In the matter of Anna Bay Resort Pty Ltd

Case •

[2022] NSWSC 331

•

30 March 2022

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of Anna Bay Resort Pty Ltd [2022] NSWSC 331
Hearing dates: 1–3 February 2022; last submissions 22 February 2022
Date of orders: 30 March 2022
Decision date: 30 March 2022
Jurisdiction:Equity - Corporations List
Before: Rees J
Decision:

1.   Set aside the issue of shares in Anna Bay Resort Pty Ltd (the Company) on 15 August 2020 and the allotment of those shares to the second defendant.

2.   Appoint a liquidator of the Company.

3.   Authorise the first plaintiff to prosecute proceedings on behalf of the Company against the first defendant.

4.   Order the first defendant to compensate the Company by payment of $67,030 with interest.

5.   By consent, judgment against the Company in favour of the second plaintiff in the sum of $300,000 with interest.

6.   Judgment against the first defendant in favour of the second plaintiff in the sum of $100,000.

7.   Order the first and second defendants to pay the plaintiffs’ costs and the Company’s costs of the proceedings.

Catchwords:

CORPORATIONS — oppression — special purpose company to acquire development site — agreement to contribute equally to acquisition of property – equal shareholders – plaintiff lends his half of purchase price to the company – defendant raises his half by loan secured over the property, which he guarantees — plaintiff ceases to be director and shareholder to ensure not liable for loan guaranteed by defendant — plaintiff controls bank accounts — defendant fails to service loan – plaintiff provides further working capital — plaintiff requests resumption of shareholding and directorship – defendant opens secret bank account — scramble for control — odd payments from secret bank account to defendant’s company – breakdown of relationship – defendant holds invalid meeting of members where resolved to issue shares – defendant subscribes for shares and uses capital to repay his loan to the company – property sold.

OPPRESSION — s 233(1)(g) Corporations Act, at [165]-[168] — principles at [169]-[173] — relief from oppression at [187]-[189] — plaintiff authorised to bring proceedings in name of the company — set aside share issue – defendant to compensate company for odd payments.

CORPORATIONS — winding up on just and equitable grounds — s 461(1)(k) Corporations Act — principles at [204]-[207] – oppression — irretrievable breakdown of relationship — sole director unsuited to deal with substantial proceeds of sale — liquidator appointed.

EQUITY — specific performance — defendant undertakes to repay plaintiff’s loan from deposit —specific performance refused as plaintiff entitled to interest and will be repaid shortly.

EVIDENCE — principal witnesses unreliable and little documentary evidence — onus and inferences.

Legislation Cited:

Corporations Act 2001 (Cth) ss 232, 233(1)(g), 236, 237, 461(1)(k), 467, 1317H, 1325

Evidence Act 1995 (NSW) s 140(2)

Cases Cited:

A v New South Wales (2007) 230 CLR 500; [2007] HCA 10

Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2008] VSCA 86; (2008) 66 ACSR 325

Ashburton Oil NL v Alpha Minerals NL (1971) 45 ALJR 162; (1971) 123 CLR 614

Asia Pacific Joint Mining Pty Limited v Allways Resources Holdings Pty Limited (2018) [2018] 3 Qd R 520; [2018] QCA 048

Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151

Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17

BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227

Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969

Boyd v Feeney [2017] NSWSC 1595

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34

Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25

Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184

Ferguson v Wilson (1866) LR 2 Ch App 77

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672

Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453

Great Investments Ltd v Warner (2016) 243 FCR 516; [2016] FCAFC 85

Hindle v John Cotton Ltd (1919) 56 Sc LR 625

HNA Irish Nominees Ltd v Kinghorn (No 2) (2012) 290 ALR 372; [2012] FCA 228

Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68; [1974] AC 821

Hungerfords v Walker (1989) 171 CLR 125; (1989) 84 ALR 119

In the matter of Amazon Pest Control Pty Limited [2012] NSWSC 1568

In the matter of Austral Alloys Pty Limited [2017] NSWSC 1833

In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775

In the matter of Crow Inn Pty Limited [2020] NSWSC 601

In the matter of Crow Inn Pty Ltd (No 2) [2020] NSWSC 1746

Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8

Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34

Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153; (2007) 71 ACSR 395

Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692; (1987) 5 ACLC 222

Mudgee Dolomite & Lime Pty Limited v Murdoch [2020] NSWSC 1510

Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343

Neville v Lam (No 3) [2014] NSWSC 607

Ngurli Ltd v McCann (1953) 90 CLR 425; (1953) 27 ALJR 349

Page v Newman (1829) 9 B & C 378 at 381; 109 ER 140

Power v Ekstein [2009] NSWSC 130

President of India v La Pintada Compania Navigacion SA [1985] AC 104

Re a company (No 00709 of 1992); O’Neill v Phillips [1999] 2 All ER 961; [1999] UKHL 24

Re Docklands Chiropractic Clinic Pty Limited [2020] VSC 364

Re London School of Electronics Ltd [1986] Ch 211 at 222; [1985] BCLC 273

Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948

Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39

Ronchi v Portland Smelter Services Ltd [2005] VSCA 83

Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29

Shelton v National Roads and Motorists Association Ltd (NRMA Ltd) [2004] FCA 1393; (2004) 51 ACSR 278

Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98

Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 84 ACSR 121

Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459; [1985] HCA 68

Texts Cited:

John Henry Wigmore, Wigmore on Evidence (3rd ed., 1940)

Category:Principal judgment
Parties: Timesgarden Pty Ltd (First Plaintiff)
Wilson Hu (Second Plaintiff)
Frank Shi (First Defendant)
Wisemans Group Pty Ltd (Second Defendant)
Anna Bay Resort Pty Ltd (Third Defendant)
Representation:

Counsel:
Mr G Campbell (Plaintiffs)
Mr RD Marshall SC / Mr M Rose (Defendants)

Solicitors:
WB Legal (Plaintiffs)
Keypoint Law (Defendants)
File Number(s): 2020/321040

Judgment

  1. HER HONOUR: This is an oppression suit under sections 232 and 233 of the Corporations Act 2001 (Cth). Wilson Hu and his company, Timesgarden Pty Ltd, sue Frank Shi and his company, Wisemans Group Pty Ltd, in respect of the operation of the third defendant, Anna Bay Resort Pty Ltd (the Company). Mr Hu was, and Mr Shi is, a director of the Company. Their respective companies are shareholders in the Company.

  2. Through the Company, Mr Hu and Mr Shi embarked upon a property development in Anna Bay, which is some 200km north of Sydney near Port Stephens. Since these proceedings were commenced, the development site has been sold at a goodly profit such that Mr Hu can confidently expect that his loans to the Company will soon be repaid. This had the consequence that some of the relief sought became less contentious or was no longer pressed. In particular, Mr Hu did not press his claim for damages for breach of an alleged joint venture agreement and shareholders’ agreement, to which much of the pleadings and evidence had been directed.

  3. Resolving the plaintiffs’ remaining claims, however, was no easy matter as both Mr Hu and Mr Shi proved to be unreliable witnesses. Further, Mr Hu and Mr Shi chose to conduct themselves without the contracts and formalities ordinarily attending a business enterprise of this nature. There were few documents contemporaneous to key events: large chasms in documentations existed on both sides. The informality of the arrangements between the parties has resulted in what could fairly be described as a mess. Matters were not helped by the pleading and presentation of the plaintiffs’ case. I have endeavoured nonetheless to try and work out what happened and what, if anything, should be done about it. I have not, however, burdened this already lengthy judgment with a recitation of the parties’ submissions.

WITNESSES

  1. The plaintiffs relied on the evidence of Mr Hu together with his partner and bookkeeper Wen (Wendy) Yun, former banker Kai Leong and solicitor Chunyu (Grace) Gong. All except Ms Gong were cross-examined. The defendants relied on the evidence of Mr Shi, who was cross-examined at length. All witnesses other than Mr Leong gave evidence through a Chinese translator, although both Mr Hu and Mr Shi speak and read English to some extent.

  2. Ms Yun appeared straightforward. Her evidence that her signature on a Transfer was not her own was not challenged. I accept her evidence.

  3. Mr Leong gave evidence in a precise and straightforward manner. Unsurprisingly, he did not recall some details of a lending transaction, having since left the bank and being without access to the bank’s records to refresh his memory. Mr Leong made reasonable concessions and was firm in his recollection of his initial meetings with Mr Shi. Mr Leong's evidence was also inherently likely and I accept it.

  4. Mr Hu appeared straightforward, intelligent and sophisticated. Of he and Mr Shi, Mr Hu appeared to be the more well-resourced and substantial business person. He was a careful witness who gave brief and accurate answers. He explained discrepancies between his affidavits well: his initial affidavits were prepared from memory “for another proceeding during which process, the preparation was not made sufficiently and thoroughly”. (Mr Hu’s first affidavit was sworn in support of an application for access to the Company’s books pursuant to sections 198F, 290 and 247A of the Corporations Act. His second affidavit was sworn in support of an application for urgent interlocutory relief.) His last affidavit was prepared having refreshed his memory with contemporaneous documents and having thought further about what had happened. As will become apparent, it is unlikely that Mr Hu had access to many contemporaneous documents at the time of his initial affidavits; presumably his evidence reflected his recollection alone (he was generally a poor historian) and was directed to the specific relief then sought.

  5. Mr Hu made reasonable concessions. On occasion, Mr Hu appeared non-responsive, although this appeared to be referable to language difficulties. Some of Mr Hu’s evidence seemed inherently likely, whilst other aspects of his evidence were less so, in particular, that he became a shareholder in Mr Shi’s company, NSW Construction Holdings Pty Ltd, without his knowledge: see [33], [82]. Business experience would suggest that, whilst a person may be unaware when an asset is taken away from them, they are rarely unaware when an asset is given to them.

  6. To his credit, Mr Hu readily accepted that he had arranged for false tax returns to be prepared in support of a loan application, whilst Mr Shi – whose detailed personal information from his actual tax return was included in the application – denied all knowledge of the matter, which seemed inherently unlikely. I have generally preferred Mr Hu’s evidence to that of Mr Shi in the event of a conflict between them. That said, there were enough discrepancies between what Mr Hu said happened and what seems likely to have happened that I have also approached Mr Hu’s evidence, where uncorroborated, with caution. I have deferred to the contemporaneous documents where available.

  7. Mr Shi began well enough and seemed a pleasant fellow. His denial that he met Mr Leong before signing loan documents was unlikely, as was his denial that he gave his personal information to Mr Hu’s accountant for the purpose of preparing false tax returns to support the loan application: “I don’t know where he got this information, or perhaps this information are publicly available”. Obviously, such information is not publicly available. Where else would the accountant have obtained Mr Shi’s tax file number, bank account numbers and health insurance membership details? Mr Shi blamed Mr Hu wherever possible, including making unsolicited remarks. Overall, it appeared to me that Mr Shi sought to align his version of events with available contemporaneous documents but, as he did not appear to appreciate the significance of the documents – whether by dint of language difficulties or a lack of commercial sophistication – Mr Shi also did not appreciate that the documents, when carefully read, did not corroborate, but undermined, his version of events: see, for example, at [57]. I have approached his evidence with caution.

ONUS AND INFERENCES

  1. The gaping holes in the documents provided by both sides and the unreliability of the principal witnesses gives rise to considerations of onus and inferences. The burden of proof rests on the plaintiffs. The standard of proof is the civil standard, being proof on the balance of probabilities but qualified having regard to the gravity of the questions to be determined: section 140(2), Evidence Act 1995 (NSW); Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; [1938] HCA 34. As Dixon J observed in Briginshaw at 361, “The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found.”

  2. A lacuna of documentary evidence, where a party might be expected to be in possession of documents to corroborate their account, may give rise to an inference that such documents as they may be expected to have would not support their account: Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 at 320 (per Windeyer J), citing with approval Wigmore on Evidence (3rd ed., 1940), “the failure to bring before the tribunal some circumstance, document or witness…”; Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (per Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (per Eames JA, with whom Buchanan JA agreed, noting that “the Jones v Dunkel principle can equally apply to missing documents as to missing witnesses”); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132]; Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112].

  3. The tension between onus and inferences was perhaps brought into clearest focus in the plaintiffs’ claim that Mr Shi had made “unauthorised withdrawals”. As to whether the plaintiffs discharged their onus, it has been said that the “difficulty of proving a negative is well known”: A v New South Wales (2007) 230 CLR 500; [2007] HCA 10 at [60] (per Gleeson CJ, Gummow, Kirby, Hayne, Heydon and Crennan JJ). As Campbell JA (with whom McColl JA and Handley AJA agreed) explained in Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78]:

If a plaintiff has the onus of proving a negative proposition, the fact that the defendant has greater means to produce evidence which contradicts that negative proposition, does not mean that the plaintiff ceases to have the onus of proof of that negative proposition. However, once the plaintiff establishes sufficient evidence from which, if that evidence is accepted, the negative proposition may be inferred, an evidential onus shifts to the defendant to adduce evidence that tends to show that the negative proposition is incorrect. If a defendant adduces such evidence, the plaintiff must then, as part of its overall burden of proof, deal with that evidence either by submission or argument. …

  1. Whilst accepting that the plaintiffs bore the onus in proving that the relevant withdrawals were unauthorised, I understood the plaintiffs to, in essence, rely on Lord Mansfield CJ’s maxim in Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 at 970. In Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWSC 453 at [26], Beazley P said, “That case is authority for the proposition that where material evidence is peculiarly within a party's knowledge, it may be sufficient for the opposing party to adduce slight evidence of a matter in issue”: at [26], [89]-[90]. As Gleeson J likewise summarised in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227 at [125]:

All evidence “is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”: Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …

  1. Of course, the principle from Blatch v Archer does not alter the onus of proof, nor the position that “the circumstances in which … the absence of evidence may be taken to account are confined by known and accepted principles…”: Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [165] (per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The Court may draw inferences to choose between competing versions of events. As Buchanan J explained in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; [2011] FCAFC 151 at [31]: (citations omitted)

Inference does not mean conjecture, even in a civil case. In civil proceedings the inferential process “may fall short of certainty, [but] must be more than an inference of equal degree of probability with other inferences, so as to avoid guess or conjecture” … A court is not authorised to choose between guesses, even on the ground that one guess seems more likely than another or others.

See also Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 at [84]-[88] (per Spigelman CJ).

  1. If the Court is unable to choose between competing versions, the party on whom the onus lies will not succeed. As Beech-Jones J (as his Honour then was) explained in Neville v Lam (No 3) [2014] NSWSC 607 at [99]: (citations omitted)

[I]n some circumstances a Court may find itself unable to choose between competing versions. In such a case, the party upon whom the burden of proof lies will have failed to discharge it.

See likewise Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34 at [60], citing Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 at 955.

  1. In a case such as this, where the Court has little reliable evidence, inferences, where available, may prove important; onus may prove decisive.

FACTS

  1. Mr Hu is a property developer. Over the years, Mr Hu obtained commercial loans for his business ventures from the National Australia Bank. Mr Leong was the commercial lending manager with whom Mr Hu dealt.

  2. Mr Shi is a builder and has also worked as a bus driver. In 2010, he and Mr Hu met when Mr Hu engaged Mr Shi’s company to manage the building of some houses in Arncliffe. Mr Shi then had a Contractor Licence subject to a condition that he was only permitted to work on contracts not requiring home warranty insurance. Mr Hu later obtained a Contractor Licence in the same terms.

  1. In 2013, Mr Hu incorporated two companies: The Avery Pty Ltd and Timesgarden. Mr Hu was sole director and shareholder of both companies.

  2. In April 2015, Mr Shi incorporated NSW Construction; his wife was sole director and shareholder. In addition, Wisemans was incorporated; Mrs Shi was sole director and the shareholders were various members of the Shi family, including Mr Shi. Mr Shi said he and Mr Hu incorporated NSW Construction “for our future projects”. This is possible, but seems unlikely where neither Mr Shi nor Hu had an interest in the company. Further, so far as the evidence reveals, Mr Shi and Mr Hu were not then working together.

  3. On 9 July 2015, Mr Shi’s Contractor Licence was cancelled, although Mr Shi considered that this did not prevent him from undertaking building work through a company. Mr Hu was then engaged on a development in Eastwood, building townhouses and residential villas. Mr Hu was having problems with his co-investor and builder. Mr Shi said he helped Mr Hu to resolve these problems, which appear to have related to the driveway, through traffic and cleaning. Mr Hu denied asking Mr Shi for any help; he did not consider that Mr Shi was qualified to do so given the cancellation of his building licence. (Such a professed reluctance on Mr Hu’s part is inconsistent with his later willingness to work with Mr Shi on the Anna Bay land.) Whilst Mr Shi agreed that he did not have a building licence, “I found people to help Wilson to get this done.”

  4. I am inclined to accept Mr Shi’s description of these events as, whatever the extent of Mr Shi’s involvement in the Eastwood project, it was such that Mr Hu and Mr Shi began looking to lease an office to do property development together. That is, Mr Hu’s experience of working with Mr Shi was sufficiently satisfactory to make plans to work together more regularly on similar projects.

Bay Wharf Pty Ltd and the Pyrmont office

  1. Mr Hu and Mr Shi decided to buy an office in Pyrmont. Mr Hu and Mr Shi agreed to set up a new company as the purchasing entity, in which each would hold equal shares. They agreed to contribute equally to the purchase of the office, with the new company to apply for a commercial loan secured by a mortgage over the property to complete the purchase.

  2. On 19 August 2015, Bay Wharf Pty Ltd was incorporated. Mr Shi’s company, Wisemans, held 50% of the shares while Mr Hu’s company, U Pin Group Pty Ltd, held the other 50%. Mr Hu, Mr Shi and Zhibin Lu were appointed directors. Mr Lu was likely Mr Hu’s accountant: the registered office of The Avery and Timesgarden was Kams & Associates; the same firm lodged the application to register Bay Wharf, where the applicant’s surname was also “Lu”; Mr Lu was appointed a director but was allotted no shares. Two days’ later, Mr Hu ceased to be a director, apparently leaving his accountant to represent his interests in Bay Wharf. This may reflect Mr Hu’s reluctance to be a director unless it was absolutely necessary. It may be consistent with Mr Hu’s evidence that he later ceased to be a director of the Company as he wished to avoid liability for loans to the Company: see [56]. This may be an earlier example of the same approach.

  3. On 4 September 2015, Bay Wharf exchanged contracts to buy the Pyrmont office for $847,000. A deposit of $50,000 was paid by U Pin Group.

  4. According to Mr Hu, Mr Shi said he wished to undertake a construction project through his company NSW Construction, but he had no building licence. Mr Shi asked if Mr Hu could help him by working as the licenced builder of NSW Construction, and Mr Hu agreed. On 10 September 2015, Mr Hu was appointed as a director of NSW Construction. Mr Hu said he was unaware that he had been appointed, while Mr Shi said that Mr Hu requested it. I am inclined to accept Mr Shi’s evidence on this subject as it seems more likely that, if NSW Construction and Mr Shi were going to avail themselves of Mr Hu’s Contractor Licence, then Mr Hu asked for, or Mr Shi gave Mr Hu, a role in the Company.

  5. In October 2015, Mr Hu transferred $100,000 to Bay Wharf, whilst Mr Shi transferred $150,000, such that their contribution to the acquisition of the office was now each $150,000. On 16 October 2015, the purchase was completed. The balance was funded by a loan from National Australia Bank to Bay Wharf of $592,900. (U Pin Group’s shares in Bay Wharf were later transferred to Ms Yun’s company.) The significance of the purchase of the Pyrmont office is that the plaintiffs contend that the same model was later used when acquiring the Anna Bay land.

Oz Recreation Pty Ltd and Halls Creek land

  1. Mr Shi said that he and Mr Hu started to look for projects to work on together. The first project was to acquire and develop a property in Halls Creek. On 27 November 2015, Oz Recreation Pty Ltd was incorporated. Mr Hu, Mr Shi and a friend of Mr Hu’s (Jieheng Yu) became directors and equal shareholders.

  2. On 22 December 2015, Oz Recreation exchanged contracts to buy land in Halls Creek for $250,000. In evidence is an undated front page of the contract signed by Oz Recreation: the contract was signed by Mr Shi and, apparently, Mr Yu. A deposit of $25,000 is recorded as having been paid, with completion to take place on 27 May 2016 (the date for completion was later extended). Mr Shi said it was a joint decision to buy the land, “it was us three together at the time. They only asked two people to sign.” Mr Hu said that he and Mr Yu never agreed to purchase the Halls Creek land.

  3. Given the short period of time which passed between the incorporation of Oz Recreation and the exchange of contracts to buy the Halls Creek land, I infer that Oz Recreation was incorporated for the purpose of buying the land. As Mr Hu was a director and shareholder of Oz Recreation, it is reasonable to think that he was aware of, and agreed, to purchase the Halls Creek land. Thus, in this respect, I have preferred the evidence of Mr Shi and find that Mr Hu was aware of and agreed to the purchase of the Halls Creek land by Oz Recreation. I will return to the Halls Creek land at [77].

  4. According to Mr Shi, the next project he and Mr Hu looked into was to tender (unsuccessfully) for a project in Lane Cove. On 18 February 2016, a preliminary costs plan was prepared for NSW Construction in respect of a proposed townhouse development in Lane Cove. Mr Hu said he was not involved in the tender.

  5. On 22 February 2016, Mr Hu was allotted 690 shares in NSW Construction. Mr Hu says that he was not aware of this at the time. According to Mr Shi, Mr Hu knew that he was a shareholder of the company, as it was discussed when NSW Construction was founded. It seems unlikely that Mr Hu’s shareholding was discussed when NSW Construction was founded in April 2015 as, so far as the evidence suggests, they had no particular dealings with each other at the time and neither became shareholders or directors of the company. However, the coincidence of the share allotment with the preliminary cost plan prepared for NSW Construction in respect of the proposed Lane Cove development may point to Mr Hu’s increasing involvement in NSW Construction which was, it will be recalled, using his Contractor’s Licence to his knowledge. As earlier mentioned, business experience would suggest that, whilst a person may be unaware when an asset is taken away from them, they are rarely unaware when an asset is given to them. It is likely that Mr Hu knew that he was allotted shares in NSW Construction.

The Company and Anna Bay land

  1. On 9 March 2016, Mr Hu sent Mr Shi a link to a real estate advertisement for land at Anna Bay, under the banner “Receiver Sale: Part-Constructed Beachfront Opportunity”. On 10 March 2016, at Mr Hu’s request, Mr Shi obtained the Information Memorandum and a link to due diligence information from the real estate agent and forwarded it to Mr Hu. It is reasonable to think that these materials included the development consent issued in respect of the “part-constructed” development. As the bank’s valuer later summarised the position, the property had the benefit of a development approval for a tourist facility comprising 154 prefabricated units, a restaurant area, reception foyer, inground swimming pool, pool room, playground, tennis courts and 24 lot strata subdivision. Further, the development application stated that the estimated cost of development was $15 million.

  2. On 22 March 2016, the sales campaign for the Anna Bay land was extended, with expressions of interest to be submitted on 13 April 2016. On 13 April 2016, Bay Wharf submitted an expression of interest to purchase the Anna Bay land for $2.75 million exclusive of GST. On 22 April 2016, the real estate agent invited Mr Shi and Mr Hu to submit a further offer in the form of a signed, unconditional contract accompanied by a bank cheque for the deposit by 26 April 2016, with completion to take place by 15 June 2016.

  3. It is apparent from NSW Construction’s bank statements that someone drove to inspect the Anna Bay land, staying locally on 24 April 2016. What Mr Hu or Mr Shi, or both, would have seen was described in a valuation obtained by the National Australia Bank two weeks’ later. The valuer described the Anna Bay land as an incomplete tourist resort requiring extensive works to enable trading. The valuer observed, “The development has been stalled since early 2013 and since then minimal security and environmental measures have been in place to protect those improvements already completed. Accordingly, the site has been heavily vandalised and environmental exposure has caused considerable damage.” It must have been apparent that raising funds to buy the Anna Bay land was one thing; raising funds to complete construction of the tourist resort was quite another, both having regard to the estimated cost of development on the development application together with the state of the construction work completed thus far.

  4. On 26 April 2016, the Company was incorporated. Mr Hu was appointed director and Mr Shi was appointed secretary. Half of the issued shares (50 shares) were issued to Timesgarden and the other half were issued to Wisemans. A constitution was adopted (to which I will return at [138]). The Company completed the first page of a contract for the sale of land, with a purchase price of $2.95 million for the Anna Bay land. Mr Shi paid a deposit of $295,000, as a loan to the Company. Contracts were exchanged. The Company requested access to the Anna Bay land prior to completion. On 3 May 2016, the receivers authorised the Company to re-erect or repair the fence surrounding the property and to engage a security company to patrol the perimeter prior to completion.

  5. A large portion of the evidence was directed to a joint venture agreement, which the plaintiffs alleged was reached at this time. Mr Hu had sued Mr Shi for damages for breach of this agreement, but the claim was not ultimately pressed. As such, it is only necessary to consider this evidence insofar as it relates to the oppression suit and the claims which Timesgarden seeks to bring on behalf of the Company. In his first affidavit sworn in these proceedings, Mr Hu described his first conversation with Mr Shi about the Anna Bay land. As Mr Hu then recalled it, Mr Shi said he had several hundred thousand dollars available for investment and “we can think about how to work together to develop this piece of land if we buy it.” Mr Hu said he did not think that Mr Shi’s available funds were enough to buy the land, but was himself then putting all his funds into developing properties in Eastwood. Those properties were expected to be on the market within two months. Mr Hu said, “Once they are sold, I can invest the sale proceeds in the Anna Bay land. Also, I can help with the loans.”

  6. As Mr Hu described it in his final affidavit, Mr Shi suggested that they work together to purchase the land through a new company and then introduce investors to invest in the development of the land. Mr Hu agreed and suggested that they become directors and shareholders with equal shares in the new company “so that we can share the costs and profits equally”, to which Mr Shi is said to have agreed. Indeed, Mr Shi accepted this portion of Mr Hu’s affidavit in cross-examination. Further, according to Mr Hu, Mr Shi said, “I will work out the solution of continuous funding the purchase of the land later on.” Mr Shi denied this.

  7. Inconsistently with this, Mr Shi deposed that Mr Hu said, “I will take care of the finance. You will be responsible for the site work, construction and development work.” Elsewhere in cross-examination, Mr Shi did not agree that he was to contribute equally in terms of cash and loans to the Company. Rather, once the Eastwood properties were sold, Mr Hu would invest the proceeds in the Anna Bay project and organise finance through Mr Leong at the National Australia Bank. However, as all of Mr Hu’s funds were then tied up in the Eastwood project, Mr Hu said Mr Shi needed to pay the deposit, and Mr Shi agreed.

  8. Mr Hu also referred to a second conversation with Mr Shi, when meeting with the real estate agent. During the meeting, Mr Hu and Mr Shi spoke to one another in the Chinese language. According to Mr Hu, Mr Shi said that, if the purchase price was $3 million, each of them would need to contribute at least $1.5 million to fund the new company to complete the purchase of the land. Mr Hu agreed to transfer his part of the investment to the Company the following month. Mr Shi said he could invest $400,000 in cash now, “but I have no further funds to invest in the new company. I talked to my loan broker already who advised that I cannot obtain a large loan if the mortgage is over my own property due to its small value. I am now thinking about how to obtain $1.1 million.” Mr Hu offered to arrange for his banker, Mr Leong, to help Mr Shi with a loan. Mr Shi also suggested that Mr Hu manage the financial affairs of the company once it was registered, to make sure that Mr Hu had full access to the company’s financials, to which Mr Hu agreed.

  9. In Mr Hu’s first affidavit, he also attributed the following to Mr Shi, “I talked to NAB already who advised that I cannot obtain the full amount of $1.1 million if the mortgage is over my own property only due to its small value unless the Anna Bay land can be mortgaged as well. Can I use the company to borrow $1.1 million with the Anna Bay land mortgaged? I will repay the mortgage for the company in a timely manner.” To this, Mr Hu is said to have agreed.

  10. Mr Shi’s version of this conversation is different. According to Mr Shi they agreed to form a company in which they would each have 50% of the shares. Mr Hu would be the director and Mr Shi would be the secretary. Further, Mr Hu said, “The funds that we put into the development will be loans to the company that will be repaid when the project is complete.” Mr Shi said that, after the Company was incorporated and contracts had been exchanged, Mr Hu said they would purchase the land with their funds and finance from the bank and fund the development with money from the Eastwood project. Mr Shi said, “Good. After all the loans are repaid we can share the profit. We can use NSW Construction for the construction work and development.” Mr Hu is said to have agreed.

  11. I am reluctant to place much weight on either Mr Hu or Mr Shi’s recollection of these early conversations, nor subtle differences between Mr Hu’s first and final affidavit where these differences may be referable to refreshed recollection from reviewing discovered documents, language difficulties, differences in translation of Mr Hu’s instructions or the settling of these affidavits by his legal representatives. Of course, these changes may be referable to Mr Hu’s changing his story without any proper basis. However, I consider that a more reliable guide to what the parties agreed is how they then conducted themselves, contemporaneous documents and the evidence of a reliable witness, being Mr Leong.

Obtaining finance

  1. Mr Leong recalls receiving a telephone call from Mr Hu, who said that he and his business partner Mr Shi were looking at buying the Anna Bay land to do a hotel development. Mr Hu said, “Frank would like to obtain [a] loan for his investment into the land” and asked whether he could bring Mr Shi in for a meeting. As Mr Hu described it in cross-examination, “We have engaged National Australia Bank to help Mr Shi to make financing arrangements.” Further:

In fact I personally took Frank Shi to the meeting with representatives from the National Australia Bank because … he needed to meet the requirements in his own part from the National Australia Bank and at that time he needed to talk in person to the representatives from NAB about his own problems.  So the representative from NAB can explain his questions or queries one by one.  So in fact at that time I was acting as introducer.

… During the meeting it was made very clear to all the three parties what documents were required and it was explained very clearly to each individual party.

  1. According to Mr Leong, Mr Hu introduced Mr Shi as his partner with whom he had recently purchased the Anna Bay land and said, “I can fund the company for my part of [the] purchase price for the land, but Frank has not sufficient money now and he has his own properties mortgaged already. He therefore would like to have the new company obtain a loan for him by mortgage over this land. Can he still borrow money from the bank?” Mr Leong said the bank may consider lending against the Anna Bay property, subject to a valuation of the land. As the purchase price of the property was some $3 million, a commercial loan may be considered for 50% of the purchase price and, as such, the loan would be about $1.5 million. According to Mr Leong, Mr Shi said, “That is sufficient. I have $400,000 and only need $1.1 million from the company’s loan. The difference between the proposed loan limit and what we propose to borrow, ie, $1.1 million can be used to fund the GST.”

  2. Mr Shi denied attending such a meeting. Rather, the first time Mr Shi attended at the bank was on 6 July 2016, to collect the loan documentation, “I never contacted [Mr Leong] except for 6 July when I went to his office for the first time.” Mr Shi maintained that he did not attend any meeting with Mr Leong before 6 July 2016, “No. I hadn’t met him.” Mr Shi’s evidence seems unlikely. So far as the evidence reveals, Mr Shi banked with ANZ. This was the first time that Mr Shi had dealt with the National Australia Bank, being on a transaction where it was proposed that he be involved in a loan of more than $1 million. It is inherently likely that Mr Shi was required to present himself to Mr Leong to begin the loan application process. As Mr Leong said, “Bank’s policy always required a bank meetup with the client before each transaction has been approved.”  Mr Leong did not accept that it was possible that his recollection about meeting Mr Hu and Mr Shi at some time before completion of the purchase was mistaken. Mr Leong was a credible witness who had no interest in the outcome of these proceedings. I do not accept Mr Shi’s evidence to the contrary.

  3. On 6 May 2016, Mr Leong’s assistant sent an email to Mr Hu, requesting information required by the valuer. Mr Hu forwarded the bank’s request to Mr Shi. On 13 May 2016, a valuation was provided to the bank for first mortgage security purposes.

  4. Mr Leong said that, in about late June or early July 2016, before the bank had approved the loan, he met with Mr Hu and Mr Shi again in his office so they could update the bank on their strategy for the asset and go through the loan structure, including the loan amount, the terms of the loan and proposed security. The Company was the loan applicant. Mr Leong said he told Mr Hu and Mr Shi that, according to the bank’s policy, the directors were required to provide a joint and several guarantee. Mr Leong agreed that it was likely that he said that, in order for the bank to assess the application, the bank would need two years of tax returns for the proposed guarantor. After the meeting, Mr Leong left the room while Mr Hu and Mr Shi remained for further discussions.

  1. According to Mr Hu, he and Mr Shi continued to discuss the matter. Mr Shi said he would repay the $1.1 million loan and bear all costs in respect of the loan application. Mr Hu agreed, adding, “As the loans are nothing to do with me, I will cease to be the director.” Mr Shi agreed, but noted that Mr Hu would still be in charge of the financial affairs of the Company. As Mr Hu put it in cross-examination, whilst the loan application was made by the Company, “That was under the circumstances that Mr Shi didn't have enough - didn't have sufficient fund and didn't have income, so the land owned by the company was used to guarantee such an application for a loan.” Further, “Because … Mr Frank Shi, was using the company’s land to guarantee such a loan. So he must be the guarantor …”

  2. Mr Shi denied attending such a meeting, either with Mr Leong or Mr Hu, or at all. Mr Shi also denied that he was told by the bank that he needed tax returns for two financial years for the loan application. For reasons earlier given, I prefer Mr Leong’s evidence and do not accept Mr Shi’s evidence to the contrary.

Timesgarden ceases to be a shareholder

  1. On 19 May 2016, Mr Shi lodged a Form 484 Change to Company Details with the Australian Securities and Investments Commission (ASIC), transferring Timesgarden’s 50 shares in the Company to Wisemans. Mr Shi said that Mr Hu asked him to make this change. According to Mr Shi, Mr Hu said he had been talking with Mr Leong about finance for the Anna Bay land; because Mr Hu had a number of companies with property loans through the bank that were complicated, it would be easier for the Company to get the loan if Mr Hu was not involved. Mr Hu said he was concerned about his involvement in the Company affecting the ability to get a loan. If Mr Hu said this, then it was an unlikely explanation as it was Mr Hu who appeared to have a long-standing relationship with the bank whilst Mr Shi was a newcomer. If anything, Mr Hu’s association with the loan application would more likely have improved its prospects.

  2. Mr Hu said this was done due to his incorrect belief that the shareholders would be liable to repay loans obtained by the Company and to avoid Timesgarden being liable to repay the loans obtained by the Company to fund Mr Shi’s loans to the Company. Mr Hu agreed that his company, Timesgarden, was no longer a shareholder of the Company “but that was out of … trust.” There being no other obvious reason why Mr Hu would have divested Timegardens’ shares in the Company at this time, being shortly before Mr Hu intended to lend $1.4 million to the Company (see [55]), Mr Hu’s explanation is worthy of consideration and acceptance.

The Company’s banking

  1. On 2 June 2016, the Company opened an account with the National Australia Bank, ending 4690 (the Operating Account). Mr Hu was the sole signatory on the account. Mr Hu managed the financial affairs of the Company. Mr Shi said he did not know how much money was in the Company’s bank account as Mr Hu was in charge of the account “and I was just doing the work.”

  2. On 6 June 2016, Mr Hu and his friend Jieheng Yu (being the same person who was a director and shareholder in Oz Recreation) transferred $1.4 million into the Operating Account. These deposits were later recorded in the Company’s accounts, by Mr Hu’s accountant, as loans from Mr Hu. On 9 June 2016, Mr Shi deposited $200,000 into the Operating Account. (Funds contributed to the Company by both Mr Hu and Mr Shi were provided, on occasion, by associates or related companies; it is apparent from Mr Hu and Mr Shi’s affidavits that they treated these funds as being provided by one another).

Mr Hu ceases to be director

  1. On 4 July 2016, at 10.32 am, Mr Shi lodged a Form 484 with ASIC, notifying Mr Hu’s resignation as director of the Company, effective on 26 June 2016. Mr Shi was appointed in his place as sole director. Mr Hu said he agreed to remove himself as director because he did not want to be the guarantor of the Company’s $1.1 million loan. Again, there being no other obvious reason why Mr Hu would have resigned as director of a company which he was then managing and to which he had just lent $1.4 million, Mr Hu’s explanation is worth of consideration and acceptance, particularly when he ceased to be a director on the same day as the loan application forms were completed: see [58].

  2. I note, however, that on 29 July 2016, the Australian Taxation Office (ATO) sent a letter to the Company marked to Mr Hu’s attention, seeking information as to whether the Company was adhering to its obligations to pay GST. (Somewhat confusingly, the ATO requested the information by 7 July 2016.) Mr Shi pointed to this letter as the reason why Mr Hu was removed as a director. According to Mr Shi, Mr Hu was upset on receiving the letter and asked why he had not been removed as a director of the Company. Mr Shi apologised, saying that he did not know that Mr Hu wanted to be removed as a director, and proceeded to remove him. However, the problem with Mr Shi’s account is that he removed Mr Hu as a director before the letter was issued (whichever date in the letter is used).

Loan application

  1. Also on 4 July 2016, Ms Leong sent Mr Hu’s partner, Ms Yun, an Application for Finance and Introducer Consent Form, asking “could you please get Frank to complete the two attached form for the Anna Bay application”. Ms Yun forwarded the email to Mr Shi. An hour or so later, Mr Shi emailed the bank, copied to Mr Hu, attaching the signed execution page of both forms. (Mr Leong said that sometimes only the signing pages were sent back.) The bank promptly replied, copied to Mr Hu, asking that Mr Shi also sign as guarantor on the execution page of the Application for Finance, and resend. Mr Shi promptly did so.

  2. Mr Shi said, “It was Wilson who asked me to just sign.” As to whether Mr Shi knew that somebody else would be completing the rest of the application form, Mr Shi said, “I don’t know. I didn’t know which parts needed filling and which part didn’t.” Mr Shi later accepted that he knew that Mr Hu would be providing information to the bank to complete the forms, but said he was unfamiliar with the loan process and this was why Mr Hu was handling it.

  3. The Application for Finance was completed in handwriting, which was not the handwriting of Mr Shi, Mr Hu nor Mr Leong. The application stated that Mr Shi was a full-time employee of The Avery, having been employed as General Manager since 10 February 2013. The parties agreed that Mr Shi was not, in fact, so employed. The application was accompanied by Mr Shi’s 2014 and 2015 tax returns, which the parties agreed were not, in fact, his tax returns. Mr Hu agreed that he had arranged for his accountant, Mr Lu, to prepare the tax returns, “under the authorisation of Mr Frank Shi to do that.” In the 2014 tax return, Mr Shi declared salary of $140,260 earned at The Avery as general manager, together with an $8,000 travel allowance. Similar income was declared in the 2015 tax return.

  4. Mr Shi said that the tax returns were fabricated; he did not see the documents at the time; he was not aware that the documents had been created and submitted to the bank. The defendants submitted that Mr Shi’s non-involvement in the falsification of the tax returns was corroborated by the existence of typographical errors not present in his genuine tax return: the spelling of the rental property in the schedule to the genuine tax return referred to “Blenheim Road” whilst the fabricated tax return referred to “Blenhaim Road”. If Mr Shi had been involved, then it was submitted that one would not expect to see such an error. I suppose that would depend on the extent to which Mr Shi was involved, if at all. If Mr Shi simply handed over his tax returns to Mr Hu’s accountant in the knowledge that false tax returns would be prepared based on the returns, then the existence of a typographical error may indicate that Mr Shi did not subsequently see or carefully check the false tax return before it was submitted to the bank.

  5. Mr Shi was initially evasive in cross-examination on this issue, “I can’t quite remember clearly where Wilson got my personal information … I can’t remember clearly. … I didn’t give it to him.” Later, “I don’t know where he got this information, or perhaps this information [is] publicly available.” Obviously, the information was not publicly available and Mr Shi was its most likely source. Consistently with this, when the bank later provided Mr Shi with these documents, there is no evidence that he raised the falsity of the documents with Mr Hu: at [130]. I find that Mr Shi provided his tax returns to Mr Hu knowing that the tax returns would be used to prepare false tax returns to support the application for finance.

  6. On 6 July 2016, Mr Shi went to the bank to collect the loan transaction documents. Mr Shi said he was asked by Mr Hu to take $800 in cash to give to Mr Leong and did so. This was denied by both Mr Hu and Mr Leong, and Mr Leong was not pressed on the matter in cross-examination. I do not accept Mr Shi’s evidence to the contrary. Mr Leong said this was not the first time that he had seen Mr Shi, whilst Mr Shi maintained that it was. I prefer Mr Leong’s evidence in this regard. Mr Shi took the transaction documents to a solicitor in Burwood, Ming Lu, who had acted for Mr Hu and Mr Shi on the purchase of the Pyrmont office. The solicitor witnessed Mr Shi’s execution of a General Security Agreement and a Guarantee and Indemnity for $1.395 million. Curiously, Mr Shi did not accept that, by becoming guarantor, he was responsible for repayment of the loan. Rather, Mr Shi said that Mr Hu was responsible for the loan and Mr Shi would be guarantor; “if we could not repay then we would first sell the company and then I would take personal responsibility.” Such an understanding is at odds with the terms of the Guarantee and Indemnity, which were explained to him by a solicitor before Mr Shi signed the document. Mr Shi’s evidence to the contrary is unlikely.

  7. The $1.395 million loan was to be withdrawn in two payments of $1.1 million and $295,000, which the parties referred to as the “Main Loan” and “GST Loan” respectively. On 11 July 2016, a loan account in the name of Anna Bay Resort was opened, ending 2087 (the Main Loan); the $1.1 million loan was later recorded in this account. (The bank statements for the GST Loan are not in evidence but, based on the bank statements for the Operating Account, the GST Loan account had an account number ending 1952.)

  8. On 20 July 2016, stamp duty on the purchase of the Anna Bay land ($163,985) was paid using funds from the Operating Account. Account and service fees for the GST Loan began to be paid from the Operating Account from 31 August 2016. On 9 September 2016, Mr Shi deposited $50,000 into the Operating Account.

  9. On 5 October 2016, The Avery transferred $50,000 to NSW Construction. The bank statement describes the transfer as “Wh loan to nswcons”. According to Mr Shi, in October 2016, he told Mr Hu that NSW Construction had been spending money on the project and needed more funds for site work such as moving the containers and making payments for labourers, tools and machines. If Mr Hu still wanted to use NSW Construction to work on the project, Mr Shi needed him to provide some further funds. According to Mr Shi, Mr Hu agreed to advance $50,000 to NSW Construction “and treat it as a loan to Anna Bay Resorts.” Mr Hu said he did so at Mr Shi’s request, where completion of the purchase of the Anna Bay land was soon to settle and Mr Shi planned to engage subcontractors to remove the prefabricated units on the land and do maintenance work. As Mr Hu was the signatory for the Operating Account, Mr Shi said it was not convenient for him to pay the subcontractors for this work from the Operating Account but preferred for funds to be transferred to NSW Construction. Mr Hu agreed to advance this amount to the Company through NSW Construction. That is, Mr Hu and Mr Shi both agree that, notwithstanding the description of the transfer on the bank statement, this was a loan by Mr Hu to the Company.

  10. Importantly, Mr Hu said he also asked Mr Shi to send him all the invoices and receipts from the subcontractors, so that he could check. Such a request made sense where Mr Hu was providing funds for maintenance and construction work other than through the Operating Account, over which Mr Hu had control. The funds were now being provided to NSW Construction’s bank account, over which Mr Shi had control. It does not appear, however, that Mr Shi adhered to Mr Hu’s request, if made.

  11. On 31 October 2016, Mr Hu transferred further funds to the Operating Account, being $10,000 (described in the bank statement as “Wh loan to Annabay”). On the same date, a further $19,000 was transferred from NSW Construction’s bank account, which Mr Hu said was “NSW Construction’s partial repayment of my loan of $50,000”. It was described in the bank statement as “Nswch loan toannab”. Mr Shi said the payment from NSW Construction was a loan to the Company, not a partial repayment of Mr Hu’s loan of $50,000. It is certainly unclear. Given the contemporaneous description in the bank statement and the fact that the suggested repayment is not listed in the ledger entries report prepared by Mr Hu’s accountant for the 2017 financial year, I have preferred Mr Shi’s evidence in this regard. On 1 November 2016, a further transfer of $85,000 was made by Mr Hu to the Operating Account.

Main Loan

  1. On 1 November 2016, Mr Shi executed a mortgage over the Anna Bay land in favour of the bank. On 2 November 2016, the Main Loan was drawn down. In addition, a further $1,586,670.68 was transferred from the Operating Account, described as “balance required for settlement.” It will be recalled that Mr Hu had been the source of the bulk of these funds. Completion of the purchase of the Anna Bay land occurred on 2 November 2016.

  2. Also on 2 November 2016, Mr Shi transferred $24,805.18 to the Operating Account, described on the bank statement as “Transfer to allow for fees and charges”. A corresponding amount was paid from the Operating Account for fees and charges including the valuation ($12,000) and loan application fee ($10,972.50). Mr Shi said he transferred the funds as a loan to the Company. Mr Shi said “Wilson tell me put the sum of money. I just put. That’s all. … I just go to work.”

  3. Mr Shi’s deposits to the Operating Account were generally without a significant description in the bank statements. This transfer had a description, on which I am inclined to place some weight given its contemporaneity. The transfer was not described as a loan (unlike “Nswch loan toannab”) but a transfer to allow for fees and charges. That is, the funds were being placed in the Operating Account in order to be available to meet these cost items. It may well be that the parties proceeded on the basis that, in due course, Mr Shi could look to the Company to reimburse him for these funds. But the fact that Mr Shi attended to payment of the costs associated with the bank loans is consistent with an acceptance by him that the loans were to fund his contribution to the Company’s acquisition of the Anna Bay land.

Loan repayments

  1. It will be recalled that Mr Hu managed the finances of the Company, including the Operating Account. By 5 December 2016, after the monthly repayment, interest and fees on the Main Loan and GST Loan had been paid from the Operating Account, the account was overdrawn with a debit balance of $5,837.18. Mr Hu deposited sufficient funds to the Operating Account to remedy this position and it is interesting to observe how he did so. Two deposits were made on 9 December 2016, being $1,200 (described as “WH loan 2 ABR RE”) and $5,840 (described as WH loan to Frank). A further deposit of $2,000 was made on 13 December 2016, described as “Wh loan toannab”.

  2. As I read the bank statements, Mr Hu considered that the funds which needed to be deposited to the Operating Account in order to redress the interest and fees drawn to pay the Main Loan and GST Loan were a loan by him to Mr Shi. Such a description, made contemporaneously, is consistent with his evidence that these costs were Mr Shi’s responsibility. The additional deposits to the Operating Account were described by Mr Hu as loans by him to the Company, presumably placing the Company in funds to continue its day-to-day operations.

  3. That said, further deposits by Mr Hu to the Operating Account in January 2017 to remedy the same problem following the payment of interest and charges Main Loan and GST Loan did not follow this pattern. The interest and charges put the Operating Account into debit on 3 January 2017. On 6 January 2017, $790 was deposited, described in the bank statement as a loan by Mr Hu to the Company and, on 16 January 2017, a further $10,000 was deposited as a loan from U Pin to the Company.

  4. On 31 January 2017, the Operating Account was replenished when the ATO refunded the GST on the purchase. These funds were used to largely repay the GST Loan on 3 February 2017. Thereafter, monthly repayments and interest on the Main Loan were paid from the Operating Account, together with fees and interest on the remaining GST Loan account.

  5. Mr Hu said that Mr Shi did not transfer amounts for the monthly repayment on the Main Loan at any time and, in order for the Company not to default on the Main Loan, Mr Hu deposited funds into the Operating Account from time to time as loans to the Company. Mr Hu said, “I had no other choice but to do that.” In total, $410,210 was deposited from December 2016 to April 2018, of which some $160,000 was used to repay the Main Loan.

Mr Hu lends $100,000 for Halls Creek

  1. According to Mr Shi, Mr Hu lent $100,000 to Oz Recreation to fund the purchase of the Halls Creek land. At some time before completion, Mr Hu said that he and Mr Yu had decided not to go ahead with the purchase. (Consistent with this, on 9 November 2016, Mr Hu and Mr Yu ceased to be directors and shareholders of Oz Recreation. The remaining shareholders were Mr Shi and Fang Liu.) According to Mr Shi, he asked Mr Hu, “What about my deposit payments if you two do not agree to settle?” and Mr Hu said he could keep the $100,000 loan to the company for the purchase. Mr Shi could not say if the $100,000 was recorded as a loan in Oz Recreation’s accounts, “Maybe there weren’t even financial reports. … because it wasn’t in operation. It was just one piece of land.” Mr Shi agreed that $100,000 was still owing to Mr Hu.

  2. Mr Hu said he loaned the monies to Mr Shi and not to Oz Recreation. According to Mr Hu, Mr Shi told him that he had purchased land in Halls Creek together with a business partner. They had split the purchase price equally. (I have not accepted Mr Hu’s evidence in this regard: see [31]). Mr Shi’s partner had paid his portion in order to settle the purchase of the land; Mr Shi needed to pay his portion but had no cash as he had invested all of his money in Anna Bay. Mr Shi asked whether Mr Hu could lend him $100,000 for a temporary advance in the short term, which Mr Shi would repay as soon as possible. Mr Hu agreed and gave Mr Shi $100,000 in cash. Mr Hu said “I had no idea how Frank used or spent that money.”

  3. In his affidavit, Mr Shi also said, “We made an offer to buy the land but we ultimately did not proceed with that project as Wilson ultimately decided he did not want to.” Mr Hu did not respond to this portion of Mr Shi’s affidavit. Given Mr Hu’s non-response, I infer that Mr Hu and Mr Yu lost interest in acquiring the Halls Creek land and were content for Mr Shi to go ahead with the purchase if he wished. However, Mr Shi’s evidence that Oz Recreation did not proceed to complete the purchase was untrue. In fact, Oz Recreation had completed the purchase but Mr Shi never told Mr Hu. (This only became apparent during cross-examination). I will return to this subject at [107].

  1. Finally, the plaintiffs contended that Mr Shi should disgorge the interest of $8,644 charged to the Company on his loan of $145,000. It was said that he caused the Company to enter into the Loan Agreement without proper assessment or documentation, while in a position of conflict as interest was payable at an excessive rate. It does appear that the Company was in need of funds at the time. The Company was then in default of the Main Loan and Mr Hu’s loan; Mr Hu had stopped providing working capital. Obtaining additional finance was not, on its face, unreasonable. Whilst it is unclear whether the loan funds were actually used to fund the Company’s activities (apart from, potentially, some $13,710 referred to at [136]-[137]), nor is there evidence as to whether the 10% interest charged on Mr Shi’s loan was excessive or not. This claim has not been established.

WINDING UP ON JUST AND EQUITABLE GROUNDS

  1. The plaintiffs sought an order pursuant to section 461(1)(k) of the Corporations Act, winding up the Company on just and equitable grounds. As to whether it is “just and equitable” that the Company be wound up under section 461(1)(k) of the Corporations Act and a winding up order be made under section 467(4) of that Act, the principles were elegantly summarised by Hetyey AsJ in Re Docklands Chiropractic Clinic Pty Limited [2020] VSC 364 at [19] ff.

  2. As noted in In the matter of Crow Inn Pty Limited [2020] NSWSC 601 at [53], a deadlock in the management of the company’s affairs is a common case for a winding up under section 461(1)(k) of the Corporations Act where the Court is of the opinion that it is just and equitable in all the circumstances to do so, including where a company was formed on the basis of a personal relationship involving mutual confidence, and that confidence has broken down so that continuation of the association would be futile; or there has been oppression in relation to the affairs of the company: In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]-[20] (per Brereton J); Boyd v Feeney [2017] NSWSC 1595 at [50] (per Black J); Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2008] VSCA 86; (2008) 66 ACSR 325 at [119] (per Dodds-Streeton JA, with whom Ashley JA and Forrest AJA agreed); Nassar at [90], [96] and [117] (per Barrett J); In the matter of Amazon Pest Control Pty Limited [2012] NSWSC 1568 at [17] (per Black J); Docklands Chiropractic Clinic at [22]. There is, of course, significant overlap between the Court’s powers under section 233 and section 461 as conduct in the nature of oppression may also make it just and equitable that a company be wound up: Asia Pacific Joint Mining Pty Limited v Allways Resources Holdings Pty Limited (2018) [2018] 3 Qd R 520; [2018] QCA 048 at [62]-[63] (per McMurdo JA).

  3. Such an order may more readily be made where a company is in the nature of a “quasi partnership”, or “a majority controlled business requiring mutual co-operation and a level of trust”, and there has been a loss of trust and confidence, or the loss of confidence frustrates the commercially sensible operations of the company in accordance with the incorporator’s expectations and such loss of confidence is justified: Nassar at [77]-[79]; Amazon Pest Control at [18]-[19]; Tomanovic at [49]-[51] (per Austin J); In the matter of Austral Alloys Pty Limited [2017] NSWSC 1833 at [18]-[30] (per Brereton J). However, the Court is not restricted to exercising its discretion to particular categories; the question whether it is just and equitable is a question of fact in respect of which each case must depend on its own circumstances: Re Catombal at [20].

  4. When asked to wind up a company on just and equitable grounds, section 467(4) of the Corporations Act requires the Court to consider the availability of some other remedy and whether the applicant was acting unreasonably in seeking to have the company wound up instead of pursing that other remedy: Mudgee Dolomite & Lime Pty Limited v Murdoch [2020] NSWSC 1510 at [293]. Even if the Court is satisfied of circumstances which justify winding up a company on just and equitable grounds, section 467(4) makes clear that the Court must consider whether an alternative and less drastic form of relief is available: Docklands Chiropractic Clinic at [24]-[25]. Whilst winding up should be a last resort, there is no absolute rule that the Court will not wind up a solvent company: Mudgee Dolomite at [293]. Solvency does not operate as a complete barrier to a just and equitable winding up, particularly where there have been serious and ongoing breaches of the Corporations Act: Docklands Chiropractic Clinic at [24]-[25].

  5. I have no hesitation in this case in appointing a liquidator on just and equitable grounds. Whilst the defendants submitted that there was no deadlock in the management of the Company’s affairs, this is only because Mr Shi has thrice removed Mr Hu as a director, notwithstanding his reasonable request to be reinstated as such. There is a complete loss of trust and confidence between Mr Hu and Mr Shi. Mr Hu is not responsible for the breakdown of that relationship. There has been oppression in relation to the affairs of the Company. The appointment of a liquidator is unlikely to affect the value of the Company’s assets where its main asset has already been sold. The Company has no ongoing business. It is apparent from Mr Shi’s conduct of the Company’s affairs that he is unsuited to supervise the receipt and disbursement of the proceeds of sale of the Anna Bay land. The net sale proceeds are substantial. The claims upon those funds – by secured and unsecured creditors, including the ATO – should be dealt with by a competent and independent person with relevant expertise, such as the proposed liquidator, Alan Hayes. It may well be that this will impose an additional cost on the Company. But it is likely to quell further disputation and may save costs overall.

MR HU’S LOAN TO THE COMPANY

  1. Mr Hu seeks repayments of his loan to the Company of $300,000. The defendants accepted that Mr Hu was entitled to repayment of his $300,000 loan together with interest calculated under the Mortgage Agreement.

HALLS CREEK LOAN

  1. Mr Hu sought judgment against Mr Shi in respect of the $100,000 loan. The problem with giving someone $100,000 cash is that it becomes difficult to prove, on the balance of probabilities, the terms on which the cash was lent or to whom. I have found that Mr Hu and Mr Shi, together with Mr Yu, incorporated Oz Recreation to acquire the Halls Creek land. However, Mr Hu and Mr Yu later lost interest in the property and ceased to be directors and shareholders in the company. Mr Shi and Fang Liu remained shareholders of Oz Recreation. It appears that Mr Shi wished to proceed with the purchase but had insufficient funds to pay his share of the purchase price, and Mr Hu lent him the money to do so. It appears that Mr Hu understood that the $100,000 would be used to complete the purchase of the Halls Creek land.

  2. Where Mr Hu had no ongoing role in Oz Recreation and, so far as the evidence reveals, did not know Fang Liu, it seems more likely that Mr Hu would have been prepared to lend the money to Mr Shi, who he knew and with whom he was then working on the Anna Bay land, than to Oz Recreation. As mentioned, the minutes of the 26 February 2016 meeting referred to the $100,000 loan but did not reveal whether the borrower was Mr Shi or Oz Recreation. However, the fact that the loan was referred to at all in a minute of meeting between Mr Hu and Mr Shi suggests that the loan was to Mr Shi, rather than to a company which was not mentioned in the minutes at all, nor represented at the meeting. On the balance of probabilities, I am satisfied that Mr Hu lent the money to Mr Shi.

  3. The plaintiffs also seek interest on the loan. There is no evidence that Mr Hu and Mr Shi discussed the subject of interest when the loan was made. In the absence of agreement, a creditor is not entitled to interest where the borrower fails to repay the money lent on the due date: Page v Newman (1829) 9 B & C 378 at 381; 109 ER 140 at 141 (per Lord Tenterden); President of India v La Pintada Compania Navigacion SA [1985] AC 104 at 115, cited in Hungerfords v Walker (1989) 171 CLR 125; (1989) 84 ALR 119 at 137-8 (per Mason CJ and Wilson J). Mr Hu is not entitled to interest.

SPECIFIC PERFORMANCE

  1. Finally, the plaintiffs sought specific performance of obligations said to arise under an undertaking or “Deposit Agreement”, being the payment of $300,000 out of the second tranche of the deposit and the final repayment of the Main Loan. As already described, through discussion and correspondence from November 2021 on, the parties came to an amicable agreement that, from the $605,000, the bank would be repaid in full (some $215,000), then $300,000 would be paid to Mr Hu towards repayment of his loan and the balance to remain in trust with the defendants’ solicitors. The precise figures varied slightly over time, but the parties were agreed that $300,000 of the second tranche would be paid to Mr Hu. Preparations were made accordingly: Mr Hu provided an authority; the second tranche was received by the defendants’ solicitors; Mr Rozdal informed Ms Gong that the transfer of $300,000 would be made that day; the accounts department of Mr Rozdal’s firm called Ms Gong to confirm the details of her firm’s trust account. But the transfer was never made. Correspondence between the practitioners soured.

  2. There is no evidence as to why the $300,000 was not transferred. The defendants’ senior counsel informed the Court at the commencement of the hearing that the second tranche “hasn’t been paid into my solicitor’s trust account in whole … my instructions are the real estate agent actually holds $250,000 of it so it wouldn’t be possible to honour this agreement in full. … we’d need to put some evidence on about whether or not that money could come forward …” Of course, I would be loathe to order specific performance if the undertaking or agreement could not actually be performed, as equity will not specifically enforce what cannot be done: Ferguson v Wilson (1866) LR 2 Ch App 77. But such evidence was not ultimately forthcoming.

  3. On the face of it, Mr Shi should comply with his undertaking. However, if Mr Hu’s loan is not repaid, then he is entitled to interest under the Loan Agreement. I do not consider that it will make any difference whether Mr Hu’s loan is repaid in accordance with an order for specific performance or on completion of the sale of the Anna Bay land. Further, as a Court-appointed liquidator will now be supervising completion of the sale, Mr Hu’s fear that the loan will not be repaid on completion should abate. For these reasons, I am not minded to order specific performance.

ORDERS

  1. The defendants submitted that, as no relief was sought against Wisemans, the proceedings against Wisemans should be dismissed with costs. This is not correct. An order is sought that the ten shares issued to Wisemans on 15 August 2020 be set aside. In addition, where an order was sought that the Company be wound up on just and equitable grounds, Wisemans’ presence in these proceedings was likely necessary and appropriate in any event. For these reasons, I make the following orders:

  1. Pursuant to section 233 of the Corporations Act 2001 (Cth), set aside the issue of ten ordinary shares in Anna Bay Resort Pty Ltd (the Company) on 15 August 2020 and the allotment of those shares to the second defendant.

  2. Pursuant to section 461(1)(k) of the Corporations Act, appoint Alan Hayes of Level 16, 55 Clarence Street, Sydney NSW 2000 as liquidator of the Company.

  3. Pursuant to section 233(1)(g) of the Corporations Act, authorise the first plaintiff to prosecute proceedings on behalf of the Company against the first defendant.

  4. Pursuant to section 1317H(1) of the Corporations Act, order the first defendant to compensate the Company by payment of $67,030 together with interest.

  5. By consent, judgment against the Company in favour of the second plaintiff in the sum of $300,000 together with interest.

  6. Judgment against the first defendant in favour of the second plaintiff in the sum of $100,000.

  7. Order the first and second defendants to pay the plaintiffs’ costs and the Company’s costs of the proceedings.

  8. Direct the parties within 14 days to:

  1. confer and provide interest calculations, preferably agreed, in respect of Order 4 and Order 5;

  2. notify any errors or omissions; and

  3. if seeking a variation of Order 7, provide any affidavits or submissions (limited to three pages).

  1. In the event that affidavits or submissions are served under Order 8(c), direct:

  1. those parties affected by the variation sought to provide any affidavits or submissions (limited to three pages) within 14 days; and

  2. such application to be determined on the papers.

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Decision last updated: 30 March 2022

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Statutory Material Cited

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