Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 5)
[2019] VSC 42
•12 February 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS’ LIST
S ECI 2016 01132
and
S ECI 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: | 10 and 11 December 2018, 13 and 14 February 2019 | |
DATE OF JUDGMENT: | 12 February 2019 | |
CASE MAY BE CITED AS: | Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 5) | |
MEDIUM NEUTRAL CITATION: | [2019] VSC 42 | Second revision: 29 May 2019 |
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ORDERS – Application for costs – Application for ‘Bullock order’ or ‘Sanderson order’ – Application refused.
ORDERS – Application for payment out of moneys paid into court for security for costs – Consideration of Huon Shipping and Logging Co Ltd v South British Insurance Co Ltd – Stay of order.
ORDERS – Consideration of orders generally of Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 3) [2018] VSC 711.
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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 | A Schnaider (solicitor) | SBA Law |
TABLE OF CONTENTS
Introduction.......................................................................................................................... 1
Result of the tracing proceeding....................................................................................... 1
The tracing proceeding....................................................................................................... 2
When was a trust alleged?................................................................................................. 4
Fourth party claims............................................................................................................. 7
Proposed orders.................................................................................................................. 8
Orders in the share-sale proceeding 1132 of 2016.......................................................... 8
Orders in the tracing proceeding 1242 of 2016.............................................................. 12
Zhu parties’ fourth party orders sought against Mr Zhang........................................ 14
HIS HONOUR:
Introduction
On 22 November 2018, I delivered my reasons for judgment in both the share-sale proceeding and the tracing proceeding.[1] In the share-sale proceeding, I directed that FLC bring in draft minutes of orders reflecting my findings. In the tracing proceeding, I directed U&D bring in draft minutes of orders reflecting my findings. On 10 and 11 December 2018, I heard argument on the form of the orders. One issue involved the calculation of interest on moneys owed by KQ to FLC under the Equity Transfer Agreement (‘ETA’). I initially gave reasons on this issue.[2] When the matter came back before me on 13 and 14 February 2019, I was told the parties had resolved their differences regarding the calculation of interest.[3] Thus, these reasons no longer deal with that issue.
[1]Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 3) [2018] VSC 711 (‘Flash Lighting v KQ (No 3)’).
[2]Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 5) [2019] VSC 42 (‘Flash Lighting v KQ (No 5)’).
[3]Transcript of Proceedings (13 February 2019) 2–3.
Result of the tracing proceeding
The result of the tracing proceeding was as follows:
(a) U&D was successful against Mr Zhang, Ms Zhu and the Zhu trusts.
(b) Mr Zhang was wholly unsuccessful.
(c) Ms Zhu and the Zhu trusts were wholly unsuccessful, save for the fourth party claims.
(d) FLC’s claims in the tracing proceeding fell away after the balance owing under the ETA by KQ was not found to have been held by U&D on trust for FLC, as KQ had alleged.
(e) Australia Wales Financial Management Pty Ltd (Australia Wales) was successful against FLC and U&D.
The tracing proceeding
FLC’s claims in the tracing proceeding (which depended on its allegation that U&D held moneys on trust for FLC) were unsuccessful. FLC seeks a Sanderson or Bullock order against KQ, that KQ bear the costs of the defendants for which FLC would otherwise be liable.
In Victorian WorkCover Authority v Kagan Bros Consolidated Pty Ltd (‘VWA v Kagan’),[4] Redlich and Bongiorno JJA referred to the following principles concerning the discretion to make a Sanderson or Bullock order:
[4](2011) 31 VR 389 (‘VWA v Kagan’).
(a) A plaintiff which seeks to have an unsuccessful defendant pay the costs of a successful defendant pursuant to a Sanderson or Bullock order must establish that, in the circumstances of the case, it would be reasonable and just for such an order to be made.
(b) An assessment of whether such an order will do justice to the unsuccessful party usually commences with an inquiry as to whether it was reasonable for the plaintiff to have joined the successful defendant. Subsequent events may demonstrate that the joinder was reasonable. In the first instance, however, reasonableness is judged upon the material that was or ought to have been available to the plaintiff’s lawyers at the time the writ was issued.
(c) The grant of such an order will usually, but not necessarily, require that the plaintiff’s claims against the respective defendants be interdependent or essentially alternative claims.
(d) The conduct of the unsuccessful defendant must be such as to make it fair to impose some liability on it for the costs of the successful defendant. Critically, such conduct will be found where the unsuccessful defendant tells the plaintiff in one way or another that it should look to the successful defendant for its remedy, or has done something to induce the plaintiff to maintain its action against the successful defendant.[5]
[5]Ibid [12]–[14].
Further, the fact that the unsuccessful and successful defendants are parties to separate proceedings does not affect the Court’s power to make a Sanderson or Bullock order, provided at least that those proceedings have been heard together.[6] There is no doubt that the Court has an unfettered discretion to make a costs order against a non-party to a proceeding.[7]
[6]G E Dal Pont, Law of Costs (LexisNexis Butterworths, 3rd ed, 2013) [11.64].
[7]Supreme Court Act 1986 (Vic) s 24(1); Knight v FP Special Assets Ltd (1992) 174 CLR 178.
FLC submits that the criteria for a Sanderson order, identified by Redlich and Bongiorno JJA in VWA v Kagan, are satisfied in this case with respect to FLC, KQ and the tracing proceeding defendants.
FLC submits that it was reasonable for FLC to have commenced the tracing proceeding in order to recover the proceeds of the $29.2 million, which, FLC contends, KQ alleged had been paid to U&D in discharge of its debt to FLC. FLC submits that if KQ’s allegation that it had paid the money to U&D for purposes including the discharge of its debt to FLC was established, then KQ would not bear any liability to FLC. It was therefore necessary to bring a claim against Mr Zhang and U&D. Further, having regard to the investigations done on behalf of FLC, following the receipt of KQ’s amended defence and counterclaim, there was a real risk that any judgment awarded against Mr Zhang would be wholly or partly unsatisfied, to which Mr Lucarelli deposed in his affidavit of 18 October 2016.[8] FLC contends that it was therefore compelled to join the Zhu parties and Australia Wales as defendants to the tracing proceeding. The fact that Ms Zhu and the Zhu trusts have been found liable as knowing recipients of part of the $29.2 million, on the case made by FLC, demonstrates that their joinder was reasonable.
[8]Affidavit of Peter Michael Lucarelli dated 18 October 2016, [80]–[87].
FLC submits that the tracing proceeding was only pursued in the alternative, if the Court found that FLC had been paid with the moneys transferred by U&D to KQ, in that the moneys were held on trust for FLC. In other words, KQ alleged that the debt due to FLC by KQ was discharged by the payment KQ made to U&D. As it was, I held in my judgment that the receipt purportedly given by Mr Zhang was not authorised by FLC. I also held that the moneys transferred to U&D by KQ were not held on trust for FLC.
When was a trust alleged?
On 27 June 2016, FLC commenced proceedings against KQ. In its statement of claim, FLC pleaded the ETA and the sale of its shares in U&D to KQ for $51,600,000.
FLC pleaded as follows. Pursuant to the terms of the ETA, KQ was required to make payment to FLC of the FLC Purchase Price by no later than on or about 8 May 2012. On or about 17 September 2012, FLC received payment of $5,400,000 from U&D as part-payment of the FLC Purchase Price. Subsequently, on or about 18 September 2012, FLC received the further payment of $17,000,000 from U&D as part-payment of the FLC Purchase Price.
FLC pleaded that, wrongfully and in breach of the terms of the ETA, KQ has not paid the balance of the FLC Purchase Price, being the amount of $29,200,000.
By its defence and counterclaim dated 2 September 2016, KQ denied that it had not paid the balance of the moneys due to FLC, and alleged that on or about 18 September 2012, Jun Xiao signed a receipt confirming that FLC had received $51.6 million from KQ. At that time, no other defence was pleaded by KQ to FLC’s plea that it had not been paid the outstanding $29.2 million of the Purchase Price, save that KQ alleged the amount was $24.2 million rather than $29.2 million, after taking into account the $5 million paid to FLC under the co-operation funding agreement.
KQ counterclaimed against FLC, Hao Liu, Jun Xiao and Yinan Zhang. The counterclaim pleaded, inter alia, that on or about 17 August 2012, Hao Liu, on behalf of KQ, signed an instruction addressed to the Bank of China requiring the bank to pay $70 million from KQ’s bank account to U&D for purposes including the discharge of the FLC Purchase Price.[9]
[9]KQ defence and counterclaim dated 2 September 2016, [33].
KQ then pleaded the payments made by Zhang of $10 million and $19.2 million to CJI. There is no plea by KQ that any portion of the $70 million was held on trust for FLC, or that by reason of a trust, FLC had been paid.
KQ pleaded, inter alia, that by reason of these and other matters, Hao Liu contravened his director’s duties to KQ.
On 6 October 2016, KQ delivered an amended defence and counterclaim. In respect of the instructions to the Bank of China, the plea added that the moneys were paid as instructed. Thus, at this stage of the proceeding, no allegation had been made by KQ that FLC had been paid, as moneys were held by U&D on trust for it.
Subsequently, on 18 October 2016, FLC issued proceedings against Mr Zhang and U&D (the tracing proceeding).
Under the attached indorsement of claim, FLC pleaded that on 27 June 2016 FLC commenced proceedings against KQ for the $29.2 million allegedly owing under the ETA. FLC pleaded that, by its amended defence and counterclaim of 6 October 2016, KQ had denied the allegations made against it by FLC and had further alleged, amongst other things, that it was not indebted to FLC for the sum of $29.2 million on the grounds that KQ had paid an amount to U&D sufficient to discharge its indebtedness to FLC under the ETA.
FLC then pleaded the instructions of 17 August 2012 from KQ to the Bank of China, whereby KQ directed the bank to transfer $70 million from KQ’s bank account to U&D, of which $51.6 million was expressly directed to be paid to FLC in respect of KQ’s obligations to FLC under the ETA.
FLC then pleaded that, by reason of those matters, the said sum of $51.6 million was held by U&D as trustee for and on behalf of FLC, and U&D thereby owed a fiduciary duty to FLC. This was the first reference in the pleadings in either the share-sale proceeding or the tracing proceeding that moneys were allegedly held on trust for FLC.
FLC pleaded that, of the trust amount, $22.4 million was paid by U&D to FLC in accordance with the instruction, but the balance was paid away by U&D to CJI in breach of trust. Consequential claims were then made against U&D and Mr Zhang.
On 31 October 2016, FLC added further defendants to the claim in the tracing proceeding, being Wei Kun (third defendant); Yi Kun (fourth defendant); Yi Wei (the fifth defendant) and Australia Wales (sixth defendant).
On 3 March 2017, U&D made third party claims against Yinan Zhang (first third party); Beibei Zhu (second third party); Wei Kun (third third party); Yi Kun (fourth third party); Yi Wei (fifth third party) and Australia Wales (sixth third party).
As mentioned above, FLC contends that the tracing proceeding claim was instituted as KQ had made allegations implying that moneys transferred by KQ to U&D were held by U&D on trust for FLC and that KQ had thereby discharged its obligations to pay FLC the balance of the Purchase Price.
Returning to the plea in the original indorsement to the tracing proceeding issued 18 October 2016, I am not satisfied that FLC is correct in its contention that KQ had alleged in its pleading that it was not indebted to FLC for the sum of $29.2 million, or at all, ‘on the grounds that KQ has paid an amount to U&D sufficient to discharge its indebtedness to FLC’. Rather, in my view, the allegation of KQ as to the purpose for which the moneys were transferred by KQ to U&D was to lay a factual foundation upon which to mount the subsequent claims against Hao Liu (a director of KQ); those claims being that Hao Liu had breached his duties as a director of KQ by, inter alia, instructing the Bank of China to transfer $70 million from KQ to U&D, a portion of which was then misappropriated by Mr Zhang.
In my opinion, the plea by KQ does not state, suggest or imply that any moneys paid to U&D were held on trust for FLC.
After the tracing proceeding was issued, however, KQ again amended its defence and counterclaim on 29 September 2017. This time it did plead that the payment of $70 million by KQ to U&D on or about 17 August 2012 ‘discharged any obligation of KQ to pay the FLC Purchase Price.’ The particulars, however, refer to and rely on the plea by FLC in the tracing proceeding, that $51.6 million of the payment (of the $70 million) was held by U&D for and on behalf of FLC.
Accordingly, KQ did not seek to rely on the trust ground to make out that it had paid FLC the Purchase Price until after the tracing proceeding had been instituted and only then did KQ rely on FLC’s pleas in the tracing proceeding to maintain that claim.
In my judgment of 22 November 2018, I said that as a consequence of KQ’s allegation that $29.2 million was held by U&D on trust for FLC, FLC instituted the tracing proceeding.[10] Those were the submissions made to me by FLC during the trial. For the reasons discussed above, I do not now accept the submissions of FLC that as a consequence of, and relying on, KQ’s plea, it commenced the tracing proceeding. I have corrected the reasons in my judgment to reflect this finding.[11]
[10]Flash Lighting v KQ(No 3) (n 1) [15]–[16].
[11]Ibid (first revision 12 February 2019) [19].
Accordingly, I find that FLC has not established the basis that it relies on for a Bullock or Sanderson order against KQ for the costs FLC is otherwise liable to pay the Zhu parties and Australia Wales, and I refuse FLC’s application for such an order.
Fourth party claims
I have now dealt with the fourth party claims in the first revision of my reasons for judgment in Flash Lighting v KQ (No 3)[12] and set out proposed orders below.
[12]Flash Lighting v KQ(No 3) (n 1) (first revision 12 February 2019).
Proposed orders
On 13 and 14 February 2019, the parties submitted draft forms of order in each of the share-sale proceeding and the tracing proceeding that purported to reflect my findings. There was substantial agreement as to the form of each. I deal with the outstanding disputed orders below and conclude by making final orders in each of the two proceedings.
Orders in the share-sale proceeding 1132 of 2016
In the share-sale proceeding, the parties have agreed on the form of the final orders, save for one issue. FLC submits that an order should be made that the moneys paid to the Senior Master as security for the costs of the defendant pursuant to the orders of the Court made 22 July 2016, 22 May 2017, 16 February 2018 and 28 March 2018 be paid to Baker McKenzie, the solicitors for the plaintiff. KQ agrees that such an order should be made but submits that it should be stayed for 14 clear days.[13]
[13]KQ, ‘Submissions on Orders’, 10 December 2018, [23]–[28].
FLC submits that the proposed order provides for the moneys which FLC has paid into Funds in Court as security for the costs of KQ, as the defendant to FLC’s claim, to be repaid to FLC, care of its solicitors. FLC contends that the form of that order, as with the other proposed orders for the return of moneys paid into Funds in Court, has been adapted from the standard form of order advised by the Senior Master.[14] The Senior Master has also confirmed the sums which have been paid into Court as security for KQ’s costs as defendant, the dates on which those sums were paid and the dates on which the orders for payment of those sums were made. It is appropriate, FLC contends, that these amounts of security be repaid to FLC immediately, notwithstanding the possibility of an appeal by KQ, in conformity with well-established authority.[15]
[14]Letter from the Senior Master, Funds in Court, to Baker McKenzie dated 30 November 2018 (Exhibit TFC-1 to the Affidavit of Tuck Farn Chung dated 7 December 2018).
[15]FLC, ‘Submissions on Final Orders’, 7 December 2018 [6]: see Texxcon Pty Ltd v Austexx Corporation Pty Ltd (No 2) [2013] VSC 343, [26]–[28]; A & R Construction Pty Ltd v Lees (1982) 7 ACLR 900; Huon Shipping and Logging Co Ltd v The South British Insurance Co Ltd [1923] VLR 216.
In Huon Shipping and Logging Co Ltd v The South British Insurance Co Ltd (‘Huon Shipping’),[16] Irvine CJ ordered the release of security for costs at the conclusion of the trial. He stated:
This appears to be an important point of practice, but it is, I think, governed by authority. It is not a question of discretion, but of what is the proper effect of an order that “the plaintiff do pay into Court the sum of £100 as security for the costs of the defendant in this action.” At first I was disposed to think that the order should be construed to include the costs of the action and the costs of any proceedings that might subsequently be taken by way of appeal. I think, however, that that is not so, and that the plaintiff, having secured a judgment in his favour, has complied with the terms of the order.[17]
[16][1923] VLR 216 (‘Huon Shipping’).
[17]Ibid 217.
A similar application was made to Davies J in Texxcon Pty Ltd v Austexx Corporation Pty Ltd (No 2) (‘Texxcon’).[18] Davies J noted that the decision of Irvine CJ in Huon Shipping was cited with approval and applied in A & R Constructions Pty Ltd v Lees.[19] Her Honour also referred to The Law of Costs,[20] where the learned author said:
Case authority dictates that where a plaintiff pays money into court as security for the defendant’s costs of the action, and is successful in the action, assuming no order requiring a successful plaintiff to meet the defendant’s costs, the plaintiff is entitled to have that money paid out of court as soon as judgment is entered, notwithstanding the fact that the defendant has been granted a stay of execution with a view to an appeal. This continues to represent the law unless modified by the express terms of a statute or court rules.[21]
[18][2013] VSC 343 (‘Texxcon’). The decision of Davies J in Texxcon was overturned on appeal, but no criticism was made in respect of the trial judge discharging security for costs: see Wieland v Texxcon Pty Ltd [2014] VSCA 199.
[19](1982) 7 ACLR 900 (Blackburn CJ).
[20] G E Dal Pont, Law of Costs (Butterworths, 2009).
[21]Ibid [28.65] (footnotes omitted). See also Ambridge Investments v Baker [2010] VSC 234 (Vickery J).
Her Honour continued:
Although the defendants challenged the correctness of those decisions, I am not persuaded that I should not follow them. On the law as it stands at present, the first plaintiff is entitled to have the guarantees returned. In the circumstances I propose to make an order for the return of the guarantees.[22]
[22]Texxcon (n 18) [28].
On the other hand, in Ambridge Investments Pty Ltd v Baker & Ors [No 2] (‘Ambridge’),[23] Vickery J referred with approval to the decision of Beazley JA in Kiri Te Kanawa v Leading Edge Events Australia Pty Ltd (‘Kiri Te Kanawa’),[24] where her Honour held that the question of the discharge of a trial judge’s order for security for costs was a matter to be determined in the exercise of the Court’s discretion. Her Honour said:
I consider that this application should be determined on the basis that leave to appeal will be granted, and that there is an arguable prospect that the appeal will be allowed. It is not necessary, in my opinion, to make any assessment of that prospect, it is sufficient to judicially notice that there is an argument available to the 1st defendant that her costs should not have been conflated with those of the 4th defendant.
In that circumstance I am of the opinion that the 1st defendant should be in no worse position that she was at the trial in relation to her costs being secured.[25]
[23][2010] VSC 234 (‘Ambridge’).
[24][2007] NSWCA 187.
[25]Ibid [22].
Nevertheless, Vickery J in Ambridge did order the payment out of the security. His Honour observed that, unlike in Kiri Te Kanawa, he had not been able to assess the prospects of success of an appeal.[26]
[26]Ambridge (n 23) [26]–[27].
KQ submits that a stay of the proposed order is necessary to preserve KQ’s position until the hearing of an application for a stay from the Court of Appeal. KQ submits that there is a real risk that if moneys paid by way of security are released to FLC, those moneys will not stay in the jurisdiction. If KQ succeeds on appeal, it is likely that the Court of Appeal will order that FLC pay KQ’s costs of the trial. KQ submits that there would be an injustice if, in the meantime, the security for costs that FLC paid into court had been released to it and paid to the British Virgin Islands (where FLC is established), leaving no prospect of KQ recovering its costs of the trial.[27]
[27]KQ, ‘Submissions on Orders’, 10 December 2018 [22].
The issue before me is not whether an order should be made that the moneys paid into court by FLC as security for KQ’s costs should be released to FLC. The only issue is whether there should be a stay on such an order for 14 clear days.
There appears to be a tension between the decision of Davies J in Texxcon and that of Vickery J in Ambridge. In the circumstances, I consider the appropriate course is to order the payment out to FLC of the security, but to stay the order for 14 clear days from the date of the order.
Accordingly, in the share-sale proceeding 1132 of 2016 I order as follows:
1.There be judgment for the plaintiff (FLC) against the defendant (KQ) in the sum of $25,278,431.37.
2.KQ pay FLC interest on the said sum from 28 May 2012 until the date of this order, fixed in an amount to be agreed in accordance with s 58 of the Supreme Court Act 1986 (Vic).
3.KQ’s counterclaim against the first defendant by counterclaim (FLC) and the third defendant by counterclaim (Jun Xiao) be dismissed.
4.In default of agreement, KQ pay FLC’s taxed costs (including any reserved costs) of FLC’s claim against KQ and FLC’s and Jun Xiao’s taxed costs (including any reserved costs) of KQ’s counterclaim against FLC and Jun Xiao.
5.KQ’s claim against the second defendant by counterclaim (Hao Liu) and the fourth defendant by counterclaim (Yinan Zhang) be adjourned sine die.
6.The money paid to the Senior Master as security for the costs of the defendant pursuant to the orders of the Court made 22 July 2016, 22 May 2017, 16 February 2018 and 28 March 2018 be paid to Baker McKenzie, the solicitors for the plaintiff.
7.The moneys paid to the Senior Master as security for the costs of the first and third defendants by counterclaim pursuant to the orders made on 1 December 2016, 26 June 2017, 16 February 2018 and 28 March 2018 be paid to Baker McKenzie, the solicitors for the first and third defendants by counterclaim, to be applied in satisfaction of the costs of the first and third defendants by counterclaim.
8.The moneys referred to in paragraph 7 are not to be released from Funds in Court until such time as those costs have been assessed in default of agreement.
9.Liberty to apply is reserved if the parties are unable to agree on the interest calculation.
10.This order be stayed for 14 clear days from the making of this order.
Orders in the tracing proceeding 1242 of 2016
U&D and the Zhu parties remain in dispute as to whether the amount due by Wei Kun to U&D should be reduced by a set-off in the sum of $1 million.[28]
[28]Transcript of Proceedings (14 February 2019) 21.2–5.
In the first revision of my judgment, I made the following findings in the claim by U&D against Wei Kun.
947U&D alleges that Wei Kun received money paid in breach of Mr Zhang’s fiduciary obligations to U&D as a volunteer. U&D claims that Wei Kun accordingly holds that money (or the traceable proceeds which it holds) on trust for U&D, and is liable in equity to transfer that money (or the traceable proceeds which it holds) to U&D. The Zhu parties deny these allegations.
948As mentioned above, Ms Zhu was at all relevant times a director of Wei Kun, and her knowledge is attributable to it. U&D claims, further or alternatively, that Mr Zhang was a director of Wei Kun within the meaning of s 9 of the Act, and that accordingly his knowledge is attributable to Wei Kun. The Zhu parties deny this allegation.
949U&D alleges that Wei Kun knowingly received money paid in breach of Mr Zhang’s fiduciary obligations to U&D. U&D claims that Wei Kun accordingly holds that money (or the traceable proceeds which it holds) on trust for U&D, and is liable in equity to U&D to account for that money and benefits it received in relation to that money or to transfer that money (or the traceable proceeds which it holds) to U&D. The Zhu parties deny these allegations.[29]
[29]Flash Lighting v KQ (No 3) (n 1) (first revision 12 February 2019) [947]–[949] (citations omitted).
The parties agree, as found in the judgment, that Wei Kun received $5,685,000 of U&D’s moneys. Wei Kun submits, however, that its liability to U&D should be reduced by $1 million, which was received by U&D from Mr Zhang. In January 2014, Mr Zhang transferred from his Westpac Bank Account to U&D’s CBA Bank Account the sum of $1 million. These moneys were part of a loan received by Mr Zhang from Westpac, which was secured by a mortgage and guarantee given by Wei Kun over the Knightsbridge Parade property.
Wei Kun sold the Knightsbridge Parade property in October 2016, and the loan to Mr Zhang by Westpac was discharged by Wei Kun from the proceeds of sale. According to these facts, Wei Kun received $5,865,000 of U&D’s moneys, of which $4,970,000 was used by Wei Kun to buy the Knightsbridge Parade Property. U&D subsequently received $1,000,000 of the sale proceeds of the Knightsbridge Parade Property.
Accordingly, Wei Kun submits that allowance should be made for the moneys already received by U&D.
U&D submits, however, that it and the Zhu parties agreed that the outcome of the fourth party claim should lead to a reduction of $2.8 million in the judgment against Beibei Zhu. U&D says that the Zhu parties contend that it should also lead to a reduction of $1 million in the judgment against Wei Kun. U&D disagrees. U&D submits that the $1 million is part of the $2.8 million, as I have found.[30]
[30]Ibid [1301]–[1307].
In the first revision of my reasons for judgment, I held that I need not address the arguments of the Zhu parties in relation to restitution and set-off, as U&D had agreed to reduce the compensation payable by $2.8 million. I noted that in final submissions, U&D accepted that $2.8 million paid to U&D in December 2012 and January 2014 reduces the damages that U&D suffered as a result of Ms Zhu’s breach of duty.[31]
[31]Ibid [1307].
I find that it was implicit in the acceptance by the Zhu parties of the reduced claim against Ms Zhu that no further claim would be made by the Zhu parties, particularly Wei Kun, to seek a reduction in the amount ordered to be repaid to U&D for the use of its misappropriated moneys.
In the first revision of my judgment, I said I would order that the Zhu parties’ costs of and incidental to the fourth party claims against U&D, including reserved costs, be taxed and paid by U&D in default of agreement.[32] By oversight, that proposed order was not included in the reasons I delivered on 12 February 2019. I have corrected that oversight in this the first revision of Flash Lighting Company Ltd v Australia Kunqian International Energy Co Pty Ltd (No 5) [2019] VSC 42.
[32]Ibid [1308].
Zhu parties’ fourth party orders sought against Mr Zhang
In my judgment FLC v KQ (No 3),[33] I addressed the claims against Mr Zhang made by the Zhu parties.[34] I concluded that Mr Zhang was a shadow director of each of Wei Kun, Yi Kun and Yi Wei Australia. I found that I was 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.
[33][1299]–[1300].
[34]Wei Kun Pty Ltd (in its own right and as trustee for the Zhu Family Trusts) (Wei Kun), Yi Kun Australia Pty Ltd (in its own right and as trustee for the Wei Family Trust) (Yei Kun), Yi Wei Pty Ltd (in its own right and as trustee of the Kun Family Trust) (Yi Wei Australia) and Beibei (Bridget) Zhu (Ms Zhu). Wei Kun, Yi Kun and Yi Wei Australia were referred to collectively as the ‘Zhu Family Trusts’.
I addressed the loss and damage to each company that Mr Zhang was responsible for. I said that the losses may include 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 misappropriated moneys.
No particulars had been provided of any such expenses. I granted leave for, Wei Kun and Yi Kun to make submissions pointing to any evidence tendered during the trial that did identify and quantify and damages suffered by, or that would be suffered by, the companies as a result of compensating U&D for the receipt and use of the misappropriated moneys. I said that I would make no order as to costs on the fourth party claims by the companies against Mr Zhang at this stage.
Further submissions were made by Wei Kun and Yi Kun pointing to the evidence tendered during the trial that identified and quantified the damages suffered by those companies as a result of compensating U&D for the receipt and use of the misappropriated moneys.
Wei Kun and Yi Kun included in their written submissions a table setting out the claims of each. I include the table as Annexure A.
The Zhu parties claim that the evidence referred to establishes that Wei Kun incurred costs and expenses of $5,526, 927.23 and Yi Kun costs and expenses of $277,706.90.
The Zhu parties submit that the Wei Kun costs and expenses include $3,640,000 that Mr Zhang obtained by mortgaging the Knightsbridge property. Ms Zhu said that in the family split of assets, the parties had agreed that the Knightsbridge property would be Mr Zhang’s. As it was, the moneys used to buy Knightsbridge were misappropriated by Mr Zhang. Mr Zhang breached his duty as a director in taking the proceeds of the misappropriated moneys for his own use, causing Wei Kun damage. The Knightsbridge property was sold and the proceeds were used to discharge the mortgage that Mr Zhang had applied to his own use. Wei Kun, however, remained liable to U&D for the moneys it had received.
I am satisfied that the compensation to Wei Kun should include the moneys taken by Mr Zhang under the mortgage.
A further expense claimed by Wei Kun is $722,609.84 for renovations and improvements undertaken to the Knightsbridge property. The companies submit that a fiduciary liable to give up property is entitled to be recouped for value of improvements undertaken: Nolan v Collie[35] per Ormiston JA (with whom Batt and Vincent JJA agreed); Mansard Developments Pty Ltd v Tilley Consultants Pty Ltd;[36] and Warman International Ltd v Dwyer.[37]
[35](2003) 7 VR 287 at 299.
[36][1982] WAR 161.
[37](1985) 182 CLR 544.
I invited the Wei Kun to make further submissions in support of its claim under this head. I have been informed by the solicitors for Wei Kun that it is content for me to determining this matter on the papers without any further hearing and accept that it will be bound by the orders I make.
Without the benefit of further submissions, I am unable to see how Wei Kun has suffered any damage by Mr Zhang spending money in undertaking renovations and improvements to the property. Accordingly, I disallow this head of claim.
Accordingly, I find that the Mr Zhang is liable in damages to Wei Kun in the sum of $4,804,317.39 and to Yi Kun in the sum of $277,706.06.
Accordingly, I make the following orders in the tracing proceeding 1242 of 2016:
OTHER MATTERS:
(a)The second defendant (U&D) has suffered damage in the sum of $29,200,000 resulting from the contravention by the first third party (Yinan Zhang) of s 181 of the Corporations Act 2001 (Cth).
(b)U&D has suffered damage in the sum of $13,420,000 resulting from the contravention by the second third party (Beibei Zhu) of s 181 of the Corporations Act 2001 (Cth), which amount incorporates a reduction of $2.8 million to give effect to the declaration in order 32 below.
(c)Upon the undertaking of the third third party (Wei Kun Pty Ltd) not to deal with the real property at 15 Station Road, Indooroopilly, Queensland (known as the Indooroopilly Hotel) save after provision of 14 days’ notice of an intention to do so to U&D.
THE COURT ORDERS THAT:
(a) On FLC’s claims against U&D
1.There be judgment for U&D.
2.The plaintiff’s (FLC) claims against U&D be dismissed.
3.In default of agreement, FLC pay U&D the taxed costs (including reserved costs) of FLC’s claims against U&D.
4.The moneys paid to the Senior Master as security for the costs of the second defendant (U&D) pursuant to the orders of the Court made on 12 December 2016, 21 December 2017 and 16 February 2018 be paid to Clayton Utz, the solicitors for the second defendant, to be applied in satisfaction of the costs of FLC’s claims against U&D.
5.FLC’s claims against the third, fourth, fifth and seventh defendants (the Zhu parties) be dismissed.
6.In default of agreement, FLC pay the taxed costs (including reserved costs) of FLC’s claims against the Zhu parties on a standard basis up to and including 15 January 2018 and thereafter on an indemnity basis.
7.The moneys paid to the Senior Master as security for the costs of the third, fourth and fifth defendants pursuant to the orders of the Court made on 14 December 2016, 27 June 2017, 20 December 2017 and 28 March 2018 be paid to MST Lawyers, the solicitors for the third, fourth and fifth defendants, to be applied in satisfaction of the costs of FLC’s claims against those parties.
8.The moneys paid to the Senior Master in support of the plaintiff’s (FLC’s) undertaking as to damages in favour of the third, fourth and fifth defendants pursuant to the orders of the Court made on 15 December 2016, 6 July 2017 and 20 December 2017, together with any interest thereon, be paid to MST Lawyers, the solicitors for the third, fourth and fifth defendants.
9.The moneys paid to the Senior Master as security for the costs of the seventh defendant (Beibei Zhu) pursuant to the order of the Court made on 15 February 2018 be paid to MST Lawyers, the solicitors for the seventh defendant, to be applied in satisfaction of the costs of FLC’s claims against the seventh defendant.
10.FLC’s claims against the sixth defendant (Australia Wales) be dismissed.
11.In default of agreement, FLC pay the taxed costs (including reserved costs) of FLC’s claims against Australia Wales.
12.The moneys paid to the Senior Master as security for the costs of the sixth defendant (Australia Wales) pursuant to the orders of the Court made on 7 December 2016, 10 November 2017, 29 January 2018 and 28 March 2018 be paid to SBA Law, the solicitors for the sixth defendant, to be applied in satisfaction of the costs of FLC’s claims against the sixth defendant.
13.The moneys paid to the Senior Master in support of the plaintiff’s (FLC’s) undertaking as to damages in favour of the sixth defendant (Australia Wales) pursuant to the orders of the Court made on 15 December 2016 and 29 January 2018, together with any interest thereon, be paid to SBA Law, the solicitors for the sixth defendant.
14.The moneys referred to in paragraphs 4, 7, 9 and 12 are not to be released from Funds in Court until such time as those costs have been assessed in default of agreement.
15.The moneys referred to in paragraphs 8 and 13 are not to be released from Funds in Court until such time as those damages have been assessed in default of agreement.
(b) U&D’s third party claim against Yinan Zhang
16.On the second defendant’s (U&D) third party claim against the first third party, there is judgment for U&D against Yinan Zhang in the sum of $29,200,000 together with interest at the rate of 6 per cent per annum on and from 27 August 2012 as to $10,000,000 and on and from 18 September 2012 as to $19,200,000.
17.In default of agreement, Yinan Zhang pay the taxed costs (including reserved costs) of U&D’s claims against him.
(c) U&D’s third party claims against Beibei Zhu
18.On the second defendant’s (U&D) third party claims against the second third party (Beibei Zhu), there is judgment for U&D in the sum of $13,420,000 with interest at the prescribed rate under s 2 of the Penalty Interest Rates Act 1983 (Vic) calculated from 3 March 2017 until the date of this order.
19.The Court declares Beibei Zhu holds on trust for U&D the Porsche Cayenne motor vehicle.
20.Within 10 days of this order, Beibei Zhu deliver up to U&D possession of the Porsche Cayenne motor vehicle and thereafter do and execute all documents and things necessary to transfer the registration of that vehicle to U&D. On delivery of the said motor vehicle to U&D pursuant to this order, the judgment sum in order 18 is reduced by an amount of $65,000.
21.In default of agreement, the Zhu parties pay the taxed costs (including any reserved costs) of U&D’s third party claims against them.
(d) U&D’s third party claims against Wei Kun Pty Ltd
22.On U&D’s third party claims against the third third party (Wei Kun Pty Ltd), there is judgment for U&D in the sum of $5,685,000 with interest at the prescribed rate under s 2 of the Penalty Interest Rates Act 1983 calculated from 3 March 2017.
23.The Court declares that Wei Kun Pty Ltd holds on trust for U&D the sum of $1,187,021.66 and interest accrued thereon now held in the controlled moneys account of Baker McKenzie pursuant to the order made on 18 November 2016.
24.In default of agreement, Wei Kun Pty Ltd pay the taxed costs (including any reserved costs) of U&D’s third party claims against it.
(e) U&D’s third party claims against Yi Kun Pty Ltd
25.On U&D’s third party claims against the fourth third party (Yi Kun Pty Ltd), the Court declares that Yi Kun Pty Ltd holds on trust for U&D the land situated at and known as Unit 22005, ‘The Oracle Tower 2’, 21 Elizabeth Street, Broadbeach, Queensland (Oracle Tower Apartment). On delivery of the said certificate of title to U&D pursuant to this order, the judgment sum in order 18 is reduced by an amount of $858,280.
26.Within 10 days of this order, Yi Kun Pty Ltd deliver to the solicitors for U&D the certificate of title to the Oracle Tower Apartment, together with a registrable transfer of that property to U&D, and thereafter do and execute all documents and things necessary to perfect that transfer.
27.In default of agreement, Yi Kun Pty Ltd pay the taxed costs (including any reserved costs) of U&D’s third party claims against it.
(f) U&D’s third party claims against Yi Wei Australia Pty Ltd
28.U&D’s third party claims against the fifth third party (Yi Wei Australia Pty Ltd) are dismissed.
29.There be no order as to costs.
(g) U&D’s third party claims against Australia Wales
30.U&D’s third party claims against Australia Wales are dismissed.
31.In default of agreement, U&D pay the taxed costs (including any reserved costs) of U&D’s third party claim against it.
(h) Fourth party claims
32.On the Zhu parties’ fourth party claims against U&D, I declare that the moneys due by Beibei Zhu to U&D should be reduced by the $2.8 million received by U&D from Lion Glass and Mr Zhang.
33.The Zhu parties’ costs of and incidental to the fourth party claims against U&D, including reserved costs, be taxed and paid by U&D in default of agreement.
34.On Wei Kun’s fourth party claim against Mr Zhang, there be judgment for Wei Kun in the sum of $4,804,317.39 and interest of $1,248,471.41 (calculated to 29 May 2019).
35.Wei Kun’s costs of and incidental to the fourth party claim against Mr Zhang, including reserved costs, be taxed and paid by Mr Zhang to Wei Kun in default of agreement.
36.On Yi Kun’s fourth party claim against Mr Zhang, there be judgment for Yi Kun for $277,706.06 and interest of $72,165.94 (calculated to 29 May 2019).
37.Yi Kun’s costs of and incidental to the fourth party claim against Mr Zhang, including reserved costs, be taxed and paid by Mr Zhang to Yi Kun in default of agreement.
(i) Delivery of trust property
38.The funds held in the controlled account of Baker McKenzie pursuant to the order made on 18 November 2016 be released to the solicitors for U&D. On delivery of the said funds to U&D pursuant to this order, the judgment sums in orders 18 and 22 are reduced by the amount so paid.
(j) Injunction
39.The interlocutory injunctions granted by the Honourable Justice Hargrave on 15 December 2016 are discharged.
40.Liberty to apply is reserved.
ANNEXURE A
Wei Kun Pty Ltd
Expense claimed
Amount
Evidence
Knightsbridge
Purchase expenses
Stamp duty on purchase
$279,525
Ms Zhu’s First Witness Statement [49].
Court Book Vol 8 Tab 35 pages 341–347
Legal fees and disbursements
$1,600
“ “
Registration fees on transfer
$14,594.70
“ “
Adjustments on settlement
$1,256.28
“ “
Wei Kun part payment towards purchase price
$7,306.13
Ms Zhu’s First Witness Statement [44(b)]
Court Book Vol 8 Tab 29 pages 317
Holding expenses
Renovations and improvements undertaken3
$722,609.84
Ms Zhu’s First Witness Statement [68].
Ms Zhu’s Second Witness Statement [64]
Court Book Vol 8 Tab 41 pages 408–415; Court Book Vol 9 Tab 46 pages 454–562
Other holding expenses for the period 2013 to 2017, including insurance, land tax, council rates as set out
$155,249.38
Ms Zhu’s Second Witness Statement [62]–[63]
Court Book Vol 9 Tab 75 pages 1000–1002
Mortgage to secure
$3,640,000
Revised Reasons at [914],
3 A fiduciary liable to give up property is entitled to be recouped for value of improvements undertaken: Nolan v Collie (2003) 7 VR 287 at 299 [33] per Ormiston JA (with whom Batt and Vincent JJA agreed; Mansard Developments Pty Ltd v Tilley Consultants Pty Ltd [1982] WAR 161; Warman International Ltd v Dwyer (1985) 3 182 CLR 544
Zhang loan of $3.64M3 [paid out by Wei Kun on settlement of the sale of the property in October 2016]
[1067], [1068], [1138] and [1139].
Mortgage expenses
$0
Sale expenses
Agents commission
$123,750.00
Ms Zhu Second Witness Statement [79]
Court Book Vol 9 Tab 79 Pages 111–1128
Legal fees to Pan and Partners and MST Lawyers
$3,400.41
“ “
Adjustments on settlement
$26,428.85
“ “
Total for Knightsbridge
$4,975,720.59
Frank Street
Purchase expenses
Stamp duty on purchase
$104,150
NB: The settlement statement for the purchase of Frank St was discovered but not part of the final tendered Court Book
Adjustments on settlement
–$52,985.99
“ “
Legal fees
$5,287.67
“ “
Mortgage expenses and fees
$413,925.78
Court Book Vol 9 Tab 24 Pages 229–269
Loan Repayments for Commercial Advance Statement 304 123 059531‑0
________________________________
3 Wei Kun mortgaged the Knightsbridge Property to secure Mr Zhang’s loan of $3.64M. Wei Kun repaid that loan amount to the mortgagee when the Knightsbridge Property was sold. See also Revised Reasons at [914], [1067], [1068], [1138] and [1139].
4
Sale Expenses
Agents commission
$64,000
Ms Zhou Second Witness Statement [73]
Legal Fees on sale
$4,002.08
Ms Zhu Second Witness Statement [70]–[72]
Court Book Vol 9 Tab 89 Page 1154
Adjustments on settlement
$12,827.10
“ “
Total for Frank St
$551,206.64
Total for both properties
$5,526,927.23
Yi Kun Pty Ltd
Oracle Tower
Purchase expenses
Oracle Tower was purchased by Yi Kun on about 28 February 2013 for $858,230
$2000 contribution on deposit
$2,000
Ms Zhu First Witness Statement [61]
Court Book Vol 9 Tab 49 Pages 565–566
Adjustments on settlement
$1,575.83
Court Book Vol 9 Tab 49 Pages 565–566
Loan repayment/
maintenance costs during period property has been held
Expenses of $86,952 less rental income of $40,800 per annum; $46,152 net expense per annum
12 March 2013 to 18 February 2019; 5 years × $46,152 and 343 days
$43,370.23
$274,130.23
Ms Zhu Second Witness Statement [83]
Total
$277,706.06
5
1
6
0