Gemi 193 Pty Ltd v Zhu

Case •

[2024] NSWSC 1113

•

30 August 2024

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: Gemi 193 Pty Ltd v Zhu [2024] NSWSC 1113
Hearing dates: 11-15, 18 September, 4 October 2023
Date of orders: 30 August 2024
Decision date: 30 August 2024
Jurisdiction:Equity
Before: Slattery J
Decision:

Defendant/cross claimant held to be in a position of special disadvantage in relation to the plaintiff. Defendant/cross claimant’s secured guarantee may be set aside against the first cross-defendant. Second cross-defendant held not to have engaged in misleading and deceptive conduct. Final relief and costs reserved for further submissions.

Catchwords:

EQUITY — Unconscionable conduct — Special disability or disadvantage – other party’s knowledge – whether unconscientious advantage taken – the plaintiff, a financier, loans a substantial sum to a special purpose corporate vehicle associated with the interests of the defendant’s husband in relation to a property development – defendant provides a secured guarantee over her residence for the obligations of the corporate borrower to repay the loan – the loan to the corporate borrower covers temporary default interest and charges on other loans to parties and interests associated with the defendant’s husband – the defendant executes the loan documents at the office of the defendant’s husband in the presence of the solicitor for the defendant’s husband – whether the defendant was in a position of special disadvantage in relation to the plaintiff lender at the time of giving a secured guarantee – whether the plaintiff took unconscientious advantage of the defendant in taking her secured guarantee – whether the defendant had independent legal advice – whether any legal advice that was available to the defendant overcame any special disadvantage that she had in giving her secured guarantee to support the loan transaction.

CONSUMER LAW — Misleading or deceptive conduct – defendant cross claims alleging that a principal of the plaintiff, the second cross-defendant, engaged in misleading deceptive conduct which had the effect of inducing the defendant to provide a secured guarantee of the obligations of the corporate borrower – whether the principal of the plaintiff made the statements that the defendant alleges he made to her.

Legislation Cited:

Competition and Consumer Act 2010 (Cth), Schedule 2 (Australian Consumer Law), ss 4, 18, 20

Australian Securities and Investments Commission Act (2001) ss 12BB, 12BF, 12BA, 12CB, 12DA, 12GR

Contracts Review Act 1980, s 7(1)(a)-(d), 9(2)

Family Law Act 1975 (Cth)

Personal Property Securities Act 2009 (Cth)

Cases Cited:

Alderton v Prudential Assurance Company Limited (1993) 41 FCR 435; FCA 164

Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261

Blomley v Ryan (1956) 99 CLR 362

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; (1992) 110 ALR 608

Earl of Aylesford v Morris (1873) LR Ch App 484

Garcia v National Australia Bank Ltd [1998] HCA 48; 194 CLR 395

Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339

Hume Plasterboard Pty Limited v Brilliant Interiors Pty Limited [2019] NSWSC 679

Jenkyns v Public Curator (Queensland) (1953) 90 CLR 113; [1953] HCA 2

Johnson v Smith [2010] NSWCA 306

Jones v Dunkel (1959) 101 CLR 298

Karavaz v Crown Melbourne Ltd (2013) 250 CLR 392; [2013] HCA 25

Kings North Trust Ltd v Bell (1986) 1 WLR 119 and Alderton v Prudential Assurance Company Limited (1993) 41 FCR 435; FCA 164

Ledinh Sovereign Super Pty Ltd v CT Stone Pty Ltd [2023] NSWSC 1079

Nitopi v Nitopi (2022) 109 NSWLR 390; [2022] NSWCA 162

North Shore Ventures Ltd v Ansteod Holdings Inc (2011) EWCA Civ 230; [2012] Ch 31

O’Brien v ANZ Bank (1871) 5 SASR 347

Paciocco v Australia and New Zealand Banking Group Limited (2015) 236 FCR 199; [2015] FCAFC 50

Perpetual Trustee Company Limited v Albert and Rose Khoshaba (2005) 14 BPR 26,639; [2006] NSWCA 41

Provident Capital Ltd v Papa (2013) 84 NSWLR 231

Radin v Commonwealth Bank of Australia (1998) FCA 1361

Thorne v Kennedy (2017) 263 CLR 85; [2017] HCA 49

Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O’Donnell (2011) 15 BPR 29,699; [2011] NSWCA 389

West v AGC (Advances) Ltd & Ors (1986) 5 NSWLR 610

Westpac Banking Corporation v Robinson (1990) ASC 56-002

Wu v Ling [2016] NSWCA 322

Category:Principal judgment
Parties: Plaintiff/Cross Defendant: GEMI 193 Pty Ltd (ACN 641 815 492)
Second Cross Defendant: Justin Epstein
First Defendant/Cross Claimant: Xian Zhu
Second Defendant: Commonwealth Bank of Australia ACN 123 123 124
Representation:

Counsel:
Plaintiff/Cross Defendant: H. Somerville; L. Cooper-Hackman
First Defendant/Cross Claimant: A. Zahra SC; J. C. Lee

Solicitors:
Plaintiff/First & Second Cross Defendants: Paul Nathan Reese, Summer Lawyers
First Defendant/Cross Claimant: Amie Crichton, Crichton & Co Legal
File Number(s): 2021/183050
Publication restriction: No

Judgment

  1. On 5 August 2020, Mrs Xian (‘Juliana’) Zhu, the defendant, executed a suite of documents in the presence of her former husband and his solicitor in which she gave a secured guarantee of the loan obligations of Fucrez Pty Ltd (‘Fucrez’), to which Gemi 193 Pty Ltd (“G193”), the plaintiff, proposed to advance $1,095,315.19. The security she gave was over her residence in the Sydney suburb of Wahroonga. Fucrez defaulted soon afterwards on its obligations to G193.

  2. G193 brings these proceedings against Mrs Zhu on her guarantee to recover its loan, and to realise its security. Mrs Zhu has cross-claimed seeking to set aside the guarantee on the grounds of unconscionability at general law, under the Contracts Review Act 1980, under the Australian Consumer Law ss 4 and 18 and the Australian Securities and Investments Commission Act [2001] ss12BB and 12BA. Mrs Zhu alleges that the first cross-defendant, G193 engaged in misleading or deceptive conduct as well as unconscionable conduct in procuring her guarantee. Her Cross-Claim also joins as second cross-defendant, a principal of G193, Mr Justin Epstein. She alleges he was knowingly concerned in G193’s alleged misleading and deceptive conduct as the alleged author of misleading statements made to Mrs Zhu.

  3. Mrs Zhu’s Wahroonga residence has been sold and a part of the proceeds of sale are now kept in a controlled monies account. G193 claims the whole of those monies, a sum of approximately $1.8 million. The total claim it brings against Mrs Zhu on an unsecured basis is significantly larger. The first mortgagor of the Wahroonga property, the Commonwealth Bank of Australia (“CBA”) was originally joined to G193’s claim as a second defendant. But proceedings against the CBA are now concluded and Mrs Zhu is referred to here as ‘the defendant’.

  4. The principal contest in the proceeding is whether Mrs Zhu was in a position of special disadvantage with respect to G193 at the time she executed the guarantee and the security documents on 5 August 2020, by reason of her circumstances including G193’s failure to disclose to her certain alleged risks associated with Fucrez’s capacity to repay the funds advanced to it and by reason of alleged misleading conduct by Mr Epstein when acting on behalf of G193.

  5. The proceedings were heard on 11-15 ;18 September 2024 and 4 October 2023. Mr H. Somerville leading Ms L. Cooper-Hackman, instructed by Summer Lawyers, appeared for Gemi 193 and Mr Epstein. Mr A. Zahra SC leading Mr J. C. Lee, instructed by Crichton & Co Legal, appeared for Mrs Zhu. The proceedings were efficiently conducted by the legal representatives on all sides to isolate the real issues in dispute and the Court was much assisted by the parties’ submissions.

  6. Many of the Court’s findings depend upon the Court’s assessment of the credibility of each of the principal witnesses, Mrs Zhu, her husband Mr Peter Zhu, and Mr Epstein. Brief general observations about their credibility are set out initially before a narrative of the Court’s findings commences.

Credibility of the parties and witnesses

  1. Mrs Julianna Zhu. Mrs Zhu was married to Mr Zhu for approximately 15 years. Mrs Zhu spoke good English, although with a strong accent. She came across to the Court as alert, cautious and self-possessed, except in one respect which will be discussed below. At the time of the trial, she was working in a form of employment which was probably below her true intellectual attainments: she was a stock-taker in a suburban IGA retail store.

  2. English is Mrs Zhu’s second language. She pointed out several times during her evidence that she struggled to understand some of the questions put to her. In the Court’s assessment her confusion at these questions was unfeigned and caused her a genuine need to seek clarification of what was being put to her.

  3. Mrs Zhu was fundamentally trusting of family members and of people that family members told her she could trust. Her approach to complex legal documents was to put her faith in what trusted advisers told her about them. Despite her separation and divorce from Mr Zhu she still trusted and was much influenced by her ex-husband and her former mother-in-law. She believed throughout the subject transaction that her husband and her mother-in-law had her interests at heart.

  4. Mrs Zhu has a limited capacity to read English. For example, when she was asked to read part of a document in the courtroom, she would do so slowly and deliberately to herself to reinforce gradually her own understanding of the document before her.

  5. Mrs Zhu seems to think, and she gave evidence, in what might be called a "narrative" way. When responding to questions she would go through the logic of her decision-making process by retelling the story leading to her conclusion to reinforce the sequence of events she recalled and the logic of her decisions. Once this feature of her evidence is understood she displayed a good memory and was generally able to give an account of past events in detail, fleshing out her picture of those events from her redirection as she was questioned.

  6. Her evidence was mostly reliable and gave an accurate picture of the events in which she was involved, except in one respect. Her account of her conversation with Mr Epstein outside the Commonwealth Bank of Australia in Martin Place, Sydney, was not compelling and the Court doubts she gave a fully accurate narrative of those events.

  7. An aspect of Mrs Zhu’s character was nevertheless fundamental to her outlook on the transactions in which she was involved with her husband, Mr Zhu. A central driving force in her life is ensuring the wellbeing, success and advancement in life of her and Mr Zhu’s son, Alex. She was ready to defend him from any threat or disadvantage and ready to provide every opportunity or benefit for him that she could. She was constantly focused on his best interests with an intensity that was quite evident in the manner and frequency of her speaking about him.

  8. The Court infers that the well-being of Alex was behind several of the transactions in which she was involved in these proceedings. When it came to Alex’s welfare, Mrs Zhu was completely malleable by Mr Zhu. Framing a proposal as advantageous to Alex would make Mrs Zhu highly receptive to it. Putting Alex first came in many ways, large and small. One cameo example illustrates this well: when they flew to the United States from Australia together for his studies, she insisted that her son fly business class while she flew economy.

  9. An additional background burden for Mrs Zhu was that she underwent operations for cancer which overlapped with the events the subject of these proceedings. She was sensitive about her cancer diagnosis and cried spontaneously when asked questions about it.

  10. Mr Peter Zhu. Mrs Zhu’s former husband, Mr Zhu is an experienced businessman. He is streetwise, and commercially astute. He was careful in listening to the cross-examiner's questions and answering those questions to what he perceived were to his advantage. He was adept at discerning what was to his financial advantage.

  11. Mr Zhu was reasonably frank in admitting he had made mistakes at times, although very reluctant to admit that he ever engaged in any underhand or tricky conduct. But Mr Zhu was not forthcoming about several inconvenient issues and was often content to take refuge in the answer "I can’t recall”, when the Court suspected that his lack of recollection was simply inconvenient.

  12. Mr Zhu was an energetic storyteller in his answers. He wanted to put the whole picture - his way - before the Court. He more than once needed to be confined in answering questions. This habit tended to confirm one aspect of his character: his strong sense of self belief, which tended to distort his recollections.

  13. Mr Zhu is obsessed by being perceived as a success in the business of making money. He is adept in the nuances of English, although it is his third language.

  14. But Mr Zhu's evidence rang true when he was speaking about his relationship with his former wife, Mrs Zhu. It accorded strongly with the Court's perception both of their relationship and her willingness to subsume her own interests completely to those of her son, and to Mr Zhu if that would be to her son's advantage. Mr Zhu described their relationship as "we help each other." He confirmed that she was devoted to their son. Mr Zhu’s evidence vividly described events during his relationship with Mrs Zhu which showed she had personality traits that were very dependent upon promoting the well-being of her son.

  15. But comparing the evidence of husband-and-wife, generally where Mr and Mrs Zhu’s evidence diverges, the Court prefers Mrs Zhu’s evidence as more reliable.

  16. Mr Justin Epstein. Mr Epstein is the principal of G193. Mr Epstein was practical, unsentimental, and focused on financial incentives. He does not make any financial move without calculating its advantages and disadvantages. His evidence was generally reliable. Although his outlook was coloured by misplaced suspicion that Mrs Zhu was deriving financial benefits from Mr Zhu for her involvement in the Fucrez loan transaction.

  17. Mr Epstein was often credible in his account of contested events except for his account of the disputed conversation with Mrs Zhu outside the CBA building in Martin Place on 11 August 2024. But Mr Epstein is personally interested in the outcome of these proceedings. Some of his evidence was damaging to his credibility. Examples are as follows: his false denial that he and Mr Walker had a close personal and business relationship; his statement that he believed Mr Zhu had engaged in fraud in relation to the sale of The Gosford site but at other times refusing to be drawn on Mr Zhu’s lack of credibility and yet in other cases describing Mr Zhu’s behaviour as “bizarre”; his inability to accept that explain its weaknesses refusal to accept that there were termination dates on Gemi’s loans in these proceedings, saying they were subject to extensions; and finally, placing a $100 wager with Mr Fleming on The Gosford defaulting to Gemi.

  18. The following is a narrative of the relevant history. This narrative represents the Court’s findings on the matters covered, except to the extent that the context indicates that only the parties’ allegations are being recorded in these reasons. For reasons of economy this narrative does not always include reference to versions of the facts that have been rejected.

Mrs Zhu, Her Wahroonga Home, and a Development in Gosford

Mr and Mrs Zhu – Family Life and Residence

  1. Mrs Zhu was born in Shanghai in the People’s Republic of China (the PRC) in August 1964 and was aged 59 the time of the trial. She was employed in her early years in a car dealership in Shanghai. She and Mr Peter Zhu met in about 1979 in the PRC through Mr Zhu’s younger brother. They became a couple in the 1990s. Mrs Zhu migrated to Australia in 1996, the year they married in Shanghai. Thereafter they travelled back to the PRC from time to time.

  2. Mrs Zhu learned English upon her arrival here in Australia. She brought her English language skills to the “adequate” level. She had reasonable day-to-day knowledge of English. Her conversations with Mr Zhu were held in a combination of mandarin, Shanghainese (a local dialect of Wu Chinese spoken in the Shanghai region) and English. The combination varied depending upon whether other language speakers were present.

  3. Not long after her arrival in Australia, in 1997 Mrs Zhu took a course taught in Engish in migration law at the University of New South Wales. Then she worked as a licensed migration agent in Sydney for four years assisting students with migration services.

  4. In 2001, Mrs Zhu became pregnant with their son, Alex. She returned to the PRC and Alex was born there in 2002. Mrs Zhu came back to Australia with Alex, in 2003. But she and Mr Zhu separated that same year. They finalised their divorce in 2007. The property settlement between them under the provisions of the Family Law Act 1975 required Mr Zhu to pay Mrs Zhu the sum of $1.5 Million dollars, which was documented as a loan to be paid later. Mrs Zhu did not remarry. Since her separation from Mr Zhu she raised Alex on her own. Mrs Zhu remained on friendly terms with Mr Zhu after the divorce, particularly in relation to matters concerning Alex’s welfare and advancement in life.

  5. Mrs Zhu continued to try and improve her education and knowledge. Between 2003 and 2008 she studied at a TAFE college and completed an advanced diploma of accounting. But she was unemployed for approximately 12 months after completing the TAFE accounting course. So, in 2007 she began working as a stockbrokers dealer’s assistant. She worked in this role until about 2017. She gained some knowledge of the stock market and traded her own shares. But her personal attitude towards investing was conservative. She purchased Australian bank shares in her own name for their consistent franked dividend income and was not a speculator.

  6. After Mrs Zhu’s divorce she lived in an apartment in Double Bay until about 2007. Mr Zhu informally contributed money to pay for her and Alex’s expenses in the Double Bay apartment. Between 2007 and early 2015 Mrs Zhu and Alex lived in another apartment in Darling Point. Mr Zhu supported them from time to time with living expenses there and an allowance for Alex.

  7. Alex was enrolled to commence private schooling in the upper North Shore. Mrs Zhu wanted to live closer to the school, so Mr Zhu and a family friend helped her to look for a home in the area. Eventually they found the Wahroonga property, which she liked.

  8. Mrs Zhu purchased the Wahroonga property as sole registered proprietor, in February 2014 for $2.6 million. To fund the purchase she borrowed $2.08 million from the CBA, applied the proceeds of the sale of a house in the PRC, and received from Mr Zhu about 15% of the purchase price and an amount to cover stamp duty. The amounts Mr Zhu paid were in partial satisfaction of the $1.5 million loan owing to Ms Zhu from the property settlement upon their divorce.

  9. In 2009, Mrs Zhu was diagnosed with cancer, for which she received surgical treatment. She underwent further cancer surgery in 2013. In 2019, just before the Covid-19 pandemic, Mrs Zhu received yet a further cancer diagnosis, but her condition was not treated until March 2021.

  10. Alex graduated from school in 2018. In 2019 he was accepted to study at the Stern School of Business in New York University. He moved to New York in 2020 to commence his studies.

  11. Mrs Zhu was then on her own. In about April 2020 Mr Zhu invited her to re-enter the workforce with a job working in his construction company, NPH Group Pty Ltd (NPH), assisting with payroll duties, utilising her accounting qualifications. Initially she worked from home because of the Covid lockdowns but she later worked at NPH’s offices in Bligh Street in the Sydney CBD.

  12. Through this employment by about July 2020, she had become aware that Mr Zhu and NPH were heavily involved in developing a mixed use and residential commercial development site in Mann Street Gosford known as “the Archibald” and referred to in these reasons as “the Mann Street project” as the context requires.

  1. Ms Zhu’s knowledge of the Mann Street project was patchy. She overheard Mr Zhu speaking on the phone about it and came to understood that NPH was to be involved in the construction of the Mann Street project. But the Court accepts that she had no accounting or managerial or decision-making involvement in NPH in relation to the Mann Street project. But Mrs Zhu did find out that Mr Zhu had a business partner in the Mann Street project, Mr Greg Walker, who she met at the offices of NPH from time to time.

  2. With this background about Mrs Zhu, the focus now turns to the plaintiff and its lending practices.

Gemi Investments Pty Ltd, Its Principals and Its Subsidiaries

  1. Gemi 193 is one of the many numbered subsidiaries of a holding and operational entity, known as Gemi Investments Pty Ltd (“Gemi Investments”), a financial firm which organises and matches syndicates of private lenders with lending opportunities, principally associated with property investments. Gemi Investments was incorporated in 2018.

  2. The business model of Gemi Investments involves setting up a numbered subsidiary of itself as a special purpose vehicle for each new loan it syndicates. Several Gemi Investments numbered subsidiaries advanced the loans which are the subject of these proceedings which culminated in the disputed advance by G193 to Fucrez. All the loans in issue were associated with the Mann Street project.

  3. Three co-principals and directors of Gemi Investments, Mr Justin Epstein, Mr Michael Cooper, and Mr George Fleming organised and raised loan capital for Gemi Investments to fund property developments. One of them would often become a director of the numbered Gemi Investments subsidiary making a loan advance – usually the director who was most closely involved with promoting the loan advance. This triumvirate operated as something of a functional blend of a loose financial partnership and a credit committee of a financial institution. As the business records and email traffic in this case show, these co-principals often debated amongst themselves the merits or otherwise of making or calling in loans made by the numbered subsidiaries. Their views often diverged about whether advances should be made to borrowers and whether and when defaulting advances should be called in.

  4. It is sometimes necessary to identify the plaintiff or some other subsidiary of Gemi Investments, or Gemi Investments itself, as the corporate actor to whom the Court is referring in these reasons. But often it is not and where the identity of the member of the Gemi Investments corporate structure is not significant, these reasons simply refer to members of the Gemi Group generally, as “Gemi”.

Background to the Gosford Project and Fucrez

  1. The G193 loan transaction came at the end of a series of advances made by Gemi Investments subsidiaries to fund the Mann Street project by The Gosford Pty Ltd (“The Gosford”), a developer on the Central Coast of New South Wales. Ms Zhu had no direct involvement in any of these advances which commenced in April 2019. She only became involved in July 2020, not long after she commenced work at NPH. In April 2019, Gemi Investments arranged an advance of $15.5 million to The Gosford for it to fund The Gosford’s acquisition of the Mann Street project land.

  2. Mr Peter Walker was a director and principal of The Gosford and instigator of the Mann Street project, among many property development projects in which he was involved. Mrs Zhu’s husband, Mr Peter Zhu was also commercially associated with the project. Mr Zhu had begun discussing the Mann Street project with Mr Walker in mid-2018. Mr Walker set up The Gosford to acquire the Mann Street project site from its then registered proprietor, G3 Assets Holdings Pty Ltd ("G3”). Mr Zhu incorporated NPH to undertake the construction work for the Mann Street project. Some evidence estimates the gross value of the building contract proposed to be offered to NPH for the Mann Street project was as high as $185 million.

  3. Mr Zhu was neither a party to nor guarantor of the original loan from Gemi to The Gosford in April 2019. But Mr Walker and one of his companies, Macarthur Seniors Living Pty Ltd, and various other individuals became guarantors of the April 2019 loan.

  4. Mr Zhu had been made bankrupt in 2011. His bankruptcy was annulled by Court order in October 2022. Mr Zhu’s business practices had a measure of calculated opacity that attracted notice. He often used the alias ‘Thomas Cardinal’ in financial dealings.

  5. Mr Zhu also had held an interest in the vendor of the Mann Street property, G3, through an intermediate corporate entity. On 28 November 2018, The Gosford entered a put option with G3 in relation to the Mann Street property, granting The Gosford, or its nominee, the right for a period of 140 days to purchase the Mann Street property for $26.5 million.

  6. Mr Keith Snell was Mr Walker's co-principal and a director of The Gosford. He was involved in the decision-making in relation to The Gosford in the transactions regarded here prior to his death in July 2020.

  7. It is now necessary to survey the accumulating transactions between Gemi Investments and its various subsidiaries and The Gosford and Mr Walker’s interests over the 15 month period between April 2019 and August 2020 before Mrs Zhu was approached and she and her Wahroonga property became involved. This 15-month period shows much about the accumulating knowledge of Gemi Investments and its various subsidiaries about the refinancing of the Mann Street project before Mrs Zhu became involved.

The First Gosford Loan – April 2019

  1. Time was tight for The Gosford in early April 2019 to fund the acquisition of the Mann Street property. The 140-day expiry of The Gosford’s option with G3 on 28 November 2018 meant that funding to facilitate the purchase needed to be found no later than 17 April 2019.

  2. Gemi Investments advanced the April 2019 loan to The Gosford as the borrower. The guarantors were Mr Walker, Mr Snell, and companies associated with them, L & M Property Pty Ltd, BSC Professional Services Pty Ltd, The Shed Group Pty Ltd, Forest Apartments Pty Ltd, Macarthur Seniors Living Pty Ltd and MPG Property Holdings Pty Ltd. The lenders named under the April 2019 agreement were a series of individuals of the syndicate from whom Gemi Investments sourced the funding.

  3. The purpose of the first Gosford loan agreement expressed in the loan documents was that the principal sum borrowed of $15.9 million would enable payment of the initial tranche of the purchase price for the Mann Street property. The advance was for six months with repayment required by 16 October 2019.

  4. Soon after the April 2019 loan agreement was made The Gosford exercised its option and acquired the Mann Street property. On 1 May 2019 The Gosford settled the purchase of the site. But the development of the Mann Street site would take much longer and there was no prospect of a return on The Gosford’s investment in the short term. Therefore, a refinance was required by October 2019.

  5. A term of the April 2019 loan agreement was that Gemi Investments would be granted a mortgage over several properties Mr Snell owned or controlled to secure his guarantee of The Gosford’s obligations. It was also a term of the April 2019 loan agreement that a caveat over the title of the Mann Street property be removed within 14 days.

  6. The April 2019 loan went into default as soon as the loan documents were signed due to The Gosford’s failure to pay interest that was due on the date of the agreement. The project site was undeveloped and had no cash flow. The Gosford did not make interest payments on the first loan and its indebtedness began to grow.

The First Refinance – April to October 2019

  1. After The Gosford acquired the Mann Street project site, it remained undeveloped. The Gosford had only raised some of the initial funds for its acquisition not for its later development. The Gosford set about raising funds during the life of the April 2019 loan.

  2. Mr Walker was active as The Gosford's principal in seeking further advances from lenders. He repeatedly approached Gemi Investments between April and October 2019 seeking further funding. Mr Walker represented to Mr Epstein and the other Gemi Investments principals, Mr Fleming, and Mr Cooper, that he could obtain refinancing with other lenders but that in the meantime he needed further advances from Gemi Investments. Mr Fleming soon became cynical about the promises that Mr Walker was making to him and Mr Epstein about refinancing Gemi’s loan to The Gosford.

  3. In September 2019, Mr Walker began looking towards Integrated Securities Funds Management Ltd ("Integrated Securities") to assist him in procuring a refinancing of the April 2019 loan. Mr Walker represented to the principals of Gemi Investments that he could obtain finance from Integrated Securities through to October 2019 and beyond. But as the expiry of the April 2019 loan loomed Mr Walker made a more concrete approach. On 1 October 2019, he emailed one of the co-principals of Gemi Investments, Mr Cooper, referring to his attempts to obtain finance with another entity, Credit Solutions Ltd ("Credit Solutions"), but indicated there was difficulty with the prospective financing as follows:

"To further complicate matters [Credit Solutions] may not have all the funds required to settle the land being circa $26 million until mid-November but are working towards the end of October."

  1. Mr Walker concluded this email by requesting Gemi Investments to provide a further $7 million and to extend the April 2019 loan facility for a further two months. Mr Cooper responded to Mr Walker’s 1 October 2019 email. Mr Epstein became aware of this request. The Gosford did not ultimately source further funding from Credit Solutions.

  2. The Gosford defaulted on repayment of the principal of $15.9 million that was due on 16 October 2019 under the April 2019 loan agreement, and remained in default whilst further refinancing was negotiated.

  3. In early November 2019, Mr Walker promised Mr Cooper that The Gosford was close to finalising a refinance "within 10 days" but Mr Walker was not able to arrange this new funding. On 14 November 2019, Mr Walker asked Mr Cooper and Mr Fleming for Gemi Investments to advance $28 million to it, including the refinance of the existing April 2019 loan. This additional amount was said to be needed to cover the existing debt refinancing and to provide a further tranche of the purchase price of $7 million that was due from The Gosford to the vendor of the Mann Street property and to provide short-term working capital. Gemi Investments began to look at this proposal but was not initially contemplating advancing as much as $28 million.

The December 2019 Loan Agreements

  1. In December 2019 Gemi Investments decided to advance $22.3 million to The Gosford in short-term funding repayable by 15 March 2020. The loan was preceded by Gemi Investments following its usual commercial course of issuing an investment memorandum to potential loan investors. The investment memorandum gave a profile of the proposed lending to potential investors without mentioning The Gosford's default on the April 2019 loan agreement.

  2. Further funds were forthcoming. On 11 December 2019, Gemi Investments created a special purpose vehicle, Gemi 143 Pty Ltd ("G143"), to advance $22.3 million to The Gosford. This amount of funds was calculated to cover the repayment of the capital due on the April 2019 loan. But even excluding accrued default interest the advance of $22.3 million only provided a further $6.4 million ($22.3 million minus $15.9 million) towards repayment of the balance of the purchase price on the acquisition of the Mann Street property. Contractual default to G3 therefore looked likely.

  3. The structure of the December 2019 loan agreement from G143 was like the April 2019 loan agreement. G143 was the lender and The Gosford the borrower. But individual investors funded G143, which in turn advanced the funds to The Gosford. The same group of guarantors that guaranteed The Gosford's obligations under the April 2019 loan also guaranteed The Gosford’s obligations under the December 2019 loan from G143.

  4. But despite this funding through G143 there was still a shortfall in the balance of the purchase price payable by The Gosford to G3 for the title to the Mann Street property. So Mr Walker negotiated an additional advance, which was agreed in parallel with the December 2019 loan agreement.

  5. On 11 December 2019 Gemi Investments formed another special-purpose subsidiary, Gemi 144 Pty Ltd ("G144") to enter this parallel loan agreement with The Gosford and the same guarantors to record terms for the advancing of an additional sum of $6.2 million to The Gosford, with repayment required by 16 March 2020, the day after repayment was due on the $22.3 million December loan agreement with G143.

  6. Although the combined $22.3 million and $6.2 million December 2019 loan agreements exceeded the initial request of $28 million, they were still insufficient to do more than meet the purchase price for the acquisition of the Mann Street property and provide some working capital. They did not fund developing the site.

  7. Whether the $7 million Mr Walker had indicated was all that was needed to repay G3, is doubtful. By 23 December 2019, Mr Walker was on the lookout for further funds. He emailed Gemi Investments (Mr Hamish Tweedy, the Head of Credit) that day seeking further funding to assist with the acquisition of the Mann Street property.

The January 2020 Loan Agreement

  1. Mr Walker’s renewed December 2019 approaches to Gemi Investments for further funds were successful. On 13 January 2020, The Gosford borrowed an additional sum of $3,818,302 from another special purpose vehicle, Gemi 149 Pty Ltd (“G149”). The same guarantors stood behind The Gosford, guaranteeing its repayment obligations to G149 on this advance. Repayment was required at the same time as the $6.2 million December 2019 loan agreement, namely 16 March 2020.

The February 2020 Loan Variation

  1. Not long after finalisation of the January 2020 loan agreement, Mr Walker requested more near-term funding for The Gosford. Mr Walker communicated with the principals of Gemi Investments, Mr Epstein, Mr Fleming, and Mr Cooper on 28 January 2020, seeking additional funding and taking issue with the fees and charges that were being applied to the existing advances from the various Gemi entities.

  2. The principals of Gemi Investments responded positively. Gemi set up yet another special purpose vehicle, Gemi 158 Pty Ltd (“G158") to make a further advance of principal to The Gosford by varying the January 2020 loan agreement. The new advances were formalised on 5 February 2020 with the Deed of Variation of Loan Agreement made on the one side by G149 (the original January 2020 lender) and G158 (the new lender), with The Gosford as borrower and the same guarantors as before. The February 2020 loan variation extended the January 2020 loan agreement by lending an additional $356,860.27 to The Gosford but retained the same repayment date of 16 March 2020 that was provided for in the January 2020 loan agreement.

  3. After the deduction of fees and charges, G158 advanced $320,000 under the February 2020 loan variation on 7 February 2028, with the balance being applied to prepaid interest and to Gemi Investments’ fees and charges. This brought the total additional amount advanced in January and February 2022 to $4,175,162.27 (being $3,818,302 plus $356,860.27).

  4. By this time, in addition to the original April 2019 advance by Gemi Investments, another four special-purpose vehicles, G143, G144, G149 and G158, had been involved in making advances to The Gosford.

Default – 16 March 2020

  1. The Gosford had now accumulated substantial repayment obligations which were all due on 16 March 2020. It faced combined repayment obligations of $32,675,162.30, being the sum of the amounts due: on each of the two December 2019 loan agreements ($22 .3 million and $6.2 million); the January loan agreement (of $3,818,302); and the February 2020 loan variation ($356,860.27). The Gosford was unable to meet these obligations. This is not surprising. As the Covid-19 pandemic was starting to impact Australia, economic activity went into freefall and The Gosford did not have development finance.

  2. Between 11 and 13 March 2020, Mr Walker sought an extension of all the existing loan facilities. Mr Epstein was the principal dealing with Mr Walker on behalf of all the Gemi entities on this request. Through Mr Epstein Gemi indicated that another extension of the facilities would be granted to The Gosford up to 11 May 2020. But Mr Epstein stipulated that the extension to 11 May 2020 would be on terms that The Gosford would pay interest, fees and charges totalling $1,383,956.73 well before that date, namely by the earlier date 20 March 2020.

  3. This loan structure is itself a significant indicator of Gemi’s diminished regard for the reliability of Mr Walker’s promises and its doubts about the prospects of The Gosford avoiding future default as the pandemic unfolded. Gemi was stipulating in the second week of March 2020 for a loan extension to the second week of May 2020 but only on the basis that hefty fees were paid upfront in the third week of March 2020.

The March 2020 Loan Variation on 19 March 2020 the G143, G149, G158 and G144

  1. Formal variation to the existing loan arrangements was made on 19 March 2020, with the same borrowers and guarantors, and the existing special-purpose lending vehicles. The variation extended each of these loan agreements to a new due date of 11 May 2020, with a requirement to pay additional fees and charges, legal costs and expenses, as follows:

  1. G143 – $1,023,203.42 plus lender’s legal costs and expenses;

  2. G149 and G158 – $218,618.75 plus lender’s legal costs and expenses; and,

  3. G144 – $321,827.95 plus lender’s legal costs and expenses.

  1. Each of the March 2020 loan variations required these additional fees and charges to be paid by the following day, 20 March 2020. Once again, The Gosford failed to make that payment and the loans fell back into default.

  2. An attempt was made on 24 March 2020 to rectify part of the default. On that date, Macarthur Projects Pty Ltd (“Macarthur Projects”), the corporate vehicle associated with Mr Walker, paid $600,000 to Gemi Investments, apparently in satisfaction of The Gosford's obligations under the March 2020 loan variation. But The Gosford continued in default in relation to the balance of $783,956.73 (being $1,383,956.73 - $600,000).

  3. By this time the extent of The Gosford's default and Mr Walker's unfulfilled promises of refinance, were causing increasing tension within Gemi. This was revealed from email correspondence between Mr Fleming and Mr Walker on 24 March 2020. Mr Fleming indicated that he expected Mr Walker to pay $697,000, not the $600,000 lump sum that he had paid. To appease his Gemi partners, Mr Fleming personally underwrote the $97,000 shortfall from The Gosford.

  4. But Mr Fleming was not happy with Mr Walker. He communicated back to Mr Walker that he had accepted the $600,000 “much to the anger of my partners” and was concerned that "I am now liable for 97K if you do not pay the balance of $697,000 and 97,000K by the 20th of April". Mr Fleming concluded, "can you please ensure that this will be paid by this date to avoid the penalties being backdated and me having to pay the 90K".

  5. Mr Walker's promises about potential refinancing continued. On 31 March 2020 he informed Mr Fleming in an email that the potential refinancer Integrated Securities "are keen to fund the project". This email was copied to Mr Epstein, Mr Cooper, and others at Gemi. By this time, internal email evidence shows that the principals at Gemi were losing faith in Mr Walker's promises of refinancing, in the face of the continuing default by The Gosford.

  1. The rising dissension within Gemi was evident from the internal correspondence among its principals. On 9 April 2020 Mr Cooper emailed his co-principals, Mr Epstein and Mr Fleming stating:

I guess we need to understand exactly where Greg [Walker] is on Interest for April. We cannot agree to an end of month date – we need to have a date that allows some inevitable "Greg Walker" spin and slippage…I have the default notices ready to go today and think we should issue next week (Wednesday) for him missing the agreed interest payment date, even if you agree a new date with him. Issuing puts him on the clock and allows us to make whatever decisions we need to past (sic) as close to the expiry of 11th May as possible. We'll also engage and motivate Keith [Mr Snell] given he will also be served the notices."

  1. This email reflected a sharp debate then taking place within Gemi about whether to issue default notices to bring the issue with Mr Walker to a head. Mr Cooper's hawkish recommendation to issue default notices was not adopted by his co-principals. Mr Epstein was an advocate for extending further time to Walker rather than putting him and his project into default and Mr Fleming went along with Mr Epstein.

Gemi’s Risk Containment Strategy

  1. The stand-off between Mr Epstein and Mr Cooper seemed to produce an internal compromise of sorts. Until the end of March 2020, all the advances to The Gosford had added to Gemi's financial exposure to The Gosford and to Mr Walker's various entities. Late in March 2020 Gemi had reached an inflection point and began to limit its risk. This appeared to be partly driven by a reluctance on the part of Mr Epstein and Mr Cooper to pursue the seven guarantors who had continued to assume risk as sureties for The Gosford. Whether those guarantors had associations with any of the co-principals is unclear. But Gemi's internal correspondence indicates a reluctance to triggered default action and call upon these sureties.

  2. In April 2020, with further default appearing likely as 11 May approached in the absence of major project financing, Mr Epstein began to cast about for new security to buttress The Gosford’s mounting obligations to Gemi. Mr Epstein approached Mr Zhu for security, aware of his interest as a proposed construction contractor to the development of the Mann Street property.

  3. Mr Epstein’s approach to Mr Zhu was well targeted. Mr Zhu was committed to the Mann Street development in several ways. He had already guaranteed a loan to Mr Walker of $1 million. He had also paid $1.1 million in commission to Mr Walker as an earnest of Mr Walker's commitment to appoint NPH, Mr Zhu's company, to construct the Mann Street project. Thus, Mr Zhu had two financial incentives to keep Mr Walker solvent one negative and one positive.

  4. Two people emerged as potential security providers, both related to Mr Zhu. The first was his 21-year-old daughter, Ms Jia Yi (Chloe) Zhu and the second was his wife Mrs Juliana Zhu, the defendant. Ms Chloe Zhu owned a property in Rocky Point in North Queensland and Mrs Juliana Zhu, the defendant, owned her residence in Wahroonga. Although the extended loans fell due on 11 May, further instalments of interest and fees were due on 20 April 2020. But these were not paid. After that default the request for more security became more urgent.

  5. Urgent negotiations between Mr Walker, Mr Zhu, and the principals of Gemi to take new security commenced. On 23 April 2020, Mr Fleming emailed his co-principals, Mr Epstein and Mr Cooper, together with a Mr Tweedy, identifying that Mr Zhu was a new source of security and stating:

"Peter Zhu has a property in Cairns…[Mr Zhu] has agreed to put it up as security and he and Greg Walker will personally guarantee. According to Greg, Peter does not borrow money and has only agreed to this on the basis that IS [Integrated Securities] have negotiated an exit not only for this loan but our loan on Gosford. According to Greg, Elizabeth from IS has secured a lender that will take us out by the 11th of May and term sheet will be provide[d] by tomorrow."

  1. This wrongly assumes that Mr Zhu was the owner of the Rocky Point property. A similar mistake was to occur later with the Wahroonga property. Once again, Mr Walker was promising a refinance orchestrated by Integrated Securities, against a background of failing to deliver on that promise in the past. There is little credible evidence of the Gemi principals seeking contact with Integrated Securities directly to clarify whether Mr Walker's promises were realistic. There is no direct evidence of Integrated Securities offering alternative finance at this time.

  2. But the offer was still tempting to Gemi. On 24 April 2020, Mr Fleming emailed Mr Walker seeking personal financial information about Mr Zhu and the assets that he had available to offer security. One of these was the Rocky Point property. This property was not in Mr Zhu’s name, but Mr Zhu had represented to Gemi on 30 April 2020 that it was his property. The 30 April 2020 document also referred to Mrs Zhu’s Wahroonga property, again, without identifying that it was in Mrs Juliana Zhu’s name, rather than Mr Zhu’s names. The true facts behind Mr Zhu’s misrepresentations of ownership of these two properties were soon to come to the notice of Gemi’s principals. This must have alerted them to Mr Zhu’s propensity to misrepresent facts for his own convenience.

  3. Tension was rising among Gemi’s principals. Mr Fleming emailed Mr Epstein and Mr Cooper on 30 April 2020 under the subject heading "Greg Walker", complaining about the difficulties that Gemi was now facing on this loan. Mr Cooper once again recommended the issue of a default notice. Mr Walker began threatening court action to set aside some of the loan agreements based on Gemi’s alleged unconscionable interest rates and charges. Mr Fleming spoke directly to Mr Walker about this and reported to his co-principals as follows:

"I had a long talk with Greg. He has spoken to his lawyers and said that if we put him in default then they will go to court as they believe our rates are [unconscionable]. This could be another court case which we do not want. I know it is a threat but at this time we cannot go through another fight. He tells me the QS will be with IS [Integrated Securities] on Monday and from there it will take long to get a term sheet done.

Guys, I know there is a [principal Ellie] involved. Rather than going down this path I am prepared to lend them the money irrespective of the valuation. We have an appraisal by a prominent agent with a comparative sale of a property with a mile. We have personal guarantees of Peter Zhu, we are so close to getting this done a think for $$400k let's not fuck it up. I know I'm very pragmatic and take more chances than you guys but we are up to our neck in this and we should do anything we can to help…"

  1. This is not a picture of a smooth path towards refinancing. This email shows a sense of desperation on the part of Gemi and recommends a course of action to prevent destructive legal action. Mr Epstein gave evidence that at various times from May to August that he was confident from Mr Walker that a refinance would occur. But the Court does not accept any of that evidence of confidence in the face of the threatening conduct of Mr Walker of which this is an example. Such conduct would have undermined the confidence of any reasonable businessperson in Mr Epstein’s position and many more examples of this were to come.

  2. The same day Mr Fleming followed through with his proposal to give a further indulgence to Mr Walker and his development by offering a term sheet proposal for further Gemi finance. Although Mr Walker signed the term sheet characteristically, he did so making unilateral changes to it to suit himself before sending it back to Mr Fleming. This led to a blowup between Mr Fleming and Mr Walker the following day. Mr Fleming wrote to Mr Walker on 1 May 2020, expressing his overt displeasure that Mr Walker had crossed out parts of the term sheet and stating clearly to him that the term sheet reflected "the conditions that we are lending you the money, not what you think is reasonable”. Mr Fleming then stated his position, clearly reflecting the fractures within the Gemi co-principals, “I am bending over backwards to try and help you in pushing my partners to try and get this over the line." This was followed by an expression of anger about a threat that Mr Walker had made to take Gemi to court. The email concluded with an invitation to discussion.

  3. A consensus was ultimately reached. The consensus involved another advance taking Ms Chloe Zhu’s Rocky Point property as security and then an advance taking Mrs Zhu’s Wahroonga property as security. The circumstances in which each of these loans were negotiated shows Gemi was alert the risk of further default on its existing advances and not confident that any refinance of The Gosford’s obligations was in prospect.

Chloe Zhu and Her Rocky Point Property

  1. Mr Fleming pushed the idea of a further loan secured over Ms Chloe Zhu’s property and sought to persuade his co-principals of the merits of such a loan on what was curiously described as a "standalone” basis. But far from being standalone the context for Ms Zhu’s Rocky Point property being offered as security was all that had gone before.

  2. Mr Fleming's proposal was premised on the Rocky Point property being valued at $4 million and Gemi lending at a loan to valuation ratio of 60%, allowing an advance of $2.4 million. According to Mr Fleming this advance could then be disbursed as follows:

  1. interest at 16.5% to 2 months ($66,000);

  2. loan fees of $52,000;

  3. payment to Mr Greg Walker of $400,000;

  4. two interest payments to Gemi Investments for the month of April totalling $650,000; and,

  5. a further $135,000 payable to one of the Gemi entities, leaving a balance of $1,096,000 which would then be applied in reduction of the loan to The Gosford.

  1. Mr Walker's proposal was to use the Rocky Point property as security to reduce the amount owing by The Gosford to Gemi Investments and the other Gemi entities and to pay a substantial sum to Mr Walker. It is difficult to understand why Mr Walker would be favoured in this way, but it was not the only transaction sweetener he was to receive in the course of these dealings. Such remuneration to Mr Walker was one signpost that Gemi was taking a favourable view of a man whose threatening conduct reasonable deserved nothing more than commercial sceptism.

  2. Mr Fleming’s email seemed to persuade his co-investors. On the same day, 5 May 2020, Gemi Investments issued a term sheet to Mr Walker and Mr Zhu for a new advance of $2.25 million, this time to Macarthur Projects, secured over the Rocky Point property. The term sheet provided that $1.85 million of the advance would be allocated to interest payments and satisfaction of the various loans to The Gosford and that $401,460 would be advanced back to Macarthur Projects, as the vehicle to deliver it to Mr Walker.

  3. The term sheet was entered into on 12 May 2020. The new loan (the Rocky Point loan) was based upon the security of the Rocky Point property and was advanced by Gemi 184 Pty Ltd ("G184") with Macarthur Projects as borrower and Mr Walker and Ms Chloe Zhu as the guarantors. The loan of $2.52 million was payable on or before 4 July 2020. The paperwork prior to execution of the 12 May 2020 Rocky Point loan agreement shows no evidence that anyone at Gemi was aware that Ms Chloe Zhu, and not Mr Zhu, was the registered proprietor of the Rocky Point property.

Mr Walker Fails to Secure a Refinance – May to July 2020

  1. Whatever Mr Walker was doing to secure a refinance of The Gosford's obligations to the Gemi entities, it continued to be unsuccessful. If Mr Walker's emails to be co-principals are be believed, he was continuing to seek a refinance through Integrated Securities on behalf of The Gosford. He updated Mr Epstein and Gemi from time to time between May and July 2020.

  2. But Mr Epstein was a realist: he understood that The Gosford had failed to refinance its indebtedness by mid-July 2020. Despite his oral evidence to the contrary the Court infers he regarded a refinancing as unlikely. Mr Epstein says he had some contact with the potential refinancers. But such oral evidence is unsupported by the kind of detailed documentary evidence that would be likely to exist if Mr Epstein’s evidence on this issue were true.

  3. Unsurprisingly, the May 2020 Rocky Point loan went into default on its new due date of 4 July 2020. Once again, Gemi had the option of issuing default notices but, once again, Mr Epstein withdrew from the precipice and began to look around for more security.

Mrs Zhu and the Fucrez Loan

  1. The Wahroonga property owned by Mrs Zhu now came into focus. Mr Zhu did not approach Mrs Zhu about offering the Wahroonga property as security for a Gemi advance until late July 2020. But leading up to that approach Mr Zhu had been involved in intensive discussions about the possibility of using Mrs Zhu’s property as security to surmount the funding impasse which had been reached by July 2020.

  2. On 15 July 2010, Mr Fleming emailed Mr Cooper and Mr Epstein proposing that they meet with Mr Walker and Mr Zhu to confirm "that Peter [Mr Zhu] is prepared to lend a further $1.3m to cover interest". Mr Fleming also reminded his correspondents that they needed to get an update from Mr Walker and Mr Zhu about the refinancing. Mr Fleming reflected upon Mr Zhu's probable commitment to the development by The Gosford, stating:

"I would also like to understand Peter's involvement and commitment to The Gosford project. He has invested $2.5m and if invests another $1.3m it would appear that he is committed. He is obviously very shrewd and has probably worked Greg out and must be thinking that there is a better way forward. We should also alert them to the fact that there will be a rollover fee and penalty interest."

  1. Mr Fleming’s judgment about Mr Zhu being “shrewd” would have been shared by all the Gemi co-principals who dealt with him. Though a bankrupt, Mr Zhu was managing indirectly some very substantial businesses.

  2. At the same time Mr Walker was corresponding with Mr Epstein about the position of one of the guarantors of the various Gemi loans, Mr Snell. Gemi had placed caveats on several properties in support of Mr Snell's personal guarantees. Mr Walker was now applying pressure to Mr Epstein to remove Gemi’s caveats over Mr Snell’s properties. A curious feature of this case is that Gemi has not yet sought to call on the late Mr Snell’s guarantee, or to realise the securities supporting Mr Snell’s guarantees.

  3. The principals at Gemi were now clearly focused on whether refinance would be available to The Gosford for the Mann Street project. One of the potential financiers mentioned was PAG. Gemi was starting to become aware of alarming misinformation from Mr Walker about the refinancing from PAG. On 20 July 2020, Mr Fleming emailed Mr Epstein and Mr Cooper referencing their discussions about PAG and stated:

"Andrew spoke to PAG and they indicated they never made an offer on this deal…Justin your prediction that they [Elizabeth and Simon] never intended to settle this was probably correct."

  1. Mr Fleming’s internal musings with his fellow principals clearly disclose his growing disquiet about Mr Walker's reliability and lack of realism. On 27 July 2020, Mr Fleming emailed Mr Cooper and Mr Walker saying:

“I am not trying to be negative but like every deal he [Mr Walker] is so positive it is going to happen but it never does. How is he going to pay the interest for this month? What about Rocky Point. Is it still on track for Peter to pay the interest and repayment of debt?”

  1. In the face of correspondence such as this, the Court does not accept Mr Epstein’s bland generalities that he believed at this time a refinance was likely.

  2. The first written evidence connecting the Wahroonga property with Gemi is an email that Mr Walker sent to Mr Epstein on 27 July 2020, with a link to the Wahroonga property. This is very late. Mrs Zhu signed her mortgage only 10 days later. Mr Walker’s email represented that the Wahroonga property may be worth as much as $6 million from offers recently received and that there was a $1.7 million first mortgage over the property to the Commonwealth Bank of Australia ("CBA"). Mr Walker then continued in this email as follows:

"I have said Rocky Point and $814K got Gosford interests secured by caveat over the property this week will go a long way to helping us buy time and goodwill to get the main tasks done. Agree?

  1. This email makes clear Mr Walker's then attitude: that the objective of the Rocky Point loan and potential taking of security over the Wahroonga property were "helping us to buy time and goodwill to get the main task done." But not long before Mrs Zhu mortgaged the Wahroonga property, Mr Walker is not is not naming a definite refinance prospect.

  2. Mr Epstein was keen to investigate what he had just learned from Mr Walker about the Wahroonga property. Having done quick property searches of his own, he replied a few minutes later, indicating that he had an estimated value of $4 million from CoreLogic for the Wahroonga property and that if the valuation came in at $4 million, that he thought Gemi "could take it at $2.6m with a caveat and sit behind CBA".

  3. Mr Epstein was concerned that Gemi still did not have a valuation for the Rocky Point property and was uncertain who was the owner of the Wahroonga property. Having put his counterproposal to Mr Walker in the quick response email, Mr Epstein then forwarded his exchange with Mr Walker to his co-principals, Mr Cooper and Mr Fleming, with a clear assessment as to what he thought would happen next:

"The idea is this will cover interest for Rocky Point and Gosford (plus fees) and we will [shore] up Rocky Point security (a little).”

  1. Mrs Zhu submits with some force that these email exchanges demonstrate that Mr Epstein on behalf of Gemi, and Mr Walker, were to obtain further security to provide time and to partially cover the growing gap between available assets and the interest generated debt accruing over them to Gemi. Curiously, the correspondence also confirms that a valuation had not been obtained over the Rocky Point property. This is probably why it was necessary to “shore up” that security with the addition of the Wahroonga property.

  2. This day, 27 July 2020, became further crowded with communications alluding to what would become the Fucrez loan. Mr Walker replied to Mr Epstein’s email at 2:49pm. He explained to Mr Epstein that Mrs Zhu owned the property but that "Peter has full control" of it. This was some notice to Mr Epstein that the relationship of control or influence that existed between Mr Zhu and his former spouse Mrs Zhu. But just what the nature of that control was unclear.

  3. Mr Epstein replied apparently taking at face value Mr Walker's statement about Mr Zhu’s control, seeking information from Mr Walker, "has he agreed? If yes, I'll get a valuation done". Mr Walker continued to correspond on the basis that Mr Zhu was indeed in control of the property stating 2:53pm, "Peter has agreed to allow the caveat over this property – tack on the 2k to the bill and instruct."

  4. Mr Epstein now had enough information to prepare a term sheet. At 4:44pm he emailed a draft term sheet to Mr Walker. This term sheet was structured to place Mrs Zhu as guarantor of a further advance to Mr Walker’s company, Macarthur Projects. Only now did Mr Zhu raise with Mrs Zhu using the Wahroonga property as additional security for the Gemi advances.

Mr Zhu Raises the Issue with Mrs Zhu – Late July 2020

  1. Mrs Zhu’s evidence is accepted that it was only in late July 2020 that Mr Zhu first introduced her to the possibility of committing her Wahroonga property to assist the financing of the Mann Street project. Taking advantage of her presence at the offices of NPH, Mr Zhu had the following conversation with her.

  1. A case brought under the CRA involves a three stage process - the making of findings of primary fact where these are disputed, the formation of an evaluative judgment as to whether or not the contract is unjust, and why, and then, if necessary, the exercise of the Court's discretionary power to grant relief and determine its extent: Perpetual Trustee Company Limited v Albert and Rose Khoshaba (2005) 14 BPR 26,639; [2006] NSWCA 41, at [99] (Handley and Basten JJA);

  2. The reasons of McHugh JA in the majority in West v AGC (Advances) Ltd & Ors (1986) 5 NSWLR 610 (West), at 621 emphasise that it is “the contract or its provisions which must be unjust” rather than the transaction. This McHugh JA said (at [621E]–[621G]):

“If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice.

…

[U]nder this act a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract.”

  1. The parties were in contest as to whether CRA, s 6 (2) restricts Mrs Zhu from a grant of relief. It provides that “[a] person may not be granted relief under this CRA in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person”. Certain businesses that are not relevant to the present case are excepted from this prohibition.

  2. The question whether the CRA, s 6 (2) prohibition is enlivened here is to be determined by the same issues that arise in the Court’s consideration of whether Mrs Zhu is a true third-party mortgagor, or whether she has an interest in the business of Fucrez or more widely in The Gosford or in the Mann Street project. The Court has found that she is a true third-party mortgagor and does not have any interest in the business of Fucrez or more widely The Gosford or the Mann Street projects.

  3. Although the CRA, s 9(1) matters to be considered by the Court are at large, only a limited number of the specific matters to which the Court should have regard under the CRA, s 9(2) are of present relevance to Mrs Zhu’s part in the Fucrez loan. These are the following: (a) material inequality of bargaining power of the parties, (f) the relative economic circumstances educational background and literacy of Mrs Zhu, (h) without independent legal or other expert advice was obtained by the party seeking relief under the Act, (i) the extent to which provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act and whether or not that party understood their provisions and their effect, and (j) whether any unfair pressure or unfair tactics were exerted on or used against the party seeking relief under the Act.

  4. As to matters (a) and (f), these have been discussed above in relation to Mrs Zhu’s unconscionable conduct claim. As to (h), (i), and (j) Mrs Zhu did not have her own legal advice and Mr Epstein proceeded to structure the transaction along with Mr Walker so the transactions are to be signed without her having her own separate legal advice, which she had apparently refused and would otherwise have been an obstacle to the transaction taking place at all. A denial of her obtaining independent legal advice was embedded in the structure of the transaction which in the Court’s view qualifies it as an unjust contract within the CRA. This was a fundamentally unjust and unfair aspect of the contract she signed and therefore CRA relief is attracted.

  5. The form of the CRA relief to be granted can be the subject of submissions.

Unfair Contracts – ASIC Act s 12BF(1),

  1. Mrs Zhu also seeks relief under ASIC Act, s 12BF(1) which allows the Court to avoid a “term that is unfair” in “a consumer contract or small-business contract” which is a standard form contract or a contract for a financial product or the supply of financial services.

  2. Mrs Zhu has difficulty in propounding this claim. Her circumstances and those of the transaction do not qualify under either of the gateway definitions of a “small-business contract” or a “consumer contract”. ASIC Act, s 12BF(3) defines “consumer contract” as a contract “at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption”. None of the transaction documents signed by Mrs Zhu for the Fucrez loan qualify as an acquisition for any of those purposes.

  3. And ASIC Act, s 12BF(4) defines “small-business contract” is one of which at least one party to the contract “is a business that employs fewer than 20 persons” and the upfront price payable under the contract does not exceed $300,000 or where the upfront price does not exceed $1 million and the contract is the duration of more than 12 months. This is not obviously applicable to the circumstances of this case.

Misleading and Deceptive Conduct – the Positive and Negative Claims

  1. Mrs Zhu’s positive misleading and deceptive conduct case based on Mr Epstein’s statements on 11 August 2020 is not made out because the Court does not accept that he made the positive statements attributed to him.

  2. But Mrs Zhu’s representation by silence case faces another obstacle. Mrs Zhu does not have much difficulty in showing that there are many things that Mr Epstein knew that Mrs Zhu did not know immediately before entry into the Fucrez loan transaction. Some of these he readily admitted and others are not controversial for example: that The Gosford had defaulted multiple times in respect of its obligations to pay interest under The Gosford loans; that The Gosford was indebted to various Gemi companies for an amount in excess of $30 million; that The Gosford and Mr Walker had been unable or unwilling to make payments sufficient to meet the arrears then owing under the various The Gosford loans; that The Rocky Point loan was already in default, that an amount of at least $2.52 million was owing and that, having regard to the value of the Rocky Point Property, the principal security was probably not sufficient to repay that loan; and the personal guarantees given by Ms Chloe Zhu and Mr Walker were probably of little real value; that Mr Zhu had a personal interest in further time being provided by Gemi to extend the loan facilities to The Gosford loan facilities; and, that both Mr Zhu and Mr Walker wanted the Fucrez loan to go ahead and they both would benefit financially if the loan proceeded. Several other undisclosed factors pleaded and relied upon in Ms Zhu’s case.

  3. And G193 also knew or probably knew other relevant matters such as the following. Mr Zhu was an undischarged bankrupt. Ms Chloe Zhu was a young woman with no or substantially no income. Fucrez had a share capital of $2 and no substantial assets.

  4. But the question is whether Mr Epstein or G193 were required by the circumstances to disclose these and other matters to Mrs Zhu. Unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it will be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; (1992) 110 ALR 608. There is well-established authority in relation to the relationship of debtor, creditor and guarantor that generally absolves creditors from having any duty to disclose a range of matters to a guarantor. These matters include any unusual transactions and the level of existing borrower’s indebtedness (O’Brien v ANZ Bank (1871) 5 SASR 347), borrower default (Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339), whether notices of demand have been served (Westpac Banking Corporation v Robinson (1990) ASC 56-002, at 59,035.), whether criminal activity is suspected (North Shore Ventures Ltd v Ansteod Holdings Inc (2011) EWCA Civ 230; [2012] Ch 31. ) and the credit worthiness of the borrower (Radin v Commonwealth Bank of Australia (1998) FCA 1361).

  5. In the Court's view, it is difficult to see what takes this case out of the legal rules that ordinarily apply to disclosure by creditors to guarantors. Mrs Zhu's nondisclosure case cannot succeed for this reason.

Other Issues – Apportionment, Penalties and Costs

  1. Gemi submits in its written submission that were the Court to find that either Mr Epstein or G193 engaged in unconscionable or misleading or deceptive conduct, the concurrent wrongdoer provisions are invoked: ASIC Act, s 12GR.

  2. Gemi further submits in its written submission that in considering the degree of apportionment, the relative culpability of the Cross-Defendants and those other persons identified as concurrent wrongdoers must be analysed. This is an impressionistic task which calls for a broad exercise of discretion.

  3. Gemi has identified the potential concurrent wrongdoers as Mr Hedges, Mr Zhu and Mr Walker. Gemi acknowledged in its written submissions that given the multitude of unresolved factual controversies, which include matters traversing the conduct of each of the alleged concurrent wrongdoers, it is difficult to provide a meaningful attribution of culpability.

  4. Gemi submits that if the Court finds that Mr Hedges failed to provide adequate legal advice, it is likely that a substantial portion of damages would be apportioned to his alleged conduct. But the Court has not made detailed findings about Mr Hedges’ conduct in part because of difficulty in ascertaining what assumptions he may have made about whether Mrs Zhu had a business interest in Fucrez whether he assumed he was acting both for Mrs Zhu and Fucrez

  5. Gemi also submits that if Mrs Zhu makes out her case, then the Court might take the view that she was primarily misled by Mr Zhu and Mr Walker and the culpability of G193, and Mr Epstein was minimal. But the misleading and deceptive conduct case against Mr Epstein has now failed and the roles of Mr Zhu and Mr Walker are now the subject of findings.

  6. There is the potential for the parties being denied procedural fairness if they do not each have an opportunity to put submissions about any questions of apportionment once these reasons have been published to the parties and they have had the opportunity to examine the Court’s factual findings about the conduct and liability of the parties and the conduct of various witnesses.

  7. If the parties still wish to put submissions in relation to apportionment issues, then they will be directed to consult and agree upon and appropriate timetable for that purpose when the matter is listed again for directions in accordance with the orders made today.

  8. In her cross-claim, Mrs Zhu challenged the recovery against her on the basis that the interest rate charged in the Fucrez loan documentation constituting the overall transaction was a penalty. There was a contest between the parties as to which of them bore the onus of establishing that a high rate of interest being charged was punitive. The relevant law is conveniently discussed in cases such as Ledinh Sovereign Super Pty Ltd v CT Stone Pty Ltd [2023] NSWSC 1079 (“Ledinh”), which established among other things that even high rates of interest do not constitute an unconscionable or unjust provision and it is necessary for positive evidence to be adduced as to whether the rate charged falls outside the prevailing rate for short-term bridging loans secured by second mortgage: cf the discussion of the law by Davies J in Ledinh.

  9. But given the conclusion to which the Court has come, setting aside the transaction documents signed by Mrs Zhu in support of the Fucrez loan it is no longer necessary to consider this question. But it should be observed that the high agreed interest rate of 34% on Fucrez is some indicator of the risk associated with that advance.

  10. As to the question of costs, the failure of Mrs Zhu’s misleading and deceptive conduct case against Mr Epstein and the success of her case against G193 means that the parties may wish to put submissions in relation to a special costs order to accommodate this combination of results. They should set a program of submissions for this purpose in conjunction with any submissions about apportionment issues.

  11. For these reasons Court makes the following orders and directions:

  1. ORDER otherwise that the parties bring in short minutes of order to give effect to these reasons.

  2. DIRECT the parties to agree upon a timetable of submissions in respect of possible apportionment and costs.

  3. ADJOURN the proceedings for further directions to 9:30am on 3 October 2024.

  4. COSTS are reserved.

  5. GRANT liberty to apply.

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Amendments

03 September 2024 - Amendment made to record of counsel's appearance at [5] and on the coversheet.

Decision last updated: 03 September 2024

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Most Recent Citation
Gemi 193 v Zhu [2025] NSWSC 295
Cases Citing This Decision

2

Gemi 193 Pty Ltd v Zhu (No.3) [2025] NSWSC 879
Gemi 193 v Zhu [2025] NSWSC 295
Cases Cited

28

Statutory Material Cited

5

Alderton v Prudential Assurance Co Ltd [1993] FCA 164
Alderton v Prudential Assurance Co Ltd [1993] FCA 164
Attorney General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261