FEDERAL COURT OF AUSTRALIA
Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370
File number(s): VID 1438 of 2016 Judge(s): O'BRYAN J Date of judgment: 25 September 2020 Catchwords: CORPORATIONS – share and debt capital invested by the first defendant in various joint venture companies – whether transactions undertaken in breach of fiduciary duties, specifically the conflict rule and the profit rule – whether monies of the first defendant were applied for the purchase of real property – whether real property held on a constructive trust for the first defendant – whether claims are time barred in equity by analogy to claims based upon breach of the statutory duties of directors or by the equitable doctrine of laches – whether share transfer to the first defendant vitiated by mistake – whether decision by the first defendant not to renew a lease of commercial premises a breach of the statutory duty to act in good faith – dividends not declared by the first defendant for a lengthy period – whether the affairs of the first defendant have been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, the plaintiff Legislation: Companies Act 1981 (Cth) s 229
Corporate Law Reform Act 1992 (Cth)
Corporations Act 1989 (Cth)
Corporations Act2001 (Cth)
Evidence Act1995 (Cth) s 191
Federal Court Rules 2011 (Cth) r 28.61
Limitation of Actions Act 1958 (Vic) s 21
Retail Leases Act 2003 (Vic) s 35(3)
Companies Act 1985 (UK)
Cases cited: Allco Funds Management Limited v Trust Company [2014] NSWSC 1251
Ananda Marga Pracaraka Samgha Ltd v Tomas (No 6) [2013] FCA 284; (2013) 94 ACSR 199
Australian Securities and Investments Commission v Adler [2002] NSWSC 171 (2002) 168 FLR 253;
Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1
Aussie Ideas Pty Ltd v Tunwind Pty Ltd; Hoddinott v Tunwind Pty Ltd [2006] NSWCA 286
Barnes v Addy (1874) LR 9 Ch App 244
Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] Ch 515
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1
Bennetts v Board of Fire Commissioners of NSW (1967) 87 WN (Pt 1) (NSW) 307
Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150
Boardman v Phipps [1967] 2 AC 46
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304
Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62
Coombs v Dynasty (1994) 14 ACSR 60
Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561; 2 ACLR 307
Donaldson v Natural Springs Australia Limited [2015] FCA 498
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239
Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 170 FLR 451
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296
Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198
Hillam v Ample Source International Limited (No 2) (2012) 202 FCR 336
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
In the Matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332; 96 ACSR 1
Joint v Stephens [2008] VSCA 210; 26 ACLC 1467
Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221
Paul A Davies (Australia) Pty Ltd v Davies (1983) 1 NSWLR 440
Quinlan v Fiboze Pty Ltd (1988) 14 ACLR 312
R v Byrnes (1995) 183 CLR 501
R v Lawrence [1982] AC 510
Re a Company [1986] 2 All ER 253
Re Broadcasting Station 2GB Pty Ltd [1964–65] NSWR 1648
Re News Corp Ltd (1987) 15 FCR 227
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
Shirim Pty Ltd v Fesena Pty Ltd [2000] NSWSC 878; (2000) 35 ACSR 221
Smith Martis Cook & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Date of hearing: 9 – 13, 16 – 19 September 2019 Date of last submissions: 3 October 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 366 Counsel for the Plaintiff: G D Dalton QC with D J Fahey Solicitor for the Plaintiff: KHQ Lawyers Counsel for the Defendants: M S Osborne QC with D F McAloon Solicitor for the Defendants: B2B Lawyers ORDERS
VID 1438 of 2016 BETWEEN: HYLEPIN PTY LTD ACN 006 702 969
Plaintiff
AND: DOSHAY PTY LTD ACN 006 575 202
First Defendant
JOHN CHUN SAI SO
Second Defendant
GLOBAL 2000 MELBOURNE PTY LTD ACN 092 825 842 (and another named in the Schedule)
Third Defendant
JUDGE:
O'BRYAN J
DATE OF ORDER:
25 September 2020
THE COURT DECLARES THAT:
1.At all times since 15 June 2000, the first defendant has been the owner of five ordinary shares in the third defendant.
AND THE COURT ORDERS THAT:
2.The third defendant do all things necessary to correct its register of members, and lodge a notice of correction with the Australian Securities and Investments Commission, to record that, at all times since 15 June 2000, the first defendant has been the owner of five ordinary shares.
3.The plaintiff’s originating application be otherwise dismissed.
4.Within 28 days of these orders, the parties file and serve written submissions in respect of the costs of the proceeding of no more than five pages in length.
5.Subject to further order, the issue of costs will be determined by the Court on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
A. INTRODUCTION
[1]
B. OVERVIEW OF THE APPLICABLE LEGAL PRINCIPLES
[21]
B.1 Oppression
[22]
B.2 Fiduciary duties
[31]
B.3 Defence based on informed consent
[44]
B.4 Defences based on the application of statutory limitation periods directly or by analogy and laches
[46]
B.5 Loan transactions
[55]
C. OVERVIEW OF THE EVIDENCE
[62]
C.1 Witnesses for Hylepin
[67]
C.2 Witnesses for the defendants
[87]
D. FACTUAL FINDINGS
[107]
D.1 Incorporation of Doshay
[107]
D.2 Incorporation of Hylepin
[117]
D.3 Shareholdings in Doshay
[118]
D.4 Westlake Restaurant
[129]
D.5 Lyleable and Dragon Boat Knox
[135]
D.6 Jadetrex and Dragon Boat Palace
[148]
D.7 Dragon Wall and Dragon Wall Take Away
[159]
D.8 The acquisition of the Exhibition Street Property
[167]
D.9 Evaluator and Café Puccini
[183]
D.10 The acquisition of the Lonsdale Street Property
[201]
D.11 Doshay’s shareholding in Global 2000
[219]
D.12 Dividends
[235]
D.13 Hylepin’s requests for information
[241]
D.14 Offers to acquire Hylepin’s shares
[252]
D.15 Non-renewal of the lease for the Dragon Boat Restaurant
[255]
D.16 Declarations of interest
[272]
E. ALLEGED BREACHES OF FIDUCIARY DUTIES
[273]
E.1 Overview
[273]
E.2 Doshay’s investments in other Chinese restaurants
[281]
E.3 Acquisition of the Exhibition Street and Lonsdale Street Properties
[310]
E.4 Doshay’s investment in Evaluator and Café Puccini
[329]
E.5 Altering the share register of Global 2000
[342]
E.6 Doshay’s decision not to renew the lease over the Dragon Boat Restaurant premises
[346]
F. ALLEGED OPPRESSION
[359]
G. CONCLUSION
[364]
REASONS FOR JUDGMENT
O’Bryan J:
A. INTRODUCTION
This proceeding concerns the business affairs of the second defendant, John So, the fourth defendant, Wendy Ming Yee Cheng, and of companies associated with them. John So is well known in Melbourne as the longstanding general manager of the “Dragon Boat” restaurant located at 201-203 Little Bourke Street, Melbourne (within Melbourne’s Chinatown district) (Dragon Boat Restaurant) and as a former Lord Mayor of Melbourne. It is relevant to the matters raised in the proceeding to note that John So was previously married to Hellen Chin and has three children from that marriage, two of whom are referred to in this judgment: his daughter Natalie and his son Alexander. John So and Wendy Cheng have been in a relationship since 1984 and have one son, John Ho Ping So, also referred to as John Junior. John So has a brother, Anthony So.
The proceeding most directly concerns the business affairs of the first defendant, Doshay Pty Ltd (Doshay), which was incorporated on 2 June 1986. Amongst other business activities, Doshay has owned and operated the Dragon Boat Restaurant since around December 1986. At all times, Doshay’s directors have included John So and his former wife, Hellen Chin. Both hold indirect shareholdings in Doshay. At all times, John So has been the managing director of Doshay and has controlled its affairs.
During 1987, the plaintiff, Hylepin Pty Ltd (Hylepin), acquired 45,000 ordinary shares in Doshay. Hylepin is a family company, originally owned by Peter Chan and his wife Celia Chan. After Celia Chan died on 7 May 2004, Peter Chan became the sole owner of Hylepin. Peter Chan has been a director of the company at all times. Celia Chan was a director until her death, after which their son, Ben Ming Chan, became a director.
Hylepin alleges that, over the course of many years, John So has used his position and the assets of Doshay to benefit himself, Wendy Cheng and companies associated with them, including the third defendant, Global 2000 Melbourne Pty Ltd (Global 2000). Hylepin’s complaints about the conduct of Doshay’s affairs can be categorised into six main topics, which are summarised in an approximate chronological order.
First, Hylepin alleges that John So caused Doshay to acquire shares in, and advance loans to, four other companies that operated Chinese restaurants in Melbourne, being:
(a)Westlake Restaurant Pty Ltd (Westlake), which was the trustee of the Westlake Restaurant Unit Trust and which operated the Westlake Chinese Restaurant in Melbourne’s Chinatown district (in Little Bourke Street) and in which Doshay first invested in FY1988;
(b)Lyleable Pty Ltd (Lyleable), which operated a “Dragon Boat” restaurant at the Village Cinema Complex within the Knox District Centre (which is located on the Burwood Highway in Wantirna South) (Dragon Boat Knox) pursuant to a Franchise Agreement with Doshay entered into in February 1989;
(c)Jadetrex Pty Ltd (Jadetrex), which operated the “Dragon Boat Palace” restaurant at 144‑159 Lonsdale Street Melbourne (Dragon Boat Palace) pursuant to a Franchise Agreement with Doshay entered into in March 1990; and
(d)Dragon Wall Pty Ltd (Dragon Wall), which operated a Chinese takeaway restaurant business from Bourke Place, 600 Bourke Street Melbourne and in the Telstra building on Exhibition Street, Melbourne from about 1990.
Hylepin complains that the defendants held personal interests in those companies and that John So caused Doshay to invest in and transfer substantial sums to those companies without any loan agreements, security or interest and without disclosing his conflicts to Doshay.
Second, Hylepin alleges that John So used Doshay’s assets, without its consent, to acquire buildings at 231-235 Exhibition Street, Melbourne (the Exhibition Street Property) and 149 Lonsdale Street, Melbourne (the Lonsdale Street Property) for Global 2000, a company that he directed and in which he and Wendy Cheng held a substantial shareholding through a company called Global Crest Pty Ltd (Global Crest). Global 2000 settled the purchase of the Exhibition Street Property in June 2000 and settled the acquisition of the Lonsdale Street Property in December 2004.
Third, Hylepin alleges that, in 2001 and 2003, John So caused Doshay to buy shares in and transfer funds to Evaluator Pty Ltd (Evaluator), a company that was directed by Wendy Cheng and majority owned by Global Crest. Evaluator was incorporated to acquire the Cafe Puccini business which operated next door to the Dragon Boat Restaurant and lease the premises that it occupied. Over time, Doshay used parts of those premises for the Dragon Boat Restaurant and also operated a noodle shop called DB Express Noodle Bar.
Fourth, Hylepin alleges that, in May 2004, John So wrongly caused Global 2000 to correct its register of members and lodge a form with the Australian Securities and Investments Commission (ASIC) to show that Doshay owns four shares and John So owns one share in Global 2000, when in fact Doshay owned five shares in Global 2000 (with Global Crest owning the other five shares).
Fifth, Hylepin alleges that John So caused Doshay to fail or refuse to pay dividends to its shareholders at any time prior to 9 November 2018, despite having substantial retained profits of more than $8 million.
Sixth, Hylepin alleges that, on 9 May 2019, John So (together with Hellen Chin, who was the second director of Doshay) resolved not to exercise the option to renew Doshay’s lease of the premises at which it operates the Dragon Boat Restaurant for his own personal convenience and without any proper regard to the interests of Doshay or its members.
The proceeding was commenced by Hylepin on 15 December 2016. At that time, the proceeding was brought under ss 232 and 233 of the Corporations Act 2001 (Cth) (Corporations Act), alleging that the conduct of the affairs of Doshay (as summarised above) has been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Hylepin. Hylepin seeks relief under s 233 of the Corporations Act, including that Doshay declares and pays a dividend, John So or Doshay buy Hylepin’s shares at fair value (that is, at a price that removes the effect of the oppression), or alternatively that Doshay be wound up.
On 23 October 2018, the Court gave Hylepin leave pursuant to ss 236(1) and 237(1) of the Corporations Act to intervene in the proceeding in the name of Doshay to bring and prosecute derivative claims against John So for breach of fiduciary duty in respect of the transactions summarised above (other than the non-payment of dividends), and against Global 2000 and Wendy Cheng for their knowing involvement in the breaches and receipt of trust property. In that respect:
(a)The claims against John So relate to each of the impugned transactions. The relief sought against John So includes the payment of equitable compensation, a declaration that the one share in Global 2000 registered in the name of John So is owned by Doshay and orders to correct the register of Global 2000.
(b)The claims against Global 2000 principally relate to the acquisition of the Exhibition Street Property and the Lonsdale Street Property. The relief sought includes declarations of trust over the Exhibition Street and Lonsdale Street Properties in favour of Doshay and that the properties be transferred to Doshay or orders that Global 2000 account to Doshay for benefits derived.
(c)The claims against Wendy Cheng relate to the Evaluator transactions and the relief sought is the payment of equitable compensation to Doshay.
Given the length of time between the transactions the subject of complaint and the commencement of the proceeding, almost 30 years for the earliest transactions, the possible application of limitation periods looms large. All of the transactions, other than the non-renewal of the lease of the premises of the Dragon Boat Restaurant, occurred prior to 15 December 2010 being the date six years prior to the commencement of the proceeding. Limitation law is not some “unmeritorious procedural technicality”. Rather, as McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 (at 553), a limitation period represents the legislature’s judgment that “the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated”. His Honour explained (at 551) that the enactment of time limitations has been driven by the general perception that "[w]here there is delay the whole quality of justice deteriorates", citing R v Lawrence [1982] AC 510 at 517, per Lord Hailsham of St Marylebone LC, and that the “longer the delay in commencing proceedings, the more likely it is that the case will be decided on less evidence than was available to the parties at the time that the cause of action arose”. His Honour further observed (at 552, citations omitted):
The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one. Courts and commentators have perceived four broad rationales for the enactment of limitation periods. First, as time goes by, relevant evidence is likely to be lost. Second, it is oppressive, even "cruel", to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period.
…The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible.
This case is an illustration of the difficulties and unfairness involved in seeking to litigate complaints about conduct that occurred a long time in the past.
Hylepin sought to counter the application of time limitations by alleging that the impugned transactions involved fraud (in the equitable sense) on the part of John So or were fraudulently concealed by John So. Hylepin alleges that John So did not disclose the transactions to the directors or shareholders of Doshay and failed or refused to provide Doshay’s financial statements to Hylepin or conduct a general meeting of Doshay.
Given the nature of the claims made, Doshay did not take an active role in the proceeding. The allegations were defended by the other defendants: John So, Wendy Cheng and Global 2000. When in these reasons I refer to the submissions or arguments of the defendants, I am referring to the second, third and fourth defendants who had the carriage of the defence.
The trial of the proceeding was on all issues, both liability and relief, save for the determination (for the purposes of relief) of:
(a)the current market value of the Exhibition Street Property and the Lonsdale Street Property;
(b)the assessment of the fair value and/or market value of Hylepin’s shares in Doshay; and
(c)the assessment of the lost value (if any) of the Dragon Boat Restaurant business by reason of the decision not to exercise the option to renew Doshay’s lease of the premises at which it operates the Dragon Boat Restaurant.
For the reasons stated below, I have upheld one of Hylepin’s claims but dismissed all other claims. The claim I have upheld does not involve any breach of fiduciary duty or oppression. It is the fourth claim made by Hylepin, that in May 2004 John So wrongly caused Global 2000 to alter its register of members to show that Doshay owns four shares and John So owns one share in Global 2000. I have found that John So transferred his share in Global 2000 to Doshay on 15 June 2000 and that the subsequent instructions given by John So to Paul Tjioe & Associates in 2004 to alter the share register and effectively cancel that transfer were erroneous and of no legal effect.
Otherwise, I reject Hylepin’s claims against the defendants based on breach of fiduciary duty and oppression. The evidence shows that, at the invitation of John So, Hylepin subscribed for 45,000 shares in Doshay in 1987 at an issue price of $1.00 per share, being an investment of $45,000. Hylepin has generally been a passive investor in Doshay. Between 1987 and the date of trial, a period of more than 30 years, John So has been a director of Doshay and general manager. He has undertaken many business investments on behalf of Doshay. Some have been successful. Some have been unsuccessful. However, as at February 2018, Mr Greg Meredith of Ferrier Hodgson assessed the value of Doshay at $16,865,647. If that valuation was adopted, Hylepin’s shareholding in Doshay would be worth approximately $2,735,000, giving an annualised rate of return on investment (taking account of compounding) between November 1987 and February 2018 of approximately 21%. In my view, Hylepin’s complaints about John So’s conduct in relation to Doshay rely on hindsight, are selective and fail to take account of all the relevant facts and circumstances. In almost all instances, I reject the contention that John So breached his fiduciary duties by making decisions with a conflict of interest or from which he would personally benefit. In all instances, I reject the contention that John So acted dishonestly or concealed his wrongdoing. To the contrary, I find that John So caused his accountant, Paul Tjioe & Associates, to keep accurate accounts for Doshay and all of its associated entities, and that the financial statements for Doshay were made available to Hylepin. Even if I had upheld any of the claims made by Hylepin, I would have barred the claims by application of limitation periods. I also reject the contention that the affairs of Doshay have been conducted oppressively.
B. OVERVIEW OF THE APPLICABLE LEGAL PRINCIPLES
As already noted, Hylepin’s claims in the proceeding are generally based on two causes of action: the first is oppression, relying on ss 232 and 233 of the Corporations Act; and the second is breach of equitable fiduciary duties. The following is a summary of the primary legal principles relied on by Hylepin and the defendants, which provides a framework within which to consider the facts in dispute between the parties.
B.1 Oppression
Relevantly, s 232 of the Corporations Act provides that the Court may make an order under s 233 of the Act if the conduct of the company’s affairs, an actual or proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of the members or a class of members of the company, is either:
(a)contrary to interests of members as a whole (s 232(d)); or
(b)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity (s 232(e)).
Hylepin’s pleaded case in oppression is based on the impugned transactions summarised above, most of which occurred a long time ago. There is no currently proposed act or resolution to which Hylepin takes objection, save in respect of the payment of dividends (although a significant dividend has been declared and paid by Doshay since the commencement of the proceeding).
The phrase “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” in 232(e) is a compound expression: Joint v Stephens [2008] VSCA 210; 26 ACLC 1467 at [134] per Nettle, Ashley and Neave JJA; Hillam v Ample Source International Limited (No 2) (2012) 202 FCR 336 at [4] per Emmett, Jacobson and Buchanan JJ. That phrase is concerned with conduct that involves “commercial unfairness”, or “a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair”: In the Matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332; 96 ACSR 1 at [178] per Black J. Whether there has been “unfairness” in the requisite sense is to be judged objectively: Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 (Wayde) at 472-473 per Brennan J. The relevant test is “whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision” (Wayde at 472-473 per Brennan J) or whether “objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair”: Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62 at [9].
Mismanagement or poor management alone does not constitute oppression: Shirim Pty Ltd v Fesena Pty Ltd [2000] NSWSC 878; (2000) 35 ACSR 221 at [71]; Donaldson v Natural Springs Australia Limited [2015] FCA 498 at [250]; Ananda Marga Pracaraka Samgha Ltd v Tomas (No 6) [2013] FCA 284; (2013) 94 ACSR 199 at [417]; Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [41]. In an oppression case, the court is concerned “to avoid an unwarranted assumption of the responsibility for management of the company”: Wayde at 467 per Mason ACJ, Wilson, Deane and Dawson JJ.
As with the s 232(e) ground, an assessment of whether conduct is “contrary to the interests of the members as a whole” is objective: Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 170 FLR 451 (Goozee) at [42]-[44]. It is determined by whether the conduct adheres to “accepted standards of corporate behaviour” or is in accordance with how reasonable directors would act in attending to the affairs of the company: Goozee at [41].
A claim for oppression under s 232 is not subject to any limitation period, and the oppression remedy allows the Court to make orders even if the oppressive conduct has ceased: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [65] per French CJ and [182] per Gummow, Hayne, Heydon and Kiefel JJ (referring to the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 at [6.132]). Nevertheless, the Court has a broad discretion as to remedy: Smith Martis Cook & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136. The defendants submitted, and I accept, that delay in bringing proceedings is a relevant factor in the exercise of the Court’s discretion to grant relief under s 233.
The defendants also submitted that, in its claim for oppression, Hylepin cannot seek an order that John So or Doshay buys its shares. In respect of John So, the defendants submitted that s 232(1) only contemplates orders for the purchase of shares by a member of the company under s 233(1)(d) or by the company itself under s 233(1)(e). It follows, in the defendants’ submission, that an order could not be made against John So because he is not a member of Doshay. The defendants also submitted that an order could not be made that Doshay purchase Hylepin’s shares because that would affect the rights of the other shareholders in Doshay, including Mr Kolarik who is not a party to the proceeding.
The defendants did not cite any authority in support of the submission that an order to purchase the plaintiff’s shares cannot be made against a non-member. While paragraphs (d) and (e) of s 233(1) are limited in the manner stated by the defendants, those paragraphs are not expressed to be exhaustive of the kinds of orders that the Court may grant under the section. The chapeaux to s 233(1) provides that the Court can make any order under the section that it considers appropriate in relation to the company. A similar issue was considered by Hoffmann J on a pleading summons in Re a Company [1986] 2 All ER 253, and his Honour concluded (at p 256) that s 461(1) of the Companies Act 1985 (UK) (which was in materially the same terms as s 233) should be given its full effect and he would not strike out a claim for orders to be made against a former member.
Nor did the defendants cite any authority in support of the submission that an order to purchase the plaintiff’s shares cannot be made against the company unless all members are joined to the proceeding. There is authority for the proposition that, before ordering a company to acquire the shares of a member as a remedy in an oppression proceeding, the Court should give creditors an opportunity to be heard: Quinlan v Fiboze Pty Ltd (1988) 14 ACLR 312 at 313 per Young J, cited with approval in Coombs v Dynasty (1994) 14 ACSR 60 at 102 per von Doussa J. However, that principle is founded on the potential prejudice to creditors associated with a reduction in the company’s capital. That principle does not apply in the same way in the case of members. Nevertheless, the effect on other members of an order that the company purchase the plaintiff’s shares may be a relevant consideration in the exercise of the Court’s discretion to grant relief.
B.2 Fiduciary duties
Hylepin’s claims are generally based on the equitable fiduciary duties owed by directors, rather than the statutory duties (save in respect of the recent decision not to renew the lease of the Dragon Boat Restaurant premises). In particular, Hylepin’s claims are based on what are often referred to as the “conflict rule” and the “profit rule” of fiduciary obligations.
The conflict rule
The conflict rule is that a director of a company is under a fiduciary obligation not to promote his or her personal interest by making or pursuing a gain or benefit in circumstances in which there was a conflict or a real or substantial possibility of a conflict between his or her personal interest and the interests of the company without the fully informed consent of the company: see Boardman v Phipps [1967] 2 AC 46 (Boardman v Phipps) at 124 per Lord Upjohn; Chan v Zacharia (1984) 154 CLR 178 (Chan v Zacharia) at 199 per Deane J; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (Hospital Products) at 103 per Mason J. The question whether there is a real possibility of conflict is assessed objectively: Boardman v Phipps at 124 per Lord Upjohn; Australian Securities and Investments Commission v Adler [2002] NSWSC 171 (2002) 168 FLR 253 (ASIC v Adler); [2002] NSWSC 171 at [735] per Santow J. In Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 (Bell v Westpac), Owen J said at [4512]:
One way of ascertaining whether the interest of the fiduciary is remote or insubstantial is to ask whether the interest is such that a reasonable person would think there was a real or substantial possibility of the fiduciary being swayed by it.
There are many cases which state that where a director of a company has caused the company to engage in a transaction in which the director has a conflicting interest, it is no defence that the impugned transaction has brought a benefit to the company that would not otherwise have been available or that the transaction was objectively reasonable: see for example Allco Funds Management Limited v Trust Company [2014] NSWSC 1251 at [167]; Harris v Digital Pulse (2003) 56 NSWLR 298 at [406]-[407] per Heydon JA; Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 at 245 (Prior J).
A conflict of duties may arise where a person is a director of two companies that transact with each other. In R v Byrnes (1995) 183 CLR 501 at 516-517, the High Court stated:
A company is entitled to the unbiased and independent judgment of each of its directors. A director of a company who is also a director of another company may owe conflicting fiduciary duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company's interest to the first company and obtaining the first company's consent.
However, it is not always the case that a conflict of duties will arise where a person is a director of two companies that transact with each other. The scope of the fiduciary duty depends upon the particular circumstances and the nature of the relationships in issue. In Howard v Commissioner of Taxation (2014) 253 CLR 83 (Howard), French CJ and Keane J observed (at [34], references omitted):
The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be “moulded according to the nature of the relationship and the facts of the case”. By way of example, company directors are frequently shareholders. The decisions they take as directors may therefore affect their personal interests. They do not breach their fiduciary obligations merely because in promoting the interests of the company they are also promoting their own. On the other hand, a decision taken by directors to advantage themselves other than as members of the general body of shareholders would constitute an abuse of fiduciary powers.
In the same case, Hayne and Crennan JJ said (at [60]-[61], references omitted):
But, as the majority in Pilmer also pointed out, it is necessary to recognise, and give due weight to the fact, that different minds may reach different conclusions as to the presence or absence of a real possibility of conflict between duty and interest or duty and duty. That is, the doctrine cannot “be inexorably applied and without regard to the particular circumstances of the situation”.
It follows that the working out of the application of the rule to company directors is not achieved by the bare repetition of its terms. Much closer attention must be given to the duties, interests and alleged manner of conflict than is given by simply observing that directors owe fiduciary duties. It is necessary to identify the duties or interests which are said to conflict or present a real possibility of conflict.
The law recognises that a director of one company, that holds an investment in a second company, may be nominated as a director of a second company to further the interests of the investment. Frequently, no conflict of duty arises because relevant decisions are in the interests of both the appointor company and the appointee company. The director makes decisions to promote the interests of both companies. Consistently with the principles stated by Dixon J in Mills v Mills (1938) 60 CLR 150 at 186, a nominee director only acts in breach of their duty owed to a company if they would not have made a decision as director of one of the companies but for the interests of the other company: see Re Broadcasting Station 2GB Pty Ltd [1964–65] NSWR 1648 at 1663 per Jacobs J; Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 at 165-6; Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561; 2 ACLR 307 at ACLR 318; Re News Corp Ltd (1987) 15 FCR 227 at 244-5 per Bowen CJ. There are cases in which a person who has been appointed as a director of a company as nominee of a shareholder in that company has been found to have acted in breach of fiduciary duty by reason of a conflict of duty, but the breach typically relates to the duty owed to the appointee company, not the appointing shareholder: see for example Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324; Bennetts v Board of Fire Commissioners of NSW (1967) 87 WN (Pt 1) (NSW) 307.
The profit rule
The profit rule is that a director of a company is under fiduciary obligation not to use their position as a director for their own personal advantage or the advantage of anyone other than the company without the company’s fully informed consent: see Chan v Zacharia at 199. However, for the “profit rule” to be engaged, there must be a causal connection between the fiduciary office and the receipt of the benefit: Links Golf Tasmania v Sattler (2012) 213 FCR 1 [520]-[525]. The rule does not apply to an opportunity that a director obtained in a personal capacity or a separate corporate role: Streeter v Western Areas Exploration (No 2) (2001) 278 ALR 291 at [79].
Account for the benefit or gain
It is well established as a principle of equity that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain obtained in breach of the conflict rule or profit rule, and any such benefit or gain is held by the fiduciary as constructive trustee. In Chan v Zacharia at 198–9, Deane J explained as follows:
The variations between more precise formulations of the principle governing the liability [of a person in a fiduciary relationship] to account are largely the result of the fact that what is conveniently regarded as the one “fundamental rule” embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the “use of fiduciary position” doctrine is but an illustration or part of a wider “conflict of interest and duty” doctrine … the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee. … That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: eg, an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: eg, the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom.
As Mason J explained in Hospital Products at 107:
A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.
…
Any profit or benefit obtained by a fiduciary in either of the two situations already described is held by him as a constructive trustee (Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350). Neither principle nor authority provide any support for the proposition that relief by way of constructive trust is available only in the case where a profit or benefit obtained by the fiduciary was one which it was an incident of his duty to obtain for the person to whom he owed the fiduciary duty. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in equity the appropriate remedy is by means of a constructive trust.
In reliance on Paul A Davies (Australia) Pty Ltd v Davies (1983) 1 NSWLR 440 (Davies), Hylepin advanced a broader contention that, where a director has used company monies in breach of fiduciary duty, the monies so used are held on a constructive trust in favour of the company. Ultimately, it has not become necessary to determine whether that contention is correct or is stated too broadly. However, it appears to be in conflict with the decision of the High Court in Daly v The Sydney Stock Exchange (1986) 160 CLR 371 (Daly), where the majority concluded that monies received as a loan in circumstances of a breach of fiduciary duty (by failing to make full disclosure) were not the subject of a constructive trust and the recipient was bound to repay the monies as a debt. In Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198, the Court of Appeal of the Supreme Court of Western Australia observed (at [204]) that, in Davies, it was not clear from the trial judge’s findings whether the directors had obtained the company’s money by way of contracts of loan (in which case, the High Court’s decision in Daly applied) or had misappropriated the money (in which case the monies belonged to the company).
Hylepin seeks relief against Global 2000 (which is the registered owner of the Exhibition Street Property and the Lonsdale Street Property) on two bases. The first is that Global 2000 was the “corporate creature, vehicle, or alter ego” of John So which he used “to secure the profits … of [his] breach of fiduciary duty” and, as such, is liable for the profits made from his breaches of fiduciary duty: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 (Grimaldi) at [243]. The second basis is the rule in Barnes v Addy (1874) LR 9 Ch App 244 (which is founded on what Lord Selborne LC said at 251-2):
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
It has become common to describe the first limb of the rule as involving “knowing receipt” and the second limb as involving “knowing assistance”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [112]. Hylepin relies on both limbs. In relation to knowing receipt of trust property, Hylepin relies on the principle that the law attributes to a corporation the mind and will of the natural person or persons who manage and control its actions: Tesco Supermarkets Ltd v Nattrass [1972] AC 153. Hylepin argues that John So was the controlling mind of Global 2000 at all relevant times.
B.3 Defence based on informed consent
There will be no breach of the conflict rule or the profit rule of fiduciary obligations if the director establishes that he or she obtained the company’s fully informed consent to the transaction. As Brennan CJ, Gaudron, McHugh and Gummow JJ made clear in Maguire v Makaronis (1997) 188 CLR 449 at 466:
…if the [fiduciary was] to escape the stigma of an adverse finding of breach of fiduciary duty, with consequent remedies, it was for [it] to show, by way of defence, informed consent by the respondents to the appellants’ acting, in relation to the mortgage, with a divided loyalty. What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given.
Fully informed consent in this context was explained by Samuels JA in Woolworths Limited v Kelly (1991) 22 NSWLR 189 at 207-11:
Unless the articles of the company otherwise provide, a contract made in breach of this fiduciary duty will be voidable at the option of the company unless the director makes a full disclosure of the nature of his interest in the contract to the members of the company in general meeting, who must approve the contract by ordinary resolution: George A Bond & Co Ltd v Bond (1929) 30 SR (NSW) 15 at 19; 46 WN (NSW) 199 at 201; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; Re James; Bagot's Executor & Trustee Co Ltd v McGregor [1949] SASR 143 at 145 and Regal (at 150). Disclosure to the company's directors, even if the interested director does not attend the board meeting or vote on the contract, will be ineffective to validate the contract at general law since the company has a right to the unbiased views and advice of all its directors: Benson v Heathorn (1842) 1 Y & C CC 326 at 341-342; 62 ER 909 at 916, per Knight-Bruce V-C and Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558 at 567-568 per Hatherley LC (CA).
…
It is necessary then to ascertain the extent of the disclosure which will satisfy these requirements. This element has been clearly described by Lord Radcliffe in Gray (at 14) in these words:
“… The nature of [Gray's] interest in the agreement proposed consisted of just this fact that he stood to gain so much by the transaction: and only he at that time had the means of knowing how much. There is no precise formula that will determine the extent of detail that is called for when a director declares his interest or the nature of his interest. Rightly understood, the two things mean the same. The amount of detail required must depend on the nature of the contract or arrangement proposed and the context in which it arises. It can rarely be enough for a director to say ‘I must remind you that I am interested’ and to leave it at that, unless there is some special provision in the company's articles that makes such a general warning sufficient. His declaration must make his colleagues ‘fully informed of the real state of affairs’ (see Imperial Mercantile Credit Ass'n v Coleman (1873) LR 6 HL 189 at p 201, per Lord Chelmsford). If it is material to their judgment that they know not merely that he has an interest, but what it is and how far it goes, then he must see to it that they are informed …”
In other and more general words the requirement is to make full disclosure of the nature and extent of the interest.
B.4 Defences based on the application of statutory limitation periods directly or by analogy and laches
In defence of Hylepin’s claims based on breach of fiduciary duty, the defendants argue that the claims are time barred in equity by analogy to claims based upon breach of the statutory duties of directors and by the separate equitable doctrine of laches.
In proceedings based on equitable principles and remedies, where there is a corresponding remedy at law in respect of the same matter and that remedy is the subject of a statutory bar, equity will apply the bar by analogy unless there exists a ground which justifies not doing so because reliance by the defendant on the statute would in the circumstances be unconscionable: Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435 (Gerace) at [70] per Meagher JA (with whom Beazley P and Emmett JA agreed). There are two main classes of case to which the doctrine applies: (a) when the action is one alleging fraud, or when fraud is an element in the cause of action, in which case time does not run until the discovery of the fraud; and (b) where the cause of action is one which does not involve fraud, but its existence was fraudulently concealed by the defendant, in which case time does not begin to run until both the concealment is discovered and the cause of action ascertained: Meagher, Gummow and Lehane’s Equity Doctrines and Remedies at [36-100], cited with approval in Sze Tu v Lowe (2014) 89 NSWLR 317at [368] (Gleeson JA, with whom Meagher JA and Barrett JA agreed). The principles were explained by Meagher JA in Gerace at [75]:
The grounds on which equity declines to permit a defendant to rely upon a statutory bar by analogy include where there has been fraudulent concealment, which requires either fraudulent conduct as an element of the right of action or conduct consisting of active concealment of a right of action that does not include fraud as an element: Meagher, Gummow and Lehane’s Equity Doctrines and Remedies at [34-085]. The more recent cases which discuss this doctrine do so when applying the modern statutory equivalents of s 26 of the Real Property Limitation Act 1833 (UK). The references to “fraud”, “concealment” and “fraudulent concealment” in those statutes have been understood in the same sense as they are in the equitable doctrine on which those provisions were based. The equitable doctrine is not confined to common law fraud or deceit and requires a consciousness on the part of the defendant that what is being done is wrong or that to take advantage of a particular situation involves wrongdoing: see Beaman v ARTS, Ltd [1949] 1 KB 550 at 559–560 per Lord Greene MR, Kitchen v Royal Air Force Association [1958] 1 WLR 563 at 572–573 per Lord Evershed MR, Applegate v Moss [1971] 1 QB 406 at 413 per Lord Denning MR, King v Victor Parsons & Co [1973] 1 WLR 29 at 33–34 per Lord Denning MR.
In a case in which the defendant has “no inkling” of any breach of duty, that is, the defendant was not conscious of wrongdoing in the sense that he or she did not know they were acting or had acted in breach of duty, equity will follow the law and apply a time bar notwithstanding the breach: Gerace per Meagher JA at [76] and [77], referring to Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] Ch 515 at 537.
Hylepin contended that, in situations where assets are misapplied through a breach of duty, equity will not permit the trustee or fiduciary to plead a limitation defence, relying on Aussie Ideas Pty Ltd v Tunwind Pty Ltd; Hoddinott v Tunwind Pty Ltd [2006] NSWCA 286 at [21] per Handley JA (with whom Giles JA and Bryson JA agreed) and Gerace at [35] per Meagher JA. The contention is stated too broadly. As explained by Meagher JA in Gerace at [35], two classes of case in which courts of equity declined to apply limitation periods by analogy were claims by a beneficiary against a trustee for breaches of trust and claims involving fraud or fraudulent concealment. In Victoria, actions by a beneficiary under a trust are governed by s 21 of the Limitation of Actions Act 1958 (Vic) (Limitations Act).
Thus, it is necessary to consider whether there is a remedy at law that corresponds to the fiduciary obligations on which Hylepin relies and which is the subject of a statutory bar. During the period of alleged contraventions of duty (which date back to the late 1980’s), the applicable companies legislation imposed statutory duties that were equivalent to the conflict rule and profit rule of fiduciary obligations. At the time the impugned transactions were entered into by Doshay, the relevant statutory duties and the applicable statutory limitation provisions that applied to breaches of those duties were as follows:
(a)Prior to 1 January 1991, the statutory equivalent of the fiduciary obligations of directors was s 229 of the Companies Act 1981 (Cth) (which, as applied as a law of Victoria, was called the Companies (Victoria) Code). Subsection 229(7) provided that a company could recover from a director who had contravened the duties in s 229 as a debt due to the company (a) if the director or any other person had made a profit as a result of the contravention - an amount equal to that profit; and (b) if the company had suffered loss or damage as a result of the contravention - an amount equal to that loss or damage. The relevant limitation period for such an action was provided by s 5(1)(d) of the Limitations Act which refers to “an action to recover any sum recoverable by virtue of enactment, other than a penalty or forfeiture sum or by way of penalty or forfeiture”. The limitation period was 6 years from the date on which the cause of action accrued.
(b)With effect from 1 January 1991, the Corporations Law, enacted by the Corporations Act 1989 (Cth), was adopted by each State including Victoria. Section 232 of the Corporations Law replaced the former s 229 of the Companies Code to substantially the same effect. Section 232(8) of the Corporations Law was in materially the same form as the former s 229(7) of the Companies Code and, accordingly, s 5(1)(d) of the Limitations Act applied a six year limitation period from the date on which the cause of action accrued.
(c)With effect from 1 February 1993, the Corporations Law was amended by the Corporate Law Reform Act 1992 (Cth). Relevantly, s 232(8) was repealed and s 232(6B) was enacted which provided that the duties stated in s 232 were civil penalty provisions. That enlivened the new provisions in Part 9.4B. Section 1317HD was in materially the same form as the former s 232(8), save that s 1317HD was expressed to impose a six year limitation period from the date of contravention.
(d)With effect from 15 July 2001, the Corporations Law was replaced by the Corporations Act. The statutory equivalent of the fiduciary obligations of directors is ss 182 and 183. Sections 182 and 183 are civil penalty provisions. Section 1317H provides that a court may order a person to compensate a company if the person had contravened a civil penalty provision in relation to the company and damage resulted from the contravention, and s 1317K imposes a six year limitation period from the date of contravention.
Accordingly, I accept the defendants’ submission that at all relevant times there was a remedy at law that corresponded to the fiduciary obligations on which Hylepin relies and which was the subject of a statutory limitation period of six years. It will therefore be necessary to consider whether the conduct of John So about which complaint is made:
(a)involved a consciousness on the part of John So that what was being done was wrong or involved wrongdoing; or
(b)was fraudulently concealed by John So.
The defendants also rely on the separate defence of laches. The elements of the defence are (a) knowledge of the wrong; (b) delay; and (c) unconscionable prejudice caused to the opponent by the delay: Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 (Crawley v Short) per Young JA at [163]-[164]. As explained in Meagher JA in Gerace at [73]:
The doctrine of laches is directed to a broader and different question. That question is whether, as between the parties, it would be practically unjust to give relief which otherwise would be just. In answering that question, account is taken of the length of any delay, the nature of acts done during the period of that delay, whether the plaintiff had sufficient knowledge to justify the commencement of proceedings, whether there has been prejudice to the defendant or others and the nature of the relief claimed: see Lindsay Petroleum Company v Hurd at 239–240.
In Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221, Lord Selborne LC observed (at 239‑240) that:
Where it would be practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse of time and delay are most material. But in every case, if an argument against relief, which otherwise would be just, is founded upon mere delay, that delay of course not amounting to a bar by any statute of limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances, always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.
The key element is whether, in all the circumstances, “it would be practically unjust to give a remedy”: Crawley v Short at [164] per Young JA (with whom Allsop P and Macfarlan JA agreed).
B.5 Loan transactions
It is convenient to address at the outset one other issue of legal principle raised by Hylepin because it concerns many of the transactions undertaken by Doshay that are challenged by Hylepin.
Hylepin submitted that, for an advance of monies to be a loan, there must be a loan agreement. In support of that submissions, it relied on Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 (Radilo Enterprises) in which Lee J said (at 313):
A loan involves an obligation on the borrower to repay the sum borrowed. The matter is put this way by Dr Pannam (C L Pannam, The Law of Money Lenders in Australia and New Zealand (1964), p 6):
A loan of money may be defined, in general terms, as a simple contract whereby one person (the lender) pays or agrees to pay a sum of money in consideration of a promise by another person (the borrower) to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid. The essence of the transaction is the promise of repayment. As Lowe J put it in a judgment delivered on behalf of himself and Gavan Duffy and Martin JJ: “‘Lend’ in its ordinary meaning in our view imports an obligation on the borrower to repay” (Ferguson v O'Neil [1943] VLR 30 at 32). Without that promise, for example, the old indebitatus count of money lent would not lay. Repayment is the ingredient which links together the definitions of “loan'’ to be found in the Oxford English Dictionary, the various legal dictionaries and the text books. In essence then a loan is a payment of money to or for someone on the condition that it will be repaid.
Hylepin also relied on the decision in Grimaldi in which the Full Federal Court (Finn, Stone and Perram JJ) found that payments by way of a running account were not loans but dishonest misappropriations of Chameleon’s funds (at [336]-[337]).
Hylepin argued that the monies advanced by Doshay to various entities, which are the subject of challenge in this proceeding, were not loans because in many instances the loans were undocumented and interest free.
The question whether an advance of money from one company to another is a loan or a misappropriation of funds is ultimately a question of fact. As stated by Lee J in Radilo Enterprises, a loan is a payment of money to or for someone on the condition that it will be repaid. It is not a condition of a valid loan that it be documented in a formal agreement; nor is it a condition that the advance of monies earn interest. The transaction must be considered in its context to determine its character. Relevant to that context is the nature of the parties to the transaction and their relationship. While the Full Court in Grimaldi upheld the primary judge’s finding that advances by Chameleon were not loans, their Honours observed that the primary judge “was viewing the matter through the prism of allegations of what can only be described as egregious breaches of statutory duty and of fiduciary duty” and that the “language of ‘not loans’ but ‘diversions of funds’ ought in some degree be seen in that light” (at [330]).
In the present case, the companies involved can be described as small to medium sized enterprises conducting restaurant businesses and also investing in commercial real estate in Melbourne. The investors in the companies that were party to the transactions were members of the Australian-Chinese community and known to each other. The evidence indicated that many of the investors had limited English skills. Documentation of the various transactions was limited, and trust was placed in the relationship between the investors rather than on written agreements.
For the reasons explained below, I do not consider that the advances of money made by Doshay to various other entities, usually without a formal loan agreement and in a number of instances on an interest free basis, were dishonest misappropriations of Doshay’s funds. I consider that the advances were interest free loans made by Doshay repayable on demand. In my view, each of the advances had the potential to improve Doshay’s financial position for the benefit of its shareholders. The fact that, in some cases, that did not occur does not alter the character of the original transaction. Further, the advances were properly recorded in Doshay’s accounts and the accounts of the borrowing entity. There was nothing dishonest or hidden about the advances.
C. OVERVIEW OF THE EVIDENCE
Certain primary facts were not in dispute and the parties filed an agreed statement of facts for the purposes of s 191 of the Evidence Act 1995 (Cth) recording the uncontested facts.
The parties tendered a large body of documentary evidence relating to the transactions the subject of complaint by Hylepin (which I will refer to as the impugned transactions). The documentary evidence included many financial statements relating to the companies the subject of allegations in the proceeding, including accounting ledger’s relevant to particular impugned transactions. Given the historic nature of most of impugned transactions, many occurring 20 to 30 years ago, it is significant that the transactions undertaken by Doshay and associated companies, and which are the subject of complaint in this proceeding, have been recorded in the accounting and financial records of Doshay and the associated companies. It is possible to trace the transactions through those records. I accept the submission of the defendants that, while aspects of Doshay’s affairs have been conducted with relative informality, Doshay’s directors have ensured that its external accountants, Paul Tjioe & Associates, prepared financial statements for Doshay and associated entities on an annual basis.
Section 1305(1) of the Corporations Act provides that a “book” (defined in s 9 to include “financial reports or financial records, however compiled, recorded or stored”) kept by a body corporate under a requirement of the Act “is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book”. In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1, Austin J made the following observations about the effect of s 1305(1) (at [396]):
The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a “first view”. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.
In respect of a relatively small number of transactions, Hylepin put to John So that the relevant accounting record was inaccurate, which proposition was not accepted by John So. No evidence was called by Hylepin to contradict the accounting records that were in evidence and I therefore accept what they record, save in some minor respects referred to later in these reasons.
The parties also tendered by agreement the special referee report of Mr Greg Meredith of Ferrier Hodgson dated 21 February 2018 and its annexures (Special Referee Report). Mr Meredith was appointed as a special referee pursuant to rule 28.61 of the Federal Court Rules 2011 (Cth) on 2 February 2017 to give his opinion with respect to a series of questions relating to the value of various assets including the Exhibition Street Property and the Lonsdale Street Property and the value of Doshay’s interests in various assets and the value of Doshay. At that time, it was hoped that the report would assist the parties in resolving their dispute. That did not occur. By the time of trial, the parties had agreed that the trial would determine all issues other than those values. For that reason, neither party applied to have the opinions of Mr Meredith on those values adopted for the purposes of the trial. Rather, the parties agreed that Mr Meredith’s report should be received by the Court as evidence of the transactions that are described in the report.
C.1 Witnesses for Hylepin
Hylepin called Peter Chan and Andy Kwak Hui as witnesses. An overview of their evidence follows, with points of detail referred to below in relation to the impugned transactions.
Peter Chan
As already noted, at all times Peter Chan has been a shareholder and director of Hylepin and he is presently the sole shareholder of Hylepin. Peter Chan swore an affidavit dated 13 May 2019 and was cross-examined.
Peter Chan was born in Kedah, Malaysia on 18 July 1939. He came to Australia in 1958 and graduated in Dentistry from the University of Melbourne. Soon after his graduation, he found a job as a dentist in Kerang, northern Victoria. Later, he moved to Melbourne and started work in a dental surgery in St Kilda. In 1969, he married his late wife, Celia, and also opened up his own dental surgery in St Albans. He continued to work as a full-time dentist until around 1991 when he reduced his hours and worked part-time. He retired some years later. Celia Chan was a qualified accountant.
Peter Chan deposed that he met John So through his role with the Chinese Professional and Business Association. He explained that, during the 1980s, he became interested in Chinese community work so he joined the Association and, after a short time, became the Vice President. The Association held dinners in Little Bourke Street at various Chinese restaurants, which Peter Chan attended.
Peter Chan said that, after first meeting John So, he would see him from time to time in Chinatown (I interpolate, in Little Bourke Street, Melbourne) and talk with him. In around 1986 or 1987, Peter Chan had a conversation with John So about becoming a shareholder in Doshay. Peter Chan conceded that he cannot now recall the particular circumstances of the conversation, or the specifics of what was said, but that John So said words to the effect that Doshay would operate a Chinese restaurant to be called 'Dragon Boat' in Chinatown, that John So had a history of running Chinese restaurants and had considerable expertise, and that he would make Doshay profitable and would grow the company. John So also said that the business would be owned by him, Peter Chan, Andy Hui (who was to be the head dim sum chef), Willie Yeung (who was to be the head waiter), John So's three brothers, John So's wife Hellen, and a company called Pecosong Pty Ltd (Pecosong). Peter Chan agreed to the proposal and incorporated Hylepin for that purpose. On 30 March 1987, Hylepin subscribed for 30,000 ordinary shares in Doshay. Peter Chan said that, in late 1987, during an encounter in Chinatown, John So told him that Willie Yeung no longer wanted to be part of the Dragon Boat Restaurant. John So offered Willie Yeung's shares for sale to Peter Chan, and the other Doshay shareholders. In November 1987, Hylepin purchased 15,000 shares from Willie Yeung, and Pecosong purchased the other 15,000.
As discussed below, John So’s recollection of these events differs somewhat from Peter Chan’s, but nothing turns on the differences.
Peter Chan became a director of Doshay on 30 March 1987 and remained a director until 8 August 1991. In 1991, Peter Chan and his wife Celia used their company, Cathay International Pty Ltd trading with the business name "Cathay Gold Nugget", to commence operating a TAB agency on the ground floor of 117 Lonsdale Street, Melbourne. Peter Chan and his wife had owned the property at 117 Lonsdale Street since 1982. In 1991, the Victorian Government passed a law to allow gaming machines in Victoria. In 1992, after the relevant permits had been obtained, Cathay International Pty Ltd also operated a gaming machine business from the first floor of the building and managed the Cathay Gold Nugget business until it was sold in 2000.
In about the year 2000, Celia Chan became terminally ill. Peter Chan deposed that he and his wife then spent more time travelling outside of Australia and did not prioritise business affairs. Celia Chan died on 8 March 2004.
The burden of Peter Chan’s evidence was to the effect that neither he nor his late wife were informed or consulted about the impugned transactions by John So and Hylepin never received financial statements concerning Doshay. Peter Chan expressly denied John So’s evidence to the effect that John So met regularly with the members of Doshay (including Hylepin, represented by the Chans) to discuss its business affairs.
I do not consider that Peter Chan was a reliable witness, particularly on the question whether Hylepin was informed about the impugned transactions and whether Hylepin received copies of Doshay’s financial statements. The evidence given by Peter Chan in cross-examination was often vague and inconsistent with both his own evidence and the documentary record. Peter Chan himself accepted that the events the subject of the proceeding occurred a long time ago and that, consequently, it was difficult to recall those events. However, the inconsistencies in Peter Chan’s evidence went beyond the inevitable difficulty in recalling events from up to 30 years ago. In my view, aspects of Peter Chan’s evidence involved reconstructions designed to favour the case brought by Hylepin. I regard the following matters as having particular significance and undermining Peter Chan’s reliability and credibility as a witness:
(a)As stated above, Peter Chan became a director of Doshay on 30 March 1987 and remained a director until 8 August 1991. Although Peter Chan acknowledged during cross-examination that his duties as a director of Doshay included considering and approving annual financial statements, when asked whether he had performed that task during his tenure as director, he said he could not recall. When Peter Chan was shown the Doshay financial statements for FY1989, he denied having ever seen them. When it was put to Peter Chan that he had in fact seen financial statements of Doshay during his tenure as director, he said he could not recall. When asked whether it was possible that he had in fact seen the financial statements, but had forgotten that fact, Peter Chan said he could not recall. When Peter Chan was shown a resolution of the directors of Doshay, signed by him, in which he expressed the opinion that the information contained in the company’s annual return for FY1989 was correct, and it was put to him that he would not have signed such a document unless he had first familiarised himself with those financial statements, he replied that he trusted John So’s reporting on the activities of Doshay. I consider that Peter Chan’s evidence as to whether he received or read Doshay’s financial statements during his period as a director of the company was both inconsistent and implausible, entailing responses that included, “I can’t recall reading the financials but apparently – maybe I have, maybe I haven’t”; “I wasn’t shown the financials whatsoever”; “I can’t remember”; and stating that certain financial statements “were not tabled for discussion” and that from “day one” of his investment, he never saw a set of financials up until July 2014. I consider that the answers given by Peter Chan were evasive and inconsistent and undermined his credibility.
(b)In his affidavit, Peter Chan deposed that the first time that Hylepin and he had received any financial statements from Doshay was July 2014. When asked in cross-examination whether his wife, a director of Hylepin and a qualified accountant, ever asked for copies of the financial statements of Doshay, Peter Chan said she did but that she never received them. When asked whether Hylepin ever made any written request to John So for copies of Doshay’s financial statements from 1991 to 2004, Peter Chan said it did not. Peter Chan said that his wife only told him verbally of the requests she had made to John So for financial statements. When Peter Chan was asked how John So’s refusals to provide Doshay’s financial statements to his wife made him feel, he said it made him feel anxious because he did not know how the company was performing. When asked why Hylepin did not send any written requests to John So regarding Doshay’s financial statements, Peter Chan said he thought that the verbal requests made by his wife would be sufficient. When it was put to Peter Chan that he would have known that the verbal requests were insufficient, because on his evidence his wife had never received any financial statements when she had made those requests to John So, he agreed. When Peter Chan was asked whether he had personally asked John So for Doshay’s financial statements, he said he did so on four occasions. When he was further asked about these four occasions, Peter Chan said he might have asked on more than four occasions, but he could not recall. Peter Chan’s evidence was that, up until his wife’s death in 2004, his focus was on her health and that this was why he did not follow up John So to obtain copies of Doshay’s financial records. When it was put to Peter Chan that his wife only became terminally ill in 2000, and that his wife’s illness would therefore not have prevented him from making inquiries with John So regarding Doshay’s financial statements in the period from 1991 to 2000, Peter Chan said that they had no evidence of any wrongdoing on the part of John So and his wife’s health was his priority. I regard Peter Chan’s evidence as lacking cogency. It is inherently implausible that Peter Chan and his wife sought financial statements from John So, were rebuffed and then failed to act. The implausibility of the evidence is compounded by events in 2004. Peter Chan was asked whether information pertaining to Doshay had been sought and obtained in connection with administering his wife’s deceased estate after she passed away in 2004. Peter Chan denied that that had occurred. However, a letter dated 15 May 2004 showed that Hylepin had (by means of a letter signed by Peter Chan himself) requested financial information from Doshay and asked for the information to be provided to QR Accounting Services. On 1 June 2004, Doshay’s accountants, Paul Tjioe & Associates, wrote to QR Accounting Services enclosing income tax returns and financial statements for Doshay for the four financial years FY1999 - FY2002, and stated that the financial statements for FY2003 would be forwarded in the week commencing 14 June 2004. No evidence was called from Hylepin’s accountants (the designated recipients of the financial statements) to suggest that those documents (or other financial statements pertaining to Doshay) had not been provided and I infer that the financial statements were provided. Confronted with the correspondence from 2004, Peter Chan ultimately conceded that his sworn evidence regarding non-receipt of Doshay’s financial statements may have been mistaken.
(c)In an affidavit sworn 14 December 2016, Peter Chan deposed that it was in or around March 2008 that he learned of the formation of Global 2000 and its purchase of the Exhibition Street Property and the Lonsdale Street Property. His sworn evidence included the statement “From that time I became concerned that John So was moving assets away from Doshay into entities under his and Wendy Cheng’s control”. If that evidence were correct, it creates difficulties for Hylepin because Doshay has raised a limitations and laches defence in the proceeding (arising from Hylepin’s failure to raise any concerns with Doshay at that time). In his affidavit sworn on 13 May 2019, Peter Chan’s evidence changed: he deposed that it was on or around 15 May 2013 that he “became aware for the first time that Global 2000 and not Doshay was the registered proprietor of the Exhibition Street Property and the Lonsdale Street Property”. During cross‑examination, Peter Chan repeated that he first learned of the existence of Global 2000 in May 2013. When it was put to Peter Chan that he had in fact become aware of the existence of Global 2000 much earlier, shortly after Doshay’s purchase of the Exhibition Street Property in 2000, he denied this. When asked whether he had become aware in 2008 of the purchase of the Exhibition Street and Lonsdale Street properties by Global 2000 rather than Doshay, Peter Chan said he had not. When asked if he had ever sworn an affidavit to that effect, Peter Chan said he could not recall. When the inconsistency in his affidavits was put to Peter Chan, he said that the statement in his earlier affidavit was due to an error of expression and that only his son (Ben) had learned of the purchase by Global 2000 in 2008 when he ran a title search, and his son did not inform him of that fact. I consider that Peter Chan’s evidence that his 2016 affidavit contained a “mistake of expression” to be implausible and the evidence undermined his credit. It is also implausible that Peter Chan’s son Ben discovered Global 2000’s ownership of the Exhibition Street and Lonsdale Street properties in 2008 (when he was a director of Hylepin) and did not inform Peter Chan.
(d)In his affidavit, Peter Chan deposed that the first time that he became aware that Doshay had acquired shares in Westlake was in 2014. In cross-examination, it was put to Peter Chan that he knew that Doshay had made an investment in Westlake in 1989, to which he first replied “maybe” and subsequently replied “yes”. Peter Chan then gave evidence that John So told him about the investment after it was made in the presence of Hellen Chin and Andy Hui, but he could not recall the month when he was told. Peter Chan was asked whether he asked John So the amount of the investment, and he replied that he did not. When asked why he did not, he said that there was no point because the investment had been made. I do not accept that Peter Chan has an actual recollection of that conversation which occurred 30 years before he gave evidence and that his evidence was an unreliable reconstruction.
(e)Although not directly relevant to the issues in dispute, Peter Chan was also asked during cross-examination whether he recalled the existence of a company named Lyleglow Pty Ltd (Lyleglow). Peter Chan said he did not. He was unable to explain why Hylepin, a company of which he is a director, is listed as a shareholder of Lyleglow in an ASIC extract for the company. When Peter Chan was asked whether he remembered a restaurant in Chinatown called Diamond Dynasty, he said that he did. When it was put to Peter Chan that Lyleglow owned the Diamond Dynasty restaurant, Peter Chan replied that he thought he was a shareholder, not Hylepin. When it was put to Peter Chan that his recollection that he was a shareholder of Lyleglow (as opposed to Hylepin) was likely mistaken, he said that “it appears so on paper”. When it was put to Peter Chan that Lyleglow was a company which operated a restaurant business named Diamond Dynasty and that he had forgotten that fact, Peter Chan said that he had not previously been aware of the existence of Lyleglow. When Peter Chan was shown during cross‑examination an administrator’s report in respect of Lyleglow showing that Hylepin held 161,000 shares in Lyleglow, he said “I think I remember now” and offered the following evidence:
I remember the situation is like this. John So asked me to contribute or to pay $161,000 because he used Doshay to buy the defunct Diamond Dynasty. We were all against it, but he said that it’s just too late; we have to come up with that money or else Doshay will lose all its money. So I think I have to ask my friend for a favour, Mr David Norris, my fellow colleague in the East Keilor Rotarian Club – Rotary Club, to give me a loan of $161,000. In two days he got it for me, and I paid Mr John So, and he said, “No, write it payable to Mr Chun Sek Cheng. Now I remember that incident. At no point we were part of – Hylepin was part of the Diamond Dynasty. Apparently, Mr John So take – on his own joined Hylepin into it. But to me it is a loan to him. But he converted it into shares. Now I remember why.
(f)When challenged about that evidence, Peter Chan agreed that his conclusion that John So had converted the loaned money into shares in the name of Hylepin was a conclusion he drew in the witness box based on having been shown the administrator’s report. When asked whether Peter Chan had ever referred to the existence of the $161,000 which he said he had loaned to John So in written correspondence related to this proceeding, he said he had not. When asked why he had not included a claim for repayment of the $161,000 loan to John So in this proceeding, Peter Chan said he did not want to complicate the proceeding. I do not accept any aspect of Peter Chan’s evidence about Lyleglow and Diamond Dynasty. In my view, Peter Chan’s testimony demonstrated a propensity to speculate and reconstruct events based on limited evidence, particularly the statement that John So had applied monies intended as a loan as a subscription for shares.
Even if I had come to the opposite conclusion in respect of any aspect of Doshay’s investment in Global 2000 in FY2000, I would bar Hylepin’s claim applying the six year statutory limitation period for breach of directors’ duties by analogy. In that regard, I reject Hylepin’s submission that “the facts leave no other conclusion than that Mr So’s arrangements were part of a dishonest and fraudulent design” and that “Mr So’s conduct involved him taking advantage of his position as a director of Doshay to use its funds to advance his own interests and to enrich himself, Ms Cheng and Global 2000 at Doshay’s expense”. For the reasons given, I find that the opportunity to purchase the Exhibition Street Property belonged to John So. There was nothing dishonest or fraudulent in John So extending the opportunity to Doshay through a 50% share in the company Global 2000, and nor was there anything dishonest or fraudulent in the financing arrangements that were struck. The arrangements had aspects that favoured Global Crest and aspects that favoured Doshay. The arrangements did not enrich John So at the expense of Doshay; the arrangements enriched Doshay and John So in a reasonably equitable manner.
As stated earlier in these reasons, I also reject Hylepin’s submission that, where assets are misapplied through a breach of duty, equity will not permit the trustee or fiduciary to plead a limitation defence and that the limitation runs from the time the plaintiff has full information and knowledge of the alleged wrong. The contention is stated too broadly. The class of case to which Hylepin is referring concerns claims by a beneficiary against a trustee for breaches of trust (which, in Victoria, are governed by s 21 of the Limitation Act). The claims in this case are not of that kind. Rather, the claims are for breach of fiduciary duty by a director in respect of which there exists a remedy at law which is subject to a statutory limitation period. Equity applies the time bar by analogy unless reliance by the defendant on the statute would in the circumstances be unconscionable: Gerace at [70] per Meagher AJ (with whom Beazley P & Emmett JA agreed). In my view, it would not be unconscionable for John So to rely on the limitation period. The conduct did not involve fraud and the conduct was not fraudulently concealed by John So. The relevant transactions were duly recorded in the financial statements for Doshay and Global 2000. Doshay’s financial statements for FY2002 and FY2003 which were provided to Hylepin’s accountants in 2004 disclose Doshay’s shareholding in Global 2000 and its loan to Global 2000 in the amount of $647,560.
Lonsdale Street Property
Hylepin contends that John So breached the fiduciary duties owed to Doshay, specifically the conflict rule, in relation to the acquisition of the Lonsdale Street Property during FY2005.
The first aspect of Hylepin’s contention is based on the premise that Global 2000 holds the Exhibition Street Property on constructive trust for Doshay. On that premise, Hylepin submitted that the Lonsdale Street Property was acquired using Doshay’s money, being $54,000 in Global 2000’s bank account which was earned from the rental of the Exhibition Street Property. Hylepin also submitted that the acquisition of the Lonsdale Street Property was financed by the use of the Exhibition Street Property as part of the security.
The premise of the contention must be rejected having regard to the conclusions I have reached with respect to the Exhibition Street Property. Global 2000 does not hold the Exhibition Street Property on constructive trust for Doshay, and therefore there was no breach of duty (or trust) associated with the use of that property (or income derived from it) in the acquisition of the Lonsdale Street Property.
The second aspect of Hylepin’s contention concerns the application of Doshay’s monies toward the purchase of the Lonsdale Street Property. Hylepin submitted that John So caused Doshay to make four payments from its ANZ bank account (account number ending 193) totalling $175,563.81 which were recorded as loans to Global 2000, but that the monies were in fact paid to John So, Wendy Cheng, Okaybye or Global Crest. For the reasons given earlier, I reject that submission. I have concluded that the payments were loans made by Doshay to Global 2000.
The third aspect of Hylepin’s contention concerns the application of Doshay’s monies towards the payment of stamp duty on the acquisition of the Lonsdale Street Property. As set out earlier, the stamp duty liability was met by Doshay advancing a loan of $300,000 to Global 2000.
Hylepin submitted that by causing Doshay to advance the loans of $175,563.81 and $300,000 to Global 2000 in connection with the purchase of the Lonsdale Street Property, John So breached the conflict rule and the profit rule. In my view, for substantially the same reasons as given in relation to Doshay’s investment in other businesses, there was no conflict of interest or breach of the profit rule associated with making those loans. By September 2004, when the contract for the purchase of the Lonsdale Street Property was entered into by Global 2000, John So was no longer a shareholder in Global Crest. His sole financial interest in Global 2000 was through his interest in Doshay (as I have found that he did not have a direct shareholding in Global 2000). John So had a personal relationship with Wendy Cheng but there was no evidence that he had a financial interest in Wendy Cheng’s financial affairs or assets. In my view, the mere fact of that personal relationships does not establish a conflict of interest. Doshay’s interest in Global 2000 was in common with Global Crest. Global 2000’s annual financial statements for FY2005 show that, on completion of the purchase of the Lonsdale Street Property, Doshay’s loan to Global 2000 stood at $911,543.97 while the loans from Global Crest, Okaybye and “Directors” were in aggregate $1,330,218.83. Global 2000’s annual financial statements for FY2006, following the further loan from Doshay of $300,000 for the payment of the stamp duty liability, show Doshay’s loan had increased to $1,278,086.68 while the loans from Global Crest, Okaybye and “Directors” were in aggregate $1,377,849.34. When regard is had to the full factual circumstances, Hylepin has not persuaded me that the presence of Wendy Cheng as an indirect shareholder in Global 2000 (through Global Crest) was a factor that caused John So to have Doshay advance loan monies to Global 2000. In the present case, I am satisfied that John So would have made the same decision, causing Doshay to advance the loan monies, regardless of the identity of the other investors in Global 2000.
Even if I had come to the opposite conclusion in respect of any aspect of Doshay’s investment in Global 2000 in FY2005, I would bar Hylepin’s claim applying the six year statutory limitation period for breach of directors’ duties by analogy for substantially the same reasons as given in relation to the Exhibition Street Property. In my view, it would not be unconscionable for John So to rely on the limitation period. The conduct did not involve fraud and the conduct was not fraudulently concealed by John So. The relevant transactions were duly recorded in the financial statements for Doshay and Global 2000. I have rejected Hylepin’s claim that Doshay withheld the financial statements from it.
E.4 Doshay’s investment in Evaluator and Café Puccini
Initial investment
Hylepin submitted that Doshay’s initial acquisition of shares in Evaluator, and “lopsided” contribution of funds to Evaluator, during FY2001 was a clear breach by John So of the conflict rule given his part ownership of Global Crest and his partner Wendy Cheng’s interests in Global Crest.
I reject that characterisation of the transactions. It ignores the commercial context in which Doshay’s initial investment in Evaluator occurred. To recap, John So became aware that the cafe named "Cafe Puccini" that was operating in the premises next to the Dragon Boat Restaurant was being marketed for sale and that other operators of Chinese restaurants were interested in acquiring the business in order to open a restaurant in the style of the Dragon Boat Restaurant. John So was concerned about the potential competition and decided that Doshay should acquire the Cafe Puccini business primarily to protect the Dragon Boat Restaurant from potential competitors.
To implement that plan, Doshay and Global Crest established Evaluator in November 2000. The idea was to take over the "Cafe Puccini" business through a joint venture-style arrangement between Global Crest and Doshay because Global Crest was experienced in operating a Western-style food and beverage business (the Melbourne Bar & Bistro). Global Crest was allotted 51 shares and Doshay was allotted 49 shares in Evaluator. Wendy Cheng was appointed the director of Evaluator. Interest free loan capital was also advanced to Evaluator to fund the acquisition of the Café Puccini business (the purchase price being approximately $250,000). Doshay advanced a loan of $134,951 to Evaluator while Global Crest and Wendy Cheng advanced an aggregate loan of $128,417.
At the time that Evaluator was established and capitalised during FY2001, John So held one share in Global Crest. It is likely that, at that time, Global Crest’s issued share capital comprised four shares (the annual return for FY2000 for Global Crest filed with ASIC on 10 January 2001 showed that, by that time, there were four issued shares, with one share held by each of Wendy Cheng, her brothers Chok Wing Cheng and Chok Man Cheng, and John So).
For similar reasons to those stated in connection with the restaurant businesses discussed earlier, I am not persuaded that Doshay’s initial acquisition of shares in Evaluator and the advancing of interest free loan capital to enable the purchase of the Café Puccini business was a breach by John So of the conflict rule by reason of his personal relationship with Wendy Cheng and shareholding interest in Global Crest. Hylepin did not contend that John So was in breach of his duties by failing to acquire the whole of the Café Puccini business opportunity rather than 49%. Nor did it contend that John So was in breach of his duties by causing Doshay to enter into the joint venture arrangement with Global Crest, as opposed to another joint venture partner. Rather, Hylepin’s contention is that John So was in breach of his duties by causing Doshay to invest in the Café Puccini business at all. However, the evidence shows that the investment decision was made by John So to advance the commercial interests of Doshay. In my view, there was nothing uncommercial or improper about the business decision or the joint venture arrangements. There was an understandable business objective to protect the Dragon Boat Restaurant from competition on its door step, and to do so using the business experience of Global Crest to continue to run the Café Puccini business. Overall, I consider that John So would have made the same decision regardless of whether he entered into a joint venture with Global Crest or with another entity (or no joint venture partner) and that the decision did not involve a breach of his duties.
Even if the position were otherwise, I would bar Hylepin’s claim applying the six year statutory limitation period for breach of directors’ duties by analogy. In my view, reliance by John So on the statute would not be unconscionable. I consider that the investment decision did not involve fraud, in the sense that there was a consciousness on the part of John So that what was being done was wrong or involved wrongdoing, and the loans were not fraudulently concealed by John So. To the contrary, the loans were duly recorded in the financial statements of Doshay and Evaluator. I accept John So’s evidence that Doshay’s financial statements were available to its members, including Hylepin. Doshay’s financial statements for FY2002 and FY2003, provided to Hylepin’s accountants by Paul Tjioe & Associates, recorded the shareholding in, and loans made to, Evaluator.
Subsequent buy out of Global Crest
Hylepin submitted that John So’s decision to cause Doshay to buy out Global Crest’s interests in Evaluator in December 2003 was a breach of the conflict rule. For the reasons that follow, I accept that submission. However, I reject Hylepin’s further submission that John So’s conduct was dishonest.
In December 2003, Doshay bought out the whole of Global Crest’s share capital and loan capital in Evaluator, and a portion of Wendy Cheng’s loan capital in Evaluator. The relevant ledger entries and financial statements show that both forms of capital were effectively bought at “par value” (i.e. dollar for dollar). Thus, Doshay paid $51 to purchase Global Crest’s 51 shares and advanced a loan to Evaluator of $119,945 to enable the repayment of Global Crest’s loan to Evaluator (after adjustment in the ledger entries) and a further loan to Evaluator of $39,201.53 to enable the repayment of part of the “Directors” loan to Evaluator. The ledger entries also showed that, during FY2004, Doshay loaned a further amount of $38,250.52 to Evaluator, taking its total loans to $426,687.05, and the “Directors” loan (from Wendy Cheng) also increased by $35,000 to $76,015.47.
Hylepin submitted that the conflict of interest was serious and the transaction was dishonest because, as at December 2003, Evaluator was a loss making entity and its share and loan capital was worthless. Again, the submission ignores the commercial context in which the transaction occurred and the options available to Doshay. It is correct that Evaluator had made losses in its first three financial years. Evaluator’s financial statements for FY2001 recorded a net loss of $23,177.11; in FY2002 the net loss was $49,137.14; and in FY2003 the net loss was $67,224.64. However, those losses do not establish that Evaluator was worthless to Doshay. As set out earlier, I accept John So’s evidence as to the commercial rationale for Doshay to buy out Global Crest’s interests in Evaluator. Evaluator held the lease over the Café Puccini premises which had strategic value to Doshay, protecting the Dragon Boat Restaurant from competition and providing additional space that was available for use by Doshay. John So said that the acquisition enabled the Dragon Boat Restaurant to extend its kitchen operations to the Café Puccini premises. The acquisition enabled the Dragon Boat Restaurant to make use of the premises occupied by Café Puccini without regard to Global Crest’s interests.
Hylepin did not contend that Doshay could have achieved those commercial objectives without buying out Global Crest’s interests. The loan capital advanced by Global Crest (and Wendy Cheng) was repayable at call or on reasonable notice. I infer that there was no realistic option for Doshay to acquire Global Crest’s shareholding in Evaluator without also buying out its loan capital. If Global Crest had called for repayment of its loans, the only choices for Doshay would have been to allow Evaluator to become insolvent (thereby losing the strategic benefit of the lease over the Café Puccini premises) or to provide funds to Evaluator to enable the loans to be repaid.
For the foregoing reasons, I consider that Doshay’s decision to buy out Global Crest’s interests in Evaluator were not uncommercial or improper. However, in making that decision, I consider that John So was in breach of the conflict rule and the profit rule by reason of his 25% shareholding interest in Global Crest (which he held until 20 May 2004). The effect of the buy out was to advance Doshay’s monies as a loan to Evaluator in order to repay Global Crest’s loans. While, for the reasons already given, I consider that the transaction was in Doshay’s interests, there was an obvious financial benefit for Global Crest in having its loans repaid at that time (given that Evaluator was loss-making). In contrast to other transactions undertaken by Doshay, I am not persuaded that John So would have made the same decision if he held no interest in Global Crest.
Despite that conclusion, I would bar Hylepin’s claim applying the six year statutory limitation period for breach of directors’ duties by analogy. Reliance by John So on the statute would not be unconscionable. Contrary to Hylepin’s submissions, I consider that the buy out decision did not involve fraud or dishonesty, in the sense that there was a consciousness on the part of John So that what was being done was wrong or involved wrongdoing, and the transactions were not fraudulently concealed by John So. The loans were duly recorded in the financial statements of Doshay and Evaluator in FY2004. As referred to earlier, I accept John So’s evidence that Doshay’s financial statements were available to its members, including Hylepin.
After the buy out transactions, Evaluator was a wholly owned subsidiary of Doshay. Understandably in those circumstances, Hylepin did not allege that further loans advanced by Doshay to Evaluator in subsequent years involved a breach by John So of his fiduciary duties. Subsequently, Evaluator acquired other investment assets being the property situated at 456‑458 La Trobe Street, West Melbourne and a 20% interest in the Blue Sky Unit Trust which owns the property at 122 Russell Street, Melbourne.
E.5 Altering the share register of Global 2000
Hylepin submitted that the evidence shows that John So transferred his share in Global 2000 to Doshay on 15 June 2000, and that the subsequent instructions given by John So to Paul Tjioe & Associates in 2004 to alter the share register and effectively cancel that transfer were of no legal effect.
I accept that submission, for the reasons explained earlier. The instructions given by John So to Paul Tjioe & Associates in 2004 were based on the erroneous premise that the documents recording the original share transfer were executed on the basis of a mistake made by John So and that, as a consequence, the share transfer was void or voidable. I do not accept that the original share transfer was vitiated by mistake.
The relief sought by Hylepin on behalf of Doshay is:
(a)a declaration that, at all times since 15 June 2000, Doshay has been the owner of five ordinary shares in Global 2000; and
(b)an injunction requiring that John So and/or Global 2000 do all things necessary to ensure that the register of members of Global 2000, and ASIC’s records in relation to Global 2000, record that, at all times since 15 June 2000, Doshay has been the owner of five ordinary shares in Global 2000.
It is appropriate to grant declaratory relief in favour of Doshay. I will also order, pursuant to s 175 of the Corporations Act, that Global 2000 do all things necessary to correct its register of members, and lodge a notice of correction with ASIC, to record that, at all times since 15 June 2000, Doshay has been the owner of five ordinary shares.
E.6 Doshay’s decision not to renew the lease over the Dragon Boat Restaurant premises
Hylepin submitted that the conduct of John So in resolving, in May 2019, that Doshay should not exercise the option to renew the lease over the Dragon Boat Restaurant premises was in breach of his fiduciary duty to Doshay and in breach of his duties as a director of Doshay under s 180(1) of the Corporations Act.
Hylepin submitted, and I accept, that in order for an interest of the fiduciary to be a “personal interest” for the purposes of the conflict rule, the interest does not have to be a pecuniary one: Bell v Westpac at [4509].
Section 180(1) of the Corporations Act provides that:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
The duty in s 180(1) is subject to the business judgment rule set out in s 180(2) as follows:
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of sub-section (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a)make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Section 180(3) defines “business judgment” to mean “any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation.”
In determining whether a director has exercised reasonable care and diligence, the inquiry focuses on what an ordinary person, with the knowledge and experience of the defendant, might be expected to have done on their own behalf: ASIC v Adler at [372] per Santow J. The question whether a director has exercised a reasonable degree of care and diligence is answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question: Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 at [395] per Edelman J.
Hylepin submitted that John So’s evidence in relation to the reasons why he decided not to exercise the lease option was contradictory, untruthful and disclosed that, in making his decision, he took into account his own personal circumstances and other irrelevant factors and yet failed to have regard to obvious and critically important matters that should have informed his decision.
In relation to John So’s personal circumstances, Hylepin relied upon the following statements in John So’s first affidavit (sworn 12 July 2019):
Doshay's lease of the premises from which the Dragon Boat Restaurant is operated will expire in August 2019. Whilst there is an option for a second term, it has a 10-year term and comes with a demolition clause and a relocation clause. Given my age (72), I have no intention of taking on any further risk associated with extending the lease.
and the following statements in John So’s second affidavit (sworn 28 August 2019):
I had reservations about Doshay renewing the lease of the Premises for a further ten year term. I was particular1y concerned about the length of the renewed term.
However, I am now in my 70s, am hopeful of being able to retire from my role soon and cannot commit to being involved in the operations of the Dragon Boat Restaurant for a further ten years.
Hylepin submitted that, during cross-examination, John So falsely denied that he had had regard to his age when making his decision not to exercise the lease option and that the primary reason behind his decision was that he just did not want to work in the Dragon Boat Restaurant anymore. Hylepin argued that, in this way, John So preferred his own interests ahead of those of Doshay and its shareholders and thereby breached his fiduciary obligation to Doshay to avoid, and not act in, a conflict of interest.
Hylepin’s submissions misstate the purport of John So’s evidence. In his first affidavit sworn 12 July 2019, John So made only brief mention of the lease as it was not, at that time, part of Hylepin’s claims. In his second affidavit sworn 28 August 2019, John So gave a fuller account of the reasons for deciding not to exercise the lease option. In addition to the statements relied on by Hylepin reproduced above, John So also explained that trading conditions for the Dragon Boat Restaurant were becoming increasingly difficult by reason of changing tastes in Chinese food; the restaurant was experiencing difficulty with retaining good staff; John So considered that a renewed lease on the same terms as the existing lease did not provide security to Doshay; and John So believed that “there was a good chance that, if the option was not exercised by Doshay, the landlord would enter negotiations with Doshay for an alternative leasing arrangement that would better serve Doshay's interests than renewing the lease for ten years on the terms provided in the lease”. In cross-examination, John So did not deny that he had had regard to his age when making his decision not to exercise the lease option. He denied that it was an important consideration in making his decision. I accept that evidence. Although, as noted earlier, John So’s explanation of the reasons that he did not renew the lease were not expressed clearly or coherently during cross-examination, the reasons were substantially as expressed in his second affidavit.
I therefore reject Hylepin’s submission that John So had a conflict of interest when he decided not to exercise the lease option by reason of his personal circumstances, particularly his age and intention to retire in the near future. That is for two reasons. First, I accept John So’s evidence that his personal circumstances were not the primary consideration in his decision. Secondly, even as a secondary consideration, I do not consider that John So’s personal circumstances created an interest that was conflicting with the interests of Doshay. To the contrary, John So’s personal circumstances was an additional business circumstance or risk that had to be managed as part of or together with the decision concerning the lease. As John So sought to express in cross-examination, restaurant businesses involve risk and often lose money. Decisions concerning the length of a lease were connected with decisions concerning the future management of the Dragon Boat Restaurant.
I also reject Hylepin’s submission that John So failed to exercise due care and diligence when making the decision. Hylepin’s submission is based on the premise that it was commercially obvious that Doshay should exercise the option. However, the premise is not made out on the facts and is largely based on assertion. Hylepin adduced no evidence to contradict John So’s evidence that tastes for Chinese food had been changing and trading conditions for the Dragon Boat Restaurant had become more difficult; it adduced no evidence as to the difficulties for the Dragon Boat Restaurant in retaining staff; it adduced no evidence to contradict John So’s belief that he could negotiate better terms from the landlord than the existing lease. Hylepin also asserted that, in the circumstances facing the Dragon Boat Restaurant in 2019, renewing a lease for 10 years involved less commercial risk than moving to a monthly tenancy and seeking to negotiate a better and possibly shorter lease. John So disagreed. I accept his evidence. All businesses face risk. Restaurant businesses are small businesses subject to changing tastes in local markets. It is a matter business judgment whether, at a given point in the business cycle of a restaurant, it is more risky or less risky to enter into a 10 year lease. I also accept the defendants’ submission that Hylepin provided no coherent explanation as to why John So and Hellen Chin, who between them have an interest in approximately 75% of the shares in Doshay (ignoring the shares held by Evaluator), would have acted otherwise than bona fide in the interests of Doshay.
In my view, Hylepin has not established that, in deciding not to renew the lease for the Dragon Boat Restaurant, that John So acted in breach of his fiduciary duty to Doshay or in breach of his duties as a director of Doshay under s 180(1) of the Corporations Act.
F. ALLEGED OPPRESSION
Hylepin also alleges that the conduct of the affairs of Doshay has been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Hylepin. The conduct the subject of the oppression claim is the same as the conduct the subject of the fiduciary duties claim, but also includes the alleged failure to pay dividends.
It follows from my conclusions with respect to the fiduciary duties claims that I do not consider that the impugned transactions were oppressive. As stated earlier, the statutory phrase “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” in 232(e) of the Corporations Act is concerned with conduct that involves commercial unfairness or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair. Mismanagement or poor management alone does not constitute oppression. As explained above, in my judgment the impugned transactions were not uncommercial or improper. They were undertaken with the aim of increasing the value of Doshay, recognising the risks associated with all business ventures. Some of the transactions turned out to be profitable. Some turned out not to be profitable. They did not involve statutory oppression. Although I have found that Doshay’s decision to buy out Global Crest’s interest in Evaluator to be a breach of fiduciary duty, I do not consider that that one transaction constitutes statutory oppression.
In that respect, I reiterate that I do not accept Hylepin’s contention that it was kept in the dark about Doshay’s business affairs. This is not a case in which an investor, believing that it had invested in a particular type of investment (a Chinese restaurant) had its investment funds redeployed to other business ventures without its knowledge. I have found that Peter Chan received and approved Doshay’s financial statements for FY1988, FY1989 and FY1990 in his capacity as director of Doshay, which disclosed a number of the investments undertaken by Doshay which are the subject of allegations in this proceeding. I have also found that, in the period to about 2008, John So consulted with the other directors and shareholders, including Celia Chan on behalf of Hylepin, in an ad hoc manner as circumstances and convenience allowed. In mid 2004, Hylepin’s accountants received Doshay’s income tax returns and financial statements for FY1999 to FY2003 which disclosed Doshay’s investments in, and loans to, the various entities that are the subject of challenge in these proceedings.
I reject Hylepin’s further claim that Doshay’s failure to pay a dividend after FY1988 until November 2018 was oppressive. The evidence shows that, following the payment of the FY1988 dividend, John So spoke with Doshay's shareholders and proposed that the profits generated by Doshay should be retained as this would assist Doshay in meeting its working capital requirements and enable Doshay to make other investments. That is what occurred. There is no evidence of any complaint by any shareholder, including Hylepin. There is nothing unfair about that investment strategy. By letter dated 11 July 2014, QR Accounting Services on behalf of Hylepin asked about Doshay’s dividend policy, but no complaint was made. It was only in 2016, in connection with these proceedings, that a complaint was made by Hylepin for the first time. On 9 November 2018, Doshay declared a dividend totalling $2,000,000 and forwarded a cheque to Hylepin in the amount of $300,000. Perhaps Doshay might have declared a dividend more promptly after Hylepin complained in 2016. There is no evidence, though, to suggest that Doshay refused to declare a dividend to prejudice Hylepin.
Finally, I note that the relief sought by Hylepin on account of the alleged oppression is that Doshay buy back Hylepin’s shares at fair value or that John So acquire Hylepin’s shares at fair value. The evidence shows that the defendants have made two offers to buy Hylepin’s shares at fair value as a means of resolving this proceeding. The first offer was made on 7 September 2018 and the second offer was made on 4 September 2019. Both offers were refused. Those offers further negate any suggestion of oppression.
G. CONCLUSION
In conclusion, I uphold Hylepin’s claim that Doshay holds five ordinary shares in Global 2000. I will make a declaration to that effect. I will also order, pursuant to s 175 of the Corporations Act, that Global 2000 do all things necessary to correct its register of members, and lodge a notice of correction with ASIC, to record that, at all times since 15 June 2000, Doshay has been the owner of five ordinary shares.
I otherwise dismiss Hylepin’s originating application.
As to costs, I will allow the parties 28 days in which to file and serve written submissions in respect of the costs of the proceeding of no more than five pages in length. Unless the parties seek an oral hearing on the question of costs and I consider that an oral hearing is necessary, I will determine the question of costs on the papers.
I certify that the preceding three hundred and sixty-six (366) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan. Associate:
Dated: 25 September 2020
SCHEDULE OF PARTIES
VID 1438 of 2016 Defendants
Fourth Defendant:
WENDY CHENG
- AGLC
- Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370
- Case
- [2020] FCA 1370
- Decision Date
CaseChat Overview and Summary
The court determined that Doshay's investments were interest-free loans, properly recorded and not dishonest. It held that Doshay's decision not to renew the lease over the Dragon Boat Restaurant premises was not a breach of fiduciary duties or statutory duties as a director, as it was made in good faith and for the company's best interests. The court found that the claims were not barred by limitation periods or the doctrine of laches, as the transactions were adequately documented and traceable through financial records. Consequently, the court granted declaratory relief in favour of Doshay and ordered Global 2000 to correct its register of members to reflect Doshay's ownership of shares. The court dismissed Hylepin's originating application otherwise and directed the parties to submit written submissions on the costs of the proceeding.
Orders
Orders of the court
2. The third defendant do all things necessary to correct its register of members, and lodge a notice of correction with the Australian Securities and Investments Commission, to record that, at all times since 15 June 2000, the first defendant has been the owner of five ordinary shares.
3. The plaintiff’s originating application be otherwise dismissed.
4. Within 28 days of these orders, the parties file and serve written submissions in respect of the costs of the proceeding of no more than five pages in length.
5. Subject to further order, the issue of costs will be determined by the Court on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
A. INTRODUCTION
[1]
B. OVERVIEW OF THE APPLICABLE LEGAL PRINCIPLES
[21]
B.1 Oppression
[22]
B.2 Fiduciary duties
[31]
B.3 Defence based on informed consent
[44]
B.4 Defences based on the application of statutory limitation periods directly or by analogy and laches
[46]
B.5 Loan transactions
[55]
C. OVERVIEW OF THE EVIDENCE
[62]
C.1 Witnesses for Hylepin
[67]
C.2 Witnesses for the defendants
[87]
D. FACTUAL FINDINGS
[107]
D.1 Incorporation of Doshay
[107]
D.2 Incorporation of Hylepin
[117]
D.3 Shareholdings in Doshay
[118]
D.4 Westlake Restaurant
[129]
D.5 Lyleable and Dragon Boat Knox
[135]
D.6 Jadetrex and Dragon Boat Palace
[148]
D.7 Dragon Wall and Dragon Wall Take Away
[159]
D.8 The acquisition of the Exhibition Street Property
[167]
D.9 Evaluator and Café Puccini
[183]
D.10 The acquisition of the Lonsdale Street Property
[201]
D.11 Doshay’s shareholding in Global 2000
[219]
D.12 Dividends
[235]
D.13 Hylepin’s requests for information
[241]
D.14 Offers to acquire Hylepin’s shares
[252]
D.15 Non-renewal of the lease for the Dragon Boat Restaurant
[255]
D.16 Declarations of interest
[272]
E. ALLEGED BREACHES OF FIDUCIARY DUTIES
[273]
E.1 Overview
[273]
E.2 Doshay’s investments in other Chinese restaurants
[281]
E.3 Acquisition of the Exhibition Street and Lonsdale Street Properties
[310]
E.4 Doshay’s investment in Evaluator and Café Puccini
[329]
E.5 Altering the share register of Global 2000
[342]
E.6 Doshay’s decision not to renew the lease over the Dragon Boat Restaurant premises
[346]
F. ALLEGED OPPRESSION
[359]
G. CONCLUSION
[364]
Background
Background to the litigation
Full text does not contain this section.
Evidence
Evidence Before The Court
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
The proceeding was commenced by Hylepin on 15 December 2016. At that time, the proceeding was brought under ss 232 and 233 of the Corporations Act 2001 (Cth) (Corporations Act), alleging that the conduct of the affairs of Doshay (as summarised above) has been either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Hylepin. Hylepin seeks relief under s 233 of the Corporations Act, including that Doshay declares and pays a dividend, John So or Doshay buy Hylepin’s shares at fair value (that is, at a price that removes the effect of the oppression), or alternatively that Doshay be wound up. On 23 October 2018, the Court gave Hylepin leave pursuant to ss 236(1) and 237(1) of the Corporations Act to intervene in the proceeding in the name of Doshay to bring and prosecute derivative claims against John So for breach of fiduciary duty in respect of the transactions summarised above (other than the non-payment of dividends), and against Global 2000 and Wendy Cheng for their knowing involvement in the breaches and receipt of trust property. In that respect:(a)The claims against John So relate to each of the impugned transactions. The relief sought against John So includes the payment of equitable compensation, a declaration that the one share in Global 2000 registered in the name of John So is owned by Doshay and orders to correct the register of Global 2000.(b)The claims against Global 2000 principally relate to the acquisition of the Exhibition Street Property and the Lonsdale Street Property. The relief sought includes declarations of trust over the Exhibition Street and Lonsdale Street Properties in favour of Doshay and that the properties be transferred to Doshay or orders that Global 2000 account to Doshay for benefits derived. (c)The claims against Wendy Cheng relate to the Evaluator transactions and the relief sought is the payment of equitable compensation to Doshay. Given the length of time between the transactions the subject of complaint and the commencement of the proceeding, almost 30 years for the earliest transactions, the possible application of limitation periods looms large. All of the transactions, other than the non-renewal of the lease of the premises of the Dragon Boat Restaurant, occurred prior to 15 December 2010 being the date six years prior to the commencement of the proceeding. Limitation law is not some “unmeritorious procedural technicality”. Rather, as McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 (at 553), a limitation period represents the legislature’s judgment that “the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated”. His Honour explained (at 551) that the enactment of time limitations has been driven by the general perception that "[w]here there is delay the whole quality of justice deteriorates", citing R v Lawrence [1982] AC 510 at 517, per Lord Hailsham of St Marylebone LC, and that the “longer the delay in commencing proceedings, the more likely it is that the case will be decided on less evidence than was available to the parties at the time that the cause of action arose”. His Honour further observed (at 552, citations omitted):The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one. Courts and commentators have perceived four broad rationales for the enactment of limitation periods. First, as time goes by, relevant evidence is likely to be lost. Second, it is oppressive, even "cruel", to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period.…The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible.