Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 3)

[2018] VSC 711

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS’ LIST

S CI 2016 01132

and

S CI 2016 01242

BETWEEN

FLASH LIGHTING COMPANY LTD	Plaintiff
v
AUSTRALIA KUNQIAN INTERNATIONAL ENERGY CO PTY LTD	Defendant

AND BETWEEN

FLASH LIGHTING COMPANY LTD	Plaintiff
v
ZHANG YINAN	First Defendant
U&D MINING INDUSTRY (AUSTRALIA) PTY LTD	Second Defendant
WEI KUN PTY LTD	Third Defendant
YI KUN PTY LTD	Fourth Defendant
YI WEI AUSTRALIA PTY LTD	Fifth Defendant
AUSTRALIA WALES FINANCIAL MANAGEMENT PTY LTD	Sixth Defendant
BEIBEI ZHU	Seventh Defendant

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	14, 15, 19, 20, 21, 22, 26, 27, and 28 February, 1, 5, 6, 7, 8, 12, 13, 14, 15, 16, 20, 21, 22, 23, and 26 March, 11, 12, 16, 17, 18, 23, 24, 26, and 27 April 2018
DATE OF JUDGMENT:	22 November 2018
CASE MAY BE CITED AS:	Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 3)
MEDIUM NEUTRAL CITATION:	[2018] VSC 711	First revision:  12 February 2019

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CONTRACT – Sale of shares in company (U&D) that owned a coal mining tenement in Queensland – Vendors, two companies, FLC and ANB – Purchaser (KQ) a wholly owned subsidiary of a Chinese State Owned Entity(Yima) – Yima instructed KQ to purchase the shares from the two shareholders – Vendor (FLC) not paid agreed purchase price – Proceedings by FLC for payment of balance of sale price allegedly owed by KQ – Defence and counterclaim by KQ alleging that Yima and KQ misled and deceived by a fraudulent report on the coal resources of the tenement produced by a director of ANB – Price of the shares in U&D to be determined by Chinese valuer – Valuer used fraudulent report provided by director of ANB in reaching valuation of the shares – Whether Yima and KQ relied on the fraudulent report in approving the purchase of the shares in U&D at the price determined by the valuer – Whether provision of the fraudulent report constituted a breach of the share sale agreement – Whether breach of the share sale agreement led to any loss or damage to KQ.

MISLEADING AND DECEPTIVE CONDUCT – Claim under Competition and Consumer Act2010 (Cth) and Fair Trading Act1989 (Qld) that Yima being misled and deceived by the misleading and deceptive conduct constituted by the fraudulent report caused KQ to suffer loss and damage in buying shares for more than their worth – Claim by KQ for compensation under the Acts and for the damages to be set off against any moneys owed.

AGENCY – Whether the director of ANB acted as the agent of FLC in the sale by FLC of its shares in U&D in providing fraudulent report to Yima and the valuer.

AGENCY – Director of ANB acknowledged receipt of outstanding purchase price due to FLC – Whether director acting as agent for FLC – Whether FLC bound by actions of director of ANB.

RECEIPT AS A VOLUNTEER – Moneys transferred by KQ to U&D to be paid by U&D to FLC – Director of ANB, that provided fraudulent report, misappropriated moneys paid by KQ for the purchase of the shares from FLC – Director paid the misappropriated moneys to his former wife and former intimate friend – Proceedings by U&D to recover moneys misappropriated from former wife and former intimate friend.

BARNES v ADDY CLAIM – Knowing recipient claim.

CORPORATIONS – Alleged breach of director’s duties.

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APPEARANCES:	Counsel	Solicitors
For Flash Lighting Company Ltd	T J Margetts QC with W Thomas	Baker & McKenzie
For Australia Kunqian International Energy Co Pty Ltd	J P Moore QC with G Kozminsky	Clayton Utz
For Jun Xiao	T J Margetts QC with W Thomas	Baker & McKenzie
For Beibei Zhu	A P Rodbard-Bean with R Chan	MST Lawyers
For U&D Mining Industry (Australia) Pty Ltd	R D Strong with A D Barraclough	Clayton Utz
For Wei Kun Pty Ltd	A P Rodbard-Bean with R Chan	MST Lawyers
For Yi Kun Pty Ltd	A P Rodbard-Bean with R Chan	MST Lawyers
For Yi Wei Australia Pty Ltd	A P Rodbard-Bean with R Chan	MST Lawyers
For Australia Wales Financial Management Pty Ltd	C M Pierce	SBA Law

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1

The allegations..................................................................................................................... 2

The Coal Resource Assessment Report........................................................................... 5

The relevant train of events leading to the purchase of shares in U&D...................... 6

Details of Mr Songying Li’s criticisms of the CRA Report............................................ 9

Summary report................................................................................................................. 13

Mr Hao Liu......................................................................................................................... 14

A draft agreement and Mr Dongmin Wang................................................................... 16

Further research report of 11 January 2012.................................................................... 18

The January research report is sent to Mr Dongmin Wang......................................... 21

The meeting with the chairman 31 January 2012.......................................................... 25

Mr Hao Liu given the task of making further investigations..................................... 28

The co-operation funding agreement............................................................................. 29

Australian Resources Report Problem of 10 April 2012.............................................. 31

Equity Transfer Agreement of 27 April 2012................................................................. 34

Proposal put to the board of Yima................................................................................. 35

Proposal put to Henan SASAC........................................................................................ 37

The valuation report dated 15 May 2012....................................................................... 39

Yima approval of purchase by KQ................................................................................. 40

Witnesses for FLC.............................................................................................................. 45

Evidence of Mr Jun Xiao................................................................................................... 45

Cross-examination of Mr Xiao......................................................................................... 53

Evidence of Madam Cui................................................................................................... 61

Cross-examination of Madam Cui.................................................................................. 63

Witnesses for KQ............................................................................................................... 68

Evidence of Gavin Houghton.......................................................................................... 68

Cross-examination of Mr Houghton............................................................................... 69

Evidence of Qian Yu......................................................................................................... 71

Cross-examination of Mr Yu............................................................................................ 75

Evidence of Paul James Vincent...................................................................................... 76

Cross-examination of Mr Vincent................................................................................... 76

Evidence of Mr Songying Li............................................................................................ 78

Cross-examination of Mr Li............................................................................................. 80

Re-examination of Mr Li................................................................................................... 89

Evidence of Mr Li Yong Jiu.............................................................................................. 90

Cross-examination of Mr Li Yong Jiu........................................................................... 102

Evidence of Darren Noel Walker.................................................................................. 119

Cross-examination of Mr Walker.................................................................................. 120

Campbell Tuan Jaski....................................................................................................... 121

Cross-examination of Mr Jaski....................................................................................... 124

Witnesses not called and documents not produced.................................................. 124

KQ submissions............................................................................................................... 126

Third-party reliance........................................................................................................ 128

Onus of proof................................................................................................................... 133

Damages under s 236 of the Australian Consumer Law........................................... 134

The due diligence report................................................................................................ 140

No further investigations............................................................................................... 142

Dongmin Wang’s knowledge that Yima did not have reliable coal estimates...... 144

Mr Dongmin Wang’s role in the transaction............................................................... 145

Desire of the Yima board to internationalise.............................................................. 146

The lack of financial analysis......................................................................................... 147

Decision made to buy despite Mr Songying Li’s report........................................... 148

Relevance of draft contracts........................................................................................... 150

Unaddressed inferences................................................................................................. 151

Unresolved inferences.................................................................................................... 152

Failure to produce evidence.......................................................................................... 153

Conclusions...................................................................................................................... 163

Claim that Henan SASAC was misled or deceived.................................................... 164

Claim that the valuer relied on the CRA Report........................................................ 167

The claim that Songying Li relied on the CRA Report.............................................. 168

KQ’s allegation of breach of contract............................................................................ 169

Resolution of breach of contract claims....................................................................... 175

The amount owing to FLC under the ETA has been paid........................................ 176

The detail of the claims and relevant evidence.......................................................... 176

KQ’s submissions............................................................................................................ 179

The alleged trust.............................................................................................................. 181

Was a trust created?........................................................................................................ 182

Agency............................................................................................................................... 186

Outstanding balance only $24.2 million...................................................................... 189

Outstanding liabilities.................................................................................................... 191

Conclusion........................................................................................................................ 197

The tracing proceeding................................................................................................... 198

U&D’s role in the tracing proceeding........................................................................... 198

The Zhu parties................................................................................................................ 199

Australia Wales and Ms Lidan Wang.......................................................................... 199

Background...................................................................................................................... 200

Yinan Zhang..................................................................................................................... 201

Beibei Zhu........................................................................................................................ 201

Wei Kun............................................................................................................................ 201

Purchase of Knightsbridge Parade............................................................................... 202

Mortgage of Knightsbridge Parade.............................................................................. 203

Payment away of net proceeds of sale of Knightsbridge Parade............................ 203

Purchase of Frank Street................................................................................................. 204

Yi Kun............................................................................................................................... 204

Australia Wales, World Wide Energy, and Lidan Wang.......................................... 205

Pleadings.......................................................................................................................... 206

U&D’s claims against Yinan Zhang.............................................................................. 207

U&D’s claims against Beibei Zhu................................................................................. 209

U&D’s claims against Wei Kun..................................................................................... 213

U&D’s claims against Yi Kun........................................................................................ 214

U&D’s claims against Australia Wales......................................................................... 215

Table of relevant expenditures...................................................................................... 217

Evidence of Beibei Zhu.................................................................................................. 218

Ms Zhu’s background in accounting............................................................................ 218

Lion Glass......................................................................................................................... 218

Relationship with Yinan Zhang.................................................................................... 219

Property settlement and Ms Zhu’s alleged loan from her mother.......................... 221

Calmwater Crescent........................................................................................................ 228

Queen Anne Court.......................................................................................................... 230

Aqua Street....................................................................................................................... 230

Gailey Road...................................................................................................................... 232

Indooroopilly Hotel........................................................................................................ 233

Frank Street....................................................................................................................... 238

Oyster Cove...................................................................................................................... 238

The $2.35 million paid to Golden Globe...................................................................... 240

Yi Kun and Oracle Tower.............................................................................................. 240

Porsche.............................................................................................................................. 241

Lion Glass electricity bills.............................................................................................. 242

Knightsbridge Parade..................................................................................................... 242

Yinan Zhang’s sudden influx of wealth....................................................................... 250

Directorship of ANB........................................................................................................ 252

Directorship of U&D....................................................................................................... 253

Directorship of KQ.......................................................................................................... 256

Evidence of Li Yong Jiu.................................................................................................. 257

Evidence of Lidan Wang................................................................................................ 257

Expert evidence — forensic accounting....................................................................... 261

Joint reports...................................................................................................................... 263

Knightsbridge Parade mortgage................................................................................... 271

Porsche.............................................................................................................................. 272

Drawdowns of Knightsbridge Parade mortgage........................................................ 274

Australia Wales’ bank statement................................................................................... 275

Yi Kun and Aqua Street.................................................................................................. 275

Yi Kun and Oracle Tower.............................................................................................. 275

Issues................................................................................................................................ 279

Did U&D hold the $51.6 million on trust for FLC?..................................................... 281

Did Mr Zhang pay away the $29.2 million in his capacity as director of U&D?... 281

Receipt of money by the Zhu parties........................................................................... 283

Beibei Zhu Transaction................................................................................................... 285

10 December:  $2.35 million........................................................................................... 286

10, 15, and 17 December 2012:  $190,030...................................................................... 287

14 March and 18 April 2013:  $100,000.......................................................................... 288

4 and 5 March 2013:  $103,800........................................................................................ 288

Sale of Knightsbridge:  $1.75 million............................................................................ 289

Ms Beibei Zhu’s knowledge.......................................................................................... 290

Experience with financial matters................................................................................. 292

Ms Zhu’s relationship with Mr Zhang......................................................................... 292

The source of funds for Knightsbridge Parade........................................................... 293

The source of funds for Oracle Tower.......................................................................... 296

Payment of $1.25 million to Ms Zhu personally........................................................ 298

The sale of U&D to KQ or Yima.................................................................................... 298

Was Mr Zhang a shadow director of Wei Kun?......................................................... 299

The Zhu parties’ pleaded defences.............................................................................. 304

Disentitling conduct........................................................................................................ 304

Change of position.......................................................................................................... 304

Indefeasibility under the Land Titles Act 1994 (Qld)................................................ 306

Personal equities............................................................................................................. 308

Delay. ................................................................................................................................ 308

Ms Zhu’s alleged breaches of directors’ duties.......................................................... 309

Mr Zhang’s alleged breaches of directors’ duties...................................................... 310

Receipts by Australia Wales.......................................................................................... 311

Fourth-party claims......................................................................................................... 316

Claims against Mr Zhang............................................................................................... 316

Findings............................................................................................................................ 319

Restitutionary and set-off claims against U&D........................................................... 319

Costs. ................................................................................................................................ 321

Orders................................................................................................................................ 321

HIS HONOUR:

Introduction

1. This case concerns the purchase by a Chinese company of shares in an Australian company (U&D) that owns a coal tenement in Queensland.  In the first proceeding (the ‘share-sale proceeding’), the vendor of the shares claims that it has not been paid the full purchase price.  The purchaser claims that the vendor procured the sale through a fraudulent report on the coal tenement.  The purchaser raises other defences to the vendor’s claim.  In addition, moneys transferred to U&D by its parent company were misappropriated.  The second proceeding (the ‘tracing proceeding’) involves an attempt to recover those moneys from the recipients of the misappropriated moneys.

1. EPC 818 is a coal-mining tenement in the Bowen Basin in Queensland.  The tenement extends for some 44 square kilometres.  In 2011, Mr Yinan Zhang devised a plan to buy the tenement and to sell it, or a part of it, immediately to Yima Coal Industry Group Co Ltd (‘Yima’) at a significant profit.  Yima is a Chinese, government-owned, coal-mining company.  The first step in Mr Zhang’s plan was to interest Yima in purchasing an interest in the EPC 818 tenement, which he did.  As a result, in about June 2011, Yima sent a delegation to Australia to assess the tenement.  Subsequently, Mr Zhang incorporated a company, U&D Mining Industry (Australia) Pty Ltd (‘U&D’), to buy the tenement.  U&D issued 40 per cent of its shares to Flash Lighting Company Ltd (‘FLC’) (the plaintiff) and 60 per cent to Daton Group Australia Ltd (‘Daton Australia’).  Mr Xiao and Madam Cui controlled FLC.  Mr Zhang controlled Daton Australia.  The name of Daton Australia was later changed to ANB.

1. Mr Zhang arranged for ANB to sell 11 per cent of the shares in U&D to Australian Kunqian International Energy Co Pty Ltd (‘KQ’) (the defendant in the share-sale proceeding), a wholly owned subsidiary of Yima, that was incorporated specially to buy the shares in U&D.  FLC agreed to sell its entire 40-per-cent holding in U&D to KQ.  The agreement between FLC, ANB, and KQ for the sale and purchase of the shares in U&D was called the equity transfer agreement (‘ETA’).  The price of the shares in U&D was to be fixed by a valuer appointed by Yima’s parent company, State-owned Assets Supervision and Administration Commission of Henan Province (‘Henan SASAC’).  Henan SASAC is a Chinese regulator of Chinese state-owned enterprises.

The allegations

1. FLC alleges that under the ETA, KQ agreed to purchase FLC’s 40-per-cent shareholding in U&D at the price of $51.6 million (‘FLC purchase price’).  FLC alleges that KQ also agreed to acquire ANB’s 11-per-cent shareholding in U&D at the price of $14.19 million (‘ANB purchase price’).

1. FLC alleges that after KQ, ANB, and FLC signed a co-operation funding agreement, KQ paid a deposit of $5 million to U&D.  After the signing of the ETA, the $5 million deposit would convert into the equity transfer payment.[1]

   [1]ETA cl 8.3.

1. FLC alleges that under the ETA, KQ was to pay the remaining $60.79 million of the equity transfer price to ANB and FLC within 20 days of the time that the ETA enters into force.[2]  The $60.79 million just referred to comprises the FLC purchase price (ie the $51.6 million) and the ANB purchase price (ie the $14.19 million) less the deposit of $5 million.  FLC alleges that on or about 8 May 2012, in accordance with the ETA, FLC transferred its shares in U&D to KQ.

   [2]ETA cl 8.5.

1. FLC alleges that, pursuant to the terms of the ETA, KQ was required to make payment to FLC of the FLC purchase price by no later than 8 May 2012.  FLC alleges that on or about 17 September 2012, FLC received payment of $5.4 million from U&D as part-payment of the FLC purchase price.  Subsequently, on or about 18 September 2012, FLC received the further payment of $17 million from U&D as part-payment of the FLC purchase price.

1. The balance of the purchase price is $29.2 million.  FLC alleges that KQ has not paid the balance of the purchase price to FLC, and that the failure to pay is wrongful and in breach of the ETA.  FLC makes no allowance in its claim for the conversion of the $5 million deposit into the share transfer payment.

1. KQ raises several defences and set offs to the claim of FLC.  KQ also counterclaims against FLC, Mr Hao Liu (a director of KQ), Mr Jun Xiao (the part-owner of FLC), and Mr Zhang.  

1. KQ denies that it has not paid the balance of the moneys due to FLC.  KQ alleges that, on or about 18 September 2012, Mr Xiao signed a receipt confirming that FLC had received $51.6 million from KQ for the transfer of 40 per cent of the shares in U&D.

1. KQ claims the geological report contained false information, including making false estimates of deep reserves of coal of 1.3 billion tonnes.

1. KQ alleges that the valuer who was to fix the price under the ETA was misled and deceived by a false geological report that Mr Zhang prepared and provided to the valuer.[3]  KQ alleges that the Yima board relied on the valuation in authorising and directing KQ to purchase the U&D shares at the price determined by the valuer.  KQ also alleges that Henan SASAC relied on it when they approved KQ’s acquisition of 51 per cent of the shares in U&D.

   [3]KQ, ‘Seventh Further Amended Defence and Counterclaim’, 22 March 2018.

1. KQ alleges that it has suffered loss and damage because of FLC’s alleged misleading or deceptive conduct.  The conduct alleged to be false or misleading is the provision of a false geological report.  KQ alleges that its loss and damage is the amount it paid for the shares, as the shares were worthless.

1. FLC denies providing the false geological report.  It further denies that KQ, Yima, and Henan SASAC were misled or deceived.  It further denies that KQ, Yima, and Henan SASAC relied on the geological report, whether it was false or not.

1. KQ also alleges that ANB and FLC breached the ETA and the co-operation funding agreement by providing the false geological report.  FLC denies the breach and says that if there was a breach then no damage was suffered by KQ.

1. There is no dispute that Mr Zhang misappropriated from U&D $29.2 million of the moneys that KQ transferred to U&D.  U&D was to have used these moneys to pay FLC for the balance of the purchase price that KQ owed to FLC.  The misappropriated moneys have been traced to Wei Kun Pty Ltd (‘Wei Kun’) and Yi Kun Pty Ltd (‘Yi Kun’).  These companies are trustees of family trusts that were established for the benefit of Mr Zhang’s former wife, Ms Beibei Zhu, and their children.  The moneys have also been traced to Australia Wales Financial Management Pty Ltd (‘Australia Wales’).  Ms Lidan Wang controls Australia Wales.  She is a former intimate friend of Mr Zhang.  Since the hearing concluded, Australia Wales has gone into liquidation.

1. KQ has counterclaimed against FLC, Mr Hao Liu, Mr Jun Xiao and Mr Yinan Zhang.  Mr Hao Liu was a director of KQ.  Mr Jun Xiao is one of the two directors and shareholders of FLC. 

1. In its counterclaim against Mr Liu, KQ alleges that Mr Liu, on behalf of KQ, signed an instruction addressed to the Bank of China requiring the bank to transfer $70 million from KQ’s bank account to U&D for purposes including the discharge of the FLC purchase price, and that amount was paid to U&D.[4]  KQ alleges that Mr Liu contravened his duties as a director of KQ.  The case against Mr Liu was not pressed before me.

   [4]KQ defence and counterclaim of 2 September 2016 amended 6 October 2016.

1. Subsequently, FLC issued separate proceedings against Mr Zhang and U&D.[5]  In the tracing proceeding, FLC alleges that $29.2 million of the $70 million, transferred from KQ’s account with the Bank of China to U&D on Mr Liu’s instructions, was held on trust for FLC.    

   [5]Matter 1242 of 2016:  FLC v Zhang and U&D.

1. After the tracing proceeding was issued, KQ amended its defence and counterclaim to the share-sale proceeding to allege that by reason of the trust alleged by FLC, FLC has been paid the balance of the purchase price for the shares in U&D.[6]

   [6]Further amended defence and counterclaim of KQ in share sale proceeding, dated 29 September 2017, [11A].

1. At the trial, FLC submitted that the claims it makes in the tracing proceeding are alternative claims to the claims made by FLC in the share-sale proceeding.  FLC said that it did not seek to recover both.  FLC said that it either sought to recover $29.2 million from KQ, or FLC sought to recover the claims made in the tracing proceeding.[7]

   [7]Transcript of Proceedings (14 February 2018) 75-76 (W Thomas).

1. In the tracing proceeding, FLC makes claims against U&D and the recipients of the misappropriated moneys.  U&D in the tracing proceeding also makes claims against the recipients of the misappropriated moneys.

1. For the reasons given below, I have found that the moneys were not held on trust for FLC as alleged in the tracing proceeding, and FLC’s claims in the tracing proceeding therefore fall away.  Nevertheless, the tracing claim of U&D remains on foot.

1. Although the Court heard the proceedings together, I will divide the judgment into two, dealing first with the share-sale proceeding and then with the tracing proceeding.

The Coal Resource Assessment Report

1. Mr Songying Li is a senior geologist whom Yima employed.  As will be discussed below, Mr Songying Li was provided with the geological report when he visited Australia to assess the tenement in about June 2011.  When Mr Songying Li returned to China, he reported to Yima that he had received a geological report and that it was unreliable.  He also prepared a written report and a summary report.

1. The geological report on the tenement EPC 818, given to Mr Songying Li, has been referred to differently by KQ and FLC.  The report was headed as a Coal Assessment Report (the ‘CRA Report’).  There were two versions of the CRA Report.  The first version is the report given to Mr Songying Li in July 2011 and subsequently to the valuer in 2012.  The second version was one given to the valuer in 2012 that had an extra page attaching the signature of Richard Smith as the purported author of the report.   

1. FLC refers to the first version of the report as the ‘Report’ and the second version as the Smith Report.  KQ refers to both versions of the report as the ‘Smith Report.’  To avoid confusion, I consider that it is appropriate to reserve the appellation of the Smith Report only for the version which bears the purported signature of Richard Smith.  Otherwise, the Coal Resource Assessment Report shall be referred to as the ‘CRA Report.’

1. I propose to address the relevant oral evidence given on behalf of both FLC and KQ.  To understand the oral evidence, it is first necessary to outline the relevant events.  This is best done by addressing the documentary trail of the relevant events and the relevant agreed facts.

The relevant train of events leading to the purchase of shares in U&D

1. In discussing the relevant train of events and resolving the claims made by KQ, I often find that a reasonable and plausible inference of a fact arises from the evidence and make the observation comment that KQ has not dispelled the inference.  

1. By so finding, I should not be taken to be finding that the fact inferred has been established on the balance of probabilities.  Rather, I am identifying  reasonable and plausible inferences that arise from the evidence, as they ultimately bear on whether or not I am satisfied with the case pleaded by KQ, and in particular, whether I am satisfied that the board of Yima, Henan SASAC and the valuer were misled as alleged.

1. The parties have agreed upon many of the relevant events, and I will cite these as ‘agreed events’, and number them according to the document of agreed events marked for identification during the trial.  I turn to the relevant train of events.

1. Mr Yulu Wu was the chairman of Yima.  In April or May 2011, Mr Zhang raised with Mr Yulu Wu the possibility of Yima purchasing the EPC 818 tenement.  Mr Zhang was introduced to the chairman by Mr Wei Liu, a former director of Yima.  Mr Wei Liu plays an important part in the purchase of the tenement, but why he was involved and what he was up to remains a mystery, like so many aspects of the purchase.

1. I infer from Yima’s later conduct that Yima was interested in the proposition.  Consequently, in about June 2011, Yima sent a delegation to Queensland to prepare a report about the EPC 818 tenement.  The delegation comprised Mr Songying Li, Mr Yuantao Zhai, Mr Yu Li, and Mr Dongsheng Wu of Yima.  Mr Wei Liu was also present at the tenement inspection.  Only Mr Songying Li gave evidence on behalf of KQ.

1. Mr Songying Li was a senior and experienced geologist engineer employed by Yima.  Mr Zhai was at that time chief executive officer of Yima and a director of Yima.[8]  Mr Dongsheng Wu was both the chief financial officer and a director of Yima.

   [8]Transcript of Hearing in Hong Kong (16 March 2018) 27.22–28.2.

1. It is not clear who hosted the delegation.  It was probably Mr Zhang or someone he nominated.

1. A representative of the vendors provided Mr Songying Li with information about the EPC 818 tenement, which included a copy of a document headed ‘Coal Resource Assessment Report’ (ie the CRA Report).  The CRA Report bore the heading of ‘U & k Resources (Australia) Pty Ltd.’  It was dated 20 August 2010.  At that stage, U&D had not been incorporated.  It was incorporated later in 2011.

1. The CRA Report was said to be authored by the ‘Project Team for the Coal Resource Assessment in the Bowen Basin, Australia.’  The CRA Report was on a USB drive given to Mr Songying Li while he was in Australia.  Mr Songying Li could not recall who gave him the USB drive.[9]

   [9]Amended witness statement of Songying Li, 13 March 2018, [2].

1. After inspecting the tenement in Australia, Mr Songying Li prepared a written report for Yima.  In this report he detailed the significant inadequacies of the CRA Report’s assessment of the coal reserves in the EPC 818 tenement.  In this report Mr Songying Li also advised Yima that the CRA Report could not be relied on to assess the coal reserves of the tenement.  Mr Songying Li described his report as a ‘due diligence report.’  Mr Songying Li also produced for Yima what he called a summary of his due diligence report, which I will discuss later.

1. In about July 2011, Mr Songying Li presented to a meeting of the Yima management committee an oral report on the CRA Report, and he read to the meeting from his due diligence report.  Those present at the meeting included Mr Yulu Wu (the chairman of Yima), Mr Yuantao Zhai (the chief executive officer of Yima, and companion of Mr Songying Li to Australia), Mr Fujun Tian (the deputy chief executive officer), and Mr Li Yong Jiu (the Deputy Chief Executive Officer of Yima and a director of Yima).[10] 

   [10]Agreed event 12.

1. The evidence about who else was present at the management meeting is not clear.  Of the six directors whom Mr Li Yong Jiu (the only director of Yima to give evidence) spoke to before preparing his witness statement, only Mr Yuangui Fan was not a member of the management committee.[11]  The other five directors were members of the management committee as well as being directors.  Mr Li Yong Jiu could not remember whether the five directors were present at the management committee meeting when Mr Songying Li gave his presentation.[12]

   [11]See above at [471].

   [12]See above at [535].

1. Mr Songying Li’s due diligence report plays a significant part in FLC’s claim that Yima did not rely on the CRA Report nor the valuer’s report in authorising and instructing KQ to purchase shares in U&D.  Despite Mr Songying Li’s due diligence report being a critical piece of evidence, KQ did not discover Mr Songying Li’s due diligence report before the trial began.  Mr Li Yong Jiu, who was responsible for obtaining documents to be discovered on behalf of KQ, discovered the due diligence report during the trial.[13]  Mr Li Yong Jiu agreed in his evidence that minutes of the management committee meeting at which Mr Songying Li presented his report should exist.  However, KQ failed to discover these minutes.

   [13]Ex LTJ 6, CB vol 6 tab 79 867.

1. During Mr Li Yong Jiu’s evidence (which I address below), he repeatedly referred to the due diligence report as a ‘preliminary report’.  FLC says that the report has been characterised as a preliminary work by KQ in order to downplay its significance.[14]  Mr Li Yong Jiu’s oral evidence was inconsistent with the evidence he gave in his witness statement, where he referred to the report under the heading ‘preliminary due diligence.’[15]  FLC says that the description ‘preliminary’ was only added during the trial when the significance of the due diligence report was challenged by KQ.[16]

   [14]Transcript of Proceedings (26 April 2018) 2023–4 (T J Margetts).

   [15]Ex KQ 35, Amended witness statement of Li Yong Jiu, signed 16 March 2018, [33].

   [16]Transcript of Proceedings (26 April 2018) 2024 (T J Margetts).

1. In the due diligence report, Mr Songying Li starts his introduction on coal measures (coal seams) stating, ‘According to the material provided by the U&D Mining Industry (Australia) Pty Ltd EPC 818 exploration area consists of four coal measures all formed during the Permian period.’  The ‘materials provided‘ by U&D, which go to the quantity and quality of the coal, or the measurement of the coal, referred to by Mr Songying Li, is the CRA Report.

Details of Mr Songying Li’s criticisms of the CRA Report

1. In the due diligence report, Mr Songying Li refers several times to the unreliability of the information in the report he received in Australia.  There are 10 instances of his mentioning the unreliability of the information.

1. There is no dispute that when Mr Songying Li inspected the tenement, only one exploratory borehole had been carried out in the tenement.  The borehole drilling ascertains the content of the bore at the different levels of the bore.  As discussed below, the evidence established that whether a seam of coal as shown in the borehole sample continued throughout the tenement would require 100-200 boreholes to be drilled over the whole tenement.

1. First, Mr Songying Li says, ‘With data of only one borehole and in the absence of coal seam structure information.  It is unattainable to comprehensively evaluate the feasibility of mining and resource quantity of coal seams in the coal measures.’[17]

   [17]Ex KQ 31, CB vol 6 888–9.

1. Secondly, Mr Li said:  ‘In the absence of more detailed information, including the thickness and variation of each coal seam, parting band conditions, coal quality etc., proper evaluation cannot be made.’[18]

   [18]Ex KQ 31, CB vol 6 889.

1. One can infer from this component of the report that the management committee was informed that the information that Mr Li was using in his due diligence report came from only one borehole.  As experienced miners, I have inferred from the evidence discussed below, that the committee would have realised themselves that the forecasts based on only one borehole, were not a reliable basis to make an estimate of the coal resources of the tenement.  As mentioned above, and discussed further below, to properly assess the deep-coal resources at the tenement, some 100–200 boreholes would have been required, and this was well known to anybody involved in coal mining. 

1. As discussed below, the evidence establishes that the board of Yima was aware that no further boreholes had been drilled at the tenement when the board of Yima decided to proceed with the purchase of shares in U&D.  A reasonable and plausible inference arises that the board of Yima therefore knew that any estimate of the deep-coal reserves of the tenement was entirely speculative, that the CRA Report did not provide a reliable estimate of the deep-coal reserves at the tenement, and that the CRA Report or the valuer’s report could not be relied upon by the board.

1. Thirdly, in a table titled ‘General Information of Coal Seams’ in the tenement, Mr Songying Li said that the information in respect of the Moranbah seam lacked detail.  Mr Songying Li said, ‘Based on this data and accumulated coal seam thickness of single borehole and whole region, method improper.’  Besides that, he observed that it had ‘no exploration value.’

1. Fourthly, Mr Songying Li said, ‘Analysis of the English and Chinese materials provided has indicated that the calculation of resource quantity is obviously inappropriate, mainly reflected in the following aspects.’[19]  Further Mr Songying Li says that ‘the estimated quantity of 100 Mt for the deep-seated resources is obviously defective.’[20]

   [19]CB vol 6 tab 79 898.

   [20]CB vol 6 tab 79 898.

1. Fifthly, Mr Li said, after referring to the fact that there is only one government borehole in the area:  ‘Therefore, it is obviously unconvincing to include the total exploration area of 44.5 km square into the calculation.’

1. Sixthly, Mr Li said, ‘Coal resources in the two, deeper coal measures were calculated using data of just only one borehole or data area outside the region, which is inappropriate.’[21]

   [21]CB vol 6 tab 79 898.

1. Seventh, Mr Li said, ‘Some thickness figures were borrowed from regional data (or data of single borehole) with low reliability, there is a lack of  information on the thickness, variation of coal seams, such as maximum thickness, minimum thickness, average thickness, recoverable index and other coefficients, all of which are very important in mining.’[22]

   [22]CB vol 6 tab 79 901.

1. Eighthly, Mr Li said in his due diligence report that:

The calculation method, process and parameter selection for the reserves calculation are not provided, and there are some errors in the calculation.  Based on the back-calculation, the total area of EPC 818 is 44.5 square kilometres, was used when calculating coal resources in the Fort Cooper Coal Measures, in spite of the fact that there are extensive outcrop denudation areas and areas intruded and ravage by volcanic activities.  With regard to the resources of the Rangai Coal Measures, simple analogy calculation would be inappropriate in the absence of necessary information such as the area of precisely surveyed region.’[23]

[23]CB vol 6 tab 79 901.

1. The ninth and tenth criticisms are in Mr Li’s concluding observations:

1.   According to the existing data provided and the open-pit mining conditions in several surrounding coal mines overlooked from a helicopter, the occurrence situation and mining conditions of coal seams in this section are not very good, even in China the resource conditions would only rank medium level.  In addition, with regard to open-pit mining, the degree of exploration still appears insufficient, further hole arrangement and exploration are still needed.  Since there are multiple layers of coal which are mainly thin coal seams, and that a considerable number of coal seams have splitting and folds developed, the mining conditions are complex.  Therefore, for the moment the deep part of this area is not suitable for underground mining.

2.   There is a lack of details regarding the resource conditions, so further relative information is still needed.  The exploration degree in deep-seated coal seams and deep areas is relatively low, and the resources are difficult to estimate at present.  Only after further exploration can the resources, mining conditions and development prospects be evaluated.

1. I am satisfied that the oral report that Mr Songying Li gave to the management committee of Yima would have covered the substance of these criticisms of the CRA Report.  Mr Songying Li struck me as a careful and methodical man who would have ensured that the management committee fully understood that the information supplied by U&D on the coal resources at the tenement was unreliable and the reasons why it was unreliable.

1. One would have expected that the chief executive officer and board director, Mr Yuantao Zhai, who accompanied Mr Songying Li to Australia, to have also given a report, either oral or in writing, to his fellow board members or some of them on his observations on the tenement.  KQ did not call Mr Zhai.  KQ did not call any evidence, either oral or written, to establish whether or not Mr Zhai was given the CRA Report, saw the CRA Report, or read the CRA Report.  KQ led no evidence as to whether or not Mr Zhai had any and what discussions with his fellow board members on this inspection of the tenement and his assessment of the proposed investment.  I find it is a reasonable and plausible inference, however, that Mr Zhai was given the CRA Report when he was in Australia.  KQ did not dispel that inference.

Summary report

1. The parties agree that Mr Songying Li also provided to the Yima management committee what is called a summary document.  The summary document does not summarise Mr Songying Li’s due diligence report.  Rather, it is a calculation of coal reserves based on two assumptions, which assumptions, his due diligence report made clear, had not been established by the material given to him in Australia.  As discussed above, the main criticism of the material provided to Yima in Australia was that it relied on only one borehole and the information from that one borehole itself was not verified.

1. The assumptions in Mr Songying Li’s summary calculation were that information from the one borehole was reliable and secondly that seams disclosed by the results of the one borehole extended evenly over the whole of the 42-square-kilometre tenement.  On these non-established assumptions, the summary calculated deep-coal reserves of 700 million tonnes.[24]  Mr Li gave considerable oral evidence on the summary which is discussed below.

   [24]Ex SL 3, CB vol 12 tab 148 1978–8.2

1. Mr Songying Li’s summary said:

Calculation of Resources

According to report that the stripping ratio of less than 15:1, there are 30 million tons of resources available for open-pit mining; we believe that: open-cut coal seams are in poor conditions, the value of mining is not good.  According to the report, the resources of all the coal beds 800m shall be 1.5–2.0 billion tons.  We think: According to the data provided in both English and Chinese, the amount of resources is obviously over calculated [sic].  The Moranbah coal measures three layers thick Coal seam (2.62m; 5.33m; 3.50m).  However, only one borehole revealed that if the information provided is reliable, the coal seam is stable and has the potential of well production.  The estimated resources of the 3-layer coal are respectively 160 million ton, 330 million ton, 210 million ton; a total of about 700 million ton.

1. Mr Songying Li’s summary is an important document.  It confirmed to the management committee of Yima that Mr Songying Li was taking the information he used in the summary from a ‘report’ that he had received.[25]  This is relevant to the issue that the reasonable and plausible inference that arises from the evidence, is that the board of Yima was aware that the only source of information on coal reserves of the tenement was from the information that had been provided to Mr Songying Li and which he had found to be unreliable.  KQ did not dispel that inference.

   [25]Ex SL 3, CB vol 12 tab 148 1978.2

Mr Hao Liu

1. After receiving Mr Songying Li’s report, the management committee appointed Mr Hao Liu to investigate the tenement investment opportunity, head the due diligence into the tenement and to establish, and operate, a company in Australia that could be used as the investment vehicle.[26]  In that role, Mr Hao Liu was to report his findings to Yima and keep Yima updated about the tenement and the feasibility of the investment opportunity.[27]  Mr Hao Liu arranged for the incorporation of KQ in Australia.  He was appointed a director of KQ.  The other directors were Mr Dongmin Wang and Ms Beibei Zhu (the wife of Mr Zhang).  KQ was incorporated on 20 October 2011.  Yima was the sole shareholder in KQ.

   [26]Ex KQ 35, CB vol 1 439.50 [24].

   [27]Ex KQ 35, CB vol 1 439.50 [24].

1. FLC asks the Court to find that Mr Hao Liu was given the due diligence report.  The evidence suggests that when Mr Hao Liu was appointed the only geological information that Yima had on the tenement was that provided by Mr Songying Li.  I find that it is a reasonable and plausible inference that Mr Hao Liu was provided with a copy of Mr Songying Li’s due diligence report in view of the task he was given of assessing the feasibility of Yima acquiring an interest in the tenement.  I also find that it is reasonable and plausible to infer that Mr Hao Liu was given the material that had been supplied to the Mr Songying Li in Australia.  I also find that it is reasonable and plausible to infer that that Mr Hao Liu therefore knew that Mr Songying Li had been given a report in Australia and Mr Songying Li had found that report to be unreliable and that it could not be used to assess the coal reserves at the tenement.  KQ did not call Mr Hao Liu or anybody else to rebut those inferences.

1. As discussed below, Mr Hao Liu did provide a further report on the tenement in January 2012.

1. Ms Beibei Zhu said that she was appointed to provide an Australian resident director.  I thus infer that Mr Wang and Mr Liu were still residing in China.  Ms Beibei Zhu claims that she was not aware of the business activities of KQ.

1. Mr Li Yong Jiu gave evidence that it was the practice at Yima — and at other Chinese state-owned corporations — for an independent body to carry out a valuation if there was a proposal to acquire another business.

1. On 9 November 2011, Henan SASAC selected Jinshi to value the EPC 818 tenement.[28]  On 9 November 2012, Henan SASAC in a document addressed to Yima, confirmed that Henan Jinshi Mineral Rights Appraisal would undertake the assessment of the Australian coal project.[29]

   [28]Agreed event 21.

   [29]Ex LJT 16, CB vol 6 tab 89.

1. I comment later on the significance of this appointment when Yima, to its knowledge, had not received any reliable report on the deep-coal resources at the tenement (which it never did).

1. On 16 November 2011, Mr Zhang Xin emailed Mr Bo Li of ANB.[30]  The email informed Mr Bo Li that the appraisal company in China had sent him a list of supplementary information required for the assessment.  The information requested included:[31]

The geological reserves report of general of detailed coal mine investigation (signed by a registered geologist) or staged summary report of geological work, including exploration engineering layout, detailed information or exploration engineering workload,  resource, reserves estimation drawings, etc which can be used to determine the degree of geological exploration and resource reserves.

[30]Mr Zhang Xin was Mr Hao Liu’s translator and assistant. 

[31]Ex LJT 17, CB vol 6 tab 90.

1. As discussed below, KQ sent the CRA Report to the valuer.  This was in spite of Mr Songying Li’s report that it was unreliable and could not be used to estimate the deep-coal resources at the tenement.  Also as discussed below, Yima sent to the valuer a report prepared by Mr Hao Liu dated 10 January 2012, that was not based on any geological research.  According to the evidence, these were the only documents that Yima provided to the valuer.  KQ did not tender any evidence to disclose what information, if any, Mr Dongmin Wang gave to the valuer when he travelled with the valuer to Australia, in April 2012.

1. On 21 November 2011, U&D entered into an agreement (sale and purchase agreement) to acquire Arch’s 80-per-cent interest in the EPC 818 tenement; and, the shares in RPP, which held a 20-per-cent interest in the EPC 818 tenement, from Houghton Investments Pty Ltd, for $25.25 million.[32]

   [32]Agreed event 23.

A draft agreement and Mr Dongmin Wang

1. Mr Dongmin Wang was a senior executive within Yima.  He was in charge of the securities department.  Mr Dongmin Wang was also appointed a director of KQ.

1. On 21 December 2011, Mr Hao Liu’s personal assistant, Mr Kevin Zhang, sent to Mr Dongmin Wang what was described as the fifth draft of the equity transfer agreement between FLC, ANB, and KQ (the ETA).  Under the draft, the price to be paid for acquiring FLC’s 40 per cent shareholding in FLC was $80 million.  On that basis, 51 per cent would be valued at $102 million.  The copy of the draft agreement tendered had amendments in red that suggested that the price for FLC’s shares must, at least, have appeared in the fourth draft.  KQ failed to discover the four earlier drafts nor provide any explanation for not doing so.

1. The draft of the Mine Project Agreement[33] included a term that ‘[KQ] agrees to invest AUD$ 124.9 million to acquiring and increasing capital for the equity investment in the new joint venture company.’  Included in red (which I assume was a recent amendment) was a clause reading as follows:  ‘Party A and Party B affirm that the value of the U&D Mining Industry (Australia) Pty Ltd’s EPC 818 resources is AUD 200 million.’

   [33]Ex FLC 31.

1. Clause 5 of the draft agreement further provided:

(2)Among Party B’s investment of 124.9 million AUD$80 million is used for acquiring the 40% of U&D Mining Australia Pty Ltd’s equity held by Flash Lighting Company Limited and the remaining AUD $44.9 million is used for increasing capital for the equity investment in the new joint venture company.

(3)Party A invest equity in the new joint venture company — U&D Mining Industry (Australia) Pty Ltd based on the existing  assets of the mining right, accounting for 49% of the equity.

1. The insertion of a clause in red and the underlining of the sums of $80 million and $124.9 million suggest that these items were being negotiated.  As discussed below, a few weeks later, on 31 January 2012, Mr Wang and Mr Zhiwei Zhang, the Yima general manager, gave a special report to the chairman of Yima on ‘the negotiations over the Australian EPC 818 project.’

1. Accordingly, I find that it is a reasonable and plausible to infer that the terms of the ETA agreement, including the price, were being negotiated between Yima and U&D despite the valuation being carried out.

1. KQ did not dispel that inference.  KQ failed to explain the existence of the draft ETA agreements or the reason for which Yima and U&D were negotiating the price of the sale of the interest in U&D while at the same time Yima was purporting to arrange for a valuation of the shares in U&D.

Further research report of 11 January 2012

1. As the following evidence discloses, in the period from Tuesday 10 January 2012 to Monday 16 January 2012, there were a chain of events bearing on the information provided to the valuer, that give rise to reasonable and plausible inferences, and unanswered questions, that KQ did not dispel or resolve, as discussed below.

1. On 11 January 2012, Mr Bo Li of ANB sent a research report titled ‘Investigation and Research Report on the EPC 818 Mining Right Project in Australia’ to Mr Zhang.[34]  On this research report there appears the date 10 January 2012.  It appears to come from KQ.  I will refer to the report as the ‘January research report’.  Mr Li Yong Jiu said a copy was found in the Yima archives.[35]  Mr Li Yong Jiu said in his oral evidence that the January research report was the report of Mr Hao Liu.[36]  In his witness statement, he deals with the report under the heading ‘Report by Hao Liu.’[37]

   [34]Ex LTJ 7, CB vol 6 tab 80 903; agreed event 26.

   [35]Ex KQ 35, Amended witness statement of Li Yong Jiu, signed 16 March 2018, [38], vol 1 tab 40C 439.52.

   [36]Transcript of Hearing in Hong Kong (16 March 2018) 12–13.

   [37]Ex KQ 35, Amended witness statement of Li Yong Jiu, signed 16 March 2018, [38], vol 1 tab 40C 439.52.

1. The copy of the January research report tendered into evidence has a heading that reads ‘Investigation Report approved in the meeting of the leading group, sent by Mr Hao Liu on 29 January 2012.’[38]  As mentioned above, Mr Hao Liu is the CEO of KQ and the employee of Yima charged by the management committee with investigating and reporting on the tenement.

   [38]Ex LTJ 7, CB vol 6 tab 80 963.

1. The January research report discussed the desire and need to internationalise Yima:[39]

   [39]Ex LTJ 7, CB vol 6 tab 80 944–5.

2. Necessity

(1) At the Macro Level

After the exchange rate system reform of Renminbi (RMB) in 1994, it took 12 years for China’s foreign exchange reserves to increase from 51.62 billion US dollars in 1994 to over one trillion US dollars.  By the end of March 2011, China’s foreign exchange reserves had exceeded 3 trillion US dollars.  Excessive foreign exchange reserves have brought a variety of pressures and hidden dangers to the sustained high growth of the economy.  Therefore, in recent years, various ministries and commissions have introduced policies to promote enterprises to go abroad and invest overseas.  For instance, in September 2011, the Minister of Commerce Chen Deming announced in a speech that the Ministry of Commerce would take five measures to increase its support to overseas investment during the ‘12^th Five-Year Plan’ period.  For those competent Chinese enterprises, seizing this opportunity to take the road of internationalization would be the only correct strategic decision for development.

(2) At the Micro Level

After a round of rapid resource reorganization and annexation of small coal mines in recent years, a new pattern of coal resources has basically taken shape in the domestic coal industry.  As an enterprise focusing on resources development, going abroad to seek more resources has become a necessary strategic choice for Yima Coal Group to realize a long-term development.  Moreover, internationalization plays an important facilitating role in promoting the brand appeal, improving the management level and enhancing the enterprise strength.

For instance, Yanzhou Coal Mining Company has made significant improvement in its enterprise strength since it entered the Australian market in 2004.

1. The assessment said that:[40]

   [40]Ex LTJ 7, CB vol 6 tab 80 s 3.1 950.

3. Overview of the EPC 818 Mining Right

….

According to the Australian JORC Code, the Proven Reserves in EPC 818 were calculated to be 16.5Mt, Controlled Reserves 18.5Mt and inferred Resources 15Mt, and the inferred resource reserves in the deep part were calculated to be 1.35 billion tons.  All of these coal resources above are coking coal.

1. Under the heading of ‘Existing Problems of the EPC 818 Project’ was another heading: ‘Relatively Small Amount of Coal Resource Reserves.’  The Investigation and Research Report stated, inter alia, that the 1350 metres of ‘inferred Resources in the deep part are of uncertainty.  Since the Proven Reserves are relatively small, the production capacity of the open-pit coalmine might be restricted to some extent at the earlier stage.’[41]

   [41]Ex LTJ 7, CB vol 6 959.

1. The Investigation and Research Report further said:[42]

   [42]Ex LTJ 7, CB vol 6 960–1.

6. Perceptions of the Cooperative Development of EPC 818 Project

The cooperative development of EPC 818 project is the first step for Yima Coal Group to go abroad, enter Australian market and realize its international operations.  Taking the first step steadily and maintaining a stable development afterwards will strongly support the Group to realize its ‘12^th Five-Year’ plan, that is, to achieve an output of 70 Mt, an operating revenue and an asset amount exceeding 100 billion respectively [translator’s note: the name of currency is not mentioned in the Chinese text); meanwhile, it will significantly help establish Yima Coal Group’s brand and increase its capital.

In recent years, there has been a rapid increase in the number of foreign companies coming to Australia to invest in the mining industry, and the competition for coal resources in Australia is extremely intense.  A number of Chinese mining enterprises have made their investments in Australia, including Shenhua Group, China Coal Group, Sinosteel Group, Chinalco Group, Yancoal Group and Henan Shenhuo Group.  There are also many examples involving setbacks in the investment.  Yancoal Group is the only one that outperforms all others.  In order to move to internationalization successfully, the first thing Yima Coal Group needs to do is to gain a firm foothold in Australia.  Through the cooperative and win-win development method, Yima Coal Group could get familiarized with the investment process in Australia and accumulate experiences in project operation, which would provide a solid foundation for the Group to grow bigger and stronger.

1. At the end of this section, the Investigation and Research Report concluded:[43]

As Yima Coal Group’s first step into the Australia coal industry and a breakthrough for internationalization, EPC 818 project will be both a tough challenge and rare opportunity.

[43]Ex LTJ 7, CB vol 6 961.

1. FLC says that there is real doubt about the origin of this document.  FLC argues that it cannot be the report prepared by Mr Hao Liu on the instructions of the chairman of Yima on 31 January 2012, as it predates the instructions.  KQ in its final submissions submitted that the document came from Mr Yinan Zhang.[44]  KQ led no evidence as to its provenance. 

   [44]KQ, ‘KQ’s Closing Submissions: Facts’, 5 April 2018, [60].

1. FLC says that if the document came from Mr Zhang as KQ contends, then there is only one document that has been put into evidence to show that Yima obtained any assessment on the geological reserves at the tenement.  That one document is Mr Songying Li’s due diligence report, which made clear that the information on the geological reserves of the tenement obtained from the vendors was unreliable.[45]

   [45]Transcript of Proceedings (26 April 2018) 2028 (T J Margetts).

1. Importantly, for this case, the January research report is the second and only other report received by Yima on the coal resources at the tenement (the first being Mr Songying Li’s due diligence report).  The January research report does not rely on any geological investigations such as boreholes to justify its estimates of the coal resources at the tenement.  I find that it is reasonable and plausible to infer that Yima and its officers would have known that the January research report did not provide any reliable assessment of the deep-coal resources at the tenement.

1. As will be discussed below, that was certainly the view of the chairman of Yima at the meeting he chaired of 31 January 2012.

The January research report is sent to Mr Dongmin Wang

1. In January 2012, Mr Bo Li, of ANB, sent the January research report to Mr Yinan Zhang. 

1. On Friday 13 January 2012 at 9:14 am, Mr Zhang sent a copy of the January research report to Mr Wei Liu via email.

1. On Sunday 15 January 2012 at 1:24 pm, Mr Wei Liu forwarded to the valuer the January research report.[46]

   [46]CB vol 12 1981.4.

1. Previously, on Friday 13 January 2012, Mr Songying Li sent by email to Mr Dongmin Wang a copy of the summary report that Mr Songying Li had given the management committee in about July 2011.[47]  The note under the heading of ‘Calculation of Resources’ is set out above.[48]  Relevantly, the summary stated limitations in the calculation that ‘only one borehole revealed that if the information is reliable, the coal seam is stable and has the potential of well production.’

   [47]Agreed event 28; Ex SL 4, CB vol 12 tab 149.

   [48]See above at [61].

1. The copy sent to Mr Dongmin Wang contained a table headed ‘Table 2.1 General Information of Coal Seams of EPC 818 in the Bowen Basin Australia.’  The table had a column for ‘Resources (100 Mt).’  The table advised under the heading of ‘Existing Problems’ that data was from only one borehole.  It also advised in relation to the Rangal Coal Measure:  ‘Lacking calculation process and calculation method for parameter selection.’  For the Fort Cooper Measure, the table advised:  ‘Coal thickness of 6.5 m from regional data, whole mining right area calculated, and conclusion obviously defective.’

1. I find that it is reasonable and plausible to infer that Mr Dongmin Wang understood from this document that Yima had not received a reliable estimate of the coal resources in the EPC 818 tenement.  Another reasonable and plausible inference is that Mr Dongmin Wang was expressly informed that the data in the summary was based only on one borehole, and that the figures were based on the assumption that the information from that one borehole was reliable.  KQ fail to dispel either inference.

Distribution of CRA Report in January 2012

1. On Sunday 15 January 2012,[49] under the subject heading of ‘818‘, Mr Zhang emailed the CRA Report to Mr Wei Liu.  On the same day, at 1:24 pm (that is the same time that Mr Wei Liu sent the valuer the January research report) Mr Wei Liu forwarded the email with the CRA Report attached to the valuer, under the heading ‘818’ and with no further observations.  On the next day, Monday 16 January 2012 at 2:42 pm, the valuer forwarded the email with ‘Attachments: EPC 818_resource-cn.doc’ to Mr Dongmin Wang.[50]  Also on Monday 16 January 2012, at 2:41 pm, the valuer forwarded to Mr Dongmin Wang the January research report, described as attachments ’EPC 818 Investigation Report.docx.’

   [49]Ex LTJ 8, CB vol 6 tab 81 965–1040.

   [50]Ex LTJ 8, CB vol 6 tab 81 1004.

1. According to Mr Li Yong Jiu, Mr Wei Liu was an executive of China Huarong and a former director of Yima.  Mr Li said that it was Mr Wei Liu who introduced the chairman Mr Wu to Yinan Zhang in early 2011.  Apart from the evidence that Mr Wei Liu was a former director of Yima, KQ led no evidence as to what role if any Mr Wei Liu played in Yima’s affairs.  Under cross-examination, Mr Li said that Mr Liu was not an employee.  When asked whether Mr Liu was a consultant to Yima, Mr Li said, ‘Mr Liu Wei was a director of Yima.’[51] 

   [51]Transcript of Hearing in Hong Kong (16 March 2018) 13.

1. It will be recalled that Mr Dongmin Wang, who was a senior executive of Yima and a director of KQ, had been sent a draft of the ETA on 21 December 2011,[52] that included a price, and, had on Friday 13 January 2012, asked Mr Songying Li for a copy of his summary report to the management committee.[53]

   [52]See above at [74].

   [53]See above at [95].

1. KQ led no evidence as to whom within Yima was responsible for dealing with the valuer, or what role Mr Dongmin Wang played with the valuer.  As will be seen below, when I consider the written agreements with the valuer, it was Yima’s responsibility to provide information on the tenement to the valuer.

1. A reasonable and plausible inference can be drawn as follows.  When Mr Dongmin Wang asked Mr Songying Li for a copy of the summary of his report, Mr Dongmin Wang was aware of Mr Songying Li’s due diligence report and its conclusion (ie that the report given to him in Australia was unreliable and could not be used to assess properly the coal resources at the tenement).  KQ failed to dispel that inference.

1. A further reasonable and plausible inference can be drawn that when Mr Dongmin Wang received the CRA Report, he realised that it was the report that Mr Songying Li had received in Australia and referred to when he prepared his due diligence report and that CRA Report could not be used to estimate the coal resources at the tenement.  KQ failed to dispel that inference.

1. It is also a reasonable and plausible inference that when Mr Dongmin Wang received the January research report, he realised that the coal resource figures it used had come from the CRA Report, and were the subject of Mr Songying Li’s due diligence report.  KQ failed to dispel that inference. 

1. It is a reasonable and plausible inference to draw that Mr Dongmin Wang knew that the information given to the valuer in both reports was unreliable and could not be used to value the tenement.  KQ failed to dispel that inference.

1. If that was the case, then several questions arise.  Did Mr Dongmin Wang inform the valuer of Mr Songying Li’s assessment of the CRA Report?  Did Mr Dongmin Wang inform the valuer that the January research report relied on unreliable resource estimates from the CRA Report?  Did Mr Dongmin Wang inform any and what other executives of Yima that the valuer had been given unreliable information?  If not, why not?  Why would Mr Dongmin Wang, a senior executive of Yima, provide useless reports to the valuer?  As will be discussed below in detail, KQ failed to answer any of these questions or lead any satisfactory evidence as to why it was unable to do so.

1. KQ led no evidence to explain whether or not Mr Wei Liu was acting on behalf of Yima when he forwarded the reports to the valuer or what if any role he was authorised to play.

1. KQ led no evidence as to whether or not Mr Wei Liu informed the valuer that the reports (which Mr Wei Liu had forwarded to him) were unreliable and could not be used accurately to value the tenement. 

1. Mr Wei Liu was not called by KQ to give evidence to explain why he would provide useless reports to the valuer or otherwise explain his actions.

The meeting with the chairman 31 January 2012

1. On 31 January 2012, the Group Company’s General Legal Counsel, Mr Zhang Zhiwei, and the head of the Department of Securities of Yima, Mr Dongmin Wang, made a special report to the chairman of the Board, Mr Yulu Wu, and Deputy General Manager, Mr Li Yong Jiu.  This happened at a meeting regarding the negotiation over the Australian EPC 818 coalmine project and existing problems.  The minutes of the meeting record that after listening to the report ‘the Chairman of the Board gave important instructions regarding how to standardise the operation of the Australian coal project and the Group Company’s next step for capital operation.’[54]

   [54]Ex FLC 32.

1. In relation to the Australian project, the minutes go on to state:

1. Regarding the Australian project

Making every effort to ‘Go outside’ is the Group Company’s strategic goal.  Australia Kunqian International Energy Co Pty Ltd, who serves as the Group Company’s ‘bridgehead’ in Australia and the platform for resource development and capital operation, should firstly gain a firm foothold so that it could achieve great development in the future.  In order to guarantee a smooth advancement of the Australian project and to avoid investment risks that might emerge in the future, with regard to the problems emerged during the negotiation over the EPC818 project, currently the following six aspects of work must be well-accomplished:

(1)       With respect to economic feasibility, we should collect further information, carry out an analysis on the feasibility of economic benefits of the EPC818 project, as well as check and verify the parameters adopted in the economic analysis at the same time.

(2)       With respect to technical feasibility, relevant functional departments should carry out further in-depth analysis, conduct research and make judgement on the technical information in terms of geological conditions, coal mining, coal quality, etc.

(3)       With respect to commerce and trade, we should clearly work out the feasibility of the Australia’s EPC818 project in terms of coal mine resources and reserves, service out-sourcing (mining and intermediary services), railways, ports, power supply, land, water supply, coal sales, export and various types of permits as well as the information related to the economic parameters.

(4)       With respect to the ownership of the EPC818 mining right, we should clarify the ownership of the EPC818 mining right through investigation.

(5)       With respect to various prerequisite conditions before signing the formal agreement, in order to guarantee formal production and operation after the project commences, efforts should be made to clearly check in advance various kinds of policies, laws and permits involved in the Australian cooperation project, such as the relevant policies and product exporting permits which are required by the Australian Government in relation to the investment in coal mining by China’s state-owned companies.

(6)       The due diligence should be well performed.  Relevant departments are required to further understand the conditions of the EPC818 project.  A detailed due diligence checklist should be developed, based on which the Australian project team should be responsible for the initial information collection while the Group Company should send well-trained staff to Australia to assist with the due diligence work.  Professional consulting companies can be appointed to participate in performing the due diligence if necessary.

Regarding the cooperation issue of the EPC818 project, the Chairman of the Board finally pointed out that before the matters which may affect investment decisions are clearly identified, a cooperation framework agreement may firstly be signed with the other party.  After further and detailed due diligence as well as the economic and technical feasibility studies are completed, we could then consider signing a formal equity transfer agreement with the cooperation party.

2. Regarding the guidelines of the Group Company’s assets management and capital operation

Regarding the Group Company’s assets management and capital operation, the Chairman of the Board put forward the following guidelines:

(1)       We should adopt an industry and finance integrated development model, in which assets management and capital operation are combined; enhance the development of the key business of mining and dressing while make every effort to achieve excellence in capital operation according to the requirements of capitalisation and internationalisation.

(2)       The notion of cooperation and mutual benefits should be employed.  We should cooperate rather than doing everything on one’s own; cooperate with those who share the same operation ideas and philosophy and a similar enterprise culture, as well as those who have knowledge, thoughts and courage; base on the principle of the state-owned first and the private-owned second, share both risks and interests and apply a harmonious and integrated approach.

(3)       With respect to the Australian project, plan in advance the assets management and capital operation, follow a socialisation approach for production and operation, and outsource tasks when necessary.  The construction of the project should be competitive and efficient.  Members of the project team should update their thinking.

(4)       Vigorously advance the capital operation.  Firstly, the Group Company’s three modules, i.e. mining and dressing (including rare metals), coal chemical industry and aluminium industry should be well-prepared in advance for raising capital to enter the capital market.  Secondly, with regard to the Australian project, the Group Company is only responsible for the project investment capital for the early stage.  The follow-up investment should be raised from the capital market.  Once the construction of project is completed, it should start the process of listing in Hong Kong or Australia immediately.  Thirdly, the preliminary work for Kaixiang Chemical to be listed in Hong Kong should commence as soon as possible.  In summary, each of the modules should seek to be listed and raise development funds.

1. Mr Li Yong Jiu said:[55]

Wu Yulu asked further investigations to be conducted including the quantity of resource as well as other technical issues.  There are also other issues that were discussed but I couldn’t remember it clearly.  But things related to the price were not reported on or discussed.

[55]Transcript of Hearing in Hong Kong (15 March 2018) 99–100.

1. As discussed below, Mr Li Yong Jiu said that at the meeting Mr Wu got angry and said that former work and investigation had not been properly done.

1. As discussed below, it was put to Mr Li that the reason Mr Yulu Wu got angry was that Mr Hao Liu’s report ignored the opinions expressed by the geologist Mr Songying Li in his presentation to the management committee.  Mr Li said that the reason was that Mr Hao Liu’s report was not comprehensive enough.[56]

   [56]Transcript of Hearing in Hong Kong (16 March 2018) 18.

1. I find that it is reasonable and plausible to infer that Mr Yulu Wu had read Mr Hao Liu’s January research report.  I also find that it is also reasonable and plausible to infer that Mr Yulu Wu knew that Mr Hao Liu’s report did not address the criticism’s Mr Songying Li made of the information given to him when in Australia about the coal resources at the tenement.  As discussed below in the evidence of Mr Li Yong Jiu, Mr Yulu Wu was upset, because proper technological or geological investigations had not been carried out.

1. I also find that it is reasonable and plausible to infer that Mr Li Yong Jiu also knew that Mr Hao Liu’s January research report did not satisfy the further research and investigations that Mr Songying Li had told the management committee (at which Mr Yulu Wu and Mr Li Yong Jiu were present) needed to be carried out.

1. Mr Dongmin Wang was one of the two people delivering the special report to Mr Wu and Mr Li Yong Jiu.  The evidence suggests that Mr Dongmin Wang did not draw the CRA Report (which he had received about two weeks previously) to Mr Yulu Wu’s attention at the meeting.  I find that it is reasonable and plausible to infer that he did not do so, as he knew that the CRA Report was the report that Mr Songying Li found unreliable and that the chairman was so aware.

1. KQ failed to dispel any of these inferences, or to provide another explanation for the events that took place.  Nor did KQ call any satisfactory evidence to explain why it was unable to do so.

Mr Hao Liu given the task of making further investigations

1. Mr Li Yong Jiu was asked whether Yima conducted any further investigations after the meeting with the chairman.[57]

1. I consider that there are three factual questions which I must address.  First, did Mr Zhang borrow CN¥25 million from Australia Wales in August 2011?  If he did, then the second question is whether the terms of the loan were varied such that the debt could be repaid in Australian dollars at a fixed exchange rate.  If that question is answered in the affirmative, then the third question is whether the $1.5 million that Australia Wales received from Mr Zhang in March 2014 constituted repayment of the loan.

1. In response to the first question, I am satisfied on the balance of probabilities that Mr Zhang borrowed CN¥25 million from Australia Wales in August 2011. A copy of a document titled ‘Investment Loan Agreement,’ dated 2 February 2018, was tendered into evidence in both the original Mandarin and an official English translation,[1156] and I have no reason to doubt its authenticity. During cross-examination, Ms Wang gave clear and cogent answers to questions relating to the loan, and her demeanour gave me no cause for suspicions as to her honesty.

   [1156]Ex AW 5.

1. The question of whether the loan agreement was relevantly varied is less easily answered.  U&D submitted that the alleged variation ‘makes no commercial sense.’[1157]  The loan was allegedly varied so that the debt would be repaid in Australian dollars at a rate of $1 to CN¥5.5.  When Australia Wales and Mr Zhang made the agreement in November 2011, the exchange rate was $1 to CN¥6.9.  Between then and January 2012, when Ms Wang said he agreed to vary the loan,[1158]  the exchange rate never fell below $1 to CN¥6.2.[1159]

   [1157]U&D, ‘U&D’s Outline of Closing Submissions’, 5 April 2018, [108].

   [1158]Transcript of Hearing in Hong Kong (13 March 2018) 20.11–15.

   [1159]Ex UD 7.

1. The exchange rate on 10 March 2014, when Mr Zhang paid the money to Australia Wales was approximately $1 to CN¥6.8.  At this exchange rate, CN¥25 million was worth approximately $3.68 million.  At the exchange rate allegedly fixed by the variation, CN¥25 million was worth approximately $4.55 million.  And yet, the cost of purchasing CN¥25 million at that time was only $3.68 million.  In other words, Mr Zhang was approximately $870,000 worse off for having (allegedly) agreed to the fixed exchange rate of $1 to CN¥5.5 instead of using the market cost of Australian dollars.

1. U&D submits that ‘[i]t is inherently improbable that [Mr Zhang] would have agreed to incur this loss for no good reason … [T]he supposed variation locked him into a then below-market rate.’[1160]  For the below reasons, I do not accept this submission. 

   [1160]U&D, ‘U&D’s Outline of Closing Submissions’, 5 April 2018, [109].

1. First, Ms Wang was cross-examined on the circumstances in which she claimed to have varied the loan agreement with Mr Zhang,[1161] and her answers were detailed and consistent. She was not evasive, and acknowledged that the exchange rate of $1 to CN¥5.5 was lower than the market exchange rate in January 2012 of $1 to CN¥6.7. Ms Wang did not appear to be obfuscating or attempting to deceive.

   [1161]Transcript of Hearing in Hong Kong (12 March 2018) 73.17–76.2; (13 March 2018) 20.11–27.9.

1. Secondly, it is not accurate to say that Mr Zhang incurred ‘an immediate loss’ of approximately $870,000 upon agreeing to vary the terms of the loan agreement to a fixed exchange rate.  When the loan was allegedly varied, the time for repayment had not yet arrived:  it was a one-year loan, and so repayment was not due until August 2013.  Depending on the fluctuation of the exchange rate between the time the loan was allegedly varied in January 2012 and the time the loan would be due for repayment in August 2012, Mr Zhang might not have crystallised any loss at all.  If the exchange rate had fallen below $1 to CN¥5.5, then it would have been Ms Wang who suffered loss.  (Indeed, Ms Wang might have).  As to her state of mind at the time of the alleged loan variation, Ms Wang gave the following evidence:[1162]

Bear in mind that within a very short time, only four months, the exchange rate has already fallen or fell from 6.9 to 6.2, and I thought to myself there are still six more months to go before the repayment would occur, and during that time, if the exchange rate goes up or down, it would be unfair to either party. Therefore, we had agreed on an exchange rate of — a middle point exchange rate of 1 to 5.5.  This is only something that is very common in China.

[1162]Transcript of Hearing in Hong Kong (13 March 2018) 22.6–14.

1. I find Ms Wang’s evidence as to her desire to hedge against the risk of fluctuation plausible, and I found her demeanour during cross-examination to be convincing.

1. U&D makes a second argument as to why I should reject Australia Wales’ claim that the loan was varied: that it is strange for the variation not to have been recorded in writing when other transactions between Ms Wang and Mr Zhang had been so recorded.[1163]  U&D points, in particular, to the receipt dated 8 February 2012 endorsed on the November loan agreement, and to the additional loan agreement dated 6 January 2012.

   [1163]U&D, ‘U&D’s Outline of Closing Submissions’, 5 April 2018, [110].

1. On this point, Ms Wang gave evidence that she had an incentive to keep the written record of the Investment Loan Agreement in Chinese, rather than creating a written record of the variation that provided for repayment in Australian dollars.  She gave evidence that she felt more comfortable with the prospect of suing Mr Zhang for repayment in China than in Australia:[1164]

The loan that I made to him and the related agreements must be made in Chinese and the loan must be denominated in the Chinese currency.  This is a way that I protect myself, because in the event, if Mr Zhang does not repay his loan or cannot repay his loan, then I still reserve the right — I still have the right to sue him in China, under Chinese law, and I have the ability as well as the confidence that under Chinese law I can guarantee my own interest.

And if the loan arrangement was made in the Australian currency, then I would have to go after him in the case of a default in Australia, where I do not have such capabilities.  Therefore, I have always insisted on making loan arrangements in RMB, and that is because I wanted to protect my rights and my ability to sue him in China, because he has a lot of properties in China and I consider that this is under control, this circumstances is under control for me.  However, if such were to happen in Australia, I would have lost that capability.

[1164]Transcript of Hearing in Hong Kong (13 March 2018) 32.12–25, 33.1–4.

1. I find that Ms Wang’s explanation is plausible.  At the time, when the loan was allegedly varied, Ms Wang had no business contacts in Australia, and had never even been to Australia.  For the above reasons, I am satisfied that the Investment Loan Agreement between Mr Zhang and Ms Wang was varied by oral agreement in January 2012 according to the terms alleged by Australia Wales.

1. The third question to answer, then, is whether the $1.5 million that Australia Wales received from Mr Zhang in March 2014 constituted repayment of the loan.  Besides the evidence of Ms Wang, there is no evidence that the $2.5 million that Australia Wales received on 10 March 2014 was transferred in repayment of the Investment Loan Agreement.  Ms Wang loaned Mr Zhang the CN¥25 million in November 2011, and it was to be repaid within 12 months.  The impugned payment of $2.5 million to Australia Wales did not occur until March 2014 — more than a year overdue.  Ms Wang gave evidence that she chased Mr Zhang for repayment during that time, but there is no other evidence to corroborate her assertion.

1. Nonetheless, I am satisfied that Ms Wang was a reliable witness, and I accept her evidence that Mr Zhang transferred the $2.5 million to Australia Wales as part-repayment of the Investment Loan Agreement as varied in January 2012. 

1. I have been informed that Australia Wales has gone into liquidation since the trial concluded.  Normally I would dismiss U&D’s claims against Australia Wales.  In the circumstances, I propose giving the liquidator an opportunity to make submissions on the appropriate order, before I make any order in respect of Australia Wales.

Fourth-party claims

1. On 14 April 2017, the Zhu parties filed a fourth-party notice in the tracing proceeding.  By the statement of claim on fourth-party notice the Zhu parties made claims against Mr Zhang and U&D.  The Zhu parties filed an amended statement of claim on fourth-party notice on 19 March 2018.

1. The Zhu parties’ fourth-party claims are contingent upon U&D’s success against the Zhu parties in the tracing proceeding.[1165]  That is, it is only U&D’s success against the Zhu parties in the tracing proceeding that enlivens the latter’s claims.  Because U&D succeeded against the Zhu parties in the tracing proceeding,[1166] the Zhu parties’ fourth-party claims are enlivened.

   [1165]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [7].

   [1166]See above at [1197], [1212], [1216]–[1217], [1222], [1250], [1255].

1. I will deal first with the Zhu parties’ claims against Mr Zhang, and then with their claims against U&D.

Claims against Mr Zhang

1. The Zhu parties claim that at all relevant times, Mr Zhang was a director of Wei Kun, Yi Kun and Yi Wei Australia within the definition of ‘director’ in the Corporations Act.[1167]  The Zhu parties allege that Mr Zhang meets the statutory definition because he was a de facto director or shadow director of each of the companies.

   [1167]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [14].

1. The Zhu parties claim that Mr Zhang owed directors’ duties to each of Wei Kun, Yi Kun and Yi Wei Australia, particularly duties:[1168]

   [1168]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [15].

(a)        ‘to exercise his powers and discharge his duties as a director in good faith in the best interests of’ each company and ‘for a proper purpose,’ under Corporations Act s 181;

(b)        ‘not to improperly use his position’ to his own or someone else’s advantage, or to the detriment of each company, under Corporations Act s 182;

(c)        ‘to act bona fide in the interests of’ each company and ‘to exercise his powers for proper purposes,’ in equity; and

(d)       ‘not to act in his own interests or the interests of other parties where those interests conflicted with the interests of’ each of the companies, in equity.

1. The Zhu parties allege that Mr Zhang breached all of those duties.[1169]  In making this allegation, the Zhu parties refer to FLC’s allegations against Mr Zhang, as set out in FLC’s statement of claim in the tracing proceeding.[1170]  The Zhu parties also refer to some of U&D’s allegations against Mr Zhang, as set out in U&D’s statement of claim on third-party notice.[1171]

   [1169]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [16].

   [1170]FLC, ‘Further Amended Statement of Claim’, share-sale proceeding, 7 March 2018, [19]–[27], [32], [40]–[114F], as referred to in Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [16].

   [1171]U&D, ‘Second Defendant’s Further Amended Statement of Claim on Third Party Notice’, 27 February 2018, [7]–[10A], as referred to in Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [16].

1. The Zhu parties allege that ‘if U&D succeeds in its claims against Wei Kun and Yi Kun … because of Mr Zhang’s conduct as a director of Wei Kun and Yi Kun’, then each of those companies will suffer loss and damage.[1172]  The Zhu parties say that each company’s loss includes ‘the award of any claim for damages, compensation and/or costs or other relief in favour of U&D’, and their costs in making their defence to U&D’s claims.

   [1172]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [17].

1. The Zhu parties claim that Mr Zhang’s alleged breaches of directors’ duties are the cause of each company’s loss.[1173]

   [1173]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [18(a)]–[18(b)].

1. The Zhu parties claim that Mr Zhang is liable under s 1317H of the Corporations Act and in equity to compensate each company for its loss.[1174]

   [1174]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [18(c)]–[18(d)].

1. The Zhu parties submit that if the Court finds that Yi Kun and Wei Kun are liable to U&D on the basis that Mr Zhang was a shadow director, then the Court should find that Mr Zhang has breached the director’s duties that he owed to them, and compensate them for their loss.[1175]

   [1175]Zhu parties, ‘Outline of Zhu Parties’ Factual Submissions’, 11 April 2018, [26].

1. The Zhu parties gave particulars of the loss and damage claiming ‘the loss suffered by Wei Kun, Yi Kun and Yi Wei Australia includes the award of any claim for damages, compensation and/or costs or other relief in favour of FLC in the Principal Proceeding and their costs in defending the Principal Proceeding.’  The Zhu parties stated that further particulars of loss and damage would be provided before the trial of the proceeding.  As far as I am aware, no further particulars of loss and damage have been provided.  The claim by Yi Wei Australia was not pressed.

Findings

1. I have already found that Mr Zhang was a shadow director of each of the relevant companies.  I am satisfied that Mr Zhang did breach his duty as a director of each company in causing them to receive misappropriated moneys of U&D to acquire assets in the name of each company.

1. I have also found that Ms Beibei Zhu breached her duties as a director to each company.  No claim for damages has been made against her by the companies.

1. What is the loss and damage to each company that Mr Zhang is responsible for?  The loss may include any expenses, such as fees, stamp duties, rates and the like that the company incurred over and above receiving the misappropriated moneys applied in purchasing assets and that may be incurred in compensating U&D for receiving and using the misappropriated moneys.  As mentioned, no particulars have been provided of any such expenses, although I am satisfied that such expenses would have been and will be incurred.

1. Accordingly, in the absence of any particulars, I will permit the companies, Wei Kun and Yi Kun, to make submissions pointing to any evidence tendered in the trial that does identify and quantify any damages suffered by, or that will be suffered by, the companies as a result of compensating U&D for the receipt and use of the misappropriated moneys.  I will make no order as to costs on the fourth-party claims by the companies against Mr Zhang at this stage.

Restitutionary and set-off claims against U&D

1. In the fourth-party claim, the Zhu parties alleged that U&D was liable to repay the $2.8 million to Ms Zhu, or one of the companies, as monies had and received.  However, as I have described above,[1176] the amounts constituting the $2.8 million were paid to U&D by Lion Glass and by Mr Zhang — not by Ms Zhu. 

   [1176]See above at [16].

1. The Zhu parties make against U&D a contingent claim of money had and received, for which they seek restitution.[1177]  The Zhu parties submit that U&D ‘had the benefit of $2.8 million which should be taken into account in ascertaining U&D’s loss, or further that U&D is liable to make restitution to the Zhu Parties in respect of that sum.’[1178]

   [1177]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [23].

   [1178]Zhu parties, ‘Outline of Zhu Parties’ Factual Submissions’, 11 April 2018, [27(b)].

1. The claim is contingent because it depends upon the Court’s finding that U&D is entitled to ‘an award for damages, compensation and/or costs or other relief’ against any of the Zhu parties.  I have so found, which means that the Zhu parties’ contingent claim is enlivened.

1. The Zhu parties’ claim relates to various payments that were made to U&D between December 2012 and January 2014.  The payments add up to $2.8 million.  The Zhu parties claim that they are ‘entitled to relief by way of restitution’ of the $2.8 million, together with interest, ‘as money had and received.’[1179]  The Zhu parties further claim that they should be allowed to set off the $2.8 million from any amount the Court orders them to pay U&D.[1180]

   [1179]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [23(b)].

   [1180]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [24].

1. The Zhu parties allege that the following payments were made to U&D’s CBA Bank Account:

(a)        $500,000 from Lion Glass’ CBA Bank Account No 1 in December 2012;[1181]

(b)        $1.3 million from Lion Glass’ HSBC Bank Account No 1 in December 2012;[1182] and

(c)        $1 million from Mr Zhang’s Westpac Bank Account in January 2014.[1183]

[1181]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [22(b)].

[1182]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [22(c)].

[1183]Zhu parties, ‘The Third, Fourth, Fifth and Seventh Defendants’ Amended Fourth Party Statement of Claim against the First and Second Defendants’, 19 March 2018, [22A(b)].

1. The Zhu parties make a submission about why a set off should be allowed as between themselves and U&D.  The Zhu parties submit that ‘equitable set-off is available … as the claims and cross-claims are closely connected as to subject matter.’[1184]  The Zhu parties submit that ‘that connection impeached U&D’s claims in the sense that it would be unjust to allow U&D to recover without deduction from the Zhu Parties’ claims’.[1185]

   [1184]Zhu parties, ‘Outline of Zhu Parties’ Factual Submissions’, 11 April 2018, [31(a)].

   [1185]Zhu Parties, ‘Outline of Zhu Parties’ Factual Submissions’, 11 April 2018, [31(b)].

1. I need not address the arguments of the Zhu parties in relation to restitution and set off, as U&D has agreed to reduce the compensation payable by Ms Zhu by $2.8 million.  In final submissions at trial, U&D accepted that the $2.8 million paid to U&D in December 2012 and January 2014 reduces the damage that U&D suffered as a result of Ms Zhu’s breach of duty.[1186]

   [1186]Transcript of Proceedings (16 April 2018) 1616.29–1617.4 (R Strong).  See also Transcript of Proceedings (11 December 2018) 69.7 (R Strong).

Costs

1. In relation to the costs of the fourth-party claim by the Zhu parties against U&D, I propose to order that the Zhu parties’ costs of and incidental to the fourth-party claims against U&D, including any reserved costs, be taxed and be paid by U&D in default of agreement.

Orders

1. I direct that U&D bring in draft minutes of orders reflecting these reasons.