People’s Court pushes [sic] the list of dishonest persons subject to enforcement to the Ministry of Public Security, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the Civil Aviation Administration of China, and the China Railway Corporation through information technology means such as CD-ROMs and dedicated lines. After receiving the list, the relevant organs record the information on limiting high consumption and implementing other credit punishment measures in their management systems, or require regulated enterprises, departments, industry members, and branch organizations to monitor in real-time and effectively implement credit punishment. The list is widely publicised in the media to create a strong public opinion pressure on dishonest persons subject to enforcement and to build a strong atmosphere of honesty and punishment for dishonesty.

IV. Dynamic Management of Credit Disciplinary Measures

After a person subject to enforcement is remove [sic] from the Supreme People’s Court’s list of persons subject to enforcement in accordance with the law due to the execution of obligations, the Supreme People’s Court should notify all institutions to lift the restrictions within two working days. For newly added lists of dishonest persons subject to enforcement, the Supreme People’s Court should promptly push them to all relevant institutions.

15. In evidence is an example of a restriction on consumption order issued against Ms Lu by the Yantai Intermediate People’s Court of Shandong Province on 27 September 2019 (Ex 2). This provides, as translated into English, relevantly as follows:

LV [sic] Weiping,

On 1 August 2019, our court accepted the application for execution filed by Yantai Branch of China Bohai Bank Co., Ltd. against you regarding a contractual dispute. Since you failed to perform the payment obligations as determined by the effective legal document within the period specified in the execution notice, in accordance with Article 255 of the Civil Procedure Law of the People’s Republic of China, as well as Article 1 and Article 3 of the Supreme People’s Court’s Several Provisions on Restricting the High Consumption and Related Consumption of the Executed Persons, this court has taken measures to restrict your consumption, and prohibited you from engaging in the following high consumption and non-life and work necessary consumption activities: (1) Riding civil aircraft, soft sleepers in trains, second-class-or-above seas [sic] in ships for transportation; (2) Conspicuous consumption at star-rated venues such as hotels, restaurants, night clubs, golf courses; (3) Purchase of real estate or construction, expansion or extravagant houses renovation; (4) Rental of high‑end office buildings, hotels, apartments as workplace; (5) Purchase of vehicles not essential to business operation; (6) Travel and vacation; (7) Enrolling children in expensive private schools; (8) Paying high-value premiums for insurance policies with a cash value; (9) Other consumption behaviours not essential to life or work such as booking any seat of G-series high-speed trains or any first-class-or-above seat of D-series high-speed trains. If you wish to engage in the aforementioned prohibited consumption activities due to business needs, you shall apply to this court and only proceed when an approval is granted.

If any violation of the Consumption Restriction Order is substantiated with evidence, this court will impose fines and detention in accordance with Article 111 of the Civil Procedure Law of the People’s Republic of China; if the violation is of a serious nature and constitutes a crime, criminal responsibilities will be investigated according to law.

16. Also in evidence is a translation into English of Article 146 of the Company Law of the People’s Republic of China (Ex 6) which states relevantly:

Whoever is under any of the following circumstances is not allowed to assume the post of a director, supervisor, or senior management person of a company:

(1) He/she has no or limited civil capacity;

(2) He/she has been sentenced to criminal punishment due to corruption, bribery, embezzlement of property, misappropriation of property, or disrupting the order of the socialist market economy, and less than five years have elapsed since the punishments are fully executed; or he/she has been deprived of political rights due to any criminal offense, and less than five years have elapsed since the punishment is fully executed;

(3) He/she has served as a director, factory manager or manager of a company or enterprise that is bankrupt and liquidated, and is personally liable for the bankruptcy of the company or enterprise, and less than three years have elapsed since the date of completion of the bankruptcy liquidation of the company or enterprise;

(4) He/she has served as the legal representative of a company or enterprise that has its business license revoked and is ordered to close down due to violations of the law, and is personally liable for such punishment, and less than three years have elapsed since the date of revocation of the business license of the company or enterprise; or

(5) He/she has a relatively large amount of overdue debts.

If the company elects or appoints any director or supervisor, or engages any senior management personnel in violation of the preceding Paragraph, the election, appointment or engagement shall be invalid.

The company shall remove a director, supervisor or senior management person from his/her post if he/she falls under any of the circumstances described in Paragraph 1 of this Article during the term of office.

17. It became apparent from the cross-examination of Mr Wang that the Report was prepared after a discussion between him and Mr Zhang about the background of the case and why the report was necessary, during which Mr Zhang asked Mr Wang some questions about how Chinese law might affect this case. Mr Wang then did some research, and they had a further discussion about Chinese law following which Mr Zhang sent Mr Wang a draft of the Report in English which he reviewed and then corrected (T30.10-41.5).

18. The plaintiffs objected to the Report being admitted as expert evidence and I reserved on its admissibility at the hearing. The objection was based on three grounds. First, the Report is inadmissible because Mr Wang had not stated that he had read the expert witness code of conduct in Schedule 7 of the UCPR and agreed to be bound by it. Under UCPR r 31.23(3), an expert report which fails to include an acknowledgement to that effect is not admissible unless the Court otherwise orders: see e.g. Investmentsource v Knox Street Apartments [2007] NSWSC 1128 at [42]–[50]. Second, the Report should be given no weight due to the circumstances in which it was prepared. Third, large parts of the Report involved a comparison of Chinese law with s 206B(3) of the Act (reflecting the question which Mr Wang was asked to address) which were matters beyond the expertise of Mr Wang and so was not admissible under s 79 of the Evidence Act.

17. Taking the plaintiffs’ third objection first, the proper role of an expert on foreign law is to prove the content of the foreign law which is relevant to an issue in the proceedings: Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331; [2005] HCA 54 at [115], [119]–[120]; Noza Holdings Pty Ltd v Commissioner of Taxation (2010) 273 ALR 621; [2010] FCA 990 at [13]–[14]. The Report goes beyond dealing with the content of Chinese law and seeks to address the ultimate issue for the Court, which is whether particular persons affected by a ‘restriction on consumption order’ in China are an undischarged bankrupt. For that reason, the following paragraphs are not admissible: (a) the first paragraph under the heading ‘Background’, (b) the three paragraphs under the heading ‘Analysis’ and (c) the first two paragraphs under the heading ‘Conclusion’. Those paragraphs will be treated as submission only. The remainder of the Report after excluding those paragraphs is uncontroversial and merely summarises the content of Chinese law as it applies to debtors who have failed to pay their debts.

18. As to the plaintiffs’ first and second objections to the balance of the Report, in my view, the appropriate course in this case is that the Court should otherwise order under r 31.23(3) for three reasons. First, as noted above, the parts of the Report which are otherwise admissible are uncontroversial and merely give context to the three documents referred to at [14]–[16] above which were admitted without objection. Second, I take into account the fact that Mr Zhang is self-represented and while formerly a solicitor, is not (on his evidence given in cross-examination) an experienced litigator. Third, the content of Chinese law on the issue raised in the Motion is relevant to CLGC’s contempt motion. The serious consequences for Mr Zhang of that motion justifies the exercise of the discretion to admit into evidence the parts of the Report which are otherwise admissible notwithstanding non-compliance with Schedule 7 of the UCPR, but the weight given to what remains will take into account the unsatisfactory manner in which the Report was prepared.

Submissions

21. The first defendant’s contention is that s 206B(3) applies because while China does not have a personal bankruptcy law, Chairman Zhang and Ms Lu were subject to restriction on consumption orders in China which placed them in an equivalent position to an undischarged bankrupt under Australian law. Consequently, by engaging in decisions to bring and prosecute the proceedings which resulted in the making of the orders, they each breached s 206A(1)(a) of the Act.

22. The plaintiffs submit that the Motion should be dismissed for two reasons. First, the first defendant is an undischarged bankrupt, and consequently has no standing: Cummings v Claremont Petroleum NL (1996) 185 CLR 124; [1996] HCA 19. However, the plaintiffs accept that as the issue raised by the Motion also affects the standing of CLGC to bring the Contempt Motion, the substance of the Motion needs to be addressed.

23. Second, Chairman Zhang and Ms Lu are not undischarged bankrupts in Australia, its external territories or any other country and consequently s 206B(3) of the Act cannot apply. The report confirms that there is no bankruptcy law applicable to natural persons under Chinese law and a restriction on consumption order is merely an enforcement mechanism and not akin to bankruptcy. Further, the evidence does not establish that either Chairman Zhang or Ms Lu are disqualified from being a director in China and that would not, in any event, establish that s 206B(3) applied.

Consideration

24. The Motion cannot succeed for two independent reasons.

25. First, as an undischarged bankrupt, the first defendant has no standing to seek the relief claimed in the Motion.

26. In Cummings v Claremont Petroleum NL (1996) 185 CLR 124; [1996] HCA 19 the High Court held that a bankrupt had no standing to bring an appeal from a money judgment entered against the bankrupt which results in a judgment debt provable in the bankruptcy. Brennan CJ, Gaudron and McHugh JJ in a joint judgment held that “a bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy” (at 136).

27. Their Honours explained that this was not because the right to appeal is part of the property of the bankrupt which has vested in the trustee under s 58(1) of the Bankruptcy Act 1966 (Cth) but rather because the bankrupt has no further interest in the proceedings. They approved the following observations of Hoffmann LJ in delivering the judgment of the Court of Appeal in Heath v Tang [1993] 1 WLR 1421 at 1424:

In cases in which the bankrupt is defendant, there is of course usually no question of the cause of action having vested in the trustee. Unless the defence is set-off … the bankrupt will not be asserting by way of defence any cause of action of his own. But in cases in which the plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in claims for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no interest in the proceedings. As we have seen, s 285(3) [Insolvency Act 1986, the United Kingdom analogue of s 58(3) of the Bankruptcy Act 1966 (Cth)] deprives the plaintiff of any remedy against the bankrupt's person or property and confines him to his right to prove. (Emphasis added.)

28. Brennan CJ, Gaudron and McHugh JJ then continued (at 137–138):

So far as a judgment entered in an action against a bankrupt creates or evidences a provable debt, we respectfully agree that the bankrupt has no financial interest which would confer locus standi to appeal in his own name against the judgment. That is because it is fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts.

Of course, a money judgment entered against a bankrupt has the effect of increasing the amount of the debts provable in his estate. But it is immaterial that, if an appeal against the judgment were successful, there would or might be a surplus in the estate after the remaining creditors are paid. A bankrupt's contingent interest in a surplus does not give him an interest which would allow him to sue to enforce proprietary rights and, that being so, it cannot give him an interest to appeal to minimise liabilities.

29. The principle recognised in this case (that once a defendant against whom a money judgment is entered becomes bankrupt, he or she ceases to have any interest in the proceedings and hence lacks standing to take a step in those proceedings) applies to an application of the kind in the present case seeking to set aside the Judgment and orders made to give effect to it. This is illustrated by Hedwan v Hannouf (1997) 140 FLR 229 where Santow J held that a defendant who had become bankrupt as a result of a money judgment entered in circumstances where his legal representatives had failed to turn up at the relevant hearings had no standing to argue that the judgment should be set aside.

30. In these circumstances the only person who has standing to bring an appeal or otherwise contest the Judgment and orders made is the trustee in bankruptcy.

31. Second, even if the first defendant had standing, the Motion would be dismissed because it is clear that s 206B(3) of the Act does not apply. The provision only applies if the relevant person is ‘an undischarged bankrupt under the law of … another country’. The terms ‘bankrupt’ and ‘undischarged bankrupt’ are not defined and therefore have their ordinary meaning. The word ‘bankruptcy’ has a well-recognised meaning under Australian law as referring to a legal process which includes as an essential element the taking of the assets of the insolvent person under compulsion and their subsequent realisation and equitable distribution among his or her creditors.

32. In Le Mesurier v Connor (1929) 42 CLR 481; [1929] HCA 41, which concerned the power of the Commonwealth Parliament to makes laws with respect to ‘bankruptcy and insolvency’ under s 51(xvii) of the Constitution, Isaacs J approved the following observation of Lord Herschell LC in Attorney-General of Ontario v Attorney-General for the Dominion of Canada [1894] AC 189 at 200:

It is not necessary in their Lordships’ opinion, nor would it be expedient to attempt to define, what is covered by the words “bankruptcy” and “insolvency” in sect. 91 of the British North America Act. But it will be seen that it is a feature common to all systems of bankruptcy and insolvency to which reference has been made, that the enactments are designed to secure that in the case of an insolvent person his assets shall be rateably distributed amongst his creditors whether he is willing that they should be so distributed or not. Although provision may be made for a voluntary assignment as an alternative, it is only as an alternative. In reply to a question put by their Lordships the learned counsel for the respondent were unable to point to any scheme of bankruptcy or insolvency legislation which did not involve some power of compulsion by process of law to secure to the creditors the distribution amongst them of the insolvent debtor's estate.

33. In R v Davison (1954) 90 CLR 353; [1954] HCA 46, Fullagar J said at 375–6:

Bankruptcy, as we know it, is the creation of statute law. It was originally devised for a twofold purpose, the protection of the honest debtor and the circumvention of the dishonest debtor. The essential features of a bankruptcy system are sequestration and distribution—an initial taking into custody of an insolvent debtor's property, and the subsequent realization and division among creditors.

34. In Storey v Lane (1981) 147 CLR 549; [1981] HCA 47, Gibbs CJ (with whom Mason, Wilson and Brennan JJ agreed) said at 556–7 (footnotes omitted):

An essential feature of any modern system of bankruptcy law is that provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts. In Hill v. East and West India Dock Co. Earl Cairns cited with approval the following passage from the judgment of James L.J. in Ex parte Walton; In re Levy:

Now, the bankruptcy law is a special law, having for its object the distribution of an insolvent's assets equitably amongst his creditors and persons to whom he is under liability, and, upon this cessio bonorum, to release him under certain conditions from future liability in respect of his debts and obligations.

If further authority is needed for the proposition that the equitable distribution of the assets of the insolvent debtor is a fundamental purpose of the bankruptcy law, reference may be made to Attorney-General (Ontario) v. Attorney-General (Canada) and Reg. v. Davison. It is equally clear that any system of bankruptcy law “may frequently require various ancillary provisions for the purpose of preventing the scheme of the Act from being defeated”: Attorney-General (Ontario) v. Attorney-General (Canada); Royal Bank of Canada v. Larue. For example, it may be necessary to frame provisions to stop individual action by creditors for the purpose of obtaining payment of the debts due to them when the aim of the law is to secure administration of the debtor's assets in the interest of the creditors generally: Attorney-General (British Columbia) v. Attorney-General (Canada).

35. It is clear from the evidence before the court that China does not have a bankruptcy law for natural persons and that a ‘restriction on consumption order’ does not include a critical feature of bankruptcy under Australian law which is the taking of the assets of the insolvent person and their subsequent realisation and distribution among his or her creditors. Nor does it include the other feature mentioned by Gibbs CJ in Storey v Lane that the debtor is discharged from future liability for his or her existing debts.

36. Further, in so far as Article 146 of the Company Law is relied on, there is no evidence that either Chairman Zhang or Ms Lu are prohibited by that provision from being a director of a company in China, and even if there was, that of itself would not cause either of them to be an undischarged bankrupt under the law of China. Nor would it disqualify them from being a director of an Australian company. Section 206EAA of the Act deals with the circumstances in which disqualification as a director under the law of a foreign country has that effect under the Act, and it is limited to a disqualification under the law of New Zealand (s 206B(7)).

Costs

37. For the above reasons, the Motion should be dismissed. The plaintiffs seek indemnity costs.

38. Under s 98(1) of the Civil Procedure Act 2005 (NSW), costs are in the discretion of the court, with full power to determine by whom, to whom and to what extent costs are to be paid and whether they are to be paid on the ordinary basis or on an indemnity basis. The ordinary rule is that costs follow the event unless the court otherwise orders: UCPR r 42.1. As the plaintiffs have been successful it is appropriate that the first defendant should pay their costs of the Motion. The fact that the first defendant is impecunious is not a reason to order otherwise.

39. Departure from the usual practice that costs are payable on the ordinary basis will depend on whether there is a sufficient special or unusual feature of the case to justify that course. In Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225 at 233, Sheppard J gave some examples of special circumstances which have been seen as warranting the exercise of the discretion. One situation where it is appropriate to consider an order for indemnity costs is if an action has been commenced or continued in circumstances where the applicant properly advised should have known he had no chance of success: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401. In my view this is such a case.

40. It is relevant to take into account that the first defendant was unrepresented but the mere fact that he was unrepresented is not a reason for declining to make an order for indemnity costs where otherwise it is appropriate to do so: see Bhagat v Global Custodians Ltd [2002] FCA 223 at [57] per O’Loughlin, Whitlam and Marshall JJ. It is also necessary to bear in mind that the purpose of an award of indemnity costs is not to punish the unsuccessful party, but rather to compensate the successful party for costs it has incurred as a result of the conduct of the unsuccessful party in the course of the proceedings.

41. In my view, this is an appropriate case to award indemnity costs. First, the plaintiffs put the first defendant on notice at an early stage (by their written submissions dated 12 May 2023) that he had no standing to bring the Motion. Second, it is clear that the first defendant knew that China does not have a bankruptcy law applicable to natural persons and he should have understood that the argument based on s 206B(3) was speculative at best. Third, the hearing was significantly prolonged by the Motion and the reliance on expert evidence which was prepared in the entirely unsatisfactory manner referred to at [18]–[20] above. Fourth, while the first defendant was unrepresented, he is a qualified Australian lawyer who practised as a solicitor for 10 years and was in my view, based on my observations of the way he conducted the hearing, quite capable of assessing the strength of the argument he put in support of the Motion. In all the circumstances, it is in the interests of justice that the plaintiffs received their costs of the Motion on an indemnity basis.

Contempt Motion

42. By the Contempt Motion filed on 3 June 2022, the third plaintiff, CLGC Investment Pty Ltd (CLGC), seeks orders that Mr Zhang be held in contempt of court and be punished for alleged contempts of court as a consequence of breaches of freezing orders made against the fifth defendant, SEPAM, and an undertaking given to the Court by Mr Zhang.

43. CLGC relied on an affidavit of Mu Hudson Lu and two affidavits of Mr Zhang sworn by Mr Zhang in 2018. Mr Zhang relied on one affidavit made by him and he was cross-examined.

The freezing orders

44. On 11 July 2018, freezing orders were made by Ward CJ in Eq (as her Honour then was) against and served on SEPAM (freezing orders). The orders were subsequently extended by consent, ultimately until further order. Mr Zhang confirmed in cross-examination that he received a copy of the freezing orders on 11 July 2018 and read them.

45. Order 6 of the freezing orders imposed an obligation on SEPAM not to remove from Australia or in any way dispose of, deal with or diminish the value of any of its assets in Australia up to the unencumbered value of $2,980,000. That obligation was subject to the exception set out in order 10. It is sufficient to set out orders 6, 7, 8 and 10 which provide as follows:

6.   (a)   You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia (“Australian assets”) up to the unencumbered value of AUD$2,980,000.00 (“the Relevant Amount”).

(b)   If the unencumbered value of your Australian assets exceeds the Relevant Amount, you may remove any of those assets from Australia or dispose of or deal with them or diminish their value, so long as the total unencumbered value of your Australian assets still exceeds the Relevant Amount.

(c)   If the unencumbered value of your Australian assets is less than the Relevant Amount, and you have assets outside Australia (“ex-Australian assets”):

(i)   You must not dispose of, deal with or diminish the value of any of your Australian assets and ex Australian-Australian assets up to the unencumbered value of your Australian and ex-Australian assets of the Relevant Amount; and

(ii)   You may dispose of, deal with or diminish the value of any of your ex-Australian assets, so long as the unencumbered value of your Australian assets and ex-Australian assets still exceeds the Relevant Amount.

7.   For the purposes of this order,

(1)   our assets include:

(a)   all your assets, whether or not they are in your name and whether they are solely or co-owned;

(b)   any asset which you have the power, directly or indirectly, to dispose of or deal with as if it were your own (you are to be regarded as having such power if a third party holds or controls the asset in accordance with your direct or indirect instructions); and

PROVISION OF INFORMATION

8.   Subject to paragraph 9, you must:

(a)   at or before the further hearing on the return day (or within such further time as the Court may allow) to the best of your ability inform the applicant in writing of all your assets in Australia, giving their value, location and details (including any mortgages, charges or other encumbrances to which they are subject) and the extent of your interest in the assets;

(b)   within 7 working days after being served with this order, swear and serve on the applicant an affidavit setting out the above information.

EXCEPTIONS TO THIS ORDER

10.   This order does not prohibit you from:

(a)   [DELETED]

(b)   paying [$20,000 on] [your reasonable] legal expenses;

(c)   dealing with or disposing of any of your assets in the ordinary and proper course of your business, including paying business expenses bona fide and properly incurred but note this does not include payment of the two invoices issued 4 July 2018 which appear at pp 310 and 318 of Exhibit A on this application; and

(d)   in relation to matters not falling within (a), (b) or (c), dealing with or disposing of any of your assets in discharging obligations bona fide and properly incurred under a contract entered into before this order was made, provided that before doing so you give the applicant, if possible, at least two working days written notice of the particulars of the obligation.

46. In accordance with order 8, on 20 July 2018, Mr Zhang filed an affidavit setting out the balance sheet of SEPAM as at 20 July 2018, which stated that all the assets shown in the balance sheet were located in Sydney, Australia. The assets disclosed in the balance sheet comprised a business transaction account with the Commonwealth Bank (CBA), with a balance of $1,054,214.21, accounts receivable of $83,179.83, a loan to “AXF” in the amount of $1 million (which was never repaid), other receivables in the amount of $40,007.37, office equipment (after depreciation) of a nominal amount and an investment in “iHorde” in the amount of $100. The total assets were shown as $2,197,501.84 and net assets were shown at a negative amount of $4,630,817.04.

47. SEPAM’s account with CBA referred to in the previous paragraph had an account number ending 4449 (SEPAM Account).

The Undertaking

48. After a further motion seeking freezing orders against Mr Zhang personally was filed and served, on 17 March 2020, Mr Zhang gave an undertaking to the Court which was accepted and noted in orders made by Ward CJ in Eq on that day (Undertaking). The Undertaking was in the following terms:

The first defendant undertakes:

1.   to provide the plaintiff’s solicitors with 3 business days notice in writing prior to any completion of any sale of the property [Northbridge property], or prior to further encumbering that property (other than to allow the first defendant’s purchase of a new home in Northbridge);

2.   to use any proceeds of the sale of the Northbridge property or the property at [XXX], Kensington to:

a.   acquire a new property;

b.   pay down any loan secured by a mortgage over the Northbridge property; and/or

c.   pay any damages in respect of the termination of the contract of sale in respect of the new Northbridge Property.

49. Mr Zhang admits in his affidavit of 11 November 2022 that he gave this undertaking which, as it was given on his behalf, was clearly known to him at the time it was given. The Northbridge property referred to in para 1 was a house in Northbridge owned jointly by Mr Zhang and his wife and was ultimately sold. CLGC alleges that the proceeds of sale were dissipated in breach of the Undertaking.

Alleged contempts

50. The alleged contempts fall into two categories. The first relates to breaches of the freezing orders. The relevant part of the statement of charge (SOC) for this category is as follows:

9.   The First and Fifth Defendants were aware of the orders made extending the Freezing Orders, including the orders on 2 October 2018, which were made by consent.

10.   In wilful disobedience and contravention of the Freezing Orders, between 12 July 2018 and 31 March 2021 the First Defendant caused the Fifth Defendant to dispose of, deal with or diminish its assets, being cash in its bank account with Commonwealth Bank of Australia with account number [XXX 4449] (CBA Account).

Particulars

Debits from Commonwealth Bank of Australia with account number [XXX 4449] in the period from 11 July 2018 to 31 March 2021, including those set out in Table 1 in Annexure A to this Statement of Charge.

11.   The disposal of cash from the CBA Account occurred in circumstances where the unencumbered value of the Fifth Defendant’s assets was, or by reason of the removal of cash from the CBA Account, was caused to be below the Frozen Amount (Disposal).

12.   The Disposal constituted a deliberate and contumacious breach of the Freezing Orders by the Fifth Defendant.

13.   By reason of the matters stated at paragraphs 4 and 5 above, the First Defendant knowingly aided, abetted and procured the breach of the Freezing Orders by the Fifth Defendant, and weas knowingly involved in that breach.

14.   By breaching the Freezing Orders, the Fifth Defendant is in contempt of the Court.

15.   By his involvement in the breach of the Freezing Orders, the First Defendant is in contempt of the Court.

51. The second category relates to the alleged breach of the Undertaking. The particulars in relation to this alleged contempt are set out in the SOC which provides as follows:

19.   On 17 September 2020 the Northbridge Property was sold, and settlement of that sale occurred on or about 29 October 2020.

20.   In wilful disobedience and contravention of the Undertaking from 29 October, the First Defendant did not use the Proceeds of the sale of the Northbridge Property in accordance with the Undertakings and caused the Proceeds of the sale to be paid to a third party.

21.   In the alternative to paragraph 21, in wilful disobedience and contravention of the Undertaking, between 29 October 2020 and 31 March 2021 the First Defendant used the proceeds of the sale of the Northbridge properties for purposes other than those stated at paragraph 18 above.

Particulars

(i)   Payment of proceeds of the sale, alternately part of the proceeds of sale, into [the CBA account] in the name of SEP Asset Management Pty Ltd on or about 4 November 2020.

(ii)   Payment of proceeds of the sale, alternately part of the proceeds of sale, into an account with account number [XXX] in the name of MMEE Management Pty Ltd on or about 9 November 2020.

(iii)   Debits from Commonwealth Bank of Australia with account number [XXX] in the period from 30 October 2020 to 31 March 2021 including those set out in Table 2 in Annexure A to this Statement of Charge.

22.   The breach of the Undertakings by the First Defendant was deliberate and contumacious.

23.   By breaching the Undertakings, the First Defendant is in contempt of the Court.

52. Table 1 in Annexure A to the SOC sets out payments from the account in the name of SEPAM on 12 July 2018 of $20,000, three payments on 13 to 15 September 2018 in amounts totalling $181,508.06 (which were not pressed at the hearing), and four payments of $900,000 made on 23 March, 9 November, 11 November, and 13 November 2020.

53. Table 2 in Annexure A to the SOC sets out 55 payments made from the joint account with the CBA in the names of Mr Zhang and his then wife, Ms Zhou with account number ending 7241 (Joint Account). These payments were made over the period from 4 November 2020 to 31 March 2021, including four payments of $900,000 made on 4 November, 9 November, 10 November and 12 November 2020, and two payments totalling $900,000 made on 31 March 2021. I note that there appears to be a typographical error in para (iii) of the particulars because the account specified there is the SEPAM Account rather than the Joint Account. Ultimate, nothing turns on this discrepancy.

Relevant events

54. On 12 July 2018, the day after the freezing orders were made, $20,000 was paid from the SEPAM Account described in the bank statement as being for “Legal fee”. In his affidavit Mr Zhang stated that this was a payment made to W&H Lawyers for legal fees due in connection with SEPAM ceasing its business. While the tax invoice for the legal services provided by W&H Lawyers for those services is not in evidence, it is not in dispute that SEPAM did cease its business around this time. Mr Zhang’s evidence in cross-examination was that it was a payment which he regarded as falling within order 10(a) of the freezing orders. On the evidence, I am not satisfied beyond reasonable doubt that the payment does not fall within the exclusion in order 10(a) of the freezing orders. However, I note that the payment was made on the day after the freezing orders were made and serves to confirm that Mr Zhang read and understood the orders when he received a copy of them, including the exclusions in order 10.

55. On 23 March 2020, a payment of $900,000 was made from the SEPAM Account to the Joint Account. Mr Zhang’s evidence was that he treated this as loan to him by SEPAM which he intended to repay and did ultimately repay on 31 March 2021. The loan was undocumented. The circumstances in which this payment of $900,000 was made are as follows:

1. On around 4 December 2019, RZ Consulting Services Pty Ltd, a company with which Mr Zhang says he was associated, without significant assets or regular income, borrowed $765,000 from N1 Venture Pty Ltd on terms that the interest was 1.5% per month (18% per annum) defaulting to a higher rate of 4% per month (48% per annum) if not paid on the due date (N1 Venture loan). At the time the loan agreement was entered into, Mr Zhang was expecting to receive a very large payment from a business associate, Richard Gu, on around 13 December 2019. Mr Zhang and his wife gave a guarantee of the loan and a mortgage over the Northbridge property, which was their existing home and an apartment at Kensington, New South Wales, in respect of which Mr Zhang was the registered proprietor. Mr Zhang and his wife were the registered proprietors of the Northbridge property.

2. On 7 December 2019, Mr Zhang and his wife entered into a contract to purchase another residential property in Northbridge at a price of $6.5 million (2^nd Northbridge property). At the time of entering into the contract Mr Zhang expected that he would be able to complete the purchase using the funds he expected to receive from Mr Gu referred to above. However, by about 13 December 2019 he realised that that amount would not be paid to him.

3. On about 19 December 2019, the principal amount of the N1 Venture loan increased to $1,085,000.

4. On 28 January 2020, Mr Zhang exchanged contracts for the sale of the Kensington property, and the proceeds of sale were ultimately used partly to repay the N1 Venture loan.

5. In February 2020, Mr Zhang and his wife listed the Northbridge property for auction. The auction date was 19 March 2020, but no sale eventuated.

6. On 20 February 2020, the contract to purchase the 2^nd Northbridge property was terminated and the deposit which Mr Zhang and his wife had paid was forfeited to the vendor. Around this time Mr Zhang became concerned about the amount of interest payable on the N1 Venture loan and wanted to repay that loan as soon as possible.

7. On 17 March 2020, the Undertaking was given to the Court.

8. On 23 March 2020, a payment of $900,000 was made from the SEPAM Account to the Joint Account.

9. On 1 April 2020, Summer Lawyers, the solicitors for N1 Venture Pty Ltd, issued a letter to RZ Consulting Services Pty Ltd stating that the payout figure to repay the N1 Venture loan was $587,989.92, and that this payout figure would expire on 5 April 2020.

10. Over the period from 3 March to 31 March 2020, debits to the Joint Account were made totalling $300,000 (three payments) and in the period from 1 April to 7 April 2020, further payments were made from the Joint Account totalling $587,989.92 (five payments).

11. The N1 Venture loan was discharged on around 8 April 2020. I infer from the bank statements that the $900,000 transferred from the SEPAM Account to the Joint Account on 23 March 2020 was used to repay the N1 Venture loan, together with the net proceeds of sale of the Kensington property.

56. On 17 September 2020, Mr Zhang and his wife entered into a contract to sell the Northbridge property.

57. On 26 October 2020, Mr Kwok, of Summit Legal, the solicitors for Mr Zhang sent an email to Mr Hudson Lu, of Luminus Legal, the solicitor for CLGC, stating that his client had arranged a bank guarantee and also that the sale of the Northbridge property “will be settling on 29 October 2020”.

58. Mr Lu responded by email on the same day pointing out that the Undertaking required three business days’ notice prior to completion of any sale, and on the following day Mr Lu sent to Mr Kwok a copy of the orders made by Ward CJ in Eq on 17 March 2020 and the Undertaking noted in those orders, and requesting a reply by 4:00pm “advising how your client proposes to deal with the proceeds of the sale of the property in light of his undertaking to the Court on 17 March 2020”. At 2:37pm that day, Mr Kwok responded by email stating:

We are instructed that our client’s intended usage of the proceed will be buying a new property (Undertaking 2(a)) and/or for funding his Federal Court and Supreme Court proceedings”.

59. Mr Lu responded to this email by two emails later on 27 October 2020, requesting advice as to where the proceeds are proposed to be held pending the proposed purchase, noting that the Undertaking did not provide for Mr Zhang to use the proceeds to fund the proceedings in the Federal Court or the Supreme Court, and asking for a copy of the front page of the contract as well as the settlement sheet.

60. On 28 October 2020, Mr Kwok provided a copy of the first page of the contract and the settlement adjustment sheet to Mr Lu. The latter stated that the balance of the net proceeds of sale, after adjustments was $3,169,374.84, but stated that the payee was “TBA”.

61. Mr Lu responded by email on the same day, requesting Mr Kwok to remind Mr Zhang of his obligations pursuant to the Undertaking in respect of how the proceeds of the sale may be applied. Mr Lu then followed this up by emails on 29 and 30 October 2020 and 2 November 2020, requesting a final settlement adjustment sheet with payee details for the balance of the proceeds.

62. On 4 November 2020, Mr Kwok responded to these emails by an email stating in relation to the Northbridge property that: “We advise that the sale proceed of the Northbridge property is currently held in the trust account of W&H Lawyers”.

63. On 4 November 2020, Mr Lu responded to that email, and in relation to the Northbridge property said:

Please provide a PEXA settlement direction to verify that all proceeds were directed to the trust account of W&H Lawyers, and a trust account statement or other documentary evidence to confirm that the funds are currently still held in the trust account. Please additionally remind your client that the funds are only to be released from that trust account for the purposes identified in your client’s undertaking to the Court, and confirm that your client instructs you that he will comply with the terms of his undertaking.

64. On 6 November 2020, Mr Lu chased up Mr Kwok for a response to the 4 November 2020 email and indicated that unless an explanation was provided by close of business, he anticipated instructions to relist the matter before the Court to raise Mr Zhang’s non-compliance with the Court orders. At 6:16pm, an email was sent to the Associate to Ward CJ in Eq, which stated relevantly:

We are writing to seek to have the matter urgently relisted before her Honour for the following reasons:

1.   Non-compliance by the defendants with order 10 of the orders made by her Honour on 15 September 2020 to provide an unconditional bank guarantee to the plaintiffs in the sum of $178,000 to cover any judgment in respect of interest payable on one or more of the loans the subject of the pleading for the period from that date through to the varied hearing date, in light of the defendant’s application to vacate the hearing of the proceedings.

2.   Failure by the first defendant to provide documentary evidence to confirm compliance with the undertaking made by him to her Honour and the Court on 17 March 2020 in respect of how proceeds from the sale of the property identified in that undertaking may have been dealt with, despite a number of requests.

We would request that the matter be relisted as soon as possible.

65. On the following Monday, 9 November 2020 at 5:36pm, Mr Kwok sent an email to Mr Lu providing a response in relation to the bank guarantee and then in relation to the Northbridge property, he stated:

Proceeds from the sale of the Northbridge property – we are instructed that the proceeds were now disbursed to the bank account of our client’s family trust since the title of the property was under the name of [Mr Zhang and his wife]. We are instructed our client intends to use this (sic) funds to acquire a hear (sic) property as per undertaking 2(a) made on 17 March 2020.

We trust the above will be satisfactory to your client and there is no need to relist the matter before the court.

66. On 10 November 2020 at 11:51am, Mr Lu responded to this email. He dealt first with the issues relating to the guarantee, which are not presently relevant, and then said the following about the Undertaking:

We refer to the terms of the undertaking made by your client to the court on 17 March 2020.

We note that you have advised that the proceeds of the sale of the Northbridge property have been disbursed from the trust account of W&H Lawyers Australia Pty Ltd to an unnamed family trust operated by your client. We have not been provided any details of this family trust, including but not limited to the identity of the trustee, the identities of the beneficiaries and details of in what circumstances the property and proceeds of the trust can be distributed.

We anticipate that the trustee of the family trust would be a separate legal entity to Mr Ronglai Zhang. In such circumstances, it appears that your client has caused the distribution of his share of the proceeds from the sale of the Northbridge property to a third party. The terms of your client’s undertaking do not permit the payment of the proceeds to a family trust. This would accordingly appear to constitute a breach of the undertaking, even if the funds are used to purchase real property by the trustee of the family trust. Your client is a solicitor, who would be expected to have an understanding of these things.

We additionally note that, despite numerous requests, no documentary evidence has been provided to confirm that all of the proceeds were paid into the W&H Lawyers Trust Account, and that no documentary evidence has been provided to confirm how the proceeds were distributed from the W&H Lawyers Trust Account (including whether all the proceeds were paid to your client’s family trust, or alternatively only part of the proceeds were paid). We would request that those documents urgently be provided, together with a copy of the trust deed of your client’s family trust.

Our client is accordingly of the view that it remains necessary to raise this matter with the court.

We look forward to your urgent input into the matters raised in this email.

67. On 12 November 2020 at 5:54pm, Mr Kwok responded by an email which stated:

1.   Copy of the bank guarantee attached. Original has been sent by express post (with tracking) to your office today.

2.   Proceeds of the Northbridge sale:

(a)   PEXA financial statement showing proceeds of $1,032,338.62 was transferred to the trust account of W&H Lawyers.

(b)   Bank transaction record from W&H Lawyers trust account to MMEE Management (family trust).

(c)   Bank account balance showing the proceeds of the sales in the [Joint Account].

I believe the undertakings are now satisfied and I await your email confirmation to the Judge’s associate in relation to withdrawing the relisting request.

68. Attached to the email were (a) a copy of the bank guarantee and covering letter, (b) the PEXA statement which showed that the net proceeds of sale after adjustments and the payout of the CBA loan secured over the Northbridge property, to be the amount of $1,032,338.62 paid to W&H Lawyers trust account, and various screenshots for transfers made from W&H Lawyers trust account to the Joint Account. It may be noted that it is clear from the bank statements in evidence that on 4 November 2020, $900,000 was paid from the W&H Lawyers trust account to the Joint Account and then immediately transferred from the Joint Account to the SEPAM Account on the same day.

69. On 13 November 2020, Mr Lu responded to Mr Kwok’s email as follows:

We note that the screenshot for the W&H Lawyers Trust Account shows that a payment of $1,032,338.62 was paid into an account with account number ending 7241, which we understand to be in the name of MME Management Pty Ltd (“Account NMEE 7241”). We further note that the screenshot provided for the joint account with account ending 7241 shows the following funds being paid into that account on 11 November 2020:

1.   $200,000.00 from a Commonwealth Bank Account with account number ending 3678 (which we understand to be account MMEE 7241); and

2.   $900,000.00 from a Commonwealth Bank Account with account number ending 4449.

We accordingly note that the larger part of the payment into the joint account was not from account MMEE 7241, and were instead paid from a different account with the Commonwealth Bank of Australia. In such circumstances, we are concerned that your client has provided inaccurate information, and that the majority of the funds paid into your client’s joint bank account were not proceeds from the sale of the Northbridge property and instead comprise of other funds from an account ending 4449. Please provide bank account statements for each of the bank accounts that the proceeds from the sale of the Northbridge property have been transferred through after leaving the W&H Lawyers Trust Account, so that we can confirm that the whole of the proceeds are accounted for.

We additionally note that another of your clients, [SEPAM] is subject to a freezing order made on 11 July 2018 (and subsequently extended on 2 October 2018 to apply until further order of the Court), a copy of which is attached for your reference. The assets of SEPAM covered by that freezing order include the funds in a Commonwealth Bank Account in the name of SEPAM with account ending 4449. Please ask your clients to provide the most recent bank statements for that account, so that we can confirm that your client Mr Zhang did not transfer those funds into an account in the joint names of himself and his wife, as our client is now highly concerned that SEPAM may have breached the freezing order of 11 July 2018.

We look forward to your urgent reply in relation to these issues by 3:00pm today. If no further reply is received, we will have no choice but to press the relisting of the matter before her Honour, especially in light of the potential additional breach of a freezing order by SEPAM and, further, our clients will contemplate contempt of court proceedings against your clients.

70. Mr Kwok responded to this email later on 13 November 2020 at 4:41pm by an email as follows:

1.   Bank guarantee – our client agrees to provide replacement guarantee at a time six months before the expiry of the bank guarantee if the proceedings are not finalised by such time.

2.   Proceeds.

Please find attached excel spreadsheet and bank statements showing the transaction among the 4 different bank accounts. We are advised that some transactions were made by mistake and all have been rectified now.

As of today’s date, there are balances of not less than $900,000 in SEP bank account and no less than $1,100,000 in the [Joint Account].

71. Mr Zhang confirmed in cross-examination that he instructed Mr Kwok to send this email and that he prepared the excel spreadsheet which was enclosed with it. The email did not in fact enclose bank statements but rather screenshots of payments to and from various accounts, including the W&H Lawyers trust account, the SEPAM Account, the MMEE Management account and the Joint Account.

72. It appears that the excel spreadsheet attached to the email could not be opened and Mr Kwok resent it by a separate email at 4:43pm that day. The excel spreadsheet was in the following form.

Date	W&H Lawyers Trust account	MMEE Management (3678)	SEP Asset Management (4449)	Ronglai Zhang & Dai Qi Zhou offset (7241)
09-11-20	-1032338	1032338
10-11-20	-900000	900000
11-11-20	-200000	200000
11-11-20	-900000	900000
12-11-20	900000	-900000
13-11-20	900364.60 (Balance)	1163047.10 (Balance)

73. On 19 November 2020, Mr Lu sent an email to the Associate to Ward CJ in Eq, with a copy to the other parties, which stated: “we advise that we are no longer seeking for the matter to be relisted as requested on 6 November 2020, as the issue raised in that email has been addressed between the parties”.

74. It is apparent from the bank statements in evidence that the email from Mr Kwok to Mr Lu of 13 November 2020 set out at [68] above, was misleading in suggesting that on 13 November 2020, the balance of SEPAM Account was not less than $900,000 and the balance of the Joint Account was not less than $1,100,000.

75. This is clear when regard is had to the evidence regarding the various payments that were made over the period from settlement of the sale of the Northbridge property on 29 October 2020 up to 31 March 2021, which was the first day of the hearing before Parker J. The bank statements disclose the following:

1. On 29 October 2020, a deposit was made to W&H Lawyers’ trust account of $1,032,338, being the net proceeds of sale of the Northbridge property after discharge of the loan by CBA (CB 211).

2. On 4 November 2020, $900,000 was transferred from W&H Lawyers’ trust account to the Joint Account (CB 257) and then from the Joint Account to the SEPAM Account (CB 244 and 257).

3. On 9 November 2020, $900,000 was transferred from the SEPAM Account to the Joint Account (CB 244 and 258), and then from the Joint Account to the W H Lawyers trust account (CB 222 and 258). On the same day, a transfer was made from the W&H Lawyers trust account of $1,032,338 to the MMEE Management account (CB 222 and 217).

4. On 10 November 2020, a transfer of $900,000 was made from MMEE Management account to the Joint Account (CB 217 and 258) and then from the Joint Account to the SEPAM Account (CB 217 and 244).

5. On 11 November 2020, a transfer of $900,000 was made from the SEPAM Account to the Joint Account (CB 244 and 258). Also on the same day a transfer of $200,000 was made from the MMEE Management account to the Joint Account (CB 217 and 258).

6. On 12 November 2020, a transfer of $900,000 was made from the Joint Account to the SEPAM Account (CB 244 and 258). At the end of that day the balance of the SEPAM Account was $900,364.60.

7. On 13 November 2020, a transfer of $900,000 was made from the SEPAM Account (CB 244). It is not clear where this payment went to, but credits were made to the Joint Account on 13 November 2020 totalling $962,400 which resulted in that account having a balance at the end of 13 November 2020 of $1,163,258. However, the balance of the SEPAM Account at the end of 13 November 2020 was $364.60 as a result of the withdrawal from that account of $900,000 during the day.

8. No further transactions occurred in the SEPAM Account until 31 March 2021, when $900,000 was transferred from the Joint Account to the SEPAM Account (CB 244, 258 and 277).

76. The entries in the bank statements referred to in the previous paragraph indicate that the excel spreadsheet provided by Mr Kwok to Mr Lu in the email of 13 November 2020 and the statement in the last paragraph of that email were not accurate. Contrary to those statements, on 13 November 2020: (a) at the beginning of the day the balance in the SEPAM Account was $900,364.60 but reduced to $364.60 by a transfer of $900,000 to “Commbank App” by the end of the day and (b) at the beginning of the day the balance in the Joint Account was $200,908.06 and increased to $1,163,258.00 by the end of the day due to various transfers from the Commbank App on that day, one of which is described as a “loan repayment” of $420,000. The inference which is open on the evidence referred to in the previous paragraph is that the transfers on 13 November 2020 between the Joint Account and the SEPAM Account were made by Mr Zhang to give the appearance that the two accounts had on that day the balance stated in the email, but that was not in fact the case at the same point in time.

77. Mr Zhang was cross-examined about the transfer from the SEPAM Account to the Joint Account on 23 March 2020 of $900,000. His evidence was that it was a loan to him by SEPAM, although it was not documented in writing (T32.17). He said in his affidavit the following about this “loan”:

At the time I borrowed the $900,000 from [SEPAM] I thought this was allowed by the freezing order because that borrowing did not encumber the assets.

At that time, and in addition to [Northbridge property] through a family trust, the MMEE Family Trust, I owned two other properties.

(1)   One was [a property at Sussex Street];

(2)   The other was [another property in Sussex Street]

I did not think very much about the details of that borrowing transaction because there was sufficient equity in [the Northbridge property] to by itself repay the loan from [SEPAM]. I always intended that that happen.

If I had thought about it more carefully, it would have been better if I had arranged for [SEPAM] to have a mortgage over [the Northbridge property and/or the other properties].

78. Mr Zhang accepted in cross-examination that he: (a) instructed Mr Kwok to send the email stating that the balances in the two accounts were not less than $2 million (T47.30); (b) he prepared the spreadsheet (T44.10 and T47.40), but later changed his evidence to say that his solicitor prepared it (T51.32), that change I do not accept; and (c) through the spreadsheet he deliberately tried to show that the balances in the SEPAM Account and the Joint Account were over $1.1 million and $900,000 respectively (T44.10 and T47.40).

79. His explanation for why he took those steps was that he wanted to avoid the impression that there was a breach of the freezing orders although he accepted that the email gave a false impression as to the amounts standing to the credit of the two accounts. His evidence in cross-examination was (T47.38–T48.50) (emphasis added):

Q. And then you prepared a spreadsheet which identified that both of those accounts had balances in excess of $900,000. You did that, didn't you?

A. Yes.

Q. And you must have done that to convey an impression that each of those accounts had that balance in it.

A. At that time there's not much money less than that, that, after that anyway.

Q. Well that's just simply not true, is it? In fact, you had just been transferring the same amount of $900,000 between the accounts to make it look like both accounts had money in them.

A. Not both account. Only, only SEPAM.

Q. Then why did you send a screenshot of the other account with $1.1 million in it?

A. Because you're going to ask me where the money, SEPAM got money, coming from.

Q. So because we were going to ask you where the money came from‑‑

A. You asked the, the - my account first. Ask this, the, the, the, the, that account, my personal account first, then SEPAM account, then that account.

Q. It was‑‑

A. It's follow that order.

Q. It was a deliberate ploy for you to cover up‑‑

A. No.

Q. --the fact that one of the accounts didn't have the money in it. That's true, isn't it?

A. No because the, the order your, your, your, your, your, your, the solicitor send out the, the questions, that's why, you know I have to move the money. I don't want to give the impression that I, I breach freezing order and the - but that, that because that going to be testify in court anyway.

Q. That's not true, is it?

A. That's true.

Q. Because of the screenshots you sent you're aware that the plaintiff ultimately didn't approach or cancelled their approach to the Court, aren't you?

A. Yeah because that, you, you come, you're going to see that in during a hearing.

Q. Well they cancelled the approach to the Court because you'd tricked them into believing that there was over $2 million held between the accounts‑‑

A. No.

Q. --hadn't you?

A. No.

Q. I'm sure you would agree with me that there wasn't a total of $2 million, was there?

A. There's no two million or two million or above. I just want, want, don't want to, your, your client‑‑

Q. Mr Zhang‑‑

A. --to think I, I, I, I, I breach freezing order.

Q. --just answer the question.

A. That's it.

Q. There wasn't a total of $2 million, was there?

A. Was not.

80. Mr Zhang’s evidence was that his understanding at the time he withdrew amounts from the SEPAM Account was that the freezing order did not preclude him from borrowing money from SEPAM. This was a related explanation for why he believed that he had complied with the Undertaking when “repaying” the amount of $900,000 to SEPAM which he had borrowed to discharge the N1 Venture loan. His evidence was (T9.39-T50.35) (emphasis added):

Q. You deliberately provided screenshots to provide a false impression of the amounts in those accounts to cover the fact that $900,000 was gone. That was your purpose, wasn't it?

A. No, paid.

Q. Sorry?

A. The $900,000 been repaid. It didn't gone. It wasn't gone.

Q. So when you say it's been repaid what that means is you took the money that was the subject of the undertaking and you put it in the account the subject of the freezing order. That's, that's‑‑

A. No, so the undertaking, undertaking I made and my, always my understanding is to repay the mortgage.

Q. And you say that a mortgage was repaid?

A. Yes.

Q. But there is no mortgage?

A. No, they because not - it didn't document it. But in my mind that was mortgage. That, that's how I borrowed. That's the whole purpose I borrow the money.

Q. You knew that you shouldn't have taken the money, but you believed that if you had some time, you could pay it all back. That's the truth, isn't it?

A. Had what time?

Q. Well you believed that if you had a little bit more time Richard Gu would repay you the money‑‑

A. I believe your, your client‑‑

Q. --and you could make the accounts whole.

A. --wouldn't sue me for this.

Q. That's not the question. You knew that you shouldn't have taken the money out of the frozen funds. But you believed that if you had some time you could pay it back and no‑one would know.

A. No.

Q. That's the truth, isn't it?

A. No. That's not, not truth.

Q. What other possible reason could you have had for making each account look like they had amounts in excess of $900,000?

A. Because I didn't think I breach anything in the first place. The whole, the money I, I borrowed, the, the one I make and that I give a undertaking, that undertaking, the money is always in my mind is to repay that, the, the money borrowed from SEPAM. And then I, I did repay it.

81. Later he gave the following evidence regarding the payment of $900,000 to SEPAM from the proceeds of sale of the Northbridge property (T51.50–T52.29) (emphasis added):

Q. Going back to the proceeds of the sale of the Northbridge property, you've acknowledged that you paid $900,000 to SEPAM from those proceeds, that's right, isn't it?

A. Yes.

Q. And SEPAM didn't actually hold any security over the property, did it?

A. Not didn't document, I - in my mind is - I should have a document that--

Q. SEPAM simply didn't hold any security over the property, did it?

A. Either strictly it is, is not.

Q. And it wasn't the owner of any property that you were purchasing, was it?

A. No.

Q. And it didn't have a damages claim against you for lost deposit, did it?

A. No.

Q. You knew that you weren't permitted to use the money that was subject to the undertaking for anything other than the three purposes we went through before, that's right, isn't it?

A. Yes, but I didn't think I breach, I think in my mind is, is a mortgage.

Q. You paid the money over to SEPAM because you knew that you were in breach of SEPAM's freezing order, that's true, isn't it?

A. No.

Q. And you thought the freezing order--

A. I did - the reason I - no, no, I answer this. The reason I, I borrow money from SEPAM because I reviewed the, the freezing order. In my understanding the freezing order does not allow - forbid me from borrowing money because it says does not diminish the value of the, of the - of the fund.

Relevant principles

82. The principles to be applied where a plaintiff brings a charge of civil contempt against an individual or a company for a breach of a court order or undertaking given to the court were summarised by Perram J in Re. Group Pty Ltd v Kazal (No 4) [2017] FCA 1084 at [73]:

1.   The purpose of the law of civil contempt is to compel obedience rather than punish disobedience which, by contrast, is the domain of criminal contempt.

2.   Both are to be proved beyond reasonable doubt.

3.   In a case of civil contempt, the Plaintiff must prove that:

(i)    an order was made by a court;

(ii)    the order was sufficiently clear such that one can be sure beyond reasonable doubt that the order was not complied with;

(iii)    the order was served on the alleged contemnor or that service was for some reason dispensed with under some lawful order;

(iv)    the alleged contemnor had knowledge of the terms of the order;

(v)    the alleged contemnor breached the order; and

(vi)    the alleged contemnor took a deliberate step which, even if not intended to, breached the order. What is necessary is not that the alleged contemnor intended to breach the order but rather that the order was breached and that the action constituting the breach was intended. Hence, casual, accidental or unintentional acts which breach an order are excluded.

4.   Whether the alleged contemnor intended to breach the order and to defy the Court is a matter going to penalty.

83. See also to the same effect National Australia Bank Ltd v Juric [2001] VSC 375 at [37] per Gillard J, Metcash Trading Ltd v Bunn (No 5) [2009] FCA 16 at [9] per Finn J and Huang v Liao [2022] NSWSC 347 at [31]–[32] per Black J.

84. The SOC states that the conduct of Mr Zhang in relation to both categories of alleged contempt was deliberate and contumacious. If this is established, the contempt will be a criminal contempt: see Pang v Bydand Holdings Pty Ltd [2011] NSWCA 69 at [73]–[74] and [172]. In light of paras 12 and 22 of the SOC, the contempt with which Mr Zhang is charged is criminal contempt and it does not allege civil contempt in the alternative. This is confirmed in the plaintiff’s submissions (at [20]).

85. A contempt will be contumacious where it involves deliberate defiance of the Court: Witham v Holloway (1995) 183 CLR 525 at 530; Pang v Bydand Holdings Pty Ltd [2011] NSWCA 69 at [78].

86. In so far as the alleged breaches of the freezing orders are concerned, Mr Zhang was not personally bound by those orders. However, it is clear that a director of a company can be held liable for contempt where the company has breached freezing orders. It is necessary that the company itself has committed contempt: Re Intex Consultants Pty Ltd [1986] 2 Qd R 99 at 104–5. A company can only be liable for contempt for breach of a court order by reason of the acts or omissions of its officers, agents or employees: Lade & Co Pty Ltd v Black [2006] 2 Qd R 531; [2006] QCA 294 at [42]. Here, all the relevant acts of SEPAM, the party subject to the freezing orders, were done by its sole director and shareholder, Mr Zhang. Consequently, if his acts on behalf of the company satisfy the requirements to civil contempt referred to at [82] above, there will be a contempt by the company. However, it is not sufficient for Mr Zhang to be liable for contempt that SEPAM itself committed contempt in respect of a breach of the freezing orders.

87. The principle on which the plaintiff relied for the contention that Mr Zhang, as sole director of SEPAM, was liable for criminal contempt in respect of the breach of the freezing orders was the following observation of Woolf LJ (giving the judgment of the Court of Appeal) in Attorney-General for Tuvalu v Philatelic Distribution Corporation Ltd [1990] 1 WLR 926 at 936:

In our view where a company is ordered not to do certain acts or gives an undertaking to like effect and a director of that company is aware of the order or undertaking he is under a duty to take reasonable steps to ensure that the order or undertaking is obeyed, and if he wilfully fails to take those steps and the order or undertaking is breached he can be punished for contempt. We use the work “wilful” to distinguish the situation where the director can reasonably believe some other director or officer is taking those steps.

88. This principle has been applied in Australia on a number of occasions to hold directors of a company liable for contempt in connection with the company’s breach of a court order: e.g. Australian Competition and Consumer Commission v Goldstar Corporation Pty Ltd [1999] FCA 585 at [41]; Hurd v Zomojo Pty Ltd [2015] FCAFC 148 at [93]; Mahaffy v Mahaffy (2018) 97 NSWLR 119; [2018] NSWCA 42; BCEG International Australia Pty Ltd v Xiao [2023] NSWSC 57 at [25], [37] and [43].

88. There is a more general principle under which any third party (not just a director) can be held liable for contempt for conduct which has the effect of frustrating or subverting a court order which is not binding on that third party. It was referred to by the High Court in Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [121]:

…Intervention against persons who, though not personally bound by a court order, procure those who are bound by it to contravene it, or otherwise thwart it, rests on a different basis: those persons are not liable as accessories who aided and abetted the persons bound by the order, but are directly liable for independent contempts committed by themselves in obstructing the course of justice…

90. This principle was applied to a director charged with contempt in connection n with the breach of a court order by a company which he controlled in Sigalla v TZ Ltd [2011] NSWCA 334. Young JA (with whom Macfarlan JA and Handley JA agreed) after setting out the above passage from Zhu said at [14]:

It is trite law that where there is an injunction against X, only X will
commit a contempt by disobeying the injunction as opposed to a different
contempt for obstructing the process of the court … The non-party to the original proceedings who knows of the order and assists in the breach of the order and thereby obstructs the process of the court is liable to be punished for that offence against the court, not for a breach of the original order …

91. In Mahaffy v Mahaffy (2018) 97 NSWLR 119; [2018] NSWCA 42 Simpson JA after referring to Sigalla said:

[121]   There is, however, another line of authority, to which it seems that the court in Sigalla was not referred. That line of authority is specifically referable to the obligation of a director of a company, aware of an order of a court, to take reasonable steps to ensure compliance with the order.

[122]   In Attorney-General for Tuvalu v Philatelic Distribution Corporation Ltd [1990] 1 WLR 926 at 936 Woolf LJ said:

“In our view where a company is ordered not to do certain acts or gives an undertaking to like effect and a director of that company is aware of the order or undertaking he is under a duty to take reasonable steps to ensure that the order or undertaking is obeyed, and if he wilfully fails to take those steps and the order or undertaking is breached he can be punished for contempt. We use the word ‘wilful’ to distinguish the situation where the director can reasonably believe some other director or officer is taking those steps.”

[123]   That proposition was adopted by Kiefel J (as the Chief Justice then was) in Australian Competition and Consumer Commission v Goldstar Corporation
Pty Ltd [1999] FCA 585. Her Honour said:

“[41] Directors who have notice of a Court order (as to which see Madeira v Roggette [[1990] 2 Qd R 357], 364) are under a duty to take reasonable steps to ensure that it is obeyed, and if they wilfully fail to do so and the Order is breached they may also be held liable for contempt …”

Her Honour cited the Philatelic Distribution Corporation case.

[124]   In Hurd v Zomojo Pty Ltd [2015] FCAFC 148, Besanko and Gilmour JJ said:

“[93] A person, other than a person to whom the order is directed, may be found guilty of contempt in connection with a contravention of the order … In addition, a third party may be guilty of contempt if they know of the order and aid and abet the respondent in contravening it or otherwise do an act that obstructs or frustrates the object of the order … In certain cases, the liability of the third party is direct and not as an accessory …” (Internal citations omitted)

The passage from Zhu earlier mentioned was cited as authority for the proposition contained in the final sentence.

[125]   That line of authority is directly referable to this case. The appellant was the sole shareholder and director of DBMA. He controlled what it did and what it did not do. If DBMA could be held in contempt for failure to comply with the (2018) 97 NSWLR 119 at 141 order of McLoughlin DCJ, then it follows, on the authority of the decisions extracted above, that the appellant could also be held in contempt.

92. Payne JA at [251]–[252] agreed with Simpson JA’s approach above:

As Simpson JA explains, the weight of authority is in favour of the proposition that, depending on the nature of the order, a non-party director of a company may be in contempt for breaching an order directed at the company of which he or she is a director. Whether the authorities go so far as to provide that an omission by a non-party company director to take steps to cause a company to pay a costs order is not something I need to decide here. I will assume that on the facts of this case, the appellant, although not a party to the relevant proceedings and not the subject of the order, as the sole shareholder and director of DB Mahaffy & Associates Pty Ltd and a person on notice of the order, was bound to take steps, if those steps were able to be taken, to have DB Mahaffy & Associates Pty Ltd comply with the order.

The relevant issue here is whether, in his capacity as sole director of DB Mahaffy & Associates Pty Ltd, by act or omission, the appellant deliberately caused the company to fail to pay $136,679.46 to Jeffrey Mahaffy pursuant to orders made on 4 September 2009. For present purposes, although no time was fixed for payment by the order of the District Court, I am content to adopt the time for compliance identified by Simpson JA of 30 January 2011.

93. Emmett AJA took a similar approach at [291]:

Clearly enough, persons who, although not personally bound by a court order, procure those who are bound by it to contravene it or otherwise thwart it, may be directly liable for contempt in obstructing the course of justice [See Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 571 [121]; [2004] HCA 56]. Further, where a company is ordered not to do certain acts and a director of a company who is aware of the order wilfully causes the company to do the acts, the director himself may be guilty of contempt [See Attorney-General for Tuvalu v Philatelic Distribution Corporation Ltd [1990] 1 WLR 926 at 936]. However, where an order is made against a company requiring the company to take some positive step, such as the payment of a sum of money, the position may be different.

94. More recently the Full Federal Court in Jorgensen v Fair Work Ombudsman (2019) 271 FCR 461; [2019] FCAFC 113 (a decision to which the Court was not taken by the parties) discussed at length the principles which apply where, as here, the alleged contemnor is a director of the company bound by the freezing order, rather than the company itself and applied the line of authority which includes Sigalla. The Full Court (Greenwood, Reeves and Wigney JJ) said:

[10]   Thus, where the alleged contemnor is a party specifically bound by the order, it is not necessary to prove that they intended to disobey the order. Rather, deliberate conduct in breach of the order will be taken to constitute “wilful disobedience” of the order unless the conduct is “casual, accidental or unintentional”.

[11]   The position is, however, different where the alleged contemnor is not a party bound by the court order. That will include the situation where the party bound by the order is a company and the alleged contemnor is a director of the company. In such a case, the alleged contemnor is only liable for contempt if it is proved, beyond reasonable doubt, that they knowingly aided, abetted, counselled or procured the breach of the order: Seaward v Paterson [1897] 1 Ch 545 at 555; ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 255, 266; 110 ALR 47 at 55, 66; Australian Competition and Consumer Commission v World Netsafe Pty Ltd (2003) 127 FCR 542; [2003] FCA 159 at [86]; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; 162 ALR 294; 45 IPR 1; [1999] HCA 18 at [30]. In such circumstances, the alleged contemnor is not liable as an accessory, but rather is directly liable for an independent contempt committed by themselves in obstructing the course of justice: Zhu v Treasurer of New South Wales (2004) 218 CLR 530; 211 ALR 159; [2004] HCA 56 at [121].

[12]   A third party not bound by the court order will only be liable for contempt if they not only know of the order, but also engage in conduct which is intended to frustrate, thwart or subvert the purpose of the order. In CCOM Pty Ltd v Jiejing Pty Ltd (1992) 36 FCR 524 at 530–1 (CCOM), Drummond J referred to the liability of a party not bound by the order in the following terms …

[13]   Drummond J also held that a party not bound by the order will not be liable if they had an honest but mistaken belief as to the meaning or operation of the order which, if correct, would mean that their conduct could not amount to an interference with the operation of the order. His Honour said, in that regard (at 532):

And if a stranger, in fact, interferes with the operation of an undertaking given in an action between A and B, but does so in the honest but mistaken belief that the undertaking has a particular meaning which, if correct, would mean that his conduct could not be an interference with this operation, then there is equally a lack of the mens rea necessary to put him in contempt. This is so, in my view, no matter how unreasonable the stranger’s mistaken belief is, so long as it is a belief that is honestly held.

[14]   Those passages from the judgment of Drummond J in CCOM were referred to with approval in Sigalla v TZ Ltd [2011] NSWCA 334 at [14]–[16], [28] (Macfarlan JA, Young JA and Handley AJA agreeing); see also Admark Property Group Pty Ltd (in liq) v GJ Building and Contracting Pty Ltd [2016] NSWSC 1309 (Admark) at [23]–[27].

[15]   The critical point for the purposes of the present appeal is that, because Mr Jorgensen was not a party to or directly bound by the freezing order, the Ombudsman was required to prove that when Mr Jorgensen caused funds to be transferred from the frozen bank accounts, he knew that the transfers breached the freezing order. As will be seen, that in turn required the Ombudsman to prove, beyond reasonable doubt, not only that the transfers did not fall within the “ordinary and proper course of business” exception, but also that Mr Jorgensen knew that to be the case and did not honestly, but mistakenly, believe that the transfers fell within the exception.

95. Later their Honours said:

[222]   The freezing order was made against 828 Pty Limited. Mr Jorgensen was not a party to and therefore was not directly bound by the freezing order. The authorities referred to earlier in these reasons clearly establish that a third party who is not bound by a court order will only be liable for contempt arising from a breach of that order if it is found that they engaged in conduct which was intended to frustrate, thwart or subvert the purpose of the order: see in particular CCOM at [14]–[17]; Sigalla at [14]–[17], [28]; Admark at [23]–[27]. That involves proof that the alleged contemnor not only knew about the order, but also knew that their conduct involved or gave rise to a breach of the order. A party not bound by the order will not be liable for contempt if they had an honest but mistaken belief as to the meaning or operation of the order which, if correct, would mean that their conduct could not amount to an interference with the operation of the order.

[223] It follows that, to convict Mr Jorgensen of the charges of contempt brought by the Ombudsman, it was not sufficient for the primary judge to find, beyond reasonable doubt, that “the exceptions do not apply”: Judgment at [86]. It was not enough for his Honour to be satisfied beyond reasonable doubt that Mr Jorgensen authorised and directed the transfers and that the transfers breached the freezing order. It was also necessary for the primary judge to be satisfied beyond reasonable doubt that Mr Jorgensen knew that the transfers breached the freezing order.

[224]   Moreover, it is abundantly clear that Mr Jorgensen’s case before the primary judge was that he believed that the impugned transfers fell within the “ordinary and proper course of business” exception in order 10(c). That was the effect of his affidavit evidence and his evidence during cross-examination. It was, in those circumstances, necessary for the primary judge to be satisfied beyond reasonable doubt that Mr Jorgensen did not honestly entertain any such a belief.

96. In DC Rd DC Pty Ltd v Zhang (No 3) [2024] FCA 221 Jackman J discussed at length, in the context of an allegation of contempt against a director of a company which had breached a freezing order, the difference in the approaches taken in Jorgenson and in Mahaffy and considered himself to be bound by the former for the reasons he gave.

97. On the principles stated in Jorgensen, in order for Mr Zhang to be guilty of contempt for the alleged breaches of the freezing orders by SEPAM, it is necessary for the plaintiff to prove beyond reasonable doubt that:

1. Mr Zhang knew of the freezing orders when he caused the payments to be made from the SEPAM Account referred to in Table 1 of the SOC.

2. Mr Zhang knew that those payments breached the freezing orders. In proving this element, the plaintiff must also prove beyond reasonable doubt that Mr Zhang did not have an honest but mistaken belief as to the meaning or operation of the freezing orders which, if correct, would mean that his conduct would not amount to an interference with the operation of the orders.

98. I am bound by what was said in Mahaffy to apply the principle stated in Tuvalu set out at [87] above. It may be that there is no necessary inconsistency between that principle and the principle applicable to third parties generally which was applied by the Full Court in Jorgensen, particularly where, as here, the director is the sole director and the acts which constitute the alleged contempt were done by the director on its behalf. Given the requirement in Tuvalu that the director’s conduct be wilful, there may not be any real difference in substance between the two approaches. Further, the principle stated in Tuvalu reflects the fact that a company acts through the acts of its officers, agents or employees, and the requirement that the relevant failure of the director to take reasonable steps to comply with the orders must be wilful for the director to be in contempt of court, is consistent with the purpose of contempt proceedings which is protective as to the judicial function and the role of courts: Kazal v Thunder Studios Inc (California) (2017) 256 FCR 90; [2017] FCAFC 111 at [97]. See also D Rolph, Contempt (Federation Press, 2023) at Chapter 9 (pp 555–557) and Chapter 10 (particularly at pp 602–609) where the two lines of authority are treated as being separate. However, in case the matter goes further, it is appropriate that I make the necessary factual findings on the evidence on both approaches.

99. In relation to the alleged breach of the Undertaking, this was an undertaking given by Mr Zhang to the Court. The elements which the plaintiff must prove beyond reasonable doubt as a result of the non-compliance with the Undertaking are set out at [82] above (with the word “undertaking” substituted for “order”). In addition, because the alleged breach of the Undertaking is criminal contempt it is necessary for the plaintiff to prove beyond reasonable doubt that the breaches were in deliberate defiance of the Undertaking: see Cohen v Double Bay Bowling Club [2019] NSWSC 1625 at [211]–[233].

100. In circumstances where Mr Zhang does not admit the facts which establish that his conduct concerning the breach of the freezing orders or the Undertaking was deliberate, it will be necessary for the required conclusion to be reached by a process of inference from the evidence as a whole. In addressing that question, the Court must be satisfied that the required inference is the only reasonable inference and no other reasonable inference consistent with the innocence of Mr Zhang is open or available on the evidence: Jorgensen at [218]; Mahaffy at [253]–[254].

Consideration

Breach of the freezing orders

101. I am satisfied beyond reasonable doubt that all the necessary elements to establish civil contempt by SEPAM in respect of the four payments of $900,000 on 23 March and 9, 11 and 13 November 2020 have been established: the freezing orders were made by the Court; they are sufficiently clear such that one can be sure the order was not complied with; the order was served on SEPAM and it, through Mr Zhang, had knowledge of its terms; and SEPAM breached the freezing orders on each of those dates by the payments of $900,000 because the assets of SEPAM were diminished in value by reason of each payment.

102. I am also satisfied beyond reasonable doubt that Mr Zhang understood at the time the freezing orders were made what their purpose was, having previously advised CLGC itself, when acting as its solicitor, about the effect of a freezing order (T57.32).

103. Before addressing the question whether Mr Zhang is guilty of criminal contempt under the principle stated in Tuvalu it is necessary to address submissions made by Mr Zhang.

104. Mr Zhang made three submissions as to why there was no contempt in relation to the breach of the freezing orders. First, he submitted that the SOC failed to properly particularise the acts or omissions said to constitute the contempt: Matthews v ASIC [2009] NSWCA 155 at [40]–[47]. The complaint was that the SOC failed to allege that SEPAM’s total assets (not just its assets in Australia) went below $2,980,000 as a result of the payments referred to in Table 1 of Annexure A to the SOC and accordingly, Mr Zhang had not been put on notice of the allegation against him. I reject this submission. The SOC clearly identifies that the payments from the SEPAM Account diminished its assets in circumstances where the unencumbered value of its assets was, or by reason of those transactions was, caused to be below $2,980,000.

105. The affidavit filed by Mr Zhang on 20 July 2018 pursuant to order 8 of the freezing orders set out SEPAM’s assets and stated that all the assets were in Australia. In cross-examination, Mr Zhang accepted that the only substantial asset of SEPAM was the SEPAM Account and further that the payment of $20,000 for legal costs on 12 July 2018 was in connection with SEPAM ceasing its business in about late 2017. In these circumstances, Mr Zhang could have had no misunderstanding as to the nature of the breach of the freezing orders alleged.

106. Second, Mr Zhang submitted that the exceptions in order 10(b) (legal expenses) and 10(c) (business expenses) apply to each of the payments in Table 1 of Annexure A to the SOC. I have accepted that the plaintiff failed to discharge its onus of proof in relation to the payment of $20,000 on 12 July 2018. It is clear beyond reasonable doubt that the four payments of $900,000 (which are the only payments remaining in issue) on 23 March and 9, 11 and 13 November 2020 were not within orders 10(b) or (c).

107. Third, in relation to the payment of $900,000 from the SEPAM Account on 23 March 2020, Mr Zhang submitted that this was used by him to repay the N1 Venture loan that was incurring very high interest. His evidence was that the effect on SEPAM of the payment was that SEPAM went from having a deposit with CBA to having the benefit of a loan of the same amount which he (or he and his then wife) owed to SEPAM. He submitted that this was not a breach of the freezing order or, if it was, that he was under a misunderstanding of the freezing order believing that the borrowing “was allowed by the freezing order because the borrowing did not encumber the assets” and he believed that there was sufficient equity in the Northbridge property to enable “the borrowing” to be repaid and he always intended that it would be repaid. In cross-examination, he said that he believed that the freezing order was not breached because it did not forbid him from borrowing money as the borrowing did not diminish the value of the assets of SEPAM (see [81] above).

101. Even if it is accepted, in favour of Mr Zhang, that the payment of $900,000 on 23 March 2020 was a loan to him which he always intended to repay, it cannot be accepted that there was no diminution in the value of the assets of SEPAM by that payment or the payments on three payments of $900,000 on 9, 11, and 13 November 2020. A debt constituted by an unsecured loan to Mr Zhang (or to him and his wife jointly) which is not evidenced in writing would not have the same unencumbered value to SEPAM as a deposit of the same amount with CBA. A deposit with a bank of up to $250,000 is subject to a government guarantee under the financial claims scheme (see Banking Act 1959 (Cth) Pt 2 Div 2AA). That deposit was replaced with (at best) an unsecured debt against Mr Zhang (or both of Mr Zhang and his wife).

102. In relation to the first payment of $900,000 on 23 March 2020, I accept Mr Zhang’s evidence that he honestly believed at the time of that payment that it did not diminish the value of SEPAM’s assets so that he believed that the freezing order was not breached. Accordingly, either he did not wilfully fail to take reasonable steps to ensure the freezing orders were complied with on that date or, alternatively, he did not act in deliberate defiance of the Court at that time and his defence is made out in relation to that payment.

103. However, I am satisfied beyond reasonable doubt that Mr Zhang is guilty of contempt of court under the principle stated in Tuvalu in respect of the payments of $900,000 on each of 9, 11 and 13 November 2020 because he was under a duty to take reasonable steps to ensure that the freezing orders were complied with, and he wilfully failed to do so.

104. His explanation of the other three payments of $900,000 on 9, 11, and 13 November 2020 was not, in my opinion, credible. He said in his affidavit that the payment on 9 November 2020 was a loan by SEPAM to him and his wife which was repaid on 10 November 2020; the payment on 11 November 2020 was similarly a loan repaid on 12 November 2020; and the payment on 13 November 2020 was similarly a loan repaid on 31 March 2021. Again, none of these “loans” was documented. I infer that his evidence was that he believed that each “loan” was, like the earlier “loan” on 23 March 2020, one which did not diminish the unencumbered value of SEPAM’s assets.

105. In my opinion, it is clear beyond reasonable doubt that each of those payments on 9, 11 and 13 November 2020 was made in connection with his attempt to give the appearance that the SEPAM Account had a credit balance of $900,364.60 on 13 November 2020 when it did not. The plaintiff has established beyond reasonable doubt that Mr Zhang intended through the email sent on 13 November 2020 on his instructions, to seek to hide the fact that the SEPAM Account had a balance of only $364.60 so that the plaintiff would not inform the Court of this and would not discover that there had been a breach of the freezing orders and Undertaking. Had he really believed on 9, 11 and 13 November 2020 that there was no breach of the freezing orders because the unencumbered value of the assets of SEPAM had not been diminished by the “loan” to him (or him and his wife) on 23 March 2023 and the further payments on those dates, he would not have sought to create the false impression as to the balance of the SEPAM Account on 13 November 2020. I am satisfied beyond reasonable doubt that each payment of $900,000 on 9, 11 and 13 November 2020 was made deliberately in defiance of the freezing orders. Accordingly, he is guilty of criminal contempt in relation to those breaches of the freezing orders.

106. I will turn next to the alternative principle stated in Jorgensen under which the plaintiff must prove the matters set out at [97] above. In my opinion, each of those matters has been established beyond reasonable doubt in respect of the payments of $900,000 on 9, 11 and 13 November 2020: I am satisfied beyond reasonable doubt that on those dates he knew of the freezing orders and their purpose, he knew that the payments breached the freezing orders, and he did not have an honest belief that the payments did not breach the freezing orders.

107. Accordingly, the plaintiff has made out the alleged criminal contempt in relation to the three payments from SEPAM’s account on 9, 11 and 13 November 2020.

Breach of the Undertaking

115. The requirements which must be established for criminal contempt in relation to breach of the Undertaking are referred to at [99] above.

116. The evidence establishes beyond reasonable doubt that Mr Zhang gave the Undertaking to the Court and had knowledge of its terms as he instructed his solicitor to provide it on his behalf (T35.43). The terms of the Undertaking are clear and unambiguous and capable of compliance. Mr Zhang breached the Undertaking as he did not pay or apply the net proceeds of sale of the Northbridge property in any of the ways permitted by the Undertaking, but rather disbursed the relevant net proceeds of sale of the Northbridge property in the manner set out at [75] above, including by transfers to the Joint Account, the SEPAM Account and the MME Management account, none of which complied with the Undertaking. All of these actions involve deliberate steps by Mr Zhang which breached the Undertaking. Hence, the requirements for civil contempt have been established.

117. Mr Zhang submitted that there was no breach of the Undertaking for two reasons. First, the plaintiff had indicated in open correspondence with the Court in the email at [73] above that the issue it had raised had been addressed. I reject this submission because it is clear that the email was sent on the basis of the misleading email of 13 November 2020 at [70] above. Second, $900,000 of the net proceeds of sale were ultimately returned to the SEPAM Account on 31 March 2021. I reject this submission. That payment does not cure the breaches of the Undertaking which came about when the payments over the period from 4 to 13 November 2020 set out at [75] above occurred, nor did it in fact comply with the Undertaking.

118. As the Northbridge property was jointly owned with his wife, it could be said that he was not able to comply with the Undertaking as to the full amount of the net proceeds of sale. However, he was capable of complying with it as to his share of the net proceeds, and he did not direct any part of the net proceeds of sale in the matter required by the Undertaking.

119. As the charge is for criminal contempt, it is necessary for the plaintiff to establish beyond reasonable doubt that the breach of the Undertaking was contumacious, involving deliberate defiance by Mr Zhang of the requirements of the Undertaking. The evidence establishes that Mr Zhang’s purpose in applying the net proceeds of sale in the manner he did was to give the impression that the balance in SEPAM’s account was not less than $900,000 and the balance in the Joint Account was not less than $1,100,000, to avoid the matter being listed before Ward CJ in Eq for breach by him of the Undertaking.

120. I am satisfied beyond reasonable doubt that these steps were taken in deliberate defiance of the Undertaking. His intention was not to comply with the Undertaking but only to give the appearance that he was.

121. The course Mr Zhang should have adopted was to have the matter relisted before Ward CJ in Eq to apply for the terms of the Undertaking to be varied because his financial situation had changed since the Undertaking was given: Attorney-General v Punch Ltd [2002] UKHL 50; [2003] 1 AC 1046 at 1057 and 1063.

122. For these reasons, the charge of criminal contempt in relation to the breach of the Undertaking has been established beyond reasonable doubt.

Conclusion

123. For the above reasons, I have concluded that the contempt charges in relation to the breach of the freezing orders have been established in respect of the payments of $900,000 from the SEPAM Account on each of 9, 11 and 13 November 2020, and Mr Zhang’s breach of the Undertaking.

124. For the above reasons, the Motion is dismissed with costs on the indemnity basis, as agreed or assessed.

125. The Court accordingly will make the following orders:

1. Declare that Mr Zhang is guilty of criminal contempt by authorising payments of $900,000 from the SEPAM Account on 9, 11 and 13 November 2020.

2. Declare that Mr Zhang is guilty of criminal contempt by using the proceeds of sale of the Northbridge property otherwise than in accordance with the Undertaking.

3. The amended notice of motion filed by Mr Zhang on 17 May 2023 is dismissed with costs, to be payable on the indemnity basis as agreed or assessed.

126. In accordance with the usual procedure, there will be a separate hearing on penalty. It is appropriate that the question of costs in respect of the Contempt Motion be dealt with at that time.

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Decision last updated: 22 May 2024